1. NS4540 Winter Term 2019 Costa Rican Economic Model
Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

2. Overview
Robert Looney, Costa Rica’s Economic Model, World Politics Review, December 7, 2016
For years Costa Rica has been a Latin American Success story.
Economy has thrived despite limited resources due to
Democratic institutions
Good Governance
Country overachieves on various measures of prosperity considerably above the norm for countries at a similar level of development

3. Macroeconomic Trends

4. Costa Rica Strengths/Weaknesses

5. Costa Rica: GDP

6. Costa Rica: Per Capita Growth

7. Costa Rica: Recent Growth

8. Costa Rica: Population

9. Costa Rica: Demographic Profile

10. Costa Rica: Poverty

11. Costa Rica: Unemployment

12. Costa Rica: Income Distribution

13. Costa Rica: HDI

14. Costa Rica: Sector Growth

15. Costa Rica: Trade

16. Costa Rica: Governance Patterns

17. Costa Rica: Economic Freedom

18. Costa Rica: Competitiveness

19. Costa Rica: Minimum Wage

20. Costa Rica: Labor Productivity

21. Costa Rica: Doing Business

22. Costa Rica: FDI

23. Costa Rican Model I
Much of the country’s success over the past several decades can be attributed to a development model focused on FDI and high tech exports
Starting point was the mid 1990s when Indel made a $300 million investment in a chip-testing plant in San Jose.
With this strategy, Costa Rica attempted to transition to a postindustrial economy focused on services but without developing a strong traditional manufacturing sector
With Intel as centerpiece, strategy based on Michael Porter’s theory of clusters
Called for the creation of a “Silicon Valley” to attract other waves of foreign high-tech export oriented firms
Theory correct
Soon high tech component accounted for 40% of total manufacturing exports

24. Costa Rican Model II
Rude awakening in 2014 when Intel moved its operation to Asia
Raised doubts about the future of the Costa Rican model
Even before Intel’s departure concerns developing
Inequality was increasing during past decade stemming from
Higher wages associated with skilled labor in high-tech export sector and
Absence of related industries that are lower in the value-added chain
These factors helped widen the gap between
highly profitable export sectors such as high-tech industries and
lower-skilled sectors such as agriculture and tourism

25. Costa Rican Model III
In effect strategy created a two-track economic structure with widening economic disparities
Costa Rica has the fifth largest number of free trade zones in Latin America after: Colombia, Dominican Republic, Nicaragua and Honduras
Workers employed in the zones earn on average 1.8 times more than average for private sector workers
Few linkages with the rest of economy to pull up wages outside the zones
Still Costa Rica around 20% more expensive than other Central American Countries
Hurts the country’s competitiveness as an outsourcing destination

26. Costa Rican Model IV
Other troubling trends pointing to economic model’s diminishing effectiveness
While wages rose, unemployment rate increased from average of 6.1% in the 2000s to 8.1% from 2000 to the present
Investment rate fell from 17.6% of GDP in earlier period to in the latter period
Government appears to have been unprepared for the way the economic model has played out.
Budget deficit increased from average of 2.6% of GDP in 2000s to 5.2% from 2010 to present
Government debt increased from 28.4% of GDP to 44.5% in 2016

27. Costa Rican Model V
The government’s ability to finance deficits through debt may be constrained moving forward
Costa Rica borrowed $4 billion from in the Eurobond markets
Failing to enact fiscal reforms has significantly reduced the market’s appetite for further issuance
Costa Rica’s bonds are now in junk status
Significantly increases the cost of borrowing

28. Assessment I
Costa Rica’s current plight provides another reminder of the difficulties small countries face in today’s rapidly changing global environment
Gone are days when small open countries like Singapore, Hong Kong and Mauritius could count on buoyant international trade and revenues to sustain growth of 7-8% annually
While in the past, Costa Rica’s macroeconomic stability and its opening to international markets and FDI was necessary to bring prosperity
It is no longer sufficient

29. Assessment II
The dual economic structure created by Costa Rica’s economic model is still dominated by small, low productive firms in sectors outside of high-tech
Economy linked to slower – growing U.S. economy
These factors have not gone unnoticed
The government and China have recently agreed to expand trade and investment
Increased urgency to break the political gridlock to resolve the country’s fiscal crisis
Government with World Bank assistance is attempting to addresse problems of small firms outside high-tech sector

30. Assessment III
However for now country will face continued strains stemming from
Slower world trade
Reduced flows of FDI and
An increasingly inward-focused U.S its largest trade partner.

31. EIU Forecast

32. EIU Risks