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DE RUEHSJ #0774/01 2692326
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O 252326Z SEP 08
FM AMEMBASSY SAN JOSE
TO RUEHDG/AMEMBASSY SANTO DOMINGO IMMEDIATE 1597
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC IMMEDIATE
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE IMMEDIATE
RHEHNSC/NSC WASHDC IMMEDIATE
RUEHC/SECSTATE WASHDC IMMEDIATE 0134

UNCLAS SAN JOSE 000774 
 
SENSITIVE 
SIPDIS 
 
COMMERCE FOR SECRETARY'S OFFICE 
SANTO DOMINGO PLEASE PASS TO SECRETARY GUTIERREZ'S PARTY 
DEPT FOR WHA, WHA/CEN, WHA/EPSC AND EEB 
PLEASE PASS TO USTR AMALITO AND DOLIVER 
 
E.O. 12958: N/A 
TAGS: CS ECON ETRD OVIP PGOV PINR PREL
SUBJECT: SCENESETTER FOR SECRETARY GUTIERREZ,S VISIT TO 
COSTA RICA 
 
¶1.  (SBU) SUMMARY: Embassy San Jose warmly welcomes Secretary 
Gutierrez, the first USG cabinet-level official to visit 
Costa Rica since HHS Secretary Leavitt in March 2007. 
Secretary Gutierrez,s visit comes as the Arias 
administration is into its third year, feeling embattled by 
challenges on CAFTA, the economy, domestic security, and 
early political maneuvering for the 2010 national elections. 
If Arias and his team can maintain their focus and unity, 
however, there are still opportunities for success ahead. 
CAFTA implementation should bring additional investment and 
trade, cement Costa Rica,s place in the regional and world 
economy, and help the country ride out the crisis caused by 
rising energy costs and U.S. economic woes.  Merida 
Initiative assistance, coupled with pending domestic security 
legislation, should leave Costa Rica safer and better 
equipped to confront transnational crime.  Improved budget 
management, new legislation and better planning should begin 
to make badly-needed improvements to Costa Rica,s national 
infrastructure.  A we-are-with-you, you-can-do-this message 
may help President Arias and his team stay on track. 
Although determined to make his mark on the international 
stage, Arias,s most enduring positive legacy could be right 
here at home.  END SUMMARY. 
 
=========================== 
CAFTA CONTINUES TO CONFOUND 
=========================== 
 
¶2. (SBU) By the end of August, when the national legislature 
completed action on the 12th of 13 CAFTA implementation 
bills, entry-into-force by the (extended) October 1 deadline 
seemed within reach.  Under new, more moderate leadership in 
the legislature, even the PAC opposition party wanted to put 
CAFTA behind it and get on to other initiatives.  The 
September 11 ruling by the Constitutional Chamber of the 
Supreme Court, which blocked action on the 13th CAFTA bill, 
thus came as a shock to all sides.  The Court ruled that one 
section of the bill on IPR and biodiversity issues was 
unconstitutional, because the GOCR did not consult with Costa 
Rica,s indigenous communities, in accordance with ILO 
Convention 169, about CAFTA-generated changes in the existing 
biodiversity law that could affect those communities. 
 
¶3. (SBU) The Court decision re-galvanized the Arias 
administration, its pro-CAFTA allies in the legislature and 
the private sector into action.  The relevant committee in 
the legislature has stripped the offending clause from the 
CAFTA bill; full plenary debate follows and another 
Constitutional Court review is possible.  On September 16, 
Minister of Foreign Trade (COMEX) Marco Vinicio Ruiz opened a 
dialogue with USTR on the GOCR,s proposed way ahead, which 
included meetings in Washington on September 22 and 25. COMEX 
has also taken some preliminary (and positive) soundings with 
the other CAFTA partners about a further delay. 
 
¶4.  (SBU) The GOCR has not (yet) asked for a date-specific 
entry-into-force (EIF) extension, just USG understanding and 
flexibility.  Once the USG agrees to another EIF delay, the 
GOCR believes the other CAFTA countries will follow suit.  In 
a September 19 letter from President Arias to President Bush, 
and in private conversations with the Ambassador and Emboffs, 
senior GOCR officials have made clear they are determined to 
amend and complete the final CAFTA law as quickly as 
possible.  After the Pathways to Prosperity Summit in New 
York on September 24, Arias told the media that he hoped to 
have CAFTA wrapped up by the U.S. elections.  Minister of the 
Presidency Rodrigo Arias reiterated this timetable to the 
Ambassador on September 25, but it may be optimistic.  Our 
best guess:  Costa Rica may need until the end of the year to 
finally enter CAFTA into force.  The delay is not all bad 
news, however; it allows both sides to wrap up a few pending 
technical issues as well. 
 
