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Backgrounds: Costa Rica Economy
Costa Rica's economy showed strong aggregate growth in 1998-99. The Central Bank attributes almost half of 1999 growth to the production of Intel Corporation's microprocessor assembly and testing plant. The strength in the nontraditional export and tourism sector is masking a relatively lackluster performance by traditional sectors, including agriculture. Inflation, as measured by the Consumer Price Index, was 11% in 2001, up from 10.3% the year before. The central government deficit increased to 3.0% of GDP in 2001, up from 2.2% from the year before. On a consolidated basis, including Central Bank losses and parastatal enterprise profits, the public sector deficit was 2.8% of GDP.
Controlling the budget deficit remains the single-biggest challenge for the country's economic policymakers, as interest costs on the accumulated central government consumes the equivalent of 30% of the government's total revenues. About 42% of the 2001 national budget was financed by public borrowing. This limits the resources available for investments in the country's deteriorated public infrastructure.
Costa Rica's major economic resources are its fertile land and frequent rainfall, its well-educated population, and its location in the Central American isthmus, which provides easy access to North and South American markets and direct ocean access to the European and Asian Continents. One-fourth of Costa Rica's land is dedicated to national forests, often adjoining picturesque beaches, which has made the country a popular destination for affluent retirees and ecotourists.
Costa Rica used to be known principally as a producer of bananas and coffee. In recent years, Costa Rica has successfully attracted important investments by such companies as Intel Corporation, which employs nearly 2,000 people at its $300 million microprocessor plant; Proctor and Gamble, which employs nearly 1,000 people in its administrative center for the Western Hemisphere; and Abbott Laboratories and Baxter Healthcare from the health care products industry. Manufacturing and industry's contribution to GDP overtook agriculture over the course of the 1990s, led by foreign investment in Costa Rica's free trade zone. Well over half of that investment has come from the U.S. Dole and Chiquita have a large presence in the banana industry. Tourism remains the largest foreign exchange earner, although the industry suffered a 4% contraction following the September 11, 2001 terrorist attacks against the U.S.
The country has not discovered sources of fossil fuels--apart from minor coal deposits-- but its mountainous terrain and abundant rainfall have permitted the construction of a dozen hydroelectric power plants, making it largely self-sufficient in most energy needs, except oil for transportation. Costa Rica exports electricity to Nicaragua and has the potential to become a major electricity exporter if plans for new generating plants and a regional distribution grid are realized. One challenge will be how to secure payment for these exports. Mild climate and trade winds make neither heating nor cooling necessary, particularly in the highland cities and towns where some 90% of the population lives.
Costa Rica's infrastructure has suffered from a lack of maintenance and new investment. The country has an extensive road system of more than 30,000 kilometers, although some of it is in disrepair. Most parts of the country are accessible by road. The main highland cities in the country's Central Valley are connected by paved all-weather roads with the Atlantic and Pacific coasts and by the Pan American Highway with Nicaragua and Panama, the neighboring countries to the North and the South. Costa Rica's ports are struggling to keep pace with growing trade. They have insufficient capacity, and their equipment is in poor condition. The railroad does not function, with the exception of a couple of spurs reactivated by a U.S.-owned banana company. The government opened the ports and the railroad to competitive bidding opportunities for private investment and management but U.S. companies chose not to participate in this process.
Costa Rica has sought to widen its economic and trade ties, both within and outside the region. Costa Rica signed a bilateral trade agreement with Mexico in 1994, which was later amended to cover a wider range of products. Costa Rica joined other Central American countries, plus the Dominican Republic, in establishing a Trade and Investment Council with the United States in March 1998. Costa Rica has signed trade agreements with Canada, Chile, the Dominican Republic, and is negotiating trade agreements with Panama, and Trinidad and Tobago. Costa Rica and its Central American neighbors are currently negotiating a free trade agreement with the U.S. Costa Rica also is an active participant in the negotiation of the hemispheric Free Trade Area of the Americas, a process that the Costa Rican Government chaired in preparation for the April 1998 Summit of the Americas in Santiago, Chile. It also is a member of the so-called Cairns Group which is pursuing global agricultural trade liberalization in the World Trade Organization.
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