World Bank Document

ERM129

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INTERNATIONAL BANK FOR RECONSTRUCTION AND IEfl . 4M Public Disclosure Authorized

* -.. Public Disclosure Authorized

REPORT ON THE ECONOMY OF COSTA IEI CA 1:t Tl.~'. JI

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.i . -'4'^ Public Disclosure Authorized k'~~.

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[S, ~ K L Economic Department J d , b t, Wo htr Al TABLE OF CONTENTS _LPae Paragraph

FORE WARD SUM4MARY 1. .,

I. GENERAL ...... ! ...... 1 16

(A) Geography ...... ,, 1 16 (B) Population ,.,., 2 21 (C) Standards of Living ...... '.'.,.?.* 3 25 (D) Recent Political History ...... 5 31 II. AGRICULTURAL PRODUCTION ...... ,836

(A) Export Crops ., ...... 8 39 (B) Production for Domestic Consumption .... 16 61

III, INDUSTRIAL RESOURCES, TRANSPORTATION AND INDUSTRY .20 72

(A) Mining ...... ,...... *20 72 (B) Transportation ...... *..... 20 74 (C) Industry ...... 21 77

IV, DOMESTIC FINANCE ...... 26 87

(A) Budget ...... 26 87 (B) Tax System ...... 30 96 (C) Public Debt ...... 31 99 (D) Money and Credit ...... 34 105 (E) Prices and Wages ...... 39 115

V. INTENTATIONAL TRADE AND FINANCE ...... 41 120

(A) Foreign Trade ...... 41 120 (B) Balance of Payments ...... 43 127

VI, DEVELCPMENT POLICY AND PRACTIr(E ...... 50 140

STATISTICAL APPENDIX

Table I - Government Receipts and Expenditures Table II t Gold and Foreign Assets Table III I mrnports and Exports Table IV - Imports Since 1940 Table V - Selected Imports in 1946 Table VI - Exports Since 1940 Table VII - Exports in 1947 Table VIII - Terms of Trade Table IX - Balance of Payments

MAPS REPUBLIC OF COSTA RICA BASIC STATISTICS

Area 19,238 square miles

Population (1947) 810,000

Currency:

Unit colon (sign ¢

Exchange rates:

Controlled 5.67 colones = US `1 Uncontrolled 7.00 colones z US 1

Trade Statistics (1947)

Imports (less Compania Bananera) ,'37.4 million Exports ;23.O million Deficit 5)14,4 million

Balance of Payments: Official Our Estimate Estimate 19)47 f it.3 million -Jl117ni7lliorn 1948 1lf3 million $ 10.0 rillion

National Income in 1947 (estimated) 'Al)4 million

Budget in 1948:

Official

Expenditures $20.1 million Deficit v 1.3 million

Our estimate

E-xenditures ,20.1 million Deficit ' 5.lmillion

Public Debt

Internal /141.8 m.illion(925.2 m-llion External 22.1 million Defaulted 18.8 riillion

Prices (wholesale and cost of living indexes)

1936 100 1948 (i.ugust) 229

Exchange Reserves

End of 19)43 1Si6.2 million End of 1947 7.7 million End of Septemiber 19)48 3.0 million FOREWORD

The report on the Costa Rican economy which follows was based on information available on November 19, 1948. There has been no material change in the basic situation since then which would affect the conclusions contained in the report.

Somewhat unexpectedly, after Costa Rica had ratified the Rio de

Janeiro peace pact and announced the dissolution of its army, Costa Rican

territory was invaded in December by a small force under the leadership of

the exiled former President, Calderon Guardia, with the announced intention

of overthrowing the Junta. Amid charges that General Somoza of Nicaragua was lending material aid to the invaders, the Organization of American States

took prompt and effective action to check the conflict. The matter seems

officially closed with the signing of a friendship pact by representatives of

Nicaragua and Costa Rica on February 21, 1949. President-elect Ulate, who

joined the Junta during the period of the emergency, has now withdrawn from

the Government.

Some events which were impending at the time the report wap written,

and which are mentioned as such, have since taken place. The election of

the Constituent Assembly was held on December 8th, 1948, and 35 of the 45

members elected are supporters of President-elect Ulate. The Assembly has

approved Ulate's election to the Presidency and extended the rule of the

Junta to May 8, 1950. These actions were expected. The contract with the

United Fruit Company, retroactive to January 1, 1948, was signed by the

Junta oni the 27th of December 1948 and, in consequence, the Government will

receive from the Company additional revenues in foreign exchange for 1948,

estimated at US$1.25 million. If, as is probable, the Constituent Assembly

ratifies the agreement with the Pruit Comraryy it is scheduled to remain in

force for 40 years; otherwise, it is to have a life of only one year. In November and December 1948, Costa Rica purchased $1.25 million

from the International Monetary Fund with the understanding that the total,

would be repaid in full within one year. The drawings on the Fund, as well

as seasonal receipts from exports, have increased foreign exchange reserves

from $5.8 million at the end of September, 1948 to 1`8.6 million at the end

of December 1948. A credit of $1.5 million with the Federal Reserve Bank

of New York,, which would require an equivalent amount of Costa Rican gold

to be pledged against drawings, remains unused. During 1948, the backlog

of foreign exchange applications declined by 88.4 million, only $0.3 million

less than estimated in the report. Reflecting higher foreian exchange

receipts, both currency in circulation nnd deposits advanced from $177 million

($31.5 million) in Jvly 1948 to $201 million ($35.3 million), the major rise taking place in December.

The budgetary deficit for 19°48 had been estimated by the Govern-

ment at $7.2 million ($1.3 miiT3i-n) and in the report at /29 million

(W.I million). It now appears that the deficit may exceed the estimate

in the report by a considerable amount as a result of heavy military expendi-

9 tures during the recent invasion (estimated at well over $5 million or

$0,9 million) and drastically reduced estimates of receipts from the 10%

capital levy (¢5 million as against original government estimates of $32

million and an estimate of no more than $10 million in the report). Even

the $5 million in receipts now expected may be high if a radio report proves

correct that Costa Rican courts have invalidated the levy on the ground that

it was imposed by a de facto government and could be rescinded by subsequent constitutional governments.

Preliminary information indicates that the 1949 budget will amount

to $110 million ($19.3 million) compared to $113 million ($20.1 million) in

1948. A "special budget" of $107 million (M8.8 million) is also being -3- established for the purpose of refunding approximately 84% of the internal debt, Qn December 30th, a series of Decree-Laws provided for the establishment of a National Banking System to include the National Bank and the commercial banks nationalized last year. Stock holders of the former private banks will be reimbursed through a new issue of "17% bonds of the National Banking

System".

