San José, Costa Rica, since 1956

Costa Rica’s struggle with fiscal reform highlights its governance problems

The Costa Rican government’s struggle to launch fiscal reform to deal with its large and growing budget deficit brings into sharp focus the ongoing governance problems faced by President Luis Guillermo Solís and his administration.

With a Legislative Assembly in which Solís’ party lacks a majority, and faced with cutting deals to pass any fiscal reform legislation, Solís recently has been reaching out to opposition leaders in an effort to reach consensus on reducing the deficit, currently at more than 6.4 percent of gross domestic product.

Last week, President Solís, who served in the government of two-time President Óscar Arias, paid a visit to the Rohrmoser home of the Nobel laureate in an effort to get Arias to use his influence with the opposition National Liberation Party (PLN) on the reform issue.

Saying that Costa Rica could not afford to let Solís fail, Arias offered to “roll up my sleeves and go to work.” But he was skeptical that Solís could succeed where three former presidential administrations – including Arias’ own – had failed, beginning with Abel Pacheco of the Social Christian Unity Party (PUSC) from 2002-2006.

Political scientist Constantino Urcuyo said Solís’ visit with Arias could have political importance given that Arias has clout with a wing of the PLN that is in his camp, and Arias also could sway other factions of Costa Rica’s oldest party.

But that support will come at a price, Urcuyo argued, which possibly includes the institution of a value-added tax, the privatization of electricity generation or cuts in government spending – all measures Arias has supported in the past.

Calls for cuts in government spending as a condition for raising taxes have been repeated by many in Costa Rica, including leaders of the country’s powerful chambers of commerce and industry.

But Solís has been equally adamant that fiscal reform should not be accomplished on the backs of Costa Rica’s poor and working classes.

On Wednesday, Solís submitted a fiscal reform bill to the Legislative Assembly that would increase revenue by $1.2 billion, about 2 percent of GDP. Among other things, it would replace the 13 percent sales tax with a value-added tax of the same rate to increase to 15 percent within two years. Low-income Costa Ricans – about 40 percent of the population – would receive refunds using an electronic system.

Solís also paid a visit to former President Abel Pacheco earlier this week in a courtesy call that observers dismissed as of little political importance, given that the elderly Pacheco has alienated most of the leaders of the PUSC party. In any case, PUSC already has fallen into disrepute with scandals that saw two of its former presidents arrested.

Costa Rica’s former President Óscar Arias.

Lindsay Fendt/The Tico Times

‘Dysfunctional democracy’

After his meeting with Solís, Arias lamented that Costa Rica has become ungovernable because leaders, he argued, have a difficult time implementing their policies.

“In this dysfunctional democracy that we have, it is difficult to achieve what you propose,” Arias said.

He also lamented the recent legislative alliance between Solís’ Citizen Action Party and the leftist Broad Front Party.

Arias said the country needs the confidence of investors – both internal and from abroad – in order to grow and continue to develop.

“An alliance with a communist party does not generate that confidence,” he said.

Arias added that he was glad Solís disavowed his party’s alliance with one that many believe have aligned themselves with other leftist parties in Latin America and that find inspiration in the policies and philosophy of the late Venezuelan leader Hugo Chávez.

The Broad Front Party stunned Costa Rica’s political establishment by winning nine seats in the country’s Assembly in the 2014 elections, and some observers saw the PAC alliance with the leftist party as proof that the ruling party has a strong wing that harbors ideas in line with “chavismo.”

The 2014 elections also saw a party other than PLN or PUSC take power for the first time in recent history.

Though Solís and party founder Ottón Solís (no relation) were both formally members of the PLN, PAC came to power as an insurgent party made up of members from across the political spectrum, attracted by the party’s stand against the corruption that had created scandals for both major political parties in the recent past.

That anti-corruption stance aside, PAC has failed to become steady on its feet.

Costa Rican President Luis Guillermo Solís, right, meets with the president of the Inter-American Development Bank, Luis Alberto Moreno, to talk tax reform at the presidential office in San José, on Aug. 11, 2015.

Ezequiel Becerra/AFP

In an opinion piece in the daily La Nación, columnist and former Editor-in-Chief Eduardo Ulibarri said the administration is suffering from Solís’ inability to turn PAC into a true institutional party after he was elected president.

Ulbarri blamed in large part PAC founder Ottón Solís, who he said was intent on maintaining the party’s “ethical purity.”

