| Contemp. Costa Rica |
| Modern-day Costa Rica is the culmination of a system in transition. The 90s have been a decade of shutting down State enterprises, and pulling in foreign capital to create a more diverse production structure. Costa Rica has used both freeing of the economy and assistance to the economy pursuant to creating a more modern society. In the end, it is the process of modernization and diversification that are the goals of the Costa Rican system. They attempt to use both the free market and various policies of social engineering to achieve these goals. However, contemporary Costa Rica is not purely a free market/social engineering mix. Like most, if not all, real world economies, it has elements of nearly every economic system. There are, indeed, some enterprises that are state-run (indicative of a Soviet economy). Examples include electricity generation, liquor manufacturing, and oil refining. From 1995 to 2002, expenditure on government enterprises have risen slightly faster than expenditure on government as a whole (which have risen in real terms). However, during this time period some important things have happened. In 1995, the government owned and ran ten major enterprises. By 2002, that number has decreased to seven (though they are, admittedly, more highly funded). The Corporation for Costa Rican Development, the Company for Public Services in Heredia, and the Costa Rican Institute for Railroads were all shut down. In fact, the only enterprises that grew at a faster than average rate during this time period were the Costa Rican Electricity Institute and the Costa Rican Oil Refinery. (Banco Central “Ingresos…” 2003) From this fact, it can reasonably be concluded that, even though some (very limited) Soviet traits will probably remain in Costa Rica for some time, the philosophy that drives Soviet-style socialism is not present in mainline Costa Rican politics. The breadth of state-run enterprises is decreasing, which is clearly not consistent with the notion that the factors of production should be owned by the state. In addition to these Soviet socialist traits, there is a significant degree of Social-Democratic style socialism in Costa Rica. Between 1995 and 2002, spending on transfer payments increased by approximately three times in real terms. In 2002, transfer payments were roughly equal to 4.6% of Costa Rica’s GDP, as opposed to 2.2% in 1995. (Banco Central [combined from different files] 2003) This data, however, does not necessarily give a full picture of the extent of transfer payments in Costa Rica. Many social democratic measures may be disguised as old-age pensions, workman’s compensation, and similar programs. Costa Rica has such programs. In total, “the welfare system uses up almost 45 percent of the national budget.” (Morrison 1998, 123) While these programs have many justifications, one is the goal of equality. Presidente Pacheco demonstrates this kind of attitude when he states, “Also, the Costa Rican economy depends on the internal efforts to achieve stability, growth, and equity.” (emphasis added) (Pacheco 2002) The fact that social democracy is present in Costa Rica is no surprise, however. Liberation theology (and the socialist economics that it inspired) has been quite influential throughout the whole of Latin America, and Costa Rica is no exception. Liberation theology carries with it the idea that man must be freed from his physical needs. This goal is met by the ideal of economic equality (or at least a substantial “safety net”). Even though this is not Costa Rica’s only goal (or even its primary one), it is clearly one of the goals underlying Pacheco’s plan. In his own words, “Economic growth is not an end in itself, it is the means for combating poverty and benefiting the Costa Rican people. For that, the Government of the Republic is entrusted with the creation of conditions that permit the benefits of economic revitalization to lift the low-income groups.” (Pacheco 2002, 29) Many of Costa Rica’s interventions, however, are best typified as being forms of social engineering. Rather than being guided by a certain philosophy, most of the interventions are ad hoc, with the goal of achieving economic development for the most part. Pacheco’s plan clearly demonstrates that the Government has decided that certain industries are important to Costa Rican development, and that they must be assisted through special government programs. “All the sectors of the national economy merit particular attention, but there is no reason that some, for their relative importance within the productive structure of the country, or for their effect on the poverty level or for their level of development or for another reason, cannot merit a special attention.” (Pacheco 2002, 18) Once the politically necessary words are cut away, Pacheco is merely justifying the fact that his plan will give special help to specific “pet” sectors. His plan specifically focuses on tourism, agriculture and fishing, small and medium sized businesses, and science and technology. Pacheco explains that tourism is one of the most important Costa Rican sectors because it is has been one of the fastest growing sectors, and