FIU C,Y INTERNATIONAL BANK FOR RECONSTRUCTION ......United Fruit Company, retroactive to January 1, 1948, was signed by the Junta oni the 27th of December 1948 and, in consequence,

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INTERNATIONAL BANK FOR RECONSTRUCTION AND IEfl . 4M

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

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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 ANDINDUSTRY .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 ExpendituresTable II t Gold and Foreign AssetsTable III I mrnports and ExportsTable IV - Imports Since 1940Table V - Selected Imports in 1946Table VI - Exports Since 1940Table VII - Exports in 1947Table VIII - Terms of TradeTable 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 `1Uncontrolled 7.00 colones z US 1

Trade Statistics (1947)

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

Balance of Payments: Official OurEstimate Estimate

19)47 f it.3 million -Jl117ni7lliorn1948 1 lf3 million $ 10.0 rillion

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

Budget in 1948:

Official

Expenditures $20.1 millionDeficit v 1.3 million

Our estimate

E-xenditures ,20.1 millionDeficit ' 5.lmillion

Public Debt

Internal /141.8 m.illion(925.2 m-llionExternal 22.1 million

Defaulted 18.8 riillion

Prices (wholesale and cost of living indexes)

1936 1001948 (i.ugust) 229

Exchange Reserves

End of 19)43 1Si6.2 millionEnd of 1947 7.7 millionEnd 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 establish-

ment of a National Banking System to include the National Bank and the commer-

cial 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, 1949Albert Waterston

; 1 \t sNI E I 17A

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

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O C~~~~~~~~~~~~ E A N

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 4srt-elect

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 pasteuriza-

tion 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 bever-

ages 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 im-

ports 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.

mayfree 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 ex-

cellent. 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 nredomi-

nantly 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 atten-

tion 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.

LS Ae 1 8 0 40 ,!80

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00 AND OVER ~ 1 .iCOSTA RICA 341.0

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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 trans-

portation 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.

(C) Standards of Living.

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 andi almost 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)o r

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 8EondurasGuatemala 9icTi caregua 65L

Panama (including income fromCanal 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, 19471947 Imports Estimated Imports

Co-antry (. millions) PoTpulation aer Canita

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

,in extention 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.J 43

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 nationaliza-

tion 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 20.25oMeats 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 pro-

duction 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 pro-

ducts., 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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COFFEE ,@; go~~~Ech dot represents /00,000 pounds -SN,tb ~~~~~Tofo/ production 51,661, 000 pounds '

81, 84 8

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DAIIRY CATTLE BANANAS

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~'I SYMOLSCOPYRIGHTED BY PICTOGRAPH CORPORATIO AND QU*hME COWOtA1VN

-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 appli-

cation 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 pro-

ducers, 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 ofCrop Year Kilos Produqed Expqrt Value

(: millions )1944-45 25,3 , 7.51945-46 18,7 6.51946-47 21.8 10.71947-48 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 trans-

portation.

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 opera-

tion. 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 inac-

cessible 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 produc-

tion 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.

(c) Cacao

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 produc-

tion. 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 pro-

duction 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

L\', A K N C A R ^G91 (

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RAILWAYS e' , I -

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COSTA R ICA A> "G,osLEGEND '

RAILWAYS1- NORTHERN RAILWAY, 42- GAge2-PACIFIC ELECTRIC RAILWAY (I Fo,rOCorrN

feI.ctl,co al PAc,f.CAI 42" Goo*3 THE UNITED FRUIT COMPANY RAILWAYS

(Comrpaho BOMIroA de 1 Cofta Rico) 42 tog4,

PAN AMERICAN HIGHWAY 1-PAVED

ALL WEATHERDRY WEATHERTRAILSFEEDER ROADS SC LE

(Z MAJOR PORTS ± MINOR PORTS o- ul ,

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del Sua ,X Blancr3 WGroa .nars

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COSTA RICA 0 l-- �;--- $ 4JLEGEND 4

PAN AMERICAN HIGHWAY

= UNDER CONSTRUCTION

SECONDARY HIGHWAYS C4

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'Ii. MAJOR PORTSD 25 so 75Miles U. S DEPARTMENT Of COMMERCE

I Nil. - 1. S xio"oDa UREAU OF 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, -U ell

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 con-

cessions 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 i 'th

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 planta-

tions 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 indus-

try, 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 south-

east 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.

(C) Industry

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 in-

dicated 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 cer-

tain 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,i64Letals and ilning 85 453Clothirg, Textiles 316 2,577Iood Products 249 2,737Bevzerages, Tobacco 27 610I!ood, Furniture 118 1,306Construction 1Laterials 19 416Printing, Publishirg 19 516Chemicals (soa-n, crndles, matches) 53 777Building 105 2,041Industry, other 125 931

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

sion 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-

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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.

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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 since1940.

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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 alloca-

tions 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 low0 have 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 equi-

valent 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

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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, tGax payments are delayred -rile t1he

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

me

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 AccumulatedType 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

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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

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. B Ietween 1937 and 1941, as indicated in the table belo w, 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 followringtrro y,ears, 1942 and 1943, sizeable e:)penidiL,ures byr the United States

Governm Ient 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:I 0: .T 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 (

-35-

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

194.3, but in June and July, tne cu:rrency ag-air e,panded lar-oly cu.e to

deficit financingi by 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 Z .,_2,5

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 raised ate

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 frree P marlket over neroW-na ele

-36-

dollar instruments in the black market, in spite of the fact that instru-

ments 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

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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 Cen