www.oecd.org/eco/surveys/economic-survey-costa-rica.htm

OECD

OECD Economics

2016 OECD ECONOMIC ASSESSMENT OF COSTA RICA

Making Costa Rica more productive and inclusive

San José, 15 February 2016

2

Main message

• Costa Rica has made remarkable progress in the last decades:

o Rising living standards and well being

o Good management of natural resources

• Current challenges:

o Restore fiscal sustainability

o Make growth more inclusive, especially for informal workers and women

o Adopt reforms to boost productivity growth

3

Living standards have risen sharply in the last decades

Note: OECD upper half refers to the non-weighted average of 17 OECD countries with the highest GDP per capita.Source: OECD, National Accounts Database and World Bank, World Development Indicators.

22

23

24

25

26

27

28

29

30

31

22

23

24

25

26

27

28

29

30

31GDP per capita of Costa Rica relative to OECD upper half

% %

4

Well-being is high

Note: Data are preliminary. Each well-being dimension is measured by one to four indicators taken from the OECD Better Life Index set. Normalised indicators are averaged with equal weights. Indicators are normalised to range between 10 (best) and 0 (worst) according to the following formula: (indicator value - minimum value) / (maximum value - minimum value) x 10.Source: For Costa Rica: National Institute of Statistics and Censuses (INEC); National Electoral Tribunal (TSE); Gallup World Poll Database (Gallup, 2015). For OECD average: OECD Better Life Index Database.

Many components of well being are already comparable with OECD countries' levels

Housing

Income (incomplete)

Jobs (incomplete)

Community

Education

EnvironmentCivic engagement (incomplete)

Health

Life satisfaction

Safety

Work-life balance

0

5

10

Costa Rica OECD average

5

Life expectancy is high

Note: Life expectancy at birth for all population.Source: OECD Health Statistics.

50

55

60

65

70

75

80

85

50

55

60

65

70

75

80

85Costa Rica Latin America & Caribbean OECD

Years Years

6

Costa Rica is an attractive destination for investment

Source: World Bank, World Development Indicators.

Net foreign direct investment

0

1

2

3

4

5

6

7

8

0

1

2

3

4

5

6

7

8Costa Rica Latin America & Caribbean OECD

% of GDP % of GDP

7

Macroeconomic stability is crucial for growth

Note: Inflation expectations are one year ahead. Source: Central Bank of Costa Rica.

Improved monetary policy framework has contributed to falling inflation

2003 2005 2007 2009 2011 2013 2015-5

0

5

10

15

20

-4

-2

0

2

4

6

8

10

12

14

16

18

InflationInflation expectations

% %

8

Natural resources are well managed

Source: IEA CO2 Emissions from Fuel Combustion Statistics, Indicators for CO2 Emissions Database.

CO2 emissions per capita are low; the share of renewables in electricity generation and forest cover are large

CRI

MEX TU

R

SWE

PRT

CHL

FRA

CHE

ESP

ITA

GRC

GBR

POL

DEU

JPN

NLD

USA

0

2

4

6

8

10

12

14

16

18

0

2

4

6

8

10

12

14

16

18tCO2 per capita, 2012 tCO2 per capita, 2012

9

First challenge: restoring fiscal sustainability

10

The tax reform will cut the budget deficit

Source: Ministry of Finance of Costa Rica and OECD Economic Outlook 98 Database.

General government budget balance

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017-6

-5

-4

-3

-2

-1

0

1

2

-6

-5

-4

-3

-2

-1

0

1

2No reform OECD recommendation

% of GDP % of GDP

Tax reform submitted to Congress

No reform

11

0

10

20

30

40

50

60

70

80

0

10

20

30

40

50

60

70

80General government debt as % of GDP

No reform

Tax reform submitted to Congress: 2.1% GDP

With additional fiscal measures: 3% GDP

General government debt as % of GDP

A fiscal adjustment of 3% GDP will cut the public debt

Effect of alternative reforms

Source: OECD calculations.

