Heritage Foundation Leadership for America

Edwin J. Feulner, Ph.D.: It is my privilege to introduce President Miguel Angel Rodriguez, a man who has made a life of climbing mountains, both literally and figuratively. When he is not ascending the mountain peaks of his own country, Costa Rica, he is battling the rugged terrain of economic protectionism and high tariffs within his nation's capital.

President Rodriguez's career has been a remarkable one, to say the least. Beginning as a journalist, he was a columnist for the daily newspaper La Nacion. He went on to teach economics at the University of Costa Rica and then served as a visiting professor of economics at his alma mater, the University of California at Berkley.

In 1990, he was elected as a congressman and quickly rose to the position of president of the Congress before being elected to the presidency of his nation in 1998. He is an ardent proponent of the free market and received his Ph.D. from the University of California in 1966 after defending his thesis on Professor Ludwig von Mises.

Dr. Rodriguez is well aware of what it takes to put an economy on the ascent: fiscal restraint, free markets, and wise investment. In a country renowned as much for its large public sector as its strong tradition of democracy and human rights, his administration has pledged to cut dead weight by slicing public debt, privatizing state monopolies, and, at the same time, energizing the economy by attracting additional foreign investment.

Perhaps the greatest obstacles that block the way to the maximum benefits of the market have come in the form of high tariffs and market protection. In order for Costa Rica and other countries in the Western Hemisphere--including the United States--to continue to prosper, barriers to market access must be moved aside.

That's what the Free Trade Area of the Americas is about, that's what bilateral free-trade agreements are about, and that's what the Global Free Trade Association that The Heritage Foundation advocates is about.

Edwin J. Feulner, Ph.D., is President of The Heritage Foundation.

FREE TRADE: THE KEY TO SUCCESS IN THE WESTERN HEMPISPHERE

The Honorable Miguel Angel Rodríguez : A few weeks ago, I participated in an event that exemplified the advantages and opportunities that Costa Rica faces at the beginning of the 21st century. It was the signing of an agreement whereby Intel would invest several million dollars in a Costa Rican software company named ArtinSoft, which has developed the most advanced software in the world for migrating software from one language into another.

This event was significant for several reasons. First of all, because the software company did its original research and development in a coffee plantation. This is a remarkable symbol of the transformation that has taken place in Costa Rica as industry has moved from coffee production into high-tech.

Second, the fact that Intel was investing in this software company is evidence not only that Costa Rican universities are able to produce highly trained individuals who can work for the multinational high-tech companies that are moving into Costa Rica, but also that their graduates can become entrepreneurs with the ability to develop their own companies in software and other high-tech areas. This shows that centuries of investment in education are now yielding substantial benefits for Costa Rica.

Throughout its history, Costa Rica has evolved through different development models. In the first half of the 19th century, the country was a very small and isolated place where, I always say, the Spaniards who came stayed only because they couldn't leave. Though the Spanish originally came for gold and Columbus had dubbed the land the "Rich Coast," Costa Rica's treasures were a result of the ability of the native people to craft the gold into ornaments and jewelry, rather than vast amounts of the precious metal. In fact, there was little gold or minerals and, in colonial times, a very small native population, so the plantation system could not be developed as it was elsewhere. The Spaniards had to raise their own corn and live in very humble ways.

Later, when Costa Rica achieved independence, it experienced tremendous success in the coffee business. It was able to export coffee to Europe 20 to 30 years before the larger countries of Latin America. This allowed Costa Rica to receive the benefits of international trade very early, and its small population invested these earnings in education and health and into developing a stable democracy with a strong rule of law, a very strong independent judiciary system, and stable legislation that has made it a model of democracy in Latin America. By the end of the 19th century, Costa Rica was at the forefront of American countries in terms of education and health standards. This development took place very early in the nation's history.

Throughout the first half of the 20th century, growth came primarily from the export of agricultural products. This changed in the second part of the 20th century, when Costa Rica joined the rest of the Central American countries in adopting an "import substitution" scheme, based on very high import duties and quotas that protected the local market. This system was successful to the extent that it attracted many foreign investors who established plants inside this heavily protected Central American market, and Costa Rica enjoyed strong growth throughout the 1960s and part of the 1970s. Needless to say, there were many problems with this model that affected the stability of public finances. The system did not encourage exports outside of the region, and, with the external debt crisis of Latin America, it collapsed at the beginning of the 1980s. A change had to be made, and the course chosen was to move towards an export promotion model based, again, on fiscal incentives.