March 3, 1949 Albert Waterston ;1 \tsNI E I17A 41~~~~

P AC~~~~ I C A R AX\G U A

~~~SE

3agricultural O N

Mapof ost Ria sowig pincpalares o agricultural production.~~~~~~urre Map~~~~of Costa Ric shoin prinia ara of SMUIi y

1. Costa Rica differs from most other Central American countries in

its fertile soils, oredominantly white nopulatiorn, and high literac7 rste.

On the basis of national income estimates as well as imports, on which

much of its standard of living is predicated, Costa Rica has a higher

level of living than most of its neighbors. Great disrarities exist

betV.een the unoer and low!er strata, however, and most of tile pi1at'en

outside the banana nlantations subsist on substandard levels.

2. Since I:ay 8, 1948, tie country has been governed by a revolutionary

Junta 'which overthrew the Previous rerime when it invalidated the election

of a President ou,osed to the Administration. The Junta is to -overn a

maximum period of two years from iay 8, 1948, Qter whih tIhe Pr 9i srt-elect4

is to assume offlee, The provistonel charstqr tf th- J*nte an4 unsettlIrd

relations with Nicarmgua have baeer responsible tor a oertain 1mount of

political unoertaisty,

3. Costa Rica is a nredominantly agricultural country, Uevertheless, * only 15 per cent of the country's land is utilized for crops and livestock, the remainder being 4n forests, inaccessible or situated in the less

attractive lowlands. Coffee is the major exnort and determines the pros-

perity of the coumtry. Unlike bananas, which are grown for the most nart

by one large foreign comnany, coffee is nroduced by a*consideraole number

of indenendent farmers, nost of -hom are Costa I,icans,

4. Bananas, grown almost exclusively by the Cornania Eananera, the

United Fruit Comrary subsidiary in ^,osta Rica, constitute the second

most important export. The Panama disease has made bananas a transitory

crop, and substitute plants have had to be found as thae land became useless

for banana cultivation. Among the nlants -hich sho,' donsiderable nromise

are cacao, Costa Rica's third most imnortant export, African palm oil and abaca. Timber, the fifth export, is potentially more important since

Costa Ricats forests, artiong the best in the world, are largely untouched.

5. The production of sugarcane and its conversion into slbstandard sugar, mostly for doLrestic conswaption, constitute laedizg Acttvittos a

Costa Rica. Increasin- domestic production has resulted in a decline of cheese and butter imports, but imports of milk and milk products remain hi,gh due to the lack of refrigeration, seasonal shortages, and inadeouate pasteurization facilities. The number of hots is inadequate due to the lack of cheap concentrate feeds and unsatisfactory production methods. As a consequence, the price of pork is higher than that of beef and lard imports are twice as

great as domestic production.

6. ihining of minerals and -letals has never been important and is of diminishing sig;nificance. Costa Pican industry is in the primary stages of development, and luith minor exceptions produces consumer oods typical of underdeveloped agricultural countries, such as textiles, leather goods beverages and furniture, mostly for local use. The country possesses an inadequate transportation network of railroads and hig;1ays and excessive rates are a burden on the economy.

7. The Costa Rican State budget has been deficitary every year since

12h0 because of disordered fiscal administration and the inability of the

Government to levy and collect enough taxes. The 19h8 budget originally balanced at the equivalent of `15.3 million vas incerseed to &ROj million by the new regime, largely because of increased military and public security disbursements and expenditures connected with the recent revolution.

On the basis of somewrhat optimistic expectations concerning revenues from a 10O capital levy, the budget shows ma deficit of only 41.3 million,

A more realistic appraisal of probable receipts, hoveverj inricates that the deficit may reach 84.8 million. 14eanwhile the Treasuryts precarious cash position has made it necessary to have recourse, indirectlY, to the

Central Bank in order to nay current exnenses. Any lasting correction of fiscal disorder in Costa Rica must be accompanied by a revision of the tax system.

8. Costa Ricals external public debt amounts to 425.5 million, of w,:hich $21.4 million is principal and $4.1 million accumulated interest.

The entire foreign r.ublic debt of Costa Rica, other than two Ex0ort-I1ioort

Bank loans, has been in comolete default since 1941. While it may be understandable why Costa Rica's foreign debt service was reduiced and finally discontinued during the depression years it is not easy to find sound reasons why service was not resumed after 1.941.

9. United States exnenditures in Costa Rica durinT the war were primarily responsible for more than doubling the monetary supply between

1939 and 1943. Further exnansion of the monetary medium in 1947 and

1948, because of the growth of bank credit and Government srending, have raised currency and deposits to levels almost four times as great as before

the war. The amount of currency in circulation continues to increase be-

cause of deficit financing by the Government. Ho¶,ever, denosits have been falling as a result of widespread hoarding,

10. The method of paying stockholders of the recently nationalized

commercial banks has not yet been determined, but there are good reasons for believing that the operation may prove inflationary. The Government has already fanned inflationary fires by authorizing an increase eauiva-

lent to $1.8 million in the capital of the IFational Bank to be financed

from future seigniorage rrofits and the issue of UZ.6 million in bonds

to be serviced by (a) new surcharges on sales of foreign exchange for

imports, and (b) Central Bank funds. Both the increased capital and the bond issue will be used to supply credit for development purposes.. lv.

11. The primary determinant of the Price level has been the increase

in monetary circulation. Wholesale prices and the cost of living hlave

both risen 129d, since 1936, although larger increases have been registered

for individual series, particularly textiles and clothing. Outnut has not

kept i)ace with nrices. Nevertheless, the rise in rrices has probably been

lower in Costa Rica than in most Latin American countries, 1tsne/r wages

seem to have kept pace .t4it the increased cost of living, but changin-

consumption patterns have resulted in a net loss of real wiages,

12. 1he Costa Rican balance of payments has been characterized

by substantial deficits in the balance of trade, offset by large capital

movements, especially by the Comorania Bananera, and during the war, by

expenditures of the 7Jnited States in Costa Rica. At the end of the war,

no restrictions existed on imports, which rose unchecked, In July, 1946,

after foreign reserves had fal'.en to $6.2? rillion, Costa Rica innosed

mild restrictions on the sale of foreign exchange. The regulations proved ineff-ective in halting the increase in i:-)orts. The rise in imports over exnorts was primarily responsible for the deficit of A11.6

million in the 1947 balance of payments, In 1948, the balance of nayments

is exnected to sholw a surnlus of over kl0 million, reflectin,g, increased

receipts from the bumper coffee crop.

13. Since July 1948, Costa Pican foreign exchange reserves have

deteriorated markedly and at the end of Sentember amounted to only $3

million. Of considerable significance for the future of the balance of payments are the series of measures adopted in consequence of recornienda-

tions by the Tund and calculated to curb credit expvnsion and reduce the

drain of foreign exchange. Continued decline of the value of tEe col,n on the v.

may free and black markets/bring a demand from the coffee growrers for measures to co-anteract the fall in incomes.

14, But 1while the irmediate situation is difficult, the long_ term outlook for the Costa Pican balance of payments is not unfavorable.

The nrice of coffee 1has reached an all-time high and is likely to remain high, while export prospects of most other Costa Rican crops are excellent. A ne'w contract is about to be signed with the Compania Bananers which will nrovide a substantial amount o' new revenue and exchange.

Prospective agreements with Argentina and Great rritain ray also result

in savings of dollar exchange.

15. The development of Costa Ricats industries is .nainly limited by the unavailability of technical assistance, lack of long-term credit facilities and shortages of electric oower. The greatest nromise for future economic development comes from activities related to the nredominantly agricultural character of the country. It is in increased pro-

duction of agricultural covmmodities and their transformation by indus_

try, rather than in generalized erxansion of industry that imoortant possibilities exist to raise real income, reduce present reliance on

imported food and raw materials, and develoo the external market.

The same factors which- hamper industrial expansion also hinder further

development in agriculture.. In addition, the scarcity of agricultural

labor is also a major obstacle. Nevertheless, there are many o)portu-

nities for economic develo-rient in the vegetable fats and oils industry,

canning, nilk processing, luribering, irrigation, fisheries, dairying, and

in improving farming methods. To develop agriculture and industry, much

can be done within Costa Rica to adjust its internal policies to meet vi.

the need for economic expansion. Too ofter the r.roblem is seen solellIr as a question of obtaining large amounts o:- foreign capital. Little attention has been directed towarde alternative courses by -}lich tne country coula ;,romote rather than retard its economic develonpment. (A) Geography

16. Costa Rica is the third smallest of all Latin American Rer.ublics, only El Salvador and Haiti having less territory than its 19,238 square . .2es.

The country extends for 275 miles at its longest point between 'Ticararua, on the north and Panama on the southeast and its greatest -idth is onl-r about 170 miles bet-een the Pacific Ocean and the Caribbear Sea. The regular Caribbean coastline is 120 miles long, and provides a place for only one major port,

Limon, but the indented Pacific shore -inds for 360 miles, and harbors three important ports at Puntarenas, Quenos, and Colfito.

17. The tropical climate of the Costa Rican coastal and northern lo-r-

lands is what might be expected. in an area only eight to eleven Cegrees above

the equator. In the central part of the country, however, mountains and

plateaus rising 3,000 to 6,000 feet above sea level counteract the effect of

low latituide, and the climate is nleasantly temperate throuthout the year,

18. All of Costa Rica receives an abundant suunly of rain, but most of

the central part of the country, the Province of Cuanacaste, rnd. a zone near

Puntarenas, have i-ell-defined dry seasons from December through liarch. Onl the

Pacific Coast, there are Drotracted d.ry periods, although some rain falls

during the dry season; on the Atlantic sloDe, rain falls the year arounc.

These differences in the amount and distribution of rainfall, as -ell as

variations in elevation above sea level, make the climate of Costa Tica range

from tropiical througih semi-tropical and temperate and determine the chnracter

of each of its seven nrovinces.

19. The rivers of Costa Rica are more innortant as sources of -ater for

irrigation and hydroelectric po-ner than as means of transportation. The major

navigable stream is the San Juan, i-hich forms a nortion of the boundary POPULATION DENSITY: COSTA RICA AND EACH PROVINCE.

LSAe 0 401 8 ,!80 I < i ° s | m EPL)BLU ICARAORUPALI .'OF 0 f .. ra>

39AAE ot_l I /, ',',', ~~~~~~~~*

.'EL at°_.El*0. ~~~~~~~~~4 A ~ ¶ A

KIO S? I...... 9 ......

.A..A...~......

A A .. '7 * ...... O

ALAJtJ A ...... ;. .

...... NDER 2S.1 i9 oi..:. Jo ;. V.. ~. ~~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~.....

cc;, '-',, I / ~.... CO#0XADO......

UNDER 2.

g2..4...... 3 D)lCs2 ~ ~ 215~~~~~~~O.C~ ~ ~ ~~b- 49-

1 .i , aoN?o eA E 50 ANI)00 OVER AND ~ + COSTARICA 341.0 sountsrABLIE 9

CC)STA~~~~~~~~~34 ~ RIC I A...... e

f p*~~~~~~ ~ lr1v4° ~ ~~~~~~~~~~~~~~~~~~~~~~~~~ 2 wioth Niicaragua, and is navigable from the Caribbean Sea to Lake Ficaragua.

20. The heart of Costa Rica. is the 1,1eset. Central, a highiend ra.gimg

3,000 to 6,000 feet abo,-e sea level in the center of the country. Si7ty miles long and thirty miles side end coverinv less than 10,^ of the total territory of the ?.epublic, it is the area within which most of the country's coffee, sugar, and. daiiry products, and a lar,Xe nroioortion of its basic food. crollf, are produced. Almost all the important cities, most of the improved roads, m.lost industries and the best farmis are contained -ithin its confines.

(B) Population

21. Outside the I4eseta Central, to which almost three-quarters of the

Costa Rican r'o:ulption has been attracted by favorable climate and rich soils, the distribution of Popilation has been determined by the preeence of transportation facilities. Estimates of ponulation size vary greatly, but it is probably conservative to place the present -osu' .tion at about 810,000. The people are predominantly rural, more then three-fourths living outside the cities.

22. The Capital and most imioortant city of Costa 'ica is San Jose, -ith an estimated pooulation of 96j952. Cartago, abouat 12 miles f.rom San Jose, has a nopulation of 14,384 and is the second city in imnort nce. The third and fourth cities with'a their estimpated nonulations are 'Ieredia (11,775) and.Alajuela

(11,683), also near San Jose. Limon (10,957), is the most imnortant nort of

the country, and handles about half the country's exoorts and imnorts.

Puntarenas (9,858), on the Pacific coast, is the second port of the country,

and handles about a fifth each of exports and imnorts.

23. Unlike other Central Americani countries, -hich have large Indian or

iAestizo populations, there are only about 4,000 Indians and 22,000 _eEroes in -3-

Costa Rica. About 80% of the Costa Ricen neoPle are of pure Euronean stock, most of them lescendants of the original Spanish settlers.

24. The ratio of births to deaths has been rising steadily, becarise of an increese in the nwmber of births as well as declining mortality. 'he si7e of the nopulation has doubled since 1912 and has been incre-.-in- et a rate of 3. ner annum. It is likely to continue to expand as improved medical care reluces the number of deaths due to infections, narasites, and digestive disorders, the m,ost important causes of mortality in Costa Rica.

25. Costa Rica is also !ifferent from its neighbors in its high literacy rate, estimated to be close to 75,. Justifiable pride is taken in the coumntry#s extensive educational system, which in 1941 included more than 700 rrimary schools with over 2,600 teachers andialmost 70,000 stud.ents as well as advanced instruction at the University of Costa Rica. The official stress nlaced on education is reflected in the handsome appronriations received. -Dy the M!inistry of Education and explains -hy foreign exchange allocations have 'seen continued for Costa Ricans studying ebroad in spite of the current exchanZe stringencyr.

26. The absence of reliable data on. national income orecludes any quantitative analysis of recent changes in the distribution of incomes. An unpublished and. tentative crude estimate of the 1947 national income made by the United Nations olaced the national income of Costa Pica at ,1)or ca.ita. Assuming a nopulation of 782,000, total national income in 1947 amounted to 2114 million. Costa Rica's ner caPita national income -'as considerably higher than estimated per canita income in any other Central

American country, excent Panama, -here the nroximity of the Canal Zone intro- -4- duces special circumstances; Per capita Count,rv Income in,1947

Costa Rica $1461. El Salvador 8 Eonduras Guatemala 9 icTicaregua 65L Panama (including income from Canal Zone) 1811/

] United Fations estimates , IERD estimates

Costa Rica's per capita nptional income in 1947 was estimated. at 10C!) above

1946 estimates of 131 per caoi.ta. The recent increase in raoney incomes has been unevenly distributed and has been largely concentrated in the hands

of a small segment of the nopLlation.

27. The visitor to Costa Rica is likely to be impressed -ith the :.reat differences in living standards between the highest and, lowest strata. Even

in San Jose, wide disparities are everylhere evident. Nxpexnsive American

automobiles negotiate the same streets -ith large numbers of shoeless Dedes-

trians and next door to a shoD featuring w-ide assortments of imported canned

goods people vill be living on substandard diets. EKousing similarly vares

throughout the country from solidly constructed concrete homes to structures

that are little more than thatched roofs sunptorted by poles, However, on the

banana plantations of the Comxpania Bananera one is likely to see w-orkmen housed

decently and living on a general level ,,ell above that of most Costa Rican

laborers.

28. Like other undeveloped agricultural countries with undiversified

production, Costa Rica maintains a large Part of its plane of living on

importst naid for to a considerable extent by exDorts. 1ieasured in these

terms, as indicated in the table belo-^, Costa Ricals standard of living, -5- exclusive of Panama, is about three times higher than those of other Central

American countries, 1947 1947 Imports Estimated Imports Co-antry (. millions) PoTpulation Canitaaer