Structural reforms will boost growth, further cutting the debt ratio

12

Public spending is rising because of an increasing wage bill

General government, composition of expenditure

Source: Ministry of Finance.

2008 2009 2010 2011 2012 2013 20140

5

10

15

20

25

30

35

40

0

5

10

15

20

25

30

35

40Others Wage bill

% of GDP % of GDP

13

Fiscal revenues are low

Approve and implement the proposed tax reform submitted to congress

Total revenue

Source: OECD Revenue Statistics in Latin America and the Caribbean 2015.

1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

5

10

15

20

25

30

35

40

0

5

10

15

20

25

30

35

40

OECD

Costa Rica

% of GDP % of GDP

14

Earmarking makes public spending inflexible

Organisation of the public sector with expenditure share in percent (2014)

Source: Ministry of Finance.

The central government has little control over public-sector finance

Strengthen the authority of the Ministry of Finance to control overall public-sector expenditure

Constitutional and legal mandates

69%

Debt service14%

Non-rigid spending 17%

15

Second challenge: making growth more inclusive

16

DNK

CZE

FIN

SVN

ISL

SVK

BEL

NOR

SWE

DEU

NLD

CHE

AUT

LUX

HUN

POL

FRA

IRL

NZL

CAN

AUS

EST

OECD PR

TGB

RJP

NKO

RIT

AES

PGR

CRU

STU

RUS

AM

EX CHL

CRI0

5

10

15

20

25

30

35

0

5

10

15

20

25

30

35

The richest 10% earn 32 times the income of the poorest 10%

Ratio of incomes of the top 10% vs. bottom 10% (latest available year)

Note: Data for 2012 or latest available year. Preliminary estimate for Costa Rica.Source: OECD Income Distribution Database (IDD).

17

The tax and transfer system does little to reduce income inequality

Inequality (Gini) before and after taxes and transfers (latest available year)

Note: Data for 2012 or latest available year. Preliminary estimate for Costa Rica.Source: OECD Income Distribution Database (IDD); and Lustig et al. (2013).

18

Female labour market participation is low

Note: Data for Brazil is 2013.Source: OECD Labour Force Statistics Database.

TUR

MEX CR

IIT

ACH

LKO

RGR

CBR

AHU

NPO

LIR

L

SVK

COL

BEL

LUX

CZE

JPN

USA

SVN

FRA

ESP

PRT

AUS

AUT

EST

GBR

DEU

FIN

NLD

NZL

CAN

DNK

NOR

CHE

SWE

ISL

0

10

20

30

40

50

60

70

80

90

0

10

20

30

40

50

60

70

80

90% %Women labour force participation rate (age 15 to 64, 2014)

19

The lack of childcare services keeps poor women out of paid work

Increase the supply of publicly-funded childcare services to facilitate women’s participation in the labour market

Percentage of women out of the labour force because of non-paid care responsibilities (24-35 years, 2014)

Source: OECD calculations based on ENAHO 2014.

Poorest quintile Quintile II Quintile III Quintile IV Richest quintile0

10

20

30

40

50

60

70

80

90

0

10

20

30

40

50

60

70

80

90% %

20

Informality is increasing

Strengthen enforcement and reduce administrative burdens

Source: INEC, Encuesta Continua de Empleo, 2015.

I 2011

II 2011

III 2011

IV 2011

I 2012

II 2012

III 2012

IV 2012

I 2013

II 2013

III 2013

IV 2013

I 2014

II 2014

III 2014

IV 2014

I 2015

II 2015

III 2015

70

80

90

100

110

120

130

140

150

70

80

90

100

110

120

130

140

150Informal employment

Formal employment

Index 2011 Q1=100 Index 2011 Q1=100

21

Educational outcomes are poor

Percentage of adults who have attained at least upper secondary education (2014)

Establish better educational outcomes as the main policy target

Source: OECD Education at a Glance 2015.

