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Costa Rica - Economy

A country with a costly health and pension system, by 2018 Costa Rica saw its deficit inch up to stand at 6.2 percent of gross domestic product. Public debt was 65 percent of GDP, creating concerns among officials that much-vaunted economic stability could be threatened. The outgoing government -- like the three before it -- was unable to push through tax reforms to counter the growing deficit.

After experiencing positive growth over the previous several years, the Costa Rican economy shrank slightly in 2009 (-2.5%) due to the global economic crisis. The services sector was the most affected, with tourism falling by 8%. Services account for nearly 70% of GDP. The economy experienced a rebound in 2010, with a 4.2% and 4.0% GDP growth rate in 2010 and 2011 respectively. Costa Rica enjoys the region’s highest standard of living, with purchasing power parity per capita income of about U.S. $11,500. The unemployment rate was 6.5% in 2012. Consumer price inflation has historically been high at about a 10% annual rate in the past decade, but since 2009 the rate stayed in the 4% to 6% range.

Costa Rica's major economic resources are its fertile land and frequent rainfall, its well-educated population, and its location in the Central American isthmus, which provides easy access to North and South American markets and direct ocean access to the European and Asian continents. Costa Rica is known worldwide for its conservation efforts with more than 26% of its land under protection, thus safeguarding more than 5% of the entire world's biodiversity. The country's top economic priorities include passing fiscal reform, pursuing responsible monetary policy, and creating opportunities for inclusive economic growth. Significant legislative hurdles slow down passage of new laws and present challenges for the country’s economic policymakers.

Costa Rica's insurance, telecommunications, electricity distribution, petroleum distribution, potable water, sewage, and railroad transportation industries have been state monopolies. However, under the U.S.-Central American-Dominican Republic Free Trade Agreement (CAFTA-DR), Costa Rica accords substantial market access in a wide range of services, subject to very few exceptions. The wireless telephony, data telecommunications, and insurance markets opened to market competition in 2010. As part of the implementing agenda for CAFTA-DR, Costa Rica intends to strengthen and modernize the state monopoly telecommunications provider (ICE) so that it can remain competitive with new companies entering the market.

Although the country's economic history reflects an image of freedom and entrepreneurial achievement, underlying problems have alerted the country and the international community to a situation that challenges Costa Rica's economic stability. Throughout the 1960s the economy experienced a boom that promoted it as one of the fastest growing in Latin America, and the people enjoyed a rising standard of living throughout the decade. Agriculture and industry were the bases of the economy, industrial growth exceeding that of agriculture. Foreign trade and the inflow of foreign investment were at record levels. Coffee and bananas, which once had accounted for almost all of the country's exports, shared their place of importance with sugar, meat, shrimp, and miscellaneous other products as agriculture became diversified for export markets. But because some food staples, such as beans, corn, and wheat, were not grown in sufficient quantities, annual imports were required to meet the domestic demand.

The “El Niño” weather pattern causes lower than normal rainfall in the Central Valley and in the Pacific, and higher than normal rainfall in the Atlantic side of the country. Based on preliminary data, Costa Rica’s 2014/2015 coffee crop reached 1,397,542 60 kg bags. Production was higher than previously estimated, but remained lower than the previous crop. Lower production was primarily the result of the negative effects of coffee rust and dry weather patterns. Production is expected to decline about 5 percent in 2015/2016 based on the weaker condition of the coffee plantations and also as a result of the lower amount of rainfall expected this year. The weather pattern in 2015 was similar to that of 2014 and 2013, a long dry season followed by a relatively late and mild rainy season. This has resulted in late flowering of coffee plantations.

Although coffee has declined to third place in terms of the export value of agricultural products, it is still an important source of foreign exchange. Coffee exports amounted to $278.36 million during the 2012/2013 crop year, down 9.7 percent from the previous period. Bananas and pineapples now surpass coffee in terms of export value Costa Rica used to be known principally as a producer of bananas and coffee, but pineapples have surpassed coffee as the number two agricultural export. Del Monte, Dole, and Chiquita have a large presence in the banana and pineapple industries.

