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Who Says the Chips Are Down?


San Jose South. That's what proud Costa Ricans have dubbed their nation's capital, in a nod to its reputation as Central America's answer to Silicon Valley. Since 1997, when Intel Corp. (INTC) opened a $370 million plant on the outskirts of town, Pentium chips have become Costa Rica's No. 1 export, eclipsing coffee and bananas. The Intel investment has created a high-tech halo effect as well. The capital is home to more than 140 locally owned software-development companies, with annual overseas sales in excess of $50 million--a pittance by U.S. standards, but not bad for this $16 billion economy. Enthusiastic policymakers have even assigned all Costa Ricans an e-mail address: Those without PCs can use the terminals at local post offices.

The policy is highly enlightened. And until now, highly successful. But the country's commitment to high tech is being tested. A global slump in computer sales will slash output at Intel's plant to around $800 million this year, just one-third of its 1999 peak. "A lot is caused by the downturn worldwide," says manager Pat Raeburn. But Intel hasn't laid off any of its 1,800 employees. "We're busy developing new products," she says.

"BAD YEAR." Because of the sharp drop in chip exports, the Costa Rican government expects the economy to grow just 0.5% this year--quite a letdown after rates of more than 8% during boom times. "This is going to be a bad year," admits Anabel Gonzalez, general director of the Costa Rican Investment Board. "But the only way for a small economy like ours to advance is to integrate with the world economy, for better or worse."

The slump throws into sharp relief other obstacles to Costa Rica's high-tech ambitions. For instance, the telecom infrastructure badly needs investment, with just 17 fixed phone lines per 100 inhabitants, compared with 65 in the U.S. And Internet users complain that e-mail often goes missing.

Despite such shortcomings, a government attempt to privatize the national telephone monopoly failed last year. That may prove costly, according to Science & Technology Minister Guy F. de Teramond. "Without a powerful telecommunications infrastructure, we don't have a technological future," he says.

For now, the government is stuck with footing the bill for improvements. It has promised to add 100,000 digital subscriber lines before yearend, at a cost of $100 million. That should lower the monthly bill for a high-speed Internet link from $900 to $40, which is welcome news to Eduardo Wheelock, president of Sysde, a local company that writes software for the financial-services industry. "We developed an e-business product that we can't test or launch in Costa Rica because the telecommunications are so bad," he says.

Although Costa Rica is in a tight spot right now, the government still deserves credit. Its mid-1980s decision to slash tariffs on computers from 133% to just 10% was key. The country continues to outspend most other Latin nations in education: By law, outlays must amount to 6% of gross domestic product. The government recently teamed up with the U.S. Chamber of Commerce and the American Embassy to provide advanced English-language training to 3,000 people a year.

And despite the tough odds, some of Costa Rica's high-tech entrepreneurs have scored coups. A decade ago, Carlos Araya, a professor in computer engineering, and four of his students holed up at a coffee farm outside of San Jose to write some software. They came up with a program that almost completely automates the task of upgrading software applications to new platforms and technologies. Their work caught the eye of Microsoft Corp. (MSFT), which on July 23 inked an investment deal with their company, ArtinSoft, to provide programmers worldwide with a specially designed "wizard" for upgrading to Microsoft's new Web-design software. Impressive: Now if only the chip orders could start flowing again. By Geri Smith in San Jose, Costa Rica


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