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Costa Rica 19. September 2017
BTI 2006
Ranking 2006
Ländergutachten 2006

Status Index
(Democracy: 9,40/ Market economy: 8,7)
8,70 Management Index 6,63
HDI 0,838 Population 4.0 mn
GDP p. c. ($, PPP) 9,606 Population growth 2,5 % 1)
Unemployment rate N/A Women in Parliament 35,1 %
UN Education Index 0,87 Poverty 2,0 % 2)
    Gini-Index 46,5 (2000)
Source: UNDP: Human Development Report 2005. Figures for 2003 - if not indicated otherwise. 1) Annual growth between 1975 and 2003. 2) Population living below $ 1 (1990-2003).


A. Executive summary

Costa Ricans were shocked when, in the fall of 2004, the policetook two former presidents, Rafael Angel Calderón Fournier (1994-1998)and Miguel Angel Rodríguez (1998-2002), to jail. A crusading GeneralAttorney Francisco Dall’Anese consigned both to preventative detentionwhile his office investigated charges that each received bribes fromprivate contractors. Both cases involve influence peddling amongmembers of the supervisory boards of the Costa Rican Social SecurityInstitute (CCSS) and the Costa Rican Institute for Electricity (ICE),two of the most powerful autonomous institutes in the public sector.

The scandals are the tip of an iceberg of political discontent andinstitutional failures. They come in the aftermath of the 2002 generalelections, when the Party of National Liberation (PLN) and the Party ofSocial Christian Unity (PUSC) went from obtaining an average of 92% ofthe vote in the previous five elections to 63% in 2002. In the wake ofthese watershed elections, the average effective number of legislativeparties jumped to 3.7 from 2.5 in the previous five decades.

The administration of PUSC President Pacheco (2002-2006) showed amixed performance in order to tackle these new problems of Costa Rica’spolitical system. The collapse of the two-party system and the failureof checks and balances (or horizontal accountability) are going toforce changes in a political model that lasted from the late 1950suntil the late 1990s. Amazingly high voter turnout rates (an average of80% of the eligible population) will not return until the politicalclass cleans up its act and builds the political consensus to raise lowtax rates and/or cut expenditures to deal with a public debt that isnow 60% of the annual GDP. The productivity of executive andlegislative relations is deteriorating as the party system fragmentsand differences between legislative factions become more pronounced.While repeated interaction between a relatively small number of partiesmay have facilitated the agreements necessary to develop long-termdevelopment policies, partisan familiarity also led to collusion andthe violation of the public interest, as the recent scandals reveal.

In retrospect, the Costa Rican political system had glaringweaknesses as well as notable strengths. Along with typically favorablecross-national comparisons, a dearth of systematic research made it alltoo easy to focus on the good aspects. If left unattended, currentproblems could lay the basis for a gradual political implosion.Reasonable levels of economic growth and the resilience of thepolitical system should permit a political recovery, one that isunlikely to be quick or painless. The less than pessimistic scenariomight result in politicians and citizens figuring out how to createeffective institutional safeguards against corruption andinfluence-peddling, some of the most serious afflictions affectingpolitical systems in less developed and unequal societies.



B. History and characteristics of transformation


Costa Rica has been a democracy for nearly 50 years. It also has hada competitive political system for more than 100 years. Before the1950s, hotly contested elections often involved the use of violence andfraud and included virtually the entire male population. After decadesof election-related conflict and even violence, politicians began, in1946, to remove the executive and legislative from electionadministration. The 1949 Constituent Assembly made an independent courtsystem - the Supreme Tribunal of Elections - responsible for theorganization of elections and the tally of the vote. Since the late1950s (when the losers of the 1948 civil war returned from exile andbegan to compete for elected offices once again), Costa Ricans havecompeted for power in a “full democracy”, that is, a political systemwhere all political forces can compete for elected offices and wherethe entire adult population is entitled to vote. Since 1958, when theincumbent PLN reluctantly conceded defeat in the presidential electionsof this year, executives and legislators have come to power inquadrennially scheduled elections, renown for their openness andfairness.

After the United States, Costa Rica has had the longest, continuousperiod of stable presidential democracy. Standoffs between theexecutive and the legislature have never been the backdrop for apresidential assault on the political system. The Costa Rican politicalsystem uses an innovative constitutional design, one that devolvesimportant policymaking responsibilities to autonomous institutions, andone whose budgets the executive does not propose and the legislaturedoes not approve. Health care, pensions, monetary policy and electoralgovernance are among the policy areas not under the direct purview ofthe two elected branches of government. The constitution calls for anindependent judiciary that, since the establishment of theConstitutional Chamber in 1989, has become an assertive interpreter ofthe powers of, and boundaries between, the branches of government. The1949 constitution also proscribes the existence of a standing army, thecapstone of a decades-long trend of under-funding the military.

While Costa Rica is not rich, there is no doubt that a country withfew natural resources has made much of itself in the 20th century. In1990 U.S. dollars, its GDP per capita grew from $702 in 1940 to $3,227in 2003. In comparative historical terms, the Costa Rican GDP percapita was virtually at the mean of the 15 smallest Latin Americancountries in 1950. Fifty years later, its GDP per capita was 50% higherthan that of the other 14 economies. In PPP terms, the Costa Rica GDPper capita in 2002 is $8,840, the sixth highest of 19 Latin Americancountries.

