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Conflict

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Conflict Inherent in an Emerging Country:


A closer look at Costa Rica

Josh Richard

Table of Contents
INTRODUCTION................................................................................................2

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Thesis...........................................................................................................2
Topics to be covered.....................................................................................2
PAST.................................................................................................................2
History..........................................................................................................2
Significant Historical Events.........................................................................2
Recent Developments...................................................................................2
PRESENT DAY...................................................................................................2
Business Climate..........................................................................................2
Education......................................................................................................2
Infrastructure................................................................................................2
Modernization...............................................................................................2
Reform and Foreign Investment Incentives..................................................2
Debate over future.......................................................................................2
Small and Medium Enterprise Advancement................................................2
Push for Computers......................................................................................2
Problems with SME.......................................................................................2
FUTURE............................................................................................................2
Perceived Issues...........................................................................................2
Proposed Solutions.......................................................................................2
Infrastructure Issue.......................................................................................2
Infrastructure Solution..................................................................................2
CONCLUSION....................................................................................................2

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INTRODUCTION
Thesis
Taking a country from a natural, organic tourist paradise to a modern
technologically advanced tourist hot spot can be both fundamentally flawed
in its inception and implementation but also quite challenging in as far as
changing the minds of the natives to adopt and embrace this new
environment. This was the case as I saw it in Costa Rica. I will detail my
views and concerns for this emerging country and perhaps we can come to
some conclusions as to the state of the country and its plan for future
development.
Topics to be covered
Were going to start off with a brief history of Costa Rica, its many
different traditions, attractions, and its people. Secondly, we will take a look
at the current position of Costa Rica as it relates to the tourism industry and
the world as a global player. Finally we will take a look at some proposed
concepts for the future of Costa Rica and visions of some for where the
country should go. In the end I hope to enlighten you as to the unique
position Costa Rica is in and hopefully evoke a sense of curiosity to follow the
country in the years to come and see if what they are doing is working.

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PAST
History
Costa Rica is a Latin American country that sits below Nicaragua and
above Panama. It is bordered on the east and west by the Atlantic and
Pacific oceans, respectively. It is home to about 5 million people, whose
backgrounds are as diverse as the countries species of orchids. While the
majority of people are from Spanish descent there is a large population of
Jewish, Chinese, Jamaican, and South Americans. Costa Rica gained
independence from Spain on September 15, 1821 and was told this by
Guatemala, upon hearing what was proposed they replied with a decision to
wait until the cloudiness dissipates to make a decision about becoming
independent (Gonzales, 2008) San Jose. What this statement meant was
that on that particular day it was quite cloudy and it signs to the style and
culture in Costa Rica. A much laid back, nonchalant country that didnt want
to make a hasty decision.
Significant Historical Events
After gaining independence Costa Rica went through a series of small
incidents to bring it up to where they are now. Some of the more notable
incidents involve William Walker who tried unsuccessfully to capitalize on the
newly formed Costa Rica and make himself head of power. Costa Rica
revolted and drove him out, ultimately leading to his death. In the mid 19th

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century, after gaining independence, the then president Juan Mora Fernandez
gave land grants to anyone who wanted to plant coffee and because of that
Costa Rica became a coffee exporting country. In 1890 the democratic
elections were near perfected and Costa Rica would be soon seen as a
democratic nation that is leading Latin American countries. And most
notably in 1948 they abolished their army. This was a bold move due to the
times and nature of violence amongst Latin American countries.
Recent Developments
In more recent years weve seen the privatization of banks to attract
foreign investment; a universal healthcare system was set up; and an influx
of immigrants from both Nicaragua and the southern country of Columbia. In
the 1970s Costa Rica had an economic downturn and interest rates
skyrocketed. They knew that no longer could they survive solely on coffee
and desserts to maintain their economic status. Hence, the tourism sector
emerged.