One prime coffee region that is being affected by rising temperatures is the narrow mountain range of Costa Rica. The Seattle Times, from a city strongly connected to the rise of premium coffee and coffeehouses in the United States and around the world, described the coffee situation in Costa Rica in the March 5, 2011 article, "Climate change takes toll on coffee farmers, drinkers too." The article states the following: "A mile above this rural mountain town, coffee trees have produced some of the world's best arabica beans for more than a century. Now farmers are planting even higher — at nearly 7,000 feet — thanks to warmer temperatures.... Almost all coffee grows in the tropics, and in general, tropical species are more sensitive to climate change, said Joshua Tewksbury, the Walker professor of natural history at the University of Washington. There are more species there, they can withstand only a narrow band of temperatures, and they are not likely to adapt well to change.... Costa Rica has 25 percent fewer acres planted in coffee than it did a decade ago, according to the national coffee agency iCafe. Roughly 10,000 farmers have quit coffee, some converting their land to pasture for cattle or dairy businesses. The remaining coffee farms produce less, with yields down 26 percent in a decade."

Coffee ranks just after oil in its value among traded commodities and is grown in more than 60 tropical countries. An estimated 25 million farmers produce coffee on over 1 million ha, most of whom are smallholders who depend on coffee for their livelihoods. This web of small coffee farms is important in the economies of some developing countries. Arabica (Coffea arabica) and Robusta (Coffea canephora) coffees dominate production (5.1 Mt and 3.1 Mt respectively in 2011. Arabica coffee is mostly grown in tropical highlands and is used in gourmet coffees due to its higher quality, while Robusta coffee is lower quality grown at lower altitudes.

Costa Rica would gain suitability at elevations 1500–2500 masl, which could compensate in part for losses at lower altitudes. Land at higher altitudes is often forested, so that we expect increased land-use pressure on high-altitude forests. Mesoamerica would confront an average decrease in the area suitable for Arabica coffee up to 30%, with largest losses for Mexico (29%) and smallest losses for Guatemala (19%).

Manufacturing and industry's contribution to GDP overtook agriculture in the 1990s, led by foreign investment in Costa Rica's free trade zone. Well over half of that investment has come from the United States.In recent years, Costa Rica has successfully attracted important investments by such companies as Intel Corporation, which employs 3,200 people at its $1.996 billion microprocessor plant; Procter and Gamble, which employs about 1,200 people in its administrative center for the Western Hemisphere; and Boston Scientific, Allergan, Hospira, and Baxter Healthcare from the healthcare products industry. Two-way trade between the U.S. and Costa Rica exceeded $16.2 billion in 2011. Costa Rica was the United States' 40th-largest goods export market in 2010.

The country is rich with renewable energy. It gets about 99% of all its electrical energy from clean sources, and it is aiming to become carbon neutral by 2021. Costa Rica has oil deposits off its Atlantic Coast, but the Pacheco administration (2002-2006) decided not to develop the deposits for environmental reasons. The Arias administration (2006-2010) reaffirmed this policy. The country's mountainous terrain and abundant rainfall have permitted the construction of a dozen hydroelectric power plants, making it largely self-sufficient in electricity, but it is completely reliant on imports for liquid fuels. Costa Rica has the potential to become a major electricity exporter if plans for new generating plants and a regional distribution grid are realized. Its mild climate and trade winds make neither heating nor cooling necessary, particularly in the highland cities and towns where some 90% of the population lives.

Costa Rica ranked 121st out of 183 countries in the 2012 World Bank's Ease of Doing Business Index. This hampers the flow of investment and resources badly needed to repair and rebuild the country's public infrastructure, which has deteriorated from a lack of maintenance and new investment. Most parts of the country are accessible through an extensive road system of more than 30,000 kilometers, although much of the system has fallen into disrepair. Contamination in rivers, beaches, and aquifers is a matter of rising concern. Although Costa Rica has made significant progress in the past decade in expanding access to water supplies and sanitation, just 3.5% of the country's sewage is managed in sewage treatment facilities, and the Water and Sewage Institute (AyA) estimates that perhaps 50% of septic systems function. In 2007, Costa Rica experienced nationwide blackouts resulting from a severe dry season (which limited hydroelectric resources) and the state electricity monopoly's inadequate investment in maintenance and capacity increases.

Costa Rica has sought to widen its economic and trade ties within and outside the region. The country signed a bilateral trade agreement with Mexico in 1994, which was later amended to cover a wider range of products. Costa Rica also has signed trade agreements with Canada, Chile, the Dominican Republic, Panama, and several Caribbean Community countries. In March 1998, it joined other Central American countries and the Dominican Republic in establishing a Trade and Investment Council with the United States. Following a 2007 public referendum, Costa Rica ratified CAFTA-DR, which entered into force in January 2009. The country was an active participant in the negotiation of the hemispheric Free Trade Area of the Americas and is active in the Cairns Group, which is pursuing global agricultural trade liberalization within the World Trade Organization.

