Honduras swore in its new president Juan Orlando Hernandez on the 27th of January. His chief concern will be tackling the cartel war that has brought the country to its knees. The prognosis is grim: two thirds of the population live in poverty, and the Central American state boasts the highest homicide rate in the world. Meanwhile, neighbouring Costa Rica is cartel-free, politically stable and growing economically, and has recently been named the happiest country in the world. The differences between Costa Rica on the one hand, and its regional neighbours Honduras, Nicaragua, and El Salvador could not be more pronounced.
In both absolute and relative terms, Costa Rica is richer and more egalitarian than the rest of Central America. A cursory look at the economic and social indicators on the World Bank Database is revealing. Per capita GDP in Costa Rica is $11900 per annum, compared with $3700 for El Salvador, $2000 for Honduras, and $1700 for Nicaragua respectively. Panama has a nearly identical per capita GDP but this amount is distributed less equally throughout the population, given that its economy is dominated by the Canal and associated activities. Life expectancy in Costa Rica rivals that of the US, while figures for its neighbours fluctuate but are roughly par for the course for states of their level of development. Costa Rica’s civil service and government are more mature; 38% of its legislators are women, and this percentage has been steady for a decade. Its neighbours do not compare favourably. Remittances represent 1% of Costa Rican GDP, yet represent one sixth of economic output in El Salvador and Honduras. By any standard, Costa Rica is richer, healthier, better educated, and boasts a more balanced economic model than its regional rivals.
How to explain these giant divisions? Costa Rica has no energy resources. Before 1985, the makeup of its exports scarcely differed from those of the region at large—coffee, bananas, and cheap textiles.
Some commentators point to Costa Rica’s decision to abolish its army in 1948; the resulting ‘peace dividend’ was attributable not to the lack of international wars but rather the stability afforded by a democracy invulnerable to army-led coups. This stands in clear contrast to the likes of Honduras, which suffered a coup as recently as 2009. A history of long-term governance in the country has made it the oldest and most stable Latin American democracy. Yet that alone does not explain the divergence of its fortunes comparative to its neighbours.
In John Kay’s 2010 bestseller ‘Obliquity,’ he argued that success and profitability in business is often achieved obliquely; that is to say, profitability is often achieved indirectly, through the prioritisation of higher-level objectives. CEOs who pursue profit directly and for their own sake often fail. This is due to the complexity of the business environment and the role of luck in the system, which often leads individuals to overestimate the level of control they hold over a chaotic system. It seems that this conclusion can be generalised to Costa Rica’s development. A stable political system, a healthy investor environment, and a latently high level of homegrown expertise could only take the state so far.
The single biggest investor in Costa Rica’s history, and the catalyst for the rise and predominance of non-traditional exports in the Latin American country, was a bolt out of the blue in 1996. Intel approached Costa Rica and deemed it suitable for a large-scale assembly plant, which would eventually generate just shy of a billion dollars of accumulated investment. Several large multinational corporations have followed suit, as Costa Rica was able to leverage this flagship investor for more FDI over the last decade, and move towards exporting higher value added products. Costa Rica was especially attractive due to the relatively high levels of local management competence, due to a long-standing focus on education. So while in hindsight lawmakers might be self-congratulatory and speak of attracting high-profile investors, the initial push was very much an exterior initiative from Intel.
Much of Costa Rica’s success in monopolising the ecotourism market has also been achieved obliquely. As with the rise of FDI, serendipitous returns have come from the pursuit of unrelated goals.
Cattle ranching and agricultural exports were the primary drivers of the economy before the debt crisis that struck Latin America in the 1980s. The primary rainforest was being aggressively logged to support this activity. Costa Rica then suffered a fate similar to that of its Latin American neighbours: its debt obligations, brought about by an unfavourable balance of trade, a fall in coffee prices, as well as an expensive set of social programs, forced the government to default on its debts. The imbalance in trade was corrected by the prescriptions that would come to typify IBRD and IMF interactions in Central America—reduced subsidies for agriculture, devaluing the currency, fostering exports through special economic zones—in hindsight dubbed the ‘Washington Consensus’. Despite early misgivings, Costa Rica’s economic update has been a broad success. The 1985 plan that President Luis Monge signed saw the country pioneer land use laws that protected large swathes of rainforest, valuing ecological resources for their intrinsic public goods rather than their short-term exploitation for timber or agriculture. A recognition among Costa Rican lawmakers that the country’s ecological resources held value that exceeded their exploitable economic worth led to a system of payments for ecological services (PES), whereby landowners were paid not to develop their land. In the 90s, Costa Rica developed a reputation as the foremost destination for ecotourism, due to their progressive forestry policy. The country’s support for the environment for its own sake led obliquely to its establishment as the world’s leading destination for ecotourism. Today tourism accounts for roughly 2 billion in revenue a year, and has allowed it to diversify its economy while the slow trudge towards industrialisation continues.
The structural adjustment programs that Central American states agreed to in the 80s have rightfully received widespread criticism for emphasising the importance of macroeconomic indicators at the cost of deepening social divisions and heightening poverty. Cutting social services and the bloated public sector whilst cutting protectionism is bound to increase poverty. Costa Rica was able to recover from these side effects, although 20% of the population does still live under the poverty line. Nevertheless, the World Bank can sincerely claim Costa Rica among one of its success stories in the region. Ecotourism and non-traditional exports have proved more sustainable than their alternatives, and have elevated the state into a middle-income status unreachable to its neighbours in the near future.
The Costa Rican model of development is not exportable in any meaningful sense, however. If anything, the principal moral of their story is that context and the unique contingencies of economic growth are far more useful as explanatory factors than the generalities found in an undergraduate macroeconomics textbook. If coffee and cattle prices hadn’t been low when Costa Rica restructured their economy, the modern reality might have looked different. If Intel had looked elsewhere, Costa Rica would be in a far worse shape today. One truism is worth repeating: good governance and stability at the very least will always foster an attractive environment for investors. Other Central American states would do well to remember this.