DEVELOPMENT PROGRESS
Costa Rica continues to stand out as a development success story; however, the future trajectory of development outcomes will largely depend on the course taken to spur competitiveness and broaden opportunities in the face of growing income inequality. Despite the political challenges that slowed policy advancement during the last government administration (May 2002 - April 2006), economic growth outstripped projections and social indicators remained strong, largely due to the favorable global economic environment. However, as global growth is expected to slow, petroleum prices remain high, and interest rates rise, Costa Rica will likely face mounting challenges in maintaining growth, reducing poverty, and lowering inequality.  |  |
Costa Rica has enjoyed an average income that is among the highest in the region. However, deteriorating incomes among the bottom fifth of the population since 2000 are undermining poverty reduction efforts, even as the well-off do better. In addition, Costa Rica is burdened with macroeconomic imbalances, including high debt, dollarization and inflation. These factors are a drag on growth and pose economic risks, while poorly maintained and increasingly outmoded infrastructure increase the costs of doing business.
The previous administration was unable to advance its economic agenda, which was to be built up from a fiscal reform package that languished in the Legislative Assembly. The Pacheco administration completed negotiations with the U.S. of the Dominican Republic-Central America Free Trade Agreement (DR-CAFTA) and developed a robust complementary agenda, but these were held back pending passage of the Fiscal Reform. The new administration led by Nobel Prize winner President Oscar Arias, which took office on May 8, 2006, is determined to improve Costa Rica’s competitiveness – including a big push to improve secondary education outcomes – to spur higher economic growth and reduce poverty and inequality, its overall policy objective. Arias’ party, the Partido Liberación Nacional (PLN), ran on a pro-DR-CAFTA platform. In support of this agenda, Arias chose an experienced cabinet, gained the support of minor opposition parties in the legislature, and streamlined administration functions to increase the Government’s policymaking effectiveness and coordination with the Legislative Assembly. The Arias administration views universal secondary education combined with reforms to and investment in infrastructure, telecommunications, and energy as primary drivers for increasing Costa Rica’s competitiveness and creating jobs for poverty reduction. To realize education targets, the President set a goal of dedicating 8 percent of GDP to education. To make this and other needed public expenditures possible, Arias supports the creation of an “appropriate and progressive” tax system to end what he calls “the country’s perennial fiscal crisis”[1]. At the same time, the administration is emphasizing state modernization as a vehicle for its broader policy agenda, including a big push for e-government to improve efficiency and transparency of government institutions. President Arias aims to return Costa Rica to its leading role in the international theater, including making sustainable development and environmental protection foreign policy priorities. Oscar Arias’ speech at his Presidential Inauguration, May 8, 2006. Back to top
WORLS BANK ASSISTANCE TO COSTA RICA The World Bank’s portfolio consists of three active projects with a commitment of US$74 million. These three loans cover the areas of Health, Education and Environmental Management. In June 2006, the Bank’s Board of Directors approved the Mainstreaming of Market Based Instruments for Environmental Management Project for Costa Rica. This project consists of a US$30 million loan for Costa Rica, as well as a US$10 million GEF grant to improve the provision of environmental services. The project aims to enhance sustainable natural resource management and biodiversity conservation in key areas, as well as to ensure its long-term sustainability by focusing on productive landscapes in the buffer zones of protected areas and the biological corridors connecting them.
The current Country Partnership Strategy (CPS) for Costa Rica (FY04-07) was discussed by the Board of Directors in May 2004. In accordance with Government interest, the FY04-FY07 CPS was a highly selective program of lending and analytical and advisory work focused more on knowledge transfer, and less on resource delivery to tackle “second generation” challenges in key sectors. Presidential elections were held in February 2006, and the Bank was invited to engage the new Government in program discussions beginning in June 2006. This dialogue resulted in a slightly revised program based on the requests of the new administration. These changes are reflected in the CPS Progress Report, which was approved by the Board in November, 2006. Additionally, the CPS assessed the progress made by the previous administration (2002-2006) and the Bank in achieving the objectives established in the CPS.
Revised CPS Program 
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PROPOSED ROJECTS Telecom Sector Modernization (US$12-US$15 million): The project will contribute to the government’s strategic objective in the telecommunications sector through the following measures: (i) modernization of the legal, regulatory and institutional framework in the sector; (ii) the introduction of fair competition and private participation in the sector; (iii) the modernization of ICE; and (iv) the promotion of investment in rural and isolated poor areas and vulnerable groups.
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NON-LENDING SERVICES The Bank also conducts detailed analytical work at the country level. As part of an ongoing dialogue between the World Bank and the Government of Costa Rica on economic and social policy, the Bank recently completed the following analytical work: Country Economic Memorandum (CEM): Analyzes the sources of growth and competitiveness, with particular attention to addressing the bottlenecks in infrastructure through greater participation of the private sector. Poverty Assessment: Focuses on recent poverty and inequality trends in Costa Rica and in-depth analysis of why the growth elasticity of poverty was low during 1994-2002. The assessment also analyzes the implication of these trends for migration. Investment Climate Assessment (ICA): Presents a large survey followed by in depth studies of conditions related to the investment and business environment in which firms operate. For more information on World Bank assistance to Costa Rica, including lending breakdown and project reports, see: Proposed projects
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