During the second half of the 20th century, development transformedthe Costa Rican economy from an exporter of coffee and bananas - whichaccounted for three-fourths of exports in 1960 - to one exporting awide variety of non-traditional agricultural products, lightmanufactures, and even sophisticated computer goods. By 1993, coffeeand bananas accounted for only one-third of all exports as atransnational coalition of exporters, state officials, and UnitedStates Agency for International Development (USAID) officials promotedthe development of non-traditional exports in the wake of the 1982 debtdefault.

The 1982 economic collapse had a severe impact on Costa Rica’sdevelopment. During the Carazo presidency (1978-1982), the public debtsoared from 56.2% in 1980 to 125.2% in 1981 of the annual GDP as aresult, of the government’s refusal to unfix the exchange rate in thecontext of burgeoning trade and fiscal deficits. Paying off a massiveforeign debt required adopting export-led development that neutralizedthe skirmishes between a left-oriented PLN and its right-of-centeradversaries. Between the early 1960s and early 1980s, the governmentpursued import-substitution industrialization (ISI) policies thatencouraged the growth of light manufacturing and gradually turned thedomestic terms of trade against agriculture, historically the economy’sengine of economic growth.

Costa Rica is now a major tourist destination; foreign exchange fromtourism equaled roughly one-fifth of total export earnings by 2000.Between 1960 and 1994, the economy has been open: exports and importshave averaged 66.4% of the GDP. Even during the heyday of ISI between1965 and 1982, exports to the Central American Common Market (CACM),all of which erected trade barriers with the rest of the world,constituted less than 18.57% of its international trade.



C. Assessment


1. Democracy


Costa Rica has had a stable presidential democracy since the late1950s. The system is based on the 1949 Constitution, one forged in theaftermath of the 1948 civil war. The president and the legislature areelected in separate ballots, but serve concurrent four-year terms.Costa Rica is one of three countries that prohibit the consecutivere-election of executives and legislators.



1.1. Stateness


There is no doubt that the state exercises sovereignty throughout the national territory.
Thereare no violent movements operating in the country, even though CostaRica is a shipment point for illegal drugs from Colombia to Mexico andthe United States. Drug-related violence, however, is not an issue inCosta Rica.
There is separation between church and state, and relations between the two are without conflict.

People of Afro-Caribbean descent tend to live in Limón Province andare treated as citizens, even though they are the target of socialdiscrimination.
The national constitution is universally accepted.The state is present throughout the national territory in the form of adifferentiated administrative structure, which is often regarded asoverly bureaucratic and inefficient.



1.2. Political participation


From1949 to 2002, turnout at elections has involved more than 77 % of theadult population. Suffrage rights are universal. Not only haveelections been free and fair, but they also have been close andhard-fought. Between 1953 and 1978, the PLN (a quasi-hegemonic partyduring this period) only lost a presidential election when enough ofits rivals organized a coalition and a joint ticket. After debt defaultduring the United Coalition’s term (UC, PUSC’s predecessor), thegovernment of President Rodrigo Carazo (1978-1982), the PLN, won twoelections in a row before losing in elections between 1990 and 2002.His margin of victory averaged less than 3.07 %.

There are no military or other hidden veto players in Costa Rica,although the U.S. Embassy and multilateral institutions do provide somefinal limits on what the government can do internationally and what itcan accomplish. Both Presidents

José Figueres (1953-1958, 1970-194) and Oscar Arias (1986-1990) hadconflicted relations with Washington, D.C., stemming from differentconceptions of security threats in Central America.

Subject to checks and balances in the constitution, electedofficials can build sufficient political consensus to enact new laws orchange old ones. There are no relevant restrictions on the freedom ofthe press, or on the freedoms of association and assembly.



1.3. Rule of law


Basic rule of law isunproblematic in Costa Rica. Citizens generally obey laws and publicofficials typically follow them. Though justice is slow, the judiciaryis generally respected and there are no credible reports of judgestaking money in exchange for favorable rulings on criminal cases.Citizens tend to rank the judiciary (especially the ConstitutionalChamber established in 1989) and the Ombudsman highly. There are alsono significant restrictions on civil rights and human rights as of thiswriting.

Compared with some transformation countries, the separation ofpowers and the system of checks and balances seems to be working. Theabsence of systematic studies, however, makes it hard to determine howwell the political system actually polices itself. Several trendssuggest that horizontal accountability is less effective than it mightbe. Firstly, the formation of a two-party system by the late 1970smeant that two partisan players began to colonize autonomousinstitutions. Since the 1980s, the erosion of policy differencesbetween the two parties has meant that they had as many reasons tocollude as to compete in politics. Secondly, party loyalists’appointments to decentralized agency presidencies and supervisoryboards are rarely discussed in public, a topic about which citizensknow very little. Interviews suggest that these positions went to a mixof middle-level and upper-level politicians (former deputies,ambassadors, mayors, etcetera), campaign contributors, and members ofthe president’s coterie. Positions as presidents or on boards ofdirectors went to individuals with no relevant experience, no interestin supervising bureaucratically complex agencies, or worse, realconflicts of interest.

