Assessment and policy recommendations

Assessment

This Review, undertaken in close co-operation with the Costa Rican Executive Secretariat for Agricultural Sector Planning (SEPSA) and other institutions of the Agricultural Public Sector (APS), assesses the performance of the agricultural sector in Costa Rica over the last two decades, evaluates the country’s agricultural policy reforms, and provides recommendations to address future challenges faced by the sector. The evaluation is based on the OECD Committee for Agriculture’s approach that agricultural policy should be evidence-based and carefully designed and implemented to support productivity, competitiveness and sustainability, while avoiding unnecessary distortions to production decisions and to trade. The Review also includes a special chapter highlighting recent advancements and key challenges related to the adaptive capacity of agriculture to climate change.

Agricultural policy context

Costa Rica’s political, economic and environmental conditions have benefitted its agricultural sector

Costa Rica is a small country (51 000km²), with a population of 4.8 million in 2014. The country’s long democratic tradition and political stability have underpinned its important economic progress – including the development of its agricultural sector. Political stability has helped to secure land property rights and to attract Foreign Direct Investment (FDI). Propelled by an outward-oriented growth strategy in the 1980s, the economy has grown by around 4.2% per annum over the last 15 years, exceeding the average growth of a number of other economies in the region (INEC, 2016). Inflation has been on a declining trend, from 19% in 1990 to 0.8% in 2015 – recent low inflation was due to falling commodity prices, spare capacity in the economy and exchange rate appreciation (OECD, 2016a). However, Costa Rica is now facing an important fiscal deficit that in 2015 reached 6% of GDP. Unemployment was low, averaging around 5% until 2008, but sharply increased following the global economic crisis, and has subsequently remained consistently around 8% (Figure 1). Notwithstanding the impact of the crisis, Costa Rica has achieved higher standards of living and lower poverty rates than other countries in the region, with a per capita income of USD 15 377 – in purchasing power parity (PPP) terms – in 2015. However, inequality, as measured by the Gini coefficient (where 1 is completely unequal), has increased during the last 20 years, reaching 0.49 in 20121 (WDI, 2016; INEC. 2015).

Costa Rica’s rich natural resource endowment – and its preservation through significant achievements in environmental protection – has also supported development of the agricultural sector. Despite its small land area, Costa Rica’s rich biodiversity, fertile land and favourable climatic conditions underpin its comparative advantage in a diverse range of agricultural products. The country also has an abundant water supply, although water scarcity is a growing concern in certain regions. Environmental regulations have led to the reforestation of large parts of the country, and 25% of Costa Rican territory is now under some category of environmental protection (INBio, 2016). A strong prioritisation of sustainability and environmental awareness in agri-environmental policies has also helped to reduce the agricultural sector’s vulnerability to natural hazards. However, resilience is a continuing challenge: Costa Rica already has the seventh highest risk of natural disasters worldwide (ADI, 2014), and the severity and frequency of natural hazards is projected to increase with climate change.

Agriculture features a highly competitive export sector, alongside a low-productivity traditional domestic sector

Agriculture’s share in GDP has declined over the last two decades – from 13.7% in 1995 to 5.6% in 2013 (Table 1) – due to structural transformation in the Costa Rican economy. Over the same period, the share of agriculture in employment also declined – from 21.4% to 12.7%. Notwithstanding this decline, the agricultural sector remains the second largest source of employment in Costa Rica (INEC – ECE, 2016), underscoring its central role in rural areas.

The agricultural sector has developed a successful and dynamic export sector in recent decades. Building on Costa Rica’s outward-oriented growth strategy in the 1980s and integration in international markets, agricultural exports grew by an average of 5.6% per year from 1994 to 2015. While exports declined due to falling demand during the global economic crisis in 2009, they recovered quickly. The share of agro-food exports in total exports has declined since the 1990s, reflecting the success of manufacturing and service activities, but has stabilised at around 38% from 2010 onwards (Table 1).

