Compared with its Central American neighbors, Costa Rica has achieved a high standard of living, with a per capita income of over U.S. $5,000, a rate of economic growth over the last decade averaging 6%, and an unemployment rate normally under 5%. Costa Rica's economic advantage is due to the historical success of its development policies, the nation´s lack of an army diverting funds from development to military ends, the reigning stable democracy, its well-educated and hard-working population, and its location in Central America with easy access to North and South American markets and direct ocean access to the European and Asian Continents.
Costa Rica is a country with a population of only 4.5 million people and a small geographical area, much of it consisting of mountains with limited agricultural potential. Nevertheless, the country compares well on all economic and social indices to the most advanced Latin American countries. While Costa Rica does not have the industrial might of Brazil, Argentina, Chile, or Mexico, its development policies have been successful in diversification away from traditional agricultural exports like coffee and bananas to industrial activity in electronics, pharmaceuticals and medical hardware, to a vital service sector in call centers and other outsourcing activity and software development, and Costa Rica enjoys a flourishing tourism industry that takes advantage of the country´s tropical marvels. The nation is at or near the top of the list for Latin America on indicators such as poverty level, life expectancy, and educational and health services. There is less inequality in income than other countries in the hemisphere. Costa Rica´s environmental policies are notably among the most advanced in the world. As a matter of public service since the 1950s, state enterprises have extended potable water, electric and telephone services, and serviceable roads to almost the entire population. A national health care system of high quality and low cost covers almost all Costa Ricans and the many foreigners who settle here.
Due to these factors, Costa Rica ranked first in the latest Happy Planet Index (http://www.happyplanetindex.org/), which "combines environmental impact with human well-being to measure the environmental efficiency with which, country by country, people live long and happy lives".
This is not to say that Costa Rica is a paradise without real problems. The economy is in fact integrated into the global economy in a highly dependent position, vulnerable to international events over which national economic actors have little or no control. (See our comments below on the impact of the 2008-2009 international financial crisis and economic recession). Income inequality and poverty levels are rising, resulting in increased levels of social problems and crime. Real incomes of working and middle class people are declining. The historical extension of public services by state institutions and enterprises are now being curtailed. The infrastructure necessary to national development, such as roads, water systems and electrical grids, is being ignored, while the government is extending contracts to international conglomerates for port, airport, and other facilities which were previously the responsibility of government and oriented toward community development.
Costa Rica has been moving away from its historical record of successful government directed development programs toward what is conventionally termed the policies of neo-liberalism. These policies, promulgated to the extreme in most of Latin America beginning in the 1970s, involved opening the economy to integrate into the global system, an emphasis on exporting natural resource based products, dismantling government regulatory and development agencies, the privatization of public enterprises, the repression of unions and flexibilization of labor, and other measures that had very serious effects. In Chile and Argentina these policies were imposed by fierce military dictatorship, and in Argentina lead directly to economic collapse in 2000 and 2001. In the region as a whole, the policies imposed resulted in greatly increased poverty, income inequality, and social discontent, creating the conditions for recent successful political movement away from neo-liberalism.
While in Costa Rica this policy shift began in the 1980s it did not reach the extremes of most of the region and only became pronounced under President Oscar Arias administration from 2006 to 2010. This is in sharp contrast to most of the rest of Latin America which is now experiencing a decided move away from neo-liberalism toward more autonomous development and social democracy. In Venezuela, Bolivia, and Ecuador this takes the more radical form of “Socialism for the 21st Century” and in Argentina, Brazil, Chile, Uruguay, and Paraguay new forms of Social Democracy. In El Salvador, Guatemala, and Nicaragua former revolutionaries of the 1980s have been elected to form more left-leaning governments moving away from class dictatorship, military interventions, and neo-liberalism. This tendency was recently reversed in Honduras with the May 2009 military coup there. At present, together with Colombia, Peru, and Panama, Costa Rica is going against the hemisphere trend.
In 2008-2009 the Costa Rica legislature enacted enabling legislation for CAFTA, the Central American Free Trade Agreement with the United States. This is a commercial treaty that enshrines the principles of neo-liberalism. The free trade agreement, originally negotiated in 2006, met with widespread public opposition. Social forces opposed to the agreement included trade unions, farmers associations, environmentalists, university counsels, many professional associations, all progressive political parties and movements, high school and college teachers and students, religious groups, and other sectors of the public grouped into a loose association called the Patriotic Alliance. Opponents held massive protests on the streets and kept vigils in front of the Legislature. Active supporters of CAFTA were business associations and the media, controlled by business interests, and conservative political parties, which have a majority in the Legislature. The outcome was decided by a plebiscite with a narrow Yes vote in October 2008, gained according to opponents by a campaign of fear and intimidation.
