UNDP-WORLD BANK TRADE EXPANSION IPROGRAM COUNTRY REPORT 9 26 160 COSTA RICA Strengthening Links to the World Economy This country report is a product of the joint UNDP/World Bank Trade Expansion Program which provides technical and policy advice to countries intending to reform their trade regsmes. The views contained herein are those of the authors and do not necessarily reflect those of the United Nations Development Program or the World Bank. COSTA RICA Strengthening Links to the World Economy Trade Policy Division Country Economics Department World Bank July 1992 Washington, D.C. This report was prepared for the Costa Rican government in response to its request for assistance from the joint United Nations Development Program/World Bank Trade Expansion Program. The report was directed by John Nash (World Bank) with the participation of Jonathan Coleman (consultant), Steven Graubart (consultant), Nancy Jesurun- Clements (consultant), Ramon Lopez (consultant), Julio Nogues (World Bank), and Claudia Sepulveda (consultant). The mission received much valuable support from the World Bank country officer for Costa Rica, Mr. Federico Changanaqui. The main mission visited Costa Rica from August 5-16, 1991, with subsequent trips from August 26-30 by Mr. Nogues, and October 18-31 by Ms. Jesurun-Clements. Excellent logistical support was provided by the resident UNDP mission, under the direction of Mr. Bruno Guandalini, as well as by counterparts in the Ministry of Foreign Trade, particularly Minister Roberto Rojas, Vice-minister Bernardo Kopper, and Ms. Teresita Quesada. The views and recommendations of the report are those of the authors and do not necessarily reflect those of the United Nations Development Program or the World Bank. Table of Contents Page No. Executive Summary i Chapter 1 Macroeconomic and Labor Market Issues I Fiscal policies I Current account, exchange rate, and monetary issues 5 Real exchange rate adjustments and public expenditures 7 Stabilization and credibility 9 Labor markets 11 Conclusion 15 Chapter 2 Trade Facilitation and Transportation Infrastructure 17 Airports 19 Ports 20 Customs 24 Roads 25 Other infrastructure and trade facilitation issues 25 Recommendations 26 Chapter 3 Institutional Support for Nontraditional Exports 31 The Costa Rican Coalition for Development Initiatives- CINDE 31 The Center for the Promotion of Exports and Investments- CENPRO 49 Export Development Fund-FUNDEX 51 Chapter 4 Nontraditional and Traditional Exports 59 Nontraditional exports 59 Traditional exports 69 Conclusions and recommendations 81 Chapter 5 Import Policy in the 1990s 85 Tariff structure 85 Surcharges and import taxes 88 Duty exemptions 89 Non-tariff barriers to imports 93 Domestic price controls 94 The role of antidumping and safeguards in Costa Rica 95 Conclusion 99 Chapter 6 Priorities for Sustaining Trade Policy Reform and Growth 101 Potential opportunities and pitfalls in the world trading environment 101 Priorities in policy actions 106 An agenda for future research and technical assistance 112 Appendix 1. Traditional Exports by Jonathan Coleman 115 Appendix 2. Antidumping vs. Safeguards During Trade Liberalization: 143 The Case of Costa Rica by Julio Nogues Appendix 3. Nontraditional Exports of Costa Rica 171 Appendix 4. Nontariff Barriers to Imports and Exports 175 Appendix 5. Price and Margin Controls 189 List of Tables Page No. 1.1 Consolidated nonfinancial public sector operations, 1980-91 3 1.2 Summary of real revenue and expenditure of the central government 3 1.3 Composition of current expenditure of the central government 1.4 Summary balance of payments 5 1.5 Nominal lending rates paid by producers 6 1.6 Indicators of economic activity: output, investment and inflation 9 1.7 Minimum wages adjustments in Costa Rica 12 2.1 Trade facilitation and transport study: survey results for Costa Rica 18 2.2 Limon Port general port indicators for January- September 1990 and 1991 21 3.1 CINDE's investment promotion results, 1986-90 34 3.2 CINDE's budget for 1985-91 44 3.3 FUNDEX's budget, 1992-2000 53 4.1 Export incentives, by export regime 61 4.2 Composition of exports of goods 62 4.3 Gross tourism receipts by exports of tourism services 62 4.4 Percentage of FOB exports received as CATs 64 4.5 Composition of CATs issued, 1990 65 4.6 Sectoral distribution of firms that used or were issued CATs, March 1988 to December 1989 66 4.7 Value added by maquila, 1980-89 67 4.8 Exports and number of firms in free trade zones 69 5.1 Structure of average nominal protection: mean tariff pre-1986 and 1986 86 5.2 Changes in the structure of nominal protection 1987-91 90 5.3 Distribution by tariff position of consumption goods, raw materials and intermediate goods and capital goods after tariff adjustments 1986-91 91 5.4 Tax revenues by source, 1989-90 91 5.5 Import duty exemptions in 1988 92 5.6 Effects on tax revenue of exemptions from import duties and other taxes 92 5.7 Costa Rica's antidumping regulations and proposals for reform 98 List of Boxes Pa2e No. 3.1 Characteristics of successful trade promotion organizations 43 Executive Summary Macroeconomic policy issues and trade policy reform The public deficit-and the expectation that it will increase substantially in the next few years-is one of the largest obstacles to achieving macroeconomic stability and realizing the full benefits of Costa Rica's trade policy reforms. The deficit interferes with potential salutary effects of reforms in many ways. Experience in many countries shows that successful integration in the world economy requires that the real exchange rate be maintained at a stable and sufficiently depreciated level. The large deficit fuels both inflationary expectations and actual inflation, making this difficult to achieve. The deficit also keeps real interest rates high; thus it is hard for businesses to adjust to the new trade policies. To a large extent the failure to achieve a permanent solution to the public sector disequilibrium has made monetary and exchange rate policies less effective in reducing inflation and the current account deficit. The high level of the current account deficit-now running at an unsustainably high 7.5 percent of GDP-makes the trade reforms less credible, since in the past import surcharges or prior import deposits have been used to control such deficits. In addition to these effects of the deficit, public sector spending generates a significant appreciation of the real exchange rate, further interfering with trade reforms. Although the consolidated public sector deficit fell in 1991, almost all of the improvement came from increased revenues (temporary import and sales tax surcharges and increased charges for public sector goods and services) and a precipitous decline in capital spending. Real current spending continued to increase rapidly. Surcharges have now expired and capital spending is urgendy needed on trade infrastructure (ports, roads, airports). Therefore, sustainable reduction in the fiscal deficit will require a major contraction in current public expenditures. This, in turn, will require a large reduction in public sector employment (a conservative estimate would be 15-20 percent of the public sector labor force) within the next two years and further compression of public sector wages. The tight monetary and domestic credit policies will also need to continue, to permit a significant deceleration of inflation and a further depreciation of the real exchange rate as the trade liberalization measures take effect. This should further reduce the current account deficit, bringing it below 5 percent of GDP, perhaps a sustainable level in the long run. This new fiscal and monetary tightening will require greater price and wage flexibility to avoid a slowdown in economic growth and a substantial increase in unemployment. For the private sector, absorbing the labor force released from the public sector and adapting to the structural changes implied by trade liberalization will require a recovery of private investment in both physical and human capital. The large number of minimum wages and the high social security and other wage taxes (the highest among developing countries) prevent wages and prices from adjusting to maintain growth rates and employment levels. Minimum wages have been shown to reduce the demand for labor overall, as well as discouraging businesses from providing the kind of on-the-job training for employees that would facilitate adjustment. Minimum wage adjustments should be kept substantially below expected inflation rates, and the 80 or so different rates need to be consolidated into a single minimum wage. At the same time, reform of the social security system and other wage taxes should be given high priority. It is estimated that labor costs overall need to fall by 7-8 percent a year in the short run to avoid increased unemployment. In the longer run, of course, increased productivity growth will set wages on a sustainable high growth path. Interest rates also need to fall to assist the recovery of private investment. Reduced inflationary expectations and sustained lower public sector deficits (that reduce govermnent borrowing in domestic capital markets) will be important in lowering these rates, as will allowing private financial institutions to compete on an equal basis with state banks. By decreasing the large gap between - ii - lending and borrowing rates this increased competition in the financial sector should ultimately lead to lower costs for credit to the productive sector. Nontraditional and traditional exports With the aim of diversifying exports so as to reduce dependence on traditional commodity exports and on regional export markets, the government in recent years has made several new or improved incentive schemes available to exporters of nontraditional products to extraregional markets. Supported mainly by a favorable exchange rate policy (chapter 1) and a reduction in protection of the domestic market (chapter 5), as well as the efforts of the export development institutions CINDE and CENPRO (chapter 4), these incentive schemes have been quite successful. Nontraditional goods now account for over half of total goods exports, up from about 40 percent in the early 1980s. Over this same period, value added in maquilas has grown from virtually nil to about 10 percent of nontraditional exports. Exports from free trade zones have shown similar growth, accounting for about 10 percent of nontraditional exports in 1989, with almost all growth occurring after 1986. Exports from firms outside the maquila or free trade zone regimes have also increased greatly. And tourism has become an important source of export earnings as well. To a large extent the export policies of recent years must be regarded as a success. They have been successful largely because they insulated exporters from the adverse direct effects of import tariffs and exchange restrictions, giving them access to duty-free inputs from abroad and thereby putting them on a more or less even footing with their competitors in world markets. The policies also focused on removing bureaucratic obstacles for exporters. These successful policies should of course be continued and, to the extent possible, broadened. For example, offshore financial service companies could be allowed to operate in the free trade zones, improving services for other businesses in the zones and increasing service exports. This would require changing Costa Rica's - iii - banking and insurance laws, but since this would have very little effect on the domestic market ("offshore" firms cannot operate in the local market), the changes should be relatively noncontroversial. The government could also consider fine-tuning the system to further increase exporters' access and especially to encourage indirect, first-time, part-time, and small exporters who now apparently find the export contract procedures very cumbersome. And foreign exchange controls need to be phased out, to (among other reasons) allow exporters to make use of services from abroad. Other policies, such as direct subsidies through the tax rebate certificates (CATs), went beyond insulating exporters from paying duties on inputs. They were, in effect, an attempt to offset the indirect antiexport bias that came from high effective protection for import substitutes. As this protection has been steadily reduced, these incentives have become less necessary. This will be increasingly the case as the tariff range approaches 10-20 percent. The problems these policies create are significant, however, including fiscal imbalances (and consequent overvaluation of the exchange rate), discrimination against some exports (including services), and friction with trade partners. The government has recognized this and is reducing the rates of CATs. It should seriously consider eliminating them entirely for export contracts issued after 1992. Markets for most traditional exports have functioned reasonably well in Costa Rica, although the beef industry is in serious difficulties now for a number of reasons. Its recovery could be supported by removing export restrictions and price controls on all cattle products, including leather and milk. These issues should be given high priority. Other than eliminating export restrictions on these and other products, (e.g., wood products), policy reforms in traditional sectors are not as urgent. However, one major justification for heavily regulating the coffee industry-to comply with obligations under the International Coffee Agreement-is no longer valid. To encourage the flexibility that will be needed in an increasingly unstable international environment, the market should be deregulated. The first step should be to eliminate the implicit tax that comes from requiring producers - iv - to sell part of the crop at low prices in the domestic market. In the current environment of depressed world prices, the resulting rise in consumer prices would not be large, but it could help producers a great deal. Nontraditional export development institutions FUNDEX was recently established by an agreement between the government, the Central Bank of Costa Rica, and USAID as the primary mechanism for future funding of nontraditional export development activities. FUNDEX's purpose is to serve as the funding vehicle for export promotion activities, thereby separating the technical export organizations from the financial resources funding them. This allows for funding of export programs to come from outside the political system, ensuring that programs are not subject to inappropriate govermnent influence or budgetary uncertainties. Through FUNDEX, CINDE and other programs will be able to receive funding from multilateral sources as well as USAID, helping ensure continued funding and bringing in new perspectives. FUNDEX can serve as a coordinating agency for aid for export promotion, channeling it into a range of activities. FUNDEX'S organizational structure is sound. It maintains a separation from the government and is designed with a system of checks and balances. Participating foreign donors have a significant role in naming directors. No recipient organization has a long-term guarantee of access to the fund's resources, since continued funding depends upon production of results. FUNDEX is to be operated on a low budget, with a small staff. The board of directors and general manager are highly respected and are independent of fund recipients. It is important that future members of the board have the same stature in the business community and respect of the government as do the current members. Even though initially CINDE and CENPRO will be the only recipients of funds, FUNDEX needs to maintain its separation from these organizations and to avoid being viewed simply as a financing vehicle for them. Other programs and service providers should eventually be funded in areas where CINDE and CENPRO are not operating, where they are ineffective, or simply to promote competition in the delivery of services. In addition to basic fiscal reviews, FuNDEx should monitor CINDE and other recipients of funds through measurements of program results (e.g., exports, investment, employment, user satisfaction, qualitative analysis). Cost recovery should be included in performance measurements. For the percentage of costs not covered, the public benefits of the program must be clearly elaborated and justified. If a program or service is not recovering a sufficient percentage of its costs, and it cannot be justified as providing benefits that extend beyond the specific firms using the service, then the program or service should be discontinued. FUNDEX should also undertake periodic reviews of the overall strategy and management of the programs it is funding. One of the important lessons of export development institutions in other countries is that the exporters that use these services should have the greatest influence on what services are provided and how. FUNDEX needs to keep in close touch with these users. To some degree this will be done by monitoring the results of the program and through cost recovery. To supplement this, FUNDEX might also want to consider undertaking periodic user surveys. As other service providers besides CINDE and CENPRO develop in Costa Rica or as exporters wish to use foreign service providers, FUNDEX might want to consider eventually moving to a scheme in which firms decide directly on the organizations they use to obtain services. This could be done, for example, through a voucher system or by giving exporters a grant for part of the fee they pay to the service provider of their choice, whether that be CINDE, one of the camaras, or private sector oocal or foreign) service provider. Individual programs, as well as CINDE'S and FUNDEX'S overall role in the economy, should be reevaluated every few years to ensure that they are compatible with the needs of the economy and are not discouraging private sector activity in export services. - vi - CINDE has made important contributions to the development of nontraditional exports in Costa Rica. It has addressed a wide range of problems affecting trade and investment, including promotional, marketing, regulatory, technological, and government policy issues. CINDE's structure as a semiprivate organization has allowed it to avoid many of the problems associated with government-run trade promotion organizations in other countries. CINDE is divided into several operational divisions. The Marketing Division focuses on investment promotion activities and has received favorable reviews from independent evaluators and foreign companies that have used its services. The division also participates in trade fairs, promotes export contacts, and provides marketing assistance to Costa Rican companies. The Agricultural Division is involved in promoting nontraditional agricultural crops. The division carries out analyses, lobbies for reform of policies and institutions, identifies and provides technical support for new export opportunities, and gives direct marketing support. The division is investigating new services, including a laboratory, a quality certification program, and a pesticide management program. The Industrial Division of CINDE consists of two programs: Training and Industrial Development. In the area of training, CINDE provides courses for primarily mid- and upper-level managers in Costa Rica and overseas. The purpose of the program is to expand the capabilities of Costa Ricans to meet the needs of foreign firms investing in Costa Rica and of Costa Rican firms seeking to export. The high level of costs recovered by this program suggests that the private sector finds its services valuable. The Industrial Development Program is a new program that provides comprehensive technical assistance to companies in industries identified as having strong export potential. A recently completed indepth review of the program found it to be well conceived and implemented, although improvements were suggested for some areas. As USAID funding has diminished in recent years, CINDE has responded by reducing staff and expenses, restructuring, and increasing its efforts to recover costs. Its budget is expected to be $8.4 - vii - million in 1991, a substantial drop from the $11.7 million in 1990. CINDE claims that its results have not suffered from the reduction in staff. While results for the first half of 1991 look very good, to some extent they reflect previous-year activities, before the staff reduction. Employee morale is reported to be somewhat low as a result of the layoffs and the strong management style. These are issues that need to be addressed in future organizational reviews. CINDE has moved aggressively to develop ways to recover costs for its programs and services. Based on results to date, cost recovery is expected to be 15% in 1991. This is projected to increase to as high as 35 percent or even 50 percent by 1995. If achieved, this will compare favorably with cost recovery by trade promotion organizations in other countries. CINDE needs to continue to pursue cost recovery, both for financial reasons and to impose market discipline on itself and its users. Cost recovery is not only a means of obtaining funds to finance programs; it should also serve as a measure of demand for CINDE's services, helping to ensure that appropriate services are offered and that resources are being used efficiently. Charging for services also weeds out potential users who would not make the best use of CINDE's services. In summary, stressing cost recovery will help CINDE act like a private provider of services. Still, it needs to be recognized that some of CINDE's services are public goods, generating benefits that are distributed widely in the economy. For example, investment promotion can be viewed as largely a public role. For such activities with strong externalities, less cost recovery should be required. But the more a service benefits primarily an individual firm, (e.g., technical or marketing assistance) the greater should be the cost recovery. And services for which there are private sector competitors should be offered at market prices or not at all, to avoid discouraging private sector providers of these services. CINDE has been and should continue to be flexible, changing to meet the needs of the Costa Rican economy. In the beginning CINDE focused on investment promotion, recognizing at the time that - viii - export promotion activities taken too early could be detrimental. Over time CINDE has refocused its investment promotion activities on higher value added investments and nonapparel companies. It has recently begun offering technical assistance to industrial companies. As the antiexport bias of the economy decreases and Costa Rican firms gain more export expertise, they are likely to need less technical assistance, requiring only information on markets and buyers, as in other export-oriented economies. As this happens, CINDE will need to change the service it provides. To insure that it is responsive to users, CINDE should seek increased input from them, perhaps by strengthening the roles of the advisory councils for the divisions. CENPRO, the government export and investment promotion agency, performs a number of functions, but focuses on two areas: export administration and promotion. Most important has been its development and management of the one-stop export documentation centers located in a number of cities. These centers have greatly simplified the exporting process. CENPRO also monitors export contracts, for which it has recently simplified procedures and reduced delays. It should continue to look for ways to simplify the processing wherever possible. CENPRO's trade fair program is reported to have generated good results, with some cost recovery. It coordinates these efforts with CINDE. CENPRO also provides information services. It is not clear that the organization's information services should be expanded or even continued, with the major exception of the export statistics generated from its other functions. Even collection of export statistics should be subject to cost recovery to determine the true demand for the service. But its role in collecting statistics might make it a logical unit to act as a monitor of the progress and effects of trade policy reforms, and of the antiexport bias. -ix - Import policy Since 1986, the government of Costa Rica has made significant progress in rationalizing the structure of import tariffs and reducing protection. Average nominal protection has gone from 53 percent to 17 percent (excluding surcharges and import tax), and will fall even lower when a tariff structure with only two rates, 10 percent and 20 percent, is put in place. While detailed calculations are not possible, it is clear that the antiexport bias in the economy has been reduced. Surcharges and advance deposit requirements, however, have until recently prevented full realization of the potential reduction in bias from such significant tariff cuts. It is important that they not be used in the future. This will require bringing the fiscal problems under control (chapter 1). Some other problems remain in the import regime. One is the significant number of exemptions from import duties on inputs for nonexporting activities. These exemptions increase effective protection and the bias against exports and also contribute to fiscal imbalances. They should be quickly phased out. (Legislation is currently pending which would move in this direction.) Various nontariff barriers to imports are another problem. With the exception of some food products, the government has wisely not relied on nontariff barriers as a direct means of protection, but a large number of such barriers are in place, ostensibly to protect public health and security or to guard against phytosanitary problems. Some, however, are clearly overly restrictive. The entire system ought to be evaluated carefully, to ensure that these regulations meet their legitimate goals with the minimum possible restrictive effect. The government should move as quickly as possible to carry out its commitment (along with the other countries in the region) to eliminate the barriers to intra-and extraregional movement of food products. Finally, the existence of price and margin controls is clearly inconsistent with a trade policy that attempts to integrate the domestic economy with world markets. They give incorrect signals to both producers and consumers and interfere with the adjustment process. The government should put a high priority on their repeal. An incipient but potentially important problem is the aritidumping code. Current regulations and those being considered in new legislation incorporate a number of undesirable characteristics that make them prejudicial to the interests of consumers and competition. The experience of many countries with antidumping regulations makes it very clear that these regulations have heavy economic costs. The government should seriously consider whether any regulations of this type are really needed in Costa Rica. If so, several options should be considered. These include use of a safeguard mechanism (which considers all costs and benefits of actions and takes actions temporarily on a most-favored-nation basis) instead of an antidumping mechanism or, although less desirable, the introduction of a number of technical changes in the antidumping regulations now being considered. Trade facilitation and transport infrastructure Weaknesses in the system for moving goods into and out of the country will be one ot tne most serious constraints to continued rapid expansion of nontraditional exports. It will also be an important problem for traditional exports of bananas. Exporters and importers alike identify major problems with the physical facilities and institutional shortcomings. Even before the earthquake damage, congestion in the Limon/Moin port caused by infrastructural deficiencies was creating serious delays. Waiting time for service now averages about 16 hours. To compensate them for such delays, shippers are imposing surcharges that could cost Costa Rican importers and exporters as much as US$17 million a year. The delays are likely to get worse as tourism and banana traffic increase in the port, especially since both of these get priority over cargo ships. At the airport, the major problem for exporters is the lack of adequate cold storage facilities and the high risk of theft. Exporters, especially of perishable products, must bring their merchandise to the airport shortly before shipment, and any delay in flights can result in spoilage and losses. Highway infrastructure in Costa Rica will not be a major problem in the immediate future, after the - xi - earthquake damage is repaired. The railway at present is not an important part of the transportation chain, except for some banana exporters. Its physical limitations make it relatively inflexible and nonresponsive to users' needs. With respect to institutional issues, many exporters and importers in a survey identified the customs service, port authorities, and government ministries as being very important for their operations, but providing unsatisfactory service. The customs service is clearly a major problem because of the delays and extra costs (damaged merchandise and bribes) it imposes. The organization of the Junta Administradora de Puertos y de Desarrollo Economico de la Vertiente Atlantica (JAPDEVA) contributes to the problems of the Limon/Moin port, which it manages. JAPDEVA is responsible for efficient port administration and economic development of the region, two largely unconnected and sometimes inconsistent goals. Thus it is not as effective as it could be in meeting either one. At present, even though there is a staff shortage in the port administration section of JAPDEVA, it cannot legally transfer personnel from the development side. In addition, the institutional arrangements with stevedoring companies preclude competition. As a result of all these problems, service at Limon is poor and the real costs of using the port are high. Resolving some of these problems will require increases in the public investment budget or at least changes in its priorities, but even some of the infrastructural constraints could be partially resolved by policy actions requiring no increase in public spending. For example, allowing the private sector to construct, expand, and operate storage facilities and auxiliary services at the airport would require some legal changes, but no public sector investment. Allowing IAPDEVA increased flexibility in using its own personnel could also help alleviate bottlenecks. These reforms could be carried out in the short term. In a longer time frame the govermnent should consider a reorganization of the port authorities. A reorganized port authority should not have responsibility for regional development: its sole concern xii - should be the efficient operation of the ports. One attraciive opiion would be to have a central streamlined organization that would be responsible for port regulations and major investment decisions, with day-to-day operations handled by private firms on concession (including a privatized JAPDEVA and INCOP). Although customs issues are addressed more thoroughly in other studies, it is clear even from this study that both short-term and long-term changes for customs should also be considered. In the short run, better training of personnel and relocation of custom facilities (e.g., to plant sites of large-scale importers) could help. Changing to a system of spot-checks (with the percentage adjusted to reflect the past history of the importer/exporter or other indicators of the likelihood of fraud) could also expedite imports and exports. In response to the need for increased physical capacity, the government is studying the possibilities for constructing both a new airport and a new port. In the light of current fiscal constraints, however, the large investment necessary to construct new facilities should be carefully weighed against the costs of improving existing ones. The adoption of the policy actions mentioned above combined with the relatively small investments outlined in chapter 2 would go a long way toward alleviating problems now and into the medium term. - xiii - Chapter 1. Macroeconomic and Labor Market Issues In recent years Costa Rica has made great progress toward an outward-oriented trade strategy, a strategy that cross-country comparisons clearly show to significantly expand the medium-term growth potential of the countries that adopt it. Costa Rica should be no exception. Experience also shows, however, that the sustainability of such a strategy depends crucially on a stable macroeconomic environment. High inflation, large fiscal and current account deficits and rigidities in the labor markets seriously imperil the capability to benefit from trade liberalization and may even lead to the collapse of the reform process by magnifying the temporary adjustment costs. Successful and sustained trade policy reforms have almost always been accompanied (though not necessarily preceded) by stable macroeconomic policies. Without them, reforms have been difficult to sustain.' This chapter analyzes the current performance of the major macroeconomic and labor market variables in Costa Rica and their interactions with the trade policy reforms. It identifies the most serious problems and the policies that will be needed to resolve them. Fiscal policies Costa Rica's consolidated public sector deficit is expected to drop significantly in 1991 - from 5.4 percent of GDP in 1989 and 5.1 percent in 1990 to around 2.2 percent in 1991 (table 1.1). Most of this improvement comes from the revenue side, from temporary tax surcharges on imports and the sales tax (from 10 percent to 13 percent) that are expected to boost central government revenues by about 15 percent in real terms during 1991 (table 1.2). Revenues have also increased somewhat in the rest of the public sector, thanks largely to adjustments in the prices of the goods and services produced. Real public expenditure, however, is expected to drop negligibly in 1991 despite a 20- 1.Choksi, A., M.A. Michacly and D. Papageorgiou, 'The Design of Trade Libcralization' Finance and Development (March 1989): 2-5. percent expansion in real expenditure in 1990. Even more worrisome is the fact that this stabilization is the result of a reduction in the level of public capital expenditures substantially below the recent low level of 1989 (table 1.1). Meanwhile, central government current expenditure will increase by more than 17 percent in 1991 in real terms (a nominal increase of about 46 percent) or by 10 percent, excluding interest payments (35 percent in nominal terms). The sales tax surcharge is scheduled to drop by one percentage point a year over the next three years to bring the tax back to the 10 percent rate, and the special import surcharges are also scheduled to be eliminated soon. Since the sales tax accounts for more than 33 percent of central government revenues, elimination of the surcharge will reduce central government revenues by approximately 10 percent by 1995. Elimination of the trade surcharges will cause revenues to fall an additional 9 percent. Since there does not appear to be any obvious way of compensating for such large revenue losses through other revenue sources, real expenditures will need to be reduced to avoid a serious rise in the public sector deficit. Capital expenditures, currently at less than 5 percent of GDP, are at their lowest level in 15 years, implying that the 'easy' way of reducing fiscal expenditures is exhausted, and if anything, capital expenditures will have to grow in the next few years. The new outward-oriented strategy is likely to require a substantial increase in public investment, particularly in infrastructure, to allow the country to take full advantage of its trade potential. In fact, certain bottlenecks in the export infrastructure (ports, airport facilities) have already become apparent (see chapter 2). Current expenditure, therefore, will need to be significantly reduced in the next two years to keep the deficit under control. The major components of current expenditures are interest payments on the public debt-28 percent of the total in 1991-and the wage bill-34 percent of the total (table 1.3). Interest payments cannot be reduced; if anything, they are likely to rise in the near future because of accumulating debt. That means that cuts in the wage bill will be -2 - Table 1.1 Consolidated nonfmnancial public sector operations, 1980-91 (percentage of current GDP) 1980 1982 1986 1987 1988 1989 1990 1991P Current revenues 21.0 18.1 25.0 26.0 26.7 26.7 26.1 28.2 Current expenditures 23.3 20.6 20.6 21.3 21.8 23.5 24.1 23 7 Current balance -2.3 -2.5 4 4 4.7 4.9 3.2 2.0 4.5 Neacapital expenditure 11.0 6.2 6.2 4.9 5.2 5.9 5.2 4.9 and Iending Overall deficit and lending -13.3 -8.7 -1.7 -0.3 -0.3 -2.7 -3.2 -0 4 Central bank losses n.a. -5.6 -3.8 -3.5 -3.3 -2.7 -1.9 41.8 Consolidated deficitisurplus -14.3 -5.5 -3.8 -3.6 -5.4 -5.1 -2.2 a. Projected source: Ministeio de Hacienda, Costa Rica Table 1.2 Summary of real revenbue and expenditures of the central government (millions of 1991 colons) 1989 1990 1991 Amount Amount % ChanRe Amount % CbanRe Revenue 34,151 31,457 37,630 20.0 Durect taxes 5,878 5,948 1.07 6,220 5.0 Indirect taxes 26,960 24,381 -10.0 30,928 24.0 Sales tax 9,169 9,552 4.0 12,713 33.0 Import taxes 6,161 6,747 10.0 9,590 42.0 Export taxes 4,052 672 -83.0 1,364 103.0 Expenditure 38,494 44,160 15.0 43,205 -2.0 Currmnt expenditure 29,800 32,081 +8.0 37690 +17.0 Capital expenditure 8,670 12,077 +39.0 5,51S -54.0 Export taxes 4,052 672 -83.0 1,364 103.0 Note: Real values are obtained Source: Manistenio de Hacienda necessary to avoid unsustainable fiscal deficits.2 It thus appears that significant reductions in public sector employment cannot be avoided.3 To offset the reduction in government revenues resulting from phasing out of the temporary sales surtaxes, public sector wage expenditure would need to drop by about 18-20 percent. In the long-run this could be achieved through a 15-20 percent reduction in total public sector employment (about 25,000 employees). In the short-run, however, the savings will be considerably lower because of the high costs of severance payments. So even if public employment is cut by 20 percent (a savings of about US$20 million a year), the structural deficit problem is not likely to be resolved in the next two years, because the cost of severance payments during that time is estimated at more than US$70 million. Thus the net savings of reducing the public payroll by 20 percent during the first two years are uncertain at best. To allow for a rapid reduction of the public sector deficit, employment cuts will need to be accompanied by a reduction of average government wages. This reduction, however, should not affect the high level salaries, which are currently below those of the private sector. The adjustment should take place in those occupations that are rewarded at higher levels in the public than in the private sector. Table 13 Composition of current expenditures of the central government (miElions of colones) 1989 1990 1991 Wages and salaries 11,557 11,785 12,930 Interest payments 4,474 6,820 10,550 Transfers 12,093 11,800 13,067 Others 1,444 1,422 1,144 Total current expenditures 29,800 32,081 37,690 Source: Costa Rican Ministy of Finance 2.Reductions in export subsidies and exemptions on import tariffs are contemplated in the forthcoming trade reform. However, since import tariffs will also be reduced, the net fiscal impact of the trade reform (including elimination of the import surcharge) is projected to be nearly neutral. 3.The share of public sctor employment in total employment has increased dramatically from le"s than 6 percent in 1950 to IS percent in 1973 and about 18 percent in 1991. This expansion of the public sector has significantly reduced the labor pool for the private sector as well as boosting government expenditures. -4 - Current account, exchange rate, and monetary issues Thanks to a substantial improvement during the first half of 1991, the current account deficit for the year is expected to fall from 11.8 percent of GDP to 7.5 percent (table 1.4). The improvement has been due largely to a tight monetary policy, a large reduction in domestic credit, and periodic devaluations, which together have permitted a modest but significant real devaluation. According to data provided by the central bank, the real money supply during the first half of 1991 fell by about 5 percent because of a reduction in the monetary base and in the money multiplier due, in turn, to an increase in required bank reserves. Moreover, net nominal credit to the public and private sectors increased by only 5.6 percent during the first half of 1991. With inflation running at about 11 percent for that period, this represents a significant real contraction of domestic credit. Table 1.4 Summary balance of payments (USS millions) 1980 1982 1986 1987 1988 1989 1990 1991 Trade balance -526.6 -25.2 -76.6 -282.0 -234.0 -413.1 -671.5 -414.4 Trade balance as -12.0 -1.0 -1.9 -6.3 -5.1 -7.9 -11.8 -7.5 percentage of GDP Current account balance Before official grants -658.5 -303.5 -196.6 -477.2 -392.1 -608.9 -673.1 406.0 After official grants -643.9 -297.1 -82.1 -290.0 -176.7 -456.7 -508.2 -306.0 Capial Account Balance 471.1 436.5 137.1 214.4 281.6 473.6 204.1 365.0 Net foreign direct investment 48.1 26.3 57.3 89.5 167.8 142.5 112.3 90.0 Net public medium-and long-term debt 85.2 -115.0 -234.6 -545.9 -261.5 -331.2 -158.7 61.4 inflows Other capital 337.8 525.5 314.4 670.8 375.3 662.3 250.6 213.7 Changes in reserves 172.8 -139.4 -55.0 75.6 -104.9 -16.9 304.1 -59.0 Current account balance as a percentage of GDP -14.7 -12.4 4.8 -10.6 -8.5 -11.6 -11.8 -7.4 Source: Bank of Costa Rica -5 - Despite impressive efforts on the monetary front, however, the reduction in the current account deficit does not appear to be sufficient to bring the external account to a sustainable position. Moreover, the monetarv and credit contractions have been associated with a drastic increase in commercial interest rates to the productive sectors. Nominal rates rose from less than 30 percent in late 1989 to about 38 percent by mid-1991 (table 1.5), while real rates rose from 19 percent in 1990 to an estimated 20-23 percent for 1991. Apart from the monetary tightening there are structural factors as well that explain the high cost of credit for productive activities. At about 9-12 percentage points, the spread between the lending and borrowing rates is extremely high. There is general agreement in Costa Rica that inefficiencies in the financial sector are largely responsible. The financial sector is dominated by a few state banks with significant monopoly power over demand deposits. Private banks are allowed to operate, but they are subject to limitations that impede their ability to compete effectively with the state institutions. Lending rates could fall significantly if more competition were allowed in the financial sector. Private institutions should be allowed to accept demand deposits and, in general, be subject to the same rules that apply to state institutions. Table 1.5 Nominal lending rates paid by producers (percentages) January 1990 July 1990 July 1991 Agriculture 27.0 29.0 37.0 Industry 30.0 31.5 39.0 Construction 30.0 31.5 39.0 Others 31.0 34.0 39.8 Source: Centrl Bank of Costa Rica The current account deficit of 7.4 percent of GDP does not appear to be sustainable chiefly because only a relatively small fraction of it is equity financed (i.e., through foreign investment or grants). For 1991, net direct foreign investment is expected to be about US$90 million, or less than 1.1 percent of GDP (table 1.4) - substantially below the near 2 percent rates prevailing in the late 1980s. Official grants are also in a downward trend and are unlikely to be more than 1.2 percent of GDP in the foreseeable future. Thus only about 2.3 percent of the 7.4 current account deficit in 1991 will be equity financed, while the other 5.1 percent will be financed through increased foreign indebtedness. Since annual GDP growth is likely to be only about I percent in 1991 and to remain below 4 percent over the next few years, a current account deficit of the size expected for 1991 will cause an expansion of the country's already high debt-GDP ratio (currently at about 0.76).4 Assuming that equity inflows will remain at about 1.5 - 2 percent of GDP in the medium term and a 3 - 3.5 percent annual growth, one can conclude that a sustainable current account deficit should not exceed 5 percent of GDP. This would allow the debt/GDP ratio to be maintained at current levels. If growth reaches 4 percent to 4.5 percent per annum some reduction in the debt/GDP ratio could be accomplished. Real exchange rate adjustments and public expenditures The inadequate external adjustment and high interest rates caused by the tight monetary and credit policies are due to actual and expectational factors. Inflation has accelerated in response to the still large public deficit and, especially, the expectation of a worsening fiscal deficit in the next two-three years, preventing the tight monetary policy from bringing about a larger adjustment in the real exchange rate. National aggregate expenditure has been reduced only modestly because of continuing hgh fiscal deficits and the expectation of even higher ones. Thus both the devaluation of the real 4.The debt export ratio stands at about 2.8, which is subsantially higher than in most LAtin American countries, with the exception )f Brazil, Mexico and Peru, which are considered to have an unsustainable debt. Other Latin American countries have considerably lower debt-export ratios: Dominican Republic at 2, Colombia at 2. 1, Panama and Chile at 2.5, Jamaica at 2.6. - 7 - exchange rate and the improvement of the current account have been only modest. The large increase in interest rates is associated with the same expectational factors and with the large demand for credit from the government to finance the deficit. The effect has been a perceptible crowding out of private investment in 1991, with real private investment expected to decline by more than 18 percent in 1991 (table 1.6). A high level of public expenditures impedes a real devaluation of the exchange rate through various mechanisms. If the increase in real public expenditure is not fully financed-if it increases the public deficit-it will induce an expansion in aggregate expenditure. This, in turn, puts pressure on the domestic market for nontradables, eventually pushing their prices up and causing the real exchange rate to appreciate. Even a completely financed increase in public expenditure can cause the real exchange rate to appreciate because it implies a shift in the composition of expenditures from the private to the public sector. Since the government tends to spend more on non-tradables (services) than the private sector, the change in the composition of expenditures is likely to increase the demand for nontradables. This would, in turn, result in a rise in the price of nontradables, thus contributing to an appreciation of the real exchange rate. No empirical analyses are available for Costa Rica for estimating the quantitative importance of public expenditure - real exchange rate linkages. However, studies for other Latin American countries can give a sense of the likely importance of these effects for Costa Rica. A recent empirical study for Chile finds that a 10 percent permanent increase in aggregate expenditure (private and public) induces a 4.5 percent appreciation of the real exchange rate.5 A 10 percent permanent increase in the share of government expenditure in total expenditure (for example, from 30 to 33 percent) that does not change total expenditure is likely to cause a 2.5 percent appreciation of the real exchange rate through 5.