Although Costa Rican exports are dominated by commodities, processed goods have gained in importance. Costa Rica has been particularly successful in exporting new crops such as pineapples, where it is a leading exporter with a world market share of 55% in 2015, as well as continuing to successfully export more traditional crops such as bananas, coffee and sugar. Processed goods – in particular, pineapple juice (for which its world market share was 19.5% in 2015), syrups and concentrates – are also common. Food industry exports have grown dramatically in the last decade, achieving a growth rate of 4% in 2014–15 (PROCOMER, 2016). Main food exports are syrups and concentrates (20%), juice and concentrates (13%), palm oil (7.8%), sauces and preparations (6.9%), pastry (5.4%) and sugar (6%) (PROCOMER, 2016). The number of products exported increased from 289 in 2006 to 342 in 2015 for the whole food industry (PROCOMER, 2016).

Costa Rica’s main agro-food export destination is the United States (accounting for 35% of agro-food exports in 2015), although exports to other countries in Latin America are increasing (26% of agro-food exports over the same year). Trade agreements seem to have played a large role in the diversification of export destinations; all member states of the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) – the United States, Nicaragua, Guatemala, Honduras, El Salvador and the Dominican Republic – are now within the top 15 export markets for Costa Rica, accounting for more than 50% of all trade (UN Comtrade database, 2016).

Agro-food imports have increased significantly over the last two decades, closing the gap between exports and imports. Imports rose from 0.3 USD billion in 1995 to 1.9 USD billion in 2015 (UN Comtrade database, 2016; Figure 2), although the importance of agro-food in total imports has not changed, and remains at around 11%. Basic staples for domestic consumption dominate imports: maize, soya, wheat and rice were among the most important agro-food imports in 2015. Other key imports are chicken, pork and dairy, as well as bakery products. While still concentrated in the United States (40% in 2015), agro-food imports have shifted to some extent to Latin America (where imports increased from 30% of total imports in 1995 to 35% in 2015) and China (3%) for the same year.

Box 1. Costa Rica: Agriculture in context

Table 1. Contextual indicators, 1995, 20151
	Costa Rica
	1995	2015 (1)
Economic context
GDP (billion USD in PPPs)	22	74
Population (million)	3.5	4.8
Land area (thousand km2)	51	51
Agricultural area (AA) (thousand ha)	2 048	1 817
Population density (inhabitants/km2)	69	94
GDP per capita (USD in PPPs)	6 136	15 377
Trade2 as % of GDP	50	49
Agriculture in the economy
Agriculture in GDP (%)	13.7	5.6
Agriculture share in employment (%)	21.4	12.7
Agro-food exports3 (% of total exports)	69.0	44.7
Agro-food imports3 (% of total imports)	11.2	12.5
Characteristics of the agricultural sector
Crop in total agricultural production (%)	77	67
Livestock in total agricultural production (%)	23	33
Share of arable land in AA (%)	11	13
← 1. Or latest available year.
← 2. Ratio of the sum of exports and imports to GDP.
← 3. Including fish and fish products.
Sources: World Bank (2016), World Development Indicators; UN, UN Comtrade Database (2016)
https://doi.org/10.1787/888933451410

The agricultural sector in Costa Rica has a dualistic structure, with a strong agricultural export sector accompanied by a low-productivity, traditional sector producing mostly for the domestic market. There have been limited spillovers from the successful export sector dominated by medium-large farms to the weaker traditional sector, which is characterised by less competitive, small-scale farms experiencing slow growth. Fragmentation is also a concern – while medium and large farms are consolidating, the number of farms of less than five ha has increased in recent decades and now they account for a majority of farms (52.1%). More than one third (36.3%) of small-scale farms (below 5 ha) produce coffee as their principal activity (INEC, 2014). Common products in the traditional sector include fruits and vegetables and staple grains. Many produce staple grains for their own consumption (including 72% of rice farmers, 71% of maize farmers, and 65% of bean farmers [INEC, 2014]). For many of these crops, there is a limited integration of smallholders in supply chains (SEPSA, 2016).

Moreover, while Costa Rica’s poverty rate is lower than that of most Latin American countries, the incidence of poverty has not improved over the last 20 years. In rural areas, 30.3% of households lived under the national poverty line in 2014 (INEC, 2016). The highest poverty rates are found in the region bordering Nicaragua, the main source of migrants and a significant share of informal labour in the agricultural sector. Informal labour is growing in the agricultural sector, increasing from around 50% to 60% of total agricultural labour in 2014 (INEC-ECE, 2016).

