Foreign Relations of the United States, 1958–1960, Volume V, Microfiche Supplement, American Republics

CR–3. Briefing Paper for Visit of Costa Rican President-Elect Echandi¹

Washington, undated

Anticipated Subjects That President-elect Echandi May Discuss:

(1) The Costa Rican Financial Situation

Costa Rica’s international reserves have declined from $22 million at the end of 1955 to $13.3 million at the end of 1957. This drop has been occasioned by a substantial deficit in the 1956 balance of payments arising from a decrease in agricultural production for both export and the domestic market, a rise in monetary income chiefly from expansion in domestic credit and a continued high rate of imports. Although 1957 foreign exchange receipts were high, imports and other payments continued their upward trend, and 1957 ended with no appreciable increase in the country’s reserves. In a recent report made by the International Monetary Fund, it was concluded that Costa Rica is not prepared to withstand major downward fluctuations in the international prices of its main export commodities (coffee and bananas) nor to cope with adverse developments in export crop production with the present level of exchange reserves.

Within the country the government has experienced difficulties with its budget and there is a likelihood of a sizeable fiscal deficit for 1957. Up to 1954 the fiscal policy offset the expansion of credit to the private sector, but since that time the government has competed with the private sector for available bank credit. If the excess of current government expenditures over revenues continues to increase, and if bank credit to the private sector expands at the rate of the recent past, the loss of exchange reserves will pose some very serious problems.

Indications are that Echandi is very much concerned over the future financial condition of his country. In a recent press conference (March 5) he said, “our country is facing an economic situation which can be serious, above all if coffee prices continue to drop”. He has indicated that he will try to improve existing financial practices and future government revenue. In this connection he has announced that foreign capital could come to Costa Rica and work on even terms with Costa Rican capital.

(2) Coffee

The Costa Ricans are very much concerned over the possibility of an additional future drop in world market coffee prices. During 1957 coffee export prices dropped from an average of $0.70 per pound to a low of $0.50 per pound. The decline in coffee prices induced Costa Rica to become a very active proponent and signatory of the Mexico City coffee pact last October,² which called for withholding a portion of their 1957–58 coffee crop in an effort to stabilize coffee prices. Mr. Echandi has already stated that coffee prices constitute a vital problem for Costa Rica, as unfortunately the economy depends fundamentally on the price of coffee. He has announced that he is in favor of the Mexican agreement and believes that if the coffee producing countries do not defend themselves against the trend towards low prices, the consequences to Costa Rica’s economy will be disastrous.

The 1957–58 Costa Rican coffee crop is expected to be a record-breaking crop and the withholding from the export market of a sizeable portion of this crop (the excess over 80 percent of the average of the volume of the previous two crop years available for export) could prove to be an overwhelming financial burden for Costa Rica’s limited resources. Our Embassy estimates that approximately $35 million will be required during 1958 to finance the 1958–59 coffee crop and the 1957–58 hold-over surplus.

Possible Question:

In view of (1) and (2) above, Mr. Echandi may ask what assistance his country might be given from the United States in the event of a depletion of foreign exchange reserves stemming primarily from a decrease in world market prices of coffee.

Suggested Reply:

If this subject is raised, Mr. Echandi could be informed that sympathetic and careful consideration would be given to Costa Rica and that every effort to give assistance commensurate with the then existing financial problem would be made, provided that the Costa Rican Government had taken or given evidence of a resolve to take all measures within its power to cope with and reduce the scope of this problem. In this connection, it could be pointed out that Costa Rican imports have been at a relatively high level; that these have been stimulated by domestic credit policy and government deficits, both of which may be further curbed; that the need for action in the field of credit and fiscal policy is accentuated by unfavorable prospects for earnings from coffee exports; and that in the event such measures proved unsuccessful in stemming loss of reserves Costa Rica enter into consultation with the International Monetary Fund. In regard to our position on coffee it is suggested that Mr. Echandi be informed the United States is prepared to participate in discussions and studies with coffee producing and consuming countries on problems of coffee trade. We have been pleased to note the initiative taken by the Latin American countries in organizing at Rio a Conference³ at which the United States was represented by an observer to discuss and formulate an active program in an effort to resolve coffee trade problems.

