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Peace and political stability give Costa Rica a head start in Central America. Biodiversity is shaping ecotourism. The future lies in computer chips, software and free trade with the U.S.

San Jose, the historic capital of Costa Rica since 1835, lies in a once quiet and lonely valley on a mountainous central plateau surrounded by evergreen pastures and coffee plantations. Graced by a benign climate, Costa Rica's 4 million Spanish-speaking people are a paradigm of success in Central America: since the late 19th century political stability has ensured a high standard of living, despite dependence of one-in-five families on agriculture in a country the size of West Virginia. The armed forces, a drain on many Central American states, were disbanded as long ago as 1948, allowing successive governments to invest in education and health -- Costa Rica was an island of calm in the 1980s when conflict reigned elsewhere. Land ownership is widespread. The population, one in three are under 14, is well educated and hard currency earnings flow in from tourism, business services and electronic exports.

Although GDP growth has been modest at 3%, since 2000, poverty has been substantially reduced over the past 15 years, and a strong social safety net exists, with inflation curbed to 10% a year. More than $2 billion foreign investment has poured in over the past two years, 70% of it from the US, admiring Costa Rica's political stability and literate workforce, while tourism has avoided heavy fallout from the tragic events of September 11th. Over half the 1 million tourists a year come from the US - also the destination for 50% of exports. Although coffee and bananas are now hit by low commodity prices, Costa Rica scores as a hub for business services, including call centers and back-office operations for multinationals.

With both a Pacific and Caribbean coastline, Costa Rica, sandwiched on the isthmus between Nicaragua and Panama, is rich in bio-diversity, with rivers, volcanoes and more than a quarter of the land mass occupied by over 50 nature reserves and national parks. The government is seizing the ecotourism niche, offering trekking, rafting, canopy tours of the forest and outdoor sports as well as beaches. President Bush said, on January 17th, he is ready to conclude a free trade agreement with Costa Rica and four other Central American states, singling out Costa Rica for transforming its economy in the past decade from one based "on bananas and coffee to one powered by computer chips and software." An eventual deal will lead to a de facto expansion of the North American Free Trade Agreement that groups Canada, Mexico and the US. The biggest potential obstacle is Costa Rica's competitive advantage in cheap labor and agriculture, which infringe on powerful US interests.

In April, a new head of state succeeds outgoing President Miguel Angel Rodriguez Echeverria, a lawyer and economist, with a run off pending between Abel Pacheco of the ruling Social Christian Unity party (PUSC) and Rolando Araya of the opposition National Liberation party (PLN). A third-party candidate Otton Solis, who favors protectionist measures for farmers and traditional industries, gained enough ballots to force a second round of polling. The two traditional political parties that have alternated in power for over 70 years. Now they must work with Solis and his Civil Action party (PAC), because his group holds the balance of power in the legislature. Echeverria won in 1998, pledging to open the country up to more trade and privatize many state-run institutions, including banks and the national liquor production plant. He combined the ministries of foreign trade, economy, science and technology into a super-ministry aimed at modernizing Costa Rica for the new world order.

The government's major economic headache is a persistent fiscal deficit that pressurizes debt and inflation. Despite these twin challenges, Echeverria leaves a legacy of progress in privatization and trade liberalization, although the major public utilities are still state owned. Foreign currency reserves have grown and the president did not fall into the trap of making "unpayable promises" for the future. His emphasis was on controlling expenditure in a responsible way, but also to increase income. Stung by its conscience the government set up a 1 billion colones agricultural trust in 2001 to disburse relief for small farmers saddled with debt in order to keep farm hands on the land.

"Conscious of increasing globalization and developments in new technology, Costa Rica is working to a new development model that is knowledge-based and seeks to create companies that use technology and skilled labor," the President told technologists at a seminar in October 2001. "More than 150 companies, and foreign investment, have made us the biggest exporter of hi-tech products from Latin America to the US." Echeverria exemplifies other achievements: the teaching of technical English to the work force and that 60% of education centers with IT suites also offer students free Internet access. As part of an ambitious strategy for e-government, state purchasing ledgers are becoming more transparent, with details of all financial transactions by government open for inspection on line. "We don't need 20 years to be clean," says Echeverria, extolling the virtues of fighting corruption, cutting redtape, reducing costs and boosting efficiency.

International investors showed confidence in Costa Rica's macroeconomic management by underwriting a $250 million 10-year bond issue, lead managed by Deutsche Bank, in January. It's targeted at rescheduling on finer terms some of the government's more expensive $5.5 billion domestic debt. Total debt, including external creditors, is $8.7 billion - that number consumes 40-45% of GDP "This is a subject we need to sort out, but Costa Rica is totally up to date with its debt re-payments, " says Central Bank president Eduardo Lizano. "We don't owe the IMF even one cent and we have been paying off our debts to the World Bank."

ONE OF COSTA RICA'S BIGGEST ATTRACTIONS TO FOREIGN INVESTORS - NO FOREIGN EXCHANGE CONTROLS

Foreign exchange controls were abolished in 1993. " We are more open than Chile, for example, as there they tax the movement of capital," says Lizano. "In Costa Rica we have no such restrictions or taxes. This is one of the elements that helps us bring investment from abroad." Internally, the Central Bank works hard at improving the quality and transparency of the financial system through bank regulation. Lizano takes pride in the IMF's accrediting Costa Rica in November as the 50th country to subscribe to its Special Data Dissemination Standard - recognition of the accuracy of government data about its public finances.