Costa Rica 46.9 782,000 $ 60 El Salvador 37.0 24100,000 18 Honduras 28.9 1,300,000 22 Guatemala 57.3 3,700,000 16 ITicaragua 20.8 1,200,000 17 Panama 75.2 701,000 117

29. On the other hand, an FAO study comoleted t-o years ago, found the diet of most Costa Ricans inadeouate in quantity and ouality by t1.estern standards. The per capita calorie intake was placed at 2,000 per day, as against the 2,530 to 2,650 calories wAhich -ere considered minima, and only in

Javw. -as the daily per capita consunmtion of proteins said to be lo-er tha'n- the average of 50 grains consumed in Costa Rica. 'Thile 2000 calories, canrot be considered very low for an underdevelooed country, the diet could. etancL imorove- ment. The customary diet consists of rice, corn, beans, unrefined bro-n sluaar, small uauntities of fats and occnsionally, some bread. ;;eat is eaten only once or twice a i-eek, sunnlemented by fruits in se?son, and milk1 butter and e5,es are usually beyond the means of the avera.e la-borer.

30, Fundamentally, the problem is one of increasing real income by increasing production ancd efficiency,for Costa Rica possesses natural resources in its land and waters which have barely been utilized andc -ic~Ah could produce much more -ealth for a larger porml.ntion,

(D) Recent Political History

31. Since 1871, when Costa Rica a.dopted her constitution, the Republic has been kno-n as a orogressive democracy of independ.ent farmers. Utnlike other coumtries in Central America, revolutions have been uLknown in Costa

Rica, ex-ceot for Federico Tinoco's bloodless coup in 1917 anrd Manuel Castro - 6-

Quesedal s three-day rebellion in 1932.

32. The last President of the ReT.ublic w-as Teodoro Picado, wlho served

bet-een 194L and 1948. Congressional elections in 1946 wSere held to

be fraudulent by the opnosition to the Picado regime, and :frowin- resentment

in 1947 resulted in a general strike -hich paralyzed commerce and banking ir.

the countr,y for ten days until settled by an a.greement bet7-een the Administra-

tion and the opp)osition wehich Drovided for nonTnartisan control of the

impending presidential election. In the election held in February 1948, the

0 nnosition candidate, Otilio Ilate Blanco, defeated former President Eafcel

Angel Calderon Guardia, the Administration candidate. After one of the

members of the ITational Electoral Tribunal refused to certify Ulate's election,

the pro-Administration Congress declared the election illegal. This action

precipitated the bloodiest revolution in Costa 'lica's history in -hich over

1,000 persons lost their lives.

33. 'The revolt wtas led bv Jose Figures Ferrer, a well-to-do coffee

Dolanter and was sunnorted by the large coffee farmers, landowners and business-

men who cher,-ed the Picado administration wtith corrul)tion and alliance -ith the

* Vanguerdia Polular, the party *ith Communist influence in Costa Rica, The

revolutionists overThelmed the Administration anc! took control of the country

on iVay 8, 1948. A Revolutionary Junta was set up 1-ith Senor Figures as

President of the Junta. Ly agreement between Senores Figueros and TTlate, a

Constituent Assembly is to be elected by the people on the 8th of December and

take office on the 15th of January 1949. This body is expected to ratify

Ulate' s election, which the Junta has agreed to recommend, and aonrove 'a new

Constitution . The Junta is to gdvrst11 6duiftry *r4theut a Ghnqres foi'-

mighteen months fom May -8, 1948, althourlh the aqreement with Ulate permits

,inextention of the Junta's life by the Assembly for a maximum of six -7- months, After the Junta's period of government, Sr. Ulate will assume the presidency for a term of four years.

34. Before the advent of the Junta, the executive no-er Xax vested in a

President, and the legislative po-er in a. unicameral Congress comnosed o.J43 permanent members and 18 substitutes, a11 elected for four-year terms by secret, universal, compulsory suffrage. Under the "Second Rerublic" estrMbl&thed by the revolutionists, both the legislative and executive functions are exercised. by the Government Junta, comnosed of the President of the jwnta, ten iMiinisters of State and a Secretary.

35. The ne- Constitution is tl-o-thirds completed and is reported to offer guarantees for canitel and pri-vate enterDrises, but provi.des for nationalization of the banks. In a speech delivered September 25, 1948, ?resiclent Figueres also stated that all public service enternrises, such as -nter -'orks, tre-nsoort and electric poi-er, -ould be nationalized, II, AGRI,CULIUR4L,PRODT4CTXON

36. The major economic resource in Costa Rica is its soil. It is

believed that about 38!o rf Costa Rica's land territory could be used for

crons and livestock; yet, only 15bo of Costa Ricat s area is now being employed

for these purposes, of t'rhich 12i is parture and only 31 is under cultivation,

in part because of the inaccessibility of certain areas of the country and

in part because Costa Ricans prefer the mild climate of the lieseta Central

to that of the lowlands.

37. Accurate statistics of production are not available, but total

agricultural production in an average postwar year, including forest pro-

ducts and fish, has been estimated on the basis of 1945 prices -.t $L'7.1 million, of *-hichI

Coffee constitutes 20.25o Meats and fish 16.2. Dairy products 16.6% Basic foods (corn, beans, rice, potatoes) 13.4, Sugar 12.1% Other (fruits, vegetable oils, etc,) 21.5%

Of the total, $12.8 million (29.24) is exported; the remainder, $34,3 million (70.8..) is consumed domestically. Annual agricultural imports in

1945 amount to $4.7 million, making the total apparent consumption of agri-

cultural products equal to $39 million.

38. Agricultural activity in Costa Rica is easily divisible into production for export or domestic consumotion. The principal export crops are coffee, bananas and cacao, which account for almost 77< of the total value of exports.. Major production for home use includes sugar, meats, dairy products., and basic foods (corn, beans, rice and cootatoes),

(A) Thcnort Cro-ps

(a) Coff Pe

39.. If the HIeseta Central is the heart of Costa Pica, coffee, is the life blood of the Heseta Central, and a map of coffee production is, for practical purposes, a map of the Meseta. Coffee, more than bananas, rules 5 84* 83-

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-X Banana Plant and Fruit

4i~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Costa Rica and determines the prosperity of that predominantly tgricultural

country, In 1947, not the best year for coffee, the export value of the

crop was about twice the value of banana exports; coffee farms cover

118,000 acres of the best highlands amounting to 32% of all cultivated lands; and the crop furnishes occupqtions for about 145,000 Costa Ricans.

40. Unlike bananas, which are grown in Costa Rica for the most part by a large foreign company on the Pacific coast, coffee is produced by a considerable number of independent planters, mostly Costa Ricans. According to a recent count, there were almost 25,500 coffee farms distributed among v 21,600 owners. Most of the plantations were small, 56% of the farms being less than a hectare with fewer than 1,000 trees. However, less than 1% of the owners control over 25% of the trees.

41. After harvesting, the coffee berries go to about 150 processing

establishments where the beans are carefully dried and washed by the application of techniques as advanced as in any other coffee country. This pro-

cess and the favorable climate, account for the excellent reputation of Costa Rican coffee and the premium price it commanos.

42, The vagaries of weather and world markets make the production of

coffee an uncertain venture in Costa Rica. The size of the coffee harvest is largely determined by the incidence of rain; the price for the crop, 85% of which is exported, is fixed in the world market, over which Costa Rican producers, whose coffee exports amount to less than 1% of the total, have no control, The variation in output and price is clearly revealed in the following

listing of the volume produced and export values of coffee in the last four crop yearst

Millions of Crop Year Kilos Produqed Expqrt Value (: millions )

1944-45 25,3 , 7.5 1945-46 18,7 6.5 1946-47 21.8 10.7 1947-48 25.0 (est.) 14*0 (est.) 43. in 1947-48, the coffee crop reached bumper proportions, while the price of 66 cents per kilo was the highest since the First World War. The next crQp is expected to be smaller, but coffee prices continue te advance.

(b) Bananas

44. Costa Rica has been shipping bananas, its second most important export crop, since 1878. In 1947, it occupied fourth place after Honduras, Guatemala and Panama as an exporter of the fruit. About 10% of the bananas

are produced and shipped by independents, but banana cultivation is largely

an operation of the Compania Bananera, the United Fruit Company subsidiary

in Costa Rica. The bananas grown and shipped by independents are below the

Company's standard of quality and oome from the Caribbean coast, where the United Fruit Company was forced to abandon its plantationa because of the

steady inroads of the Panama disease, a fungus infection which affects the

soil. Unlike sigatoka, a leaf spot disease which threatened the entire banana industry in Central America until it was brought under coritrol by an expensive

spraying process, the Panama disease did not yield to any corrective measures.

Beginning in 1938, therefore, the Compania Bananera transferred its banana plantations to the Pacific Co-st. There, the soils have been found to make the plant more resistant to the Panama disease. Prevention of sigatoka disease increases costs, and the greater distance from the east coast of the United States, the most important banana market, appreciably raises the cost of transportation.

45. Bananas are an exceedingly profitable crop, but the huge investment involved in preparing the land for planting (lands may be drained for as much as five years before planting) and installation of expensive spraying equipment for disease control, require concentration of production for profitable operation. Small growers have survived thus far only because they use the imnroved lands abandoned by the Company and because they can find a market for the inferior bananas grown on the diseased lands of the Caribbean coast.

46. To grow and ship banarias on the Pacific Coast, the Compania Bananera has invested over $30 million in a wide variety of facilities. What was inaccessible and malaria-infested jungle a few years ago, has been transformed into flourishing and healthful plantations connected by an extensive network of the

Company's railroads with modern ports created at Quepos and Golfito. Substan- tial housing, commis6arMs carrying imported and domestic goods (some at sub- sidized prices), hospitals, recreetional facilities, and high waces have attracted workmen who would otherwise be unwilling to live in the tropics where bananas must be grown.

47. As more acreage is being put into cultivation, the Compania's production has been increasing. In 1946. 5 million stem-s were shipped; this was increased to 6 million in 1947; and 1948 shipments are expected to surpass 8 million stems.

48. The Panama diseaae, which eventually renders infected soils useless for growing bananas, does not affect other crops. When it became apparent, therefore that bananas might be a transitory crop, the Compania Bananera ern- deavored to-find other suitable. crops which could be orown on its CRribbefn- plantations, in which it had made hQavy invtstmetts for clearing, drrtin'wPe, railroads, highways, housIn and other improvements.

49. In 1914, the Compania began to plant cacao, which althouigh indigenous to Central America, is produced in the greatest quantities in Africa and

Brazil. Over 20,000 acres were planted in 1939, and cacao production, including the output of independent growers, reached a peak of 7,675 tons. Although this amounted to only 1% of world production, it was nearly 13% of Costa Rica's exports. Some ten years ago, however, a pod rot disease began to attack the

Compania's cacao plantations and a considerable decline took place in production. Nevertheless, cacao remains Costa Rica's third most important export.

50. Attempts by the Compania to develop disease-resistant cacao tree varieties have been successful and 1,700 acres on the Pacific Coast already planted are to be expanded to 3,000 acres. The new trees are proving to be high producers as well as disease-resistant, and are expected to yield from

4,000 to 7,000 pounds per acre compared to an average of only 224 pounds obtained in the Almerante Division of the United Fruit Company in Panama.

Plans of the Compania also include the future construction of a plant to prepare cacao for export.

51. Coincident with expanding production, prices of cacao have been soar- increased demand and ing (up 742% since 1941) in consequence of/a drastic drop in output in West

Africa, brought about by a cacao tree disease known as the "swollen shoot".

The resulting world shortage is expected to continue for at least five more years. The riEe in cacao prices has made it profitable to rehabilitate disease- the ravaged plantations on the Caribbean side of the country. In 1948/cacao crop is expected to be excellent, recent forecasts placing it at 11 million pounds.

Normally, 80% of the crop is exported, mostly to the United States. because 52. The fall in the Compania's cacao production over the last decade / of pod rot disease made the small growers the most important factors in cacao exports. In 1946, total cacao exports amounted to 8.7 million pounds, to which independents contributed 5.4 million and the Compania Bananera 3.3 million pounds. In 1947, the Compania's shipments increased to 4.9 million pounds

against 5.8 million by independents. As the Company's trees begin to bear

increasing amounts, its relative importance will undoubtedly increase. The

heavy investment required for nurseries and disease control are beyond the

resources of small growers and the Compania Bananera may be expected, therefore,

to become the dominant force in the output of Costa Rican cacao in the next

few years.

(d) Afrioan Palm Oil

53. The same reasons which impelled the Compania Bananera to enter into

cacao production prompted the planting of about 6,000 acres of African palis

since 1943 on the Pacific Coast. The palms begin to yield fruit containing oil used for culinary and other purposes in 3 or 4 years and reach peak production from 11 to 13 years, producing for as long as 50 years.

54. The future of palm oil production in Costa Rica appears promising. Low planting and maintenance costs and relative freedom from disease and pests make the palms a practical crop. The Compania plans to install a processing plant in 1949 to cost between $600,000 and $700,000. While the principal objective is the export market, local requirements, particalarly those of the

soap industry which must now import raw materials, could also be filled.

(e) Abaca

55. Abaca is a plant of the same family as the banana plant and produces manila hemp, used primarily in the manufacture of marine rope. In 1943, after the main source of manila hemp had been shut off by the Japanese capture of the Philippine Islands, the United States Government sponsored abaca projects in Panama, Honduras, Guatemala, and Costa Rlica. Under a Reconstruction

Finance Corporation contract with the United Fruit Company5 the Company -14-

planted 10,062 acres of abaca in Costa Rica on a non-profit basis. Two decor- ticator plants, which separate the fiber from the pulp, are in operntion on the abaca plantations. The residual pulp is now a waste product, but experi- ments are under way to determine its utility in making paper. It also has value as fertilizer but it has proved too expensive to prepare and ship.

56. With Philippine production of hemp only 50% of prewar levels, demand pontinues well above supply, and prices are high. The U. S. Government's no-profit contract with the United Fruit Company ia scheduled to terminate at the end of the year, but the Compania Bananera and RFC representatives in

Costa Rica have indicated that it will be renewed for an additional two-year period, probably under an arrangement which would allow some return to the

Company now that the war is over.

57. The seed used in Costa Rica was apparently a less satisfactory variety than those used in other projects. This factor, as well as the cutting of the plants before maturity in response to wartime needs, resulted in low yields.

However, output is improving and it is expected that 13.9 million pounds of hemp will be exported this year as compared to 9.8 million in 1947 and 1.1 million in 1946. The relative importance of manila hemp exports has been increasing and in 1947 it helu fourth place among Costa Rican products with

5.8% of exports, compared to only 4% in 1946.

58. In addition to the favorable export outlook for abaca, further use may be made of hemp in local production to cut down imports. Some of the fiber has been used with "cabuya", a lower grade domestic fiber, to manufacture rope and fiber bags. It is also planned to manufacture coffee bags which must now be imported. -15-

(f) Rubber

59. The Compania Bananera also attempted to produce rubber on the Pacific

Coast, but the insufficiency of rainfall in the western part of the country- has interfered with this venture. However, about 1,000 acres of trees rlanted by the Goodyear Rubber Company on the East Coast have been more successful.