25-64 year-olds 25-34 year-olds0

10

20

30

40

50

60

70

80

90

100

0

10

20

30

40

50

60

70

80

90

100OECD average Chile Brazil Costa Rica

% %

22

Waste-water treatment is deficient

Note: Data for the latest available year.Source: World Bank, World Development Indicators Database 2012; Estado de la Nación 2014; UN stat; Eurostat; Aquastat FAO data; UNEP 2000; OECD Water database; OECD Environment at a Glance 2013.

Improve waste-water management facilities

Connection to sewage treatment (%) Sewage treatment (%)0

10

20

30

40

50

60

70

80

90

100

0

10

20

30

40

50

60

70

80

90

100Costa Rica Brazil Mexico Chile OECD average

% %

23

Third challenge: adopt reforms to boost productivity growth

24

1990s 2010-20150.0

0.5

1.0

1.5

2.0

2.5

3.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Costa Rica OECD

Y-o-y % change, average

Annual % change, average Annual % change, average

Productivity growth is slowing

Source: OECD Economic Outlook 98 Database.

Enhance the strategic role of the Presidential Council on Competitiveness and Innovation

25

COL

CHL

MEX CR

IGR

CAR

GSV

KPO

LTU

RIT

ANZ

LHU

NES

PPR

TNO

RIR

LCA

NGB

RCZ

ECH

NAU

SNL

DBE

LFR

A

SVN

USA

AUT

DNK

DEU

CHE

JPN

SWE

FIN

KOR

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5% of GDP % of GDP

R&D activities are limited

Note: Total R&D expenditure (public and business) as a percentage of GDP, 2012 or latest available year.Source: OECD, Main Science and Technology Outlook 2014; Eurostat; UNESCO Institute for Statistics (UIS), June 2014.

Public R&D spending (latest available year)

The public sector accounts for a large share of R&D spending

26

Higher education contributes to s small share pf public R&D expenditure

Increase the share of public R&D channeled to universities; better enforce intellectual property rights (IPRs)

Note: Public R&D expenditure by type of research system. Data for 2012 or latest available year.Source: OECD Science, Technology and Industry Outlook 2014.

Public R&D spending (latest available year)

CHN

ARG

KOR

SVN

MEX US

ACR

IPO

LDE

UHU

NSV

KNZ

LES

PCZ

EFR

AJP

NOE

CD GRC

NOR

ITA

FIN

AUS

BEL

NLD

GBR

TUR

CAN

IRL

AUT

SWE

PRT

COL

CHL

DNK

CHE

0

1020

30

405060

70

8090

100110

0

1020

30

405060

70

8090

100110

Higher education expenditure on R&D Government expenditure on R&D

% of public R&D spending % of public R&D spending

27

Regulation restricts competition in product markets

Eliminate anti-trust exemptions and give the competition commission more independence

Note: OECD is a simple average of OECD countries, 2013 data. USA latest data is 2008. Source: OECD Product Market Regulation Database for OECD countries and Brazil. OECD-World Bank Group Product Market Regulation Database for Colombia, Peru and Costa Rica.

NLD

GBR

USA

AUT

DEN

NZL

ITA

AUS

EST

FIN

DEU

PRT

HUN

SVK

BEL

CZE

JPN

CAN

ESP

IRL

LUX

NOR

FRA ISL

CHE

CHL

LTU

SWE

LVA

POL

PER

SVN

GRC

COL

KOR

MEX CR

ITU

RBR

A

0.00.20.40.60.81.01.21.41.61.82.02.22.42.6

0.00.20.40.60.81.01.21.41.61.82.02.22.42.6

Level of PMR score Level of PMR score

28

State-owned banks play a dominant role but have higher costs than private banks

Eliminate regulatory asymmetries favouring state-owned banks; improve corporate governance of state-owned banks

Banks' administrative costs over total assets and liabilities

Note: The bars show the median of private and public banks' monthly administrative costs (general and personnel expenditures) expressed as percentage of the sum of total assets and liabilities; the ratio of the monthly administrative costs to the sum of total assets and liabilities are averaged over the year; data for 2015 are from January to September.Source: Superintendencia General de Entidades Financieras (SUGEF).

