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### Viewing cable 05SANJOSE2850, SCENESETTER: CODEL BLUNT IN COSTA RICA

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
05SANJOSE2850 | 2005-12-14 00:12 | 2011-03-15 21:09 | CONFIDENTIAL | Embassy San Jose

`

    This record is a partial extract of the original cable. The full text of the original cable is not available.

` `

    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.

    ----------------------------------------
    COSTA RICA ) A LONG HISTORY OF DEMOCRACY
    ----------------------------------------

    ¶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.

    -------------------------
    STATE OF RELATIONS WITH GOCR
    ----------------------------

    ¶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.

    -----------------------------------------
    CAFTA-DR RATIFICATION ) A LONG ROW TO HOE
    -----------------------------------------

    ¶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.

    --------------
    TRADE OVERVIEW
    --------------

    ¶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.

    -------------------------------------------
    LOW REAL GROWTH, HIGH INFLATION, LARGE DEBT
    -------------------------------------------

    ¶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

`