Cablegate: Scenesetter for Secretary Gutierrez,S Visit To

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COMMERCE FOR SECRETARY'S OFFICE
SANTO DOMINGO PLEASE PASS TO SECRETARY GUTIERREZ'S PARTY
DEPT FOR WHA, WHA/CEN, WHA/EPSC AND EEB
PLEASE PASS TO USTR AMALITO AND DOLIVER

E.O. 12958: N/A
TAGS: CS ECON ETRD OVIP PGOV PINR PREL
SUBJECT: SCENESETTER FOR SECRETARY GUTIERREZ,S VISIT TO
COSTA RICA

1. (SBU) SUMMARY: Embassy San Jose warmly welcomes Secretary
Gutierrez, the first USG cabinet-level official to visit
Costa Rica since HHS Secretary Leavitt in March 2007.
Secretary Gutierrez,s visit comes as the Arias
administration is into its third year, feeling embattled by
challenges on CAFTA, the economy, domestic security, and
early political maneuvering for the 2010 national elections.
If Arias and his team can maintain their focus and unity,
however, there are still opportunities for success ahead.
CAFTA implementation should bring additional investment and
trade, cement Costa Rica,s place in the regional and world
economy, and help the country ride out the crisis caused by
rising energy costs and U.S. economic woes. Merida
Initiative assistance, coupled with pending domestic security
legislation, should leave Costa Rica safer and better
equipped to confront transnational crime. Improved budget
management, new legislation and better planning should begin
to make badly-needed improvements to Costa Rica,s national
infrastructure. A we-are-with-you, you-can-do-this message
may help President Arias and his team stay on track.
Although determined to make his mark on the international
stage, Arias,s most enduring positive legacy could be right
here at home. END SUMMARY.

===========================
CAFTA CONTINUES TO CONFOUND
===========================

2. (SBU) By the end of August, when the national legislature
completed action on the 12th of 13 CAFTA implementation
bills, entry-into-force by the (extended) October 1 deadline
seemed within reach. Under new, more moderate leadership in
the legislature, even the PAC opposition party wanted to put
CAFTA behind it and get on to other initiatives. The
September 11 ruling by the Constitutional Chamber of the
Supreme Court, which blocked action on the 13th CAFTA bill,
thus came as a shock to all sides. The Court ruled that one
section of the bill on IPR and biodiversity issues was
unconstitutional, because the GOCR did not consult with Costa
Rica,s indigenous communities, in accordance with ILO
Convention 169, about CAFTA-generated changes in the existing
biodiversity law that could affect those communities.

3. (SBU) The Court decision re-galvanized the Arias
administration, its pro-CAFTA allies in the legislature and
the private sector into action. The relevant committee in
the legislature has stripped the offending clause from the
CAFTA bill; full plenary debate follows and another
Constitutional Court review is possible. On September 16,
Minister of Foreign Trade (COMEX) Marco Vinicio Ruiz opened a
dialogue with USTR on the GOCR,s proposed way ahead, which
included meetings in Washington on September 22 and 25. COMEX
has also taken some preliminary (and positive) soundings with
the other CAFTA partners about a further delay.

4. (SBU) The GOCR has not (yet) asked for a date-specific
entry-into-force (EIF) extension, just USG understanding and
flexibility. Once the USG agrees to another EIF delay, the
GOCR believes the other CAFTA countries will follow suit. In
a September 19 letter from President Arias to President Bush,
and in private conversations with the Ambassador and Emboffs,
senior GOCR officials have made clear they are determined to
amend and complete the final CAFTA law as quickly as
possible. After the Pathways to Prosperity Summit in New
York on September 24, Arias told the media that he hoped to
have CAFTA wrapped up by the U.S. elections. Minister of the
Presidency Rodrigo Arias reiterated this timetable to the
Ambassador on September 25, but it may be optimistic. Our
best guess: Costa Rica may need until the end of the year to
finally enter CAFTA into force. The delay is not all bad
news, however; it allows both sides to wrap up a few pending
technical issues as well.

