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  • Costa Rica Economy

    Posted by Carl from Chicago on March 9th, 2009 (All posts by )

    Recently I had an opportunity to travel to Costa Rica. Being a rather boring blogger / analyst type, I thought a lot about the Costa Rica economy.

    The Costa Rican dollar is known as the “colon“. Being the finance type, I went out to exchange money into local currency prior to entering the country. Most big local banks like JP Morgan didn’t have colones on hand – although they said that they could order the money and I’d have it in a few days – so they sent me to a specialized currency exchange. At this currency exchange there was a pretty wide “bid / ask” spread, or the difference at which they would purchase currency back from you against what they’d sell it to you for, indicating a rather thinly traded currency. I gave them 300 USD and received a big wad of Costa Rican currency – the common denomination I used was the 2,000 note which was a bit over 4 USD. This is a rate of about 500 colones to the dollar, or each one is worth about 2/10 of a cent.

    I spoke to a settler from the US who was a Quaker who opened a cheese factory in Monteverde in the 1950s – he said that the colon was worth about 5 to 6 to the dollar in the 1950s. Thus even while the US dollar has depreciated against other major currencies, such as the Yen, the colon has plummeted from 20 cents on the dollar to .2 cents on the dollar, or to 1% of its “relative” value from the 1950s.

    From the Wikipedia article (I haven’t done much other primary research), there is a band for currency, and the colon trades at the low end of the band. However, I pretty much was able to use US dollars throughout Costa Rica, and everyone seemed to prefer the dollars (they always asked for dollars and seemed a bit disappointed when I pulled out colones, but I didn’t want to bring any back). Cash stations dispensed either dollars or colones.

    It seems to make sense that Costa Rica ought to drop their local currency entirely and just move to the dollar – this would end the charade and limit inflation locally. I’m sure that there are many other considerations to this decision, including the independence of monetary policy and nationalist concerns, but it seems that de-facto “dollarization” has already occurred. If you are traveling to Costa Rica, I’d recommend having a few colones around, but would do most purchases in dollars or via credit card to avoid taking a loss on purchase and selling back remaining currencies. Local merchants and cab drivers would probably appreciate it, too.

    One item that didn’t seem to impact the local economy but annoyed me as an anal-retentive numbers guy is the fact that Costa Rica does not have a fixed address system. For example, if you wanted to send a letter to someone, you would reference the city and then say “500 meters east from the Coca-Cola bottling plant” and it would arrive. The cities were named (obviously) and landmarks were noted, but that was about it. In the guidebooks they mentioned that there aren’t street signs, and those municipalities frequented by westerners that tried to put up a few signs often had them up the wrong way because the workers had no context.

    In the cities there were often lines of people queued up for the public pay phones. I spoke to one of our guides and he said that the land lines were a monopoly (no surprise there) but that the same phone company ALSO controlled the cellular company, so you couldn’t get a cell phone without a lot of effort. Needless to say this is going to saddle the country with a big productivity gap since the wireless carriers have been able to “leapfrog” the slow land-line companies and offer innovative services, especially to less wealthy customers (like text messaging and pay-as-you-go minutes). It seemed like many places (all resorts) had internet access, and many bars and restaurants of the types that would be accessed by Westerners had wi-fi services. I seemed to be able to get a signal on my AT&T phone but was refraining from making calls in fear of punitive local “roaming” charges.

    Agriculture seemed to be very effective in Costa Rica. Any plant that you’d struggle to grow in the States just popped right out of the ground in Costa Rica – for many plants (bananas, for instance), you can just put a certain type of branch from an existing plant into the ground and a new plant would sprout up and grow at a prodigious rate. In addition to the banana cash crop, coffee was a major export earner, and palm oil (such as the view below from a local airplane) plantations, as well.

    I learned that apparently bananas are at risk of being extinct – there are no “seeds” since you just put an existing shoot into the ground – so when some sort of agricultural blight strikes the banana (in its current form), they will likely all die off. Apparently the Cavendish banana is the one we all eat today, and here is a Wikipedia article describing the situation.

