Blessed with rich natural resources and long standing political stability, Costa Rica is assessed by the GCI as one of the most competitive economies in Latin America and the Caribbean; at 59th position, it comes in ahead of Mexico (60th) and Brazil (64th), among others. Furthermore, an analysis of Costa Rica’s evolution in the rankings over the last three years highlights a remarkable upward trajectory, with a nine-place improvement since 2006.
The unique development strategy followed by the country since its return to democracy in 1948 has allowed it to build up important competitive strengths, thus providing the rest of the region with best practices examples in dimensions as diverse as education, public governance, and product and export diversification.
The importance of good governance standards, as well as high-quality education, are seen as prerequisites for a viable democracy, sustained growth and development. These elements have consistently underpinned the country’s policy agenda over the decades. In particular, the early and steady focus on education, with the creation of the first public university in 1940 (the University of Costa Rica) followed by three more in the 1970s, and the establishment of world-class private higher education and training and research institutions—such as INCAE, EARTH University, and INBio—equipped the productive system with a relatively large pool of highly qualified professionals.
The policy agenda has placed particular emphasis on diversifying the economy away from commodities toward more value-added products. In this sense, Costa Rica has been particularly successful in nurturing its high-tech sector over the last 15 years, with high-tech exports accounting for 30 percent and 40 percent of total and industrial exports in 2006, respectively, and with a 13 percent rise in the 2001–05 period. The development of the high-tech sector has been boosted by the establishment in Costa Rica of an important group of multinationals in the 1990s, with Intel at the forefront, investing first in a large assembly and testing plant, and later in a software development center. Instrumental in bringing about this development have been the targeted FDI promotion strategy pursued by the national investment promotion agency CINDE, the export fiscal incentives (namely the Export Processing Zone and the Export Contract regimes) adopted in the 1990s in parallel with trade liberalization, and Costa Rica’s geographical location and strong transportation logistics. Also critical have been the country’s political stability and respect for the rule of the law, coupled with the availability of a relatively low cost and educated labor force with good English language skills.
CINDE targeted high-tech FDI with a view toward diversifying Costa Rica’s production structure away from agriculture and unskilled labor-intensive manufacturing (i.e., apparel produced in the maquiladoras), in which the country was already losing its competitiveness, to skill-intensive industries. This leveraged the country’s educated labor force and ensured a more advantageous position in international markets. FDI was a crucial component of the cluster strategy envisaged by CINDE, since they were to develop backward linkages through the domestic suppliers and foster training and collaboration with national universities.
Another cluster that has been targeted and developed in a similar spirit of promoting higher value added industries is that surrounding the eco-tourism industry. Building on Costa Rica’s extraordinary biodiversity (accounting for 5 percent of the world’s total biodiversity), natural beauty, and pristine environment, the tourism sector has experienced an impressive dynamism in recent years, representing 6.3 percent of total GDP and 6.5 percent of total employment in 2007. Moreover, with 1.725 million tourist arrivals in 2007, bringing in an average US$940 in receipts per visitor, Costa Rica leads Central America and displays a more lucrative tourism sector than Mexico, the most-visited country in Latin America (with 21.35 million visitors), for which the average receipt per visitor is only US$570.6 It is not by chance that Costa Rica, at 44th, is the second highest ranking country in the LAC region, after Barbados (29th), in the World Economic Forum’s Travel & Tourism Competitiveness Index 2008.
The fairly successful economic diversification described above feeds into strong levels of business sophistication (42nd) and innovation (38th), particularly by regional standards. Companies established in Costa Rica are operating quite high on the value chain (34th), with comparative advantages based predominantly on sophisticated products and processes (30th). Further, their innovation capacity is assessed as being fairly high (43rd), thanks to high R&D spending (30th) and wide-ranging research collaboration with academia (33rd). The country gets good marks in the innovation and sophistication factors sub index (39th), the best showing across the three sub indexes composing the GCI, which bodes well for the preparedness of Costa Rica’s economy to evolve toward a higher, innovation-driven, stage of development.
Furthermore, Costa Rica has made important progress in the macroeconomic aspects of competitiveness, consistently improving its public finances over the last three years: public debt has been brought down from 55.2 percent of GDP in 2005 to 46.6 percent in 2007, while the government budget balance has been turned from a 1.6 percent (of GDP) deficit in 2005 to a 0.6 percent surplus in 2007. This has been facilitated by the strong growth experienced by the country in the last couple of years, but is also indicative of the current government’s effective tax administration, with reduced tax evasion and tight control on nonpriority spending.
On a less positive note, inflation continues to be a source of concern at 9.4 percent in 2007, reflecting high oil and food prices worldwide. Moreover, the poor state of the country’s infrastructure (94th) looms as a potential bottleneck for the further modernization and diversification of the economy, as well as for its overall growth prospects. The adoption of fiscal reforms broadening the tax base should therefore be high on the government’s agenda in order to free up important resources for investment in infrastructure and social programs, while not increasing the debt burden.
In addition, the long-awaited ratification of the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA) could prompt the politically thorny liberalization of the telecommunications and insurance sectors, traditionally closed to private investors, thus enhancing their efficiency and eliminating important rigidities in the goods market. This should be done in parallel with efforts to reduce red tape and excessive regulation. This area remains a major concern in the country, as reflected by the disappointing marks registered by Costa Rica in aspects such as the number of procedures to start a business (12, corresponding to 103rd position), the time required to start a business (77 days, corresponding to 118th place), and the burden of government regulation (72nd).
By tackling such weaknesses, Costa Rica will further strengthen the foundations of its competitiveness and ensure sustained economic growth and prosperity going forward.
Source: World Economic Forum – Global Competitiveness Report 2008-2009