Yet, a narrow focus on whether citizens generally follow the laws ofthe land misses key issues that suggest Costa Rica does not quite rankalongside the law-abiding countries of the world. Though Costa Ricagets high marks for the competitiveness of its elections, it does notreceive such a high rating for the openness of its public sector. The2004 Transparency International Experts Corruption Perception Indexplaces Costa Rica in 41st of 146 countries, below Chile (20th) andUruguay (28th). Or in other words, though Costa Rica is perceived farbetter than most of the transformation countries, its score of around4.5 in the Corruption Perception Index (on a scale from zero to 10)indicates that the country is performing at a mediocre level inabsolute terms.

What is clear is that Costa Ricans believe their public officialsare corrupt. The 1994 political culture survey indicates that 75% ofCosta Ricans believe that corruption is somewhat or very generalizedamong public officials (the highest rate among five Central Americancountries and Colombia, Mexico, and Panama), even though only 15% ofrespondents report experiencing one act of corruption per year, tyingwith Colombia for the lowest rate among the these countries.

The recent scandals of former presidents also involve the boards oftwo important autonomous institutions. Former ICE president JoséAntonio Lobo (and confidant of jailed President Rodríguez), a formerdeputy (on two occasions) and executive minister, received a financialgift from a French telecommunications firm because ICE holds a monopolyon telecommunications and electricity contracts. Even though there hasbeen no criticism of the contract for cell phones that Alcatel won (allof which the Comptroller must endorse), nevertheless observers andcitizens wonder how many ICE contracts generated such gifts. Similarly,the stink surrounding the CCSS, which buys a huge amount ofpharmaceuticals and medical supplies, and the Calderón clan also raisesquestions about institutional oversight. Though the CCSS is exempt fromLaw 4/3 (the law regulating appointments to the supervisory boards ofautonomous institutions), its more independent board also did not stopit from betraying the public interest.

There are therefore good reasons to wonder how effective horizontalaccountability is in Costa Rica. Though no one raises doubts about theprofessionalism of the Comptroller General, many criticize the agencyfor taking a narrow, bookkeeping view of its functions. In theory, theComptroller is the legislature’s delegate for overseeing the executiveand the decentralized sector. Yet, neither the Assembly nor itsauxiliary institution has a reputation for being aggressive watchdogsof the public interest. Recent research by Kevin Casas-Zamora shows howneither the Comptroller General nor the Supreme Tribunal of Electionshave really verified the accuracy of the receipts that parties submitfor reimbursement. Parties do little more than dump boxes of receiptsat the Comptroller, which does not apparently sanction parties forsloppy and incomplete bookkeeping. In addition, while the powerfulelite has started to be prosecuted (and the Legislative Assemblyenacted a new anti-corruption law in October 2004), few individualshave had to pay a price for questionable or corrupt behavior.



1.4. Institutional stability


Thestability of Costa Rica’s democratic institutions has suffered fromscandals in recent years, though they still work effectively andefficiently. Despite the implosion of the two-party system, the CostaRican political system retains the support of its citizens.

There is no support for authoritarian solutions; according toLatinobarometro surveys between 1996 and 2004, less than 9% ofrespondents believe a dictatorship is preferable to democracy. Thepolitical system is not deaf to changes in popular preferences, aninstitutional asset.

The ultimately failed attempt to democratize the candidate selectionprocess in the PLN and PUSC is part of a broader effort to deepencitizen participation—perhaps the single most important andunderstudied development in contemporary Costa Rican politics. Bothparties have supported municipal decentralization, communityparticipation, and have tinkered with the legislative selectionprocess. Moreover, the laws for electing the Legislative Assembly allowdisgruntled citizens to give third parties a chance to rectifypolitical problems.



1.5. Political and social integration


Itis doubtful that a stable and socially rooted party system exists inCosta Rica since the 2002 elections, given that the electorate turneddecisively against the two-party system. Previously in 1998,non-Marxist third parties obtained 25% of the legislative vote. In2002, the Citizen Action Party (PAC), a breakaway faction of the PLNled by Ottón Solís, took 25% of the legislative vote. The PAC alsoforced the PLN candidate Rolando Araya and PUSC candidate Abel Pachecointo a runoff, which Pacheco won. For the first time since 1936, noparty met the 40% threshold for winning the presidency (in the end,deputies completed the reform of the constitution in this year to awardthe presidency to the candidate with the largest number of votes and atleast 40% of the valid vote). In total, parties not aligned with thePLN or the PUSC obtained 37% of the congressional vote and an equalshare of legislative seats in 2002.

Dissatisfaction with the party establishment initially expresseditself in three ways. First, Mitchell Seligson noted a decline insupport levels for their political system—as distinct from support fordemocracy in the abstract—in Costa Rica. On a scale from one (low) toseven (high), support for the political system peaked at 6.7 in 1983before falling steadily and reaching 5.5 in 1999. Second, turnout fellto an average of 69% of the adult population in 1998 and 2002, downfrom an average of 81.12% between 1962 (when PRN leaders returned fromexile) and 1994. Third, citizens openly expressed disdain for thetwo-party system by increasingly identifying themselves as independentssince the 1990s. The average percentage of independent voters increasedfrom a low of 17.1% of respondents during Oscar Arias’s government(1986-1990) to a high of 30.8% in Rodríguez’s government (figures areaverages of CID Gallup quarterly polls). After the 2002 elections, theeffective number of legislative parties jumped to 3.7 from an averageof 2.5 in the previous five decades. In December 2004, only 9% and 5%of survey respondents said they wanted the PLN and PUSC to win the 2006elections, respectively.