-Chile: Consolidating Economic Growth," Country Economic Memorandum (World Dank, Washington, D.C. June 1990). - 8 - the expenditure-composition effect. A 10 percent increase in governrnent expenditure that is not financed through higher taxes is likely to cause a 6.0 percent appreciation of the real exchange rate. While the actual size of the impact depends on country-specific conditions, the linkages between government expenditure and the real exchange rate seem to be strong. This suggests that a significant reduction in the fiscal deficit coupled with a contraction in the share of government expenditure in total expenditure is likely to induce a substantial real devaluation. To be effective, however, the public has to regard the expenditure reduction as permanent and sustainable. Table 1.6 Indicators of economic activity: output, investment and inflation 1980 1982 1986 1987 1988 1989 1990 1991P GDP at market prices 0.8 -7.3 5.5 4.8 3.4 5.7 3.8 2.0 Gross domestic investnent 7.0 -25.5 30.8 3.1 -6.7 7.6 5.8 -12.5 Private -14.7 -27.7 22.7 24.1 -3.7 15.8 15.4 -18.4 Public 1.9 -28.0 -6.7 -20.7 -3.6 14.0 7.5 -11.4 Inflation (CPI) 18.1 90.1 1.8 16.8 20.8 16.5 19.0 24.0 Note Inflation figures are average annual rtes. a. Projcted Source: Cenwl Bank of Cosa Rica and DIF Stabilization and credibility The ongoing trade reforms make the still high current account deficit more serious than it might otherwise be. The planned simultaneous reduction of import tariffs and export subsidies and the elimination of most tariff exemptions (for nonexport activities) is expected to have a nearly neutral effect on fiscal revenues, but these reforms could increase the current account deficit in the short run if appropriate exchange rate and fiscal actions are not taken. To avoid any worsening of an already difficult current account position, further real devaluations may be necessary (other relevant economic variables such as terms of trade and exogenous capital flows remaining unchanged). Sustaining those devaluations would require an even greater reduction in the fiscal deficit; otherwise, the required -9- nominal devaluations are likely to accelerate inflation rather than bring about a real devaluation. Furthermore, unless the fiscal deficit is reduced quickly through expenditure reductions, there is a danger that import surcharges and prior deposit requirements could be reimposed, as they have been in the past when current account deficits have burgeoned. This, in turn, would be a serious setback for the trade policy reforms. So unless the government's fiscal conduct is reconciled with the trade reforms and tight monetary policies, the credibility of its overall economic program may suffer. Inadequate fiscal adjustment will generate expectations of worsening government imbalances in the next few years, especially since the political and institutional characteristics of Costa Rica suggest that it will be very difficult to reduce public expenditures sufficiently to compensate for the phasing out of the tax surcharges that have kept the deficit in check during 1991. That expenditure reduction would need to be achieved through politically difficult cuts in wage expenditures makes this even more likely. This lack of credibility explains why the tightening of domestic credit and overall monetary policy during the first half of 1991 has not been accompanied by a reduction of inflation in 1991. The public expects a reversal in the stabilization policies and so believes that inflation will not slow down in the future. Expectations that inflation will remain high are, in turn, self-fulfilling as workers and firms demand wage and price adjustments in line with their expectations about inflation, putting furhier pressure on prices. If monetary policy is sufficiently tight, adjustment under these conditions will come about through lower output and employment rather than lower inflation. The reduction in economic activity may bring about a failure in political will, leading to a reversal in the monetary and exchange rate policy, with very negative consequences for the economy. Thus, unless decisive measures are taken on the fiscal front to show that the government fully intends to keep the deficit at sustainably low levels, the inflationary inertia is likely to continue to dominate actual monetary trends. - 10 - In summary, then, the measures takeh in i991 to control domestic credit expansion and to devalue the exchange rate, although commendable, have not been effective in reducing inflation and have been only partially successful in decreasing a still unsustainable current account position. These policies have also had negative side effects, inducing very high interest rates that, in turn, have caused a perceptible reduction in investment. Both the relative ineffectiveness of the monetary policy and its severe negative side effects appear to result from the public's inability to believe that the public sector disequilibria are going to be resolved in the near future. This suggests that the government needs to strongly signal its commitment to a permanent reduction in the deficit by taking decisive measures. These measures will necessarily involve a large reduction in current expenditures, particularly the wage bill. Labor market The importance to the trade reforms of reducing the public sector wage bill emphasizes the linkage between labor market and trade policies. Effective labor market policies must be an important part of the trade and fiscal adjustment package, both to encourage smooth redeployment of workers from the public to the private sector and to help keep Costa Rican businesses internationally competitive. As already indicated, the necessary reduction in the public sector deficit for 1992-93 would require a 20 percent or so decrease in public sector employment, which is equivalent to 3.4 percent of total employment (public sector employment constitutes about 17 percent of total employment). Employment in the private sector would have to increase by about 2 percent a year over the next two years just to absorb the workers released by the public sector and by another 4 percent a year to accommodate normal growth in the labor force. In other words, to maintain unemployment at current levels (about 4.3 percent), employment in the private sector would need to grow by at least 6 percent a year during the next two-three years. Table 1.7 Minimum wages adjustments in Costa Rica (annual percentage changes) Basic miniLnum Minimum wage Average wage CPI Year wage In agriculture 1986 18.0 18 9 17.9 11 8 1987 164 18.0 11.3 16.8 1988 17.3 15.6 15 4 20.8 1989 20.5 20.7 19.6 16.5 1990 16.8 15.9 19.0 199lb 29.0 34.3 24 0 a. Prelimrunary. b. 4th Category, which covers about 85 % of the labor force in agriculture. c Sources: Ministry of Labor and Camara Nacional de Agricultura y Agroindusuia. Output elasticities of labor demand6 are not available for Costa Rica, but studies for other Latin American countries have found elasticities of less than unity, or about 0.7-0.8. Thus, it constant real wages, a 6 percent rate of growth in employment in the private sector requires output growth on the order of 7.5-8 percent, which is significantly higher than projected growth rates of less than 5 percent a year for 1992-93. Thus, it appears that employment in the private sector can expand at the required high rates only if labor costs are downwardly flexible. Using an employment wage elasticity of -0.25 (which is in line with estimates for Colombia and other Latin American countries), and assuming that private sector output grows at 5 percent a year, we estimate that real labor costs will need to fall by about 7-8 percent a year to avoid a significant increase in unemployment. Wages would then be expected to rise in the longer-term-see below. If labor costs do not fall, unemployment may easily double to about 8 percent in the next two-three years. Labor costs to firms are determined by the wage level and by payroll taxes. There is probably some room for reducing cost by reducing these taxes, but real wage levels will also need to decline. Costa Rica has eighty or so different minimum wages, which are defined for each type of occupation. 6.Defined as the percent increase in total employment when output rises by 1 percent for given real wages. - 12 - This multiplicity of minimum wages encourages the various groups to vie against each other to achieve the maximum increase in their minimum wage. These minimum wages do not appear to be directly binding in determining wages in most sectors, with the possible exception of certain agricultural activities. However, over the last few years minimum wages have increased at a significantly faster rate than the average wage and faster than the rate of inflation (table 1.7). This pattern suggests that minimum wages may soon become directly binding, at least in low-wage sectors. Moreover, minimum wage adjustments tend to be used as a guide, generally a lower bound for salary increases in all sectors in the economy, so even if minimum wages are not directly binding, large increases in their levels will accelerate the rate of increase of the economy's entire wage structure because of the indirect effects on wage negotiations. To a large extent, then, adjustments in minimum wages are a signal from the government about its support for wage increases across the economy. Thus, a continuation of the policy of making relatively high minimum wage adjustments may become an obstacle to the required downward flexibility of wages. Another issue that affects employment is the high social security and other employment taxes. A World Bank study found that Costa Rica has the highest wage taxes among developing countries.7 Between 1979 and 1989 social security taxes in Costa Rica increased from 20 percent to 32 percent of the payroll, and employer contributions more than doubled, from 9 percent to 22 percent of the total payroll. Total social charges for social security taxes and other charges amounted to 58 percent of payroll taxes in 1989. Firms are required to contribute to a national training fund that provides for centralized training of workers, a system that forces firms to pay for training that may not be the most efficient way of meeting their needs. 7.Y. Bacn, 'Harmonizing Tax Policies in Central America,' Working Paper no. 309 (Washington, D.C.: World Bank, November 1989). - 13 - In addition to absorbing the public employees who will be released in the near future, the private sector will also have to alter its structure of production as trade liberalization measures deepen and the real exchange rate continues to depreciate. A likely outcome of this process is contraction in import- substitution and nontradable sectors and continuing expansion of the export sector. This restructuring process is likely to require major investments in manpower training and physical capital. Existing labor market distortions are likely to become a serious problem because of the rigidities that minimum wages impose on the capacity of the private sector to absorb the surplus labor, and the mismatch between the skill composition demanded by the private sector and the skills of workers being released from the public sector. Minimum wages also significantly reduce the incentives for firms to provide on-the-job training, a vital consideration in periods of significant structural adjustment. Even if minimum wages are not binding for unskilled workers in general, they may create a binding constraint on firms' provision of non-firm specific training. Firms provide this type of training only if workers are able to 'pay" for it through lower wages. Thus, minimum wages may limit on-the-job training by eventually becoming binding for apprentices or trainees.8 To provide employers with an incentive for spending money to train workers, wages may have to fall temporarily; then, as productivity increases and workers acquire skills that make them valuable to their current firms and to other employers, their wages will increase accordingly. Thus, a major policy implication of this analysis is the need to eliminate legal minimum wages or to drastically simplify the current structure and adjust minimum wages at a pace significantly below the inflation rate to allow the private sector to rapidly expand employment and manpower training. 8.Empirical studies in the United States have shown that minimum wages substantially reduce training on the job. - 14 - Conclusion The public deficit-and the expectation that it will increase substantially in the next few years-is one of the largest obstacles to achieving macroeconomic stability and realizing the full benefits of the trade policy reforms. The large deficit fuels both inflationary expectations and actual inflation, making it difficult to maintain the real exchange rate at a sufficiently depreciated level. The deficit also keeps real interest rates high, making it difficult for businesses to adjust to the new trade policies. To a large extent the failure to achieve a permanent solution to the public sector disequilibrium has made monetary and exchange rate policies less effective in reducing domestic inflation and the current account deficit. A sustainable reduction in the fiscal deficit will require a major contraction in current public expenditures. This, in turn, will require a large reduction in public sector employment within the next two years and further compression of public sector wages. The tight monetary and domestic credit policies will also need to continue, to permit a significant deceleration of inflation and a further depreciation of the real exchange rate as the trade liberalization measures take effect. This may allow for further reductions in the current account deficit, bringing it below 5 percent of GDP, perhaps a sustainable level in the long run. This new fiscal and monetary tightening will require greater price and wage flexibility to avoid a slowdown in economic growth and a substantial increase in unemployment. For the private sector, absorbing the labor force released from the public sector and adapting to the structural changes implied by trade liberalization will require a recovery of private investment in both physical and human capital. The large number of minimum wages and the high social security and other wage taxes prevent wages and prices from adjusting to maintain growth rates and employment levels. Minimum wage adjustments should be kept substantially below expected inflation rates, and the 80 or so different rates need to be consolidated into a single minimum wage. - 15 - Interest rates also need to be reduced to assist the recovery of private investment. Reduced inflationary expectations and sustained lower public sector deficits (that reduce government borrowing in domestic capital markets) will be important in reducing these rates, as will allowing private financial institutions to compete on an equal basis with state banks. By reducing the large gap between lending and borrowing rates this increased competition in the financial sector should ultimately lead to lower costs for credit to the productive sector. - 16 - Chapter 2. Trade Facilitation and Transportation Infrastructure Although most Latin American governments are committed to improving the economic and regulatory environment for international commercial activity, most have been slow to modernize the physical infrastructure and institutional arrangements on which trade depends. Improving the efficiency of the transport chain should be an important priority in any strategy to strengthen international competitiveness and facilitate the international flow of goods. This chapter identifies the main obstacles in the transport chain for Costa Rican importers and exporters and suggests ways these might be overcome. As part of this effort a representative sample of exporting and importing firms in Costa Rica was surveyed, using questionnaires and follow-up interviews. The survey attempted to capture perceptions about the quality of the domestic supply of services in the transportation chain. A few months later, interviews were also conducted with representatives of selected government agencies and private entities involved in trade. Their responses were similar to those of importers and exporters. Costa Rica's infrastructure does not have the capacity to handle the current volume of exports efficiently, much less the expected growth in volume. Both physical and institutional capacity constraints exist, and improvements in both areas are required to support the government's trade expansion policies. Infrastructure, especially ports and airports, is seriously deficient, and customs, port authorities, and various ministries (including Agriculture and Health) were identified as significant problems (table 2.1). Bottlenecks in the transport chain result from the large increase in the volume of exports-traditional and nontraditional-and from the failure to modernize infrastructure to keep pace with the rapid changes in world transportation technology. The agricultural sector, especially banana production, is most affected by the infrastructure deficiencies. Nontraditional exports are also hard hit. - 17 - Table 2.1 Trade facilitation and transport study: survey results for Costa Rica Ongin Impornance Sausfacnon Problem of Agency of Agency wish Agency wuh Agency Very Not Risk of Agency NationalForeign important Important important Satisfactory Unsatisfactory Cost Time damage Other Freight forwarder 4 4 4 1 3 5 Custom agent 9 1 7 3 7 Cargo consolidator 1 4 5 1 2 2 2 2 1 Government/ministry 7 5 3 1 2 5 3 6 1 Custom authorities 7 5 2 1 3 6 3 6 2 Port authorities 8 7 3 4 4 2 4 1 1 Trade unions 1 2 3 1 2 6 Multimodal transport operator (MTO) 2 3 2 1 4 3 1 1 1 Modal transport operator S 2 3 3 3 2 6 4 4 2 2 Shipping line 7 5 2 1 5 1 1 1 1 Consignee/consignor 2 5 6 2 1 5 1 Bank 6 3 6 3 5 2 1 1 Cargo insurer 4 3 S 2 1 4 1 1 1 Container insurer 2 2 2 5 4 1 1 Note: Numbers in table are number of respondents to the survey who answered each question about services received from the agency with the answer indicated by the column in wbich the number appears. For example, 8 respondents answered questions about national port authorities. Seven identified port authorities as vcry important, 4 indicated dissatisfaction, 2 indicated port authorities cause problems in terms of cost, 4 indicated problems in terms of time, and I in terms of risk of damage. (The number of responses to each questions may not matech the number of respondents because of multiple responses ot because each respondent may not respond to every question.) The situation has undoubtedly worsened since the earthquake in April 1991, which seriously damaged Costa Rica's physical infrastructure in the Atlantic region, the main fruit-exporting region of the country. Damages was serious to the road and railroad networks and to the port facilities in the Limon/Moin complex, the port through which most banana exports and nontraditional exports flow. - 18 - Airports Most perishable exports are transported by air from the Juan Santamaria airport, whose facilities are grossly inadequate. No refrigeration units are available at the cargo terminals, so exporters have to deliver their goods close to departure time. Any unexpected delay means damage or loss of merchandise. Although estimates of such costs are unavailable, authorities and users alike acknowledge that the costs are significant. Airport personnel also lack basic training. Security in airport warehouses is a serious problem, and customs procedures are slow and cumbersome. Export permits, issued by customs officials at the airport, are required before merchandise can be loaded onto planes. Exporters complain that they sometimes must "tip' airport and customs personnel to speed up the issuing of embarkment permits and to prevent theft of their merchandise from warehouses. Exporters face other procedural difficulties at the airport as well. The Ministry of Agriculture requires that all products be physically inspected before they are shipped. Since inspections personnel are untrained and no x-ray equipment is available, delays and damage to merchandise are common. These mishandled products are often rejected at their destination. An assessment and updating of the Santamaria airport master plan, financed by USAID, recommended no large new investments in the airport. It concluded that the airport's current capacity will be adequate to meet demand for the next ten years. It recommended that a new airport be constructed at Orotina, about 20 kilometers from San Jose. The Chamber of Exporters would be permitted to construct and operate the cargo terminal at Orotina under an 'exploitation certificate" arrangement that would exempt terminal operation from competitive bidding requirements. The chamber would be allowed to invite venture partners, such as airlines and freight agents, into the enterprise. Other commercial activities at the airport would be handled by private concessioners. A different study commissioned by the Chamber of Exporters, however, suggested that a less costly yet - 19 - feasible solution would be to modernize and expand Santamaria airport. A new cargo terminal could be constructed and operated under administrative arrangements similar to those proposed for Orotina. With this expanded capacity, Santamaria airport could satisfy demand for the next 25 years. It is beyond the purview of this report to judge whether this alternative would adequately serve Costa Rica's needs, but it is clearly less costly, an important consideration in light of the current fiscal difficulties. Since private sector participation in airport or port commercial activities is legally proscribed, the government submitted a procurement law reform measure to Congress in September. The proposed revision to the law, which is now under review, would permit private firms to engage in commercial activity in the transport sector, traditionally a monopoly of the public sector. Ports The Ministry of Works and Transport is responsible for transport policy, planning, coordination, and investment in ports. Costa Rica has six ports on the Pacific coast handling about 25 percent of the country's international maritime traffic, mainly imports, and two ports on the Atlantic coast, handling about 75 percent of the traffic, mostly exports. The Pacific ports include two public ports, Caldera and Puntarenas, and four specialized ports. Two of the specialized ports, Morales (for sugar) and Fertica (for fertilizer), are industry owned and operated, and two, Golfito and Quepos (both banana ports), are owned by the state. The public ports on the Pacific are operated by an autonomous agency, INCOP, which conducts its operations-on shore and on ships-through force account, contracting directly for all personnel and equipment. The ports on the Atlantic coast are operated by an autonomous port authority, Junta Administradora de Puertos y de Desarrollo Economico de la Vertiente Atlantica (JAPDEVA), with full financial autonomy and responsibility for port administration and planning, as well as social and economic - 20 - development in the Limon region. Stevedoring services are provided by three companies that contract directly with ship owners for these services and rent their equipment from JAPDEVA, which also receives royalty payments from the companies. Other services, such as pilotage, mooring, and towage, are provided directly by JAPDEVA. Since about 70 percent of international traffic is handled at Atlantic coast ports, attention has focused on those ports. The Limon/Moin port is severely congested, with an occupancy rate of 77 percent at Moin and 67 percent at Limon-the average for this type of port is about 56 percent. At Limon, ship waiting time averages 16 hours, at a cost of US$10,000-$25,000 in lost time. Bottlenecks are common and are reflected in the 23 percent increase in waiting time between 1990 and 1991 (table 2). Because of the slow turnaround in the Limon/Moin port, the WITASS conference shipping lines, which move 90 percent of Costa Rican traffic, imposed a surcharge to compensate them for lost time. The surcharge rose from US$1.4 a ton in February 1991 to US$5.0 a ton in October 1991. Since the port handles about 3.7 million tons of cargo a year, the delays may cost Costa Rican importers and exporters as much as US$17 million annually, in addition to indirect costs (inconvenience, storage costs, and the like). Table 2.2 Limon Port general port indicators for January-September 1990 and 191 ham 1.990 199) Dirffwe +J- Number of vessels 912 935 +23 Gross registered tonnage (GRT) 7,159,915 8,938,829 +1,778,914 Length (L.O.A. in meters) 124,093 133,660 +9,567 Hours in pOa 36,629 41,088 +4,460 Hours in berth 22,591 23.801 +1.210 Waiting time (Hours) 14,038 17,287 +3,249 Hours worked in vessel 17,692 18,848 +1,156 Effective hours worked in vessel 15,295 16,147 +851 Hours worked by crew 34,559 38,348 +3,789 Effective hours worked by crew 29,671 32,629 +2,958 Tons (import) 1,296,380 1,294,692 -1,688 Tons (export) 1,416,060 1,519,414 +103,334 Total tons 2,712,440 2,814,106 +101,666 Average number of crews 1.96 2.04 0.08 Source: JAPDEVA. -21 - Institutional constraints JAPDEVA employs about 1,500 people, but only 55 of them are assigned to freight elevators. Since the minimum size of a service crew is 35 people, and there are four six-hour shifts, some people work 24 hours in a row. As a provisional measure, administrative staff are being offered an overtime bonus of 150-200 percent of their base salary to operate freight elevators on night shifts, substantially increasing the personnel cost of port operations. Shortages of staff to work in the port (distinct from administrative or development staff) will get even worse as port workers retire because of a hiring freeze and policies preventing internal transfers within JAPDEVA. JAPDEVA'S economic and social development objectives are also being poorly served. Activities are politically motivated rather than based on an integrated economic plan for the region. Most of the 350 employees working on JAPDEVA's activities in this area are involved in bureaucratic details or in conducting studies rather than providing developmental services to the community. Income from port operations goes into a common account that also covers the development staff, to the detriment of maintenance and port improvement activities. To finance capacity expansion at the Limon/Moin ports, estimated to cost US$12.0 million, the government imposed an 8 percent tax on banana exports. About US$17 million had been raised from this tax as of July 1991, but because of fiscal difficulties, the government did not release the funds for port improvements as planned. Banana exporters protested the continuation of the tax, and in August the government agreed to use all new revenue collected from the tax to construct a 55 metric ton expansion in early 1992. This smaller project is estimated at US$4.0 million. Labor problems also afflict the port complex. Unions are strong, and strikes and labor disputes are frequent, impeding export flows. While workers have generally opposed any modernization of port management, the Chamber of Exporters is negotiating a cooperative agreement with the port unions, hoping to bring the workers around to a more entrepreneurial way of thinking about port activities. - 22 - They also hope to create a strong pressure group to push for privatization of port facilities and the separation of JAPDEVA'S port operation activities from its economic development activities. The current award process for stevedoring services is very politicized and anticompetitive. Although stevedoring services are provided by private companies, the companies jointly negotiate uniform rates with JAPDEVA. Stevedoring firms also submit requests for rate increases to JAPDEVA, which does not require them to provide justification based on underlying costs. The companies also rent JAPDEVA'S equipment, rather than supplying their own, which greatly reduces their capital investment costs. Exporters consider the rates at Limon/Moin to be high compared to those at other ports. The tariff structure is flat, with no volume discounts reflecting economies of scale for large volume users. A USAID study comparing charges at Limon/Moin with those at other ports in the region found handling charges to be somewhat higher than at other ports, but it also found the total tariff for using Costa Rican ports to be relatively competitive. As indicated by our survey and interviews, however, despite competitive tariffs, dissatisfaction with the service provided remains high. A World Bank study reached similar conclusions that monetary costs are competitive, but service unsatisfactory, making the real cost of using the port too high. Physical constraints The April 22, 1991 earthquake caused structural damage to the port facilities, worsening already inadequate conditions. The ground level rose, making the water in the port too shallow for some ships to dock. Port dredging is urgently needed. In addition, the corroded, abandoned metal wharf (Muelle Metalico) uselessly occupies a large area in the port and obstructs ship traffic. Port operations are further hobbled by inadequate equipment for the volume of cargo that passes through the port. For instance, there is only one container crane for every 120,000 containers-the - 23 - standard ratio is one to 40,000. Only five sets of palette-and-bulk-handling equipment are available for bananas at the two berths. Since each berth requires a minimum of four sets, the port is at least three full sets of equipment short. Passenger vessels also arrive at both Atlantic and Pacific coast ports, and tourist traffic is expanding. International and national laws require that priority be given to passenger vessels for services at ports. With merchandise congestion already fierce at most times, this leads to even greater delays, which are especially destructive and costly for perishable goods. According to Ministry of Transport and World Bank estimates of trends in port traffic, the port will reach its physical capacity limit for handling traffic in about three years. USAIt is financing a prefeasibility study for construction of a new port on the Atlantic coast, possibly at Parismina. Another study on the legal changes needed to allow private sector operation of the port is also being conducted. Customs Importers are unanimous in their complaints about customs administration. Most users consider customs to be the worst link in the transport chain. Among the ills arising from inefficient customs administration are long delays, merchandise damage, and pilferage. Importers complain that customs house organization is chaotic, administration is incompetent, and personnel have a poor attitude. Reaching custom houses is logistically complicated for many importers, and warehouse release procedures are slow. Merchandise is often kept in warehouses for up to 45 days before it is released, accruing high storage fees. Exporters also find existing procedures to be impractical and unnecessary as discussed in the section on imports. - 24 - Roads The earthquake caused extensive damage to the primary road network and to access roads to the Limon export corridor. Along the damaged roads, five bridges were partially damaged and seven were completely destroyed. Serious flooding in August 1991 wiped out repairs on some of the roads that had been made by a large banana exporter soon after the earthquake. Other infrastructure and trade facilitation issues Freight forwarders are rarely used by Costa Rican traders, who are generally unaware of their facilitating role in the international flow of goods. Most exporters make their own arrangements, while importers rely heavily on customs agents. The railroad is not designed to meet transport user needs and is quite inflexible, so it is not an important part of the transport chain. Some banana exporters use the rail line between the Valle de la Estrella and Limon, but most bananas are shipped on palettes, which the train system is not equipped to handle. The rails are also unsuitable for container traffic because of inadequate tunnels and bridges. Most Costa Rican exporters sell on fob terms, and most importers buy on cif terms. This means that they have little or no control over transportation decisions, in spite of their stake in minimizing costs and maximizing quality of service. Costa Rica makes almost no use of electronic data interchange systems, even though these systems have major cost and efficiency advantages in the processing of commercial documentation. Telefax systems are used for most communications, which may be adequate for the present volume of trade, but not for the future. - 25 - Recommendations Improving the quality and reliability of the main export corridors should be a top priority in Costa Rican infrastructure policy, to make the country's products more competitive internationally. In the transport sector top priority should be given to improvements in the ports, especially to reduce congestion and rationalize operations. To support nontraditional exports, improved airport facilities also deserve priority. In both of these areas, options to upgrade and expand existing facilities should be given serious consideration as an alternative to building new ones, given the fiscal constraints. For banana exports especially, the road infrastructure is very important and has suffered greatly from recent natural disasters. Rehabilitation and maintenance should be emphasized over new construction, as the road system will be basically adequate for the needs after repairs are completed. An assessment of the potential role of rail services should be undertaken, followed by appropriate investments or divestiture. With few exceptions, government policies and legislation in Costa Rica have prevented private domestic and foreign companies from investing in or operating trade infrastructure or facilities. These policies need to change quickly, to encourage economic efficiency by promoting competition and to take advantage of private sector interest in developing and operating commercial infrastructure activities. This would allow important investments to be carried out by the private sector, even in a period of declining availability of public sector investment funds. Specific recommendations are presented below. Airport * Build cold storage facilities at Jose Santamaria and Alajuela airports. Private firms should be allowed to invest in the facilities and to operate them. - 26 - * Review and analyze the plans for Orotina airport carefully, comparing the costs and benefits with the alternative of expanding and modernizing Santamaria airport. * Introduce legal reforms allowing airport services to be concessioned to the private sector. * Acquire x-ray equipment for security screening of shipments. Ports Because most exports are moved through the port of LimonlMoin, most of the problems appear to be concentrated there. Modernization of port facilities would lead to better use of existing infrastructure, personnel, and equipment and improved handling of exports now and in the future. Efficiency improvements in operations and management are essential for reducing port costs to users and delaying the need for capacity expansion in the short to medium term. Specifically, the following measures are important: * Revise the Ministry of Transport's master plan for investment in Limnon (1989) and Calderas (1986), to accommodate new traffic growth projections deriving from renewed support for trade liberalization. * Reconsider carefully the idea of building a new port. There is considerable potential for improving Limon/Moin, and doing so would probably cost much less than constructing a new port complex. Projected traffic, improvements at Limon/Moin, and institutional arrangements should all be carefully analyzed. * Increase the efficiency of port operations by rationalizing the size and functions of crews, providing training in administration and operation, and improving information systems. * In the short term, allow JAPDEVA to transfer redundant personnel from development activities to understaffed port operations. This move should significantly reduce the cost of overtime payments. - 27 - * In the medium term, establish a single port authority with responsibility for the regulatory environment, coordination of public functions (drug traffic control, customs, immigration), and major investment decisions. The authority would coordinate the work of the port operators, which could be private firms operating on a concessionary basis. JAPDEVA and INCOP would compete for the concessions on the same terms as private firms and would eventually be privatized. Development responsibilities could be handled by a separate government agency. * Award stevedoring contracts in open competition. Stevedoring companies should also be required to supply and maintain their own equipment. * Increase the physical capacity of the port. Banana exporters would like a 250 metric ton expansion in the Moin port, the equivalent of about four new berths. That much expansion would not be necessary if operational efficiency were improved, as suggested above, and some facilities were rehabilitated. The following relatively inexpensive improvements could add the equivalent of three new berths in Limon and Moin: * Demolish the metal wharf and install a Roll on-Roll off ramp in its place. * Install an additional gantry crane in the German wharf once the metal wharf has been demolished. * Expand the banana wharf at Moin by 55 metric tons, so that a total of three berths would be available for banana exports. The estimated cost of the expansion would be US$4.0 million and would be financed by the new revenue from the tax on banana exports. * Acquire a mono-buoy, a single-mooring floatation device anchored offshore, with connecting pipelines to the berth. A mono-buoy enables oil tankers to anchor away from the dock, freeing additional space for other vessels. This is a relatively inexpensive alternative for unloading oil products. - 28 - * Find ways to accommodate the growing passenger traffic at ports without displacing merchandise traffic. * Acquire additional support equipment and freight elevators for bulk handling in existing and new berths. The equipment could be financed and operated by the private sector. Sufficient extra capacity should be added to allow for routine maintenance without disrupting operations. * Improve equipment and facility maintenance. Customs * Simplify and speed up customs warehouse release procedures. * Set up new, strategically located customs control stations to improve customs operations. Consider locating stations inside large importing plants, following an arrangement similar to that at the Free Trade Zones. This could be introduced on a voluntary basis for firms willing to pay the cost of the customs facility. * Establish a plan for integrating the country into the global information network by gradually introducing electronic data interchange (EDI) systems. The process would involve developing information systems and integrating data bases and communication capabilities. * Train personnel at all levels-managerial, technical/operational, and clerical. * Encourage importers to introduce better packaging, use unified transportation (e.g., containers), and improve communications (use EDI systems). Roads * Construct ditches to the Matena, Pacuare, and Reventazon rivers as a preventive measure to avoid future flooding and destruction of roads. - 29 - Chapter 3. Institutional Support for Nontraditional Exports Three organizations are active in promoting nontraditional exports and investment in Costa Rica: the Costa Rican Coalition for Development Initiatives (CINDE), the Center for the Promotion of Exports and Investments (CENPRO), and the export development fund (FUNDEX). Other Costa Rican organizations are also involved in international trade, but they have different types of functions-regulatory (the Corporation on Free Trade Zones), lobbying (various chambers and associations), or technical assistance to producers. This chapter describes the activities of the three principal organizations and evaluates their effectiveness. Close attention is given to issues of special concern to international donors, whose assistance is being sought to fund FUNDEX and, through it, CINDE and CENPRO. The Costa Rican Coalition for Development Initiatives-CINDE CINDE was established in 1982 as a private sector alternative to the government investment and trade promotion programs run through CENPRO. Costa Rican businesses, suffering the effects of a weak economy and the decline of the Central American Common Market, believed that a private sector organization could do a better job of promoting trade and investment than CENPRO. The hope was that CINDE, as a private sector organization, could avoid the problems that plagued CENPRO and most other government-run trade promotion organizations-undue political influence and interference, excessive red tape, and an inability to attract high quality staff. CINDE's activities CINDE's activities began with the Progran for Exports and Investments and then expanded to include the Private Agricultural and Agribusiness Council (cAAP), the Human Resources and Training - 31 - Program (PROCAP), and more recently, a pilot Industrial Development program. These activities were funded as separate projects by the U.S. Agency for International Development (USAID), CINDE'S main source of funding. The programs functioned as separate projects under a central CINDE management group; a recent reorganization established three divisions incorporating the previously separate programs. CINDE also engages in lobbying activities to influence public policy and practices. Along these lines, it is currently preparing a comprehensive report on export development, which it intends to publicize broadly. CINDE also applies the lessons of its practical experience with the problems encountered by Costa Rican enterprises to promote simplification and efficiency-boosting reform of trade and investment procedures and regulations. The Marketing Division focuses on investment promotion activities. It is the largest division of CINDE, accounting for $5.5 million in 1990, or almost half of CINDE'S $11.27 million budget.9 CINDE began to emphasize investment promotion after its initial broad approach-export and investment promotion, general lobbying, and studies-proved ineffective. As an earlier review of CINDE had pointed out: "In world markets, the Costa Rican economy is relatively weak. Consequently, resources spent on export promotion were insufficient given the relative weakness of the local productive structure. Resources allocated to investment promotion were meager and based incorrectly on the assumption that foreign investors already knew about Costa Rica.""' With the assistance of the Industrial Development Authority of Ireland, CINDE completely restructured its programs in 1985. Since domestic firms were not yet ready to compete in export markets, a new foreign investment promotion program sought instead to identify and contact 9.Budget figures are from a draft internal USAID memomndum dated July 18, 1991. 1O.Louis Berger International, 'Promoting Trade and Investment in Constrained Environments- AID Experience in Latin America and the Caribbean,' AID Evaluation Special Study, No.69 (Washington, D.C.: USAID, May 1990). - 32 - individual foreign companies that might be interested in investing in Costa Rica. The results were quick and positive. A USAID evaluation noted that the "project demonstrates the effectiveness of developing a targeted investment package. From the third year of the project, managers effectively reformulated their strategy to better match project promotional efforts with the competitive advantages resulting from changes in the policy and productive structure environment." I The investment promotion program relies on aggressive and personal selling techniques made effective by a high-quality staff attracted by a competitive salary and benefits package with built-in performance incentives. Foreign companies are carefully selected in sectors in which Costa Rica is believed to have a comparative advantage. The companies are then contacted by foreign-based promoters who are part of a network of foreign offices set up for this purpose in the United States, Europe, and Asia. Using a CINDE database on the investment climate in Costa Rica, the promoters are able to offer prospective investors detailed information about their industry's position in Costa Rica. Prospective investors are also encouraged to visit Costa Rica and to meet with other foreign investors in the same industry. Once a company decides to invest, the after-sales support unit provides continued support to the investor, from helping the company decide on an investment site to guiding it through the government bureaucracy or helping it recruit employees. The Marketing Division also participates in trade fairs, promotes export contracts, and provides marketing assistance to Costa Rican companies. It also handles overseas activities for the other divisions, particularly for the Industrial Division, helping it to find buyers or partners for the companies it is assisting. Some problems are reported in this area, however, because incentives for the overseas promoters are structured to reward work on investment promotion activities more than other activities. 