WHAT A YEAR

Costa Rica 2017 | DIPLOMACY | YEAR IN REVIEW

The world has much to envy about Costa Rica, from its sterling green credentials to praiseworthy human capital, yet there is work to do to prevent widening inequality across the country.

Costa Rica is Latin America's oldest working democracy, with uninterrupted elections stretching back to 1953. Over the decades, the country has invested strongly in social services, emerging as a generator of highly sought-after human capital in tune with the demands of the modern world. Indeed, Costa Rica is, by many accounts, the greenest country on earth, with renewables accounting for 99% of electricity generation and, in 2015, the country running entirely on renewables for 285 days straight. The country does owe much to the weather, however, with 80% of its clean energy sourced from hydro sources—when the rains fail, Costa Rica resorts to burning fossil fuels.

Shifting gear now to look at growth, Costa Rica again impresses. The country enjoyed five years with a CAGR of 6.65% in the mid 2000s, before being hit by the global financial crisis, which shrank the economy by 1.02%. It rebounded in 2010 to grow 4.95%, and grew 3.5% in 2014 and 2.58% in 2015. Per capita GDP stands at over USD10,000, above the Latin American average of USD8,370 and behind only Panama in Central America.
Much of Costa Rica's growth in recent years can be attributed to its approach to trade policies—its FTA network grants it access to 2.5 billion people. Costa Rica is a member of the Central American Integration System (SICA), as well as the Central America Free Trade Agreement (CAFTA-DR), which is arguably its most significant trade deal. Announced in 2007, the FTA has spurred foreign investment in the country, ending the domination of agriculture in the economic mix and introducing new, high-tech and high-skilled industries. The country also has an attarctive free trade zone law, which has done much to attract money to Costa Rican shores. Big names to have set up shop include Hewlett-Packard, as well as Zollner Elektronik AG and Boston Scientific.But for all its opening up through free trade zones (FTZs), some locals have remained shut out, with several indicators pointing to widening inequality. Average wages at FTZ firms grew by 7% in the past year, 1.8 times faster than the average across the rest of the country, suggesting plans to ensure the equal distribution of wealth are not going as smoothly as they could. And with drawing big-name multinationals to your country now a competitive business, Costa Rica has lost some of its sheen due to an appreciating real exchange rate and rising labor costs. Those factors considered, Intel, in 2014, moved its assembly center operations from Costa Rica to China, Malaysia, and Vietnam—in 9M2015, exports of electronics components dropped 16.7% as a result.

Going forward, Costa Rica predicts growth of 4.2% in 2016 on the back of strengthening tourism, “which has grown very strongly, as well as investments in medical devices and exports in that field, which have been significant," President Luis Guillermo Solís Rivera told TBY in an interview. President Solís has been hands on in the quest to attract investment to the country, and points to steadily climbing figures as proof that the strategy being pursued is the correct one. Costa Rica has been pulling in investment “at a rate of around 14% per year, and that has been the case for the last two or three years," said the president, who personally has headed to Silicon Valley, New York, Chicago, and cities in Europe to sell the benefits of setting up in Costa Rica.
At the top of President Solís' agenda, however, is Costa Rica's fiscal deficit and the country's ongoing accession processes with the Pacific Alliance and the OECD.

According to OECD data, the public debt-GDP ratio almost doubled to 42.4%, with the budget deficit reaching 6% of GDP in 2015. President Solís told TBY that, “we are defining a small reform that would increase VAT by 2%," as well as highlighting other efforts to boost fiscal sustainability, including a potential transformation of sales and income tax. Indeed, the OECD also highlights inequality as a long-standing structural issue, along with disappointing labor productivity growth as a result of sluggish technical progress despite efforts to attract FDI into this area.

Going forward, the government has set out its plans for the increased use of public-private partnerships (PPPs), while also doubling down on its Puente al Desarrollo initiative, aimed at taking close to 60,000 families out of extreme poverty, with almost half that figure already incorporated into social processes. From here on out, the government's other key mission will be to continue to smooth the investment environment in order to reaffirm Costa Rica's position as a top investment destination in the region.