Global trade, as it is known today, is a phenomenon associated with the dismantling of artificial barriers to the flows of goods, services, capital, people, and, in general, with the liberalization of markets. The revolution in information and communication technologies enhanced the integration of economies.
Globalization is not good or bad.
With its virtues and disadvantages, it is a train that does not stop. While some countries want to get out of it and close their economies, others want to get on or continue the trip.
This country is located in the center of Central America; Costa Rica has been one of the most politically and economically stables countries in all America since its birth in the 19th century. The nation compares favorably to its regional neighbors in areas of human development, and it has used its landscapes of jungles, forests, and coastlines to develop an international reputation for ecotourism.
Costa Rica’s constitution was adopted in 1949 as a multicultural and multiethnic nation. The overwhelming majority of Costa Rica’s population is either white or mestizo, a combination of European and Amerindian descent. Costa Rica’s official language is Spanish and the most commonly practiced religion is Roman Catholicism.
The country has had a functioning democracy since the mid-20th century, and its government features executive, legislative and judicial branches.
Exports of agricultural products such as bananas, coffee, and sugar form the biggest agricultural products of Costa Rica’s economy. Years of political stability and a relatively highly educated workforce have made the country attractive for foreign investment.
In the chart below we can see the Gini Coefficient in which Costa Rica has more inequality of the average of OCDE countries.
GDP per capita has increased considerably in the last 30 years and according to the World Bank classification, the country has reached high average income levels in 2016.
We are going to divide this study into different parts trying to capture the behavior and factors of Costa Rica in a recent trade landscape.
Nations continue to use trade barriers for a variety of reasons: some rational, some not so rational. Fortunately, tariffs generally have been reduced to record lows, and substantial progress has been made on eliminating nontariff barriers. And work continues around the world to further reduce these pesky hurdles to peace and prosperity. (Cateora et al., 2016)
Costa Rica achieved greater economic development in Latin America during the last four years this is very positive scenery to further trade, investments and brand equity as a country.
The USA has 70 times more inhabitants than Costa Rica that are on average 3.6 times richer each one of them to Costa Rican people. Due to this immense difference in size and purchasing capacity (252 times that of the United States), its exports of goods and services account for only 12.6% of GDP while ours is 30.5%.
How could we specialize in the production and have a greater division of labor that increases the efficiency and remuneration of workers, if we renounce globalization?
The answer is simple Costa Rica can not have a protectionist or anti-globalization politics because our big commerce investment is related to US companies like Intel, Amazon, PG and more.
Thanks to this open vision Costa Rica exports of high technology products accounted for 4% in 1996 to nowadays represent the 43%, knowledge-intensive industrial exports accounted for 35.2% of total exports in 2015, growing by 25% in 1994. (Cinde.org, 2018)
Costa Rica is the 77th largest export economy in the world and the 48th most complex economy according to the Economic Complexity Index (ECI). In 2016, Costa Rica exported $12.9B and imported $14.7B, resulting in a negative trade balance of $1.74B. In 2016 the GDP of Costa Rica was $57.4B and its GDP per capita was $16.6k.
The top exports of Costa Rica are Medical Instruments ($2.4B), Bananas ($1.42B), Tropical Fruits ($1.27B), Orthopedic Appliances ($673M) and Semiconductor Devices ($447M), using the 1992 revision of the HS (Harmonized System) classification. Its top imports are Refined Petroleum ($1.11B), Cars ($819M), Packaged Medicaments ($498M), Broadcasting Equipment ($303M) and Computers ($283M). (Atlas.media.mit.edu, 2018)
The top export destinations of Costa Rica are the United States ($4.32B), Belgium-Luxembourg ($589M), Guatemala ($583M), the Netherlands ($568M) and Panama ($524M). The top import origins are the United States ($5.58B), China ($2.07B), Mexico ($1.05B), Guatemala ($421M) and Japan ($409M).
Technology and productivity
The economic growth depends not only on factors of production but also on the incorporation of technology and knowledge into continuously in the production.
In Costa Rica, the three-quarters of the growth rate of the economy is explained by the accumulation of factors and one quarter by increases in total factor productivity (TFP).
In short, the accumulation of physical factors, mainly through FDI and the incorporation of more labor, explain most of Costa Rica’s economic growth during the past 50 years.
Not all innovation needs to be based on formal expenditures on R&D. Importing capital equipment, licensing, worker training, recruitment of more skilled labor, management retooling and efforts to enter (or reposition in) production value chains, exporting new products or old products to new markets, et cetera, can also help to promote innovation. (World Economic Forum, 2018)
R&D expenditure relative to GDP is a classic measure of the innovation effort. Data show that Costa Rica’s position according to this indicator is similar to that of México, Chile, and Uruguay, but very low relative to most technologically oriented countries, which invest between three and eight times more in R&D than Costa Rica does. This last result shows a large gap between most technologically oriented countries and Costa Rica, where the actual level of investment in R&D is five times lower than its optimal level, which should be 2.53 percent of GDP.