    I am not an expert on ranching by any means but the cattle seemed very skinny in Costa Rica. A local said that they had programs encouraging the farmers to clear the land for grazing at one point but once the trees are gone the soil isn’t so great, and plots are small and often on steep ledges, meaning that the cattle have to expend a lot of energy to eat and thus grew slower, making ranching not very profitable to the rancher.

    This photo also shows another endemic issue – poor quality roads. Outside of the main cities and parts of the Pacific, most of Costa Rica seemed to lack paved roads. I often was astounded to cover an abysmal road for a couple of miles that led to an absolutely top quality, brand-new resort. You’d think that the resort would invest a bit to pave the local road, too, but maybe it is because they often wash out anyways on the steep hills. From what I’ve heard the situation is getting a bit better over time, but this is an area that they could stand some more investment. At least the country is relatively small.

    This photo is of Lake Arenal, a major dam built in the country. This dam provides a significant portion of the country’s electricity, allowing it to avoid dependency on outside fossil fuels and even to earn some money exporting electricity to neighboring countries. As I traveled throughout the country it appeared that almost all dwellings in towns along the road had power – it is safe to say that Costa Rica has their priorities in the right place when it comes to leveraging their natural assets (rivers) in order to improve the lives of their people, as opposed to the US where we refuse to take advantage of our hydroelectric potential anymore and are even considering blowing up dams in order to allow free fall of the various streams and rivers.

    As I traveled in the country, I noted a large number of smaller-scale resorts. Various documents (I don’t have definitive proof) said that up to 80% of the coastline is in the hands of outside investors. For all this, the Costa Ricans seemed very friendly and not angry over foreigners purchasing property. If you think of it from their perspective, the foreign owners build the facility using local labor, staff it with local labor, and purchase food and alcoholic beverages locally. Without the foreign money, it is likely that many of the resorts wouldn’t have been built in the first place. Other than the “economic profit” of owning the resort, which would be the profit after all costs are deducted and the investment and construction costs are taken into account, all of the other outflows are received by Costa Rica families as noted above. The foreign owner has to make money after paying all costs plus covering investments, even while the Costa Rica currency continues its slide against the US dollar, which reduces the value of assets if you are predominantly dollar based.

    Some of the resorts purchased adjacent land in the rain forest, for example, and left it in its natural state. This land was used for tours (usually with a local guide) and raised the value of their existing resorts. Some of our tours were thus on private lands, even though much of it was next to park lands allowing the animals more room to roam.

    All in all, it seemed that they were doing a generally fine job of running their economy, relying on agriculture (which the country is fantastically suited for), being open to foreign investment and tourism, and leveraging their hydroelectric assets to provide electricity throughout the land without paying out currency to foreign suppliers. They might as well give up the ghost and just dollarize, and it would make sense to lift the telecom monopoly on mobile phones, but perhaps they will consider this in the future. Although it doesn’t seem to affect anything, they also ought to put in some sort of address system, just to ease my number-orientated mind.

     

    13 Responses to “Costa Rica Economy”

    1. Phil Fraering Says:

      Right now everyone has all the benefits of dollarization with the added advantage that if the dollar craters and another currency becomes advantageous they don’t have to wait for whoever’s the national banker to pull their head out their butt.

      (And frankly, considering that the colon is worth two tenths of a cent, this seems wise. Reserve currencies come and go, but whoever let the colon inflate so much seems to be there forever).

    2. Jim Bennett Says:

      The problem with informal dollarization is that you may not be able to write enforceable contracts in dollar denominations, or issue enforceable debt instruments that are dollar denominated. Local courts may rule that debts could be paid in the national currency at the rate that existed when the contract was signed. (This has happened in third-world economies.) Depend on local tax structures, you may be taxed on phantom capital gains if the official local currency falls and you have a dollar-denominated account or instrument.

      It sounds as if the smart thing to do when travelling to Costa Rica is to carry a Skype phone, since wireless is prevalent but cell raoming charges are steep.

    3. Anonymous Says:

      Japan has no sensible system of addresses.You have to go to the police kiosk to know where to go.

