Arias Reclaims Reins Of Power In Costa Rica

by Mike Godfrey, Tax-News.com, Washington

11 May 2006

Nobel Peace Prize winner Oscar Arias Sanchez assumed power for the second time in Costa Rica this week and has vowed to push through the Central American Free Trade Agreement and important fiscal reforms.

Costa Rica is the only country that has not yet ratified the agreement, which has aroused vociferous protest from labour unions who fear job losses will ensue after the country is opened up to greater foreign competition.

Under CAFTA, 80% of US exports of consumer and industrial goods will become duty-free in Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic, immediately, with remaining tariffs phased out over 10 years.

Arias argues that CAFTA is vital to ensure Costa Rica's future economic prosperity and has signalled his determination that his government "will not cede" any ground in its fight to push through legislation that will give effect to the trade deal. Arias sees the adoption of CAFTA as central to his belief that Costa Rica should embrace free trade rather than shrink from it.

"Turning our back on economic integration, returning to commercial protectionism and disdaining the attraction of foreign investment at this time constitute the surest ways to condemn Costa Rica's youth to unemployment and Costa Rica to underdevelopment," he told a gathering of political dignitaries including former Polish leader Lech Walesa and US First Lady Laura Bush at his inauguration ceremony in the national stadium.

However, despite his determination to steer the agreement through the legislative assembly, Arias's efforts may be hampered by his lack of a majority by four seats; he was expected to win a landslide victory in February's elections, but in reality he just squeezed home with a majority of 1.12%.

Moreover, the Supreme Court has yet to decide whether CAFTA needs a two-thirds majority in order to be approved.

Arias also believes that the adoption of tax reforms are vital and he is likely to resurrect a tax reform package that was struck down by the country's constitutional court in March after it ruled that supporters acted illegally in the Legislative Assembly by creating new procedures to "fast track" priority legislation.

The tax reforms, which have been bogged down in the assembly since the bill was introduced in 2002, would increase tax revenues by $500 million by taxing worldwide incomes, introduce value added tax on all but a handful of exempt services and usher in a general tax rate of 30% on all types of economic activity, among other measures. It is thought that Arias may push a slimmed-down version of this plan.

Arias previously served as Costa Rican President between 1986 and 1990, during which time he was awarded the Nobel Peace Prize after working to end armed struggles in other Central American countries.

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