By Alberto Gonzalez Pandiella and Alessandro Maravalle, OECD Economics Department
Costa Rica has made remarkable economic progress over the past two decades, such as achieving life expectancy at par with the OECD average. Thanks to a strong commitment to trade, it has succeeded in attracting foreign direct investment and in increasing the level of sophistication of its export basket. However, the challenges to safeguard these achievements and further improve living standards are substantial. Growth prospects were deteriorating before the pandemic and going forward population ageing will take an additional toll (Figure). Unemployment is high, at a two-digit rate since 2018, as well as informality, affecting nearly half of the labour force. The fiscal situation improved in 2021 and 2022, thanks to the 2018 fiscal reform, but with public debt at around 70% of GDP, public finances remain a critical vulnerability requiring sustained efforts to contain spending and boost public sector efficiency. Nearshoring trends, by which companies seek reducing supply chain disruption risks by locating closer to their final markets, are providing new investment opportunities. Costa Rica is a front runner in environmental protection and renewables generation, and the global transition to net zero greenhouse gas emissions can further increase the country’s competitiveness.
The latest OECD Economic Survey (OECD, 2023) argues that continuing and stepping up structural reform efforts would be the best way for Costa Rica to respond to these challenges and seize new opportunities. Reforms to boost productivity are particularly critical to uphold growth in GDP and living standards. Strengthening competition is especially a promising avenue to boost productivity. Weak competition tends to translate into relatively high prices of goods and services for consumers and firms. Valuable and bold steps have been recently taken to boost competition in key markets, such as rice or professional services. Steps are also being taken in cooperation with the private sector to reduce regulatory burden, by identifying regulations and procedures susceptible to be phased out, including also specific deadlines for their elimination. Providing the national competition authority with the budget granted by law is a pending challenge that would be particularly beneficial at the current juncture when measures to improve regulations and open up key sectors of the economy are being taken. Effective competition authorities, by promoting stronger economic growth, can also have a positive fiscal impact by supporting higher tax revenues.
Informality, at around 45% of total employment, remains high and is both a cause and a consequence of low productivity. A comprehensive strategy is required to reduce it, with actions needed in several policy areas, such as reducing non-wage labour costs, facilitating the creation of formal firms, including by reducing the bureaucratic and economic cost of establishing a formal firm, helping more Costa Rican to acquire the skills needed to access formal jobs, simplifying taxes and enhancing enforcement mechanisms. Experience in some OECD countries, such as Colombia, indicates that reducing non-wage costs, by cutting employer payroll charges, can help to reduce informality. Employer payroll charges in Costa Rica are high in comparison with the OECD average, indicating that there is ample room to move in this direction.
Virtually universal health care and primary education and one of the highest pension coverage in the region have led to remarkable social outcomes. However, Costa Rica faces substantial social challenges, such pas poverty remaining largely unchanged at around 20% over the last 25 years and increasing income inequality. There is room to improve social programmes targeting, as in some cases more than 40% of the beneficiaries are middle and high-income households. There is also room to reduce fragmentation, as 21 institutions are in charge of delivering more than 35 schemes. Better targeting and lower fragmentation would facilitate reinforcing social protection in key areas and reduce inequality.
Improving the quality and efficiency of education and training is also key to support growth and equity in Costa Rica. Even if spending on education is high in Costa Rica, where it amounts to more than 6.5% of GDP, one of the highest shares across OECD countries, educational outcomes remain poor and educational exclusion is still high, with too many Costa Ricans leaving school without an upper-secondary education. A more targeted support to students with learning gaps, improving teachers’ selection and training and expanding access to education to children below four years would help increase equity of opportunities and help more Costa Ricans access better paid formal jobs and firms fill easier their vacancies.
Figure. Without reforms the economy’s growth potential will fall as the demographic bonus fades
Contributions to potential growth, % pts
References:
OECD (2023), OECD Economic Surveys: Costa Rica 2023, OECD Publishing, Paris.