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The reforms have contributed to an improving economy. The economy of Costa Rica showed significant growth during 1993, but slightly less than in 1992. Gross Domestic Product (GDP) increased 6.1 percent in 1993 (7.7 percent growth in 1992). Financial intermediation continued to be the fastest growing activity in Costa Rica, growing 12.4 percent in 1993, followed by communications, transportation and storage which grew 11.3 percent in 1993, and electricity and water which grew 7.0 percent in 1993, largely the consequence of price increases in state-supplied services. Industry grew 6.5 percent, and agriculture 2.2 percent, in 1993. Commerce, restaurants and hotels grew 8.2 percent in 1993. The general price level, as measured by the Consumer Price Index (CPI), increased 9 percent in 1993, a significant improvement after an increase of 17 percent in 1992. However, the CPI had increased 10.5 percent by the end of August 1994, and is expected to be close to 20 percent by the end of 1994. 1993's lower price levels were the result of tight money controls by the Central Bank and continuing decreases in tariff rates. These reduced tariffs also caused record-breaking increases in imports of cheaper goods. While increased taxation and public sector revenue reduced disposable income in 1992 and 1993, the relative stability of the exchange rate, plus the gradual reduction of tariffs, contributed to a record 40 percent increase in imports from the United States in 1993.

The Central Government's fiscal deficit reached USD 145.7 million in 1993, vs. USD 129.8 in 1992 and USD 173.9 million in 1991. Despite the increase in nominal terms, the Central Government deficit in 1993 remained equivalent to 1.9 percent of GDP, the same share as in 1992, and much lower than the 3.1 percent of GDP share in 1991. According to Central Bank data, the consolidated Public Sector fiscal deficit totalled USD 66.5 million in 1993, equivalent to 0.9 percent of GDP, an improvement over 1992 when the deficit was 1.1 percent of GDP. While tax income increased 15.8 percent in 1993, government bond sales (USD 686.2 million in 1993) increased 92.2 percent, becoming a critical source of financing. Monetary measures taken by the Central Bank in the second half of 1993 and rising interest and exchange rates made the cost of borrowing higher for the GOCR. On the revenue side, decreased tariff revenues (caused by lower tariff rates) and reduced export tax revenues (due in large part to low world coffee prices) resulted in lower tax revenues.

In 1993 the Central Bank continued to use a range of tools to control the growth of the money supply, including open market operations, restriction of public sector credit, and increases in the reserve requirements to commercial banks. Starting August 1, 1993, the Central Bank raised by 2 percent per month the reserve requirement for local currency demand deposits. By the end of 1993, the rate was 36 percent. The reserve requirement for time deposits in local currency (less than 180 days) increased from 14 percent at the end of 1992, to 17 percent at year-end 1993. Reserve requirements for foreign currency deposits were made equal to those applied to deposits in local currency. This measure consisted of a 13 percentage points increase in reserve requirements for dollar deposits of less than 30 days, and 5 percentage points for dollar deposits of more than 30 days but less than 180 days. The rate of interest paid by the Central Bank for its bonds was increased gradually by 18 percentage points from June to September 1993, in an effort to capture excess liquidity. On October 31, 1994, the Central Bank announced forthcoming increased reserve requirements for on-sight deposits from 36 percent to 43 percent, and from 17 percent to 30 percent for time deposit less than 6 months, effective at the end of November 1994. The reasons given for the increases were the need to capture excess liquidity, and for the Central Bank to cover some of the losses resulting from the closing of Banco Anglo. Also for reasons of excess liquidity, limits were put by the Central Bank on amounts that could be used by public institutions from donations previously made by USAID and deposited in the form of bonds with the Central Bank. 2. Exchange Rate Policy

The exchange rate policy in 1993 continued practices set in March 1992 by the Central Bank, aimed at primarily allowing the market to determine the exchange rate. The single exchange rate is set indirectly every morning by the Central Bank through its sale or purchase of foreign currency. Exporters are allowed to keep 60 percent of incoming dollars, but must sell the remaining 40 percent to a commercial bank, which in turn must sell 25 percent to the Central Bank, facilitating the Central Bank's acquisition of reserves. Additionally, all

foreign transactions by 'state institutions are channeled through the Central Bank. Commercial banks are free to negotiate foreign exchange prices. However, the difference between the sell and buy rates cannot exceed 1 percent, and from that limited spread, 0.39 colon per dollar is a tax, and 0.68 colon is fee paid to the Central Bank. Commercial banks must liquidate their foreign exchange positions daily.

