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Cablegate: Costa Rica Response to Ustr Request for Info On

VZCZCXYZ0002
RR RUEHWEB

DE RUEHSJ #1963/01 3112235
ZNR UUUUU ZZH
R 072235Z NOV 07
FM AMEMBASSY SAN JOSE
TO RUEHC/SECSTATE WASHDC 9168
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SAN JOSE 001963

SIPDIS

STATE PASS TO USTR FOR KSHIGETOMI
STATE PASS TO USITC FOR LSCHLITT
STATE PASS TO EXIMBANK FOR CREQUE
STATE PASS TO FEDERAL RESERVE MIAMI BRANCH MANIERO
TREASURY FOR SARA GRAY

SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD PREL PGOV CS
SUBJECT: COSTA RICA RESPONSE TO USTR REQUEST FOR INFO ON
CBI-BENEFICIARY COUNTRIES

REF: SECTATE 143212

1. The following is Post's response to Reftel's enquiries.
Questions can be directed to Econoff Steven Bitner, (506)
519-2502, Fax (506) 519-2364, bitnesr@state.gov.

2. Costa Rica
Population: 4,299,234 (Dec 2006)
Per Capita GDP: $5,050 (2006)

Department of Commerce Trade Statistics (2006):

U.S. Exports: $4,132,405,740
U.S. Imports: $3,844,274,625
U.S. Trade Balance: +$288,131,116

===============
Economic Review
===============

3. Over the last two years Costa Rica has experienced
significant economic growth, with foreign direct investment
(FDI) and exports serving as the fuel for the economy.
With GDP growth rising from 4.3% in 2004 to 5.9% in 2005
and hitting an estimated 8.2% in 2006, the country is
experiencing the positive side effects of economic
expansion including the lowest poverty level in 30 years
and an unemployment rate of 4.6%. Over the last two years
Costa Rican exports have grown 30.2%, from $6,301 million
in 2004 to $8,207 million in 2006. Over the same
timeframe, exports to the U.S., most of which enter under
CBI/CBERA/CBTPA benefits, have increased 15% percent, from
USD 3,332 million in 2004, to USD 3,844 million in 2006.
The influx of FDI also plays a significant role in the
economy, with FDI totaling USD 1,410 million in 2006 and
U.S. FDI accounting for 80.4% of the total (excluding real
estate).

4. Costa Rica's ratification of the Central American Free
Trade Agreement (CAFTA-DR) in a nationwide referendum in
October 2007 sets the stage for continued economic growth.
After protracted and unproductive discussions on CAFTA-DR
dragged on in the Costa Rican Legislative Assembly
(Asamblea) for a year and a half, the Costa Rican
government circumvented the legislative process by
submitting the ratification of the agreement to a national
referendum. This was the first referendum in Costa Rica's
history, as well as the first FTA ever submitted to a
referendum, and generated enormous interest in issues
related to trade, intellectual property rights,
telecommunications, and insurance among the Costa Rican
electorate. On the day of the referendum 59.24% of the
electorate participated with 805,658 (51.6%) voting in
favor of ratification and 756,814 (48.4%) voting against.
Costa Rica now faces the daunting task of implementing the
necessary laws and regulations to become compliant with its
CAFTA-DR obligations before March 1, 2008. Opposition
political figures, union leaders, and a number of academics
have proclaimed they will continue to fight passage of
these laws and regulations, despite having lost the
referendum which ratified the deal. In fact, opposition
supporters continue to congregate daily in the public
gallery of the Asamblea and attempt to disrupt CAFTA-DR
legislative proceedings.

5. Although the country has made progress in several
fronts over the last two years, challenges to the Costa
Rican economy remain. Despite improvements, the country
still faced double-digit core inflation rates of 11.0% in
2004, 14.6% in 2005 and 10.6% in 2006. Although Costa
Rica's tax system has seen improvement in collections with
the advent of a new automated customs system and assistance
from the United States Treasury, problems remain in
simplifying the tax regime and collecting revenue. In the
World Bank's "Doing Business" index, Costa Rica dropped to
162nd out of 178 countries in "paying taxes."

