ABSTRACT
Costa Rica also adopted the Washington Consensus type of reforms, but in a much more gradual and less ‘orthodox’ way than the other countries in the region. It has combined import liberalization with active export promotion. By the 1980s, Costa Rica already had relatively few restrictions on capital inflows. Nonetheless, further liberalization of the capital account and legislative changes easing the entry of maquila industries and establishment of firms in export-processing free zones led to a boom in foreign direct investment in the 1990s. Despite the inflow of foreign capital, the government managed to stop the exchange rate from appreciating, keeping it competitive during most of the 1990s with a managed floating exchange regime. Economic growth has been volatile but on average the economy expanded at an annual growth rate of 4.3 per cent during 1985–2001. Exports have been the engine of Costa Rica’s growth performance, especially non-traditional exports supported by export promotion policies (tax credit certificates, export-processing free zones and maquilas) and, since the late 1990s, exports by the Intel plant in the country. Growth in employment lagged behind gross domestic product growth, but was still substantially higher than growth of the labour force. Most new jobs were created in the formal sector. Real labour income increased, but due to growing demand for skilled workers, labour income inequality increased significantly. Income inequality also increased at the household level. The incidence of absolute poverty has remained stable, however, since the mid-1990s, thanks to an increase in employment and average income. Simulations with the computable general equilibrium model for Costa Rica indicate that trade liberalization tends to lead to increasing inequality of income, given the combined effect of significantly higher labour income in the most dynamic economic sectors, especially those intensive in the use of skilled workers, and a reduction in labour incomes in agriculture. Simulations also show, however, that because of the generally positive outcomes for employment, trade liberalization seems to have generated positive, though small, effects towards poverty reduction. Poverty also falls under the scenario of further trade integration through the Free Trade Area of the Americas and a worldwide World Trade Organization agreement. Not all workers will benefit from trade integration, however. Those in agriculture, in particular, would face falling employment and real incomes.
