IV Examen de las Políticas Comerciales de Costa Rica

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  • Secretariat and Country reports have provided good basis for discussion Appreciate the advanced timeline where questions and answers too have been processed Allow for a deeper level of engagement Will use 14 slides to take you through material drawn from external sources Outline provides a reference of how I’ve framed the issues after reviewing the material in order to best fit with the Secretariat and Country reports Much of this corroborates the thrust of the two reports, but useful to approach same issues from a different lens
  • This is the ‘101’ information of our TPRs which many delegations will cover So we needn’t spend too much time But to help put it in context and perspective: CR’s average annual growth rate for the period under review remained above the latest LatAm average of 2.7% Similarly, its average applied MFN tariffs – although constant with the last TPR – remains well below the World Bank’s collated average tariff among developing countries Lastly, while trade represented 80% of CR’s GDP in 2012, this figure was much higher at 102% in 2007 This last factoid may help us contextual some of the policy choices CR has had to make in the face of developments during the period under review
  • Another ‘must cover’ area of TPRs is the country’s network of preferential agreements According to the Costa Rican Investment Promotion Agency, 90% of goods in 2010 from CR were exported under FTAs Although the Secretariat report notes that the export figure was lower at 68% as at end-May 2013… Over 80% of CR’s volume of trade will be covered by FTAs with 57 partners when all are fully entered into force Not yet featured on this map is the newly minted Pacific Alliance whose participating economies are much excited
  • In times where citizenry place great expectation on Governments, employment generated the sectors of the economy are worth pausing for reflection Unemployment rate is expected to remain at around 7% Just want to highlight the different pictures in the Ag and Services sectors Ag accounts for 13% of employment We note: tariffs even higher than the average 14% for some products, government support for rice production, and the presence of the State in some products Services account for 67% of employment, and is estimated to be worth US$39 billion in 2014 Here we note a highly liberalised applied regime, with greater competition In the Secretariat report, the impact of high electricity tariffs under State monopoly is highlighted as a factor in manufacturing, asking if this sector could benefit from lower costs if the electricity market was privatised I juxtapose this against a very positive story in the ending of a state monopoly in services - mobile telephony and internet providers where competition has led to lower rates and diversified supply of services
  • We leave our more familiar reports for a look at CR’s standing in the more famous of global rankings Time constraint, cover some broadly, while taking some time with details in the WEF and WB rankings CR has consistently ranked highly in the EIU’s Democracy index, placing in the 20 th percentile, and 2 nd in Latin America. A reflection of low political risks which other analysts also recognise in consolidated institutional permanence. Of 16 problem factors used by the WEF, CR scored ‘zero’ under concerns about “Government instability/coup” CR ranks in the “high human development” category with the UNDP. Under the Economic Freedom Index, CR ranked 49, up from 69 in the previous year. However, detailed scores showed some erosion in property rights, freedom from corruption and labour freedom. For innovation, CR ranked 1 st in regional rankings for the first time, being the only Latin American country to be placed among the “innovation learners” for the year. This reflects a strong showing in the Innovation Outputs Sub-Index, leaping from 53 to 31, with a corresponding 9 th place in innovation efficiency. The WEF’s GCI corroborates this innovation factor, with CR ranking 35 of 144 in under “innovation and business sophistication” factors.