=================================
THE ECONOMY: NEW CHALLENGES . . .
=================================

5. (SBU) The Costa Rican economy continues to post positive
economic growth, but slower than in 2007. Minister Arias
(the president's brother) told the Ambassador on September 25
that real GDP growth for 2008 should be approximately 4.0
percent, down from 8.8 percent in 2007. While unemployment
may remain low, near 5 percent, inflation may rise

significantly, due to the worldwide food and fuel price
crisis. The inflation rate was 8.5 percent in 2007, but has
reached 15 percent over the last six months. Minister Arias
predicted to the Ambassador in June that nine percent of
Costa Rica,s 2008 GDP would go to fuel costs, nearly double
the 2007 total of 5.5 percent. This is not where the Arias
administration expected to be entering the last two years of
its term, and not where the Arias brothers wanted Costa
Rica,s economy to be with a U.S. economic crisis brewing.

6. (U) Exports continue to drive Costa Rican economic growth,
and traditional agricultural products (primarily coffee,
pineapple, sugar cane, and bananas) are doing well, backed by
high added value goods and services, including microchips
from Intel, and regional back-office operations by Western
Union, Proctor and Gamble and HP. However, the government
and private sector worry about the eventual impact of the
U.S. economic crisis, especially on the tourism sector (still
a major earnings generator and job creator) and the real
estate industry (which depends heavily on U.S. and Canadian
investors and retirees). In addition, Costa Rica,s
cumbersome and hyper-legalistic bureaucracy impedes business
development and investment. In the World Bank,s 2008 Doing
Business Index, Costa Rica ranked 115th (out of 178) on the
ease of doing business, 113th on starting a business, 158th
on protecting investors and 162nd on paying taxes. Despite
these impediments, in 2007, Costa Rica attracted the second
largest amount of FDI in the region, after Chile ($1.8
million), according to UN statistics.

7. (U) The good story in the GOCR financial picture is the
Finance Ministry's stewardship. Government tax revenues have
increased due to astute management of collections, spending
scenarios and multi-year budgeting, with the GOCR realizing a
surplus in 2007 for the first time in 50 years. On-site
advisers from Treasury's Overseas Technical Assistance
programs have played a major and positive role in this
success.

======================
. . . AND OLD PROBLEMS
======================

8. (U) Even without the fuel and food price crisis, the GOCR
needs all the revenue it can collect and investments it can
attract. Public infrastructure improvement remains the most
daunting challenge. Highways, airports, ports, electrical
capacity, waste treatment and wireless telecommunications all
suffer from years of negligence and limited capacity, slowing
development. The lack of coordinated local, regional or
national development plans and unbridled development,
especially in the high-end resorts along the northern Pacific
Coast, compound the problem.

9. (U) A proposed IADB Bank loan of USD 850 million promises
relief to the beleaguered highway system (if approved by the
national legislature). An ambitious mega-port scheme may
finally revamp the major (but tumbledown) Caribbean port of
Limon, but financing is a challenge and a new concessions law
should be completed first. Houston Airport System,s winning
the rights to complete development of the major international
airports in San Jose and Liberia is good news and will bring
long-needed expansion, but only if the GOCR,s dense
regulatory system approves. CAFTA, plus free trade
agreements with the EU (under negotiation) and China
(planned) will place more pressure on the creaky national
infrastructure.

==========================================
LOOKING FOR &FRIENDS8 IN THE WRONG PLACES?
==========================================

10. (SBU) To ease the budgetary pain caused by rising fuel
prices, the GOCR agreed in principle in July to join
Petrocaribe. The Petrocaribe deal would allow Costa Rica to
purchase crude from Venezuela at 40 percent of the price
within 90 days followed by payment of the remaining 60
percent over a 25 year term at 1 percent interest. The deal
has no effect on reducing prices to the consumer; it simply
&manufactures8 government revenues from the payment terms.
The GOCR originally proposed to "escrow" the proceeds from
crude transactions into a trust fund for the future payments,
but this has fueled a debate in the legislature about how

best to use the "found" revenues. The GOCR hopes to join
Petrocaribe before the next summit of that organization, in
December. Negotiations have been slow, however, and it is
not clear whether the notoriously slow national legislature
can approve membership in time.

