SEPTEMBER 1996 · VOLUME 17 · NUMBER 9

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I N T E R V I E W

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Multinational Monitor: Why did Costa Rica, a relatively rich country, end up with a structural adjustment plan?

Ottón Solís: At the beginning of the 1980s, our country became heavily indebted. International factors, like rising oil prices, high interest rates and recession in the major industrial countries, created a trade deficit which induced the country to get money abroad. In 1982, after Mexico announced it could not pay back its loans, private banks stopped lending to other countries like Costa Rica. So we had to turn to international financial organizations and the American government.

At the time, Reagan was in power and Reaganomics was the order of the day. The condition that the international financial organizations placed on loans was that we adopt structural adjustment policies.

In fact, we did need to make changes and modernize our economy. Some structural disequilibria had been introduced throughout the years. But the type of structural adjustment policies chosen were not to our satisfaction. But we had to accept them because of loan conditions by the international financial institutions (IFIs).

MM: What were some of the changes that you think did need to be made?

Solís: We needed land reform, to facilitate better land use. We needed to privatize some public institutions that should not have been in the hands of the public sector. We needed to work for efficiency and productivity in the public sector. We needed to create new programs for subsidies for small entrepreneurs. We needed investment in science and technology, because international competition depends very much on investments in science and technology, education and health. And that investment had to be done by the public sector, otherwise the benefits of those investments would concentrate, and we didn't want that.

MM: But a number of the things on that list are not part of the structural adjustment agenda, right?

Solís: That is right. We needed changes, we needed modernization, but structural adjustment policies were in a direction opposite from the changes we needed to do.

Structural adjustment touched upon fundamental institutions and weakened, or privatized, institutions which were key for Costa Rica, like the banking system.

Instead of spending more on health, education and R&D, structural adjustment reduced expenditures in those areas. That was the way found by the structural adjustment proponents to get back to equilibrium in public finances.

They adopted free trade as an international competitiveness policy, reducing our import tariffs in a very indiscriminate manner. Of course that is a very simple policy that won't lead by itself to international competitiveness.

MM: You were in the government. Are you saying that the government adopted structural adjustment policies unwillingly?

Solís: I think that is true not only for the Costa Rican government at that time. The current Costa Rican government won the election on the platform of opposing structural adjustment. That was the theme topic of the campaign; and six or seven months after we were in government, the president and the party in government had to support structural adjustment.

MM: In broad terms, what were the effects of having structural adjustment policies forced on Costa Rica?

Solís: From the economic point of view, objectives were not achieved. Growth is very low in our countries, and whenever it is a little bit satisfactory, it is unsustainable.

Secondly, international competitiveness was not achieved. Trade deficits have been far higher during the structural adjustment era than before. Before structural adjustment, the four years prior to structural adjustment, the trade deficit was $88 million. In the nine years of structural adjustment policies, the trade deficit has been $520 million. This has been the case for all countries. Instead of achieving international competitiveness, the trade situation has become more dangerous.

Thirdly, the fiscal deficits in our countries, far from being sorted out through structural adjustment have become more and more acute. Recurrent fiscal crises emerged, and governments have been forced to introduce new laws to increase indirect taxation.

Social conditions have also changed. In Costa Rica, we were traditionally a society of small entrepreneurs and small farmers. If something explains our democratic, peaceful traditions, it is the fact that mainly everyone was an owner. Structural adjustment has concentrated wealth in the hands of big local business, and especially big foreign business. I can say now with certainty that most of the beach fronts in Costa Rica belong to foreigners, that the most dynamic businesses -- pineapple exports, orange juice exports and so on -- are in the hands of foreigners such as Del Monte and Chiquita. So wealth has concentrated, the most dynamic activities are in the hands of foreigners, and increasingly Costa Ricans are employed as workers, not as owners, and that changes dramatically the structure of our society for the worse.

MM: How has privatization and deregulation affected the country?