Throughout the 1980s and 1990s, numerous fiscal incentives were given to Costa Rican companies to produce new products for export. This model was initially successful, and exports increased by nearly 9 percent per year during that 20-year period. By the end of the 1990s, Costa Rica was the largest per-capita exporter of Latin America--outstripping countries that were rich in natural resources and countries such as Chile that had worked very hard to open their economies.

But Costa Rica also ran into difficulties with the export-promotion model because of the fiscal costs this model entailed, and because of its international commitments with the World Trade Organization, which called for the elimination of export subsidies by December 2002. Thus, the country has to move away from the export promotion model that it adopted in the 1980s. But what is next?

A HIGHLY SKILLED WORKFORCE AND EMERGING OPPORTUNITIES

It has become clear that Costa Rica cannot compete in unskilled-labor intensive goods with countries such as China, India, or even neighboring Honduras, El Salvador, or the Dominican Republic, which have greater abundance of low-wage workers. Costa Rica's new model must be based on skilled labor; this is the area where the country enjoys a strong advantage. As a result of investment in human capital throughout the 19th and 20th centuries, Costa Rica is now prepared to move into a new stage of production.

According to the 2001 Human Development Report, published recently by the United Nations Development Program (UNDP), Costa Rica was ranked 41st among the 170 countries that were evaluated. One factor influencing the rating was life expectancy: In the year 2000, average life expectancy in Costa Rica was 77.48 years--a year greater than the next-rated country in Latin America and the Caribbean. The infant mortality rate for Costa Rica in 2000 was 10.2 per thousand, lower than in any other country in Latin America, with the exception of Cuba, whose figures are not comparable due to its policy of legal abortions. In addition, Costa Rica has the lowest rate of illiteracy in Latin America (4.5 percent) and the illiteracy rate of women is even lower than that of men.

Given Costa Rica's high ranking in human development, it is not surprising that Costa Rican workers have been ranked first in Latin America in their productivity and capacity to learn new skills, as well as the time needed to complete training. ¹ Costa Rica's skilled labor force is, without doubt, its main advantage in the highly competitive international marketplace.

Costa Rica, whose population is only 4 million, has become the largest exporter of high-tech products from Latin America to the United States--not in per-capita terms but in absolute terms, including Mexico and Brazil, whose populations are between 100 and 200 million. Costa Rica has also attracted foreign investment in the area of services, mainly call centers and business services (back office). A good example is Procter and Gamble, which moved its back-office operations for the entire hemisphere to Costa Rica because of its ability to provide skilled professionals in areas of administration, accounting, fiscal management, human resources, and purchasing. Western Union has also chosen Costa Rica as the location of one of its three global offices (the others are in Australia and Belgium) which have management responsibilities for its worldwide network of agencies. Many other widely known companies are also locating their call centers and computing services in Costa Rica.

The country now has a thriving industry of software production, and many of its small local companies now have offices in Santiago, Madrid, London, and Warsaw. Not considering exports that might be generated from these offices, Costa Rica now exports $100 million in software products annually.

Another emerging business in Costa Rica is eco-tourism, a service that gives travelers an opportunity to visit the nation's forests, volcanoes, and beaches, and to observe its fish, birds, and wildlife. Eco-tourism has brought more than a million tourists to Costa Rica each year, and this business has grown at a rate of nearly 12 percent annually in real terms in recent years, attracting international investments by many large hotels.

In addition, Costa Rica has attracted investment for environmental research. Twenty-five percent of all research in tropical biology is conducted in Costa Rica, where studies are facilitated by the country's system of national parks and its environmental services.

In sum, human capital and knowledge now provide the foundation for Costa Rica's economic development, and this is enhanced by direct foreign investments through which the managerial and market expertise of multinational companies are linked to the skills and abilities of Costa Rica's workforce.