================================= 
THE ECONOMY: NEW CHALLENGES . . . 
================================= 
 
¶5. (SBU) The Costa Rican economy continues to post positive 
economic growth, but slower than in 2007.  Minister Arias 
(the president's brother) told the Ambassador on September 25 
that real GDP growth for 2008 should be approximately 4.0 
percent, down from 8.8 percent in 2007.  While unemployment 
may remain low, near 5 percent, inflation may rise 
 
 
significantly, due to the worldwide food and fuel price 
crisis.  The inflation rate was 8.5 percent in 2007, but has 
reached 15 percent over the last six months.  Minister Arias 
predicted to the Ambassador in June that nine percent of 
Costa Rica,s 2008 GDP would go to fuel costs, nearly double 
the 2007 total of 5.5 percent.  This is not where the Arias 
administration expected to be entering the last two years of 
its term, and not where the Arias brothers wanted Costa 
Rica,s economy to be with a U.S. economic crisis brewing. 
 
¶6. (U) Exports continue to drive Costa Rican economic growth, 
and traditional agricultural products (primarily coffee, 
pineapple, sugar cane, and bananas) are doing well, backed by 
high added value goods and services, including microchips 
from Intel, and regional back-office operations by Western 
Union, Proctor and Gamble and HP.  However, the government 
and private sector worry about the eventual impact of the 
U.S. economic crisis, especially on the tourism sector (still 
a major earnings generator and job creator) and the real 
estate industry (which depends heavily on U.S. and Canadian 
investors and retirees).  In addition, Costa Rica,s 
cumbersome and hyper-legalistic bureaucracy impedes business 
development and investment.  In the World Bank,s 2008 Doing 
Business Index, Costa Rica ranked 115th (out of 178) on the 
ease of doing business, 113th on starting a business, 158th 
on protecting investors and 162nd on paying taxes.  Despite 
these impediments, in 2007, Costa Rica attracted the second 
largest amount of FDI in the region, after Chile ($1.8 
million), according to UN statistics. 
 
¶7. (U) The good story in the GOCR financial picture is the 
Finance Ministry's stewardship.  Government tax revenues have 
increased due to astute management of collections, spending 
scenarios and multi-year budgeting, with the GOCR realizing a 
surplus in 2007 for the first time in 50 years.  On-site 
advisers from Treasury's Overseas Technical Assistance 
programs have played a major and positive role in this 
success. 
 
====================== 
. . . AND OLD PROBLEMS 
====================== 
 
¶8.  (U) Even without the fuel and food price crisis, the GOCR 
needs all the revenue it can collect and investments it can 
attract.  Public infrastructure improvement remains the most 
daunting challenge.  Highways, airports, ports, electrical 
capacity, waste treatment and wireless telecommunications all 
suffer from years of negligence and limited capacity, slowing 
development.  The lack of coordinated local, regional or 
national development plans and unbridled development, 
especially in the high-end resorts along the northern Pacific 
Coast, compound the problem. 
 
¶9. (U) A proposed IADB Bank loan of USD 850 million promises 
relief to the beleaguered highway system (if approved by the 
national legislature).  An ambitious mega-port scheme may 
finally revamp the major (but tumbledown) Caribbean port of 
Limon, but financing is a challenge and a new concessions law 
should be completed first.  Houston Airport System,s winning 
the rights to complete development of the major international 
airports in San Jose and Liberia is good news and will bring 
long-needed expansion, but only if the GOCR,s dense 
regulatory system approves.  CAFTA, plus free trade 
agreements with the EU (under negotiation) and China 
(planned) will place more pressure on the creaky national 
infrastructure. 
 
========================================== 
LOOKING FOR &FRIENDS8 IN THE WRONG PLACES? 
========================================== 
 
¶10. (SBU) To ease the budgetary pain caused by rising fuel 
prices, the GOCR agreed in principle in July to join 
Petrocaribe.  The Petrocaribe deal would allow Costa Rica to 
purchase crude from Venezuela at 40 percent of the price 
within 90 days followed by payment of the remaining 60 
percent over a 25 year term at 1 percent interest.  The deal 
has no effect on reducing prices to the consumer; it simply 
&manufactures8 government revenues from the payment terms. 
The GOCR originally proposed to "escrow" the proceeds from 
crude transactions into a trust fund for the future payments, 
but this has fueled a debate in the legislature about how 
 
best to use the "found" revenues.  The GOCR hopes to join 
Petrocaribe before the next summit of that organization, in 
December.  Negotiations have been slow, however, and it is 
not clear whether the notoriously slow national legislature 
can approve membership in time. 
 
