The Economist

January 8, 2000

Chip shop afire in Costa Rica

S A N J O S E

IN NOVEMBER, when Intel named a new boss for its Costa Rica operation, President Miguel Angel Rodriguez
joked that the new manager’s job was more important than his own. Perhaps he was right. Since Intel, an American
semi-conductor maker, opened a factory outside the capital, San Jose, in March 1998, Costa Rica’s economy has
been transformed.

So the statistics suggest, at least. After stagnating in the mid-1990s, the economy has
surged: officials estimate that GDP grew by almost 8% in 1999, and that
the increase in chip exports (to $2 billion) gave Costa Rica a trade surplus for the
first time since 1986. But these dizzy figures mask a more complex story. While last
year, the value of the Intel factory’s production almost tripled, the rest of the
economy grew more modestly, by around 3%.

Tourism is a second bright spot: Costa Rica’s beaches, rain forests, and volcanoes
attracted more than 1m foreign visitors to the country in 1999. But farming,
traditionally the mainstay of the economy, is suffering from low prices. Some Costa
Ricans worry that their country now has a “dual economy”, and is swapping one
form of economic dependency for another. “Fifty years ago we depended on coffee
and bananas; today we depend on Intel,” the central bank president, Eduardo do
Lizano, complained recently. One statistical effect of that dependency is that once the Intel plant reaches full capacity
by the middle of this year, the economy’s rate of growth will plunge. Another was that national income (as opposed
to GDP) grew by only 2% last year, because of the outflow of profits.

The government wants to keep growth going by seeking more foreign investment. Manufacturers who export their
output get an eight-year tax exemption. Other Central American countries offer more generous incentives, but Costa
Rica has other advantages, rare in the region. These include a democratic tradition, respect for the rule of law, and a
well-educated workforce. Such factors led Intel to choose Costa Rica for its only factory in Latin America.

Mr Rodriguez’s people are now concentrating on improving Costa Rica’s infrastructure. The main airport is being
expanded, and there is much road-building. Despite resistance from traditionalists, they are also pushing ahead with
plans to allow private investment in ICE, the state-owned electricity and telecommunications monopoly. These efforts
seem to be paying off. Other foreign investors have followed Intel. Even if growth now slackens a bit, Costa Rica has
started to make the transition from banana republic to high-tech manufacturing centre.