Costa Rica: History and the Role of Evaluation



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Costa Rica: History and the Role of Evaluation


Costa Rica’s development history demonstrates how the decisions of the past forge the present and the future of a country. Its successful structural change and economic stability was built on the pillars of a market based economy, integration into the world economy, good regulatory institutions, and environmentally sustainable policies. At the same time, it secured a stable democracy, political stability and social cohesion, based on policies aimed at providing a better quality of life for its population in the long run. The development of solid institutions has been accompanied with a judicial system that is based on the rule of law, transparency in public administration, and strong enforcement of the law, including anti-corruption regulations. Costa Rica´s political, economic and social characteristics, combined with its geographical location and its high-skill labor force, make the country a very attractive destination for high-value added foreign direct investment, including high-tech firms.

Costa Rica’s successful development model has been recognized by various international fora and organizations. It tops rankings in democracy, freedom, and environmental protection in Latin America, and constitutes one of the middle-income countries with higher levels of human development. The Republic is one of the most open and competitive countries in the region, mainly because its exports are linked to the high-value added chains. In 2011 it became the fourth country in the world with the largest share of high-tech industrial exports and the first in Latin America.

Costa Rica abolished its armed forces over 60 years ago, relying exclusively on the international community and legal institutions to ensure its safety and territorial integrity. While war was raging en the Central American region in the 1980s, Costa Rica was not only reaping a “peace dividend” that allowed it to build both its educational and national health systems, but also played a crucial role in bringing both peace and democracy to the region when former President Oscar Arias was awarded the Nobel Peace Prize for his role in putting an end to the civil wars that were tearing Central America apart.

Costa Rica is a mixed economy, in which productive activity is undertaken mostly by the private sector, and all exports of products and services originate in the private sector. The exceptions are banking, insurance and telecoms, where there is both public and private participation under an open competition regime; power generation, where there is regulated private participation; and imports and refinery of oil and its derivatives, and water utilities, which are either public or owned by non-profit community organizations.

The rest of the economy is completely market based, with institutional provisions to prevent anti-competitive behavior, while protecting consumers’ rights. Three specialized entities regulate banking, insurance and securities, under a common board of directors, the National Council for the Supervision of Financial Services. The quality of regulation in Costa Rica ranks among the best in the Latin American.

As a result, Costa Rica’s financial sector has not suffered any systematic crisis since the early 1980s. Individual banks have encountered difficulties and have been forced to close their operations in an orderly fashion, under the regulator’s supervision, but not even the financial crisis of 2009 created any systemic pressures for the sector as a whole. Neither solvency nor liquidity has posed dangers for any bank. There is no doubt that the lessons of the 1980s were learnt, and today the country enjoys a sound and solid financial system.

From very early on, but with more intensity since the early 1950s, Costa Rica invested considerable resources in human capital, in the form of education and health. A healthy, well educated, flexible and fast learning work force has proven to be a decisive factor in Costa Rica’s export success and transformation from a commodity exporter to a knowledge intensive one.

Costa Rica made elementary education free, mandatory – for boys and girls - and publicly funded as early as the 19th century and has achieved by now universal enrolment in elementary education, rapidly expanding coverage in secondary education, and high rates of enrollments in higher education. Additionally, enrollment in early childhood programs, negligible a few years ago, has already reached almost 69% of the relevant age group. Even more, in 2011 the Government invested 7% of GDP in public education, and will continue to expand this allocation through the recently approved Constitutional mandate to reach 8% of GDP by 2014, which is high even by developed world standards. The quality of Costa Rica´s educational system is well known internationally. The Global Competitiveness Report (2012), for example, recognizes the quality of Costa Rica’s educational system as an important competitive advantage.

Costa Rica also created in the 1940s a public health system that provides both insurance and medical services. Today the system is universal, mandatory, and delivers a life expectancy that is higher than many Latin American countries and on par with most European countries, while offering every citizen –regardless of income- universal access to high quality health services. Furthermore, infant mortality has been improving and in 2011 was ranked the second lowest rate in Latin America.



Just as important, Costa Rica heavily invested in institutional development well before “building institutions for growth” became commonplace in the development economics literature. Rule of law, an independent judiciary, protection of both human rights and property rights – both strengthened in the 21st century – and political stability have also proven to be a decisive competitive advantage for the Republic.


Economic performance


Costa Rica has been able to achieve average GDP growth of 5.5% annually over the past 60 years, while undergoing several structural changes. Given its relatively small size, Costa Rica always has pursued an export-led development strategy. In the period 1950-1963, Costa Rica’s economic dynamism was led by a model mostly based on agricultural exports. The following period up to 1982 centered on the import substitution strategy that took advantage of the Central American Common Market, but eventually ran out of steam because of limited market size. This period is also characterized by strong public investment in infrastructure, health and education. The final period is characterized by increasing product diversity and destination of exports, but most importantly by lowering trade barriers, allowing exports to the rest of the world to lead economic development.