In Costa Rica there are two competing visions of the future, one defined by the Free Trade Agreement and the policies it requires and the other a resurgence of the vision of a Costa Rica based on principles of social justice, social democracy, and autonomous development. With presidential and legislative elections scheduled for February 2010 it appears likely that President Arias successor will be Laura Chinchilla of the National Liberation Party who pledges to continue to work toward Arias´s vision of the future.
Costa Rica is a small economy in a vast global system. As such, the country is in a highly dependent position, subject to the decisions and conditionality of international institutions and to adverse events over which the country has no control. The international financial crisis originating in the United States and the subsequent rapid decline into deep recession on a world scale has had its repercussions here in the tropical periphery.
During the last quarter of 2008 the financial debacle abroad precipitated a virtual closure of credit in Costa Rica. However Costa Rican financial institutions had no history of unregulated banking excesses that brought collapse in the United States. No banks or financial institutions failed and in early 2009 credit became available, at least to the most qualified borrowers. The survival of financial institutions in Costa Rica is in good part attributable to the regulatory system of the Central Bank and the Superintendence of Financial Institutions. To stabilize the banking system the Central Bank upped reserve requirements and the government injected a modest amount of liquidity into the banking system. There were no ¨bubbles¨ attributable to a predatory and unregulated financial sector in real estate values, consumer debt, or stock indices.
The lack of credit, especially from international sources, and current domestic tightened lending policies have had a considerable impact on business financing and particularly on real estate investments. This is notably the case in the Pacific Coast boom areas where a number of mega-projects for luxury hotels and expensive homes have been suspended. Ironically, these projects were oriented to the international jet set that benefited from the bubbles in the foreign financial superstructure. Environmentalists and local people have been highly critical of these developments. More generally, since much of the financing for development projects in Costa Rica comes from abroad, investor uncertainty combined with the drying up of foreign funding has caused a decline in real estate investment of all types in the country. Some of the many foreigners dreaming of retiring to the tropics, or younger people seeking new frontiers, have placed plans on hold since they have lost equity, or can’t sell, their properties in North America or Europe or find financing. However, local credit for home or building site purchase and for smaller scale projects is available, although the interest rate is high. Some Sellers offer owner-financing on favorable terms to acquire a home, land, or business.
Tourism, a principal pillar of the Costa Rican economy that has enjoyed steady growth over the last decade, is expected to experience a small decline in 2009. This tends to place a temporary hold on hotel construction and the flourishing eco-tourism business—new construction permits declined 60% in the first quarter of 2009—although tourism is likely to rebound once the world economy begins to recover.
World recession has impinged in painful ways on the Costa Rican economy. The high rate of economic growth, 6 to 8% over the last decade, is expected to fall into the negative of about 2% in 2009. The unemployment rate has increased from 4.5% in 2007 to over 6% in 2009. Employment has fallen with a first quarter 2009 production decline, compared to Q1 2008, in manufacturing of 16%, 10% in hotels, and 6% in construction and agriculture. Exports in all these sectors have declined as consumers in the industrial countries tighten their belts. The recession here, moderate in comparison with many countries, will exacerbate the trend already in motion in the prior decade toward increased inequality in income distribution, with inevitable consequences for poverty and crime rates.
The major real estate agencies in Costa Rica cater to foreigners relocating to this tropical paradise. Americans, Canadians, Europeans, Colombians, and Venezuelans immigrate here in large numbers. All Costa Rican real estate agencies that we are in contract with report a decline since mid-2008 in foreign visitors seeking residence relocation or a business investment. Real estate sales in general are down from the previous steady rate, although middle and upper income Costa Ricans are still buying homes. With more difficult financing and recession, and declining real estate values on a world scale, one could reasonably expect downward pressure on real estate values in Costa Rica. Market prices here are difficult to determine as there is no reliable data base. Although there is a glut of offerings on the market, pricing seems to be quite inelastic in relation to these pressures. In terms of availability of all classes of property at least, it is definitely a Buyer’s Market.
Is buying a home or starting a business in Costa Rica a wise and secure investment? At this time it is not possible to give a certain answer to that question. A qualified Yes is reasonable. A more definitive answer depends in good part whether the international economy slides from recession into depression or recovers. If the world economy sinks further, many who have already lost up to half their retirement funds and equity in their homes in the industrial countries will not have the funds to start anew in another country. Since the Costa Rica economy is so inextricably linked to global events, people here will also suffer and become less able to afford a new home or to undertake an entrepreneurial venture. If the world economy recovers with only adjustments to more realistic values in the previously bubble inflated real estate and stock markets, then Costa Rica will likely be a recipient of this liquidity. We hope that we are not being too optimistic in expecting that the worst will not come to pass.