Unsettled conditions in the Far East, where most of the worldts natural rubber supply is obtained, might encourage further expansion, but the absence of an adequate labor supply is a lilniting factor. Moreover, competition from syn- thetic rubber might exercise a depressilve ffect on future developm-nt of natural rubber.

(g) Forest Products

60. Although forest products are fifth in the line of exports, they are potentially much more important. With 60% of its land area covered by some of the most luxuriant forests in the world and containing an estimated 40 billion feet of merchantable lunber, Costa Rican imports of forest products (railroad ties, lumber, furniture, paper, and paper pulp) generally exceed its exports of forest products. Inefficient logging methods, small scale operations, and expensive transportation have raised log and lumber prices to levels which make imports cheaper in many oases. Timber exploitation is a haphazard occupa- tion in Costa Rica, and most logging has been confined to balsa although there are over 1,000 varieties of trees in the forests. Saw mills are stall and poorly equipped and there are only a few dry kilns for conditioning lumber in the country. In 1947, high prices and increased demand resulted in increasing timber exports to $1,256,000 from 4498,000 in 1946, but 1948 exports are reported to be down again. -16-

(1) Agricultural Production for Domestic ConsumDtion (a) Sugar

61. The production of sugarcane and its conversion into sugar, mostly for domestic consumption, constitute lending sctivities of Costa Ric4. High sugarcane yields depend on a warm climate and evenly distributed preci- pitation for seven to eight months of the year, conditions which are unfor- tunately absent in the Meseta Central, where most of the cane is grown. Con- sequently, the cane takes longer to mature and much more land is cultivated in sugarcane than probably would be necessary to produce an equal amount in a more favorable area such as exists in the southern part of Puntarenas Province.

Since land in the Meseta Central is at a premium, and culltivation techniques are inefficient, costs of production are relatively high. Most of the molasses, obtained as a by-product in the manufacture of sugar from cane, is used in the Government Liquor Factory to distill alcoholic beverages, the manufacture of which is a State monopoly in Costa Rica. 62. More than 55% of the sugar obtained-from the cane is in the form of an unrefined brown sugar, known locally as "dulce", and used by most of the population . Dulce is produced by the most primitive means In over 600 small enterprises known as "trmpiches." By comparison, the "plantation white" sug.ar produced in about 20 mills is superior, although its quality 'lso is b.Dlow stnndard quLr1ity white sugar. Su.ar mills draw cane from limited areas in their neighborhood because the absence of good roads raises the cost of lone hauls to prohibitive levels. The capq6ity of most of the mills is too small therefore, for optimum efficiency, and eosts of production are excessive.

Because of high costs, the sugar industry still requires the tariff pro- tection it has rqeeived for the post forty years. -17-

63. Most of the sugar produced in Costa Rica is consumed locally, although

a fair amount of exports were made in the boom sugar market following the

World War I and in 1938-39. A current surplus of ten million pounds has been

reported and negotiations are going forward with Argentina to export this

amount. No satisfactory statistics on current production are available, but

in 1941, considered a normal year, about 61 million pounds were produced., of

which 27.4 million pounds were plantation white and 33.6 million tro'm sugar. 0 (b) Livestock (1) Dairying

64. Costa Ricats dairy industry is located mostly in the NIeseta Central

but mixed dairy and beef herds also are found in the coastal lowlands. - con-

siderable amount of scientific breeding with imported, purebred livestock has

been practiced and one can find dairies on the Meseta Central which compare

well in appearance with any in the United States. On the other hand, in

Guanacaste Province, beef cattle are milked in open corrals with no semblance

of care and sanitation.

65. There has been a steady expansion in the production of butter and

cheese, which in the absence of statistical corroboration, is discernible in

the decrease of imports of butter from 3.6 tons in 1938 to 0.6 tons in 19459

and of cheese from 68 tons in 1938 to 26.2 tons in 1945. Butter and cheese

are made on individual farms, sometimes because the distance from consumption

centers prohibits the shipment of fresh milk without refrigeration.

66. In spite of a corresponding increase in milk output on the lieseta

Central the value of imports of imported canned milk, powdered milk, and milk

products has been rising. In 1945, such imports were valued at 467,000 and

in 1946, at $697,000. The diversion of milk to butter and cheese manufacture because of the lack of refrigerated shipping and storage facilities only par-

tially explains the substantial amount of milk imports. Seasonal shortages

and the lack of adequate pasteurization facilities also play important purts.

There are three small pasteurization plants in or near San Jose which supply

about 60% of the demand. However, effective demand is 1ept low because of

high selling prices of milk produced on the expensive lands of the Meseta

Central where imported concentrate feeds retniling at up to `080 per ton must 0 supplement scarce natural forage. (2) Meat Production

67. The beef cattle industry is distributed largely throughout the Costa

Rican lowlands, although Guanacaste Province contains most of the estimated

375,000 head of cattle in the country. Unlike the dairy cattle, which have

been subjected to a considerable amount of brecding, beef cattle are often of

nondescript varieties which show need for more adequate disease control and

better feeding.

68. While over 80% of cattle slaughtered are raised domestically, the import

of cattle from Nlicaragua for fattening is a comnon practice. The fertile

soils and extensive pastures in Guanacaste Province are particularly suited

for fattening cattle, but the dry climate and poor transportation facilities

to distribution centers have retarded the development of the industryr "he

absence of modern slaughter houses and refrigerated storage space also pre-

vents further expansion of the industry.

69. The swine industry is distributed over the country but production

efficiency is low because of high mortality of pi;lets and unsatisfactory

feeding practices. This factor and the unavailability of cheap concentrate

feeds has raised the price of pork above the price of beef. -19-

Lard is the most popular cookihg fat and constitutes over 90% of all animal

fat imports, exclusive of butter. Local production amounts to about 1,5

million pounds per year, less than 50% of the 3.2 million pounds imported.

(3) Food Crops

70. Because of the restricted nature of the domestic market, most of the

larger farms concentrate on export products, and the production of corn, rice,

beans and potatoes, the four staple food crops in Costa Rica, has been unstable.

Is In some years, it has been necessary to supplement local supplies with imports,

particularly in the case of rice, while at other times when export prices

fall, surpluses have accumulated. Inadequate storage facilities have been

responsible for a considerable amount of spoilage, which perhaps more than low

production, have made imports necessary.

71. To overcome the uncertainties attending the production of basic food

crops, the National Bank of Costa Rica has sponsored a program under which

credit and technical assistance are furnished for the production of basic foods

which is purchased at guaranteed minimum prices furnishing a reasonable profit

* to farmers. Eighteen prefabricated steel silos with an overall capacity of

9,000 tons have been erected to provide modern storage facilities for food

crops purchased under the program. As a result of these measures, there has

been a progressive movement toward self-sufficiency in the basic food crops.

An estimate obtained by the Bankts Mission from the Costa Rican Chamber of

Agriculture placed 1948 production of beans, corn and rice at 7 million

pounds and potatoes at 4.8 million pounds. *-s- u.oC.4 - -8

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D 25 so 75Miles U. S DEPARTMENTOf COMMERCE I Nil. - 1. S xio"oDa UREAUOF FDRE AND OESTIC OOMMERCE|

2-1)582 -20.

III. IIDUSTRIAL RESOURCES, TRlSP?9RTATION & ILDUSTRY

(A) l;ining

72. Iining has never been important and is of diminishing sivnificrnce in Costa, Rica. De-)osits of manganese, copner, lead, gold and silver, -Uell as coal, exist in the country but production is either unim,sportant or the deposits have not been explored end develoned. The vnlue of golCi ex-orts declined from $554,393 in 1938 to only -.59,185 in 194?, but it is believed that smuggling rather then reduced production accounts for the cL.r e. Exn-.orts of mineral concentrates in 1941 amounted to 35,000 kilos i-orth -102,000; in

1947, they had fallen to 54,000 kilos valued at -13,000.

73. Initiel discussions have taken place between foreign oil comnenies and the Coste. Ricar Government concerning exnlorptions for oil. Under Costa

Rican law, all hydrocarbon deposits, includin : netroleum. and coal, even if located on private lands, are the exclusive pro9er't- of the State and concessions to exploit them may be -rranted only for limited -?eriods. At the present time, acceptance of bids for exploitation has been susnended until minin, leaislation is revised.

(B) Transportation

74. There are four small 42"-eu,e railways onerpting in Costa. -ic'thi a total of about 300 miles of main line. The Pacific Railrond is an electri- fied road ol-ned by the GTovernmeent and connecting San Jose t"ith Purntrena.s on the Pacific Ocean. The l7orthern Rrilropd, o-ed by ritish interests, uses oil-burning locomotives and runs from Sasn Jose to Puerto Li.mon on the

Caribbean. The other t-o railroads, also w-ith oil-burning, locomotives, are operated by the LTnited 'rPlit Com'nany on the Pacific Coast and connect plantations w-ith the banana ports of quepos and. Golfito, resoectively. Excessive -21_ rainfall and freauent wYashouts interf'ere with the proper operation of Costa

Rica's railroads and greatly increase maintenance costs,

75. Costa Ri.ca depends heavily on its high-ays, as is manifest from the relatively low railroad trackage, ecual to only 1 mile for each 64 sauare miles of territory. Of the 4,220 miles of highi-ays, only 920 miles are all-weather roads, or about 1 mile to every 21 sq,uare miles of land. Mlost of the better highi"ays are concentrated within thirty miles or' the Capital, the remaining, roads being little better than dirt tracks and trails.

76. Excessive transDortqtion rates are a burden on agriculture and industry, It has been estimated, for example, that the cost of shioping grain from

Guanacaste to San Jose is -reater than it would be to ship it from Siam to

Costa Rica. Reductions in some transnortation costs can be exnected -4hen the

Inter-American Hirhway, now finished for about 120 miles northloest and southeast of San Jose, is completely 'uilt. y'ork on this road has been stopped for lack of funds. Domestic air services are operated by a few foreign and locally owned companies which serve all the important to-ns in Costa Rica. Some freight is moved by this means, and sometimes cream is shipped by air to San Jose. Air freight is too expensive a medium, ho-ever, for most cargoes. The air-ort at

San Jose is the only nort of entry. The field is small and accommodates planes with no more than t-.o eng,ines, -hile weather conditions are often poor during the rainy season.

77., Industry in Costa Rica is in its first stages of develonment. The number of industries are fei! snd they onerate on a small scale, -ith limited capital and small numbers of -orkers, producing almost entirely for the local market. Some, like the sugar industry, are based on domestic agricultural -22- production, but most rely on imported raw materials to some extent and entirely on imnorts for machinery and eouipment.

78, In the absence of statistics on industrial nroduction or a census of industry, some measure of the relative imnortance of various industries is indicated from a nartial list shown below and obtained by the I.I4.F. Mission to

Costa Rica from Social Security records giving the number of employers in certain industries and the number of '-orkers earning less than 0300 (.553.40) ner month in October 1945. Other Costa Rican industries not listed make ceramics, lepther products and shoes, brooms and brushes, pharmaceuticals, glass articles and other consumer goods typically )roduced in undeveloned agricultural countries. Yutiber of Number of Industrv Einnloyers .Iorkers

TCTAL 1,202 1 59

Industrv and. Construction 11i6 12,i64 Letals and ilning 85 453 Clothirg, Textiles 316 2,577 Iood Products 249 2,737 Bevzerages, Tobacco 27 610 I!ood, Furniture 118 1,306 Construction 1Laterials 19 416 Printing, Publishirg 19 516 Chemicals (soa-n, crndles, matches) 53 777 Building 105 2,041 Industry, other 125 931

Transnortation and Communication 86 3.231 Railroads 6 2,124 w.ir Transnort 2 45 .y.otor Vehicle 51 606 Telephone, Telegranh 4 45 Other 23 411

(a) Electric Poleer Production

79. Although estimates indicate that the numerous small but s"Tift rivers of Costa Rica cen nrovide over 700,000 kI in energy, prepent capacity is limited to about 28,000 k-. and an rncute shortage of electric nower impedes economic develonment. There is no grid system in operption and the different -23w electric power systems operate as separate units. Dlunicipal hydro systems furnish light and pot*-er to the cities of Alajuela (742 kw) and Herediae (YLiQ tv-).

An American operating a company with units having about 4,0Q0 kie camacity suni,lies service to Limon, Puntarenas, Cartago and Turrialba. The lar-est installations, with a capacity of 20,730 kv., are onerated by the National

Pol-er and Light Company, o-ned by the American and Foreign Po-er C.rn-r.;r a subsidiary of the Electric Bond and Share Company. The National Po'er anc.

Light Company furnishes electricity for San Jose and operates the trolle-! and telephone systems in that city. The price of 3 cents ner kwh to the domestic consumer is among the cheapest in the vorld. Seven of its small hydro nl,ints together contribute 11,600 kw, sunolemented by 10,000 kw.from the Las Ventanas turbines on the Virilla River. A ne- 2,500 ki- generator was recently -.t into operation and another plant of 7,500 kw capacity is to be completed in lnarch

1949. The Company has been subject to criticism for failure to meet the cdemand for power; this was in nart due to loi-w ater levels as well as the need of equipment repairs -hich together -ere resnonsible for 'keenin- outnut -ell belo- existing capacity. In order to conserve electricity, the Comnany has obtained permission and plans to re-olace the electric trolley system in San

Jose -with buses.

(b) Vegetable Fats and Oils Industry

80. The vegetable fats and oils industry d.eserves soecial mention. A relatively recent develonment, it has already brought about an increr.se in the low domestic consumption of fats and oils and some decline in imnorts, 1-ith resultant savings in dollar exchange. jioreover, the industry's steady expansion promises to malke Costa Rica self-sF.fficient in vegetable f.,ts and oils, and by shifting consumxntion from animal fats (narticularly la,rd) to vegetable oils, to reduce further the country's dependence on imports. Present consumn- -24-

tion of edible fats and oils is estimated at some 4000 tons, of -^hich 65, is

imi-orted. Inedible fets and oils used in industry, narticularly in the manu-

facture of soan, are estimated at 2,275 tons, of which over 40% is imported. (c) Leather and Leather Goods

81. Another Costa Rican induqstry capable of improvement and exTansion is

the leather industry, vhich tans locally-produced hides and oroduces saddles,

harness, ladies' hand-bags, lug-age, and other leather goods, The most

important part of the industry, however, is the manufacture of shoes.

* 82. About 50,000 cattle hides are produced annually, and practically none

is imoorteC. Since the cost of the hides and tanning materials represent over

60Q/of the wholesale sellin- price of leather goods, the principal value of the

industry to the country is in the utilization of native hides and tanning mater-

ials. About 15. of te locall-nroduced leather and 201 of imported leathers

are consumed in the manufacture of leather goods other than shoes, mostly by

haLdicrPft methods. The remaining domestic and imported leathers are used in shoe manufacture.

83. Local hides Pre generally of ooor quality because of inadecoua.te

control of cattle disease. 'hen nrocessed -ith the lov grede ve-etable tanning

materials used in domestic tanneries, the leether oroduced is useful mainly as

sole let1ther. Attempts have been mede to ten leather for urnners, leather for

*.hich is imoorted., but the results have been unsatisfactory.

84. All leather shoes produced in Costa Rica are handmade by about 3,800

skilled shoemakers, who have successfully resisted mechanization of the industry.

A la., recently permitted. to lapse, prohibited the manufacture of shoes in Costa

Rica by imported machinery, and. at the present time a sales tax of 07 ($1.25)

is levied on machine-made shoes of local manufacture. about 350,000 pa.irs of

shoes are Droduced annually, -ith a retail va.lue estimatecd at ¢22 million (C3.9 million). About 50% of the cost of manufacture is attributable to labor. The