Solís: In the case of the banking system, that has not only led to the concentration of the financial business in the hands of a few families and foreign companies, but has also reduced the access to credit for small entrepreneurs. So, for instance, in 1984, before structural adjustment arrived, 14 percent of the lending stock of the banks was going at subsidized rates to small entrepreneurs. Now, that has practically disappeared. Rural banking has weakened. State banks were forced to close because they did not earn profits.

A lot of the development research that was undertaken by the Minister of Development was eliminated and is now in the hands of a corporation that is financed with public funds but does not respond to the public sector. The objectives and the policies that they promote have little to do with overall country needs and aspirations, and more to do with the aspirations of entrepreneurs.

There was an institution called the National Council of Production that used to buy from, and guarantee a market for, small farmers. At the same time, it would sell the grain bought from small farmers to consumers at subsidized prices. That has disappeared. So now there is a very speculative market in the basic foodstuffs where big traders go to the farmers and pay whatever they want, and then they sell at whatever price they want to consumers. Everyone has lost except these big traders.

Because of deregulation, there has been a concentration of activities in the beef processing business. There is only one processing plant, which of course exploits beef producers and also exploits consumers.

So all the mechanisms to regulate the private sector which benefitted producers and consumers have disappeared. That has affected wealth distribution, and also the quality of life of consumers and the quantity produced by producers.

MM: What sort of results has free trade had on the country?

Solís: If you want to choose a single damaging policy, it has been the policy of reducing import tariffs. As a result of a massive ignorance, the neoliberals have felt that commercial policy is just tariff reduction. What has happened is the country has become an importer of things that previously we produced behind protectionist barriers. This has introduced a change in relative prices so that now there is a structural trade deficit problem.

If the economy grows faster than 3 percent a year, it tends to generate massive trade deficits. Before, we could grow at 6 percent GDP and trade deficits were manageable; now above 3 percent, they are unmanageable, because the reduction in import prices promotes imports heavily.

This has not only caused this trade deficit problem, which forces us to sell out the country to foreign companies. It has also erased a lot of small entrepreneurs, because they cannot compete with producers in very rich and developed countries like the United States, Germany and France, especially in areas like agriculture where many rich countries subsidize producers.

MM: What are the prospects for regional cooperation and integration?

Solís: There is a lot of talk about that, but that talk contradicts what is going on concerning trade policy. A trade policy based on tariff reduction without any discrimination contradicts integration. Integration requires a certain trade policy that is specific to the countries you are integrating with. If that is not happening, then you are not in an integrating scheme with these countries, but with the rest of the world.

MM: How has NAFTA affected the Central American countries?

Solís: I think that the problem with NAFTA for the Central American countries is that insofar as Mexico can export to the USA without tariffs and the Mexican economic structure looks like ours in some respects, then our exports to the USA and Canada are affected. Because there is trade diversion from us to Mexico. That could have potentially very damaging effects, given that the USA has been our main trading partner.

In general, the new U.S. trade policy does not have preferences for developing countries. They say we are in the same boat, and they don't want to give special treatment to countries like ours. We are in a tough situation, because of course the USA and Central America are very different in terms of strengths, chances and possibilities.

MM: What are the outlines of an alternative economic program for Costa Rica?

Solís: Instead of weakening and destroying the state, first we need to make it more efficient. We must accept that there are a lot of inefficiencies, that our bureaucrats are not hard workers, that we must improve the managerial quality of the public sector. Of course, that has nothing to do with privatizing. It has to do with closing certain programs and sacking some people -- that is correct. We must do it, we must not kid ourselves.

Secondly, we need to get the state doing things which it has stopped doing, or never did and should do -- like R&D, expanding education and health and giving people the tools of wealth creation -- I call them fishing rods -- so as to promote equality and social mobility through production. That implies an expansion and a role for the state.

We need to have a proper industrial policy, a production promotion policy based on privileging small entrepreneurs. The tools of those economic policies are there, and are very easy to put into practice.