Campaigns were set up to advertise Costa Rica as a natural,

safe, and bio diverse filled country with many different sights and sounds
to appease the world traveler. Coincidentally, at the same time civil wars
and civil strife of surrounding Latin American countries brought Costa Rica
from a 2.5-day tourism spot to a jolting 15 day stay. This did indeed help the
economic hard times in Costa Rica unfortunately it wasnt very sustainable.
This came to attention in 1984 where Costa Rica experienced its lowest year
for tourism and totally revamped the industry. They developed 14, 1-day

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tours of the country, repositioned the country as a soft nature vacation. It
boasted travel products such as adventure, sports, health, cultural, leisure,
educational, business, and ecological for its tourists. It divided the country
into 10 sections for tourism each with its blend of the aforementioned
activities. It also positioned itself as a multi-destionational spot; where Costa
Rica would be part of tours that covered multiple countries. As you can see
Costa Rica had positioned itself in a very unique way to capture the attention
of the tourist. It is in this fashion that Costa Rica developed from early on in
the overall climate and attitude of the country. It is this attitude that is
dominate and guides many of the choices and decisions the country has
made.
PRESENT DAY
Business Climate
The current situation in Costa Rica is quite different from what they
initially setup to do. Lets first take a look at the business climate under
which firms operate. Of the businesses in Costa Rica the better known ones
are Intel, P&G, Baxter, Continental, Western Union, and HP. Exports are
growing at an annual rate of about 11% and 25% of the exports are highend. Costa Rica is located in the central time zone and shipping usually
takes 2-3 days; in addition they have 14 worldwide air cargo flights and 24
world cargo shipping lines. GDP is growing at about 4.5%, the inflation rate
is about 10%, unemployment hovers somewhere around 4.6% and there is a

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13.5 poverty index. According to the World Bank Costa Rica has the highest
political stability of the Latin American countries which is partially due to its
nearly 100 years of democracy. There is free capital movement in Costa Rica
along with equal rights and obligations for natives and foreigners alike.
Intellectual and property rights are in accordance with the World Trade
Organization. The current tax Rate is somewhere around 13%. Some of the
incentives for businesses are that there is 100% tax exemptions for import
duties on raw materials, corporate income tax, and export local taxes. There
are 12 industrial parks in the greater metropolitan area for businesses to find
a home. With the presence of credit unions and low turnover businesses
can easily find loans and workers.
Education
The educational side of things is quite impressive. In addition to
education being completely free and mandatory for children through high
school, there are numerous technical colleges, technical high schools, the
National Training Institution, and universities. A note about the National
Training Institution is that it was founded by companies existing in Costa Rica
already for the sole purpose of training employees in job specific skills that
were not being widely taught at other free schools. As a special incentive for
businesses the country is willing and able to build custom schools to offer job
specific education for your business if needed.

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Infrastructure
The country is run on 97.5% clean and renewable energy such as solar,
wind, water and geothermal. To top that off Costa Rica is part of the SIEPAC
(Sistema de Interconexion Electrica para America Central or Central
American Electrical Interconnection System) project which is an electrical
grid that is projected to run through six major Latin American countries that
are: Panama, Costa Rica, Honduras, Nicaragua, El Salvador, and Guatemala.
(Wikipedia, 2008) It will ensure cheap, even power distributed throughout
the country and will benefit the countries as never before seen. San Jose,
the capital of Costa Rica, is rated as the 4th top quality of life in all Latin
America. It is easy to see that the conditions described above give way to a
cornucopia of advantages and benefits found within Costa Rica for doing
business.
Modernization
Most recently the main sources of revenue have made their presence
known. Tourism is still number one, but with Intel, medical supplies, and fruit
in their respective positions. This is why the country has now made a turn
towards modernizing and building up the business aspect of Costa Rica. The
tourism and agricultural past of Costa Rica has served the country well, but
with a historical momentum of certain decisions mainly by Intel and others to
move into Costa Rica, it has developed a sense of modernization. The
historical momentum to which I speak of is two-fold. The first part lies within