PREPARING THE WAY FOR FURTHER DEVELOPMENT

There are several key issues that Costa Rica should address as it continues its transition to a development strategy based on human capital and knowledge. The educational system, which has been a priority since the first half of the 19th century, should continue to be a key concern.

Advances in Education

In the 1980s, Costa Rica made an important decision to introduce information technology at the grammar school level, in contrast with many other countries who were reserving this new technology for high-school students. Significantly, the strategy was not limited to operating computers but instead emphasized the use of computers as a tool to learn other subjects, mainly through research and exploration, even writing software. The resulting widespread knowledge of information technology was a tremendous help in the initial attraction of companies such as Intel to Costa Rica. It also served as a foundation for the development of the country's computer software industry. In recent years, grammar schools and high schools have been linked to the Internet, generating a surge in the capacity of students to access information.

Costa Rica's education system has also incorporated the study of English (or another language) as a second language at the grammar-school level. Today, approximately 50 percent of the students in the public educational system are learning English.

In addition, there has been a successful effort to provide a high-school education to more citizens. Within the past three years, the proportion of the population attending high school has increased from 59 percent to 73 percent. In sum, there has been a significant improvement in the capacities of the nation's workers. In recent years, there has also been a focused effort to upgrade the quality of education provided at the high-school level through new laboratories, new textbooks, and better preparation of the teachers.

Investment in Infrastructure

In the early1980s, the international debt crisis led Costa Rica to reduce its investment in infrastructure. As a result, the nation's highways, ports, and airports did not receive needed improvements. In the past three years, significant efforts have been made to upgrade the nation's infrastructure and to make substantial improvements in the highway system. A new terminal has been built for the airport and it is now under the management of a private organization that has a very strong program for improvements.

In the past three years, investments in upgrading Costa Rica's Atlantic ports have surpassed those of the preceding 16 years and BOTs are under way for the highway system and Pacific ports, significantly increasing the capacity of the nation's infrastructure. The government has already granted the first large concession of a highway that will operate on a toll basis, and a second one may follow soon. Reviews have been conducted of the entire system of highway maintenance and three-year contracts will be awarded to private-sector entities that will take responsibility for highway maintenance in different areas of the country. Competition for these contracts will help to ensure the cost-effectiveness and efficiency of highway maintenance in the future. Such improvements in the nation's infrastructure are an asset to tourism and have helped to reduce the transportation costs of commerce.

Issues of infrastructure have also been addressed regarding electricity and telecommunications. Costa Rica has consistently kept energy supply and delivery ahead of demand. More than 99 percent of the nation's electricity is generated through the use of water, wind, and geothermic energy, greatly reducing the pollutants that are generated by fossil fuels. Only 1 percent of the nation's electricity is generated through the use of oil. The country has increased its supply of electricity by nearly 35 percent within the past three years.

In the area of telecommunications, a proposal was made to move the country out of a state monopoly toward a competitive market, but this move was not widely accepted. In a democracy, if a proposal does not meet with public approval, authorities must accept it and do their best to work within the alternatives acceptable to the people. Costa Rica is now moving to strengthen the telecommunications services that are provided by the state company. The number of cellular phones in the country has tripled and it is expected to double again next year. In addition, a program has been initiated to use the fiber optic connections that had been installed for voice communications for data transmission through new technology.

The goal is to use the copper network and relatively small new investment to establish 100,000 new broad-band Internet connections by the beginning of next year, making Costa Rica the third "best connected" country in the world. Through fiber optic cables, Costa Rica has been linked to the United States and neighboring countries.

Promoting Enterprise by Reducing Red Tape

In addition, effort has been made to reduce red tape. During the first three years of my administration, the waiting period for construction permits has been cut from nearly six months to just a few days. Counterproductive and outdated regulations that have stifled the permit process for small businesses have been eliminated. Recently, the government released an Investor's Manual that gives investors a complete guide, including digital information, relevant formulas, and descriptions of the forms that must be completed to apply for a permit. The manual is part of an easier, more transparent system of permitting that helps companies set up investors more quickly. We have also reduced the limitations on imports of agriculture inputs, medicines, and other products so the market is more widely competitive.

My administration has been working with the Inter-American Development Bank (IDB) to promote the generation of linkages between high-tech multinationals and national small and medium-sized businesses within the country.

