SCENESETTER: CODEL BURTON IN COSTA RICA

UNCLAS SECTION 01 OF 03 SAN JOSE 000001

SIPDIS

SENSITIVE

DEPARTMENT FOR H FOR BFLECK AND DPARKS
WHA/CEN FOR JMACK

E.O. 12958: N/A
TAGS: OREP AMGT ASEC AFIN ETRD CS
SUBJECT: SCENESETTER: CODEL BURTON IN COSTA RICA

REF: STATE 229334


1. (U) SUMMARY: Embassy San Jose warmly welcomes CODEL
Burton on its January 10 ) 12 visit to Costa Rica. The
delegation's visit comes at a time when the main issue in the
bilateral relationship is the United States-Central
American-Dominican Republic 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.
Meantime, there are elections on February 5, 2006, of a new
President and new Assembly members (deputies). (Note: The
Costa Rican Constitution does not allow these elected
officials to serve consecutive terms. Therefore, the
executive and entire legislative branch will change. 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. 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 the 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 that
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
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 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. (SBU) 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.


6. (SBU) 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 because of Costa Rica's reluctance 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 unavoidably
affects the level of our cooperation with Costa Rica in the
areas of counternarcotics, counterterrorism, and trade.


7. (SBU) The next general elections in Costa Rica are
scheduled for February 5, 2006. Former president and current
front-runner Oscar Arias is heavily favored to win the
election in the first round of balloting, which would require
garnering forty percent of the vote. Arias is deeply
committed to free-market policies and CAFTA-DR, 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 is likely to 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 treaty. President Pacheco
signed CAFTA-DR in August 2004 but since that time has
publicly expressed his doubts that the treaty will benefit
the poor. Only on October 21, 2005, did the president
finally send 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 5, 2006 for the holidays and the national
elections, completion of the Committee's work is expected no
sooner than the end 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, in
between which the Supreme Court will review CAFTA-DR for any
constitutional issues. The total ratification process will
take at least six months and most likely longer.


10. (U) 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 yet been sent to
the Assembly, and passing these bills could be as difficult
as passing CAFTA-DR. These bills should effect the 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. (U) 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
"somewhat" in favor of the agreement. Those responding that
they were "somewhat" or "very much" 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. Bananas and coffee, which were primary
exports 20 years ago, fell behind tourism, integrated
circuits, medical devices and pineapples as the top exports
to the U.S. 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, but the U.S. currently imports from Costa Rica
more than three times what it exports to Costa Rica.


16. (U) Total foreign direct investment (FDI) in 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. Costa Rica's economy is also affected by
operations of large multinational 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, but continued strong growth in non-traditional
agricultural exports helped limit the overall impact on the
economy ) the result was growth of 4.2 percent. 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 2003 and 2004, 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.
FRISBIE