Costa Rica: Still the "Switzerland of the Americas"?
With Nicaragua on one flank and Panama on the other, can Costa Rica be a safe haven for you or your money?
Costa Rica is one of only a handful of nations that qualify as ideal for Americans to live. It also offers some of the best long-term investment opportunities in the world." Best-selling financial author Doug Casey is not the only one to so conclude. Costa Rica is often described as the "Switzerland of the Americas," and for the many Americans looking for a second home, a retirement haven, a long-term industrial or agricultural investment, a tax and money haven from which to conduct offshore investments on a worldwide basis, or simply a pleasant vacation destination, Costa Rica does have a lot to offer. Its recent de facto devaluation of the colon from 8.60 to the dollar to a floating range of 13 to 17 has made this a particularly opportune time to consider some of these options.
CULTURAL CLUES Costa Rica was ruled by Spain as part of the Central American Federation for the first 250 years of its existence. Unlike most of the colonized areas of Latin America, however, the Spanish conquistador and his legions were not pitted against a relatively large indigenous (Indian) population. Since there were no large treasures of gold and the Indian population was limited, mining ventures and large-scale plantation farming were not feasible. As a matter of fact, Costa Rica was a backwater of the Spanish colonial development and, to its good fortune today, attracted only rugged individualists willing to wrest their livelihood from the soil. Not having inherited the old plantation system, Costa Rica today does not suffer the social problems of so much of Latin America.
After independence from Spain was declared on September 15, 1821, there followed an era of democratically elected governments. In 1948 the nation had its "revolution" when the left-wing candidate was charged with election fraud and ousted by the Liberacionistas, led by "Pepe" Figueres. A new constitution drafted in 1949 abolished the army and established the current framework of government—an executive branch made up of a president, two vice-presidents, and thirteen ministers; a legislature composed of 57 deputies; and a judiciary headed by a supreme court and four appellate courts. The judicial system is based on civil rather than common law, and does not use juries. The constitution guarantees equality before the law and freedom of speech, assembly, press, and organization. It guarantees foreigners the same rights as Costa Ricans except for participation in political affairs.
Although the country has a multiparty system, the Partido Liberacion Nacional (PLN) continues as the single dominant party. A coalition of smaller parties under the Unity banner, however, managed to get its candidate, Rodrigo Carazo, elected president in 1978. The 1982 election is now heating up, with Luis Alberto Monge (PLN) and Rafael A. Calderon (Unity) already selected as candidates. Measured by the US political spectrum, the Liberacion party would approximate Democratic standards, while Unity would come closer to Republican principles. The Communist Party operates legally as it does in the United States, but it has never been able to garner more than three percent of the vote.
The Costa Rican population is unusually homogeneous, both ethnically and socially. Excepting the some 10,000 Indians and blacks who immigrated from Jamaica in the early 1900s, most of the population is descended from the original Spanish settlers, while the more recent waves of European immigrants make up the balance. German, Italian, French, Dutch, and some 15,000 Americans are included in the latter group, as is an increasingly important Japanese community with connections to Japanese multinational companies.
A rising level of education and family planning has led to sharply lowered birth rates and a relatively low 2.4 percent annual population gain. Still, Costa Rica is a young country, with 53 percent of the population below 19 years of age.
There is a high degree of social mobility, and the large middle class is politically and economically influential. Although there is an ongoing urbanization of the population as industrialization develops, the current mix still shows the rural sector a dominant 57 percent of the total.
INVESTMENT INSIGHTS Fully 30 percent of the national budget is dedicated to education, by far the largest item. Even the most remote hamlet in the countryside has its one-room schoolhouse. The level of education is one of the highest in Latin America and includes public, vocational, and technical schools plus two universities. Private education ranges from a variety of foreign language schools through a number of technical schools and the recently established Central American University.
Like the United States, Costa Rica has a minimum-wage scale, although it is based on a six-day, 48-hour week and encompasses three basic work categories with different minimums. Labor unions are free to organize and are particularly strong in the banana companies and, more recently, in governmental services. Measured by US standards, wages and salaries are low, even though they range at the top among Latin American countries. With the recent devaluation of the colon, they have become even lower.
