VZCZCXYZ0013
OO RUEHWEB

DE RUEHSJ #0299/01 0461732
ZNR UUUUU ZZH
O 151732Z FEB 07
FM AMEMBASSY SAN JOSE
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7246
INFO RUEHMU/AMEMBASSY MANAGUA PRIORITY 4782
RUEHQT/AMEMBASSY QUITO PRIORITY 1295
RUEHPE/AMEMBASSY LIMA PRIORITY 0959

UNCLAS SAN JOSE 000299 
 
SIPDIS 
 
CODEL 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: OREP OTRA PREL PGOV WHA ECON CS
SUBJECT:  SCENESETTER FOR CODEL NELSON'S VISIT TO COSTA RICA 
 
REF: STATE 15976 
 
¶1.  SUMMARY: Embassy San Jose warmly welcomes CODEL Nelson. The 
visit comes at a key point in the approval process for the 
U.S.-Central America-Dominican Republic Free Trade Agreement 
(CAFTA). CAFTA is a key element in President Arias's agenda to 
modernize the country and begin to rebuild its creaky 
infrastructure, domestic security apparatus and education system. A 
comfortable majority of Costa Ricans (and a two-thirds majority in 
the legislature) favors CAFTA, but the ratification and 
implementation process has been hyper-legalistic and slow. The hard 
core of opponents has not given up; the next national anti-CAFTA 
protest is planned for February 26. Nevertheless, the government is 
reasonably confident that the first of two required ratification 
votes could take place in April, with CAFTA being fully ratified by 
mid-year. Implementation will take longer. The economy performed 
well in 2006, fueled by CAFTA-hopeful investment. The government 
continues to be a reliable partner in confronting drug and migrant 
trafficking, despite limited resources. USG-supplied equipment and 
training has been essential to supporting Costa Rica's security 
forces, but current assistance levels are only a fraction of what 
they were in the 1980's. It is the growth that will be fueled by 
trade, not aid, however, that will provide Costa Rica with the 
resources it needs to modernize and develop in the long run. The 
Arias Administration's top foreign policy priority is election to 
the UN Security Council for the 2008-2010 term. On Nicaragua, the 
Arias team has taken a wait-and-see approach following Daniel 
Ortega's election. 
END SUMMARY. 
 
------------------ 
CHALLENGES AT HOME 
------------------ 
 
¶2.  Returning to office in 2006 after a 16-year hiatus, President 
Oscar Arias faces a number of challenges. He won a surprisingly 
close election, defeating Otton Solis of the Citizen's Action Party 
by a margin of less than two percent, and his National Liberation 
Party won only 25 of 57 seats in the National Assembly. He took the 
helm of a well-developed democracy, with a history of stability and 
relative prosperity (per capita income is approximately USD 4,700). 
On the other hand, recent previous administrations accomplished very 
little, three former presidents face corruption allegations and 
Costa Ricans thus have less confidence in their governing 
institutions. 
 
¶3.  Costa Ricans also suffer the effects of the nation's creaky 
infrastructure and increased crime. Only one-fourth of students 
entering the public school system graduate from high school. The 
judicial system is broken; of 37,000 robbery cases opened in 2005, 
for example, only three percent ended with a conviction. In World 
Bank rankings, Costa Rica places 159th out of 175 in countries 
measured for protecting investors, and 114th in enforcing contracts. 
On other key measures of international competitiveness, Costa Rica 
is also slipping. The country dropped from 99th to 105th overall on 
the World Bank's 175-country "Doing Business Index" for 2006, and in 
the key measure of paying taxes, ranked 160th out of 175. 
 
