QCOSTARICA – Of course, I’m referring to the Government having the necessary intestinal fortitude to deal with the current economic crisis. Costa Ricans by nature do not like conflict, hence the most famous saying that is repeated over and over, “Pura Vida”(translation: the good life; the pure life; or all is well; take your pick), supposedly is a reflection of life in Costa Rica on a daily basis.
Lately, on the Executive Branch side of the Government, we’ve heard from primarily the President and the Minister of Hacienda (Tax Department), promoting a fiscal reform package that would increase personal income taxes, substitute a VAT tax for the current Sales Tax and increasing the Tax from 13% to 15%, and proposing measures to fortify the tax collection process. One of the most recent Decrees from the President, provides the Tax Department with the power to require Lawyers and other professionals, to disclose certain client information for tax purposes. This, of course, will not be enforceable with respect to Lawyers, as the Lawyer/ Client confidentiality provisions are sacrosanct and the College of Lawyers has responded to the Decree stating as much.
Taking all of the response by the Executive Branch to the economic crisis as a package, it has been extremely “weak-kneed” and clearly would be ineffective in solving the problem. Any fiscal reform package has little chance of success of passing in the Legislature, before significant Government spending cuts are made, primarily in the Public Sector wages and benefits area, as has been well stated by the Opposition.
Even then, I would suggest that the fiscal reform package has little chance of passing, as proposed, or even in a “watered-down” amended form, as the Legislators who will have to pass it, will all be negatively affected by its implementation and although possibly giving “lip-service” along the way in the political process, will not support the proposals when it comes time to vote. It would appear from the proposals made to-date by the Government, that they really don’t understand the nature of Costa Rican Society and what is clearly “doable”, or not.
I’ve lived and worked in Costa Rica for seventeen years and I can state categorically, that what I’m saying here, is historically correct as to the eventual outcome of this matter.
Having said the foregoing, this is my take on what is required to solve the current economic crisis:
1. Public sector wages and benefits must be capped and in the case of benefits, such as pensions, rolled-back. Wages, likewise must be rolled-back in an incremental manner over a short time period. Will this create a hardship for those affected; of course it will. Could there be civil unrest generated by such a move, as has happened in Greece under similar circumstances; yes, possibly it could. Do you want to point fingers at who is responsible for this economic mess of Public Sector wage and benefit spending being out of control; Oscar and Rodrigo Arias are your men to point at, as was admitted by them in the recent meeting with President Guillermo Solis. The Arias’ stated that they had not properly considered the effect of raising a few hundred upper level professional Public Sector salaries during the 2008 economic down-turn (Oscar Arias was President), as to the effect on the Public Sector salaries and benefits paid to the Civil Service employees as a whole.
2. The tax structure and the related structure for the cost of doing business in Costa Rica must be made competitive with other countries to attract foreign investment into Free Trade Zones, the tourism sector, and the like. This will have the effect of stemming the current growing unemployment problem in the Country, put more money in the hands of employed Costa Ricans, and generate more general tax revenue through pay-roll deductions for those so employed. There will also be a reduced cost to the Government for social and domestic problem solving associated with the rising unemployment circumstances.
3. The effective exchange rate between the Colon and the U.S. Dollar must be made real, as opposed the current Central Bank manipulated exchange rate currently in effect. The true exchange rate is probably somewhere between 600 and 700 colones to the U.S. Dollar. This will certainly be a hardship for those Costa Ricans paying loans, or mortgages in dollars, with wages and salaries being received in colones. Obviously, monthly payments to service such debts would rise for those affected by such an exchange rate adjustment. However, the adjustment would certainly stimulate the Exportation Sector of the Economy and would further bolster foreign investment in the Country and tourism in general; again, producing more general tax revenue.
In my opinion, this three point plan of attacking and solving the current economic crisis in the Country, is the only viable plan to follow, but it will require a President and a Government as a whole, to have “the right stuff” to implement it.