Costa Rica: May 1995
Costa Rica's trade regime has undergone significant liberalization over the past decade, including moves to deregulate and increase competition in the domestic economy.
Reforms begun in 1986 and strengthened in 1990 when Costa Rica became a GATT member
Costa Rica's trade regime has undergone significant liberalization over the past decade, including moves to deregulate and increase competition in the domestic economy. Reforms begun in 1986 and strengthened in 1990 when Costa Rica became a GATT member, were further enhanced last year as the country prepared for WTO membership. In January 1995, Costa Rica - the leading merchandise trading nation in Central America - introduced a new export promotion programme with the target to raise exports to $5 billion by the year 2000.
A WTO Secretariat report on the country's policies for merchandise and services trade states that Costa Rica's shift from an import-substitution to an export-oriented model have helped cut average nominal tariff protection from about 17 per cent in 1989 to 11.2 per cent in 1994. In 1990 Costa Rica bound its tariffs at a general ceiling level of 55 per cent. This will be reduced to 45 per cent by 2004 under Uruguay Round commitments. The report states that tariff rates as well as taxes were increased recently to help reduce fiscal and current account deficits in the short term; in view of the larger gap between applied and bound rates tariff rates, these increases may create some uncertainty as to the stability of the trade regime, as well as inhibiting structural change and sacrificing higher gains from trade.
Other reforms in the past, adds the report, have eliminated prior import deposits, tariff surcharges and restrictive import and export licensing requirements and streamlined administrative procedures. Meanwhile, financial assistance to non-traditional exports is being phased out and official prices and exclusive marketing arrangements for basic foods are being abandoned.
State presence in production, trade and services activities has also been progressively downscaled, says the report. State monopolies, however, remain in oil imports and refining, insurance and certain banking and telecommunications operations. In other areas such as mining, distilling, electricity generation and distribution, port administration and certain public services, private companies may operate through franchises or joint venture. The report says that no major privatization plans seem to be under way.
The country's commitments under the General Agreement on Trade in Services involve informatics, education, health-related and social services and affect commercial presence and the presence of natural persons. The report explains that in view of its commitments to its Central American Common Market (CACM) partners, Costa Rica has exempted professional, advertising and land transport services from most favoured nation treatment. Other horizontal exemptions have been invoked under investment-related bilateral agreements.
Costa Rica is a signatory of numerous international and regional agreements in the area of intellectual property rights and has in recent years undertaken efforts to improve their protection. The report states that it is foreseen that domestic legislation in this area is to be modified within the relevant time period (five years for developing economies) to bring it into conformity with WTO obligations.
Notes to Editors
1. The WTO Secretariat's report, together with a report prepared by the Government of Costa Rica, will be discussed by the WTO Trade Policy Review Body (TPRB) on 6 and 7 June 1995.
2. The WTO Trade Policy Review Body conducts a collective evaluation of the full range of trade policies and practices of each WTO member at regular periodic intervals and monitors significant trends and developments which may have an impact on the global trading system.
3. The two reports, together with a record of the TPRB's discussion and of the Chairman's summing up, will be published in due course as the complete trade policy review of Costa Rica and will be available from the WTO Secretariat, Centre William, Rappard, 154 rue de Lausanne, 1211 Geneva 21.
4. The reports cover development in all aspects of Costa Rica's trade policies, including domestic laws and regulations, the institutional framework, trade-related developments in the monetary and financial sphere, trade practices by measure and trade policies by sector. Attached are the summary observations from the Secretariat and government report. Full reports will be available for journalists from the WTO Secretariat on request.