The record shows that Costa Rica’s policies over such a long period have yielded high growth with a very equitable income distribution. Since 1960, Costa Rica has been the third highest growing economy in Latin America and since 1984 it was the second behind Chile.

Since the early 1950s, Costa Rica´s economic structure has undergone significant changes. For example, agricultural employment represented nearly 57% of total employment in 1950; by 2011 the figure is just 14%, still much higher than the corresponding percentage in many developed countries. In terms of the composition of GDP, the change is even more dramatic, with services accounting for 65.6% of GDP (compared to 40.2% in 1950), and agriculture for 7% (compared to 41% in 1950), while manufacturing industry accounts for 18.3% of GDP and non-manufacturing industry for 9.0% (compared to 13% and 24% in 1950, respectively). Costa Rica has become one of world’s top agricultural exporters both in per capita terms and in terms of exports per hectare of arable land.

Costa Rica took advantage of the international debt crisis of the 1980s to transform its economic model of growth, which has led to highly satisfactory growth rates ever since. Severely impacted by that economic crisis, like many Latin American countries, Costa Rica was able to restore order to its public finances and overcome the external debt crisis at the same time that it jump-started an outward oriented, pro-growth policy, and protected its social institutions, combining universal access programs with targeted programs for its most vulnerable sectors of society. During the 1990s, macroeconomic stability was restored through responsible fiscal and monetary policies, with a pro-growth policy stance, while safeguarding social institutions. As a result, the economy stabilized and poverty levels were reduced dramatically during this decade, after a crisis that resulted in doubling the number of Costa Ricans living in poverty.

Post-crisis fiscal policy resulted in reduced public debt and deficit levels rather quickly. Inflation was also brought under control, but remained in the low double digits until recently. After a large devaluation that became inevitable after the crisis, the country turned very rapidly to a pro-growth strategy with a considerably expansive fiscal policy, even if fiscal expenditures took the form of incentives rather than cash outlays.

Export promotion was a more deliberate effort from the start, but attention was paid to identify and supporting revealed competitive advantage - rather than engaging in the game of picking winners. Hence, when a promotion instrument did not yield the expected results, it was abandoned and replaced by a new one, until a very effective set of policies and instruments was put in place.

In a relatively short period, an economy that exported a few agricultural products to a few markets was transformed into an economy that exports today over 43.000 products and services, many of them quite sophisticated and knowledge-intensive, to more than 150 markets. Today, Costa Rica has one of the most open economies in Latin America, as measured by the sum of exports and imports as a percentage of GDP. While the value of this indicator came down as a result of the 2009 world financial crisis, it has remained Latin America’s highest and it has already rebounded.

The relative weight of the North American market for the country´s exports has fallen from 29.2% to 28.8%, while Europe remains Costa Rica’s second most important market, at around 20% of total exports, in spite of the current economic situation. Central America, Asia, the Caribbean and other markets have also grown in importance, while the participation of South America remains stable. In short, Costa Rica’s portfolio of export destinations is now more balanced and the impact of risks associated with negative developments in any individual region would be lower.

In the manufacturing sector, a similar, if perhaps more dramatic transformation has taken place, as Costa Rica’s main exports have shifted toward more knowledge intensive –not labor intensive- exports and close to 40% of Costa Rica’s exports are associated with participation in global value chains1. Electronics, electrical products, medical devices, automotive and aeronautic and aerospace products are all part of Costa Rica’s export basket. As a result, the share of high-tech exports in total manufactured exports is extremely high in Costa Rica by international standards.

On the services side, Costa Rica has developed a highly successful and innovative tourism industry, which has led the way on eco-tourism first and on the wider concept of sustainable tourism later, and has become since the 1980s the main driver of service exports. Notably, the vast majority of companies in this sector are small and medium-size enterprises, which bring opportunity and employment in some of the country’s less advanced areas. Medical tourism is a high potential new development, and Costa Rica is already second among top destinations offered by medical tourism facilitation companies to United States residents.

During the past years business services of increasing complexity have become more important. These services include customer service, shared financial, accounting, logistics and human resource services, technical support, collections, digital animation, market studies and interactive advertising, plus complex services such as software development, embedded software, process engineering, user experience and automation, and engineering design, amongst others. Business services currently account for almost 50% of total service exports and their contribution to GDP equaled that of agricultural exports for the first time in 2011.

