Costa Rica’s Development Costa Rica’s Costa Rica’s Development From Good to Better Systematic Country Diagnostic Ana Maria Oviedo Susana M. Sanchez Kathy A. Lindert J. Humberto Lopez Costa Rica’s Development From Good to Better Ana Maria Oviedo, Susana M. Sanchez, Kathy A. Lindert, J. Humberto Lopez © 2015 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 18 17 16 15 This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Contents Acknowledgments .................................................................ix About the Authors .................................................................xi Abbreviations ....................................................................xiii Executive Summary . 1 Costa Rica’s Development Model: Enduring Democracy, the Social Compact, Open Economy, and the Green Trademark ...........................................1 Inclusion: Inequality, Jobs, and Skills ................................................5 Growth and Competitiveness ......................................................7 Sustainability: Fiscal, Social, and Environmental Pressures .............................8 Governance .....................................................................9 Priority Areas, Links, and Complementarities .......................................10 Note ...........................................................................14 1 . Introduction and Country Context . 15 Notes ..........................................................................22 2 . Poverty and Shared Prosperity . 23 Poverty: Relatively Low Levels, but Recent Stagnation ................................23 Profile of the Poor: Increasingly Urban, Larger Households, and Lower Educational Attainment ..........................................................26 Shared Prosperity and the Rise of the Middle Class ...................................32 Rising Inequality, in Contrast to Regional Trends ....................................36 Limited Poverty Responsiveness to Growth .............................................37 Notes ..........................................................................40 3 . Inclusive Growth? Inequality, Jobs, and Skills . 41 Labor Earnings and Inequality ....................................................41 Fewer Jobs for Poor and Unskilled Workers .........................................42 Education: Not Making the Grade, Especially for the Poor ............................46 Widening Earnings Gaps for Poor and Unskilled Workers .............................53 Redistribution Has Not Offset Rising Inequality .....................................59 Notes ..........................................................................61 4 . The Nature of Costa Rica’s Growth and Its Constraints . 63 Growth Analysis and Trends ......................................................65 Policies Explaining Growth .......................................................68 iii Competitiveness Challenges ......................................................77 Notes ..........................................................................98 5 . Sustainability of Costa Rica’s Development Model . 101 Fiscal Sustainability .............................................................101 Sustainability of the Social Compact ..............................................107 Sustaining the Green Trademark: Managing Natural Resources and the Environment. 119 Governance Challenges Hamper Government Effectiveness and Regulatory Growth .....125 Notes .........................................................................132 6 . Priority Areas, Linkages, and Complementarities . 135 Appendix A: Team Engagement and Consultation Process . 143 Appendix B: Country Comparators . 145 References . 147 Boxes 1.1 Historical Underpinnings of Costa Rica’s Social Compact. .16 1.2 Costa Rica’s Celebrated Green Trademark . 19 2.1 How Have Methodological Changes Affected Poverty Measures in Costa Rica? .........25 2.2 Indigenous People in Costa Rica: A Very Small and Disadvantaged Minority ...........29 3.1 Female Household Heads and Immigrants Face a Tough Labor Market ................46 3.2 Nicaraguan Workers in Costa Rica Do Not Appear to Drive Down Native Workers’ Wages ................................................................55 4.1 Intel and Development of the High-Tech Sector in Costa Rica ........................73 4.2 Corporate Governance of State-Owned Electric Utility ICE ..........................91 5.1 The Rice Sector: Failure of a Productive Development Policy ........................128 5.2 The CCSS Lacks an Integrated Management System Over Resources .................129 Figures 2.1 Poverty in Costa Rica is Low by LAC Standards, but it Has Stagnated Recently. 24 B2.1.1 Poverty Rates Adjusting the Non-Food Component of the Poverty Line with the Overall CPI, 2001–2009 ...................................................25 2.2 Poverty Varies Widely by Region, but Most of the Poor Are in the Central Region. 27 2.3 The Highest Poverty Incidence Is in Border Areas ................................28 B2.2.1 Indigenous People Are Located Mostly in the Southern Region ....................29 B2.2.2 Access to Basic Services Is Lower for Indigenous Communities ....................30 B2.2.3 Indigenous People Are More Likely to Work in Self-Employment, or to Be Inactive. 31 2.4 The Middle Class in Costa Rica Is One of the Largest in LAC ......................33 iv Contents 2.5 More People Moved Out of Poverty than Into Poverty ............................34 2.6 Shared Prosperity by Country in LAC Mean Income Growth (Overall Population) .....35 2.7 Before the Crisis, Shared Prosperity Was High in Poorer Regions ..................36 2.8 Evolution of Inequality and Income Distribution in Costa Rica and in LAC .........37 2.9 Despite Regional Variation, Inequality in the Central Region Explains Most of Overall Inequality ...........................................................38 2.10 Growth Benefited the Poor Relatively More Only Until 2007 ......................39 2.11 Contributions of Growth, Prices, and Income Inequality to Poverty Reduction, 2001–2014 .................................................................39 3.1 Labor Income Contributed Significantly to Poverty and Inequality Changes, 2001–2014 .................................................................42