brings in a lot of foreign money. However, reading his plan, one cannot ignore the fact that Pacheco is not interested in just any type of tourism that may occur. Rather, his plan clearly opposes any form of tourism that may “put the physical or moral integrity of the nation in danger”. (emphasis added) Also, the plan focuses on “sustainability” by encouraging small and medium sized businesses that offer a diverse array of tourist activities. As Pacheco talks about the importance of tourism, he always comes back to the fact that the industry will be kept accountable to the community. The Plan also details the specific infrastructure, and certain programs that will be necessary for this particular industry to grow. (Even going so far as to include pension reform for independent businessmen.) (Pacheco 2002, 21-22) Pacheco also places great importance on the agriculture and fishing sector. A major part of his plan here is “to implement programs and specific projects, and any other mechanism that promotes production, the utilization of adequate base technology, and the minimization of the productive and commercial risks to ensure productivity.” (Pacheco 2002, 23) This process will include research, professional training and education, market research, financing, and other related programs. Much of this process is to be encouraged (at the very least) by the public sector, and will be transmitted to the private sector by alliances that Pacheco plans on building. (Pacheco 2002, 24) A third important industry to Pacheco (and therefore Costa Rica) is small and medium sized businesses. This part of Pacheco’s plan is general seen as more integrated into the other industries. However, the Government does have a plan for a law that will set up a government office that will be specifically oriented to dealing with the concerns of the small and medium sized businesses. Specifically, it will be focused on providing development banking, technical assistance, technological development, and commercialization of products. Another office will be oriented at collecting and disseminating information that these businesses would find useful. In his plan, Pacheco sees these particular businesses as a vehicle for bringing in businesses interested in “high technology, tourism, [and] software” specifically. Finally, Pacheco is interested in specifically encouraging the very modern industry of science and technology (using, no surprise, the Ministry of Science and Technology). Specifically, Project Red Advance for Internet will act as a base for further development in information technology. This base will be used to encourage human development, communication, academic research, and software development for business. In addition to this, Pacheco is increasing funding for science and technology research. While this work will be performed in private laboratories, the government will provide incentives for it to take place. Another important part of his plan for technological development is investment in human capital (specifically education). Using Costa Rica’s institutes of higher education, Pacheco plans to bring up people that will be qualified to lead Costa Rica through the technological development that he foresees. Finally, Pacheco supports building a “scientific and technological culture” through scientific exhibitions, science fairs, technology conferences, and the like. (Pacheco 2002, 25-26) These four sectors provide a good example of the kind of social engineering Costa Rica is interested in. Though the official literature does not declare so, one can easily see that Pacheco’s plan for these sectors is aimed at economic growth (through science and technology, and tourism), stability (through diversification brought from the previously mentioned two), and equality (through promotion of agriculture and small and medium sized businesses). Despite the numerous examples of socialist activities that are present in Costa Rica, it would be unfortunate to ignore the significant place that the free market plays, even in Pacheco’s plan. As businessman Samuel Yankelewitz observes concerning Costa Rica, “Think of country as an aircraft with two engines. The private-sector engine works but the public-sector one does not.” (“Challenge to Paternalism” 2002) Indeed, this is the kind of philosophy that underlies Pacheco’s plan. Pacheco is seeking throughout to build an alliance (in his terms) between the private and the public sector. So, despite the fact that he places much importance on the place of the public sector, he realizes that the private sector is also an important engine for economic growth. In fact, much of his plan is written in terms of providing an environment that will permit development to take place, which carries implications for the place of the free market. Specifically, Pacheco supports revising regulations to make them simpler and less restrictive on private industry. (Pacheco 2002, 18) When speaking of his plan for the agriculture and fishing sectors he states that “all actions should be taken in concert with the private sector…” (Pacheco 2002, 24) In fact, it is in dealing with this particular sector that Pacheco is very clear in