Written by Andre Ugalde Tchinov - Winchester College
Rodrigo Cubero, PhD Oxford (Economics), is a leading expert on Costa Rica’s economic transformation, having written his thesis on the impact of capital inflows on the Costa Rican economy. As the former president of Costa Rica’s Central Bank, Cubero shares his insights on how the country has navigated its economic evolution, including the challenges and opportunities it faces today.
A Unique Economic Transition
Figure 1 - Wikipedia
Costa Rica has undergone a significant economic transformation, shifting from an agricultural base to a high-tech economy, largely driven by foreign direct investment (FDI). After the 1980s, the country became a hub for transnational corporations including Intel, Amazon, and Procter & Gamble, which set up regional bases due to the country’s favourable business environment. In this interview, Cubero and I discuss Costa Rica’s foundations, its model of economic growth, and the challenges ahead.
The Foundation
Costa Rica’s early adoption of the rule of law in 1821 set it apart from many other Latin American countries. Its commitment to constitutional governance has been a cornerstone of the country’s economic model. Cubero highlights another key decision: the abolition of the military in 1948, which allowed resources to be diverted to education and healthcare, crucial sectors for human capital development, (Runde, Daniel F.) “By investing in public services, Costa Rica has built a solid foundation for economic growth,” says Cubero. Today, Costa Rica boasts universal public education and healthcare, creating a strong foundation of skilled and bilingual workers, which has been key to attracting high-tech industries.
Pre-1980s Economic Model
Like many Latin American nations, Costa Rica initially relied on agricultural exports, particularly coffee and bananas. Under the import substitution industrialization (ISI) framework, the country sought to protect domestic industries through tariffs, looking to boost industrial growth and reduce import reliance. This model was followed to try to develop and converge Costa Rica’s living standards with the economies of the developed world. However, as Cubero explains, "the ISI model led to inefficiencies and growing debt." This culminated in the Latin American debt crisis of the 1980s (Perry, G., & Garcia, E. 2017), forcing Costa Rica to consider a new economic strategy.
The Shift - Export-Led Growth
The 1980s marked a critical turning point for Costa Rica. In response to the debt crisis, the country shifted toward export-led growth. By establishing Free Trade Zones (TMF Group, 2022) and offering tax incentives, Costa Rica attracted multinational corporations, particularly in the high-tech sector. Cubero finds similarities to the Asian Tigers: “Like South Korea and Taiwan, Costa Rica adopted policies that encouraged industrialization and trade openness, focusing on exports to drive growth.” With companies like Intel setting up operations, Costa Rica diversified its economy, significantly boosting its exports and growing to become a regional hub for technology.
Duality
Rodrigo Cubero explains the Balassa-Samuelson effect (higher productivity leading to higher wages) in Costa Rica's economy, highlighting the divide it has created. He points out that as productivity increased in the high-tech sectors, it led to higher wages and rapid economic growth in those areas. However, this success came demand-pull inflation, where rising wages in dynamic sectors drove up overall prices. "While parts of the economy were booming," Cubero remarks, "this created an economic duality, as only certain sectors were benefiting from wage increases."
This duality became more pronounced due to Dutch disease. Cubero illustrates that the Balassa-Samuelson effect did not benefit those outside the FDI-driven sectors, such as workers lacking bilingual skills or advanced education. As FDI poured in, the Costa Rican colón experienced a “rapid, historical appreciation from CRC 678 in June 2022 to CRC 486.5: USD in April 2024” (FrontierView), making traditional exports like agriculture less competitive. "While a fraction of the workforce saw their wages rise, the rest of the population had to cope with increasing living costs brought on by higher wages and currency appreciation," Cubero explains, illustrating Costa Rica’s succumbing to Dutch Disease. QUOTE. Indeed, Costa Rica has become one of the most unequal nations in Central America, with a Gini coefficient of 0.49 (Statista 2023), placing it below Mexico and Chile.
Figure 2 - Costa Rica Law
Steps forward
Cubero emphasizes the importance of inclusive policies to reduce Costa Rica's growing inequality. “To bridge the gap between the high-tech, FDI-driven sectors and the rest of the economy, we need targeted strategies,” he explains. Cubero advocates for improving vocational training and education, particularly for workers in low-productivity sectors like agriculture, to boost their competitiveness and earning potential. Information provision is a key issue, and it seems that only the transnational corporations have access to the specialised information providing services. Contrastingly, domestic firms do not, thereby creating significant barriers to entry for domestic Costa Rican businesses. “We must strengthen the linkages between multinational corporations and local firms,” Cubero notes, pointing out that collaboration could help transfer knowledge and skills from high-tech industries to the domestic economy. Progressive taxation and expanding conditional cash transfer programs are key inequality-reducing tools that Cubero suggests to ensure that the benefits of growth reach the most vulnerable populations.
Sources:
Runde, Daniel F., et al. “Education and Human Capital Development.” Innovation-Led Economic Growth: Transforming Tomorrow’s Developing Economies through Technology and Innovation, Center for Strategic and International Studies (CSIS), 2017, pp. 1–7.
Perry, G., & Garcia, E. (2017). The Influence of Multilateral Development Institutions on Latin American Development Strategies. In G. Carbonnier, H. Campodónico, & S. T. Vázquez (Eds.), Alternative Pathways to Sustainable Development: Lessons from Latin America (pp. 199–232). Brill.
TMF Group, (2022) Costa Rica’s Free Trade Zone Regime: an attractive market? https://www.tmf-group.com/en/news-insights/articles/company-formation-administration/costa-rica-free-trade-zone/
Frontier View (2024) Strong Colon Appreciation Poses Risk to Economy https://frontierview.com/insights/strong-colon-appreciation-poses-risks-to-economy/#:~:text=Overview,a%20role%20in%20the%20appreciation.
Statista (2023) Income distribution inequality based on Gini coefficient in Costa Rica from 2011 to 2023 https://www.statista.com/statistics/982982/income-distribution-gini-coefficient-costa-rica/#:~:text=The%20Gini%20Index%20score%20in,within%20a%20group%20or%20society.