Report No. 3195-CR FILE COPY Costa Rica""E Trade Incentives and Export Diversification November 5, 1900 Latin America and the Caribbean Regional Office FOR OFFICIAL USE ONLY Docurnent of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World F.ank authorization. LIST OF COMMON ABBREVIATIONS CAAFIID Central American Agreement on Fiscal Incentives for Industrial Development CABEI Central American Bank for Economic Integration CACM Central American Common Market CAT Certificado de Abono Tributario (Export Tax Credit Certificate) CENPRO Centro de Promocion de Exportaciones e Inversiones CET Common External Tariff CIEX Certificado de Incremento de Exportaxiones (Certificate of Increase of Exports) CIIU Clasificacion Industrial Internacional Uniforme (Uniform International Industrial Classification) IDB Inter-American Development Bank IMP International Monetary Fund NAUCA Nomenclatura Arancelaria Uniforme Centroamericana (Uniform Central American Customs Nomenclature) REIFALDI Regulamento de Incentivos Fiscales para el Desarrollo Industrial (Regulations for Fiscal Incentives for Industrial Development) SIECA Secretaria Permanente del Tratado General de Integracion Economica Centroamericana (Permanent Secretariat for the General Treaty for Central American Economic Integration) FOR OFFICIAL USE ONLY PREFACE This report was prepared by a Bank mission which visited Costa Rica in June/July 1979, and a draft was presented to the Government in early 1980. Accompanying its present publication is the publication of two further World Bank reports: a report entitled "Costa Rica: Current Economic Position and Prospects" and a special report on the Central American Common Market. Since the report was written, the country's macroeconomic difficul- ties have deepened. These problems speak directly to the major recommendation of this report, that the pervasive anti-export bias which forms the incentive policies of the country should be changed. The considerable disequilibrium in Costa Rica's balance of payments is, in large part, attributable to import substituting policies which although successful in the past, are now in need of revision. The price prospects facing the country's traditional agricultural commodities (about two-thirds of export trade) in the decade ahead are not promising. The-country, thus, urgently needs to promote non-traditional exports outside the region. Whilst the present need for a stabilization program renders this task difficult, nonetheless the basic policy issue remains inescapable. In addition, since the report was written, political difficulties in the region have continued, and there has been some loss in momentum in restructuring the integration agreements of the Central American Common Market. It is hoped that this report, along with its companion volumes, may assist in rekindling the effort to reform the market's tariff and industrial policies. Such a reform holds gains for all the countries concerned and, may indeed, be regarded as one of the most urgent issues on the development agenda for the region. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not othcrwise be disclosed without World Bank authorization. This report is based on the findings of a mission which visited Costa Rica in June-July 1979. The mission comprised: Farid Dhanji Mission Chief William Tyler Consultant Jose A. Guerra Consultant Rene Moreno Young Professional Robert Howe Research Assistant COSTA RICA TRADE INCENTIVES AND EXPORT DIVERSIFICATION Table of Contents Page No. SUMIARY OF PRINCIPAL CONCLUSIONS AND RECOMMENDATIONS i - x I * EXPORTS .................... ..... o ......... 1 Introduction ........................................ 1 The Export Sector ......... . ................... . . 6 Traditional Exports ....................... . ......... 6 Non-Traditional Exports -*a** ... e. ** ... ......... 8 II. INDUSTRIAL DEVELOPMENT - Major Features ............... 15 Industrial Structure ................. * . - . - * a ............ 15 Import Substitution and the Sources of Growth ......... 17 Industrial Concentration .................. ..... ....... 22 Import Intensity ............... ...................... 23 Capacity Utilization.. ................................ 26 Wages and Employment ................................*. 27 III. INCENTIVES SCHEMES ......................................... 33 A. The Exchange Rate . ............................... 33 Real Effective Exchange Rate ................... 34 The Trade Regime Exchange Rate .. .... 38 B. Tariffs ....................... a......... .... 39 Nominal Tariffs ........ . 39 C. Tariff Exonerations and Investment Incentives .... 45 Import Duty Exemptions . ........................ 47 Income Tax Incentives .......................... . 52 D. Export Incentives ......... 53 "CATS" ................ ..... ........ . 53 Drawback Schemes .... ................... . .. . 56 "CIEXs" .. ................... . 56 Export Taxes .. ..............................a... 57 Financial Incentives ........................... 57 E. Net Impact of the Incentive System ............... 59 TABLE OF CONTENTS (Continued) Page No. IV. EXPORT ADMINISTRATION ........................ ...... 64 CENPRO .......................................... 64 The Paperwork in Exporting . 66 Further Elements in Export Promotion .................. 69 V. LIBERALIZATION .70 Introduction .......................................... 70 The Exchange Rate ..................................... 72 Tariff Dismantling .73 Macro-Economic Policies .75 "CATS" ...................... 77 The CACM - The Challenge of New Industrial and Trade Policies ......................... 77 Role of a Strong Export Promoting Agency .............. 79 ANNEXES 1.0 Estimation of the Sources forManufacturing Demand Growth 81 2.1 Costa Rican Exchange Rate Regime .... ................. 83 2.2 Real Effective Exchange Rate Calculation .............. 86 2.3 Shadow Exchange Rate Calculations ...................... 89 3.0 Estimates of Effective Protection and Effective Subsidy for Export ................................... 95 COSTA RICA - TRADE INCENTIVES AND EXPORT DIVERSIFICATION SUMMARY OF PRINCIPAL CONCLUSIONS AND RECOMMENDATIONS i. Costa Rica is a small country with slightly more than two million inhabitants and a GNP per capita in 1978 of $1,650. With a narrow resource base and a small domestic market, the country has consistently and correctly perceived that trade with other countries must act as the economy's engine of growth. Much of the impulse for growth in thLs century has been provided by the export of agrLcultural commodities. The development for export of coffee, bananas, cocoa, sugar and beef have raised the levels of domestic output and income, provided the base for forward linkages to agricultural processing enterprises, raised the country's capacity to import, and yielded many of the dynamic benefits of specialization. Exports in 1977-79 were about 31% of GDP. About two-thirds of agricultural output in the economy is cur- rently exported, and these exports Ln turn constitute about two-thirds of the total export earnings of the country. Trade has also played an important role in the development of the industrial sector. In 1963 Costa Rica joined the Central AmerLcan Common Market and adopted the instruments of integration which, in essence, promoted a strategy of regLonal import substitution. Exports of manufactured goods, which constituted only 4% of exports in 1963, grew to 28% in 1977, and fully 80% of these manufactured goods exports were to the other members of the Common Market. ii. This strategy of regional import-substituting industrialization now shows diminishing returns. Future economic growth will continue to depend on the country's ability to circumvent, through trade, the limitations imposed by size and natural resource endowment. Whilst traditional agricultural exports will continue to play a role, the extensive margin of cultivation is rapidly being approached, and these commodities have recently been losing their growth momentum, and by extension their ability to propel the country's development. In additLon, they are subject to considerable price volatility and this has imparted an undesirable degree of instability to the domestic economy. Moreover, the Central America market, so successfully tapped in the last two decades as a source of growth for manufacturing enterprise, has also lost much of its dynamism. The first "easy" stage of import substitution has come to an end, the expansion of intra-regional trade has slowed significantly, and the demand impulse for expansion of industry from domestic and regional sources has experienced considerable weakening. Unfortunately, many of the inefficiencies and distortions brought about by the policy of import-substitu- tion are apparent in the structure of production. Continued adhesion to this path of development is likely not only to exact Lncreasingly onerous costs on domestic and regional consumers but also to place the economy upon a declining growth path with diminished foreign exchange availability exercising a severe constraint to rapid development. Recognizing, therefore, that increased trade must continue to be the country's avenue to sustained improvements in its standard of living, this report recommends a fundamental change in policy orientation, away from import substitution, towards the promotion of non- traditional exports to third markets outside the region. - ii - iii. The primary instruments of this reorientation are to be sought in changing the incentive policies of the CACM. Prior to recommending these changes, however, the non-traditional export experience of the country, the pattern of manufacturing activity in Costa Rica, the precise content of the impor -ubstituting incentive instruments, and present mechanisms of export promotion are analyzed. The conclusions of these analyses may be summarized. Non-Traditional Exports iv. Non-traditional exports, comprising non-traditional primary products as well as manufactured products, have experienced spectacular growth since Costa Rica joined the CACM in 1963. In that year they were $12 million, in 1971 they were US$67 million and in 1977 were estimated to be $292 million. Their annual growth-, 12.3% in real terms, was more than double that of tradi- tional exports at 6.0% per annum. In 1963, primary commodities were just under half of non-traditLonal exports; in 1977 they were only 14%, with the remainder being exports of manufactured goods. Of these manufactured goods exports of chemicals, textiles, clothing and food products were the most important. About 70% of non-traditional exports go to the CACM. About 97% of these exports to the CACM are manufactured products, and these in turn constitute 80% of the country's entLre export of manufactured goods. The proportion of manufactured exports destined for the regional market has, however, declined from its high point of 88% in 1971, again illustrating the weakening demand impulse of the CACM. The 30% of non-traditional exports which go to markets outside the region are comprised of about 40% non-tradi- tional primary products, and the remainder manufactured exports; of the latter chemical and electrical machinery exports are the most important. Outside the CACM the U.S. is the largest absorber of non-traditional exports from Costa Rica. Manufacturing v. Manufacturing has now supplanted agriculture as the most important productive sector in the economy and has played an important role in absorbing new entrants to the labor force. Between 1963 and 1977 manufacturing alone absorbed more than twice the numbers of workers as agriculture. Within the manufacturing sector itself important shifts in the pattern of production have been registered since 1963. Consumer goods industries have experienced declines in their shares of total manufacturing value added, while gains have been made by the intermediate and capital goods sectors. Despite this, Costa Rica has not developed particularly deep intermediate or capital goods sectors, testimony in part to the relatively weaker incentives for production in these branches. vi. The success in import substitution policies can in one rough measure be gauged by measuring the decline in total domestic supply represented by imports. In Costa Rica imports of goods competing with the products of domes- tic manufacturing enterprise declined from 46% of domestic supply in 1963 to 42% in 1971 and 40% in 1977. The small reduction in the import coefficient between 1971-77 testifies, however, to the declining importance of import substi- tution to the expansion of manufacturing activities. This is further brought - iii - out by examining the sources of demand growth for Costa Rican manufacturing between 1963 and 1977. Domestic import substitution provided 12% of the demand impulse for growth in 1963-69 and only 3% in 1969-77. The combined regional import substitution impulse declined from 21% in 1963-69 to 11% in 1969-77. Despite the weakening demand impulse to manufacturing expansion from Central American import substitution sources in 1969-77, many industries continue to export a significant proportion of their output to Central America and are likely to be particularly hard hit by sudden changes in the system of protection. vii. Two consequences of protectionist policies are readily apparent. The first, which is also in part due to the small size of the country is the high concentration of industrial activity. In 1975, 70% of manufacturing value added was generated in subsectors where two firms at most accounted for 50% of the subsector's output; these same subsectors employed 56% of the manufacturing labor force. Concentration is naturally associated with the size of the firms, with 40 of the country's 50 largest establishments found in the highly concentrated subsectors. Surprisingly, these large firms do not export as high a proportion of their output as do medium-sized firms, and of the exports that are generated, smaller firms tend to export a much higher proportion to countries outside the region. One explanation is that the oligopolistic biases of the domestic and regional market, with which large firms are so clearly identified, allows them to dominate domestic activity and regional trade, and thus force medium- to small-scale firms to look for markets abroad. viii. A second consequence of the environment of protection is the paradox- ical increase in import intensity in manufacturing activity. In 1974-76, for instance, excluding the food products sector, intermediate and raw material imports for manufacturing exceeded manufactured exports by about 70%. Two characteristics of industrial development help explain this phenomenon. First, as protection has largely been granted at the finished end of consumer goods production, domestic intermediate and raw materials have either been unavailable or in short supply, and industry has consequently veered into import intensity. The process has been aided by generous exemptions from the payment of all tariffs for the import of manufacturing inputs and by persis- tent overvaluation of the exchange rate. The second charactertic explaining increased import intensity is the changing structure of production. Certain rapidly growing industries (especially the chemical and metal mechanical industries) are particularly dependent upon imports. ix. The large external trade deficit of the manufacturing sector promotes a highly unwelcome rigidity in the balance of payments. Industrial raw materials were nearly 40% of the country's imports in 1974-76, as compared to slightly more than 20% in 1960-62. Balance of payments deficits have thus become much more difficult to manage as compressing imports entails depressing perhaps severely, the level of domestic activity. Moreover, as the growth of industry's demand for foreign exchange far outruns the growth of agriculture's net supply of foreign exchange, the stage is set for chronic and ever deepen- ing balance of payments difficulties. Continued adhesion to protective policies for domestic industry will likely place the economy on a declining growth path, punctuated by periodic exchange crises. - iv - x. Cheap credit policies accompanied by very generoua fiscal exemptions for industry have resulted in strong incentives for capital accumulation and considerable underutilized capacity now exists in Costa Rican manufacturing industry. A recent sample survey showed nearly 80% of individual establish- ments working only one shift and approximately 20% each working two and three shifts. Capacity underutilization is pervasive across industries, and the products produced do not appear to be a determinant of the pattern of utiliza- tion. In Costa Rica, unlike other countries, capacity utilization decreases the larger the size of the firm. There is some evidence, however, that firms with high utilization rates tend to export proportionately more. The limited size of the market and manpower unavailability are the reasons most commonly cited for failure to achieve higher rates of capital usage. Underutilized capacity does nevertheless represent a reservoir for export expansion. Wages, Salaries, and Employment xi. The charge that Costa Rican wage levels are "uncompetitive" vis-a-vis the successful exporting countries of East Asia and Latin America is unfounded. A cross-country survey of wage levels (admittedly approximate in that it does not take into account differences in productivity) shows that Costa Rican wage levels are only slightly above those of Korea, Taiwan and Singapore. The differences, however, are well within the bounds of statistical error. Costa Rican wage levels are below those of the newly industrializing countries of Latin America such as Brazil and Mexico. Two sets of Government policies have the potential to directly affect the price of labor to industry. The first of these, minimum wage levels, are found to be unimportant. Social charges on income, however, amount to 26% of gross income. These charges, which in relative terms, are perhaps not high in comparison to other Latin American countries, nevertheless have a dampening effect on the demand for labor. It is recommended that they not be increased. A further belief that manufacturing activity in Costa Rica will suddenly strain at capacity due to labor shortages also does not withstand examination. The country is unusual in that it does not have large supplies of surplus labor. However, some labor is currently underemployed, agriculture will continue to be a net supplier of workers to industry, women's participation in the labor force is steadily growing, and reversal of the very high absorption of labor by the public sector will free labor for employment in industry. Structural mismatches are, however, evident, and the supply of particular kinds of occupational skill to industry deserves further study. In this regard, a closer surveillance of the education system's capacity to meet the labor market's demand for specific skills is called for. The System of Incentives xii. The exchange rate, in many ways, is the central instrument for promoting exports to countries outside the region. In Costa Rica a survey of the use of the exchange rate in the last two decades demonstrates that the authorities have not considered this the highest priority in balance of payments management. Rather the converse. The country has passed through several devaluations and in each instance the protective intent of the devaluation has outweighed the objective of improving the incentives for exports. The disincentive to exporting given by exchange rate policy is analyzed in two ways. First, the course of the real effective exchange rate (i.e., a purchasing parity rate) is charted for the years since 1970. In the first devaluationary phase between 1970 and 1974, Costa Rican inflation was higher than inflation experienced in her trading partners and much higher than the U.S. (which accounts for about 35% of Costa Rica's imports and exports). Changes in parity more than offset, however, the decline in compet- itiveness experienced by higher relative inflation. Since 1974 Costa Rica's exchange rate has been pegged to the dollar and the parity unchanged. With no overall compensatory devaluation movements against the dollar among Costa Rica's major trading partners, the real effective value of the colon was 15% lower in the third quarter of 1979 than in 1974. The real decline in the effective rate against the U.S. was more dramatic. The 1979 real effective rate was 17% below 1974 devaluation parity and 27% below the 1973 parity. xiii. A second measure of the exchange rate captures the bias against exporting imparted by the entire system of commercial policy. On the one hand, the quantitative effect of all import barriers on the exchange rate is evaluated; on the other hand, the quantitative effect of export incentives (with export taxes serving as