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believing that education is the key and instituting the first public university
of the 20th century, and later in the 90s with the concept of putting
computers in all elementary schools. This was a novel idea by any stretch of
the imagination and it had very profound effects.
The more major player in this turnaround was the switching of what
models to use. Costa Rica had previously used an import substitution model;
which basically says that instead of engaging in free trade and global
markets that it should substitute products it imports with products that are
made domestically. This has its obvious flaws most distinctly with the fact
that nations practicing this model have very archaic and horribly inefficient
industries as substitutes comparably with the global market. Where that was
most dramatically felt was in the infrastructure of core businesses such as
the telecommunications industry. In any case, Costa Rica switched from this
substitution model to an export promotion model. Now the country exported
and gave business incentives for businesses to open up shop in Costa Rica.
In fact, a study by FIAS (Foreign Investment Advisory Service, a joint service
of the International Finance Corporation and The World Bank) concluded that
Costa Ricas free trade zone legislation has resulted in one of the better
export processing zone systems in the developing world. (Rodriguez-Clare,
2001)

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Reform and Foreign Investment Incentives
In the 1990s the topic of structural reform was being debated. This
was due to the fact that although the current system worked with all of the
incentives and such liberal trade policies a heavy burden was placed on the
fiscal system. In a nutshell Costa Rica was having problems funding the dayto-day operations while at the same times giving all these tax breaks to
companies. The companies that were granted tax exclusions argued that
these tax incentives were needed to offset the inadequate infrastructure
they operated in, such as the telecommunications industry. Others argue
that while the inadequate infrastructure does exist they needed to
simultaneously reform the system and eliminate the poor infrastructure.
Unfortunately, the overwhelming opposition from the private sector led to
slow, lethargic results.
This is where CINDE (The Costa Rican Investment Promotion Agency)
enters the picture. CINDE had its main focus on attracting foreign
investment. With it being a non-profit, non-governmental agency it was able
to make progress in a way that was both timely and logical. As Mr. Jesse
Moralez told us CINDEs main goal is to establish a national brand so that
foreign investment potentials could see what Costa Rica had to offer them.
By evolving certain sectors and promoting industry specific advantages
CINDE was able to bring Intel to Costa Rica. Theyve established three main
sectors: medical devices, advanced manufacturing, and services. CINDE has

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advanced Costa Rica in leaps and bounds attracting such companies as:
Motorola, Trimpot, Sylvania, Espion, and DSC Communications Corporation.
Debate over future
You would think that with such benefits everyone would be on board,
but many people felt that such moves were risky, unproven, and downright
wrong. These people felt that Costa Rica should focus on what it does best:
tourism and agriculture. This conflict arises from the diverse countryside all
the way to downtown San Jose where the streets are lined with people in
business suits early in the morning on their daily commute. This conflict is
one of tremendous importance due to the fact that this country is at a pivotal
point in its history. It has the chance to potentially become one of the world
players with moves towards privatizing the banks and outsourcing its
telecommunications industry to signing treaties and building up the business
climate to suit the world market.
With the introduction of things such as NAFTA there has seen some
concern for the preservation of Costa Rica by its native people. The country
is much divided on the controversial issue of NAFTA and its implications for
the country. Many felt that signing such treaties such as NAFTA or CAFTA
would make the country more vulnerable for becoming Americanized or
just losing a sense of national pride. It will destroy who we are! said an
angered worker outside the newsstand in downtown San Jose.(Rojas, 2008)
People feel that these treaties will destroy their social solidarity and loose the