Private banks

Public banks

Private banks

Public banks

Private banks

Public banks

2013 2014 2015

0.00

0.05

0.10

0.15

0.20

0.00

0.05

0.10

0.15

0.20General expenditures Wage bill

% %

29

BRA

CRI

POL

LAC

SVK

CZE

NOR

ITA

GRC

EST

MEX AU

STU

RIS

LSV

NNZ

L

CHL

GBR

BEL

IRL

CAN

DNK

SWE

KOR

USA

LUX

FIN

DEU

ESP

JPN

CHE

NLD

FRA

AUT

PRT

1

2

3

4

5

6

7

1

2

3

4

5

6

7From 1 (worst) to 7 (best) From 1 (worst) to 7 (best)

Perceived quality of transport infrastructure is poor

Source: World Economic Forum, The Global Competitiveness Index Historical Dataset © 2005-2015.

Reduce the number of public-works agencies and better coordinate their policy and project-execution roles

Perceived quality of roads (2013-2014)

30

Summary

31

Main Findingso Tax revenues are low and spending is rising fast. The public

administration is highly fragmented.o The central bank’s independence in the conduct of monetary policy can be

improved.o Banking-sector competition and financial systemic risks remain concerns.

o Income inequality is high and poverty has remained largely unchanged over the last two decades.

o Female labour market participation is low.o The share of informal employment is high and rising. o Spending on education is high but outcomes are poor.

o Competition is weak and the role of state-owned enterprises is pervasive.o Low productivity growth and barriers to entrepreneurship hamper income

convergence.o Transport infrastructure is deficient due to a complex institutional

framework and low coordination.

Prod

uctiv

ityIn

clus

ion

Mac

ro

32

Recommendations to restore fiscal sustainability and enhance monetary credibility

Cut the central government deficit by 2% of GDP during 2016-17 and an additional 1.5% thereafter by approving and implementing the proposed tax reform, combatting tax evasion, eliminating tax exemptions without an economic or social rationale, and curbing expenditure growth.

Introduce a medium-term fiscal framework with a verifiable expenditure rule.

Strengthen the authority of the Ministry of Finance to control overall public-sector expenditure and introduce performance-based budgeting.

Strengthen the effectiveness of monetary policy to achieve price stability with appropriate institutional reforms, in particular by delinking the designation of the President of the Central Bank from the political cycle, and clarifying accountability rules such as clear motives for her/his dismissal.

Establish a deposit-insurance scheme covering all banks to help level the playing field in the banking sector, accelerate the adoption of Basel III principles, and release publicly the results of banks' stress tests.

33

Recommendations to make growth more inclusive

Increase the supply of publicly-funded childcare services to facilitate women participation in the labour market.

Simplify the minimum wage structure and enforce compliance with the law.

Adopt a comprehensive strategy to reduce high labour market informality by strengthening enforcement, reducing administrative burdens to entrepreneurship, and enabling the poor to become formal workers.

Establish better educational outcomes as the main policy target, with special emphasis on improving the performance of disadvantaged students and schools.

Develop an apprenticeship system that closely involves employers.

More in Chapter 1 of the Economic Assessment

34

Recommendations to boost productivity

Give the competition commission more independence and eliminate anti-trust exemptions.

Improve the corporate governance of state-owned banks and enterprises by adopting the OECD Guidelines on Corporate Governance of State-Owned Enterprises.

Strengthen the institutional design to align policies to boost productivity by enhancing the strategic role of the Presidential Council on Competitiveness and Innovation

Improve the business environment and reduce barriers to entrepreneurship.

Streamline the institutional and legal framework of public-work agencies, to achieve better policy design and execution in transport and other infrastructure sectors.

More in Chapter 2 of the Economic Assessment

More Information…

www.oecd.org/eco/surveys/economic-survey-costa-rica.htm

OECDOECD Economics

Disclaimers: The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

35