The Economy of Costa Rica - Essay Example

Order 116153 Global Business Plan The economy of Costa Rica is basically stable with tourism, agriculture and electronics exports being its mainstay. Among the Latin American nations, its GDP is the second biggest. Over the last 15 years, poverty has been reduced considerably with a strong safety net functioning ably. There has been a turnaround in economic growth from negative levels in 1996 to 7% in 1999. Inflation which hovered around 22% during 1995 came down to 11% in 1999. Huge government deficits propelled by interest payments on the massive internal debt have destabilized the efforts to maintain the worth of social services. Checking inflation, lowering the deficit, and bettering the efficiency of public sector continue to be vital challenges confronting the government. (The Economy of Costa Rica) Costa Rica continues to be one of the safest and most attractive countries for foreign investment in Latin America. The Costa Rican government, its ministries and F.I.s keep up a distinctly pro-US and continental position with regard to financial security and tax laws. The avowed objective is to attract mainly the companies that are on the technological forefront to leverage Central America's most educated, computer literate and highly disciplined workforce together with the modern production infrastructure the nation is presently building. Currently, the economy is being changing over from its long-term dependence on coffee, bananas and cattle rearing to electronics like microprocessor production and high-tech telecommunication services. The pro-investment friendly climate and government policy of transforming the country into the Silicon Valley of Latin America has lured major companies like Acer, Microsoft, GE, Intel Corporation to make considerable investments in the country both financially as well as physically, with major production and distribution facilities. (Doing Business in Costa Rica) During 1998, in the course of its entire history, Costa Rica is set to earn a major part from high technology exports than from coffee or bananas or from the flourishing tourism industry. The World Bank has highly rated the country in terms of political and financial health. In the annual conference, the World Bank commended the nation as possessing one of the most stable and robust democracies among the Latin American countries. World Bank also praised the country because of the healthy growth rate and some of the best social indicators in the continent. The country is one of the strongest advocates of continental trade zone, and already possesses its own agreement with Mexico and other nations of the region. The number of tree trade zones of the country and tax holiday opportunities is lucrative. They extend benefits like exemption from import duties on capital goods, components, raw material; unlimited profit repatriation, exemption of tax on profits for 8 years and a 50% exemption for the subsequent four years. (Doing Business in Costa Rica) Even though the country is not an offshore financial centre in the conventional sense, it favourable tax structure implies that it could have been categorized as a tax haven some decades ago. But it was not until recently that the government came to know of its tax haven potential and started to enact laws and market this sector of economic activity. The country possess a lot of characteristic feature which renders it a distinct advantage compared to other offshore jurisdictions inclusive a perceived on shore jurisdictional status, rock bottom taxes and a fiscal policy that does not differentiate between residents and non-residents for taxation purposes. Off-shore activity is at present booming in Costa Rica and a number of popular companies have established operations, however the industry is yet just in its early stages. A major offshore banking industry is not present primarily due to the fact that the industry came out of the shackles of state control in the year 1996. (Offshore Business Activities in Costa Rica) The financial institutions in the country are regulated by the Central Bank. The modified legislation lowered the reserve liquidity needs to 15% of the value of the balance sheet, bans loans to individual customer that is over 20% of the capital of the bank and indicates that a bank's capital cannot be minimal than 9% of its loans. It is the Finance & Credit companies, which accept deposits from the general public, and they must need a license from the central bank and must possess a minimum capital of 300 million colons. The country has strict banking secrecy laws. Banking information is not shared by the banks with the taxation department or with any other government departments except the Central Bank. (Offshore Business Activities in Costa Rica) It is an accepted feature that promotion and creation of ideal conditions for foreign investment is indispensable for the exports growth. This also permits launching of new technologies and create employment. The government of Costa promotes direct foreign investment. This attitude is being shared by the two dominant political parties and has been executed actively as the early 1980's. Besides, the conditions needed to lure foreign companies have been the mainstay since the last 15 years. In order to support this initiative, CINDE -- Costa Rican Investment and Trade Development Board which is a private non-profit organization, was established to assist and guide investors and companies in the set up for functioning in Costa Rica. (Cost Rican Investment and Trade Development Board: Investment Overview) One more step in this direction was the enactment of legislation providing sizeable tax and operational incentives to companies in export connected activities. These sets of inducements are the "export contract, the free zone and the provisional admission system, all of which comprises total or partial tax exemptions and expedite customs clearance services among other simplified operational features". (Cost Rican Investment and Trade Development Board: Investment Overview) The laws of the land, regulations and practices encourage