(3) Establishment of Branches of Private Banks:

The nationalization of banks took place in 1948 and a Central Bank was established, endowed with typical central bank functions. The nationalization decree as it now stands permits the setting up of private banks with permission of the Government but prohibits them from accepting deposits, as it stipulates only the state may “mobilize deposits of the public”.

Mr. Echandi has expressed an interest in inviting American banking and insurance companies to open branches in Costa Rica. He has said it is not his intention to propose measures which might destroy the national banking system, but that he thinks the existence of a private bank operating with its own funds will help solve the growing lack of facilities to increase loans to farmers and industrialists. He has also recently expressed his firm belief in the necessity of extending security and support to private initiative, limiting the intervention of the State in the field of economic activities to the absolutely indispensable.

Suggested Position:

That Mr. Echandi be encouraged in his desire to further economic development through increased private investment. It could be pointed out that an increase in private institutions would not only bring new capital into the country’s money market but also capital investment in industry and agriculture, and would also add to the government’s revenue in the form of taxes, without the necessity of the Government to be financially obligated for development and maintenance.

It could be suggested that Mr. Echandi, while in New York, get in touch with various banks concerning his desire to permit private banks to operate in Costa Rica.

(4) Costa Rican Armed Forces:

Mr. Echandi has announced to the press that Costa Rica will abolish the Army and sell its armaments to buy farm implements and medicines. He does plan to keep the Guardia Civil for safety and police service. In this connection he may express interest in having United States assistance in establishing an engineering construction unit, the same as is now being established in Honduras. Our Embassy has recommended that such a battalion be established.

Suggested Reply:

If this subject is raised, it is suggested that Mr. Echandi be informed that we are very much interested in any disarmament proposals for Latin America, as well as plans any individual country has for reducing its arms; and that a reduction in a country’s expenditure for armaments leaves more money available for expenditures on constructive economic developments. With regard to an engineering unit, Mr. Echandi could be told that careful consideration will be given to his request. FYI: In this connection much depends upon available funds, and comparative priority needs of other Latin American countries in relation to our overall policy objectives. End FYI.

(5) Loan Projects:

World Bank: In January 1957 Costa Rica negotiated a loan with the IBRD for $3 million designed to finance the importation of capital goods for agricultural and light industry development. The Central Bank of Costa Rica now has a second loan request for its capital goods importation program in the amount of $5 million with the IBRD. This application is now under consideration.

The Costa Rican Institute of Electricity (ICE) has a preliminary loan application with the IBRD, the amount as yet undetermined, to finance the Rio Macho hydroelectric project. This projected development would have a generating capacity of 24,000 KW and the cost is estimated at $4.1 million. Whereas this was to be an autonomous government agency project, it may be that Mr. Echandi, in line with his thought concerning private investment, may have an interest in trying to have the American and Foreign Power Company develop this project.

Development Loan Fund: The Government of Costa Rica has expressed interest in obtaining a million loan from the DLF for augmenting the capital available to the rural credit boards for promoting agricultural development. Preliminary discussions have taken place between officers of the Department and Costa Rican officials, but as yet no formal application has been made.

Suggested Position:

If this subject is raised, Mr. Echandi can be informed that the DLF is considering each loan request on its own merits, and that he can be assured that when a formal application is submitted, it will be given every possible consideration.

Increasing Proportion of United Fruit Company Profits Subject to Costa Rican Taxation.

Mr. Echandi has informed Ambassador Woodward that this is one of the subjects he wishes to discuss while in Washington. He is interested in obtaining a larger amount of taxes from the United Fruit Company. He has in mind eventually working out an arrangement (principally with the Treasury Department) by which a larger proportion of the profits of the banana producing and selling operations, which pertain to Costa Rica, would be allocated by Treasury to the operations of the producing subsidiary in Costa Rica in order that the larger proportion of the profits would be taxable by the Costa Rican Government.