There is a relatively dense network of associations and interestgroups that articulate and moderate conflicting social interests. Inthe private sector, however, the level of labor union organization islow. There is also a robust but heterogeneous network of autonomous,self-organized groups, societies and organizations.

So far, support for democracy has not declined. Latinobarometersurveys indicate that support for democracy oscillates around 75% inCosta Rica between 1996 and 2004. Political polarization also has notaccompanied the rise of multi-party politics. There have been noconfrontations between President Pacheco and the Assembly, even thoughcooperation between both branches of government has not been high.Ideological confrontations have been minimal, largely because there isno large, anti-neoliberal rejectionist party in Costa Rica (even if thePAC does have critics of structural adjustment and the Washingtonconsensus). Multiparty politics, however, is associated with a declinein the enactment of laws (see section on governance).



2. Market economy


2.1. Level of socioeconomic development


Development indices suggest that there are disadvantagedminorities, but that they are not ethnically separate or geographicallyisolated from the rest of the population. Approximately one-fifth ofthe population lives below the national poverty line (though onlyone-tenth lives on less than $2 a day). Yet, economic development andsocial programs have significantly reduced the number of poor. ThePrograma del Estado de la Nación points out that the share ofhouseholds living in poverty has declined from 50% in 1960 to 18% in2003. The World Bank points out that Gini coefficients remained below0.45 during the 1990s, one of the lowest rates of inequality in LatinAmerica.



2.2. Organization of the market and competition


CostaRica has always had a vibrant, export-oriented economy based oncompetitive markets. There are clear rules of the game for stablefree-market competition. The extent of government intervention in theeconomy is still comparatively large. Many state-owned companies areactive in the banking, insurance and other financial sectors, as wellas in many non-financial sectors, including telecommunications, energy,and the postal service. Some state companies hold a monopoly position.

During the heyday of import substitution industrialization betweenthe early 1960s and early 1980s, trade barriers did lead to thegeneration of sizable rents for domestic manufacturers. Created in1972, CODESA (Costa Rican Development Corporation) played an activerole in the economy. They were registered as private corporations whoseprincipal shareholders are the Council of Government. CODESA is exemptfrom the multitude of constitutional articles and laws promulgatedsince the late 1960s to gain control of the decentralized state sector(and registered as a private company whose shareholders were thepresident and his cabinet). CODESA blossomed into an organization thatchanneled state funds into panoply of infrequently profitable companieslike ALCORSA (the Cotton Corporation) and FERTICA (the Costa RicanFertilizer Corporation). CODESA grew to such inefficient proportionsthat it consumed about 18% of domestic credit or 50% of all the creditavailable to the public sector in 1984 and generated millions ofcolónes’ worth of debt by the 1990s.

Since the 1982 debt default, trade has been liberalized. Averagetariffs dropped from 53% 1985 to 3.3% by 1999. No government has talkedabout closing up what is, and has been, an open economy. ThoughPresident Pacheco refuses to send the Central American Free TradeAgreement (CAFTA) to the Assembly for approval, there are few doubtsthat the next government (elections are due to be held in February2006) will act to ensure approval of the free trade bill.

Since 1995, Costa Rica’s autonomous bank regulation agency has beencalled the General Superintendence of Financial Institutions (SUGEF).Its effectiveness is unclear. In addition, the Bank of Costa Rica andthe National Bank of Costa Rica are the two largest banks in thecountry. Conversations with informed individuals suggest that the banksabuse their market position by granting loans to politically connectedclients, many of whom do not pay their loans back.



2.3. Stability of currency and prices


Economicpolicymaking has become gradually more flexible since 1982. After thegovernment was forced to let the colón float, a relatively independentCentral Bank developed a crawling peg system as a compromise between afixed rate and letting it float. It should be noted that there are nosystematic studies of the Central Bank’s independence. Well-informedindividuals, however, claim that the bank is relatively independent ofthe elected branches of government. It is also part of thedecentralized state sector and therefore is not directly accountable toelected officials.

The state has always run a fiscal deficit. Between 1966 and 1992,the government ran an average fiscal deficit of -2.9%. Mostdecentralized sector agencies, such as the CCSS and the WaterCommission, charge for their services, which lessens the impact of sucha low tax take. Altogether, the public sector obtained around 17% ofthe GDP in taxes and fees between 1980 and 2000; the central governmentgot about 4% less during this period in the form of taxes. Only prudentmonetary policy and positive inflows on the capital account kept thepublic-debt-to-GDP ratio to an average of 23.6% between 1961 and 1980,substantially below the 60% ceiling recommended for developingeconomies. Between 1979 and 1991, it ballooned to an average of 96% ofthe GDP before falling below 60% in 1992.