average retail price of a pair of shoes iorod.uced in Costa Rica is atout 050-

¢60 (%8.9o--lo.68), much too high for large numbers in the Dowulation *^ho now

are without a single pair of shoes.

(d) Tertiles

85. The small textile industry of Costa Rica is also cs.nable of consider-

able development. The largest sninning and -eaving mill -ith over 300 emnloyees

nroduccs cotton lint, yarn, textiles and cotton and rayon knit goodcs. Some of

the machinery used. is over thirty years old and the factory renuires a con-

siderable amount of reconditioning and increased capacitly to obtain oTtimum

efficiency. One medium sized mill -ith sbout 70 workmen and 3 smaller

manufacturers compose the other important units, the balance consisting of

many small manufacturers '-'ho nrocluce miscellaneous goods,

86. It is doubtful whether local manufacturers sup ily as much as 15- of

the cotton fabrics imnorted, -hich in 1944 amounted to :2.8 million. Although

climatic conditions in some parts of the country are ideal for cotton growing,

domestic p)roduction sunnlies only 31 of the yearly reauirements of 3.2 million

oounds of the fiber, the remainder constituting imports. -26-

IV* !X.T.-.'TIC 717,77,

(A) Budget

87. The Costa Rican State budget has been deficitary every year beginning in 1940 and the deficits have been financed by internal and

external borrowing. In the eighjt years bet,ieen 1940 and 1947, deficits have ranged to over 42z) of receipts 1/ The size of the defiqits has been

decreasing steadily since 1943, and amounted to only 04.4 million (.78 million) in 1947, largely because the public -orks nrogram was almost

completely halted.

88. The exact situation witl regard to the 1948 budget is difficult

to determine becaiise of the complete break in administration which took place early this year when the Revolutionary Junta replaced the former

Governrient. The 1948 budget, as originally prepared by the previous

Ad.ministration, balanced at 085.8 million (015..3 million), but was in-

creased by subsequent appropriations to ¢94.7 million ($16.9 million).

Actual eroenditures and commitments during the first five months of 1948,

during most of which time the Picado Administration was nominally in

power, have been stated to be 043.4 million ($7.7 million). In the same

Period, revenues are put at 035.7 million ($6.4 million), wrhich would leave

an apparent deficit for the first five months amounting to 07.7 million

($1.7 million).

89. "'hen the ne- regime camrie into being, a ne-1 budget was l-repared

for tl..e last seven nonths of the year, calling for exnenditures of 081.8

million($14.6 million). ?Por the entire year, combined expenditures will

amount to 0125.2 million (;22.3 million), about ¢12.5 million ($2.2 million)

above budgeted revenues 0P 01?.7 million (20.1 nim'lion). However, the

1/ Table I in Statistical Aprnendix svmImarizes the annual budgets since 1940. -27_ deficit is expected to be reduced to 07.2 million ($1.3 million) by the sum of ¢5.3 million ($0.9 million) which was fo=nd in the Treasury wThen the Junta took over. Ordinary expenditures are estimated at ¢112.2 million ($20.0.million) and extraord,inary disbursements at ¢13 million

($2.3 million).

StrIVAPRY O0 OICIAL 0OOzA RICAN BUGDCT POR 1948 (Iiillions of Colones and Dollars)

Jan., lay June Dec. Total

Revenues ¢35.7 (t6.4) $77.0 ($13.?) ¢112.7 (020.1)

E-xpenditures

Ordinary 43.4 ($,7.7) 68.6 (512.3) 112.2 ($2°0.0) Extraordinary - 13,0 ($ 2.3) 13.0 ($ 2.3)

Total 43.4 (*7.7) 81.8 ($14.6) 125.2 (,l22.3)

Gross Deficit 7.7 (41.3) 4.8 (, 0.9) 12.5 ($ 2.2)

Less funds in Treasury carried over 5.3 (' 0.9)

Yet Deficit 7.2 ($ 1.3)

90. The considerable increase in military and police exnenditures under the new budget has raised them to record levels. Although it is not possible to determine fron the budget figures the exact amount to be experd- ed on public security, the visible increase over last year in the allocations to the I!inistry of T-ublic Security and the Iinistry of Government and

Police amounted to 08.5 million ($1.5 nillion), not including ¢200,000

('i39,000) budgeted for the President's military staff.

91. Substantial increases were also made in the budget for the judicir ary, Thich has increased tasks as a result of the revolution. The most imior- tant items in the extraordinary budget are an allocation of 06 million

($1.1 million) for indemnification of victims of the revolution and $5 million ('890,000) for public security. Although the 1,300 civil servants are no groater in number than in the nrevious AdLlinistration, salaries which were generally too low0have increased considerably above former levels. On the other hand, public works remain at the depressed level of last year, about $9 million ($1.6 million) compared to ¢22 million ($3.9 million) in 1945. The Government railroad, vhich will operate as an autonomous entity, has been removed from the budget, but the recently nationalized banks are expected, for the first tirle, to contribute to tle Government ¢500,000 (^,89,000) from orofits.

92. Since budgeted revenues seem to be above w!hat it would aprear reasonable to expect, the actual deficit for 1948 will nrobably be higher than the estimated 07.2 million (1.3 million). The seven-month budget includes an estimate of ¢3.5 million from income taxes, Such a return would be equivalent to an annual rate of 06 million (Sl.. million), as compared to collections for all of 1947 of only p4.4 million

($783,000). It remains to be seen whether the official contention is correct that ta-cnayers, wrho fornerly evaded income tax nayments on political grounds, will not continue to irithholeI payments to the present

Government.

93. A far more imnortant reservatio.i concerns revenues expected from the 10 tax on canital levied by the Junta on all property valued above 050,000 ($8,818.35). At the time the tax was decreed, President

2Figueres announced that funds nrovided by tho capital levy would be used for the liquidation of debts and economic develonment. In fact,, however, it is being used to cover a portion of the budgetary deficit.

The levy is payable in ten successive annual instalments, each equivalent to one-tenth of the total tax, and the return estimated in the budget fFor 1948 is 032 million ($5.7 million). According to com-oetent opinion in Costa Rica, however, the yield is not likely to reach

¢10 million ($1.8 million). If this proves accurate, the 1948 budgetary

deficit is likely to exceed $29 million ($.551 million).

94. Collections on the 10" capital levy are scheduled for YTovember, but,many payments will nirobably be made after that time. In the meantime,

thle Treasury position has become precarious and funds on hiand are well below the present Government's current liabilities of t2 million ($356,000) and the 024 million ($4.3 million) in overdue bills inherited from the previous administration. In order to meet current exnenses, the linister of Finance was authorized to issue up to 20' of budgeted expenditures in the form of short-term Treasury bills to be repaid from nroceeds of the capital levy. At the end of Sentember 1943, bills in the amount of

¢23.5 million ($4.2 milliQn) had been sold to the banks and additional

issues were being contemplated by raising the limit for the issues to

30', of expenditures.

95. Budgetary deficits in Costa Rica have been due, in the first

instance, to disordered fiscal administration which made it possible for official agencies to incur debts even when funds were unavailable.

However, political opnosition to the previous administration also prevented

the levying and collection of taxes and this had the effect of intensi- fying the fiscal crisis. It has become the custom for the Government to mortgage future tax payments by obtaining advances against tax pavments from large comoanies when it has found itself in difficult financial circumstances. The Compania Bananera loaned the Government $1 million in 1938 which is now being amortized by a two-cent tax ner stem of bananas exported. The Government is in arrears on payments to the local public utility for years of electric light and telephone service wihich is being -30- liquidated as taxes fall due, ano advances by the Texas and the Standard Oil

Companies have been made against future t'c payments on iiaports of petroleuw products.

(B) Tax System

96. it is too early to deter;ine the extent to which th.e interi-n

Government will imp2ove thae fiscal disarra-T ihich- has pre-va-led for a consic.era.le period. The :xInister of gLconomy told a m-neb.ber of the ranikts

-ission that the Government e-pects to increase revenues by enforcing inco:me tax collections, wihich now yield only /4.4 11illion (7,83,000) instead4 of an estimated V30 million (,5.3 m-Allion), and by raising appraisals on ta;-able real property. The increase in the size of the bud-et for thle last se-;eren months of 1948, howTever, will not make it easy, to balance the budget. Any lasting7 correcti.on of the fiscal situation must 's acco.mpa.nied by, a tlorough overhau.ling of the tax systeLi. Direct ta:xes are most unpopoular in Costa Rica, and previous adiinistrations have usuall- talken th.e eas- -ray out btr resorting to indirect levies. In 1(247, ovc-r 62` o' all receipts c2 m fromrl ind.irect taxes, and only 77 from d_rect iiiposts, the balance coriin- frolo G-overnment enterprises and services likce tlhe .i.quor Factory., Pacific Railroad, alatents, etc. About 50%O ol Costa .icats revenues is derived 'roml custOms receipts and. the Govermr.entls dea-endence on this for.mi of inco-me has been the i;iajor olbstacle in thle way of i.nposin- effective curbs on imports during the last two years.

In the immediate future, customas receipts are likely to decline as a coni- sequence of restrictive measures on iMports recently -dopted on th-e recommendation of tihe Fund. Unless direct tax revenues are increased as a cosr,!ensatory measure, budget balance is unlikely.. A favorable factor, noAiever, is the exuected increase in tax incom..e from t-e Jorapania Bananera, when the new-. contract bsEing negotiated,is sigined. 97. The tax system. is overburdened with' a host of picayune indirect levies, ountint; in the a-re-,ate to V12 mi-llion (.2.1 million). Thie revenue of each of these taxes is specifi cally earr-iarked Lfor one or more purposes and a ',iven activity miay receive mfunds frorm as many as t-relve or mniore o--t'nese smuall tax:es. *Ihere are imposts eaXsaarked f'or school lunclhes, centrol of tuberculosis, school boolks 'or indiZrents, the establishm:ent of' a medical SChoOlJ landany Ccharitable instit-tions. Th e system is cuxibrous and uYnnecessar-y. It shold be re;olaced by a simp-ler tax- structure that does not, tic Goverment contributions to specific t ax collections.

93* Tax evasion is a proble coi.mon to all counitries, but in Costa

Rica thle difficlty h',-as been corpounded by thle successful indoctri-nation of taxpayers a-ainst om-.of ta;xes ori patriotic -xroun.ds by the political op-u)os.L-tion to thle t-ro previous rerLimes. Nevertheless, tax enf orcem%ent inspectors for the entire courtry nOVT rnlinber only eleven, laviv -Lg been increased recen-tlly by four. Uinder tihe prevailin,_ sy.st-e_, tax pay t are made onlr after tax returns, filed prior to t, are ap?roved byr

Governmen-t exai,iners. Since tLhe process of eJa.ii'l the ^eturns often takces a considerable am:ionunt ofn timue, tGaxpayments are delayred -rile t1he

Goverr2ue;ut Jis co-iu;elled to borrowr f-unds until collectJions arc made . Th"is me

°'.' --lie entire Governm?.ent debt at -thle end of Auril 194` totalled /02/5.8

i:il.lion (t:47.3 Ymillion), of whi.ch- 141.3 m-illion (['25.2 million) consti-tutes internal indebtedness and /12.. m.illion (22.1 r-Jilion), exiteornal. 3etvWeen

1939 and -tlhe encd of April 194., te iriternal debt increased fromq /33 villion

(',5.9 million) to /124m.illion ('.22.1 miLllion). ilost of the debt is fuLded. but the e,act proportion of long to short-term debt is not known.

100. The external debt rose fro,,-l7.S million (..lo .3 nmillion princi-oal and 1.5 accumulated interest) in 13939 to F25.5 million (:.i21.4 illlion principal and .;;4.1 million ac cu!ulated interest) at the encd o° April 1943, rerlectin.W: i}.part t'ne bud-etary deficits wrhich began in 1940 and in part

the accumulation of interest resultin- fro:.i debt default.

101. The external issues of thie Costa Rican Government consist of (a) six dollar loans, two of whiCili are credits of the Dcport-TIDport Dan.c,

(v) three sterling loans, and (c) one franc loan, as follows:

Out,standinc Accumulated Type of Loan Princi-al Thiterest Total

Export-Thaport 3anlc Loans i'16,753,527 _6,753,527

Other dollar loans 7, 944,492 761,673 8,706,165

Sterling loans 5,672,035 Zr723,369 8, 395,404

Franc loan 1,047,170 617,997 Y665,1`7

TOTAL .21,417,224 ,4,103, 03 9 25,520 263

Not included among the dollar loans is a balance of `6;59,000 remaining fro., the million dollar loan e;tended to thle Governmrent by the United Fruit Compan,y- in 1933. 102. Fron 1912 to 1932, all pay-ments on the external debt rrere .imade in full. In lugust 1932, the effects of the depression made it neQessatry 'or the Government to curtail service payments on the debt below contract ual levels and further reductions were -,made in 1936, In 1939,3, the C-overn,m,ent offered to buy defaulted coupons at 13 1/3>, of face value and coupons maturing through 1941 at 305 of face value. Some funds wTere m:;ade wailable for thais purpose, but the 'oreign Jondholders 2rotective Council did lnot consider the offer fair or equitable and refused. to recommiend it to tho -33- bondholders. Since 194, the entire publi dy-held et-ernal debt has been in comlDete default.

1012a,. It a,ya,- be understandable whly Costa Rice. believeCd it necessary, in comuon with other countries, to reduce andc even discontinue Da'Tsnts on 'ts e:nternal deb't during thie depression years. T'ae pDrice o2-c`0fee, u-irjei <:i tle cow-ttr - depends to an --icortant extent fell `rori '".60 cr kzilo in 1.',-iC tO a lotr of .22 in 1939-4.0. Dut it is not eas- to discover sound r-.sonr why Costa :ica did not restune service oIn its forei . debt after 1:41.

P.,in-ieing in that year, the price o- coffee -tarted to r-.se, althoug,;u i2 did not reacllh predepression levels unt,il l9',-47. 1o7,-ever, ticeini.teod Stat½s contributed '17.9 million to Cost;a .Lica ir thu sin;eair :.criod 1941-46 tov,,dr-i!; the building of ti-e In'Cer-Aimeican lag:a va- wi/iie golCd anid e-__,:an:c 3! holdings rose from ':,3.3 .i1ion in 1°41 to i6.. i'.'ion in 1S4..3 ie absence of imoort restrictionc after t'he n.mar paerr:itted t".se r.ez.veys to cduindle, 'but t!e s-tLuation didl not make thte Governrzenlt tarle any action unti tlhe middle of 1946, wvilen mitld excne restrictions -rere ado.?tocd.

103. On Janucry 31, 1946, an agreement w7as concl,uded botween Ccsta `ica and the Zxpo 'Tmn-r -t ar1', undcr Vhichi Costa Rica, which had declareC. itsel;f unalble to meet payments oIn the credits ori-inally totalling 7 million, agreecl to pay a ndmnuim of 350C,00 per an-,nu in thle five-year p)eric,'. 1,4'-

1950. Paynents thereafter are to be subject to further negotiation, a tc C expiration of the period.

104. Service requireidents on th,e Costa Rican foreil-n debt, ca1calated on thie basis of ori-inal interest and a.iortizaLton co'oments but inQllint

2/ Cf. t'able :- in the Statistical forfinnn6in deta-Ils.

3/ Cf. Table II in the Statistical Apipendix for CQosta Rica's ol. ama foreig n ex:cha-ngr7e assets. only- a 350, 000 paynment on th e Lxirnba-ik loans, amio',unt to some 2 r.illion.

Thids smi is eOual to 1.8I. of Costa pica's estii.iated national incoi,,e in 1947

and ,i of its 1947 ex-orts. -hile the prop)ortion of service to exports is

not low, neither of the percentag,es can be considered excessive compared to

other co.untries wlritlh the sinilar levels of incomrte andl exports. (D) : oney and Credit

105. BIetween 1937 and 1941, as indicated in the table below, there

w;as sorne increase in the mo.netar- supl.)ly whi resulted froex srall balance

0 of >. : surpluses and mrtoderate. expansion of credit, In thie followring trro y,ears, 1942 and 1943, sizeable e:)penidiL,ures byr the United States

GovernmIent f>or militar-yr urrose and the lifte---American I. P--:- were nriamarily

responsible for mlore than doublin,- the supply of money. ThIere w-ras little

change beti,eeni 1944 and 1946, but in 1947 and the beginnin_ of 1945, the

growth of ban, credit and Government spending durin-; thne last -months of thle

previous Ad,ministration caused a further increase in currency and deposits

1w%|]S;>~hL,y th1e enid oF' Februa-,''y 1942, raised t-he monetar-iy circulation tc ;almost

four ti,mes the level in 193'.

CO'SI Ch C0>2:i§ SU,.,L:IT 0: - . L LT.' (:illions of Colones .nd Dollars)

Last Day of Currency Deposit o-.ey I'otal

1939 ¢'23.0 (.4.2) PU3C.3 (5.4) A54.1 (') 9.6) 1941 325 4 (S6.3) 35.9 ( s6.4) 71.2 (<; 12 .7) 19Z442 52.3 (;9.) 68,7 (-1.2.2) 121l. (21.5) 1943 68.6 (',12.1) 35.7 (:15.2) 154.3 (.27.3) 1 4-tl45 70.5 (.;1,2.5) 37.9 ( .15S) 153* ( ; 196 6 7.2 ( ;,11.9) 90.7 (l.661) 1579C 2ur0) 1947 02.6 (.14.7) 105.0 (1.r7 187.6 ;334)( fob. 190'4 111.9 (,;19.9) 97.7 ( 17.5) 209.6 ( 37.4) July 1,4G, 100.4 (.17.8) 76.9 (.13.7) 177.3 ('J31.5) -35-

106. Soi-e decline in currenc- in circulation occurred in April andc'