negative incentives) is considered. The net effect of commercial policy on the exchange rate is a currency overvaluation of about 18%. (For a variety of technical reasons, however, this is a highly conservative estimate.) That is to say, if all barriers and incentives to trade were removed overnight, the currency would have to be devalued by at least 18% to maintain the present deficit in the balance of payments. If the present large deficit were to be reduced, the devaluation would correspondingly have to be greater. Nonetheless, an effective overvaluation of at least 18% represents a serious disincentive to exporting activity, capturing as it does the net effect of the entire pattern of Costa Rica's commercial policy. xiv. The major instrument of protection in Costa Rica is the tariff (and not as in some other countries, quotas). The tariff regime derives, for the most part, from the common agreements of the CACM, and consists of a series of charges that are or can be applied to imports from outside the region. At the same time, a large number of extra-regional imports are exonerated from some or all of these charges, usually on the grounds that they are intermediate, raw material, or capital goods inputs to productive activity. One result is high levels of effective protection to Costa Rican industry. Taking the various elements of the import charges together (the common exter- nal tariff of the CACM, the San Jose Protocol Surcharge, the temporary import surcharges and the discriminatory element in the consumption tax) yields very high levels of nominal protection for manufacturing industry. In 1972 (the last year for which comprehensive data are available) the average nominal tariff Ln manufacturing is estimated to be 106%. There is reason to believe that nominal ad valorem tariff equivalents have been reduced since 1972, and the average manufacturing tariff is currently estimated to be in the region of 60%-70%. Nominal tariff rates (which are highly correlated with effective protectlon rates) have a wLde dispersion across industrial branches indicating highly uneven resource pulls between different manufacturing activities. In general, however, the consumer goods industries show the highest levels of protection. xv. Exemption from the payment of tariffs plays an important role in trade policy. Between 1976 and 1978 about three-quarters of Costa Rica's imports have entered the country duty free. The great majority (about 55% of these imports) were imports of raw materials and intermediate and capital - vi - goods from extraregional sources exempted under the industrial incentives program of the CACM. In view of the high tariffs imposed on finished goods, the import duty exoneration has facilitated high levels of effective protection, fostered an import intensity of production, and restrained the growth of inter- mediate go-is industries in Costa Rica. The fiscal cost of these exemptions is substantial, representing about 4% of 1978 GDP, and about four-fifths of the central government's overall deficit in that year. xvi. Not all intermediate goods are exempted from tariff payments. Firms can seek to have their products placed on special regional and national lists of goods which have to bear customs duties. To do this, they must satisfy the relevant authorities that their products can compete in quality, price (CIF import price plus relevant tariff) and assurance of supply, with imports. This system of intermediate goods production has not advanced very far, and occa- sionally gives risp to onerous consequences. Existing or potential exporters find their competitiveness eroded as they pay inflated prices for inferior products, the adequacy of whose supply cannot always be guaranteed. xvii. In subscribing to the Central American agreement on fiscal incentives, Costa Rica allows firms to import capital goods duty-free, allows full deduc- tion from the tax base of reinvested profits, and then provides generous depreciation allowances. The income tax incentives alone reduce income tax liabilities for firms holding industrial contracts by about 12% to 18%. The reinvestment benefit represents on the average a 40% subsidy to capital. These incentives, coupled with cheap credit policies, have encouraged capital accumulation with the resulting excess capacity noted earlier. xviii. On the side of export incentives, Costa Rica has developed one major instrument to overcome the cost disability imposed on exports by the trade regime. The Certificado Abono Tributario (CAT) is a tax credit of 15% of the f.o.b. value of the export, applied to certain non-traditional exports destined for extra-regional markets. The use of CATs has grown dramatically from less than $0.5 million in 1973-74 to about $10 million in 1977-78; this has paralleled the rapid rise in non-traditional exports to extraregional markets from about $40 million in 1973-74 to almost $120 million in 1977-78. About half of Costa Rica's non-traditional exports are underwritten by the CAT subsidy, while the remainder suffer the full cost disability of the overvalued exchange rate. Processed and non-traditional agricultural products are the major beneficiaries of this scheme. While reasonably well administered, the CAT scheme has certain deficiencies. Firms have to prove "need" in order to obtain the CATs, meaning in effect that efficient firms are or should be penalized and rather cumbersome criteria are applied to obtain CATs. The suggestion has been made that the CAT subsidy rate be changed from the present 15% to a multiplicity of rates reflecting the presumed national benefits generated by different export lines. This course is not recommended as it will introduce further distortions as well as invite a tangle of administrative problems. Other export incentive instruments in Costa Rica include a scheme to reward exporters for the increment in exports achieved over previous year's levels, as well as a drawback scheme. The former has proved unimportant, while the latter confers few advantages over the presently available CACM incentives and is not widely used. At the same time that Costa Rica applies these export incentive schemes, all exports are subject to a 1% export tax, and traditional exports are subject to much higher levels of export taxation (coffee 9-1/4%, cocoa 13%, sugar up to 18%, etc.). - vii - xix. The net impact of the incentive system is in one sense given by the overvaluation of the exchange rate. Effective protection rates are another measure indicating the pro- or anti-export bias of the regime. (Effective protection rates measure the proportional excess of domestic value added over value added which would be obtained if trade were free.) In Costa Rica effective rates of protection are very high, ranging from 230% in the consumer goods manufacturing branches to 62% in the metal mechanical branches, with an overall manufacturing average of 164%. In nearly half of industrial categories, Costa Rica has the highest rates of effective protection in the region. Even when effective rates of export subsidy are incorporated, there stLll remains a severe anti-export bias. While many firms studied did export a part of their output outside the region these export activities, are simply not as profitable, on the average, as producing for the domestic market. The conclusion restated is that for manufactured exports to achieve rapid growth the tilt in the incentive system will need to be modified. xx. The proposals of the Integration Secretariat (SIECA) for the CACM to adjust the Common Market incentives yield, when analyzed, no improvement in the current very high levels of protection. Indeed, when adjustments are made for omission in the Secretariat's calculations, the resulting levels of protection are likely to be even higher than currently in force. Export Promotion xxi. The Center for the Promotion of Exports (CENPRO) was established in 1968 with a wide mandate to stimulate non-traditional exports from Costa Rica. The institution only began to exercise a powerful role after the estab- lishment of the CAT scheme (which it administers) in 1972. Its activities have been wide-ranging and have included expediting the exporting process in Costa Rica, providing information to exporters about foreign markets, survey- ing exporters' needs and problems, participating in international trade fairs, and maintaining commercial attache posts in overseas embassies and consulates. The institutLon suffers from the major handicap of trying to promote exports' in an environment not particularly conducive to that end, does not have a large budget, and its manpower resources are relatively small. For these reasons it has not achieved the visible success first hoped for it, though exporters who have had dealings with the institution have found that contact valuable. In two areas the institution has performed or is performing impor- tant work. The first is an attempt to simplify the paper work in exporting. Costa Rican exporters face a multiplicity of document requirements and a poorly coordinated system of procedures. Various suggestions are made in the report to simplify the procedures and requirements, but since interagency coordination is beyond the legislative mandate of CENPRO, the simplification of the system requires Government commitment at high levels of decision-making authority. The second valuable initiative of CENPRO is, in coordination with the Ministry of Economy, Industry and Commerce, to distinguish key bottlenecks to exporting in specific manufacturing subsectors. It is recommended that this initiative be strengthened by experts with a broad crosscountry experience in the sectors being examined who can help place the subsectors on a competitive export footing. Finally, CENPRO needs to re-evaluate the objectives of and expe- riences in its participation in international fairs and its commercial attache program. - viii - xxii. Although the mission was unable to examine all areas of concern in the process of export promotion, two areas merit further study. The first is transport arrangements from Costa Rica; communications with Europe, the Caribbean and Latin America south of Panama need to be strengthened. The second area is finance and insurance. The instruments of (u<)rt financing and of export credit insurance are not well developed in the country. These are necessary adjuncts to successful exporting and it is recommended that studies be initiated and steps be taken to provide exporters with these facilities. Liberalization xxiii. The primary recommendation of this report is that the Government should change the principal components of the present incentive system, remove the biases against exporting, and create a stable polic- environment where there is an unquestioned perception of strong Government commitment to expand exports and keep exporting activities profitable. Judging from both private sector response in Costa Rica to incentives schemes (and in particular export incentive schemes) as well as from the experience of a number of countries which have implemented liberalization programs, there is ground for reasonable optimism that this strategy will be successful. The suggested elements of the strategy are (a) devaluation and subsequent import liberalization; (b) the establishment of prudent monetary and fiscal policies; and (c) more active Government involvement in export promotion. For a variety of reasons, the most important of which are the regional dependence of much of industrial activity as well as the fact that Costa Rica's economy currently faces an urgent need for stabilization, the liberalization should be implemented gradually rather than in a dramatic "overnight" fashion. xxiv. The centerpiece of the reform would be changing the exchange rate. There is no other instrument which in its power and simplicity can so effec- tively signal to producers the gains to be made in exporting. The currency is overvalued both from the perspective of a purchasing parity comparison and more central to this report, from the perspective of the implicit anti-trade bias, imparted by the instruments of commercial policy. Devaluation should not be a once-for-all affair, but rather the country should adopt a mechanism for keeping the real effective parity profitable to exporters. In practice this will probably mean the adoption of a crawling peg system, where adverse domestic price and wage cost increases can promptly be reflected in a new nominal exchange rate parity. This recommendation rests on the assumptions that those inflationary pressures stemming from excess demand will be appropriately tackled and reduced by strict monetary and fiscal policies. xxv. Tariff dismantling should be used as a complement to exchange rate policy. High protection levels in Costa Rica are essentially a function of high tariffs on finished goods, and hence the removal of the bias toward import substituting will need to focus on tariffs. It is not recommended that all tariffs be removed at once. This would invite severe producer resistance and, given the dependence of many industries on protection for continued survival, would likely result in severe short-term economic dislocation and high social costs. Rather it is suggested that tariff dismantling be phased over a period of time, with initial maximum and, from thence, declining rates of nominal protection established on an annual basis. - ix - xxvi. The present need for Costa Rica to undertake a stabilization program introduces complications for a simultaneous program of trade liberalization. Although the historic evidence suggests that most countries which have liberalized have done so in circumstances of macro-economic difficulty, never- theless, these conditions are not the most propitious for a trade liberaliza- tion. The structural dislocations of the latter, in essence, are exacerbated by the deflationary consequences of tight fiscal and credit policies. A survey of countries which have successfully liberalized in difficult circums- tances, however, yields the important inference that exchange rate policies are crucial to success. Provided that the real effective parity of the new exchange rate is maintained (i.e., profitable export opportunities are not hidden by persistent overvaluation), and provided also that stabilization instruments are effective in reducing domestic inflation, then the liberali- zation program has a much greater chance of being sustained over the longer term. Certain emphases can be given to stabilization instruments if trade liberalization is attempted at the same time. First the Government's foreign exchange and credit requirements should be reduced to a minimum so as not to preempt private sector and especially exporters' demands for these resources. Next, export expansion could first be promoted from the intensive use of existing capacity; in this regard temporary surcharges on investment goods as well as reform of the very generous fiscal incentives may be recommended; in order not to penalize exporters further, however, they should have access to duty-free inputs. Finally, to augment import capacity in the short term credits tied to the liberalization program should be sought from institutional investors. xxvii. Prudent macro-economic management is an essential ingredient in a trade liberalization program. This report focuses more fundamentally on some of the underlying, structural reasons for repeated Balance of Payments crises in Costa Rica; it visualizes declining economic growth if trade policy remains unchanged and perceives nontraditional export expansion as the only medium- and long-term answer to the country's foreign exchange constraint. From a different perspective therefore, the report emphasizes the exchange rate instrument as the major tool for adjustment to a more balanced and ultimately higher growth path. If a liberalization program is indeed embarked upon, then it will be important to ensure consistency between stabilization instruments and the measures (especially the exchange rate) used to promote exports. The objective, of course, is not to sacrifice the stabilization effort, but rather to accommodate, within the discipline of reduced fiscal expenditures and monetary expansion, the additional objective of export expansion and diversification. -x - xxviii. Since the general agreements of the CACM are the source of the major part of Costa Rica's commercial and fiscal incentive policies, the issue of change will need to be tackled at the regional level. Although detailed country studies are not available recent studies of the regional integration process poi-t to the similar consequences and the generally worsened environ- ment for economic management in each of the countries stemming from the policy of import substitution. The commonality of interest and the similarity of the problems heighten the need for a regional approach to tackle what is essentially a regional problem. xxix. On the side of a more active Government participation in the process of export promotion, the role of CENPRO should be strengthened. Far-reaching changes of the structure of production are likely to be set in train by a trade liberalization. In the effort of export promotion, the Government will need to be continuously informed of producer problems and where possible apply timely and appropriate remedies. In this regard, a clearing lhouse of infor- mation which can simultaneously act as a bridge between producer interests and the highest levels of Government will attenuate some of the difficulty and uncertainty- that inevitably accompanies an export drive. Specific areas for action include the already mentioned surveys of subsectoral export capa- cities and the strengthening of the systems of export finance and insurance. In addition, the role of trading companies, the pooling of capacity in different enterprises to meet large export orders, and the installation of a roster of industrial consultants to formulate programs and assist export projects should be examined. COSTA RICA: TRADE INCENTIVES AND EXPORT DIVERSIFICATION CHAPTER I: EXPORTS Introduction 1. In the past three decades Cost Rica has consistently opted for a strategy of vigorous participation in international trade. With a narrow resource base and relatively small population, the country has correctly per- ceived that trade with other countries must act as the engine of economic growth. Much of the impulse for growth in the twentieth century has been provided by the export of agricultural commodities--where successive develop- ment of first coffee, next bananas, and then beef exports have yielded many of the dynamic benefits of specialization. In 1977 exports of primary agri- cultural commodities comprised two-thirds of agricultural output in the country, with many forward linkages from the agricultural sector to agricul- tural export processing enterprises. In the last two decades trade has also served to propel the development of the industrial sector, although most of this trade has been regionally concentrated and industrial growth stimulated behind the protective barriers of the Central American Common Market (CACM). In 1977 about 16% of manufacturing output was exported--13% to the CACH and 3% to the rest of the world. 1/ 2. There can be little doubt that future economic growth, and with it the well being of the people, will depend upon the capacity to maintain a vigorous and competitive export thrust. The exports of traditional products 2/ will continue to play an important role. At present they constitute some two-thirds of total export earnings and are an important underpin of general economic activity. Traditional exports are, however, most affected by highly volatile price fluctuations in external markets, and for this reason have imparted a degree of instability to the domestic economy. 3/ The stop-go 1/ Excluding roasted coffee, refined sugar and processed beef. For most of the purposes of this report, these are counted as agricultural rather than manufactured products. The processing of these agricultural commo- dities is, however, of fairly recent origin, and for this reason it is conventional in Costa Rican trade statistics to regard them as non- traditional rather than traditional exports. This convention is main- tained here. In 1976, roasted coffee, refined sugar and processed beef constituted less than 8% of the total exports--raw and processed--of these commodities. 2/ Defined here as coffee, bananas, beef, cocoa and sugar. 