Historically, Costa Rica's growth has been based on a solid agricultural economy. The rich volcanic soils covering much of the country, coupled with ideal year-round growing weather, make agricultural development a natural catalyst for all other activities. A trip into the green countryside dramatically reveals the fertility of the land; almost everywhere, untreated fence posts sprout into trees.
Coffee and bananas have been the two dominant export crops, with sugar, cocoa, and meats rounding out the list of traditional products. Recent agricultural projects, many under the aegis of foreign capital and management, include macadamia nuts, ornamental plants, spices (especially black pepper and ginger), and the newest entrant, the jojoba bean. The varying altitudes, from the mountain sides to the central valley and down to the tropical lowlands, provide desirable growing conditions for a great variety of crops. With less than 50 percent of the land potential in production and much of that in lower-yielding sectors, agricultural expansion still is very viable. About half of Costa Rica's agricultural production is exported.
Since 1959, when a system of tax incentives was introduced, the government has focused on encouraging industrial development. In 1963 Costa Rica joined the Central American Common Market, with an estimated population of 20 million. Initial emphasis on industries geared to import substitution, particularly nondurable consumer goods, has shifted to consumer goods industries with export potential. The overall shift from agriculture to industry is reflected in the employment figures: in 1960 agriculture employed 50.7 percent and industry 11.4 percent of the labor force; by 1978 the figures were 32 percent and 16 percent, respectively. Over the past 15 years industrial growth has become one of the highest in Latin America, with an average annual gain of 10 percent per year. Food processing dominates the industrial sector, followed by chemicals and fertilizers, metal and metal working, textiles and clothing, and wood and wood products.
The basic utilities and the insurance industry are under national government control. The banking system was nationalized when the Liberacionistas took power in 1949, although a number of international banks and finance companies function in all banking areas except demand deposits. CODESA, which acts essentially as a government development bank, is dedicated mainly to helping finance large industrial and agricultural projects and in some cases acts as a partner in the project. COFISA is the private-enterprise counterpart, which usually undertakes projects of a more limited scope. A national stock exchange, Bolsa Nacional de Valores, was organized five years ago to trade in shares, bonds, and the US dollar.
PROPERTY POINTERS Private ownership of land is in general encouraged and protected by the laws and constitution of Costa Rica. Foreigners enjoy the same rights as citizens, with a few minor exceptions. Of great interest to investors is a very safe system of title registration that protects the buyer from hidden claims. All titles are inscribed in a central national property registry, and in order to be valid any change in the status of the title or any claim that would affect it must also be duly inscribed therein.
Costa Rica has available a broad spectrum of types of property but not a very large selection of any one kind. There is a notable lack of industrial or commercial park development, as well as apartment houses and condominiums, although the need for both of these is coming to be recognized. Zoning regulations are far less stringent than in the United States. Subdivision approvals are required from the housing authority, the local municipality, and the Ministry of Health.
A lack of adequate financing at economically feasible rates makes development more difficult and less profitable than in countries where substantial financial leverage can be obtained. Fairly high yields and rapid increases in property values—due to a growing population and economy—tend to make up for the lack of leverage, however.
Good agricultural land, in moderate quantities, is available for a wide variety of crops. Prices seem to be high compared to past experience but are reasonable compared to the United States and low compared to Europe. Prices tend to reflect productivity, except for cattle land and where there is development potential for commercial purposes. In areas suitable for commercial development or tourism, prices seem to be limited only by the sellers' imagination and can be totally erratic. Excellent properties of all kinds are available throughout the country at prices consistent with their present productivity or value for intended use.
In areas outside the metropolitan San Jose area, many buyers are discouraged by the lack of highway access, electric power, municipal water, etc. As many are aware, the time to buy this kind of property is before these improvements if the property is basically good and the general area and economy are growing. Costa Rica is growing and, more importantly awakening to its growth potential. The fact that the last five years have shown a marked shift from selling to buying among Costa Ricans themselves is a significant indicator.