11. (SBU) Media and public opinion have been divided on the
issue, with some commentators and politicians voicing
concerns about the future &political8 price of joining
Petrocaribe. Senior officials in the MFA and Presidencia
insist the GOCR is going into this deal with eyes wide open,
however, with no intent to take more drastic steps such as
also joining ALBA. GOCR officials describe joining
Petrocaribe as &economic pragmatism,8 given the high fuel
prices worldwide and that Venezuela is already Costa Rica,s
major supplier of crude oil (87 percent of its imports).

=================
THE PEOPLE WORRY
=================

12. (U) Economic concerns have overtaken rising crime as the
major worry of Costa Ricans. In the national UNIMER poll
conducted August 28-September 4, 44 percent of those surveyed
listed the economy/cost of living as their top preoccupation
(up from 28 percent in March). Sixteen percent listed crime
and violence. Eighty-four percent viewed 2008 (thus far) as
economically worse than 2007; seventy-five percent expected
2009 to be worse, still. Not surprisingly, the overall
ratings for President Arias and his administration have also
suffered, with 29 percent of those polled rating his
performance as good or very good (down from 50 percent in
March and a steady 45 percent since August 2006). His
confidence rating has also dropped to its lowest in this
administration. Over half of those polled said the GOCR was
doing a poor job of protecting citizens, security.
Politicians and pundits acknowledge to us that most recent
Costa Rican administrations have lost support at their
half-way mark, but the decreases for Arias have been
precipitous.

13. (SBU) Rising crime and a broken judicial system continue
to worry Costa Ricans, however, with good reason. Although
crime rates here are less than elsewhere in Central America
(e.g., a homicide rate of 8 per 100,000 persons versus the
region's rate of 36 per 100,000), they are higher than in the
U.S. (5 per 100,000 persons). They also illustrate a
deteriorating security picture in a country where case
resolution rates have plummeted. In 1995, there were 143
crime events per 100,000 with a resolution rate of nearly 25
percent. In 2007, the crime rate was 887 per 100,000 persons
with a resolution rate of just over two percent. Although
Costa Rica may not be as dangerous as its neighbors, it is no
longer as safe as it once was, and its current legal-judicial
system is not up to the challenge.

===================
US ASSISTANCE FLOWS
===================

14. (SBU) Although Costa Rica is economically-developed
enough to have &graduated8 from most forms of USG
assistance, it still needs help, especially on security
issues. From 2004 to 2007, overall USG assistance to Costa
Rica, including regional programs such as CAFTA trade
capacity building and a large debt-for-nature swap under the
Tropical Forest Conservation Act, fluctuated annually from
USD 27 million (FY 2004) to USD 5.9 million (FY 2007). Under
the Merida Initiative regional security plan, Costa Rica will
receive USD 4.3 million in security- and
law-enforcement-related funding in FY08 funds alone, another
USD 9.4 million in FY09, and significant funding in FY 2010.
For FY 2008, the majority of this assistance will help
modernize and refurbish the Costa Rican Coast Guard, with
healthy amounts of assistance also going to/for the national
police, improved border inspection equipment and training, a
regional fingerprint system, a regional center for drug crime
intelligence, firearms destruction and improved prison
management.

15. (SBU) The Merida Initiative builds on close and
successful bilateral counternarcotics cooperation with Costa
Rica. In 2007, the GOCR interdicted more than 30 tons of

cocaine and 4.5 tons of marijuana, coming in second only to
Panama among Central American countries in the
amount of cocaine seized in 2007 and 2006. In 2008 to date,
the GOCR has interdicted nearly 16 tons of cocaine and over
USD 800,000 worth of seized assets. These numbers hint at
what Costa Rica could do with more and improved resources,
but they also indicate the magnitude of the challenge. The
USG estimates that approximately 60-75 percent of the drug
flow from South America to Mexico and the United States runs
through Costa Rican territory or national waters.
========================
THE PRESIDENT COMPLAINS
========================