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overall smoothness of how they perceive the country is doing. They also feel
that these treaties are often lopsided. Countries such as The United States,
knowing that Costa Rica is on the emerging side, could bully the smaller
countries into unfair trade agreements and force their country to buy a
higher percentage of their goods from the United States.
Another hotly debated topic is the outsourcing of the
telecommunications industry. With an economy like Costa Ricas theyve
almost become too wealthy without having the basic infrastructure to
adequately maintain the country. So while they have the opportunity to
outsource some of the basic infrastructure components there is a
fundamental argument that arises. Just because you can, doesnt mean you
should. What the previous statement implicates is that the outsourcing of
key critical industries could make the country more dependent on outside
firms, countries, or even certain persons and thus giving those outside
persons an artificial advantage over the native companies. With
telecommunications industry in full swing in developed countries such as the
United States, a large enough company could in theory lock into a contract
with the Costa Rican government for far cheaper than the local companies
could. Some argue that this is inherently good, cheaper prices means more
disposable income to develop the country in addition to having a better
overall quality of the infrastructure. But others warn of the position the
United States has fallen into in recent years with the oil and gas industry.

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Many people in Costa Rica feel that if they can learn the process and build
their own infrastructure that the advantages attained this way would far
outweigh the cost saving element in outsourcing.
Many of the indigenous people of Costa Rica also feel the system of
healthcare is failing them. With their universal healthcare anyone from
anywhere can come to Costa Rica and be treated. The healthcare system
currently in play has worked for several years and for several reasons. Costa
Rica is known worldwide for having excellent doctors and hospitals but this is
due to the historical path it took some 50 years ago to disband the army and
make a major push in healthcare and education. The healthcare system is a
universal one, citizens or for that matter anyone, can pay into the social
security system based on their income level and receive any medical
treatment. This is widely known by Nicaraguans and foreigners alike.
Because of the system people will travel to Costa Rica for the sole purpose of
getting treated. With Costa Rica becoming more international and
modernized this system needs to be carefully monitored so that it maintains
its integrity. Natives worry that the growing global presence of their country
may be the downfall of the healthcare system that has served them so well
in the past. On the other hand some argue that, if done properly, Costa Rica
could continue to be a shining example of how a healthcare system should
be done.

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As you can see the country is very much divided when it comes to the
future of Costa Rica. Assuming that they continue the push into becoming a
world player we can expect a few things.
Small and Medium Enterprise Advancement
In the wake of organizations like CINDE, business ventures are plentiful.
One of them is SME (Small and Medium Enterprises). This organization has
its sights sets on smaller businesses, but not smaller results. The goal is
SME is to really show the natural advantages of doing business in Costa Rica
but with an emphasis on the small and medium sized companies. Costa
Ricas population in relation to age is more like a rhombus than your
traditional triangle. Where triangular societies have the working class of the
population at the bas supporting everyone else; we have the working class in
the middle of the rhombus with equal seniors and adolescents above and
below them, respectively.(Monge, 2008) In Costa Rica small and medium
sized companies make up 28% of the GDP; 98% of them have 100
employees or less; they make up 50% of total manufacturing for Costa Rica;
they make up 50% of all the salaries; and are of about 4862 companies.

Push for Computers


More recently the push has been for these small and medium sized
companies to integrate computers into their operations. This is one aspect

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that is going to become increasingly important. Due to the fact that Costa
Rica is in such a transitional period one way to ease the fears of the people
of losing their natural, Costa Rican pride is to evolve the businesses that
are seen in the communities as cornerstones to keep up with the changing
nation. If the local markets can adapt themselves to compete or at least
maintain their share of the cash flow we will see less opposition for the
change that is coming. Of these 4862 companies 25% have internet access;
12.5% actually use the internet for sales; and 12.5% use the internet to
search for potential markets. SME has put into effect an initiative to push the
use of both the internet and management software to these companies.
Problems with SME
The problem with trying to raise awareness and involvement with
respective to use and implementation of computers is that the mentality of
the employers isnt as open minded amongst the smaller employers as it is
amongst the larger employers. The employers have a system that serves
them well; they have always used pencil and paper and have a certain level
of comfort with it.
The people have many apprehensions when it comes to using
computers and understanding them. Many are afraid that they are not smart
enough to understand the complexities a computer is; others fear that using
the computer will only lengthen the time of work and not produce any
tangible evidence that using a computer has any real benefits. Even if the