  • Drill deeper on the WEF and WB findings as they bear out some of the strengths and areas of concern highlighted in both Government and Secretariat reports. In the WEF’s competitiveness index, country breakdown saw CR rank well in basic requirements and sophistication factors. But for concerns, the two lowest ranking individual indicators were financial market development at 101, and Infrastructure at 74 (of 144). Businesses surveyed with the WEF’s fixed set of problematic factors saw the uppermost concerns being: Inefficient government bureaucracy Inadequate supply of infrastructure Access to financing Using another global barometer, the WB’s Ease of Doing Business report looks at key factors for doing business Areas which saw small declines in ranking compared to previous year were: Starting a business -3 Getting electricity -2 Protecting investors -2 Resolving insolvency -1 But these were balanced by significant improvements in the following: Dealing with construction permits +11 Getting credit +14 Paying taxes +10 Trading across borders +11 These big improvements may speak of improvements from a low base, so there will be a need to press on with reform in these areas CR will also need to avoiding further erosion of performance in those which saw small declines, which warrant a closer look:
  • CR dropped 3 places in ease of Starting a Business, lagging the regional and OECD averages in number of procedures required and the time taken Ministry of Economy, Industry and Commerce, 23 October 2012 press release states that CR implemented a business facilitation programme that simplified the registration of companies. All formalities have been concentrated in one place and the time required to register a company has been reduced from nearly 90 days to 20 days or less. In the ease of accessing electricity for business, procedures are on par within the region, and time taken is better than the OECD average, but cost is significantly higher than OECD, although better than the regional norm. In protecting investors, CR fares below the regional and OECD norms in 3 of 4 categories, with overall perception of strength of investor protection being low. This is consistent with the WEF investor protection ranking of 130 of 144.
  • Only 16,000 miles of CR’s extensive 22,400 mile road network is paved, the rest is constructed of gravel or packed earth Vast improvement on recent years following extensive investment by the latest 2 administrations of Presidents Arias & Chinchilla Tropical climate poses particular problems for roadway conservation, meaning budget for repairs and new projects is rarely sufficient Most railway mileage is commercial, designed to service the agriculture industry Although state rail company Incofer has plans to renovate the national rail system, funding is major problem Air transport is well developed On top of 2 international airports, there are 30 regional airports, and 179 useable airfields of which 133 are permanently surfaced While the cost of electricity was previously flagged as high, the quality and reliability ranks extremely well Over 90% of electricity is generated through green and renewable sources An EIU Whitepaper on infrastructure in LatAm notes that successful Public-Private Partnerships have been developed in CR in toll roads and airports, but even these projects have faced opposition and required changes along the way. The National Concession Commission (CNC) is the co-ordinating agency for concessions, but the commission lacks sufficient resources, and is only one of many agencies that must approve PPPs. The multitude of agencies involved in the process makes it difficult for a single entity like the CNC to push the concessions agenda forward.
  • As a small country and an open economy, CR is vulnerable to external shocks. Significant FDI has transformed CR from a commodities exporting economy to a complete manufacturing centre in the region, and a back-office and support services centre to US companies, but CR is not resting on these accomplishments Given the size of these companies, changes in their levels of output and sales have major consequences in terms of foreign exchange earnings, overall economic activity and even employment levels Some of us are familiar with the conviction of small countries that we have to take our future in our hands through aggressive policy choices, we cannot afford to be reactionary Quickly highlight three distinct strands as a demonstration of the CR government’s driven-ness in ensuring its economy is ready for future challenges The first is something we are familiar with at the WTO, which is to take a Global Value Chain approach to its entire economy, not just the manufacturing sector Second, their continued pursuit of domestic reforms include a strong engagement of the OECD Membership aspiration is not a vanity project, but built on understanding that reforms and enhancements are needed for the long term good governance and effectiveness of national institutions A continued pursuit of investments to diversify Securing as many options as possible for movements along the value chain
