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Monday, June 14, 2010
Perspectives

Costa Rica: Chinchilla's Challenges

Lost competitiveness and rising social problems are among the key challenges facing Costa Rica’s first woman president.
Costa Rican president Laura Chinchilla last week when she announced a veto on congressional salary hikes. (Photo: Costa rican President's Office)

CHRONICLE SPECIAL
Knowledge@Wharton 

On May 8, Laura Chinchilla was sworn in as Costa Rica’s first female head of state, joining a select club of women who have occupied that post in other Latin American countries. After 1974, when Maria Estela Martinez -- known as “Isabelita” -- took over the leadership of Argentina following the death of her husband, President Juan Domingo Perón, ten other women have assumed the top leadership positions in Latin American countries. With the recent end of the administration of President Michelle Bachelet in Chile, there are now only two female presidents in the region: Chinchilla and Argentina’s Cristina Fernández de Kirchner. However, one of Brazil’s latest candidates could soon be added to the list -- Dilma Rouseff of the Workers Party and Marina Silva of the Green Party. At the moment, neither candidate is a clear favorite to win Brazil’s presidential election on October 3.

Meanwhile, Chinchilla and Kirchner will attract plenty of political attention in a region where, according to Chinchilla, “poverty has a woman’s face.” Chinchilla, who graduated from the University of Costa Rica with a bachelor’s degree in political science and from Georgetown University with a master’s degree in public policy, rose from being vice minister of public safety (1994-1996) to public safety minister (1996-1998), to congressional representative (2002-2006), and then vice president (2006-2008), before winning the presidential election in February. She defeated her rival, Ottón Solis, by a margin of 47 percent of the vote to 25 percent, succeeding the popular Oscar Arias, who had won the Nobel Peace Prize in 1987 for helping to end the armed conflicts in Central America.

According to Carlos Malamud, chief researcher at the Elcano Royal Institute for Latin America, the participation of women in public life is considered normal in Costa Rica. “[Chinchilla] has inhabited other governmental roles, and women play a substantial role throughout society -- in administration, legal courts, etc. Her election [as president] has been viewed as something quite normal. In fact, neither during the campaign nor during the primaries … did anyone use the issue of her sex to disqualify her candidacy.” Nevertheless, adds Malamud, “while it is true that Costa Rica is more open than other countries of the region, machismo has a significant presence [in the population], especially among lower-income groups.”

Several other Costa Rican women are part of Chinchilla’s incoming team. Of the 21 ministers who are members of her governing team, nine are women. They will occupy offices as important as the ministries of Economy, Health, Agriculture and Foreign Trade.

CONTINUITY IN GOVERNMENT

Gender issues aside, Chinchilla’s arrival maintains a line of continuity with the previous administration because she worked for Arias’ government, and both she and Arias belong to the social-democrat National Liberation Party. Perhaps that is why she has tried to make it clear from the beginning, in speeches and statements to the media, that she remains independent from ex-president Arias. According to Roy Zúñiga, dean of the Walter Kissling Gam campus of the INCAE Business School in Costa Rica, Chinchilla brings her own credentials to the position. For example, he cites her broad experience in public safety issues. “She has been a consultant on Latin America and Africa for such organizations as the U.S. Agency for International Development, the United Nations Development Program and the Inter-American Development Bank, on issues of judicial reform and public safety reform. Her performance and leadership on key issues for Costa Rican society have brought her to power.”

Chinchilla has made a firm commitment to combat the alarming increase in violence among the generation population and among organized crime rings in a country that has no army and, until recently, has been practically an oasis of safety in the otherwise crime-ridden region. The growing presence of drug trafficking in the country is due to the fact that “it has been hit by the Colombian cartels that are fighting so hard in Mexico, several of which are trying to strengthen themselves in Central America,” notes Malamud.

Although the current situation is disturbing, he says, crime has not reached the level of activity in neighboring countries. “In relative terms, the country continues to be an exception in the region when compared with the levels of public safety in Guatemala. The same thing is true with respect to the strength of its political institutions, if you compare those with Nicaragua’s. Costa Rica’s [degree of] institutional strength is non-existent in other countries of the region; the political party system operates in the most efficient way, and respect for law and separation of powers continue to be in effect. All of those factors are obviously favorable.”

This institutional stability will be an asset when it is time to deal with another challenge facing Chinchilla: She lacks a congressional majority. Her party has only 24 of the 57 congressional seats. “From the beginning, this has led her to propose a policy of dialogue and consultation with other stakeholders. In order to get enough votes to support her policies, [her administration] is going to need the support of deputies outside her own party,” notes Malamud.

Even so, Cristóbal Pérez-Jérez Alvarado, a professor of business administration at the Universidad Latina de Costa Rica and a consultant in economic policy and business strategy, believes that it is necessary to strengthen public safety by increasing support and resources for authorities. He fears that “the new government will fall into the temptation of negotiating a platform of political management with all social sectors, thus getting bogged down in negotiations that are unavoidable but which will limit the ability to make decisions to resolve the major problems that concern the country.”

The main challenge of the new government will be to remain consistent, he says. “To preserve coherence between the promises of continuing a policy of free trade and increasing the competitiveness of the country [on the one hand], while moving [at the same time] to strengthen social stability and reform the mechanisms of education, health and social work.”

GROWTH ANDD NEW TRADE

When it comes to opening up its trade, Costa Rica has yet to deepen its relationship with China -whose significance as a trade partner is increasing quickly in the region- or deal with the repercussions of the Honduras crisis on Central American economic integration. Integration initiatives have stagnated since last June as a result of that crisis, which followed on the heels of the coup d’etat that toppled Honduran president Manuel Zelaya. The main problem now is that some Latin American countries still do not recognize the legitimacy of the government of Porfirio Lobo, who won the presidential election in Honduras last November. Those elections took place under the de facto regime that followed the toppling of Zelaya. Ever since then, there has been no summit meeting of the Central American Integration System, (known in Spanish by its initials as SICA). Its member-states are Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama. The Dominican Republic has associate membership.