The central government is unable to collect more than 12% to 13% ofthe GDP in taxes. Yet, it spends more than 15% of the GDP. In response,the central government has met this shortfall by cutting the size ofthe state payroll and public investment. It has also contracted a largeinternal as well as foreign debt, one that by 2003 was close to 60% ofthe annual GDP. As a share of the GDP, an average of 28.77% of allpublic debt between 1984 and 2003 has been internal. The cost of notraising taxes and rationalizing expenditures is high: an average of32.53% of central state expenditures goes to pay the interest on thepublic debt.

One of the results of chronic fiscal deficits is a long-terminflation rate of 10%. High oil prices in 2004 led to increases in thecost of goods and services. As a result, inflation slightly increasedin 2004.



2.4. Private property


Property rights and the regulation of property acquisitionare appropriately defined, but there are occasionally problems withexercising these rights in accordance with the law. Privatization hasbeen quite limited. The National Insurance Institute (INS), a stateinsurance monopoly, is still an autonomous institute.Telecommunications and electricity remain in the hands of another suchinstitute, the Costa Rican Institute for Electricity (ICE). Yet, thereare two important changes worth mentioning. First, while two of thelargest banks are state-owned (a third was closed in 1995), state bankslost their monopoly on dollar and colón bank deposits with the 1984Banking Law reform. These, along with other changes, may explain whythe financial component of Eduardo Lora’s Index of Structural Reformregisters an increase from 0.210 in 1985 to 0.727 in 1999. Second, thegovernment did close CODESA, the publicly funded and loss-makingdevelopment corporation.



2.5. Welfare regime


The Costa Ricanwelfare state has extensive health care programs and old-age pensions.According to the Programa del Estado de la Nación, an average of 68% ofthe salaried and unsalaried members of the economically activepopulation and their families had health care coverage between 1990 and2003. Between 2000 and 2003, the share of salaried personnel with ahealth care plan has fallen to 62%. During this more recent period,unsalaried workers have rapidly lost health care coverage. It hasfallen from 75.33 to 37.76% between 2000 and 2003. Since 1990, anaverage of 62% of salaried workers have an old-age pension while onlyan average of 12.66% of unsalaried workers are saving for an old-agepension. There are no provisions for unemployment benefits, the onlymajor welfare state program not available in Costa Rica.

The public sector also has several major anti-poverty programs,including the Children's Hospital, the Mixed Institute of SocialAssistance, the National Institute of Housing and Urban Issues, and theNational Ward for the Blind. The share of households in poverty droppedfrom 50% to 21% by the end of the twentieth century. Illiteracy ofindividuals 12 years or older has gone from 21% to 5% in the sameperiod. The infant mortality rate has fallen from 90 to 10 per 1000live births in this 50-year period. Family income inequality has fallenfrom 0.5 in 1961 to 0.43 in 1988. As a result, of these programs and asteady rate of economic growth, the UNDP Human Development Index (HDI)has risen from 0.55 in 1960 to 0.820 in 2002.



2.6. Economic performance


Real GDPgrew annually by an average of 4.1% between 1983 and 1998 beforestagnating between 1999 and 2001. In 2002, it picked up again, reaching6.5% in 2003 and 4.2% in 2004. Economists Andrés Rodríguez and ManriqueSáenz suggest that growth has been lower than expected since the debtcrisis because of a decline in productivity, which they trace to a fallin public investment since the

1982 debt default. While budget deficits as well as the deficitin the current account balance are still high, the economy as a wholeperformed quite well, especially concerning foreign debt, investment,and unemployment.



2.7. Sustainability


Environmentalconcerns are an important issue in Costa Rica, though public policy hasnot always protected it. Roughly one-quarter of the country’s territoryis under protection, a considerable portion of it in the form of natureparks and reserves. A portion of the protected areas, approximately 5%to 8% of the national territory, is in private hands. In 2001, publicpressure led the abandonment of offshore oil production. Costa Rica iscommitted to high-quality eco-tourism and, as a result, the governmentbanned strip mining in a 2002 decree.

Environmentalists criticize the planned opening of the electricityand telecommunications markets. The proposed liberalization would haveallowed, among other things, private companies with appropriate permitsto construct hydroelectric facilities in national parks. Principles ofsustainability are increasingly taken into account in the economic useof forests. Over-fishing threatens marine resources, especially on thePacific coast. A new fishing law to replace the existing one datingfrom 1948 is urgently needed. Water supply and sewage disposal in thecapital city, neglected for many years, are in need of modernizationand they were put up for competitive bidding as private concessions inApril 2002.

Expenditures on education and health are high, in part becausespending on schools has been higher than on guns since the early 20thcentury (and something that the proscription of the army helped tomaintain since 1948). The country has a comprehensive education system,one that includes primary and secondary schools, and universities. TheU.S. Chamber of Commerce claims that Costa Rica also has the highestlabor productivity rate in Latin America. Minimum wage is high byCentral American standards, and the work force is expensive. To setitself apart from the low-wage countries in the region, the governmentemphasizes development in high-tech areas.



