Election campaigning is already well under way in Costa Rica, where a new government will take the reins of power in May of next year. After four years in office, the constitutional limit, president Carlos Alvarado will step down amid an unprecedented public health crisis in the Central American nation.
Covid-19 has stalled much needed political reforms and cost the Costa Rican economy dearly — not least the tourism industry, which is only now beginning to recover. But Mr Alvarado is determined to spare his successor a few headaches.
Earlier this summer, Costa Rica signed up for a three-year $1.78bn loan from the IMF to stabilise the economy. Attached to the credit facility agreement are a set of conditions, or laws, that the country must pass in order to access the funds.
Doing the groundwork
Talking to fDi Intelligence on the sidelines of September’s session of the UN General Assembly, Mr Alvarado says he is confident the proposed reforms — including a tax on luxury homes and a dual global income bill, aimed at streamlining tax collection — would receive parliamentary approval.
“I don’t want to kick the ball on to the next person. I’m offering the opposition a great opportunity — I'll use my political capital to fix this problem. My interest is that the next government has a better playing field to pursue their policy agenda,” he adds.
In 2018, the president pledged to reduce the deficit from 6.2% of gross domestic product (GDP) to 3% by the end of the year. As of December 2020, however, abrupt revenue losses caused by the pandemic forced the deficit higher, to 8.1%.
“This year, we expect to end up at least with a zero on the primary deficit. That means expenditures will equal what we have in taxes,” says Mr Alvarado. “The problem remains the financial deficit, because of the debt we carry. Our strategy has been to exchange expensive debt that was mainly from the local market for external debt, which is cheaper.”
In August, the government pointed to the effectiveness of its deficit reduction programme when it reported a small primary surplus for the first time since 2008.
There were other silver linings. Despite severe headwinds, Costa Rica topped fDi Intelligence’s 2021 Greenfield Performance Index, which ranks countries by foreign direct investment (FDI) inflows as compared with the size of their respective economies.
Mr Alvarado attributes the country’s success to its advantageous geographic location, 14 free trade agreements, and a sustained strategy over two decades of courting multinational corporations, particularly in the value-added manufacturing sector. Computer hardware companies Intel and Hewlett Packard, as well as medical technology supplier Edwards Lifesciences, are just a few of the businesses to have set up shop in Costa Rica in recent years.
“Costa Rica has also perhaps been helped by two other elements: the necessity of nearshoring value chains and our political stability,” he says. Mr Alvarado adds: “There’s this sense among companies that they need to reduce risk,” referring to the US-China trade relationship. “And in our case, we’ll benefit because of the favourable business environment we’ve built... and I don’t see in the short term or the mid term that this geopolitical tension will go away.”
Yet Costa Rica has no special immunity from the economic slump that has gripped the world over the past year. As of May 2021, the unemployment rate stood at 17.7%, almost double what it was shortly after Mr Alvarado was elected in 2018.
FDI will be crucial to the country’s recovery efforts, he says. Besides aiming to become a fully bilingual country in Spanish and English by 2040, the government has added new technical programmes to Costa Rica’s national curriculum and has relaxed requirements for educators to allow more companies to train workers for strategically important industries.
Mr Alvarado wants businesses that have established a foothold in the country to build on their presence by opening new financial services and human resources divisions, or even research facilities. “The natural next step is to encourage pharmaceutical companies to join our growing life sciences cluster,” he says, touting Costa Rica’s recent role in developing and testing an effective vaccine for the treatment of human papillomavirus (HPV).
He further hopes Costa Rica’s track record on the environment, including an electric grid almost entirely powered by renewable sources, will strengthen its value proposition to foreign companies that have pledged to “build back better”.
With the improvement of interest rates resulting from the IMF programme, the government intends to invest 90 basis points of GDP in new infrastructure projects. This will be complemented by other initiatives. For example, the Green Climate Fund, through the Central American Bank for Economic Integration, has approved $800m in financing for 82 kilometres of railway tracks to be laid in the greater metropolitan area of the capital, San José.
According to a study from the Inter-American Development Bank, if Costa Rica completes these planned decarbonisation projects, the country could save up to $41bn by 2050 in energy costs, greater agricultural yields, and other ecosystem services. “We believe greening our industries is ethically necessary, but also a competitive advantage. It’s good for the green environment, and the green dollar,” says Mr Alvarado.
Tourism and vaccinations
One place where these two principles meet most clearly is the country’s hitherto booming ecotourism industry. Between 1990 and 2019, international tourist arrivals grew at an average yearly rate of 7.4%, as per data collected by the OECD.
“Tourism, without any doubt, is the sector that’s been hit the most by the pandemic,” says Mr Alvarado. “Last year, our GDP decreased by 4%, and from that decrease, about 40% was explained by the hit to the tourism industry.”
In 2018, government data shows that tourism accounted for 8.2% of Costa Rican GDP and directly supported upwards of 200,000 jobs, making the resumption of international travel a top priority for the administration. To that end, government officials have embraced an aggressive strategy of recovering flights to San José and Guanacaste, a north-western province famed for its idyllic beaches.
So far, the number of tourist arrivals is hovering at about 60% of what it was two years prior, in September 2019, says Mr Alvarado, although he expects that figure to rise during the high season after Thanksgiving in the US.
By the end of October, the government estimates that about 70% of Costa Ricans will be fully vaccinated against Covid-19. However, the same cannot be said for other emerging market countries, where falling revenues and rising social spending could spell disaster, he says. “My concern is that Costa Rica managed to secure those vaccines from private contracts and not necessarily through COVAX [the international scheme to ensure developing countries get the Covid vaccine].
“There’s a huge inequality in the global distribution of vaccines, and that’s putting all of us at risk, because it doesn’t matter if you have all the vaccines in the world. If in some places you don’t have it, the virus will mutate and perhaps give rise to a variant that may surpass the power of our current vaccines,” he says. “If that happens, then we will have to start all over again. And that would be very frustrating.”
This article first appeared in the October/November print edition of fDi Intelligence. View a digital edition of the magazine here.