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This exchange policy, resulted in an essentially unchanged exchange rate during 1993, as freely traded dollars from tourism and capital investment continued to flow into Costa Rica. The free and sufficient supply of foreign currency continued to be the most significant factor in increasing imports during 1993, particularly from the United States, aided by the relative devaluation of the U.S. dollar vs. other major currencies. Between June and August of 1993, high demand for dollars forced the Central Bank to depreciate the exchange rate. By the end of 1993, the exchange rate had depreciated 9 percent with respect to the end of 1992, resulting in an increase of 13.52 colones per dollar. 3. Structural Policies

While consumer protection laws in Costa Rica fix prices, regulate profit margins, and prohibit price speculation, most price controls and all margin controls are currently suspended by executive decree. Pending legislation would remove most price and all profit margin controls, impose antitrust rules and protect consumers against product misrepresentation and price fixing. This change in pricing laws is a requirement for the World Bank's Third Structural Adjustment Loan (SAL III), which was signed by the Government of Costa Rica in 1993, but which has not been ratified by the Legislative Assembly.

Other laws and regulations affecting. U.S. exports to Costa Rica include the exclu. sive use of metric units, detailed labeling requirements, including the required use of Spanish, and strength requirements for car bumpers. Phytosanitary and zoosanitary restrictions on the import of fresh produce, as well as import permit requirements for many agricultural products limit or act as a de facto ban on U.S. exports of these products. Pharmaceuticals, veterinary drugs and chemicals, includ. ing chemicals that are component parts, must be registered and approved by the Ministry of Health before the chemicals or finished products can be imported. Chemicals and pesticides exported to Costa Rica must be legally available in the exporting country.

Government purchasing and contracting are highly regulated and often frustrating due to protracted appeals of contract awards, and bid and performance bond requirements. Despite this, no special requirements apply to foreign suppliers and U.S. companies regularly win public contracts. Competition is fierce among international suppliers and frequently the winner must propose comprehensive packages that include performance guarantees and financing. All exporters must have a legally responsible representative in Costa Rica in order to sell goods or services in Costa Rica. 4. Debt Management Policies

Costa Rica had a net foreign reserve decrease of USD 19.3 million during 1993. This was the result of a record USD 856.1 million deficit in the trade balance, resulting from an 18.1 percent increase in imports and a 12.7 percent increase in exports. The trade deficit was offset by net foreign investments of USD 275.0 million (USD 222.0 million in 1992) and services and transfers mostly due to tourism of USD 486.1 million in 1993 (USD 384.5 million in 1992). Costa Rica imported USD 1,300 million from the United States in 1993, a 13.2 percent increase from 1992. In 1993 Costa Rica exported USD 850 million to the United States, resulting in a trade surplus for the United States of USD 450 million. While the pending (since 1992) SAL III funds, for USD 350 million, are a potential source of foreign exchange, it is unlikely to be disbursed in the near future, if at all, due to the unwillingness of the Legislative Assembly to approve loans and pass quickly the laws that are conditions for its disbursement. Consequently, Costa Rica will continue to experience pressure on its balance of payments, especially its trade account, and will need to attract more foreign investment and tourism, in order to avoid an eventual foreign exchange shortage.

Costa Rica paid USD 481.6 million in 1993 (USD 497 million in 1992) to service its official foreign debt, equivalent to 24 percent of exports. The debt is now USD 3,158.4 million (Dec. 31, 1993), equivalent to 42 percent of GDP. During 1993, the Government of Costa Rica managed to renegotiate USD 56.7 million of bilateral debts with the members of the Paris Club. Debt service payments decreased 3 per. cent in 1993, after an increase of 42.9 percent in 1992 when a concerted effort to reduce the country's debt was made in order to qualify for an eventual partial debt forgiveness by the United States. Servicing the very large internal debt continues to be a more serious immediate problem. Almost a third of the government's budget is spent in servicing its domestic debt, more than the amount spent in paying public employees, leaving precious little for making capital improvements and for importing U.S. goods and services. The Central Bank's anti-inflation policy of keeping interest rates high keeps debt service costs extremely high for the Finance Ministry.