3. Management


3.1. Level of difficulty


Thedifficulties that PUSC President Pacheco faced between 2003 and late2004 are not just a product of unfortunately becoming president just asthe two-party system fell apart. Policymaking has gradually become moredifficult since the 1990s because the political system now includesmore veto players. The establishment of the Constitutional Chamber in1989 brought a new veto player to politics, one that can prevent billsfrom becoming laws while they proceed through the legislative process.In 1989, the executive lost its long-term ability to legislate bysticking “atypical norms” in the ordinary budget, an unconstitutionalaction that allowed the executive to overturn constitutional rights andexisting laws without formal discussion. The gradual increase in thenumber of independent voters means that both the executive and thelegislature must continuously court an increasingly skeptical publicopinion. These developments have compounded the effects of term limitson policymaking; nonconsecutive re-election makes legislatorsuninterested in supporting the president. The decay of presidentialpower begins after the middle-point of a term, or by 2004 in thecurrent electoral cycle.

Other factors contribute, to a lesser or greater extent, in makinggovernance difficult. The fact that 20% of households live in povertyleads to anti-poverty initiatives that fight for a share of the publicsector’s limited resources. A decrease in public investment -particularly evident in the road network which, according to thePrograma del Estado de la Nación, has not really increased since 1993 -lowers economic growth, thereby limits the government’s tax receipts,and thus prevents standards of living from rising more quickly.

Over the last five decades of stable democracy, an autonomous civilsociety has developed in Costa Rica. However, from time to time civilsociety organizations also make governance more difficult. Even thoughthe PLN and the PUSC (which jointly held the presidency and anoverwhelming majority in the Assembly) had agreed to open uptelecommunications to private sector investment in March 2000, massivesocial protests terminated the government’s bipartisan plans to open uptelecommunications to private sector investment (the “combo”) withinone month. Both before and after these protests, governments had tonegotiate with relevant sectors of society and listen to public opinionmuch more carefully than it had been used to doing.

There are no ethnic cleavages interacting with partisan differencesto magnify the stakes of political conflict. Nor does the absence of aneducated labor force limit economic development and thus complicategovernance.



3.2. Steering capability


The PUSCPresident Pacheco’s administration (2002-206) does seem to hold a setof policy priorities that are consistent with a social market economy.There is, in fact, little disagreement among key policy and partisanactors that the state should invest in human and physical capital topromote market-based development and to minimize social inequality.Both are long-term concerns of Costa Rican state and society.

Despite consensus on ultimate goals, the Pacheco administration hasbeen unable to solve the chronic fiscal deficit. Nor has it been ableto obtain legislative approval for CAFTA, a free-trade agreementimportant for obtaining continued access to the U.S. market. Pachecohas also done little to advance the broader agenda of institutionalreform that political renewal requires.

In part, the inability to make progress on these goals is a productof a decline in steering capability. One of the sources of decline isinstitutional. Unfortunately for Pacheco and for the country, thesteering capability of the state has reached a 10-year low because ofthe increase in the number of veto players. Pacheco is the firstpresident in more than 40 years to have a legislative contingent below45% of all Assembly seats. The government only began its four-year termwith the support of 33% of all legislative seats in 2002.

The Pacheco administration’s political management strategy isanother source of steering capability decline, with effects on theimplementation of needed reforms. To its critics, the Pachecoadministration has also proven not to be an adroit manager of politicalconflicts. In the face of public sector work stoppages in the middle of2004, the president agreed to raise public sector salaries above therate wanted by his minister of finance. As a result, Finance MinisterAlberto Dent resigned on September 1, 2004, which provoked several morecabinet resignations. As the government’s fiscal reform law becamebogged down in the Assembly, the government would not submit CAFTA tothe legislature until deputies approved the government’s fiscal reformpackage. This political ploy did not produce the desired resultsbetween 2003 and 2004 (and, as of April 2005, it has still notsucceeded to date). The president’s handling of these key bills with adivided legislature generates speculation about the administration’scapacity to set priorities and to develop effective politicalstrategies to turn bills into laws.

The ability to learn, for instance to develop innovative policies incase of failed measures, which had been an advantage of Costa Rica’spolitical system for years, also seems to have suffered from the recentturbulences. Yet, the agenda of necessary political reforms, necessaryto restore confidence in the political system, are long and complex.Without political renewal, elected officials will find it impossible tobuild the consensus to raise taxes and therefore to obtain more fundsfor investments in human and physical capital. An innovative politicalarchitecture, one that delegates central state functions toinstitutions largely independent of the executive and legislativebranches of government, appears to have succumbed to bipartisannepotism and bureaucratic inertia.

While the Comptroller General is constitutionally empowered toreview the budgets of all public agencies, a concentration on narrowbook balancing inhibits horizontal accountability. That theComptroller’s governing body, the Legislative Assembly, has notencouraged the Comptroller to oversee the behavior of the executive orof the decentralized sector impairs accountability and transparency.

Appointment of directors and board of directors of autonomousinstitutions remains shrouded in mystery. Though parties choosepresidential candidates in primaries (a process that started in the1970s), presidential candidates and factional leaders fill closed-listPR lists for the Legislative Assembly, without consulting very muchwith the regular members. The half-hearted efforts to reform thelegislative candidate selection process, which started in the 1990s,have not produced legislative contingents more responsive to citizendemands. While Assembly deliberations often have gotten front-pagebilling in newspapers, the virtual absence of roll-call votes limitsaccountability and transparency. Committee hearings do not get muchmedia attention and budget committee hearings are not constitutionallyrequired to make their deliberations public.



