Rising Wages and Inflation Damage the Luster of Costa Rica

Rising wages and inflation are threatening to undermine Costa Rica’s outsourcing sector, with several outsourcing firms scaling down operation and fleeing to cheaper locations.

Costa Rica has the highest rate of inflation in all of Central America and the country’s currency Colon too has continued to rise against the US dollar. Inflation in February was 6.52 percent, the highest since 2009 and beyond the central bank’s target of 5 percent, according to Bloomberg.

“It is certain that rising wages are weakening the country’s competitiveness in the global marketplace. I think Costa Rica is 20 percent more expensive than all other countries in Central America,” says Jeff Pappas, a BPO site selection expert and senior vice president at US-based real estate firm Arledge Associations.

Last month, HP started to move its English call center units in Costa Rica to the Indian city of  Bangalore. Rising wages has apparently caused the Silicon Valley company to scale down operation, but the company’s executives dismiss such a speculation.

“Relocation was part of the restructuring program announced in May last year,” said the company’s spokesperson Martha Cecilia Mejia in an interview with NSAM. “We have started moving a portion of the global services center to Georgia in the United States and Bangalore in India. Yet, we retain a large part of the business in Costa Rica. We are still the second largest employer in the country.”

HP is not the only foreign outsourcer scaling down operation in Costa Rica. Teletech closed down a part of its business in the country and laid off 160 call center employees, according to CINDE, Costa Rica’s investment promotion agency. Stream Global Services, another BPO provider from the United States, has shut down all its operation in Costa Rica.

“Costa Rica is more than 30 percent expensive than other countries  there. We left  because it appeared almost impossible to hire skilled English speaking agents in the country of four million people,” said Salvador Salazar, Vice President, Stream Global Services. Stream has gone on expanding operation elsewhere in the region. The US company inaugurated a new delivery center in Honduras as recently as last week.

What is threatening Costa Rican prospects is that BPO site selection experts like Pappas are increasingly comparing Costa Rica to Puerto Rico, the US territory in the Caribbean.

“Outsourcing is not just about cutting cost, though cost is a major factor. However, I don’t think there is any sense in outsourcing jobs to high-cost countries,” Pappas said.

Not only are the outsourcing companies, everyone in Costa Rica is feeling the weight of inflation.

A report in Tico Times says prices of many goods in Costa Rica are on par with those of developed nations.  “Certain goods and services, such as a bottle of wine, a box of cereal or a tank of unleaded fuel, are as expensive – in some cases more expensive – than in the U.S, Canada or Spain.”

Given its assessment, inflation rate in Costa Rica is 17 percent higher than Nicaragua’s and 74 percent higher than Panama’s.

A recent study conducted by the ECLAC (Economic Commission for Latin America and the Caribbean) says the wages in Costa Rican services sector rose 350 percent between 1997 and 2010.

Inflation and Costa Rica

What attract the foreign BPOs, however, are the factors such as Costa Rica’s political stability, high education levels, and the incentives offered in the free trade zones. And the country’s IT market is comprised of big names like Microsoft, IBM, Intel, Oracle, Infosys and Cisco.

According to a report in a local Spanish paper La Nacion, the foreign investment in the free zones dropped 21 percent in 2012.

It seems Costa Rica – where more than 120 technology services firms operate – is the victim of its own remarkable growth.  “Yes, I think so. As more and more BPOs entered the market, the labor pool dried up. Wages went up, transportation cost went up and the rent cost went up,” said Salazar, recalling the initial days of the Stream in Costa Rica.

Nevertheless, everyone does not seem to bother about cost. Everest analyst  Anurag Shrivatsav says US companies can still save between 50 and 60 percent of operational cost in Costa Rica.  “Costa Rica has a high-level of education and has relatively good number of English-speaking people. Yet it is a small country. It is natural that small countries will have smaller labor pool,”  he added.