Overview of macroeconomic policy in Costa Rica and its influence on agricultural trade

Declining real income per capita and rapid inflation replaced the continuous income growth and relatively stable prices of the previous 20 years. Some of these problems may have been attributable to the agricultural sector. This paper overviews Costa Rica"s macroeconomic policies and their effects on agriculture. Agriculture is an important source of output and employment in Costa Rica, and agricultural exports account for most of the foreign exchange earnings. A major policy issue has been whether to change the relative importance of traditional exports (coffee, bananas, sugar, and beef), basic grains (maize, rice, beans, and sorghum), and nontraditional exports. Costa Rican agriculture has been influenced by domestic monetary, fiscal, and exchange rate policy as well as by sector-specific policy. It has also been influenced by the international terms of trade and the macro and trade policies of other countries, especially the United States. Rapid growth in the money supply combined with restrictions on interest rates led to inflation, a shortage of credit, and capital flight. An increase in budget deficits led to foreign borrowing and an external debt crisis. Inflation combined with a fixed exchange rate led to overvaluation of the colon and devaluation in 1981. A policy of a managed float with exchange controls followed, and inconvertibility of the colon reduced regional trade. A return to growth for Costa Rican agriculture depends on reform of both macro and agricultural policy. It also requires effective coordination of policies among the Central Bank and the Ministries of Finance and Agriculture. (Author abstract, modified)