3.3. Resource efficiency


It is hardto judge the resource efficiency of the political system during thereview period. It is clear that something like a bureaucratic apparatuscontinues to exist in Costa Rica, one that has many of the tools andsome of the resources necessary for policymaking success.

The use of the available economic and human resources by thegovernment has not been optimal. The efficient use of economicresources suffered from the inability to manage the budget deficit, thefailed tax reform, and the salary rise for public employees. At thebureaucratic level, a civil service law dating from 1951 is a source ofrigidity. Interviews with policymakers reveal that it is virtuallyimpossible to dismiss state personnel for lack of performance or forcorruption. They allege that salaries for lower-level administrativestaff are higher than in the private sector while salaries forprofessional workers are lower. There are concerns about more qualifiedstaff leaving the state sector. The not-high 2004 TransparencyInternational index for Costa Rica (ranked 41st of 146 countries)supports the claim that many observers make that cumbersomebureaucratic procedures permit public servants to extract “bribes” fromcitizens before performing basic public services. While no one claimsthat bribery is widespread in Costa Rica, inefficiency does createpossibilities for rent seeking. It also contributes to low publicregard for the political system, even though few citizens report beingthe victims of corrupt acts.

During the last two years, the Pacheco government often failed tosuccessfully coordinate conflicting interests and objectives;presidential leadership and capability for integration were sometimestoo weak. For example, in the face of the public sector work stoppagesin 2004, the President agreed to the salary rise, which in the end ledto the resignation of the Finance Minister and several other cabinetmembers.

Renewing a bankrupt party system and improving the effectiveness ofchecks and balances are tasks complex enough to keep public officialsbusy for years. Though most of the integrity mechanisms are in place inCosta Rica, the Pacheco administration has done little to combatcorruption other than allocating additional funds for the GeneralAttorney and approving the anti-corruption legislation the Assemblyapproved in late 2004.

Unfortunately, the current administration must also repair the shipof state as it is becoming dangerously low on fuel. Though the publicsector no longer has a huge external debt with which to contend, it isrunning short of funds just when it needs them to rebuild itself. Thedramatic rise in the public debt is an outcome that severely restrictsthe government’s ability to deploy resources in order to confrontpolitical and economic challenges.



3.4. Consensus-building


Between 2003and late 2004, the well-established consensus in favor of the country’ssocial market economy, and its export-oriented growth model, continuesto exist. However, debate in Costa Rica does revolve around ways toincrease state revenues, clean up its political system, and deependemocracy.

Deep-seated conflicts do not exist. Elected officials and citizenstherefore do not have to worry about thwarting political polarization.Indeed, the political system is a product of numerous negotiations overpast conflicts, mostly about the distribution of state power. Thepolitical system promotes stability and compromise, even if thedisintegration of the two-party system and other structural changes isslowing down policymaking.

Critics of the consensus, however, do exist. On the left, factionswithin the Party of Citizen Action (PAC), which holds 25% of Assemblyseats, raise questions about neo-liberalism. Public sector labor unionsexpress opposition to CAFTA. On the right, only one party, the Party ofthe Libertarian Movement (PLM), openly questions the “social” side ofthis project.

Building consensus around raising taxes (or cutting publicexpenditures) and political renewal is not easy. For example, PresidentPacheco asked a committee of distinguished economists to produce areport on fiscal reform, one that initially welcomed the participationof civil society, but later dropped many of their proposals. Issued in2003, the fiscal reform bill remains frozen in the Assembly. Until thegovernment and the citizenry agree to increase tax collection rates andpay for public services, increasingly voters will have their policydemands unfulfilled and yet another set of reasons to punish parties atthe polls.

Strengthening social capital is not a priority for electedofficials, even though they do not try to hinder its development. Forthe reasons presented previously, elected officials cannot excluderelevant social organizations from policymakers. It is true that thehighly centralized parties probably never went out of their way to workwith unions, community groups or NGOs before the 1980s.

Reconciling perpetrators and victims of human rights abuses is not an issue in Costa Rica.



3.5. International cooperation


Thepolitical leadership does work with its international counterparts andorganizations. Especially since 1982, governments have signedagreements with the Agency for International Development (USAID), theInter-American Development Bank (IADB) and the World Bank. In economicaffairs, Costa Rican administrations have been willing to work with,and borrow ideas from, international institutions. Though internationalcounterparts express frustration with the slowness of lawmaking (acomplaint no doubt likely to increase as a result of the collapse ofthe two-party system), the Costa Rican government has fulfilledinternational agreements and is therefore credible and reliable.

However there seems to be less interest in borrowing ideas forpolitical renewal. The judiciary has signed agreements with both theInter-American Development Bank and the World Bank for modernization.Yet, there are not a lot of policy specialists or researchers familiarwith international debates and academic findings on transparency andaccountability. This lack will make political change that much moredifficult to enact.

Costa Rican governments have always been reluctant to get tooinvolved in Central American affairs. The instability of the othercountries on the isthmus makes Costa Ricans leery of too manyentanglements with their neighbors. Costa Rica, nevertheless, isengaged in several bilateral agreements and has been actively involvedin CAFTA.