  • 38% of exports are part of GVCs Understanding comparative and competitive advantages at the level of intermediate goods will help governments better understand how to help not just MNCs, but SMEs The word map on the left reflects the many strands of CR’s efforts to deepen engagement in the GVC Further deepening trade liberalization and reducing trade costs Increasing supply and quality of skilled labor: science, engineering and design Promoting the culture of a knowledge-driven society Enhancing coordination between FDI and innovation policies Diversifying and updating FDI promotion Upgrading infrastructure Securing the energy supply at competitive rates Better understanding CR's participation in GVC
  • The UNCTAD World Investment report places CR well among the economies who a show high level of participation in the GVC Table on the right shows the cohort of economies within which CR engages Most developing countries have increased their participation in GVCs over the past 20 years, usually at the cost of a higher share of foreign value added in exports. The optimal policy outcome is higher GVC participation and higher domestic value added creation. ie. In the chart on the right, you Really want to be pointing upwards and to the right. Nevertheless, it is also recognised that GVC development paths are not one-off moves along the participation and upgrading dimensions, they are a sequence of moves. One can adjust course, which implies at a policy level, Government must be aware of where they stand in the GVC, given that this is largely driven by the investors and companies operating in their economy
  • Strong FDI inflows have contributed to an upscaling of the workforce and of living conditions, as well as an improvement of product standards and certifications . It is hence the correct time to ride this upswing to introduce reforms for long term structural robustness, shoring up the fundamentals of the economy. In targeting investments from multinationals, then what benchmarks for reforms are credible? CR has chosen to look to the OECD for external benchmarks She could have chosen easier first steps, but its application for Adherence to the OECD Declaration on International Investment and Multinational Enterprises can be seen as holding itself up to a high bar, and demonstrating seriousness in this aspiration Other institutional structures have also been developed in compliance with OECD guidelines: a comprehensive institutional framework for human rights protection which is based on its Political Constitution and international conventions, reflected in other subsidiary legislation. Costa Rica grants Constitutional Protection to fundamental labour rights. The country has also ratified 8 fundamental ILO conventions, and has included labour standards provisions in FTAs. The government has conducted notable efforts towards combating bribery, bribe solicitation and extortion. It has established a strong legal framework and is party to the Inter-American convention and United Nations Convention against Corruption, with independent oversight bodies: specialized court, Public Prosecutor’s Office dedicated to fighting corruption, attorney for Public Ethics, and the Comptroller General. The reality is that long term structural reforms take time, so what can be delivered upfront and quickly to traders? Without waiting for infrastructure and hardware, CR focused on software and gains through improved disciplines and procedures in Trade Facilitation OECD’s 2013 paper examined 107 countries for TF preparedness. Costa Rica performs better than the averages of Latin America and the Caribbean and the “upper middle income countries” in the areas of information availability, involvement of trade community, advance rulings, appeal procedures, simplification and harmonisation of documents, internal border agency co-operation. its performance is relatively on par with the averages for fees and charges, automation, streamlining of procedures and governance and impartiality , according to OECD trade facilitation indicators.
  • 2012 FDI flows into LatAm, stand at USD 244 bn according to UNCTAD, CR is well placed to keep attracting a bigger slice of that The virtues of the CR economy are well articulated by the government and continued reform will help them build on a strong track record and the existing stock of FDI FDI and trade policies are defined and coordinated by the Ministry of Foreign Trade, whose mission is to promote the integration of the country into the global economy by supporting the expansion, diversification and sophistication of exports and the attraction of foreign investment. The Ministry of Foreign Trade coordinates with two implementing agencies: CINDE (the Investment Promotion Agency), primarily responsible for investment promotion, and PROCOMER (Costa Rica’s Export Promotion Agency), primarily responsible for the promotion of exports and the administration of the Free Zone Regime.