5. Significant Barriers to U.S. Exports

Costa Rica requires import permits for dairy products, pork and poultry meat, rice, beans, potatoes, onions, wheat, and sorghum. Some of these permit requirements can act as de facto bans on V.S. exports. That the requirements can be met is evidenced by U.S. exports of wheat, which is not produced in Costa Rica, and is almost exclusively imported from the U.S. However, it is expected that on November 24, 1994, in compliance with GATT requirements, import permits will be replaced by tariffs. Solvents and precursor chemicals are carefully regulated to prevent illegal use. Surgical and dental instruments and machinery can be sold only to licensed importers and health professionals. All food products, medicines, toxic substances, chemicals, insecticides, pesticides and agricultural inputs must be registered and certified by the Ministry of Health prior to any sale.

The Central Bank no longer licenses imports. All imports and exports are registered for statistical purposes only. Foreign companies and persons may legally own equity in Costa Rican companies, including real estate. However, several activities are reserved to the state, including public utilities, insurance, bank demand deposits, the production and distribution of electricity, hydrocarbon and radioactive minerals extraction and refining, and the operation of ports and airports. (Note: Electricity can be produced, in plants up to 20 KVA capacity, by private entities for sale to the state electricity grid, and legislation is under discussion to increase the percentage of foreign ownership allowed). However, recognizing the impossibility of public financing of large scale infrastructure projects, the legislature recently passed a law, which, once its implementing regulations are approved, would allow private construction and operation of public projects on a concession basis. Such facilities would revert to the state after an agreed upon period.

Many service industries are so rigorously controlled that foreign participation is practically impossible. Medical practitioners, lawyers, certified public accountants, engineers, architects, teachers and other professionals must be members of local guilds which stipulate residency, and examination and apprenticeship requirements that can only be met by long-time residents of Costa Rica, Investment in such private sector activities as customs brokerage firms is limited to Costa Rican citizens. In October 1994, the law limiting ownership of newspapers and radio and TV stations to Costa Rican citizens was repealed by the Constitutional Court. The law, which had been enacted in 1974 to prevent fugitive American financier Robert Vesco from owning a newspaper, was deemed discriminatory and therefore unconstitutional by the Constitutional Court of Costa Rica.

While the Government encourages the development of nontraditional exports and tourism, and may provide incentives for U.S. investment, it does not restrict foreign equity participation. The share of foreign workers in an enterprise is limited by law, but the Ministry of Labor generally grants permission for foreigners to work. Permits for foreign participation in management have always been granted. No requirement exists for foreign owners to work in their own companies. There are no restrictions on the repatriation of profits and capital.

The government and other state institutions make procurements through open public bidding, but the law allows private tenders and direct contracting of goods and services in limited quantities or in case of emergency, with the consent of the Contraloria (General Accounting Office). Public bidding is complicated and foreign bidders are frequently disqualified for failure to comply with the detailed procedures. The lengthy and costly appeal process often causes losses due to interim price changes while bidders cannot alter their bids.

Customs procedures are legendary for their cost and complexity. Most large enterprises are forced to have customs specialists on the payroll, in addition to buying the services of customs brokers. Customs brokers must be bonded Costa Rican companies and enjoy a monopoly on the handling of imports. All importers and exporters, including U.S. companies, suffer from defective customs procedures, poor administration, theft, graft and inadequate facilities. The Government of Costa Rica, with USAID and U.S. Customs Service assistance, is implementing a profound reform of the system to automate and streamline to lessen the possibility of corruption and improve efficiency. This project is expected to be completed by December 1995. In addition, the Government of Costa Rica, again with USAID financial assistance, is setting up a one-stop window to speed up the pre-import permit process.