11.Louis Berger International, 'Promoting Trade and Investment in Constrained Environments: AID Experience in Latin America and the Caribbean," AID Evaluation Special Study No.69 (Washington, D.C.: USAD, May 1990). - 33 - The investment promotion program has received favorable reviews from independent evaluators (sponsored by usAID) and is praised by foreign companies that have used its services and by local Costa Rican entities. A manager of a group that owns two free trade zones stated unequivocally that the trade zones would not have existed without CINDE'S involvement and that 90 percent of investments in the zones were generated by CINDE. The group has agreed to pay CINDE a fee on all future investment in the free trade zones, whether generated by CINDE or not. The investment promotion program appears to be quite successful. The Marketing Division reports an average of more than two hundred site visits a year by foreign investors, with the average nearing three hundred visits in recent years. In 1990 the division made more than a thousand first-time presentations, 27 percent to agriculture-related companies, 19 percent to electronics firms, and 13 percent to apparel firms. Current efforts focus on attracting investment in higher value added apparel industries. Table 3.1 CINDE'S investment promotion results, 1986-90 Category 1986 1987 2988 1989 1990 TOta No. of projects 20 22 55 78 176 351 No. of jobs 3,739 3,721 8,420 9,709 10,177 35,766 Expons (Smil) 29.53 28.06 59.87 121.38 107.99 346.83 Investment (Smil) 17.59 27.15 65.97 58.38 82.64 251.73 Source: Shicl's report (fn.4) The division claims investment results totaling about $250 million over 1986-90, leading to the creation of about 35,766 jobs and exports of $346.83 million (table 3.1). For the first half of 1991, it reports $100 million in investments, 5,810 jobs, and exports of $148 million. Some reports on the CINDE program present different figures, however. For example, a June 1991 report calculates investments of $81 million (compared with division estimates of $82.6 million), 6,941 jobs (compared - 34 - with 10,177), and exports of $84 million (compared with $108 million).12 Most such discrepancies are small, however, and could reflect later refinements of early, rough estimates. There, is however, a more fundamental problem with the numbers. In evaluating the results of an investment promotion program, two measurement issues are particularly problematic. One is whether the investment promotion organization is actually responsible for generating the number of investments it claims (attribution). The other is whether the results reported for these investments are accurate. Both efforts to convince companies to invest in Costa Rica and efforts to help them accomplish their investment objectives can be considered when examining attribution. Price Waterhouse, in a USAID-sponsored assessment of CINDE, judged its efforts to have had a strong influence on foreign investors' decisions to invest in Costa Rica.13 The study found that CINDE could be credited with 80 percent of the investments for which it claimed responsibility. Since that study, CINDE has introduced more formal procedures for documenting its role in bringing in foreign investors. The second issue-whether the results claimed for each investment are accurate-needs to be carefully addressed. CINDE reports as results the figures established by the investing company as targets for the first two years after its initial investment. An internal audit report for CINDE suggests that actual results are typically lower than target levels of investment, exports, and employment. For example, CINDE claimed responsibility for investments of $66 million in 1988. As of the second quarter of 1991, however, actual investment totaled only $35 million, or 55 percent of the reported amount. While some of that investment gap may be reduced in later periods, this cannot be assumed. It seems, then, that there is an optimistic bias in CINDE's reporting system. 12.Report of Tony Shiels, a CINDE consultant, June 20, 1991. 13 .Price Waterhouse, *USAID Cosa Rica CINDE Investment Promotion Program Attribution Analysis,' (Washington, D.C.: USAID October 1990). - 35 - The auditor's report also indicates another potential source of bias. Of the claimed number of jobs generated in the first half of 1991, 2,500 are to come from an investment in a high technology park by a U.S. company. This number apparently refers to the employment level that will be reached when companies invest in the newly established park. If CINDE is claiming full credit for this investment, as it apparently is, then it would be double counting if it later takes credit for any of the individual company's subsequent investments. This is a potential problem that CINDE should take care to avoid. The division has made significant efforts to increase cost recovery. It expects to recover 15 percent of total costs in 1991, and forecasts that this will increase to 35-40 percent in the next three years.14 CINDE'S fees include a percentage (now 3 percent) of the cost of buildings purchased by foreign investors that it brought to the free trade zones. (The fee is paid by owners of the free trade zones.) For investments made outside the free trade zones, CINDE is seeking to impose a fee on the sale of property to the investor. These are commendable efforts, considering that it is normally difficult to generate fees for investment promotion activity. CINDE is also seeking to charge for other services it provides to investors, such as filing legal documents or undertaking feasibility studies. The division has also charged fees for preparing itineraries for visits to the United States and for services rendered to the Costa Rican Tourist Board, primarily rental fees for CINDE office space in the United States. The division also charges for advisory services to foreign governments on investment promotion activities and for foreign market studies on behalf of Costa Rican companies. In sum, then, CINDE'S investment promotion activities are generally well regarded. Still to be considered, however, is the longer term, and what CINDE should do about its investment promotion activities once investors become sufficiently aware of Costa Rica's investment potential that a 14.Cost recovery estimates were provided during interviews with the numagers of each of the divisions. - 36 - proactive program is no longer required. Having a strong monitoring system in place will help CINDE identify when that time has come. The Agricultural Division promotes nontraditional agricultural crops for exports. In 1990 it received $2.4 million, a 21 percent share of CINDE'S budget. The division grew out of the Private Agricultural and Agribusiness Council (CAAP), formed as a separate subdivision within CINDE in 1986 with USAID funding. The program was created in response to declining agricultural exports in the early 1980s and the belief that the government was not able to meet the sector's needs. Its original goals were to analyze and promote the reform of agricultural policies and institutions, to identify and provide technical support for new export opportunities, and to offer direct marketing support. To avoid duplicating the activities of CENPRO's agricultural division (including its office in Miami), the two organizations agreed in early 1989 to merge their agricultural promotion activities within CINDE. The division systematically identifies and promotes new crops for which Costa Rica has a competitive advantage, based on agricultural and economic conditions, market potential, and balance of payments effects. A technical assistance package is developed for promising crops, and a few local producers are encouraged to plant those crop so that agronomic studies can be conducted. When the results are in, producers are encouraged to grow the crops that have done well, and CINDE provides assistance in production, handling, packaging, marketing, and pricing. In effect, CINDE acts as a local investment promotion agency, providing extension services as an incentive for investing. - 37 - According to the Agricultural Division and USAID, CINDE can take credit for the following export crops: Asparagus 80 percent of total exports Strawberry 80 percent of total exports Melon 50 percent of annual growth Broccoli 80 percent of total exports Cacao 10 percent of processed exports Hot chilies 34 percent of toatl exports Tomatoes for processing 80 percent of foreign exchange savings Pepper 60 percent of total exports Plants 20 percent of total exports Flowers 20 percent of total exports The division claimed that in 1990 its efforts resulted in the planting of 3,796 hectares, exports of $33.2 million, and local investment of $9.4 million. Results in 1989 were 2,611 hectares planted, exports of $18.7 million, and new investment of $5.9 million. The division is also developing information services on-world markets for specific crops. For example, it now provides a report on the asparagus market covering demand, pricing, and information on U.S. regulatory issues and key international events. It also provides reports on potential buyers in the United States, using a variety of sources to obtain key background information on U.S. companies. In addition, the Miami office provides inspection services for containers shipped from Costa Rica to the Port of Miami, to verify importers' claims about the quality and grade of the shipped goods. The division is planning a new quality assurance program that would include training in phytosanitation and the establishment of a testing laboratory, a quality certification program, and a pesticide management program. The program would increase the marketability and price of exports of participating Costa Rican firms by assuring importers that exports meet quality and pesticide residue - 38 - standards. Program costs of $3 million are being funded by USAID ($2 million), CINDE, and Spain. The program is expected to recover costs and eventually to become self-sufficient. The division has also assisted the Costa Rican government and producers to simplify procedures and strengthen infrastructure for agricultural exports. These efforts have resulted in improvements in the air cargo terminal infrastructure and administration at Costa Rica's principal airport, and a program to help exporters prevent illegal drugs from infiltrating their shipments. (This function is now handled through the general manager's office, with input provided by the Agricultural Division.) In the past, USAID monitored the program closely, but its last formal evaluation was completed in May 1988. More systematic evaluation of the program, especially for the attribution and quantification of results, will be needed in the future. The Agricultural Division has begun a cost recovery program and anticipates that 20 percent of its budget will be recovered this year, increasing to 40 percent over the next few years. Cost recovery much beyond this level is not expected since much of the division's work is developmental, with a strong public goods component (research on crops and encouragement of investment), and the gains are not appropriable by individuals. Costs are being recovered-or soon will be-through charges for the following activities: * Consulting assistance to individual producers. * Feasibility studies for international institutions, local companies, and foreign govermnents (for example, the government of Ecuador and the European Community). * Information services, such as individual crop reports and investigations of potential buyers. * Services under the quality assurance program. The Industrial Division consists of two programs directed at improving the exporting capabilities of Costa Rican industry: the Human Resources and Training Program (PRocAP) and the newer Industrial - 39 - Development Program. The division received $2.0 million in 1990, which it split evenly between the two programs, or approximately 18 percent of CINDE's budget. The training program was established in 1984 to strengthen the management capabilities of Costa Rican industry, to better meet the needs of foreign firms investing in Costa Rica and Costa Rican firms seeking to export. The program has provided courses for approximately 14,000 participants, primarily mid- and upper-level managers. The largest of its subprograms, organized by industry, provides training to Costa Rican managers. Seven hundred courses were offered during 1985-90, and about 1,500 participants attended seminars and courses in the first half of 1991. Other subprograms provide short-term training and long-term advanced degree training abroad. A USAID evaluation found the courses to be of high quality, with a high level of satisfaction among participants. Recently, the training program has worked at lowering its costs, achieving a 40 percent reduction in 1990 over 1989, and increasing cost recovery from 10 percent in 1989 to 63 percent in 1990 and 91 percent in the first half of 1991. The high level of cost recovery implies a strong vote of confidence by training program users in the Costa Rican private sector. The Industrial Development Program was established in 1989 as a 30-month experimental program to provide comprehensive technical assistance to companies in industries identified as having strong export potential. The assistance is provided as an integrated package of diagnostic, technical, and marketing assistance to help Costa Rican producers make the shift to exports. The program is designed to target specific sectors in which Costa Rica appears to have a comparative advantage and to develop and implement assistance programs for companies in those sectors. The first targeted sectors were apparel, metalmechanics, and electronics (subsequently dropped). Companies were identified in each of these sectors, and a U.S. organization was contracted to conduct market studies of niche products. The research was used to identify potential buyers, who were then contacted about doing business with the Costa Rican firms. - 40 - Firms receiving technical assistance through the program sign a contract agreeing to pay CINDE between 1 and 5 percent of the value of exports generated for two or sometimes three years after the assistance ends. A detailed work plan of assistance is developed for each case. For example, the program diagnosed excess capacity among a group of bicycle manufacturers in Costa Rica, advised them on shifting some of their production to physical fitness equipment, and identified potential buyers in the United States. To complement the detailed integrated assistance program, a General Trade Promotion program was established to provide marketing support to companies that required little or no technical assistance. The program identifies and contacts potential foreign buyers, primarily in the United States, and directs companies seeking information on potential sources of supply to appropriate Costa Rican firms. A USAID-sponsored review of the program completed in August 1991 found the program to be well conceived and implemented overall, but suggested several ways to improve its activities. The reviewers calculated that twenty-three company-specific work plans had been prepared under the integrated assistance program for targeted sectors. It concluded that of $11 million in export contracts, $2.8 million in exports had actually been shipped and another $3.3 million was expected to be shipped, a finding that suggests that CINDE needs to be careful about using contracts as the measure of the results of its activities."5 The review concluded that the General Trade Program had generated exports of $29 million over the 2.5-year life of the project, with $20 million having been shipped at the time of the evaluation. The Industrial Development program is expected to have a cost recovery rate of 15 percent for 1991, rising eventually to 25 percent. Assuming that the Human Resources and Training program 15.Discrepancies between orders and deliveries arise for various rasons. The supplier may be unable to deliver because of quality. production, or managcment constraints. In one case a major order by a U.S. company was canceled because of the buyer's financial problems. - 41 - achieves full cost recovery, the Industrial Division as a whole could eventually achieve a 50 percent cost recovery rate. Key organizational issues Overall success. CINDE seems to have made a significant contribution to the development of nontraditional exports in Costa Rica, particularly through investment promotion. For the most part, it has approached its programs systematically and comprehensively, addressing a wide range of issues affecting trade and investment, including promotional, marketing, regulatory, technological, and public policy issues. CINDE seems to have avoided many of the problems associated with goverment- run trade promotion organizations in other countries, an achievement largely attributable to its private status. Recent research concludes that govermment-run trade promotion organizations are typically not very effective (box 3.1 compares the characteristics of unsuccessful government-run organizations with those of CINDE). These conclusions are corroborated by other research on the characteristics of successful trade promotion organizations (box 3.1). Growh and efficiency. CINDE seems to have grown excessively-admittedly a somewhat subjective judgment-and to some extent to have used its resources inefficiently in response to the ample availability of usAm funding. Staff increased from 94 in 1987 to 275 in early 1991.16 Salaries are in the upper range for the private sector, which has elicited some criticism, although CINDE believes such salaries to be necessary to attract high-quality people. The high salaries may be acceptable as long as individual performance standards are results-oriented and comparably high and CINDE does not absorb too large a share of the private sector's limited business talent. And, indeed, CINDE'S private status, which means it is not overly constrained in its hiring and firing practices, and its results- 16.Significantly, criticism of cDNDE has tended to be about these issues and not about the usefulness of the organization's programs. Even the most critical of those interviewed about CINDE believe that the organization serves an important function-usually identified as investment promotion, CaNDE's best-known progrm-and ought to continue to operate. - 42 - Box 3.1 Characteristics of successful trade promotion organizations * They enjoy a substantial degree of autonomyfrom government. While most organizations are public, they are not usually set up as a unit of a larger government ministry. Instead, they are independent entities, often headed by boards of directors. In some cases, as in Taiwan and Hong Kong, their autonomy is safeguarded through budgetary arangements that bypass requirements for yearly government appropriations and authorization. * They are not monopoly suppliers of exporn-related services and information. Instead, they compete with other public and private sector organizations that provide similar types of services, such as trade and industry associations, chambers of commerce, private consultants, accountants, banks, and lawyers. * They incorporate official mechanisms to ensure strong private sector involvement, especially in program design. Most often these mechanisms take the form of requirements for private sector membership on the board of directors or on special advisory committees. The official involvement of the private sector ensures that programs are relevant to the needs of exporters and that good communication channels are established between the providers and users of the services. * They have some ability to focus resources for in-depth research and promotional activities in targeted industry areas that show high potentialforfurther development of exports. * They make effective use of grant and financing programs to support and encourage export activities. * 7hey establish some framework to enable at leasrt selected fihms to obtain individual, in-depth services. Firms are either actively selected based on criteria defined by the organization or self-selected as a result of much higher charges associated with these services. Source: Steven Grmubart and Elizabeth Dc Vega, IPAC, Inc. Conclusions of dRft document, based on several years of primary and secondary rmsearch on tade promotion organizations for the period ending in 1989. oriented standards seem to serve as a safeguard against the danger that unqualified personnel, unable to receive comparable salaries outside of CIDE, could establish themselves in the organization. As usAm funding has diminished, CJNDE has taken several steps to improve its efficiency. Most significant have been efforts to reduce expenses and to recover costs. C[NDE's budget for 1991 is expected to be $8.4 million, a drop from its $11.27 million budget in 1990 (see table 3.2). Staff size has dropped to 230 people and is expected to drop even more before the end of 1991.17 17.As of August 7, 1991, the Marketing Division had 62 enployees, the Agriculural Division 54, and the Industrial Division 30, excluding administraivc employces. - 43 - The use of outside contractors who work full time with CINDE has been almost completely curtailed. The New York and Chicago offices have been closed, and promoters now work out of their homes. Other costs have been cut as well, and approval procedures for purchases and travel have been tightened. CINDE'S recent reorganization into divisions encourages it to view itself as a private organization rather than as a series of unconnected publicly funded programs. Employment grades and job descriptions are being standardized, and job titles and responsibilities have been made more uniform. Each division develops a yearly business plan that establishes precise goals for the coming year. CINDE claims that results have not suffered because of the cuts in staff, and that goals are, if anything, higher than before. While results for the first half of 1991 are positive, they reflect to some extent previous-year activities-activities that occurred before the staff reductions. Employee morale is reported to be low as a result of the firings and layoffs and the strong management style. There is some concern that this environment could lead to problems in the longer term if staff become unwilling to express ideas or if key staff decide to leave. Table 3.2 CINDE's Budget for 1985-91 (millions of dollars) DiWvsin 1985 1986 1987 1988 1989 1990 19914 Marketing 2.40 2.40 3.50 3.57 5.50" 2.19 Agriculture 0.38 0.61 0.64 2.87 2.40 1.04 Industrial 0.47 0.59 1.60 1.50 2.00 0.76 Other programs 4.70 1.80 0.17 0.25 0.88 0.47 0.14 Administration 1.12 0.46 0.64 0.54 0.72 0.90 0.27 Total 5.82 5.51 4.41 6.53 9.54 11.27 4.40 a. Six months cnding June 30. b. Increase from 1989 caused by switch to Marketing Division structure. Source: CINDE Governing structures. CINDE has a 10-member board of directors and an assembly of 76 associates; each of the three divisions also has an advisory council. Members of these groups are all from the private sector. There is some feeling that these organizations are not providing adequate guidance, that the board has not challenged CINDE management sufficiently, and that the assembly and advisory councils have not taken an active interest in CINDE's activities. Ways need to be found to improve these governing organizations, to ensure that the private sector has an active voice in CINDE's affairs. One suggestion is to invite former managers of CINDE to participate in the advisory councils, since they have detailed knowledge of the programs and could offer guidance based on their direct experience. Cost recovery CINDE has worked aggressively to find ways to recover costs for its programs and services. Based on results to date and projections provided by each division, cost recovery is expected to cover 12-15 percent of the 1991 budget. CNDE projects this will rise to 17-20 percent by 1992 and to 35-50 percent by 1996. By comparison, charges for services covered 63 percent of the cost of similar organizations in Switzerland, 40 percent in Finland, 33 percent in Sweden, 20 percent in France, and 17 percent in Norway. Unlike CINDE, however, which has an investmnent promotion component, these organizations focus primarily on trade promotion. The following are among services for which commissions or other charges are applied: * The sale of buildings to investors in free trade zones. v Information services (such as U.S. market reports on specific vegetables). * Technical assistance to specific companies (the Agricultural Division charges for these services on an hourly basis; the Industrial Division assesses a 'success fee' based on the value of exports generated). - 45 - * Training activities (seminars and classes). * Consulting services to private and public entities (such as U.S. market research on behalf of a number of companies, and assistance to the Costa Rican Mining Association in the drafting of a new mining law). * Other firm-specific services, such as container inspection of agricultural goods shipped into Miami, services to the Tourism Institute provided by CINDE'S overseas offices, and the proposed agricultural laboratory and quality control services. Each division appears to be developing its own schemes for recovering costs. A method for apportioning overhead costs on shared facilities will need to be developed soon. CINDE also needs to ensure that fees are based on the true cost of providing a service, even in cases where full cost recovery is not feasible. Efforts to pursue cost recovery need to continue, both for financial reasons and to impose market discipline on the organization and its clients. CINDE seems to view cost recovery primarily as a way of financing its programs; it needs to begin to view cost recovery as a way of measuring demand for services as well, helping it to offer appropriate services and to use its resources efficiently. Charging for services also helps to weed out those who would not make the best use of its services and encourages CINDE staff to continue to provide high-quality services. Certain of CINDE'S services have strong externalities, and for these quasi-public goods, less cost recovery should be required. Investment promotion and basic agricultural research are good examples. But the more a service benefits an individual firm or firms, the higher should be the percentage of cost recovery. And services for which there are private sector competitors should be offered at market prices or not at all. CINDE must take care not to discourage the development of private sector providers of services. -46 - For several reasons, CINDE may need to reconsider its sale of investment promotion and agricultural export services to foreign countries. First, private sector organizations in Costa Rica and other countries also provide this service, raising the issue of whether cINDE has an unfair competitive advantage since, unless it is fully recovering total cost (including overhead), it is in essence receiving a subsidy for these services. Second, the market for development consulting services is very competitive, and profits are small. Finally, its mission is to promote Costa Rican exports, not those of potential competitors, and resources devoted to foreign producers are diverted from local producers. As CINDE gains experience in cost recovery, it needs to reassess its fee structure and determine optimal fees for its services. On its export assistance activities, CINDE charges both an hourly consulting fee and a commission. Because of the difficulty of developing new exporters and CINDE'S low commission rate (1-5 percent of sales), commissions may not be an appropriate way to charge for its services-an issue that can be decided only through a study of the relative effectiveness of commissions and hourly or daily fees. It is nevertheless clear, however, that a time-based fee structure offers some advantages. Charging an hourly fee forces clients to bear some of the risk that exports will not materialize, thus filtering out uncommitted users of the service. With commissions based on results, CINDE effectively assumes all risks, even those that are clearly beyond its control and within the client's control. Costa Rican companies are, however, unaccustomed to paying for consulting services, so setting fees too high will discourage use of the services. As the economy becomes more export-oriented and exporters more experienced, the charges should be increased. CNDE'S fiSure One of CINDE's strengths-and one that it should be encouraged to maintain-is its flexibility in responding to the changing needs of the Costa Rican economy. In the beginning CINDE focused on investment promotion, realizing that trying to push export promotion activities too soon would be - 47 - counterproductive if it meant that producers would be unable to deliver on their promises and satisfy buyers. As time passed, however, CINDE refocused its investment promotion activities on higher value added investments and nonapparel companies, and on export promotion. Only recently has it begun to offer technical assistance to industrial companies. As the antiexport bias of the economy decreases and Costa Rican firms gain more export experience, they will need less technical assistance, eventually requiring only information on markets and buyers. CINDE will again need to adjust its services, perhaps by becoming a simple trade facilitator, offering trade leads to firms, as in the case of export promotion agencies in Hong Kong and elsewhere where local companies have considerable export expertise.8 CINDE also needs to periodically reassess its overall role in investment promotion. The time may come when investment opportunities in Costa Rica are well enough known that CINDE will no longer need to assume an active promotion role. So that it will be able to recognize that this time is approaching, CINDE will need to carefully monitor its investment promotion results (especially in the area of attribution). Finally, CINDE needs to be sensitive to any anticompetitive side effects of its activities. As it continues to provide assistance to individual firms, it must take care not to discourage the development of a competitive market for these services in Costa Rica. As is discussed below in the section on FUNDEX, one solution would be to establish a grant scheme that would allow companies to choose service providers, with CINDE just one among several possible providers. 18.Many export promotion agencies offer a wide range of information services in addition to providing various types of trade leads or matchmaking services. These other roles may not be appropriate in an economy where cxportern ar maturm. For example, the work of the Hong Kong Trade Development Council emphasizes providing the names of Hong Kong suppliers to foreign companies secking to do business in Hong Kong. -48 - The Center for the Promotion of Exports and Investments-CENPRO CENPRO, created by a law of Congress in 1968, is the government export and investment promotion agency. It is an autonomous agency functioning as a technical branch of the Ministry of Foreign Trade. Originally, CENPRO engaged in a broad range of activities, even establishing promotion offices abroad. After the economic crises of the early 1980s and the establishment of CINDE, however, CENPRO substantially reduced its activities, finally focusing mainly on export promotion and administration of export regulations, in particular the export contracts (chapter 4). CENPRO also coordinates its activities with those of local and international organizations, including Costa Rican foreign commercial officers and foreign embassies located in Costa Rica. CENPRO'S greatest contribution to exporters has been the development and management of the "single window," a one-stop export documentation center. The first center opened in San Jose in June 1988, followed by one at the main airport in May 1989 and others in the ports of Limon and Caldera. The centers have greatly simplified exporting by enabling the required documentation to be processed in minutes or hours rather than days. A major achievement was the introduction of the single export form in June 1989, which combines in one document the several forms and documents required for exporting. This service generates significant revenue for CENPRO, while also providing it with up-to-date statistics on exports. CENPRO also monitors export contracts, for which it recently introduced simplified procedures. It has approved and monitors over 1,300 export contracts. Exporters noted in interviews that CENPRO's efforts have considerably reduced delays and red tape. Trade fairs organized by CENPRO have reportedly generated substantial sales for Costa Rican companies. In 1990 CENPRO participated in fifteen trade fairs in the United States, Canada, Europe, and Japan. In total, 143 companies participated in these shows, with participation ranging from 3 firms in the Pacific food show in Vancouver to 41 for a commercial mission to Mexico. The shows generated $23 million in sales contracts, with the potential for an additional $20 million in the -49 - following year. To measure the actual results of these activities, CENPRO will need to follow up on the contracts to determine how many orders were actually placed. CENPRO recovers part of the costs of running this program by charging participating firms. CENPRO also provides information services, including accessing international data bases. While CENPRO receives numerous requests for information (over a thousand a month according to one source), not all of them come from Costa Rican firms-many come from students and other researchers and foreign government officials. CENPRO should continue to provide these services only if it can fully recover its costs-the only real measure of true demand. CENPRO also collects and distributes information on exports through its role as administrator of export contracts. It would be useful to set up a unit somewhere in the government to monitor the overall progress and results of trade policy reform, and CENPRO'S role in statistical collection would make it a logical choice for this function. Of CENPRO'S budget of about $2 million a year, $150,000 comes from charges for services and $750,000 from the central government budget. The remainder is financed by colones generated in connection with usAn balance of payments assistance to Costa Rica.19 Following CENPRO's reorganization in recent years, senior management began looking for ways to improve the organization's effectiveness. Two issues should be given consideration in that effort: the role of the private sector in the administration of CENPRO and the scope of CENPRO's activities. About 60 percent of CENPRO's board members are from the public sector, and 40 percent from the private sector. Its current director general has private sector experience. If CENPRo'S primary functions continue to be regulatory, then increasing the number of private sector members on the board might usefully broaden exporter representation and yield valuable insights from those directly burdened by the regulations. But since these are likely to be large exporters, CENPRO may also need to actively 19.Based on information in a draft document prepared by FUNDEX. - 50 - seek input from potential or part-time exporters on how procedures can be simplified enough so they can avail themselves of duty exemptions for their exports. CENPRO'S management has demonstrated an interest in expanding its activities. It is clear that CENPRO has played an important role by using its regulatory function to simplify trade and investment activities. It should continue to do so and to look for new ways to streamline procedures. (Some suggestions are in chapter 4.) A strong case does not seem to exist, however, for CENPRO to expand its promotion activities beyond these areas. Export Development Fund-FUNDEX In October 1990 the government and Central Bank of Costa Rica and USAID signed an agreement to establish an export development fund (FUNDEX). Its function is to encourage, promote, increase, and diversify Costa Rica's exports, principally its nontraditional exports. The Fund will finance activities tending directly or indirectly toward that purpose, including but not necessarily limited to the following: (a) attracting foreign export-oriented investment to Costa Rica; (b) encouraging tourism to Costa Rica; (c) stimulating other nontraditional activities which generate foreign exchange; (d) developing the human and technological resources needed to improve Costa Rica's international trade; (e) fostering improvement of the country's export-related infrastructure; and (f) supporting studies and conferences relevant to export and economic issues. In recognition of USAID'S diminishing involvement in Costa Rica in general and in the funding of Costa Rican export activities in particular, FUNDEX was created to serve as a vehicle for funding export promotion activities, including continued UsAID funding of CINDE. That function-separating - 51 - the technical export organizations from the financial resources funding them-is important because it establishes a system of checks and balances. And, by providing a conduit for funding that is outside the political system, FUNDEX will be able to buffer the programs and activities financed through it from inappropriate government influence or budgetary uncertainties. Through FUNDEX, CINDE and other programs will also be able to receive funding from multilateral sources as well as from USAID, thereby helping to ensure continued funding and bringing in new perspectives. FUNDEX will serve as a coordinating agency for channeling export promotion assistance into a range of activities. Donors will chose the type of programs to be funded, and FUNDEX will decide which organization is best qualified to undertake the program and to monitor the performance of the implementing organization. Initial contributions to the fund came from USAID (colones equivalent of $22.5 million) and the government of Costa Rica (298 million colones a year for twenty years, drawn from an interest spread on an export-oriented credit line in the central bank). FUNDEX has also held extensive discussions with the government of Taiwan. Assuming that Taiwan provides $10 million in funding in the near term (as seemed probable at the time of the mission to prepare this report), FUNDEX iS seeking additional support of $45-$55 million in grants or $65-$75 million in soft loans (cumulative to the year 2000; see table 3.3). This amount should allow FUNDEX to provide continued support to both CINDE and CENPRO if CINDE generates substantial resources of its own through cost recovery. FUNDEX'S annual contributions to export promotion activities and to its administrative budget will be financed by interest on its stock of funds. FUNDEX was set up as an autonomous agency, and its organizational structure, which incorporates a system of checks and balances, seems sound. To receive funding, programs must meet stringent criteria, as formally outlined in a manual (prepared by Price Waterhouse) that describes how recipients are evaluated and monitored. Before any disbursements are made, FUNDEX must receive - 52 - Table 3.3 FtNDEX's Budget, 1992-2000 (million dollars) ILem n1992 1993 1994 1995 1996 1997 1998 1999 2000 Expenditurc 8.8 9.2 9.7 10.2 10.7 11.2 11.8 12.4 13.0 Net cost to be funded 4.3 4.3 4.3 4.3 4.7 5.2 5.6 6.1 6.5 Net annual income required 1.9 2.2 2.1 2.0 2.3 2.7 3.0 3.4 3.7 Fund balance required (incremental to existing funds) 5% annual return 37 44 42 40 47 54 61 68 75 7% annual return 27 31 30 28 33 38 43 48 53 Source: FUNDEX written agreement from USAID that programs meet pre-award qualification standards. (CINDE iS exempt from this requirement for three years.) To receive continued funding, programs must produce results, so no organization has guaranteed access to the fund's resources over the long term. In general, FUNDEX will not be directly involved in implementing or contracting to provide export promotion activities, except for studies or conferences on Costa Rican export strategy. Spending on these activities, which can be initiated by FUNDEX or the government of Costa Rica, is not to exceed 2 percent of FuNDEx's annual earned income. FUNDEX is required to report twice yearly to the Costa Rican government and donors on its funding commitments, on the performance of programs relative to their targets, and on any irregularities or deficiencies uncovered in program audits. Also to be included is a summary of actions taken by the board of directors, and a copy of the FUNDEX'S financial statements for the period. Annual independent audits of FUNDEX and the programs it finances are to be conducted by public accounting firms. These audits must certify the accuracy of financial statements, compliance with the terms of the governing agreements, and the adequacy of the financial, administrative, and procurement systems. Donors may also conduct other reasonable audits or evaluations of FUNDEX and - 53 - the programs it finances. The agreement establishing FUNDEX calls for active USAID monitoring through 1994, after which USAID involvement will taper off. FUNDEX is to operate with a small staff and budget: an executive director assisted by a project analyst, a secretary, and an accountant, with administrative costs not to exceed $250,000 a year, although first year costs are expected to be lower. FUNDEX may hire consultants to help it evaluate program proposals. The current executive director and the members of FUNDEX's board of directors are leading experts in their fields; the five-member board includes a corporate lawyer, entrepreneur, banker, economist, and a senior executive of an international company. They are familiar with the Costa Rican business community, which will become an important advantage when entities other than CINDE and CENPRO seek funding from FUNDEX. The directors are independent of recipient agencies. The government of Costa Rica and the municipality in which FUNDEX is located each selected one board member; two others were selected by the legal founder of FUNDEX, who is also on the board. The government of Costa Rica and usAID concurred with theses selections. Membership on the board is on a rotating basis, with one member replaced each year. Since the remaining board members have a say in selecting replacements, future members of the board are likely to have the same stature in the business community and respect of the government as the current members. The board has full authority to select and oversee the operating agencies and may stop financing them if it decides that their programs are no longer technically or economically viable. That decision may be reversed only by agreement between the government and the donor organizations. FUNDEX'S first formal review is scheduled for after December 31, 1996. Six months before that, an evaluation is to be carried out, at which time the government of Costa Rica and donor agencies will decide whether to modify FUNDEX'S goals and objectives, change the terms of the agreement establishing FUNDEX, or dissolve FUNDEX, leaving only enough funds to satisfy existing commitments. - 54 - If the decision is made to continue FUNDEX, a second review will be conducted in four years, unless the government and donors decide otherwise. CINDE is to receive the largest share of funds through FUNDEX in 1991 (410.8 million colones), with the rest going to CENPRO through CINDE (19.7 million colones). Although there are good reasons for CINDE to receive the lion's share of funds, at least in the early years, it is important that FUNDEX maintain a separate identity and not be viewed simply as a financing vehicle for CINDE. There seems to be some division of opinion on this, however, with some people viewing FUNDEX primarily as a conduit for transferring funds to CINDE. The concept paper for FUNDEX stated that: We are proposing this Fund only because the programs which it will finance (principally CINDE's) are already in place, have already worked out most of their administrative and managerial bugs, and have in the main already demonstrated impressive results. Thus, it is CINDE'S systems and management capacity which will be the principal determinant of future success, rather than those of the Fund....20 While CINDE has demonstrated its effectiveness in some areas, it must be clear that funding will not be automatic-for CINDE or any other organization-but will depend on each program's continued effectiveness and the needs of the economy. Other programs should eventually be funded as well, whether to cover areas in which CINDE is not operating or is ineffective or simply to promote competition. As USAID'S involvement in funding, monitoring, and advising CIMDE diminishes, FUNDEX needs to move in smoothly and assume these functions. Its involvement is likely to be less intense than usAm's has been, however, since CINDE is now a more mature organization. Whereas USAID closely monitored CINDE's activities and continuously provided advice through long-term advisers, discussions with key CINDE officers, and periodic reviews of programs, FUNDEX may need to focus its attention 20.USAID, undated 'Export Fund: Project Paper-like Document,' p.25. -55 - more narrowly on results for the more mature programs, such as investment promotion, reserving its monitoring and advisory activities for newer programs. More generally, FUNDEX needs to monitor all recipient organizations to ensure that when funding levels rise, staff and administrative expenses do not increase to absorb the additional funds. In addition to basic fiscal reviews, FUNDEX should monitor organizations and programs through the following: * Measurement of program results. Careful analysis is needed to ensure that the reported results (user satisfaction, export, investment, and employment levels) are really attributable to the program and that the results were actually realized. As already mentioned, CINDE sometimes reports planned or contracted amounts as results. FUNDEX should institute periodic independent audits of CINDE'S results. * Cost recovery. Cost recovery, on both a program and individual service basis, should be included as a performance measure. If a program or service is not recovering its costs, the gap needs to be clearly accounted for. If the difference is not accounted for by public benefits that extend beyond the firms using the services, then funding to the program or service should be discontinued. * Periodic management and program evaluations. FUNDEX should periodically review the overall strategy and management of the organizations and programs it funds. For the near term, FUNDEX ought to evaluate CINDE'S investment promotion program (the program most affected by its staff reductions) and its agricultural program (which has not had a formal evaluation since 1988) and conduct an analysis of its organizational structure. Both individual programs and the contribution of CINDE and FUNDEX to the economy should be reevaluated every few years to ensure that their activities are compatible with the needs of the economy and that they are not discouraging private sector activity in export services. The danger of - 56 - stifling competition is not as important in investment promotion, since much of the benefit accrues to the economy as a whole rather than to individual firms, and having a sole provider reduces confusion for foreign investors and makes investment easier. Trade assistance to local companies is a different matter, however, since most of the benefits go to the clients, who can and should be charged for the service. Furthermore, export services are commercially available through international providers; if the environment is appropriate, such service providers will spring up locally as well. Competition in services should be encouraged, not inhibited. A danger exists that CINDE will remain the sole provider of trade assistance services. To avoid this, FUNDEX should take care that its policies do not discourage the use of other private sector providers of these services, whether domestic or international. As other programs are established and begin to seek funding, FUNDEX should consider setting up a grant scheme that would allow a firm to obtain services from the organization of is choice. FUNDEX would pay a percentage of the cost either directly to the provider or to the user of services. The size of the subsidy could vary by type of service according to its public goods characteristics or the degree to which the subsidy was needed to help new exporters. Such a scheme might encourage the development of local service providers, and it could gradually be phased out as the need for it wanes, with subsidies tapering off as the antiexport bias of the economy is reduced or as particular exporters become better established. In the long run, user demand should determine which services will be provided and in what manner. FUNDEX needs to keep in close touch with these users. To some degree this will occur automatically through cost recovery mechanisms and monitoring of results. FUNDEX might also want to consider periodic user surveys. But the most effective way of ensuring that exporters get the services they want is to develop a financing system that gives them the power to shop for the best quality and price of services. - 57 - Chapter 4. Nontraditional and Traditional Exports Historically, Costa Rica's exports have been dominated by bananas, beef, coffee, and sugar-the traditional exports-which still contribute around 50 percent of total export value and 90 percent of agricultural export value. Banana and coffee production experienced significant increases in productivity and exports expanded significantly in the 1980s. In recent years, however, as nontraditional exports have grown more rapidly, the relative importance of the traditionals has declined. This chapter reviews the performance of these two groups of exports and the policies that affect their performance. It identifies some reforms that may be needed to maintain dynamism in the growth of some exports and restore it to others. Nontraditional exports In 1972 Costa Rica passed the Law of Export Promotion establishing the first incentive structure to stimulate nontraditional exports for markets outside the Central American region, its aim being to reduce the economy's overdependence on only a few export commodities. The changes compensated only partially for some of the distortions of the old tariff regime and in 1984 the govermnent introduced export contracts to further offset the antiexport bias of its trade policies. Export contracts are now the government's principal instrument for promoting exports to extraregional markets. The other two are temporary admission (or maquila) and free trade zones, which have been in operation since 1981.21 The characteristics of these regimes are summarized in table 4.1. 