3/ Between 1957 and 1976 Costa Rica underwent four major balance of payments crises, in 1961, 1965, 1971 and 1974, with the resource gap as a percent of GDP reaching 4.0, 10.0, 10.3 and 14.9% respectively. In the three years preceding the first crisis, the coffee-banana price index fell by 30%. In each of the other years, except 1974, the traditional export price index fell. In 1974, with the first major oil price rise, the terms of trade moved sharply against the country. The most recent period of difficulty, 1978-79 -- with the resource gap in 1979 estimated at 14.5 of GDP--has occurred against a back- ground of an 18% decline in the coffee-banana price index since 1977. - 2 - pattern of economic management, that has characterized Costa Rican development in the last two decades, is in large measure a reflection of Costa Rica's commodity trade cycles. Whilst diversification into different primary commodity exports (from coffee and cocoa into bananas, sugar and beef) has, to an extent, dampened the effect of sudden, sharp changes ir one market, nevertheless the repercussions from single commodity price swings are still pervas-Lvely felt. On the demand side, as is well known, agricultural commodi- ties face relatively less buoyancy from increased income growth than do the products of manufacturing enterprises. On the supply side, the extensive frontier of cultivation in Costa Rica is rapidly being approached, and the tradit-Lonal exports now increasingly rely on yield improvements rather than acreage expansLon as the source of their growth; indeed recently they have been losing much of the dynamism experienced in the decades of the fifties and sixties. These considerations lead to the view that Costa Rica should continue diversifying her export base, seek sources of export earnings different from her traditional commodity exports, and urgently discover export lines which can serve to propel future development. 3. In thLs setting it is natural to turn to the exports of non- traditLonal products and analyze Costa Rica's experience in developing these exports, as well as examine the potential for future expansion. The experience, to date, as outlined in the section below, has been promising. As much to the point, the country has, Ln the last six or seven years, acquired the Institu- tional infrastructure that can act to service and strengthen at key points a novel export thrust. This includes institutions of technical learning, a center for export promotion, export finance instruments, and a system of export incentives, with complementary administrative facilities. Moreover, the industrial base has been considerably strengthened and expanded and a wide range of manufacturing skLlls have been developed. Much of course remains to be done, but only a few years ago a contemplated export thrust would not have enjoyed these advantages. 4. The crux of the matter is, however, that the highly satLsfactory non-traditional export performance has occurred within a narrow geographical settLng and behind the high protective barriers of the Central American Common Market (CACM). The adhesion to the regional free trade arrangement occurred at a time when total exports, consisting almost entirely of traditional agricultural exports to their markets, were growing slowly. Exports to the CACM increased four-fold in the first year of entry, 1963, and by 1976 1/ comprised 25% of all merchandise exports. Almost ninety-five percent of these exports were manufac- tured goods. The achievement was bought, however, by a policy of import subst-Ltution which, by combining high nominal protectLon on final goods with exemptions for imported raw materials on intermediate inputs, affords high levels of effective protection for Costa Rican industry. There can be little question that, despite its serious shortcomings, the policy has yielded for 1/ 1976 is the last year for which detailed trade statistics are available. Figures after 1976 are preliminary and cannot usually be disaggregated to the same level of detail as 1976 trade data. - 3 - Costa Rica benefits which on balance have been positive. 1/ However, the advantages that first motivated the creation of the regional group have now been realized. Costa Rica's growth of exports to the CACM, in real terms, were 43% annually between 1963 and 1968, 9% in 1969-1970, slackened to 5% in 1971-1973, and dropped to a mere 2% between 1974-1976. The impact of high coffee prices on incomes in the Central American economies stimulated a higher growth of intra-regional trade in 1977, but performance after this date was again disappointing with political difficulties in the CACM in 1979 further dampening trade flows. Between 1976-1979, the real annual growth of Costa Rican exports to the CACM is estimated in the order of 3%-4%. This slowing of growth does not reflect the worsening of Costa Rica's position vis-a-vis its regional trading partners--in fact Costa Rica's performance after 1969 is only exceeded by Nicaragua. Its significance lies in that the regional opportunities for import substitution, under the present system of incentives, have by and large dried up, a conclusion of general application to all member countries. This being the case, a policy of export expansion and diversification takes on a new coloring. It must mean the seeking of new markets outside the CACM in products that reflect comparative advantage and which are internationally competitive. 1/ The Brookings Institution has produced the most detailed description and analysis of the development of the Common Market and the impact of the integration movement on the Central American economies ("Economic Integration in Central America," edited by William R. Cline and Enrique Delgado, The Brookings Institution, 1978). Their conclusions on this point are worth restating. "Total net economic benefits of integration were large amounting to 3% or 4% of regional product by 1972. Expressed as a single present discounted value for all future years, the decision to integrate was with an estimated $3 billion ... all five countries enjoyed positive gains for economic integration ... The distribution of net benefits of integration across countries was relatively equitable." Brookings Institution op. cit. pps. 112, 395, 396. Table 1.1: COSTA RICAN EXPORTS, 1957, 1969, 1977 EXPORT REVENUES REAL GROWTH -/ RATES (%) (Millions of Current Dollars) PRODUCT 1969 1977 1957-77 1957-69 l9I0-77 Coffee 40.6 55.8 319.2 3.5 4.9 -0.3 Bananas 32.2 51.5 150.3 9.3 6.4 2.6 Cocoa 4.0 7.1 17.1 -4.8 -3.4 5.1 Beef and Cattle 2.2 15.2 51.3 7.6 5.0 11.7 Sugar 0.1 9.1 15.6 16.7 32.4 -1.3 Total Traditional Products 79.1 138.7 553.5 6.o 5.5 1.5 Fertilizer 0.6 2/ 3.0 13.7 10.5 13.1 12.5 Other 7.7.3/ 48.0 278.6 15.9 23.7 10.7 Total Non-Traditional Products 7.7 3/ 51.0 292.3 12.3 19.6 11.5 Memo Item: Exports of Non-Traditional Products 2/ 204.7 to Central America 4.5- 42.3 87.6 13.7 29.2 8.3 to Rest of World 7.82/ 8.7 11.1 2.1 23.9 Total Exports 83.4 189.7 845.8 8.2 10.7 5.2 1/ Growth rates are log-regressed. 2/ First year of time series: 1963. 3/ First year of time series: 1960. Source: Comercio Exterior de Costa Rica. Minor discrepancies exist between export data found here and the figures supplied by the Central Bank. FiURE .1 CuSS'A RICAN EXIOPT .R_CE AND 11A-IU ' i.ICES, I-E?,'7 Price Index (1970.ISo) 7777= COFEE HANANAS . ......... NON-TRADITIONAL PRODUCTS 500 - 500 450 - _ - 450 400 -_ 400 300 - _ _ --_--_--- 300 250 ____ _-_____-- _- Z50 200 --_ ___ 200 150 -_ --+ + -150 100-_,;- 7' - -100 _.__ __.__ - 50 u 0 , . . . . . . . . , , , , , 57 59 61 63 65 67 69 71 73 75 77 SOURCE CENTRAL HANK AND BANK STA"l CALCULATIONS QUANTUm rNDEX (1970X1'00) 258 158 59 111111 lI I III 1111111 57 56 59 66 61 62 63 64 65 66 67 69 69 70 71 72 73 74 75 76 77 TRAD. QLANTUN WONTRAD. QUANTUM YEARS Source: Banco Central. Algunas Estadfsticas del Sector Externo. -6- The Export Sector 5. In the period since 1960, exports have served as the pivotal activity directly advancing the levels of economic development in the country and indirectly propelling that advance through the linkage of effects from the exporting sector to other areas of economic activity. Export growth at 8.2% per annum has consistently outstripped GDP growth at 6% p.a., and consonant with this a share of exports to GDP has risen from 22% in 1957-1960 to 31% in 1975-1977. Two-thirds of agricultural output goes to markets in other countries, and about a sixth of manufacturing output. 1/ The economy can thus truly be characterized as an export economy. Changes have, however, taken place both in the composition of exports and in the geographical markets that have been reached. Indeed, much of the remarkable development performance of the country in the last two decades can be attributed to the emergence of new products and new markets at crucial moments when the wind has suddenly fallen away from those products which, till then, had served as leading components of growth. Traditional Exports 6. Five products - coffee, bananas, beef, sugar and cocoa - together characterize Costa Rica's traditional exports. These five commodities averaged some two-thirds of all export earnings in the period 1975-1977. The argument for diversification is lent weight by noting that bananas and coffee have between them ranged from 50%-60% of all export earnings in this period. Either coffee or bananas, depending upon international prices, is capable of being the country's major foreign exchange earner. In 1975, for instance, banana exports were about 30% of merchandise export earnings with coffee constituting about 20%; in 1976 the two commodities contributed equally together generating 51% of export revenues; in 1977, with the second doubling of coffee prices in as many years, coffee earnings were nearly 40% of total merchandise export earnings, and bananas had fallen to a share of 20%. It is only in the banana trade that Costa Rica can exercise influence on prices in the market. Costa Rica's banana exports constitute some 14% of world trade in bananas, whilst coffee exports are a mere 2.3% of world trade in the commodity (1974-76). The markets for the two products are essentially different. Coffee, largely grown by small independent producers and marketed by a national production agency, is, for the most part, exported to Europe (especially West Germany), which in 1976 absorbed 80% of the exported crop with lesser amounts destined for the USA (14%) and Japan (3%). Bananas on the other hand, grown on estates under the aegis of large U.S. concerns, find their largest market in the USA (73% of exports in 1976) with most of the remainder (24%) destined for Europe. 7. Beef is the next most important traditional export commodity; in 1976-1977 earnings from beef average 7% of merchandise export revenues. Like sugar the product is unusual in that the upper limits to export expansion in its largest market, the USA (73% of beef exports), is dictated by quota 1/ These figures overstate slightly the proportion of output exported, as they do not incorporate internal transport costs or export taxes. restrictions of the importing country. Finally, cocoa and sugar exports make up the tail end of traditional commodity exports. Although dwarfed in relative importance by the other traditional exports, they are nevertheless sizeable in comparison to particular non-traditional exports: in 1976 sugar comprised some 4% of all exports and generated about one and a half times the revenue of the largest single non-traditional export (fertilizers). The long slump in cocoa prices that began in the early fifties and lasted to the late sixties had its inevitable effect on cocoa production, and the commodity contributed only 1% of export earnings in 1976 as compared to an average 8% in 1957-1958. A remarkable upsurge in price and output in 1977, however, placed the commodity ahead of all non-traditional export earners. 8. The pattern of growth in these traditional export commodities has shown wide divergencies in the last two decades, exemplifying both the country's talent for spurring the development of new export lines, as well as good fortune having a variety of exports to continue the momemtum of growth, as specific commodity markets have suffered sudden sharp reversals. Between 1957 and 1967 coffee exports constituted the mainstay of export activity, averaging 47% of all export earnings and ranging from a high export share of 59% in 1958 to a low share, 39% in 19.67. During this period, the volume of coffee exports more than doubled, at an annual growth rate of 8.5%. Since 1967 the volume of coffee exported has been highly erratic but there can be little doubt that the pace of growth has slowed; between 1967-1978 the volume of coffee exports grew by an estimated 2.4% p.a. 1/ Simultaneous with this sudden levelling in coffee available for export, however, the banana sector experienced rapid growth. Between 1957 and 1967 banana exports grew in volume by less than 2% per annum; from 1967 to 1973, however, the volume of exports nearly tripled, growing at an annual rate of about 20%; and with prices largely stable, revenue from banana exports also tripled. After 1973 the quantum of banana exports declined but with rising prices export earnings were some two-thirds higher in 1977 than in 1973. 2/ Even as the banana resurgence peaked in 1973, 1/ 1977, the endpoint used in the text for most of the traditional export growth series was not a good year for coffee exports; 1977 exports were only 2% higher than in 1967; 1978 exports, on the other hand, were 30% higher in volume terms than in 1967. Several reasons explain the erratic form of the export series since 1967: (a) inadequate rainfall in several years, (b) high labor and fertilizer costs (espe- cially after the 1973 oil crisis) which diminished coffee exporters' margins, (c) export price swings; unit prices increased between 1967-1970, declined between 1970-1972, increased between 1972-1974, declined again in 1975 and then surged ahead to a near quadrupling of prices between 1975-1977. 2/ In the 1930's when the Sigatoka and Panamanian diseases first appeared in Costa Rica many banana plantations on the Atlantic coast were abandoned, and the locus of major banana growing shifted to the South Pacific region. In 1967 however the Cavendish banana, resistant to both these diseases was planted on the Atlantic Coast and achieved an overnight spectacular success. The fall in output after 1973 is attributed to several causes including adverse climatic conditions, strikes by banana labores and producer resistance to a newly-imposed export tax. - 8 - before production declined, the beef industry generated momentum to fill part of the slack. Export volume grew by an annual rate of 16% between 1973-1977 in contrast to their growth of 9% in the previous 10 years. 9. F-r none of these commodities can it be claimed that the frontier of production has been reached. Within this pattern of acceleration at opportune moments, however, rests considerable volatility in both output and prices. The variation of output in each commodity can on examination be seen to be in part a response to price movements, in part the effect of natural causes affecting each crop, and on occasion a response to such events as the raising of the US beef quota. What does emerge, however, is that the raising of production to new plateaus in the case of coffee and beef will become increasingly more difficult. Beef production is rapidly approaching the extensive margin of cultivation, having brought in its wake environmental problems of deforestation and conse- quent soil erosion. Increases in output are likely to come from yield improve- ments rather than acreage expansion. The same is true of coffee. Costa Rican Governments, in subscribing to the international coffee agreements, have traditionally discouraged expansion of coffee acreages. Only two thousand additional hectares were planted to coffee between 1962 and 1973, for instance. Substitution of old coffee trees with high yielding varieties will now likely constitute the major source of future growth. Plans are, however, being imple- mented to increase acreages in banana and sugar. In sum, given the large weight in the export trade of these traditional commodities, and granted also Costa Rica's demonstrated comparative advantage in their production, these five agricultural products will continue to play an important role. Dramatic gains in production and growth, as has been experienced in the past, are now, however, unlikely. Non-traditional Exports 10. In the last two decades, and in particular since Costa Rica joined the Common Market in 1968, non-traditional 1/ exports have experienced spectacular growth. Non-traditional exports were US$12 million in 1963. In 1971 they had increased to US$68 million and in 1977 were estimated to be US$292 million. In 1963 non-traditional exports were about 13% of the country's total exports; in 1977 this ratio had climbed to 35%. In 1963 more than half of non-tradi- tional exports were primary commodities (including refined sugar and fish); in 1976 manufactured exports were 85% of the vastly increased total of non- traditional exports. The contrast with the performance of traditional 1/ By non-traditional exports are meant all those exports other than raw coffee, bananas, beef, unrefined sugar and cocoa. Included in non- traditional exports are, therefore, such commodities as roasted coffee, refined sugar and processed beef and primary exports such as fish and crustaceans, black beans, plantains, and unprocessed vegetables. By far and away, however, the largest component of non-traditional exports is manufactured exports; in 1976 these constituted 85% of the non-traditional exporting sector. Naturally, somewhat difficult allocations of commodities to traditional/non-traditional and between primary/manufacturing categories have to be made. The text will make clear which category or sub-category of export each commodity has been allocated to. - 9 - exports is vivid. Between 1957 and 1977 traditional exports grew at 6% per annum, keeping precise step with the overall growth of domestic output; between 1963-1977 non-traditional exports grew more than twice as fast at 12.3% per annum. Within the period several pronounced price swings can be distinguished in the price indices for traditional exports--swings which, when combined with output fluctuations, have resulted in significant revenue fluctuations. The importance of non-traditional export revenue in total export earnings has meant that these swings have been rapidly transmitted to the domestic economy and created conditions for periodic external payments difficulties. By contrast non-traditional exports have experienced much less volatility in prices; the trend of prices has been upward and export revenues in every year after 1963 has been higher than the previous year. Table 1.2: COSTA RICAN EXPORTS, 1963, 1971, 1976 ($ ooo) 1963 1971 1976 To Central To Rest To Central To Rest To Central To Rest America of World America of World America of World NON-TRADITIONAL PRIMARY PRODUCTS 855.9 6,026.5 2,671.1 4,281.5 9,839.8 26,128.i Fish, Crustaceans, Etc. 3.0 894.5 590.0 2,016.1 1,152.2 4,051.8 Inedible Vegetable Products 30.9 740.1 95.6 652.2 264.5 4,639.5 Edible Vegetable Products 53.6 326.6 185.3 97.0 405.2 2,798.3 Plantains 12.5 43.7 104.1 441.3 76.4 934.5 Roasted Coffee 0.0 0.5 0.0 4.3 o.6 11,229.9 Refined Sugar 0.0 3,458.4 0.0 0.0 0.0 0.0 Processed Beef 48.o 0.3 526.7 1.4 1,064.9 0.3 Other 717.9 562.4 1,169.4 1,069.2 6,876.o 2,473.8 MANUFACTURES 3,605.8 1,783.7 52,875.0 6,783.1 139,816.3 37,450.7 Food, Beverage, and Tobacco Products 1,135.9 122.4 7,568.0 770.3 -13,813.3 3,393.9 Textiles, Clothing, Leather Products 474.3 28.9 7,720.1 77.6 29,024.5 4,105.7 Wood and Products, Including Furniture 403.4 588.0 1,495.4 453.2 3,591.1 2,467.5 Paper, Printing and Related Products 160.1 108.8 2,356.5 15.1 3,549.1 1,184.9 Chemical, Petroleum, Coal, Rubber and Plastic Products 928.5 537.5 18,188.9 3,824.6 49,452.9 13,429.2 Other Nonmetallic Mineral Products 59.7 0.1 204.8 0.3 1,214.9 30.7 Iron and Steel 13.6 0.0 2,592.1 l0.6 l0,408.6 24.7 Metal Products, Machinery and.Equipment 339.7 5.2 11,163.1 332.3 25,295.9 5,741.5 Other Manufactures 90.6 392.8 1,586.1 1,299.1 3,466.o 7,072.6 TRADITIONAL PRIMARY PRODUCTS 598.7 79,629.7 763.8 157,988.5 972.e 378,733.4 TOTAL 5,o60.4 87,439.9 56,309.9 169,053.1 150,628.9 442,312.2 Source: IEIC, Comercio Exterior de Costa Rica - 11 - FIGURE 1.2: EXPORT DESTINATION FOR MANUFACTURED AND TRADITIONAL PRODUCTS 1963, 1971, 1976 MANUFACTURES $5.4 mi.lLion $59.7 million $l77.3 million 12.2% 6.1% 11.8% 6.0% F= fi 15.3% ~~~~~~~~~~~8.1% E E T 87.9%80 72.5% 1 9 b .3 1 191;4 C:ENTPRL Wl1ERlCi T PerioiJ OTHER TRADITIONAL PRODUCTS $80.2 million $158.6 million $379.7 million 1EE w 2.9% 8.4% - 7. 