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from the February 23, 1994 edition

Costa Rica's Economy Bears Fruit of Ten Years of `Structural Adjustment'

SAN JOSE, COSTA RICA—

DEPENDING on the economist, Costa Rica's economy is either the Central American success story of the decade or a jerry-built structure about to come tumbling down with a thud.

On the surface, Costa Rica's economy is booming. Never mind that San Jose, the capital of what was once called the Switzerland of Central America, is a car-crammed and increasingly smog-ridden city. Costa Rica is riding a $400 million wave of tourist investment that has dotted its lush landscape with new hotels and package tours for the ecology-minded.

High growth rates, soaring exports, rising per capita income, single-digit inflation, and Latin America's lowest unemployment combine to form a star-studded statistical picture.

The glowing present is the product of a 10-year process of ``structural adjustment.'' Before a crisis in the early 1980s, strongly interventionist governments protected domestic industry, while providing Costa Ricans with perhaps the highest standard of public welfare in Latin America.

In little more than a decade, however, policymakers have reversed this. They have opened up the economy to a flood of imports, cut spending on social programs, and privatized state-run businesses in an effort to win the game of international competitiveness.

Once known mainly as a producer of bananas and coffee, Costa Rica now sells on world markets a wide variety of agricultural produce and simple manufactured goods, many of them produced in duty-free zones within Costa Rica.

One question, however, is whether the 6 to 7 percent growth of the last two years can be sustained. Noting that outgoing President Rafael Calderon is leaving behind record high reserves and a tiny government deficit, economist Ronulfo Jimenez with the governing Social Christian Unity Party argues that ``if current policies are adhered to, the economy can grow 5 to 6 percent over the next four years.''

Carlos Manuel Castillo, also an economist and president of the National Liberation Party which won a national election Feb. 6, disagrees. ``These growth rates have been nurtured in an explosion of imports, and are not sound or sustainable.''

Mr. Castillo is pointing to the immediate problem which will confront president-elect Jose Maria Figueres when he takes office May 8 - Costa Rica's massive trade deficit. If tourist income and ``nontraditional'' exports are booming, imports are rising even more rapidly, to the point of creating an $800 million deficit - 7.8 percent of national output - in 1993.

Economist Otton Solis, who won election as a deputy this year and is a critic of government policy, notes the irony in this result. Referring to a trade and payments crisis in the early 1980s, which forced the turn toward current policies, Mr. Solis argues that ``the problem that was supposed to be solved by economic adjustment has gotten worse.''

Although strong foreign investment and speculative capital inflows have kept Costa Rica's accounts in balance the last couple of years, World Bank experts privately foresee a crunch coming, perhaps by the end of 1994.

Problems looming a bit farther down the line raise deeper queries about the nature and cost of current success. To date, Costa Rica's export boom has been powered by tax subsidies, a form of state paternalism for business that international lending organizations have insisted be done away with by 1996. Once they are gone, no one is quite sure how Costa Rica's export industries will perform.

Tax incentives to prop up exports, which amounted to 6 to 7 percent of the 1993 budget, have come out of spending on social services, particularly health. During the Calderon years, critics charge, infant nutrition and preventive health-care programs went underfunded, leading to outbreaks of contagious diseases.

President-to-be Figueres promises to repair the damage to the nation's semisocialized health system, traditionally one of the best in Latin America.

Figures will have to do this and more if he wants to make a dent in another problem. Per capita income in Costa Rica has been rising steadily since 1984, to its current $2,300 annually, enough to make the country receive a ``semideveloped'' rating. But the wealth has been unevenly divided. Despite a decade of 4 percent real growth rates, the poverty index hovers at around 20 percent of the population.

The persistence of poverty in the midst of boom, critics of the model argue, has much to do with export-led growth. This is providing people with jobs, putting unemployment at 4 percent and underemployment at 5 percent. Migrant workers from neighboring Nicaragua, where the corresponding figures are 20 percent and 54 percent, increasingly replace locals in Costa Rica's coffee fields and at San Jose construction sites.

But the jobs are low-paying and precarious. ``We are seeing work days grow longer, working conditions deteriorate, and job-related accidents rise,'' says Mauricio Gonzalez of the Social Action Studies Center. An economy that grows off of tourism, pineapple-raising, and apparel manufacture in maquiladoras is not creating the kinds of jobs that incorporate new technology and upgrade the labor force, laying the basis for real wage growth.

Meanwhile, the number of self-employed Costa Ricans, including small farmers who are selling their land to foreign banana growers and tourist companies, is rapidly declining.

Faced with these contrasting trends, Costa Rica's economists are presently debating the pros and cons of agreements negotiated by the outgoing Calderon government with the World Bank and Inter-American Development Bank. The accords would deepen current policies by cutting jobs in government and opening up public utilities to competition from the private sector.

Seemingly irreversible by this point, those policies may eventually lay the basis for a sound development. Costa Rica voters, however, remain to be convinced.

In the last two elections, they have turned thumbs down on contenders who promised more of the same ``success,'' and voted in presidents who, like Figueres, promised to protect them against the rigors of the economic change.