San José, Costa Rica, since 1956

How Will Small Businesses Fare under CAFTA?

John Flores remembers when he went to the nearby Más x Menos as a kid, and bought food at what was then a grocery store.

Flores, who now manages the appliance store Corwalt’s on the same block as a Más x Menos on Cuesta de Moras in downtown San José, says the supermarket has been growing ever since. It now offers clothes, a restaurant and even electric appliances – some of the products that Corwalt’s offers.

“We’re not growing right now,” he said. Flores stood next to a row of washing machines in his humble five-employee shop.

Outside the shop’s glass window, the streets bustled with potential customers. None stopped in.

A few stores down the block, the entrance of Más x Menos was flooded with customers coming and going.

Corwalt’s now has to compete with that growing retail chain, which was recently bought out by the world’s biggest retailer, Wal-Mart.

The U.S.-based retail giant became a majority shareholder in the company that owns Más x Menos and various other supermarket chains earlier this year (TT,March 17).

Flores is one of tens of thousands of micro, small and medium-sized businesses in Costa Rica taking on globalization as the Arias administration nudges Costa Rica to further open to the world market. In Costa Rica, micro, small and medium-sized businesses account for 98% of all formal businesses, a statistic that doesn’t take into consideration businesses in the massive informal economy.

Many, like Flores, welcome the competition, perhaps because they feel confident that they can compete. Others are more wary, and fear that the Central American Free Trade Agreement with the United States (CAFTA), under discussion in the Legislative Assembly, will just make matters worse.

“When a North American corporation like Wal-Mart comes, they can work three years without any profit. I can’t go without profit for a month,” Flora Fernández, who helps run a small, family-owned watch shop in downtown San José, said during an anti-CAFTA protest earlier this year (TT, Sept. 15). “Then, when we disappear, they raise the prices,” she added.

Some worry that the United States’ historical dominance of the product market in Costa Rica – and the rest of Central America – would expand under reduced tariffs, crowding out small local businesses unable to compete against multinational corporations functioning on economies of scale.

CAFTA “expands opportunities for multinational businesses and businesses that are competitive today. But it doesn’t provide conditions needed for (small and mediumsized businesses) to survive,” said Eugenio Trejos, the director of the Costa Rican Technology Institute (TEC) and an outspoken CAFTA opponent.

Proponents of the controversial trade pact say Costa Rica’s booming $7 billion export industry – nearly half of which is owed to trade with the northern world superpower – presents an opportunity for small and medium-sized businesses in this country the size of West Virginia to play its hand in the world market.

With one in five Costa Ricans living in poverty, many see the fate of the country’s poor hinging on the success or failure of these small and medium-sized businesses.

Global shifts in political economic thinking have trickled into this country, which is beginning to see redistributing wealth in terms of “teaching to fish,” instead of giving welfare handouts.

“We’re leaving behind the ‘assistentialism’ of the past … people seemed to think there was such thing as free money. Instead, now we ask them to tell us their idea, their plan, and then we can help them,” said Fernando Chávez, director of a new program in the Economy Ministry to support small and medium-sized businesses.

CAFTA supporters point to a massive effort that has brought together a network of dozens of state-sponsored and non-governmental organizations that are already spending millions to develop and finance small and medium-sized businesses.

This effort, which is in its infancy in Costa Rica, also has large businesses thinking about social responsibility and is giving the government new tools in the fight against poverty, instead of just traditional welfare wealth redistribution.

It has left its mark on business culture and business language. One example is the business-circle buzzword “SMEs,” (pronounced smees), an acronym for Small and Medium-sized Enterprises, translated from the Spanish acronym for pequeños y medianas empresas, PYMEs (pronounced peemis).

Research and development in this field has become a science, with engineers diagnosing small and medium-sized enterprisers, prescribing them solutions and carrying them through to become exporters. Other programs are also linking large businesses with small businesses, fortifying the country’s supply chain.

Others say not enough is being done. “There are 40,000 small and mediumsized businesses in Costa Rica that don’t have access to micro-financing, technical assistance or technical tools they need,” said the Technology Institute’s Trejos, who was recently singled out by pro-CAFTA President Oscar Arias for his opposition to the pact.

Micro-financing for SMEs in Costa Rica is still largely just a dream. A quick stroll down Avenida Central in downtown San José reminds anyone of the bustling informal economy in Costa Rica, where few have access to such programs and information because legally, they don’t exist.

Whether small businesses are ready or not, one thing is for sure: with legislators strapping on their gloves to engage in heated debate over the pact, and recent nationwide protests turning violent in some corners of the country (TT, Oct. 27), and President Arias pushing for CAFTA to be ratified by early next year, the debate has never seemed so important as now for the only country that hasn’t ratified the tariff-eliminating agreement.

Money in the Bank

The world set its eyes upon the promises of micro-financing last month when Indian economist Dr. Muhammad Yunus was awarded the Nobel Peace prize for his work pioneering loans to the poor.

In Costa Rica, micro-financing still faces huge obstacles.

Part of the problem, Chávez says, is barriers for SMEs to access millions that public banks have available to loan to small businesses.

A measly chunk – just 2% of $27 million that Banco Popular has available for such credits, for example – has actually been used by SMEs, Chávez said. The Economy Ministry has been working to make those funds more accessible to small businesses by revising its tramitología – or bureaucratic processes – and reducing requirements for SMEs to access loans, he added.

The Arias administration has been working to restructure the banking system to free up funds for micro-financing, according to Production Minister Alfredo Volio. Volio told The Tico Times that next week, the Legislative Assembly should receive a proposal to do just that.

The idea of the proposal, which the Arias administration is pushing as part of a national development agenda to accompany CAFTA, is to free up funds that wouldn’t be restricted by the international regulations that traditional financial institutions are held to, Volio explained.

Taking Them by the Hand

“Big businesses are coming into Costa Rica with or without CAFTA,” said Mauricio Lanzar, a Nicaraguan who recently immigrated to Costa Rica. Lanzar sells cellular phone covers on the streets of downtown San José to support his four children.

A recent University of Costa Rica (UCR) study estimated there are some 150,000 micro-enterprisers who are self-employed like Lanzar.

“These are people that are out on the street selling ice cream or handicrafts,” Chávez said. Though there are approximately 70,000 formal SMEs in the country, these self-employed micro-enterprisers are the ones who have the least access to information on public support for SMEs.

More and more organizations are making it their job to grab these micro, small and medium-sized businesses by the hand. Funded by a 2003 law to support SMEs, new government agencies are taking their first swings at helping develop the tiny entrepreneurs.

Chávez’s organization, the Economy Ministry’s General Administration for SME Support (DIGEPYME), is part of a network of at least two dozen public and private organizations – including government agencies, banks, universities and non-governmental organizations – that offer services for SMEs such as job fairs, missions, training, diagnosis, help developing business plans, and more.

“You have to find (SMEs) alternatives. They have to think of a bigger pulpería, a bigger supermarket, bigger business opportunities,” said Roberto Calvo, the director of Costa Rica Provee, a Foreign Trade Ministry program that hooks domestic SMEs to supply larger exporters.

Calvo explained the program has already helped hook up more than 115 new supply contracts with larger exporters this year for product parts that were once imported, and are now being produced in Costa Rica.

He said CAFTA could mean positive things for Costa Rica, a country he says has an increasingly strong supply chain network.

“We have been supporting small businesses,” he said. “I see a very interesting set of opportunities if CAFTA is approved.”


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