This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 SAN JOSE 000001 
 
SIPDIS 
 
SENSITIVE 
 
DEPARTMENT FOR H FOR BFLECK AND DPARKS 
WHA/CEN FOR JMACK 
 
E.O. 12958: N/A 
TAGS: OREP AMGT ASEC AFIN ETRD CS
SUBJECT: SCENESETTER: CODEL BURTON IN COSTA RICA 
 
REF: STATE 229334 
 
¶1.  (U) SUMMARY: Embassy San Jose warmly welcomes CODEL 
Burton on its January 10 ) 12 visit to Costa Rica.  The 
delegation's visit comes at a time when the main issue in the 
bilateral relationship is the United States-Central 
American-Dominican Republic Free Trade Agreement (CAFTA-DR). 
The debate has just started in the Costa Rican unicameral 
57-member legislature (the Assembly), and the entire 
ratification process will take at least six months. 
Meantime, there are elections on February 5, 2006, of a new 
President and new Assembly members (deputies).  (Note: The 
Costa Rican Constitution does not allow these elected 
officials to serve consecutive terms.  Therefore, the 
executive and entire legislative branch will change.  End 
Note.)  End Summary. 
 
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COSTA RICA ) A LONG HISTORY OF DEMOCRACY 
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¶2.  (SBU) Costa Rica has a strong history of democracy.  In 
1948, after a brief civil war, the army was abolished to 
preclude military interference in the country's politics and 
to allow a greater concentration of resources for universal 
health care, education, and a relatively generous social 
welfare system.  The consensus-building aspect of democracy 
in Costa Rica results in slow decision-making but has allowed 
Costa Rica to avoid the civil wars that wracked its Central 
American neighbors in the latter half of the twentieth 
century.  As a result, Costa Rica is the most developed 
country in the Central America, with the lowest poverty and 
unemployment rates, lowest infant mortality rates, and 
highest GDP per capita. 
 
¶3.  (SBU) To spur development in the middle of the last 
century, the legislature created state-owned monopolies in 
the banking, electricity, telecommunications, petroleum 
distribution, and insurance markets.  Income from these 
institutions was used to help the poor and ensure that 
services reached all corners of the country.  But over the 
years these institutions have become large, bloated, and 
inefficient entities that deliver poor-quality services and 
are susceptible to corruption.  Despite these faults, many 
Costa Ricans continue to view these organizations as 
venerable institutions that demonstrate that the state will 
take care of them. 
 
¶4.  (SBU) The current President, Abel Pacheco (Louisiana 
State University-educated psychiatrist), was elected in the 
country's first ever run-off election in April 2002 in which 
he won 58 percent of the vote.  President Pacheco is in his 
final months as President, and he has seen his popularity 
rating drop during the course of his administration.  This is 
due in part to his accepting gifts and favors which violated 
the same anti-corruption laws that he championed, but is 
principally due to a generally-held low opinion of his 
effectiveness as president.   President Pacheco has seen 18 
cabinet-level ministers resign, some over the President's 
uneven and wavering support for CAFTA-DR.  Most of the 
management of the Ministry of Foreign Trade that was 
responsible for negotiating and implementing the agreement 
left the organization over the last 18 months. 
 
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STATE OF RELATIONS WITH GOCR 
---------------------------- 
 
¶5. (SBU) Relations between the United States and Costa Rica 
are friendly, abiding, and complex.  We share core political 
values, including a belief in democracy and a commitment to 
human rights.  Like the United States, Costa Rica does not 
have formal diplomatic relations with Cuba and is concerned 
about attempts by the Venezuelan government to increase its 
influence in the hemisphere.  Although Costa Rica has no 
military, the Costa Rican Coast Guard and police Cooperate 
closely with the U.S. Coast Guard, Navy, and Drug Enforcement 
Agency (DEA) in narcotics interdiction. 
 
