Remarks by Angel Gurría
15 July 2020 - OECD, France
(As prepared for delivery)
President Alvarado, Ministers, Distinguished guests, Ladies and Gentlemen,
It is a great pleasure to present the third OECD Economic Survey of Costa Rica. This edition is a special one, not only because we are facing an unprecedented crisis, but because takes place in the context of the completion of Costa Rica’s accession process to the OECD.
Let me begin by thanking President Alvarado, Dyalá Jiménez and the Ministry of Foreign Trade, particularly the Representative to the OECD, Ambassador Manuel Tovar, for the excellent collaboration throughout the accession process and their support during the preparation of this work. I am convinced that Costa Rica’s accession to the OECD sends a message of confidence to the international community, and reinforces the image of strength and stability to the rest of countries and international organisations.
This Economic Survey comes at a crucial moment. The COVID-19 crisis has had an unprecedented impact on the global economy. In June we published the OECD’s Economic Outlook, which warned that global output may shrink between 6% to 7.6% in 2020, depending on the possibility of a second wave of the pandemic this year. While we expect global economic growth to bounce back in 2021, we expect a recovery in a “U” shape rather than a “V”; the question is how large will the low part of the “U” be, and what will be the impact on economies and most importantly on societies.
In this challenging context, I would like to first congratulate the Costa Rican authorities for the innovative measures adopted to respond to the pandemic and to protect the most vulnerable. For instance, Bono Proteger, a cash transfer programme aimed to support informal, self-employed workers, as well as those who have lost their jobs, has proved a key measure to support those most in need.
The OECD Economic Survey also highlights the impressive progress made by Costa Rica in recent years. The steps taken to strengthen its macroeconomic framework, including through improved monetary policy giving more independence to the Central Bank, have been essential to improve living standards. Over the last 30 years, growth has been steady and GDP per capita has tripled .
Moreover, Costa Rica’s solid healthcare has raised the well-being of its people to levels comparable to those prevailing among OECD countries. Costa Rica has the largest life expectancy at birth in all of Latin America, and the level of self-reported well-being is above the OECD average.
A strong commitment towards trade openness has also been key to attract foreign direct investment, to move Costa Rica up in global value chains and to diversify its exports basket. FDI inflows, at 5% of GDP, surpass those seen in other Latin America countries as well as the average OECD economy.
In addition, Costa Rica is one of the few countries that has succeeded in reversing deforestation, and I would like to commend the President for establishing the ambitious target of zero net carbon emissions by 2050. Reducing emissions by the transport sector will be key to meet this target.
Yet, despite this progress, there is still room for improvement. Our Survey identified a number of challenges that are currently being faced. Allow me to highlight a few that I consider most relevant.
The Covid-19 crisis is a great challenge for the country. As a very open economy, it will be greatly affected by the disruptions in global value chains, the increasing volatility in financial markets and the disruptions in global trade and the tourism sector.
According to our projections, the GDP in 2020 could suffer a contraction within the range of 4% to 5% in 2020, and we estimate a very gradual recovery in 2021 with GDP growing within 1.5% to 2.7%, again depending on the possibility of a second wave of the pandemic.
The projected GDP contraction is lower than the OECD average, and in fact the lowest in the region, and we estimate that unemployment could increase significantly in case there is a second outbreak.
Moreover, the fiscal situation remains fragile. Budget deficits and rising public debt threaten the country’s remarkable achievements. The overall budget balance shifted from a surplus in 2007 to a deficit of 7% of GDP in 2019, higher than in most OECD countries. And debt doubled, reaching 58% of GDP in 2019.
Finally, I want to highlight two challenges that are particularly important and that Costa Rica shares with other Latin American countries: inequality and the high levels of informality. Informality currently affects 45% of employment and this is likely to continue increasing over time given the bleak economic prospects. Costa Rica also has higher levels of inequality than many OECD countries, with a Gini coefficient at 0.48. The gap in female labour participation is particularly large. Only 50% of women are in the labour market, which contrast with an OECD average of 70%.
Care responsibilities are the main barrier to access the labour market, particularly for women in low-income households. While Costa Rica has made recent progress in extending early childhood education, further efforts are needed, including the implementation of paternity leave, to further promote women’s integration in the labour market.
To tackle these challenges, our Survey outlines several key recommendations to help Costa Rica prevail in this challenging context, sailing towards more resilient, inclusive and sustainable growth.
Let me share some of the most important:
First, addressing the coronavirus outbreak and its impact is the overarching priority in the short-term. Current confinement and economic measures are helping to contain the pandemic, but boosting testing and tracing capabilities, and preparing for increases in healthcare demands is essential. It is also crucial that we increase the support to businesses and workers to limit the number of bankruptcies, as well as a second wave of unemployment.
Second, a complete and timely implementation of the fiscal reform approved in December 2018 is key to ensure fiscal sustainability. The budget deficit will unavoidably increase further due to spending and measures to respond to the pandemic. Improving debt management, adhering firmly to the fiscal rule and returning to a deficit-reduction path once the economic recovery is consolidated will be vital. Not before, of course.
Third, increasing efficiency in public spending. While progress has been made in recent years, more efforts are needed to ensure that increases in public spending are inclusive and effective. The reforms in the public sector employment and public procurement, which are currently being discussed, will be key to boost efficiency, avoid duplicates and create more room for investments towards greater inclusiveness and productivity.
Fourth, strengthening competition. The new competition law addresses a number of previous weaknesses in Costa Rica’s competition framework, such as the lack of independence and of resources of authorities. Complying strictly with the implementation road map is now vital. Moreover, existing exemptions to competition rules, such as those granted to essential products like rice, sugar, coffee, should be gradually phased out as they can increase the prices of the basic market basket, which particularly affects the most vulnerable.
Fifth, improving regulations would boost productivity and job creation. Regulations in Costa Rica are among the most burdensome in advanced and emerging economies, and barriers to entry are particularly large. There is also room to further improve the methodology to set up administered prices, as well as the performance of state-owned enterprises. The State is facing unprecedented challenges derived from Covid-19, but it will be fundamental to resume economic activity that it develops through public enterprises as soon as possible.
Last but not least, rebuilding the social pact. We need to move towards stronger and more universal social protection systems that cover vulnerable workers and families, improve financial inclusion, as well as increase skills and education, especially in light of the digital transformation. Expanding access to early childhood care and education would also help further boost female labour market participation.
Ladies and Gentlemen,
Costa Rica has made impressive progress. Its efforts to put in place reforms and move towards best practices have been inspiring. Keeping this reform momentum is the best response to the current times of crisis and uncertainty. In this challenging context, increasing regional co-operation and integration is also essential. We will only prevail if we progress together.
We hope that the Survey being launched today will help the Government successfully tackle the challenges that lie ahead.
Rest assured that the OECD stands ready to work with and for Costa Rica in designing, developing and delivering better policies for better lives. Thank you.
Press Release: Costa Rica: critical to stabilise public finances once recovery from Covid-19 crisis is consolidated