¶11. (SBU) Media and public opinion have been divided on the 
issue, with some commentators and politicians voicing 
concerns about the future &political8 price of joining 
Petrocaribe.  Senior officials in the MFA and Presidencia 
insist the GOCR is going into this deal with eyes wide open, 
however, with no intent to take more drastic steps such as 
also joining ALBA.  GOCR officials describe joining 
Petrocaribe as &economic pragmatism,8 given the high fuel 
prices worldwide and that Venezuela is already Costa Rica,s 
major supplier of crude oil (87 percent of its imports). 
 
================= 
THE PEOPLE WORRY 
================= 
 
¶12. (U) Economic concerns have overtaken rising crime as the 
major worry of Costa Ricans.  In the national UNIMER poll 
conducted August 28-September 4, 44 percent of those surveyed 
listed the economy/cost of living as their top preoccupation 
(up from 28 percent in March).  Sixteen percent listed crime 
and violence.  Eighty-four percent viewed 2008 (thus far) as 
economically worse than 2007; seventy-five percent expected 
2009 to be worse, still. Not surprisingly, the overall 
ratings for President Arias and his administration have also 
suffered, with 29 percent of those polled rating his 
performance as good or very good (down from 50 percent in 
March and a steady 45 percent since August 2006).  His 
confidence rating has also dropped to its lowest in this 
administration.  Over half of those polled said the GOCR was 
doing a poor job of protecting citizens, security. 
Politicians and pundits acknowledge to us that most recent 
Costa Rican administrations have lost support at their 
half-way mark, but the decreases for Arias have been 
precipitous. 
 
¶13. (SBU) Rising crime and a broken judicial system continue 
to worry Costa Ricans, however, with good reason. Although 
crime rates here are less than elsewhere in Central America 
(e.g., a homicide rate of 8 per 100,000 persons versus the 
region's rate of 36 per 100,000), they are higher than in the 
U.S. (5 per 100,000 persons).  They also illustrate a 
deteriorating security picture in a country where case 
resolution rates have plummeted.  In 1995, there were 143 
crime events per 100,000 with a resolution rate of nearly 25 
percent.  In 2007, the crime rate was 887 per 100,000 persons 
with a resolution rate of just over two percent.  Although 
Costa Rica may not be as dangerous as its neighbors, it is no 
longer as safe as it once was, and its current legal-judicial 
system is not up to the challenge. 
 
=================== 
US ASSISTANCE FLOWS 
=================== 
 
¶14. (SBU) Although Costa Rica is economically-developed 
enough to have &graduated8 from most forms of USG 
assistance, it still needs help, especially on security 
issues.  From 2004 to 2007, overall USG assistance to Costa 
Rica, including regional programs such as CAFTA trade 
capacity building and a large debt-for-nature swap under the 
Tropical Forest Conservation Act, fluctuated annually from 
USD 27 million (FY 2004) to USD 5.9 million (FY 2007).  Under 
the Merida Initiative regional security plan, Costa Rica will 
receive USD 4.3 million in security- and 
law-enforcement-related funding in FY08 funds alone, another 
USD 9.4 million in FY09, and significant funding in FY 2010. 
For FY 2008, the majority of this assistance will help 
modernize and refurbish the Costa Rican Coast Guard, with 
healthy amounts of assistance also going to/for the national 
police, improved border inspection equipment and training, a 
regional fingerprint system, a regional center for drug crime 
intelligence, firearms destruction and improved prison 
management. 
 
¶15. (SBU) The Merida Initiative builds on close and 
successful bilateral counternarcotics cooperation with Costa 
Rica. In 2007, the GOCR interdicted more than 30 tons of 
 
cocaine and 4.5 tons of marijuana, coming in second only to 
Panama among Central American countries in the 
amount of cocaine seized in 2007 and 2006.  In 2008 to date, 
the GOCR has interdicted nearly 16 tons of cocaine and over 
USD 800,000 worth of seized assets.  These numbers hint at 
what Costa Rica could do with more and improved resources, 
but they also indicate the magnitude of the challenge.  The 
USG estimates that approximately 60-75 percent of the drug 
flow from South America to Mexico and the United States runs 
through Costa Rican territory or national waters. 
======================== 
THE PRESIDENT COMPLAINS 
======================== 
 
