Conflict Inherent

Conflict Inherent19

Conflict Inherent in an Emerging Country:A closer look at Costa Rica

Josh RichardTable of Contents

2INTRODUCTION

2Thesis

2Topics to be covered

2PAST

2History

2Significant Historical Events

2Recent Developments

2PRESENT DAY

2Business Climate

2Education

2Infrastructure

2Modernization

2Reform and Foreign Investment Incentives

2Debate over future

2Small and Medium Enterprise Advancement

2Push for Computers

2Problems with SME

2FUTURE

2Perceived Issues

2Proposed Solutions

2Infrastructure Issue

2Infrastructure Solution

2CONCLUSION

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. 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 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 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 high-end. 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 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.

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 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)

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 day-to-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 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 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. 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.

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 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 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.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 long-term 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 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 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 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 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 sector-specific 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.

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.