  • We had a focused, non-exhaustive look at some of the challenges and fundamentals of the CR economy The picture from external sources is not far different from our own Secretariat report The challenges are real and mounting because the world does not stand still President Chinchilla’s attempts to address a growing shortfall in public revenues through tax reform faces fierce opposition. Many today will undoubtedly point out the need to scale back SOEs and hasten privatisation. Coming from another very small country, I have some personal sympathy for SOEs Not in the ‘monopoly’ connotation, but the ability of a hybrid entity to meet objectives on both ends of the spectrum The key is whether an SOE behaves according to market rules. In small economies, the markets may not always deliver ideal outcomes, especially if not sequenced properly An example which will keep repeating itself is CR’s electricity sector, but we should pause to give credit that high tariffs notwithstanding, 90% of electricity comes from clean and renewable resources – in a population and market of 4 million. The policy aspiration is for 100% of electricity generated from renewable energies; and in the short term, increasing electricity generation from renewable sources to 95% by 2014. Can this be delivered solely by markets? The EIU Whitepaper on LatAm infrastructure notes that Costa Rica needs to achieve a broader political and social consensus that PPPs are a viable option for meeting the infrastructure deficit identified by President Chinchilla. At the same time, several reports recognise that Costa Ricans take great pride in the strong environmental focus of their public policies. As this meeting goes on to examine what is good or not so good for CR in their national context, I take comfort that they have set their sights on OECD benchmarks; in other words, they are pointed in the direction of a significant and substantive body of best practices We recall that CR ranks highly for democracy and stability of government. This is a valuable asset which should translate into policy coherence and continuity. CR has a system like others in the region of no consecutive terms for its elected Presidents. This may present some challenge to continuity in public policy. Then all the more, bipartisan support will be significant for the hard choices to be made. This small but dynamic country is well-poised to entrench the very strong inroads it has made into the global economy. Through its well-socialised and robust democratic values, we wish the people of CR well in supporting their leaders with the tough choices which the government has been brave enough to lay before them.
  • IV Examen de las Políticas Comerciales de Costa Rica

    1. 1. Costa Rica :Costa Rica : 44thth Trade Policy ReviewTrade Policy Review 24 September 2013
    2. 2. Costa Rica Trade Policy Review: Discussant’s Remarks: What external sources say: WEF, World Bank, OECD, EIU, UNDP, Heritage Foundation, IHS Global Insight, WIPO/Insead, Costa Rican agencies  State of Costa Rican economy  Importance of trade to Costa Rica  Costa Rica’s relative performance  Economic & other indicators  Challenges faced  Issues identified and responsive measures  Looking ahead  The policy choices & their relationship to trade
    3. 3. State of Costa Rican Economy: the importance of Trade to Costa Rica  Average Growth Rate 2007-12 : 3.2%  World Bank LatAm 2012 growth rate: 2.7%  Average Applied MFN tariff: 6.9%  World Bank developing country average: 13.6%  Ag products high at 14% (other products: 5.5%)  Bound rate is 44.1%  Trade was 79.5% of GDP in 2012  Was 102% in 2007 Source: WTO Secretariat Report & World Bank
    4. 4. State of Costa Rican Economy: Preferential Trade Agreements Source: Secretariat Report & Costa Rican Investment Promotion Agency •Central America – Dominican Republic & US •Central America – Panama •Costa Rica – CARICOM •Central America – Chile •Costa Rica – Canada •Costa Rica – China •Central America – Mexico •Costa-Rica – Peru •Costa Rica – Singapore •Central America – EU •Costa Rica – Colombia •Costa Rica – EFTA “In 2010, 90% of goods from Costa Rica were exported to world markets under Free Trade Agreements” • Costa Rica also has Investment Promotion & Protection Agreements with 15 countries
    5. 5. State of Costa Rican Economy: the importance of Trade to Costa Rica  Employment by Sectors:  Agriculture, forestry, fishing: 13.4%  Govt protection/support affects productivity  Manufacturing: 11.3%  State monopoly, high electricity tariffs have effect on competitiveness  Services: 67%  Services regime more open than GATS commitments  Competition introduced but State still present in some market segments Source: WTO Secretariat Report & IHS Global Insight Ag Goods Services Others
