US embassy cable - 05SANJOSE2658

UNCLAS SECTION 01 OF 05 SAN JOSE 002658 
 
SIPDIS 
 
WHA/CEN 
EB FOR WCRAFT 
E FOR DEDWARDS 
WHA/EPSC FOR KURS 
STATE PASS TO USTR FOR RSMITH 
 
E.O. 12958: N/A 
TAGS: ECON, CS 
SUBJECT: COSTA RICA RESPONSE TO USTR REQUEST FOR INFO ON CBI- 
BENEFICIARY COUNTRIES 
 
REF:  SECTATE 188288 
 
1.  SUMMARY: Post has updated information provided in 
previous report using the same format.  Post contact is 
Maria D. Villanueva, (506) 519-2419, Fax (506) 519-2364, 
villanuevamd@state.gov.  End Summary. 
 
2.  Country Reports: Compliance with Eligibility Criteria 
 
The country reports contained in this section focus 
particular attention on current performance of CBI countries 
with respect to the eligibility criteria reflected in the 
CBTPA, as the most recent expression of U.S. policy 
objectives linked to the extension of CBI benefits.  The pre- 
existing eligibility conditions of the CBERA are also 
reflected in the country reports, where relevant. 
 
3.  Costa Rica 
Population: 4,178,755 (Jul 2004) 
Per Capita GDP: $4,204 
 
Central Bank of Costa Rica (2004) 
Trade Statistics: 
 
U.S. Exports: $3,725,000,000 
U.S. Imports: $3,741,000,000 
U.S. Trade Balance: -$17,700,000 
Central Bank of Costa Rica Data 
 
4.  Economic Review: Costa Rica has continued to pursue an 
economic strategy based on trade liberalization and 
investment promotion.  This strategy has led to 
diversification of the economy away from traditional 
dependence on agricultural products, such as bananas and 
coffee, and towards tourism; services, such as call centers; 
and manufactured industrial goods, such as semiconductors. 
However, during the five-year period from 2000 through 2004, 
average GDP growth dropped to 3.1 percent per year, compared 
to a 5.4 percent annual growth from 1995 to 1999.  The 
current rate is insufficient to prevent a creeping rise in 
unemployment, despite a thriving export sector.  Among the 
problems currently encountered by the Costa Rican economy 
are continued double-digit inflation rates, and stagnant 
real family incomes and per capita GDP figures.  Costa Rica 
has an ineffective tax system that has not raised sufficient 
funds to build or even maintain the necessary infrastructure 
to take advantage of CBI opportunities.  Out of 155 
countries surveyed in the World Bank's "Doing Business" 
index, Costa Rica ranks 129 in "paying taxes".  Costa Rican 
policies during this administration have led to a decline in 
competitiveness.  This decline is reflected by a drop of 14 
places between 2004 and 2005 in the most recent World 
Economic Forum Growth Competitiveness Index. 
 
The United States supplied 45 percent of Costa Rican imports 
and absorbed 59 percent of Costa Rican exports in 2004.  The 
tourism sector is the principal earner of foreign currency, 
and tourists from the U.S. far outnumber those from other 
countries.  The United States remains by far the largest 
foreign investor in Costa Rica.  The U.S.-Cental American- 
Dominican Republic Free Trade Agreement (CAFTA-DR) 
negotiations concluded on January 24, 2004, the agreement 
was signed on August 8, 2004 and the President of Costa Rica 
sent the bill to the Legislative Assembly for ratification 
on October 21, 2005.  The GOCR will likely not be able to 
complete the ratification process and pass all the necessary 
implementation laws before the second half of 2006, meaning 
Costa Rica will join CAFTA-DR sometime after it has already 
come into force for all other partners. 
 
5.  Commitment to the World Trade Organization (WTO) and 
Free Trade Area of the Americas (FTAA): Costa Rica 
participates actively in the WTO and has taken its 
obligations under the Uruguay Round seriously.  In 2000, 
Costa Rica ceased granting financial investment subsidies 
and tax holidays to new exporters.  Companies established in 
duty-free exporting zones are scheduled to begin paying 
taxes in 2007 although they can request an additional two 
year extension.  Costa Rica has been supportive of 
multilateral trade liberalization through negotiations in 
both the WTO and the FTAA.  Currently, Costa Rica serves as 
the Chair of the Working Group on Transparency in Government 
Procurement Practices.  In the FTAA negotiations, Costa Rica 
is currently the Chair of the Government Procurement 
Negotiating Group and served as Chair of the Dispute 
Settlement Negotiating Group from 1999-2001.  The majority 
of the staff of the Costa Rican Ministry of Foreign Trade 
left between late-2004 to mid-2005, which has affected the 
Ministry's operational capabilities. 
 