--------------------------------- 
AMBITIOUS AGENDA; GROWING SUPPORT 
--------------------------------- 
 
¶4.  Arias's agenda goes right to the heart of these problems, based 
on the twin pillars of fiscal reform (overhauling the tax system) 
and a more open and competitive economy (enacting CAFTA-DR, 
reforming the telecom and energy sectors, establishing an effective 
concessions system, and creating jobs). These reforms should provide 
Costa Rica the resources to modernize infrastructure and 
institutions, increase spending on education, and invest in a more 
robust omestic security apparatus. Costa Ricans increasinly 
believe that Arias will deliver on his agenda two out of three in 
the January CID-Gallup poll) The same poll shows a 68 percent 
personal approval rating for Arias (up from 60 percent in October), 
with 54 percent describing his presidential performance as "good or 
very good" (up from 50 percent in October). Arias's goals are fully 
consistent with the four pillars of USG policy in the hemisphere: 
consolidate democracy, promote prosperity, invest in people and 
protect the democratic state. 
 
------------------------------ 
CAFTA: 2007 IS THE BIG YEAR 
------------------------------ 
 
¶5.  Ratification and implementation of CAFTA is a central component 
of Arias's development agenda, and it is the U.S. Embassy's top 
foreign policy objective. The Arias Administration inherited CAFTA, 
an initiative he and his party have always supported. The previous 
government signed the agreement in August 2004 and submitted it to 
the legislature in October 2005. After a slow start, the Arias 
administration picked up momentum in late 2006. A long-planned 
national anti-CAFTA protest fizzled in October and a costly 
dockworkers strike in the major Caribbean port of Limon was resolved 
peacefully. The administration recently has formed a five-party, 
38-seat working coalition to push initiatives through the 57-seat 
legislative assembly. This super-majority voted the CAFTA bill out 
of committee in December, after 278 hours of hearings. 
 
¶6.  In January 2007, the super-majority also approved rule changes 
which would limit CAFTA floor debate and accelerate consideration of 
the implementation agenda. In February, procedural obstacles slowed 
progress, and the opposition filed a constitutional challenge to the 
rule limiting debate. A Supreme Court ruling is expected in March. 
Even with this delay, the Arias Administration is reasonably 
confident that the first of two required ratification votes could 
take by early April, with CAFTA being fully ratified by mid-year. 
 
¶7.  Challenges remain, however. CAFTA opponents in the legislature 
are making full use of complex, arcane rules and procedures which 
favor obstructionism. In order to enact the 13 bills that would 
implement CAFTA by the February 29, 2008 deadline, the government 
will have to move faster than all the other CAFTA countries. 
Anti-CAFTA labor union and student groups have set the next national 
protest for February 26. With 62 percent of those who know about 
CAFTA in favor of it (according to the January CID-Gallup poll), and 
a ratification vote approaching, the opposition is running out of 
time, and becoming more shrill. The government has made clear that 
the public has the right to demonstrate, but roadblocks and other 
disruption to public order (features in past demonstrations) will 
not be tolerated. 
 
----------------- 
ECONOMIC SNAPSHOT 
----------------- 
 
¶8.  The Costa Rican Central Bank (BCCR) reports that the country's 
GDP grew at over 7 percent in 2006, the highest since 1999. Foreign 
Direct Investment increased from $861 million in 2005 to $1.4 
billion in 2006. Much of the economic growth was in anticipation 
that CAFTA would enter into force in 2007. If that is not the case, 
the investment-fueled growth is likely to dry up. Inflation declined 
from 14.4 percent in 2005 to 9.4 percent in 2006. Surprisingly, the 
tourism industry grew only 1.8 percent in 2006, although it remained 
the largest employer and earner of foreign exchange. Other key 
sectors such as agriculture and free trade zone manufacturing also 
showed marked improvements in 2006.  Costa Rica imports more from, 
and exports more to, Florida than any other U.S. state; in addition, 
Florida constitutes the number one destination for Costa Ricans 
traveling to the U.S. 
 