5% 39.0% 38.2%418 p E R E N T I 58.1% 20 1963 1971 1976 | 1 EUROPE Time Periods OTHER SOLRCE: COMERCID EXTERIOR DE COSTA RICA. - 12 - 11. In 1963 refined sugar was the only non-traditional product that had an export value of more than US$1 million. In 1976 five non-traditional primary product categories and fully 37 manufactured product categories registered export sales of more than US$1 million (see Appendix, Table 2.4). Focusing on manufactured exports by industrial sector classification, the largest categories of manufactured goods exports in 1976 were, in descending order of importance: chemicals--including fertilizers, medicines, and phar- meceuticals and insecticides and fungicides; textiles and clothing, includLng synthetic fabrics, knit and crocheted textiles, interior and exterior clothing, and thread and yarn, electrical machinery, including refrigerators, electrical control mechanisms, and copper cables (sold to Chile); food products, including syrups and concentrates, margarine and lard, preserved fruits, buscuits and crackers, cocoa butter and paste, processed vegetables, and candies and sweets; and basic metals and metal products. Lacking detailed price informa- tion and given significant product diversification since 1963, it is not possible to comment on the real growth in different non-traditional manufac- turing export categories. A few examples in current prices illustrate the surge in export activity in this period. Processed food exports rose from slightly under $5.0 million in 1963 to $16 million in 1976. Exports of chemicals rose from just over US$1 million in 1963 to slightly under US$50 million in 1976; textiles and clothing exports increased from US$0.5 million in 1963 to US$28 million in 1976. Examples could be multiplied, but clearly there has been a powerful growth in manufactured exports as well as a signifi- cant diversification in the products exported. 12. Costa Rica's participation in the CACM must account for a large share of this growth. From a total sale of manufactures to Central America of US$4 million in 1963 sales of manufactures grew in 1976 to US$140 million and the share of manufactured exports going to the CACM increased from 72% to 80%. Indeed, the share of manufactured exports absorbed by the Common Market reached a peak of 88% in 1971 before the gradual exhaustion of import substitution possibilites within the region weakened considerably the regional group as a final market. The pattern of Costa Rica's export trade in manufactures Ln the Common Market reflects quite clearly the impact of production for a regional grouping protected from external competition by high tariff barriers. Chemicals constitute the largest grouping of manufactured exports to the CACM, and within this, fertilizers are the most important sub-category; fertilizer production in Costa Rica is dominated by the activities of a Mexican-owned consortium, and within the regional protection available, fertilizer prices are in the range of up to twice those ruling internationally. Food products and textiles, the next most important exports in the Common Market are, in order, the most heavily protected industries in Costa Rica and in the regLon (see Table 3.2). These three industries together accounted for 62% of Costa Rica's non-traditional exports to the CACM in 1976. Refrigerators, electric cables, tires, plastLcs and metal sheets are further examples of products or product groupings with high export sales to Central America, which owe their development and perhaps even their continued survival to generous tariff protection and access to duty free imported inputs for production for the local market. Even for product groupings where Costa Rica may reasonably be argued to have a comparative advantage in production, such as wood or leather, TABLE 1.3: COSTA RTCAN EX?CRTS BY DESTINATION (US $000) 1975 CENTRAL OTHER LATIN DESCRIPTION TOTAL AMERICA U.S. CARIBBEAN AMERICA EUROPE 1/ OTHER TRADITIONAL PRIMARY PRODUCTS 379,706.2 972.8 192,618.L 6,570.5 5,458.9 158,877.8 15,207.8 NON-TRADITIONAL PRIMARY PRODUCTS 2/ 35,967.9 9,839.8 14,972.4 2,841.1 429.8 2,424.0 460.8 CIIU MANUFACTURED PhODUCTS 177 267.0 139,816.3 15, 55.7 2,809.2 14,534.1 3 722 7 1,029.0 31 Food Products Beverages, Tobacco 17,207.2 13 , 1 . 2 594 201i .4 37 0.0 32 Textiles, Clothing, Leather Products 33,130.2 29,024.5 1,844.4 96,o 195.6 1,886.7 43.0 33 Wooden Products, including Furniture 6,058.5 3,591.1 1,722.4 668.2 61.8 12.6 2.5 34 Paoer, Paper Products, Printing and Publishing 4,734.0 3,549.1 432.2 647.5 92.7 10.8 1.7 35 Chemicals, Rubber, Plastics, Petroleum, and Coal Products 62,882.1 49,452.9 336.2 636.9 11,642.9 23.8 789.4 3/ 36 Non-4,etallic Mineral Products, excent Petroleum and Coal 1,245.6 1,214.9 20.7 0.4 9.6 0.0 0.0 37 Basic Metals 10,433.3 10,408.6 24.7 0.0 0.0 0.0 0.0 38 Metal Products, Machinery and Equioment 31,037.4 25,295.9 1,500.3 575.3 2,286.7 1,241.6 137.6 39 Other Manufactures 10,538.6 3,466.o 6,808.9 0.1 40.4 lid.4 54.o Total 592,941.1 150,628.9 227,946.5 12,220.8 20,422.8 165,024.5 16,697.6 1/ .Jot inclus.6 .3ovieb Union. 2/ Includes NAUCA categories 30104, 0110 , 01139, 32, 03, 042, 3610115, )511199, 05137, 3563201, 954L3, 90469, 37102, 37202, 074, 375, 08103, 08104, 121, 21, 22, 23, 24, 25, 26, 272, 291, 292, 4 and 92. 3/ Of which 753.1 was fuel for shins. Source: Comercio Exterior de Costa Rica, 197S. TranslatiOn of NAUCA trade data to CIIU industrial categories was effected using a 1972 translation supplied by the Consejo Monetario Centroamericano, Tabla de Equivalencias de los Codigos UAUCA, CUODE, y CIIU Revisados. However, this translation includes many primary products within manufactures, particularly in food oroducts. Elsewhere, induistrial statistics do include these products, buit this table classifies them separately. - 14 - protection levels have been high, and high export sales have been generated within the CACM at the cost of earning hard currency foreign exchange by expanding sales to the rest of the world. 13. Competing against the very strong pull for product n for the regional market, non-traditional exports to the third countries have not yet achieved the high visible impact of manufactured goods sales to the CACM. Nevertheless they are important, comprising about 30% of all non-traditional exports (some 11% of all merchandise exports). Recently these exports have experienced very high growth in contrast to slower absorption by the CACM. Between 1970 and 1977, non-traditional exports to the rest of the world grew at a 24% real rate per annum; non-traditional exports to the CACM grew, over the same period, at 8% per annum. This reverses the previous trend: in 1957-69, non-traditional exports to the rest of the world grew by an average 2% per annum in contrast to the 29% growth in these exports to the CACM. In 1963 non-traditional exports to the rest of the world were heavily weighted in favor of non-traditional primaries (including refined sugar); non-traditional primaries comprised 74% of all such exports in that year. In 1976 the balance had changed somewhat; non-traditional primaries (including roasted coffee) were 41% of non-traditional exports and manufactured products constituted the remainder. The chief (over US$1 million sales) non-traditional exports to the rest of the world in 1976 were roasted coffee, fertilizers, seafood, vegetable products, tanned leather, electrical control mechanisms, canned beans, furniture, cocoa butter and paste, insecticides and fungicides, vegetable raw materials and plantains. 14. The largest market for non-traditional exports to the rest of the world from Costa Rica is the US, which absorbs 56% of such exports at the value in 1976 of about US$35 million. Mexico is the second largest market with a share of 17% (US$10.5 million), but this is almost totally due to the intrafirm transactions of FERTICA, the Mexican owned fertilizer firm. Other Latin American countries received about US$10 million of non-traditional exports in 1976, and Europe, the next most important trading partner, about US$6 million. It is clear that in the most important market, the US, resource based processed products have found a ready outlet; these products include roasted coffee, potted shrimps, vegetables, cocoa butter and paste, furniture and wood products, tanned leather and shoes. The important exports to Europe are similar, including inedible vegetable products and tanned leather, and a non-primary based export, electrical control mechanisms. Latin America and the Caribbean purchase chemicals (medicines, insecticides, fungicides) furniture and plywood, and electric cables. 15. In summary, non-traditional exports have grown very rapidly, and the export of non-traditional products to the rest of the world between 1969 and 1977 considerably outpaced the export of these products to the CACM. There has been considerable diversification in the composition of non-traditional products, away from a heavy reliance on nontraditional primary or processed traditional primary products towards manufactured goods. Exports of the latter, however, given the strong incentives to provide for the regional market, are for the most part destined for the member countries of the CACM. At the same time manufactured exports are making inroads into markets outside the region. As might be expected, domestic resource-based products have achieved the greatest penetration in third markets. - 15 - CHAPTER II: INDUSTRIAL DEVELOPMENT - Major Features Industrial Structure 16. The rapid growth of non-traditional exports from Costa Rica has been accompanied by an equally rapid growth in industrial production. The Costa Rican economy has, in the last two decades, undergone a fundamental structural change where industry has become the largest productive sector in the economy, and the relative contribution of agriculture to output has fallen. In 1960, agriculture's share of GDP was 25%. In 1977 this had fallen to 19%. Over the same period manufacturing industry increased its share in production from 14% to 22%. 1/ Changing shares in output naturally reflected different underlying growth trends; between 1960 and 1977 industrial growth, at an annual real rate of 9.2% outstripped GDP growth of 6.1% per annum, and considerably outstripped agricultural growth at 4.4% annually. 2/ Manufacturing industry absorbed 58,000 new employees between 1963 and 1977, as compared to agriculture, which absorbed 25,000. As a result, industry's share in total employment increased from 11.7% in 1963 to 15.8% in 1977, whilst agriculture's share declined from 50% in 1963 to 33% in 1977. 31 Consistent with these trends, productivity (value-added in real terms per person employed) has been growing in both sectors--at an equal pace of 3.7% per annum since 1963. Relative productivity has not changed since 1963; value-added per person employed in manufacturing is still about two and a half times as high as in agriculture and one and a half times the nation4l average. 17. Despite the pronounced shifts in output and employment patterns, Costa Rica has actually proceeded along a fairly balanced path of development. Based on a cross-country survey of "expected" structural characteristics the country fits well to norm. For a country of its size and level of income the "most probable" shares of primary output in production would be 1/ The more traditional definition of industry includes, in addition to manufacturing industry, construction, electricity, gas and water. Since it is manufacturing output that we are primarily concerned with in this report the word "industry" will be used in the narrower sense and exclude construction, electricity, gas and water. 2/ This is not to belittle the achievement in agriculture. Costa Rican agricultural growth is considerably higher than the average of Latin America, which in 1960-73 experienced an agricultural growth rate of 3.2% per annum. Between 1965 and 1973 Costa Rica achieved the highest agricultural growth of any country in the region. 3/ Correspondingly, manufacturing industry has displayed a much higher employment elasticity with respect to value-added than agriculture; between 1963 and 1977, for instance, manufacturing industry's employment elasticity was 11% as compared to 2% for agriculture. - 16 - 19% (Costa Rica 1977: 19%) and of industry (widely defined) would be 32% (Costa Rica 1977:33%). 1/ The country has thus neither veered into an over- whelming industrial concentration nor remained with a heavy concentration of agricultural production. The reasons for this are, unfortunately, not easy to distinguish. Over the period it can be argued that the intent of public policy has been to "favor" industry at the expense of agriculture, by follow- ing a policy of protecting manufacturing activity behind high tariff barriers. This has not only raised the domestic price levels of manufactured consumer goods vis-a-vis agricultural goods, but the prices of locally manufactured inputs to agricultural activity have also risen, with both effects acting to turn the domestic terms of trade against agricultural activity. 2/ Three points however deserve emphasis. First, despite the industry-oriented policy stance Costa Rica has capitalized remarkably successfully on its natural resource advantage in agricultural production, suggesting that the sector will continue to be an important mainstay of activity. Second, the small size of the economy entails that further changes in productive structure will continue to be considerably affected by trade and by extension, by overall commercial policy. The importance of trade to Costa Rican agriculture need not be restated. As analysed below, intraregional trade and domestic import substi- tution have been important sources of growth for Costa Rican industry. These sources are now of diminishing importance. Industry's growth and hence the pace--and pattern--of increased industrial participation in the economy will be predicated on finding new sources of export growth. 3/ The third point is that despite its size the Costa Rican economy is indeed highly complex. Both the agricultural and industrial sectors have shown dynamism in growth and entrepreneurs in each sector have responded vigorously and successfully to new opportunities. It is not, therefore, easy to type-cast the country as either typically "agricultural" or "industrial." Neither is it easy to clearly identify comparative advantage as between sectors. In these circumstances an even-handed policy which does not serve to unduly discriminate in favor of one sector against the other and which does not serve to disorient the pattern of resource allocation might best be advised. 1/ Chenery and Carter: "A Handbook of Expected Values of Structural Characteristics," IBRD 1973. 2/ This hypothesis, probably correct, does deserve further study, for in Costa Rica the prices of agricultural products are not by and large determined by exchange relationships in the domestic market but, with two-thirds of agricultural output exported, by prices ruling inter- nationally. Moreover, the Government has in recent years set high support prices for domestic grain production and subsidized certain subsectors of agricultural activity by a policy of low interest rates. The question as to the relative strength of incentive pulls between agriculture and industry over the period--and thus some of the reasons for Costa Rica's fairly balanced pattern of structural transformation in the last two decades--cannot therefore be easily answered. 3/ This is not to say that in the normal course of development industry will not continue to increase its share in output and employment. Rising in- comes, higher income elasticity of demand--for manufactured goods and, on the cost side, a higher productivity in industry will all tend to move resources away from agriculture and into indust iai activities. - 17 - 18. Not only has an economy-wide change in production pattern occurred in the last two decades, but the structure of industry has itself changed. Table 2.1: INDUSTRIAL STRUCTURE 1960-1977 Shares in Value Added Growth Rates 1960 1969 1977 1960-69 1969-77 Consumer Goods 79.2 65.2 63.8 6.9 8.1 Intermediate Goods 20.8 31.3 33.1 14.3 9.1 Capital Goods 0.0 3.5 3.1 - 6.9 Total 100.0 100.0 100.0 9.2 8.4 Source: Appendix Table 3.2. In 1960 about 80% of value-added in manufacturing industry was in the final consumption goods industries of food, beverages, footwear, clothing, printing and consumer chemicals. The subsector experienced a drop of about 15% in its share of industrial activity in the period 1960 to 1969; thereafter its share declined but little. The most visibly affected industries were food and beverages, which between them accounted for 11 points of this reduced share. Intermediate good production on the other hand experienced strong gains, with textiles, industrial chemicals, plastic and rubber products and metal products registering strong increases in their share of manufacturing activity. Capital goods (mechanical and electrical machinery) of which there was no registered production in 1960, grew to slightly more than 3% of value-added in 1977. Despite this widening of the industrial base, the composition of activity is still heavily slanted towards consumer goods industries. Partly because of the policies of providing high protection for consumer goods industries, Costa Rica has not developed particularly deep or extensive capital or inter- mediate goods sectors. Import Substitution and Sources of Growth 19. The policy of import substitution and the tying of industrial incentives to the common schemes of the regional market have exercised a most powerful influence on the development of industry in Costa Rica. One rough measure of the success of import substitution policies is provided by the degree to which domestic production has replaced imports in total supply (Table 2.2). When Costa Rica joined the Common Market in 1963, there was little production in many industries. Imports accounted for over 90% of total available domestic supply in such industries as basic metals, mechanical machinery, electrical machinery and transport equipment and over 60% of total domestic supply in textiles, chemicals, and rubber products. By 1977 the percentage of total available domestic supply represented by imports of manufactured goods had fallen from an average of 46% to 40%. In some industries such as food products, beverages, tobaccos, clothing, wood products and furniture (that is, largely consumer goods industries), imports were at - 18 - Table 2.2: RATIO OF IMPORTS TO TOTAL AVAILABLE DOMESTIC SUPPLY - BY INDUSTRIAL BRANCH, 1963, 1971, 1977 CIIU INDUSTRY 1963 1971 1977 31 Food Products, Beverages, Tobacco 2/ 12.2 10.0 8.7 32 Textiles, Clothing, Leather Products 36.2 38.3 3/ 29.3 33 Wood and Products, including Furniture 1.3 4.6 2.1 34 Paper and Products, Printing, Publishing 56.7 50.0 43.9 35 Chemical, Petroleum, Coal, Rubber and Plastic Products 67.9 47.5 49.9 36 Other Non-metallic Mineral Products 46.8 30.8 28.7 37 Basic Metals 100.0 84.7 84.4 38 Metal Products, Machinery and Equipment 90.1 69.2 70.9 39 Other Manufactures, including Re-exports 80.8 78.2 64.4 TOTAL 46.4 42.2 40.3 1/ Expressed as a percentage, Ratio = M/(M. + Y.), where M. are subsectoral competing imports and Yi is gross vaiue 6f doiestic output. 2/ Omits coffee drying and roasting, beef preparation and packing, and sugar refining. These agrindustrial processes, because of their large weight in production, tend to overwhelm the measure of import substitution in food processing, and in total import substitution. See footnote on page19. 3/ This import ratio increased from 1963 because of a large increase in imports of footwear. For the other categories of the subsector, textiles, clothing, and leather products, the import ratios declined. Source: MEIC, Comercio Exterior de Costa Rica, and Banco Central, Cifras de Produccion Industrial, 1957-1977. - 19 - most 11% of total domestic supply in 1977. There is little scope for further import substitution in these subsectors. Inevitably, further import substi- tution possibilities exist in the metal mechanical sectors and more generally in intermediate product categories. In view, however, of the very small size of the domestic and regional markets, of the inefficiencies entailed in additional protection, and of certain higher costs to consumers, further import substitution incentives in these sectors should be avoided. 20. Whilst the import substitution policy has clearly been important for Costa Rica's industrial development, recently much of the steam has been going out of the movement. The process was strongest in the early years of the com- mon market and weakened considerably after the El Savador/Honduran confict in 1969. Four sources of growth for Costa Rican industry have been distinguished in Table 2.3: (1) Export expansion to Central America, (2) Export expansion to the rest of the world, (3) Import substitution (seen as the reduction in the ratio of imports to total domestic supply), and (4) The expansion of domestic demand (measured as a residual). 1/ In 1971-77 domestic import substitution contributed only 3% to industrial growth in contrast to the period 1963-1971, when 11% of the expansion of industry could be attributed to the process of replacing imports by local production (excluding major food products exported outside the region). 