6.  Protection of Intellectual Property Rights (IPR): Costa 
Rica has been on the Watch List since 2002 when it was moved 
from the Priority Watch List.  Costa Rica is a party to all 
major international intellectual property agreements with 
the exception of the Budapest Agreement.  In part due to 
being named a Priority Watchlist Country in 2001, the GOCR 
took steps at that time to combat piracy and passed several 
IPR protection laws including the requirement for the GOCR 
to not use pirated software. 
 
However, since that earlier push to combat IPR violations, 
progress has stalled.  The GOCR does not have the political 
will to pursue IPR violators, in part due to scarce 
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, needs to 
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.  IPR protection 
is covered under CAFTA-DR chapter 15, but Costa Rica's IPR 
obligations will require much more attention whether or not 
CAFTA-DR is ratified. 
 
7.  Provision of Internationally Recognized Worker Rights: 
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.  Labor courts and case 
backlogs have been significantly reduced as a result of 
additional shifts, including night-shift work, the 
appointment of more labor court judges, and a center for 
alternative dispute resolution that operates in San Jose. 
However, the Costa Rican judicial system can further benefit 
from efforts to expedite cases, redress procedures, and 
increase efficiency.  Costa Rican labor leaders claim that 
stronger remedies for retaliatory dismissals of trade 
unionists would advance trade unions in the country. 
 
According to the Labor Ministry the rate of unionization is 
53 percent in the public sector and 6 percent in the private 
sector, with an overall rate of 12 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. 
 
With regard to the issue of public sector collective 
bargaining, the International Labor Organization (ILO) 
Committee of Experts on the Application of Conventions and 
Recommendations (CEACR) has encouraged Costa Rica to ratify 
ILO Conventions 151 and 154.  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. 
 
The ILO conducted a labor law study at the invitation of the 
Costa Rican government in 2003.  The study entitled, 
"Fundamental Principles and Rights at Work: A Labour Law 
Study" documented that 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 frequently takes up to ten 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 eight years. 
 
The ILO, in conjunction with the University of Costa Rica 
and the Costa Rican Supreme Judicial Court, recently 
proposed legislation to update the country's labor law to 
streamline the labor dispute resolution process, encourage 
alternative dispute resolution, and ease restrictions on 
collective bargaining and strikes. 
 
The GOCR is engaged in labor cooperation initiatives to 
increase the capacity of the Labor Ministry and to better 
protect worker rights.  These initiatives include 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. 
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. 
 
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. 
 
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. 
 
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.  Inspectors lack the resources to effectively police 
small enterprises and the informal labor sector but few of 
these enterprises export items covered by CBI preferences. 
 
8.  Commitments to Eliminate the Worst Forms of Child Labor: 
Costa Rica is serious about addressing the issue of the 
worst forms of child labor, and President Pacheco has been 
very public 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.  Responsibility 
for child welfare and labor enforcement is shared among 
several ministries and directorates, coordinated under the 
National Committee on Child and Adolescent Labor.  The 
Ministries of Labor, Education, Health and Children's Issues 
are all represented on the committee.  The Office for the 
Eradication of Child Labor and Protection of the Adolescent 
Worker (OATIA), an office within the Ministry of Labor, has 
principal responsibility for drafting and implementing 
action strategies and education programs. 
 
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. 
This year, the OATIA issued its second National Action Plan 
for the period 2005-2010.  Drafted in conjunction with some 
twenty governmental offices and NGOs the plan ambitiously 
seeks to eradicate child labor in Costa Rica by 2010 through 
implementation of eight rights-based goals.  Each general 
goal is accompanied by specific goals, strategies and action 
plans calling for significant involvement and contribution 
from diverse child governmental agencies and NGOs.  Among 
the strategies to be implemented are training of teachers, 
parents and labor inspectors, detailed regional information 
gathering, and aggressive poverty-reduction campaigns.  In 
addition, the Government of Costa Rica has a number of 
social programs to reduce the causes of child labor.  These 
programs include providing small loans and economic aid to 
families with at-risk children and scholarships for poor 
families to cover the indirect costs of attending school. 
 