194.3, but in June and July, tne cu:rrency ag-air e,panded lar-oly cu.e to deficit financingiby the Government. The increase irn circulation, in junne and July amounted to less than V6 million (l.1 million) but it h.a aCld;:i sip,;nUicance bjecause it occurred in spite of the steriLizC.tion o0 .,_2,5Z ilr;Llion (2 ,2 m.illion) in currency,- deposited by inpoorters against i7o in e.xchange anplications unclQr exchange regu.Llations. it had beern hopnca iL..aI' thie 4ritadrav.al of currency de.-osited by-, aTpliCarfts for fo:'ei;n C u-h-ich is expected evont-aa"'- to remove about /3 million (' million) from. circulation, would cause an act"al dcl:le in thlle a:aou-nt of cuar .cy in circulation . lOrf Unlike curr-encyc, deposits lave boon fal3.iu¢ since .,;ril l4.

Deposits rose steaa'dily unt.l then to a i r of V,100 .2 i.-,L' 1 ( 19.3 illion),

but betvween April and July the- dec'linccd to /262 milliO- ( ,;13.7 :ill-cn, leaving the total money v.p :1: at theo on' of thlat &aonth at /177 .3 mtillion

(d:31.5 million). Althoughl C.ove-rTlent and Central Bank of'icials opofelss to

'be puzzled by the continued -nit4tihdra-rral otf deposts, vrlich has raisedate proportion Of notes in ciroulation as afanst deposits from-l /3` to 5&; i thle first seven mon-ths of 1940, it is con.,On ;oledge thiat .one- is oeang hloardecd vridLel,y to redLuce tax liab'ilities under the capital levy anio:. per-lalu, to hedge against currency dep,reciation.

1038 Other evidence lendds credence to t-is e.-plan.at:.on. ihe price of dollars on the free market has been rs4eng e-ver -since thc decree announcan the capital levy was -made -p,ublic aid the b,in raL.,o is now sevorn colones to the dollar, almost 24' above thne controlled rate, -ith sellers scarcl.

Joreover, the present preY-iu-n on dollar bills on tea frreeP marlket over neroW-na ele -36- dollar instruments in the black market, in spite of the fact that instruments normally commAnd a higher price to cover handling, cannot be explained on reasonable grounds except by the fact that hoarders are bidding up the price of dLllars. Also, between the end of 1947 and the end of May 1948, Costa Rican short-term holdings in the United States increased about T'5 million. Of the $12.2 million of these assets, at least half are held by private persons who are adding to their assets without official sanction,

TQtal Costa Rican private balances in the United States must be much larger than the above figures indicate since the reported figures only include holdings in the Second Federal heserve District and do not include Costa Rican importers' balances with suppliers. The apparent lack of confidence of the public is also reflected in the enormous increase in the velocity of dtposits, which have risen more than 25 times between March and July of this year. 109. Coincident with the issuance of the decree imposing the 10%, levy on capital, the Junta nationalized the three private comniercial banks in the country. A fourth banks specializing in short-term loans to agriculture, accepts no deposits from the public, and the National Bank already is a

Government institution. Except for the appointment of several bank directors to represent the Government and a commission to draft new banking legislation, the nationalized commercial banks are being operated in much the same way as before, although one of the reasons given for nationalization was the urgent need for major shifts in bank policy vvhich it was claimed could not be obtained by ordinary regulation. 110, The form and condition of payment to the banks' stockholders, whose interest amounts to %27 million ('p4.8 million), are still to be determined. With the Government lacking resources and already facing a -37- budgetary deficit which may reach V27 million ($4.8 million), the feeling is widespread that the stockholders of the nationalized banks will be pnid through means vzhich wvill prove irnflationary. The Government has already -fn-

ned the inflationary fires in other ways. In August 1948, the Junta increased the capital of the National Bank by 10 million (Ql.8 miilion) to provide funds for industrial credit. The increase in the Centr6l Usankls capital is to be financed by seigri'rage profits on future issues of frac- tional money. At the end of August, however, the National Bank had already included the A'0 million ($1.8 million) in its capital etatement in spite of the fact that few of the new coins had been issued, 11u. On October 15, 1948, the Governnent also authorized the issue of 020 million ($3.6 million) in bonds to be serviced by proceeds of new surcharges on imports, and from National Bank funds if the surcharges do not yield enc.ugh, Under the provisions of the decree, the 14ortgage Department of the National Bank will use the bonds to ray for and take over from commerciel banks private short-term loans invested in agricultural or industrial improvements which are being renevwed indefinitely and convert them into lonw-tsrm. loans, The purpose of.the law is to provide long-term financing for persons who have been forced to rely on short-term credit. However, since commercial banks will be able to pay off liabilities to the National Bark with the bonds at par, it is almost a foregone conclusion that the new bonds ultimately wvill find their way into the National Bankts portfolio, as has already occurred in the case of most of the short-term Treasury drafts issued to finance the State's current expenses. The shift of frozen indebtedness from the commercial banks to the Central Bank is potentially inflationary in another way. It permits the banks to make additional loans under the credit ceilings established on an informal basis at the end of December, at the

International MAonetary Fund'a recommendation, ceilings which have already been increased in August by 10% above the original level of December 1947.

112. Besides performing the usual central banking functions through its Issue Department,the National Bankt' Commercial Department is in effect a fourth commercial bank in the country. The Bank also maintains a llIortgage Department which extends long-term credits secured by land, as well as 36 Rural, Agricultural Credit Boards located throughout the country. The Government-owned Banco Nacional de Seguros sells insurance, which has been a State monopoly since 1924.

113. Central Bank policy designed to counteract the deflationary effect of postwar balance of paymento deficits has been indirectly reeponsible, at least in part, for the expansion of commercial credit to finance imports. As a result of this policy, the Commercial Depart- ment almost trebled its credits to the public between 1943 and the end of 1947,obtaining much of the necessary funds by rediscounting with the

Issue Department. Furthermore, the Issue Department purchased V3.9 million

($694,000) in Government securities in open market operations. The increase in commercial bank deposits and reserves resulting from these operations, enabled the private bankm to expand loans to importers without rediscounting to the same extent as the Commercial Department, although in the process banik reserves declined from 47$ in 1937 to 23%

(3% above the legal requirement for demand deposits) at the end of 1947.

As a result of the decline in deposits during 1948, commercial banks have had greater recourse to the Issue Department in order to maintain liquidity and a sharp increase in rediscounts has raised them from 4 million (0712,000) at the end of 1947 to $20,5 (C3M7 million) as of September 22,1948, while reserves have again risen to 46% of deposits. -39-

114, Loans by commercial banks to the Government and official entities have been relatively low, amounting to only f26.5 mill-ion (.;'4.7 millioni) in July 1948 out of total loans of 0162,4 million (t28.9 million). The National Bank, however, has been increasing its advances to the Govee.rr.elit and State bodies. Between the end of December 1947 and July 31, 1948, such loans rose about $ 12 million ($2.1 million) to a total of 038 millicn (06.8million).

(E) Prices and 'Wages

115, The primary determinant of the price level in Costa Rica has been the increase in monetary circulation, General price controls exist in Costa Rica but they have been ineffective outside a few items such as imported foods and construction materials. Since 1944, the prices of

corn, rice, beans, and potatoes have been fixed annually. SQme reduac- tion has recently taken place in the prices of some of these commodities

ard the dutiea on wheat and wheat flour have been abolished. 116. The Costa Rican indexes of wholesale prices and the cost of

living have moved upward together. In August 1S)48, the wholesa&le price index stood at 229, on the basis of 1936 _ 10Q. The greatest increase has taken place in the price of articles for export, the index number

for which was 357, although imported txtiles were closed behind with 351. Among articles produced locally, industrial products were highest at 238.

117. The cost-of-living index, based on prices in Zan Jose, also

stood at 229 (1936 _ 100) in August 1948. Most of the increase in the cost of living took place during the war years, the rise in the last yeaz.

amounting to only 3 points. The greatest increase took place in clothing the (index 252) J/price of wihich depends on world price movements; the smallest -40- increase (index 150), occurred in light &nd fuel, the- priee of'whieh depends on local timber and hydro-electric power. The cost-of-living index has been almost stationary since the beginning of 1948, but the wholesale price index has fallen from 240 in January to 229 in August, largely because of the seasonal decline in prices of domestic agricultural commodities.

118. Although production data are unavailable, it is known that output has not kept pace with prices, and that an inflationary situation has resulted from the disparity. However, prices in Costa Rice have probably risen less than in any other Latin American country except Argentina,

Guatemala, Uruguay and Venezuela.

119. Data collected by the International L:onetary Fund indicate that money wages since 1936 have increased to about the same extent as prices.

However, if changes in consumption patterns are taken into account, some decline in real wages probably has occurred. Real wages in Costa Rica remain below adequate standards and an increase in the wages of peons from v.25 (.04) to %.62 ($.11) per hour, while relatively large, still leaves absolute wages low. Higher wages paid by the Compania Bananera are having the indirept effect of raising wages of agricultural labor outside the banana plantations, -41-

V, TVTh'.rI"NkL TRIDD k7D 1INIJNCE

(A) Foreign Trade

120. Costa Tican irnports, even excluding those made by the Compania .,a-.>.ne- ra, are almost invariably greater than exports, and tne excess of iraports over exports has been increasing steadily since 19h2V During the war, Costa Rican imports were maintained by investment goods and materials for the account of the

Cornlpania Bananera and the Inter-American Highway, Excluding Compania Baiia%era imnports of '5.6 m,illion financed by the Coripan-y and for vhi.ch Costa R.ica nade no outlay in foreign exchange, imports in 1939 -wTere valued at 1.,3 mm:lion. 'NO substantial changes in net imports occurred until 19L3, when they rose 801 to

418.5 million over the previous year. Thereafter, appreciable increases vere registered each year, the greatest absolute rise occuring in 19,79'

121. It is not possible to determine from thle available data the precise increase in the quantity of net imports since 1939, Hovever, it is probable that the volume of net imports rose only Lo% in spite of tlue more than threefold rise in the value of net imports, and that the per capita increase (because of a 2C' increase in ponulation) amounted to about 20%2. The absence of comparable data also prevents a corm-iparison of the compositioni of imports over any extended period.

In 1926, howiever, textiles, clothing, vwl-heat and wXheat flour, and petrole-wm products constituted the most important imports, in the order sgivenV

122. !!ost imnorts come from the United States, whose importance sincce the end of the wvar has al]iost doubled with the elimination of Germany and t he decline of the United KvingdoEm as suppliers. Before the war, Germany was the second most imiportant supplier of Costa Rica's imports and the United Kingdom was third. In

19,7 none of Costa Rica's imports carie from Germany, while imports froml the

1/ Table III of the Statistical Appendix shovcs the relation between Costa RPican imports and exports. 2/ Table IV of the Statistical Appendix gives Costa Rican ilm,ports since 1939. §/ See Table V in Statistical AXppendix for a gelected list of imports,. United Kingdom accounted for only 2% of total imports compared to 16% in 1939, Aside from ITicaragua, from which Costa Rica obtains such items as cattle for fattening, sesame oil seed, imports from other Central American countries are negligible. Following is a comparison of the percentages of Costa Rican imports obtained from the United States, the United Kingdom, Germany and Nicaragua in

1939 and 19h7:

Supplier 1939 1947

United States 45% 80% United Kingdom 16% 2% Germany 25% - Nlicaragua 0.2% 2%

123. Costa Rican exportsiJwhich in 1940 amounted to 99.7 million kilos valued at ;7 .5 million, were depressed during most of the war because of poor shipping coinditions in the Caribbean and fixed vwartime prices for coffee. Begin- ning in 1944, however, there began a steady increase in the volume and value of exports, and in 1947, because of the excellent coffee crop, exports were more than double the quantity and over three times the value of exports in 1940. 124. As has already been indicated, coffee, bananas, and cacao are regular- ly the most important export crops, together accounting for 77% of all exports.

Abaca jumped from a low point in 1946 to fourth place in 1947 and in the next few years is likely to increase in relative importance. Timber and lumber hold 2/ fifth place as exports,

125. Before the war, the United States, Germmay and the United Kingdom took almost 99% of all Costa Ricats exports. In 1947, the United States and the

United Kingdom together toQk 78%, the United States alone taking 73,3%. ')ther countries, including Svwitzerland, the Netherlands and Colombia, have become more important markets for Costa Rican products than the United Kingdom, The following listing shovws the change in the export pattern between 1939 and 1947:

1/ Table' VI irn the Statistical ApTendix showrs exports from 19L0. 7/ See Table VII in Statistical Appendix for the value and relative importance of cormodities exported in 1947. Country 1939 1947

Germany 25.0% - United States 45.6% 76.4¢ United Kingdom 16.9% i.88 Switzerland n,a, 3.7 Netherlands n.a. 3.2% Colombia n.a. 2.2S

126. If Costa Rican export and import prices are used as a basis, the terms of trade are found to be disadvantageous for Costa Rica through 1943 ccm)areu to

1937. Beginning in 1943, the termis of trade began to move in favor of Costa R!ica until January 1947 when they were 45% above 1937. Since then, the term+*sof trade have begun to move against her and in February 1?LB tney wrere eight points below the peak in January7 1947 but still 37% above 1937. A more important lndex, however, is a colnparative cost estimqate madle by relating United States general export prices w.ith Costa Rican import prices. On this basis, Costa Rica enjoys an advantage equal to 8251 corinared to 1937, but this percentage is lower thran the peak of 92cc reached in December 194,7

(B) Balance of Payments

127. The official balance of payments prepared by the National Barnk is only a partial statement of Costa Rica's foreign e,2change transactions, since it ex- ciudes free and black market transactions, estimated to equal from 10, to 2O% of all foreign exchainge payments, Certain activities of the Compania Bananera also are not reflected adequately in the official balance of payments figures. The

Costa Rican balance of payments has been characterized by substantial de2icits

in current account, offset by large capital investraents, especially by the Com-

pania Bananera, and during the war, by expenditures of the United States in Costa

Rica, mostly for the construction of the Inter-Al-mrerican Highr!ay,

128. These investments and e-n.enditures resulted in balance of payments sur-

pluses betw;reen 19L1 and 1913 and the accumnulation of substantial foreign excharge

1/ See Table VIII in the Statistical Appendix for detailed calculations. -44- reserves. Since 19h4, vrhen the United States began to reduce its contrilbutions, the Costa FRican balance of payments has registered deficits. When the war end- ed, no restrictions on imports existed and in 1945 and 1946 imports were over tb,5million more than in 1944. Exports also increased but by lesser amounts than imports while receipts for the Irnter-Anmerican Highvway alraost fell to zero. 7n spite of larger investments by the Compania Bananera, the balance of payneats deficits in 1945 and 19L6 amounted to t5-8 million and .o million,rn resinect-i'vet.

129. In July 19h6, Costa Rica imposed mild: restrictiorns on the sale of exchange, but no controls on imports, after its foreign reserves had fal.len to

* 6.2 millaion from ¢;16.2 million in 19]3. The regulations set up three categories of im)orts: indispensable, necessary, ard 'lux-ury cormodities. Yowever most commodities wrere classilfied as indispensable and about 88% of all foreign exchange allocations were made for items in that categoryr, which includeed sta- tionery and wrapping paper, ran-es of all types, thlenrmos bottles, plastics for household use, hats, watches, typevrriters, calculating nachiries, shoeblacking, etc.