21 .Export contracts were established by Law 6955 called LAw of Export Incentives. Maquilas or temporary admision was part of the Law 5162 called Law of Export Promotion. Finally free trade zones were established in Law 6695 of 1981 called the law of Export Processing Zones and Industrial Parks. Other incentive schemes have also been used to promote exports, such as preferential credit through FOPEX and FODEIN. - 59 - Costa Rican exports in the second half of the 1980s have become much more diversified through the development of many nontraditional exports. Some of the most important are textiles and garments, plastics, perfumes, precious metal items, shoe components, fishery products, flowers and ornamental plants, and fresh fruits (pineapples, melons, etc.) (Appendix 3). Nontraditional exports constituted approximately 42 percent of total exports in 1980 (table 4.2), but by the end of the eighties their share had risen to 55.7 percent. This performance reflects improvements in Costa Rica's competitiveness, the strong fiscal incentives given to the nontraditional export sector, and aggressive development efforts. The U.S. dollar value of nontraditional exports rose approximately 20 percent a year during 1987-89, with a peak annual growth of 24 percent in 1988. Growth was slow or negative in 1990, however, the result of macroeconomic disequilibrium in the economy and changes in the export incentive regime. The share of Costa Rica's nontraditional exports going to extraregional markets has also increased significantly. In 1986, 64 percent of nontraditional exports were sold to markets other than the Central American Common Market (CACM) and Panama; by 1989, this figure was 76 percent. Export incentive regimes have been designed to diversify exports not only in the type of goods, but also in their market destination. In the last decade exports of services such as tourism have become significant, with gross receipts rising from US$84 million in 1980 to US$205 million in 1989 (table 4.3) Tourism as a contributor to export earnings ranks just behind coffee and bananas. Much of the growth has been in 'ecotourism," which is a very high value-added activity, since it is estimated that each ecotourist spends an average of six times the amount spent by a package tour participant. Tourism has benefitted from some special incentives to increase the capacity and quality of its facilities, such as tax breaks for refurbishing and some duty exemptions on imported inputs. The challenge for the future is to maintain a steady rate of growth of nontraditional exports and more fully incorporate new sectors such as tourism in the export effort. - 60 - Table 4.1 Export incentives, by export regime item Expon contract Temporary admission Free zone Import duties on raw materials, Exemption proportional to 100 percent exemption 100 percent exemption components, and capita] goods extraregional exports Export taxes 100 percent exemption on 100 percent exemption 100 percent exemption cxports to extraregional on exports to markets extraregional markets Indirect taxes: consumption and Exemption proportional to 100 percent exemption 100 percent exemption sales extraregional exports Taxes on profits Exemption proportionas to 100 percent exemption 100 percent exemption at extraregional exports first; later 50%; then 0 Taxes on profit repatriation 15 percent tax 15 percent tax 100 percent exemption Management of foreign currency Through the central bank Through the central bank Independent Custom services Normal procedure Normal procedure Expedited on site CAT (tax credit rebate) For exports with more than Not applicable Not applicable' 35 percent of national content. CAT is a percentagn of fob extrare ional export value, depending on the national content, and decreases over time until 1996. Sales to the local market Allowed Allowed with previous Up to 40 percent of authorization of the products, with Consejo Nacional de authorization; taxed as Inversion; taxed as imports imports Time limitations All contracts expire in 5-year permit, Indefinite 1996 automatically renewed Market Local, Central AmeTican, Only extraregional Local, CenWal American and exuraregional markes markets and extraregional markets Exemptions on import duties for Exemption proportional to Not applicable 100 percent exemption vehicles extraregionid exports, only on selected vehicles trucks over two tons Source: Minisctrio de Comercio Exterior dt Costa Rica. 'Firms can also sign export contracts if they meet the conditions. - 61- Table 4.2 Composition of exports of goods (fob in millions of U.S. dollars) Tradinonal Nowra&n3onal Vala % in Towal Value % in Tow.l Towa) E&pons Erporns Value 1980 581.0 58.0 420.7 42.0 1001.7 1981 599.1 59.4 409.0 40.6 1008.1 1982 545.0 62.6 325.4 37.4 S70.4 1983 532.7 61.0 339.9 39.0 872.6 1984 604.7 60.1 401.7 39.9 1006 4 1985 601.1 61.6 374.9 38.4 976.0 1986 694.0 61.9 426.6 38.1 1120 6 1987 643.9 55.6 514 4 44.4 1158.3 1988 607.4 48.8 638.3 51.2 1245.7 1989 622 4 44.3 781.5 55.7 1403.9 1990 616.8 45.4 741.5 54.6 1358.3 Note. Figures include added value by maquilas Source: Central Bank of Costa Rica Table 4.3 Gross tourism receipts by exports of tourism services (in thousands of U.S. dollars) 1970 20.9 1980 84.4 1985 118.3 1986 132.7 1987 136.3 1988 170.1 1989 205.4 - 62 - Export contracts and Cer4ificados de Abono Tributario (CATs) To qualify for an export contract a firm must make a commitment to export some percentage of its output to extraregional markets. In return, the firm is eligible for the incentives listed in table 4.1. "Indirect exporters"-that is, suppliers to direct exporters-can also sign export contracts to get access to other benefits, but they are not eligible for CATs. To prevent exporters from having a competitive advantage over local firms in sales to the domestic market, the firms receive benefits only in proportion to the fraction of sales to extraregional export markets. Thus, the contracts are in theory a good way to encourage relatively small or part-time exporters. However, because of the voluminous paperwork involved (reportedly requiring one full-time employee), small or part-time exporters may be less able to take advantage of the exemptions, although some of them do so indirectly by consolidating shipments with or supplying a larger exporter, who handles the paperwork and passes through some of the benefits. Another important advantage of the export contract is that extraregional exports with more than 35 percent national content (value added) qualify for direct subsidies in the form of tax rebate certificates (CAT.). These can be used at face value (after a delay of about a year) to pay the recipient firm's tax liabilities or they can be sold in a secondary market, often at a substantial discount (variable, but on the order of 35 percent). Many firms prefer to sell the CATs, either because they are exempt from taxes or because they need immediate cash. Eligible firms located in free trade zones (who are tax exempt) often sign export contracts, primarily to get access to the CATs. Since their introduction, the volume of CATs has grown sharply, partly because of an increase in the number of qualifying firms and partly because of a growth in their export revenues. Accordingly, CATs grew from 1.3 percent of total government expenditure in 1980 to an estimated 5 percent for 1990. Because of the fiscal burden imposed by CATS, contracts approved since 1990 receive a lower percentage of export value, and this percentage decreases over time. Table 4.4 shows the structure of - 63 - rebates for all export contracts approved before 1990, between January 1990 and May 1990, and after May 1990.2 Table 4.4 Percentage of FOB exports received as CATs Date of Contract Approval Percentage Percentage of expor1 value received as CATs natzonal content Before January 1990 35-50.5 15 50.5 + 20 Between January 1990 and May 1990 35-39 12,11,10,9,8,7,7 from 1990-96 40-44 12.5,11.5,10.5,9.5,8.5,7.5,7.5 from 1990-96 45-49 13,12,11,10,9,8,8 from 1990-96 50+ 13.5,12.5,11.5,10.5,9.5,9,9 from 1990-96 Since May 1990 35-39 8,7,5,3,3,3 from 1991-96 40-44 9,8,6,4,3,3 from 1991-96 45-49 10,9,7,5,4,3 from 1991-96 50-54 11,10,8,6,5,4, from 1991-96 55+ 12,11,9,7,6,5 from 1991-96 Source: CENPRO During 1990, 568 firms received CATa (table 4.5). More than a third of them received tax rebates of less than one million colones, which represented less than one percent of the total CATs given by the central bank. A little over 2 percent of firms (12) received CATs for more than 100 million colones, representing over a third of total tax rebates given in that period. These figures confirm a high degree of concentration in CATs. In terms of sectoral distribution, between March 1988 and December 1989, a little over half the firms that used CATs were in the agriculture sector, one quarter in industry, 9 percent in commerce, and 11 percent in agroindustries (table 4.6). The distribution for CATs issued during that period differed, however, with the agricultural sector receiving only 36 percent of the CATs compared to 44 percent for industry. This apparently indicates that the agricultural sector is a 22.Also since 1990 to be eligible for CATs .11 exports have to be to extrregional market. - 64 - net purchaser of CATS from the industrial sector. Since the subsidy element is not nearly as large for CATs that must be purchased as it is for CATs that are given to the original recipient, the figures on CATs issued is a better indicator of the distribution of benefits. On this criteria, the benefits are concentrated in industrial firms with low domestic content and to a lesser degree in agricultural firms with high domestic content. Table 4.5 Composition of CAT& issued, 1990 (milLions of colones) Number of Amount FirMs Percentage CA Ts PerventaRe < 1 205 36.09 73.13 0.99 1-5 157 27.64 370.39 5.03 5-10 74 13.03 543.54 7.38 10-25 66 11.62 996.28 13.53 25-50 29 5.11 976.71 13.27 50-100 25 4.40 1735.0 23.57 > 100 12 2.11 2667.1 36.23 Total 568 100.00 7362.2 100.00 Source: Ministry of Treasury According to one estimate, exports in 1989 were around 10 percent higher than they would have been without the CATs.23 However, the domestic content of these exports is estimated to be only about 40 percent; 60 percent of the increased export revenue was spent on imported inputs. On balance, then, each $1 of CAT issued increased gross exports by $1.35, but net foreign exchange earned by only around $0.81. Furthermore, there is considerable administrative cost involved in issuing the CATs. 23.See A. Hoffmaister, -Tbe Cost of Export Subsidies: Evidence from Costa Rica, International Monetary Fund Working Paper. September 1991. - 65 - Table 4.6 Sectoral distribution of firms that used or were issued CATs, March 1988 to December 1989 Firms using CATs Nanonal Content A enculturu Industry Commerce Aero-lndustm Total 35-40 3.4 40.2 6.9 10.7 21.6 40-45 4.1 8.1 9.3 5 4 5.7 45-50 3.1 8 9 9.3 3 6 5.1 50-55 6 4 4.8 4.6 5 4 5.7 55-60 8.7 4.8 16.3 17.8 9.4 60-65 14.7 3.2 11.9 16.0 11.7 > 65 59.6 - 41.9 41.1 40.8 Total 54.2 25.5 8.9 11.4 100.0 Firms issued CATs 35-40 1.4 75.9 2.8 14.2 35.7 40-45 1.5 1.0 3.1 7.8 2.2 45-50 2.1 15.4 21.3 2.2 10.5 50-55 0.9 6.4 3.3 2.6 3.7 55-60 7.1 0.8 15.7 9.2 5.3 60-65 7.5 0.5 S.5 14.5 5.3 > 65 79.5 - 35.3 49.5 37.3 Total 36.0 43.9 S.7 11.4 100.0 Source: Mirustry of Trmasury, Cosa Rica. Temporary admission or maquila The temporary admission or maquila regime (also known as drawbacks) suspends duties, taxes, and other import charges for certain goods, such as raw materials, semi-processed products, labels, capital goods, equipment, and samples, that will be exported to third markets after they are repaired, assembled, or incorporated in machines or transport equipment. The goods admitted under this regime can stay in the country for three months for samples or commodities for research and instruction; twelve months for raw materials, semi-processed products and labels; and five years for capital goods. These terms can be extended with the authorization of the Director of Customs. Goods imported under this regime must stay in special sites designed for the production process. - 66 - Since 1983 maquilas have shown a steady growth in value added and as a share of nontraditional exports (table 4.7). In 1982 Maquilas represented only 0.38 percent of nontraditional exports, but by the late 1980s that share had risen to nearly 10 percent. Maquilas are concentrated in the textile and electronics industries. Their main market is the United States with a share of over 90 percent of the total added value. Table 4.7 Value added by maqu;Ja, 1980489 (thousands of dollars) As a share of Unuzed nontradJnonal Year Staes Taiwan Panama OtJers ToWi £xpo,ts 1980 1614 0 29 363 2006 0.4S 1981 965 0 18 38 1021 0.25 1982 1160 0 63 31 1254 0.38 1983 18616 0 135 447 19198 5.65 1984 27912 0 22 569 28503 7.10 1985 34204 0 165 588 34957 9.32 1986 33551 68 438 750 34807 8.16 1987 41531 1026 903 733 44193 8.59 1988 57469 1350 1288 448 60555 9.49 1989 70303 2175 1162 1215 74855 9.58 1990 - - - - 70000' Projection Source: Central Bank of Costa Rica; for 1990, CADEXCO Free trade zones Free trade zones are areas in which goods and raw materials can be imported duty and tax-free to be transformed, packed, or marketed for export to third markets. Free trade zones are subject to their own special procedures for customs (with on-site customs facilities) and for management of foreign currency and taxes. Six types of firms can apply to establish themselves in the zones: export processing firms, export marketing firms, firms providing services to firms operating under the free trade zone regime, management firms with concessions to manage the free trade zone, firms that operate shipyards and docks and firms dedicated to scientific or technological research. Financial - 67 - service firms, such as offshore banks or insurance companies, are prohibited by law from locating in free trade zones. Firms under the free trade zone regime are completely exempt from duties (on raw materials, capital equipment, and certain types of vehicles) and from all indirect and property taxes. Furthermore, firms can buy domestic products exempt from sales and consumption taxes. Export marketing firms are 100 percent exempt from profit taxes for the first 4 years and 50 percent for the next two years. All other firms are 100 percent exempt for the first eight years and 50 percent for the next four years.> A major advantage of this regime over temporary admission is the independent foreign currency management. Firms in free trade zones are not forced to remit to the central bank the foreign currency they receive for exports. Also, they can write foreign currency contracts with domestic firms, as long as they exchange the foreign currency in any bank of the national banking system to pay for services such as labor, raw material, and the like hired in the Costa Rican territory. Another major advantage is that customs procedures are handled directly in the industrial parks. Thus, the zone operators can by paying overtime have more control to ensure that customs inspectors are available when needed. One feature that distinguishes this system of free trade zones from those in some other countries is that export processing firms can sell up to 40 percent of their production in the domestic market with previous authorization of customs and the Treasury. Buyers pay duty on these sales as imports. Authorization is generally given only for products that do not compete with domestic producers. The free trade zones established under the law promulgated in 1981 were owned and operated by the government through the Free Trade Zone Commission. They were quite unsuccessful in attracting 24.For frms located in le"s developed regions, the exemption for export marketing firms is 100 percent for the rfi six years and 50 percent for the next four years, and twelve years and six years for other firms. Also firms in less developed regions receive a subsidy equal to IS percent of their payroll in the previous year. - 68 - businesses. Since 1985, the zones have been privately owned and operated (but regulated by the Commission) and have grown rapidly (table 4.8). There are now eight free trade zones in Costa Rica with approximately 109 firms, and exports estimated at $140 million for 1991 or approximately 9 percent of the total value of nontraditional exports. The government has recently given the development of the free trade zone regime even greater priority with the promulgation of Law 7210 (Ley del Regimen de Zona Franca) of December 14, 1990. Table 4.8 Exports and number ot firms Lo free trade zones (in millions of US dollars) Erpots No. of Finns 1986 7.03 IS 1987 20.20 28 1988 41.50 35 1989 77.22 So 1990 100.0 70 1991' 140.0 109 * estimated Source: Corporation of Free Trade Zones. Traditional exports Coffee Coffee has been the most important Costa Rican export in terms of its contribution to export earnings and GDP. It also provides employment for about one-quarter of the agricultural labor force. During the 1970s and 1980s, the sector grew rapidly and by 1989 production was double its 1970 level, reaching a record 2.76 million bags. Some of this expansion resulted from the development of new coffee area, which increased from 74,000 hectares in 1970 to 101,000 in 1990, although higher yield per hectare was a more important factor in production growth. Improved varieties are now reported to cover 90 percent of the coffee area. Between 1970 and 1980, exports increased modestly - 69 - from 1.07 million bags (60 kg) to 1.32 million bags. However, during the 1980s, exports increased rapidly, reaching 2.45 million bags in 1990, an average annual rate of increase of 6.3 percent. Costa Rica supplied about 3 percent of the world trade in 1990 compared with only 1.9 percent in 1970. The coffee industry faces a number of constraints that could damage its prospects for export expansion. Currently, as a result of oversupply and the breakup of the International Coffee Agreement, the price of about $2/kg is below the cost of producing coffee for most of the world's coffee-producing countries. Furthermore, Costa Rica's Andean Pact competitors (most importantly, Colombia) are exempt from a 4 percent import tax in the EC market. In this environment it will be important to ensure that Costa Rican coffee is viewed as a high-quality product for which the international trade and consumers are willing to pay a premium. Promotion may be useful, although the potential for increasing awareness of Costa Rican coffee's quality is limited because awareness' is already high. It will also be useful to continue to press for preferential tariff treatment equivalent to that given Andean Pact countries. Other constraints on export expansion are associated with the overregulated and inflexible system of coffee marketing and pricing, which was designed to meet the needs of a market environment very different from today's. These constraints, unlike those imposed by external conditions, could be substantially alleviated by appropriate policy actions. One set of problems relates to regulations governing the delivery of coffee to the mills and payment of producers. By law, mills cannot make full payment for the coffee upon delivery and thereby assume ownership. Instead, they must make one payment to the producers upon delivery and then a series of payments throughout the year. Growers are, in essence, forced to extend credit to the mills. Until the final payment, growers retain legal ownership, even though they have virtually no input in decisions on how the coffee is handled and marketed to exporters. This system, combined with regulation of the margins of the mills (see below), removes most of the incentive for millers to maintain quality during processing and to bargain with - 70 - their buyers for the best price.25 Serious consideration should be given to lifting these restrictions, so growers and millers would have the option of full payment and transfer of ownership upon delivery. Also by law, growers must deliver directly to the mills; no traders (middlemen) can be involved. Typically, the growers are smallholders who deliver small volumes, so it would be costly (relative to the potential benefits, which are proportional to the quantity sold) for growers to shop around much for better deals from millers (who, at any rate, cannot compete on price under the present system) or transport the coffee very far. Mills therefore are essentially in an oligopolistic position with respect to local growers. The small quantities also make it costly and impractical for the mills to grade the coffee and pay growers accordingly. Allowing traders to buy from growers and sell to millers might help resolve these problems. Traders would deal in larger quantities than growers (and so would have greater incentives to shop among a larger group of millers for the best deal), and yet would have a closer relation than do millers with the growers, perhaps putting them in a better position to grade the coffee. A related issue is the regulation of millers' margins, which are fixed at approximately 9 percent of the difference between the price at which they sell to exporters and their direct cost of processing the coffee. One problem - the adverse effects on millers' incentives to raise quality and bargain for the best price - was discussed above. The second problem is that the system ensures that virtually all risk from fluctuating export prices is passed to the farmer, rather than some of it being absorbed by the millers or middlemen. Not surprisingly, coffee growers are generally unhappy with the current arrangements. Removing the regulations on millers' margins and the delivery and pricing of coffee in 25 .Without regulation, if a miller received a price SI lower because of lower quality or poorer bargaining with buyers, his profits would be SI lower. With a margin regulated at 9%, however, the $1 lower price would only reduce his profits by $0.09. The other $0.91 of the price reduction is absorbed by the growers. - 71 - general would allow the coffee market to operate as a normal product market. This would create greater competition, increase incentives to improve quality, and spread risk more widely. A final set of issues is related to the explicit and implicit taxes on coffee. The most important of these historically has been an ad valorem tax (formerly based on the fob export price, now based on the free-on-rail price), which is set at percentage rates that increase with the price. Currently, because of low prices, the rate is 0. This sliding scale has the advantage of stabilizing domestic prices, but it does so in a way which reduces short-term production incentives at times when production is most valuable, as well as long-term investment incentives. Alternative ways of taxing coffee deserve consideration. These include using the same kind of taxes imposed on other sectors or using a 'quota- tax",26 which would exempt from tax any production over some quota amount (which would be set for each producer based perhaps on historical figures). A very important implicit tax on producers is imposed by the requirement to sell on the domestic market some percentage of production (in the 1980s, between 10 and 14 percent) at greatly reduced prices. Domestic consumer prices in the 1980s averaged about 25 percent of average export prices. This translates into a tax as high as 9 percent of production value.27 Furthermore, it reduces incentives to maintain quality, since the mills can select their lowest quality coffee to be sold domestically. Eliminating this tax would not only improve export incentives overall, but would particularly improve incentives to maintain quality. This would be an advantageous time to take this step, while world prices are low and domestic prices would not rise as much as they would in a coffee boom. 26. Sec F. Jaramillo 'Policy Responses to the Collapse of World Coffee Prices: Tne Cases of Costa Rica, Mexico, and El Salvador,. World Bank Report No. 8311-LAC, February 22, 1990, p. 61. 27.The 9 percent tax represents a 75 percent tax on 12 percent of production. This is probably a somewhat high estimate, since the coffee sold domestically is of low quality and would not fetch the avcrage price of exported coffee. -72 - Another important source of implicit taxation is the credit system and exchange restrictions. The coffee sector does not have access to special domestic credit lines in Costa Rica, so millers often borrow on international markets. Dollars from coffee sales, which are used to repay the loans, must be converted at the exchange rate at which the loans were made, while the loans must be repaid at the rate in effect when the loan comes due. Thus, there is an implicit tax on the credit equal to the percentage by which the exchange rate has been devalued during the period of the loan. This not only taxes the sector, but does so in a very nontransparent and uncontrollable way. The credit and exchange policies that produce this tax should be revised. Conditions on the world market and international prices determine the prospects for Costa Rican coffee exports. Prices in the future will depend heavily on changes in the real exchange rate and on productivity in the major coffee-producing countries. Based on the World Bank's econometric model of the world coffee market, the price of coffee is expected to increase throughout the 1990s, from $2.05/kg in 1991 to $4.42/kg in 2000 and $5.32/kg in 2005 in nominal terms, or by 54 percent in real terms by 2000, staying constant thereafter. Costa Rican exporters will benefit to the extent that the colon continues to depreciate in real terms against the dollar, as well as from higher future coffee prices. World consumption is forecast to increase from 98.7 million bags in 1991 to 107.3 million bags by 2000. Costa Rica's share of this growth will depend on its competitiveness in international markets, which is determined by efficiency in production and marketing. Efficiency in production is determined by non-human factors, such as land area, soil, and climate, as well as human factors, such as education, research, extension, and government policies affecting the overall economy and the coffee sector. Among these, land expansion is unlikely. More efficient use of fertilizers and irrigation and greater access to credit could improve efficiency somewhat, though these gains are likely to be small since Costa Rica is already highly efficient and has one of the highest rates of productivity in coffee - 73 - production in the world. Another potential source of yield growth, conversion to high-yielding varieties, is almost exhausted since nearly all the area is already converted. Growth will also be constrained by high wages and labor shortages. Furthermore, effluent from coffee processing has been reported to be causing environmental degradation of some bodies of water, raising the possibility of constraints on growth through environmental regulation. In spite of these constraints, production is forecast (by the Coffee Institute, ICAFE) to increase at an average annual rate of 2.4 percent over the period 1991-2005. But selling increased production profitably on depressed world markets will require that Costa Rica's competitiveness be maintained and even increased. Since the opportunities for improving efficiency of production are small, improving Costa Rica's competitive position will require that marketing channels be made more efficient, through the measures suggested above. (Promotion of Costa Rican coffee in the external market might also be useful.) These policy measures will be equally useful whether the international market evolves into a new ICA (unlikely) or a cartel arrangement (as Brazil and Colombia are trying to organize) or remains a competitive market. Bananas Bananas represent about 25 percent of agricultural GDP and have traditionally been the second most important crop after coffee. Almost all bananas are grown by big multinational companies in the Atlantic region, using high levels of technology and supported by good organization and investment in research. As a result, the cost of production, ranging from $4.0/box to $5.0/box, is low by international standards, and Costa Rica has been able to maintain its market share during periods of world market instability. Productivity grew rapidly during the mid- and late- 1980s, increasing more than 25 percent between 1985 and 1989. Since 1987, banana area has also expanded rapidly, with an additional 8,000 hectares coming into production between 1986 and 1990. Generally, between 80 percent and 85 percent of the - 74 - crop is exported. In 1985, exports were 44.3 million (18 kg) boxes, increasing almost 70 percent by 1990. Most banana exports are sent to the United States (60 percent) and the EC (30 percent), although Japan is becoming an important market. While the growth in banana exports over the last decade has been impressive, industry officials have identified a number of constraints on export growth that threaten to slow the rate of expansion. One is the port at Limon, which is very inefficient and inadequate, and is the single most important concern of the banana industry. For a port in its current condition, it is heavily overutilized (72 percent), and many of the facilities are outdated. Further problems have been created by labor disputes, and the recent earthquake caused considerable structural damage. Efforts to improve the port infrastructure have been weak. More than $17 million has been collected from a tax on banana exports, with the proceeds supposed to be used to improve the port facilities, but as yet nothing has been done. (This issue is discussed in more detail in Chapter 2 of this report.) Another constraint or a potential constraint is labor. The banana harvest extends throughout the year and is fairly labor intensive. Some companies have experienced labor shortages, and migrant workers from Nicaragua and Panama have been employed in recent years. If labor policies in Costa Rica or market conditions in Nicaragua and Panama cause these labor sources to dry up, shortages could become a serious constraint. Also, a potentially important constraint on further expansion is the enviromnental concerns of consumers in importing countries, especially the United States. There are reports that fertilizers used in banana production have created ecological problems, associated particularly with developing new plantations in areas of former rainforest. Negative publicity generated by such reports could influence consumers to stop buying Costa Rican bananas if this problem is not addressed. The banana companies are aware of this possibility and have responded that the claims are overstated. - 75 - Other constraints to exports are created by the trade regime. One is the direct tax on banana exports of $0.55/box. Another is the difficulty, cost, and delay in importing inputs such as packaging. Foreign exchange restrictions, for example, require companies to wait 60-90 days to get dollars for these imports. A final constraint (or opportunity) that is largely outside Costa Rica's control is the future of world markets. World trade in bananas is expected to increase 1.5 percent annually between 1991 and 2005, with prices falling in real terms by more than 16 percent. Demand is expected to increase in Western Europe, although much depends on the changes that take place after 1992. The current banana trade regime in the EC is not compatible with the establishment of a single market after 1992, and the bilateral preferential agreements between EC countries and various exporters (mostly ex-colonies in Africa, Caribbean and the Pacific, ACP countries) will have to be dismantled. If these preferential agreements are not replaced by some EC-wide preference, Caribbean producers will not be able to compete with Costa Rica and other Latin America countries because of higher production costs and inferior fruit quality. In this scenario, prospects for Costa Rican exports would be bright. However, measures for protecting ACP banana producers are still under discussion, and the outcome is uncertain. Recent market-oriented reforms in Eastern Europe could stimulate demand for bananas, which is very low there (0.2 kg per capita in the USSR in 1988 compared to 11.2 kg in the United States) but there is some uncertainty about their ability to pay in hard currency. U.S. banana imports are expected to grow, albeit at a modest rate, given already high per capita consumption and low population growth. Depending on how all these issues are resolved, prospects for export expansion could be good. Costa Rican exports are forecasted at 75.7 million boxes for 1991, increasing to 106.5 million boxes by 1995. This expansion is due mainly to rapid growth in the area of banana plantations, which is - 76 - expected to increase from 32,000 hectares in 1991 to 40,600 hectares in 1993. Thereafter, area is expected to remain constant. Productivity is expected to increase steadily throughout the period. Beef Traditionally, beef has been a major agricultural export of Costa Rica, third after coffee and bananas. Recently, however, the sector has declined. Between 1985 and 1990, its contribution to agricultural export earnings fell from about 11.4 percent to 5.9 percent, while its share of total export earnings fell from 7.1 percent to 3.2 percent. Nonetheless, beef remains an important source of food in Costa Rica and employs a large number of workers. If a number of institutional reforms take place in the future, the sector has potential for growth and export expansion. During the 1960s and 1970s, substantial growth in production led to a rapid expansion of beef exports, especially to the United States. By 1981, total extractions had reached about 420,000 head, of which about 44 percent were exported. Between 1982 and 1983, the livestock economy weakened as real export prices fell by more than half between 1981 and 1983. After that the sector improved, and by 1986 extractions reached a record level of 562,000 head and exports a record 206,000 head. During the early and mid-1980s, low prices and high interest and tax rates led to financial crisis in the sector. As a belated consequence of this crisis, between 1986 and 1989 production declined 30 percent and exports 43 percent. A major constraint on export expansion is low productivity. During the financial crisis, livestock producers were unable to make important investments required for production improvements, and productivity declined substantially. Evidence of poor productivity is provided by low pasture intensity, low conception and calving rates, and high calf mortality. These factors are among the main causes of the decline in livestock extraction during the 1980s. Further, some industry officials claim that production and export expansion is constrained by the lack of institutional support for the sector. - 77 - For example, tiere are tew programs to train and educate producers, and this has impeded the uptake of technology, resulting in poor herd management. Also, some complain that the training that is undertaken is not relevant to farming conditions in Costa Rica and that research findings are not well communicated to all parts of the sector. A further constraint on export expansion is the fact that many producers over-culled the female herd in order to pay debts, and consequently herd replacement rates have fallen, threatening future production. A major problem is the variable and high interest charges, which are the largest component of input costs. Producers are also constrained by low prices and profitability. The U.S. price of beef, converted into colones and deflated by the CPI, dropped by more than half between 1981 and 1989, although it has remained fairly constant since 1985. Profitability has been further depressed by price controls on domestic sales of low-quality beef and export restrictions on jointly produced goods, such as leather and milk. Beef trade expansion depends critically on internal and international market conditions. In the domestic market, wider use of productivity-enhancing technology would allow higher offtake, lower production costs, and better land use. With such technological improvements, livestock production in Costa Rica could become profitable and sustainable. But this will require investment, which in turn will require policy measures that increase profitability, such as removal of price and export controls on livestock products. This is especially true in an enviromnent of high interest rates, since investment will be financed more readily from retained earnings. The prospects for trade expansion also depend on world beef market conditions, which are highly uncertain at this time. Beef prices in the United States are forecast to decline slightly in the short term, reflecting the expected slow down of the U.S. economy, lower feed prices, and continued competition from the poultry sector. Over the long term, prices are expected to rise slightly in real terms, increasing just under 12 percent between 1990 and 2000. U.S. beef imports are unlikely to - 78 - increase in the near and medium term. Another uncertainty is whether the EC will fully open its borders after 1992 or whether it will maintain its protective policies. Japan remains a potentially important market for beef in the 1990s, with per capita consumption very low relative to income. Liberalization of the Japanese beef trade began in April 1991, with the removal of beef quotas and the introduction of an ad valorem tariff on imports (currently set at 70 percent). The tariffs rates will be reduced over time (to 60 percent in 1992 and 50 percent in 1993), which could lead to considerably greater Japanese imports and higher beef prices in the international market. Sugar Among the traditional exports of Costa Rica, sugar has the smallest export share. Its contribution to agricultural export earnings declined from 6.5 percent in 1980 to less than 2.5 percent in 1990. The total area of cane is 45,000 hectares, with the most important cane-growing area in the Chorotega region. During the 1980s, production was fairly stable and ranged between 180,000 tons and 230,000 tons of cane. Average yields are about 50 tons per hectare of cane with a sugar content of about 10 percent, although yields on irrigated plantations reach 70 tons per hectare. Sugar has three main end- uses: white sugar for domestic consumption, raw sugar for export to U.S. and world markets, and alcohol. About 70 percent of sugar is consumed domestically. The sector is highly dependent on the U.S. quota allocation, which fell from 63,000 tons in 1984 to 14,000 tons in 1988, forcing Costa Rica to export more to the world market. In the 1989/90 crop year, Costa Rica's quota was 33,633 tons (about 1.45 percent of the total U.S. quota allocation), accounting for about half of its sugar exports. Sugar exported to the United States receives a much higher price than the international price prevailing in other markets. Alcohol production is also important. In 1991, it is expected that about 20.5 million liters of alcohol will be exported to the - 79 - United States to be used as a gasoline additive. Alcohol is bought from the EC and reprocessed, adding at least 20 percent in value to qualify for re-export into the United States at preferential terms. For Costa Rica and many other sugar producers, low international sugar prices are the most important constraint on export growth. Policy interventions in the world sugar market by the EC and United States have long distorted world sugar trade. Surplus sugar in these regions is exported to the world market, forcing down international prices. Although cane production is relatively efficient in some areas of Costa Rica, costs of production (estimated by the Sugar Producer Association, LAICA, to be about $317/ton for raw sugar in 1987) prevent the sector from being competitive at current world prices, which have averaged less than $300/ton for most of the 1980s. The future of the industry is linked to world market trends and internal policy. The future price is very uncertain since it is greatly affected by weather and by policies in the OECD countries. Based on the World Bank's econometric model of the world sugar market, the price of sugar is expected to increase in real terms by 28 percent from 1991 to 2005. World exports are expected to increase 2 percent annually between 1991 and 2005. Latin American countries, including Costa Rica, are likely to modestly increase their exports to the United States, where import demand is expected to remain strong. During the 1980s sugar subsidies led to the introduction of high-fructose corn syrup (HFCS) in the United States, displacing about 3.5 million tons of sugar imports. However, the penetration of HFCS into the U.S. market has almost stopped. Some industry officials in Costa Rica are quite concerned about the possible reduction or loss of the U.S. quota. Based on data for 1990, it is estimated that if the U.S. quota allocation to Costa Rica were halved, total export earnings from sugar could fall by as much as 10 percent. However, it is unlikely that the U.S. quota will be cut in the next few years, given supply and demand conditions for sugar in the United States and some political pressure to liberalize. On the other hand, the political strength of the sugar interest groups is probably - 80 - great enough to block total market opening, so the outlook is probably one of no major changes in the quota system. Conclusions and recommendations In the mid- to late 1980s, Costa Rican exports boomed. In 1991, however, there are some signs that this growth may be slowing. To a large extent, this is probably due to macroeconomic problems. Still, there are some policies related to the export regime that could help keep exports growing. The export contract system seems to be working reasonably well, thanks especially to CENPRO'S efforts to expedite and simplify the process. There still is a bottleneck at the Treasury, however, which slows the process. CENPRO should, of course, continue to explore ways to improve the system and cut paperwork, thereby making it more accessible to small and part-time exporters. One possibility that might be explored is a computerized link between CENPRO and the Treasury to speed up processing. In addition, CENPRO should consider ways to support indirect exporters (who provide goods and services to direct exporters) and potential exporters who have not signed export contracts (first-time exporters or producers who do not know whether they can export). Such producers should at least be assured that they will be able to speedily get drawbacks for import taxes paid on inputs incorporated into their exports. While mechanisms are currently in place that allow them to do this, they seem to be used seldom if ever, suggesting that they either are not well known or are too cumbersome and not worth the effort. The government should also develop a system to automatically exempt service exporters (including tourism) from controls and duties on imported inputs, thus reducing the bias against these exporters. Controls on the use of foreign exchange also need to be phased out, particularly when used by exporters to purchase services from abroad. The most politically divisive issue with respect to the export contracts concerns the future of the CAT system. The constitutionality of the CAT. has been challenged in court; furthermore, the - 81 - government is seeking to negotiate reductions in the value of CATs in existing contracts. It has become very clear that the CATs are fiscally very costly. Their contribution to the fiscal deficit implies that they also contribute to an overvaluation of the exchange rate (see chapter 1), thereby taxing all exports. Yet the CATs are discriminatory in that they promote only exports that meet certain criteria. Furthermore, the need for such direct subsidies has declined over time as reduction of import restrictions and tariffs has diminished the antiexport bias. The government's new commitment to move quickly to a tariff range of 10-20 percent will accelerate this process. And the CATs have been and will increasingly be an irritant in trade relations with other countries and a possible trigger for antidumping actions. For all these reasons, the government should consider rapidly phasing out CATs in new export contracts signed after 1992. Fiscal policy improvements and reduced import protection should allow for a continued real depreciation of the exchange rate, at least partially compensating exporters for the elimination of CATs in new contracts and the reduction under the old contracts. The govermnent's new policies with respect to the free trade zones appear to be generating good results. There are, however, two identifiable issues requiring attention, one policy and the other mainly institutional. The policy issue is that Costa Rican law prohibits off-shore financial service corporations from locating in free trade zones (or elsewhere in Cost Rica). This prohibition not only imposes some extra cost on firms in the zones that might otherwise find these services convenient, but also precludes Costa Rica from taking advantage of a potential source of foreign exchange and employment. Lifting this prohibition would require changing Costa Rica's banking and insurance laws, but the required changes should be relatively noncontroversial, since off-shore banks and insurance companies would not operate in the domestic market. The institutional issue is the role of the Free Trade Zone Commission. This role was much reduced when operational responsibility for the zones was shifted to private sector developers. Developers now operate the zones and essentially decide where to locate the zones, who the tenants are, and so on, - 82 - though the final decision is made by the Commission. This