=========================================
WTO Obligations and Free Trade Agreements
=========================================

6. Commitment to Undertake WTO Obligations and Participate
in Completion of a Free Trade Agreement: Costa Rica
participates as an active member of the WTO, taking its
Uruguay round commitments seriously and participating in
discussions to move Doha round issues forward. While in
2000 Costa Rica ceased granting financial investment
subsidies and tax holidays to new exporters, it continues
to rely on duty-free exporting zones to attract foreign
direct investment. Companies established in duty-free
exporting zones were originally scheduled to begin paying
taxes in 2007 but were allowed a two-year extension, if
requested.

7. In addition to its attempts to ratify and implement
CAFTA-DR, the Costa Rican government is also pursuing trade
discussions with the European Union (EU). These multi-
lateral discussions between the Central American countries
and the EU stalled during the run-up to the Costa Rican
referendum on CAFTA-DR but the first round of discussions
took place the week of October 22 in San Jose. The second
round has been scheduled for February, in Brussels.

==========================================
Protection of Intellectual Property Rights
==========================================

8. Costa Rica is due to pass several important laws to
improve its intellectual property rights (IPR) regime in
order to become CAFTA-DR compliant. The ratification and
implementation of the International Convention for the
Protection of New Varieties of Plants (UPOV) and the
Budapest Agreement will bring the country closer to
international IPR norms. Under its CAFTA-DR obligations,
the country's criminal penalties must serve as a sufficient
deterrent against IPR violations. It remains to be seen
whether Costa Rica's legislature will pass the needed laws
to strengthen the country's IPR regime sufficiently to meet
its CAFTA-DR obligations.

9. Updating its laws, however, will likely not address the
larger issue of a lack of general enforcement of IPR. The
Attorney General for the Government of Costa Rica has not
made IPR enforcement a priority due to a lack of resources
and other "higher priorities." Criminal and civil remedies
are available but the onus is completely on the victim of
the crime, i.e., the victim not only has to investigate the
violation but also, in most cases, must request seizure of
the property, pay for all required analysis, and employ
legal counsel to bring the case to trial. Piracy of
pharmaceuticals is a concern as the large majority of the
drugs purchased by the Costa Rican Social Security System
are generics and Costa Rica does not have the capability to
test for bioequivalence. As a result of the deficiencies
in enforcement, Costa Rica continues to remain on the
Special 301 Watch List, a position it has maintained since
2002.

============================================= ========
Provision of Internationally Recognized Worker Rights
============================================= ========

10. The Costa Rican Constitution protects the right to
organize. Specific provisions of the 1993 Labor Code
reforms provide protection from dismissal for union
organizers and members during union formation, including
reinstatement for workers who were unfairly dismissed.
Courts order reinstatement as appropriate under Costa Rican
law, although employers do not always comply with such
orders. Unfortunately, there are no specific tools to
enforce reinstatement. Additionally, the backlog has
inched up in the past few years and the average labor
dispute case takes 3 to 4 years to be resolved. Two centers
for alternative dispute resolution are operating in San
Jose and more are planned for the Southern end of the
country in San Isidro del General and for the Caribbean
region, in Limon, to be operational by the end of 2007. A
labor reform project is currently in Costa Rica's
Legislative Assembly but its progress is slow. Costa Rican
labor leaders rightfully claim that stronger remedies for
retaliatory dismissals of trade unionists would advance
trade union interests in the country.

11. According to the most recent July 2007 report of the
Labor Ministry the rate of unionization is 36 percent in
the public sector and 4.5 percent in the private sector,
with an overall rate of 9 percent. Currently, public
sector bargaining is governed by a provisional regulation
that requires collective agreements to be reviewed by a
commission of state officials, making approval contingent
on the impact of the agreement on the national budget.

12. In May 2002, the Government of Costa Rica proposed
legislation to expand and guarantee the right to bargain
collectively in the public sector and in April 2003 the
Government proposed the ratification of ILO Conventions 151
and 154. To date the Costa Rican Legislative Assembly has
failed to enact either the legislation or the ILO
Conventions.

13. Costa Rican law specifies the rights of workers to join
unions of their choosing without prior authorization, and
workers exercise this right in practice. Unions operate
independently of government control. The law prohibits
discrimination against union members and imposes sanctions
against offending parties. In practice, however, labor
organizations complain that employers, especially in the
private sector, regularly fire workers for joining unions.
Due to extensive backlog and outdated case management,
labor dispute resolution within the Ministry of Labor takes
an average of 3-4 years and some cases have taken up to 13
years to complete. As a result, according to union
officials, employers regularly restrict employees' access
to unions or dismiss workers without cause with little fear
of official sanction, since few workers can maintain a
dispute for such an extended period of time.

