CHAPTER II. 

                        ECONOMIC TRENDS AND OUTLOOK 

 

A.  MAJOR TRENDS AND OUTLOOK 

 

Costa Rica 's economy grew at a healthy pace during 1994.  Gross 

Domestic Product (GDP) in constant terms (1966 colones) increased 

4.5 percent, considerably less than the 6.4 percent rate of GDP 

growth during 1993, but still well above the 2.3 percent annual 

population increase.  GDP growth continued to be fuelled by a 

strong tourist sector, promoting Costa Rica's natural wonders and 

offering niche-oriented eco-tourism.  Costa Rica, with 1/4 of its 

land dedicated to national forests, parks and reserves, has 

become a destination for affluent visitors interested primarily 

in nature tourism.  Growth in the textile/apparel area, an 

important source of investment and employment, slowed 

significantly during 1994, registering an increase of only 3.6 

percent, versus increases of 10.6 percent in 1993 and 33.6 

percent in 1992. 

 

Unemployment increased slightly to 4.2 percent of the labor force 

during 1994, up from 1993's rate of 4.1 percent.  Real salaries 

increased about 6.9 percent, down slightly from the 8 percent 

gain realized in 1993. 

 

The consumer price index (CPI) increased 19.9 percent in 1994, 

more than double the 9.8 percent increase experienced in 1993. 

The CPI for 1995 is expected to increase 18 to 23 percent. 

 

From December 1993 to December 1994, the colon devalued 8.9 

percent.  The pace of the daily mini-devaluations has picked up 

substantially in the first months of 1995 and the outlook is for 

an annual devaluation rate of at least 17 percent. 

 

According to official figures, poverty seems to have decreased 

slightly from 1993.  In July 1994, about 15.8 percent of the 

homes were at or below the poverty level as defined by the the 

United Nations Economic Commission for Latin America (ECLA), 

about half of which (7.1 percent) is said to be in extreme 

poverty. 

 

The fiscal situation of the Central Government worsened during 

1994.  While total spending increased 45.4 percent (to a level 

equivalent to 21.3 percent of GDP), revenues increased only 15.2 

percent (equivalent to 14.7 percent of GDP), a deficit that was 

met mostly by internal borrowing.  Government borrowing drove 

interest rates back to 1993 highs (34 percent charged by State 

commercial banks to prime customers, 41 percent charged by 

private banks to prime customers), and increased the government's 

outstanding internal debt to about 2.6 billion dollars.  The 

government has announced important spending reductions and 





proposed corresponding increases in taxes, which have yet to be 

approved by the Legislative Assembly, in an effort to reduce the 

fiscal deficit of the public sector from 7.5 percent of GDP 

during 1994 to about 4.5 percent of GDP during 1995. 

 

During the past year, some government and business leaders have 

worried publicly that Costa Rican firms are losing their 

competitive edge due to the highest interest rates in Central 

America, slower foreign investment, proposed higher taxes, and an 

8 percent across-the-board tariff increase (March 1995) to 

generate revenues to help cover the government's large fiscal 

deficit.  The mood in the business community is marked by 

uncertainty as to whether the government will be able to 

implement a macroeconomic plan to lower interest rates plus 

concerns that slowed foreign investment and tourism may not 

provide the boost this economy needs in 1995. The GDP is expected 

to increase 2.5 to 3.5 percent in 1995.  Both investment and 

tourist income are likely to increase (though at a less robust 

pace than in previous years), international coffee prices -- 

though volatile -- continue significantly higher than 1993's 

record lows, and the country has managed to retain a sizable 

share of banana exports to the European Union, despite the 

continuing conflict with U.S. banana marketing companies. 

 

 

B.  PRINCIPAL GROWTH SECTORS 

 

Sectors directly involved in servicing tourists grew considerably 

during 1994, continuing the trend of recent years. Although there 

is no precise statistical information to measure this growth, the 

importance of tourism can be deduced indirectly.  According to 

the tourist board (ICT) 761,448 visitors came to Costa Rica 

during 1994, in comparison with 376,000 in 1989.  At the same 

time, the number of available rooms increased from 5,456 in 1989, 

to above 14,000 in 1994, causing many hoteliers and owners of 

tourist businesses to complain about overcapacity and lower 

occupancy rates.  Income from tourism is estimated at over $685.5 

million in 1994, a 19 percent increase over 1993.    Employment 

in the tourist sector is estimated to be above 62,000, with a 

similar number of workers employed in jobs directly connected to 

tourism. 