policy seems to be working well, though some zone operators complain that the Commission's bureaucratic requirements have been increasing. In general, the role of the Commission should be kept to a minimum. This in turn raises the issue of what to do with the monthly tax of about US$0.25/square meter that the Commission charges zone tenants. Until now the tax has been used to pay off the Commission's debts from the period when it operated the zones. But most of these debts have now been liquidated. Since the Commission should not need an expanded budget, the tax could be eliminated or reduced, making the zones more attractive to investors. Alternatively, proceeds (at least some) could be used to help fund CINDE, which apparently provides useful services to the zones by attracting new investment. Many policy discussions assume that development of traditional exports depends on international markets, which are outside the control of governments in individual countries. While there is some truth to this view, experience in many countries including Costa Rica shows that domestic policy can greatly impede or facilitate producers in taking maximum advantage of positive movements in international markets and minimizing the effects of adverse developments. In the coffee market, recent developments have largely been negative and the prospects are not bright for a successful revival of the International Coffee Agreement. In response to the fall in prices, Costa Rican policymakers wisely eliminated the direct tax on exports. This would also be a propitious time to eliminate the implicit tax that comes from requiring producers to sell part of their production at low prices in domestic markets. Making this change now would help producers at a time when their incomes are especially depressed and when the domestic price would not rise as much as it would were the restriction to be removed when world prices were high. To prepare the market for future developments and make it more responsive to an international situation that will be less stable than it has been in the past, the government should also begin to phase out the many other regulations in the coffee market. - 83 - The other traditional export product whose market is depressed is beef. While trade policy can have limited impact here, high priority should be given to doing what can be done - removing export restrictions and related price controls on all meat, milk, and leather products. Increased profitability of the industry will encourage investment in the technology that will be necessary to make the sector efficient again. The banana and sugar industries are doing quite well. For bananas, the main constraints are infrastructure problems (chapter 2) and some remaining controls and tariffs on imported inputs. These, along with other such controls and tariffs on inputs for other traditional exports, should be phased out. The sugar market is highly controlled and forces consumers to pay considerably higher prices. In the long run, deregulation of the sector should be considered, though there is little reason to make this a high priority. - 84 - Chapter 5. Import Policy in the 1990s By the early 1980s the Costa Rican economy had exhausted its options under the easy stages of its import-substitution strategy. The antiexport bias of the trade regime and related government policies, stagnation in Central American trade, and unfavorable shocks produced a crisis that led to high external indebtedness, declining GDP, and high inflation. The government of Costa Rica responded to these unfavorable prospects with a tariff reform in 1986. The reform reduced the average rate of nominal protection from 52.8 percent to 26.4 percent; by 1991, it was 17.2 percent (all figures exclusive of surcharges and the import tax). Despite the tariff reform, Costa Rica has now fallen behind other countries in the Central American Common Market (CACM) and Latin America in the pace and depth of its trade liberalization. The government's outward-oriented development strategy is seriously undercut by regulated domestic prices, the high percentage of duty-exempt imports, and the ad hoc use of surcharges to offset fiscal problems. This chapter reviews the recent evolution of import policy, looking at the trade instruments used, including antidumping policy. It concludes with a discussion of the remaining issues to be addressed in the next stage of trade policy reform. Tariff structure Costa Rica led the modernization of the trade regime under the CACM. The new tariff regime that became effective in January 1986 eliminated all specific tariffs, reduced the highest tariff from 220 percent to 100 percent, and modernized the nomenclature by converting the system to the Brussels code (NAUCA II). These changes were particularly significant because this was the first effort to reform the CACM structure in twenty years. - 85 - Under the new regime, the average tariff decreased from 52.8 percent to 26.4 percent, and dispersion was cut in half (table 5.1). Most of the adjustment was made on final goods. The largest decline was for nonessential final goods that did not compete with domestic production-tariffs fell from 135 percent to 56.3 percent. The second greatest decline was for competing final goods-whose nominal tariffs fell 42.5 percentage points. Since tariff levels for raw materials, intermediate goods, and capital goods fell by less, eeacrive protection of the heavily protected final goods declined significantly 28 Table 5.1 Structure of average nominal protection: mean tariff pre-1986 and 1986 Pre-1986 regime New regtme Whole economy 52.8 (51.5) 26.4 (21.4) Final goods Competing 92.5 (69.4) 50.0 (17.5) Noncompeting nonessential 135.0 (70.7) 56.3 (35.6) Raw materials and intermediate goods Competing 54.3 (72.6) 30.7 (17.4) Noncompeting 32.6 (29.3) 10.3 (5.5) Capital goods Competing 54.3 (47.3) 34.7 (20.7) Noncompeting 23.7 (9.4) 17.1 (4.8) Note: Numbers in parentheses are standard deviations. Source: Bank staff estimates 28.As an illustration, suppose an average competing final good with a tariff of 92.5 percent used as inputs competing products (raw materials, intermediates, and capital goods) worth 40 percent of the value of the final product at world prices and noncompeting products worth another 40 percent. Suppose tariffs on competing inputs were 54.3 percent and those on noncompeting inputs were 28 percent, as in the pre-1986 regime. Then the effective protction for the fnal product would be about 299 percent [1.925-(0.4)(1.543) - (0.4)(1.280) _ I Suppose that the tariffs ar then reduced to 50 percent for the final product and 33 percent and 13 percent for the inputs as in the post-1986 regime. Effcctive protection then falls to 158 percent [1.5-(0.4)(1.33) - (0.4)(1.13) - - 86 - Despite this major tariff restructuring, the tariff structure continued to heavily favor producers of consumer goods for the regional market. To remedy this, the government began a new round of its trade liberalization, reducing the average rate and variance of tariffs over three years for most products and over five years for textiles, apparels and shoes. This tariff restructuring-part of Costa Rica's second structural adjustment program-was scheduled to reduce tariffs on consumption goods to a range of 5 to 40 percent with the exception of non-competing essential goods, such as medicines, on which tariffs were to be 1 percent, and some noncompeting final goods, primarily luxury goods, on which tariffs would be over 40 percent. The tariffs on raw materials, intermediates, and capital goods were scheduled to be reduced to a range of 5 to 20 percent. The first of seven scheduled tariff adjustments was implemented in October 1987. Tables 5.2 and 5.3 show average nominal protection rates and the distribution of consumption goods, capital and, intermediate goods and raw materials by tariff positions during the seven scheduled and one ad hoc tariff adjustments. Two points are worth highlighting. First, the reforms since 1986 have changed the tariff structure significantly. The average tariff in 1986 was 26.4 percent with a dispersion of 21.4; by June 1991 it was down to 17.25 percent, with a standard deviation of 11.8. In 1986 almost half of consumption goods (45.5 percent) paid a tariff greater than 40 percent; by June 1990 that share had been cut in half (to 23.7 percent), indicating progress toward the goal of a 40 percent ceiling. Raw materials and capital goods experienced a similar, though less dramatic reduction (tariffs were not as high to begin with as on consumption goods). Second, although the Costa Rican government had committed itself to a deep trade liberalization, in July 1990 the economic authorities increased the floor by 5 percent in all positions with rates of 1 or 5 percent. This realignment was motivated by a desire to recoup revenue lost through the earlier rounds of tariff reform. Simultaneously, the maximum tariff for some durable consumption goods was - 87 - reduced from 60 percent to 50 percent for some goods and from 45 percent to 40 percent for others. Between June 1990 and July 1991 the share of consumption goods paying a tariff of 25 percent rose from 25.2 to 47.6 percent. Most imported inputs (raw materials, intermediates, capital goods) were shifted from the 1 percent or 5 percent bracket to the 10 percent bracket. This increment in the floor rate (especially when combined with a reduction in some of the high rates on consumption goods) probably reduced effective protection in the economy since it increased tariffs on fewer final goods (especially competing goods, since few of these had minimum tariffs) than inputs. Surcharges and import taxes In addition to tariffs, imports have been subject to two explicit taxes-the import tax and import surcharges-which have been used as instruments to close fiscal and trade deficits, and one implicit tax-prior deposits. The import tax was 3 percent until 1988, when it was reduced to 1 percent. This tax cannot be changed without legislative approval. Surcharges, in contrast, are administered by the Central Bank, and since legislative approval is not required, they have been used as necessary to raise revenues. More than 50 decretos specifying surcharges on various commodities exist. In 1990 surcharges ranged from 2 to 6 percent, with a special rate of 14 percent for textiles. In January 1991 surcharges were increased by 10 percent across all tariff positions for a period of 9 months to recoup revenues (table 5.4 shows the structure of tariff collection). Surcharges represented approximately 16 percent of import taxes in 1989-90, but climbed to 29 percent in May 1991. The surcharges expired in August 1991. Export taxes also increased significantly in 1991, although not to their 1989 levels. Surcharges create significant problems when they are used in an ad hoc, temporary and nonuniform manner. They increase overall antiexport bias, distort incentives across different import substitutes, and create intertemporal distortions. And they are a relatively ineffective way to raise revenue since they create an incentive to postpone imports until after the surcharges expire. - 88 - The government has also imposed prior import deposit requirements at varying rates when foreign exchange has run short. Importers are required to deposit with the Central Bank colones equivalent to a certain percentage of the foreign exchange they require. This must take place up to two months before they receive the foreign exchange. During 1986 the prior deposit was as high as 100 percent and in 1989 it was as low as 1 percent. In early 1991 it had risen to 50 percent, and in May it dropped to 30 percent. Obviously, this wide variability creates severe uncertainty for importers. It also imposes financial costs. For example, with a 30 percent prior deposit requirement, a 2 percent a month interest rate and two months between the deposit and receipt of the foreign exchange, the requirement amounts to an additional surcharge on imports of 1.2 percent. Duty exemptions Exemptions from import duties are extensive in Costa Rica, increasing effective rates of protection and lowering government revenue. In 1988 roughly 56 percent of the total value of imports was exempt from duties, resulting in a revenue loss of nearly 10 billion colones. (table 5.5). When exemption from other taxes-such as selective taxes on consumption, sales taxes and surcharges-is also considered, the result is that only 50 percent of potential receipts were actually collected in 1990. Some exemptions, such as those required by the CACM treaty, cannot be eliminated, and some, such as those affecting tourism and export-oriented business are intended to partially off-set the antiexport bias of the trade regime, allowing these industries to compete on a more equal footing with their competitors in international markets. But, the duty exemptions available to producers of products whose position in the domestic market is protected have the effect of increasing their protection and further increasing the bias against exports. - 89 - Table 5.2 Changes in the structure of nominal protection 1987-910 1st 2nd 3rd 4th 5th Ad hoc 6th 7th 10/87 09/88 05/89 11/89 06/90 07/90 12/90 06/91 Whole economy 20.12 18.60 17.53 16 48 15.74 17 89 17.31 17.25 (18.84) (17.09) (16.21) (15.35) (14 40) (12.82) (11.95) (11.82) Consumption goods Non-durable 33.08 36.80 35.12 32.58 30 67 31.02 29.42 29.23 consumptiongoods (19.89) (18.26) (17.25) (17.31) (16.32) (15.81) (14.41) (14.14) Durable 30.12 29.06 26.45 24.99 23.53 24 92 23.88 23.83 consumption goods (20.08) (19.38) (18.83) (18.13) (17.16) (15.71) (14.48) (14.41) Raw materials and intermediates Fuels 9.95 9.50 9.50 9.50 9.50 9.72 9.33 9.33 (5.91) (6.08) (6.08) (6.08) (6.08) (6.04) (6.10) (6.10) Raw materials for 12.08 10.17 8.98 8.66 8.49 10.89 10.66 10.66 agriculture (10.17) (9.12) (8.62) (8.34) (8.04) (7.07) (6.77) (6.77) Raw matcrials for 16.65 13.88 13.06 12.07 11.67 14.27 13.89 13.85 industry (17.73) (13.43) (12.57) (11.61) (11.10) (9.63) (8.92) (8.81) Construction 21.85 17.96 16.73 15.78 15.27 17.21 16.70 16.70 materials (15.80) (12.88) (12.17) (11.25) (10.61) (8.85) (8.49) (8.49) Capital goods Agriculture 13.33 12.37 12.15 12.11 12.07 14.63 14.55 14.52 (11.43) (10.27) (10.04) (9.90) (9.77) (7.99) (7.69) (7.55) Industry 13.66 12.62 12.30 12.07 11.70 14.87 14.74 14.74 (13.34) (12.14) (11.72) (11.38) (10.46) (8.49) (8.37) (8.37) Transport 12.27 13.29 13.17 12.92 12.47 15.73 15.69 15.69 cquipment (13.56) (14.86) (14.57) (14.32) (13.19) (11.40) (11.36) (11.36) Other 15.38 14.23 13.92 13.77 13.61 16.69 16.54 16.54 (17.38) (15.25) (14.72) (14.48) (14.26) (12.34) (12.14) (12.14) 'Note: Numbers in parentheses are standard deviations Source: Central Bank of Costa Rica - 90 - Table 5.3 Distribution by tariff position of consumption goods, raw materials and intermediate goods and capital goods after tariff adjustments 1986-91 Ist 2nd 3rd 4th 5th 6th 7th Taff RRaes 1986 10/87 9/88 S/89 11/89 6/90 7/90 12/90 6/91 Consumption goods 5 19.1 19.1 19.6 19.6 19.S' 22.4 1.9 1.9 1.9 25 12.4 12.4 18.6 20.2 22.1 25.2 45.9 47.6 47.6 40 23.0 25.7 30.1 31.0 . 32.9 28.7 28.7 43.8 43.8 50 20.0 31.3 20.4 18.8 17.2 17.4 17.4 5.4 5 4 50+ 25.5 11.5 11.3 10 4 8.0 6.3 6.1 1.3 1.3 Raw materials and intermediate goods 5 55.1 55.1 57.2 57.3 58.6 54.5 3.1 3.2 4.8 10 7 4 7.4 8.7 9.7 11.4 14.0 65.5 66.6 65.0 20 8.5 8.6 12.5 15.6 15.6 13.0 13.0 17.4 17.4 30 14.7 14.6 12.5 8.9 7.2 16.8 16.8 12.0 12.0 30+ 14.3 14.3 9.1 8.5 9.2 1.7 1.6 0.8 0.8 Capital goods 5 61.5 61.5 61.8 62.2 62.2 63.5 0.3 0.7 0.7 10 1.1 1.1 2.2 1.8 2.2 2.0 65.2 65.2 65.5 20 14.8 14.8 16.9 18.7 19.8 17.3 - 17.3 19.5 19.7 40 16.3 16.6 15.2 13.7 12.6 14.5 14.5 13.3 12.8 40+ 6.3 6.0 3.9 3.6 3.2 2.7 2.7 1.3 1.3 Source: Central Bank of Costa Rica Table 5.4 Tax revenues by source, 1989-90 (millions of 1990 colones) 1989 199 May 1991 Total tax revenues 26,232.3 24,268.9 28,501.8 Direct taxes 4,692.7 4,759.0 4,855.1 Indirect taxes 21,539.7 19,509.9 23,646.7 Consumption 4,462.6 4,340.7 3,727.7 Sales 7,326.7 7,642.4 10,074.9 Import charges 4,923.0 5,398.3 7,485.0 Duties 3,673.4 4,093.7 4,823.5 Surcharges 784.0 874.2 2,145.1 Import tax 364.0 340.7 396.2 Other 101.5 89.7 120.3 Exports 3,359.2 538.7 1,064.9 Other taxes 1,597.4 1,587.7 1,294.2 Source: National Statistical Office, Minisry of Treasury - 91 - Table 5.5 Import duty exemptions in 1988 Item 1988 Total value of all imports (USS thousands) 1,409,200 Total CIF value of duty-exempt imports (USS thousands) 781,076 Total duty exemptions (Colones thousands) 9,878,246 Industrial contracts 747,356 Agriculture 442,553 Fishing 92,941 Tourism 186,978 Mining 6,426 Construction 29,713 Small-scale industry 22,085 Cooperatives 73,656 Holders of old CACM industrial contracts 233,096 Export contracts 1,683,558 Government 658,555 State enterprises 1,239,932 International organizations 911,278 Retirees 139,350 CACM treaty 3,410,769 Source: Ministry of Treasury Table 5.6 Effects on tax revenue of exemptions from import duties and other taxes Dudes Consuimpton Tar Law 6946 Saks Tar Surciharges Total Potentia total 28.559 8.3S6 1.829 22.203 5.217 66.167 revenue Total revenue 13.398 5.446 1.023 10.116 2.523 32.506 receivea Exemptions 15.161 2.910 0.806 12.087 2.694 33.661 - 92 - Non-tariff barriers to imports Explicit nontariff barriers to imports include import license requirements and limits on import quantities. Such barriers have been used extensively in many countries and have created serious problems because they sever the link between domestic and international prices, create uncertainty, and generate large rents for the recipients of licenses, often leading to extensive lobbying and corruption. Costa Rica and other Central American countries have not relied on this kind of policy instrument to regulate trade, resolve balance of payments difficulties, or raise prices in the domestic market. Restricting access to foreign exchange also has much the same effect, but this instrument has not been used in Costa Rica in recent years.29 Costa Rica does, however, have some explicit nontariff barriers in place for other reasons. Imports of some products are prohibited or require licenses from one or more government ministries. Many of these are agricultural products-wheat, milk products, meat products, for example. Most wood products require an import license from the Director General of Forestry. Before pharmaceutical products, including cosmetics, can be imported, they must pass through a multistage process of registration (brands, labels, formulas), analysis, and approval that may take up to 2 years (appendix 4 lists restrictions and prohibitions). Some of the prohibitions and restrictions are justified by public health, or security concerns-although this does not prevent them from being administered in overly restrictive or burdensome ways, with protectionist effects. And many have no obvious justification and seem to be purely protectionist in intent. A technical review of prohibitions and restrictions would be helpful, to identify ways to make the system less protectionist, while still meeting its legitimate goals. 29.The requirement to deposit colones months before foreign exchange imposes a cost on importers, but its economic effects differ from those of other exchange restrictions and explicit nontariff barriers in two ways: frst, it is not discretionary-importers get the foreign exchange; second, it does not break the connection between international and domestic prices-although domestic prices rise by an amount approximately equal to the financial cost to the importer, they still move up and down with world prices. (Of course, if the percentage rate of the requirement is changed often, the connection between domestic and world prices becomes tenuous.) - 93 - Domestic price controls Costa Rica implemented its first formal price control mechanism in 1950 with the Law of Economic Defense, which established profit margins and official prices for a list of commodities. In 1975 the law of Consumer Protection established the legal framework for all price controls with special emphasis on the "basic consumer basket" (as defined by Decreto 13877-MEIC of September 12, 1982). Today, price controls consist of three regimes: * Maximum profit margins at the wholesale and retail levels for all goods produced domestically or imported, except goods with official prices. * Industrial margins for products that have official prices. * Maximum retail prices for some goods in the basic consumer basket and inputs used in their production. Maximum profit margins at the wholesale and retail levels range from 5 percent to 30 percent. For many foods, prices or margins are set at low levels in part as a poverty-alleviation measure. Some controls discriminate by source. For example, milk has a 5 percent margin at the wholesale level if produced domestically and 15 percent if imported (appendix 5 lists maximum profit margins). For the industrial sector, profit margins are set as a percentage of total cost, including financial costs, taxes, salaries, advertising, rent, training, transport and other indirect costs. But for the retail sector the margin is set as a percentage of the cost of operations excluding these indirect costs, so when indirect costs change-say when interest or tax rates change-a business' true profits may change greatly. In addition, margins are not calculated to take into account the need to retain earnings for reinvestment, thus discouraging capital accumulation. - 94 - Official prices have been established for several broad categories of goods-from rice, sugar, and beans to parking and notebooks: Animal feeds Intermediate inputs for food production (wheat) Rice By-products of rice and wheat Sugar Pasta Beef Milk Parking Corn Beans Vegetable oil Flour Purgative syrups Eggs Bread Notebooks Some of these prices are established using historic costs adjusted for changes in the consumer price index, some using cost models. In neither case is the methodology transparent and the frequency with which prices are updated varies-from every 3 months to once a year-and bears little relationship to movements in international prices. Price controls have discouraged movements of labor and capital to newly liberalized sectors of the economy, thereby reducing the impact of trade reforms. The role of antidumping and safeguards in Costa Rica There is a clear correlation between the introduction of trade liberalization measures and increased demands from pressure groups to activate or introduce antidumping measures. In recent years, this has happened in several countries in Latin America including Argentina, Brazil, Chile, Colombia, Mexico, and Peru. As trade liberalization programs reduce protection and the number of instruments that offer inefficient producers relief from import competition, antidumping measures are increasingly used as a substitute. The experience of industrial countries with antidumping measures shows that the measures have provided much unjustified protection, reducing competition in domestic markets harming consumers, and increasing the bias against exports (appendix 2). Even under antidumping regulations that are consistent with the GA7T code, initiating an antidumping action is quite easy for producers. And, once an action is started, the probability of an affirmative finding is very high given - 95 - the broad definition of "dumping" in most codes. In addition, most regulations greatly facilitate overestimation of the "dumping margin", thereby inflating the antidumping duty. It is hard to escape the conclusion that, from an economic point of view, countries would be better off without antidumping mechanisms. Costa Rica's entrepreneurs are expecting a similar policy response in Costa Rica. But the appropriate instrument to provide breathing space to import-competing industries during a trade liberalization process such as the one in Costa Rica is a safeguard mechanism, not an antidumping mechanism. Furthermore, current antidumping legislation in Costa Rica departs significantly from international rules and requires several changes to bring it more in line with international standards and to reduce its protectionist bias. Antidumnping regulations in Costa Rica Two laws govern antidumping regulations in Costa Rica: Law 2426 on Industrial Protection and Development and Law 7134, introduced as part of the second Structural Adjustment Program. No antidumping measures have ever been introduced under Law 2426, which dates back to 1959. In 1989, article 7 of Law 7134 introduced two modifications to Law 2426. First, it remedied the omission of agriculture from coverage by antidumping actions by creating a two-track antidumping mechanism, one administered by the Ministry of the Economy for manufactured products, and the other by the Ministry of Agriculture for agricultural products. Second, article 7 allowed import prohibitions to be used as an antidumping measure. Apparently, these modifications were needed in order to sell the program politically and to get Law 7134 approved. Article 7 of Law 7134 departs from GATT regulations. First, no country has a two-track antidumping mechanism in which the two tracks are totally independent-even to the extent of having two different administrative processes and two different ministers responsible for them. Second, any - 96 - quantitative restrictions under antidumping actions should be in the form of voluntary export restrictions. Since Costa Rica's law does not allow for price undertakings (voluntary price actions by the exporter to resolve the problem and avoid the imposition of antidumping duties), the antidumping measure must be an ad-valorem duty added to the existing tariff. Even though the tariff plus the antidumping duty might produce an effect similar to an import prohibition, explicit prohibition is inconsistent with the principles of antidumping and should not be used unilaterally. Thus Costa Rica's antidumping procedures (as embodied in legislation, regulations, and decrees) depart from GAIT regulations and accepted practices. And they go against the lessons of international experience with antidumping measures, which shows that antidumping measures may reduce the salutary effects of trade liberalization. As part of its negotiations to join the GATT, Costa Rica has agreed to sign the GAIT Antidumping Code. When this occurs, several changes will have to be introduced to the existing antidumping regulations. The current state of antidumping legislation and the recommended changes are summarized in table 5.7. The role of a safeguard mechanism Because of the protectionist danger inherent in the antidumping mechanism, Costa Rica might be better off with no antidumping regulations at all. This would not necessarily mean, however, that no mechanism would be available to provide "breathing room' for particular industries that are likely to be hit especially hard by international competition. A safeguard mechanism could serve this purpose far better than an antidumping mechanism if (but only if) the administrative apparatus is designed to balance all the costs and benefits to the economy-that is consumers as well as producers-deciding what action will be taken. How this could be done is discussed in Appendix 2. 97 - Table 5.7 Costa Rica's antidumping regulations and proposals for reform Convenmo and Law 7134 and Pro osalsfor reform of MEIC, Law 7134, Decree 16790- Decree 18098-MEIC andDecree 18098 MEC Principles Traditional Traditional Recognizc protectionist dangers Ministries of AJlow oniv affected industry to file Petition filings Not addressed Economy and of Publish peition in Diario Oficial Agriculture Improve petitioning form Evidence for assessing petition Not addressed Petitioning form Publish petition in D iario Official Representation of industry Not addressed Not addressed At least 30% Definition of industry Not addressed Not addressed Needs further study Prioritize the use of prices and be critical Determination of dumping Traditional Traditional of constructed values Introduce notion of serious injury to Determination of injury Vaguely Many indicators industry detin Connection between dumping and injury Not Not contemplated Be vefy careful in establishing link contemplated Responsibility for dumptng and Ministries of Process should unify and centralize injury investigations Not addressed Economy and of perhaps in the Ministry of Foreign Trade Agriculture Price undertakings None Not contemplated Introduce it Limit tariff surcharge to the margin of Type of antidumping measures dumping-or even lower; less if this allowed None Can be import removes the injury prohibition Duration of antidumping duty No expicit No explicit time Get a three-year limit time limit limit Forbid such measurcs, at least not Provisional and retroactive without preliminary evidence on dumping measures Not addressed Contemplated and injury Administrative time limits Not addressed Four months Limit to nine months Minister of Political responsibility Not addressed Economy and of Keep final decision visible Agriculture Members of the Antidumping Commission Not addressed See appendix Reduce bias in representation - 98 - Conclusion Costa Rica's trade policy reform program has made substantial progress in reducing the antiexport bias of the trade regime and making the economy more competitive. This progress has been substantial despite some back-tracking in the form of temporary surcharges and prior import deposits. The next steps in trade policy reform in Costa Rica have to be addressed in a broader context. Trade liberalization, elimination of domestic price and margin controls, rationalization of exemptions, and supportive macroeconomic policies will all be needed to achieve a sustainable outward development strategy. Domestic price and margin liberalization should be a top priority to reap the full benefits of the tariff reforms already in place. Any justification for these price controls based on fears of domestic monopoly or oligopoly is now undermined by the opening of the economy to foreign competition, while the poverty-alleviation argument for price controls on food is weak, since most of the implicit subsidy goes to higher-income groups who purchase more food than do the poor. The costs of the regulations are clear, though not easily quantified. Distorted and inflexible domestic prices send the wrong signals to producers and consumers. They make the adjustment process more difficult by hiding the true costs of products and activities. During adjustment, efficient activities and businesses should become more profitable and expand, while inefficient ones become less profitable and contract. Price controls interfere with this process. A second priority should be the immediate elimination and renunciation of any future use of prior import deposits and tariff surcharges. Temporary surcharges applied in an ad hoc manner to raise revenue increase the antiexport bias of the trade regime and are probably inefficient in raising revenue since the purchase of most nonessential imports is likely to be postponed until the surcharge expires. A better way to increase revenue would be to reduce the commodities and businesses exempted from taxes and import duties. In general, only imports to be used as inputs for exports of goods and - 99 - services or those required by treaty of diplomatic obligation should be exempt. Cutting out exemptions will not only increase revenue but will further reduce antiexport bias, and will be perceived as a permanent policy to solve the fiscal gap. Provided these reforms are backed up by supportive macroeconomic policy (chapter 1), economic agents will be able to base their decisions on policies that are sustainable, credible and consistent. In the short-term Costa Rica should continue to move toward a tariff range of 10-20 percent. An even better long-term target would be a uniform tariff, similar to Chile's, at the lowest level consistent with revenue needs. This may require negotiations with other members of the CACM, but it would be a worthwhile goal. A uniform tariff is not only efficient in an economic sense, but it makes the regime less susceptible to lobbying pressure from special interest groups as well. It also simplifies revenue collection. As a signatory to the GATT antidumping code, Costa Rica will need to revise its antidumping regulations and the legislation to do so is pending. While the protectionist slant of antidumping measures can be mitigated by appropriate design, two other approaches are likely to be superior. One is simply to have no mechanism to provide exceptions to the general trade regime. There is a very strong economic case to be made for this alternative, but experience suggests that trade policy reforms are politically more saleable if some mechanism is in place. The second alternative is to use a GATT- consistent safeguard mechanism that would allow the costs and benefits to society as a whole to be weighed before any action is taken. Nontariff barriers are not the problem in Costa Rica that they are in other countries. Nonetheless, it would be useful to look closely at a number of restrictions imposed on public health, security, or phytosanitary grounds. Those with protectionist effects should then be revised or repealed. This could be a useful topic for further study. -100- Chapter 6. Priorities for Sustaining Trade Policy Reform and Growth In recent years Costa Rica has made significant strides in reforming its trade policies to better integrate its economy with that of the international community. This has paid off in high rates of growth of GDP and nontraditional exports. Recently, however, there have been some signs that growth may be faltering. The challenge now is to deepen the reforms and support them with appropriate complementary policies, taking into account the repercussions-both positive and negative-of the changing international trading environment. Policy actions are required in a number of areas, not all of equal urgency. This chapter briefly discusses Costa Rica's current situation with respect to its trading partners and the international economy. It synthesizes the conclusions of previous chapters to identify the most important issues and priorities for policy action. The chapter concludes with some suggestions for future research and technical assistance that would be useful to the government in formulating and executing trade policy. Potential opportunities and pitfalls in the world trading environment Costa Rica's trade policies, which define its commercial relations with the international community, are in the midst of rapid transformation. At the same time, the policies of its trading partners and conditions in external markets are also changing rapidly. It is important that the changes in Costa Rica's policies be designed to allow the economy to take full advantage of opportunities offered by the external changes and to minimize the costs they may impose. Several changes or prospective changes in external market conditions are the results of Costa Rica's bilateral or multilateral trade negotiations. These include reduction in the remaining barriers to regional trade and the consequent revival of such trade; Costa Rica's membership in the GAIT and - 101 - the signing of codes that make it more difficult to impose countervailing duties on Costa Rican exports; and (apparently in the near future) sweeping reductions in tariffs and nontariff barriers to trade with Colombia, Mexico, and Venezuela. Other important developments are largely beyond Costa Rica's control. These include the collapse of the International Coffee Agreement and the uncertain future of the institutional arrangements in the world coffee market, the incorporation of Eastern Europe and the former Soviet Union into the world trading system, the increasing integration of members of the European Community and European Free Trade Association, and the prospective inclusion of Mexico in the North American Free Trade Agreement. These external changes do not alter the basic outline or relative priorities of the policies needed to sustain Costa Rica's exports and growth. Indeed, to a large extent they reinforce the rationale for these policies as well as the priorities laid out in the following section. In a period when the private sector must respond to rapid changes in the international environment, it becomes even mor important to have an appropriate policy framework that allows firms to respond quickly and flexibly and to maintain competitiveness. Nonetheless, it is instructive to consider how the new environment will change the opportunities and constraints for the Costa Rican economy. There is a great deal of concern in Costa Rica (and throughout Central America) that the incorporation of Mexico into a free trade agreement with the United States and Canada will seriously damage Costa Rica's export trade. The fear is that when Mexican exports are no longer subject to tariffs and other import barriers in the U.S. market, they will displace Costa Rican exports in the U.S. market, and investment in these products will go to Mexico instead of Costa Rica. While this may occur for some products, the problem is not likely to be as severe as some believe. Serious problems from displacement would occur only for products that are currently subject to high tariffs or other barriers when exported from Mexico and that are important Costa Rican exports. - 102- Even without undertaking a quantitative analysis, it is clear that the number of products that meet both conditions is small. In many of the markets where Costa Rican and Mexican products compete, the products from both countries already enjoy duty-free access, so a free trade agreement will have no direct effect. This is true, for example, of the "maquila" assembly industries like garments and electronics, as well as Costa Rica's major traditional agricultural exports. (It is not true of sugar, but since the elimination of restrictions on Mexican sugar imports would have to be tied to major reforms in U.S. agricultural policy, such a step appears doubtful. It is also unclear what, if anything, the negotiations will do to open the U.S. market in goods covered under multilateral agreements like the Multi-Fibre Arrangement.) Some nontraditional agricultural exports could be affected by the agreement, though it remains to be seen how agricultural products will be handled in the Mexico-U.S. negotiations. There could be some negative impact on Costa Rica's ability to develop new exports, but this impact will likely be limited, for two reasons. One is that tariffs on most imports into the United States are already quite low, so eliminating them wIll give only a small advantage to imports from Mexico. The second is that Costa Rica's competitive edge in the future will likely be in products that depend on relatively high-wage, skilled labor, for which competition with Mexico will not be as intense. Overall then, a Mexico-U.S. agreement offers little reason for pessimism, though it does increase the urgency of making the Costa Rican economy flexible and competitive and of strengthening Costa Rican-Mexican trade links. Indeed, in some respects, Costa Rican policy-makers could be justifiably optimistic. If, as expected, the free trade agreement leads to increased growth of the Mexican economy, the prospective Costa Rica-Mexico agreement could put Costa Rica in an excellent position to take advantage of increased demand in that market. Also, Costa Rica, like most other Latin American and Caribbean countries, has signed a framework agreement for future negotiations to join the North American free trade area. While this is a promising development, it must be regarded as a - 103 - long-term prospect. Four years passed between the signing of a framework agreement between the United States and Mexico and the beginning of negotiations on the free trade agreement. And U.S. Trade Representative Carla Hills has recently noted that the U.S. Congress will probably want to see positive results before authorizing negotiations to include more countries. Nonetheless, the reforms already carried out or currently being considered-including those recommended in this report-will go a long way toward making Costa Rica an attractive candidate with which to negotiate such an agreement when the time comes. And while waiting for the larger negotiations, Costa Rica should open discussions on some technical issues whose resolution could greatly help exporters-for example, ensuring that the U.S. and the EC accept Costa Rican documentation on health inspections, country of origin, etc. In the meantime, Costa Rican trade negotiators will be busy with ongoing negotiations with other Latin American partners. Increased trading links with Colombia, Mexico, and Venezuela will create opportunities for significant gains for the Costa Rican economy. Two pitfalls should be avoided, however, when negotiating and implementing these agreements. One danger is symbolized by the tendency (in Costa Rica as well as other countries) to view negotiations as a 'one-way street' and to emphasize only the opportunities for increasing exports. This ignores the advantages to be had from increasing imports: increased competition in domestic markets and wider selection, higher quality, and lower prices for buyers, whether consumers or producers who use imported inputs. Thus, although Venezuela has essentially offered to immediately lower all barriers to Costa Rican exports without asking for reciprocal actions for five years, Costa Rica may want to accelerate this schedule to take advantage of the gains from opening its own markets. A second danger to avoid concerns the response to the transshipment of goods through Mexico. If Mexico has free trade with the United States and Costa Rica has free trade with Mexico, there is a potential for U.S. goods to be transshipped duty-free to Costa Rica through Mexico with little or no - 104- processing. Rules of origin are generally applied to prevent this. These specify, for example, that any goods imported from Mexico must have a certain fraction of their value added produced in Mexico. The danger here, judging from problems in some regional integration schemes, is that the rules of origin may be too restrictive. Rules that require very high percentages of value added in the trade partner discourage trade in light manufactures (which require minimal processing) and may force producers to use inferior or costly local inputs. In formulating and negotiating its rules of origin, Costa Rica should be careful to minimize this danger by making the rules relatively unrestrictive. Negotiators may want to seek technical assistance for this. Reactivation of the Central American Common Market (CACM) may also be beneficial, as long as this is part of a general reform process among all the member countries to integrate their economies with international markets, and as long as it does not impede progress on broader reforms in any country. Regional markets in general will never be as important as the international market, but they could be quite important for products whose international markets are thin or nonexistent, such as special bean varieties and white corn. Regional trade in these products could help mitigate the effects of crop failure in some areas of the region, and for that reason it will be especially important to follow through on the commitment of the CACM agriculture ministers to quickly eliminate the remaining barriers to intraregional agricultural trade. Expanding intraregional trade may also call for increased attention to the highways that carry much of this trade, although this seems to be of secondary importance in Costa Rica, which has relatively good roads but has problems with its ports and airport. - 105 - Priorities in policy actions Macroeconomic policy Perhaps the greatest immediate danger to reform and future growth is the macroeconomic environment: unsupportive macroeconomic conditions could seriously undermine the reforms. In the recent past, Costa Rica responded to fiscal problems by increasing import surcharges and prior deposits, thereby partially reversing previous measures that had reduced antiexport bias. Although the surcharges have been eliminated, uncertainty remains, fueled by continuing large fiscal deficits, and the accompanying threat that import surcharges and prior deposits could be raised again. To reduce the uncertainty, top priority should therefore be given to reducing deficits by cutting government current spending. Reduced spending will also be necessary to sustain the continuing real depreciation of the exchange rate that will have to accompany the further reduction of import tariffs and exemptions. Since much of the spending reduction will necessarily occur through reductions in the government labor force, the private labor market must be encouraged to absorb and train these workers. This will increase their productivity and raise wages in the medium term. In the short term, however, changes in the minimum wage structure will be required to make wages more flexible and encourage businesses to hire and re-train workers. If these policies are followed, there is no reason to believe that the structural adjustment will result in rising unemployment. Controls on holding, trading, and writing contracts in terms of foreign exchange-which are special problems for exporters, but also a burden for local firms-need to be phased out. In the meantime, exchange rate policy should aim to ensure that there is no significant market distortions introduced by large deviations of the official from the parallel market rate. - 106 - Trade and infrastructure Apart from macroeconomic policy, perhaps the greatest threat to continued trade expansion is the difficulty and cost of getting goods into and out of the country. Customs is a particularly serious problem. Although this report does not specifically address this issue (it is the subject of other ongoing studies, like that by the Inter-American Development Bank), it seems clear that the government needs to focus attention not only on minor technical reforms of customs (better training, computerization) but also on the possible need for deeper changes (changing to a system of spot inspections, limiting custom's role in export inspection, or even private operation of Customs). Airport and port capacity are strained and are quickly becoming major obstacles. Facilities need to be upgraded and inspection procedures improved. Port costs and efficiency appear to be issues as well. Resolution of all these problems will require government investment and revision of the laws to allow the private sector to invest in and operate facilities, such as cold storage facilities at the airport. Institutional changes in JAPDEVA will probably also be necessary. In the current environment, in which fiscal problems are very serious, the government should carefully consider the option of upgrading the existing port and airport before deciding to embark on large-scale investment in building new facilities. Import regime Although tariffs have been reduced considerably in the last few years, effective protection still remains high for many products, because of the high (50 percent including surcharge) ceiling on tariffs and numerous exemptions from tariffs on imported inputs. Except for exporters (including service exporters, like tourism) or where required by treaty or diplomatic obligation, these exemptions should be eliminated quickly. Certain laws, such as Law 7017 and laws applying to the poultry and pork industries, give special tax breaks to producers for the domestic