There is now in effect a formula established by Treasury by which approximately one-half of all the profits made by the United Fruit Company and all its subsidiaries are taxed as profits made by the home company and therefore taxable only in the United States at the regular rate for corporate profits of 52 percent. The remaining half of the total profits are considered to be profits made by the subsidiary producing companies in the various countries where the country produces its product. This half of the profits divided among the operations in all producing countries is taxable in each producing country now at 30 percent.

Mr. Echandi has informed our Embassy that he is authorized to discuss this method of increasing revenue on behalf of the Presidents of Guatemala and Honduras.⁴

Suggested Reply:

It is suggested that Mr. Echandi be told the Executive in the United States does not have the authority sometimes found in other countries to modify tax liabilities of taxpayers. Taxpayers have well settled rights under United States laws and the regulations that are issued to implement those laws. Consequently, we cannot give an opinion as to whether the method for allocating the income of the United Fruit Company can be changed. However, to the extent that the present method may not adequately reflect the regulations and the law, the Treasury would be prepared to discuss the question with the United Fruit Company.

It could be suggested that this matter be worked out between the United Fruit Company and the Treasury. Treasury has informed us that there would have to be a detailed study before any decisions could be made on this proposal.

Suggested Subjects You May Wish to Discuss With Mr. Echandi:

(1) Inter-American Highway:

It is suggested that you point out to Mr. Echandi the importance of the Inter-American Highway to Central America. In this connection Mr. Echandi’s attention could be drawn to the expected increase in United States automobile traffic to Central America, with resulting additional revenue for the Central American countries and a closer tie between the people of the United States and the people of Central America.

On March 17 the Legislative Assembly authorized the Costa Rican Government to negotiate an increase of $4 million from the EXIM Bank for completion of the highway in Costa Rica.

(2) Elections

You may wish to comment on the orderly, honest, democratic Presidential and Congressional elections which took place last February second. The Costa Ricans have taken great pride in these elections as they were intent upon showing other Latin American countries how free democratic elections should be conducted. As President Figueres’ party will have a plurality in the new Legislative Assembly, any comments Mr. Echandi has concerning how he expects to get his program through the Legislative Assembly will be of interest.

(3) Exiles Residing in Costa Rica:

Since President Figueres has been noted for his leniency with regard to permitting entry of political exiles into Costa Rica, and since Costa Rica has been considered by President Somoza as a sanctuary for Nicaraguan exiles plotting to overthrow his government, it would be of interest to sound out Mr. Echandi as to what his policies will be regarding admission and activities of political exiles. It is understood that Echandi, on his recent visit to Nicaragua (March 10), assured President Somoza that he would control the activities of Nicaraguan exiles in Costa Rica. It could be indicated that strict control of exile activities would tend to create harmony and political stability among the Central American countries.

(4) Communism:

Mr. Echandi has indicated to our Embassy that he will express an interest in hearing any suggestions the United States has for combatting Communism. It could be pointed out that Communists are permitted to travel freely in and out of Costa Rica and suggested that more control exercised over their freedom of movement would be effective in reducing their activities. The effectiveness of Communist propaganda could also be counteracted by anti-Communist propaganda forthcoming from leading business groups, teachers and the clergy.

Effective implementation of the provisions of the Caracas Resolution,⁵ particularly those concerning the exchange of information on Communist travel and activities, would be one of the best means of combatting Communism. The presidents of other Central American countries have recently indicated their desire for increased cooperation in controlling Communism. Emphasis should be placed on each country getting its own house in order and establishing effective internal controls.

Communism in Labor Unions:

The Pacific banana zone, the largest concentration of workers in any one enterprise in Costa Rica, presents the continuing problem of a Communist-dominated labor union (Federación Obrera Bananero y Anexos—FOBA); enjoying the strongest position, with a membership of about 3,500 members, among the farm workers of the United Fruit Company. Another union (Federación de Trabajadores Bananeros y Anexos—FETRAPA) with about 1,050 members among the Company’s railroad and shop workers, has been known to be non-Communist but has entered into a cooperative working relationship with FOBA during the past half year. A third, minor organization, the Rerum Novarum, has about 100 members in the Company’s facilities at Golfito.