16. (SBU) Facing all these challenges, down in the polls,
and disappointed by the latest CAFTA setback, President Arias
has been critical in recent public comments. In a Washington
Post op-ed on August 16, he called the Merida Initiative
&stingy8 in light of what the USG is spending on the wars
in Iraq and Afghanistan. During a swing through Europe in
early September, Arias lauded Venezuelan President Hugo
Chavez for his &generosity8 and asserted that Venezuela is
providing Latin America and the Caribbean assistance &at
least four or five times higher8 than that from the U.S.
When Russia deployed two TU-160 bombers to Venezuela later in
the month, Arias claimed the move was &justified8 in light
of NATO,s pressure (via Georgia and the European missile
defense initiative) on Russia. At home, meanwhile, Arias
used his national day speech on September 15 to emphasize how
&tired8 he was of the criticism of his administration, of
constantly confronting obstacles to his initiatives and of
Costa Rica,s overall &ingovernability.8

17. (SBU) Commentators and Embassy contacts were as
perplexed and surprised by these outbursts as we were, with a
number of interlocutors privately assuring us that Arias,
remarks did not accurately reflect GOCR policy nor Costa
Ricans, views of the United States (or Venezuela). Minister
Arias told the Ambassador the remarks were taken out of
context. In general, Costa Ricans continue to have a very
positive view of the United States, and Arias,s policy
through his first two years has been very similar to the
USG,s, based on the four pillars of security, prosperity,
opportunity and democracy. In his comments to the new OAS
Peace Forum and UNGA September 23-24, Arias reverted to
familiar themes, calling for increased foreign assistance to
countries that disarm (the Costa Rica Consensus), a UN treaty
limiting conventional weapons, and enhanced international
efforts to preserve and protect the environment (Peace with
Nature). These have been the international hallmarks of his
administration.

18. (SBU) Arias has some basis to feel frustrated, however.
Since early 2008, he and his administration have been under
relentless attack in the media (led by the country's leading
daily and a major TV channel) for irregularities in relations
with Taiwan and later China. (Costa Rica switched
recognition in June 2007.) On Taiwan, controversy has
swirled around the use of assistance directed to Costa Rica
via the Central American Integration Bank (BCIE). The
Housing minister had to resign and faces charges for using
USD 1.5 million of those funds to pay for consultants and
staff instead of helping one of San Jose's poorest
communities, as intended.

19. (SBU) On China, the Arias administration refused to
publicize the (very favorable) terms of an agreement that had
Beijing purchase USD 300 million in Costa Rican bonds. No
criminal wrongdoing has been discovered, but Arias and his
team were criticized for covering up the details of the deal,
which suggested that Beijing had &purchased8 Costa Rican
recognition. In addition, pre-election maneuvering has begun
for the 2010 contest, with Arias,s PLN party split, and key
ministers (including VP and Justice Minister Laura Chinchilla
and Finance Minister Guillermo Zuniga) having to step down no
later than February 2009 (by law) in order to launch their
campaigns.

=====================
A VISIT TO INVIGORATE
=====================

20. (SBU) Although the GOCR had hoped the Secretary's visit

would be a CAFTA completion celebration, it can still provide
a needed shot in the arm to the Arias Administration. A
you-can-do-it message should help President Arias stay on
track, and focus the country to look beyond entry into force
to the future opportunities CAFTA offers. (The visiting
business delegation will help reinforce this message.) If
Arias and his team can maintain their focus and unity, there
are plenty of opportunities for success ahead, despite the
recent domestic challenges Costa Rica is facing. Now is the
time for leadership, not drift. Now is not the time for
unwarranted public criticism of the USG or unmerited public
applause for Venezuela. Now is the time for Costa Rica to
model effective, &deliver-the-goods8 democracy for the
region, to offset the illusive attraction of the populist
alternatives.

21. (SBU) Costa Rica can and should implement CAFTA quickly
(and the GOCR seems intent on doing so). Coupling revamped
domestic security legislation with Merida Initiative
assistance will better equip Costa Rica to address its law
enforcement challenges. Add to that better financial
management and vigorous infrastructure development, and Arias
can complete his term leaving Costa Rica much better off than
when he began. This strategic conversation may find timely
resonance with Arias and his team during the Secretary's
visit.
CIANCHETTE

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