(QCOSTARICA BLOGS) On October 13, 2014, I wrote and submitted a blog to this site entitled, “The Costa Rica Budget, Or Will Costa Rica Be The New Greece”. As current matters unfold in Greece, with their likely default on their international debt and their subsequent ouster from the Eurozone, I can’t help but see the same parallels developing in Costa Rica.
Although the Contraloria (Comptroller General) for Costa Rica has indicated that the continued payment of Public Sector wages and pension benefits at the current levels is unsustainable, based on projected tax revenues and the Editorial in the newspaper “La Nacion”, as of yesterday drew these same parallels with Greece and its debt problems, the Government of Costa Rica has taken no affirmative action toward avoiding a similar debt crisis arising in Costa Rica. This includes the continued borrowing from international financial agencies, the funds required to support these unsustainable Public Sector wages and benefits payments.
This is exactly the same scenario that the Government of Greece followed, to put itself in the debt crisis that it now finds itself in. Foreign money borrowed by Greece from the German and French banks that are now demanding repayment, was based on a projected GDP from an Economy based on tourism and olive production.
Greeks were retiring at age fifty-five with substantial government pensions based on these borrowed funds. Greece has no domestic, or foreign investment in manufacturing of high-tech gadgets, or other exportable items such as generic pharmaceuticals, nor Multinational Company call centers, like Costa Rica does.
In short, there was no realistic way for Greece to repay the borrowed funds based on any realistic growth projection of their GDP.
The foreign investment aspect in Costa Rica is, in my opinion, the short and long-term solution to the current economic woes faced by Costa Rica. Otherwise, you are looking at an Economy based on tourism, bananas, and coffee, not dissimilar to the Economy of Greece.
However, since taking office, the current Costa Rica Government has taken steps to make such continued foreign investment unattractive from a “cost of doing business” point-of-view, with the threat of increased taxes, high employer pay-roll deductions and employee wages, and high utility costs.
Foreign investment has been leaving Costa Rica and unemployment in this sector of the Economy has been steadily rising. Clearly, the approach must be the wooing of foreign investment based on tax-breaks and lower costs of doing business, with the corresponding benefit of increased revenues from pay-roll deductions arising from increased employment. In that scenario, everybody wins, Costa Ricans have jobs and the Government has the revenue.
The U.S. Dollar/Costa Rica Colon exchange rate is hurting Costa Rica exporters and they have recently stated such. The Colon is obviously being manipulated by the Central Bank, to maintain a much higher value as against the U.S. Dollar than is realistic, as is reflected in any other World currency.
Canada, which has a much stronger Economy than does Costa Rica, has devalued its Canadian Dollar currency by almost 25% over the past year as against the U.S. Dollar, where the Colon has stayed essentially stable in its relationship with the U.S. Dollar. This cannot reflect the true state of affairs in this regard and is the root of the issue hurting Exporters.
Should matters come to pass in Greece as I have predicted with their ouster from the Eurozone, the life-style of the Greek population will be very negatively affected. Greeks will have no international credit and imported goods will be virtually non-existent.
This diminished life-style will continue for many years and the Greek population will suffer considerably for the “sins” committed by their previous governments.
I would hope that the Costa Rica Government would take note of these developments in Greece and would implement an economic strategy for Costa Rica which would avoid such similar negative developments to be the not too distant future case here.
in addition Forbes Magazine comments; “As far as protecting investors, the World Bank ranks Costa Rica near the bottom–number 164 out of 181 economies–alongside Iran, Senegal and Haiti.” In addition the judicial system here lacks any resolution to arbitrate/resolve business or civil disputes. Whether this is by design or incompetence is now immaterial. The fact is that white collar enterprise is flourishing and seemingly condoned. The authorities might be wise to look to an old bank study that concluded that bad news travels seven times faster than good news. Of course they may not care but then neither did the Greeks.
I agree with the analogy between Costa Rica and Greece. They are roughly similar situations.
I also agree that the exchange rate is being manipulated, and long term this is a disaster waiting to happen.
However, I don’t agree that foreign investment is the solution, either short- or longterm, and am not even persuaded that it is down.
The opening of the telecommunications market attracted zillions of investment dollars from multinationals hoping to take the profits from those sales home with them. Those investments have naturally fallen off, since most of them were seed money investments, so of course FDI has fallen.
The larger picture is where the profits from those investments will go. Here’s a hint: Not to anyone in Costa Rica. I reject the argument that FDI is the way to go, since duh, its end result is to take money out of the economy.
I also don’t understand how you can write that the government has made “foreign investment unattractive from a ‘cost of doing business’ point-of-view, with the threat of increased taxes, high employer pay-roll deductions and employee wages, and high utility costs.”
Starting with high utility costs, do you have any evidence that businesses are charged more for utilities than they cost to deliver? I’d be surprised if you did, since I sure haven’t seen any. But if you’re saying that businesses should have their utility costs subsidized, my question is by whom? Is business so important that others should subsidize their electric bills?
Yes, there is the threat of increased taxes (which even the IMF urges) but we’re mainly talking about a VAT that is only 1% above the existing sales tax. This tax will be paid mostly my consumers, who already pay the sales taxes anyway. How on earth could a change from a sales tax to a VAT discourage business?
As for “high employer pay-roll deductions and employee wages,” you’re the first one I’ve heard say that these are increasing. I don’t believe they are. Since they aren’t, I have to gather that you find it unfriendly to business to pay employees in Costa Rica an average of around $750 a month plus, God forbid, add on an amount for heath insurance and a paltry pension. Ticos, I think you are saying, don’t deserve such riches, not when the foreign investors want to pay less!
Sky-is-falling alarmism is always popular, but I think if you read less selectively you would see that many businesses are actually expanding in Costa Rica.
Mind, you are right that the government deficit is unsustainable, but I don’t see any reason to throw this other litany of complaints into the hopper. Basically, the government needs to increase tax collections from the cheaters (not subsidize their electricity rates too), uniformly raise taxes a wee bit (the tax burden in Costa Rica is currently on the average only 20%, while it is 30% in more advanced countries, and Costa Rica is increasingly becoming more internally unequal), and figure out a way to cut public spending. The problem with the latter is that, while everybody knows that the cuts need to come from public employees’ salaries and pensions, these folks are usually protected by unions and laws. I strongly favor cuts in public spending, if they are made where they should be made, but the political reality is that they are almost impossible to make where they should be made and when made are therefore usually in needed services.
Figure out a way to cut public spending fairly, and I’ll be your first fan, but don’t give me this crap about FDI being the country’s salvation or how I should subsidize some multinational’s electricity bill.