market, contributing to the - 107 - antiexport bias. These should also be phased out quickly. Both of these steps will not only reduce protection and antiexport bias, but will also increase revenue. Further reduction of tariff levels will also be useful and the recently announced plans to move to a tariff range of 10-20 percent is an excellent step. Reduction to even lower levels probably is not the highest of priorities, but in the longer term, the lower and more uniform the rates, the better. Nontariff barriers to trade (with the exception of requirements for prior deposit of foreign exchange and quantitative restrictions on some food items) are less of a problem in Costa Rica than in many countries, and their importance in the reform process is correspondingly reduced. Nonetheless, some regulations-controls on prices and margins, for example-are clearly inconsistent with a relatively open and competitive economy, in which the flexibility to change consumption and production patterns is absolutely essential, and these regulations should be abolished immediately. Less clear is the extent to which other regulations applied to imports-labelling laws, phytosanitary restrictions, brand registration requirements, health and safety requirements-restrict trade, though some undoubtedly have that effect. They also greatly complicate international trade negotiations and should be assessed to determine whether the costs exceed the benefits and whether the costs fall more heavily on imports than on domestic production. Then decisions need to be made about reforming or repealing regulations that meet either of these criteria. In general, given their potential for abuse and the poor experience of other countries with many regulations of this type, they should be looked at skeptically. One area that has not yet become a serious problem, but could do so in the near future, is antidumping policy. Judging from the revisions to the antidumping laws currently being considered in Costa Rica, the country may be headed toward installing the same kind of mechanism that a number of other economies have been using. The experience of those countries has not been a happy one, and - 108 - Costa Rica should take care to avoid their mistakes by adopting a mechanism more consistent with the recommendations in Chapter 5 or Appendix 2. Non-traditional export development Costa Rica's nontraditional exports and some traditional exports have been booming in recent years, reflecting mainly the much weakened antiexport bias, thanks to lower import protection, favorable exchange rate policy, export regime measures, and external market conditions. Reforms to the free trade zone system and introduction by the Export and Investment Promotion Center (CENPRO) of the "single window" for export documentation have made important contributions. The Coalition for Development Initiatives (CINDE) has also played an effective role by promoting foreign investment and (though it is less proven in its other roles) in providing technical and marketing assistance to nontraditional exporters. The new export development funding system (FUNDEX) represents a very promising approach to continuing support for export development, for several reasons. First, it insulates funding from the government's budgetary uncertainty in times of austerity. Second, it allows flexibility in the allocation of funding to different service providers. To ensure maximum benefit from this flexibility, FUNDEX needs to develop mechanisms to allow users (recipients of assistance) to choose among alternate providers, perhaps including CINDE, private consultants, or organizations such as the camaras, thereby also enabling service users to influence the quality of the service they receive. Third, the FUNDEX mechanism includes a periodic review which could be used to review not only specific programs but the role of export promotion as a whole. When considering appropriate policy measures for nontraditional exports, a distinction needs to be drawn between two types of functions. Those that are public goods will probably always need to be provided through public funding. These include promoting foreign investment, promoting Costa Rican exports abroad (in a general way, not linked to specific firms), and providing information helpful to a - 109 - wide range of exporters. Other export development services are firm-specific. For these, public funding has been justified by the need to offset the effects of other policies that create an antiexport bias and by the temporary infant industry nature of some export activities. Both of these justifications will decrease in importance over time, implying that public funding for export development and export subsidies (CATS) should be phased out as well. The timetable for phasing out CATS should take into account not only the reduced need for them as the antiexport bias declines, but also their distortionary effects, high fiscal cost and potential for provoking retaliatory measures by trading partners. The government has begun to reduce the rates on these subsidies and these steps should be continued. Traditional exports As is well known, the fortunes of traditional exports tend to rise and fall with international market conditions over which Costa Rica has little control. Nonetheless, internal policies do affect Costa Rica's international competitiveness in these markets since they affect the average cost of producing exports, and the flexibility with which domestic production responds to international changes. Domestic policies and marketing arrangements for these products are long-standing and well understood by market participants, and there is little pressure for immediate change. Nonetheless, the coffee and, to a lesser extent, sugar markets are heavily regulated and therefore very rigid. Furthermore, traditional export producers are not given access to duty-free imported inputs and in some cases are even taxed, either explicitly (bananas) or implicitly (through export restrictions on coffee, leather, milk, and some forestry products). With the exceptions mentioned below, reform in these markets is not a top priority. Nevertheless, in the medium term, the regulations governing the sugar and especially the coffee markets should be reviewed. For coffee, bananas, and beef exports, implicit taxation through direct controls should be - 110- quickly phased out and explicit taxes should be gradually phased out in a manner consistent with fiscal needs (the government has at least temporarily eliminated the coffee export tax). Means other than an export tax-for example, a stumpage fee for each tree cut down or a tax on the use of environmentally damaging chemicals-would be more efficient for environmental regulation of the banana industry. Consideration should be given to the pricing system for sugar, which taxes consumers by forcing them to pay prices above world levels. Traditional exports are not 'infant industries," so there is no justification for according them the same preferential treatment given to nontraditional exports. They should, however, be exempt from tariffs or controls on imported inputs and otherwise insulated as much as possible from antiexport bias. Three actions should be given high priority: removing restrictions on leather and milk exports to encourage the beef industry, which is in decline; removing bans on forestry exports (which implicitly tax the primary producers and subsidize the industries that use wood as an input); and resolving the harvest labor shortage, which could shortly become a serious problem for coffee and banana production. An agenda for future research and technical assistance This report has highlighted a number of unanswered questions and unresolved issues. Because some of these issues are quite technical, they should probably be addressed through more in-depth follow- up studies and technical assistance. The following is a list of some of the studies and assistance that should be useful (excluding those that are already being handled by ongoing work): * A technical study to identify which of numerous import requirements (phytosanitary certification, labelling, and so on) are necessary for purposes other than protection, and to design a program to reform or repeal those that are not. * Assistance (probably to CENPRO) in completing the design and putting into effect a one-stop documentation center for imports, similar to that introduced for exports. - 111 - * A study to design a method and set up a system to monitor the antiexport bias in the economy. This system would, among other things, serve as a guide to the kinds of export promotion services FUNDEX should be funding and as a monitoring device for the import policy reforms. CENPRO might be a logical unit to carry out such an activity. * Assistance in designing a more efficient alternative to the antidumping system now in place, along the lines suggested in this report. * Assistance in designing and negotiating rules of origin that will not be unduly protectionist. * For FUNDEX, the following assistance would be helpful: * Assistance in designing a system to audit the results achieved by CINDE and other recipients of funds. * Studies to evaluate CINDE's agriculture program and to update the evaluation of CINDE's investment promotion program (which has recently experienced significant personnel cuts). * Assistance in developing and conducting a survey of export service users. * An evaluation of cost recovery methods now being used by CINDE and assistance in developing criteria for cost recovery to be used by export service providers in the future. * An evaluation of the current duty drawback system for indirect exporters (focusing on why it is not used very much) and assistance in improving it. * A study of the coffee marketing system, focusing on how to de-regulate it and give it more flexibility to respond to the rapidly changing international coffee market. * A study laying out for government consideration various options for significant customs reform. Customs is clearly a major problem, and studies that have been carried out to date seem to focus on fine-tuning the existing system rather than on evaluating options for more significant changes. * A detailed evaluation of the role of railways in the transport infrastructure and what physical investments and/or institutional changes will be needed. * An evaluation of institutional changes needed in the port and airport authorities, and assistance designing a short- and long-term action plan. This kind of study/technical assistance work could be pursued by the government on its own, or in cooperation with the UNDP/World Bank Trade Expansion Program or, perhaps, UNDP country -programs or other donors. - 112 - APPENDIX TABLE Appendix 1 Traditional Exports Jonathan Coleman Appendix 2 Antidumping vs. Safeguards During a Trade Liberalization Process: The Case of Costa Rica Julio Nogues Appendix 3 Nontraditional Exports of Costa Rica, 1987-89 Appendix 4 Nontariff Barriers to Imports and Exports Appendix 5 Price and Margin Controls - 113 - APPENDIX 1 Traditional Exports Jonathan Coleman - 115 - Traditional Exports The traditional exports of Costa Rica are bananas, beef, coffee, and sugar, which make up more than 90 percent of the value of agricultural exports, and more than 55 percent of total merchandise trade (FAO). Each of the traditional exports will be discussed in terms of its contribution to the agricultural sector, pricing and marketing system, constraints on export expansion, and prospects for future export growth. Coffee Production and export performance Traditionally, coffee has been the most important export in terms of its contribution to export earnings and GDP, though its share of exports has declined in recent years due to the growth in other exports and falling coffee prices. Also, it provides employment for about one-quarter of the agricultural labor force. Production is widely scattered throughout the country on approximately 125,000 farms, three-quarters of which are less than 10 hectares. Table 1.1 shows coffee supply and distribution for the period 1970-1990. In 1970, production was 1.4 million (60kg) bags. During the 1970s and 1980s, the sector grew rapidly, and by 1989 production had doubled its 1970 level, reaching a record 2.76 million bags. Some of this expansion resulted from the development of new coffee area which increased from 74,000 hectares in 1970 to 101,000 in 1990, an increase of about one-third. Recently, the rate of increase in coffee area has declined and it is believed that much of the land suitable for production is in use. As shown in Table 1. 1, production growth also resulted from improved coffee yields. The introduction of improved varieties has been very rapid and are reported to cover 90 percent of the coffee area. Adoption of better varieties has improved cultivation - 116- practices and led to the intensive use of fertilizer, fungicides and herbicides, as well as increasing plantation densities. The increase in production was the main source of export expansion during the 1970s and 1980s. As shown in table Al.1, exports increased modestly from 1.07 million bags in 1970 to 1.32 million bags in 1980. However, during the 1980s, exports increased rapidly and reached 2.45 million bags in 1990, an annual average rate of increase of 6.3 percent. In 1990, Costa Rica supplied about 3 percent of the world trade, compared with only 1.9 percent in 1970. This expansion has occurred in spite of the export quota system of the International Coffee Agreement (ICA), which operated until March 19891 and which kept prices between $1.20-$1.40/lb since 1981. The major importers of Costa Rican coffee are Germany, Spain, France, and Switzerland, while Canada and Japan are important developing markets. Table Al.l Costa Rica: Coffee supply, distribution, and export value, 1970-1990 Year 1970 1975 1980 1985 1986 1987 1988 1989 1990 Production"/ 1,403 1,430 1,522 2,516 1,514 2,566 2,375 2,758 2,453 Area2l 74 83 81 90 91 92 97 100 101 Yield3' 19.0 17.2 18.8 28.0 16.6 27.9 24.5 27.6 24.3 Exports4' 1,067 1,412 1,325 2,083 1,486 2,385 2,205 2,490 2,450 Export Value5/ 73 125 246 305 372 334 316 286 245 % Export Earnings 31.6 28.2 24.6 31.2 33.2 28.8 25.4 20.4 16.8 " '000 bags (lbag=60kg). 2v '000 hectares. 3' bags per hectare. 4' 000 bags. 5' million US dollars. Source: USDA, ICAFE, IECIT, DMF. 1 .Akiyama and Varangis (1989) showed that Costa Rica would have reeived about 9% more in export earnings if the ICA quota system had not operated during the period 1981-86. This is because the quotas allocated to the small coffee producing countries were fairly small in comparison to their rapidly increasing production. Production in excess of the quota assigned for export to ICA member countries had to be stored or sold to non-member importer countries at prices that were artificially depressed by the ICA system. Therefore, without the quota system Costa Rica would have been able to sell coffee to non-member countries at higher world prices, and storage costs would have been substantialy reduced. - 117 - Pricing and marketing system The coffee pricing and marketing system in Costa Rica has been described by others and only a brief overview is presented below2. The system is highly controlled, with many regulations having developed so that the benefits of the ICA quota system could be shared among by all market participants. There are about 20 exporters, 100 millers (of which 50 percent are cooperatives), and 75,000 producers of coffee. All coffee flows and financial transactions within the system must be approved by the government through the coffee institute (ICAFE). Coffee is delivered to mills within 24 hours of harvest. On delivery, producers receive an initial payment (adelanto) equivalent to about 25 percent of the expected final price and further payments are made at about three month intervals after delivery. This payment acts as a form of credit enabling producers to finance their working capital throughout the season. The final price (liquidacion) is realized at the end of the crop year. (October 1) and based on the price of sales over the entire year. Until the final payment is made the coffee belongs to the growers although they have no control over the conditions of sales to exporters. However, mills must compete with one another for throughput, and therefore it is in their best interest to provide growers with the best possible initial and final payments. Millers and exporters negotiate a price which must be approved by ICAFE. This price is known as the precio rieles. The producer price is then determined by the precio rieles less the deductible processing costs allowable by ICAFE (e.g., internal freight, packing), the mill's return (currently set by ICAFE at 9 percent of the difference between the precio rieles and the processing costs), and the 2.Among other studies are: Myers, R.J., (1991), 'Managing Price Risks in the Coffee Sector of Costa Rica', Draft Report, JECIT, World Bank. Stewart, R., (1989), 'A Study of Costa Rica's Marketing System', Prepared for RPO 675-07 'Managing Instability in Agricultural Prices: The Case of Costa Rica.' Jarunillo, F., (1990), 'Policy Responsesto the CollapseofWorld Coffee Prices: The Cases of Costa Rica,Mexico, and El Salvador', Report No. 831 I-LAC, World Bank. - 118 - production tax (which depends on the export price level). In turn, the precio rieles is determined by the international price, equivalent to the export price in colones, less the per unit costs of the exporter, the exporter's return, and the export tax (which is also determined by the level of the export price, and is used to finance ICAFE as well as general government expenditures). Constraints on export expansion The coffee sector faces a number of constraints which could damage the prospects for future export expansion. While some of the constraints are beyond the control of the government, there is still much the government can do to facilitate and promote coffee exports. The main concerns voiced by coffee sector participants include the poor international coffee prices, problems associated with coffee marketing and prices, credit, labor, and the coffee policies of the EC. Currently, the price of about $2/kg is below the cost of producing coffee for most of the world's coffee producing countries. The slump in prices is essentially caused by the over-supply of coffee in the world market. Promotion of Costa Rican coffee is important, although most participants in the world coffee market know that Costa Rica produces high-quality coffee, for which roasters around the world are prepared to pay a premium (although the premium of about $2-$3/ton is not enough to compensate for the low international coffee price). Other constraints on export expansion have been associated with the excessively regulated and rigid coffee marketing and pricing system. First, by law coffee belongs to the grower until the miller sells it to the exporter, even though the miller decides at what price coffee is sold, to which exporter, and when. Separation of ownership from decision-making removes much of the incentive for making carefully considered decisions, especially since millers' profits are only loosely determined by the sales price and conditions (due to the regulated margin system). A solution would be to reform the regulated margin system and to allow payment of the whole price on delivery, thereby transferring - 119- coffee ownership immediately to the mills. However, under current law the mills are forbidden to buy coffee outright on delivery. A second problem relates to quality control. Typically, mills are supplied by many small growers who deliver fairly small volumes of coffee. This makes it impossible for the millers to individually grade the coffee received from each grower, and therefore producers in each geographical area are paid the same price. As a result, premiums can not be given to individual growers who produce high- quality coffee. Middlemen or brokers who might serve the function of collecting and grading the coffee are prohibited by law. A third constraint is caused by policies related to marketing and pricing coffee for the domestic market. About 10 percent of coffee production is sold domestically and mills are required by law to submit a portion of their output to the domestic market. Domestic prices, under the control of ICAFE, are set substantially below international prices, such that consumers receive a subsidy of about $1/kg. As a result, only the coffee of the poorest quality finds its way on to the domestic market. Also, there is anecdotal evidence that a sizable volume of coffee supposedly destined for domestic consumption is smuggled to Panama and Nicaragua, which would explain the high domestic consumption of coffee reported in the official statistics. A fourth problem, noted by many coffee sector participants, relates to the availability and cost of credit to the coffee sector. Generally, individual producers are too small to obtain credit from the domestic banks. Credit is too tight and farmers are considered too risky, and loans in colones from the Central Bank have been very limited since the late-1970s and early-1980s. However, in exchange for a guarantee of coffee delivery, producers get credit from the mills. Mills obtain finance from two sources: (i) pre-selling coffee, or (ii) overseas credit markets. The mills use their coffee as collateral against these loans (even though the coffee belongs to the growers). However, this introduces - 120 - exchange rate risk and given the long-run decline in the value of the colon, leads to financial losses3. The mechanism works as follows. The mills obtain dollar loans early in the season (say, November in year t) and convert them to colones through the Central Bank. The loans are paid back at the end of the season in dollars. The sales of coffee on the international market provide dollars, but by law, these must be converted to colones at the same rate at which the loans were made. But, the debt is converted into dollars at the new exchange rate. Therefore, the mills are not able to take advantage of exchange rate devaluation and mills who borrow less from overseas are placed at a considerable advantage over others, in that they can provide producers with higher liquidation payments. The coffee sector does not have access to domestic currency credit lines the Central Bank provides to some other sectors. A few other problems were mentioned by sector participants. In 1990, it was estimated that 300,000 tons of coffee (valued at $24 million) remained on the trees because of the lack of pickers. Nicaraguan pickers have been used but there are now stricter controls in place and the employment opportunities in Nicaragua are better now. Also, economic support of export promotion has been inadequate. ICAFE has a promotion budget of about 20 million colones. Recent export promotion has been focused on Canada and Japan and directed to the coffee specialty stores in these countries. Japan, however, is a very expensive market to penetrate (e.g., it costs $10,000/day to appear at a trade show). Finally, importers of coffee in the EC are required to pay a 4 percent import tax. However, imports from Andean Pact countries are exempt. This puts Costa Rican coffee at a price disadvantage compared to it Andean Pact competitors (mainly Columbia). Currently, a proposal to give Costa Rican coffee the same exemption is being considered by the European parliament and a decision will be made in late-1991. 3.Bctween 1985 and 1990, the average annual devaluation of the colon vira-vis the dollar was 10.4b. - 121 - Prospects for export expansion The prospects for Costa Rican coffee exports depend critically on the world market and international prices. The future prices are heavily dependent on real exchange rate changes and productivity in the major coffee producing countries. However, based on the World Bank's econometric model of the world coffee market, the nominal price of coffee is expected to increase throughout the 1990s, from $2.05/kg in 1991 to $4.42/kg in 2000, and to $5.32/kg in 2005, or an increase of about 54 percent in real terms. Prices are expected to recover because of low production in the early part of the 1990s, with this slow-down the result of low coffee prices following the collapse of the ICA in July 1989. As well as the increase in future coffee prices, exporters will benefit to the extent the colon continues to depreciate in real terms against the US dollar. World coffee production is expected to grow on average by 1.6 percent annually over the 1991- 2005 period, and Costa Rica's share of this will depend on its competitiveness in international markets. This is associated with non-human factors, such as land, soil, and climate, as well as human factors, such as education, research, extension, and government policies directed towards the overall economy and to the coffee sector in particular. Land expansion is unlikely, although more efficient use of fertilizers and irrigation, and greater access to credit would improve efficiency. However, Costa Rica is already highly efficient and has one of the highest rates of productivity in coffee production in the world. Yields are expected to remain high, although growth will be constrained by the lack of land, high wages, and labor shortages. Nonetheless, production is expected to increase from 2.6 million bags in 1991 to 3.3 million bags in 2000, and to 3.7 million bags in 2005, representing an annual average increase of 2.4 percent over the period 1991-2005. One important source of improved competitiveness may be through enhanced efficiency in the processing and marketing as discussed above. - 122 - World consumption is forecast to increase from 98.7 million bags in 1991 to 107.3 million bags by 2000. Japan is the major source of demand expansion with an annual average growth of 3.4 percent over the period 1991-2005, although this rate is below of the 7.7 percent growth for the period 1970-1990. The other potential source of demand growth is Eastern Europe and the USSR, where current per capita consumption is very low. However, it is unclear at the moment whether these countries will be able to pay in hard currency, and demand is weakened by heavy taxes on non-essential imports. A recent trend in coffee consumption has been a change in taste away from Robusta coffee to the more milder Arabica coffee, the coffee type produced in Costa Rica. Arabica is.now being used more in instant coffee and studies show that Arabica coffee has a higher income elasticity of demand than Robusta. Another issue which could impact greatly on the future of Costa Rican coffee exports is whether a new ICA will be established. The ICA broke down in March 1989 because of disagreement on how to allocate quotas among exporting countries by coffee types, and also disagreement on how to eliminate the large discounts given to exporters to the importing non-ICA members (e.g., Eastern Europe and USSR). Generally it is believed that a new ICA is unlikely in the near future, and if an agreement is made it will be much more flexible than the old one in terms of allocating quotas among exporting countries and among coffee types. - 123 - Table A1.2 Costa Rica: Prospects for the coftee sector, 1991-2005 Year 1991 1992 1993 1994 1995 2000 2005 -000 bags Costa Rica Production 2,600 2,750 2,780 2,850 2.880 3,300 3,700 Exports 2,400 2,470 2,460 2,510 2,500 2,800 3,100 World ProducLion 90,440 97,850 99,290 101,820 101,340 106,900 114,500 Exports 74,920 74,170 74,790 75,250 75,600 79,100 84,200 Consumption 98,660 98,900 100,780 101,520 102,410 107,340 115,040 Nominal Pricec' 205 223 233 250 280 442 532 Deflated Price" 134 143 146 151 161 207 207 (MUV 1985=100) " Cents/kg. Source: USDA, ICAFE, IECIT, World Bank. Bananas Production and export performance Bananas represent about 25 percent of agricultural GDP in Costa Rica and are traditionally the second most important crop after coffee. Almost all bananas are grown by big multinational companies in the Atlantic region (95 percent of farms are larger than 100 hectares). The southern Pacific coast region was an important growing area until labor disputes led to the withdrawal from this area of many important companies. Bananas are grown under high levels of technology, with good organization and investment in research. As a result, the cost of production, ranging between $4.0/box and $5.0/box, is low by international standards, while yields are around 45 tons/ha of exportable fruit. Costa Rica has been able to maintain its market share during periods of world market instability by being an efficient producer of bananas. Table Al.3 shows banana exports, area and productivity for 1985-1990. Productivity grew rapidly during the mid- and late-1980s, increasing by more than 25 percent between 1985 and 1989. Since 1987, banana area has also risen rapidly, with an additional 8,000 hectares coming into production between 1986 and 1990. - 124 - Table A1.3 Costa Rica: Banana exports, area and productivity, 1985-1990 Year Baxes Area Producvnv (18 kg) /heczares) ebareshawyr) 1985 44,301 20,535 2,157 1986 48,637 20,287 2,397 1987 51,958 20,987 2,476 1988 56,596 22,022 2,570 1989 67,519 24,722 2,731 1990 74,138 28,296 2,620 Source: CORBANA Generally, between 80-85 percent of the crop is exported. In 1985, exports were 797,500 tons equal to 44.3 million 18kg boxes. By 1990, these had risen to 74 million boxes, an increase of almost 70 percent. Most banana exports are sent to the United States (60 percent) and the EC (30 percent), although Japan is becoming an important market. Banana export growth is continuing and in the first six months of 1991, 41.2 million boxes were sold, 12.7 percent higher than for the same time period last year. Also, during this period, exports were valued at $194 million, up 24 percent over last year's value, due largely to the $1/box price increase introduced in early 1991. One forecast is for income to reach close to $400 million for 1991. Pricing and marketing systems The banana sector in Costa Rica is a mature industry. About 30 percent of the production is by domestic growers and the remainder produced by the multinational organizations (e.g., Geest, Dole, Chiquita, and Del Monte). Banana growers belong to CORBANA, an organization which represents their interests and undertakes marketing and a wide program of research and industry monitoring. CORBANA has three types of shareholders, representing the interests of the government, national - 125 - banks, and producers, including the multinational companies. Funding for CORBANA is provided by a portion of the export tax on bananas. Before 1974, the price of banana was negotiated freely between the growers and the companies. However, in order the protect the interests of growers against the powerful banana companies, the law was changed, and now the price is set by government. Recently, the price of bananas was increased by $1 to $5.29/box for first quality bananas. Currently, exports are taxed at a rate of $0.55/box. The recent price increase has strengthened the incentives for companies to supply their own fruit, and in'some cases, the companies have aggressively tried to buy-out independent growers. For some companies the cost of production is close to $4.00/box, although they must still pay $5.29/box to the growers who supply them. Therefore, companies are losing $1.29/box on purchases from independent growers. Constraints on export expansion While the growth in banana exports has been impressive during the late-1980s and early-1990s, industry officials have identified a number of constraints on export growth which threaten to slow the rate of expansion. These relate to port facilities, uncertainty over the European market, labor shortages, environmental concerns, and government control and bureaucracy. In general, the infrastructure for bananas in good. However, the port at Limon is very inefficient and inadequate, and is the single-most important concern of the banana sector. Currently the port is heavily over-utilized (72 percent) for its condition and many of the facilities are out-dated. Additionally, labor problems have impeded exports and strikes have been common. Further problems were created by the recent earthquake which caused structural damage to the port facilities. The slow turn-around at the port has led the conference shipping lines to impose surcharges to compensate them for the costs of waiting. These surcharges are reported to range between $3,000 - $8,000 per day. - 126 - Also, the cost of using the port is very high (i.e., about $600 per 40' container, in comparison to $70 at ports in the Dominican Republic). Efforts to improve the port infrastructure have been weak. JAPDEVA, a development agency which operates in the Limon area, has received more than $17 million from the banana sector to improve the port facilities, but as yet, nothing has been done. Government policies have generally not allowed privately- and foreign-owned companies to invest in infrastructure. Currently, only Germany is a major European importer of Costa Rican bananas. Nonetheless, a lot of growth has taken place, with many of the major exporters (e.g., Chiquita, Dole, Del Monte, Geest, Banacol, and Turbana) increasing exports to this market. Potentially, large volumes of bananas could find their way to the United Kingdom, France, and Spain after 1992 if these markets are opened by eliminating the current preferences given to the Lome Convention countries. The Eastern European market has a lot of potential, although exports are constrained by the lack of hard currency. Nonetheless, at the moment, consumption per capita in Eastern Europe is only 1-1.5kg annually, compared to 14kg in Western Europe, so there would appear to be great potential for export expansion in the future. The banana harvest extends throughout the whole year and is fairly labor intensive. Some companies have experienced labor shortages and migrant workers from Nicaragua and Panama have been employed, although recently, immigration policies have impeded their employment opportunities. In general, however, companies are able to keep workers by providing good wages and other benefits, including housing and health care. Some exporters claim that there is a shortage of skilled workers needed to operate the highly efficient and technically advanced banana operations which have developed in Costa Rica. A potentially important constraint on further expansion is the environmental concerns of consumers in the important consuming countries, especially the United States. There are reports that fertilizers - 127 - used in banana production have created ecological problems associated with developing new plantations in areas of former rain-forest, and that some of the reefs have been killed by the run-off of chemicals originally applied to bananas. Negative publicity generated by such reports could lead to a boycotting of bananas from Costa Rica if this problem is not addressed. The banana companies are fully aware of this possibility, and have responded by arguing that these claims are overstated. They point out, for example, that the total area of banana is currently 30,000 hectares, while the annual rate of deforestation is 60,000 hectares, indicating that banana growing could be, at worst, only a small part of the problem. As well, they claim that much of the additional area of bananas was previously used for cocoa production, pasture, or bush vegetation. It is very difficult for banana companies to purchase imported inputs (e.g., plastics) because customs are very slow and cumbersome. Also, the companies must register colones with the Central Bank to buy dollars in order to import, and must wait anywhere from 60 days to 90 days to receive the dollars. Also, exporters complain that the Government rescinds commitments made under policy initiatives. For example, the Banana Expansion Program (1985) gave firns special access to land, tax- advantages, and incentives to establish new plantations. However, this program was abandoned early in 1989 and the benefits removed. Another example is the proposed reduction of the export subsidies for non-traditional exports (CATS). These policy changes have adversely affected some banana companies which diversified into non-traditional exports, especially pineapples and melons. Prospectsfor export expansion Despite these impediments to growth, prospects for export expansion are good. Some forecasts of trade expansion and prospects for the banana sector in Costa Rica are shown in tables A1.4 and A1.5. The number of boxes exported is forecasted to be 75,714 boxes in 1991, increasing to 106,474 by 1995. This expansion is mainly due to rapid growth in the area of banana plantations, increasing from - 128 - 32,000 hectares in 1991 to 40,630 hectares in 1993. Thereafter, area is expected to remain constant. Productivity is expected to increase steadily throughout the period. Table A1.4 Costa Rica: Banana exports, area, and productivity, 1991-1995 Year Frports Area Producawry (7housands of (h ctares) (baxes/lhayr) 18 kg boxes) 1991 75,714 32,036 2,363 1992 92,544 38,178 2,424 1993 100,676 40,630 2,478 1994 102,378 40,630 2,520 1995 106,474 40,630 2,621 Source: CORBANA The price of bananas is expected to fall by more than 16 percent in real terms between 1991 and 2005, as a result of increased production and productivity. The future level of exports is more dependent on import demand than export supply, because of the high degree of responsiveness of supply to changes in prices (there is as little as 11-14 months between planting and harvesting new banana plantations). World trade is expected to increase 1.5 percent annually between 1991 and 2005. This represents a slow-down compared to previous years due to sluggish demand in the industrialized countries. Recent market-orientated reforms in Eastern Europe could stimulate the demand growth of bananas which is very low in terms of their per capita income. For instance, in 1988, per capita consumption in the USSR was only 0.2 kg compared to 11.2 kg in the United States. Demand is expected to increase in Western Europe, although much depends on the changes which take place after 1992. Imports into the United States are expected to grow, albeit at a modest rate, given that consumption per capita is already high and population growth is low. - 129 - Prospects for growth in Costa Rican exports to the EC could be either bright or dismal. The current banana trade regime in the EC is not compatible with the establishment of a single market after 1992, and the various bilateral preferential agreements between the EC countries and the various African, Caribbean, and Pacific (ACP) exporters-mostly ex-colonies-will have to be dismantled. If these preferential agreements are ndt replaced by some EC-wide preference, Caribbean producers will not be able to compete with Costa Rica and other Latin America countries because of higher production costs and inferior fruit quality. Costa Rican producers have advantages such as extensive land area, low labor costs, economies of scale, and large investments and financial support from US companies. In this case, Costa Rican exports to the EC could boom. However, France and the United Kingdom have repeatedly assured their preferential exporters that they will stand by the Lome IV protocol, which provides preferential entry for ACP bananas. Also, the big import wholesalers in Europe have a lot to protect in terms of monopoly rents (it is estimated that for each $1 of benefit given to the ACP countries by the trade regime, importer wholesalers receive $4). Measures for protecting ACP banana producers are still under discussion and the outcome is unclear. A study carried out by the International Trade Division of the World Bank concluded that ACP countries would be best served by free trade with direct aid payments. Within Costa Rica, there is an urgent need to improve the port facilities at Limon. Nonetheless, while the port infrastructure is poor, it is far superior to its major competitors in the region, Nicaragua and Panama, whose roads and port facilities are much worse. A measure of the bright prospects for the region was the entry of the British-based firm, Geest, which has developed more than 3,000 hectares, and expects to export more than 9 million boxes by 1993. This decision was based on the ideal location of Costa Rica and near-perfect growing conditions, especially as production in Costa Rica does not require irrigation. The other reason for Geest's entry was the desire to have a source of non-protected or 'dollar fruit' (in contrast to fruit which is produced in the - 130 - ex-colonies of Britain, which has free access to the protected UK market without quantitative or tariff restrictions and which is consequently too expensive to compete on world markets). Table A1.5 Costa Rica: Prospects for the banana sector, 1991-2005 Year 1991 1992 1993 1994 1995 2000 2005 '000 tons Exports Costa Rica 1,638 1,665 1,701 1,739 1,777 1,958 2,183 World 8,124 8,212 8,323 8,449 8,572 9,255 10,032 Imports United States 2,930 2,935 2,970 3,005 3,039 3,253 3,450 EC 2,511 2,531 2,547 2,567 2,585 2,667 2,741 East Europe & USSR 260 273 286 304 318 487 769 World Price Nominal" 511 523 524 524 530 582 643 Deflatcd 409 408 399 388 281 360 342 (US GNP 1985=100) V S/ton. Source: IECIT, World Bank. Beef Production and export performance Traditionally, beef has been a major agricultural export of Costa Rica, third after coffee and bananas. Recently, however, the sector has declined, with its overall contribution to agricultural export earnings falling from about 11.4 percent in 1980 to 5.9 percent in 1990 (FAO), while its share of total export earnings fell from 7.1 percent to 3.2 percent. Nonetheless, beef remains an important source of food in Costa Rica and employs a large number of workers. Given that a number of institutional reforms take place in the future, the sector has the potential for growth and export expansion. According to the most recent census (1988), the beef cattle population is about 2.2 million head (of which 61 percent are beef cattle, 22 percent dual purpose, and 14 percent dairy), while the established - 131 - area is estimated at 2.4 million hectares, concentrated mainly in the areas of Chorotega, Hueter Norte, and Central. Of the approximately 60,000 cattle farms in Costa Rica, about one-half are purely livestock enterprises, while other cattle farms are mixed. The distribution of cattle among farms is highly skewed, with production concentrated on a few very large ranches. Currently, about 83 percent of livestock farms contain less than 100 hectares and carry about 38 percent of the cattle, 15 percent of farms contain between 100 hectares and 500 hectares and carry 40 percent, while the 2 percent of farms greater than 500 hectares carry about 22 percent. The 1988 census also showed that the production of dual purpose cattle between 1982 and 1988 increased from 15 percent to 22 percent. This reflects the decision by many small and medium farms to move towards a system which is less risky and provides a more stable and regular income, as a result of the financial crisis of the 1980s. During the 1960s and 1970s, substantial growth in production took place which led to a rapid expansion of beef exports, especially to the United States. By 1981, total extractions had reached about 420,000 head, of which about 44 percent were exported (table A1.6). Between 1982 and 1983, the livestock economy weakened as real export prices fell by more than half between 1981 and 1983, and resulted in extractions declining to less than 300,000 head. Since then, the sector improved and by 1986 extractions reached a record level of 562,000 head and exports a record 206,000 head. During the early- and mid-1980s, a cost-price squeeze in the sector continued with prices remaining low and interest and tax rates high. As a consequence, between 1986 and 1989, production and exports declined 30 percent and 43 percent, respectively. In 1990, extraction recovered slightly, although while domestic consumption increased, exports declined. In general, Costa Rica exports about 75 percent of its meat to the US market in the form of boneless cuts, and 25 percent to Puerto Rico as high quality fresh meat. Recently, some Costa Rican meat has been exported to Mexico, and in the first half of 1991 close to 16 percent of exports were sent to this market, mainly at the expense of exports to the US market. - 132 - Table Al.6 Costa Rka: Beef extraction, domestic consumption, and exports, 1981-90 Year Consumtoion Erports Ernraczon '000 Head 1981 233.5 186.2 419.7 1982 205.6 119.3 324.9 1983 205.1 75.6 280.7 1984 241.1 109.9 351.0 1985 305.0 161.3 466.3 1986 355.6 206.5 562 1 1987 331.9 156.7 488.6 1988 283.8 137.3 421.1 1989 270.7 117.6 388.3 1990 300.6 112.5 413.1 Source: CORFOGA. Pricing and marketing systems Beef marketing is not directly regulated in Costa Rica but prices and profitability are depressed by domestic price controls on some products and export controls that reduce the domestic prices of joint products, such as leather and milk. Livestock producers sell directly to private trading firms at the current price or use the processing and marketing services of a cooperative. The largest cooperative, Coopemontecillos, handles about 35 percent of total beef volume. There are six processing plants in Costa Rica which, with at capacity utilization of about 30 percent, are considerably under-utilized. Efforts to increase capacity utilization by cutting back on capacity have taken place recently. As shown in table A1.6, about 70 percent of beef is marketed domestically with the remainder sent overseas by beef traders or cooperatives and processing plants, vertically integrated into meat exporting. In the local market, 30 percent of the poorest quality beef (as well as by-products, such as leather) is under price controls, while 70 percent is high quality beef and competes with the international beef market. Typically, steers are exported and females consumed internally. The export price is determined by the international price of beef, usually the US price. Domestic and international prices move closely together, although, in general, prices in the export market are higher (3 percent-5 - 133 - percent) than in the domestic market. Beef producers are free to choose whether to sell to the international or domestic markets. For orders for domestic consumption, a price is paid at the time of sale by the processor to the producer. However, if the animal is exported, then the producer receives an advanced payment of about 85 percent of the expected export value. The final payment is a pooled price, calculated each month on the basis of earnings in all export markets. There is an tax of exports of beef set at a flat rate of 1 percent. Constraints on export expansion A major constraint on export expansion is low productivity in the livestock sector. During the financial crisis of the mid- and late-1980s, producers were unable to make important investments required for production improvements, and as a result, productivity declined substantially. Evidence of poor productivity is provided by low pasture intensity, low conception and calving rates, and high calf mortality rates. These factors are among the main causes of the decline in livestock extraction during the 1980s (table A1.6). Some livestock industry officials claim that production and export expansion is constrained by the lack of institutional support for the sector. For example, there are few programs to