SCENESETTER: CODEL BLUNT IN COSTA RICA

C O N F I D E N T I A L SECTION 01 OF 04 SAN JOSE 002850

SIPDIS

WHA/CEN
EB FOR WCRAFT
E FOR DEDWARDS
WHA/EPSC FOR KURS
H FOR WMIELE AND SSHEYBANI

E.O. 12958: DECL: 12/13/2015
TAGS: OREP AMGT ASEC AFIN ECON ETRD CS
SUBJECT: SCENESETTER: CODEL BLUNT IN COSTA RICA

REF: SECSTATE 220612

Classified By: Ambassador Mark Langdale for Reasons 1.4 (b) and (d)


1. (U) SUMMARY: Embassy San Jose warmly welcomes CODEL Blunt
on its December 19 ) 20 visit to Costa Rica. The
delegation's visit comes at a time when the main issue in the
bilateral relationship is the Central America-Dominican
Republic-United States Free Trade Agreement (CAFTA-DR). The
debate has just started in the Costa Rican unicameral
57-member legislature (the Assembly),and the entire
ratification process will take at least six months due to the
required legislative process and the elections on February 5,
2006 of a new President and new Assembly members (deputies).
(Note: The Costa Rican Constitution does not allow elected
officials to serve consecutive terms. End Note.) End
Summary.

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COSTA RICA ) A LONG HISTORY OF DEMOCRACY
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2. (SBU) Costa Rica has a strong history of democracy and of
making decisions by consensus. In 1948, after a brief civil
war, the army was abolished to preclude military interference
in the country's politics and to allow a greater
concentration of resources for universal health care,
education, and a relatively generous social welfare system.
The consensus-building aspect of democracy in Costa Rica
results in slow decision-making but has allowed Costa Rica to
avoid the civil wars that wracked its Central American
neighbors in the latter half of the twentieth century. As a
result, Costa Rica is the most developed country in Central
America with the lowest poverty and unemployment rates,
lowest infant mortality rates, and highest GDP per capita.


3. (SBU) To spur development in the middle of the last
century, the legislature created state-owned monopolies in
the banking, electricity, telecommunications, petroleum
distribution, and insurance markets. Income from these
institutions was used to help the poor and ensure services
reached all corners of the country. But over the years these
institutions have become large, bloated, and inefficient
entities that deliver poor quality services and are
susceptible to corruption. Despite these faults, many Costa
Ricans continue to view these organizations as venerable
institutions that demonstrate that the state will continue to
take care of them.


4. (SBU) The current President, Abel Pacheco (Louisiana
State University-educated psychiatrist),was elected in the
country's first-ever run-off election in April 2002 in which
he won 58 percent of the vote. President Pacheco is in his
final months as President, and he has seen his popularity
rating drop during the course of his administration. This is
due in part to his accepting gifts and favors which violated
the same anti-corruption laws that he championed, but is
principally due to a generally-held low opinion of his
effectiveness as president. President Pacheco has seen 18
cabinet-level ministers resign, some over the President's
uneven and wavering support for CAFTA-DR. Most of the
management of the Ministry of Foreign Trade (COMEX) that was
responsible for negotiating and implementing the agreement
left the organization over the last 18 months.

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STATE OF RELATIONS WITH GOCR
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5. (C) Relations between the United States and Costa Rica are
friendly, abiding, and complex. We share core political
values, including a belief in democracy and a commitment to
human rights. Like the United States, Costa Rica does not
have formal diplomatic relations with Cuba and is concerned
about attempts by the Venezuelan government to increase its
influence in the hemisphere. Although Costa Rica has no
military, the Costa Rican Coast Guard and police cooperate
closely with the U.S. Coast Guard, Navy, and Drug Enforcement
Agency (DEA) in narcotics interdiction. In August 2004,
President Pacheco signed the seven-nation Central
America-Dominican Republic-U.S. Free Trade Agreement
(CAFTA-DR) but, because of his inordinate fear of protests by
public sector unions and university students, he waited until
October 2005 after every other potential partner had already
ratified the treaty before submitting it to the legislature
to begin the lengthy process of ratification. As a result,
Costa Rica will likely be the last country to join CAFTA-DR.
On December 7 Peru and the U.S. finished negotiations on a
free trade agreement.