¶6. (SBU) U.S. economic assistance to Costa Rica has fallen 
dramatically since 1995 when we closed our bilateral USAID 
mission.  There was an upsurge in U.S. military and 
counternarcotics assistance with the signing of a Bilateral 
Maritime Agreement in 1998, but that assistance 
has now been reduced because of Costa Rica's reluctance to 
sign an Article 98 agreement (committing Costa Rica not to 
surrender U.S. nationals to the International Criminal Court) 
and a shift in priorities in the State Department's Bureau of 
International Narcotics and Law Enforcement Affairs (INL). 
Failure to sign an Article 98 agreement also has caused Costa 
Rica to be ineligible for trade capacity-building funds to 
implement CAFTA-DR.  This decline in assistance unavoidably 
affects the level of our cooperation with Costa Rica in the 
areas of counternarcotics, counterterrorism, and trade. 
 
¶7. (SBU) The next general elections in Costa Rica are 
scheduled for February 5, 2006.  Former president and current 
front-runner Oscar Arias is heavily favored to win the 
election in the first round of balloting, which would require 
garnering forty percent of the vote.  Arias is deeply 
committed to free-market policies and CAFTA-DR, but with 
respect to some international issues, such as the use of 
military force and levels of economic assistance from rich to 
poor countries, Arias is likely to be at odds with the United 
States. 
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CAFTA-DR RATIFICATION ) A LONG ROW TO HOE 
----------------------------------------- 
 
¶8.  (U) Costa Rica is the only CAFTA-DR signatory country not 
to have already ratified the treaty.  President Pacheco 
signed CAFTA-DR in August 2004 but since that time has 
publicly expressed his doubts that the treaty will benefit 
the poor.  Only on October 21, 2005, did the president 
finally send the agreement to the Assembly to start the 
relatively long ratification process.  Currently, the 
Assembly's International Relations and Trade Committee is 
studying CAFTA-DR and holding hearings with various groups 
about the agreement. 
 
¶9.  (U) Due to the legislative recess from December 23, 2005 
through February 5, 2006 for the holidays and the national 
elections, completion of the Committee's work is expected no 
sooner than the end April 2006, just before the new deputies 
take office on May 1, 2006.  (Note: The new Administration 
takes office on May 8, 2006.  End Note.)  After the Committee 
has sent its findings to the Assembly floor, two separate 
votes by the Assembly are required to pass the agreement, in 
between which the Supreme Court will review CAFTA-DR for any 
constitutional issues.   The total ratification process will 
take at least six months and most likely longer. 
 
¶10.  (U) Unlike the path taken by the U.S. Congress, the 
Assembly will approve CAFTA-DR separately from the 
legislation that will actually implement the agreement.  To 
date, the implementing legislation has not yet been sent to 
the Assembly, and passing these bills could be as difficult 
as passing CAFTA-DR.  These bills should effect the phased 
opening of the telecommunications and insurance markets to 
competition ) markets that are currently legally monopolized 
by the state-owned Costa Rican Institutes of Electricity 
(ICE) and Insurance (INS), respectively. 
 
¶11.  (U)  Public knowledge of and support for CAFTA-DR has 
grown over the last year with an October 2005 CID/Gallup poll 
revealing that 64 percent of the respondents were at least 
"somewhat" in favor of the agreement.  Those responding that 
they were "somewhat" or "very much" opposed constituted 26 
percent.  Sixty-one percent of those who knew something about 
the agreement responded that they thought CAFTA-DR would 
benefit Costa Rica. 
 
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TRADE OVERVIEW 
-------------- 
 
¶13.  (U) Due to its small size, geographic location, and 
limited natural resources, Costa Rica relies heavily on 
foreign trade and investment.  The United States provides 46 
percent of Costa Rica's imports and consumes 44 percent of 
Costa Rican exports.  According to the U.S. Census Bureau, 
through September 2005, two-way trade between the U.S. and 
Costa Rica amounted to approximately USD 5.1 billion.  Total 
trade for 2004 was USD 6.6 billion, a 12- percent increase 
from 2003.  Costa Rica accounts for one-third of U.S. trade 
with the five Central American CAFTA-DR countries.  Over the 
last twenty years, Costa Rica has taken steps to diversify 
its economy and, as a result, has become less dependent on 
the traditional agricultural crops for generating revenue. 
In general, Costa Rica has integrated itself more into the 
global economy; growing imports and exports are proof of that. 
 