The biggest problem with Costa Rican real estate is that the banks will generally not finance the purchase of land. Although there are some exceptions, loan processing tends to be exceedingly slow and interest rates high, depending on the intended land use. Most land financing is carried by the seller at somewhat lower interest rates, which accounts for the general patterns of high downpayments, short terms (two to five years), and high interest rates.
All things considered, the laws and land ownership are quite liberal, and the rights of private property ownership are solidly based in the constitution and the law and have a long tradition in the Costa Rican culture and society. The favorable implications for investors are obvious; there are few places in the world where the acquisition of land could be safer than in Costa Rica.
REFUGE REASONS Costa Rica is probably the least-known and least-understood money and tax haven in the world. One explanation is that the country has never advertised itself as such. Yet this very anomaly makes it a worthwhile consideration for those who want true secrecy in their international investment activities.
What makes Costa Rica so different from other, better-known havens, such as Switzerland, Cayman, Liechtenstein, and the Bahamas? All the laws on the books involving secrecy, anonymity, and tax benefits were written by Costa Ricans for Costa Ricans. The offshore investor who sets up a Costa Rican investment company is the incidental beneficiary of these laws. In other havens, these laws were specifically enacted to protect the foreign investor with special benefits that do not accrue to its citizens. This creates dangers of international pressures against an officialdom that has no vested political interest in the laws. So there is always the danger of repeal of protective laws in these other jurisdictions.
Then there is the cost factor, one which strongly favors Costa Rica. Lawyers, accountants, and trustees set their fees to serve their Costa Rican clients. Although overcharges of the foreigner can occur, there is no industry of high-priced lawyers and trust companies that exist only for the foreign investor, as is the case in most established tax havens. Setting up a corporation in Costa Rica costs the international investor approximately $600-$700. Servicing that corporation, which includes a required annual audit, costs around $250 per year. Fiduciary or trust services are also available at an annual fee of ¾ to 1 percent of the value of the holdings.
A Costa Rican or a Costa Rican corporation can deal anywhere in the world without a capital gains tax liability. This corporation can also buy US Treasury Bills or bank CDs with no income tax liability. Costa Rica has no tax on income earned outside Costa Rica; within Costa Rica, all government and bank instruments are free of tax.
Costa Rica has no foreign exchange controls on the movement of funds, and there is no requirement for conversion to local currency, as there is in many other jurisdictions. For those who choose to invest in Costa Rica in local currency, there is an unrestricted free market in exchange from or to dollars. Investments made in dollars stay in dollars, and those dollars may leave the country at any time.
Americans have been attracted to Costa Rica for years because of its favorable climate and relatively low cost of living. In 1971 the Costa Rican government passed a law designed to attract foreign retirees who can prove a certain fixed income from abroad and will not be employed locally. To date this law has encouraged the settlement of some 30,000 people, about half of whom are Americans. The law's provisions require $300 certifiable outside monthly income, $500 for annual residency of less than six months, permits the importation duty-free of a small automobile, and offers an exemption from duties and taxes for up to $7,000 in household furnishings and personal effects.
An extra attraction for what Doug Casey has dubbed "the international man" is the availability of a Costa Rican passport without change of citizenship. This can be arranged for anyone who purchases at least $10,000 worth of property and puts at least $30,000 into other Costa Rican investments, which can be in any certifiable form.
CURRENT CONCERNS Costa Rica shares with many developing nations the problems of the rising costs of energy and capital goods against a relatively static exports price level. The price of coffee, Costa Rica's chief dollar earner, has actually fallen substantially, more than enough to offset increasing exports of nontraditional items. As a result, the trade deficit has widened to almost $500 million. At the same time government budgets have moved into mounting deficits. Between 1974 and 1979, revenues increased at a 17.6 percent annual rate while expenditures grew at a 26.7 percent rate.