 

New laws, changes in existing laws and changes in the makeup of 

government monopolies will also provide opportunities for growth 

and investment by U.S. companies.  For example: 

 

     -- Law (#7200, 1990) of Energy Co-generation:  Allows 

private entities to provide up to 30 percent of the nation's 

electricity.  Fifteen percent of all privately generated energy 

can be under the build, operate and transfer arrangement, with up 

to 65 percent foreign ownership, a 20 mw production limit and a 

20 year operation period prior to transfer to the government. 

 

     -- Public Works Concession Law:  Passed in January 1994, 

this law will allow foreign entities, together with local 

companies, to build, operate and transfer (BOT) public works 

(roads, bridges, highways and, with legislative approval ports 

and airports).  The first concession tender (highway 

amplification of 42 kilometers) will be ready for foreign 

participation in July 1995.   Other BOT tenders are expected over 





the coming years. 

 

The growth rates for construction (5.1 percent), commerce 

(4.7 percent), transportation, storage and communications 

(7 percent), and financial intermediation (6.6 percent), indicate 

continued growth of tourist activities, the most dynamic sector 

of the economy. 

 

Agriculture, the most traditional of the production sectors, 

employing about 21.4 percent of the labor force, grew only 2.9 

percent in 1994, despite some small increase in banana exports 

and significant increases in coffee exports.  Industry, the 

largest contributor to GDP and employer of 17.9 percent of the 

labor force, grew 4.7 percent in 1994. 

 

The public sector grew 2.5 percent in 1994, with the addition of 

12,000 new public-sector employees during the period April to 

December 1994. 

 

 

C.  THE GOVERNMENT'S ROLE IN THE ECONOMY 

 

In Costa Rica the direct participation of the state in certain 

economic activities is still widely accepted as legitimate and 

beneficial.  Though this sentiment is eroding, it remains 

difficult to enact serious reform of some of the principal state 

institutions because of the broad popular and political support 

they enjoy.  Reform must be shown to be absolutely necessary to 

develop the needed consensus for a change. 

 

State participation in the economy is not new.   Tobacco and 

alcohol production were state monopolies by 1830 (alcohol 

production continues as a monopoly) in order to finance the 

government of the young republic.  Insurance was made a state 

monopoly in 1929, in order to buy out a foreign private monopoly. 

National Health (Caja Costarricense de Seguro Social-CCSS) was 

founded in 1940.  The largest commercial bank, Banco Nacional de 

Costa Rica (BNCR), was created by the state in 1920, with a 

currency issuance department later separated to form the Central 

Bank in 1950, resulting from the Bretton Woods agreements soon 

after the conclusion of WWII. 

 

Other institutions were created as solutions to specific 

political problems during the depression between WWI and WWII, or 

in order to buy out foreign monopolies: the Atlantic coast 

railroad; ICE (Instituto Costarricense de Electricidad), the 

electricity and telephone monopoly; and RECOPE (Refineria 

Costarricense de Petroleo), the state petroleum refinery. 

 

In 1994, the business community stepped up calls for an opening 

of sectors heretofore dominated by the state.  Efforts to repeal 

the state monopolies on fuel (RECOPE), demand deposits, insurance 

(INS-Instituto Nacional de Seguros), electricity and 

telecommunications (ICE), there by allowing competition from 

private companies, may be more likely to succeed than attempts 

simply to close state enterprises.  The Figueres administration 

has generally rejected the sale of state enterprises as  a way of 

raising revenue to cope with the government's fiscal crisis.  At 

present, only the state liquor monopoly (FANAL-Fabrica Nacional 

de Alcohol) seems likely to be privatized.  The administration 





appears to prefer an approach whereby certain state enterprises 

(e.g. the state insurance monopoly and the state commercial 

banks) would compete in a more open environment.  There are 

current proposals which would allow private banks access to the 

Central Bank's rediscount window and to offer checking and 

savings accounts.  The primary reason for the government's desire 

to retain control of certain profitable state enterprises is that 

they yield a substantial surplus to the consolidated public 

sector budget.  Without the profits from the state banks, RECOPE 

and ICE, the government would be unable to finance itself without 

asking the Legislative Assembly for major new taxes. 