Costa Rica’s stabilization, market integration and export promotion policies have yielded consistently high growth rates over the past thirty years, and even the international financial events of 2008 and 2009 resulted in no more than a mild economic contraction in 2009. The crisis led to a drastic fall in exports and investments that resulted in a small contraction in GDP and reduced employment. Two years later, despite an international stage still marked by adversity, the Republic has grown by more than 4%. Such dynamism led to the creation of nearly 190,000 new jobs in the last year and rates of inflation that show the lowest level of the past forty years.

Foreign investment and exports of goods and services were important driver of this recovery, which can be observed in most productive sectors. For example, exports grew in 2011 by 10.2%, compared with 2010. Foreign direct investment to Costa Rica in 2011 grew by more than 45% over the previous year.

Complementing growth with sustainable policies


Costa Rica’s stability in the past years has been key to growth. After the 1980s the world experienced several global crises, some of them financial, some exchange-rate related, and others fiscal. Through all of them Costa Rica has experience positive economic growth with no exchange rate, financial, balance of payments, fiscal or any other type of crisis. Costa Rica has been an example of stability in the region. Even globally, it is hard to find other countries with a similar record of growth and stability.

The decisions made during the past decades in the environment and social areas have supported an equitable distribution of income. Since early on, Costa Rica pursued policies to protect the environment and undertook social policies that have contributed to achieve one of the best income distributions in Latin America.

Costa Rica has been a pioneer in environmental policy. Since the early 1950s, Costa Rica started to take advantage of its ample network of rivers to generate power through hydroelectric projects that have allowed it to produce over 78% of its electricity from clean, renewable sources. As climate change has made precipitation more variable, Costa Rica is increasingly producing clean energy from other sources, including eolic, biomass, waste-to-energy, geothermal and solar projects.

In the 1970s, Costa Rica started to develop a network of national parks and other protected areas that today comprise approximately 30% of its territory, and pioneered the payment of environmental services to landowners to either agree to preserve the forest on their lands or allow for natural forest regeneration. As a result, Costa Rica has one of the highest land protection rates in the world and has become the first country in Latin America to reverse the deforestation trend, boasting a higher percentage of forest coverage than it did 50 years ago.

Since the early 1950s, Costa Rica´s society has had a social contract that assigns considerable resources to public health and education, to the provision of potable water and energy to everyone, to the protection and enforcement of an expanding array of human and social rights, and a relatively equalitarian income distribution. As a result, structural adjustment has been always complemented by social programs to alleviate the transition costs for those who initially lacked the skills to become fully integrated into the new economic structure, and by educational and training programs aimed at making an increasing proportion of the population become high skill workers.

In an economy based on innovation, the contribution of digital technologies is key. According to the World Economic Forum, Costa Rica is now among the ten nations with the population better prepared to take advantage of digital technology. The Government has made ​​a significant investment for the allocation of 19,000 PCs to students and today 88% of schools and colleges already have some level of connectivity.

The most recent World Economic Forum report confirms the good harvest of the Republic’s public policies to improve its competitiveness. In 2011, Costa Rica improved four positions, from 61 (in 2010) to 57 (out of 144 countries), making it the fifth most competitive country in Latin America. Costa Rica improved in seven of the 12 general categories covering basic requirements, efficiency enhancers and innovation and sophistication factors.



The role of evaluation


While modern societies are fast developing, the role of evaluation and its challenges are changing too. During the past decade, many new institutions, organizations, and companies were founded on the basis of evaluation theories, approaches and methods. As one result of this development, evaluation must be seen as an important issue with an increasing diversity of tasks and efforts.

The increasing importance of global issues (e.g. climate change, financial crises, migration) and joint actions for solving these problems is confronting the existing transnational and national institutions with new challenges. This increased complexity and globalism call for a transnational network of evaluation mechanisms. Countries, political solutions and power interests (of both governments and private groups) need to be integrated and geared toward sustainability. Hence, the functions of evaluation need to be redefined. Evaluation needs to be a strategic instrument for supporting the governance of our society. It delivers not only independently produced scientific results for decision makers, but it should also include the different viewpoints of stakeholders in decision making processes. Consequently, evaluation would help control social programs more effectively and efficiently, justifying as well the usage of common resources for these activities and measures.

The economic rise and increasing political significance of emerging countries (particularly China, India, Brazil and South Africa) are contributing to the complexity of international politics and extending and complicating transnational relationships. A new world order with a multipolar power structure is coming about, with some emerging countries introducing different concepts of the importance of human rights, democratic participation, policy‐making and development aid, etc., into the international discussion. These processes will affect evaluation too. The outcome could be an increased demand for evaluation, e.g. in order to make rational selection decisions in times of limited financial resources, thus demonstrating the impact of policy programs and legitimating their implementation.

