SCENESETTER FOR CODEL NELSON'S VISIT TO COSTA RICA

UNCLAS SAN JOSE 000299

SIPDIS

CODEL

SIPDIS

E.O. 12958: N/A
TAGS: OREP OTRA PREL PGOV WHA ECON CS
SUBJECT: SCENESETTER FOR CODEL NELSON'S VISIT TO COSTA RICA

REF: STATE 15976


1. SUMMARY: Embassy San Jose warmly welcomes CODEL Nelson. The
visit comes at a key point in the approval process for the
U.S.-Central America-Dominican Republic Free Trade Agreement
(CAFTA). CAFTA is a key element in President Arias's agenda to
modernize the country and begin to rebuild its creaky
infrastructure, domestic security apparatus and education system. A
comfortable majority of Costa Ricans (and a two-thirds majority in
the legislature) favors CAFTA, but the ratification and
implementation process has been hyper-legalistic and slow. The hard
core of opponents has not given up; the next national anti-CAFTA
protest is planned for February 26. Nevertheless, the government is
reasonably confident that the first of two required ratification
votes could take place in April, with CAFTA being fully ratified by
mid-year. Implementation will take longer. The economy performed
well in 2006, fueled by CAFTA-hopeful investment. The government
continues to be a reliable partner in confronting drug and migrant
trafficking, despite limited resources. USG-supplied equipment and
training has been essential to supporting Costa Rica's security
forces, but current assistance levels are only a fraction of what
they were in the 1980's. It is the growth that will be fueled by
trade, not aid, however, that will provide Costa Rica with the
resources it needs to modernize and develop in the long run. The
Arias Administration's top foreign policy priority is election to
the UN Security Council for the 2008-2010 term. On Nicaragua, the
Arias team has taken a wait-and-see approach following Daniel
Ortega's election.
END SUMMARY.

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CHALLENGES AT HOME
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2. Returning to office in 2006 after a 16-year hiatus, President
Oscar Arias faces a number of challenges. He won a surprisingly
close election, defeating Otton Solis of the Citizen's Action Party
by a margin of less than two percent, and his National Liberation
Party won only 25 of 57 seats in the National Assembly. He took the
helm of a well-developed democracy, with a history of stability and
relative prosperity (per capita income is approximately USD 4,700).
On the other hand, recent previous administrations accomplished very
little, three former presidents face corruption allegations and
Costa Ricans thus have less confidence in their governing
institutions.


3. Costa Ricans also suffer the effects of the nation's creaky
infrastructure and increased crime. Only one-fourth of students
entering the public school system graduate from high school. The
judicial system is broken; of 37,000 robbery cases opened in 2005,
for example, only three percent ended with a conviction. In World
Bank rankings, Costa Rica places 159th out of 175 in countries
measured for protecting investors, and 114th in enforcing contracts.
On other key measures of international competitiveness, Costa Rica
is also slipping. The country dropped from 99th to 105th overall on
the World Bank's 175-country "Doing Business Index" for 2006, and in
the key measure of paying taxes, ranked 160th out of 175.

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AMBITIOUS AGENDA; GROWING SUPPORT
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4. Arias's agenda goes right to the heart of these problems, based
on the twin pillars of fiscal reform (overhauling the tax system)
and a more open and competitive economy (enacting CAFTA-DR,
reforming the telecom and energy sectors, establishing an effective
concessions system, and creating jobs). These reforms should provide
Costa Rica the resources to modernize infrastructure and
institutions, increase spending on education, and invest in a more
robust omestic security apparatus. Costa Ricans increasinly
believe that Arias will deliver on his agenda two out of three in
the January CID-Gallup poll) The same poll shows a 68 percent
personal approval rating for Arias (up from 60 percent in October),
with 54 percent describing his presidential performance as "good or
very good" (up from 50 percent in October). Arias's goals are fully
consistent with the four pillars of USG policy in the hemisphere:
consolidate democracy, promote prosperity, invest in people and
protect the democratic state.

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CAFTA: 2007 IS THE BIG YEAR
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5. Ratification and implementation of CAFTA is a central component
of Arias's development agenda, and it is the U.S. Embassy's top
foreign policy objective. The Arias Administration inherited CAFTA,
an initiative he and his party have always supported. The previous
government signed the agreement in August 2004 and submitted it to
the legislature in October 2005. After a slow start, the Arias
administration picked up momentum in late 2006. A long-planned
national anti-CAFTA protest fizzled in October and a costly
dockworkers strike in the major Caribbean port of Limon was resolved
peacefully. The administration recently has formed a five-party,
38-seat working coalition to push initiatives through the 57-seat
legislative assembly. This super-majority voted the CAFTA bill out
of committee in December, after 278 hours of hearings.


6. In January 2007, the super-majority also approved rule changes
which would limit CAFTA floor debate and accelerate consideration of
the implementation agenda. In February, procedural obstacles slowed
progress, and the opposition filed a constitutional challenge to the
rule limiting debate. A Supreme Court ruling is expected in March.
Even with this delay, the Arias Administration is reasonably
confident that the first of two required ratification votes could
take by early April, with CAFTA being fully ratified by mid-year.


