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CAFTA -Costa Rica.

  • FDI Profile of Costa Rica

    FDI Profile of Costa Rica

    Traditionally, the United States accounts for more than half of the foreign direct investments that take place in Costa Rica, as shown in the following chart. Nevertheless, direct investments originating from Europe have been acquiring a growing importance due to the large investments carried out by Dutch and German corporations in both the tourist sector and the food and beverage industry during 2002 and 2003.

    Source: CINDE, based on the statistics from the Central Bank.

    With respect to the sectoral distribution of foreign investments in Costa Rica, the importance of the manufacturing industry must be underlined, as its share in total FDI grew to almost three fourths in 2004, followed by the services and tourism industries, which have been also acquiring importance (relevance) during the last few years. On the other hand, investments in the agricultural industry have followed a downturn pattern that even in the year 2004 has revealed a disinvestment behavior.

    Source: CINDE, based on the statistics from the Central Bank.

    The distribution of foreign investment, according to the special promotion regimes in place is also worth illustrating. In this regard, more than half of the total is established under the free zone regime, which is followed in importance by investments that do not use special regimes (i.e. regular companies) and tourism-related FDI that request benefits under the Tourism Declaration regime.

    Source: CINDE, based on figures by the Central Bank 


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    List of established companies


    FDI contribution to domestic economic development

    As is broadly accepted worldwide, foreign direct investment conveys a series of tangible and intangible benefits to those countries that are able to attract and maintain it:

     

    Complement to domestic savings

    Economies as a whole can allocate their income to consumption or savings. These savings are in turn routed to investment projects through financial intermediaries (whether local or international). However, in some countries savings generation by local economic agents is often not enough to finance investment being then necessary to attract resources from abroad to complement for this shortage. FDI helps to overcome this difficulty and hence helps finance economic growth.

    Source: CINDE, based on Central Bank statistics

    As shown by the previous chart, during the last few years the savings rate has fluctuated between 5% and 9% of the GDP, which could be considered a low rate if compare to certain industrialized countries, whose rates fluctuate between 30% and 40%.

    Financing the deficit on the current account

    FDI currently finances nearly two thirds of the total deficit on current account, a circumstance which provides great strength to the economic stability of the country and has contributed to the reduction of the perceived country risk.

    Source: CINDE, based on Central Bank statistics

    Foreign exchange generation with low volatility

    FDI is not just any financing channel but a clean source of financing, as it is much more anchored to the host country than portfolio investment flows that respond to short term speculative considerations, and therefore it reduces the volatility of the incoming capital. In this sense, some authors call the portfolio investment flows as "bad Cholesterol" since they respond to speculative short-term considerations and the fast depletion of these flows can create or deepen currency difficulties to the recipient country. On the contrary, FDI can be considered as "good cholesterol" since it is much more anchored to the host country.

    FDI located in Costa Rican free trade zones is notable for providing nearly 30% of the country's exports, compared to 10% just a decade ago. It is also very evident that FDI has contributed to the diversification of exports, thus making the Costa Rican economy less vulnerable to basic export commodities risk.

     

    Source: PROCOMER

    Employment creation

    The creation of direct employment through FDI companies during the last decade, which to a great extent are located in the free zones, has been very significant. In this respect, the free zones currently generate nearly 36,000 jobs, which doubles the amount of jobs created 10 years ago.

    Source: PROCOMER

    Technology transfer

    Creation of Productive Links

    Although it has not become a generalized process yet, the linking of overseas companies with local suppliers represents an additional way through which the local economy can be inserted into the worldwide economy, thus allowing for the extension of the FDI benefits. Local suppliers improve their standards, learn new production processes, and improve their commercial practices through their relationship with FDI companies.

    It should also be highlighted that in many countries, FDI attraction has been a strategic element of their own development model. This is the case of various Asian countries such as China, Malaysia, Singapore and Thailand. Within the western hemisphere, Ireland is a clear example of a development strategy strongly aimed at attracting FDI; indeed, Ireland achieved growth rates of 8% in the decade of the nineties due to a great extent to the establishment of multinational companies. Naturally, this does not mean that only FDI is required to achieve high rates of growth, but there is not doubt that the latter is a fundamental element in the development strategy of these economies.

     



     

    An additional means through which FDI generates benefits to the economy is the transfer of knowledge that occurs as a result of the constant training given to the personnel, knowledge that not only refers to the production processes but also a results-oriented business culture. In fact, as transnational companies themselves acknowledge, they invest time and funds on training in order to create the necessary know-how in their local operation. This in turn increases and lingers as a competitive factor for the country. It is also important to highlight that the transfer of knowledge has even shifted to academic centers and functionally in other areas such as environmental safety and occupational health, where international regulations have been incorporated into local standards.

     

    • Complements the low level of domestic savings
    • Finances the Balance of Payment�s current account deficit
    • Generates foreign exchange with low volatility
    • Creates more employment
    • Transfers technology and know-how
    • Develops productive links

     

     

    © 2004 CINDE

  • CAFTA IN COSTA RICA

    Court Reviews Trade Pact

    The fate of the Central American Free-Trade Agreement with the United States (CAFTA) now depends not only on how people vote in a nationwide referendum Sept. 23, but also on a verdict that's closer at hand: the decision of high-court judges now evaluating whether the pact violates Costa Rica's Constitution.