4. Trend of development


4.1. Democratic development


Thedisintegration of the two-party system indicates that politicalparticipation, and social and political integration more generally,have declined between 2001 and 2005. While the 70% voter turnout ratein the 1998 general elections is still quite good comparativelyspeaking, it marks a sudden 10% drop in the country’s long-term rate.It stayed at this level in the 2002 elections, when the two dominantparties saw a dramatic drop in their share of the popular vote. Boththe PLN and the PUSC went from obtaining 92% of the vote in theprevious five elections to 63% in 2002.
Corruption scandals and,more importantly, weaknesses in horizontal accountability havenegatively affected the rule of law. While any serious look atcontemporary Costa Rica reveals continued strengths - fair electionsand comprehensive health care coverage for its population, to name buttwo - it also reveals several glaring weaknesses, which observers haveignored given the overall strength of democracy in the country. Whilethere is no effort to roll back democratic and social achievements,elected officials between 2001 and 2005 have done little to promotetransparency and accountability.

The single-most important achievement during this period has beenthe General Attorney and La Nación’s (the country’s newspaper ofrecord) aggressive investigation of acts of corruption. NeitherPresident Pacheco nor the Legislative Assembly has opposed theseefforts. Indeed, given the popularity of the anti-corruption struggle,both allocated additional monies for the General Attorney’s office inlate 2004. In late October of this year, the legislature issued thefirst ever anti-corruption law. Later this year, the Assembly alsosacked Alex Solís as Comptroller General for having forged (with theirconsent) family member’s signatures on checks.



4.2. Market economy development


The market economy continues to flourish. Attempts to open upstate monopolies in electricity, telecommunications and insurance havestopped. The 2001 “combo” protests killed interest in dismantling statemonopolies. Until a new party system comes into existence, it will bevery difficult indeed to forge the political consensus to advance thesestructural reforms.



Table: Development of macroeconomic fundamentals (2000-2004)

Real Growth of GDP in % 
Export growth in %* 
Import growth in % 
Inflation in % (CPI) 
Investment in % of GDP 
Tax Revenue in % of GDP* 
Unemployment in % 
Budget balance in % of GDP 
Current account balance in billion $* 

Sources: CEPAL, Estudio Económico 2004-05, Santiago de Chile 2005; * Programa del Estado de la Nación, Estado de la Nación en Desarrollo Humano Sostenible: X Aniversario (San José: Programa del Estado de la Nación, 2004).



D. Strategic perspective


One scenario for the future is bleak. The two-party system willcompletely disappear with the 2006 elections. The assembly will becomemore fragmented and be filled with political novices incapable ofrepairing the ship of state. Disagreement between the executive and thelegislature will paralyze policymaking. There will be no politicalconsensus to raise tax rates and improve tax collection and/or to cutexpenditures. Public sector strikes will further impair the quality ofpublic services. Economic growth will fall and so will investment inthe economy. In different ways, this route led to the collapse ofdemocracy in Uruguay in 1973 and to its implosion in contemporaryVenezuela.

An alternative scenario is that the stress and even crisis will bethe backdrop for political renewal. Though establishing news ways ofselecting presidents of autonomous institutions and their boards willbe harder, changing the blatantly partisan manner in which they arechosen is far from impossible. Perhaps the assembly will even agree tohold roll call votes, something that deputies have resisted for years,but that transparency and political accountability require. Moreover,the Costa Rican economy is also growing, unlike in Uruguay between the1950s and early 1970s and contemporary Venezuela.

Serious political renewal will have to wait until 2006, at theearliest. As of this writing, it is already beyond the halfway mark inPresident Pacheco’s term, the date by which presidential powers swiftlydecay. Term limits quickly make presidents into lame ducks, a processaccelerated because Pacheco only had the support of 33% of the assemblyat the beginning of their terms. Pacheco has also proven uninterestedin doing little more than observing political events and trends,especially once his ratings in the polls began to slide in 2003.Political observers criticize him for doing little to advance fiscalreform and for linking its approval with enactment of CAFTA. At anunfortunate time, the country is saddled with an executive unwilling toadvance the multifaceted and long-term agenda that democratic stabilityrequires.

In the near and medium term, international supporters shouldencourage elected officials to promote transparency and accountability.The international community should condition aid on the promulgation ofa “small” reforms so that, in the medium and long term, citizensrecover their faith in the political systems. It should work withgroups like the Academia de Centroamerica, the Programa del Estado dela Nación and other groups that are a goldmine of information aboutpolitics, policymaking and political economy in the country. Inaddition to encouraging legislators to hold roll call votes, they couldencourage the assembly to issue regular bulletins about committee workand deliberations. Autonomous institutions should be required to maketheir executive deliberations public. Before considering anadministrative rule change, bureaucrats should regularly solicit theopinions of interested parties and the public at large. Costa Ricashould also adopt a freedom of information law to make information ofpublic policymaking much more accessible. It remains unclear howinformed key policymakers are about the international transparencyagenda; the international community can play a vital role bydisseminating information about the diversity of ways in whichpolitical systems can open up and promote accountability.

BTI 2006

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Costa Rica

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Costa Rica

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©2004 Bertelsmann Stiftung