The government's expropriation policy is a disincentive to U.S. investment in Costa Rica. The government has expropriated large amounts of land for national parks, biologic and indigenous reserves, and squatters, and in a number of cases has yet to provide adequate compensation. Some unpaid U.S. expropriation claims date back over 25 years. While it is theoretically possible to obtain compensation through the court system, the time, cost and frustration of litigating against the government greatly diminish' the value of such efforts. The government has made some efforts

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to resolve expropriation cases. However, several U.S. citizens with long-standing claims have not yet received prompt, adequate or effective compensation. The U.S. government, through extraordinary means, has been able to encourage progress in some individual cases. In theory, claimants also have had recourse to international arbitration through the International Center for the Settlement of Investment Dis. putes since early 1993, although the Government of Costa Rica has thus far not submitted any case to ICSID. Local arbitration has been employed since 1991. Landowners in Costa Rica also run the risk of losing their property to squatters, who are often organized and increasingly violent. Costa Rican land tenure laws favor squatters, and police protection of landowners in rural areas is poor to non-existent. 6. Export Subsidy Policies

The Government of Costa Rica has attempted to diversify its export production and markets. Until mid-1992, all goods other than coffee, bananas, beef, sugar and cacao exported outside of Central America and Panama qualified for export subsidies through the issuance of negotiable tax rebate certificates (CATS). These subsidies proved costly and violated the requirements for Costa Rica's GATT member. ship. However, existing export contracts call for the issuance of CATS until 1996. Costa Rica is a member of GATT but not the GATT subsidies code. There are no discriminatory import policies. However under the terms of the Central American Common Market Treaty of 1960, industrial products produced in any of the five countries enter duty-free into the other member countries.

Costa Rica did not sign the services agreement or the subsidies code under GATT. Costa Rica has ratified the Uruguay Round agreements and became a founding member of the World Trade Organization (WTO) on January 1, 1995.

Export companies wishing to locate in duty free production zones can benefit from exemption from import duties on raw materials and products, from all export, sales and consumer taxes, from taxes on remittance abroad, and from taxes on profits for a period of six years from the beginning of the operations, and a 50 percent exemption for the following four years. 7. The Protection of U.S. Intellectual Property

Costa Rica is a signatory to most major intellectual property rights (IPR) conventions and agreements, and is a member of the World Intellectual Property Rights Organization. However, significant weaknesses exist in the country's IPR system, particularly in enforcement and in patent protection. Pending legislation would ratify the Paris Convention on Industrial Property and create a Trade Secrets law. However, prospects for passage of such legislation in 1994 are problematic. The Uruguay Round TRIPS agreement should improve the Costa Rican IPR regime.

Copyrights: Costa Rica is a signatory to the following copyright conventions: Title 17 USC (October 19, 1899 and April 9, 1910); Mexico City Convention on Literary and Artistic copyrights (1902); Rio de Janeiro Convention on Patents, Industrial De. signs, Trademarks and Literary and Artistic Property (1906); Buenos Aires Convention on Literary and Artistic Copyrights (1910), and as revised at Havana (1928); Inter-American Convention on the Rights of the Author (1946); Universal Copyright Convention (Paris 1971); Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations (1961); Berne Convention for the Protection of Literary and Artistic Works (Paris Act 1971); Convention for the Protection of Producers of Phonograms (Geneva 1971); and Central American Convention (1982).

Costa Rica's copyright laws are generally adequate. The major problem for copy, right holders is enforcement. On May 10, 1994, the copyright law. (No. 6683 of 1 October 1982), was modified to extend protection to all forms of intellectual creations, including music scores, paintings, software programs, books, etc. The modi, fications also increase protection by directing the police to prevent non-authorized presentations of protected works. On May 24, 1994, the Government of Costa Rica issued regulations to Law No. 6683 that provide better protection and mandate police participation. The cable television industry now operates almost entirely under quitclaim agreements with foreign producers. However, a number of hotels are pirating transmission signals. Pirate videocassettes are widely available. According to industry sources and their legal representatives, no authorized distributor of vid. eocassettes is currently operating in Costa Rica. The new copyright law has been challenged before the Constitutional Court by video operators. The Court has not yet decided whether it will hear the challenge.

