Central American countries have some of the worst performing economies in Latin America. Political instability, deep poverty and natural disasters plague the region. Costa Rica, which for generations has supported relatively high standards of living and a stable democracy, operates in a different league. Its per capita GDP of $3,600 is the highest in Central America.

Costa Rica has successfully shifted its economy from one based mainly on coffee and banana exports to one based on value-added goods such as computer parts and services. It has also created a highly successful eco-tourism industry thanks to its thick rain forests and unspoiled beaches.

In 1997, Intel, the world’s biggest computer chip manufacturer, built a $300 million plant in Costa Rica. Annual GDP jumped to 8% for both 1998 and 1999, much higher than average growth rates for Latin America of 2.3% and 0.3% for the same years. Last year, Intel exports accounted for 38% of the country’s exports, or 3.5% of GDP. But heavy reliance on technology has its price. A slump in US computer sales last year forced Intel to cut production, which contributed to the sharp decline in Costa Rica’s growth rate to 1.5% in 2000. Exports declined last year for the first time since 1985, dropping 12% to $5.9 billion.

Foreign direct investment also fell sharply last year to $420 million from $660 million in 1999 after the country failed to revise laws on foreign investment in public sector industries. “Privatization fuels foreign direct investment,” says Richard Francis, Costa Rica analyst at Standard&Poor’s. “And Costa Rica still needs to privatize its two largest sectors: telecommunications and power.”

Instituto Costarricense de Electricidad controls the country’s power generation and distribution, fixed-line telephony and even cellular phone services. In April 2000, President Miguel Rodríguez attempted to liberalize these sectors but was forced to drop the effort after public protest.

Roberto Artavia, director of Costa Rica’s Incae business school, says the Costa Rican government has a strong tradition of investing in public infrastructure. He believes the relatively good service provided by the state-run industries has made privatization less appealing than in the rest of the region, where foreign investors cut the cost and improved the quality services.

Costa Rica has one of Latin America’s highest rates of electrification, and with a rate of 20 lines per 100 inhabitants, it has Central America’s highest teledensity rate. Still, Artavia says that services have become increasingly inefficient. He had to wait eight months for the state phone company to install a second line in his house.

Meanwhile, Costa Rica’s budget deficit continues to grow. Last year the deficit was equivalent to 2.6% of GDP and the government spent over a quarter of its budget on interest payments. Since 1998, Costa Rica has raised $1 billion on the international bond market, issuing three 10-year bonds and one five-year bond with coupons ranging from 8% to 9.9%. Standard&Poor’s rates Costa Rica BB and Moody’s rates it Ba1. Most recently it raised $250 million in February.

Costa Rica has attracted some private investment to several public sector projects. Bechtel Enterprises, the US construction giant, and the Airport Group International Holdings, a subsidiary of TBI, one of the largest airport holding companies raised $120 million in loans from the International Finance Corporation, Deutsche Bank and Dresdner Kleinwort Wasserstein to refurbish the San José airport. The government needs similar investment packages to improve road, power and telecommunication infrastructure. Costa Rica still needs to diversify and exploit its high standard of living and education in attracting more foreign investment. LF