speaking of the necessity of an alliance between the public and private sector. (Pacheco 2002, 24) He also speaks of integrating the public and private sectors in his plan to assist small and medium sized businesses. Even when speaking of science and technology, the private sector is to play a major role. “We will look for the attraction of resources from the private sector and research centers, with the purpose of increasing research in the country, this by means of actions of promotion of sources of risk capital or other mechanisms that help to increase the investment in research and development.” (Pacheco 2002, 26) By far, the area where Costa Rica is making the greatest strides in coinciding free market principles is in foreign trade. Pacheco is actively pursuing the implementation of the Free Trade Area of the Americas alongside bilateral trade agreements with several trading partners. (Pacheco 2002, 27-29) So, even though interventionism is common in Costa Rica, free trade is seen as an important motor of growth. This mixed system with an emphasis on social engineering and the free market has provided an economy with some traits that are much more mature than they probably should be, given the overall level of economic development in Costa Rica. This may be the result of moderate interventionism (not unlike the amount that is in mature economies). Costa Rica’s level of output per capita is approximately $8,500. (CIA 2002) This level is approximately one-fourth the level of the United States ($36,000). This level of output is easily explained by Costa Rica’s past, which was much more interventionist than it currently is. (For examples, one can refer to my speaking of the Soviet style socialism that is now in decline.) Seeing as the level of economic output is dependent upon the level of accumulation of productive capital, it is reasonable to believe that a history that stifled the accumulation of productive capital would result in a lower capital stock and lower level of output currently. Between 1995 and 2002, the GDP of Costa Rica grew by approximately 32% in real terms. (Banco Central “Producto…Constantes” 2003) This averages to approximately 4.5% annually. This is slightly faster than the conventional “average” for the United States (which is usually said to be around 3%). Of course, this data is from a time of rapid economic growth throughout the world as a whole, so it is reasonable to believe that a relatively free economy, like Costa Rica’s, would share in that growth. It is interesting to note, however, that during no year (including 2001 and 2002) did the real GDP of Costa Rica actually decline. Even without government spending included, the private sector grew in real terms each year in this period. This growth pattern is also easily explained. Costa Rica is becoming a more free market oriented economic system. Therefore, economic growth should be high; however, spending on programs for social engineering and social welfare programs place a damper on this growth. Therefore, the result is a growth rate much like one would find in one of the more mature economies of the world (specifically, the United States). Another important trait of an economy is its static and dynamic efficiency. In short, this asks how well resources are being allocated both at a specific moment in time and over time. Are resources where they should be now and are they able to move to where they need to be in the future? However, there is a difficulty in measuring this particular trait of the economy. Static and dynamic efficiency asks us to measure actuality against possibility. Measuring possibility is extremely difficult, if not impossible. However, a potential measure of static and dynamic efficiency could be unemployment. While this measure is hardly complete, it does give us an idea of how much of its labor capacity Costa Rica is using, and also an idea of how quickly the Costa Rican economy reallocates employees that lose their job or just enter the job market. In 2002, the unemployment rate was approximately 6.4%. (Banco Central “Tasas De…” 2003) This rate is slightly higher than that of the United States, but lower than that of many European countries. This result can be explained from looking at the mixed economic system. Costa Rica does have a minimum wage, which would tend to create the possibility of unemployment in the first place. Also, despite the relative importance of the free market, the weight of the social democratic measures and social engineering projects imposes a cost on the private sector that makes them less capable of hiring as many workers as they may like to. So, the labor market presents us with a specific case where interventionism obstructs efficient allocation of resources. While this case is instructive, it is hardly useful in coming to an accurate measure of overall static or dynamic efficiency, since not all markets have the price floor that the labor market does. In the end, we have to resort to an analytical argument as to what level of efficiency we would expect, despite a lack of solid data to back our analysis. On the whole, the pricing system is relatively free in Costa Rica (with the exception of