Costa Rica - Overview of economy

Costa Rica has a mixed economy in which both public and private companies play an important role. The government has supported socialist policies for decades. The emphasis in the economy has been placed on the governmental promotion of human development and welfare, while still allowing private companies to operate in some industries. These efforts were intensified in the 1950s, when political and social forces supported a method of economic development (planned growth) that was heavily dependent upon the state.

The biggest indication of the government's socialist ideology was its purchasing of goods and companies that were in trouble. When the state bought an interest in key industries such as banking, electricity, telecommunications, insurance, medicine, and education during the second half of the 1900s, the economy underwent nationalization . Under government control, Costa Rica achieved a relatively high standard of living.

However, this strategy relied on deficit spending, which meant that the Costa Rican government was spending money that it did not have. Even worse, the government also financially supported import substitution industrialization (ISI) policies during the 1960s and 1970s. Such policies were supposed to make the country more self-sufficient in industrial production, but ISI policies put Costa Rica deeper in debt.

The worldwide recession of the 1980s helped cause a Latin American debt crisis. Facing a devalued currency and an inflation rate of over 100 percent, Costa Rica experienced the most severe recession since the 1930s. The country was forced to make economic reforms and to liberalize the economy. This process began with a currency stabilization program (to stop inflation ), and led to a structural adjustment program (SAP) that tried to reduce government intervention in the economy.

The government sold many companies in which it had invested, but state control of the main industries persisted, with the exception of the banking industry. The people of Costa Rica preferred a state-run economy, and chose to finance their debt through the attraction of foreign direct investment . Public funds continued to be directed towards the manufacture and export of industrial goods. In spite of an increase in taxes, deficit spending continued, and the public debt grew. Interest payments on this debt absorbed a third of public accounts annually, making the economy unstable. Foreign direct investment helped the growth of local supply networks and supported export growth. The Intel Corporation opened a microprocessing plant in Costa Rica in 1998. The country has also been successful at promoting tourism, which has become an important source of foreign investment, has increased employment, and has generated substantial exchange revenue.

High levels of gross domestic product (GDP) growth achieved during 1998 and 1999—around 8 percent—proved unsustainable in 2000 when the demand for microprocessors plummeted. GDP growth during 2000 fell to a mere 1.5 percent. Economic policy focused on controlling inflation (at a historically low 10 percent), but the fiscal deficit remained above 4 percent, limiting economic growth.