5. Since December 1989, the following reports have been completed: Argentina (1992), Australia (1989 & 1994), Austria (1992), Bangladesh (1992), Bolivia (1993), Brazil (1992), Cameroon (1995), Canada (1990, 1992 & 1994), Chile (1991), Colombia (1990), Egypt (1992), the European Communities (1991 & 1993), Finland (1992), Ghana (1992), Hong Kong (1990 & 1994), Hungary (1991), Iceland (1994), India (1993), Indonesia (1991 and 1994), Israel (1994), Japan (1990, 1992 and 1995), Kenya (1993), Korea, Rep. of (1992), Macau (1994), Malaysia (1993), Mexico (1993), Morocco (1989), New Zealand (1990), Nigeria (1991), Norway (1991), Pakistan (1995), Peru (1994), the Philippines (1993), Poland (1993), Romania (1992), Senegal (1994), Singapore (1992), South Africa (1993), Sweden (1990 & 1994), Switzerland (1991), Thailand (1991), Tunisia (1994), Turkey (1994), the United States (1989, 1992 & 1994), Uruguay (1992) and Zimbabwe (1994).
The Secretariats report: summary
TRADE POLICY REVIEW BODY: COSTA RICA
Report by the Secretariat Summary Observations
Following the debt crisis of the early 1980s, Costa Rica began a series of reforms to reduce macroeconomic imbalances and restore growth. In 1986, economic policies were shifted from an import-substitution to an export-oriented model, supported by export incentives. These reforms helped to enhance the economy's international competitiveness and reduce anti-export bias. From 1990, in a move towards more neutral, outward-looking policies, trade liberalization was intensified and made more secure through commitments made on Costa Rica's accession to the GATT and subsequent membership of the WTO. Average nominal tariff protection was cut from about 17 per cent in 1989 to 11.2 per cent in 1994; prior import deposits, tariff surcharges, restrictive import and export licensing requirements have been eliminated; administrative procedures have been streamlined and financial assistance to non-traditional exports is being phased out. Official prices and exclusive marketing arrangements for basic foods have been abandoned. Protection of intellectual property is being reinforced.
Under the reform programme, real GDP grew at an annual average rate of 4 per cent in the last decade, driven largely by private consumption and investment; in 1994 growth of 4.5 per cent was achieved. Inflation was largely brought under control, falling from some 90 per cent in 1982 to fluctuate in the 10 to 30 per cent range, according to the stop-go cycles which characterize Costa Rica's economic management. Real per capita income grew at a moderate pace in the last decade and reached US$2,482 in 1994; with extensive social programmes, Costa Rica's social indicators are among the best in Latin America, although adversely affected by austerity measures adopted in the wake of the debt crisis.
Fiscal reforms introduced in 1990 helped to reduce the public sector deficit but, in mid-1993, the deficit widened again as spending increased ahead of the 1994 elections. In 1994, the share of the public deficit in GDP was three times that of 1993, exacerbated by increases in wages and pensions, internal debt interest payments and transfers to the public and private sectors. Inflation, which fell to below 10 per cent in 1993, rose again to some 20 per cent in 1994. The new Government plans to address the deficit with a tax reform package comprising, inter alia, a 50 per cent increase in sales tax, modification of certain revenue tax rates and elimination of 23 internal taxes of marginal revenue interest. The projected Third Structural Adjustment Plan (PAE III), expected to cut the fiscal deficit though public sector reform and deregulation, was dropped in March 1995, although Central Bank reforms are currently being legislated. In addition, it has been learned that Costa Rica has recently introduced some significant tariff increases (not notified to the WTO by the completion of this report), for fiscal reasons and will reduce public expenditure (and employment) by substantially less than envisaged under PAE III.
The ratio of investment to GDP has grown strongly in recent years; however, savings have not increased in parallel, leaving a gap which has been filled by foreign direct investment, mostly in tourism and retail trade. Apart from ownership-related limitations, mostly affecting some services, Costa Rica's investment legislation is neutral, free of restrictions on, or incentives exclusively available to, foreign investors.
Costa Rica's internal imbalances are reflected by a persistent, substantial current account deficit. While merchandise exports and income from tourism have grown substantially in recent years, responding to a slight depreciation of the real effective exchange rate, this has not offset the strong import growth resulting from increased demand as a consequence of expansionary fiscal policies and trade reforms. Despite constraints related to past operational losses of the Central Bank, the use of monetary policy to attempt to control inflation has increased interest rates, attracting foreign capital and slowing the rate of depreciation, as well as pushing up operating costs of business.