On the other hand, Costa Rica has previously clashed on a few occasions with its neighbors on the issue of regional integration because it has refused to join the Central American Court of Justice and the Central American Parliament. Arias considered these SICA organs “onerous” and “useless.” To make clear her willingness to hold a dialogue with the country’s neighbors and partners, as well as her commitment to regional integration, Chinchilla followed her electoral victory by touring Central America, visiting Guatemala, El Salvador, Honduras as well as Nicaragua. Because there were some doubts about her position regarding SICA, before leaving on that trip Chinchilla told the media, “We have defined Central America as a priority for our administration in the future. And we are convinced that, with a permanent dialogue and understanding of our own realities, we are going to achieve important progress in the struggle against common challenges.”

Gabriel Leandro Oviedo, a Costa Rican economist and professor who runs the AulaDeEconomia.com website, notes that in this sense, the policies of Chinchilla will be very similar to those that the country pursued during the previous decade. “Even the people currently in charge of these efforts are almost the same ones who were working in the two previous governments. That doesn’t mean that there are no conflicts, but in the case of China, some business groups that have always supported free trade have now opposed it,” he says. “The main complaint is that many manufacturers believe Costa Rica is not competitive enough with China, and that a [free trade] treaty would benefit only a few companies, especially multinational firms like Intel.” Intel has two manufacturing plants and a distribution center in Costa Rica. Along with tourism and agribusiness, electronic equipment exports are a main pillar of the Costa Rican economy.

One of the Chinchilla administration’s priorities will be to reach trade agreements with the European Union, China and other countries. One such agreement with the EU materialized on May 18 during the Madrid Summit between the EU and six Central America countries -- Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama. It followed three long years of arduous negotiations and last-minute disagreements about milk products and textiles. The new pact, which has yet to be ratified by the European Parliament and lawmakers in the six Central American countries, has three components: trade, politics and cooperation. The agreement will reduce tariffs on bilateral trade in agricultural and industrial goods, vehicles, electronic appliances, wine, alcoholic drinks and other products. For the most part, Central American countries export agricultural products such as coffee, bananas and other fruits to the EU. Their imports from the EU are machinery, chemicals, vehicles and fuels.

EMERGING FROM THE CRISIS

Another priority for Chinchilla will be to facilitate the country’s recovery from an economic crisis that stemmed from the global recession. Between 2003 and 2007, Costa Rica enjoyed a period of sustained growth. But in 2008, its economy was affected by the turbulence of global financial markets and by a decline in the economic activity of its trading partners. Costa Rica’s real GDP dropped by five percentage points to 2.9 percent, down from 7.9 percent the previous year. Meanwhile, high prices for raw materials and demand pressures pushed inflation up to double-digit levels. That fact, along with the weakening of Costa Rica’s manufacturing exports, led the country’s external current account deficit to increase to almost 9 percent of GDP, according to the International Monetary Fund (IMF).

Although the Costa Rican economy contracted by 1.1 percent in 2009, “the economic recovery is firmly underway,” according to Marco Piñón, head of an IMF mission to the country whose goal was to support the country’s strategic efforts to deal with adverse global economic conditions. “Economic growth accelerated during the second quarter in 2009, and remained vigorous in the third quarter of 2010. The attitude of consumers and companies strengthened, and financial conditions have continued to improve,” Piñón noted in a report. “The forecast for GDP growth in 2010 was raised to 3.8 percent (which is 1.5 percent higher than in the previous forecast.) We are forecasting that inflation will come close to the upper limit of the band of 4 percent to 6 percent fixed by the [Costa Rican] central bank for 2010.”

AulaDeEconomia.com’s Leandro Oviedo agrees that the country is in relatively good condition after the crisis, since production and employment are showing signs of improvement. Nevertheless, he notes that there are still some areas where the Costa Rican economy is vulnerable. “The fiscal deficit will be about 5 percent of the GDP this year, the highest level in the last 10 years. This generates significant pressure on inflation, interest rates and the exchange rate. The balance of payments shows a growing imbalance, and the current account deficit is getting larger and larger. And inflation, which is normally above 10 percent, could start to increase again after the crisis.”

As for the poverty level, although it has remained at about 20 percent in recent years, inequality seems to be growing, he says. “The worsening of social problems, such as criminality, drug trafficking and so forth, generates both social pressures and pressure on the budget.”

Leandro Oviedo notes that it will not be easy to resolve these issues. “Chinchilla made a lot of promises during her [election] campaign, and she has created many expectations, but she doesn’t have the resources to achieve what she promised. People expect changes, but fiscal resources are very limited.”

As a result, experts believe that the country should undertake structural reforms to recover its lost competitiveness. This would include making comprehensive reforms in such areas as tax reform and opening up to private investors such sectors as electricity, telecommunications and insurance, which are now controlled by the government. Costa Rica will also need “to set up a national development plan that deals with the modernization of the nation’s infrastructure,” which has taken a major step backwards, says Pérez-Jérez. “Finally, they will need to deal with such urgent issues as public education, health and the environment.”

Leandro Oviedo adds that Chinchilla will have to polish up the image of herself as a “firm” person, which she tried to communicate during the campaign. “She is already beginning to be challenged. (...) It is too early to say for sure if she will be able to maintain her image when she deals with the tough challenges she will face.”

Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania.

 

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