According to the World Economic Forum’s Global Competitiveness Report 2013–2014, Costa Rica shows a very serious competitive disadvantage in the quality of overall infrastructure, occupying the 97th position among 144 countries (Table 3.20). This is, without a doubt, a very important area in which Costa Rican authorities must work to facilitate innovation efforts.
About new business owners from the Global Entrepreneurship Monitor (GEM) indicate entrepreneurial activities that have or could generate innovations. Costa Rica is tied with Uruguay for the fourth position among the countries in this index, behind only Chile, Colombia, and Peru. In most Latin American countries, however, many startups are not necessarily associated with market-opportunity innovations, but rather represent survival innovations. (Fundación para el Desarrollo Sostenible, 2004)
A new export from a country or even open the services-products in new markets are indicators of innovation. Costa Rica appears to be the most innovative country in terms of net exports. From 2007 to 2013, the nation managed to export 296 new products, of which only 100 were exported without interruption until 2013 (sustained new exports).
Costa Rica’s per capita emissions of greenhouse gases (GHGs) are well below half of those generated by Chile, which has the lowest per capita emissions among the current OECD member countries.
This is mainly because almost 100% of the electricity comes from renewable sources, which represent half of the total energy supply, but also because the revenues are relatively low. Hydropower accounts for most of the production of electricity, but the capacity to produce wind energy is also significant.
Costa Rica has been very successful in reversing deforestation after the unbridled felling of trees for agricultural and livestock production that took place between the 1950s and 1980s. Forest cover has more than doubled since the low reached in 1987.
This nation is also recognized worldwide for the richness of its biodiversity: although it represents only 0.03% of the world’s land surface, the country hosts 3.6% of the world’s biodiversity. Over the years, the government has strengthened the protection of biodiversity, which underpins Costa Rica’s ecological tourism brand and has contributed to the performance of the agricultural sector.
Urbanization and increased energy need to put pressure on Costa Rica’s natural resources. Due to the limited use of local wood in the construction sector, new houses are often built using cement and metal, which are associated with a high carbon footprint. In general, air quality is very good, although in the case of other environmental indicators it would be useful to have more complete data. The low levels of pollution derived from the small amount of heavy industry and the absence of thermoelectric plants. However, the increasing levels of vehicle acquisition and use have created local problems combined with congestion in San José.
Costa Rica has been consolidated in the last three years as a model of renewable electricity generation, based on the five clean sources of the national matrix: water, geothermal, wind, biomass, and sun. Between January 1, 2014, and December 21, 2017, the country reached and exceeded 1,000 days of 100% clean production, according to data from the Costa Rican Electricity Institute (ICE).
A renewable generation went from meaning 89.68% (9,075.13 GWh) of the national total in 2014 to 99.68% (10,682.68 GWh) in 2017. (Presidencia de la República de Costa Rica, 2018)
In turn, Costa Rica keeps increasing the number of days when the electricity comes 100% from renewable resources. It went from 99 days in 2014 to 299 days in 2015, 271 days in 2016 and 334 days in 2017 (to December 21), to add 1,003 from 2014, which attracted the attention of entities such as the French organization Ren21, which in its report of Renewables 2017-Global Status Report, ranked Costa Rica as the country with the largest share of renewable sources in its electricity matrix. (Ren21, 2017)
Production and skills
Labor productivity growth has been high relative to the OECD average in recent years in fact, from 2007 to 2016, only Ireland has had a faster growth rate. Also, while the vast majority of OECD countries have been experiencing a productivity slowdown, Costa Rica’s labor productivity growth rate has accelerated. Overall, Costa Rica’s labor productivity performance has improved both in comparison with other countries and also over time. (Beverinotti et al., 2014)
Since 1980, Costa Rica has been opening its economy to international trade and competition from the private sector. The economic growth of the last 15 years has been concentrated in sectors of high added value such as information technology, medical devices, and services for companies, including finance and real estate.
