Emerging Market Economy in Costa Rica - Case Study Example

Running head: emerging market economy 20nd November Introduction Costa Rica is a country that is located in Central America. The country, whose capital city is San Jose, is bordered by Panama to the Southeast, Nicaragua in the Northern part, Caribbean Sea to the east, and Ecuador to the South. Before Costa Rica came under the rule of Spain, it was sparsely inhabited by indigenous people. Major ethnic groups in Costa Rica include the White, Mestizo, Asian, immigrants, Mulatto, and the Black among others (Jacqueline, 2011). With a population of approximately 4.7 million people, Costa Rica holds 5% of the world’s biodiversity. The country is rich in plants and animals an aspect that has resulted to improved tourism sector that has generated significant amount of foreign exchange. One of the key national parks that have significantly contributed to the Costa Rica economy is Corcovado National Park (Netto and Trigo, 2015). According to World Bank report of 2013, the gross domestic product per capita of Costa Rica stood at US$12,874 PPP. The country growth was negatively affected by the global recession that was experienced in 2008. One of the notable microeconomic strategies that the government of Costa Rica adopted in 2006 was the introduction of a new currency exchange system. Just like in Chile, the new currency system allowed the value of the CRC to float between 2 bands. This paper aims at discussing the various economic concepts in Costa Rica, being one of the emerging market economies in the world. Industrial structure of Costa Rica Before the recent global recession, Costa Rica had a stable economic growth. The country economic growth has not only been attained as the result of tourism, but also as the result of the traditional agricultural exports that includes bananas, sugar, and coffee. In addition, the specialized and industrial goods have recently expanded the country’s export trade resulting to increased level of investment and job opportunities. Tourism industry is one of the major sources of foreign exchange due to the Costa Rica attractive biodiversity (Political structures and sustainable development, 1996). As a major destination of ecotourism, Costa Rica is the most visited country in the region of Central America. The $1.92-billion-a-year tourism industry has positively impacted on the Costa Rica other industries as well as the economy. As a country that in known for its real ecotourism, Costa Rica gets 46% of its tourists from Canada and US, 16% from the European Union (Honey, 1999). According to Travel and Tourism Competitiveness Index report of 2008, the country reached the 44th position globally in the tourism industry. By considering the natural resource criteria, Costa Rica is in 7th position globally (Jennifer and Thea, 2008). Despite the remarkable growth of the tourism sector in the country, the Travel and Tourism Competitiveness Index report indicated that the country’s major weaknesses include security and inadequate ground transport system. Another major sector that has impacted on Costa Rica economy is agriculture. Historically, the country economy was based on agriculture with Bananas and Coffee being major exports. In 1800s, coffee generated significant amount of wealth to the elite class in the country (Itzigsohn, 2000). However, the impact of coffee in the country gross domestic product has extensively reduced to a point of just adding 2.5% to the country’s economy in 2013. However, other parts of agricultural activities have positive impact on the gross domestic product where the sector contributes approximately 6.5% of the GDP (Lee, 1996). Key exports in Costa Rica include potatoes, pineapples, sugar, coffee, rice, tropical fruits, and corn among others. Apart from exporting food products, the country al so exercises livestock farming that includes pigs, cattle, poultry and horses is also practiced. Exports, jobs and energy Costa Rica economic development is not only being based on agriculture but also on other industries such as pharmaceuticals, electronics, software development, and financing outsourcing among others. One of the factors that have made the country an attractive investment location is the high level of education by the citizens. In this way, the country has skilled human resources that provide major sources of labor for the investors and local businesses (Osberg and Xu, 2000). Some of the key investors in the country include Intel Corporation, which has established a microprocessor plant valued at $300 million with a workforce of 3,500 employees. Procter & Gamble, on its part has established an administrative centre in Costa Rica in addition to Baxter Healthcare, and Abbott Laboratories (Situation and prospects of youth in Latin America, 1983). Based on the expansive investment within the free trade zones in Costa Rica, manufacturing and industry sector contributes significantly on the country’s GDP (Ortega, 1984). For instance, in 2006, 20% of the Costa Rica exports were contributed by Intel microprocessor. The company also contributed 5% of the country’s GDP. Another notable aspect that makes Costa Rica to enjoy economic development is its trade activities with Russia and South East Asia. As a country that is known for its high value of attracting foreign domestic investment, Costa Rica became a member of Asia-Pacific Economic Cooperation Forum (OConnor, 2000). It is worth to note that besides the impact of the tourism sector on the Costa Rica, the foreign domestic