None of the three unions supported Echandi in the recent election. Rerum Novarum very definitely supported the National Liberation Party and both FOBA and FETRABA, according to the Embassy, overwhelmingly demonstrated they were in the Calderonista-Communist camp.

Problem:

How will the Echandi administration handle the problem? Harassment for nonsupport of Echandi can strengthen the Communist position. Indifference, if it is felt to be an area not worth courting, could do likewise. Perhaps an ORIT-ICFTU campaign, now being contemplated, could be permitted to operate provided it is carried out on a strictly trade union, non-political basis designed to diminish Communist influence.

Additional Subjects President-Elect Echandi May Discuss

(1) Change of Authority in Awarding Contracts for the Inter-American Highway:

It is understood that President-elect Echandi is interested in having the Government of Costa Rica take over the awarding of the contracts for the remaining work for completion of the Inter-American Highway in Costa Rica.

Our Position:

In view of the advanced stage of construction of the Inter-American Highway in Costa Rica it appears to be a poor time to change the procedure for the operation and final construction of this highway. In addition the United States is not aware that the Government of Costa Rica presently has in being a highway department which could adequately handle the letting and awarding of contracts on the highway. The United States does not believe that it would be advantageous for Costa Rica to build up a highway department to handle this project as the Inter-American Highway is a much larger project than any future foreseeable projects in Costa Rica. Therefore, it would seem to be to the benefit of the rapid completion of this project not to undertake to change the methods of operations at this time.

The United States through the Bureau of Public Roads is willing to cooperate with and assist the Government of Costa Rica to build up and train a highway organization capable of carrying on and maintaining the highway after its completion and the Bureau of Public Roads engineers leave Costa Rica. (Prepared by Mr. Russell in REA and cleared with Bureau of Public Roads)

(2) Desire to Sell or Give Away Excess Armaments:

Our Embassy has informed us that Mr. Echandi wants to keep only sufficient armaments in the country to meet the needs of the Guardia Civil for police purposes. He has expressed a desire to discuss the sale of Costa Rican excess armaments to the United States, and in the event the United States cannot purchase them he proposes to give them to this country.

Suggested Reply:

The Defense Department states that it would not be able to purchase any excess armaments from Costa Rica nor would it be able to accept them as a gift. It could be suggested that Echandi through his country’s Embassy in Washington make arrangements to sell the armaments to private entities such as INTERARMCO. It might be well to point out that we would not like to see Costa Rica sell any of its armaments to countries which would be prone to use them for other than defense purposes. In this connection we certainly would not want to see them go to Cuba. FYI: In 1954 Echandi vigorously opposed the purchase of a relatively sizable quantity of arms. His desire to dispose of excess armaments may be due in part to vindicate the position he took regarding their purchase in 1954. End FYI.

1. Source: Department of State, Central Files, 718.11/3–258. Confidential. This paper was attached to a memorandum from Henry L. Taylor of the Office of Middle American Affairs to Assistant Secretary Rubottom, March 25, 1958.
2. An English translation of the Convention of Mexico City, signed October 18, 1957 is enclosed with Foreign Agriculture Service Report 27 from Mexico City, October 28, 1957. (820.157/10–2857)
3. Reference is to the International Coffee Conference, January 20–27, 1958. For a report, see U.S. Department of Commerce, Foreign Commerce Weekly, February 24, 1958, p. 3.
4. Miguel Ydígoras Fuentes and Ramón Villeda Morales, respectively.
5. Reference is to Resolution XCIII adopted by the Tenth Inter-American Conference, March 28, 1954; for text, see U.S., Department of State, Tenth Inter-American Conference, Caracas, Venezuela, March 1–28. 1954: Report of the Delegation of the United States of America with Related Documents, p. 156.