QCOSTARICA BLOGS – Mr. President, as a Canadian Lawyer, Naturalized as a Costa Rican, and practicing law in Costa Rica for thirteen of the past seventeen years that I have resided in Costa Rica, I believe that I have a very good background to comment on the current economic crisis facing Costa Rica, both from a legal and a political perspective.

Indeed, I have written some previous blogs for this website, which address these issues and I have offered solutions to these economic problems. The problem, as I view the short and long-term solutions to these problems, is that there are no policies or solutions being presented by your Government, which will in-fact correct the looming economic crisis and avoid undue hardship to ordinary Costa Ricans in general.

Mr. President, I do not question your personal honesty, or integrity, nor of your wanting to find a solution to these current economic problems that face the Nation. However, possibly due to your purely academic background, there does not seem to be a practical approach to solving these issues emanating from your Government at the moment. The Fiscal Reform Plan, currently submitted to a Legislative review committee, is, in my opinion, doomed to failure, as has been the fate of such predecessor legislative packages considered over the past few years. Changing the Sales Tax to a VAT Tax and implementing a 2% tax increase from the current Sale Tax rate of 13% to the proposed VAT rate of 15%, over a two-year period, will never be accepted, as it is predicated on false premises. The proposed tax increase is merely a cover-up to pay current excessive Public Sector wages and benefits, which are calculated on an error perpetrated by the Oscar Arias Government of two terms previous. In addition, such an increase in taxes would be a hardship to pay for both rich and poor people alike. I see other aspects of the Plan having an equally difficult time to achieve legislative approval.
The Legislative process for the review of the Fiscal Reform Plan will proceed like this:

1) The Legislative Review Committee, where the Plan now sits, will perform its review of the Plan and will recommend cuts in Government spending in the Public Sector, which the Government will not be able to meet under the proposed Plan, the majority of such spending going to the Public Sector for the required payment of excessive wages and benefits;

2) The Plan will be submitted to the Legislative Assembly for debate in the month of October, where is will enter the “feigned support”, legislative “lip-service” phase, where certain Diputados (Legislative Assembly Members), will wax eminently in favour of the Plan being passed, but without any conviction to pass it;

3) In the month of December, the Plan will come-up for a vote in the Legislative Assembly, on the final day of sitting prior to the Christmas break. The majority of the Diputados will miraculously have already “left for the beach”, and no quorum will be present in order for the vote to proceed, thereby avoiding any personal responsibility by any of the Diputados for the Plan’s passage and its negative consequences, if implemented.

4) The Fiscal Reform Plan will languish and the economic crisis faced by the Country will deepen, with an implemented solution becoming increasingly more urgent.

Mr. President, knowing better than I do, that this legislative outcome has been historically proven to be the predictable chain-of-events, would it not be more practical to embark on a solution which will work in solving the current economic crisis in Costa Rica and implementing it on a timely and staged basis, which would minimize the hardship of its implementation on ordinary Costa Ricans?

I offer again, the following three-step solution to solving the current economic crisis facing Costa Rica, which if acted on now, with a staged implementation, would minimize the hardship which would be suffered by the population at-large:

1. Public sector wages and benefits must be capped and in the case of benefits, such as bonuses (“plusas”) and pensions, rolled-back. Wages, likewise must be rolled-back in a staged manner over a short time period, of not more than two years.

2. The tax structure and the related structure for the cost of doing business in Costa Rica (the cost of utilities, etc.) must be made competitive with other countries to attract foreign investment, 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. Obviously, monthly payments to service mortgages and loans 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.

Mr. President, I realize that my proposals would require a firm hand from you in order to be able to implement them.

I look forward to having the beer with you to discuss them further; I’ll let you pick the time and place.

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Richard Philps
Attorney Richard (Rick) Philps is a Canadian citizen, naturalized as a citizen of Costa Rica. Rick practiced law in Victoria, B.C., Canada as a member of the Law Society of British Columbia, for fourteen years, prior to moving to Costa Rica in 1998. Rick then earned his Bachelor of Laws and Licensing Degrees (Civil Law), with Honours, and a Post-Graduate Degree in Notary and Registry Law, from the Metropolitana Castro Carazo and Escuela Libre de Derecho Universities, in San Jose. Rick is a member of the Costa Rica College of Lawyers, and practices law in Costa Rica in the areas of real estate and development, corporate, commercial, contract, immigration, and banking with the Law Firm of Petersen & Philps, located in Escazu, a western suburb of San Jose. To contact Attorney Rick Philps about hiring him as your Costa Rican Attorney, please use the following information: Lic. Rick Philps - Attorney at Law, Petersen & Philps, San Jose, Costa Rica Tel: 506-2288-4381, Ext. 102; Email: rick@costaricacanadalaw.com Website: www.costaricacanadalaw.com
  • randy berg

    Too bad that it would never happen. Unfortunately, no one has the nerve ( some would say cojones ) to tell the people that they are going to have to bite the bullet. It will not happen unless someone has a real mandate to get it done. I doubt if that will happen either.
    Sad. but we are looking at the inevitable.