We need to establish import tariffs for products according to their different needs and the type of consumer they are going to satisfy.

In general, we need to invest in the quality of the factors of production. The major problem of structural adjustment is that it starts from an assumption that the major difficulty for growth in our economies is the misallocation of resources. Neoliberals say that the misallocation originates in the fact of the market distortions caused by state involvement in the economy. Some of us believe the main problem is not the misallocation of resources, however, but the quality of the factors of production. So we have to invest in human capital, in physical capital, in land, to get more productivity. That is the basis of true competitiveness. Such investments must be taken by the state, by the public sector in the main.

Finally, instead of having a policy of weakening the state, we must identify areas in which the state has a role to play in social policy through this philosophy of handing out fishing rods, things like subsidized credit, subsidized electricity and so on.

MM: Why does the state have to do all these things? Where does the private sector fall short?

Solís: Even in the United States, where you have large companies, nearly 50 percent of R&D investment is undertaken by the public sector. Just think about the small companies with no surpluses for such purposes. If R&D is undertaken only by the private sector, only large companies will do it, so wealth differentials will increase.

Secondly, health and education has to be undertaken by the state. If we privatize education, only the rich can get educated, only the rich can go to the private sector, to the private clinics. We need that to be socialized, to be in the hands of the state, to give access to everyone.

And then we need the state to intervene in credit markets. By itself, the market tends to concentrate credit. It is cheaper to make a large loan than a small loan; it is cheaper to lend in the capital of Costa Rica than in rural areas. So only if the state intervenes by forcing private banks, or doing it itself will credit be democratized. And credit is the most important fishing rod.

This doesn't imply that I am defending bureaucrats and trade unionists who think that the state is their property. The state is the property of the people, especially small economic people.

MM: What is the role for a trade union movement in the alternative world you are sketching?

Solís: There are chambers of commerce of entrepreneurs; of course we need to have trade unions. But I think the trade union movement has to change; it has to promote efficiency and productivity. Because if they don't do it, then the people who believe in privatizing everything and in closing down everything will have a field day, because they will have plenty of examples of unproductive labor practices. We need a trade union movement with a mentality geared toward progress and modernization. If you have a trade union movement thinking about revolutions and getting high wages without working, I think they will be the enemy of progress, and they will be the enemies of the poor people of the country.

MM: What sort of land reform would you like to see carried out?

Solís: One of the outstanding facts of structural adjustment is that when the trade deficits started to increase, the IFIs and our government introduced massive subsidies for whatever generated dollars -- tourism, exports and so on. New subsidies were created for large business that were in the exporting sector at the same time that the subsidies for the small farmer -- price subsidies, interest subsidies -- were eliminated.

This has led to a concentration of land, because large business, now subsidized, can buy land from small farmers whose rate of profitability has fallen. We must counter this current.

From an economic rationale, it is good to have small farming, because that tends to lead to more intensive and productive use. When you have large farms, production is not high.

There is also the whole issue of social justice. Our country traditionally was a country of small landowners. We must recover that. That is the basis of social mobility. I believe we need to give to the poor people tools to produce. I don't believe in giving to the people handouts and things, but I believe in giving to the people productive tools like land, credit and so on.

MM: What are the prospects for seeing some of these alternatives implemented?

Solís: I am optimistic. The president of the InterAmerican Development Bank and some high top officials of the Bank have said that structural adjustment needs revision, that the results have not been the ones expected and that we must look at different experiences where state intervention has had results.

On the other hand, if you want a pessimistic note, I thought that the crash in Mexico was going to open the eyes of everyone, that the neoliberals would say, "Look, something is wrong. This was our showcase." But that didn't happen.

I think that neoliberalism is an ideology and in that sense very similar to communism. People who live off an ideology are very emotional; they are not susceptible to reason, they don't see evidence. They keep finding excuses, instead of accepting that their model is wrong.