One of the pillars of Costa Rica's economic development has been trade liberalization, which has allowed exports to surpass its 30% ratio of GDP in 1980 to a current 50% rate. This trade liberalization has been followed by a series of structural changes resulting in productivity growth, diversification of the economy and a higher level of investment. Today, Costa Rica exports thousands of distinctive products to the world and is highly recognized as one of the top 30 leading exporters of high-tech products. Foreign investors remain attracted by the country’s political stability and high education levels. All these changes have translated into important social achievements. In the last 20 years poverty was reduced from 40% to less than 20%.

Costa Rica has had a generally favorable investment climate for many years. Foreign direct investment (FDI) is high and has been a significant contributor to Costa Rica’s economic growth. Nevertheless, challenges to the country's competitiveness, including rising operating costs, a complicated legal environment, excessive bureaucratic red tape, and infrastructure deficiencies, are fueling caution on the part of investors.

Costa Rica’s continued popularity as an investment destination is well illustrated by historic FDI which climbed steadily from the year 2000 (USD 409 million) to 2008 (over USD 2 billion), reaching a high of over USD 3 billion (6.2 percent of GDP) in 2013 before dropping slightly to USD 2.75 billion in 2014 and 2.85 billion in 2015.

In recent decades the Costa Rican government through its investment promotion agency CINDE has focused on attracting relatively high-tech manufacturers and service companies that demand skilled labor, introduce new technologies and often run robust corporate social responsibility (CSR) programs. CINDE has focused on attracting and retaining investment in specific areas, currently services, advanced manufacturing, life sciences, light manufacturing and the food industry. In addition, the Tourism Institute (ICT) attends to potential investors in the tourism sector.

Costa Rica is one of the only developing countries to have adopted a tax on hydrocarbons, partially funding the only national system of payment for environmental services, and becoming the largest buyer of forest carbon in the world. Moreover, Costa Rica has set the goal to become a carbon-neutral country by 2021.

It is not surprising that tourism is Costa Rica’s main source of income and hard currency. Costa Rica receives over 1.7 million tourists per year, the majority of whom come from the United States and Canada. Earnings from tourism amount to more than $1.7 billion US dollars per year. It is estimated that up to 80% of all visitors to the country come to do eco-tourism related activities.

Costa Rica is blessed with impressive scenic beauty a fact that is not lost on the more than one million tourists that visit each year. Located in Central America in an area that covers 51.000 square kilometers (19.729 square miles), Costa Rica possesses approximately 6% of the world’s biodiversity. Because of Costa Rica’s small size, a diverse array of fabulous sites is within easy access. A trip to Costa Rica affords the opportunity to visit 12 different life zones, 20 national parks, 26 protected areas, nine forest reserves, eight biological reserves and seven wildlife sanctuaries. Costa Rica is the birthplace of ecotourism. The country is often cited as a model for conservation in harmony with community development and economic growth.

Costa Rican labor law and practice allows some flexibility in alternate schedules but is nevertheless based on a 48-hour week made up of 8-hour days. Workers are entitled to one day of rest after six consecutive days of work. The labor code stipulates that the workday may not exceed 12 hours. Costa Rican labor law requires that employees released without cause receive full severance pay, which can amount to close to a full year’s pay in some cases. Use of temporary or contract workers for jobs that are not temporary in nature in order to lower labor costs and avoid payroll taxes does occur, particularly in construction and in agricultural activities dedicated to domestic (rather than export) markets. No labor laws are waived to attract or retain investment - all labor laws apply in all Costa Rican territory, including free trade zones.

Costa Rican law guarantees the right of workers to join labor unions of their choosing without prior authorization. Unions operate independently of government control and may form federations and confederations and affiliate internationally. The vast majority of unions are located in the public sector, including state-run enterprises. Based on 2014 statistics, 52 percent of government employees are in a union as compared to under 3 percent in the private sector. Costa Rica currently has 75 collective bargaining agreements for public sector entities and 27 agreements within the private sector.

In the private sector, many Costa Rican workers join “solidarity associations,” under which employers provide easy access to saving plans, low-interest loans, health clinics, recreation centers, and other benefits. A 2011 law solidified that status by giving solidarity associations constitutional recognition comparable to that afforded labor unions. Solidarity associations and labor unions coexist at some workplaces, primarily in the public sector. Business groups claim that worker representation by solidarity associations provides for better labor relations compared to firms with workers represented only by unions. However, labor unions allege that private businesses use solidarity associations to hinder union organization in contravention of internationally recognized labor rights while permanent workers’ committees have displaced labor unions on collective bargaining issues.