Costa Rica private sector study

Key factors endemic to the crisis are identified in this report on the effect of public policies and supporting donor interventions on Costa Rica's recent economic and social history, with special reference to the private sector. It is found that the success of the industrialization strategy, which was due almost entirely to external opportunities, was accompanied by: (1) dependence on the export of a few traditional commodities, prices for which have recently fallen; (2) policies fostering the establishment of capital-intensive and inefficient industries to the relative neglect of agriculture; (3) the near exhaustion of import substitution opportunities; (4) heavy reliance on borrowed, often foreign, investment capital; (5) a policy bias against exports; and (6) the failure of the nationalized banking system to attract internal savings and provide adequate financial intermediation. On the social level, substantial progress has been made in such areas as education and health, but at the cost of a large and inefficient bureaucracy in which ever more resources are allocated to pay public employees, with decreased public benefit. Further, the progressively unsustainable cost of social programs has led to increased external borrowing and a huge and unmanageable foreign debt. It is concluded that: (1) public policies, while fostering economic and social progress, failed to prepare for or adjust to adverse external conditions during 1978-82; (2) donor support, despite major positive contributions, had little effect on these policies; and (3) the private sector, especially the key industries of food processing and apparel, reacted predictably to market and public sector signals throughout the period. Lessons taught by the Costa Rican experience are summarized and private sector needs and constraints for the period of recovery spelled out. Appendices include several statistical tables and an analysis of the impact of the CACM on Costa Rica.