By 2015, the structure of the Costa Rican economy had become similar to that of the OECD countries oriented to services. For example, the proportion of GDP attributed to skill-intensive business services (IT, communication, finance, insurance, and real estate) is similar to the OECD average. However, agriculture still accounts for 5% of GDP in Costa Rica, compared to 2.5% in the OECD, on average. (OECD, 2016)
In the last years' employment grew more than in the period 2000–15 in services to companies (5.1 percentage points) and information technology (1.8 percentage points), while the proportion of workers in agriculture decreased by 5 percentage points. Since the global financial crisis, job creation has been minimal and even negative in sectors that generally employ low-skilled workers, such as construction, domestic services, and agriculture. As a result of structural and technological change, demand shifted to skilled workers. However, the provision of skills continues to be directed towards lower levels of educational qualifications. (OECD, 2017)
Costa Rica ranks in 2018 as the fifth-best economy in Latin America and the Caribbean to do business and ranks 61st in the world among 190 countries, according to the Doing Business 2018 (Facility for Doing Business) indicator published the 31st. October 2017 by the World Bank. (La Nación, 2018)
The evolution is not a lot but in this area, Costa Rica presented an advance of 1.23 points. His grade went from 67.90 in Doing Business 2017 to 69.13 in Doing Business 2018.
This rank takes in count many indicators like opening a business (81.65), obtaining electricity (88.21) and access to credit (85). Likewise, it obtained a note of 79.32 in the cross-border trade indicator. Where it has room to improve is in the indicator resolution of insolvency (34.42) and fulfillment of contracts (51.48).
In Costa Rica, the fiscal incentive implemented in 2009 to stimulate the economy as the global crisis developed has not been reversed, despite the fact that there has been a rapid recovery and constant growth since then. The budget deficit exceeded 5% of GDP in the last 5 years. Recent efforts to increase tax collection have not contributed to reducing the budget deficit, due to the wide use of mandatory allocation of funds, the fragmentation of the public sector into autonomous institutions and spending obligations via legislation. As a result, central government debt has shot up from less than 25% of GDP in 2008 to 49% in 2017.
In recommendation with this topic, it is necessary to adopt a comprehensive fiscal reform package that will stabilize the debt to GDP ratio. There is ample scope to collect additional income by expanding the tax base and continuing in the fight against tax evasion and avoidance.
However, the increase in fiscal revenues will not help to contain the deficit, unless the marked allocation of resources to specific destinations is restricted. For this reason, the government has presented structural reforms to the Executive Power in order to regain control over the allocation of resources, including the need to resolve institutional fragmentation. Reforming the salary structure of the public sector, strengthening the budgetary framework with a new fiscal rule that is operational and improving debt management are measures that would help to balance the budget.
According to the Department of Commerce, U.S. exports of Goods and Services to Costa Rica supported an estimated 37 thousand jobs in 2015 (latest data available) (26 thousand supported by goods exports and 11 thousand supported by services exports).
U.S. goods imports from Costa Rica totaled $4.3 billion in 2016, down 3.5% ($156 million) from 2015, but up 12.7% from 2006. U.S. imports from Costa Rica are up 10.0% from 2008 U.S. imports of services to Costa Rica were an estimated $2.6 billion in 2015 12.6% ($290 million) more than 2014. Leading services imports from Costa Rica to the U.S. were in the travel, professional and management services, and telecommunications, computer, and information services sectors. The United States has a services trade deficit of an estimated $820 million with Costa Rica in 2015 (latest data available), down 48.8% from 2014. (Ustr.gov, 2018)
Advice for the country to make better off with globalization
Now more than ever it is necessary to prepare the workforce to face the demanding demands. Among others, the dual work must be consolidated, the teaching of science and languages in public and private schools should be made more comprehensive, the university education should be enhanced, and the largest number of accredited careers should be awarded; innovate in techniques that increase productivity and increase spending on research and development in order to reach the OECD parameters (2.3% of GDP). (OECD, 2017)
With a public debt that is already close to 50% of GDP, Costa Rica is risky testing the threshold above which too high a public debt can harm economic activity and destabilize the economy. The OECD analysis suggests that the threshold above which negative effects on growth may occur could be as low as 30–50% of GDP for emerging economies as they are exposed to reversals of capital flows
In Costa Rica, product market regulations are more restrictive than in any OECD country, except in Turkey, and are also compared unfavorably with other countries in Latin America, including Chile, Colombia, and Mexico, this is very unfortunate because Costa Rica’s economic development model is based on integration with international markets, so it is important to point out that an exporter or local company linked to multinationals is more likely to achieve high levels of productivity than a local company without access to such catalysts.
Another recommendation is to invest more in good education because Costa Rica has a high investment in education but with not so big outputs in patent generation, new businesses or even sophisticated skill labors and as we pointed Costa Rica is in a good productivity period.
Costa Rica is a nation with an economy able to mix its foreign trade initiatives with a successful Foreign Investment attraction policy, which together have led to a wide and fast complex transformation of the economy. But some sectors have not been able to benefit much from such investments. Actually, Costa Rican local firms are characterized by two different levels of performance, as some of them are fully integrated into international markets and the other do not have the capabilities needed for such integration.
Also, it’s necessary to improve access, quality and relevance of tertiary education in Costa Rica. Indicators to measure the success of the education engagement include an increased number of students enrolled in priority areas science, technology and mathematics in four public universities.
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