The recent increase in taxes and tariff rates may help to reduce the fiscal and current account deficits in the short term. Should this succeed, it may be possible to ease monetary policy and reduce interest rates, paving the way for more sustainable, low-inflation growth. However, in opting to reduce the fiscal deficit by a greater emphasis on increased tax receipts than on public sector reforms,Costa Rica is likely to forgo some opportunities to improve resource allocation and to maintain the existing structural rigidities that underlie the chronic current account deficits. Moreover, the tariff increases create uncertainties concerning the stability of the trade régime, as well as inhibiting structural change and sacrificing higher gains from trade.
The sectoral composition of GDP has changed little over time. The dominant services sector has led economic growth in the last 20 years, and there seems to have been a slight shift from agriculture to industry. This could be accentuated under policies, adopted since 1990, which reduce self-sufficiency objectives and envisage lower State involvement in agriculture; producers of basic food crops will face pressures to diversify or convert to alternative, export-oriented crops. In 1994, plans to improve the infrastructure and encourage expansion of the fisheries sector were introduced. In manufacturing, where most output is in food processing, the objective of raising domestic value added was complemented by emphasis on increasing competitiveness, encouraging technology transfer and fostering agro-industrial activities.
Historically, extensive State involvement in the economy was maintained largely for social welfare reasons, including security of basic food supplies. However, the State presence has been scaled back; since 1986, the public holding company CODESA, engaged in production, trade and services activities, has been progressively downsized. Nevertheless, state monopolies remain in oil imports and refining, insurance and certain banking and telecommunication operations. In other areas such as mining, distilling, electricity generation and distribution, port administration and certain public services, private companies may operate through franchises or joint ventures. No major privatization plans seem to be under way.
The private sector has generally supported market opening. However, it remains concerned with high import duties on raw materials, lack of protection against possible dumping by foreign exporters, high interest rates, high charges for certain public services (ports, electricity, telecommunications) and inadequate export-related infrastructure. The Government's ability to respond is constrained by the fiscal situation and its own hesitancy towards privatization. While anti- dumping laws being introduced may meet private sector demands, care will be needed to ensure that such measures are not used to dissipate the effects of trade reforms.
Costa Rica in World Trade
Costa Rica is the leading merchandise trading nation in Central America. In 1993, Costa Rica was the world's second largest banana exporter and in 1992 ranked as the fifth coffee exporter, with around one-fifth of world exports of bananas and about 4 per cent of coffee exports. Between
the mid-1980s and 1993, the share of trade in goods and services to GDP rose from 60 to 93 per cent. Main export markets for goods are the United States, the European Union and other Central American countries. Preferential treatment granted by the United States and measures such as free zones, export contracts and temporary admission under maquila régimes introduced by Costa Rica in the 1980s have allowed non-traditional exports to grow faster than the traditional products.
In 1993 and 1994, tourism was the major source of foreign exchange, ahead of bananas and coffee. Between 1985 and 1992, imports and exports of commercial services rose two- and three-fold; tourism accounted for over half of services exports.
Trade measures in Costa Rica are mainly based on laws; particular emphasis is given to ensuring that such laws are constitutional. This provides a stable and predictable policy framework which is appreciated by the business community. Costa Rica's legislation incorporates regional, multilateral and other international agreements.
Although plans for rationalization exist, trade policy-making is decentralized and, therefore, highly dependent on cooperation among the relevant Government bodies. The Ministry of Foreign Trade (COMEX) has overall responsibility for trade policy formulation and implementation, including sectoral coordination, as well as providing representation in multilateral fora such as the WTO and pursuing bilateral negotiations. The Ministry of Economy, Industry and Commerce (MEIC) deals with Central American integration issues and tariff policy matters.
The Costa Rican authorities believe that the elaboration of successful trade policies depends on the involvement and participation of the private sector. Thus, the Government consults systematically with business interests in ad hoc working groups. However, no formal, periodic review of trade policy is made by any independent body.
Costa Rica acceded to the GATT in 1990. Until the conclusion of the Uruguay Round, it maintained observer status in one Tokyo Round agreement, the Arrangement Regarding Bovine Meat. From 1988, it was a signatory of the Multifibre Arrangement, under which it maintained bilateral agreements with the United States and Canada.