Productivity growth has slowed

Productivity growth in the agricultural sector has slowed (Figure 4), and is low relative to other Latin American countries. During the 1980s and 1990s, structural change in the sector induced rapid growth in Total Factor Productivity (TFP). However, TFP growth has decreased over the last decade. Since the 1990s, average yields have remained stable for many of Costa Rica’s main crops: coffee, rice, sugar and palm. Notable exceptions are the rise in pineapple yields and, to a certain extent, bananas. Contributing factors to the deceleration in yield and productivity growth include the expansion of certain crops into less productive land, growing fragmentation of smaller farms, exposure to natural hazards, low labour productivity (due to low education levels and lack of skills), and limited access to new and more efficient agrochemicals. Productivity growth is also constrained by deficiencies in the broader enabling environment, such as low-quality rural infrastructure and limited access to credit for productivity-enhancing investments.

Agricultural policy evaluation

Background

Over recent decades, Costa Rica’s agricultural policy has progressed through three distinct phases:

From the 1960s to the 1980s – as elsewhere in Latin America – Costa Rica’s agricultural sector followed an import substitution path, supported by government intervention.
From the mid-1980s, Costa Rica undertook major agricultural reforms, moving from import substitution to trade liberalisation. The main policy objectives for the agricultural and food sectors were the strengthening of agricultural exports through both diversification of products and development of new markets. In line with this outward-oriented growth strategy, the level of state intervention in markets significantly declined.
Since the food price crisis (2007-08), food security has become an important objective. Specific strategies have been developed, particularly since 2014, to reduce poverty by improving conditions in rural areas, and to increase the contribution of agriculture to the economy2 by increasing sustainable productivity, with an emphasis on small-scale farms, and continued success in export-oriented agriculture. Several specific goals for increasing productivity through yield-targets have been set for some staple crops, such as rice, beans, potatoes and milk.

Today, Costa Rica’s agricultural policy priorities are articulated in three main strategic plans: (i) a long-term strategy for the agricultural sector, the “State Policy for the Costa Rican Agri-food Sector and Rural Development 2010-2021” (Política de Estado para el Sector Agroalimentario y el Desarrollo Rural Costarricense 2010-2021) (SEPSA-MAG, 2011); (ii) a short-term strategy for the agricultural sector, the “Policies for the Agricultural Sector and Rural Territorial Development” (Políticas para el Sector Agropecuario y el Desarrollo de los Territorios Rurales) for 2015-18 (SEPSA-MAG, 2014); and, at national level, (iii) the National Development Plan 2015-2018 (NDP) (Plan Nacional de Desarrollo) articulated through the sectoral plan the Agricultural and Rural Development Plan 2015-2018: “Plan Sectorial de Desarrollo Agropecuario y Rural 2015-2018” (MIDEPLAN, 2014).

Costa Rica’s current strategies define two overarching objectives for the agricultural sector: to reduce poverty and to increase productivity growth. To achieve these goals, the short-term strategy prioritises five policy guidelines (or “pillars”): (i) food security and sovereignty3 , (ii) the creation of opportunities for rural youth, (iii) rural territorial development, (iv) adaptation to and mitigation of climate change, and (v) the strengthening of the export-oriented sector.

As the agricultural sector works to achieve the objectives set by the government, two challenges have emerged: scheduled market opening and climate change. Costa Rica has committed under several trade agreements to phase out a range of agricultural protection measures over the next decade – this will require a strategy to manage the transition, to prepare farmers for competition and to assist those that will not be competitive. Climate change is also a growing concern for the agricultural sector – agricultural production is projected to be negatively affected by rising temperatures and increasingly severe disasters in the coming decades.

General services to promote productivity are a key feature of agricultural budgetary support

Most of Costa Rica’s government budgetary support for agriculture – 80% in 2013-15 – goes to general services to the sector, such as extension, irrigation investment, animal and plant health, rural development projects, marketing and promotion, and market information (Box 2). The share of general services in total support – measured by the GSSE and Total Support Estimate (TSE) – at 12% is in line with the average for OECD countries (also 12%) (OECD, 2016b). General services benefit the sector as a whole and are much less distorting than measures that directly influence farmer production or input decisions.

However, the majority of support provided to Costa Rican farmers is in the form of domestic and trade policy instruments (Box 2). Domestic policy instruments include price support measures, minor input subsidies and few payments for environmental services. Trade policy instruments include tariffs, tariff-rate quotas, import licences and sanitary and phytosanitary measures. Much of the support comes from price support and tariffs, both of which are highly market- and trade-distorting.

