A Remarkable Little-known Model
by Ellen Hodgson Brown / November 11th, 2013
In Costa Rica, publicly-owned banks have been available for so
long and work so well that people take for granted that any country that
knows how to run an economy has a public banking option. Costa Ricans
are amazed to hear there is only one public depository bank in the
United States (the Bank of North Dakota), and few people have private
access to it.
So says political activist Scott Bidstrup, who writes:
For the last decade, I have resided in Costa Rica, where we have had a “Public Option” for the last 64 years.
There are 29 licensed banks, mutual associations and credit unions
in Costa Rica, of which four were established as national,
publicly-owned banks in 1949. They have remained open and in public
hands ever since—in spite of enormous pressure by the I.M.F.
[International Monetary Fund] and the U.S. to privatize them along with
other public assets. The Costa Ricans have resisted that
pressure—because the value of a public banking option has become
abundantly clear to everyone in this country.
During the last three decades, countless private banks, mutual
associations (a kind of Savings and Loan) and credit unions have come
and gone, and depositors in them have inevitably lost most of the value
of their accounts.
But the four state banks, which compete fiercely with each other,
just go on and on. Because they are stable and none have failed in 31
years, most Costa Ricans have moved the bulk of their money into them.
Those four banks now account for fully 80% of all retail deposits in
Costa Rica, and the 25 private institutions share among themselves the
rest.
According to a
2003 report by the World Bank,
the public sector banks dominating Costa Rica’s onshore banking system
include three state-owned commercial banks (Banco Nacional, Banco de
Costa Rica, and Banco Crédito Agrícola de Cartago) and a special-charter
bank called Banco Popular, which in principle is owned by all Costa
Rican workers. These banks accounted for 75 percent of total banking
deposits in 2003.
In
Competition Policies in Emerging Economies: Lessons and Challenges from Central America and Mexico (2008),
Claudia Schatan writes that Costa Rica nationalized all of its banks
and imposed a monopoly on deposits in 1949. Effectively, only
state-owned banks existed in the country after that. The monopoly was
loosened in the 1980s and was eliminated in 1995. But the extensive
network of branches developed by the public banks and the existence of
an unlimited state guarantee on their deposits has made Costa Rica the
only country in the region in which public banking clearly predominates.
Scott Bidstrup comments:
By 1980, the Costa Rican economy had grown to the point
where it was by far the richest nation in Latin America in per-capita
terms. It was so much richer than its neighbors that Latin American
economic statistics were routinely quoted with and without Costa Rica
included. Growth rates were in the double digits for a generation and a
half. And the prosperity was broadly shared. Costa Rica’s middle class –
nonexistent before 1949 – became the dominant part of the economy
during this period. Poverty was all but abolished, favelas [shanty
towns] disappeared, and the economy was booming.
This was not because Costa Rica had natural resources or other
natural advantages over its neighbors. To the contrary, says Bidstrup:
At the conclusion of the civil war of 1948 (which was
brought on by the desperate social conditions of the masses), Costa
Rica was desperately poor, the poorest nation in the hemisphere, as it
had been since the Spanish Conquest.
The winner of the 1948 civil war, José “Pepe” Figueres, now a
national hero, realized that it would happen again if nothing was done
to relieve the crushing poverty and deprivation of the rural population.
He formulated a plan in which the public sector would be financed by
profits from state-owned enterprises, and the private sector would be
financed by state banking.
A large number of state-owned capitalist enterprises were founded.
Their profits were returned to the national treasury, and they financed
dozens of major infrastructure projects. At one point, more than 240
state-owned corporations were providing so much money
that Costa Rica was building infrastructure like mad and financing it
largely with cash. Yet it still had the lowest taxes in the region, and
it could still afford to spend 30% of its national income on health and
education.
A provision of the Figueres constitution guaranteed a job to anyone
who wanted one. At one point, 42% of the working population
of Costa Rica was working for the government directly or in one of the
state-owned corporations. Most of the rest of the economy not involved
in the coffee trade was working for small mom-and-pop companies that
were suppliers to the larger state-owned firms—and it was state banking,
offering credit on favorable terms, that made the founding and growth
of those small firms possible. Had they been forced to rely on
private-sector banking, few of them would have been able to obtain the
financing needed to become established and prosperous. State banking
was key to the private sector growth. Lending policy was government
policy and was designed to facilitate national development, not bankers’
wallets. Virtually everything the country needed was locally produced.
Toilets, window glass, cement, rebar, roofing materials, window and
door joinery, wire and cable, all were made by state-owned capitalist
enterprises, most of them quite profitable. Costa Rica was the dominant
player regionally in most consumer products and was on the move
internationally.
Needless to say, this good example did not sit well with foreign
business interests. It earned Figueres two coup attempts and one
attempted assassination. He responded by abolishing the military
(except for the Coast Guard), leaving even more revenues for social
services and infrastructure.
When attempted coups and assassination failed, says Bidstrup, Costa
Rica was brought down with a form of economic warfare called the
“currency crisis” of 1982. Over just a few months, the cost of financing
its external debt went from 3% to extremely high variable rates (27% at
one point).
As a result, along with every other Latin American country, Costa Rica was facing default. Bidstrup writes:
That’s when the IMF and World Bank came to town.
Privatize everything in sight, we were told. We had little choice,
so we did. End your employment guarantee, we were told. So we did.
Open your markets to foreign competition, we were told. So we did.
Most of the former state-owned firms were sold off, mostly to foreign
corporations. Many ended up shut down in a short time by foreigners who
didn’t know how to run them, and unemployment appeared (and with it,
poverty and crime) for the first time in a decade.
