Costa Rica’s economy has made remarkable progress in recent years and is performing well in the face of global challenges, but to safeguard its achievements and continue to improve living standards, the country will need further reforms to strengthen public finances, boost productivity, and improve education outcomes, according to the Organisation for Economic Co-operation and Development, OECD.

The latest OECD Economic Survey of Costa Rica shows that Costa Rica has raised living standards considerably faster than the Latin American average over the past two decades, with a 60% rise in GDP per capita. 

While direct impacts from Russia’s war of aggression against Ukraine are limited, Costa Rica faces challenges from the indirect effects of the war on trade and inflation, they said.  

“A strong and sustained export performance and a targeted fiscal response to covid-19 helped Costa Rica to achieve a rapid economic recovery,” OECD Secretary-General Mathias Cormann said. “Implementing structural reforms to enhance competition, improve the quality of education and make the tax system fairer through phasing out tax exemptions will spur growth and help more Costa Ricans achieve higher living standards.”

Costa Rica joined the OECD in 2021, becoming the Organisation’s 38th member country. Its robust economic recovery was helped by its commitment to trade, which has been key to attracting foreign investment, diversifying exports, and moving up in global value chains. Medical equipment, a resilient high-value-added sector, now represents 35% of goods exports.

The Survey projects Costa Rica’s GDP growth at 2.3% in 2023, reflecting slower global growth and high inflation – which peaked in August at 12.1%. GDP growth should rise to 3.7% in 2024. 

Costa Rica’s fiscal position has improved, with a reduction in the headline deficit to 5% of GDP in 2021, thanks in part to the cap on spending growth from the country’s fiscal rule. It is vital to comply with the medium-term Fiscal Plan for Public Debt at 70% of GDP and an interest rate bill of over 5% of GDP. It foresees a gradual reduction of the deficit through increased spending efficiency and tax revenues.

 

It is also important to continue to implement the fiscal rule and set up the independent fiscal council, they said.

There is also scope to enlarge the tax base and improve the tax mix. Tax revenues are lower than in most OECD countries and tax expenditures are large, amounting to 4% of GDP in 2021. Phasing out the exemptions that benefit more affluent taxpayers would help to increase revenues without increasing rates. Reducing the tax system’s reliance on social security contributions would lower the cost of formal labor and help boost formal job creation in a country where around 45% of workers are in informal jobs and overall unemployment is high.

Weak productivity, and a rapidly aging workforce, will both weigh on future growth. The Costa Rican government has recently taken steps to boost competition in key markets, such as rice and professional services. The Survey recommends following up efforts to boost competition including through lightening Costa Rica’s more burdensome business regulations, reducing barriers to firm entry and ensuring a fully independent and funded competition authority. 

Improving transport infrastructure, by improving road quality and reducing bottlenecks would also help to foster productivity.

Costa Rica combines a dynamic export sector and a domestic sector made up of small local businesses that miss out on the benefits of integrating into the global economy. It is important to better spread trade integration benefits across the country by setting the right conditions for domestic firms to thrive. Costa Rica is a front runner in environmental protection and renewable energy and can harness the global transition to net zero greenhouse gas emissions to further enhance its competitiveness.

 

Improving education, training and women’s participation in the labor market should be a priority to spur growth and reduce income and social inequalities. Education and training are a high priority for Costa Rica, which devotes over 6.5% of its GDP to education and training, one of the highest shares of OECD countries. Yet, outcomes lag advanced economies. Too many Costa Ricans leave school early without the skills to secure a formal job. Improving the efficiency and quality of public spending in education, including through better governance, is crucial to expand social progress and reducing inequalities.

Costa Rica's economic snapshot can be read on the OECD website.

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