Role of coffee exports in the Costa Rican economy

(1) How does export concentration affect the stability of foreign exchange earnings? (2) How will trade liberalization by coffee importers and exporters affect coffee export earnings? (3) What is the effect of the International Coffee Agreement (ICA) on Costa Rican coffee exports? Although export diversification has the potential to stabilize earnings, some diversification schemes would be counterproductive. For Costa Rica, diversifying away from coffee and bananas in favor of the next largest export category would have destabilized export earnings relative to their actual values. Costa Rica would benefit from trade liberalization by coffee importers, but the gains would be small because current tariff rates are low. Relaxation of export restraints by all coffee exporters would be harmful to Costa Rica, but unilateral liberalization would be beneficial. The opposite results are attributable to a large price reduction that would occur when all exporters act, and that would be absent when Costa Rica acts alone. Costa Rica has been harmed by the export quota provisions of the ICA, which have favored Brazil and Colombia. During periods when quotas have been in effect, Costa Rica has gained less from selling at premium prices in member countries than they have lost from selling at discount prices in non-member countries. In absence of major reform of the ICA, Costa Rica is likely to be harmed in the future by a return to the quota system. (Author abstract)