    • costarick

      I believe that a useful step would be the appearance of Oscar Arias on National TV to admit the mistake that was made by his Government, that led to this imbalance in Public Sector wages and benefits that now exist and are the chief cause of the economic crisis in Costa Rica at the moment. Public Sector employees have to be told by Oscar Arias, that they are receiving these current wages and benefits as a result of his mistake and that they are not entitled and it would be immoral for them to continue the receipt of such at current payment levels.

      • randy berg

        IMO, Oscar Arias is the only person that would be able to rectify the mistake and carry the correction through to its proper conclusion. I cannot think of another person that would have the balls to follow through with it… or even think about it without throwing up.

        Most Americans think of Ronald Reagan and how he handled the air traffic controllers strike… too bad that that could not happen here. Costa Ricans simply are not built that way.

        • costarick

          Agreed; he is the only real Statesman that has held the Office of President in Costa Rica. After-all, it was a mistake by the Arias’ Government, which has been admitted publicly by both Oscar and Rodrigo Arias, that has led to this current economic crisis, fueled by the Public Sector wages and benefits fiasco. His legacy as a true Statesman is in jeopardy if he doesn’t own-up to it and take the lead to resolve the matter on behalf of the current Administration.

          • randy berg

            Right on, you are…

  • Ken Morris

    It sounds like your chief difference with the president involves when an “implemented solution” will be imposed. You prefer that it be imposed now, and predict that if isn’t, it will be imposed anyway the day after Christmas.

    Specifically, you want caps and even roll-backs of public sector wages imposed now, an immediate devaluation of the currency, and an immediate cut in both business taxes and their utiity rates–all without increasing tax revenues.

    In short, you want an immediate economic crisis, which is surely what will happen with your plan. Public employees will clog the courts with suits against the government and win most of them, even as they will engage in work slow downs and more strikes that keeps the government from conducting its business. The devaluation of the currency will lead to massive defaults on dollar-based bank loans, crippling the banking industry and forcing it to jack up interest rates to the point where there’s no affordable capital available for businesses. The devaluation of the currency will also force the country to default on its international debt, which will basically put the government out of business. (Don’t count on pot holes being filled then, much less on being admitted into a hospital if you have a heart attack.) Lower business tax and utility rates will have to be made up for by others, who however will see their purchasing power eroded by inflation and currency devaluation and not have the money.

    Maybe–just maybe–five or ten years down the road your preferred “implemented solution” will result in an economic rebound and fiscal solvency. Austerity plans like yours tend to have this longterm effect. The cost of them however is enormous suffering (and usually increased inequality).

    By contrast, Solís is trying to ease the country through the peril with modest tax reforms (that will increase compliance more so than taxes), equally modest budget cuts, a gradual currency devaluation, and steady economic development. Five or ten years down the road, the president’s plan promises to achieve the same economic rebound and fiscal solvency that your plan promises, but without the crisis and suffering.

    Of the two plans, I prefer the president’s.

    However, you predict that the president’s plan will fail in the legislature, and by the day after Christmas (Boxing Day for you Canadians) your solution will be implemented anyway.

    You may be right about this, but if you are, the fault will be the legislature’s–not the president’s.

    As a fellow congressman once told Sonny Bono (Remember him of Sonny and Cher?) after Sonny complained of all the complicated laws he had to deal with in congress, “Look, Sonny, this is what the legislature does. It writes laws.” Thus, if the legislature doesn’t like a bill the president proposes or wants additional bills, it is perfectly capable of writing a passing its own laws. In fact, this is what a legislature is supposed to do.

    Say then the legislature doesn’t like a VAT creeping up to 15%. It is free to scratch out “15%” and write in “13%” (the same as the current sales tax) if it wants to–and then to pass that bill. Or say that the legislature doesn’t like the high salaries and pensions of public employees. It is free to write and pass a bill reducing those salaries and pensions (although if it does it better be very careful lest the bill fail to pass constitutional muster or even backfire into a sea of costly lawsuits). Say it doesn’t even like the utility rates businesses pay. It is free to write and pass a bill subsidizing them. Odds are that it may not have the direct power to devalue the currency, but it has a fair amount of indirect power it could use the pressure the Central Bank.

    So if an “implemented solution” is imposed the day after Christmas, it won’t be the fault of Solís. He is not after all a dictator governing by edict, but part of a government in which the legislature–not the president–makes the laws.

