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Does Costa Rica deserve its positive reputation?

For some time, Costa Rica has had a reputation of being one of the most stable countries in the Latin American region. And the graph above-showing the rate of growth of per capita income-displays a trend line portraying a steady increase.

But it also highlights a contrasting volatility, the very opposite of stability. And, most alarming of all, the graph indicates an expected decline in the rate of growth for both 2007 and 2008.

There are reasons for the expected decline, of course. The United States, a major trading partner, is experiencing a slowdown, as is the rest of the global economy. Costa Rica, heavily dependent on tourist dollars, suffers at a disproportionate rate.

Economists call this part of the situation a vulnerability to "external shocks." This, too, is not in keeping with Costa Rica's international reputation as a stable economy.

Without wanting to take away from the genuine progress the government of Costa Rica has made in managing the government itself as a financially responsible entity-in spite of recent serious allegations of corruption with accusatory headlines such as "Paradise Lost," and "Fall from Grace"-one can say that Costa Rica may not be quite the island of stability in the region its public relations people like to portray.

Consider the following April 30, 2007 headline posted on the website of news aggregator Inside Costa Rica: "Electrical Power Rationing Resumes Today."

The website says, "Following more [than] almost two days of no power rationing, the Instituto Costarricense de Electricidad (ICE) will resume its rationing of electrical power throughout the country as the country faces an energy crisis."

ICE says the energy shortage is due to a drought, which has slowed the production of hydroelectric energy. An electric energy shortage has the potential to undermine productivity and stunt growth.

The point is that a truly stable economy would not be vulnerable to either economic nor environmental shocks. The country's infrastructure should cope with most anything. There would be enough redundancy built into its systems to mitigate such shocks. And certainly there would be nothing like the volatility in per capita income shown in the graph on page 1.

In it's February 2007 review of the Costa Rican economy, the Inter-American Development Bank (IADB) acknowledges Costa Rica's recent progress. "The country has a long track record of political stability and institutional quality, a firmly established outward-looking growth model, and a social structure that includes a large middle class and low levels of exclusion relative to other countries in the region."

Notwithstanding these high marks, the IADB says Costa Rica's, "pace of growth has shown signs of slowing in recent years and its economic growth has been somewhat volatile."

The International Monetary Fund (IMF) also reviewed Costa Rica's economy in February 2007. The IMF, too, praised Costa Rica's progress, but called for tax reform and increased social and capital spending.

Since offshore banking is a growing and important economic contributor, the IMF said, as well, that this sector needed enhanced supervision presumably as a way of assuring investor confidence.

Finally, the IADB wants Costa Rica to improve its global competitiveness.

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Publication:Market Latin America
Geographic Code:2COST
Date:Jun 1, 2007
Words:519
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