Many of the local firms went broke or sold out quickly in the face of
ruinous foreign competition. Very little of Costa Rica’s manufacturing
economy is still locally owned. And so now, instead of earning forex
[foreign exchange] through exporting locally produced goods and
retaining profits locally, these firms are now forex liabilities,
expatriating their profits and earning relatively little through
exports. Costa Ricans now darkly joke that their economy is a
wholly-owned subsidiary of the United States.
The dire effects of the IMF’s austerity measures were confirmed in a 1993 book excerpt by Karen Hansen-Kuhn titled
Structural Adjustment in Costa Rica: Sapping the Economy.
She noted that Costa Rica stood out in Central America because of its
near half-century history of stable democracy and well-functioning
government, featuring the region’s largest middle class and the absence
of both an army and a guerrilla movement. Eliminating the military
allowed the government to support a Scandinavian-type social-welfare
system that still provides free health care and education, and has
helped produce the lowest infant mortality rate and highest average life
expectancy in all of Central America.
In the 1970s, however, the country fell into debt when coffee and
other commodity prices suddenly fell, and oil prices shot up. To get the
dollars to buy oil, Costa Rica had to resort to foreign borrowing; and
in 1980, the U.S. Federal Reserve under Paul Volcker raised interest
rates to unprecedented levels.
In
The Gods of Money (2009), William Engdahl fills in the back
story. In 1971, Richard Nixon took the U.S. dollar off the gold
standard, causing it to drop precipitously in international markets. In
1972, US Secretary of State Henry Kissinger and President Nixon had a
clandestine meeting with the Shah of Iran. In 1973, a group of powerful
financiers and politicians met secretly in Sweden and discussed
effectively “backing” the dollar with oil. An arrangement was then
finalized in which the oil-producing countries of OPEC would sell their
oil only in U.S. dollars. The quid pro quo was military protection and a
strategic boost in oil prices. The dollars would wind up in Wall
Street and London banks, where they would fund the burgeoning U.S. debt.
In 1974, an oil embargo conveniently caused the price of oil to
quadruple. Countries without sufficient dollar reserves had to borrow
from Wall Street and London banks to buy the oil they needed. Increased
costs then drove up prices worldwide.
By late 1981, says Hansen-Kuhn, Costa Rica had one of the world’s
highest levels of debt per capita, with debt-service payments amounting
to 60 percent of export earnings. When the government had to choose
between defending its stellar social-service system or bowing to its
creditors, it chose the social services. It suspended debt payments to
nearly all its creditors, predominately commercial banks. But that left
it without foreign exchange. That was when it resorted to borrowing from
the World Bank and IMF, which imposed “austerity measures” as a
required condition. The result was to increase poverty levels
dramatically.
Bidstrup writes of subsequent developments:
Indebted to the IMF, the Costa Rican government had to
sell off its state-owned enterprises, depriving it of most of its
revenue, and the country has since been forced to eat its seed corn. No
major infrastructure projects have been conceived and built to
completion out of tax revenues, and maintenance of existing
infrastructure built during that era must wait in line for funding, with
predictable results.
About every year, there has been a closure of one of the private
banks or major savings coöps. In every case, there has been a
corruption or embezzlement scandal, proving the old saying that the best
way to rob a bank is to own one. This is why about 80% of retail
deposits in Costa Rica are now held by the four state banks. They’re
trusted.
Costa Rica still has a robust economy, and is much less affected by
the vicissitudes of rising and falling international economic tides than
enterprises in neighboring countries, because local businesses can get
money when they need it. During the credit freezeup of 2009, things
went on in Costa Rica pretty much as normal. Yes, there was a
contraction in the economy, mostly as a result of a huge drop in foreign
tourism, but it would have been far worse if local business had not
been able to obtain financing when it was needed. It was available
because most lending activity is set by government policy, not by a
local banker’s fear index.
Stability of the local economy is one of the reasons
that Costa Rica has never had much difficulty in attracting direct
foreign investment, and is still the leader in the region in that
regard. And it is clear to me that state banking is one of the
principal reasons why.
The value and importance of a public banking sector to the overall
stability and health of an economy has been well proven by the Costa
Rican experience. Meanwhile, our neighbors, with their fully privatized
banking systems have, de facto, encouraged people to keep their money
in Mattress First National, and as a result, the financial sectors in
neighboring countries have not prospered. Here, they have—because most
money is kept in banks that carry the full faith and credit of the
Republic of Costa Rica, so the money is in the banks and available for
lending. While our neighbors’ financial systems lurch from crisis to
crisis, and suffer frequent resulting bank failures, the Costa Rican
public system just keeps chugging along. And so does the Costa Rican
economy.
He concludes:
My dream scenario for any third world country wishing to
develop, is to do exactly what Costa Rica did so successfully for so
many years. Invest in the Holy Trinity of national development—health,
education and infrastructure. Pay for it with the earnings of state
capitalist enterprises that are profitable because they are protected
from ruinous foreign competition; and help out local private enterprise
get started and grow, and become major exporters, with stable
state-owned banks that prioritize national development over making
bankers rich. It worked well for Costa Rica for a generation and a
half. It can work for any other country as well. Including the United
States.
The new
Happy Planet Index,
which rates countries based on how many long and happy lives they
produce per unit of environmental output, has ranked Costa Rica #1
globally. The Costa Rican model is particularly instructive at a time
when US citizens are groaning under the twin burdens of taxes and
increased health insurance costs. Like the Costa Ricans, we could reduce
taxes while increasing social services and rebuilding infrastructure,
if we were to allow the government to make some money itself; and a
giant first step would be for it to establish some publicly-owned banks.
No comments:
Post a Comment