    After weeks of speculation about whether the Constitutional Chamber of the Supreme Court (Sala IV) should evaluate CAFTA before a public vote, the chamber's justices announced May 11 that they'd take on the challenge and present their opinion within a month. Ombudswoman Lisbeth Quesada, who two weeks ago requested that the high court review the trade pact's possible effects on human rights, succeeded where others who've asked for a Sala IV review of the controversial agreement, including the Supreme Elections Tribunal (TSE), have failed.

    The high court justices indicated they would have one month to reach a decision as soon as the Ombudsman's Office, as the institution that requested the evaluation, submitted a copy of the more than 2,000-page agreement to the Sala IV. Ombudsman's Office spokesman Ahmed Tabash told The Tico Times this took place Wednesday morning, meaning that the chamber will likely release its decision by June 15.

    The seven justices' decision, particularly if they find violations within the agreement, could certainly have drastic consequences, although it's not yet clear what those consequences might be. Luis Antonio Sobrado, interim president of the Elections Tribunal, told The Tico Times this week that he prefers not to speculate about what will happen after the Sala IV's decision. However, he suggested that a ruling against CAFTA could affect whether the referendum proceeds.

    “It depends on how the Sala resolves (the consultation),” he said. “For the moment, we're continuing to organize the referendum.”

    When pressed to define whether a public vote could be held despite a negative high-court ruling, Sobrado said again that he prefers to wait for the decision.

    Part of the confusion is that the consultation is just that, and not a binding ruling. Sala IV opinions on legislation that has not yet reached a vote is binding only if the justices find procedural errors in the way the bill has been handled, not on content.

    According to legislator Rafael Madrigal, the country could be heading into murky waters involving a never-before-seen conflict of powers.

    “There's a – well, I'm not sure whether to call it a legal void, but it's a very new (situation),” he said of the Supreme Court-Elections Tribunal pairing. “If there's a problem, if the Sala IV says the trade agreement is unconstitutional, I don't think the TSE can contradict what they say.”

    According to Madrigal, the interim faction head of the anti-CAFTA Citizen Action Party (PAC), it may not be clear whether the Tribunal's three magistrates could move forward with the referendum if the Sala IV rules against CAFTA – but it's very clear that they shouldn't.

    “It won't be binding, but if the Sala finds constitutional violations, the logical thing would be for the Executive Branch to move forward to renegotiate,” he said. “It makes no sense to go to a referendum if the Sala tells us it's unconstitutional.”

    Ombudswoman Lisbeth Quesada, who has spoken out against CAFTA in the past and on April 27 requested that the Sala IV review CAFTA, echoed this argument when she presented her request.

    “There are 1.5 billion reasons why the Sala IV should admit to and make a pronouncement about the extremes of what is suggested” in the U.S. trade agreement, Quesada said, referring to the estimated ¢1.5 billion (approximately $2.9 million) cost of holding a referendum. She listed workers' rights, health benefits, intellectual property and the protection of minority groups as areas her office sees as problematic or not included in the trade pact (TT, May 4).

    Madrigal, a lawyer, clarified that a “yes” vote on CAFTA in September would not negate or overrule any constitutional problems with the agreement. To change the Constitution, a Constitutional Assembly must be convened, which also requires a nationwide election but is an entirely different process in which voters choose representatives to revise the document.

    Disputed Chapters

    While no one knows what's going on behind the Constitutional Chamber's closed doors, a lively debate about the trade pact's constitutional contradictions – or lack thereof – has taken place in recent weeks, particularly between a group of legal experts from the University of Costa Rica (UCR), whose board of directors has officially proclaimed their opposition to the agreement, and CAFTA proponents such as the Foreign Trade Ministry (COMEX). UCR's Special Commission on Constitutional Aspects of CAFTA released a report last month detailing what its members claim are violations of the Constitution.

    The 56-page university report details a laundry list of alleged violations, to which COMEX provided a partial rebuttal in the days that followed. The bulk of the debate centers on whether CAFTA would infringe upon Costa Rica's sovereignty.

    One of the primary points of dispute is whether international arbitration and supervisory agencies CAFTA creates would infringe upon constitutional powers of the Costa Rican state. Chapter 10 of the agreement allows investors to take Costa Rica to an international arbitration court to settle differences, which the UCR group says is an unconstitutional transfer of power and discriminates against national investors, who have no such option. The Trade Ministry maintains that this is a common arrangement in free-trade agreements, including five of Costa Rica's existing FTAs with other countries.

    Another conflict: how CAFTA would affect workers' rights. The UCR report claims that the wording of the agreement's Chapter 16 includes only specific labor legislation and excludes Costa Rica's wide range of constitutional social guarantees, leaving workers unprotected. The Trade Ministry response says this is a misinterpretation and that the agreement “does not attempt to substitute national legislation on this topic, so that any right of Costa Rican workers is maintained, as is the possibility of improving those rights.”

    The list of disputes of this nature on the Sala IV's plate may grow. Though Quesada's request, now under consideration, focuses on human-rights issues, Madrigal said that he and his fellow PAC legislators are still working on a separate request for a Sala IV review of CAFTA, including questions about some of the same issues Quesada and the Ombudsman's Office included, as well as others.

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