Costa Rica

(a) Economist Intelligence Unit estimates. (b) Actual.

Background: Costa Rica has historically benefited from political stability. A short civil war in 1949 opened the way for institutional reforms that led to a long period of rapid economic growth, resulting in significant improvements in human development. Since a debt crisis in the early 1980s, however, performance has been mixed as Costa Rica has struggled to define a new economic model. The country has succeeded in attracting high-tech investment, but income inequality and social tension have grown. An economic reform agenda has been subject to severe delays.
Political structure: The president, elected for a four-year mandate by universal adult suffrage, is the head of state. The executive is relatively weak in relation to the 57-member unicameral Legislative Assembly. Re-election for the president and deputies is permitted, but not consecutively. A political system historically dominated by the social democratic Partido Liberacion Nacional (PLN) and the right-wing Partido Unidad Social Cristiana (PUSC) has become more fragmented in the last few years, with other parties now wielding the balance of power, compounding difficulties of governability. The Supreme Court is at the apex of the judicial system, with its magistrates appointed by Congress for an eight-year term.
Policy issues: The approval of a fiscal reform and the ratification of the Dominican Republic-Central American Free-Trade Agreement (DR-CAFTA) are the government’s main priorities. However, public opposition to the treaty (mainly to the liberalisation of state-controlled monopolies that it will entail) is intense and there is a high risk that it will be rejected in the referendum. The approval of a fiscal reform has become urgent, in order to reduce the huge public debt burden, which makes the economy vulnerable to shocks and constrains monetary policy.
Taxation: The overall level of taxation is relatively low. Tax evasion remains high, but has been reduced, contributing to growth in tax collection. The tax system is dominated by the income tax, the sales tax and other indirect taxes. A long-delayed project for fiscal reform seeks to overhaul existing taxes and create new ones to broaden the taxpayer base.
Foreign trade: Export value growth has been rapid, owing to the dynamism of free-trade zones (FTZs) and strong demand for microprocessors from China, and has recently started to outpace expansion in the import bill (which is underpinned by the high import propensity of firms operating in the FTZs). This has led the trade deficit to narrow as a percentage of GDP, but not by enough to offset a growing income deficit, leading to a widening current-account deficit.