investments contributed approximately 40% of GDP in 2013. Most of the investment came from US while Spain contributed approximately 6%. Apart from little deposits of coal that have been discovered in Costa Rica, the country has not discovered large fossil fuels. However, through innovation as well as extensive research and development in the country, hydroelectric power plants have been established due to the abundant rainfall especially in the mountainous terrain. The hydroelectric power plants provide sufficient energy to run major industries in the country. It is worth to note that the country also exports the excess energy to Central America. Macro-economic indicators for Costa Rica GDP Costa Rica has progressively experienced an increase in GDP due to the government effort to attract investments that have resulted to emergence of industries and job opportunities. The table below indicates the level of GDP for the last 10 years. Figures in billion USD 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 18.6 19.96 22.55 26.32 29.84 29.38 36.35 41.03 45.13 49.62 Based on this data, it is clear that within the last 10 years, Costa Rica economy has doubled. This is attributed to the introduction of new industries by the government, increase in foreign investors, relatively high education of the residents and political stability (Arora, 2014). With this trend, there is an indication that the country will attain a significant growth in the next 10 years. Balance of payment Costa Rica has historically experienced problems in reference to balance of payment as the result of vulnerability of the country sources of foreign exchange fluctuations globally. In 1970, Costa Rica experienced increment in foreign capital receipts but the country payment problems occurred due to domestic inflation policies as well as increased trade imbalances. In 1990s, the country trade balance was experienced due poor coffee prices in addition to the high oil prices. However, in 1999 through the government interventions the balance of payment leveled. One of the notable strategies that the Costa Rica government has adopted to increase the foreign direct investment in order to offset the chronic trade and deficits in the current account. The table below indicates the Costa Rica balance of payment from 2002 to 2012. Figures in billion USD 2002 2004 2006 2008 2010 2012 0.54 0.56 1.7 1.8 0.9 1.479 Imports/Exports As noted earlier, major products that are exported by Costa Rica includes bananas, melons, pineapples, sugar, ornamental plants, electronic items, textiles, and medical products among others. Based on the increased need by the government to increase the number of trade partners, Costa Rica has provided ample business opportunities for the investors. Key export partners are United States 42.7%, Guatemala 4.3%, Hong Kong 6.9% and Netherlands 6.4%. In 2006, Costa Rica exports were estimated to be $ 7.931 billion (Shields and Henderson, 2003). Just like any other emerging economies, Costa Rica imports various products that are used in its industries. Major commodities that the country imports include petroleum, raw materials, capital equipments, and consumer’s goods (Paugam, 1998). Notable import partners include US - 41.3%, Japan-5.7%, Venezuela-4.9%, Mexico -4.8%, Ireland-4.6%, Brazil-4.2%, and China 4.3%. In 2006, Costa Rica imports stood at $ 10.88 billion (Lederman and Lederman, 2010). The table below indicates the amount of exports and imports in Costa Rica for the last 10 years. Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Jan-Sept Exports 3055 3598 4132 4580 5679 4699 5178 6099 7236 7223 5330 Imports 3333 3415 3844 3941 3938 5611 8697 10115 12045 11915 7888 As indicated by the table above, the amount imports indicate a lowing trend while the country increases its exports. This implies that the country economy is improving and that is why the country is in a position to export more products. Inward/outward FDI Foreign domestic investment (FDI) refers to net flows of investment from another economy and not that of the investor. Some of the major aspects of FDI are equity capital, reinvestment of earnings, short-term capital, and long-term among others (Christopher, 2013). The table below indicates the FDI values for Costa Rica from 2005 to 2011. 2005 2006 2007 2008 2009 2010 2011 -0.22 0.44 1.00 0.02 0.03 0.07 0.14 From the above table, it is clear that Costa Rica received the highest value of FDI in 2007 and the lowest in 2005 (Paus, 2005). Since 2007, the country has experienced FDI value of less than 1an indication of growing economy. Inflation When measured by the consumer price Index, inflation indicates the annual percentage in terms of the cost of acquiring certain goods and services (Arias, 2001). . As an emerging economy, Costa Rica rates of inflation have been in a dropping trend for quite some time. The table below indicates the rates of inflation from 2004 to 2014. 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004-Oct. 13.9% 13.7% 11.55% 8.0% 13.5% 7.6% 6.1% 5.0% 4.0% 5.1% 5.7% For the last 10 years, the level of inflation depicts a reducing trend apart from in 2008 during the global recession. Even though up to the month of October 2014, the inflation rate has increased to 5.7%, at the end of the year the rate is likely to reduce through the intervention of the Central Bank of Costa Rica. Unemployment With the increased investment by local as well as foreign investors, the level of unemployment in Costa Rica has been reducing over the years (Greenwood, 1989). The table below indicates the rate of unemployment in the last 10 years. 