--------------------------------- 
TRAFFICKING IN DRUGS AND MIGRANTS 
--------------------------------- 
 
¶9.  Despite the government's limited security resources, Costa Rica 
continues to be a reliable partner against transnational drug and 
migrant trafficking. In 1999, Costa Rica was the first nation to 
sign a bilateral maritime agreement with the United States, which 
authorized joint patrols in Costa Rican waters. Since then, the 
record has been impressive. U.S. and Costa Rican forces teamed up to 
seize over 25 metric tons of cocaine in 2006, a record. In January 
2007, another six metric tons were seized. These successes 
underscore the magnitude of the drug flow through the region. In 
October 2006, joint U.S.-Costa Rican cooperation rescued 128 Chinese 
migrants abandoned at sea by smugglers. They were returned to Peru 
(their port of embarkation). Costa Rica remains historically 
reluctant to participate in anything suggesting "militarization," 
which has limited Costa Rican participation in regional cooperation 
on security issues. 
 
--------------- 
U.S. ASSISTANCE 
--------------- 
 
¶10.  USG-supplied military equipment and training has been essential 
to maintaining and improving Costa Rica's security forces, but 
current assistance levels are only a fraction of what they were 
during Arias's first term. The October 2006 waiver of APSA 
restrictions on International Military Assistance and Training 
(IMET) funds made $45,000 available under the FY 2007 Continuing 
Resolution. The President's FY 2008 budget included a request for 
$88,000 in IMET funding for Costa Rica. State Department 
counternarcotics assistance has fallen sharply from over $1 million 
in FY 2000 to $100,000 in FY 2006. Given the reduced assistance 
flows, the Embassy has looked for other creative ways to assist 
Costa Rica. A State Partnership Program with New Mexico was 
established in January 2007, offering training and technical 
assistance from the National Guard. The U.S. Treasury provides 
significant technical assistance and training to Costa Rica's 
finance ministry and tax authorities.  Meanwhile, other governments 
have become more prominent donors. Taiwan is providing $2 million in 
vehicles ad equipment for the national police. 
 
¶11.  For President Arias, the foreign assistance issue has a 
philosophical component. He advocates the Costa Rica Consensus, 
based on two premises: first, that Costa Rica and other 
middle-income countries have been unfairly "cut off" from the large 
foreign assistance flows from the past; second, that countries which 
invest more in social programs and less for armaments (like Costa 
Rica) "deserve" additional assistance. Arias also proposes a "Peace 
with the Environment" initiative which would build a new 
international "rain forest" coalition, linking countries such as 
Papua New Guinea, the Congo (and Costa Rica) with international 
donors.  Under these rubrics, Arias advocates debt relief for 
middle-income countries like Costa Rica. 
 
¶12.  It is trade, not aid, that will provide Costa Rica the 
resources it needs to modernize and develop, however. As a 
"sustaining partner" according to the State Department's new foreign 
assistance scale, Costa Rica should be well-placed, especially with 
CAFTA, to attract needed foreign investment. New U.S. government 
initiatives are likely to be limited. As a CAFTA signatory, Costa 
Rica is eligible for a share of the $40 million in regional trade 
capacity building. Under the Tropical Forest Conservation Act 
(TFCA), Costa Rica likely will be eligible for some targeted debt 
forgiveness. 
 
--------------------------------------- 
FOREIGN POLICY ISSUES: UN AND NICARAGUA 
--------------------------------------- 
 
¶13.  The Arias Administration's top foreign policy priority is being 
elected to the UN Security Council to fill an upcoming Latin 
American vacancy for the 2008-2010 term. The government views a 
Security Council seat as a key prerequisite to furthering its other 
top objectives, including the Costa Rica Consensus and the Peace 
with the Environment initiative. On Nicaragua, the Arias 
Administration has taken a wait-and-see approach following Daniel 
Ortega's election. With over 300,000 Nicaraguans estimated to be in 
Costa Rica, and relying heavily on Nicaraguan labor to harvest 
coffee and perform other manual labor, Costa Rica seeks to handle 
bilateral relations with its northern neighbor very carefully. 
Langdale