    6. 6. State of Costa Rican Economy: Relative Global Rankings Source: As cited, and IHS Global Insight  WEF Global Competitiveness Index: 54/148  World Bank Ease of Doing Business: 110/185  WIPO/Insead/Cornell Global Innovation Report: 39/142  Heritage Foundation Economic Freedom Index: 49/177  UNDP Human Development Index: 62/187  Steady improvements across indicators since 2005  EIU Democracy Index : 22/167  2nd in Latin America
    7. 7. State of Costa Rican Economy: Challenges from global rankings… Sources: WEF Global Competitiveness Index 2013, World Bank Doing Business Report 2013  WEF Global Competitiveness Index: 54/148  Open economy, strong institutions, good education, skilled workforce, high technological adoption  Poor transport infrastructure, concerns about government spending/bureaucracy, access to finance  World Bank Ease of Doing Business: 110/185  Registering property, trade across borders, accessing electricity  Protecting investors, starting businesses, insolvency, construction permits
    8. 8. Challenges in the Economy: What the rankings highlight… Indicator Costa Rica LatAm & Caribbean OECD STARTING A BUSINESS Number of procedures 12 9 5 Time (in days) 60 53 12 C0st (% of income per capita) 11.4 33.7 4.5 Paid-in min. capital (% of income per capita) 0 3.7 13.3 GETTING ELECTRICITY Number of procedures 5 5 5 Time (in days) 62 66 98 Cost (% of income per capita) 256 559 93 PROTECTING INVESTORS Extent of disclosure index (0-10) 2 4 6 Extent of director liability index (0-10) 5 5 5 Ease of shareholder (law) suits index (0-10) 2 6 7 Strength of investor protection index (0-10) 3 5 6.1 Sources: WEF GCI 2013, WB Doing Business Report 2013, IHS Global Insight
    9. 9. Challenges in the Economy: Transport Infrastructure… Sources: WEF GCI 2013, WB Doing Business Report 2013, IHS Global Insight WEF rankings for various types of infrastructure (out of 144):  Overall infrastructure: 95  Roads: 131  Railroads: 106  Air transport 60  Quality of electricity 42 supply
    10. 10. Challenges in the Economy: Responses to mitigate…  Integration into Global Value Chains (GVC)  Continuous and continued reform  External benchmarking against OECD for long term structural reform  Short term enhancements like Trade Facilitation to bolster competitiveness  Aggressive investment attraction  Building on a proven track record Sources: IHS Global Insight
    11. 11. Looking Ahead: A GVC response to challenges… Source: Costa Rica Ministry of Foreign Trade deepening tradedeepening trade liberalizationliberalization quality skilled labor science, engineering & design knowledge-knowledge- driven societydriven society Innovation Upgrading infrastructure Diversifying FDI updating FDI promotion Increasing labour supply reducing trade costs Better understanding Costa Rica’s participation in the GVC
    12. 12. Looking Ahead: A GVC response to challenges… Source: UNCTAD World Investment Report 2013
    13. 13. Looking Ahead: An OECD driven response… Sources: Costa Rica Ministry of Foreign Trade, OECD Trade Facilitation Indicators  External benchmarks for long term structural benefits  Adherence to the OECD Declaration on International Investment and Multinational Enterprises  Compliance with OECD Guidelines  Human Rights  Employment and industrial relations  Combating bribery, bribe solicitation and extortion  Trade Facilitation  Fared well in OECD’s assessment
    14. 14. Looking Ahead: Promoting Investment as a response… Sources: Costa Rica Ministry of Foreign Trade, UNCTAD World Investment Report Investment Policy Framework:  Open and transparent legal regime for FDI, though no specific law in place  Foreigners and nationals are granted equal rights by constitutional mandate  Limited exceptions to national treatment are established by law  Access to information is guaranteed by the Political Constitution  Free transfer of funds  14 bilateral investment treaties in force and 11 FTAs with investment provisions in force FDI Inflows 1990 to 2012
    15. 15. Looking Ahead: Wishing Costa Rica well in continuing tough reforms…  Political stability is valuable asset  Policy coherence & continuity should be a good by- product of such stability  Bipartisan support for continued reforms…  Including hard public finance decisions  Continued privatisation of SOEs  Enhancing competitiveness of the economy Sources: IHS Global Insight
    16. 16. Costa Rica :Costa Rica : 44thth Trade Policy ReviewTrade Policy Review 24 September 2013

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