Costa Rica was an active participant in the Uruguay Round, ratifying the Marrakesh Agreement on 26 December 1994 to become a founder member of the WTO. It plans to sign one Plurilateral Trade Agreement, the International Dairy Agreement. Costa Rica's textile and clothing exports may be adversely affected by competition from lower cost suppliers as restrictions are phased out, and from erosion of CBI preferences in the U.S. market. While Costa Rica has welcomed the establishment of a WTO work programme on trade and the environment, it is expected to oppose issues which may disguise protectionist trends, including discussion of trade and labour conditions.
Trade Policy Features and Trends
Costa Rica conducts its main formal trade relations through the WTO and the Central American Common Market (CACM). The share of Central American countries in its imports is less than half of that in its exports to the region; this gap seems to have widened since 1987. The share of merchandise exports destined to non-regional markets has risen considerably in recent years.
Regional and bilateral agreements are important elements in Costa Rica's trade policy. On 1 January 1995, the Free Trade Area Agreement between Costa Rica and Mexico entered into force. Costa Rica has been active in the establishment of the Association of Caribbean States, to be launched in mid-1995 and intended to promote greater integration in the region through liberalization of trade, investment and transport. Costa Rica is taking part in discussions to establish a free trade area among the members of the CACM, Colombia and Venezuela by 2003, as well as a programme for a Free Trade Area for the Americas by 2005.
While Costa Rica has so far supported full implementation of the CACM free trade area, it does not support the creation of a common external tariff, a common tax collection body or the free movement of persons.
Costa Rica also maintains preferential trade agreements with the Dominican Republic and Panama; the latter covers a large part of the trade flows between the signatories.
Evolution of trade policies and instruments
Costa Rica's economic policies changed direction in the mid-1980s, when a policy of region-oriented import substitution was gradually replaced by one of export orientation. Considerable efforts were made to achieve better, more secure access for Costa Rican exports and expand clothing and non-traditional agricultural exports. However, since 1990 emphasis has been placed on reducing import barriers and export incentives, to achieve a more neutral régime.
On accession to the GATT, Costa Rica bound its tariffs at a general level of 55 per cent. These commitments were strengthened in the Uruguay Round by agreeing to reduce the bound rate to 45 per cent by 2004. Transposition of Costa Rica's Schedule LXXXV into the Harmonized System was completed in 1994.
In January 1995, Costa Rica adopted a new tariff schedule comprising 28 tiers, adding a number of high duties (ranging up to 270 per cent) reflecting tariffication under the Uruguay Round of agricultural and processed products previously subject to import restrictions, as well as some revisions to industrial tariffs to counter distortions in world trade in certain textile items. Tariffs thus apply in a non-neutral manner across sectors, with tariff escalation apparently designed to favour domestic manufactures and raw materials of CACM origin. The new tariff increased tariff dispersion and peaks. As noted, further changes were apparently made in early April 1995, but have not yet been notified to the WTO.
Concessional entry is available for imports covered by preferential agreements; items under régimes such as free zones, export contracts, tourism contracts and temporary admission; and goods purchased by State agencies and private firms providing public services. Reduced tariffs apply for agricultural and industrial inputs when local supplies are not available in sufficient quantity, quality or price. In 1992, 50 per cent of imports were covered by tariff concessions and preferences.
The tax on customs value has been incorporated in the tariff and forms part of Costa Rica's Uruguay Round Schedule. Import surcharges were eliminated in March 1992.
Internal taxes do not discriminate between domestic and foreign goods. A 10 per cent sales tax (possibly to be increased to 15 per cent) affects virtually all goods and services. A selective consumption tax ranging from 5 to 75 per cent applies mainly to industrial goods. Two taxes (IDA
and IFAM) with rates from 2.5 per cent to 14 per cent are collected mainly on alcoholic beverages, certain bottled waters and cigarettes. Cement and second-hand transport equipment are subject to specific sales taxes.