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employers get past all of these fears, there is still the issue of training them.
Most all of the employers cannot afford to simultaneously learn the
computer, pay the added costs, and maintain the business on a day to day
schedule.
If the employer does want to seek the tremendous benefits of having a
computer SME has setup three basic steps to ensure their time and money
will not be wasted. The first step is courses dedicated to bring the user up to
speed with respect to computers. Everything from turning on the monitor
and CPU to opening up a word document is taught in these courses.
Because of the fact that some people are more computer literate (i.e. the
younger generation particularly) there are different levels of classes one can
attend and thereby expediting the process. The classes show the users all of
the Microsoft Office Suite software and try to relate as much of it as possible
to the business the user is running. The second step is the actual training of
certain software programs that can specifically aid the user in anything from
inventory control, payroll accounts, to expense reports, and time
management software. This step is most crucial due to the fact that this is
the foundation for peaking interest in the actual purchase of the computer
and software by the employer. The final step is the actual leasing/financing
of the computers to the employer.

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FUTURE
Finally we will take a look at where the country is going, how better to
meet the needs of tomorrow and how to deal with the conflict that is
engulfing the nation.
Perceived Issues
Lets first examine some fundamental issues that Costa Rica will have
to take care of before it can be a global player. One of the largest concerns
for an emerging country is financial dollarization. This refers to the fact that
Costa Rica is more prone, and actually prefers using foreign currency rather
than its own. As it stands currently the onshore banking dollarization stands
at 62% while the loans are at 70%.(Armijos, 2008) With the exchange
markets being naturally volatile the mismatches that occur due to the
change in exchange rate is equivalent to 10% of the nations GPD. A change
in the exchange rate would make it harder for debtors to pay back their
debts making Costa Rica seem quite unstable to foreign investment.
Another problem is that the current policies about inflation are set not
so adequately. Costa Rica has policies in effect that target short-term
certainties by focusing on the real exchange rate instead of going for longterm nominal uncertainty. What this does is it anchors the real exchange
rate instead of domestic prices, adjusting ever year for differences between
past inflation of itself and its largest trading partners. Thus, it has passed

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on that inflation to the next year compounding the problem and inducing
inflationary inertia. Because of the two aforementioned problems the Central
Bank has problems raising capital. For example if dollarization is in effect
and the inflation rate is rising, any money that the Central Bank creates will
be created at a cost to the government.
A further problem facing the country of Costa Rica is the debt under
which the government operates. The combined debt of the central banks
and the central government is about 50%. The main reason there is a
surplus is through cutting things out of the budget and tightening the budget
so much that it cannot be supported over the long run. The debt the bank
and government has is artificially low due to the monetary and fiscal policies
set forth to cover partial losses within those organizations; thereby setting a
floor on inflation; otherwise the debt would have been much higher. This is
yet another issue needed to be resolved if Costa Rica is to emerge on the up
side.
Proposed Solutions
To remedy these abovementioned problems: dollarization, incorrect
fiscal and monetary policies, and overwhelming debt; a multi-step process is
necessary. Since dollarization is tied directly to inflation policies need to be
put in place to anchor the price level and stabilize the inflation rate. This
would attract the foreign investments in colons-the local currency because
investors wouldnt be afraid that the government wouldnt turn to creation of

