Juan Carlos Hidalgo Proposes Making All of Costa Rica a Free Trade Zone

Juan Carlos Hidalgo, a candidate for the Christian Social Unity Party (PUSC), has proposed a bold economic vision for Costa Rica: to turn the entire country into a massive free trade zone. According to Hidalgo, the proposal would bring an influx of foreign investment, create thousands of new jobs, and increase the country’s state revenues. This would significantly shift the country’s economic strategy, potentially revolutionizing areas that traditional economic development models have long overlooked.

The Proposal: Reducing Corporate Tax Rates to Boost Investment

At the heart of Hidalgo’s proposal is reducing the corporate income tax for companies operating in Costa Rica. Under the current regime, companies must pay a tax rate of 30% on their profits. Hidalgo’s vision is to gradually reduce this rate to 15%, aligning the tax contributions of companies operating in the current definitive regime and those already benefiting from the special free trade zone regime. This reduction, he argues, would incentivize foreign businesses to invest in Costa Rica and stimulate job creation, particularly in areas outside the capital.

Hidalgo draws inspiration from Ireland, which successfully implemented a similar strategy. Ireland began with a high tax rate of 50% but reduced it gradually over time, eventually reaching a rate of 12.5%. This change signaled to the global market that the country was open to business, and foreign investment poured in. Hidalgo believes Costa Rica can follow this successful model, reducing its corporate tax rate from 30% to 15%, with a compressed timeline to expedite the process.

Benefits for the National Economy

According to Hidalgo, the proposal to make Costa Rica a free trade zone would bring numerous benefits to the nation. Firstly, by lowering the corporate tax rate, Costa Rica would become more attractive to foreign companies, bringing capital and expertise. This would increase productivity and wages and create a more diversified economy.

Additionally, Hidalgo believes that reducing corporate taxes would lead to higher state revenues in the long term. He highlights the example of Ireland, which now collects three times as much in taxes with a 12.5% corporate tax rate than it did when the rate was 50%. By aligning the tax policies and creating a more straightforward pathway for investment, Costa Rica could experience similar economic growth.

Hidalgo envisions a countrywide growth rate of 6% to 7% per year, a marked improvement over the current rate of 4%. He argues that Costa Rica can only improve the quality of life for its citizens, particularly those living outside the capital, through high and sustained economic growth. With more foreign investment and job creation, the proposal to make Costa Rica a free trade zone would benefit the country, from the coasts to rural areas.

Free Trade Zones: A Success Story in Costa Rica

The free trade zone regime in Costa Rica has proven to be a key driver of economic success. This regime allows companies to operate in a special tax-exempt environment, where they can avoid paying certain taxes, such as corporate income tax, in exchange for investing in the country. The free trade zone sector currently generates around 12% of the country’s GDP.

According to a 2023 Promotora del Comercio Exterior (Procomer) study, companies operating under the free trade zone regime have produced a remarkable economic impact. Costa Rica receives $2.8 in benefits for every dollar exempted from taxes in this regime. From 2019 to 2023, companies in the free trade zones avoided paying over $8.2 billion in taxes, but they brought in over $29.9 billion in benefits. These benefits include direct revenue and indirect economic effects, such as increased demand for local goods and services and higher levels of consumer spending.

Job Creation and Economic Growth

Free trade zones are also a significant source of employment in Costa Rica. These zones generate over 250,000 direct and indirect jobs, providing much-needed employment opportunities, particularly in areas outside the capital. Workers in free trade zones earn an average of 1.8 times the salary of those in the private sector, which helps improve the living standards of many Costa Ricans.

While the free trade zones have created a thriving economy, the definitive regime, which encompasses 85% of the country’s economy, has struggled in comparison. Many small and medium-sized enterprises (SMEs) face significant challenges, including high production costs, a heavy tax burden, and critical social charges. As a result, over 80% of SMEs fail within their first few years of operation. Hidalgo argues that the definitive regime needs significant reforms to remain competitive and that the expansion of the free trade zone regime could provide the solution.

Challenges to Overcome

Hidalgo acknowledges that the transition to a national free trade zone would not be without challenges. The Costa Rican government would need to carefully balance the tax reductions to avoid losing revenue in the short term while ensuring long-term economic growth. Additionally, certain sectors of the economy may resist the proposal because they are concerned about its potential impacts on their businesses.

The dollar exchange rate is another obstacle to growth, as fluctuations in the dollar’s value can make it more difficult for companies to produce goods at competitive prices. High production costs and the tax burden on non-free trade zone companies remain significant issues, and addressing these concerns will be key to the proposal’s success.

Free Trade Zones: A Path to National Development

Despite these challenges, Hidalgo is optimistic that turning Costa Rica into a free trade zone would be a powerful way to encourage investment, create jobs, and stimulate growth. Costa Rica could attract more foreign capital and foster a more competitive economy by reducing corporate tax rates and offering incentives for businesses to invest in the country. This would benefit all regions of the country, not just the capital, and create new opportunities for Costa Ricans.

The proposal to make Costa Rica a free trade zone is about reducing taxes and creating a vision for the country’s future. By following Ireland’s example, Costa Rica could transform its economy and improve the lives of its citizens, ensuring long-term prosperity for the entire nation.

Conclusion

Juan Carlos Hidalgo, a Costa Rica’s Christian Social Unity Party candidate, has proposed making all of Costa Rica a free trade zone by reducing corporate income tax rates from 30% to 15%. This bold strategy aims to attract foreign investment, create jobs, and stimulate economic growth, particularly in areas outside the capital. Drawing inspiration from Ireland’s successful tax reforms, Hidalgo believes that turning Costa Rica into a free trade zone would boost productivity and wages and increase state revenues over time. While challenges such as balancing tax cuts and addressing sector resistance remain, Hidalgo envisions this approach as a key driver of long-term prosperity for the nation.