train and educate producers, and this has impeded the uptake of technology and resulted in a low level of herd management. Also, some complain that the training that is undertaken is not relevant to the farming conditions in Costa Rica and that research findings are not well communicated to all parts of the sector. A further constraint on export expansion already mentioned is the financial pressure on producers. This caused many producers to over-cull the female herd in order to pay debts, and consequently the herd has been unable to replace itself, threatening future production. A major problem is the variable and high interest charges, which are the largest component of input costs. In the past, livestock producers have benefitted from the FODEA law which helped producers with large debts. The law - 134 - gave producers preferential interest rates and more time to pay, and in some cases, debt forgiveness of up to 65 percent of total debts. Despite this measure, high and variable interest rates continue to dominate the financial well-being of livestock enterprises. As well as high input costs, producers are constrained by low prices and profitability. The US price of beef converted into to colones and deflated by the CPI, more than halved between 1981 and 1989, although it has remained fairly constant since 1985. In addition, the profitability of the cattle producers is reduced by the price and export controls on joint products. Export expansion is also impeded by government restrictions placed on imported inputs, such as live cattle. Prospects for trade expansion The prospects for beef trade depend critically on internal and international market conditions. In the domestic market, wider use of productivity enhancing technology would allow higher offtake, lower production costs, and better land use. If this occurred livestock production would increase and export expansion prospects would improve. Recently, steps in the right direction in the beef sector have included the following: (i) pasture improvement, (ii) on-farm infrastructure development, (iii) herd management improvement, (iv) better livestock health, (v) improved input supply, (vi) research, (vii) establishment of private extension services, and (viii) an improved credit system. In earlier periods, land was easily accessible, and cattle were raised highly extensively with very little cost. Now improved efficiency is required, especially in the form of improved pastures, better animal health, and farm management. On the regulatory side, it is important that restrictions on exports of leather and milk, as well as domestic price controls on beef and its by-products, be removed quickly to help improve profitability of the industry and give producers capital they will need to invest in upgrading their technology. This is especially important in the current economic environment of high interest rates, as producers find it difficult and costly to borrow for these investments. - 135 - The prospects for trade expansion are also dependent on world beef market conditions, which are highly uncertain at this time. Beef prices in the United States are forecast to decline slightly in the short-term, reflecting the expected slowing down of the US economy, lower feed prices, and continued competition from the poultry sector. Over the long-term, prices are expected to rise slightly in real terms, increasing from $215/kg in 1990 to $240/kg in 2000, an increase of just under 12 percent. US beef imports are unlikely to increase in the near- and medium-term because of lower New Zealand beef output and increased diversion of Australian beef to Asian markets. Another important factor is whether the EC will fully open its borders after 1992, or maintain its protective policies. Japan remains a potentially important market for beef in the 1990s. Japanese per capita consumption at about 4kg (compared to 20kg in Costa Rica) is very low relative to their income. The liberalization of the Japanese beef trade, which began in April 1991 involved the removal of beef quotas and the introduction of an ad-valorem tariff of imports (currently set at 70 percent). The tariffs rates will be reduced over time (i.e., to 60 percent in 1992, and 50 percent in 1993) and this development could lead to increased imports and therefore higher beef prices in the international market. Sugar Production and export perfomance Sugar is the least important of the traditional exports of Costa Rica. In 1980, sugar contributed about 6.5 percent of agricultural export earnings, but since then this share has declined, falling to less than 2.5 percent in 1990 (about $20 million). The total area of cane is 45,000 hectares. The location of production has shifted from the fertile central region to Chorotega, which is now the most important cane growing area. Sugar has three main end-uses. These are the following: (i) white sugar -136- for domestic consumption, (ii) raw sugar for export to the US market and world market, and (iii) alcohol. Production, consumption and exports for the 1980s are shown in table A1.7. Table A1.7 Costa Rica: Sugar production, domestic consumption, and exports, 1981-901 Year Prod=ion Coonsumpnon Erports '000 M. tons of cane equivalent 1981 189.7 128.4 75.1 1982 181.5 132.5 44.2 1983 200.0 129.8 64.4 1984 241.3 135.3 88.2 1985 218.3 142.2 46.5 1986 206.3 153.3 76.2 1987 214.7 154.7 75.8 1988 205.4 157.6 58.4 1989 209.7 157.6 45.3 1990 230.2 164.7 67.9 2 Excludes alcohol. Source: LAICA. During the 1980s, production was fairly stable and ranged between 180,000 tons and 230,000 tons of cane. Average yields are about 50 tons per hectare of cane with a sugar content of about 10 percent, although on irrigated plantations, yields of 70 tons per hectare are reached. About 70 percent of sugar is consumed domestically, and following growth in the early-1980s, consumption has remained stable since 1986 at between 150,000 tons and 165,000 tons. During the late-1980s, per capita consumption has remained constant at about 60kg, which is among the highest in the world. With consumption fairly constant, exports have fluctuated with production. For example, in 1986 production reached a record level-88,000 tons were exported, more than double the 1982 level-despite a decline in the quantity of sugar harvested. Since 1984, exports have generally been on a declining trend, though they recovered considerably in 1990. - 137 - The sector is highly dependent on the US market. Exports to the United States fell with the quota allocation from 63,000 tons in 1984 to 14,000 tons in 1988, forcing Costa Rica to export more to the world market. For the 1990 crop year, Costa Rica received a quota of 33,633 tons (about 1.45 percent of the total quota allocation), accounting for about one-half of total exports. Sugar exported to the United States receives a price substantially higher than sugar exported to the other markets at the international price. In recent years, the main export destinations have been the Soviet Union, Mexico, Trinidad and Tobago, Nicaragua, and Switzerland. Also, Costa Rica exports sugar to some Lome convention countries for their domestic consumption. Another activity important to the sector is alcohol production, which is refined by one of the private cooperatives. In 1991, it is expected that about 20.5 million liters of alcohol will be exported to the US to be used in gasoline. These exports come from 21 million liters of imported ethanol alcohol from the EC. Alcohol is bought from the EC and re-processed adding at least 20 percent in value to qualify for re-export into the United States at preferential tariff. In 1989/90, value-added in the processing of alcohol earned the sugar sector about $2 million. Pricing and marketing systems Most of the cane is grown by big agro-industrial estates, while production by small farms (below 100 hectares) is less than 35 percent of the total. Technology used for sugar production varies widely. In all, there are 17 sugar mills and about 7,800 producers. All domestic and export marketing is controlled by LAICA (Sugar Cane Agricultural Industrial League), an association of sugar cane producers and processors which is responsible for regulating the production, processing, and marketing of the cane and related products. LAICA also undertakes research and extension. Virtually all sugar is sold by the mills to LAICA, which has well-established marketing and exporting channels. - 138 - The payment to growers and the mills is fixed in an agreement between producers and the processing industry within LAICA. The price of sugar on the domestic market is fixed by the government at a level approximately 20 percent less than the US price, but far above (3 times in 1987) the world market price. Growers receive an advanced payment at the time of sale to the mill (about 2/3 of expected value). The initial payments act as credit for working capital during the crop year. At the end of the season, all income from the various sugar activities are pooled (i.e., domestic sales, exports to the US and international market, alcohol, and molasses). From this is subtracted LAICA costs, mainly financing costs, transportation costs, and taxes. This is the industry's net income. Payment to producers and mills per pound is set by dividing the industry's net income by the national production quota set by LAICA (e.g., about 210,000 tons). Producers and mills are then paid this "price" per pound, with mills receiving 67.5 percent of the price and producers 32.5 percent. (These proportions are now under reconsideration). All producers throughout the country get the same price. Mills which produce more than their share of the production quota must dispose of the excess at the world price. This excess does not affect the level of the national quota which is used to calculate the price of sugar to producers and millers. Therefore, over-production by any mill does not change the price received by its competitors. Over-production by individual mills can be used by LAICA if other mills under-produce or used to supply additional US quota or domestic consumption needs. The sugar sector receives no subsidies from the government. Constraints on export expansion Policy interventions in the world sugar market by the EC and United States have long distorted world sugar trade. Both these producers support their producers with price intervention schemes which cause domestic prices to far exceed world prices in most years. These support prices are underpinned by controls on imports which insulate producers from world prices and encourage over- - 139 - production. Surplus sugar in these regions is exported to the world market, forcing down international prices. For Costa Rica, as well as for many sugar producers, low international sugar prices are the most important constraint on export growth. Although cane production is relatively efficient in some areas of Costa Rica, costs of production do not allow the sector to be competitive in the world sugar market. The costs of production were estimated by LAICA to be about $317/ton for raw sugar in 1987, compared to a world price of less than $300/ton for most of the 1980s. As mentioned earlier, Costa Rica exports a large share of its sugar to the US market at the preferential US price. The major concern of some industry officials is the possible loss of quota. Currently, the quota allocated to Costa Rica stands at about 33,600 metric tons. Based on data for 1990, it is estimated that if the US quota allocation to Costa Rica were halved, total export earnings from sugar could fall by as much as 10 percent. However, in the next few years, it is unlikely that the US quota level will be lowered, given supply and demand conditions for sugar in the United States. If anything, the quota is more likely to be expanded, as the United States' sugar sector is being increasingly pressured to liberalize sugar production and trade policy. But the system of quotas is unlikely to be totally abandoned in the near future, given the political strength of the sugar interest groups. Prospects for export expansion The prospects for in the world sugar market are shown in table A1.8. The future price is very uncertain since it is greatly affected by weather, as well as policies in the OECD countries4. A forecast, based on the World Bank's econometric model of the world sugar market, is for the price to increase in real terms by about 22 percent by 2000 (compared to 1991) and 28.5 percent by 2005. 4.A recent study by Borrell and Duncan showed that without policy intervention in the intcrnationai market by OECD countries, the world sugar price would be 33% higher, and the variability of price would be 28% lower. - 140- Annual consumption growth of 1.7 percent is expected between 1991 and 2005, and total consumption is expected to reach 145 million tons by 2005, an increase of 37 million tons or 35 percent from the 1990 level. The major source of demand growth is Asia, where incomes are growing rapidly. World exports are expected to increase 2 percent annually between 1991 and 2005. Latin American countries, including Costa Rica, are likely to increase their exports to the United States as import demand there is expected to remain strong. During the 1980s, the sugar subsidies led to the introduction of High-Fructose Corn Syrup (HFCS) in the United States which displaced about 3.5 million tons of imports of sugar. However, the penetration of HFCS into the US market has almost stopped. Table A1.8 Projections of international sugar market, 1991-2005 Year 1991 1992 1993 1994 1995 2000 2005 '000 tons Imports United Statcs 2,400 1,700 2,100 2,000 2,000 2,500 2,900 World 31,500 33,600 34,200 34,800 35,200 39,100 42,600 World Price Nominal" 290 445 424 342 341 457 560 Deflaxed 232 347 323 253 245 282 298 (US GNP 1985=100) S/ton. Source: IECIT, World Bank. - 141 - APPENDIX 2 Antidumping vs. Safeguards During Trade Liberalization: The Case of Costa Rica Julio Nogues - 143 - Antidumping vs. Safeguards During Trade Liberalization: The Case of Costa Rica Based on stylized observations of policy behavior in many developing countries, Costa Rica's entrepreneurs hope that a soon-to-be submitted draft law will facilitate the introduction of antidumping measures. This appendix suggests that during a trade liberalization process such as the one Costa Rica is implementing, the best instrument to provide breathing space to import-competing industries is a safeguard mechanism with balanced consideration of costs and benefits, not an antidumping mechanism. This appendix first reviews general experience with antidumping mechanisms and suggests that they serve a protectionist function. It then describes Costa Rica's existing and proposed antidumping regulations and concludes that they are inconsistent with the GATT antidumping code. It proposes a set of regulations for Costa Rica that would reduce the amount of protection provided by its antidumping regulations and that are economically superior to those that meet the minimum requirement of the GAIT. Finally, it discusses the role that a safeguard mechanism could play in helping Costa Rica to open its economy. Recent experience with antidumping mechanisms Table A2. 1 shows the number of import-relief measures by type that were initiated world-wide during 1979-88 and that are consistent with the GATT. It shows that, of these measures, antidumping is by far the preferred instrument, representing 77 percent of all cases initiated between 1979 and 1988. In addition, the number of antidumping cases has increased significantly, from well below 100 a year before 1980 to about 200 a year since then. In recent years, developing countries have started to actively use antidumping measures. The table also shows that safeguard measures remain underutilized. -144- Table A2.1 Import relief measures initiated by type and country, 1979-88 Type of action 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 9 iA World Percent of total Antidumping 59.0 89.3 77.0 61.8 78.9 74.0 78.0 84.9 84.1 89.9 76.9 Countervailing duty 33.3 9.4 13.2 35.4 13.4 22.3 16.9 11.1 6.3 6 9 18 0 GAT safeguard 0.0 0.0 0.6 0.5 1.1 0.4 0.4 0.7 0.5 0 0 0.5 Escape clause' 3.4 1.3 3.4 0.7 3.8 2.6 4.3 2.3 6 3 0 9 2 7 Otherb 4.3 0.0 5.7 1.6 2 7 0.7 0.4 1.0 2 9 2.3 1 9 World Number of actions NVumber of actions All actions 117 149 174 432 261 273 255 298 207 218 2,384 United States Antidumping 16 24 15 63 47 73 65 70 14 40 427 Countervailingduty 37 11 22 145 22 52 38 26 5 13 371 GATr safeguard 0 0 0 0 2 0 0 0 0 0 2 Escape clause 4 2 6 1 5 6 3 3 2 2 34 Other 5 10 7 7 2 1 3 4 5 44 Eutropean Community Antidumping 53 26 47 55 43 42 35 31 34 40 406 Countervailingduty 2 0 1 4 3 1 0 0 2 0 13 V GATr safeguard 0 0 0 1 0 1 1 2 1 0 6 Escape clause 0 0 0 2 5 1 8 4 11 0 31 Other 0 0 0 0 0 0 0 0 2 0 2 Australia Antidumping n.a. 58 49 77 80 56 63 62 17 16 478 Countervailingduty n.a. 0 0 3 7 6 3 3 0 0 22 GA1T safeguard n.a. 0 0 0 1 0 0 0 2 0 2 Canada Antidumping n.a. 25 23 72 36 31 36 85 86 53 447 Countervailing duty n.a. 3 0 1 3 2 2 4 6 2 23 GAIT areguard n.a. 0 1 1 0 0 0 0 0 0 2 Developing countieg Antidumping 0 0 0 0 0 0 0 5 23 47 75 Countervailing duty 0 0 0 0 0 0 0 0 0 0 o GATT safeguard 0 0 0 0 0 0 0 0 0 0 0 n.a. = not avas eTc a. The numbers in the table represent the proportion of each proposal (as measured by number of lines) that deals with the article in question. b. Japan, Hongkong, Korea, and the Noric countries. Singapore is not included because its presentation differs from that adopted by the other proposals. c. These changes would invioce the creation of new articles. Source: Messerlin (1990) The antidumping mechanism can be criticized on at least three grounds: * The GATT definition of dumping, rather than producing a fair "level playing field," biases antidumping measures in favor of protection. * The GATT antidumping rules are also biased toward protection. * Empirical analysis shows that antidumping measures have, in fact, provided protection. Protectionist bias of the GA TT definition of dumping In the economic literature and the popular press, dumping is usually identified with predatory pricing, actions that seek to displace producers from a market in order to establish monopoly prices. Antidumping actions applied against attempts at predatory pricing are, in principle, welfare- enhancing. If antidumping actions are not applied against predatory pricing, the number of suppliers in any given market and therefore competition in that market would decline, and eventually all other suppliers would be eliminated. However, if antidumping measures are applied in circumstances where predatory pricing intentions are absent, the measures will protect the domestic producers and therefore, consumers and society in general will incur a cost. Article VI of the GATT defines dumping as occurring when the 'products of one country are introduced into the commerce of another country at less-than-normal values ..."; normal value is the domestic sale price in the exporting country. Several circumstances, not all of them accompanied by predatory pricing, are consistent with this definition. Dual pricing can occur when export prices are low enough to increase exports and cover fixed costs during a recessionary period in the domestic market, when the domestic market is protected, when the exporter has market power in the domestic market (a less elastic demand schedule in the domestic market than in the international market), when exports are subsidized, or when there is predatory pricing. - 146- Therefore, dumping according to the GAT7 definition is more likely to occur in international trade than is true predatory pricing. Furthermore, given the conditions of strong competition prevailing in international trade, it is highly unlikely that predatory pricing can be successful. The clear implication is that in most antidumping investigations, protection of a domestic industry has been increased by the antidumping measures. In fact, Palmeter (1988) observes that the U.S. Supreme Court has concluded that "predatory pricing schemes are rarely tried and [are] even more rarely successful". Palmeter himself concludes that it "probably is safe to predict that in none of the 767 affirmative antidumping determinations reached by Australia, Canada, the EC and the U.S. between 1980 and 1986 was predatory pricing remotely present." Industrial countries argue that their antidumping measures make international trade fair. But even the most blatantly protectionist measure can be justified on grounds of fairness. Protectionist bias of GA1T antidunping rules We have seen that the GATT definition of dumping is biased in favor of protection. Unfortunately, the GAIT is also lenient about what regulations it considers consistent with its antidumping code. A few examples will illustrate the point. First, it is extremely easy to initiate an antidumping investigation. All that is needed is a credible case showing that competing imports are priced below the domestic sale price of the exporter. Second, the regulations greatly facilitate overestimation of the dumping margin. According to the GATT regulations, this margin can be constructed from observed or constructed prices. For constructed prices, there are degrees of freedom to be used that inflate the margin of dumping, for example, by using a rate of profit above what normal market conditions would deliver. In some countries like Australia, use of this practice has been increasing (Banks 1990). Third, the injury test is very imprecise. To put an antidumping measure into effect, it is necessary, according to GAiT - 147 - regulations, to prove the existence of dumping, to prove injury and to prove that the injury is produced by the dumping. An industry might be declining for many reasons, and the effect, if any, that dumping has had is difficult to disentangle from that of other factors, so in practice antidumping measures are imposed even though the standard of proof is not met. Evidence of the protectionist effects of antidumping measures So far, I have noted the strong protectionist bias of antidumping rules and expansion in the use of this instrument by industrial countries during the 1980s. The econometric evidence supports the hypothesis that antidumping mechanisms have been protectionist. A few results from the literature will illustrate this point. In a classical study on the factors that influence the pricing tests (margin of dumping and margin of subsidy) and injury tests in the U.S. antidumping and countervailing duty mechanisms, Finger et al. (1982, 464) concluded that their intention 'is to resolve or diffuse complaints about import competition, and all in all, they seem to serve this function ...." Revalidating these early findings, Finger and Murray (1990) conclude that the "patterns of petitions and of results suggests strongly that injury to U.S. producers ... by import competition is what the antidumping and countervailing duty law are about ... In a study on the consequences of EC antidumping measures during 1980-88, Messerlin (1989) found that the average advalorem antidumping duty was 12.1 percent, approximately five times the average most-favored-nation (MFN) tariff rate. In a study of antidumping actions against Latin American countries (Nogues 1991), I found the average advalorem duty to be about 15 percent. I also found that the incidence of U.S. cases against highly indebted countries has grown; Messerlin did not find this for the EC cases. Messerlin noted a strong import-reduction effect of antidumping measures. Three or four years after the initiation of an investigation, import volume was at two-thirds of its level in the year of initiation. After five years, volumes were reduced by half. In addition, the EC - 148 - antidumping measures helped sustain high prices at home and high prices for export to the United States. In another recent investigation, Messerlin (1990) shows convincing evidence of how antidumping measures have reinforced the EC chemical industry cartel. Costa Rica's antidumping legislation Antidumping regulations in Costa Rica, are included in the "Convenio Sobre el Registro Arance- lario y Aduanero Centroamericano" (Decree 16790-MEC) and Law 2426 on "Protecci6n y Desarrollo Industrial" and Law 7134, which introduced the second structural adjustment program. The antidumping regulations in the Convenio have never been used and are bound to change soon. In fact, the Declaraci6n de Puntarenas signed in December 1990 states that by December 1991, member countries of the Central American Common Market (CACM) must have approved a Central American antidumping code. Since discussions on this matter have not yet started, Costa Rican officials consider it unlikely that a Central American antidumping code will be on the books by the end of this year. Nevertheless, given the importance of the subject and the fact that current regulations in the Convenio greatly facilitate the introduction of antidumping measures, it is recommended that the Bank closely follow these discussions and the drafting of this legislation. While this appendix focuses on Costa Rica's antidumping legislation, most of the recommendations apply equally to other countries and, therefore, to the CACM. The goal of harmonizing domestic and regional antidumping legislation is important economically and is probably shared at a political level. Currently, there are differences between Laws 2426 and 7134 on the one hand and the Convenio on the other. These differences are bound to increase if, as planned, the Costa Rican government submits a draft of the antidumping law to Congress. No antidumping measures have been introduced under Law 2426, which dates back to 1959. Articles 10 and 11 of this law which deal with antidumping, were only implemented in 1988 by - 149 - Decree 18098-MEIC. In 1989, article 7 of Law 7134 modified 2426, introducing two major changes. First, Law 2426 refers only to manufactures-recall its name "Protecci6n y Desarrollo Industrial"-and therefore, the law left agricultural producers with no antidumping protection. This omission was rectified by Article 7 of Law 7134, which created a two-track antidumping mechanism, one administered by the Ministry of the Economy for manufactured products and the other by Ministry of Agriculture for agricultural products. The second modification allowed import prohibitions to be used as an antidumping measure. I have been told that both of these modifications were necessary to sell the structural adjustment program politically and to get Law 7134 approved. Article 7 is inconsistent with GATT regulations. First, I know of no country that has a two-track antidumping mechanism in which the two tracks are totally independent to the extent of having two different administrative processes and two different responsible ministries. Furthermore, although these measures could include quantitative restrictions, they should be in the form of a voluntary export restriction. When an antidumping regulation does not allow for undertakings-which the Costa Rica Law does not-then the antidumping measure should be an advalorem duty that is added to the existing tariff. The tariff plus the antidumping duty might produce an effect similar to an import prohibition, but an explicit prohibition is inconsistent with the principles of antidumping and should not be used unilaterally. In sum, Costa Rica's antidumping legislation departs from GATr regulations and accepted practices. In addition, the regulations to implement Law 7134 (introduced by Decree 18098-MEIC) are not consistent with GATT recommendations and of recommendations based on international experience with antidumping measures during the 1970s and 1980s. The next section proposes measures to minimize the negative consequences of antidumping measures in Costa Rica. - 150 - Proposals for the reform of Costa Rica's antidumping regulation Table A2.2 summarizes the main characteristics of Costa Rica's antidumping regulations and proposals for their reform. The rest of the discussion in this section focuses on the proposals for reform as they relate to Costa Rica's domestic legislation (Law 7134 and Decree 18098-MEIC). Nevertheless, most of the recommendations apply as well to the Convenio and Decree 16790-MEIC. Principles Antidumping actions are based on the identification of dumping with "unfair" trade. This identification has a long tradition and is incorporated in the GAiT antidumping code. But the economic research on the consequences of antidumping actions has shown that most, if not all, antidumping cases thus far have gone beyond off-setting the unfair margin and have actually increased protection to domestic producers and thereby increased the antiexport bias and penalized consumers. Therefore, the preamble to the new antidumping legislation in Costa Rica should caution administrators of the regulations about the potentially harmful consequences of their decisions. Filing a petition According to article 6 of Decree 18098-MEIC, both the interested party and the Ministry of the Economy can file an antidumping petition. As discussed below, the Ministry of Agriculture is seeking to activate its own antidumping procedures. Clearly this implies a risk, since it empowers the ministers to use antidumping actions for political motives and would allow producers to initiate antidumping actions at little cost by persuading the Ministry to file the petition. It is strongly recommended that only interested parties be allowed to file petitions. Likewise, it is recommended that the antidumping petitions be published in the Diario COficial to increase public scrutiny, which might make petitioners less enthusiastic about filing petitions. - 151 - Table A2.2 Costa Rica's antidumping regulations and proposals for reforimi Convenio and Decree 16790- Law 7134 and Decree 18098-MEJC Proposals for Reform of MEIC, Law 7134, and MEC Decr-ee 18098 Principles Traditional Traditional Recognize the protectionist dangers Minist Of Economy and of Only affected industry is allowed Filing of petition Not addrssed Agrc Pub ish petition in Diario Oficial Improve petitioning form Evidence for assessing petition Not addressed Petitioning forn Publish petition in Diarno official Representation of industry Not addressed Not addressed At least 30% Defnition of industry Not addressed Not addressed Needs further study Prioritized use of prices and be critical of Determination of dumping Traditional Traditional constructed values Introduce notion of serious injury to Determination of injury Vaguely defined Many indicators industry Connection between dumping and Not addressed Not addressed Be very careful in establishing link injury Reponsibility for dumping Ministries of Economy and of Process should be unified and centralized and njuq inivestigttions Not addressed Agriculture perhaps at the Ministry of Foreign Trade. Price undertakings None Not addressed Introducc it Nature and height of Tariff surcharge never higher than margin antidumping barriers None Can be import prohibition of dumping and less if this fixes injury Duration of antidumping duty No explicit time limit No cxplicit time limit Three years Should not be allowed or at least not Provisional and retroactive without preliminary evidence on dumping measures Not addressed Addressed and injury Administrative times Not addressed Four months Nine months Minister of Economy and of Final decision should remain politically Political responsibility Not addressed Agriculture visible Members of the ADC Not addrssed See text Representation should be less biased Assessment of petition The quality of the assessment of a petition can be only as good as the quality of the evidence provided on the petition form. Edgar Chac6n, a member of the Antidumping Commission (ADC), believes there is much room for improvement of these forms. More analysis is needed on this matter, and the GATT Secretariat appears to be an appropriate source from which to seek technical advice. Industry representation According to article 1 of Decree 18098, injury or the threat of injury to national production is the issue an antidumping investigation should address at the filing stage. Therefore, it would appear that the petition should be filed by a significant portion of the industry. While "significant" may be difficult to determine, 30 percent, as Colombia has included in its legislation, is probably a reasonable proportion. Anything much higher than this might induce cartelization and anything much lower might overwhelm administrative capacity with cases. There is also a risk that a petition from a small firm might end up providing protection to a broader element of the industry, thus unnecessarily delaying liberalization. Definition of industry Industries can be defined broadly, such as the flower or chocolate industry, or narrowly, such as the white rose industry or the almond chocolate bar industry. There is evidence that the more narrow an industry is defined, the more likely it is that legal dumping will be found. The U.S. cut-flower cases against Colombia, Costa Rica, and others (see Mendez 1991), and Costa Rica's chocolate case, discussed in the next section, show this quite convincingly. This issue gains prominence during a trade liberalization process, which is expected to increase specialization in the economy. By using a very narrow definition of industry in either unfair or fair trade cases, a country might hurt its chances - 153 - of improving its pattern of specialization. The counterargument is that if antidumping duties are to be imposed, the fewer the specific products to which these apply, the better. It is difficult without careful study to say how broad the definition should be. One thing is clear, however: the worst solution would be to use a narrow definition in deciding whether to impose antidumping duties, and a broader definition in deciding on which products the duties should be levied. Determination of dumping According to the GATT antidumping code, dumping occurs when the export price is lower than the normal value of the good. 'Normal value' can be (1) the domestic sale price in the exporting country, (2) the export price in another country, or (3) the cost of production. Recent research suggests that a high degree of arbitrariness is introduced into the antidumping mechanism when normal value is identified with a constructed estimate of the cost of production. This is so because a number of arbitrary assumptions must be made when estimating the cost of production, including an assumption about the rate of profit. This arbitrariness facilitates the finding of a positive margin of dumping (see, for example, Banks 1990). Thus, it is recommended that Costa Rica's new antidumping legislation be critical of this practice and that it explicitly permit the use of estimates of the cost of production for assessing normal values only in exceptional and well documented circumstances, when alternatives are not available. Determinanon of injury It is recommended that there be a requirement to prove injury to the industry and not only to the enterprise or group of enterprises requesting the investigation. This does not appear to be the approach currently used in Costa Rica, as the discussion in the next section shows. Also, to avoid - 154 - antidumping actions based on trivial problems, the standard of proof should be based on "serious injury," rather than simply "injury," as is now the case. Connection between dwnping and injury An industry can be injured by many factors including cyclical factors, overall recession, changes in consumer preferences, mismanagement, and dumping. To introduce an antidumping duty, it is necessary to prove that the injury is directly attributable to dumping. Thus, the new regulations should emphasize the need for care in attributing injury to dumping. Again, the next section argues that this is not current practice in Costa Rica, although the GATT requires that a connection between dumping and injury be demonstrated before an antidumping measure is introduced. Responsibility for dumping and injury investigations Article 7 of Law 7134 divided responsibility for dumping and injury investigations for agricultural and manufactured products-including the final decision on the imposition of antidumping measures-between the Ministry of Agriculture and the Ministry of the Economy. So far no antidumping petition has been requested for agricultural products, and no regulations have been promulgated for these products. For manufactures, regulations under Decree 18098 govern antidumping investigations. There are two main shortcomings with the current institutional arrangement. First, there is no good reason to have two antidumping tracks with no connection between them. Preparation under Law 7134 of regulations for administering unfair trade cases for agricultural products should stop. Instead, these should be subject to the same mechanism as other products, since there are no distinct characteristics of agriculture that would argue for a separate track. Second is the inadvisability of having dumping and injury investigated by ministries that are likely to be biased in favor of - 155 - affirmative findings. One alternative is to shift responsibility for all investigations to the Ministry of Foreign Trade. The ministry would not have to undertake the investigations itself; it could instead prepare a list of professionally respected economists who could be contracted to undertake these investigations, with the interested parties paying the cost of the investigation. In collecting the evidence on dumping and injury, researchers should cost their nets widely, looking at which groups are likely to gain and which to lose if antidumping measures are introduced. This suggestion, which moves away from current GATT antidumping provisions, is supported by recent economic analysis, which was discussed earlier. One final comment concerns responsibility for undertaking research on the margin between dumping and injury. The current arrangement is for the Ministry of the Economy to collect evidence on both dumping and injury. The investigations ought to be separated to avoid pressuring researchers to find evidence linking dumping and injury. Such pressures are likely to be less strong if the research is undertaken by different people in different ministries. Also, dividing these responsibilities might eliminate or reduce the risk that researchers might manipulate the data in favor of specific findings. Price undertakings An "undertaking" is giving the offending party-in this case, the exporter-a chance to eliminate the injury being done to the local industry. This provision is contemplated in the GATT legislation and is part of the antidumping regulations of many countries. It should be introduced into Costa Rican legislation, which does not now include provision for undertakings. What commonly occurs when an undertaking is accepted by both parties is that the exporter increases its export price by the margin of dumping or by an amount which is considered sufficient to remedy the injury. - 156 - Nature and height of antidumping barriers Article 7 of Law 7134 allows the introduction of either antidumping duties or import prohibitions. However, quantitative barriers are inconsistent with the nature of the problem addressed by antidumping-the existence of market determined differences in prices-and the upcoming legislation should not permit the use of quantitative import barriers. Furthermore, the legislation should explicitly mention that in the absence of an undertaking, any antidumping duty that is introduced should be an advalorem duty added to any existing duties. The rules should also explicitly mention that an antidumping duty cannot be higher than the margin of dumping. The legislation should also provide for the possibility of introducing a lower duty if it is sufficient to eliminate the injury caused by the dumping. Duration of antidumping measure The GATT code does not specify the duration of an antidumping measure, and introduction of a sunset clause has been recommended. A period of 2-3 years should certainly be long enough. Provisional and retroactive measures In Article 7 of Decree 18098, Costa Rica contemplates the possibility of introducing provisional (i.e., before the case is concluded) antidumping measures with the approval of the Antidumping Commission. Since current procedures bias the Commission in favor of antidumping actions, the Commission is likely to favor imposition of provisional measures. Provisional measures should not be introduced without a preliminary finding that the accumulated evidence supports the existence of both dumping and injury caused by dumping. - 157 - Administrative time limits Figure A2. 1 shows the current time limits for the various steps in the antidumping investigation. The investigation and voting of the Commission is to be completed in three months from the date of initiation. After that, the Minister of the Economy has one month to decide whether to follow the recommendation or reject it. An explanation must accompany the decision to reject the recommendation. Four months is a short period of time by international standards. For example, Colombia's antidumping regulation provides nine months for completing an antidumping investigation. It is recommended that Costa Rica extend its investigation to nine months, to enable it to improve the quality of the investigation of dumping and injury and the investigation of whether there is a clear connection between them. The next section argues that a recent antidumping case in Costa Rica resulted in a poor investigation report and little time to assess or correct it. It is also likely that improving the quality of investigations will also require improving skills, and this issue should be included in the discussions. Perhaps the GAT1 can be of help on this matter. - 158 - Figure A2.1 Time limits and stages in an antidumping case Petition filed 15 days Accused completes presenting evidence in its favor 2 months Technical investigations on dumping and injury presented to the members of the Antidumping Commission | 15 days Antidumping Commission Vote I month Ministry of the Economy introduces antidumping measure Political responsibility Political accountability for trade protection actions is not a trivial matter. The general feeling is that the less the political accountability of the person or institution responsible for introducing an antidumping measure, the easier it is for the mechanism to be co-opted by interest groups. The current arrangement in Costa Rica provides for a high degree of political accountability, with the - 159 - decision on whether to introduce an antidumping measure made by the Minister of the Economy for manufactured goods and the Minister of Agriculture for agricultural goods. This high degree of political accountability should continue, with the final decision being made at the ministerial level. But as already noted, the Ministries of the Economy and Agriculture are not the best ones to make these decisions. One alternative is to shift the final decision to the Ministry of Foreign Trade, which is likely to be less biased. Another alternative is to require a joint ministerial decision of the Ministries of Agriculture, the Economy, and Foreign Trade. Members of the Antidumping Commission Under the current arrangement, the Antidumping Commission votes on the technical report and recommends to the Minister of the Economy. This administrative arrangement seems sensible, but the institutional composition of the Commission undercuts its objectivity. Currently, there are six members-one from each of the following: the Ministry of the Economy (whose representative is the president of the Commission), the Ministry of Finance, the Central Bank, the Chamber of Industry, the Chamber of Trade, and the Chamber of Representatives of Foreign Houses (CECREX). While ideally all members of the Antidumping Commission should be independent personalities without close ties to interest groups, actually achieving this is another matter altogether. Additional thought should be given to this issue. At the very least, there should be no members from the Ministry of the Economy or Agriculture. Also, consumers should be represented on the Commission, able to participate with "voice and vote." Antidumping cases in Costa Rica In Costa Rica antidumping petitions have been filed against imports of chocolates, electric cables, and ceramics (in two different instances). The electric cable case was rejected because the petition was -160- not for an antidumping investigation but for the assistance of the Antidumping Commission in getting Colombia to lift an import license requirement for exports from Costa Rica. One of the ceramic cases was rejected for lack of evidence on dumping; in the other, a 15 percent antidumping duty was assessed. The rest of this section focuses on the chocolate case and is based on a conversation with Edgar Chac6n, who sits at the Antidumping Commission as the representative of the Chamber of Trade. On July 7, 1991, based on the evidence presented during the investigation, the Antidumping Commission voted 4 to 3 in favor of recommending that the Minister of Economy impose antidumping duties. Mr. Chacon is critical of the process followed during the investigation and of the quality of the evidence on which the vote was based. He is especially critical of the short time-only a couple of weeks-the Commission had to analyze the report and make a decision. The analysis was weak, yet members of the Commission had very little time to gather additional data to strengthen the analysis and provide a more sound foundation for their decisions. Nestle-the exporting company-apparently would had been prepared to negotiate an undertaking, but Costa Rica's antidumping rules do not provide for undertakings. An undertaking would have avoided many problems for the government of Costa Rica. Mr. Chac6n critized the quality of the evidence presented on several counts. First, the margin of dumping was based on evidence from an invoice showing that the export price to Costa Rica was lower than the price at which the chocolate was selling in other foreign markets. But the sample of products was very small, while the antidumping duty would have much broader coverage: the sample covered only two of more than fifteen types of chocolates being imported into Costa Rica. Mr. Chacon believed that the price discrepancies, even if construed as dumping, legally defined, could be explained by the pricing strategy of Nestle. The larger the sample of products, the less likely that a multiproduct firm will be found guilty of dumping. But Mr. Chac6n believes that even the evidence - 161 - that was presented never really proved the existence of a positive dumping margin. He asserts, for example, that an adjustment was never made to take account of differences in insurance and advertisement costs in different markets. Also, as the evidence showed, Nestle had been exporting to Japan, Panama, and Guatemala for more than a year the same products at the same price as covered by the investigation. Furthermore, those prices were similar to the export prices of Hershey's, strongly suggesting that this was a competitive price in the international market. Regarding injury, Mr. Chac6n also argues that it was never proven. It is fundamental to the GATT antidumping rules that measures are to be used only against dumping that causes injury or a threat of injury to national production. In Costa Rica, there are only two producers of chocolate. While they have approximately equal market shares, only one of them-Gallito-filed the antidumping petition. It appears that sales of Gallito were declining, but it was never proven that the industry as a whole was passing through difficult times, much less that this could be attributed to dumping. In fact, the antidumping investigation failed even to analyze import penetration. Also, article 3 of Decree 18098- MEEC calls upon the Ministry of the Economy to try to find a balance between the interests of producers and consumers. It is clear from the comments made that the interests of the consumers were never factored into the analysis. Based on this weak evidence, on July 7, 1991, the members of the Commission voted 4 to 3 In favor of recommending to the Minister of Economy the imposition of antidumping duties. The negative votes were those of Ministry of Finance, the Chamber of Trade and Chamber of Representatives of Foreign Houses. The votes in favor were those of the Ministry of the Economy, Chamber of Industry, and the Central Bank. In case of a tie, the vote of the Ministry of the Economy counts double. Based on the comments presented above, the hypothesis that the affirmative votes were based more on group interest than on sound evidence from the investigation appears difficult to reject. - 162 - The margin of dumping, found to be about 30 percent, would be added to the advalorem tariff of around 40 percent. It is now up to the Minister of the Economy to make the final decision. Whatever the final decision, it is likely that the losing side will use its right to appeal the decision. This, together with the high visibility of the case, should make the Minister of the Economy think carefully before making the final decision. The role of a safeguard mechanism There is a clear correlation between the introduction of trade liberalization measures and increased demands for activating or introducing antidumping measures. In recent years, this has been seen in Argentina, Brazil, Costa Rica, Colombia, Mexico and Perd, among other countries. The reason for this is that trade liberalization programs reduce the number of instruments-mainly nontariff barriers-available to give import relief to inefficient producers. When this happens, the experience of industrial countries shows that antidumping measures can play much the same role that nontariff barriers used to play. Antidumping measures are a GATT-consistent instrument that allows the introduction of discriminatory protection. Nevertheless, the goal of trade liberalization programs and the existing experience summarized at the beginning of this appendix suggest that antidumping is the wrong instrument to use during a trade liberalization program. The objective of trade liberalization is to increase foreign competition. Thus, if any relief is warranted during implementation of these programs, it should be provided not by antidumping measures, but by safeguard actions that increase protection from all sources-on a most favored nation (MFN) basis-not just from a particular source. - 163 - The rationale for providing import relief during a Trade Liberalization Program The question of whether and under what circumstances and conditions a country should provide import relief is important, particularly during an ambitious and accelerated trade liberalization program implemented in the presence of other serious policy distortions. It is now well known that trade liberalization is one of the most important means of improving the welfare of nations. Thus except in very special circumstances-such as monopoly power in trade, infant industry protection, and strategic trade considerations (the empirical basis of which is very weak)-satisfying requests for import protection would entail costs to the national economy. Nonetheless, the costs of not providing such relief must also be considered, especially if not providing some instrument for import relief means that a trade liberalization program might not be politically feasible. Often, two steps forward are followed by one step back. This is what appears to have occurred in Costa Rica when antidumping regulations were introduced to ensure congressional approval of the second structural adjustment program which was included in Law 7134. From an economic rather than political point of view, import relief measures might be justified when trade liberalization occurs in an environment in which there are many other important policy distortions. Consider the case of an industry with high costs that would be forced to close as a result of trade liberalization (figure A2.2). Now suppose that the reason for the industry's high cost is some form of policy constraint, say a labor-stability regulation that increases the cost of labor. Furthermore, assume that the regulation is expected to be abolished one year after introduction of the trade measures. Then it might be desirable to grant a request for temporary protection. Figure A.2 shows that protection raises prices from PI to PI(1 + t), entailing social losses equal to ABCD minus BEF. -164- Figure A2.2 A case for temporary protection against import competition SI~~~' P, (1 +t) P1 ID\ D 0 a, Q Once the labor regulation is lifted, the industry is able to restructure by reducing costs, which shifts its supply schedule from S to Si. Now under free trade, the industry produces OQ1. It is quite conceivable that the present value of the triangle AGH, which measures the gain to society from the restructuring of the industry, is greater than the present value of the welfare loss from protecting the industry until the labor regulation is eliminated (ABCD minus BEF). Many other situations could have been used to illustrate how, during a trade liberalization program, other policy distortions may remain unchanged for some time, impeding a full restructuring of industries. But whatever the rationale for providing import relief, it should be recalled that such relief - 165 - is economically sound if the present value of the loss from trade protection is lower than the present value of the gain from restructuring. This must be the central concern of the safeguard mechanism. The design of a safeguard mechanism Under the GATT, countries have a "right" to introduce safeguard mechanisms. Article XIX on "Emergency Action on Imports of Particular Products" states in paragraph la, that if any product is being imported "in such increased quantities and under such conditions as to cause or threaten serious injury to domestic producers in that territory of like or directly competitive products, the contracting party shall be free, in respect of such product, and to the extent and for such a time as may be necessary to prevent or remedy such injury ...." This is one of the original articles of the GA7T, yet safeguard actions have seldom been used (table A2. 