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money (thereby inducing inflation) as quickly. De-dollarization is primarily a
confidence issue. If investors felt that Costa Rica, as a stable country, was a
place they wanted to do business, they would be more apt to do business
given the fact that they could use the local currency.
The next step to fix these problems would be to target the real
exchange rate rather than the inflation rate in their fiscal policies. We must
set forth policies to ensure the perceived risk of inflation will be lower,
simultaneously developing the independence of the central bank. The
central bank must become independent of the central government, which
entails the non-transferring of debt and/or money to cover losses. Making
the central bank a more credible institution will result in an overall boost in
confidence both intrinsic and extrinsic.
The final step to reducing the overall debt would be to increase their
surplus from 1% of GPD to some higher level of their GDP. Costa Rica has
had its surplus not from good policies but from a very tight budget and
unsustainable under spending. Of course we cannot calculate the exact level
without running very analytical and sophisticated models and simulations,
suffice it to say that if the surplus were elevated their debt sustainability
would increase making the government that much more efficient and
effective. The government should raise the surplus by increasing the
percentage points only; obtaining the monies from public resources (i.e.
taxing corporations income or forcing them to pay dividends) would almost

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undoubtedly weaken the already fragile infrastructure. Finally the central
bank needs to be out of debt with an influx of capital. This doesnt
necessarily need to come in the form of cash, it could come in bonds, or
notes; however it comes it needs to establish the central bank as a debt free
institution so that investors dont feel as if the central bank were going to
monetize its deficit in the way of printing money thereby inducing the
inflation effect.
Infrastructure Issue
While Costa Rica has a bountiful business climate one sure-fire barrier
to growth when trying to attract foreign investment is a poorly developed
infrastructure. It is worth note that all of the above problems can be solved
but if this barrier remains it will jeopardize all of the effort put forth above. It
is reported that 52% of firms reported that poor infrastructure was the major
constraint to future investment, with the emphasis on roads and
telecommunications while only 7% found that it was taxes and trade
regulations.(Bank, 2005) While seemingly isolated if we look closer we can
see that poorly maintained roads can lead to slow movement of products and
goods, which in turn can lead to poor capacity of firms to export products,
which in turn lead to loss in future global integration, global competitiveness,
and innovation. Connected to all of this is a higher cost in transportation,
which can lead to higher inventory costs and reduced profit margins. We
cant use a just-in-time inventory system because transportation of the raw

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materials cannot be correctly estimated due to the infrastructure
here.(Supervisor, 2008)
Infrastructure Solution
Solutions on infrastructure repair are as numerous as they are
different. One major concept that must be understood is additional funding
is needed, from somewhere be it public or private to make the infrastructure
adequate. These initiatives would be most efficient if they were sectorspecific solutions. Each particular sector has its own nuances and
differences so a generalization of one basic solution would be trivializing the
problem. Sector-specific solutions are needed; however those solutions are
outside the scope of this paper. It is enough to say that capital needs to be
introduced in most areas.
It is an increasing trend that the gap between rich and poor countries
is not the capital investment but the innovation and technological advances
that come from what is invested. Comparably to other countries having the
same economic situation, we can see that on the whole Costa Rica is lagging
in the overall number of new exports; and excelling in licensing payments. It
should be noted that while some things may appear to offset others not all
variables weigh the same. The rates of return, however it may be measured,
may not be equal. And with this mindset Costa Rica needs to make sure its
policies and vision promotes innovation.

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CONCLUSION
It is in my mind that if Costa Rica wants to play on the global field it
has many obstacles both domestic and foreign it must meet head-on. This
period of time in their history will prove to be one of great importance and
monumental change. If done properly Costa Rica can expect the future to be
a very bright and promising one in which they will be seen as the primary
leader of Latin America and moreover a model for other Latin American
countries to follow. Assuming all the necessary changes in policy and
revamping their infrastructure is done Costa Rica can expect tremendous
leaps forward both in growing as a nation and as growing to be a world
power. However, if certain steps arent followed and they proceed upon the
path that has gotten them here it can be said almost assuredly that they will
falter, and the historical significance of that would be so great that one could
postulate it could mean their demise as an emerging leader. Since this is
such a pivotal time for the nation any moves they make will either compound
or relieve the current problems in Costa Rica, the only downside is that the
effects of their decisions today will not be felt for some time in the future. It
is quite possible that the decisions of today will only be seen as historically
incorrect until time has passed and the path is irreversible.