Bellwether state

San José, Costa Rica- Enrique Carranza has what his countrymen call pura vida-a pure, simple, enviable existence that captures the essence of life in Costa Rica.

He is young, single, and carefree. He likes gallo pinto and whiles away evening hours on his breezy hammock with Imperial longnecks and José Capmany albums. Most weekends, he packs up and surfs at Playa Jaco.

But a decade of high-tech development and pro-business reforms has remade Costa Rica, and with it the idea of pura vida. Prized now are Carranza's bilingualism, his computer science degree from Instituto Tecnológico de Costa Rica, and his job as a network support specialist at chipmaker giant Intel's 2,000-employee La Ribera compound outside of San José.

Formerly a quiet tropical paradise good for coffee and Chiquita bananas, Costa Rica has become Central America's economic bellwether. With pedigrees like Intel, it has become a destination for global corporations wanting to outsource customer service centers cheaply or to hire highly trained workers at a fraction of Silicon Valley salaries.

The country has the region's oldest democracy and highest literacy rate, and perhaps its brightest future. Óscar Arias-a pro-business Nobel Peace Prize winner who served as president from 1986 to 1990 and was elected again in 2006-has proposed ending state-run monopolies in electric power, social security, and telecommunications. Under Arias the Costa Rican economy has grown by almost 5 percent and the inflation rate has dropped into the single digits (to 9 percent) for only the third time in three decades.

Arias also favors tax and trade reform, and trade agreements with the European Union. He favors ratification of the U.S.-Central American Free Trade Agreement, known as CAFTA-DR since the Dominican Republic joined in 2004. But parts of the populace believe such innovations will trample the old pura vida and will not benefit the economy. "Costa Ricans are used to a life where they depend on the state," says Carranza, who supports the reforms. "It will be a battle for Arias to make the changes he wants."

Many foreign businesses in Costa Rica have wagered that Arias will win that battle. Intel, according to a vice president, worried that its investment in the country was like "putting a whale in a swimming pool," but it took the plunge. Other corporations, such as Procter & Gamble, have followed, and with marked success.

The selling points have been Costa Rica's zonas francas, or free-trade zones, which exempt foreign companies from income tax and allow them to import raw materials duty free; its well-educated labor force, which is as cheap as $1.40 an hour per employee in areas like Puntarenas; and its stable democratic system, as much a part of the environment as white beaches.

In two years, Intel alone dumped nearly $600 million into the Costa Rican economy-more than 4 percent of the country's GDP at the time. Computer chips and processors now make up 20 percent of Costa Rica's exports.

Costa Rica's challenges are evident in the capital, San José-an overbuilt, dirty city of 350,000 (in a metropolitan area of 2.5 million), mostly devoid of the colonial beauty in Latin America's historic cities and of the high-rises in its modernizing ones.

Near Morazán Park, San José's busy and graffiti-filled central plaza, down a side street of mannequined shop windows, real estate agent Daniel Salinas sat in his second-floor office, chatting amicably over the phone with a man from Florida interested in buying property in Guanacaste.

Thanks to its postcard beaches that helped inaugurate the real estate boom, Guanacaste has been called the new Gold Coast. Salinas tells of an acre of beachfront property that just went for $1 million. Gated communities that cater to wealthy American expatriates and retiring Baby Boomers have their own grocery stores, restaurants, and movie theaters.

Salinas beams when he hangs up the phone: His client is "coming down next week to see some properties." Like many other realtors, he angles for wealthy retirees. Salinas deals frequently in irony, he says, because foreigners "want the old pura vida they've seen in movies, which isn't really how life is anymore. Their resorts make Costa Rica a lot of money, but they've changed life. The funny part is they still think they've found it."

Tourism is "the economic motor of the country," Salinas believes. He's excited about Costa Rica's high-tech future, too, but the real estate market is less risky. He fears too much could be undone in one election-relations with the United States ruptured, future Intels and Procter & Gambles discouraged, new businesses actively kept out. "Just look at Venezuela before and after Hugo Chávez."

Other Costa Ricans resent the foreign invasion because it upsets the way life used to be and sends land prices skyrocketing. The Arias administration cuts deals with foreigners instead of fixing the disheveled capital, they say. The government says public works projects are limited because it has to pay high interests on the large national debt.

Alleyway graffiti-"Costa Rica is not for sale!"-oppose the government's courting of foreigners. "We are auctioning off our resources to the highest bidder, almost always Americans or Japanese," says Jorge Mora, who works for the Yiski Conservationist Association, a group opposing the sale of public land to foreigners for resort development. "Foreigners are buying up lots of land, mostly to put up gated communities on the beaches and deforesting National Park territories for development. It's profitable, but it's an insult to the nation."

Costa Rica's modern political era began in 1949 following a civil war, when President Arias' National Liberation Party, or PLN, abolished the armed forces to fund state-run education and health programs.

Riding a wave of economic growth in the 1950s, successive PLN governments expanded on this welfare state. A more pro-business conservative party that offered tax breaks and subsidies rose to wrest power from the PLN, and the presidency spent 30 years seesawing between the left and right, alternately growing the economy and the welfare state with a whiplash of disparate policies.

By 1981, the welfare state was serving nine out of 10 Costa Ricans and absorbing nearly half of the budget. When export prices nosedived the over-extended government was helpless. International loans Costa Rica had taken out came due, flinging the country neck deep into the world's worst per capita debt. The United States and several other nations came to Costa Rica's aid, but the government still runs a perpetual deficit to finance its welfare state and devotes roughly a third of the budget to servicing its debt.

The wealth gap, meanwhile, is widening, even though the poverty rate has shrunk. Proponents of the country's myriad state-run industries have taken to the streets and found the strike, or even the threat of one, an effective tool of negotiation. Tensions frequently boil over onto the immigrant community, which includes 500,000 Nicaraguans (a ninth of the country's population). Legal and illegal, they provide a cheap labor source but burden the welfare system.

The debate over ratifying CAFTA-DR, which every Central American nation but Costa Rica has approved, is intense. Its ratification was one of Arias' campaign pledges, but his countrymen's tepid, if oftentimes hostile, reaction to it has ratcheted down his own support publicly. Polls now suggest only 40 percent of Costa Ricans favor CAFTA-DR.

Last October, teachers and public workers unions-an intimidating array of 30,000 professionals, farmers, and laborers-responded to the call for a ratification vote in the National Assembly with promises of a national strike. They threatened to stop teaching, freeze hospital services, and upend traffic. They argued that privatization of state-run industries and budget cuts would chip away at Costa Rica's literacy rate or introduce instability into the newly privatized industries.

To survive, CAFTA-DR must now pass two tests: a Sept. 23 nationwide referendum and a ruling on its constitutionality by the high court in June. Arias received the Nobel Peace Prize in 1987 for his efforts to end civil wars in several Central American countries. Twenty years later, he has the hard task of bringing political peace to his own country.