“[Luis Guillermo Solís’ election] was the moment to make [PAC] into a modern political party with machinery, political philosophy, programmatic bases, stable leadership, opportunities for advancement and discipline. At the same time, it needed to develop its vocation for negotiation and governing,” Ulibarri wrote. “None of that happened, in large part because [Ottón] Solís presumed it would contradict the ethical purity to which he was obsessively tied.”

The result is a party that does not have the organization or coherence to govern as an established political party.

“Citizen Action, as a party, never came out of the closet,” Ulibarri continued. “Its internal weakness was a bill that came due when [Ottón] Solís was absent for 10 months, when a vacuum formed that made it possible for the party virtually to be taken over by one of its wings.”

As if the pressure from his own citizens is not enough, President Solís hosted a visit from Inter-American Development Bank President Luis Alberto Moreno on Tuesday, where Moreno told members of the press that the waiting for fiscal reform in the country ought to be over by now.

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I read people saying Costa Rica is taking the same path as Greece.

Personally I expect Costa Rica will follow Venezuela.
Venezuela being in the too ten oil producing countries on earth and their currency is now worthless.

This is a 3rd world country but the governments think they can buy their way into the first world economies.

A hwy that will cost 5 million USD per km.
That hwy in guanacaste with sidewalks for the cows.
New international airport after they just completed upgrading SJO.
I’m told hwy 27 is going to expand to 8 lanes.

ICE with the nicer equipment than most American hydro companies.

More tax to an over taxed 3rd world country isn’t going to fix what is broken.

Time to get a grip on spending.
Ridiculous salaries.
Lifetime Pensions for X officials.

These past governments learned how to budget when they bought at the appliance stores.
Costs is ten
Financed it ends up being 30mil.

Big business has pulled out of Costa Rica.
Companies are axing employees and moving north to Nicaragua or El Salvador.
Unemployment is rising fast.
Crime will get worse with unemployment.

Tourism will cave if they don’t make it more affordable for visitors.

Grim outlook for Costa Rica and its people.

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Ken Morris

I’m afraid that I don’t understand the opinion piece in La Nación. The writer objects to the PAC’s commitment to “ethical purity” and claims that it should become more of a “machine” if it wants to govern successfully. This sounds a lot like a call for just another corrupt party operating according to the spoils system, when this is exactly the kind of politics the PAC ran and won against. Maybe the opinion is correct, but it’s sad if it is.

I do alas understand Arias. He has steadily moved to the right over the years, and is now solidly rightwing. His calling the FA “communist” is just silly when there actually is a real communist party in Costa Rica, and I can’t believe he faults the PAC for forming an alliance with the FA. It only did so because Arias’ party, the PLN, formed an alliance with the rightwing parties with the intent of obstructing the PAC. The PLN is the problem, but Arias won’t admit it.

BTW, the way things are going, there could well be a serious leftist move in the next election. The PLN is banking on being able to ruin the economy and thereby the PAC in order to win the next election. It might work, but it’s a risky political strategy. It’s entirely possible that the electorate revolts and really does turn commie.

It’s really better to fix the problems now, but that requires the PLN’s participation, and so far it is refusing to participate.

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Elise Frappier

They say they don’t want to burden the poor, but the poor need jobs. Who will hire them if that socialist party gets hell bent on continuing the vicious circle of too many benefits, too much taxes, and too much red tape? They are driving away the businesses CR desperately needs. CR needs to dramatically reduce the size of its over-inflated bureaucracy, get rid of as many taxes and customs as possible, and change the rules to make it appealing for all the businesses to come to CR and boost the overall economy.

No one wants to hire people that costs them one 13th month extra, PLUS vacations, PLUS the massive payment when the employee leaves or gets fired after many years of working. Talk about the best way to make sure you don’t keep faithful employees, or hire them illegally! And I’m not even talking about government workers and their pension plans… I’m canadian, a very liberal and fairly socialist country, and workers don’t even have such crazy benefits. Some workers get a lot already (like blue collars, police, etc) and people are not happy about it and it’s very costly to the public finances.

It’s really sad. I think the only way to start turning things around would be with a more fiscally conservative government, but ideally the Libertarian Movement Party would be a great first step; not perfect by any means (seriously, no one should be able to dictate what you do to your own body; yes I’m talking about abortion), but at least it would be a good step towards repairing a lot of what is hurting this country.

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