Registration and documentation fees appear based on the cost of services rendered and affect trade in a relatively uniform manner. Mooring and handling fees are higher for imports than exports. Port fees are related to volume, except for storage fees (including those for customs warehouses) which contain an ad valorem element based on the c.i.f. value.
With the aim of simplifying and accelerating import and export administration, a "single window" for foreign trade procedures was introduced in November 1994. Tariffs, taxes, fees and charges relating to imports are collected by the Central Bank or other state-owned banks.
Import prohibitions are maintained on public health, security and environmental grounds. A ban on imports of all foodstuffs containing coffee was abolished in December 1994. Import licensing, used to protect domestic production of certain agricultural items, was eliminated at the same time. The allocation of remaining quotas on imports (e.g. tariff quotas under the Uruguay Round minimum access commitment) is now made through BOLPRO, the commodity exchange established in 1992.
Despite the reduction in the activities of CODESA and cuts in State intervention in agriculture, state entities still enjoy monopoly rights, grant franchises through public tendering and participate in a number of economic activities. Since 1983, barter trade with certain countries has assisted Costa Rica in obtaining raw materials or eliminating coffee surpluses.
Public procurement of goods and services, worth about US$1.4 billion in 1993, is governed by detailed rules, except for state trading enterprises, whose purchasing is subject only to general principles. Although no specific margins apply, preference is given to any sole domestic supplier of goods or services, and to national firms which can offer similar conditions to foreign firms tendering for public work contracts. The National Supplies Agency organizes procurement procedures and the Comptroller-General's Office monitors adjudications and appeals. No detailed data on contracts or suppliers were available from the authorities.
Costa Rica applies standards adopted at international, regional or developed country levels. The Standards Office (ONNUM) ensures that legitimate objectives are pursued in this area and checks compliance by spot-sampling of goods.
Export restrictions, reflecting mainly international obligations, affect coffee and items covered by textile agreements, while access to EU tariff quotas for bananas has been regulated through export certificates since 1 January 1995. Export quotas for coffee are set taking into account domestic consumption, as well as retention commitments by the Association of Coffee Producing Countries whenever these are in force; such a retention scheme operated from October 1993 to May 1994. Export licensing, based on domestic supply considerations, was abolished in December 1994; this can now be used only in exceptional circumstances as a last resort. Environmental protection, data collection or compliance with international or bilateral commitments are the main reasons for maintaining such requirements.
Export licensing fees on an ad valorem basis affect wild animal and plant species as well as restricted textile items. Currently, export taxes affect only the traditional exports of bananas, coffee, meat and cattle. A minimum export price for bananas is set, in line with world market price developments, to preserve a balance between the interests of domestic producers and those of the transnational fruit companies. About half of Costa Rica's banana exports are produced by independent growers, but less than 10 per cent is exported directly by them; the larger share is sold to the transnationals.
No comprehensive drawback system applies in Costa Rica. Tariff and tax concessions are granted under the Free Zones, Export Contracts and Temporary Admission régimes; these have played an important rôle in attracting foreign investors since the 1980s. When local content conditions are met, assistance on non-traditional exports is provided through tax credit certificates (CATs), part of the Export Contracts régime, at rates from 7 to 11.5 per cent or 14 per cent in very special circumstances. The CAT facility has not been used in new contracts since December 1992 and is to disappear on the expiry of all individual contracts, either in 1996 or by 1999 when the Export Contracts régime will be discontinued.
Government setting of producer and/or consumer prices, and of maximum profit margins for specified goods, was abolished in December 1994; price fixing can now only be introduced in exceptional circumstances. Since 1992, the National Production Council has ceased marketing basic foods and moved into the maintenance of food reserve stockpiles and promotion of food processing and trading activities. Small-scale agricultural producers and manufacturing firms benefit from non-subsidized credit facilities. The State may acquire land for allocation to peasant farmers, while the Ministry of Agriculture and Livestock provides support services to producers. A number of measures, including tax incentives and logging licenses, are used to encourage reafforestation and the sustainable use of forest resources. Pending a new pricing policy, electricity prices are fixed on a "no-loss" basis and differ according to the consumer category.
