Economic Policy Reforms 2019

Costa Rica

Productivity growth is driving convergence towards OECD countries. However, GDP per capita and labour productivity are still only around 30% of those of the upper half of OECD countries.

Income inequality is high relative to OECD countries. Absolute poverty is low by Latin American standards, but almost no improvement has been made since 2010. Costa Rica has established a green trademark and an eco-tourism industry by protecting its abundant biodiversity and developing renewable energy sources. However, environmental pressures from urbanisation are growing.

Costa Rica has accelerated its structural reform momentum recently. Concrete actions taken are the overhaul of labour laws, that came into force in July 2017, the roll-out of a modernised school curriculum,in 2018, modifications to social security contributions aimed at reducing informal employment, a slight reduction in the number of minimum wage categories, and further alignment of corporate governance of state-owned enterprises with OECD guidelines.

Further strengthening competition and reducing non-tariff barriers to trade, improving educational outcomes and tackling the high rate of informal employment remain priorities for boosting inclusive growth.

Growth performance, inequality and environment indicators: Costa Rica

Source: Panel A: OECD, Economic Outlook Database; Panel B: OECD, Income Distribution and National Accounts Databases; International Energy Agency (IEA), Energy Database; Panel C: OECD, National Accounts and Productivity Databases.

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Policy indicators: Costa Rica

Source: Panel A: OECD, PISA and Education Databases; OECD (2018), OECD Economic Surveys: Costa Rica 2018; Panel B: OECD, Trade Facilitation Indicators Database.

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Beyond GDP per capita: Costa Rica

Source: Panel A: OECD, Income Distribution Database, World Bank, World Development Indicators Database and China National Bureau of Statistics; Panel B: OECD, Environment Database.

Note: For the explanation of the sets of indicators above, please go to the metadata annex at the end of this chapter.

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Costa Rica: Going for Growth 2019 priorities

Strengthen competition. Product market regulations are stringent and there are extensive anti-trust exemptions. State control in many sectors is high and barriers to entrepreneurship are large.

• Actions taken: A priority bill to create a new competition authority with greater independence and resources was presented to Congress in April 2017, but no legislation has been adopted. A state‑owned enterprises (SOE) Action Plan to increase adherence to OECD Guidelines on the Corporate Governance of State-Owned Enterprises was launched in 2017. Reviews of twenty-five sectors exempt from competition law are due to be completed by 2020.

• Recommendations: Adopt and implement the bill reinforcing the powers, independence and funding of the competition authority. Continue the implementation of the SOE Action Plan. Continue with the twenty-five sector studies evaluating exemptions from competition and eliminate unjustified anti-trust exemptions. Eliminate regulatory asymmetries between state-owned and private banks and introduce a deposit insurance scheme for all banks. Establish one-stop shops for business registration and licensing.

Enhance the quality and efficiency of the education system. Education spending is high, but outcomes are poor and strongly influenced by socio-economic background.

• Actions taken: The roll-out of a modernised school curriculum in 2018. A small-scale dual education pilot programme in the automotive sector started in 2017. In November 2018, a National Qualifications Framework for Vocational Education and Technical Training was established. This aims to clarify the content of technical education courses, to ensure consistency between the education received and the qualification granted, and to provide clearer information to employers to improve recruitment and skills matching.

• Recommendations: Establish better educational outcomes as the main policy target, instead of a focus on spending, and develop performance indicators. Rebalance education spending towards early childhood and secondary education. Expand publicly-funded early childhood education and care. Strengthen targeted support for at-risk students and improve teacher selection and training. Further develop vocational education in close consultation with employers.

Reduce barriers to formal employment. The share of informal employment is high by OECD standards. Contrary to other Latin American countries, it has not been decreasing.

• Actions taken: A National Strategy to Transition to a Formal Economy was launched in February 2018, with the goal of reducing informal employment to 33% by 2025. In July 2017, the minimum base social security contribution rate for domestic service workers was reduced. A pilot reduction in social security contribution rates for coffee pickers is taking place in 2018. The Labour Procedural Reform Law came into force in July 2017 and includes measures to encourage individuals to report labour regulation breaches. In January 2018, the number of minimum wage rates was reduced from 25 to 23.

• Recommendations: Implement the National Strategy to Transition to a Formal Economy and its associated action plans. Strengthen the enforcement of labour regulations by granting inspectors the right to impose sanctions directly and ensuring that sanctions are large enough to act as a deterrent. Continue moving to a smaller number of minimum wages.

Address transport infrastructure gaps. Transport infrastructure is deficient due to a complex institutional setting and inadequate co-ordination among agencies, leading to low and ineffective spending. Costa Rica has relatively little experience with PPPs and the few projects that have taken place have suffered from long delays. Electricity tariffs are high.

• Actions taken: No action taken.

• Recommendations: Improve co-ordination among the different public-works bodies by clarifying mandates and granting overall control to a single lead agency. Prioritise projects on the basis of cost-benefit analysis. Monitor the implementation of the new PPP regulatory and institutional arrangements introduced in 2016. Clarify the role of the new PPP framework in relation to the existing concessions legislation. Clarify the mandates of the National Concessions Council and the new PPP unit and introduce mechanisms to align and coordinate the work of the two entities. Move from cost-based tariffs for regulated services (energy, transport and water) to methodologies that encourage productivity improvements (such as price- and revenue-cap regulation) to curtail tariff increases.

1Promote domestic firms’ participation in global-value chains. Innovation and technology use is concentrated in free-trade zones. Integration of local firms into the supply chains of multinationals is limited.

• Recommendations: Continue efforts to improve trade facilitation, including by simplifying and harmonising documents, automating and streamlining border procedures, and improving co‑ordination of the relevant national agencies. Create a one-stop shop for government business assistance services.