2/ The export expansion to Central America can to a degree 1/ For a description of the analytical procedures employed see Annex 1. The original formulation of the procedure can be found in Hollis B. Chenery "Patterns of Industrial Growth," American Economic Review, Vol. 40, No. 2, June 1960, pages 634-640. This analysis does not measure industry linkages and Keynsian multiplier effects and as a result is likely to overstate somewhat the importance of domestic demand growth. 2/ For technical and substantive reasons it is useful to exclude a large part of the food products sector in analyzing the process of import substitu- tion. The technical reason is that the food product sector so dominates manufacturing production that changes in the food subsector easily over- whelm the averages for manufacturing as a whole, thus giving a partial view of the evolution of import substitution in the rest of the manufac- turing sector. The substantive reason is that the food product sector is in turn dominated by the export-oriented enterprises (coffee roasting, beef preparation and sugar refining), only a small proportion of whose output is destined for the local market. Thus, the food product averages and that of manufacturing as a whole are heavily influenced by primary- based export-oriented enterprises. Inclusion of these enterprises again confuse the analysis of import-substitution. (In 1977, the food product sector constituted 44% of total manufacturing output; fully one-half of this was the "output" of the coffee roasting, meat processing and sugar refining enterprises. About 70% of the combined output of these products is exported, and more than 95% of these exports are destined outside the region.) Table 2.3 thus reports calculations in the foods products sector both with and without these export-oriented agricultural processing concerns and the manufacturing totals again present calculations with and without the coffee roasting, beef preparation and sugar refining enter- prises. Table 2.3: SOURCES OF DEMAND GROWTH (AS % OF TOTAL GROWTH IN OUTPUT) FOR COSTA RICAN INDUSTRIES, 1963-71, AND 1971-77 EXPORT EXPANSION EXPORT EXPANSION IMPORT SUBSTITUTION TO CENTRAL AMERICA TO REST OF WORLD WITHIN COSTA RICA DOMESTIC DEMAND GROWTH CIIU INDUSTRY 173 /-7I 197t-t7 1953-71 1971-77 1953-71 1971-77 19S3-71 1971-77 311-312 Food Products, less Coffee Roasting, Meat Processing and Sugar Refining 8.0 4.3 0.8 13.0 5.9 3.4 85.2 79.3 313 Beverages 0.1 0.0 0.0 0.0 6.1 -5.9 93.8 105.8 314 Tobacco Manufactures 0.0 0.0 0.5 8.8 -2.8 1.2 102.3 90.0 321 Textiles, including Carpet and Lace 15.9 12.9 0.1 0.1 1.1 39.9 82.8 47.0 322 Clothing 4.6 9.0 0.1 0.3 4-4 -3.3 91.0 94.1 323 Leather Products, exceot Clothing & Footwear 21.0 16.' -0.5 26.4 25.0 5.9 54.4 51.4 324 Footwear 23.9 6.6 0.0 0.2 -153.0 -5.2 229.0 98.4 331 Wood and Products, including Cork 9.1 5.7 -1.3 2.3 -7.5 3.2 99.9 87.8 332 Wooden Furniture and Accessories 2.3 2.4 0.4 3.4 -9.1 3.6 106.5 90.6 34 Paper, Printing, and Related Products 5.4 3.3 -0.2 0.0 19.6 14.5 75.2 82.1 351-352 Chemicals 13.0 13.2 1.9 1.4 22.7 S.7 62.4 78.6 355 Rubber Products 9.2 11.9 3.3 -2.1 66.1 6.3 21.4 83.8 356 Plastic Products 17.5 17.7 0.0 1.2 -8.9 5.1 91.4 76.o 36 Non-metallic Mineral Products, nei 0.7 2.6 0.0 0.1 34.3 3.9 64.9 93.4 37 Basic Metals 0.0 14.o 0.0 0.2 100.0 2.4 0.0 82.6 381 Metal Products 4.3 14.2 0.2 0.14 78.4 7.4 17.2 77.9 382 Mechanical Machinery 1.9 9.5 0.1 0.2 77.0 -61.4 21.3 151.7 383 Electrical Machinery 0.9 11.4 0.0 5.5 94.3 16.1 4.8 67.0 384 Transport Equipment 0.0 0.1 0.0 0.5 o0.8 -13.3 19.2 112.6 39 Other Manufactures lb.l 74.9 11.0 70.5 29.4 31.6 100.3 6.8 Total 9.3 8.0 0.9 1.6 10.6 3.3 79.2 83.6 Memo Item: Food Products Sector, inciuidinr Coffee, Meat, Sugar 4.9 2.6 14.7 12.4 0.5 0.8 80.0 84.2 Total, including Meat, Coffee, Sugar 9.0 7.3 7.4 19.4 1.7 0.4 81.9 72.9 Source: Bank staff calculations. For methodology, see Annex 1. - 21 - be regarded as part of a regional import substitution process. Again exclud- ing those food products which are overwhelmingly exported outside the region, the region provided 9% of the demand impulse for growth between 1963 and 1971 and 8% between 1971 and 1977. In the first phase of high import substi- tution within Costa Rica, intermediate and capital goods industries were most rapidly establishing domestic bases. The consumer goods industries of food, clothing, footwear and wooden furniture during this first phase, gained significantly from the extension of protection from the national to the regional market, as export expansion to Central America (i.e. regional import substitution) provided a more powerful stimulus to growth than domestic import substitution. In the second period, 1971 to 1977, domestic intermediate and capital good import substitution gave way to export expansion to Central America as the chief source of development; overall, in this latter period regional import substitution as a source of growth dropped in most consumer good categories. In both periods the most powerful stimulus for expansion came from the growth of the domestic demand, which in Costa Rica is, to a large extent, the result of buoyancy in traditional and non-traditional exports to third countries outside the CACM. 21. Even though the impulse for industrial growth coming from regional import substitution may be fading, much of the Costa Rican industry has been and continues to be dependent on the regional market. In 1963 for instance 2% of manufacturing output was exported to market countries. In 1977, 13% of manufacturing output was sold to market countries (Appendix Table 3.4). (Both these figures exclude the dominating influence of processed food exports to third markets from the food sector.) Industries which export a high proportion of their output to Central America included in 1977: basic metals (93%), mechanical machinery (47%), electrical machinery (35%), chemicals (30%), textiles (31%), metal products (24%), plastic products (21%), rubber products (19%), and leather products (18%). These later industries contribute almost 25% of value-added in industry and comprise some 22% of the total value of sales. Only the food and beverages, tobacco, furniture, petroleum, and non-metallic mineral subsectors, in fact, sold less than 5% of their output to the CACM. Thus, a considerable interdependence exists between the regional economy and the Costa Rica's manufacturing industry. The industries with high export ratios to the market and which have grown most rapidly behind the protective walls of the market are likely to be particularly sensitive to changes in CACM arrangements. 22. Export expansion to markets outside Central America has provided a minor stimulus to manufacturing sector growth--in 1963-1971, 0.9% and in 1971-77, 1.6% of industrial growth can be attributed to this source. Over- seas markets have been important, however, for particular industries. For the food products sector export expansion to third markets provide 1% of the demand stimulus in 1963-1971 and 13% in the later period 1971-1977. Several industries are now, however, fast increasing their exports outside the region. The wood and furniture products industries are an example; in 1963 these industries together exported 3% of their output to the rest of the world and 2% to Central America. With the formation of the CACM the industries were granted one of the highest protection rates available (see Table 3.2). By 1967, exports to the CACM were 7% of output, and extra-regional exports had - 22 - dwindled to virtually zero. With the saturation of the regional market, however, the industry has had to look abroad again for markets. In 1977 regional exports had fallen to 4% of total output, and extra-regional exports were back at the position they enjoyed in 1963, i.e., 3% of output. In general, and as can be expected, those industries with a high domestic resource content have been most successful in exporting outside the region. Industrial Concentration 23. Costa Rica's industrial structure is highly concentrated with a few establishments generating the major share of employment, output, and manufac- tured exports. In 1975, for instance, those companies which employed 200 or more persons (less than 2% of all manufacturing establishments) employed about a third of the manufacturing labor force and generated about 44% of the sector's value-added. At the other end of the scale enterprises which employed less then 20 persons comprised over 80% of all establishments, employed 20% of the labor force and produced only 10% of manufacturing value-added. A recent study has focused more incisively on this problem of concentration. I/ The study reports that those industrial subsectors which generate the largest shares of value-added and employment, are in fact dominated by the activities of one or two firms. In 1975, for instance, 70% of manufacturing value-added was generated in subsectors where two firms at most accounted for more than 50% of the subsector's output; these same subsectors employed 56% of the manufacturing labor force. Thus, a sizeable proportion of manufacturing activity occurs in subsectors where one or two firms dominate production. In 1975, 40 out of 50 of the largest establishments (200 employees or more) in Costa Rica, which together accounted for 41% of value-added in manufactur- ing, were to be found in these highly concentrated subsectors. 24. At the same time the evidence is much less clear that large firms exercise the same predominance in the export effort. Large firms do on the one hand contribute by far and away the greater proportion of total manufac- tured exports; firms which employ 150 or more employees (about 3% of all establishments) for instance produce about 54% of the total manufactured exports of the country. On the other hand, the proportion of output exported is much more evenly spread across firms of different sizes (see Appendix Table 3.13). Firms which employ ten to 29 persons, for instance, export 26% of their total output--the highest proportion reported among firms of different sizes. If firms are classified by value of output rather than by numbers of employees the same pattern emerges. Firms with value of sales greater than 030 million contributed 53% of all manufactured exports, exporting about 22% of their output. Small- to medium-sized firms however, ranging in production levels from ¢10 million to ¢29 million, have, on average, export ratios of 31%. 1/ Carlos A. Izurieta Segura: La Concentracion Industrial en Costa Rica 1964-75 y las Actuales Formas de Mercados Dominantes, 1979. Instituto de Investigaciones en Ciencas Economicas, Universidad de Costa Rica. - 23 - 25. There is a small but significant difference in the destination of export sales amongst firms of different sizes. Medium-sized firms tend to sell a greater proportion of their export production to the rest of the world; conversely, larger firms export proportionally more to the CACM. Firms of from 30 to 100 employees send, on the average, slightly more than half of their exports to countries outside the common market. Firms which employ more than 100 employees, on the other hand, send little more than a third of their exports to countries outside the CACM. This feature requires explanation, as it might be expected that larger firms are perhaps better placed to exploit economies of scale, and have greater resources to devote to marketing efforts abroad. One possible explanation is that the oligopolistic biases of the domestic and regional markets, with which large firms are.so clearly identified, allow them to dominate regional trade and allow them to neglect third-market exports which medium- to small-scale firms cannot afford. In this sense, large firms do not feel compelled, nor does the incentive system encourage production to third markets. 26. The picture which emerges is thus one of a few large firms dominating manufacturing activity and export activity, operating in highly concentrated market strata, but with a promising partLcipation of medium-sized firms in foreign trade, and especially in the proportion of output destined from these firms to third markets. Several policy prescriptions follow. First, it is desirable to reduce the oligopolistic biases in the market by stimulating the development of the smaller sized firms. This would increase competition and efficiency and stimulate the larger firms to utilize excess capacity by exporting abroad. Second, the participation of medium-sized firms in the export effort requires, greater analysis and ways sought to assist them in their efforts to export to third markets. The mission met several examples of smaller-scale firms which were simply not large enough to capture the scale economies necessary for powerful export pushes. On occasion, and this is particularly true of the textile industry, severe market fragmentation (small fLrms producing essentially the same product but with great "brand differentiation") acts as a constraint to successful exporting. In this regard, pooling supply arrangements of small firms (under the aegis of trading companies for instance) can create levels of supply sufficiently attractive to large foreign buyers. Import Intensity 27. Paradoxically, at the same time that industrial strategy has been to replace imports by domestic production, manufacturing activity has become more, rather than less, import intensive. Raw material imports for industry averaged 11% of industrial output in 1960-1962, and this ratio had climbed to 20% in 1975-1977. Several characteristics of industrial development help explain this development. First, the successive replacing of imports by domestic production has largely been at the finished end of consumer goods production. As industry has expanded, and as domestic intermediate and raw materials have either been unavailable or in short supply, the structure of industrial product-Lon has veered into import intensity. The process has been aided and abetted by very generous exemptions from the payment of all tariffs for intermediate and raw material imports. In fact, as the exchange rate has been consistently overvalued, the imports of raw materials and intermediate inputs for industry have contained an important subsidy - 24 - component. A second reason for the high overall import intensity of production is that certain industries which have grown very rapidly are particularly dependent on imports. The chemicals (especially pharmaceuticals, fertilizers, tires) and metal/mechanical industries fall into this category. Table 2.4 summarizes cector import intensities from a sample of firms which obtain import exonerations. 28. The phenomenon of increased import intensity in manufacturing has had important consequences for the country's external trade position. In 1960-1962 industrial raw materials were 22% of the country's total imports; in 1974-1977 the ratio had climbed to 37%. In fact the manufacturing sector has consistently run trade deficits; in 1974-1976, for instance, raw material imports for industry exceeded manufactured exports by 25%; excluding the food, beverages and tobacco sector (CIUU 31) the excess of raw materials imports over exports of the manufacturing sector was about 70%. 1I/ The growing proportion of imports that are inputs to manufacturing activity in the country creates an unwelcome rigidity in balance of payments. External deficits become much more difficult to manage as compressing imports entails depressing, perhaps severely, the level of domestic activity. 29. Because industry earns much less foreign exchange than it demands (for intermediate and raw material imports), the economy has to rely on agricultural activities to redress the foreign exchange imbalance. Both the cyclical variation in export revenues earned by the latter as well as the fact that foreign exchange demand by industry far exceeds the growth of exchange supply by agriculture 2/ set the stage for chronic and ever-deepening balance of payments difficulties. This is why one of the conventional wisdoms about Costa Rica should be changed. It is not simply export price swings any longer, which lead the country into periodic exchange crises. The other edge of the scissors, as it were, is the rapid growth in demand by industry for foreign exchange. The twin effects lead to move pronounced crises than would otherwise be the case. Moreover as the foreign exchange feeds into protected, inefficient industries serving a small market, the country inevitably finds itself on a declining growth path, punctuated by periodic and ever worsening exchange crises. As is well known, developing countries do discover secularly increasing demands for foreign exchange as their economies grow. The elevated levels and peculiarly intractable composition of this demand in Costa Rica is, however, directly attributable to the policies of import substitution followed by the country in the last two decades. 1/ This estimate is arrived at, by assuming from the MEIC data, that 17% of the raw material imports for manufacturing industry are for the food, beverages and tobacco sector. 2/ Between 1963-1965 and 1974-1976 the derived demand for foreign exchange by industry, reflecting the demand for imported industrial inputs, grew by 20% annually; agricultural export revenue, by contrast, grew by 14% annually. Table 2.4: IMPORT INTENSITY, EXPORT CONTRIBUTION, AND TRADE DEFICITS OF SELECTED -/ MANUFACTURING ENTERPRISES, 1975-1976 Imported Inputs as % of Output Export as % of Output Rest Rest TRADE DEFICIT Cent. of Cent. of AS % OF OUTPUT Amer. World TOTAL Amer. World TOTAL EXPORTS-IMPORTS 31 Food, Beverages and Tobacco 4.1 21.7 25.8 7.9 15.2 23.1 -2.7 32 Textiles, Apparel and Leather 10.8 16.1 26.9 20.2 5.4 25.6 -1.3 33 Wood Products and Furniture 2.1 13.0 15.1 14.2 8.8 23.0 7.9 34 Paper Products and Printing 3.2 31.8 35.0 10.9 1.6 12.5 -22.5 35 Chemicals 6.5 42.8 49.3 29.3 8.3 37.6 -11.7 36 Non-Metallic Mineral Products 2.4 8.0 lo.4 2.4 0.0 2.4 -8.o 37 Basic Metals 1.6 79.1 80.7 8.6 0.0 8.6 -72.1 38 Metal Products and Machinery 1.6 46.o 47.6 34.5 7.9 42.4 -5.2 39 Miscellaneous Manufacturing 1.5 36.4 37.9 30.3 0.0 30.3 -7.6 1 Total 5.1 31.3 36.4 20.2 8.4 28.6 -7.8 Source: MEIC, Bank Staff Computations / A sample of 433 firms which, because they receive industrial incentives, have to file with MEIC. Total output of these firms is about 40% of national manufacturing output. - 26 - Capacity Utilization 30. A further consequence of the incentive schemes that have been applied in Costa Rica has been to encourage entrepreneurs to install excess capacity. Over time, low interest rates subsidizing the purchase of capital goods, duty exemptions for the import of machinery and equipment and tax provisions which allow full deductions from the tax base of reinvested profits at the time of capital good purchase, followed by generous depreciation allowances, have each acted to lower the price of capital below its social opportunity cost. Relative factor prices have been further distorted by high payroll charges (payroll taxes comprise about one-fifth of average gross compensation) which have effectively served to reduce the demand for labor. 1/ Excess capacity manifests itself in the low number of shifts worked, in the large number of days when activities shut down (weekends, holidays, etc.), and low intensity of utilization during the work day. In a 1974 study of capacity utilization of Costa Rica, Schydlowsky reported that about two-thirds of industrial firms typically work one shift, slightly 10% work two shifts, and the remainder works three. 2/ An OFIPLAN survey of 1976 3/ found that the number of shifts worked was on the average only 56% of the number of shifts that entrepreneurs considered technically feasible. A later survey by the Ministry of Labor (1977) showed, in a sample of 700 industrial establish- ments, nearly 80% working only one shift and approximately 10% each working two or three shifts. Although the pattern of utilization varies across industries there are some single-shifters and triple-shifters in each industrial category. Thus, the products produced do not seem to determine the pattern of utilization. 4/ The size of an establishment, in most countries, is usually positively correlated with multiple shifting; in Costa Rica, however, the percentage of firms working only one shift rises as one goes to the highest sized group (See Appendix Table 3.8). Most interestingly, Schydlowsky reported, "A further major variable which affects utilization is the extent to which a firm's output is exported. In the presence of economies of scale, protected domestic markets tend to develop oligopolistic structures, which hamper expansion of sales and multiple shifting. Exporting provides a 'vent for surplus' for the production of additional shifts, while not upsetting the domestic oligopolistic structure. Exports seem to be related to utilization in the Costa Rican data." 5/ 1/ Chapter III analyzes these incentive schemes and policies in greater detail. 