    Thus, at minimum I think you’re inviting the wrong guy out for a beer. Those you need to be buying beers for are the members of the legislature. These are the people with the power to modify bills proposed by the executive branch, add other bills to the package, and so on. If however they prefer to grandstand without proposing bills on their own, as they now seem to prefer, and then play hooky when it comes to voting on bills proposed by the president, they will be shirking their responsibilities and directly to blame for the results.

    However, I would hope that if you do manage a few drinking sessions with legislators that you fail to persuade them of your crisis-austerity plan. Easing carefully through the mess, as Solís is trying to do, is the far better approach. However, he needs the help and ideally even tempering wisdom of the legislature to succeed. The best case scenario is if the legislature gets off its collective behind and pitches in.

    • costarick

      I have suggested a period of up to two years for the implementation of my proposed solutions, on a staged basis, to minimize the hardship of those in the Public Sector affected by wage and benefit roll-backs. I believe that this time period of implementation would avoid the problems you suggest would occur.

      • Ken Morris

        I missed the two-year phase in (must be elsewhere) but this makes your proposals more reasonable. I think the public sector wage and benefit roll-backs need a longer timeline to succeed–more like five to ten years before there’s significant savings–but think some savings could be realized in even less than two years.

        We will continue to disagree both about the prudence and practicality of the executive branch’s legislative proposals and the relationship between it and the legislature.

        Almost everyone, including the IMF (which will step in and run the show if the government fails), insists that Costa Rica simply must raise taxes fast. According to the IMF, the average tax burden in middle-income countries is 19% of GDP while Costa Rica’s is coming in at 14%. The IMF says, “No can do,” and you better believe that if it takes over, taxes will increase. You can also plan on a VAT, since the IMF wants that. It strikes me as quite prudent and practical of Solís to propose IMF-favored tax reform over which Costa Rica has control before the IMF simply imposes one without discussion or debate.

        Besides this, Solís budget proposal this year is positively brilliant from the standpoint of working with the legislature. Nearly all of his proposed cuts were made in the executive branch. This sends a strong message to the legislature that if it wants more cuts, it better start finding other areas to cut and quit carping at the president. The budget is in effect a dare to the legislature to do its job, and a brilliant political move.

        Meanwhile, of course the legislature can propose legislation, and often does. It’s an unfortunate byproduct of presidential systems that the public tends to assume an excessively powerful executive and lazy legislatures fall in line. The fact is though that the legislature is the lawmaking branch of the government, not the presidency.

        BTW, I was disappointed that Solís didn’t propose a bill to get a handle on public employee costs. Even though I agree with him more than you that this will be a slow process, I think it is a process that needs to be started now, and I wonder why Solís didn’t propose something. I think this was a mistake.

        However, there’s nothing to prevent the legislature from writing and passing its own bill. Indeed, I’m a little perturbed with Guevara. He’s real big on standing in the spotlight and complaining, but my question is: Where’s your proposed bill, Otto? Absent a proposed bill, all he’s doing is grandstanding. And surely he’s been in politics long enough to know how to write a bill.

        Of course, I doubt that an Otto-drafted bill would have a snowball’s chance in hell of passing. He’s not a mainstream guy, after all. However, there’s no reason he can’t put one on the table, and after a lot of changes and compromises, get something passed.

        If he’s serious about actually improving public finances. I get the impression that a lot of these guys aren’t even serious. If they were you’d think they’d do something practical and prudent like proposing a bill.

        • costarick

          Maybe creating an economic crisis in the Country that would force an IMF intervention was the plan all along, with Greece being the example. If that were the case, it would alleviate the politicians of any responsibility to employ a dysfunctional, internal, domestic solution to Costa Rica’s administrative problems, which is currently the case with the proposed Fiscal Reform Plan.

  • JMT

    You guys make valid points. And something has to get done by those in charge or those not in charge will get involved. The IMF is not a group of good guys so it would appear that the boys and girls in office now should make a stand, popular or not popular.
    Where does property tax collection come into place?

  • Biz Duck

    The import taxes are just out of sight. A friend of mine had a choice of selling her 2004 Jeep in the states for $13,000 or paying a $9,100 tax to bring it here. Other friends have spent $50,000 to $100,000+ in building materials to build a house here, all along paying into the Tico health care system for their workers. I’m sure the taxes paid for construction materials are significant enough to make it an issue. On top of that, responsible ex-pats have to go through hell to get residency here, trying to find an attorney who won’t rip you off, With just a handful of competent English speaking Ticos, you could create an “Express Residency” service, more people would come, and bring their life savings with them. The problems can be so easily solved but all we get is a big “Pura Vida”.