¶14.  (U) Costa Rica exported USD 2.8 billion worth of goods 
to the U.S. in 2004.  Bananas and coffee, which were primary 
exports 20 years ago, fell behind tourism, integrated 
circuits, medical devices and pineapples as the top exports 
to the U.S.  With regard to revenue generation, tourism is 
number one in Costa Rica.  Approximately 1.6 million visitors 
came to Costa Rica in 2004, more than 600,000 of them from 
the U.S., generating USD 1.4 billion.  Through the first half 
of this year, tourism income is up 17 percent as compared to 
the same period last year.  Tourism also plays a special role 
in the Costa Rican economy by providing approximately 300,000 
direct and indirect jobs, a large portion outside the San 
Jose area. 
 
¶15.  (U) Costa Rica imported USD 3.8 billion worth of U.S. 
goods from the U.S. in 2004.  Top imported items included 
semiconductors and textile materials.  The U.S. is a major 
supplier of corn, wheat, rice, soybeans, and consumer foods 
to Costa Rica, but the U.S. currently imports from Costa Rica 
more than three times what it exports to Costa Rica. 
 
¶16.  (U) Total foreign direct investment (FDI) in Costa Rica 
was USD 596 million in 2004, 66 percent of which came from 
the U.S.  The Central Bank of Costa Rica estimates that FDI 
will fall to USD 540 million in 2005 based on a declining 
investment climate.  FDI is concentrated in the industrial 
manufacturing sector which attracted USD 437 million in 2004, 
followed by the tourism and services sectors which attracted 
USD 51 and USD 37 million, respectively. 
 
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LOW REAL GROWTH, HIGH INFLATION, LARGE DEBT 
------------------------------------------- 
 
¶17.  (U) Global economic changes affect Costa Rica's economy. 
 For instance, the increase in gasoline prices in 2005 hit 
Costa Ricans especially hard since they have no domestic oil 
production.  Costa Rica's economy is also affected by 
operations of large multinational companies that have 
manufacturing and service operations in Costa Rica.  Intel 
has a large operation in Costa Rica, and its growth or lack 
thereof has a noticeable effect on the economic situation. 
In 2003 when Intel's exports increased 32 percent, the Costa 
Rican economy grew 5.6 percent.  In 2004, Intel's exports 
dropped, but continued strong growth in non-traditional 
agricultural exports helped limit the overall impact on the 
economy ) the result was growth of 4.2 percent.  GDP growth 
for 2005 is expected to be approximately 4.1 percent. 
Inflation remains a significant macroeconomic challenge, and 
at 14.2 percent over the last twelve months it is at its 
highest level in eight years and one of the highest rates in 
Latin America.  The higher-than-expected inflation and 
slower-than-expected growth in exports led the Central Bank 
to increase the rate of colon (the local currency) 
devaluation against the dollar in July 2005. 
 
¶18.  (U) The fiscal deficit is one of Costa Rica's most 
serious macroeconomic problems.  More than 90 percent of the 
GOCR's income is used to pay government salaries, pensions, 
social benefits, and interest payments on the national debt. 
The central government's fiscal deficit is projected to be 
about 2.8 percent of GDP for 2005.  This compares to 2.5 and 
3.0 percent of GDP for 2003 and 2004, respectively.  Fiscal 
reform legislation, one of the Pacheco Administration's 
primary goals, has languished in the legislature for over 
three years.  This proposal is mainly a tax increase and does 
not contemplate spending cuts.  The President's bill has been 
blocked by the minority Libertarian Movement (ML) Party in 
the Assembly. 
 
¶19.  (U) At the end of 2004, Costa Rica's public sector debt 
topped USD 10.5 billion.  The central government's deficit is 
largely financed by government borrowing and the surpluses 
generated by some state-owned monopolies (which include 
telecommunications, electrical power, insurance, and 
petroleum distribution).  In late 2004, the GOCR, unable to 
attract investors on the open market, resorted to forcing 
state-owned service providers to take on government debt to 
allow the GOCR to meet its end-of-year obligations. 
FRISBIE