6. (C) U.S. economic assistance to Costa Rica has fallen
dramatically since 1995 when we closed our bilateral USAID
mission. There was an upsurge in U.S. military and
counternarcotics assistance with the signing of a Bilateral
Maritime Agreement in 1998, but that assistance has now been
reduced very substantially because of Costa Rica's
unwillingness to sign an Article 98 agreement (committing
Costa Rica not to surrender U.S. nationals to the
International Criminal Court) and a shift in priorities in
the State Department's Bureau of International Narcotics and
Law Enforcement Affairs (INL). Failure to sign an Article 98
agreement also has caused Costa Rica to be ineligible for
trade capacity-building funds to implement CAFTA-DR. This
decline in assistance, which is viewed as "sanctions" by many
in the GOCR and the press, unavoidably diminishes U.S.
influence in Costa Rica and affects the level of cooperation
in the areas of counternarcotics, counterterrorism, and trade.


7. (C) The Pacheco Administration, which took office in May
2002, has been characterized by passivity, inactivity, and,
stated bluntly, a leadership void. Admittedly, the president
has had to deal with a fragmented legislature where often a
small minority can prevent action. Further complicating
governance in Costa Rica are a supreme court and autonomous
regulatory bodies that insert themselves in matters we
normally think of as the prerogative of the executive branch,
such as whether or not to support the U.S.-led coalition in
Iraq. The next general elections in Costa Rica are scheduled
for February 5, 2006, and we expect far more vigorous
leadership if former president and current front-runner Oscar
Arias is elected. Arias is much more committed to
free-market policies and CAFTA-DR than is Pacheco, but with
respect to some international issues, such as the use of
military force and levels of economic assistance from rich to
poor countries, Arias will likely be at odds with the United
States.

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CAFTA-DR RATIFICATION ) A LONG ROW TO HOE
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8. (U) Costa Rica is the only CAFTA-DR signatory country not
to have already ratified the agreement. Fourteen months
after signing CAFTA-DR and after much public debate over
whether or not the agreement would benefit the poor,
President Pacheco on October 21, 2005 finally sent the
agreement to the Assembly to start the relatively long
ratification process. Currently, the Assembly's
International Relations and Trade Committee is studying
CAFTA-DR and holding hearings with various groups about the
agreement.


9. (U) Due to the legislative recess from December 23, 2005
through February 13, 2006 for the holidays and the national
elections, completion of the Committee's work is expected no
sooner than the end of April 2006, just before the new
deputies take office on May 1, 2006. (Note: The new
Administration takes office on May 8, 2006. End Note.)
After the Committee has sent its findings to the Assembly
floor, two separate votes by the Assembly are required to
pass the agreement, between which the Constitutional Court
will review CAFTA-DR for any legal or procedural issues.
The total ratification process will take at least six months
and most likely longer.


10. (SBU) Unlike the path taken by the U.S. Congress, the
Assembly will approve CAFTA-DR separately from the
legislation that will actually implement the agreement. To
date, the implementing legislation has not been sent to the
Assembly, and passing these bills could be as difficult as
passing CAFTA-DR. These bills should effect the gradual
phased opening of the telecommunications and insurance
markets to competition ) markets that are currently legally
monopolized by the state-owned Costa Rican Institutes of
Electricity (ICE) and Insurance (INS),respectively.


11. (SBU) Public knowledge of and support for CAFTA-DR has
grown over the last year with an October 2005 CID/Gallup poll
revealing that 64 percent of the respondents were at least
&somewhat8 in favor of the agreement. Those responding
that they were &somewhat8 or &very much8 opposed
constituted 26 percent. Sixty-one percent of those who knew
something about the agreement responded that they thought
CAFTA-DR would benefit Costa Rica.

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TRADE OVERVIEW
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13. (U) Due to its small size, geographic location, and
limited natural resources, Costa Rica relies heavily on
foreign trade and investment. The United States provides 46
percent of Costa Rica's imports and consumes 44 percent of
Costa Rican exports. According to the U.S. Census Bureau,
through September 2005, two-way trade between the U.S. and
Costa Rica amounted to approximately USD 5.1 billion. Total
trade for 2004 was USD 6.6 billion, a 12-percent increase
from 2003. Costa Rica accounts for one-third of U.S. trade
with the five Central American CAFTA-DR countries. Over the
last twenty years, Costa Rica has taken steps to diversify
its economy and, as a result, has become less dependent on
the traditional agricultural crops for generating revenue.
In general Costa Rica has integrated itself more into the
global economy; growing imports and exports are proof of that.


