Presentation of the 2018 Economic Survey of Costa Rica

Remarks by Angel Gurría

OECD Secretary-General

San José, Costa Rica - 17 April 2018

(As prepared for delivery)

Ladies and Gentlemen,

I am delighted to be here in San José to present the OECD Economic Survey of Costa Rica for a second time. I would like to thank Minister Mora, the Central Bank and the Costa Rican authorities for their continued support in the preparation of this report.

We hope that this report that the OECD prepares every two years on the outlook and challenges for the Costa Rican economy will help to promote more resilient, more inclusive and more sustainable growth in Costa Rica. And in particular, we hope it will be useful to the new administration of President Carlos Alvarado.

Costa Rica has made significant progress

Over the last decade, Costa Rica has taken large strides in its economic and social development, underpinned by health services, education and almost universal pensions. Costa Rica is renowned for its ecological footprint, forest protection and abundant biodiversity. Life-expectancy is in line with OECD levels, there is a relatively large middle class and life satisfaction is similar to some OECD countries. Costa Rica has embraced globalisation, reaping its fruits by increasing its exports, including high-tech manufacturing, tourism and professional services. In addition, there has been enhanced foreign direct investment and integration into global value chains.

The start of the OECD accession process in 2015 gave Costa Rica fresh impetus to reform many of its policies to bring them in line with OECD best practices. The accession process is operating as a catalyst for reforms by analysing, scrutinising, evaluating and generating proposals for improving the efficiency of public spending, and the quality of the services provided to citizens. These reforms are first and foremost beneficial for Costa Rica and Costa Ricans.

However, although the overall assessment is positive, there is still plenty to do if it wants to play in the Champions’ League of Best Practices countries, which is where the OECD comes in.

Restoring the sustainability of public finances is a priority

One of Costa Rica's fundamental challenges is its fiscal imbalance, which continues to remain the major threat to the country’s economic stability, growth and living standards.

Back in 2016, when I presented the first Economic Survey of this kind, we alerted Costa Rica about its dangerous fiscal situation. At the time, rating agencies had downgraded the country’s sovereign debt to below investment grade and risk spreads had also risen. For the past 9 years the country has run negative budget and primary balances. The fiscal deficit deteriorated to 6.2% of GDP in 2017, the worst performance in three decades. Half of Costa Rica’s deficit is used to pay interest on debt, which has escalated from about 25% of GDP in 2008 to nearly 50% in 2017. You need to act urgently, capitalizing on the momentum that the new government will enjoy.

Costa Rica needs to spread the fruits of growth more widely

According to the survey, Costa Rica will continue to grow at a sustained pace in the coming years, at around 3.7% in 2018 and 2019. However, this growth must translate into better quality of life for all citizens. Costa Rica needs to spread the fruits of growth more widely. Poverty, income inequality and gender gaps, although lower in comparison with other Latin American countries, are high in comparison to OECD countries. The gender gap in the employment rate is almost twice the OECD average. Income inequality is also high, with the incomes of the wealthiest 20% of households 14 times higher than those of the poorest 20% of households, compared to 5.4 times on average in OECD countries.

As in other Latin American countries, the informal economy has remained at high levels, reaching 40% of the total number of workers. Meanwhile, the rate of labour market participation has decreased. Unemployment is also high, especially among young people.

Strengthening productivity is an imperative

Costa Rican productivity has gained some momentum since the mid-2000s, although the gap with OECD countries is still wide. Labour productivity is just over one third of the OECD average. The issue of productivity, which is key to socioeconomic development, will be at the heart of tomorrow’s meeting of the OECD Global Forum on Productivity that is taking place in San José.

Education also has to remain a political priority to drive inclusive productivity and growth. Costa Rica needs to get more out of its investment in education, however. Spending on education, which represents almost 8% of GDP, is higher than in all OECD countries. But around 30% of students drop out of school before the age of 15, and a third of those who remain in school lack basic skills. Spending on education must be more effective and must be reflected in the outcomes.

If Costa Rica does not address both productivity and inclusiveness challenges, it risks becoming trapped in a “vicious cycle”, whereby individuals with low skills and poor access to opportunities are confined to low productivity, low wages and informal jobs. And this hampers aggregate productivity and further worsens inequality. Setting in motion a “virtuous cycle” will require reforms across several policy areas that present win-win opportunities in terms of equity and productivity improvements.

Main recommendations

Growth alone will not stabilise the debt path and each year of inaction will require additional efforts. The recommendations made in the survey highlight the need to implement a comprehensive fiscal package, with measures to curb expenditures and raise revenues.

The bill to strengthen public finances which has recently been fast tracked in the Legislative Assembly should be swiftly approved. This bill proposes a fiscal adjustment of almost 2% of GDP, of which ¾ comes from increased revenues. While the Ley de Fortalecimento de las Finanzas Públicas also contains a revamped fiscal rule, which will be more effective in containing spending increases than the current one, more needs to be done to control public spending. Without substantial reductions to earmarking, consolidation measures stemming from improved tax collection will not be sufficient. In the medium term, more action to contain public spending will be needed to bring the debt-to-GDP ratio to prudent levels and create more fiscal space to address contingencies.

The survey also recommends measures to combat the high proportion of workers in informal jobs, which is a source of inequality and a drag on productivity. A comprehensive strategy is needed to ensure compliance with labour regulations as well as continued efforts to simplify the complex structure of the minimum wage.

In addition, boosting the productivity of the labour market productivity requires encouraging the entry of competitors. In this respect, barriers to entrepreneurship, antitrust exemptions and state control are an obstacle in many sectors. Our survey recommends improving the governance of state enterprises in accordance with OECD standards, establishing one-stop shops for registering and issuing business licences, speeding up insolvency proceedings, eliminating antitrust exemptions and improving trade facilitation.

With regard to education, resources must be channelled into early childhood education and care to ensure that all children have the opportunity to fully develop their potential. Given that the results of the reforms are strongly influenced by the socio-economic environment, targeted support should be provided to students at risk. The overall approach must be results-oriented: clear and verifiable performance-based objectives must be established to measure the success of educational policies.

Reforms to reduce labour market informality, encourage women’s labour market participation, improve outcomes and equality in education, strengthen competition, lower regulatory burdens, and boost infrastructure provision and quality are priority areas to stimulate inclusive growth. We must also work to build a more innovative business environment. It is important to boost investment in R&D, which accounts for merely 0.6% of GDP, well below the OECD average of 2.4%, as well as encouraging the transfer of knowledge to the private sector.

Ladies and gentlemen,

During the mandate of President Solis, Costa Rica embarked on a major programme of policy reform aimed at progressing towards development. By deepening its ties with the OECD, Costa Rica has deepened its knowledge of best practices in policy making. The momentum needs to be sustained and bold actions taken in order to continue to pave the way to a better and brighter future.

The OECD is working closely with President Alvarado to help his future government boost productivity and achieve more robust and inclusive growth that benefits all Costa Ricans. You can count on us. Thank you.