Over the last twenty-five years, Costa Rica has been one of the more stable and faster growing economies in Latin America primarily due to past economic reforms. Since 1980, growth in per capita income has averaged 1.2 percent, compared to 0.8 percent for Latin America as a whole, and economic volatility in the country has been about 20 percent lower than the rest of the region. Only about 10 percent o f the country’s population lives on less than US$2 a day, compared to a poverty rate o f about 25 percent region-wide and the literacy rate i s at nearly 96 percent for people ages 15 and above, compared to 86 percent in the rest o f the region. These tangible socio-economic achievements have been accompanied by-and to a large extent can be attributed to-a stable macroeconomic and political environment, strong institutions, relatively open markets, and a well-educated work force. Indeed, strong growth during the 1990s can be largely attributed to reform efforts made since the mid-1980s on trade, public sector consolidation, infiastructure and moves toward liberalization o f the banking system. Costa Rica today continues to benefit from prior reforms, but the economy is at a crossroad and challenges lie ahead if the country is to provide a strong basis for sustainable growth, higher living standards, and poverty reduction in the years to come.

Costa Rica faces several economic policy choices that could have profound implications for the future. In recent years, economic growth has been modest, business innovation and product upgrading has not kept pace with the more dynamic exporting economies of East Asia, and the country’s infiastructure-once the envy o f the region-is in need o f significant investment and upgrading in order to meet the challenges o f a more dynamic and open global economy. While Costa Rica’s growth is consistent with the deterioration in the terms o f trade and slower growth seen across the region over the same period, a more efficient and competitive business environment would likely have led to a stronger rebound in recent years. Since 2001, real GDP growth (including the contribution o f high tech industry) has averaged 4.0 percent, compared to 5.3 percent during the 1990s. At the same time, overall financing for infrastructure investment-traditionally one o f the highest in the region-peaked at over 4 percent o f GDP in 2000, but has steadily declined to under 3 percent. In order to unlock the benefits o f trade, infrastructure needs to be available, reliable and cost effective and the environment for innovation should be strong. Costa Rica’s competitiveness will largely rest on improvements to the quality of investment and ability to spur innovation, which can largely be achieved through efficiency gains and enhancements to the institutional framework to stimulate private investment without necessitating additional spending beyond the current fiscal envelope.