Looking ahead Lizano singles out inflation management as a key priority -- the target is to reduce 10%-but-stable inflation to international rates, while maintaining full transparency and keeping the financial sector under control. The major challenges for the new government include modernization of infrastructure - roads, air and seaports - and to unstick the sluggish state monopolies in insurance, electricity generation and telecommunications. "We may well have to open these markets, as happened in banking," says Lizano, "but we want to maintain our stability above all. Costa Rica is a good example politically, with its well-run institutions, press freedom and human rights record. Maybe it is the best in the region."

Foreign investors that already operate in Costa Rica and are making long-term commitments to its economy include US computer hardware manufacturer Intel. Toronto-based Four Seasons Hotels & Resorts is planning a beach hotel and golf resort development, while household products manufacturer Procter & Gamble has based its service hub for Latin America in Costa Rica. "Here they have accounts, technology, sales, human resource management -- important for the quality of people they bring here," says Lizano. "Many other corporations have done the same, building business services or caller centers for their Central and South American operations. So we are exporting services."

PROPOSED US FREE TRADE AGREEMENT PUTS COSTA RICA IN THE FAST TRACK

Lizano supports the proposed US free trade agreement, the authorities already having such deals with Canada, Chile, Mexico and other nations. "If the US opens the possibility that Central America, as a block, has access to the US this will be incredibly significant," he says. "It will put us on the fast track"

The Costa Rica Investment Board (CINDE), a private and not-for-profit organization with offices in San Jose, New York and California, is charged with attracting foreign direct investment iin three strategic sectors - medical equipment, electronics and business services. It also concentrates on special projects in textiles, tourism and other areas of interest, seeking to create jobs, empower technology transfer and diversify exports. "As a rule, foreigners have exactly the same rights as locals for conducting business in Costa Rica. Companies and individuals can establish operations in several ways and in almost every industry without limitations," says Anabel Gonzalez, General Director of CINDE. " We work as a catalyst and facilitator for the investment process. From its non-political, non-sectorial interest position, CINDE has excellent relations with both public and private sectors."

More US tourists visited Costa Rica last year than in 2000, despite September 11th and recession in Europe and Japan. Walter Niehaus, Minister of Tourism, is confident of 3-4% growth in 2002. Following September 11th, Niehaus appealed on national television for "an act of common sense and solidarity from Costa Ricans to drop their rates and tariffs, and to practise a kind of national tourism." The government's commitment to the environment was recognized in the Environment Sustainability Index released to the World Economic Forum, where Costa Rica came ninth of 142 countries in the study, a Yale center and Columbia University joint project. "In a small territory like Costa Rica you can find a lot to do," says Niehaus. "We are a multi-destination that promotes ecotourism but with sun and beach. You can enjoy the beach for a few days and then go explore the bio-diversity. See the flora and fauna from above the treetops!"

After September 11th, Costa Rica researched the US market through tourist focus groups only to find that Americans view Costa Rica as peaceful country, with a reputation of friendliness towards visitors. More than half the tourists return for a second visit and over 40% go three times. "Ecotourism doesn't just mean we have jungle here," says Niehaus," you can stay in comfort whether you visit the beach, the national parks or go to the Arenal volcano. Where else in the world can you breakfast by watching sunrise over the Atlantic, go to a volcano and have lunch, then see the sun set over the Pacific coast." Costa Rica offers a range of hotels from one- to-five star, from small family-owned properties to the multinationals and even boutique hotels. "You can feel safe and warm in a family environment, having great contact with not only nature but also with the communities of Costa Rica," says Niehaus.

Investment in Costa Rica's tourism rose 800% in 2001 compared to the previous year with seven new hotel chains including not only Fours Seasons but also Marriott, Hampton Inn & Suites and Comfort Inn. "This shows there is trust in Costa Rica as a tourist destination," says Niehaus, "otherwise these companies wouldn't be investing their money here, and that alone restores confidence." Post-September 11th Costa Rica also benefited from a wave of visitors from Latin America too timid to fly to the US. These visitors could indulge in Costa Rica's shopping malls and find all the products on sale in the US at competitive prices.

Costa Rica is escaping the downward slide of world coffee prices by aiming at the gourmet market. It's the first global producer with an independent quality certification scheme and is placing more of its exports direct with roasters and retailers. Additionally, Costa Rica invested $100 million-plus in an environmentally friendly milling process. While world coffee consumption is growing at 1.5% a year, specialty coffee consumption -- the Starbucks phenomenon -- is expanding at over 15% annually.

Costa Rica's Specialty Coffee Association, is leading the quality assurance scheme. Participants pay for an independent inspector to verify every part of the production cycle and ensure they conform to certain standards. The final stage is a tasting by an expert panel. In 2001, six producers took part and Starbucks bought the entire offer for $1.25 a pound. The Costa Rica Coffee Institute (Icafe), the country's private sector coffee council, is also backing the shift to quality. It has joined Columbia, El Salvador, Honduras, Nicaragua and Mexico in a plan to remove five per cent of the lowest-quality coffee from the consumption chair. Growing low-quality Robusta coffee in Costa Rica is now illegal and 80% of its cash crop is highland coffee. "Quality remains the fundamental pillar to move us forward in times of low prices and to secure a future for our industry," says Juan Bautista Moya, Executive Director of Icafe.