7. Challenges remain, however. CAFTA opponents in the legislature
are making full use of complex, arcane rules and procedures which
favor obstructionism. In order to enact the 13 bills that would
implement CAFTA by the February 29, 2008 deadline, the government
will have to move faster than all the other CAFTA countries.
Anti-CAFTA labor union and student groups have set the next national
protest for February 26. With 62 percent of those who know about
CAFTA in favor of it (according to the January CID-Gallup poll),and
a ratification vote approaching, the opposition is running out of
time, and becoming more shrill. The government has made clear that
the public has the right to demonstrate, but roadblocks and other
disruption to public order (features in past demonstrations) will
not be tolerated.

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ECONOMIC SNAPSHOT
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8. The Costa Rican Central Bank (BCCR) reports that the country's
GDP grew at over 7 percent in 2006, the highest since 1999. Foreign
Direct Investment increased from $861 million in 2005 to $1.4
billion in 2006. Much of the economic growth was in anticipation
that CAFTA would enter into force in 2007. If that is not the case,
the investment-fueled growth is likely to dry up. Inflation declined
from 14.4 percent in 2005 to 9.4 percent in 2006. Surprisingly, the
tourism industry grew only 1.8 percent in 2006, although it remained
the largest employer and earner of foreign exchange. Other key
sectors such as agriculture and free trade zone manufacturing also
showed marked improvements in 2006. Costa Rica imports more from,
and exports more to, Florida than any other U.S. state; in addition,
Florida constitutes the number one destination for Costa Ricans
traveling to the U.S.

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TRAFFICKING IN DRUGS AND MIGRANTS
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9. Despite the government's limited security resources, Costa Rica
continues to be a reliable partner against transnational drug and
migrant trafficking. In 1999, Costa Rica was the first nation to
sign a bilateral maritime agreement with the United States, which
authorized joint patrols in Costa Rican waters. Since then, the
record has been impressive. U.S. and Costa Rican forces teamed up to
seize over 25 metric tons of cocaine in 2006, a record. In January
2007, another six metric tons were seized. These successes
underscore the magnitude of the drug flow through the region. In
October 2006, joint U.S.-Costa Rican cooperation rescued 128 Chinese
migrants abandoned at sea by smugglers. They were returned to Peru
(their port of embarkation). Costa Rica remains historically
reluctant to participate in anything suggesting "militarization,"
which has limited Costa Rican participation in regional cooperation
on security issues.

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U.S. ASSISTANCE
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10. USG-supplied military equipment and training has been essential
to maintaining and improving Costa Rica's security forces, but
current assistance levels are only a fraction of what they were
during Arias's first term. The October 2006 waiver of APSA
restrictions on International Military Assistance and Training
(IMET) funds made $45,000 available under the FY 2007 Continuing
Resolution. The President's FY 2008 budget included a request for
$88,000 in IMET funding for Costa Rica. State Department
counternarcotics assistance has fallen sharply from over $1 million
in FY 2000 to $100,000 in FY 2006. Given the reduced assistance
flows, the Embassy has looked for other creative ways to assist
Costa Rica. A State Partnership Program with New Mexico was
established in January 2007, offering training and technical
assistance from the National Guard. The U.S. Treasury provides
significant technical assistance and training to Costa Rica's
finance ministry and tax authorities. Meanwhile, other governments
have become more prominent donors. Taiwan is providing $2 million in
vehicles ad equipment for the national police.


11. For President Arias, the foreign assistance issue has a
philosophical component. He advocates the Costa Rica Consensus,
based on two premises: first, that Costa Rica and other
middle-income countries have been unfairly "cut off" from the large
foreign assistance flows from the past; second, that countries which
invest more in social programs and less for armaments (like Costa
Rica) "deserve" additional assistance. Arias also proposes a "Peace
with the Environment" initiative which would build a new
international "rain forest" coalition, linking countries such as
Papua New Guinea, the Congo (and Costa Rica) with international
donors. Under these rubrics, Arias advocates debt relief for
middle-income countries like Costa Rica.


12. It is trade, not aid, that will provide Costa Rica the
resources it needs to modernize and develop, however. As a
"sustaining partner" according to the State Department's new foreign
assistance scale, Costa Rica should be well-placed, especially with
CAFTA, to attract needed foreign investment. New U.S. government
initiatives are likely to be limited. As a CAFTA signatory, Costa
Rica is eligible for a share of the $40 million in regional trade
capacity building. Under the Tropical Forest Conservation Act
(TFCA),Costa Rica likely will be eligible for some targeted debt
forgiveness.

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FOREIGN POLICY ISSUES: UN AND NICARAGUA
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13. The Arias Administration's top foreign policy priority is being
elected to the UN Security Council to fill an upcoming Latin
American vacancy for the 2008-2010 term. The government views a
Security Council seat as a key prerequisite to furthering its other
top objectives, including the Costa Rica Consensus and the Peace
with the Environment initiative. On Nicaragua, the Arias
Administration has taken a wait-and-see approach following Daniel
Ortega's election. With over 300,000 Nicaraguans estimated to be in
Costa Rica, and relying heavily on Nicaraguan labor to harvest
coffee and perform other manual labor, Costa Rica seeks to handle
bilateral relations with its northern neighbor very carefully.
Langdale