14. The GOCR is engaged in labor cooperation initiatives to
increase the capacity of the Labor Ministry and to better
protect worker rights. These initiatives included a
regional project in Central America funded with a fiscal
year 2004 grant of $6.75 million from the U.S. Department
of Labor to increase workers' and employers' knowledge of
labor laws, strengthen labor inspections systems, and
create and bolster alternative dispute resolution
mechanisms. In Costa Rica this cooperation ended in 2007,
although the project continues for the other Central-
American countries.

15. The Costa Rican Constitution prohibits forced or bonded
labor, and there have not been any reports that such labor
has occurred. Laws specifically prohibit forced and bonded
labor by children, and the government enforces this
prohibition effectively. The minimum age of legal
employment in Costa Rica is 15 years.

16. The Costa Rican Constitution provides for a minimum
wage by occupation that is set by the National Wage
Council. The Ministry of Labor effectively enforces
minimum wages in the San Jose area, but is less effective
in rural areas, especially those where large numbers of
migrants are employed. The national minimum wage does not
provide a decent standard of living for a worker and
family. The Constitution sets maximum workday hours,
overtime remuneration, days of rest, and annual vacation
rights. Generally, workers may work a maximum of eight
hours during the day and six at night, up to weekly totals
of 48 and 36 hours, respectively.

17. Nonagricultural workers receive an overtime premium of
50 percent of regular wages for work in excess of the daily
work shift. The law on health and safety in the workplace
requires industrial, agricultural, and commercial firms
with 10 or more employees to establish a joint management-
labor committee on workplace conditions and allows the
government to inspect workplaces and to fine employers for
violations.

18. Inspection and enforcement of labor violations are the
responsibility of the Inspections Directorate of the
Ministry of Labor. Officials within the directorate
acknowledge that their operations and effectiveness are
severely hampered by a lack of resources. While the office
represents one of the most widely dispersed agencies within
the Costa Rican government, with 31 offices located
throughout the country, most offices are under-staffed,
poorly equipped and isolated. As a result, inspectors
focus primarily on large businesses within the formal labor
sector.


============================================= ==========
Commitments to Eliminate the Worst Forms of Child Labor
============================================= ==========
19. Costa Rica is serious about addressing the issue of the
worst forms of child labor, and President Arias has been
vocal in his concern for child welfare. Costa Rica
ratified Resolution 138 of the ILO in 1974. In July 2001,
the Legislative Assembly ratified Resolution 182 of the ILO
related to eliminating the worst forms of child labor,
including the sexual exploitation of children. The
government has also established a national committee to
oversee the efforts to combat child labor and has signed a
Memorandum of Understanding with ILO-IPEC. In August 2003,
the Government of Costa Rica and the ILO released a joint,
comprehensive report financed by the U.S. Department of
Labor entitled "Results of the Survey of Child Labor and
Adolescents in Costa Rica." According to the report, of
the 1,113,987 children and adolescents between the ages of
5 and 17 in Costa Rica, 127,077 or 11.4 percent are
employed or looking for work. There are no current figures
available at this time.

20. Due to an under-funded and poorly equipped inspections
regime, child labor remains an issue mainly in the informal
sector of the economy, including small-scale agriculture,
domestic work, and family-run micro-enterprises. Sex
tourism is actively discouraged and enforcement has been
strengthened, either by prosecution and lengthy
imprisonment of U.S. citizen offenders in Costa Rica or
their capture and deportation for punishment in the U.S.,
yet child prostitution remains a problem.

=============================
Counter-Narcotics Cooperation
=============================

21. While the President has not identified Costa Rica as a
major illicit drug transit or producing country under the
provisions of the FOAA, Costa Rica functions as a
transshipment point for the smuggling of cocaine and heroin
from South America to the United States and Europe. Costa
Rican law enforcement officials fully cooperate with U.S.
counter-narcotics efforts. To date, this cooperation has
resulted in the capture of over 40 tons of cocaine
transiting through the country or its territorial waters in
2007. In 2006, Costa Rica captured what then was a record
amount of 25.5 tons of cocaine.