Patents: Costa Rica is a signatory to the following patent conventions: Convention of Paris (1883); and Rio de Janeiro Convention on Patents, Industrial Design, Trademarks and Literary and Artistic Property (1906).

Costa Rican patent laws are deficient in several key areas. The patent protection term is far too short. Patents are granted for non-extendable 12 year terms. In the case of products deemed "in the public interest,” patents are granted only for one year. This exception applies to all pharmaceuticals, items with therapeutic applica. tions, chemical and agricultural fertilizers, agrochemicals and all beverage and food products.

No patent protection is available for plant or animal varieties, any biological or microbiological process or products, although the government is working on a legislative proposal that would protect such products. Costa Rica also has broad compulsory licensing requirements that force patent owners to license inventions that are not produced locally. The limited patent protection available cannot be enforced until local production has begun. Costa Rican law also provides for compulsory dependent patent licensing and for expropriation of patents.

Trademarks: Costa Rica is a signatory to the following trademark conventions: Paris Convention (1883); Rio de Janeiro Convention on Patents, Industrial Designs, Trademarks and Literary and Artistic Property (1906); and Central American Treaty on Industrial Property (1970).

Trademarks, service marks, trade names and slogans can be registered in Costa Rica. There is no actual use requirement. Registration is for renewable ten-year periods from the date of registration. Counterfeit goods are widely available in Costa Rica and compete with goods manufactured under trademark authorization. Another problem is registration of famous marks by speculators, who demand to be bought out if and when the legitimate rights holders come to Costa Rica. Litigation to remove such speculative registrations can be lengthy and expensive.

Trade Secrets are protected by existing laws, and Article 24 of the Constitution protects the confidentiality of communications. The penal code stipulates prison sentences for divulging trade, employment or other secrets, and doubles the punishment for public servants. Some existing laws also stipulate criminal and civil penalities for divulging trade secrets. The burden of enforcement is on the affected party. 8. Worker Rights

a. The Right of Association.-Workers are nominally free to join unions of their choosing without prior authorization, although barriers exist in practice. Unions are independent of government control and are generally free to form federations and confederations, and to affiliate internationally. Various trade union organizations contend that trade unionism's right of association has been hurt by Costa Rica's "solidarismo" (solidarity) movement. This movement espouses cooperation between employers and workers, offering such services as credit unions and savings plans in return for their renunciation of the right to strike and bargain collectively. However, in practice, solidarity associations have been accused of acting as collective bargaining agents. In 1993, the Government of Costa Rica approved a package of reforms that, in part, addressed the International Labor Organization's (ILO) concerns about the effect of solidarity organizations on workers' right to association. Prominent among these reforms was a provision explicitly prohibiting solidarity associations from participating in collective bargaining or direct agreements affecting labor conditions. In June 1994, the ILO's Committee of Experts ruled that, with the 1993 changes to the Labor Code and the promise of further reforms made by the Government of Costa Rica, progress has been made in assuring worker rights.

Costa Rican law restricts the right of public sector workers to strike, but two articles of the Penal Code that mandated tough punishment for striking government workers were repealed in 1993. There are no restrictions on the rights of private workers to strike, but the Labor Code contains clauses that employers have used to fire employees who try to organize or strike. Very few private sector workers are union members.

b. The Right to Organize and Bargain Collectively. The right to organize is protected by the Constitution. Specific provisions of the 1993 Labor Code reforms provide protection from dismissal for union organizers and members during the period of union formation. Previously, employers used a clause in the Labor Code, permitting employees to be discharged “at the will of the employer" provided the employee received severance benefits. The payment of severance benefits to dismissed workers has often been circumvented in practice. Public sector workers cannot engage in col. lective bargaining because the Public Administration Act of 1978 makes labor laws inapplicable in relations between the Government and its employees. Collective bargaining is allowed in the private sector but, due to the dearth of unions, is not a widespread practice.

c. Prohibition of Forced or Compulsory Labor.—The Constitution prohibits forced or compulsory labor, and there are no known instances of either.

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