2/ Daniel M. Schydlowsky; Capital Utilization, Growth, Employment, Balance of Payments and Price Stabilization. Boston University Center for Latin American Development Studies, Discussion Paper Series Number 22, December 1976. 3/ OFIPLAN Encuesta de Empresarios Industriales, Informe Preliminar July, 1976. 4/ Schydlowsky, op cit page 26; see Appendix Tables 3.6-3.10. 5/ Schydlowsky op cit. - 27 - 31. The reasons Costa Rican entrepreneurs give for not using capital more intensively, i.e., working more shifts, vary. In the Ministry of Labor survey, of the 555 firms which worked only one shift, nearly 214 firms (40%) indicated they were satisfied with the status quo (i.e., no reason given); of the remainder, 40% claim their more intensive use of capital was limited by lack of markets, 30% found that they consistently worked overtime but could not justify going to a full second shift, 11% claimed that skilled second shift manpower was scarce, and often unavailable, and the remainder had diverse reasons including a lack of electric power. Evidently, entrepreneurs can not be considered irrational in adding to capacity if Government policies cheapen the price of capital in comparison to labor, and if protected small markets enable them to enjoy the good life without undue exertion. Clearly some change in the incentive framework is called for. (The cheap interest rate policy has now been changed. The duty free exemptions and highly advantageous depreciation allowances remain. These will be treated more fully in Chapter III below.) At the same time, the underutilized capacity pervasive across all manufactured sectors does represent a reservoir for expansion of exports, and the widening of Costa Rica's markets could allow economies of scale to be more appropriately exploited. Wages and Employment 32. Information on wage levels is of particular interest to countries contemplating an export drive, as information of this kind is often thought valuable in making judgments on potential competitiveness. 1/ Table 2.5 presents estimates of average wages in the manufacturing sectors of selected countries, and Table 2.6 presents more specific data on hourly remuneration in the clothing indu'stry in selected countries. The more aggregated data suggests that average Costa Rican manufacturing wages are indeed higher than the East Asian countries which are usually considered as the principal competitors in the markets for manufactured exports. The Costa Rican wage is, however, only 15% higher than the average of Hong Kong, Singapore, Taiwan and Korea, and this is certainly within the bounds of error, given the weakness of the underlying data. (Firms in Korea, for instance, will often provide meals, uniforms, transport, sports facilities, etc., to employees; these benefits, if included in the calculation of remuneration, would raise the real level of the Korean average wage.) Costa Rica's average wage is, on the other hand, considerably below those of the newly industrializing countries of Latin America, Brazil and Mexico. The more specific, and for this reason more realistic, comparison of wage levels in the clothing industry places Costa Rica between Taiwan and Hong Kong in hourly wages paid. A tentative conclusion would therefore be that Costa Rican's wage levels are not, indeed, out of line with countries that are making, or have made, major efforts to capture markets in the high income countries. 1/ There is abundant reason, however, to qualify the value of judgments of this kind. First, simple cross-country wage comparisons do not take into account differences in labor productivity. Second, "average" wage comparisons conceal large differences in wage rates to different skills, occupations, and between different industries and sectors. Third, wage rates are compared at existing exchange rates. And fourth, wage rates data are usually very poor and often not comparable, as fringe benefits and other items are included in some series and not in others. - 28 - Table 2.5: INTERNATIONAL COMPARISONS OF WAGES IN INDUSTRY 1/ Average Wages Per Month ($) GNP Per Capita (1977) USA 8762 983 Japan 6069 748 Venezuela 2910 336 Brazil (1976) 1570 266 Philippines 510 257 Mexico 1290 249 Panama 1290 238 Costa Rica 1540 168 Nicaragua (1976) 840 158 Hong Kong 3040 149 Singapore 3260 147 Taiwan 1400 144 Korea 1160 143 El Salvador 600 108 Hondjras 480 105 Colombia 870 102 Guatemala 910 100 1/ Includes basic salary and wage payments. Conversions are made on average length of work week and based upon average exchange rates during the year. Sources: ILO, Yearbook of Labor Statistics, 1977; IMF, International Financial Statistics, April 1979; and Philippine NCSO; IBRD Atlas. Table 2.6: WAGES IN CLOTHING INDUSTRY IN SELECTED COUNTRIES Wages In US Cents GNP Per Capita Per Hour, 1977 Colombia 870 30 Korea 1160 40 Taiwan 1400 51 Costa Rica 1540 66 Hong Kong 3040 75 USA 8762 362 Sources: GNP Per Capita: IBRD Atlas and estimates. Wages in Clothing: D. Morawetz: Unpublished Draft Paper on Colombian Textile exports and Costa Rican Ministry of Labour and Social Security. - 29 - 33. Two sets of Government policies do, or have the potential to, exercise influence on wage levels. The first is the operation of a minimum wage-rate system. The second is the imposition of a number of social charges on income. The minimum wage rate system in Costa Rica does not require much comment as it appears that neither is there general compliance nor are the rates economically effective in the sense that legally enforced rates vitally affect wage setting. (Considerable evasion of the minimum wage exists, especially in the agricultural sector where, except for banana laborers, minimum wage rates are considered maxima rather than minima.) Salary indices for the manufacturing industry over a long period of time show an independent life from the once a year minimum wage setting of the National Council of Salaries, confirming that these labor markets are comparatively free of regulatory intrusion. The social charges on labor are, however, a different matter. Social security and other payroll taxes total a flat 26% statutory rate on wages and salaries withheld by the employer (Table 2.7). In the short- to medium-term these taxes amount to a rise in wage costs to the employer, and have a consequent dampening effect on the demand for labor. (Estimates on plausible assumptions for Costa Rica indicate that over the medium-term only half of all payroll taxes are shifted to labor.) The taxes serve to distort relative factor prices and arguably, have contributed to the over-capitali- zation of Costa Rican industry. At the same time these charges do serve to finance the health and social security systems and have yielded benefits which presumably have some value to employees. Thus the net impact of the charges can not be ascertained without a fuller investigation. In so far as it would be less distortionary, on equity and efficiency grounds, however, to fund social services through an income tax, it is recommended at a minimum, that these charges not be raised, and, if possible, lowered. Table 2.7: COSTA RICA - PAYROLL TAXES Statutory Tax Rate (Percent of Wages and Salaries) Payroll Taxes 26.00 (a) Employer Contributions 18.50 Social Security Administration (CCSS): sickness and maternity 6.75 Social Security Administration (CCSS): disability, old age, and death 4.75 Social Assistance Institute (IMAS) 0.50 National Apprenticeship Institute (INA) 1.00 Community Development Bank 0.50 Family Assistance Program 5.00 (b) Employee Contributions 7.50 Social Security Administration (CCSS): sickness and maternity 4.00 Social Security Administration (CCSS): disability, old age, and death 2.50 Community Development Bank 1.00 Source: Centro Para la Promocion de Las Exportaciones e Inversiones de Costa Rica. - 30 - 34. With a relatively small labor force and with rates of open unemploy- ment ranging from 7% to 4% in recent years, it has been speculated that Costa Rica is likely to experience labor shortages in the future, which will quickly set limits to export expansion in the products of comparative advantage. This perception maintains that both an "absolute" constraint to expansion exists for lack of overall labor supply, as well as "structural" constraints for lack of skilled and semi-skilled personnel. (More subtly the "absolute" constraint version maintains that high industrial demand for labor will lead to a rapid wage inflation and make much of Costa Rica's manufacturing industry uncompeti- tive internationally.) Labor "shortages" have already been experienced in the country particularly in the construction sector, in agriculture during the peak of the coffee picking season, and in various industrial occupational categories. A 1977 sample survey of selected occupational groups in manufacturing industries for instance showed an average vacancy rate of 25% (ratio to people employed), fully 50% of which were unfilled for more than two months; employers claimed that 70% of vacancies could not be filled for lack of qualified people in the market, and for 10% of vacancies, workers existed but were badly trained. The textile, furniture, and metal mechanical industries had the highest ratios of unfilled vacancies to persons employed. The vacancies were largely for skilled and semi-skilled personnel, including seamstresses, embroiderers, carpenters, lathe turners, arc welders, electrical engineers, mechanics, construction workers, etc. Moreover, several businessmen interviewed by the mission maintained that the reason they did not run second or third shifts was lack of qualified personnel. The perception clearly exists, therefore, that Costa Rica faces limits to industrial expansion for lack of skilled labor. This observation deserves analysis. 35. In July 1978 the national labor force was estimated at some 720,000 persons, with an overall participation rate (labor force/total population) of 34%. Between 1973 and 1978 employment has been growing faster than the labor force, at 4.8% and 4.3% per annum respectively, and thus the rate of open unemployment dropped from 7.3% in 1973 to 4.5% in 1978. In 1978 about 94% of males between the ages of 20 years and 65 years 1/ were in the labor force and the rate of open unemployment for this group was 2.4%; 31% of females in this same age group were in the labor force with a higher rate of open unemployment of 5.7%. Women in Costa Rica have become increasingly drawn into salaried work. Whilst the overall male participation rate increased slightly from 50% to 53% between 1963 and 1978; by contrast female participation rose from 10% in 1963 to 21% in 1978; over the period the growth in the female labor force was slightly more than double that of males. 1/ It is more usual to choose 15 years, rather than 20 years, in numbering potentially economically active persons. Costa Rican statistics, unfor- tunately, only provide 12 years and 20 years as end points. - 31 - 36. These high ratios do not mean, however, that there is no "slack" in overall labor supply. Despite the high participation rates and low open unemployment rates there is a degree of underemployment. In 1978 about 8% of the labor force worked less than 30 hours a week, 10% of employed workers wished to work more hours than were offered in their current occupations (equivalent to incremental open unemployment of 3.1% of the labor force) and about 15% of the employed 1/ were in low paying, and by inference, low productivity jobs. The agricultural sector contains higher numbers of underemployed persons than industry; about 40% more workers in agriculture worked less than 30 hours a week in 1978 than in industry. A little less than a third of agricultural workers (60% of whom are wage earners) work less than 40 hours a week as compared to less than one-sixth of industrial workers. Because agriculture contains higher absolute numbers of workers, because these workers suffer from relatively greater underemployment, and because wages in agriculture are lower than in industry (by an average of 30%), it can be expected the sector will continue to serve as a net supplier of labor to industry. The educational and skill profile of agricultural labor is, however, quite different from industrial labor; nearly a third of industrial workers have secondary or university education as compared to only 7% of agricultural workers; in the category "operarios y artesanos" some 50% of all the employed, about 80% of industrial workers, are semi-skilled, as opposed to 12% of agricultural workers. The redeployment of labor from agriculture to industry is thus likely to entail substantial skill-enrichment training programs. Moreover, if the public sector curtails its policy of being "employer of last resort", which has resulted in a tremendous growth of public sector employment (public sector employment, now 19% of all employment, grew by 12.4% per annum in 1970-1978 in contrast to 3.9% per annum for the whole economy), and reduces the differential between public and private sector wages (only professionals and highly qualified technicians amongst salaried workers, receive, on the average, higher remuneration in private rather than in public service), then availability of labor to the private sector manufacturing enterprises can be reasonably assured. 37. Thus the belief that Costa Rica's manufacturing sector will suddenly strain at capacity owing to a deficiency of labor supply does not withstand examination. The country is indeed unusual among developing countries in that it does not possess large reserves of "surplus" or unemployed labor. However, female labor force participation has been increasing with further potential for rise, underemployment exists, especially in agriculture, 1/ Costa Rican labor statistics follow the ILO convention of measuring "invisible" underemployment as those workers whose earnings are below a certain cut-off point; this is placed at 832 colones per month which is about half the average wage. About 7% of salaried workers in 1978 earned approxinately a quarter of the average wage. The incidence of low wage employment is much higher in agriculture than in industry. - 32 - and the public sector by limiting its claims on the employable can free resources for development. More to the point, the failure to train and provide the skills needed in industry has created bottlenecks in certain occupational categories. Indeed there is current evidence of structural mismatches hetween educated entrants to the labor force and the demands of the economy. The growth rates of unemployed persons with higher education accelerated from 8.5% p.a. in 1973 to 19.5% p.a. in 1978. By contrast the numbers of unemployed unskilled laborers grew at 4.6% p.a. between 1963-1973 and then contracted at an annual rate of 5.2% between 1973-1978. As noted previously, measured by vacancy rates, the demand for technical and skilled labor remains high. The country does therefore need to consider carefully its educational strategy and orient the educational sector to producing manpower of the level and possessing the skills that industrialists demand. A first step in this process would be the installation of an effective planning mechanism in the Ministry of Education, which can initiate a comprehensive review of the educational system and particularly examine the degree to which the system is responsive to the economy's needs. In the final analysis, however, and assuming structural bottlenecks are cleared, high labor demand in a situation of high employment will inevitably push wage levels upwards. This does not signify an end to export competitiveness. Rather, labor can be expected to be drawn into those industries where productivity per person employed is high, and where continued profitability is consistent with high levels of remuneration. Indeed, rising wages, stemming from high demand for industrial labor, are precisely the end to be sought, marking the success, rather than the failure, of an export effort. - 33 - CHAPTER III: INCENTIVE SCHEMES A. THE EXCHANGE RATE 38. The exchange rate is, in many senses, the most vital instrument available for promoting exports. In the first place the level of the exchange rate gives the simplest and clearest signal to producers of the gains to be made in exporting. Other policy measures, such as subsidies, are less immediate in their appeal; experience from a number of countries in fact suggests that, largely due to the directness of the exchange rate incentive, exporters respond more vigorously and more promptly to exchange rate changes than to other equally "valuable" combinations of policy measures. In the second place, there exists no great variety of, (or, indeed, better), policy instruments for encouraging exports other than setting the exchange rate at a realistic level. For promoting import substitution, for instance, tariffs, import quotas, licensing arrangements, etc. can all serve to increase the profitability of import competing enterprise; for exports the only major policy instrument available, other than the exchange rate, is subsidies. These, however, invite retaliation and are clearly outside the international rules of the game as enshrined in such agreements as the GATT. Thirdly the exchange rate is a comparatively flexible instrument and its level can be adjusted, frequently if necessary, to maintain the real incentive given to exports. 39. In Costa Rica the exchange rate has not been used as an instrument to promote exports. 1/ In the last 20 years the country has experienced three devaluations, each of which was managed by a movement from a unified exchange rate to a system of multiple exchange rates and back again to a unified exchange rate. 2/ Each episode was prompted by a relatively severe balance of payments problem, and none of the devaluations was provoked by any independent desire on the part of the authorities to stimulate exports. Quite the contrary. In the three periods of multiple exchange rates, 1960-1961, 1967-1969, 1971-1973 "free" market rates ranged between 11% to 30% higher than the official market rates. In each case, exports were granted the less favorable "official" rate while imports were, by and large, granted the higher "free" rate, thus providing an extra twist, as it were, to the incentive for import substitution. There were qualifications to this picture. "Mixing" rates--or rates which were some 1/ See Annex 2.1 for an extensive classification of Costa Rica's exchange rate history. 2/ In fact, in only two of these cases of multiple exchange rate systems was the exchange rate ultimately unified at the higher "free" rate. However, all three are classified as devaluations because (a) in the exceptional case of 1967-1969 the free rate fluctuated 11% to 18% higher than the level at which the rate was finally unified, (b) the final unified rate was made feasible by the simple expedient of a 30% surcharge on imports, and (c) in any event the unified rate lasted only 18 months. - 34 - combination of "official" and "free"--were occasionally allowed to exporters, particularly if the exports concerned contained a high proportion of inputs bought in the "free" market. Even so, the mixing rates were always below the free rates. Furthermore, not all imports were brought in at the free rate; the authorities maintained lists of essential imports which wqre granted the official rate. By and large, however, these devaluations were essentially geared to stemming import flows and were managed in a fashion that gave little prospective encouragement to exporters. 40. In the last two devaluations, common market partners brought pressures to bear against the devaluation decision. In both cases, imports from the common market were allowed in at a lower "official" rate while imports from the rest of the world, if not on the select list of "essential" imports, had to bear the higher rate. Common market partners, thus, did not react favorably to the Costa Rican devaluations. Only after prolonged periods of balance of payments difficulties were common market parities unified at a higher exchange rate. The experience suggests that the devaluation instrument, if not exactly proscribed by common market agreements, is certainly limited in use. The instrument is however the most powerful tool available for stimula- ting exports and the use of the instrument should therefore be placed on the agenda for discussion in the upcoming negotiations between the various members of the market. 