How Global Shifts Are Putting Costa Rica’s Economic Model Under Stress

How Global Shifts Are Putting Costa Rica’s Economic Model Under Stress
Costa Rican President Luis Guillermo Solis after his election win, San Jose, Costa Rica, April 6, 2014 (AP Photo by Moises Castillo).

For years, Costa Rica has been a Latin American success story. The country’s democratic institutions and attention to good governance have enabled its resource-poor economy to thrive in a dangerous part of the world. The country overachieves on various measures of prosperity, with its ranking on indices such as economic quality, business environment, governance, education, health, personal freedom, social capital and the natural environment above the norm for countries at a similar level of development and wealth—and often considerably so.

In terms of overall economic growth, data from the International Monetary Fund show the economy expanded at a steady rate of 4.7 percent in the 2000s, and 4.3 percent between 2010 and 2015. Inflation, which had increased at an annual rate of 10.6 percent in the 2000s, fell to 3.9 percent between 2010 and 2015. Reflecting Central America’s current drug-related problems, the only quality-of-life area in which the country underachieves is safety and security.

Much of the country’s success over the past several decades can be attributed to a development model focused on direct foreign investment and high-tech exports. The starting point was the mid-1990s, when Intel made a $300 million investment in a chip-testing plant in the country’s capital. With this strategy, Costa Rica is attempting to transition to a postindustrial economy focused on services, but without first developing a strong traditional manufacturing sector. With Intel as the centerpiece, the strategy, based on Harvard’s Michael Porter’s theory of clusters, called for the creation of a “Silicon Valley”-like technology hub to attract further waves of foreign-owned, high-tech export-oriented firms. Porter’s theory proved correct, and the high-tech component of the export sector took off, with such exports soon averaging over 40 percent of total manufactured exports.

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