14. (U) Costa Rica exported USD 2.8 billion worth of goods
to the U.S. in 2004. Traditional agricultural products such
as bananas and coffee dominated exports 20 years ago. Now
integrated circuits and medical devices are the top exports
to the U.S. from Costa Rica. With regard to revenue
generation, tourism is number one in Costa Rica.
Approximately 1.6 million visitors came to Costa Rica in
2004, more than 600,000 of them from the U.S., generating USD
1.4 billion. Through the first half of this year, tourism
income is up 17 percent as compared to the same period last
year. Tourism also plays a special role in the Costa Rican
economy by providing approximately 300,000 direct and
indirect jobs, a large portion outside the San Jose area.


15. (U) Costa Rica imported USD 3.8 billion worth of U.S.
goods from the U.S. in 2004. Top imported items included
semiconductors and textile materials. The U.S. is a major
supplier of corn, wheat, rice, soybeans, and consumer foods
to Costa Rica. Costa Rica is a solid market for U.S.
agricultural exports, but the U.S. currently imports from
Costa Rica more than three times what it exports to Costa
Rica.


16. (U) The total flow of foreign direct investment (FDI)
into Costa Rica was USD 596 million in 2004, 66 percent of
which came from the U.S. The Central Bank of Costa Rica
estimates that FDI will fall to USD 540 million in 2005 based
on a declining investment climate. FDI is concentrated in
the industrial manufacturing sector which attracted USD 437
million in 2004, followed by the tourism and services sectors
which attracted USD 51 and USD 37 million, respectively.

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LOW REAL GROWTH, HIGH INFLATION, LARGE DEBT
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17. (U) Global economic changes affect Costa Rica's economy.
For instance, the increase in gasoline prices in 2005 hit
Costa Ricans especially hard since they have no domestic oil
production capabilities. Costa Rica's economy is also
affected by operations of large multi-national companies that
have manufacturing and service operations in Costa Rica.
Intel has a large operation in Costa Rica and its growth or
lack thereof has a noticeable effect on the economic
situation. In 2003 when Intel's exports increased 32
percent, the Costa Rican economy grew 5.6 percent. In 2004,
Intel's exports dropped and growth was 4.2 percent. (Note:
The growth could have been lower but was helped by continued
strong growth in non-traditional agricultural exports that
year. End Note) GDP growth for 2005 is expected to be
approximately 4.1 percent. Inflation remains a significant
macroeconomic challenge, and at 14.2 percent over the last
twelve months it is at its highest level in eight years and
one of the highest rates in Latin America. The
higher-than-expected inflation and slower-than-expected
growth in exports led the Central Bank to increase the rate
of colon (the local currency) devaluation against the dollar
in July 2005.


18. (U) The fiscal deficit is one of Costa Rica's most
serious macroeconomic problems. More than 90 percent of the
GOCR's income is used to pay government salaries, pensions,
social benefits, and interest payments on the national debt.
The central government's fiscal deficit is projected to be
about 2.8 percent of GDP for 2005. This compares to 2.5 and
3.0 percent of GDP for 2004 and 2005, respectively. Fiscal
reform legislation, one of the Pacheco Administration's
primary goals, has languished in the legislature for over
three years. This proposal is mainly a tax increase and does
not contemplate spending cuts. The President's bill has been
blocked by the minority Libertarian Movement (ML) Party in
the Assembly.

19. (U) At the end of 2004, Costa Rica's public sector debt
topped USD 10.5 billion. The central government's deficit is
largely financed by government borrowing and the surpluses
generated by some state-owned monopolies (which include
telecommunications, electrical power, insurance, and
petroleum distribution). In late 2004, the GOCR, unable to
attract investors on the open market, resorted to forcing
state-owned service providers to take on government debt to
allow the GOCR to meet its end-of-year obligations.
LANGDALE