Raiding Grandma's Cabinet

By William E. Smith

Carazo's free-spending ways have turned a crisis into a disaster

On the eve of Independence Day, which falls on Sept. 15, the President of Costa Rica traditionally lights a "Liberty Torch" in the old capital city of Cartago and the next day addresses school children in the present capital of San Jose. This year things did not work out too well. At Cartago, President Rodrigo Carazo Odio, 54, was shouted down when he tried to speak, and later discovered that the air had been let out of the tires of his car. At San Jose he did not even bother with the customary oration. He quickly paraphrased the first verse of the country's national anthem ("Costa Ricans, remember that beneath the limpid blue of your skies, there will always be work and peace") and just as quickly sat down.

Carazo is probably the most unpopular President in the history of Central America's showplace democracy, and the reason is not hard to fathom: the nation's economy is in ruins. Inflation is roaring along at 40% a year (up from 20% in 1980). The unemployment rate is 12%, strikes have broken out, and consumer goods are gradually disappearing from store shelves. In late July, the government was unable to make payments on the $2.6 billion it owes to more than 130 international banks--a hefty $1,180 per capita debt in a land of 2.2 million. A month later the nation stopped paying even the $30 million monthly interest on those loans. Costa Rica is flat broke.

The current crisis began when the International Monetary Fund suspended payments in August on a three-year $330 million loan. It was the third agreement broken in 17 months. According to the IMF, Costa Rica had once again failed to keep its promise to curtail excessive spending. Laments Economist Edward Lizano: "I think we have the world championship in broken IMF agreements." The situation is now so bad that nobody will lend Costa Rica even the short-term money it needs for the rest of the year. In July and August, the government sent representatives to the U.S., Canada, West Germany, France, Mexico, Venezuela and Colombia in pursuit of a fast $60 million; the representatives came home emptyhanded.

In a way, Costa Rica's current troubles stem from its greatest as sets: its history as a free society, the development of a strong middle class and the creation of a governmental system that was deliberately decentralized to minimize the danger from coups and tyrannical regimes so prevalent in The region. The unfortunate consequence is that much of the public sector is outside the budgetary control of the executive branch, and both the legislative assembly and the supreme court can make important economic decisions without the approval of the President.

Moreover, Costa Rica has a tradition of spending beyond its means. For three decades the government rolled over its debts from one year to the next, confident that the steadily rising price for coffee, which accounts for one-third of its trade, would bail it out. But gradually, even as it continued to launch more public-works projects and import more luxury goods, Costa Rica got snared in the same dilemma that is afflicting countries throughout the Third World: the price of its exports dwindled, while those of its imports soared. In 1977 an 85-lb. sack of coffee produced enough foreign exchange to buy 13 bbl. of oil; today it buys less than three.

Most economists in San Jose agree that Carazo, after his inauguration in 1978, unwittingly made everything worse. A politician who craved to be liked, he failed to devalue the colon and establish strict import controls. He continued to subsidize the prices of gasoline, food and imported luxury items. When he could not borrow any more, he printed additional money to pay government employees and avoid unemployment.

When Carazo asked the IMF to lend Costa Rica money for the third time last January, he immediately began to sell dollars on the open market in order to bolster the sinking colon and thereby impress the IMF staff negotiating in San Jose. The cost: $45 million. As soon as the IMF team left town, the colon dropped again. In May he sold the country's $41 million in gold reserves stored at Fort Knox to pay short-term debts, further demonstrating that his government was, as a local journalist puts it, "like a junkie raiding Grandma's silver cabinet for one more fix." Today Costa Rica has no foreign exchange left at all.

To its credit, the Carazo government recently succeeded in ending a a five-month wave of terrorism conducted by a group of leftist guerrillas who call themselves the "family." Now the government must see to it that the rising inflation, unemployment, food shortages and the incipient bankruptcy of 250 businesses do not lead to the sorts of civil disorders and revolution that are plaguing the country's neighbors. Luckily for Carazo, he is a lameduck President whose term will expire in May 1982. With elections set for next February, the likely winner is Luis Alberto Monge Alvarez, 55, a portly politician known as a team player rather than a charismatic leader.

Monge's National Liberation Party, however, is a socialist group with a a tradition of high spending in previous administrations. This time around, it will have to be more tight-fisted than ever before. According to a new government-commissioned report by the New York investment house of Lehman Brothers Kuhn Loeb, Costa Rica's credit requirements will rise over the next five years to more than $4 billion, a gigantic sum for so small a country. The report, which in effect asks Costa Rica's many creditors to demonstrate as much mercy as possible, concludes that the country faces "aprolonged period of severe readjustment and austerity."

The Reagan Administration, which has been working through its embassy to aid Costa Rica with the IMF, hopes to get some money from Congress to help out. This week Carazo's government will meet with some of its international bank creditors and try again to avert the day of reckoning. &151;By William E. Smith. Reported by James Willwerth/ San Jose

With reporting by James Willwerth

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