130. Under the regulations, control authorities could not reject applications for foreign exchange, and normally had to furnish exchange inrchronologi- cal order of receipt of aDplications vwithin each category. Since reserv:es w..ere irsufficient to finance the groring amount of imports, the waiting period between the filing of the application and the release of exchange progressively increased to as much as a year and the backlog of applications mounted to a peak of @:;17.2 million in December 19h7. Imports caitinued. to rise and were financed on an interim basis by involuntary credits from exporters, free tand !:. black markets, or private balances abroad. *While Costa Rican credit abroad deteriorated to the lmroest levels, the exchang,e control mechaniism became a device for reimbursing importers after the- had financed imports from outside official

1/ See Table IX in the Statistical Appendi.x for summaries of the balan.ce of payments since 1933. channels.

131, The ineffectiveness of the exchange regulations was reflected in the rise of imports from t26.6 million in 1946 to ,37.4 million in 1947. The official balance of payments for 19477- shows a surplus of $;1.3 million. Hovever, in order to get a more inclusive picture of all transactions, it is necessary to take into account the ';12.9 million increase in the backlog of exchange ap- plicztions in 1947 wvhich represents imports for which control authorities mupt furnish exchange in the future, On this basis, (i.e., from the point of view of total transactions) the balance of payments for 1947 is deficitary to the extent of t11.6 million.

132, Following recommendations of an DIF technical mission to Costa Rica, a decree was pronulgated in Decemlber 12L7 which required importers who applied to control authorities for foreign exchange to make advance deposits of 20%,

40% and 60% against the value of first, second and third category imports, respectively. Partly because of the deterrent effect of this requirement on filing of application for foreign exchange and partly because of high allocations of exchange to importers obtained from receipts for the bumper 1947 coffee crop, the backlog of foreign exchange applications declined by tR;8.2 million in the first nine months of 1948.

133. On the basis of IJational Dank estimates, the Official Costa Rican balance of payments is expected to sho-w a surplus of :.l.3 million in 1948. Of- ficial estimates of receipts from exports ('.30.4 million) are probably too high.

However, proceeds from the record coffee crop this year will probably raise the balance of payments surplus to about l10 million through increased allocations

1/ Cf. Table XI in the Statistical Appendix. -46- of foreign exchange for the reductions of the backlog in foreign exchange applications.

Summary of Official Balance of Payments for 1948 (millions of dollars)

Receipts Payments

Exports $30.4 Imports $35.5

Services 2.0 Services 1.0

Capital 8.0 Debt Service 1.2 Movements

Other 1.0 Other 2.4

Balance 1.3

$41.4 $41.4

134. Since July, 1946, the Costa Rican official exchange position has deteriorated markedly, and at the end of September reserves amounted to only

$5.8 million (there are no gold or foreign exchange reserve requirements of any kind). Exchange control authorities have been forced to reduce official allocations of foreign exchange to importers from $3 million -er month to

$1.5 million and the backlog of applications has begun to increase again.

Costa Rica negotiations are in progress to purchase dollars from the

International Monetary Fund. Costa Rica is entitled to draw a maximum of

$1.25 million from this source at the present time.

135. Much more significant for the future of the balance of pa.7ments is the series of measures adopted by the Junta in consequence of recommendations by the International Monetary Fund which sent t-ro technical missions to Costa

Rica in iTovember-December 194'7 and in August 1948, These recommendations suggested measures which would tend to reduce imports and absorb excess p-ur- chasing power exerting pressure on the limited gold and foreign exchange reserves. It was recommended among other things that (a) the budget be balanced (b) portfolio ceilings be placed on commercial bank credits (c) categories of imports be reclassified to reduce the percentage of imports in the first category from 88,7 of total imports to 20 or 255) (d) a 20% exchange tax be placed on second and third category imports until a revision of the trade treaty vrith the UInited

States vwould permit the imposition of consumption ta:+es on items covered by the treaty (e) advance deposits of 205, h40% and 60, in colones against foreign exchange requests be maintained on first, second and third, category imports, respectively. 136. The measures actually adopted differed somewhat from the recommendations: Portfolio ceilings had already been established on bank credits at the end of December but in August were advanced by 105; ho;ever authorization for the issue of bonds for the purpose of transferring up to t20 million (`3.6 million) in frozen shoat-term credits from the commercial banks to the National Bank was not included in the Fund's recommendations. Imports were reclassified into four categories instead of three: preferential, first, second, and third. ITo advance deposit is now required for imports in the preferential class (the advance deposit formerly required wras 20% of the import price), the deposit for imports in the first category was reduced from 20% to 10%, and the deposits of lO% and 60% for second and third category imports remain unchan-ecd. A differential selling rate for official exchange of 20%jrabove par wras established for goods in the second and third categories and in addition, consumption taxes of 30 and 50% were imposed on inport goods in the second and third categ-ories, respectively. 137. In the words of the Fund, "IMost of these measures are vwithin the spirit of the Fund repommendations, but miss the mark by a rather wide margin." The main shortcomings of the newi measures are that they: (a) make 80% of all imports included in the new preferential and first categories less subject to advance deposit requirements than before and (b) impose such restrictions on

the import of the remaining 20, as to reduce, possibly belowi former levels,

revenues hfliich it wras hloped -wrould increase and result in ba'lancing the 1..uadet.

On the other hand, other measures adopted to tighten exchange control re-:la-

tions could result in raising the amount of foreign exchange receipts and r-i-

ducing black and free market transactions if they are properly adminicte ed.

The last few months have made it clear that further decline in the value of the

colon might bring demands from coffee growers, vwho constitute the most in_ortant

political force in Costa Rica, for measures to counteract the decline in incomes.

138. But while the immediate situation is difficult, the long-term outlookC for

the Costan Rican balance of payments is not unfa7orable, Thp price of coffee

has reached an all-time high E.nd is likely to remain stronrr as long as coffee

continues eligible for Farrshall Plan Lid. Tihe prospects for Conpania 7-anEnera

crops, including bananas, cacao, abaca and palm oil are e7cellent, both as

regards prices and production. The importanice of the Corpania ::ananera to Costa

TZica is indicated by the fact that from 32 to 37r o04 the country's foreign

exchange originates writh the Company. The Companiats investrment program is also

scheduled to continue at high levels for at least twJo vears. Perhaps the most

favorable factor, hovwever, is the new contract beiing negotiated between thle

Government and the Company, -hrlich will provide the Govern, ent vi.th about $l

million annually in new revenues and foreign ex.^ha.nge. Discussionc are going

forward with Argentina which may result in the barter of surplus Costa Pican

sugar, alcohol and timber for Argentine -w.heat and po;dered milk. If such a

trade agreement ia consummated, it may result in savings of dollar exchanre

over the next ten years. A trade agreement iiith 'Treat T3ritain is also being discussed w,hich might cause a further shifting of Costa 'P'ican purchases from the dollar area. -40-

139. In the last analysis, horever, the solution of Costa Rica's balance of payments problem lies in increased production, especially of goods novr imported, and proper administration of monetary and fiscal controls which will counteract the high propensity to import consumption goods intherent in the undeveloped and undiversified agricultural econormy of the country, -50- VI. DEVELOP1NT POLICY ATD PR!.CT1C_

140. The limited size of the domestic market, the lack of industrial raw materials and the dependence on imported machinery, equipment and materials

constitute unavoidable obstacles to the learge-scale development oi Costa Hican industry. Hoirever, further expansion above present lolr levels is also being hindered by unavailability of technical advice and assistance lackc of long-

term credit and shortages of electric paver.

141. The pressure from industry for more electric ener-y has undoubtedly

stimulated the Junta Government to include nationalizetion of the po--er industry in its immediate program. The idea, howrever, is not newr in 7osta rtica. ' elve years ago, the Conr-ress approved 2egislation for nationalizing

the industry, bLut the law wras never implemented. The Junta has revived the project and is seeking to obtain a loan to cover the costs of acquiring the properties, integrating them and increasing the capacity. The unificatuion of

the separate power systems into a single grid might improve the present distribution system. It is not clear, however, what advaptag.es nationalization w-ould have over private ownership, particularly since the

Government wrould have to increase its foreign debt to obtain the properties,

and intends to pay the 'ierican and Foreign Power Companyj for Lurnislhing the

technical assistance and management needed to operate the new system.

142. The lack of adequate long-term credit facilities is due to a variety

of institutional and other factors. As in m;aost agricultural countries, the

accepted form Of Wealth is land, even in urban centers, Tlhere is no money

market in the usual meaning of the term, although sone exceptionally stable

organizations, like th-e National PTower and Liglht Company, find it possible

on occasion to sell some of -their securities to domestic buyers. <>he propensity to consume is high and the National 3ank is only nowr beginning to -51- aid in cultivating, the saving habit in the population. Time de?osits hav- never been large and since the 107; capital le'jy -ras announced, ha-ve f11san frcn

/35 million (-.890,000) to AL.2 million (.,748,000).

1l,3. Thie Banks are traditionally conservative and the extent to -.:'Siic; the-, have concentrated increasinply.-on short_term loans is clearly revealer, bythe statistics. DI 1936, private loans by commercial banks amounted to /2V mi4lor

(,,i4.3 million) and private long-term loans to f4U.6 million (l,.35 million); in

October 1947, although private loans had increased more than five ti%aes to

/136 million ( ,24.2 million), long-torn loans ha.d almost disa-ppeared, amounting to only ¢800,000 (142,h00).

U43a. The Central Bankls rediscount rate is only 3II, but the normel bans interest rate on a short-term loan is c-ustomarily 8'1, although coi,immercial loans are sometimes made at 67;. Loans secured by mortgages are made at 12', while the rate for unsecured notes is much greater. Interest rates on loans hy private money lenders are said to vary from .2' to as much as 100 per annum.

With such high interest rates, it is conventional for industrialists to expect unusually high rates of return on any venture and to amortize investments in inordinately short pariods of time.

144. The difficulties faced by industry and agriculture in obtainin7 long- term credits at reasonable rates of interest have beenl cited by officials of the Government and the National Dank, to justify the recent increase of /10 million (,1.8 rmillion) in the 3erlc'ts capital to be used to pro-v.ide loans for i.ndustry. The bond issue of /20 million (,3.6 million) to obtain funds for converting frozen short-termn loans inclo long-terma credits h-as also becn clefended on the samie grounds. It is argued that in a developmental economry such as

Costa Rica's it may not be nossible to e:pand the economy vrthout a measure of inflation and that a reliance only on more orthodox anproach may actually -52- retard development.

145. The Government is aware of the necessit- of attracting forei-n ca:?ita to Costa Rica and as a step in this directior recently ratified -;.he prox;isions of the Organization of' .anerican States approved in Dogota on -To-y 2, 194C ' ish

fixed safeguards for foreign investments. The Costa R!Acan Constituaion anc legci code marke no distinction bett-een natives and foreiL~ners ritth re-ard to

the right to engage in conmerce and industry. Anotier l-x, also inte--dId to encourage forei-gn investment in Costa Rica, assures the vritlahdL^rall of foreign exchan-e to cover principal, interest, and dividends on foreirn capital in-rested in Cost-a ica after January 19, 1933. Cos'a Ricans also point to the cooani2r;-rs low land and income taxes and the relativelyl lowT prices of undeveloped lEnd as incentives to the investment of foreig,n capital, and to th-e lon- history of peaceful government wrhich makces it probable that this condition viill reassert itself in the future.

14G. On the other hand, business men in San Jose informed members of the

Dank's Hission that recent mieasures taken, or announced, oy Lhe Junta, suclh as the imposition of the capital levy and th-e nationaliz-,ation of the bancs, as wrell as the progflram to nationalize the electric pow!er industry,ve discou:raged foreign investments anc in at least one case, broughat a halt to negotiations with forei-n capital interested in investing in Costa licaq

147. Industrial expansion is not being retarded by inadaquate su-plies o:' labor, thnanlcs to a labor reserve built up by the moverment of -popula-,icn to the cities in recent years at the expense of agricultural laanporer, arid unearplo--ient in the construction industries due to the low: level of public wrorks activity.

On the other hand, industry suffers from.l a serious dearth ol- teclniciens l-llich often prevents the developmenit of an industry even l-henl other obstacles have been hurdled. Typical, is the case of the candy manufacturer h'1otold members of the 3ank's Iission that he needed technical advice to select newz rmachineryt -53- as Y.-ell as technical assistance to help him operate them.

1h8o. ':The development of certain industries, particular>v those .:ih, libe the vegetable fats and oils industry, could utilize large pronortiorns oil doestic raw materials and cut dovm imports, is eminently desira-ble. 'Iaomever, th'e, exis-tence of raw-T materials for products like cement and rubb'..er tiree has czi;n rise to unclue optimism in some quarters concernin- the possibIlities o_ inJ:- trialization in Costa Rica. In vier, of the limdited .amount of PUblice ns, investment credit, and electric pow..er in Costa 2Lica, it u-ould certairnly undesirable to divert to induistries vith low return-is any resources m.ea. could be used to develop and increase output in more prof.it)ble fields. furthermore, wrhile Corsta Rica needs t,o obtain greater dliversification in order to reduce its dependence on coffee, it cannot e,:.-:ect to develop to a point vohere it coald produce most of its oi-.n requirements for consu:,ption to the detri-facnt o0' the comparati-ie advantages it enjoys in thne production of coLffee and other e;.ort crops,

149. The greatest promise for future economic development in Costa. 'ica comwes from those activities w-hich are relatecl to t';e r)redo.minantlyr agriultu' aJ. and pastoral character of the country. It is in increased production ofl'a.,ri- culturail commodities and their transformation by indust-ry rather t'hLn in generalized expansion of industry, that im.porta.nt possibilities eJist to increase real incomne, reduce the present reliance on imported foo'd and. raw naterials, and develop the external market for Costa Ricen commoditiess I-t has Deen esti,-mated that in order to satisfy minimum reqAira.acnts ofE -the Costa 1lican oopulaa: iion.

annual agricultural donsumpti 6ti -..ould have to oe increased over 10- rom about

$39 million to ,100 'illion.'t the present time, over 3T? of all imort-s are foods, and another 22;., are raw materials or prod'.ucts ma('e from materials

lhich could be produced in Costa ;'ica. -54.

150. It should also be possiole to reduce imports by shiftin; cons.i>ption from imported to related domestic products. One possioility, thze suvbstitution of vegetable fats and oils for imported lard, has already been cited. 'heat is another coimmodity rrhich might be replaced in part by loc.:l roducts. 'he consumption of wlheat and w.heat flour, w-hich are more popul-ar in Costa 1ica t a; in other Central American countries wlrith larger Indian populjations, has inuiecsed from 35.5 pounds per capita before the wvar to 57.5 pounds in l?lv It is the most important food item on the import list and foreiign ex:cY1-n:e spent orn 1945 imports of w.heat and flour amounted to ,1.9 million. If -yuca an excee-lin-l'y versatile plant and very popular with the native populatiion, were produced in greater quantity, it could be used, as it already is used to a limited extent, by itself or mixed with wrheat flour, to reduce imports ol w,rheat; and the same is true for corn. Relatively slight changes in processes, such as the pasteurization of milk for butter, as well as increased production, w!ould open foreign markets nowr closed to Costa Rica.

