Costa Rica

Costa Rica stands out within Central America for having built a middle-class society with deeply rooted democratic traditions and stable governance. Following severe balance of payments and external debt crises in the 1980s, caused in large part by misguided economic policies like import substitution, the country’s leaders deftly leveraged its relatively well-educated population, proximity to the U.S., and fairly entrenched rule of law to gain a foothold in global markets—entailing an influx of foreign capital and greater higher value-added output across agriculture, manufacturing, and services. Yet the untapped potential of Costa Rica’s unfolding economic transformation is underscored by the inability of many people and firms to participate in the dynamic export sector for want of the requisite skills, training, or other resources. Youth from poorer households, for example, tend to leave school prematurely. Inequality has duly increased somewhat, while comparatively high levels of social spending lag in efficiency and effectiveness—further weighing on human capital accumulation. The public sector also has struggled to catalyze competitiveness by foregoing critical investments, including on infrastructure, amid rising indebtedness. Overcoming these challenges would require, inter alia, repurposing fiscal policy, improving institutional capacity and coordination, plus scaling up and/or streamlining promising interventions where warranted.