The political scandal of the previous government, centered on the US refugee financier Robert Vesco, has been replaced with new scandals involving arms smuggling, first to the Sandinista movement in Nicaragua (admitted) and recently to the rebel forces in El Salvador (hotly disputed). The Carazo regime has sunk to new lows in popularity, and for the first time there has been popular concern over whether the nation will make it to the next election in 1982. (Without an army, however, Costa Rica is unlikely to undergo the sort of political upheavals known to its neighbors.)
These are the negatives, and they are well-known. The international investor might well look beyond them, recognize the bargains created by the de facto devaluation and the air of uncertainty, and examine the positives, some of which have already been related.
Further favorable factors include some very significant economic and political developments. Probably the single most important factor in an era of increasingly high energy costs is that the nation's electricity is now derived entirely from low-cost hydroelectric power. The current 770,000 KW of installed capacity will almost double on completion of the Boruca project but would still be a small fraction of the nation's estimated 12 million KW hydroelectrical potential. Mexico and Venezuela, with political interest in the survival of Latin America's most exemplary democratic government, have provided Costa Rica with its domestic oil requirement on very favorable terms.
The most significant political factors are those occurring outside of Costa Rica with the succession of more conservative governments in the Caribbean area, such as in Jamaica, and of course the election of Ronald Reagan. A Reagan administration is expected to help stabilize existing governments in Central America while discouraging the various Marxist-sponsored insurrectionists.
OPTIMISTIC OMENS With the new 200-mile fishing zone, Costa Rican waters have been extended to an area of 200,000 square miles, almost 10 times its own territory. Norwegian interests are negotiating a $60-million tuna fishing project. An Italian group has recently commenced production of modern facilities for shoe manufacturing, which they claim could equal coffee export earnings by the end of the decade. An American firm has started development of a $30-million pineapple plantation that will eventually supplant its Hawaiian production. The rapid maturity (seven to eight years) of softwood trees, one-third that for most US production, has created new interest in forestry, especially attractive with special reforestation tax incentives. The completed Arenal hydroelectric project has opened up the possibility of cotton production in the relatively dry northern Guanacaste peninsula. All of these products will save dollars on imports and ultimately provide export earnings.
Compared to Mexico, tourism is still in its early-development period. The vast beach areas are only now being accumulated by professional developers. Tourist projects on an international scale are still in the future. New North American air connections, both scheduled and chartered, are expected to rapidly expand the tourist market. With off-season rainy months corresponding to the US summer, Costa Rica lends itself to being marketed as a vacation spot for those living in America's hot and humid southern region, as most mornings are cool and clear and both golf and tennis can be enjoyed on an almost daily basis.
Under all the major political factions in the postrevolutionary period, the government has traditionally welcomed foreign investment. Investments geared to export industries in nontraditional products receive special benefits in the form of CATs (Certificado de Abono Tributario), which grant up to 15 percent of the FOB value of exports in certificates usable for any tax obligation and marketable on the Bolsa to those owing taxes. In addition, there is special tax treatment—exoneration of import duties and taxes—for in bond assembly or drawback operations. Costa Rica's lingerie and some of its electronic assembly operations function under these favorable terms, where skilled, relatively low-cost labor is an essential ingredient in the product's commercial success.
The Export and Investment Promotion Center is a government-sponsored promotional institute whose main function is to give technical assistance to investors, exporters, and foreign importers dealing in Costa Rican products. It conducts studies on potential investments in all areas of the economy, supplying information on facilities, regulations, and financing of these projects and offering procedural advice on the installation of new "drawback" industries.
Risk, of course, exists in all investments. Our perception of risk is usually magnified in all parts of the world by a press that is too often oriented toward sensationalism or liberal advocacy. Those willing to look beyond the scare headlines emanating from Central America today will find Costa Rica different. Whether you are looking for international diversification, a money and tax haven, an alternate lifestyle, or simply a pleasant vacation, this Switzerland of the Americas merits your consideration.
Charles Sexauer is a director and international vice-president of Bona International, S.A., a foreign broker-dealer based in Costa Rica. He wishes to acknowledge assistance with this article from Robert Wasson of American Realty and Robert J. Adler of the Money Doctor.