Costa Rica differed from other Spanish colonies in that it never developed a system of large land holdings. Agricultural production was limited to the size of families, and the distribution of land and other resources was relatively equal. Independence from Spain came without violence in 1821. After joining the Mexican Empire briefly in 1822, the Central American colonies— Guatemala, Honduras, El Salvador, Nicaragua, and Costa Rica—created a federated republic in 1823, which collapsed in 1829. Costa Rica is a democratic republic organized under the 1949 constitution. The president, 2 vice-presidents, and single-chamber congress (the Legislative Assembly) are directly elected for 4-year terms. The Supreme Court justices are elected by the Legislative Assembly for 8-year terms.
Liberal political reforms in the late 1800s facilitated the expansion of democratic institutions and processes. The middle class of Costa Rica flourished along with the development of commerce, services, and manufacturing. As economic conditions worsened through the Great Depression of the 1930s, the role of the state increased, and the citizens of Costa Rica demanded economic reform. Much of the country's character was defined in the 1950s through the abolition of the army, the nationalization of the main industries, and the construction of a social welfare system .
The main political forces in the country since the introduction of the social welfare system have been the Social Democrats (Liberación Nacional) and the Christian Democrats (Unidad Social Cristiana). Both Social and Christian Democrats have pursued an active involvement of the state in economic affairs. As a result, Costa Rica is a country in which the public sector plays a major role. The wave of privatization that has shaken most Latin American countries has not been significant in Costa Rica. The state continues to control key industries such as electricity, telecommunications, banking, insurance, health, oil refinery, and alcohol distillation. This situation has resulted more from public opposition to privatization than from government policy. As a result, the state has focused on administrative reforms that attempt to improve the efficiency of public companies.
Although there has been an increase in the level of participation of the private sector , the state is still in control. Banking is no longer a state monopoly , but the 3 largest banks are state owned. Medicine is also practiced privately, but the largest and most modern hospitals are owned and operated by the government's social security system. A law passed in 2000 allows the handling of oldage pensions by private companies, but the majority of pensions are still under state control.
The central government has a significant impact on the economy with its expenditures totaling over 30 percent of GDP in 1998. This is much higher than the level of expenditures in Canada (24.7 percent of GDP), the United States (21 percent) or the East Asian countries (10.4 percent), but is lower than the level in France (46.6 percent), Italy (44.6 percent), the U.K. (37.9 percent), Spain (36.1 percent), or Germany (32.9 percent). According to Central Bank figures (1999), the main sources of government revenue were import duties (42 percent), income taxes (22 percent), sales taxes (16 percent), and consumption taxes (5 percent).
Since tax revenues are lower than 23 percent of GDP, the government finances its expenditures through debt. This creates a deficit that in 1996 amounted to 4 percent of GDP and, although it was lowered to levels closer to 3 percent during 1998, has resurged during the past 2 years. Public debt has risen as a result, to a point where it represents more than the total of goods and services produced by the country, and thus represents a major source of economic instability. Interest payments on the debt absorb up to a third of the national budget, restricting the amount of funds that can be devoted to building schools, roads, and hospitals. The country's Central Bank has a limited ability to control the money supply and to fight inflation.
In spite of these negative trends, the government devotes over 5 percent of GDP to education and almost 7 percent of GDP to health. This compares well to the Latin American averages of expenditure in education and health, at 4.5 percent and 3.1 percent, respectively, and is comparable to international levels. The result of this policy has been an educated, skilled workforce.