 

On May 18, 1994, the Legislative Assembly enacted the long- 

awaited Hydrocarbons Law, which permits private parties, 

including foreign companies, to explore for and eventually to 

exploit petroleum.   The few attempts to find oil to date have 

been unsuccessful. 

 

A new Public Works Concession Law also affords foreign companies 

the opportunity to participate in major projects via the BOT 

scheme. 

 

 

D.  BALANCE OF PAYMENTS SITUATION 

 

During 1994, Costa Rica's balance of payments improved from  a 

historic deficit in the trade portion of the accounts during 

1993.  While exports FOB reached $2,224 million, imports CIF 

amounted to $3,087 million, yielding a deficit of $863 million in 

the trade portion of balance of payments accounts.  The trade 

deficit is nearly matched by capital inflows and tourism income. 

The 8.5 percent increase in exports experienced in 1994 is the 

smallest increase since 1991, primarily because of slower growth 

in draw-back exports and non-traditional exports (4.9 percent 

increase in 1994 vs. 15.8 percent increase in 1993).  Income from 

traditional exports grew 13.9 percent in 1994 (4.0 percent in 

1993), primarily as a consequence of increased world coffee 

prices.  Total imports grew 7.0 percent in 1994, a considerable 

reduction from the 18.2 percent increase during 1993.  Imports of 

consumer goods, capital goods and raw materials for industry all 

grew in 1994, but at much slower rates than during 1993. 

The balance on current account by the end of 1994 was $447 

million, a drop of $110 million in comparison with 1993.  Costa 

Rica's foreign debt totalled $3,188 million on December 31, 1994, 

an increase of $30 million from the previous year's end. 

 

 

F.  QUALITY OF INFRASTRUCTURE 

 

1.  Roads: 

Costa Rica enjoys a well-developed road system of more than 

30,000 Km, although much of it is in disrepair.  All parts of the 

country are accessible by road.  The main highland cities in the 

center of the country are connected by paved all-weather roads 

with the Atlantic and Pacific coasts and, through the Pan- 

American Highway, with Nicaragua and Panama, the neighboring 

countries to the North and the South.  Costa Rica needs to 

complete the Pacific coastal highway (and repair large sections 

of existing roadway), build a new road along the Atlantic coast, 

and possibly a coast-to-coast highway (about 300 Km) across the 





Northern plains of the country.  New road construction projects 

and the urgent need to repair existing roads and highways are 

probably the most pressing infrastructure needs of the country, 

made challenging with Costa Rica's very mountainous terrain 

(elevations reach over 12,000 feet) and heavy rainfall (59"-177" 

annually). 

 

It is hoped that a new public works concession law (under the 

auspices of the Ministry of Public Works and Transportation 

[MOPT]) will enable major roads, highways and bridges to be 

constructed more quickly and soundly. 

 

2.  Railroads: 

There are two railroads.  The railroad from San Jose to the 

Pacific ports of Caldera and Puntarenas (102 km) and the railroad 

from Limon to Guapiles and Rio Frio to serve the Atlantic coast 

banana plantations (160 km).  A section from Siquirres to San 

Jose has been eliminated.  The Costa Rican Government is 

considering closing the railroads due to the losses it is 

experiencing and because better and cheaper transportation is 

already being provided by truck on a new highway connecting San 

Jose and the Port of Limon. 

 

3.  Airports: 

There are two international airports, the Juan Santamaria Airport 

near San Jose, and the Tomas Guardia Airport in Liberia, about 

270 Km north of San Jose (the Liberia airport is expected to open 

in July 1995).  The Juan Santamaria Airport is seriously 

inadequate for current needs and is in the process of a three- 

stage renovation to include a new terminal (6,000 square meters). 

 

As well, numerous studies have examined the need for a new 

international airport for San Jose by the year 2010.  The present 

administration is also in favor of such a project and hopes to be 

able to apply the concession law for its construction.  If a new 

airport is constructed the two or three potential sites 

identified for its location will require major highway 

construction. 

 

There are small airports in San Jose, Limon, and Puntarenas, 

capable of receiving small jets, and there are landing strips in 

other coastal resorts and inland cities and towns, some of which 

are regularly serviced by SANSA, a local airline and by several 

airplane and helicopter taxi services.  In total, Costa Rica has 

approximately 31 small rural airports.  Eighteen (18) of them 

have been targeted by Aviacion Civil (Civil Aviation) for 

upgrades. 