1). Why is this so? Several reasons can be suggested. First, there is a natural tendency to blame problems on the actions of other rather than on one's own actions, and the antidumping mechanism fits this human behavior quite well. In contrast, the use of the safeguard mechanism recognizes a country's own weaknesses in terms of lack of international competitiveness. This is precisely what a country like Costa Rica is recognizing by opening its economy and the role of the safeguard mechanism to provide a breathing space while the industry prepares itself to meet international competition and the government continues to eliminate others policy distortions. A second reason is that safeguards, unlike antidumping, may entail compensatory payments to the country whose exports will be adversely affected by these measures. This is believed to be an important reason that industrial countries have seldom used safeguard mechanisms (Sampson 1988): Countries naturally seek to avoid paying such compensation. For the time being, this compensation principle is not being applied to developing countries, including Costa Rica. - 166 - Third, antidumping measures are by nature discretionary-they are applied against some countries and not others. Thus, in any tariff line, there might be as many different antidumping tariffs as there are enterprises and countries exporting to the country imposing the duties. Although Article XIX does not discuss the issue explicitly, the nature of the problem suggests that if the safeguards are going to be provided through some trade measure, the measure should be introduced on an MFN basis. Article XIX of the GATT on safeguards presents a few matters of principle rather than a full set of regulations. This is in sharp contrast with antidumping regulations. In one sense, this is an advantage. It puts Costa Rica in the position of being able to create rules and administrative procedures for supporting a sound safeguard mechanism. Basically, I suggest that whatever the rules and procedures, a safeguard mechanism should be balanced. This means that it should make every effort to take into consideration all the costs and benefits of these actions. This balance is crucial because without it, the safeguard mechanism will be just another instrument through which inefficient producers exercise their 'rights' to seek protection. Sooner or later, such a mechanism will be co-opted by protection-seeking entrepreneurs. If one agrees with this, then the remaining problem is how to put the idea of a balanced safeguard mechanism into practice. One way is to separate responsibility for investigating safeguard petitions from responsibility for deciding how much protection an industry will receive, thus isolating investigators from the pressures of interest groups. I propose that a safeguard group be created, composed of a few economists who would prepare recommendations for the government authorities. Finally, the group ought to be led by someone whose career has reflected a concern with the national interest and who has not been associated with pressure groups. The duties of the safeguard group would be * To calculate the costs and benefits of providing safeguard measures. - 167 - * To assess whether such measures increase or reduce national welfare. * To prepare specific recommendations for the government. Social costs and benefits could in many cases be calculated through a simple partial equilibrium analysis that provides a rough approximation of the costs and benefits of providing safeguard protection. Assessing whether a safeguard action increases or reduces national welfare might not be as straightforward, however, as calculating costs and benefits. Safeguard measures provide temporary protection to industries that can argue convincingly that they will be able to reduce costs and will eventually be well-positioned to face international competition, not an easy claim to assess. The next step is to design the safeguard measures to be recommended to the government authorities. The literature has long recognized that direct subsidies are preferable to import barriers when an industry is to be assisted. But many developing countries are not financially able to pay direct subsidies. Thus, in general, it is safe to assume that assistance will be provided through import relief. The preferred form of assistance should be a tariff surcharge that decreases over time and lasts no more than a few years (three?). A declining surcharge should put pressure on management to introduce the measures that are necessary to make the industry intemationally competitive, while a sunset clause is absolutely necessary to avoid making the safeguard an instrument for providing permanent protection. In administering the safeguard, certain general limits may need to be specified, based on the particular characteristics of Costa Rica. Since an important purpose of the safeguard is to make the broader trade liberalization politically acceptable, it is likely that the safeguard group will initially be flooded by requests for assistance by industries using the trade liberalization programs as justification. Perhaps only a subset of industries-those facing the highest increase in import-competition from the trade liberalization measures-should be eligible for safeguard protection. This would include - 168 - industries for which nontariff barriers are lifted and those whose tariff rates will be reduced the most. A limit on the tariff surcharge might also be considered; otherwise, the safeguard mechanism might end up providing higher levels of protection than existed prior to the liberalization. In this regard, a maximum tariff surcharge of 15-20 percent would appear to be sufficient. With respect to the time allotted to the safeguard group to complete its tasks, more is preferable to less. Too short a period of time would likely bias the conclusion in favor of protection because the less the time available to undertake the analysis, the more the group will have to rely on the data provided by the petitioner. Finally, I want to stress the importance of public scrutiny. The safeguard group should publish its analysis and finding each time it makes a specific recommendation to the authorities; probably the best place for publishing this information is the Diario Oficial. Also, once a year or every other year, all the findings and conclusions of the safeguard groups should be published and subjected to public debate. Such debate will pressure the safeguard group to improve the balance of social costs and benefits and enhance the quality of its specific recommendations. - 169 - References Banks, Gary. 1990. "Australia's Anti-Dumping Experience." Center for International Economics, Canberra. Finger, J. Michael, H. Keith Hall, and Douglas Nelson. 1982. 'The Political-Economy of Administered Protection." The American Economic Review June. Finger, J. Michael, and Tracy Murray. 1990. "Policing Unfair Imports: The U.S. Example." PRE Working Paper 401, World Bank, Washington, D.C. Messerlin, Patrick. 1989. "The EC Antidumping Regulations: A First Appraisal, 1980-85." Weltwirtshaftliches Archiv Band 125, Heft 3. Messerlin, Patrick. 1990. "Antidumping." In Jeffrey J. Schott, ed., Completing the Uruguay Round Washington, D.C.: Institute for International Economics. Nogues, Julio. 1991. "Less-Than-Fair Value: Trade Cases Against Latin American Countries." The World Economv September. Palmeter, N. David. 1988. "The Antidumping Emperor." Journal of World Trade August. Sampson, Gary. 1988. 'Safeguards." In J. Michael Finger and Andrzej Olechowski, eds., fLn Uruguay Round: A Handbook for the Multilateral Trade Negotiations Washington, D.C.: World Bank. - 170 - APPENDIX 3 Nontraditional Exports of Costa Rica - 171 - I EXPORTACION DE PRODUCTOS VARIOS (Incluyendo valor agregando en el pais por maquila) -Miles de d6lares- 1987 i29 1989 Industrializados (excepto fertilizantes) 387.598 454.737 559.582 Manteca, grasa y aceite de cacao 4.423 3.214 2.910 Legumbres, hortalizas y frutas preparadas o conservadas 3.183 4.044 4.285 Pures y pastas de frutas, jaleas y mermeladas 5.017 4.771 7.582 Preparaciones compuestas no alcoh6licas para la elab. de bebidas 4.916 6.483 7.747 Alcohol etilico 5.606 1 0 Medicamentos uso humano y veterinario 24.243 21.864 24.765 Productos de perfumeria y aceites esenciales 2.522 3.765 5.591 Desinfactes, insecticidas, fungicidas y yerbicidas 6.980 5.230 5.944 Materias plasticas artificiales, resinas artific. y manufacturas 19.604 26.531 26.845 Llantas y neumaticos de caucho 11.748 12.553 13.548 Cueros y pieles preparados, barnizados o metalizados 7.265 9.831 12.520 Madera en bruto, aserrada, chapada o regenerada y manufacturas en madera 8.033 11.728 5.184 Papeles para usos higienicos 3.610 4.600 5.205 Textiles sinteticos y artificial 12.961 8.036 13.466 Generos de punto 6.109 8.568 10.494 Prendas exteriores para mujeres y nifias 25.097 34.405 31.083 Prendas exteriores para hombres y nifios 9.215 5.350 11.723 Calzado y componentes 4.668 5.389 5.800 Vidrio y manufacturas de vidrio 9.826 6.586 9.400 Oro y sus aleaciones 7.670 28.745 0 Cenizas de orfebreria 7.648 253 574 Articulos de bisuteria en metales preciosos 7.398 11.412 23.354 Laminas galvanidas o esmaltadas 6.383 9.316 6.875 Tubos galvanizados 2.749 2.636 3.304 L4minas, hojas, polvo, estructuras, envases y partes aluminio 2.732 7.373 12.708 Manufacturas diversas en metales comunes 2.947 2.617 2.652 Refrigeradores, congeladores y enfriadores 4.015 3.270 3.651 - 172 - EXPORTACION DE PRODUCTOS VARIOS .... (Conclusi6n) 1987 1988 1989 Calderas, maquinas, aparatos y artefactos mecanicos 8.745 9.242 6.422 Maquinas y aparatos electricos destinados a usos electrotecnicos 23.733 28.088 37.765 Mobiliario medico quirirgico y similares 6.586 7.276 15.087 Valor agregado bienes extranjeros procesados en el pais (maquila) 44.193 60.555 74.855 Otros 87.773 101.005 168.243 AGROPECUARIOS, DEL MAR Y OTROS" 126.796 183.524 221.880 Pescado fresco, refrigerado o congelado 16.854 23.929 41.166 Camnarones frescos, refrigerados o congelados 12.832 17.724 12.020 Langostas frescas, regrigeradas o congeladas 2.658 5.506 3.371 Plantas y raices vivas 17.364 20.203 21.702 Flores y capullos frescos o secos 7.238 8.558 10.332 Follaje y otras partes de plantas 31.076 8.961 11.217 Legumbres y tuberculos 9.736 12.728 18.509 Pinias 21.539 31.156 39.706 Semillas para la siembra 3.998 2.860 4.018 Otros 3.501 51.899 59.839 TOTAL 514.394 638.261 781.462 t Incluye ganado en pie Fuente Direcci6n General de Estadistica y Censos - 173 - APPENDIX 4 Nontariff Barriers to Imports and Exports - 175 - - 9L1 - 08-9-e8 oP -ed : -*%1.] CA1J CX - - I & Sl l olo 4 n a IS _~~~~~~~~~~~~~~~~~~~~j;- ;Sol:l ,1 w t; 1 v; *%lA1 I & J a s6Z- It! -urv.i Id.JI te sa- IU' ! 1 DUS lop sol a -QUO13unfj L uaiu -Uu3 Ii0131JOI Ua& Da4 juerjwu pnieS -110 ap &led ap o3 eL-P-Of 0p (IC9 Ayj MP ju10ua2 U9133110 -'IP90 opeavjilla: - u9p3UOlnV 5 *C3*1S °p QILkIuUW! 81 lel3dm. p Ia..p osn v:sJd C9-U-6 ep 11 joaadQ pnieS Dp ojJAaSuljt - uglaealJoInV - °J *oJo0 A .o3J15iu': IC, OvU jm ' uy iems op U9,3U30ao4 A jo3Is.No0 6rl2uu aL-g-ec *op [pC9 Ai1 12aua- U9g330cla - -nog A j01Juo3 _ o; -,us .aor IduVfl V ! ------------------------------_-_------------------------__-____--___--__----__-----_--------_-----_------------,-_---,-----___----_--..--__------ Dal luMluv Pn%1SS ep U9P31Z3O2 *PltJollU UC:l soja 8L-t-9f loP (SZs A;Y1 1Ju D u9gezDJ3 _ -aUV A 10o2o03 G eu -fUCfi11u *0Aj1Pf (J *op -.eJodx. fled top OJZg9I5uv up *-t9SSlllIaasI O~~~~I3DEJ u~ua)uaJgna U,19J312J0inv eau ~ .;#oj A vmj P8L5 S-D~~~~~~~~~~~~~~~~~5~~~~.: - - -~~941? t- -T: J -t 0511 -tL- oxS-o : u)Vvn ue.nw-eu_g Ae SS S :*a --_ _ju a_ _ _ _ _ _ uu0 jr1t.1331 3n') Z toiatn lsioa Soj.t1inOita II0I31U liala^1Q s MO13111us14 *li tH aiOIWd .is ni s ziwji i isvl U 0LIS-IA- C iS3NO335114S3 AMICUfl Itb ?IoillsicloN SALVtWtD hESTRICCIOH RQIsItos INSItRlCOli QUE AUrOQHm, t.rcstsIJ,CtOI lea o rLaterlales Jlopreos rel^cic- nados con lo rdsvo R) Lp6sItos qulrGirg!- Coe n o A utoritacl6n - Depto. de Control do rin- Ley Ge ?mral doi gas y Est'ipetacientea. Salili. Controles y Regiatroe del 1Hln1sterio de Salud. 91 AmA Blanea no - RutorlRacl5n - linisterlo de Seimrldamd P1'blica Ley 1173 Iztanceil 10) Jr-a da utKo no - Autoritacl6n - Hilnisterlo de Sequridad Ley 1739 llrancelil bajo caltlbl PGbI lea II) ArDas Hilitares St Solo l Go- -- Hinlsterlo de Sequridad --- blerno pue- tGbilc. de ltpottar 12) lrtfculos I'iw- aevJll6n en oficine de Control de Cliculor Annh 6/f) tCcricon y txplo- Aduanag po- AtmaO y rxlg16alvoa dol de 8-9-00. nlas aivos. (tay al- ra quo coln- Hinlsterlo do Snqurldad Rota RIo. 970 d(i gunoa quo oe pro- cids lo auto- P'bilea 270-nno. hitu su iiewo-aclin to - Autorlzacln rizado. I) Avoe silveggel to - AutorinaeOln Certitieedo tie lteccl6n Genernt Salud Decreto (Po111)145fl4- Salud. Pato de AnImal aC A do 16-5-Al Or Igen. 141 Baja Lenqaui lasdera) tso JAutorinteftn Inapecel5sn Dlreeci6n Cenernl Toren- Decroto 11907-h da tal HAG 5-10-02. 15) Darras de leo-o E£stablec.r por Oticinna tocional do Hlor- lAy 5292 Lty. mg y tIldida dol HEC - 177 - ttlICtil) IUY P 13 lfLivLte , - !61 D3rtirle to _ hutorlaaeWln ln%"eccl6n Direccl6n znenral rores- DecIeto 9l0n-r. tal ltGic 5-10-P2 111 t-bidas IacohS- lIcs I- Autorloatl6n Rotulado- lUnteterlo do Salud Decrito 15449-S ttiquetado de 22-5-R4. 15109-S de 20-1-04. IrnoAn- de 4-2-85 Ifl DanrodlecepiAms N4o - Autorlraclen - Depto. Control de Dro- Decreto 15560-s de gas y Estupotacientes 31-t-94. del Ministerio do Sn- lud. 191 BLnzodleceplnas S-t - - Oeroto 15560-S do lluestres quo pue- 31-7-R4. d,n contener. 201 nilbronas de do- SI - o so ajustan *l - - DOecrto 5292 del lle qrpeu3ci6n Sistena 1nternacio- 29-R-13. nal de SIdidau. 211 Ciis o Cajonce No Autoritacl6n insp.cefdn Dl eccl6n Cneral Fo- Decetoto 11901-1 restal "AG 5-10-02 221 Caprino. NO - Autorl acl6n Certificedo do Dlreccl6n General de Decroto IRegil 14501 Salud pats ox- Salud ltnlmal de inG -t. 16-5-fi3 portador 211 Carne de Gan6o, Vacw,, m nolida S - - Docreto 696fi iric do 4-4-11. 21) Csm 1tsrolfdricjdiv tio - Autor1zoc16n lnsvNce16n Dlreccl6n Gonotal to- Decreto 11907-A dI. reetal del MAC. 5-10-n2. - 178 - I .IjA l. a. r.lIlIItfl.o Il.Y PiriWleilCloN SALVEDAD 1s1TRnccCoII PEQUIStTOS INSTIlTUCI0IS QUE AVTORIZA tcEtSLU.C10l 251 C rno Porcina 10 - hiatortgacl6n Permiso y ClE. i,W fOlreecctn Gene- Circula 1ct. y O. rF.ng Junta de No- Cuarentena tal do Salud fnnimall 024-RI de 21- ainto torcino del wFG 2-83 Dtecato en ratiica- tPegIl 14504-.A Clon dol C.N.P. do 16-5-O. 26) CISO l lh _ hutorraci6n Raccamendacl6n Clup Dlreccl6n General dul Decreto 13907-;. do CoMina6n I'IG. de 5-10-92 27) Ctbolla Co3temal- Decreto 4509-;. ttca A - - 23-1-75. 209 Clgarros Mo - Autorliael6n Leyenda "Adverten- Hlnisterlo de Salud Decrhto IS450-s el'a I tumat an no- de 22--194. eivo para la salud. 291 Chapa veneer io - Autoritsci&n Inspecclon Direeein General rores- Oecreto 13907-;. linderas tal del HAG de s-10-e2 30O Colmin3j 31 - -- Dacreto (Aeqll {:ens 13907-1Su.r- S .s 5-1-84 11) Conejos 1. - Autorl3aci6n Certificado de Ss- Dlreccc5n General Satud OD-tcto 11S04-1 lud do pats expor- kiir l MAC. d 16-5-9. todor 321 Coitiachapados lto _ Autorilaet6n Inepcccl&m Vlreccl6n General rores- Dicteto 13907-T. do Plyuood tat del MNG 5-10-02 33; tzo antea :nor- lb A iutoritecign - tlnisterlo do Salud Decrcto63l4-!'r; q' nicoa de 9-9-7C. 1 CnIn,.,tois naturr- o- Autoritaclin - Illnisterio de Sotud D;creto 6111- * seri di- 9-9-7 - 179 - I'Sqlna *5.- _ _ _ _ _ _ _ _ _ _ _- - - - - - _-- - - - - - - - - - - - - - - - - - - - -_ - -- - - -- - - - - - - -- - - -- - - - - - - - - - - ---- - - - - - - - - - .t?ltCUW ft.d '0HtIKZ CIOlt SALvWtiD ItESTRICCIOIN REQUIlSTOS INSTIICIOQ QUt AUlORIZA LECISLACIotl ColorYntws A1 - Autortzac1gn - Hlnltetlo do Salud Deceuto 6114 SIrs Sintfticos do 9-9-16 Cosm6ticos ..s - Autorwizacln I nscrito en Rrgietro lilnIsterla do Salud Decreto 6365 5rrs 9-9-16 CrustSevos - Autorlmacl6n cartificado Sanitarlo M^G Decreto 14584-1 16--S--SI. Droq2s Paloltva Sole a tra- rst:icta VigI- Cortificado Im- Depto. Control do Docreto (hagig Ali1 vsa del Co- lancla. portacl6n Droges Y tstupele- sIrs do 19190 blerno. clentes del Hlinl- tarlo de Salud. .__~~~~~~~ -- - -- - -------------- - --___ ______ _________ - ______ __--_---- ------ ----- -------- - - - - - -_ __ -- - - - _-___--_-_-__-_-_--_-_-__-_-_ Duzurle,t- ho _ ftutorltael6n Inspeccl6n Dlreccl6n General Decreto 13907-A. Iubadaarl IoreFtel MG de 5-10-R2. ___________________ __ -- - -----------------------------__ _ _ _ -_____-- -- - ---- _ _ - - - - - - - ---- - ---- - - --_ -_ _ _ -- -- -___________-- . £trtarcicIonel - Autoritracln - IAG Docrotn 9429-;. d, Ictunercst I-4-2R trIutidoe b Autortiaciln certificedo de Dlrecci5n General de Oucroto 14SR4-t dAl Salud del palo Salud tnimal IAG 16-5-Al emportador …-- - - - - - - - - - --- … --- --- - --…-- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- Cnvasis Usedog i Auteritaci6n - Certtileado de HInieterlo de Salud Decrtto 11845-srpS Salud Ipor me- do lt-6-R2. diclonoe high4- nicas adecuadam t.quinis Aa - Autorizatel6n Certtfteado de Dirocci6n General de Decreto (fe3il 145r' Salud dol pats Salud An1mAl ILV -t l,-S-A) e,portodor … ---- - - - - - - - - - - - -- - - -- - -- -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - - - -_ -_ _ -_ _- --- -_ _-_ _- -_- -_ _-_ _- -_- -_ _-_ _- - 180- AtITt I cu) .tIAy prohlbicign S;alvedad RestriccUin Pnq",eit)d Enmituc Jon que fritorlila U:GI;IJ.Clo rII F'uipo Ilospitalatai lo - Autoirizaci6n Cartificado Hlimste@rio dto Salud L:-y G4nor31 de lipogtaci60 de Salud 'O rIA 111 ClcroIblolo06'ic 10 - autoir1zaclin Cortifticdo Igliilsteirlo die Salud LAy G.I'I1 de loportacI&A do Salud ill IUjIpO odontisloct No _ Autioirizaciin Certificddo, ad, imoprtacl6n FJlmleateirio adi salii4 W* 4:;CnAgel de Salud. Ii- ioilpo I'cra Dptica Ito Auto,risaclOn Certificiedo dim Knilotairio dim Saluid Ley ttneral loportac,5 gd do Slud 31 rquipo QulrC:.rico _ut-orizaci6n Cbrtificsidoa dml43 litirle dIb Salad Ley Gim-neral Inpartacl6n de Sslud. *l Eqlpo 'Vaturilnari No _ Autojrizaci6n Cegtiticasdo d6 ilimlktoirio do Salau Ley General UsItupcG I1.cicnt<3s 1IMp@ztaci6n de Salud. OD f6iIrulas (spJcintles No _ Autoirlzac6iu certificodo dim CHIP. cariJuntiu.ntis Docroto 109Sl Jll4? eche} Salrad del pafim coirm 1. IlEIC do 12-12- loportador 9. 'A) Gamnedo icas.s) - vfc- Prag uso Indua- irutorlaeci65n Dlirct a Jer- clip Decreto 10S23 c.Iras do gonada t-1a-uno trial caro;c 14tc de I-111-R 2 C.tos St RutorizaciiSn -- Cartilicado Hinisterlo de Salud Decreto 231115 sanitarlo dac (Depto. do Cpideuiolo- SPPS dot '011 Crast Iunhidxa to - Autoritaci6n Certifictdo de HEC y HAG Decreto 11450. salvo Irporta- Salud. Autori- -A die 16--. 21 ci3bajo tra- 'zacl6n CUP 109!il lIC : taao. 12-112-19 L.; Geneal. *J.: Solud . ----------------- - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- A- - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ;.rPtlcwjw ti PRHtNlCIOlI SALVEDRD It£STRICCION ERQUtSIIMS lflSTlTlCION QUI htrOZltOwr LrCISU.C1Oll Gress T O.rivaaog St Autorlzaci6n - Certificado DOroccl6n General Inimal Decreto 14SRI-; Onin3httS Sanitaxlo HAGn 16-5-91 Ilatins da IlueSos Sf AutorJgacj5n - Cortificado Dlreccl6n General LnIral Decreto I.se-:. (anlm12ls Sanitarlo HWA 16-5-91 Ilorwnas da tladera No _ Autortira16n inspecci6n Dlroccl6n Conoral Forga- Decreto 13161-:. rare Zapeto tal HAG. do 5-10-02 ltorronne v.ge'nles - - Autorlracln Pegletro del "Inlaterlo de sglud y Decreto 6114 StP5 y $us tiecla. HnAG HC -A de 17-11-76. __________________ - - -- _ __ _ _ - -- -- - - -- - _ _ _ _ _ - __ _ _ __ _ _ -- - - - -__________________________-------_ __---- -_-- - - - - - - - -_ - -___________ ---_ _ _ _-- ___--- flufisos (pnlmnles S1 Autorlsacl6n - certificado Dlreccl6n Cenoral de Decrtto lCSA.-. Sanitarlo Selud AniMtal AGC 16-5-A) I;u.vos Io _ Autorlrzacln Recooendaci6n Hlniuterlo da Salud Decreto lIeal1 CNP sellada y rir- y CNp 9361-StPs 1917 made de Junta tIota JrA 195-Ao da romento tvw- dol 2.1-4-Ao. cola. Lsras lncandes- No - - tjustarse a Ia H"E Decreto 9919-IrtC cantes de filawKnto norma. 1-5-79. ratSlleo pate aim'- brado g,noral __ _ _ _ _ _ _ __ _ ___ _ _ _ __-_.-__ _ _ _ _-_-_-______-__ _ _ _._ _ _ _ _-__-_______-___-___-_-__-_-____ __ __-------- ---- ---- - -- --- --- - -_-_-_ _ -_-_ _ _-_-_-_-_-_-_-_ -_-_ - Lecho andultada No _ utorltacl6n Previa Autorira- NEC-MAC Decteto 10951-l-Ilc Salvo laporta- cin del CNP, de 17-17-j 91. ci6n bajo tra1 Certiflcado do -A 16-S-e1. * y tado Salud General do Sniud. … _ _ _ - _ - -- - -------------…---------------…------------------ tA,ChU awapofeda No _ hutorltacl6n P,.vla eutorita- Z-ftz Decreto 1095I-! salvo laporta- c16n dol Cr. da 12-12-11. i li6n ba]o tra- Ce tificado de -A 11-s-nj L- todo Solud noal 1.- *t - 182 - - - . ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~PSqluta b - __________- - -- - - - - - - - - - - - - - - - - - -- - - - - - -_ -- - - -- - - - - -_-_-- _ _ _ _ _ _ _ _ _ - - -- ;.iiricJLuo :A PIEI IBICOtli StILVE rn fESTfICCJON flVnaQttIs INSTTn10Co, Q'Je IkOtAlo. 1tCISUJClrtt L che matern1za- Lo - Nutorltaci6n Previa asitorlit- HMC-H7,( Dccreto 10951-Iltl Islv,o inporta- ciln dol Clip. du 12-12-19. 1: 4 tion balo tra- Cettiticado de -I 16-5-03. tny tado. Salud. Genertl da Si1ud L.chu y aus dear- No - Autorltacl6n Pggvia autorizo- IIEC-tvc D2creto 1O1-Ii: vodog. solvo lmport.- cl6n dwl -1 CN do 12-12-18. 1.5". ce6n baJo tra- Cortificado de -A 16-5-0) 1. tado. Salud. Gnernl lo Salul Licoris Nb - Autorlacl6n Cuipilt con eti- flinteterio de Solud Dectrto 5526-il quetaje y rotula- de 21-11-75. IS.S Jo. -S 22-5-84. I5SJ9 -s 29-9-04 16008-S 4-2-85 U.antss usadas - Para el reencau- Con *ro pars reen- - Docreto 41t9-SrrS the teoyralten- cauche (ingreso y 30-9--:. to con clertoo Salidal. requilotoe. !3ddere Holdurada No _ Iutorl2acign inspacel6n DireccSln Cenoral lo- Decreto 13901-;. d! testal NAG 5-10-02. lindore No - Autortzacl8n n.rsacel6n Dlteccign General t"creto 11907-1. dt Forestal It\C S-lo-SI. Itndara rolle2a Ito - AutorlzaciSn Inspecci6n Dlveccl6n General Decteto 1190n-1 1; Forostal IAG 5-lo-al. :ingos da Hlerrtmlentas instrumentos - Atnorlt2nclin 1npnccl6n Dlreecl6n General tecrcto 139n0-: Nrorestal M.C 5-10-n?. …-…-_ _ _ _ _ _ _ _ _ _ _ _ - - - -…-- I aterIo PrI:i Ito - iutoritaci8n Certilficedo de DePbrtaftnto d,1 Con- Decreto (1(8 S; pir! tndustIla Irportaclnl trol de 0roqas y rs- do 1910. y c 183 rlo- - 183- AfticUtlo hIA .KRIIlSICtON SkLVEDAD PESTtICCION gQUIStOCS 71tlStITUCIO11 OUE AUtORIZA LIGISLrCIOII Hcdlccaentos No - Autorltaci6n Reglstro Departamento de Control Decreto 0)6l-svrP- de Drogas r Estupetarien- Ley de Setd S-4-7-; teo del Itinlaterlo de So- lud. Hedlcanentos quo contlenen Fetupstecleutao No - Autorlsocl6n Ragletro Depto de Control de Dro- tiecreto B)61l-Sris Certlilcedo gea y Estumefeclentoe del t1y d* Staitrt } de Salud linlsterlo de Selud I ;egconctaa l,ro- uo _ Autortlzcl6n Inspecclon Departamento ganidad Vege-Circular 250 eeuarlas. Eunelonarloe tal HAG 20-9-71 Baie SanIdead Vege- PadloqAar del tel. 14-9-19 MAC I tiluscos I _ Autorlitel6n Cortiicado Dlreeelon Generat de Decreto 14564-. Sanitarlo Salud Animal IUG. 16-5-93. Mfi *iebles A outoritzacln Inspecel6n Dlreccl6n General ro- Decreto l)39n-: reetal del HfAG 5-10-92. I ltuostras h4dlea. St Decreto 9361-SITS que conteng-n l1- de 197S. cotr6pl,et …_______________.______----__ - ---------- - - - - _ _ - - _- -… -_ ----… - _ -____________________---------…-------------… I liqulnas de escr!btr St Sl CumplO Autorieaein IEC Hmi Decreto 141 9-Irc requleltos Inapeeel6n CIS del 1-1-93. …-- -- - -- - ---…-- - - - - - - - -- - - - - - -- - - - - - - -- -- - - - - I Ovinos No _ Autoriescldn Certltlcado Dlreccl6n General do Decreto IprIlt de Salud Ex- Salud Anietal RAG 14594-A 16-5-Al pedido por el pate exports- dor - 184 - pr4bt;1:oS 11.W "IrJIII9ICION SALvYD1rt PrSTRICCIOM UroUlsi'ros ItIStIIICIOII QUC A1utonP17A fTCISLjwline I alette llo - Autoritaci5n Inspecct6n Direccl6n General roreetal Decreto l3O1-V. I adjr a del tHag. 5-10-n2 1 leces llo _ Autoriteci6n Certificado oDrecclSn General de S-- Decreto 14504-:. Sanitarlo lud Animal WAG de 16-5-01. 2 Nrtuunes lo Autoritaci6n Aeqistro Ilinluterlo de Sniud Ley General ds Salud. ) arrol St Autorizaeln - Certlficado Depto. de Epldesclolo- Decreto 23175 Sanitazio gli, Seccl6n Zoonle SiPS- 15-6-71 Pai lxporta- Hinisterlo de Salud. dor. 4) Pisticidam Nr _ Autorlit 'on Pegistro Hlnleterlo de Selud. Ley Gneral tI dons6:Ileoo Salud. __ _ _ _ _ _ _ . _- --------------_ _ _ - ---- --- -__ _-- ____ - - -- - - -- -----_-_---- - --- - - - - - - - ------- - - - --- ----_ - --__ - _ -_ --_-__ -_ --_-__ -_ - 5),1;l do tadera Aih-toritac15n Inspeccl6n Direccl6n General ro- Decreto IlqO1-i. Pata 16:;sres. vestal' HAG. 5-10-ni. .61 Pilotis No - _tiutorlteln tnspecel5n Direccl6n Genetal io- Decreto I19017-1 rectal HAG 5-10-92 p1 ilagqloldee Ato - Autorlaolin Pegletro del Itintetorla da Malue r Decvto 1614-qrr-: HAG. KhA 17-11-76. '9) roreinos No A 0 torize:c6n Certificedo Olteccl6n General de Decreto IRgqli 1I' de Salud, Pate Salud Animal HAG 04-h d. 16-d-01. de Origen. …-…____ __ __ _ _ _ _ .____ _ _ _ _-- - - -- _____ -- ____ .9) Paotec da l-aders No Atitortracl6n Inspeccl6n Dlreccl6n r.enernl Po- Dpceeto 131;o7-. 4.' paro slumbrgdo. … restal del HAG -5-10-92 - 185 - pSgina 111 - *ntCULw HL't PioDISICtON ShLVDOLD RtES?tCCION RPQUISItOS IHStlTUqION Qut AUTORttA LtGISLAClott Proensa de F t _ utorlainpcel6n Digoleein Gmnotel rot...- Decreto 11907-I. date ' tat de fAC. del 5-10-02. Pr@ductoc lyf- sl - - Decreto 1146 IleC ColIe Qa2aJdoc I-b-7 on cocos a enve- ceg usedos I Productoc biolo- Nt _ Autorfzaeloi Cbntrol Dlrecel6n General de Lao 6241 29-4-10 gicoc y faor-,na- Solud Antmal Hh%G log 1 Productoe co Hlg-en, me _ Autorlescln Pogietro Depto. de Control do LAy Cenerel Salud donlctlcoo Certitleado Droges Y tutupetact.n- de tIporta- tee. KinlmterIo de ci6n Salud Iproductoc Fr.mLCed- No - - Pegtetro. Depto. Control de Oro- LAy Ceneial Solod. ticog. Cortificedo gas I tEtupetfclentoe de lmporta- Kinlsatrlo de Salud el6n 3 Produetom Perocodero% tk - - Pegletro. Car- Depto. Control de Pto- LAy Gene,a! Salud tificado de tm_ gee r tutu.etaotentes portecl6n. HinIsttrlo de Salud. t PRoducto. RadjLacti- Nu - - Beglatro. Corti Depto. Control do Dro- May General Slitc 'ficado de lipor- 4ic V tatupetaclentes tsel6n. l4inltteoro de Salud. ,l Ptoductos y Subpro- SS - Ley 6243 2-5-79 ductoe do deassos do oriqen animal o vegetal …-…-_ _ _ _ _ _ _ _ __ _ _. _-_-_-__-._-._-_-_-__-__ _-__-________-_____-__-____-_-__-_-_ _-_-_-___-_-__-____-_____-___-___-____. -186- Pi$na 12.- ;.ntlCcow iji VIMIRIC101 S%LVCDD £ESTAICCIOWIS SEQUISITOS IIStITIC"OH QUt: ATORI1A LECISLI.CIoIe I Proiuctos I subb_t jue- St Autorisac16n - Solo cocida Direcc1&n General de Sa- Decroto IPFrg) t2s de origen aniLa herm4ticamn- lud knimal HAG 14594-h IG-S-8l to sellado a enlatado y no rotrigeredo. Certiticado de Selud J Producto, ** subrro- No - Autorltzcl6n corttitaedo de MtC y HAG Decreto 10951 ductos de Lacho Salvo Imports- Salud. Autori- HEIC 12-12-79 ciln bajo tra- tacign CNiP Ley General Salid tado 14594-; 16-4-83 01 ProyJctilso yflunilc- sf solo tI Co- ifinImtortlo de Sequti- Lay 1739 31-1-54 "as blern… dad ?Gblica tWr&ncell 1 Puatt6s I t arcos *- tik Autorltacl6n lnspecel6n Direcct6n General To- Oecroto 139014- :sduia para venta- restal faG 5-10-P2. nlag 2) fulpa ladera tio Autorliacl6n lnspecelin Dlroccl6n General ro- Dec:eto 11907-:. reatal HAG 5-10-92 3) Puntalee AO tadera pae Hlnes 1o butorlaecldn Insr.qelon Direcl6Sn Conoral to- be.-ato 11107-r. rat-al MAG 5-10-12. 4) ".afr. de 1Iecacolmne ho Autoritreein inspeeciln Dlrecct6n Ceniral To- Cecretu 13V)n-J. roetal del HAC S-:0-R2 ___________________ _ ___ -- - -- - -- - -- - __ --- -____ -- _- - - ---- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - _____ _________ __ -- -- -- -- -- -- -- IS) ninctivos No -utortt^ 6nt Depto. Cntro1 de Dro- L y GCerF,l dO qga y EstupolcaI'rten silud. do Hlnlsterlo de Selud f) Sacos Usadoz St tutoritacl6n -- - iEC Decroto 11if. I;- - 187- * }'I r. t * I . - AWICULO V10 PROJILICION SbLVtDAD RESTRICCIO, REQUISITos IlStSlTUCIOII QUE IflOflZA LEtISLIC1oN ._ ------- - ----- ---- -_--------- - -- -- -- -------- --------------- ---------------- --------------- ----------,I_--- --------------- --------------- ItEIC. coa2 l C 12 29-4-79. I Sandallas d b - Autoriraclln Inspecclon Direccion General rores- Dccreto 1)'0-; flad4ras tal del HAC. S-10-t2. | Sangre , D9crwa tt -- Docreto ItREgl doe 1459c-:--16-S-B. ) SdWSlIos lb - Autorlsacl6n o oicina Naclonal Seuillee Ley do Senl as I Swan de genedo Nb - Autorisacln Ragistro GC- HAG Decreto 4J63-1. 1 ganado pss nee16ogco. 9-12-7. pie de crcl C.rtiticaao de Salud I Slcotr6PleoA melatlv le a trovwe tatricta Vigi- cortiicedo de Dopto. de Control de Dro- Decreto IPE,lI del Coblerno lncl- i.portaci5n gas V retup.taclentes del sii 61 SPPS dd 1970 HItIS1tR1O DE SALUD __________ ~ ~~~~~ ~ -- -- - -- - _ _ _ _ -- - - - - -__ _ - --------------_ _ __ _ ___ ______ _ _ -- - _- - -----------_--- -- _-- --- _-_--_-_--_-_--_-__ -_-__ -_-_ _ -_ - I Souvanir da N _ Autorieacldn Inspoccin Dlreccl6n General Fores- Docteto 1390-:. r.deua {{ltCpto tal HAG 5-10-92 2 rtlculom ni ..v- i te,elesa I) tabsco lb - Rutorizseclin ecaoendecl6n Dlrecci6n General de Circular frCI/0)2-A5 Culdados para qu de la Junte de Intogracl6n Econ6*ica 21-2-95 no ingresen enter- defense del Te- Cuando ae r*aliza libre same tiota dol 18-2- ;.deade "Ra baco. Cowrero I HAG. - 8S HAG. -…--- _ _ _ _ _-_ _ _ _ _ _ _ _ _ _ -- ----------- …-_ _ __ j trigo No _ Autorlzacl5n - CUP Decreto iftgil ------------~~~~~ -----_ - ___ - -_ ------- ____ --- -__ --- -26_del b-=-A] __ toda inpoot;;16n ista.rSor t $500. Cit Wequlers dal Rogletro do Pedido Contirsado. enitido por el Banoo Contrel. Ista lista po I*c'r,' *'reacf as Bujetes * REglmenes Eupeclale. como ;auis6n Teagporel. y on lo quo me rotlerr a solicitudes do autorlzeclt c.1 r:qi:ti 1,Wro .!uu *i nsez.sItUn cumplr con los requlsitos establocidos par eu lnportacl6n. - 188 - APPENDIX S Price and Margin Controls - 189 - I)refl,, N 203tOI -hit I -MEIC, puitdlkndn els li Grf N 6iI .I I. c l I Ile .ltil de 1991. su13YI.It32 UJIl l,ES ESC(OI,AlEl4S Allmentos culaizs y' e- poilvo paJa 115)11 211 20 I'RE(CIS MAXIN1f1S 111. VENIA Anor. . . 5 12 . rnlltzloUtctop itr RIATO^ta I'rA as lt 1AI IA Alda envasado lternieticamneuste . 12 12 AR tfiATORKTA A Lr.1IAIEISA A 1*114 I111t Azdcar confte . - 4 5 12 AAdcsA tel liatlo 5 12 Cafe lostad b mntilith . 12 12 Cuademnos de wallatho comndn o enculdos. de ptoduccld oncitn;t al Cafd Insla,liineo . 3(1 3t ltnhIld Cae de Fes (y sus viscemas). de piloltn.qendo Cola (Ic 400 ciO attleuis y cabalto ... 5 IS tic 20 holas du 2 W117(1 3 OIU) IN) litl Cesealtes psepasados en cualquler totitia Ie Cap (le 300 tuatteFiis pzesentacldn... 20 20 de 30 hi4as du. 2 608.70 3 000UlO I 201K Connttes y golosinas 30 30 Cala le 200 cuuateimu Dube de iaps 1.( I5 de 49 lIots do 260i810 31O00 00 KIM11 Embuildos de StOd iixs It 20 Caja de IWO custeino FdjIotes wops. negwts y h2yun de smduhttiamsn de 100 halos CIa. 2 601.10 3.WO.WJ 3tlt l national ... . .. . ...... . . .. 5 12 Fdjtles. gaibantos y guisantes preparadns. Mia dlinrdo medlente ecrelo N' 186R? - MEC puMlcasde tea 1.a U;nceisn del salts de Iomate. euctulstls. mayonesa. 16 de dlckmbre de 1933. 1sdas y paslas similates 20 20 Fdiloles Inroutados 211 1 2 PORCENTAJES MAXIMOS DE UTHlil)AID Ihane de mal y iliigi S 2 fuvsde Osalina- Impon iad lIklalilta En dom, del Detallista Mescia Cil 8 12 En dom Iel lue a tie Mewa Cil 10 12 * u tlede fluitds pivnce%ada .te vaca s 10 Le tch en pilvo Pala un, ilutoiaSIla IU 10 Lecle es"aa ycw'iit1ciisatla IS IS5 ALIMENTI OS Y OTROS Leche en polvo de ptmoduccitn saacius'nal 5 10 Arelte coins5iMe de sau. semills de algndnn tLche en polvo Imlauda y susSilisn5 an gloassol y mnuz de nsfttxccidn nactonal..5 elkvogsdos a base tie Sinys (Incilleyilli lecslw Acelles comeslibles Impisados .1 IS espotlles Pal nini . . I 10 Alinsenos en Volvo (lpIo Coconlt* base de Lclhe en poolga IiiipIliais y suStIuins Iiavt, leche y cacao. delaotoiny.leche cultivda gds base de Soya 2S 25 ptgutil celesomy 20 2(1 - 190 - Ilan de Lodo tipo (no incluye reposteria liiiIuI),d y galletas) . . . 10 20. NI . .. 0 20 Pastas alimenticias de cualquier dpo 10 20 Pescado entero 5 Is Polvo paa homear . .20 20 l uberia eIc iec ro L tat itl ,I II IL Jill Queso de todo lipo 15 20 g sus figuras Sal de cocina de todo tipo S 12 luberla de liicno gatvaiii/ado ii tic Sardinas enlaladas. . f 20 Pvc 12 mnn y sus liguras Sopas deshi lraladas y similares (mncluye ' riberfa lIVU pa t i tvo samiim tie cubilos) 15 20 31. 38. 50 y 75 inii cpci 1iI(t. 1t6n lankage 5% dfnico - 19055 Ml:C 6-7-89 SD)R-32.S y (le 11)0) tnn SI)R-s y sus le (no inctuye otras infuslones aromilicas) Is is figuras Tortillas de malz . .5 12 ARTICULOS PARA INSTALACIONES ARTICUILOS PARA INSUAI.A- DE CARERIA SEGUN DETALLE CIONES ElECTRI(AS PARA SIGUIENTE: .20 20 VIVIENDA SE(;lN DErAI.l E Aspersiones nacionales. rosca de 12 mm SIGUIENTE DesagOes con IapOii tipo pila. para hailo Apagadores 1 regaderos de cualquier material hasta Balasiros de 20) y .10 wat m de dos escurridores y utna pila Bases para lubos tiIII0Iceite% tic utds hlOixioros de color blanco (completos) pines lavalorios de color blanco (complelos) Cable eleclrico t(e uon p.11 Cable I'W dcl 6 al 14 WG, Have de choffo y de paso de 12 mm l lave sencilla de ernpotrar. para baflo. Ca cua duie ae ti ga cromada o no d ulwrmtra cromada o no ~~~~~~~~~~~~~~~~~~~~cenlros de carga par.1 LtIdIJ" dl.NyutIIIOC-; Tuberfa de hieffo cocido o vitrfiricado y Dcseuniores (ge Ia. 20. M) y t() JitprFItcOs sus figuras visu rs luberfa de hiern galvanizado o de PVC 110 volnloc 12 mm y sus liguras 20lineas lubeLla PVC par us o saniartio de 31. I'lafoneas pin bimihiIt.i, 38. 50 y 75 mim especificaci6n l ltieioes pJfJ hlnivs(t -ltiti I lte a SDR-32.5 y de 100 mm SDR-5 Suelsu h ilv.miv, m lid y sus rigurasSxet.ilie iii,ii iiIiiii Importadon rsca c,iitdadirs. tii mi iI n a 141)ii u Mayorista Dlelallisla I 0t1auirrtetites % % I ubo uhcLtiitioit l'V( hi.ti, 111111 y sUo liguras lubo I Nil I 1 2 2s fiiiii sti) tIym.i - 191 - lipoFtador Inportatlor Mayorista lIti%IJ Maymrista I)cJIlll.A % 'I 1, 'Y. Varilla Cooper Well tie 12 mmn y 1.5 mn ctn gaza IIERRAMIENTAS V SUS l'ARTES EXCEPTO AGRICOLAS SE(;UIN EQUIPO MANUAI, PARA USO DETAILE SIGtIlENTE 20 20 AGRICOLA SEGUN DETALLE SIGUIENTE: ...... .......... 25 Alicates de todas cIlscs. ColtiniC%o ilo 8FoCbas, fresas. dldi i iaaihIns Ah nadoras Caladoras Arados Cepillos de carpalnit-r 11inibas de mochila pafa atomizar Cortatubos y cortapeiiits Cinceles y pUIz(IlICS IIERRMIENTAS PARA USO Cucharas de albaflil y llanetas AGRICOLA SF(ILIN DETAI,E Cuchilto para ca"iceila SlK;UIENTE-.. IISCuchillo die electticisia, Desatornilladotes Engrasdoras y acelitcras Azadas Escuadras. tveles. metros y citlas inetricas Azadores Formones Corta hananos Cucitillas o navajas plegables para podat Herrrubienlas elacsicas le mimi o inijeftar HiaiTs para soldar ( autilles) Cuctitilos y macheles Hojas de sierra recias (hojj% p rJ segulwasl tiachas Limas y escolm(as (exCePIlol lilu L. 11 tIII) Holyadores Liaves de ajuste de ioIa %It Ia.c% (mIgleu% Innas cuchillo francesas. tie Ilumi.mifi. et C Macanas Lailaves mIccauitas .IIae%. tinIU Palas combinautcin 4uhm% Cli lattiucs Martillos licos Mazos Pscos zachos MolinilIs 1Iolo fl IJ1i1i.1icti ', pu1. IIS.1 I LII IiIc(tI Rastrltlos para agritultuia Piquetas 'I Ijras pala poltci Prensas para meclitnoc y tJLlimcll Sacabocadoe Sieftas de m11ano Lul IU113FIl (%CgICIJSI - 192- Importador Il iiputia tnr Mayonsta D)cUJIia1J Mayor3ica ctaIIi.i Siefra de mano con mango (semuchos) MATERIAIFS 'ARA l.A Sopleles CONSTRUCCION DE Talados. berbiquies. larrajas manuales VIVIENDAS SEGUN DETALLE lenazas corrientes reiiazas de armadoles SIGUIENTE In 15 'lijeras para metales loniillos dC banco Alambrc negio o gaIvaii7a(Il Arena lI.lROS EDUCATIVOS EN PASTA Azulejo hilanto o tic Lohm. Iabinta- RUSTICA SEGtJN DETALLE cain nalo uia pa a re-vesmaii SIGUIENTE . 20 201 Bisagras (le Icner i pudoulie I s I'll le espesor tie 75 X 75sR) X 89 y l)iccionarios. enciclopedias y atlas. lipo lou x 1 (0 111111 economico Bloques (le Lnititcio y .iiIIh,l I ubros de editoFiales nacionales Cal I IIeraIura infaltil Clavos con cabeza Novelas clisicas. hipo economico Tiradores o agarratiecas pjia viviciida lextos escolares y colegiales Ladnilos. baldosas y mosaicos I exios universitalims Ltamnas para lecho). (le Lidhluler hipo y mnaterial MAQUINARIA E IMPLEMENTOS Liavmnes tle paiLlie. tic on pctiusllo AGRICOLAS l'ARA TRACTORES Madera aserratia, (lc cuatiro, epllilaa. CON TOMAS l)E FUERZA SEGUlN traslapada y madiinimbatla DETALLE SIGUIENTE: ...... 10 I PicapoFes dte I11CFrr pUltRIh o C%iiJIl(Jd0 negro Ahonadoras Piedra qucbratla y rciedonlta Arados Pilas tie colncreir pr.1 IJ. at' Pintura (le fahritat.itln nair ordl Cosechadoras Pimuradla Chapeadoras T an a liquipos de lumigacion Tanques pa(l C g.IV YOIJhIL,. :qlipos de oego Tejas tc IICIOC mu uharid y lIIC( 1,11,, k4iii1oes . Varilla die hImurrol ItkIoriijuliu uIuliaiuimow I JLtores nomirnales hasla ne 1 26 tui (iinilcrls I rasplantadoras 2.3 y 4) y lisa eic sIniuelrac nil - 193 - Mayorta I )eIallal.i Mayorista I )etlllisla % tS% % de 6 mm (nmmero 2) lipiz pequeulo Vidtios y celoslas Crayolas pcqtieClea' cii e alas liasta de 12 uwidades QlJlMICOS DE [ISO AGRICOIA Cuademros cii gencral SEGUN DETAILE SIGUIENTE 2s i5 Escuadra pequeila plana liasla 10 cm tie plAsuico tde iiiatiera Escuadra pe(litCila paIIna iJntj 15 Iliw (iC Insecticidas l ungiddas ~~~~~~~~~~~~~~~~~~~plsticol Fungicidas Goma escular (tian%pateiic ho hc tt.IJ llcibicidas blanca) Bioestimulanies HoCasar Humectantes y coadyuvantes HoLaps para prtalolao defoliantes y reguladknes die crecimielito lipic o K iico ymaduraciortt)Bca iiutuc Lipiz niuia negra npra Monigol Marcadair puntia fin.n lipo cLn6oiio UNIFORMFS PARA ESTUDIANTES Pinceic po ecn6micti SEGUN DETAI.I.E SIGUIENTE- M( 211 Portafolio de 3 ganchos Reglas planas de initatera o (Ic pl5 'nco Camtsas bluisas. pantalones. enaguas y hasta 30 cm gabachas Tajadores pequefnnis pllsutis o (le metal de un orificint UTILES BASICOS PARA Tempera escolar (Ic 6 colines ESTUDIANTES SEGUN DETAIIE Tijeras escoIlares prUima rcti3u,. SIGUIENTE 201 liza blanca o tie colorcs TranspOl'adures pl5sot s pui topo rw0i Ahaco pequeilo ide I 8fr plsic. pl nu Boffadoir pequeno IptJ escolar Cala de lubos de plastcina o colores VARIOS Caja de lipices die coloses de 6 y 12 uuitlutic% clrilos Alainbre pJ.a LCIA.% 1M I Caja de lipices tic cohnes de 12 unilaIdc% Atimento para avc% (Ic tuirujl ganwtdo largos bovino y pflrcifui 12 12 Cariulinas y papcics (le clnstruccU¶u1 y Almidonics (extcplu tic 1o hgil iii.) 20) 20 satintados Baterias para 1Ita 210 20 Comnpis de u c%tuoliJf tie latdn ciiim - 194 - liviayuIII iti II ihl. NIIIa ye' IIIi. I IttII. Mayfilluls IIIz"le lletutirs p1a eallado. ... ...... .. ...... ..... 20 211 Nuglileiki I,Ui n41 % 20 Is IlUIolnS dle emp3que tle littdu""*----102)I8I Pn,, jl.l, ............U. to2)PpPlaC YUS II111 CFO211 Ll; mv . . 2. 21i lin.igilnllq flails 75 waI. losca casillnar. IS 2S Pupt IlIgW..1ie IO 2, ihnmchs. todilHoq y halldelas ratl plntat. 25 2S Pvosiuslos cJewt hie PJSa ijvjt ulenSI- t:aiistlsi die lodis, ltrp (huisluye saisdallasl. 20 2tl llos de to,e.im ... 20 21i ('2ncelas Ct,lcmitetes Pai atun,shI do . . 15 1 Repuesets Y 2Cte.eCI)II Psal veliltsiOS t*ali4ii innmieiasl y cstwilctile .............. 15 1 aulnitoltifes y maquienmia y equipo de ucmnemil, t,utelillitsi Y I'u,75itldi) elli .... S¶ us) agipetlo . 2s 31 Cepilis.e ac 2 5cii' . 25 2% Seio de set . I u cpllhi P Ifllet . 20 2tn Semllia Pas la siCsbII , . 25 2$ ccm5|5 r"' Pais -s ..... . - . . 20 211 1ejidus de niKIdo l1rpt (leIas. 211 2S cigallist.l .25 2% lollats smItela0 . . "'I 20 ctiluljas. 20ihasus y Ilins .20 211 Unguenlo baHls'iict . .. . 2S 2% ( c clu,asie leii, palns lenn y can1li 15 211 Vehiculh, popuiaso s .... 25 snul, (:0cIas. iellgesIesindt. lavaeltsifis. Soto ..... S s.i..e. plinileias Y $SS iepiIl.... . .5 2i Acelie de CscCluits 30 IO Ctom,bistibles Ino biIclye i aguush21 y illet.i.I. 15 . [:ume,tn y pIeles cti.tIa4 piea "raple- nias y lalalolteilut.I1 12 lDeslectl2mes e Iisecillid2s catlessu 20 211 Iie,IIiievs .s.to Ill IDJele'ii es ell INIvIm. lsZlulsist 0o113mS a st lavar flos ... .. ... ...... .... .......5 lwt,II1,2 escoiiSISIit Y tepitlsui..... 210 251 I colilii2smles quilmmilcast y olgilmlcsins. 111 S Irmthes,msm.10. . ............ .......... I latwmieus (IC .... ....20 211 Jaljussiec en h11inm. Ini13 I eCillusIsO P31 la1vat . ..... .. . ........... ... .. I 5 I % I law Y y s,liewilt 4s Ie dc t..is gs. . 15 I s M.isllmasl pail Vnel. Ile sitw sits,isesimetlesc 2(1 let MaIspillilItaS y siNVujillat paai alclar 21) 211 Medlclnas Iscslhlat el cl cueunlso hiticn CCSS. ....... . 25 ! - 195 -