Due to an underfunded 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, and more resources would 
improve enforcement. 
 
9.  Counter-Narcotics Cooperation: Costa Rica is a 
transshipment point for the smuggling of cocaine and heroin 
from South America to the United States and Europe.  Costa 
Rican law enforcement officials are fully cooperating with 
U.S. counter-narcotics efforts.  Costa Rica continues to 
work closely with the United States in implementing the 
comprehensive Maritime Counter-drug Cooperation Agreement 
signed with the United States in 2000. 
 
10.  Implementation of the Inter-American Convention Against 
Corruption (IACAC): Costa Rica has ratified the IACAC. 
Domestic law imposes a requirement that senior government 
officials file personal financial reports while in office. 
In 2002, the Government of Costa Rica commissioned a study 
to monitor implementation of the IACAC and to issue 
recommendations for further actions. 
 
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 a year of 
investigation.  As a result of these charges, the 
Legislative Assembly passed a law in 2004 to strengthen the 
government's anti-corruption efforts. 
 
11.  Transparency in Government Procurement:  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 are frequently delayed by appeals by 
the losing parties or the Contraloria General's efforts to 
regulate government purchases and procedures.  The 
aforementioned corruption scandals both involved state 
monopolies.  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 both of these sectors thereby lessening 
opportunities for corruption. 
 
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Additional Issues 
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12.  Expropriation: The Government of Costa Rica has 
expropriated large tracts of rural land for national parks, 
biological reserves and indigenous reservations during 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, but long-standing cases remain.  Out of 155 
countries surveyed in the World Bank's "Doing Business" 
index, Costa Rica ranks 141 in "enforcing contracts" and 134 
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 heen 
honored. 
 
13.  The GOCR has free trade agreements with the following 
countries/groups (year in which ratified): Panama (1973), 
Mexico (1995), Canada (2001), Chile (2001), the Dominican 
Republic (2001), CARICOM which comprises Antigua and 
Barbuda, Barbados, Belize, Dominica, Grenada, Guyana, 
Jamaica, St. Kitts and Nevis, Saint Lucia, St. Vincents and 
the Grenadines, Suriname, and Trinidad and Tobago (2005). 
None of these agreements appears to have had any adverse 
effects on U.S. commerce.  The FTA with CARICOM could result 
in a lowering of prices of products such as certain fruits 
and vegetables in the CARICOM countries and, likewise, 
provide another market for CARICOM-produced items.  This 
would seem to support CBI goals. 
 
14.  Costa Rica does have an extradition treaty with the 
U.S. and GOCR personnel work with Post personnel effectively 
in arranging extraditions. 
 
15.  There are no government-owned broadcasting entities 
that broadcast copyrighted materials without the express 
consent of U.S. copyright-holders. 
 
16.  Regarding the extent to which Costa Rica has assured 
the U.S. it will provide equitable and reasonable access 
for U.S. goods and services to its market (and the question 
of whether the country is undertaking self-help measures to 
promote its own economic development), the ratification and 
implementation of CAFTA-DR and its associated 
"complementary agenda" are the best indicator. 
 
The series of coordinated projects known as the 
complementary agenda to CAFTA-DR includes many self-help 
initiatives to improve customs' clearing systems, roads and 
other infrastructure, and investing in education and 
training to ensure the flourishing of small- and medium- 
size businesses.  A request to approve funding of these 
projects by loans from the World Bank (WB), the Inter- 
American Development Bank (IDB), and the Central American 
Bank for Economic Integration (BCIE) is currently being 
reviewed by the Legislative Assembly. 
 
17.  The GOCR is cooperating with the U.S. in the 
administration of CBERA.  As an example, auditors from the 
Department of Homeland Security's Immigration and Customs 
Enforcement Agency recently completed an inspection in 
country.  The Ministry of Foreign Trade, Customs Agency, 
and the quasi-governmental Costa Rican Textile Chamber 
provided unfettered access and helpful assistance to the 
inspectors. 
 
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COMMENT 
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18.  Costa Rica is a country that is benefiting greatly from 
CBI.  In general, the country has made progress since CBI 
came into force in 1984 toward freer trade and lower 
barriers.  However, the ratification of CAFTA-DR should be 
taken as the key indicator on whether that process will 
continue or whether progress in lowering trade barriers has 
stalled. 
LANGDALE