41. Changes in the level of the official exchange rate give, however, only a partial view of the impact of the exchange rate regime. It is the exchange rate in relation to local costs and prices that effectively dictates the relative profitability of exporting activity. In the second place, the official exchange rate, as is well understood, will often understate the value of foreign exchange to an economy. Import restrictions (tariffs, quotas, advance import deposits, etc.) have the effect of reducing the demand for foreign exchange and thus allow the price of foreign exchange to be kept lower than it would otherwise be. These two approaches to currency overvaluation are treated in the following sections. Real Effective Exchange Rate 42. The real effective exchange rate is in essence a purchasing power parity rate. 1/ It is a measure of how the purchasing power of Costa Rica's currency has changed over time in relation to the purchasing power of the 1/ Methodology in Annex 2.2. For an extensive review see L. Officer: "Purchas- ing Power Parity Theory of Exchange Rates: A Review Article" IMF Staff Papers, 1976. Few students now believe that PPP theory holds except in a loose and approximate fashion. For one thing, the price of non-tradeable goods inevitably enters into the construction of price indices, and, under certain conditions, upward shifts in the price of non-tradeables (and hence in the overall price index) can occur without entailing a decline in export competitiveness. A PPP analysis is presented here (a) because it can be argued that very open economies such as Costa Rica (i.e., low proportions of non-tradeables to tradeables) are more amenable than "closed" economies to PPP analysis, and (b) because a fairly long time period of analysis is presented where a systematic trend differential between inflation levels, a fortiori, creates the case for a PPP comparison. - 35 - Figure 3.l: COSTA RICA REAL EFFECTIVE EXCHANGE RATE VIS-A-VIS MAJOR TRADING PARTNERS L05.0 - 10S.0 100.0 - 100.0 CD 95.0 95. 0 C\u 90.0 90.0 85.0 85.0 80.0- 80.0 1 31 31 31 31 3 1 3 1 13131 3 197D 1972 1974 1976 1978 COSTA RICAN REAL EF'FECTIVE EXCHAMGE RATE VIS-A-VIS THE DOLLAR 120.0 - 120.0 0 . -110 -0 10.0 10.0 ff LOO.O ~~~~~- >_ _- _ _ ___ - 100.0 90. 0 - ,-90.0 80.0 80.0 1 3 3 3 3 L3 13 13 1 3 1 3 1 3 1970 1972 1974 1976 1978 Source: lFS, Banco Central. For methodology, see Annex 2.2. - 36 - Figure 3.2: EXCHANGE RATE INDICES -COSIR NICFh ElIffNIC RRIE IISIX 110.0- 110.0.. lO 10D.O- - 100.0 90.0 90.0 80.0 80.0 70.0 . 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1970 1972 1974 1976 1978 COMPFRISON OF COSTA RICAN AND WORLD PRICE INDICES I COStA AITAA PRTCEtXI 1) 200.0 200.0 150.0 _ 150.0 100.0 ,,.. 100.0 50.0 - s50.0 0.0- * 0.0 1970 1972 1974 1976 1978 COMPARISON OF COSTA RICAN AND U.S. PRICE INDICES COSIR RICR PRICS TNEX …U.,. PtINO T 200.0 - 200.0 150.0 - .... 100 100.0 ./ _ 100.0 50.0- 50.0 0.0 - 0.0 13 1 3 1 3 1 3 1 3 1 3 1 3 13 1 3 1 3 1970 1972 1974 1976 1978 Source: IFS, Ban-o Central. For methodology, see Anne. 2.2. - 37 - currencies of Costa Rica's trading partners. When, for instance Costa Rica inflates more rapidly than the rest of the world, Costa Rican exporters will find their costs rising more rapidly than the prices they can charge customers; their margins become squeezed. If the exporters do raise their product prices in line with their costs they lose competitiveness. Either way there is a disincentive to exporting. Changing the exchange rate facing exporters can restore their margins. The real effective rate also indicates, therefore, the degree to which Costa Rica's devaluations against the dollar, and pari passu, the recent currency fluctuations of some of Costa Rica's trading partners (Germany, Japan, etc.) vis-a-vis the dollar, have compensated for the difference in inflation rates. 43. Between 1970 and the third quarter of 1979 Costa Rica has consis- tently inflated more rapidly than her trading partners (Costa Rican inflation is measured by the wholesale price index.) The period divides neatly, into two sub-periods from quarter one, 1970 to quarter two, 1974, and from thence to the third quarter of 1979. For much of the first period Costa Rica operated a multiple exchange rate system, finally unifying at the higher free market rate; in the second period the country maintained unchanged its parity against the dollar. In the first period, Ql 1970 to Q2 1974, prices in Costa Rica nearly doubled; prices in the trading partner countries increased by some 50%. In the second period Costa Rican prices increased by almost 90%; trading partner prices increased by 60%. At the end of the entire period the ratio of respective inflation rates was 1.49; in other words, Costa Rica had inflated at half again the pace of her major trading partners. 44. Changes in exchange rates did, to a degree, offset the difference in inflation rates. In the first period Costa Rican devaluations against the dollar coupled with overall trading-partner currency revaluations against the dollar (mostly OECD countries) offset the relative differentials in inflation such that the real effective exchange rate was 10% higher in Q2 1974 than in Ql 1970. Since Q2 1974, however, Costa Rica has not devalued against the dollar and her trading partners, on average have not revalued either. (Numerous fluctuations occurred in parities in this latter period. At the end of the period, some OECD countries, notably West Germany, Belgium, Sweden, the Netherlands, and Japan and revalued vis-a-vis the dollar, whilst the Latin American countries, notably Mexico, Colombia, Venezuela and other OECD countries, notably Canada and Italy had devalued against the dollar). Consequently, with no compensating exchange rate movements, the differential inflation rates did affect the real purchasing parity of the colon. If the 1974 devaluation parity is taken as the authorities' correct judgment of what the real exchange rate should be, then the real effective exchange rate at the end of the third quarter of 1979 was 15% below that level. 45. About 35% of Costa Rica's trade in 1975-77 was with the U.S. (The U.S., in fact, is Costa Rica's major trade partner. The combined CACM, whose parties are fixed to the dollar, had a trade ratio in 1975-77 of about 20%). The colone's purchasing power in relation to the dollar is therefore especially interesting. Over the whole period (1970 to Q3 1979) U.S. prices somewhat more than doubled where Costa Rican prices more than trebled. In the devalua- tionary first phase Costa Rica devalued against the dollar by 29.4%; the - 38 - relatively much greater Costa Rican inflation, however, dampened the rise of the real exchange rate in this period to at its maximum 9%. Since then, with no change in nominal parity the real exchange rate has declined since Q2 1974 by 17%. In fact the interesting phenomenon occurred that the devaluations of 1973 (rather than the unification of rates in 1974) actually placed the country on a higher real effective exchange rate than subsequently experienced. In essence the 1973 average devaluation was more than compen- satory for historical differences in inflation between Costa Rica and the USA, whilst the 1974 unification of rates was not. As a result the 1974 unifi- cation failed to restore the country's earlier, and higher, real exchange rate against the dollar. In 1979 the average real exchange rate against the dollar had declined by 27% over the average prevailing real exchange rate in 1973. Since December 1973, in fact, Costa Rica has been facing a dollar exchange rate which in real terms has been lower than the exchange rate facing the country in Ql 1970 and considerably lower than the 1973, (or 1974), devaluation parities. The Trade Regime Exchange Rate 46. In one sense currency overvaluation can occur when domestic infla- tion rates are much higher than in the rest of the world. In quite a different sense, the pattern of trade arrangements itself can lead to an overvalued exchange rate. When import restrictions outweigh, in quantitative impact, export subsidies, the demand for foreign exchange is dampened and the exchange rate that maintains equilibrium in the balance of payments is lower than it would otherwise have to be. This naturally acts as a general disincentive against exporting activity, as exporters systematically receive less (in domestic currency) for their exports than they would if trade were freed and the exchange rate devalued. At the same time, import substitution is encour- aged for those imports which bear high tariffs; and duty free imports (the vast majority of intermediate and raw materials imports in Costa Rica), are subsidized by the low price of foreign exchange. 47. A conservative estimate of the bias against exporting imparted by Costa Rica's trade regime is that the colon is overvalued by at least 18%. This estimate is arrived at 1/ by quantifying the effect of all import restric- tions, on the one hand, and all export subsidies on the other, on the demand for foreign exchange. The calculation starts from an assumption of equilibrium in the balance of payments and suggests that if all tariffs, export taxes and export subsidies were removed overnight the colon would have to be devalued by at least 18% to maintain the level of the present deficit. It is thus a measure of the "trade flow" effects of current trading arrangements, and quantifies the degree of bias against exports provided by the present amalgan of commercial policies. It is a conservative estimate for a variety of reasons, the most important of which is that it infers foreign exchange demand from actual import data and does not take into account therefore the effect of high tariffs which effectively reduce demand for certain imports (and hence for foreign exchange). Put differently, in deriving the overvaluation estimate, import-weighted nominal tariffs are used to quantify the flow effects of trade restrictions. If value-added weighted nominal tariffs are used instead, the 1/ Annex 2.2 explains the methodology, and contains worksheets of the calculations. - 39 - degree of overvaluation is found to be 46%. Moreover, this measure of over- valuation does not say anything about the devaluation necessary to reduce the present large balance of payment deficit. If the large deficit were to be reduced, the eventual devaluation would have to be considerably greater. If, for instance, it is hypothesized that the Government "chooses" to reduce the level of the current account deficit from its present level at 14.5% of GDP to a "target" level of 7% of GDP, then an estimate of 34% overvaluation is derived. 1/ These estimates, though admittedly approximate, do point to the fact that the base estimate of 18% overvaluatLon is indeed highly conservative. Even so, a primary trade regime overvaluation of at least 18% represents a serious, structural disincentive for exporting activity, capturing, as it does the net effect of the entire pattern of Costa Rica's commercial policy. B. TARIFFS 48. The tariff regime is the most important instrument providing protec- tion to domestic industry in Costa Rica, and thus the chief instrument which fosters an inward-looking rather than externally oriented slant to the pattern of production. The elements of the regime derive, for the most part, from various common market agreements. On the one hand, the system consists of the series of charges that are, or can be, applied to imports from outside the region. On the other hand, the system exonorates from some or all of these charges, a vast number of extra-regional imports, usually on the grounds that they are intermediate or raw material or else capital good inputs to domestic productive activity. The net results are high levels of effective protection for Costa Rican industry, a high import intensity of industrial production, support of an overvalued exchange rate, and in general, the encouragement of import substitution activities at the expense of exporting. The character- istLcs of the regime are examined in this and the following sections. Nominal Tariffs 49. In the Costa Rican context four types of charges are, or can be, applied against imports. These are (1) the Common External Tariff (CET) of the CACM; (2) the tariff surcharge of the protocols of San Jose; (3) selective discriminatory consumption taxes; and (4) temporary import surcharges. (1) The Common External Tariff (CET) is the basic building block of the tariff regime in Costa Rica as it has been the major instrument in fostering integra- tion in Central America. Formally instituted at the inception of the market in 1960 the CET was designed to provide for a uniform degree of nominal protection, for market countries, against extra regional imports; by 1966 only 33 products in the standard trade classification did not have common external tariff levels. Each individual tariff in the code consists of two components -- an ad valorem element and a specific element which is a fixed dollar amount charged against each unit of import. The joint effect of the two elements are usually summarized by an "ad valorem equivalent." (2) The Protocol of San Jose was signed in 1969 and implemented in 1970, at a time when common market countries were facing balance of payments problems. The protocol allows for a tariff surcharge amounting to 30% of the total specific and ad valorem tariffs 1/ This calculation uses import weighted nominal tariffs. - 40 - payable. (3) In 1972 Costa Rica introduced consumption taxes on a wide range of final goods. The taxes apply to both regional and extra regional imports with the tax rates generally higher for the latter. This differential between tax rates based on region of origin, acts as a pure tariff element, thus adding to domestic protection. Frequently the margin of discrimination is high. Cheese, fish products, dried fruits, wooden furniture, manufactured wood products, electric signs, microbuses, and refrigerators are all examples of goods where the consumption tax rate for imports exceeds that for CACM products by at least 50%; products with a margin of CACM preference in the 20%-30% range are numerous. (4) Temporary import surcharges are the final taxes discriminating against imports. The current surcharge, levied on CIF import values, apply to some 156 products imported from outside Central America and Panama. The rates vary from 10%-50%; 50% rates fall on such products as meats, cheese, fish, shell fish, bread products, fruit products, chocolate products, cigarettes and manufactured wood products. In general the products subjected to the temporary import surcharges tend to be consumer goods and are frequently those same items receiving discriminatory treatment under the selection consumption tax. 50. The taxes are administered in a cascaded fashion adding an important, though hidden, element of protection to local industry. The selected consump- tion tax on imported goods is levied on a base of the CIF price plus the rele- vant tariffs, including the San Jose protocol surcharge. Costa Rica's general sales tax of 8%, when applied to imports, is levied on the base of the CIF import price plus the CET, the San Jose protocol surcharge, and the consumption tax. The effect is a considerable stretching of explicit nominal protection levels. 1/ 51. Adding up all the tariffs and related taxes providing protection from imports to domestic producers results in high levels of nominal protection. (High rank correlations exist between nominal and effective protection; See Appendix Table 4.6) 2/ Average tariffs for some 80 manufacturing product 1/ Consider for instance a good which costs $100 whether produced locally or imported. If the sales tax is 8%, the consumption tax is 20% and the tariff 100%, the imported good will carry $59.2 in consumption and sales tax charges, whereas the local good will only carry $29.6 of the same charges. 2/ Tariff nomenclature is often confusing. "Nominal Legal Ad Valorem Tariff Equivalent" refers to the sum of all the charges that could be legally applied against imports, including tariffs, discriminatory consumption taxes, surcharges etc., expressed as a percentage "markup" on the value of imports. The "realized tariff rate" of Appendix Table 4.1 is the amount of actual duty collected as a percentage of actual imports; realized tariff rates will obviously be lower than the sum of legally applicable rates because a large quantity of imports do not bear these charges. The difference between "nominal" and "effective" rates of protection is well understood: '"nominal rates" capture the sum of legally applicable charges to particular goods; the stimulus given to domestic activity by these nominal charges is better captured by measuring the proportional excess of domestic value added over value added which would obtain if trade were free. This latter protective measure is the "effec- tive rate of protection". - 41 - groups, based on 1972 data 1/ are presented in Appendix Table 4.1 and the frequency distribution drawn up in Table 3.1 below. Twenty-four percent of the product groups have nominal tariff equivalents of more than 100%. A further 29% of the product groups are between 50% and 100%. The remaining products groups have nominal protection below 50% with the most frequent tariff incidence lying between 25% and 50%. When these estimates are aggre- gated further the average nominal tariff equivalent for manufacturing is 106%. Table 3.1: NOMINAL AD-VALOREM TARIFFS, 1972 FREQUENCY DISTRIBUTION Nominal Legal Ad Valorem Ranges Tariff Equivalent, 1972 (#occurence) % 0 100 SHIFTS WORKED 1 2 3 1 2 3 1 2 3 1 2 3 PERCENT OF FIRMS COLO0MBI& 73 18 9 71 21 8 47 29 24 36 16 48 COSTA RICA 73 9 18 73 6 20 50 15 35 67 20 14 o PERU n. a. 61 18 21 68 15 17 67 12 21 VENEZUELA n. a. 75 13 12 77 11 12 67 15 18 Source: Schydlowsky, Daniel M., op. cit., page 10. Appendix Table 3.9: TNCREASES IN THE GROWTH RATE DUE TO IMULTIPLE SHIFTING BRAZIL CHILE COLOMBIA COSTA RICA PERU VENEZUELA Share of industry .24 .28 .225 .19 .239 .171 Ratio of industrial to total output/capital ratio (assumed) 2 2 2 2 2 2 Proportionate shift increase to two shifts .16 .40 .61 .5 .31 .46 Proportionate increase H in growth rate at two shiifts .08 .22 .275 .19 .13.157 Absolute increase in gro",eth rate at two shifts .83% .35% 2.01% 1.3% .90% ,82% Proportionate shift increase to three shifts .99 1.40 1.33 1.67 1.31 1.16 Proportionate increase in I growth rate at three shifts .48 .78 .599 .635 .63 .40 Absolute increase in growth rate at three shifts 4.99% 1.25% 4.37% 4.32% 3.84% 2.08% Source: Schydlowsky, Daniel 14.,op. cit., page 38. Appendix Table 3.10: STABILIZATION POTENTIAL OF CAPITAL UTILIZATION ANNUAL EXCESS SUPPLY ONE TIME EFFECT ABSOLUTE (MILLIONS) % OF GNP ABSOLUTE (MILLIONS) % OF GNP 2 Shifts 3 Shifts 2 Shifts 3 Shifts 2 Shifts 3 Shifts 2 Shifts 3 Shifts (1974) BRAZIL 3566 21320. .5 3.04 5301 31696. .8 4.5 (1970) CHILE 1476.5 5130.0 1.6 5.5 1494.7 5193.1 1.6 5.6 (1972) COLOMBIA 1874.6 4068.5 1.1 2.2 5254.5 11403.6 2.8 6.2 (1972) COSTA RICA 184.1 463.9 2,2 5.6 258.3 650.8 3.1 7.9 (1971) PERU 1123.7 3912.5 .4' 1.5 3577.5 12456.4 1.4 4.7 (1971) VENEZUELA 171.71 544.5 .3 1.0 685.7 - Z174,0 1.2 3,9 Source: Schydlowsky, Daniel M., op. cit., page 58. - 121 - Appendix Table 3.11: SURVEY INFORMATION AND AGGREGATE PARAMETERS FOR MEIC REGISTERED MANUFACTURING FIRMS, 1976 Number of Firms Covered in January (N) 433 Number of 4 digit CIIU Sectors Covered 60 Total Labor Employed (L) 35,142 Total Value Added at Factor Cost (v) us$144.8 million Average Number of Employees per Firm (L) 81 Aggregate Capital Labor Ratio (K/L) US$6,803/employee Average Salaries and Wages Paid (w) US$2,2265/year Total Exports to Sales Ratio (E/S) .270 Ratio of Extra Regional Exports to Sales ( row/S) .069 Ratio of Total Net Profits to Sales (r/S) .o64 Rate of Return of Capital (nr/K) .206 Capital Output Ratio (K/V) 1.76 Average Number of Shifts Worked per Firm 1.29 Source: Bank staff computations from a sample of 433 firms which present information to MEIC to obtain industrial contracts. Appendix Table 3.12: COSTA RICAN FIRM SIZE DATA Firm Size Modal Value of Average Value of Median Value of (Number of Employees) Production Production Production Less than 10 050,000-249,999 0193,641 050,000-249,999 10 - 29 01,000-4,999,999 01,962,263 0500,000-999,999 30 - 49 ¢1,000,000-4,999,999 04,831,731 01,000,000-4,999,999 50--- 99 01,000,000-4,999,999 010,017,480 05,000,000-9,999,999 100 - 149 010,000,000-29,999,999 015,108,696 010,000,000-29,999,999 150 and over 030,000,000 and more 021,728,395 010,000,000-29,999,999 Modal Average Median Firm Size Number of Number of Number of (Production in Colones) Employees Employees Employees less than 1,000,000 1-4 8.1 5-9 1,000,000 - 4,999,999 10-29 33.3 10-29 5,000,000 - 9,999,999 10-29 66.i 50-69 10,000,000 - 29,999,999 150 and more 99.6 70-99 30,000,000 and over 150 and more 131.6 150 and more Source: IV Censo de Manufactura, 1975, Tomo 3, Ministerio de Economi'a, Industria, y Comercio, Direccioni General de Estadistica y Censos. Appendix Table 3.13: EXPCRTS BY SIZE OF FIRM (1) Share of Extra-Reg. Expt. Share of Exports__ Reg. ExBt Total T_------ ~Total ERtra- Firm Size Production Total Production -Froduc. -El ExptReg. Expt. Total Expt. Reg. Expts. (Number of Employees) (thousand colones) (%) (%) (%) (%) (%) Less Than 10 308,450 4.36 .0758 14.01 0.35 85.99 3.05 10 - 29 579,611 8.19 .2608 25.93 4.15 74.07 16.96 30 - 49 524,823 7.41 .2251 52.45 6.56 47.55 8.51 50 - 99 1,192,957 16.85 .2264 58.23 16.65 41.77 17.07 100 - 149 964,335 13.62 .1889 66.84 12.88 33.16 9.14 150 and over 3,510,493 49.57 .2451 65.25 59.41 34.75 45.27 TOTAL 7,080,669 100.00 .2267 58.87 100.00 41.13 100.00 Firm Size (Value of Production, in colones) Less than 50,000 24,906 0.35 .0329 100.00 0.09 0.0 0.0 5o,ooo - 249,999 103,080 1.46 .0014 75.86 0.01 24.14 0.01 250,000 - 499,999 102,521 1.45 .0149 74.09 0.12 25.91 0.06 500,000 - 999,999 127,802 1.80 .0400 64.64 0.35 35.36 0.27 1,000,000 - 4,999,999 623,961 8.81 .1492 45.26 4.46 54.74 7.72 5,000,000 - 9,999,999 649,032 9.17 .2490 47.01 8.04 52.99 12.97 10,000,000 - 29,999,999 1,585,756 22.40 .3098 52.68 27.39 47.32 35.21 30,000,000 and over 3,863,611 54.56 .2204 66.06 59.54 33.94 43.76 TOTAL 7,080,699 100.00 .2267 58.87 100.00 41.13 100.00 Notes: (1) CACM and Panama. Source: IV Censo de Manufactura, 1975, Tomo 3, Ministerio de Economia, Industria, y Comercio, Direccion General de Estadistica y Censos - 124 - Appendix Table 3.14: FIRM CHARACTERISTICS OF COSTA RICAN INDUSTRY CAPITAL- AVERAGE RAW MATERIAL INDEX OF 3RD AREA LABOR NO.'WORKERS SHARE OF SKILL 2/ FORT SHARE CIIU INDUSTRY RATIOS PER FIRM OUTPUT INTENSITY- OF SALES 3111 Beef Products 78,282 197.333 .751 .157 .768 3112 Milk and Dairy Products 18,490 51.000 .685 .373 .000 3113 Fruit and Vegetable products 37,585 65.500 .656 .195 .007 3116 Mill Products 85,353 87.200 .824 .171 .000 3117 Bread Products 34,697 160.167 .477 .130 .030 3119 Cocoa and Chocolate Products 41,885 203.500 .499 .226 .151 3121 Misc. Food Products 51,281 21.333 .571 .255 .026 3122 Animal Food 55,132 17.667 .858 .208 .000 3131 Distilled Spirits 10,554 18.667 .190 .321 .000 3134 Non-alcoholic Beverages 81,516 193.000 .292 .272 .000 3211 Spinning and Weaving 97,846 190.900 .384 .147 .026 3213 Knit Fabrics 33,080 158.300 .412 .202 .002 3214 Tapestries and Rugs 84,489 44.000 .633 .352 .000 3215 Cordage 187,634 292.000 .552 .055 .000 3219 Textile Manufactures, n.e.c. 27,795 32.500 .460 .205 .000 3220 Clothing, except Shoes 19,942 218.650 .422 .095 .114 3232 Preparing and Dying of Furs and Skins 76,891 76.000 .631 .135 .290 3233 Leather,except Shoes and Clothing 20,805 20.500 .398 .130 .001 3240 Footwear, except Rubber and Plastic 24,408. 