the minimum wage). Most price setting has been abandoned by the Costa Rican government. This reality alone would create a price system that would provide proper incentives for resources to flow to their most productive use. However, the policies of social engineering and social democracy that persist warp the cost structures, and therefore the price system. Most likely, resources allocations are better than if the price system was directly interfered with, but are certainly less than ideal. Even though resources will easily flow into a productive venture, subsidies, taxes, and transfer payments will make it difficult or even impossible to determine which is the most productive venture for the given resources. In terms of income equality, Costa Rica has a distribution much like that found in the United States. The Gini index for Costa Rica is 46, for the United States it is 41. In both countries, 2% of income is earned by the bottom 10%. In Costa Rica, the top 10% earns 35% of the income, while in the United States, the top 10% earns 31% of the income. (CIA 2002) On the whole, there is relatively little difference in the income distributions between the two countries. This is the result of similar institutions. Both the United States and Costa Rica are countries based in the free market, but that view the public sector as important in attaining certain goals. Specifically, they both share the philosophy that government should encourage research and development, and that government should redistribute income to help the less fortunate (which is far more appropriate nomenclature than “poor”). Since these philosophies (and the resulting institutions) are so similar between the two countries, the fact that the sum of the negative incentive effects on equality and the positive redistributive effects would be approximately equal in each country is not a surprise. In terms of quality of life, Costa Rica is better off than many of its Latin American neighbors. Panama has a poverty rate of 37%, while Costa Rica’s is much lower at 21%. Even this is much higher than the United States rate of 13%. (CIA 2002) These differences are relatively easy to explain once again. Costa Rica’s economy is, more or less, the most free country in Latin America. Therefore, it has the highest overall level of production. The adage “a rising tide lifts all ships” applies here. Because Costa Rica’s economy as a whole has a higher level of production than other Latin American countries, it has a lower poverty rate. The fact that Costa Rica’s poverty rate is greater than that of the United States is also easily explained by the same principle. (The reasons for the differences in the level of output and income have already been dealt with.) In terms of poverty, Costa Rica, thanks to its focus on the free market (allowed by political stability) escapes the desperate poverty of many of its neighbors. Another quantity that affects the quality of life (or can reflect it) is the rate of inflation. Costa Rica has a controlled rate of inflation that is near 12% (CIA 2002). While this rate is quite high by American standards, the fact that it is relatively stable (and, in fact, declining) is a good sign for the well-being of the Costa Rican people. As Costa Rica becomes more involved with the United States, it will find it more important to decrease the inflation rate even more. The prospect of greater monetary (and price) stability will decrease the uncertainty in the Costa Rican economy, and will therefore improve the quality of life. In the end, Costa Rica’s economy is typified by a free market with some social engineering and social democratic policies. While there are some State enterprises that persist, recent governments have been devoted to keeping them in check. The Costa Rican government, even though it is pursuing many policies that are not free market, understands the importance of the private sector in driving economic growth. This understanding should encourage a (basically) private property ethic that is consistent with the current non-aggressive culture. Also, this understanding will place a limit on the extent and the type of interventions Costa Rica may attempt in the future. The focus on diversification and new technology should prevent conservative socialism from taking a strong root. Most likely, the types of interventions that are in place now will persist, with few new ones being added. The current interventions are seen either as assisting the private sector or helping the poor. So, further growth in them will be dependent on its ability to do one or the other of these goals. Also, a demonstration that these interventions are in fact harming these goals has the possibility of being accepted (though that possibility may be slight). Costa Rica’s history of eliminating State enterprises demonstrates that it is willing to abandon policies that don’t achieve these goals. Costa Rica is a generally free market economy with some social engineering and social democracy. Most likely, this is what it will stay for the near future. |
| Home Philosophy Theology Economics and Finance Politics The Arts Costa Rica 2004 Fun Stuff Links My Blog E-mail Me |
 |