WHAT A YEAR

Costa Rica 2018 | DIPLOMACY | YEAR IN REVIEW

Costa Rica has hit headlines in recent years for all the right reasons; its solid green credentials, strong human resources, and increasingly high-tech manufacturing base put it in good stead to tackle the 21st century.

As fiscal responsibility is increasingly likened to prudent household budgeting in cabinets across the developed world, Costa Rica stands as an example of what can be achieved long term by public investment. The country enjoys some of the highest levels of social welfare in the region, with educational attainment and quality of life among the best in Latin America. This is mainly thanks to timely investment in education, giving Costa Rica the human capital it needs to man its increasingly high-tech manufacturing-based economy. The country also leverages a network of FTZs to export to Western markets, with which it also enjoys a strong relationship in terms of tourist exchange—Costa Rica's tourism industry has seen strong growth in recent years as international visitors have flocked to the ecotourism and medical tourism options that have distinguished the country in a crowded market. Costa Rica's saw a record 2.92 million tourist arrivals in 2016, an increase of 260,000 over 2015, with over 40% coming from the US.

By far the biggest reason for Costa Rica to hit headlines in recent months, however, is its green achievements. It has set the goal of becoming the first carbon-neutral nation in the world, fulfilling all of its generation needs via renewable sources for 250 days in 2016. As it stands, almost 98% of Costa Rica's power generation needs are met by hydropower, geothermal power, solar, and wind. 2016 was a particularly good year for hydropower production as a result of abundant rainfall, but lower rainfall results in an older network of coal plants stepping in to pick up the slack.
In terms of growth, Costa Rica's GDP per capita has more than tripled in the past two decades and is now more than 30% above the regional average for Latin America. The last decade has seen consistently strong GDP growth; with the exception of a contraction of 1.7% in 2009 in the midst of the global financial crisis, Costa Rica's annual GDP growth was above 4% every year from 2003 through 2012. After dropping to 2.2% growth in 2013, the country rebounded with 4.7% and 4.3% growth in 2015 and 2016, respectively.
Yet, one of the primary drivers of Costa Rica's good fortune has also contributed to one of its most pressing economic problems: the widening fiscal deficit. Costa Rica's high levels of public spending have led to growing deficits since 2009, and its debt has received downgrades to below-investment grade from international rating agencies over concerns about the country's fiscal position. After hitting 6.9% of GDP in 2016, public spending cuts brought the fiscal deficit down to 4.6% of GDP in October 2017, but public and international officials recognize that further policy changes are needed to lay a strong fiscal foundation. The government is now working on bills aimed at boosting tax collection, an area the country lags in—tax revenues are currently well below OECD averages.
One area where Costa Rica has its affairs in better order, however, is its FTZ regime. Established with the passage of Law 7210 in 1990, Costa Rica's FTZ system offers tax exemptions to firms that manufacture products for export in designated industrial zones. The program has been a marked success in recent years; the Costa Rican Foreign Trade Promotion Agency has estimated that the country receives USD6.2 in benefits for each dollar of incentives granted. More than 120,000 Costa Ricans were either directly or indirectly employed by FTZ industries, and the well-paying nature of the sector—average wages in FTZs are 1.8 times that in other private industry—have provided a valuable source of private employment in a country that has struggled at times to offer high-wage jobs outside of the public sector.
Moving forward, while Costa Rica will continue to enjoy strong trade ties with the US, its relationship with Beijing is also growing. Celebrating its 10th anniversary of diplomatic ties with Costa Rica in September 2017, China pledged a generous aid package and promised other efforts to boost ties. While the idea that ties between the two nations have only existed for a decade seems strange, one must remember that throughout most of the 20th century, the vast majority of Latin American states recognized the Republic of China (Taiwan) as the rightful representative of the Chinese people rather than the People's Republic of China (Beijing). Indeed, Costa Rica is a key component of China's “One China” policy in the region as the Asian giant continues to make inroads into Central America.