Box 2. Overview of agricultural policy instruments applied in Costa Rica

Domestic policy instruments

Costa Rica has maintained an administered minimum price for rice over recent decades. Reforms to the minimum price took place in 2015, when it became a reference minimum price for rice; however, in reality, the reference price continues to function as a minimum price – although it should be noted that the reforms are still relatively recent. The reference minimum price is based on a domestic production costs analysis by the National Rice Corporation (CONARROZ). Costa Rica has one of the highest domestic rice prices in the world. Consumers, particularly those with fewer resources, which include small-scale rice farmers, allocate a significant portion of their income to purchase this staple at a price higher than the international market price.

Subsidised credit interest rates. Some minor implicit credit subsidies, derived from preferential interest rates are delivered through the Development Bank System (SBD). SBD provides different types of credit to farmers, including working capital and loans for marketing, and for investment such as the acquisition of machinery and equipment. Public institutions like the Rural Development Institute (INDER) and ICAFE, the organisation representing the coffee sector, also provide limited credit to smallholders at preferential interest rates.

Implicit insurance subsidies were provided to producers by the National Insurance Institute (INS) until end-2015. Although there were no subsidies for premiums, INS was prevented by law from making profits from the sale of agricultural insurance, resulting in an implicit subsidy reflected in cheaper insurance rates for producers. This restriction has now been abolished, however.

Subsidies for fixed capital formation are provided through several programmes: 1) Production diversification is a programme managed by the Ministry of Agriculture and Livestock (MAG) and implemented only in the Sixaola area. It provides subsidies for the purchase of machinery or equipment for production projects, with the aim of diversifying the production portfolio of small farms and promoting other sources of employment; 2) Transfers managed by MAG are provided to farmers for investment in production projects. Farmers must contribute to the total cost of the project, and transfers are provided through auctions where farmers compete to obtain the subsidy; 3) A programme managed by INDER provides subsidies for fixed capital formation to poor smallholders for the creation of auto-consumption production modules; 4) SENARA finances on-farm irrigation investments through the Irrigation of Small Areas programme (PARD). For small-scale and poor farmers, SENARA pays the total cost of the investment. For medium and large-scale farms, SENARA makes a partial contribution.

Direct payments for environmental services: The Costa Rican government’s agri-environmental policy includes direct payments for environmental services through the following funds: 1) The National Forestry Financing Fund (FONAFIFO), implemented by the Ministry of Environment and Energy (MINAE), promotes forest environmental services, and has played an important role in the recovery of the country’s forest area. FONAFIFO finances the programme (PSA) that provides financial recognition to farmers for environmental services – both environmental protection and improvement. 2) The Recognition of Environmental Benefits for Organic Production (RBAO) for organic producers is a direct payment for a maximum period of three years. 3) MAG has a small fund for the “Programme of recognition of environmental benefits” (Programa de reconocimiento de beneficios ambientales), for the use of “green or living” fences and terraces, and soil condition improvement under agreements with small and medium-scale producers. 4) The Costa Rican Electricity Institute (ICE) a government-run electricity and telecommunications institution, provides supplies and material through the Basin Management Programme to farmers that develop activities and projects that ensure the sustainable use of natural, social and economic resources in an integrated and participatory approach.

General services provision

Agricultural R&D is governed by the National Institute for the Innovation and Transfer of Agricultural Technology (INTA), that manages the agricultural R&D and innovation system.

Agricultural extension services fall within the competence of MAG. The provision of these services does not involve direct payments to producers or processors. It includes services such as general and specialised training, and extension and advisory services that facilitate the transfer of information and research to producers.

Plant health is supervised by the National Phytosanitary Service (SFE). Most of the services provided by SFE have to be paid by the farmer. Animal health is supervised by the National Animal Health Service (SENASA). As in the case of SFE, most of the services provided by SENASA are paid by farmers.

Farmer fairs (Ferias del Agricultor) seek to link producers and consumers.

Costa Rican agricultural sector maintains a market information system called InfoAgro. Costa Rica’s Export Promotion Agency (PROCOMER) is responsible for the promotion of Costa Rican exports, including agricultural products.