106.000 .486 .124 .078 3311 Cutting and Planing of Wood 89,855 128.111 .399 .067 .075 3319 Wood and Cork Products, n.e.c. 6,025 80.000 .259 .050 .000 3320 Wooden Furniture Accessories 33,209 47.250 .429 .164 .122 3412 Wood, Paper, and Cardboard Pulp 64,o74 44.286 .665 .174 .000 3419 Pulp, Paper, and Cardboard, n.e.c. 88,879 48.900 .512 .225 .038 3420 Printing, Publishing, etc. 38,584 47.944 .423 .203 .001 3511 Industrial Chemicals, except Fertilizers 56,376 38.600 .575 .142 .000 3512 Fertilizers, Insecticides, Fungicides 114,629 101.222 .790 .451 .223 3513 Plastics, Synthetic Resins and Fibers except Glass 59,706 89.000 .556 .341 .000 3521 Paints, Varnish, Lacquer 25,110 113.167 .708 .377 .000 3522 Medicines and Pharmaceuticals 45,279 45,467 .444 .478 .089 3523 Soaps, Perfumes, Cosmetics, etc. 32,612 49.739 .5o4 .298 .001 3529 Chemicals, n.e.c. 27,822 26.000 .469 .385 .000 3540 Carbon and Petroleum Products 40,646 32.000 .446 .281 .001 3551 Tires and Inner Tubes 118,420 120.750 .570 .342 .040 3559 Rubber Products, n.e.c. 65,204 117.667 .502 .093 .039 3560 Plastic Products, n.e.c. 63,191 70.462 .596 .188 .005 3610 Earthenware, Porcelain 60,460 87.000 .402 .172 .003 3620 Class and Products 36,402 82.000 .291 .061 .000 3692 Cement, Lime, Gypsum 763,248 307.000 .124 .251 .000 3699 Other, non-Metalic Mineral Products, n.e.c.62,437 127.636 .386 .217 .005 3710 Iron and Steel 144,467 137.000 .710 .124 .000 3720 Basic, non-Ferrous Metals 20,416 67.333 .391 .267 .000 3811 Cutlery, Hand Tools, Hardware 49,877 14.250 .463 .298 .000 3812 Metal Furniture and Accessories 32,219 45.200 .359 .146 .011 3813 Structural Metal Products 32,467 30.667 .325 .337 .000 3819 Other Metal Products, n.e.c. 80,222 78.333 .643 .163 .014 3823 Wood and Metal-Working Machinery 18,556 36.000 .370 .083 .000 3824 Industrial Machinery and Equipment 43,437 27.833 .413 .335 .000 3829 Other, non-Electrical Machinery, n.e.c. 53,396 69.889 .611 .211 .071 3831 Industrial Machinery and Equipment,Elec'l 34,782 70.333 .395 .412 .000 3832 Radio, Television, and Communication Equip.38,789 29.000 .414 .353 .000 3833 Domes-ic Machinery and Equip. Electrical 26,453 21.333 .466 .281 .017 3839 Electrical Apparati, n.e.c. 62,152 121.000 .575 .264 .267 3841 Ship Construction and Repair 13,717 53.000 .517 .236 .712 3843 Automobiles 31,586 56.333 .213 .180 .000 3844 Motorcycles, Bicycles 22,559 9.833 .608 .356 .000 3849 Other Transport Equipment 3,500 4.000 .599 .000 .000 3851 Prof. and Scientific Equipment n.e.c. 2,970,536 28.000 .493 .357 .000 3903 Sport and Athletic Equipment 20,333 21.000 .472 .167 .000 3909 Other Manufactures, n.e.c. 35,732 48.571 .429 .224 .005 1/ Total investment in colones over total number of workers. 2/ No. Skilled workers divided by total personnel. Source: Bank Staff calculations from a sample of 433 firms which present information to MEIC to obtain industrial contracts. Appendix Table 3 .1' SPEARMAN RANK CatRRIATION CaEFFICIENTS CFO ASS 1cSD INDUSTRY ChARACTERISTICS, 60 INDusTRIEs Ratio of Ratio of lxra Value Raw Material Average Return on Ratio of Capital Regional Added Industry Industry Inports to size of Invested Skilled to Labor Average Exporta to per Growth Growth industry Output Firm Arae Capital Emp,loyese Ratio Wages Salea Employ-e GrRate (}Rate s h (£MiJ/ / =ir (tTrj/ to Total /KJ/\ ( /E (VJ/ ) 1957-69 1969-76 _ rJ NJ of spifts __ Enloyes LJJ () iW LJ/ Industry Growth Rate, 1957-69 1.0 Industry Growth Rate, 1969-76 +(3) 1.0 Ratio of Raw Material ln,orts to Industry Output, Average Sise of Firm in Industry as Measured by Number of Enloyees (Li/) +(3) M(3) 1.0 Average Number of Shifts 34 .57(2) 1.0 Return on Invested Capital(j/ ) -.37(2) 1.0 Ratio of Skilled Employees to Total Employees .31 -.28 -.25 1.0 Capital to Labor Ratio J/53 .43 .52 -.38 1.0 Average Wages ( Nj W .40(2) .31 .53 .39 1.0 Ratio of Extra RegionLl Exports to Sales .38 1.0 Value Added per Employee {Vtw 2 Notes: (1) All the included Spearman rank correlations coefficients (rJ ) were statisticlly, significant at the S percent level with a two tailed test. Otherwise, the (rb) are not reported. (2) Also indicates that the simple (Pearson) correlation coefficient (r) was statistically significant at the 5 percent level in a two tailed test. (3) Indicates the Pearson correlation coefficient was significant at the 5 percent level, with the indicated sign. However, the Spearman rank correlation coefficient, while processing the same sign, was not statisticall significant. - 126 - Appendix Table 4.1; NOMINAL, REALIZED AND EFFERCTIVE RATRS OF PROTECTION IN COSTA RICAN MAiUFACTURING,1972 sod 197L N-ci-hal legal Nominal Tariffs Rate Of Protection te orecti -I22 Ad Valees Tllriff Realised Tariff BNsed sa legal Rcaliied3, Based on Full BRaed on lrdustry Equivale-tA/ R te 1gnie eat1/Ad Valoe-a Rqoirale-te Tariffs- Logal Tariffs Reali-ed T-riffa uob-r _() (1872) (%) (1972) (%)(1974) (S)(3974) t%)(1974) (%)(1974) 3111 Beef products 91.8 78.4 29.3 2.3 35.4 -8.1 3112 Milk and dairy prodocta 47.5 28.0 3T.4 8.o 121.5 LI 52.7 3113 Fruit r.d vegetablr products 132.4 lO4.2 128.3 13.1 -911.4 i 44.1 3114 Fish products 108.1 10.5 64.4 63.1 -4,987.7 461.9 3115 Aoieol and ved etbtle oils 26.7 13.9 23.6 1.3 382.2 -9.1 3116 Mill products 59.4 30.5 89.7 T.4 211.1 2,224.0 3117 Bread r t. 201.8 196.8 99.6 97.7 -6,984.9 4/ 2,679.9 3113 logic .nd sugar products 62.6 47.7 34.1 8.9 121.3 9.9 3113 Cocci and chocolote products 140.7 135.8 68.4 62.2 193.2 167.9 3121 Misc. food products 83.0 63.2 57.5 17.0 1,273.8 86.5 3122 Animal food '2.3 70.0 15.0 6.4 10.0 -20.0 3131 Lisoilled spirito 388.0 254.5 372.7 80.D 401.1 74.0 3132 Wi-e 161.o 126.o 145.4 114.3 3,996.6 659.4 3133 Malt beverages 172.0 162.5 21.8 21.6 a. na. 3134 NBo.slotlic bev-ragei 50.0 J0. 52.0 51.9 56.1 62.0 3140 Tobacco 267.3 255.3 203.2 173.8 234.4 1T9.6 3211 Spitning and -eaviog 66.7 18.4 23.9 5.0 46.9 14.6 3212 Teotile Products other thun 73.1 29.2 97.4 81.0 Clothing 120.6 89.3 3213 Knit Tobrice 137.2 114.3 123.2 91.3 300.8 93.0 3214 _toouft-re cf tapestrien Nnd rugs 211.3 126.0 110.5 47.8 382.1 163.8 3215 Cordage 26.0 13.7 28.0 3.1 43.7 36.1 3219 Sacuf_ctur_ o .t..tilen.e.c. 42.6 28.9 25.0 17.4 115.1 50.7 3220 Clotthig, eocept nhoe. 98.3 86.o 76.6 51.8 i8o.6 136.5 3231 Ta-siog nod fitishiog 115.9 40.1 51.9 22.2 10.4 8.1 3232 Prep-riog -nd dyciog of furs sod kibs 68.o 32.0 68.1 20.6 111.9 70.5 3233 Leather, -ccpt shoes and clothing 101.7 92.9 49.0 4o.3 59.9 57.4 3240 Footnear, except rubber nd plastic 106.3 74.o 111.1 39.1 -1,536.6 251.9 3311 Cotting nd plnoing of -od 130.4 54.4 62.o 7.T 314.5 b5.9 3311 Woodes cartons 112.6 82.8 47.3 4.6 38.5 6.7 3319 Wood and cork products, 0.0.0. 75.6 54.2 69.7 22.9 115.1 51.6 3320 Wotdes furniture andtacoen- sories 171.2 68.7 142.2 86 -1,215.3 4/ 47.0 3411 Acod, paper, and cardboard 31.4 20.0 31.3 2.6 49.7 2.D 3412 Paper and cardboard cartons 36.0 11. 47. 2.0 36.5 8.1 3419 Pulp, piper, asd cardboard, 0c.e.c. 70.8 56.8 29.4 15.8 2.5 29.0 3420 Pricting, -obli.hicg, etc. 815 64.0 11.7 6.5 3.5 6.6 3511 Industrial c_ enicals, except fertili-cro 28.1 10.9 21.1 3.5 26.2 4.1 3512 Fertili-ers, i-secticide-, fungicides 14.5 8.4 10.1 2.0 0.5 1.9 3513 Plastics, nycthetic resi-s scd fibers, e-cept glass 44.4 21.5 15.2 1.2 2a. 3521 Paieto, rrish, lacquer 51.3 39.1 40.5 14.7 50.0 21.9 3522 Medicices -nd pharaceuti-ls 19.4 7 8 11.9 6.2 6.8 8.2 3523 Sops., perfu-en, cosmetics,etc. 147.7 125.5 68.1 36.7 200.8 56.8 3529 ICeuicals, --c. 52.9 33.8 44.T 13.5 169.7 28.9 3530 Petroleum reficiog 25.4 4.8 30.4 6.5 si. o.a. 35o TCarbon sod petrole u prcducts 27.2 19.6 30.2 5.2 na. n. 3551 Tires and inoer tubes 98.5 84.0 21.8 13.7 31.1 19.3 3509 Rubber products, c. 36.3 26.1 24.4 16.3 26.7 1T.7 3560 Plastic products, n.e.c. 99.0 81.8 65.3 16.3 381.3 35.2 3610 Eartbe--ire, porcelain T5.9 62o. 65.6 60.6 258.8 147.2 3620 Glass and products 44.6 34.6 27.1 17.5 66.0 16.1 3691 Clap products fur construction 53.3 45.8 28.9 18.2 46.7 9.8 3692 Cenent, line. RIpOul 26.0 8.3 32.3 9.0 38.7 15.4 3699 Other non-etllic mineral products, ccc. 41.3 29.9 18.1 9.5 24.5 11.3 3710 Iron mit Oclc 17.0 7.1 11.2 2.3 19.3 3.6 3720 Ba-ic, soc-ferrous metals 15.4 9 18.0 1.2 87.0 4.5 3811 Cutlery,hnnd tools, htrd:are 42 4 35.1 27.6 22.4 4o.0 36.2 3812 Mtcl furniture acd accosc-ries 115.5 78.0 42.7 13.9 81.2 28.3 3813 Strocourol octal products 36.8 12.1 31.2 0.5 81.0 4.9 3819 Other setal products, nec. 37.9 28.8 28.I 16.1 49.0 22.5 3821 Motors ad turbines 18.4 14.9 13.0 8.9 n. na. 3822 Agricultural chinery and equipes-t 8.6 6.2 6.2 5.6 3.0 7.0 3823 ocod nod oehol-ncrbing srchineiy 7.0 3.0 T.0 1.3 6.3 1.0 3824 Industrial scb itery and eooipmnc 10.8 6.9 7.6 2.6 6.9 1.6 3825 Office, computation, and account- iog oqoip-nct 51.8 42.3 37.3 26.1 46.6 30.0 3829 bhdnr, non-electrical mactisery n.e.c . 44.1 32.2 21.1 9.9 40.0 13.5 3831 Icdustr,al -hctinery iod equip eon, t leotriotl 23.1 15.8 17.9 3.2 14.9 1.7 3832 Radio, tel-edion, sni cp=uni- catnoe equi-nt 69.4 48.2 37,b 8.2 85,0 19.0 3833 Dq t este machinery and equip- snot, electrical 66.8 59.8 41.4 29.6 124.7 110.0 3839 Electrical apparsti, n.e.c. 39.2 31.6 33.6 19.6 49.3 31.0 3841 Ship -coDtructi-o and repair 72.5 64.o 27.7 12.7 c. 3942 RBiloay equipnect 8.3 4.6 6.7 0.2 no. n. 3843 Autorooilet 32.3 16.0 37.1 12.4 60.2 14.6 3804 Motorrycles, biryclen 43.6 29.6 52.7 31.9 225.2 24.6 3845 Airships 10.0 10.0 10.0 - 19.3 0.2 3849 Other 4rantporoequipsnct 30.6 18.3 17.3 11.8 t.t. 0.0. 3851 Professional nod scientific equiptent, n.r.c. 15.6 8.4 14.1 5.0 0.0. 3652 Pcotograpbic and optical equip- _ent 47.7 35.7 35.4 20.4 na. n. 3853 4stctes 42.6 36.6 13.3 41.2 ni. 0.5. 3301 Jeoelry -d related prodocts 46.6 43.8 55.6 52.2 tA. 0.0. 3902 musi-lI io-tre-t2 228S 23.1 14.3 n.m. 3909 Other nufatres, n.e.c. I 59 55.2 42.5 -2.7 12.1 1/ Aver-gc tariff catns are -noeighted mr-,i being the average over all otaiff ite-a. 2/ The ad _lore equi.salet includes a h ariffs, the SIa Jo.d Protocol surch-ege, the di-erimi-story effect, if soy, is the con.us.ptio tsa, spd aLl Other surohn-g-a on importe. 3/ ReAlised tariffs acre osloulatsi an tariff receipts divided by isporta. / Cn-es vhere vale added at -orld price- is negative. bSurces: Tie fi-t too columns -rc Bo staff co-pitatio.a from MEIC data. The secood too col-n1 l are from Miniet-rio do BHiednU/CEPAL, "Los Inpuestos ad Coceroio ltaerior de Costa Rican, uspublished report, Pebruary 1976, pp. 37-40. The last too col-s are from Alan J. RNpoport, Eff-etive Protection Rates in.e- tra Amerion, is Willi= B. Clios and Ixriqoe Delgado, editors, E-onocic Istegr-tio in Central America (Wishington. Tho Bro-kings Institutios, 1978), pp. 69i-712. - 127 - Appendix Table 4.2: AGGREGA-TE NOMINAL-AND-REALIZED AD-VALOREM TARIFF RATES ON IMPORTS FOR SELECTED YEARS, 1967-1977 Extra Regional Extra Regional Total Nominal Nominal Tariff Realized Tariff Tariff Rate 1/ Rate 2/ Rate 3/ Year 7% % % 1967 44.4 n.a. 16.7 1973 60.2 33.5 10.3 1974 37.4 29.3 7.0 1975 35.2 25.9 6.2 1977 30.2 21.8 6.1 Notes: 1/ includes the San Jose' Protocol surcharge but not the discriminatory effect of selective consumption taxes nor the additional surcharge. 2/ nominal tariffs were calculated as the total nominal import taxes payable divided by imports. As such, the estimated nominal tariff rates are weighted by realized imports. For the extra regional case both imports from CACM countries and the tariffs nominally due on those imports in the absence of CACM arrangements, have been excluded from the analysis. 3/ realized tariffs were calculated by dividing tariff collections by extra regional imports. Since no tariffs are paid on CACM imports, they have been excluded. Source: Computations based on data published in Comercio Exterior de Costa Rica, various years. Appendix Table 4.3: NOMINAL AND REALIZED TARIFF RATES ON COSTA RTCAN IMPORTS FROM OUTSIDE THE CACM, (1) BY ONE-DIGIT NAUCA CATEGORIES 1967 3973 1974 1975 1977 NOMINAL ()4 3 (2) (3) (2O I3A I9 5 I93) NAUCA C02E.ODITY GRO.UP 1fAiE OIA RXALIzED~ NOMINAL(2 REAIZD ( 2) RE 3I ( ~ 2) REL 3)D 0 Food Products 46.8 14.6 30.2 5.0 22.8 2.3 14.1 3.8 18.3 5.2 1 Beverages and Tobacco 251.2 195.5 205.3 183.4 131.5 73.2 203.3 177 151. 8.7 2 Inedible Raw Materials 110.5 3.1 17.3 3.5 10.9 1.4 2..1.0 0. 3 Fuels and Lubricants 95.2 50.3 170 5 2.9 5s3 3X 35.0 0.8 7.0 0.6 4 Oil and Lard, Animal and Vegetable 71.9 25.5 37.9 3.4 21.6 2.0 22.1 2.8 20.7 1.8 5 Chemical Products 24.4 8.4 18.1 5.2 12.6 3.1 11.3 3.0 13.3 3.1 6 Manufactures Classified by Material 41.0 18.8 28.o 8.0 18.0 4.9 19.4 5.6 18.3 5.3 7 Machinery and Transport Equipment 23.5 8.3 21.0 8.1 18.2 7.2 15.3 5.9 16.3 5.6 8 Other Manufactures 79.4 34.4 42.5 24.3 31.3 15.9 16.0 14.5 26.4 12.7 9 Livestock and Special Transactions na na 54.8 7.4 308.7 11.3 163.8 0.15 48.3 0.03 Total 44.4 16.7 25.8 7.9 22.5 5.4 19.9 4.8 16.8 4.7 (1) The CACM includes Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua (2) The Nominal Tariff is Tariffs charged, special and ad valorem, plus all tariff exonerationa (specific and ad valorem) by laws and contracts. It does not include the San Jose Protocol surcharge, the discriminatory impact of selection consumption taxes, nor other import surcharges. The Nominal Tariff Rate is the Nominal Tariff divided by imports from outside the CACM. (3) The Realized Tariff Rate is Tariffs charges, specific and ad valorem, divided by imports from outside the CACM. (4) The Nominal Tariff Rate for 1967 on all imports and thus includes all exonerations. Sources: SIECA materials and Comercio Exterior de Costa Rica. - 129 - Appendix Table 4.4: NOMINAL AND REALIZED TARIFFS FOR INDUSTRY GROUPS, 1974 Industry Share in CIIU Nominal Realized Total Classification Tariff Tariff Imports No. Industry (%) (%) (%) 11 Agriculture and livestock 22.3 1.0 2.1 12 Forestry 19.3 1.9 0.4 13 Fishing 61.6 61.3 21 Coal 2.6 - - 22 Petroleum and natural gas 10.3 - 6.6 29 Other mining 24.0 13.6 0.1 31 Food products, beverages and tobacco 59.0 13.2 2.5 32 Textiles, apparel and leather 30.9 11.0 5.1 33 Wood products and furniture 95.6 11.6 0.1 34 Paper products and printing 30.2 3.4 7.9 35 Chemicals 19.4 4.8 24.1 36 Non-metallic mineral products 26.8 17.1 1.6 37 Basic metals 12.6 2.1 9.2 38 Metal products and machinery 23.9 9.4 34.5 39 Miscellaneous manufacturing 51.9 39.8 0.8 TOTAL (AVERAGE) 22.8 6.4 100.0 Note: 1/ Nominal tariffs are the ad valorem equivalents but do not include the the discriminatory effects of the consumption tax. The tariffs are import weighted. Source: Ministerio de Hacienda/CEPAL, "Los Impuestos al Comercio Exterior de Costa Rica," unpublished report, February 1978, pp. 37-40. Appendix Table 4.5: RELATIVE IMPORTANCE OF SPECIFIC TARIFFS, SELECTED YEARS, 1967-77 (Millions of Colones) Specific Specific Specific Ad Valorem Total Tariffs Specific Ad Valorem Total Tariffs Payable Tariffs Tariffs Tariffs Collected as Tariffs Tariffs Tariffs as % of Year Collected Collected Collected % of Total Payable Payable Payable Total Payable 1967 110.4 62.8 173.2 63.7 399.1 163.8 562.9 70.9 1973 77.6 117.1 194.7 39.9 981.2 420.1 1,401.3 70.0 1974 102.7 178.8 281.5 36.5 1,071.2 695.6 1,706.8 62.8 1975 69.o 166.2 235.2 29.3 957.7 649.2 1,606.9 59.6 1976 84.5 182.6 267.1 31.6 998.5 738.6 1,737.1 57.5 1 1977 99.2 244.5 343.7 28.9 1,041.8 984.6 2,026.4 51.4 o Source: Bank staff calculations from Comercio Exterior de Costa Rica, various years. - 131 - Appendix Table 4.6: SPEAPMAN RANK CORRELATIONS BETWEEN DIFFERENT MEASURES OF DOMESTIC MARKET PROTECTION AND INDUSTRY CHARACTERISTICS Legal Realized Effective Rate Effective Rate Tariff Tariff of Protection of Protection Rate, Rate, based upon based upon 1974 1974 Legal Tariffs Realized Tariffs Legal Tariff Rate, 1974 1.0 Realized Tariff Rate, 1974 .69* 1.0 Effective Rate of Protection based upon Legal Tariffs .73* .49* 1.0 Effective Rate of Protection based upon Realized Tariffs .80* .80* .69* 1.0 K Capital Labor Ratio ( /L) -.25 -.25 Value Added per Employee( /L) -.25 _.39* Average Wage Rate (w) -.24 -.25 Note: *indicates statistical significance at the 1 percent level. All other rq reported are significant to at least the 10 percent level. Source: IBRD staff estimates. - 132 - Appendix Table 4.7: IMPORT TAX EXONEATIONS UNDER ThE INDUSTRIAL INCENTIVES PROVIDED TO DIFTFEEV INDUSTRY CATEGORIES, 1976-78 Value of Imports on Industry Share of Industry Group Value of Imports veich exonerations Import Tax Total Annual Imp. Taxes Exepted were granted Exoneration Tax Exemptions (US 000) (us 000) Rate (5) tS) Food products, beverages, and tobacco products 19T6 3,700 27,580 13.4 4.3 19TT 4,i5ys 31,829 13.1 4.7 1978 6,170 35,514 17.3 1 6.2 Textile, Apparel, and leather 1976 5,359 26,oo8 20.6 6.3 1977 6,oo5 29,134 20.6 6.9 1978 4,499 25,586 17.5 4.5 Wood and wood products I 1976 757 1 4,054 1 18.7 0.9 1977 890 4,370 20.4 1.0 1978 1,218 9,158 13.3 1.2 Paper, paper products, and printing 1976 3,692. 12,682 29.1 4.3 1977 3,796 16,889 22.5 4.3 1978 4,507 21,093 21.4 4.6 Chemicals and Petrocbemicals 1976 35,672 150,84 23.6 41.6 1977 39,976 181,786 22.0 45.6 1978 46,692 193,228 24.2 47.2 Nonmetallic Mineral products 1976 14,715 3,999 368.0 17.2 1977 815 5,827 14.0 0.9 1978 3,410 26,663 12.8 3.4 Basic Metals, metal products, and machineryr 1976 17,261 78,491 22,0 2Q,2 1977 24,175 10.6,161 22,8 27,6 1978 27,879 130,255 21.4 28,2 Other manufacturing 1976 567 2,520 22.5 0.7 1977 539 2,202 24,5 0 o.6 1978 277 1,092 14.6 0.3 Cooperatives, special proJects, and other laws 1976 3,864 16,024 24.1 4.5 1977 7,346 43,375 16.9 8.4 1978 4,337 19,487 22.3 4.4 TOTAL: 1976 85,586 322,243 26.6 100.00 1977 87,699 421,574 26.6 100.00 1978 98,988 462,885 21.4 100.00 Source: Departamento de Control de Exempciones, Ministerio de EconomSa, Industria y Comercio. 133 - Appendix Table 4.8: CIEX EXPORT INCENTIVES AWARDED MAY 7, 1977-NOVEMBER 15, 1978 Amount Product (Oooo) At 4 Percent Rate Cocoa processed in cases 344.5 Processed tobacco 503.2 Fish filets and lobster tails 59.2 Cebu breed cattle 32.2 Ornamental plants 188.4 Plantains and chayotes 238.4 Sub-Total 1.365.9 At 6 Percent Rate Cinchona bark 1.2 Cardomomo 1.2 Bees' honey 100.8 Seeds 146.9 Sub-Total 250.1 At 8 Percent Rate Wood handicrafts 177.5 Roasted cbocoa 127.5 Wooden parts for furniture 37.1 Cocoa butter 81o.3 Grated and frozen yuca 718.3 Fruit pulp and paste 96.0 Cured leather 99.9 Sub-Total 2.o66.6 At 10 Percent Rate Forzen cultivated shrimp 31.8 Sub-Total 31.R TOTAL 3,714.4 Source: Banco Central de Costa Rica.