Costa Rica: Policies and Conditions for Export Diversification

Over the last thirty-five years, Costa Rican exports (in dollars) have grown at an average annual growth rate of 10.8 per cent. In the context of an import substituting industrialization and subregional integration, exports grew at increasingly higher rates through the sixties and seventies; but the severe external debt crisis in the early eighties led to export stagnation. In the late eighties and through the nineties, there has been a substantial recovery, which shows to some extent the effect of a second generation of export promotion policies.The transition to a more open, less distorted economy has been gradual and carefully avoided recessions and massive unemployment after the 1981 crisis. The initial emphasis was on a more appropriate and stable exchange rate, and direct subsidies to compensate for the anti-export bias, targeted on promoting traditional exports to third markets. As export diversification gathered momentum tariffs have been reduced and other distortions removed.Non-traditional exports exceeded the value of traditional exports in the nineties. Export growth rates averaged 12.3 per cent from 1987 to 1995 and are among the highest growth rates in Latin America for that period. Moreover, in the nineties, part of the export promotion effort has been made in areas that are not included in 'exports'.The value added of free-trade zone exports has increased very rapidly, from $25.4 millions in 1990 to $142.1 millions in 1995, an average annual growth rate of 41.9 per cent. Local purchases from free trade zones increased at an annual rate of over 30 per cent during 1993-95, albeit from a small base. Average investment per firm increased 10 per cent per annum and average wages in US dollars increased at a rate of 21 per cent. On the other hand, the value added of maquila exports has been less dynamic due to quota restrictions, rising competition and the end of some export incentives. Nevertheless, this sector contributed with $126 millions in 1995, which is an 11 per cent of traditional exports.Tourism has also risen, which is explained in part by fiscal incentives. An indication of the structural change taking place is that the share of research and development intensive activities has increased in the industrial sector total production. The participation of 'Science Based Industries' increased from 5.7 per cent in 1989 to 14.1 per cent in 1995, and 'Differentiated Products Industries' increased from 4.8 to 8.5 per cent. 'Natural Resources Based Industries' and 'Labour Intensive Industries' both decreased, from 59.4 to 51.0 per cent and from 10.8 to 9.0 per cent, respectively.Another indicator of rising competitiveness is the increase in locally designed computer software, which in 1996 reached US$11 million, the highest in Latin America. The competitiveness of Costa Rica in the electronics sector has been well documented. Further evidence is the fact that, in 1997, INTEL started setting up a plant for the assembly and testing of microchips, with an investment of between US$300 and US$500 and expected sales of US$5.000 million.