151. In the past 20 or 30 years, Costa Rica has e)ported limited amomnts of vegetables. During the w'ar, largely throul-h the efforts of the Institute of

Inter-.Amervican Affairs, iwhiclh furnished technical and othler assistance, 6,600 tons of vegetables and produce was shipped to the Canal Z,one and made available to Inter-American Highway organizations. There remwins a considerable marhet for fresh vegetables and fruits, particularly tomatoes and pinea3pples, in the Canal Zone, and it is even possible that exports could be made to the United

States. Local preference is for imported canned goods, w-hich accounts for a sizeable proportion of food imports, but a domestic can-ning factory producing quality products might be able to shift consumption, particularly if prices wrere lower than the prevailing high prices for iLported canrned ifoods.

152. In the tropical areas of Costa Rica, favorable climX.ate )errmits a year- round groT-ing season, but this advantage is counteracted by fungi which destroy -55-

plants in the rainy season, 7wrhile insects, particularly grasshoppers, attack

tilem in the dry season. Periods of abundance alternate writh periods of scarcity

for many fruits and vegetables, especi-lly potatoes and tom atoes. In tle case of tomatoes, late fungus blight often causes retail prices to jv-rn from /.10

(j.02) a pound in July to /2 (',.36) a pound in 'ugust. The lack of disease- resistant plant varieties aied adequate insect-control measures, izhich w^-iould have

to cover a u-ride area to be effective and therefore must be of a public nature,

make the supply and quality of vegetables too unstable to periait canning opera- * tions on a regular basis. The ovner of a can factory in Costa Rica assured

members of the Bank's 1,ission that he had adequate supAolies of tinplate to take care of eventualities and a plant already emists 1-which packs preserves and jellies

from local guava and other fruits. ,ince canning factories require relatively

small amoLnts of capital, there would seem to be no major obstacle in the way of expanding canning activities if an adequate supply of produce wrere asstlred through the introduction of disease-resistant plants and proper insect control.

153. In areas where agriculture has been practiced for long periods, soil orosion and the depletion of soil nutrients constitute a serious threat to the

future of Costa Rican agriculture, Haphazard methods of cultivation and unreguw

lated grazing are often conducted on steep slopes wrhich speed the washingwaway of rich topsoil. On the coffee farms, the prevailing method of cultivation has advanced erosion to a point wrhere it has reduced yields in recent years. Crop rotation and the gra-ring of leguminous plants are rare and the composting of barnyard manure was almost unknovn a few years ago. Even in the case of coffee production, where the general practice is as good as in other coffee-producing

countries, coffee farmers told tlhe Dank's representatives that output might be increased considerably through the use of orgenic fertilizer. The extst-ng

scarcity of organic fertilizer on coffee farms might be overcomue if each farm -56_ were to add cattle on its areas not suited to coffee gro.wng. The heavy concentration of aariculturaJ production on the ,.eseta Central has reduced the fertility of its rich soils to a greater extent than any other area. 71here is a need, not only to replenish the land, but to shift production to other areas.

Corn, beans, and rice now groirm on thne .ieseta tCould bb produrced elsmihere Qt

lo,w.er costs,.and cheat corn could-be-used t'or animal feed', edibje-oils ahd-flour.

Greater'.ylelds could also be obtal-ned by relocation of sugar-cane acreage.

154. The absence of adequate bransportation facilities prevents shifts of production to other uncultivated highland areas, such as exisk near the

an-manian border, r.hile miost oi. -,-he loi-wlands are cliriiatically less inviting than the highlanid areas. lNevertheless, the Conpania 3enanera has showrn that the tropical lowlands can be made attractive places for people if they are provided w.ith proper housing, sanitation, elCd recreatLional services. At the present ti!ie, the lowlands,otlantic rvith 13" of' the total land area, contain only 7[' of the population, and evren on the Pacific side, where the Compania TNMananera t s activities have resulted in the influx of many workmen, population equals onl3 r

10' of the total in an area a.pproximating 27, of 'osta Picals land area.

155. T1ne absence of connecting highways and railroads betk;ween most parts of the country and the jieseta Central ancd the lac` of refrigeration are respon, sible also for the present uneconomic concentration of dairyin- on the I;eseta

Central close to consumption zones. r'.he limirted sply of land on the .eseta and the hi£h cost o1 imported feed have prevented the epqansion o" herds -,:hile the absence of refrigerat-ed cars on the railroads malkes it impossible to ship

milk from coastal areas to popuIltion centers. Crowded conditions and poor feeding keep milL production at lowr annuwl levels, estimated at 1500 pounds per head on the averarre compared to 7,000 pounds in the United'States.

There is a great need for inex,-pensive feed concentrates anid action is long overdue on the development of such croPs as yuca (for carbohydrates feeds), sesame, peanuts, and soybeans (for proteins). The last three crors could also furnish vegetable oils, and in the case of soy beans, a cheap source of protein for human beings. The amount of bran for feed could be increased by substi- tuting wheat imports for wheat flour imports and milling the w1heat do.;Iestically.

156. From the information accumulated by the Bank's8ission, it was not clear whether an actual surplus of milk exists in the ret season wlhici is not consumed in the manufacture of butter and cheese and w^rhich could be processed for the anmual period of short supply if facilities for this rurnose were available. It is quite possible, however, that the establishment of a milk processing plant would lift production above present levels as was contended by some informants in Costa Rica. Wlhether, however, the immediate need is solely for a pasteurization plant, as the Bank I¶ission was told, or whether it is more desirable to combine pasteurization wtith the manufacture of powdered or canned milk;, is a technical question. The outcomne of action talken in this area is likely to be more favorable if, before any final decision is made, one of the large foreign operators in the field of dairying were consulted. In the meantime, the National Bank is organizing the dairy industry into a cooperative, through which it hopes to advance the oause of pasteurization of milk. The cooperative is to have a capital of 03 million (34,000), half of which is to be subscribed by its members, 0500,000 ($89,000)by the NJational

Bank, the balance to be raised by a loan from the Government.

157. Modern methods of irrigation, which could open large areas of land for the relocation of agriculture, are almost unknown in Costa R.ica outside the banana plantations. Where irrigation is used, it often takes the form of water splashed on plants with a pan from a random ditch, Certain sections of the country, particularly those adjacent to the Tampisque River, which bisects -58-

Guanacaste Province' seem to be iceally situated for irrigation projects. It has been estimated by one au.thority that a control dam built in the upper reaches of the ILiver w-ould make it possiole to irrigate a miniinum o- 25,000 ecres in the dry season with waters w-!hich no-r flood tlhese lands cL.rin- t'ae rainy season. Successful irrigation in Guanacaste w7ould cut dowrn the toll on lirestock during the long dry season wiuhen insufficient foclder is available for cattle. It w-ould also permit ex-ansion of meat herds anl, incidentll,y, recluce thle need for cattle feed imports and increase the supply of hides for the leather and shoe industry. -here coffee lands could, be irrigated, large yields would be assured., since the size of the crop depends on seasonal rainfall, particularly in the month of larch when the trees flovwer,

158. lthough there is considerable variation in the type o.' farming by region and crop, Costa Rican agriculture has been aptly described as being in the "macihete and o-Xcart" stage of development. P'rianitive farmin, methods have raised production costs and consumer prices and louered yields. On most farms, operations are characterized boy excessive amounts of hand labor, and the introduction of an ox is often a radical innovation. The Institute of Inter- American Affairs reports that the use of a plow drawn by an ox re'uced the cost of land preparation in Costa 3ica to one-third the anount usu2llly spent for hand labor.

159. The ox, therefore, rathwer than automatic farm machinery-, is thle logical replacement for the rakes, shovels, axes, and mnachetes nov in comnon use. Tractors may prove feasible in Guanacaste and certain sections of the

Pacific lowlands writh large holdings of flat land, but most parts of Costa lica can malce better use of animal-drawn implements than of tractors. I tractor has marry limitations. It is expensive to buy and maintain (tractor repair parts and fiel must be imported), requires s}cilled operators (who are scarce in Costa Rica), and is unsuited for use on the steep slopes on vwhich most -59- native farms are located. In contrast, the o0:is ide7lly suited to the cown- try's agriculture: he is cheaper to buy than a horse or mule end is easy to handle; he does not require grain feed and can negotiate the difficult terrain; he provides -aanure for fertilizer and can be sold for beef urhen he is too old to wuorlk. loO. The exploitatilon of Costa uica's timqber resources, however, provides a sector wlhere automatic equipment should replace tne ox. Some of the best forests are located in remote areas which require roads to be cut throu-h to a condition them. * single stand contains mnany types of trees,/,rhich makes it expensive to select and fell specific tylpes only, as is often done at the present time.

Profitable operations would require the fellin- of trees of many types hi-.nich could be directed to various uses, such as the maiu:facture of veneer, plv rood, railroad ties, construction, furniture, fuel, etc. Only large scale opera- tlons, involving considerable capitol investmnen-t in roads, trlcks,, ills and troined personnel could handle operations of the scope required. United States lumber firms have evinced considerable interest in Costa Ricrn timlber,, but legal difficulties have been encountered in obtaining concessions.

161. change from hand labor to ani;nal po-w7er tight also help relieve the chronic labor shortage in Costa Rica, a cordition peculiar to many undeveloped agricultural countries in LTatin America. How,,ever, such a shift is not likely to eliminate the shortage and in any case, would take a considerable amlount of time to accomplish. lHor w-ould a change from hand to animal laoor decrease the great need for technical assistance, the laclc of w7hich partially explains the lou: state of much of Costa kica t s agricultua; indeed any major chanxge in agricultural methods, such as the replacement of hand tools by animal-dra;wn implements, wrould require a greater rather than a lesser number of techniciango _60-

162. The shortege of agricultural labor and technicians could be alle-v:iated in a relatively short time by, imig-ration. The Government has sig,nif'ied its

rillin,ness to accept imamigrants. ITevertheless, present le-,islation prohibit- ing the employment of -fea.rer than 90' of Costa Ricans in an enterprise has the effect of discouraging immigration, even though exce7ptions cnla be raade urder the law. The scarcity of nianpower is so great that the Covernment winho at thle illegal entry of large numbers of ITicaraguans into the countriy to ..ork in agriculture, T-his method of obtaining labor is quite differen;t from the one employed by the Dominican nLepublic, wrhere over 4,000 7uropean faiilies have been settled as the result of an official policy, actively promoted, for the encouragement of immi,-ration.

163. 'Tne lack. of manpoywer also helps explain hThy rosta --ica. las not expanded its fisheries. 1lthough its coasts, particullarly on the .'acific

side, abound lith many varieties o" fish, no or,',.nnized dormestic trade in

fish has ever been established. A;.out 150 fishermen, wrhose fiching activities are secondary to wrork in agriculture or stevedIoring, and trho fish -;-ith the

simplist type of gear frown small sailboats anr dugout canoes, ifurnish a

sporadic supply or fish, some of which f.'inds its wary inlandc TowTever in

spite of the f'act that higher prices have caiused a decline in the per caitta meat consu=T)tion, tho consumption of fres,.h fislh is ne-li-ible in Costa Rica.

Imports of fish, mostly canned and salted, normally anoumt to 700,000 pounds, but prices are above levels most Costa R;icans can afford.

16h. Costa 'ica is the only Central 'merican countr,y ith a fish

cannery, owaned and operated by an 'merican company, w.-hich catches tuna oXf

the coast, mostly for shipment to the United States. Costa `.ica also exYports

an unimportant and declining aimount of sharlk livers, turtles, and other fissh -61- which currently amounts to about half the prewrar level. In 1944 the Govern- ment issued bonds amounting to $400,000 for the rurpose of. establishing a fishing industry but nothing was done with the proceeds to develop the indurtry

Development of fisheries in Costa Rica which could supply inexpersive protein food, feeds and fertilizer, would require the introduction of new fishink methods and improved gear including nets and traps, the purchase of vessels, and the construction of adequate shore facilities for collectingD, handlini, and marketing of the catch. It would also require trained personnel, perhaps best obtained through immigration,

165. To develop agriculture and industry, much can be done within

Costa Rica to adjust its internal policies to meet the need for economic expansion. Too often the nroblem is seen solely as a cuestion of obtaining enormous amounts of foreign capital. Little attention is directed towrard alternative courses by which the country could promote rather than retard its economic development. In this connection, it is a curious anomaly, typical of other

Latin American agricultural countries as well, that agricultural matters heve received only limited attention from the Government. The Einistry of Agri- culture was created in Costa Rica only six years ago in belated recognition of the need and its annual appropriations have been smaller than those of most of the other Government offices, including the Government Liquor Factory. In the past, the practice of employing agricultural teclnicians on the basis of political affiliation rather than merit has impaired the usefulness of the

Ministry. Technicianst salaries have been below those paid in private industry or by the Niational Bank, which has been a far more potent force in Costa Rican agriculture than the Ministry of Agriculture. The l.inistryts political orientation emphasizes the need for an independent agency, such as exists in

Chile and elsewhere, with adeoaate powers and funds to organize and riromote the complementary development of agriculture and industry. ETATFISr:IC;L AP- "D1DX TABLE I

Government Receipts and Excpenditures in Costa Rica

(in thousands of colones)

Year Receipts Expenditures Deficit

1940 41,703 43, 221 1,518

1941 42,603 51, 972 9,369 1942 36,918 48, 513 11,595

1943 50, 35 0 71,542 21,192 1944 52,827 67,018 14,191 1945 60,549 74,439 13,890

1946 62,923 72,155 9,225 1947 88,0o48 92,491 4,443

Source: Costa Rican Ministry of Finance. TABU III

Costa Rican Imports and Exports

(Millions of Dollars)

Year Imports Em1Bx.orts Excess of Imports

1940 11,1. 7r5 3.6 1941 13t8 lot2 3,6 1942 10,3 10o6 0,3

1943 18,5 12,4 6.i

1944 18t8 10t5 8t3 1945 23,3 11,6 11,7

1946 26,6 14,3 1?,3

1947 37.4 23,0 14.4

~/ Less impQrts by the Companie :ananera, for which no outlay of exchange is made by Costa Rica.

Excess of exnorts.

Source: Costa. Rican General Statistical Office. TABL'E IV

Costa Rican Imports

(Millions of Dollars)

Year Tota1 Comnania Bet Imports Bananera I=norts

1940 16,8 5.7 11i I

1941 17t8 4.0 13,8

1942 12,3 2,0 '0,3

1943 20,4 1.9 18.5

1944 21,5 2,7 18,8

1945 26,9 326 23,3

1946 33,0 6t4 26t6

1947 47.8 10.4 37.4

Source: Costa Pic&n CGeneral Statistics Office and Comroania Bananera de Costa Rica TABLE V

Selected Costa Rican Imports in 1946

(Dollars)

Milk and milk products $ 695,581

Wheat flour 1,029,990 Wheat 56,953

Fruits and fruit juice 237,534

Animal feed 146,074

Tobacco and products 198,315

Oleaginous seeds, nuts, etc. 179, 575

Fats and oils 786,431

Perfumes 198,475

Fertilizers 243,832

Paper and paper products 773,565

Textiles 5,055,5284

Clothing 1,894,042

GCasoline.- petroleum, oil and grease 1,014,077

Portland Cement 133,305

Jewelry and precious metals, stones, etc. 127,420 Electric refrigerators 56,819

Autos and accessories 984,764

Miscellaneous, including items cellophane, artificial flowers, -plastic materials, 1,127,831 photographic supplies, postal cards, etc.

Total Imnoorts $33,C000,0OM

Source:: Costa Riean General Statistical Qffice. TABL3E VII

Costa Rican "2ports in 1947

Commodity Dollars Percent

Abaca 193309124 5r78

Bananas 5,555,771 24.13

Cacao 1,642,062 7.L3

Coffee 10,741,665 46.65

Leather 37,-522

Fruits (other than above) 579

Vegetables 9, 442 0t04

Timber 1,256,166 5t46

Honey 57,492 0.25

Oran{ges 4,672 0,02

Gold 59,185 o026

Hides and skins 1,838 otOl

Ipecac 85,317 0,37