In many aspects, Costa Rica is a success story in terms of development. It is considered an upper middle-income country, which has shown a steady economic growth over the past 25 years. This growth resulted from an outward- oriented strategy, based on the openness to foreign investment and gradual trade liberalization.
Costa Rica is also a global leader for its environmental policies and accomplishments, which have helped the country build its Green Trademark. The pioneering Payments for Environmental Services (PES) program has been successful in promoting forest and biodiversity conservation; making Costa Rica the only tropical country in the world to have reversed deforestation.
The combination of political stability, social contract and steady growth has resulted in one of the lowest poverty rates in Latin America and the Caribbean, where the proportion of the population with incomes below US$ 5.5 per person per day decreased slightly from 13.2 to 10.6 percent between 2010 and 2019.
The success of the country in recent decades is also reflected in its strong indicators of human development, which have contributed to move the country up the global ranks, higher than the other countries in the region.
While these achievements are celebrated, the country faces fiscal and social challenges that have been intensified by the COVID-19 (Coronavirus) pandemic which has hit hard Costa Rica.
Fiscal consolidation efforts, launched in 2018, were interrupted as revenues collapsed amid increasing expenditures as the government sought to mitigate the impact of the pandemic. Unemployment rates nearly doubled -surpassing 20 percent in mid-2020- and family income declined despite the government’s emergency response. As a result, the poverty rate rocketed up to 16.1 percent.
A strong economic performance in 2021 and spending discipline enabled a faster than expected fiscal consolidation and started to improve labor market and social outcomes. The Gross Domestic Product (GDP) recovered 7.6 percent in 2021 after the largest drop in four decades in 2020.
A strong rebound in manufacturing, particularly of medical equipment, and a gradual recovery in services and agriculture lifted GDP above pre-crisis levels. While growth translated into job creation and increased household income, unemployment and poverty rates remain above pre-pandemic values.
Also, inequality is yet to recede, even though there is a sharp decline in unemployment to 13.7 percent in Q4 2021 (still above the 11 percent in Q4 2019), and a decline in the share of the poor (to 11.1 percent) and of the vulnerable (from 35.4 to 34.2 percent). The vulnerable includes those living with US$ 5.5 or more but less than US$ 13 per person per day.
Growth is expected to moderate to 3.4 percent in 2022 and gradually converge to 3.2 percent over the medium term. Services, particularly tourism, are expected to add momentum to the recovery in 2022-2023 as the pandemic is brought under controlled and travelers regain confidence.
Continued progress with respect to vaccination in Costa Rica and worldwide will support a gradual recovery of tourism and related jobs and exports. Fiscal consolidation is expected to continue over the forecasting period, anchored in the fiscal rule and the IMF program, even after a new administration takes power in May 2022.
As the labor market recovers, poverty rates are expected to decline while the middle class continues to recover. Further poverty reduction will require efforts to include less-educated workers in economic development.
In this context, two pressing development challenges stand out: delays in the Legislative Assembly’s approval of reforms after the 2022 elections and potential impacts from geopolitical tensions which are likely to raise food and energy costs -with disproportionate impact on those at the bottom of the income distribution.
These challenges affect the basic pillars of the Costa Rican development model: inclusion, growth, and sustainability.
The government has strived to address these problems and is committed to an inclusive society that guarantees the welfare of its people, supported by transparent and accountable public institutions.
Last Updated: Apr 11, 2022