    4. Knucklehead Says:

      Ecuador switched to the USD back in late 2000:

      http://www.globalpolicy.org/nations/sovereign/dollar/2000/ecuador.htm

      I have some contact with people who experienced Ecuador before and since and they say it has helped not only economically but also with political stability.

      It is not without its own issues though:

      http://www.voanews.com/english/archive/2008-10/2008-10-03-voa57.cfm?CFID=135134621&CFTOKEN=94719215&jsessionid=84306b8a3c770c11132a137c55d5d251a3d2

    5. mishu Says:

      The people in Ecuador love the Sacagawea dollar.

    6. Phil Fraering Says:

      I thought Ecuador was leaning towards de-dollarization after the last election.

      I like the Sacagawea dollar a lot too.

    7. Shannon Love Says:

      …Costa Rica does not have a fixed address system.

      Back in the 90’s, I read an interesting anthropology study that claimed you predict the economic success of a region just by having information about things like the rate at which drivers voluntarily obeyed traffic regulations, the number and accuracy of public clocks and the reliability of public transportation schedules. These factors predicted how easily people and goods could move around the country and how much the population valued coordination. It would seem that having a address system would fall into that category. Having no addresses or street signs signs signals that you don’t expect to see a lot of outsiders or have a need to moves goods and people to many different places.

      Anonymous,

      Japan has no sensible system of addresses.You have to go to the police kiosk to know where to go.

      Japan has a very detailed address system, their mail and package system works very well, they simply do not post signs. This is apparently part of their traditional low-tech surveillance system. Any strangers to an area have to visit the neighborhood cops and get covertly checked out in the process.

    8. Knucklehead Says:

      Phil,

      Don’t know. It’s been 2+ years since my sources visited, so I have no recent G2 beyond what is published and available on the net. From the second URL I provided above, Oct. 2008:

      “In recent months, President Rafael Correa has criticized the adoption of the dollar economy, saying it hobbles future economic growth in the Andean nation. Some opposition leaders have expressed fear the president may abandon the current system, but Mr. Correa has ruled out making any such changes so far.

      One positive note in the current economy is that a weaker U.S. dollar has made some Ecuadorian exports more attractive to foreign buyers, especially in Europe. John Price, managing director of Kroll consulting in Miami, says shrimp and banana exporters based in the coastal city of Guayaquil stand to benefit.

      “The folks in Guayaquil were not happy with the dollarization. However, we live in a world of a weak dollar and those folks are [now] reasonably happy with their level of competitiveness.”

      Price says many exporters and other business leaders would oppose an end to the dollar economy, if Quito’s government decided to launch its own currency.

      Economist Pablo Davalos in Quito says the government is unlikely to move in that direction, because the political risks are too great.

      He says the government may criticize the dollar economy, but right now the president must defend the program to ensure his own political stability.

      Davalos says the government could be forced to change that position in coming months, however, if the fallout from the U.S. crisis continues to hurt Ecuador’s economy.”

      The most recent article I spotted was from mid-Dec:

      http://www.bloomberg.com/apps/news?pid=20601086&refer=latin_america&sid=aP460_vNCd3w

    9. Brett_McS Says:

      It makes sense for Costa Rica and Ecuador etc to use US Dollars in order to protect the currency the people use from their own politicians’ grubby little hands. But, as per Hayek’s “The Denationalisation of Money”, it would be better still if currency were a fully competitive commodity supplied by private firms (ie banks) rather than a nationalised one provided by monopoly suppliers.

    10. bustoff Says:

      Nothing worse than a collapsed colon.

    11. Jonathan Says:

      It is hard to top the last comment. However, I will note that Panama uses the USD.

    12. Jerry Says:

      It is not true that you have to go to the police station in Japan to find out where you are. Each plot of land and each building is identified by district, neighborhood name, and its own number. Maps identifying what is where (very detailed maps with numbers superimposed) are published on the intnernet, in widely available atlases, and on small billboards around the neighborhoods.

    13. abadabadoo Says:

      pura vida !!