All that glitters is not gold

In spite of the economic progress that has been achieved in Costa Rica, employment growth has stagnated, results in education are deficient, and anti-competitive regulations continue to hinder business development.

Tuesday, April 17, 2018

The latest OECD economic study on Costa Rica details the factors that support the significant socio-economic achievements of the last decades, as well as the pending challenges to ensure sustainable and more inclusive growth.

The study forecasts growth of around 3.7% for the period 2019-20 and proposes an agenda to achieve greater transformation and a broader convergence with OECD countries.

From the executive summary of the OECD study:

Economic and social progress has been impressive 
Costa Rica has achieved strong well-being and robust economic growth. Almost universal access to education, health care and pensions have contributed to high levels of life satisfaction. This has been facilitated by robust economic growth and continued convergence towards OECD living standards. Poverty, income inequality and gender gaps are low by Latin American standards, though high when compared to OECD countries. Shortcomings also exist in some well-being indicators such as work-life balance, safety and income. Costa Rica has established a worldrenowned green trademark and eco-tourism industry by protecting its abundant biodiversity and developing renewable energy sources.

Open trade and foreign direct investment are an integral part of Costa Rica’s successful growth model. This has underpinned Costa Rica’s structural transformation from an agricultural-based economy to one with a more diversified structure that is integrated into global-value chains. Building on these achievements, Costa Rica has the opportunity to increase its specialisation in medium- and hightechnological intensive sectors. Robust growth of around 3.7% is projected for 2018 and 2019: a low inflation environment will protect household income and exports will benefit from the global economic recovery. Public investment is also expected to strengthen from its historically-low levels owing to ongoing large infrastructure programmes.

However, anti-competitive regulations and high labour market segmentation hinder the full realisation of opportunities to make growth more inclusive. Employment growth is also stagnant and unemployment remains above pre-crisis levels, hitting predominantly youth and the low skilled. As a result, and against the general trend in Latin America, informality and inequality are increasing.

Making growth more robust and more inclusive 
Productivity growth has gained some momentum over the past decade, but many institutional obstacles are hampering stronger growth and spreading of its gains more widely. Obstacles include labour market marginalisation, restrictions to competition and low outcomes and inequities in education. If Costa Rica does not address these challenges, it risks becoming stuck in a “vicious cycle” whereby individuals with low skills and poor access to opportunities are confined to low productivity and low-wage jobs. Setting in motion a “virtuous cycle” will require reforms across several policy areas that present win-win opportunities to boost both productivity and inclusion. Childcare provision is low and differs largely across income levels and geographical areas. These asymmetries impact negatively both on the future educational outcomes of children from disadvantaged backgrounds and on female labour market participation, also hampering equity. Expanding early childhood education and care for low-income groups and improving its quality should become a priority. To facilitate the improvement and expansion of services, all spending on early childcare education and care should be classified under the constitutionally-mandated spending on education and a single agency with clear responsibility for delivering national ECEC policy across the entire sector should be appointed.

In spite of high education spending, outcomes are poor 
Costa Rica has a strong commitment to education as a social and economic development measure. At 7.9% of GDP, education spending is higher than in all OECD countries. However, spending is inefficient both in the learning process and in reducing inequality. PISA results reveal that one third of students lack core competencies and outcomes are strongly influenced by socio-economic background. Grade repetition and drop-out rates are high. Resources need to be channelled and even reallocated to secondary education and early childhood education and care. More focused, targeted support should be given to students at risk early on. Resources should also focus on providing initial and on-the-job training to teachers as well as education materials, which are currently in shortage. Developing good quality dual vocational education and training in secondary education would offer young people strong skills and a close link to the labour market. Overall, the government should move from the current focus on resources and funding to outcomes, and should establish clear and verifiable performance-based targeting against which to measure the success of its education policies.

Overly complex regulations are holding back entrepreneurship 
Product market regulations are stringent; there are large barriers to entrepreneurship, extensive antitrust exemptions and high state control in many sectors. The potential productivity gains from reducing anti-competitive regulations are large. Improving state-owned enterprises’ governance according to OECD standards, establishing one-stop shops for business registration and licensing, streamlining insolvency procedures, removing antitrust exemptions and enhancing trade facilitation would bring large growth benefits.

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