Costa Rica supports research and technology transfer through measures other than fiscal concessions, which were abolished in 1992. To foster industrialization in rural areas and discourage migration to urban areas, the benefits of the Free Zone régime are extended to firms installed in all less-developed areas.
Under the minimum access opportunities of the WTO Agreement on Agriculture, the quantity of certain agricultural products subject to tariff quota commitments is to increase progressively by around 67 per cent in general by 2004. However, there will be no increase for certain types of milk and cheeses or for yellow maize. Costa Rica maintains Special Safeguard Provisions on 76 agricultural items which, until recently, were subject to import licensing. Under its obligations relating to the Aggregate Measurement of Support, Costa Rica is expected to reduce support to domestic producers through price fixing and compulsory purchase, by 15 per cent overall by 2004, to cut budgetary outlays on CATs by 24 per cent and to suppress revenue tax holiday facilities provided under the Export Contracts régime.
Costa Rica is a signatory of numerous international and regional agreements in the area of intellectual property rights. In recent years it has undertaken efforts to improve their protection. Nevertheless, domestic legislation in this area is to be modified, within the relevant time period, to bring it into conformity with the Agreement on TRIPs.
Tourism is the only branch of services where specific incentives have applied since 1985. Market access restrictions and state involvement, including monopolies with exclusive rights, characterize a number of service activities. Banking deregulation has been initiated in recent years, but tighter provisions on prudential supervision are being legislated. The telecommunications sector currently faces competition from international telecommunication services provided by offshore foreign companies and the status of the state monopoly in cellular telephone operations remains to be clarified.
Costa Rica's commitments under the General Agreement on Trade in Services involve informatics, education, health-related and social services, and affect commercial presence and the presence of natural persons. In view of its commitments to its CACM partners, Costa Rica has exempted professional, advertising and land transport services indefinitely from m.f.n. treatment. Other horizontal exemptions have been invoked under investment-related bilateral agreements.
In January 1995, the Government introduced a new export promotion programme, the Plan 5000 de Exportación, whose target is to raise exports to US$5,000 million by the year 2000. The Plan constitutes Costa Rica's strategy for export-driven integration of its economy into world markets.
New laws implementing the results of the Uruguay Round, the Free Trade Agreement with Mexico and improving the promotion of competition and consumer protection, were approved by the Legislative Assembly in December 1994.
In 1995, new bills on customs matters, dumping, safeguards, technical standards, phytosanitary protection, government procurement, industrial property rights, broadcasting and maritime transport, are before the Assembly. Other changes planned include elimination of certain internal taxes, the increase in sales tax, modifications of customs valuation, pre-shipment inspection, the privatization of the state alcohol monopoly FANAL, new banking and radio broadcasting legislation. The restructuring and modernization of the insurance market, including the privatization of the insurance agents' network, is under consideration.
Trade Policies and Foreign Trading Partners
Although Costa Rica's exports benefit from several GSP schemes as well as preferential treatment in Colombia and Venezuela, the greatest gains in this field appear to derive from preferential treatment in the European Union and the United States. Since 1992, the exceptional temporary assistance granted by the EU to CACM countries through duty-free access for agricultural goods helped boost non traditional exports to this market. The authorities consider that Costa Rica's graduation from Poland's GSP scheme in 1994 adversely affected its exports to this destination.
Since 1984, the United States' Caribbean Basin Initiative (CBI) (now made permanent) has contributed to attracting foreign investment, diversifying agricultural and industrial activities, and raising significantly the share of non-traditional exports to the U.S. market. However, some provisions such as Guaranteed Access Levels for textile items and the Government Procurement Initiative have been of limited use to Costa Rica. Sugar exports to the United States earn twice the world market price but are subject to import quotas. Exports of meat, certain dairy products and concentrated fruit juices also face entry barriers.
Costa Rica, together with other contracting parties, was a complainant in two GATT dispute settlement cases concerning EU and member State import measures affecting bananas. The panel reports have not been adopted. Since January 1995, Costa Rican banana exports to the EU have been subject to preferential tariff quotas under the 1994 Framework Agreement on Bananas.