¶16.  (SBU) Facing all these challenges, down in the polls, 
and disappointed by the latest CAFTA setback, President Arias 
has been critical in recent public comments.  In a Washington 
Post op-ed on August 16, he called the Merida Initiative 
&stingy8 in light of what the USG is spending on the wars 
in Iraq and Afghanistan.  During a swing through Europe in 
early September, Arias lauded Venezuelan President Hugo 
Chavez for his &generosity8 and asserted that Venezuela is 
providing Latin America and the Caribbean assistance &at 
least four or five times higher8 than that from the U.S. 
When Russia deployed two TU-160 bombers to Venezuela later in 
the month, Arias claimed the move was &justified8 in light 
of NATO,s pressure (via Georgia and the European missile 
defense initiative) on Russia.  At home, meanwhile, Arias 
used his national day speech on September 15 to emphasize how 
&tired8 he was of the criticism of his administration, of 
constantly confronting obstacles to his initiatives and of 
Costa Rica,s overall &ingovernability.8 
 
¶17.  (SBU) Commentators and Embassy contacts were as 
perplexed and surprised by these outbursts as we were, with a 
number of interlocutors privately assuring us that Arias, 
remarks did not accurately reflect GOCR policy nor Costa 
Ricans, views of the United States (or Venezuela).  Minister 
Arias told the Ambassador the remarks were taken out of 
context.  In general, Costa Ricans continue to have a very 
positive view of the United States, and Arias,s policy 
through his first two years has been very similar to the 
USG,s, based on the four pillars of security, prosperity, 
opportunity and democracy.  In his comments to the new OAS 
Peace Forum and UNGA September 23-24, Arias reverted to 
familiar themes, calling for increased foreign assistance to 
countries that disarm (the Costa Rica Consensus), a UN treaty 
limiting conventional weapons, and enhanced international 
efforts to preserve and protect the environment (Peace with 
Nature).  These have been the international hallmarks of his 
administration. 
 
¶18.  (SBU) Arias has some basis to feel frustrated, however. 
Since early 2008, he and his administration have been under 
relentless attack in the media (led by the country's leading 
daily and a major TV channel) for irregularities in relations 
with Taiwan and later China.  (Costa Rica switched 
recognition in June 2007.)  On Taiwan, controversy has 
swirled around the use of assistance directed to Costa Rica 
via the Central American Integration Bank (BCIE).  The 
Housing minister had to resign and faces charges for using 
USD 1.5 million of those funds to pay for consultants and 
staff instead of helping one of San Jose's poorest 
communities, as intended. 
 
¶19. (SBU) On China, the Arias administration refused to 
publicize the (very favorable) terms of an agreement that had 
Beijing purchase USD 300 million in Costa Rican bonds.  No 
criminal wrongdoing has been discovered, but Arias and his 
team were criticized for covering up the details of the deal, 
which suggested that Beijing had &purchased8 Costa Rican 
recognition. In addition, pre-election maneuvering has begun 
for the 2010 contest, with Arias,s PLN party split, and key 
ministers (including VP and Justice Minister Laura Chinchilla 
and Finance Minister Guillermo Zuniga) having to step down no 
later than February 2009 (by law) in order to launch their 
campaigns. 
 
===================== 
A VISIT TO INVIGORATE 
===================== 
 
¶20. (SBU) Although the GOCR had hoped the Secretary's visit 
 
would be a CAFTA completion celebration, it can still provide 
a needed shot in the arm to the Arias Administration. A 
you-can-do-it message should help President Arias stay on 
track, and focus the country to look beyond entry into force 
to the future opportunities CAFTA offers. (The visiting 
business delegation will help reinforce this message.)  If 
Arias and his team can maintain their focus and unity, there 
are plenty of opportunities for success ahead, despite the 
recent domestic challenges Costa Rica is facing. Now is the 
time for leadership, not drift.  Now is not the time for 
unwarranted public criticism of the USG or unmerited public 
applause for Venezuela.  Now is the time for Costa Rica to 
model effective, &deliver-the-goods8 democracy for the 
region, to offset the illusive attraction of the populist 
alternatives. 
 
¶21. (SBU) Costa Rica can and should implement CAFTA quickly 
(and the GOCR seems intent on doing so).  Coupling revamped 
domestic security legislation with Merida Initiative 
assistance will better equip Costa Rica to address its law 
enforcement challenges.  Add to that better financial 
management and vigorous infrastructure development, and Arias 
can complete his term leaving Costa Rica much better off than 
when he began.  This strategic conversation may find timely 
resonance with Arias and his team during the Secretary's 
visit. 
CIANCHETTE