At the same time, we have made an effort to promote small and medium-sized businesses by moving away from an approach in which specialized agencies attended to their trade and training needs and, instead, connecting them with banks and companies that train personnel. As a consequence, access to credit and training for small and medium-sized countries has greatly increased as more resources have become available to them.

FREE TRADE AGREEMENTS AND PROSPECTS FOR THE FUTURE

As a small country, Costa Rica recognizes the importance of having access to other markets and to have an open economy. We have made significant moves in this direction. Today, the average import duty is 6 percent, whereas just a few years ago, it was 150 percent. And that "average duty" does not take into account the many free trade agreements that Costa Rica has established where there are no import duty. We have had a free trade agreement with the Central American countries since the 1960s and a free trade agreement with Mexico since 1994 (it was broadened in 1998). In addition, Costa Rica has free trade agreements with the Dominican Republic and Chile. Recently, a free trade agreement was signed with Canada--the first between such a small country as Costa Rica and a G-7 country.

Our free trade agreements have also made important contributions toward the solution of environmental and labor issues. The trade agreement with Canada, for example, was accompanied by separate agreements on labor and the environment, which establish that each country has to comply with certain labor and environmental requirements. In the event of a disagreement, neither of the signing countries has a right to determine the noncompliance of the other, but a third party will be called to coordinate an arbitration procedure.

If it is determined that one country has not complied with the labor or environmental agreements, action will be taken in that area, but the trade agreement will remain unaffected. The intent of the arbitration is to correct the point of noncompliance, not to disrupt trade or to impose fines. In this way, Costa Rica has made an important contribution toward resolving a sensitive political issue that has also caused difficulties for the United States.

My administration is currently in the process of negotiating a new, broader trade agreement with Panama, with which we have had a free trade agreement since 1973. In addition, we are in the process of negotiating a free trade agreement with Trinidad and Tobago, and we have begun talks to negotiate a free trade agreement with Jamaica.

Costa Rica also promoted the enhancement of the Caribbean Basin Initiative (CBI) and coordinated a delegation of representatives of the presidents of Central America and the Dominion Republic to bring our case to the United States Congress and the Administration. We were all pleased with our success in obtaining the CBI enhancement.

The United States and Costa Rica are closely linked through trade. Costa Rica's main source of imports is the United States, and our exports are sent primarily to that country. In fact, the main investor in Costa Rica is the United States, while Spain has been the primary investor in other Latin American countries. Costa Rica is a larger importer of products from the United States than Russia, New Zealand, or Peru--which are all countries with large economies. As a whole, the CBI is a larger importer of goods from the United States than MERCOSUR or the Andean Group and it is also a larger importer than the Netherlands, France, Singapore, China, or Brazil.

Moreover, the United States exports more into the Caribbean Basin Initiative countries than it imports from them. Because it is one of the rare areas where the United States has a trade surplus, the CBI countries, and Costa Rica in particular, are important partners for business for the United States.

The negotiations for the Free Trade Area of the Americas (FTAA) have the potential to greatly facilitate free trade in the region. The countries of the Americas that met in Miami in 1994 set a goal of establishing the FTAA by 2005. However, progress toward that goal will be hindered if the current Administration in the United States is not given the trade promotion authority to pursue that agreement. The other countries in the American continent should be confident that they can negotiate with the Administration to develop an agreement that will be either approved or not approved by the U.S. Senate. It is not feasible for every Senator who may have some stake in the agreement to enter into a process of renegotiation. I strongly urge all parties to do what they can to ensure that the trade promotion authority is approved this year. If it is not approved this year, it will become more difficult to achieve as we get closer to the next elections. Postponing this decision will make the target date of 2005 impossible.

Costa Rica is open to entering direct negotiations with the United States. Aside from the FTAA concept, we would like also to work to establish a direct free trade agreement between our two countries in the same way we established an agreement with Canada. In fact, given the positive attitude that many U.S. Senators and Representatives have regarding Costa Rica, it would probably be much easier to establish an agreement between our two countries than gaining approval for a wider free trade agreement. Though Costa Rica would like to make progress toward the broader goal, we would also be willing to move toward a bilateral agreement.

The Honorable Miguel Angel Rodríguez is President of Costa Rica.