competition and do not distinguish between its citizens and foreigners for running their businesses. The only exceptions to this are the units, which are constitutionally prohibited from "total foreign ownership like telecommunications, energy generation and insurance. Tax, labor, health and safety laws do not check the flow of investment". (Cost Rican Investment and Trade Development Board: Investment Overview) Levels of financial development differ widely across countries, and the ranking of the nations themselves differs through time. Theories of financial development should explain the high persistence demonstrated by the indicators of financial depth and the alterations in country ranking at various periods. Present theories can fruitfully give an account for cross-section variation; however they are less useful while it is applied to the time series dimension of the data. In efforts to comprehend the pattern of financial development in the 20th century, a political economy approach appears to be better. Policies remain an issue, differences in the depth of financial systems form not exclusively from differences in general level of economic development, however also from the changes in the rules applied to financial systems and the implementation of those regulations. (Braun, 2005) The political economy approach at this point rests on the premise that a properly developed financial system encourages competition within the industrial sector by making the entry easier. Therefore financial development puts a differential impact on the incumbents compared to the potential entrants, and incumbent industrialists can apply financial underdevelopment as an obstacle to entry. In every industry, incumbents weigh the advantages of easier access to external finance that follows financial development, with regard to the costs of higher competition. In the case of some industries like beverages, leather and food, higher competition incites an enhanced growth in the number of companies and a sharper fall in margins. In these cases, the costs of entry possibly offset the advantages of easier availability towards external financing, and incumbents can be expected to resist policies equipped to financial sector development. In comparison, incumbents in other industries like pharmaceuticals, printing and furniture will possibly support such policies since in these cases margins are affected in a small way or even go up. The comparative strengths of opponents and promoters govern the equilibrium of financial development. In the recent years, quite a number of nations have involved in commercial opening. Trade liberalization can be applied as a shock to the equilibrium, as a medium of exploring this deciding factor of financial superiority. The financial issue remains whether in nations, wherein trade liberalization encourages promoters relative to Opponents, the financial system grows in a greater way. The solution to this issue is simply in the affirmative: the alteration in the strength of promoters against opponents is a very good predictor of following financial development. (Braun, 2005) On the whole, trade liberalization upsets the high persistence of private credit. Where the promoters are strengthened with regard to the opponents, the financial system develops in an important manner. Costa Rica is a good example of this. Costa Rica liberalized trade in the year 1986 and therefore was faced with external situations for financial development. In Bolivia the pro-financial development group was encouraged through trade liberalization, its margin went up by 2.1 points, while the opposing group was weakened losing about 2.5 point's margin. However just the reverse was true in case of Costa Rica, wherein the promoters lost 0.3 points and opponents had gained about 5.6 points. In a comparative basis, Bolivian promoters were strengthened by 4.6 margin points, whereas in Costa Rica they were reduced by 5.9 points. The trade and liberalization-induced change in the comparative strength of promoters and opponents of financial development constitutes a very good forecaster of following changes in the depth of the financial-sector. However, two policy inferences are relevant. First, to a considerable extent, nations have the level of financial development they select. Policy union to best-practice standards in not likely to happen on its own unless the political economy conditions for that type of change are available. Finding out and co-opting potential opponents may be necessary to guarantee the political sustainability of reforms. Secondly, policies which on the average have a liberalizing impact on markets do not constitute by themselves sufficiently to guarantee their extension to the financial system. They can also make matters worse than that. In this connection, an understanding of the interrelation among the sectoral reforms, and adjusting the timing in the manner are important. Trade liberalization also upsets the equilibrium among the promoters and opponents. The impact on the comparative strength of the two is considerably diverse, and that diversity is important in giving an explanation the variability of post-liberalization financial-market development. Within a country, the changes in the effect of liberalization on margin vary across industries. Within an industry, the variation of the effect across nations is about seven points. (Braun, 2005) REFERENCES Braun, Matias. (25 May, 2005) "Trade Liberalization and the Politics of financial development" Retrieved from http://www.iadb.org/res/events/semagenda/smengsummary124.pdf Accessed 11 March, 2006 "Cost Rican Investment and Trade Development Board: Investment Overview" Retrieved from http://www.costaricaweb.com/business/cindeinvestment.htm Accessed 11 March, 2006 "Doing Business in Costa Rica" Retrieved from http://www.businesscostarica.com/ Accessed 11 March, 2006 "Offshore Business Activities in Costa Rica" Retrieved from http://www.lowtax.net/lowtax/html/jcrobs.html Accessed 11 March, 2006 "The Economy of Costa Rica" Retrieved from http://en.wikipedia.org/wiki/Economy_of_Costa_Rica Accessed 11 March, 2006 Read More