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 14.9% 14.3% 14.4% 13.4% 14.12% 12.3% 11.4% 10.4% 10.4% 9.6% 9% The table portrays a decreasing trend in the rate of unemployment for the last 10 years. With the current government investment policies, more young people will be hired by the investors, further reducing the level of unemployment (Philippou, 2010). Political and legal structures of Costa Rica The system of governance that is used in Costa Rica consist the executive, legislative and judicially. There is a separation of power between each branch of the government and thus they operate on check and balance (Nez and Palmer, 1998). Costa Rica has seven provinces for example Limon, Puntarenas, Guanacaste among others which are further broken down into cantons. The cantons are similar to the current counties in United States. Cantons are then divided to territories which are governed by the municipal government (Schneider, 2009). Costa Rica has a total of 81 municipal governments who get to the office through majority vote and thus they control the country though the central government is responsible for everything (Blanco, 2010). The Supreme Tribunal of Election which is concerned with election matters is seen as if it is another branch of the government since it has the power and security to make sure that election are effectively supervised in that period. The executive branch comprises of the president, the vice president and the cabinet. The president is elected in every four years where the Costa Rica residents have to excise their democratic right. The president is the head of the government and thus has the mandate to appoint the vice president and the cabinet. On the other hand, the legislative branch which is termed as unimerical legislative assembly has 57 seats (Bethell, 2008). The members of legislative are elected by residents of Costa Rica where they only have two sessions that is in May up to 31st June, the next session is from September up to 30th November. The legislative has six commissioners who are responsible for analyzing and evaluating the proposed laws being judicial affairs, budgeting, and taxation among others. The legal system of Costa Rica is related to Spanish civil system which is independent from the other two branches. The Spanish civil system of law is different from that one of England and United States. The case laws is common on the legal structure since it is actually generated by the judicial system, the laws that are passed by the legislative are later used in courts. The Supreme Court is the highest court in Costa Rica and thus all the other courts are under it which means that the final decision will be passed by the Supreme Court (Nelson, 2005). The court system is comprised of lower courts, trial courts, appellate court and the Supreme Court. Due to the court system, delay has always been experienced and thus it has been criticized due to that serious problem. Backlog of cases has been experienced for a long time since the government lacks the required resources to modernize the judicial system so that it can provide justice to individuals (Jensen, 2009). The Supreme Court has chambers that they operate with for example commercial and civil law which is concerned with administrative issues and is allocated seven magistrates. The second chamber is administrative and labor law which is concerned with family issues, labor issues and estates (Russomando, 1982). The chamber is provided with five magistrates who preside over (Makas, 2011). The third chamber is criminal law which contains five magistrates and is commonly concerned with criminal cases. The last chamber is constitutional law which is concerned with constitution matters. In my opinion, the political and legal structure of Costa Rica can be best suited with the Nazi regime where dictatorial form of the government was being used. The legal structure is the worst and this is the reason it can be suited by Nazi regime where power belonged to one individual and justice was never prioritized (Hoffmann, 2004). Like wise due to ineffective Costa Rica legal structures cases delay due to lack of modernization causing a lot of problems. Conclusion Costa Rica is a country that has realized that for a country to attain economic development; external borrowing is not the overall strategy. Foreign Domestic Investment has been one of the major aspects that have made the country to attain a sustainable economic development Triest, 1998. In addition to the tourism sector which is quite developed in Costa Rica, the country has relied on the foreign exchange from countries such as Netherlands and Russia to maintain a stable economy. Costa Rica economy development is indicated by reduced unemployment, reduced rate of inflation, increased exports and reduced imports among other indicators. There is need to improve the political system of Costa Rica to ensure that the economic achievements being experienced in the country are sustainable. References Arora, A. (2014). The impact of globalization and multinational corporations on the secondary school system in Costa Rica and its implications for educational leaders. Los Angeles, California: University of Southern California. Arias, O. (2001). Are men benefiting from the new economy?: Male economic marginalization in Argentina, Brazil, and Costa Rica. Washington, D.C.: World Bank, Latin America and the Caribbean Region, Gender Sector Unit. 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