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06SANJOSE936 2006-05-04 15:50:00 UNCLASSIFIED Embassy San Jose
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DE RUEHSJ #0936/01 1241550
O 041550Z MAY 06
					  UNCLAS SAN JOSE 000936 




E.O. 12958: N/A

REF: STATE 69614

Country Overview

1. Costa Rica is a developing country with a per capita
income of about U.S. $4,700 and an unemployment rate of about
6.5 percent. Tourism, manufactured exports, and service
industries now far surpass traditional agricultural exports
(coffee and bananas) as sources of employment and foreign
exchange. With over 700,000 U.S. tourists annually and
almost as many from other countries, the tourism industry is
flourishing. Relative prosperity has created a larger middle
class in Costa Rica than is found in most Latin American

2. Costa Rica has serious economic problems, however,
including an unsustainable fiscal deficit, a growing debt
burden, high inflation rates, and high domestic interest
rates that restrict local business growth. The country,s
highway system, education, and health care systems have
deteriorated over time. The state telecommunications
monopoly limits competition. The current administration of
Abel Pacheco negotiated and signed the Central American Free
Trade Agreement (CAFTA), but President Pacheco remained
ambivalent about the agreement and failed to press vigorously
for ratification. As a result, Costa Rica is the only CAFTA
country that has not yet ratified the agreement.

3. Costa Rica,s traditional two-party political system
began to erode in 2002 with the emergence of strong third and
fourth parties. Unprecedented corruption scandals in 2004
leading to the arrests of two former presidents and the poor
performance of outgoing President Abel Pacheco caused the
ruling party to fall to fourth place in the 2006 elections.
Former President and Nobel Peace Prize laurate Oscar Arias
won the election by just one percent, defeating the populist
Otton Solis.

Peaceful Transitions


4. Costa Rica has enjoyed peaceful transitions of executive
leadership via free elections for more than 100 years, with
two exceptions: from 1917 to 1919 when Federico Tinoco
overthrew and elected government, and from 1948 to 1949, when
Jose Figueres Ferrer headed an unelected government junta
following a brief civil war. Figueres was subsequently
elected in free and fair elections and founded the National
Liberation Party, the party of Oscar Arias.

5. The Presidential Inauguration will be held at the
National Stadium in western San Jos. Arias will walk to the
ceremony from his home six blocks away. The concrete
stadium, which seats about 20,000, was built in 1924, rebuilt
in 1940, and last refurbished in 1972. Its main use is for
amateur soccer. It has also been used for other large
open-air events, such as a mass attended by Pope John Paul
II, a concert by Luciano Pavarotti, and, since the 1970s,
presidential inaugurations. The stadium is located in a
large park called La Sabana, which also contains the Museum
of Costa Rican Art and the National Gymnasium. La Sabana was
an airport until 1955. President Kennedy landed there in a
helicopter during his visit in 1963.

Arias's First Term as President


6. Oscar Arias took office in 1986 at age 44, the youngest
President in Costa Rica,s history. A year later he won the
Nobel Peace Prize for his contributions to the Central
American peace process. During the 1980s, Arias publicly
undercut U.S. policy toward the Sandinista regime, while at
the same time working to bring all parties to the negotiating
table. The Peace Prize greatly enhanced Arias's popularity
at home and burnished his credentials as an international
statesman. However, Arias,s aloofness limited his ability
to work effectively with the Legislative Assembly, and few
important laws were approved during his first administration.

7. Arias,s domestic policy focused on achieving economic
stability through reducing inflation, renegotiating debt, and
attracting foreign investment. Arias succeeded in slowing
inflation, obtained more favorable terms for $1.6 billion in
debt, and provided some low-income housing (though far short
of his campaign promise of 80,000 new homes). Unemployment
continued to grow, however, and the national debt ballooned
to $4.6 billion. In 1988 Arias declared a year of austerity
and pledged no new taxes during his term.

8. Sensitive to charges he spent too much effort on
international affairs, Arias often claimed that he spent 13
of the 16 hours he worked each day on domestic problems.
When critics pointed out that he had accomplished little for
such an effort, Arias countered that "the solution to all
internal problems is to keep the violence in the rest of the
region from crossing our borders."

Arias Today


9. Arias will make CAFTA ratification and implementation a
high priority for his government. He also wants to increase
spending on education and infrastructure. Internationally,
Arias will be an advocate for human rights, multilateralism,
and disarmament. Although he considers himself a good friend
of the United States and tough critic of Fidel Castro and
Hugo Chavez, he should be expected to criticize the U.S. on
issues such as Iraq, the International Criminal Court, and
international aid levels.

10. President-elect Arias faces domestic opposition,
particularly from public sector unions and university
students. Unwillingness to confront this opposition
paralyzed Arias,s predecessor, Abel Pacheco. Arias's party
is the largest block in the incoming Assembly and roughly 2/3
of its 57 members have already stated they support the
agreement. Even with this level of support, committee
hearings are expected to last through the summer. If the
Assembly moves quickly, Costa Rica could ratify CAFTA by
December 2006.