In this week of election euphoria a double blow to the Costa Rican economy was announced.

Intel and Bank of America have announced that they are closing production and a call center respectively. Some think we should all be ‘tranquilo’ about these events. This is far from the case. We should be extremely concerned.

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According to the press, the direct impact will be the loss of 3,000 highly paid, private sector jobs, in our already high unemployment economy. The government’s tax take and CAJA collections will suffer. The losses to exports have been put as high as 15% by La Nacion and AM Costa Rica.

Immediate knock on effects will include the following:

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  1. The supply chains for these firms in materials, components and services will be gutted. 3,500 further job losses have been mentioned in the case of Intel alone.
  2. The loss of spending power of the former employees will reduce demand for everything they buy and cause a multiplier effect. This will further reduce employment and profits in their individual supply chains.
  3. The reduction in exports will adversely effect our balance of payments. This usually results in downward pressure on the value of the colon verses the US dollar and upward pressure on interest rates, to offset dollar outflows. This means that those with debts, especially in dollars will find their repayments are higher. The indebted Costa Rican government, which just paid a high 7% on a dollar loan will also feed the impact.

The above effects are themselves serious, but there are more serious longer term problems.

Costa Rica’s developing country dream is partly based on the continuity of inward investment. In my working life, I led projects to advise large companies as to where in the world they should put their admin, logistics and manufacturing facilities.

Other projects included advising various government development agencies on how to attract large inward investment projects in various industries. Here is what we learned:

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  • Contrary to popular opinion, inward investors do not simply move facilities to the lowest cost labor markets. Their decisions are much more complex and are only partly made on purely economic and tax grounds.
  • Issues that they analyse and collect information on include:
    • labor productivity, for example are 1,500 Ticos likely to work harder and more efficiently than 1,500 Vietnamese of Chinese? Pura vida has its price.
    • security of supply, will operations be disrupted by strikes within and without the enterprise;
    • the flexibility and fairness to both the employer and the employee of labor laws;
    • the speed, degree of openness and lack of corruption in bureaucratic decisions making and administration;
    • the availability of English speaking and technically trained recruits;
  • the quality of life including personal security, international educational facilities and cost of living for expat employees. The Costa Rican murder rate is twice that of the US.
  • Over and above all this, the decision makers want political and economic stability and to feel welcome. They become concerned by large indebtedness and uncertain future economic conditions.
  • Sadly, the lead steers create a herd effect. When big firms pull out, others large and small, contemplating investing or already here, question their own thinking.

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    “Gee if smart people like Intel and B of A are pulling out, maybe we should not rethink our position.” Even though those leaving stay tight lipped about why they go, to ease their exit, unofficial back channels will reveal the reasons to other inward investors.

    So what can the President Elect of Costa Rica do about this? His meagre four year term leaves little time to resolve cultural and policy issues that have built up over many years. He faces a legislature and civil servants, many of who are part of the problem and likely to be obstructive.

    The solutions are all easier said than done. Dealing with widespread, corruption; over sized, inefficient and feather bedded government bureaucracy; endemic tax evasion; a large debt burden and violent crime are all major challenges. The currently supportive voters might well turn hostile when they see the personal changes that they need to accept.

    The bottom line is that there may be a serious and successful effort to deal with the issues. If not, then Costa Rica’s dream of economic growth and prosperity will founder and things will deteriorate relative to others in the world economy.

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    Written by VIP Member Chris Clarke who is a retired economist, consultant and investment banker.. Chris and his wife, Ivy are British who have lived and worked in Europe, Asia and the US. They have been fortunate in travelling extensively on the corporate dollar. When Chris retired from his role as President and CEO of a global executive search firm in December 2010, he and Ivy had already considered their retirement options. Chris wanted a haven to write novels and they both ended up retiring in Costa Rica.

    Major Job Losses in Costa Rica This Week – What will happen?

    Article/Property ID Number 4638

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