If the demand for evaluation increases further in our modern societies which already use this instrument (possibly with changed requirements) and in countries which follow modern development patterns, such as Costa Rica, the need for qualified evaluators will grow too. Thus the demands for quality and quality assurance in the evaluation process will increase.

Furthermore, the citizens of each country deserve that taxes be spent in the most efficient manner, and evaluation plays a key role. The authorities have a powerful instrument to assess the effectiveness of the policies they are implementing and should use it. Many countries measure the efficiency of the policies they implement by an input-based approach, meaning that they only look at the amount of resources they put in the budget for priority activities. However, they should care about the effectiveness of the policies they undertake which implies an output-based approach, where evaluation will play a key role, implies further increases in demand for evaluators.

This increase in demand for evaluation competences at national level, and will be fostered by the general public, that public calling more and more for sustainability oriented policies, fostering the need to integrate economic, social and environmental issues. In this context especially, the role of evaluation as a powerful instrument should be emphasized.


Conclusions


During the past 60 years the Costa Rica has implement policies designed to maintain political stability, promote economic growth, and advance social development. As a result, the country’s economy has grown steadily at an average rate of 5% over the last 60 years, with one of the lowest poverty rates in Latin America at 21.6% of the population, and health services and education have been provided to every citizen. Additionally, the country has experienced uninterrupted democratically elected governments since 1949, while as of 2012, approximately 52% of public expenditures were directed to social services.

After the debt crisis in the early 1980s, Costa Rica transitioned out of the import-substitution growth model into an export-led development model based on international economic integration, export diversification and foreign direct investment. These policies have enabled Costa Rica to diversify its trade portfolio by destination and by products. Today, Costa Rica hosts a number of large international companies, such as Intel, IBM, Proctor & Gamble, UPS and DHL. Costa Rica’s literacy rate, which is the highest in Central America, strong educational system, strategic geographic location, and political, economic and social stability contribute to its global competitiveness in international commerce.

Costa Rica is highly committed to sustainable development, through two main initiatives: (a) becoming a carbon-neutral country by 2021 and (b) maximizing its energy production through renewable sources. Today, 93% and 78% of electricity comes from renewable and hydroelectric sources, respectively, and 25% of the territory in Costa Rica is environmentally protected areas.

Costa Rica has also demonstrated its commitment to building human capital. Since the 19th century, elementary education in Costa Rica has been mandatory and publicly funded. The Constitution mandates that beginning in 2014 a minimum of 8% of GDP be invested in the education system, an increase from the current requirement of 6% of GDP. The Government is also focused on improving secondary and tertiary education in order to enhance the technical skills of the population to match demand for workers in the science and technology fields.

In the past years, Costa Rica was able to lower inflation to less than 6% and face the global financial crisis successfully. Strong growth in from 2000 to 2008 allowed to government to increase tax collections and lower debt, creating the fiscal buffers to face the 2009 global financial crisis. Costa Rica’s inflation rate was 13.9% during 2008, primarily as a result of increases in international commodity prices in the first half of the year. As a result of the slowdown in the Costa Rican economy that occurred following the global financial crisis that began in the fourth quarter of 2008 and the decrease in commodity prices in 2009, the inflation rate declined to 4.0% in 2009. The Central Bank`s target band of 4.0% to 6.0%, has been achieved in the next years, primarily due its actions aimed at improving monetary control, the relative exchange rate stability, and reducing pressures from external source inflationary pressures.

Finally, the Government is implementing a comprehensive fiscal strategy to further increase competitiveness, including: (a) executing strict policies to restrain current expenditures by limiting government hiring and limiting wage increases to match expected inflation; (b) safeguarding public investment and social spending through productive investment projects using innovative financing, and enacting measures to maintain current levels of social expenditure; (c) strengthening the fight against tax evasion, tax elusion and contraband, increasing fiscal transparency and training judges and prosecutors to better understand and fight tax crimes; (d) extending financing options for the Government with the goal of expanding its investor base and lowering borrowing costs; and (e) encouraging a national dialogue with all stakeholders to reach a consensus on ways to strengthen the finances of the public sector.



Government understands that the country requires structural changes in the way we collect and spend resources, but also in the way we design policies. More participatory processes, better consultation with all sectors of society, and, most importantly, improved monitoring and evaluation systems, will be essential. Governments should begin to anticipate evaluation from the very outset. They should set aside budget for rigorous studies and they should assign consequences to those evaluations. The quest for a more equal society is also de quest for a more efficient State. We should redefine public priorities but we should also make sure that those priorities are actually materialized in the decisions we implement.

1 Monge-Ariñano, Francisco (2011): Costa Rica: Trade Opening, FDI Attraction and Global Production Sharing. WTO, Economics Research and Statistics, Division, Staff Working Paper ERSD-2011-09



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