Overall, Costa Rica's merchandise trade and internal tax régime has been substantially liberalized in recent years. Since 1986 and more particularly since 1990, there has been serious liberalization, coupled with important moves to deregulate and increase competition in the domestic economy. Despite tariff reductions and rationalization, the system remains rather complex, with wide dispersion; a degree of uncertainty, deriving from the wide gap between applied and bound rates, has been confirmed by tariff increases in April 1995. Some restrictions appear to remain in the services field, where State intervention seems quite widespread.
In the short term, tackling internal and external imbalances in the economy by tax and tariff increases, rather than public sector reforms to reduce expenditure and the rôle of the State, forgoes an opportunity to enhance resource allocation and diminishes the potential gains from trade. In the longer term, such reforms are necessary to pave the way for improving the efficiency of the economy and achieving international competitiveness.Back to top
TRADE POLICY REVIEW BODY: COSTA RICA
Report by the Government
Economic and trade environment
Over the past 10 years, Costa Rica has made great efforts to achieve the stabilization and adjustment of its economy and active integration in the global economy. This orientation began in the mid-1980s and was accentuated and consolidated from 1990 onwards, the year in which Costa Rica acceded to GATT and in which its economic environment was reviewed in the GATT forum.
Following the economic and social problems which Costa Rica faced in the 1980s as a result of the external debt crisis and the winding-up of the existing import substitution model, in the early 1990s economic performance improved significantly, leading to major progress in transforming production structures. This is reflected in the high levels of growth over the past three years, around 5 per cent or more of GDP, very different from the levels at the beginning of the 1980s, which were even negative in 1981 and 1982.
The external sector has been extremely important as the catalyst for economic growth. The traditional openness of the Costa Rican economy has been reinforced by a very clear "outward-looking orientation", in which exports and imports play a major role. While trade in goods and services in the mid-1980s represented 60 per cent of GDP, this figure is now over 90 per cent. This has had an extremely important effect on the level of employment, since unemployment, which had reached 10 per cent in the early 1980s, has been around 4 per cent in the past five years, despite the huge immigration flows into Costa Rica.
Nevertheless, there is still the cyclical problem of the imbalance in public finance, which in 1994 reached unmanageable proportions, thereby jeopardizing the achievements in other macroeconomic areas. Whereas the consolidated public-sector deficit was less than 1 per cent of GDP in 1993, in 1994 it amounted to 8 per cent of GDP, contributing towards further increases in interest rates and growing pressure on the private sector, increasing the rate of inflation to around 20 per cent and affecting investment. Internal debt, the lack of funding for the pension system, and the State payroll are the main short-term factors causing the fiscal deficit. Special programmes have already been proposed to promote adjustment and greater fairness of the tax system, the overhaul of the pension system, cuts in public spending, labour mobility in the majority of State institutions and an increased role for private operators in areas hitherto run by the public sector. The Costa Rican political regime, which operates on the basis of consensus among the various sectors of political and economic activity, means that the adoption of structural reforms requires lengthy prior negotiations. While draft laws are being adopted to allow the proposed comprehensive reform to be carried out, and on a strictly temporary basis, the import tariff has been increased by 8 per cent in order to obtain the necessary resources to meet immediate financial obligations. The reason why this measure has been adopted in preference to others is that it is the only action which the Executive can take independently, within certain limits, without the need to obtain legislative approval. The target is to reduce the public sector deficit to 3.5 per cent of GDP by December 1995 and to 1 per cent of GDP by December 1996.
It is hoped that the reforms proposed will place public finance on a permanently sound footing so as to restore the macroeconomic balance needed to provide an environment favourable to production and economic growth.
Trade policy developments 1990-1995
The most distinctive feature of Costa Rica's economic policy from 1990-1995 has been the liberalization of trade and the deregulation of the economy. These objectives have been achieved through the adoption of a number of measures under four different approaches: unilateral opening, participation in the Central American integration system, negotiation of a Free Trade Agreement with Mexico and, of course, the adoption of the commitments negotiated within the framework of the Uruguay Round.
