Costa Rica is a top performer in Latin America, an example of rapid economic growth and diversification from coffee to computer chips. Its record of investment promotion and inclusive growth should be an example to South Africa.
Costa Rica’s economic progress has translated into a positive outcome for its people. It is consistently ranked as one of the world’s happiest countries.
Back in the 1980s, devoid of natural resources and located in Central America, then notorious for armed conflicts and criminal networks, this small country of just under five million people was expected to succumb and track a course similar to its beleaguered neighbours.
Bucking the trend with impressive economic growth, the Costa Rican economy is now five times its size in the mid-1980s. Instead of relying on its traditional agricultural exports, it has diversified by attracting new industries. The trickle quickly turned to a flood with the arrival of Intel in 1997, the company’s solicitation being a priority of President José Figueres.
From a relatively rural and underdeveloped background, it quickly emerged as an investment destination of choice for services and sophisticated technologies.
Thirty years ago, two-thirds of Costa Rica’s exports were agricultural goods. Now it exports 4,300 products to 150 countries, and is home to 300 hi-tech companies. Tourism, another “export”, has mushroomed tenfold to three million visitors over the same period, with the average stay doubling to 12 days.
Much of its economic success and firm-level competitiveness has been attributed to the development of human capital and “Brand Costa Rica”. Specifically, Costa Rica’s competitive performance is a result of strong and effective institutions modelled on a comprehensive strategy of trade and investment promotion. From these professional institutions, Costa Rica has built a culture of shared value with a broad-based social impact that is deeply integrated with the environment, vested in future generations.
Victor Umana, director of the Latin American Centre for Competitiveness and Sustainable Development at INCAE, Costa Rica’s leading business school, puts it plainly:
“Costa Rica has a history of 200 years of good decisions. From day one we had poor people doing the right thing for society and creating institutions unlike anywhere else in Latin America.”
Strong institutions lie behind a long track record of peace and economic stability.
Today Costa Rica is one of the longest-running democracies and safest countries in the Americas. Peace and stability — and the notable absence of an army — has freed resources that are now directed toward building a highly skilled and healthy workforce. Costa Rica is an outlier in human and sustainable development.
Furthermore, the progress Costa Rica has made on metrics such as the World Bank’s Ease of Doing Business are indicative of the ongoing commitment to improving connectivity and building a better investment environment. In 2018 Costa Rica ranked 61st out of 190 countries measured by the World Bank. On key measures such as starting a business, access to electricity and credit and trading across borders, Costa Rica is in the top quantile.
Costa Rica has seen a consistent growth in foreign direct investment (FDI), with inflows increasing at an average of 3.7% every year since 2007. In 2017, FDI represented 5.2% of GDP and FDI per capita reached $607.90. The African average is just 1.5% of GDP, or $35 per capita.
Two institutions have driven differentiation and commercial confidence through trade and investment promotion, and facilitation: Procomer, for export promotion, and CINDE, the investment promotion agency.
Procomer covers a range of specialised functions from trade facilitation and the development of value chains for Costa Rican exports to in-depth market studies and data development. It also administers Costa Rica’s Free Trade Zones.
While Procomer is seen by some as the principal mover behind Costa Rica’s export-led growth model, CINDE is the institution credited for the progressive investment landscape and ultimately the commercial connectedness behind the economic development and diversification of the economy.
CINDE was founded in 1982 to “contribute to the country’s economic development and social progress by attracting foreign investment and sustaining a favourable investment climate to do so”.
This was part of the overall reorientation following the 1980s debt crisis when Costa Rica switched from the inward-looking economic model of import substitution to an outward-looking export promotion model. The aim was to reduce the hassle and costs of entry into the market, and in so doing to play to Costa Rica’s key strengths: a stable country near the rich American market with a highly educated population. Free Trade Zones offered tax exemptions, incentives and basic infrastructure.
CINDE is apolitical, with an independent board, serving nine governments since 1982. It provides its services free, using an endowment for income. Its activities have not only been focused on bringing in investors but also on after-care — given that, in the words of one director, “two-thirds of investment is re-investment”.
Today CINDE is the top-ranked institution worldwide in attracting FDI, and ranked second when it comes to foreign investment agencies perceived as “best in class”.
On the back of investments, Costa Rica’s trade has increased well over ten-fold since 1985, translating into economic growth of more than 5% for three decades.
The profile of exports has changed. While back-office call-centres were the rage 10 years ago in Costa Rica, today the story is about services, spanning tourism, including medical tourism, and specialised business and financial services. Although exports are growing at about 5% per annum, a growth of services exports grew 11% and exports of specialised medical precision equipment grew by 14% in 2016 alone. Costa Rica is also positioning itself as a destination for specialised scientific and engineering testing, yet another sophisticated economic multiplier.
What can be learnt from Costa Rica?
Having taken a pragmatic “inside-out” approach to addressing societal needs in the context of the environment some decades ago, Costa Rica established a unique competitive advantage and positioning among its peers grappling similar challenges of development, differentiation and delivery. Innovative approaches to development and governance, geared toward strengthening its political institutions by nurturing its democratic stability, safety and, with time, its openness to the world, provided a crucial foundation and head start.
But it is Costa Rica’s institutions that have proven crucial for continuity and improvement, including CINDE and Procomer. They point to South Africa’s need to establish a National Economic Promotion Agency, government-funded but business-led at a board level, and with a formal institutional link into existing provincial investment and trade promotion agencies. DM
Dr Mills heads the Brenthurst Foundation; Professor White directs the Johannesburg Business School at the University of Johannesburg. This article is taken from a longer Brenthurst Discussion Paper available at www.thebrenthurstfoundation.org