=======================
Implementation of IACAC
=======================

22. Costa Rica ratified the Inter-American Convention
Against Corruption (ICAC) in 1997. Domestic law imposes a
requirement that senior government officials file personal
financial reports while in office. The GOCR has taken legal
steps to combat alleged corruption involving two ex-
presidents who are charged with having been involved in two
different corruption/kickback schemes. The cases are still
pending after more than two years of investigation. As a
result of these charges, the Legislative Assembly passed a
strict anti-corruption law in 2006 to further strengthen
the government's anti-corruption efforts.

======================================
Transparency in Government Procurement
======================================

23. While the Government of Costa Rica generally requires
all procurement to be done through open bidding, problems
and complaints occur. Costa Rican government procurement
practices are complex and cumbersome, resulting from the
many layers of government supervision in place to prevent
illegal practices. Bid awards as well as the subsequent
projects are frequently delayed by appeals by the losing
parties or the Contraloria General's (Comptroller
General's) efforts to regulate government purchases and
procedures. In addition, over the last five years, several
contracts tendered by state monopolies have been mired in
controversy. In one case, alleged kickbacks came from a
company that had "won" a contract with the state-owned
telecommunications company, and the other, embezzlement of
funds from the social security system. CAFTA-DR will allow
competition in the insurance and telecommunications
sectors, thereby lessening opportunities for corruption.

=================
Additional Issues

=================

=============
Expropriation
=============

24. The Government of Costa Rica has expropriated large
tracts of rural land for national parks, biological
reserves and indigenous reservations over the past 30
years. The Costa Rican Constitution stipulates that no
land can be expropriated without prior payment and
demonstrable proof of public interest, but disputes
frequently arise over title to the property and the amount
of compensation with some cases dragging on for over 30
years. Current and past governments have made some efforts
to resolve several pending expropriation cases involving
U.S. citizens, and those cases are currently winding their
way through the Costa Rican courts. Most recently, in
October 2007 the Costa Rican government announced the
expropriation of beach-front property owned by U.S.
citizens in order to protect a turtle-breeding habitat.
Out of 178 countries surveyed in the World Bank's "Doing
Business" index, Costa Rica ranks 130 in "enforcing
contracts" and 158 in "protecting investors" which
accurately reflects the difficulties American investors
experience in Costa Rica. There are cases where arbitral
awards by the ICSID or by local arbitration in favor of
U.S. citizens have been honored.

===========
Extradition
===========

25. Costa Rica has an extradition treaty with the United
States. Costa Rican government officials and U.S. Embassy
personnel enjoy a cooperative relationship in arranging
approximately 15-20 prisoner extraditions from Costa Rica
each year.

=================================
Broadcast of Copyrighted Material
=================================

26. There are no government-owned broadcasting entities
that broadcast copyrighted materials without the express
consent of U.S. copyright-holders.

=============
Market Access
=============

27. Costa Rica's October 7, 2007 ratification of CAFTA-DR
and its efforts to implement the laws to conform to its
CAFTA-DR obligations indicate the country's commitment to
providing equitable and reasonable access for U.S. goods
and services to its market. However, as the campaign prior
to the referendum demonstrated, there is a large contingent
of both Costa Rican citizens and politicians that oppose a
further opening of the Costa Rican market and monopolies.
As such, it will remain important, even after CAFTA-DR is
fully implemented, to monitor market access in Costa Rica.

==================
Self Help Measures
==================

28. The set of laws that Costa Rica must pass in order to
implement CAFTA-DR consist of a number of measures that
will increase the competitiveness of several sectors of the
economy. In addition, the CAFTA-DR obligations concerning
IPR should create the proper environment for industries in
Costa Rica to develop more of their own innovative
products. Costa Rica has also taken concrete steps to
facilitate trade. Over the last year, the country, using
its own resources and initiative, has implemented a new
customs regime, TICA. This system automates many of the
customs transactions, resulting in fewer opportunities for
corruption. The Arias administration has made
infrastructure improvements a priority, leading to some
improvement in the road surface of many transportation
routes. While many issues remain, the current Costa Rican
government is cognizant of the challenges and has
articulated a desire to address them. Among the most
prominent are reforming laws surrounding government
concessions, updating the tax policy, and improving the
responsiveness of government.

BRENNAN

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