The policies and measures taken in these areas have yielded very positive results for the strengthening of Costa Rica's export capacity and its greater integration in the global economy. Since 1990, exports have increased at an annual average rate of 14 per cent, rising to a figure of 29 per cent for the first three months of 1995. The composition of exports has changed, with a noticeable decrease in the dependence on traditional crops and an increase in non-traditional exports, which now amount to more than 50 per cent of total exports. In addition, the markets for Costa Rica's exports have diversified, moving away from the focus on the Central American market during the 1970s, which then received around 70 per cent of exports, towards other markets, mainly around 45 per cent to the United States and 30 per cent to European countries. Imports have also increased over the past four years at an annual average of 13 per cent.
The increase in exports, as well as their importance as the driving force for growth in the Costa Rican economy, means that Costa Rica has had to play an increasingly active and aggressive role in defending its trade interests, above all endeavouring to maintain and increase access to the markets of other trade partners and to defend its exports against the protectionism prevalent in other markets. In order to do so, Costa Rica has sought to avail itself of the instruments offered by the multilateral system.
Over the past five years, Costa Rica has lifted import barriers, increased competition in domestic markets, endeavoured to eliminate the anti-export bias of its economy and promoted more effective allocation of resources. The following are some of the most important measures unilaterally adopted for this purpose:
- Elimination of import surtaxes, which amounted to 10 per cent and affected around 50 per cent of tariff headings;
- reduction and binding in the tariff schedule of a three per cent tax on customs value for all imports;
- elimination of prior deposits for imports, which could amount to as much as 100 per cent of the value of the good imported;
- total liberalization of the capital account;
- planned phasing-out of export subsidies;
- elimination of production subsidies;
- elimination of State participation in the marketing of agricultural products;
- elimination of the majority of export taxes;
- transposition of the Central American Customs Nomenclature II to the Nomenclature of the Harmonized Commodity Description and Coding System;
- enactment of the Law on the promotion of competition, under which all non-tariff barriers on imports and all export licences are abolished;
- adoption of a new law on government procurement, under which the procedure for administrative contracting is rationalized and simplified;
- approval of reforms to the electricity co-generation power legislation, providing for increased participation by private operators in this sector.
Elements of a forward-looking trade policy
The great and growing importance of foreign trade in Costa Rica's economy means that a foreign trade policy which promotes greater and more secure access to markets, as well as the strengthening of the multilateral system, constitutes a priority in Costa Rica's economic policy.
Costa Rica is adopting measures to respond better to the new challenges arising in the sphere of multilateral trade, with the aim of strengthening the institutional capacity needed to play an active and constructive role in coming years.
Free Trade Area for the Americas
In December 1994, the Presidents of 34 countries on the American continent agreed to establish a Free Trade Area for the Americas by the year 2005. Costa Rica attaches great importance to working actively towards the establishment of this economic area, because it believes that it will open up considerable opportunities for all the inhabitants of the American Continent and, taking as a basis the rules and disciplines of the WTO, it has the potential to become a very important complement to the WTO in the task of promoting trade liberalization and enhanced prosperity for all.
The future multilateral agenda
Costa Rica recognizes that the WTO agenda for the next few years is extensive and complex, not only because of the large number of issues which the Uruguay Round Agreements make it necessary to deal with in greater detail but also because the actual implementation of these Agreements raises new and ambitious challenges that have to be met. Costa Rica is making sure that it will be able to fulfil its duties within the new system responsibly. Its participation in the review mechanism as the first country to be examined under the new disciplines and agreements of the Uruguay Round is proof of this commitment.
It is a source of concern to Costa Rica that new issues, not relevant to the discussions in the Uruguay Round and its provisions, not even to trade either, are increasingly brought before this forum by some trading partners. Costa Rica fears that, in fact, behind these apparently praiseworthy initiatives there are protectionist forces which aim to close markets, using the excuse of labour rights, environmental protection or other aspects. Costa Rica is also concerned that the values of particular societies might be imposed on others through the medium of trade provisions. It believes that the rules of the multilateral trading system are fully consistent with the pursuit of other social objectives of wider scope, but it does not believe that this trade forum is the best place to deal with them. Back to top