 

Costa Rica has two international airlines.  LACSA, the oldest, 

flies to Miami, Orlando, Dallas, Los Angeles, New York, Cartagena 

and Lima.   AERO COSTA RICA flies to Miami, Orlando and Atlanta. 

Both airlines have recently received permission to fly to Tampa. 

American Airlines, United Airlines and Continental fly regularly 

to San Jose.  There are also cargo services provided by several 

American companies (e.g. Challenge Cargo, Fine Air and Capital). 

TACA, MEXICANA, IBERIA, KLM, SAM and COPA also have regular 

scheduled flights to San Jose. 

 

4.  Seaports and ocean transportation: 

On the Pacific coast lies the port of Puntarenas, the largest 





coastal city and oldest port in the country.  Its pier, the 

Pacific Railroad terminus, was closed three years ago, reportedly 

in order to undergo renovation to permit it to receive cruise- 

ships.  The renovation is nearly complete. 

 

Caldera, ten kilometers from Puntarenas, is the newest port in 

the country (1982), with enough space for 3 large vessels for 

container and roll-on/roll-off cargo facilities as well as 

general cargo facilities.  It is a busy port handling 

approximately 30-40 ships per month.  Grain and other ships are 

often known to wait in Caldera's bay for days before unloading. 

Caldera has also become important as a cruise-ship landing point. 

In the dry season (November - April) it can handle as many as 180 

cruise ships.  The Port of Caldera has a sedimentation problem 

which requires periodic dredging. 

 

Punta Morales, a small port also on the Pacific, specializes 

mainly in bulk loading and unloading of sugar. 

 

On the Caribbean coast, the ports of Limon and Moin handle 

container and roll-on/roll-off cargo as well as processing up to 

80 percent of all the import and export cargo for the country. 

Cargo from Limon is also destined for Nicaragua. 

 

The port at Moin, the country's very important banana export 

port, also handles crude oil imports.  Limon, Moin and Caldera 

ports are in desperate need of expansion.  Limon and Moin, much 

like Caldera, handle as many as 150 cruise ships during the 

country's dry season. 

 

Two smaller ports, Quepos and Golfito on the Pacific Coast, are 

used mainly as fishing and tourist facilities, but can handle 

small international cargo.   Ten major shipping lines (some 20 

companies altogether) provide regular transport services to and 

from Costa Rica. 

 

Though efficient by comparison with some neighboring ports, Costa 

Rica's ports are also considered to be the most expensive in the 

region not only for the delays experienced at both coasts due to 

massive arrival of cruise ships but because of grossly outdated 

and broken port cargo machinery and chronic labor problems. 

 

5.  Energy and telecommunications: 

The state-owned Instituto Costarricense de Electricidad ("ICE"), 

has a monopoly on most electric and telecommunications services 

in Costa Rica.  ICE generates sufficient electricity with modern 

hydro-electric plants for its own needs and for export to other 

countries of Central America and to Panama.  Total installed 

capacity is approximately 1200 MW, 93 percent of which is hydro. 

 

However, Costa Rica has diversified its  energy sources.  In 

March 1994, the Miravalles I (55-MW) geothermal electric power 

plant became a reality.  Sources indicate that Costa Rica has a 

capacity for some 25,000 kw of electricity of which some 10,000 

kw could be geothermal power sourced from numerous and still 

active volcanoes. 

 

Costa Rica will soon (scheduled to begin January 1996) produce 20 

mw of wind-generated energy thanks to the country's co-generation 

law #7200. 





 

Costa Rican telecommunications provide direct dialing telephone 

services world-wide, as well as telex, telegram, facsimile  and 

data transmission services. ICE currently provides cellular 

telephone service, and fifteen other companies have received 

permits to provide two-way mobile phone services. 

 

Millicom, a U.S. company which pioneered cellular telephone 

communications in Costa Rica, was forced recently (May 11,1995) 

to cease operations because of a Supreme Court decision which 

held that its 1989 concession was in conflict with the 

constitutional monopoly granted to the state 

telecommunications/electricity entity (ICE).  Millicon is 

currently (July 1995) attempting to negotiate terms that would 

permit resumption of service.