Irrigation programmes are conducted by the National Irrigation and Drainage Service (SENARA). There are two types of programmes: off-farm programmes that involve large-scale irrigation works and on-farm programmes involved in the construction of private irrigation and drainage projects. For the former, SENARA manages the Arenal Tempisque Irrigation District (DRAT), a large-scale public investment. SENARA also finances private irrigation investments through the abovementioned PARD programme.

Rural territorial development is carried out by INDER, with two main areas of action: 1) land management and regulation, covering land acquisition, assignment and titles, and ensuring rural settlement on land distributed by the state; and 2) territorial development management, which includes development of rural infrastructure projects, organisational and entrepreneurial management, and rural credit – at preferential interest rates to finance services, agriculture, livestock, small-scale rural industries, trade, and ecotourism.

Costa Rica maintains tax exonerations for some sales taxes on staple food products, agricultural machinery, some veterinary products and agricultural inputs. Tax and financial incentives are provided for organic farmers. A tax exemption is also applied to activities included in the Free Trade Zone Regime (RZF), including for selected agricultural products.

There are no direct subsidies for consumers related to agriculture. Nevertheless, Costa Rica has several programmes for social protection.

For the period 2013-15, about 48% of total GSSE outlays were allocated to agricultural knowledge and innovation systems (more specifically, 33% to extension services and 15% to R&D). Development and maintenance of infrastructure (in particular, irrigation and farm restructuring) accounted for 32% of total GSSE outlays, and inspection and control services accounted for 14%. Together, these three categories represent 94% of the total GSSE budget.

Trade Policy Instruments

Import tariffs are the main instrument for trade protection in Costa Rica’s agricultural sector, although these have declined since Costa Rica joined the WTO in 1995. Between 1995 and 2014, the Most Favoured Nation (MFN) average tariff for agricultural goods decreased by 31%. However, the average MFN tariff for agricultural goods in 2014 was 11.5% – more than twice the average MFN tariff for total trade and industrial goods. Agricultural products are mainly imported duty-free (38% of agricultural tariff lines), or with tariffs lower than 15% (51%). However, tariffs on selected agricultural products are very high, with applied MFN tariffs of 151% for poultry; 66% for dairy products; 46% for both pork meat and sugar and 36% for rice. Almost all imports from the Central American Common Market (CACM) (Panama excluded) enter Costa Rica duty-free, with the exception of sugar and coffee.

Costa Rica has tariff quotas for 27 agricultural products. The Ministry of Foreign Trade (COMEX) allocates quotas based on historical record – 80% of the available volume is assigned to applicants that have already imported under the quota during the previous calendar year. The quota is issued in proportion to their participation in total imports under the quota. The remaining 20% is issued to new applicants on a pro rata basis. Apart from dairy products, use of quotas has been low, as tariff quotas with better conditions were negotiated under Free Trade Agreements for almost all products. Costa Rica applies preferential import tariff quotas for agricultural products from Canada, China, the United States, the Dominican Republic, Panama, the European Union, Peru and Colombia under the corresponding free trade agreements.

Licences or authorisations – generally related to health and phytosanitary protection, public safety and environmental protection – are required to import certain goods. In most cases, import licences must be obtained through the Single Window for Foreign Trade (VUCE). Since its launch in 2011, the VUCE 2.0 System automates 100% of import and export procedures year-round in order to reduce time and costs for users.

Sanitary and phytosanitary (SPS) measures on imports and technical regulations are carried out by SFE in conjunction with the Ministries of Trade and Customs and MAG. Since 2007, Costa Rica has adopted 125 technical regulations, most of which are related to products such as pesticides, fuels, medicines, textiles, cosmetics and food. Many of these regulations were issued under the General Treaty on Central American Economic Integration. Costa Rica has also continued to strengthen its infrastructure and institutional capacity to implement SPS measures, with the aim of facilitating trade while protecting the country from pests and diseases

Key challenges for the development of agricultural sector and productivity growth

Enhancing service provision begins with improving institutional efficiency and policy co-ordination.

The agricultural sector is governed by a complex public institutional structure, consisting of eleven institutions under the Ministry of Agriculture and Livestock (MAG) (Box 3). These institutions enjoy varying degrees of autonomy, and some have mandates that are established by legislation, posing challenges for MAG in co-ordinating activities across the Agricultural Public Sector (APS).

Complex and weak co-ordination among the APS institutions impedes effective service provision. While CAN was originally established to facilitate co-ordination across the sector, it has not been active for a number of years, and information-sharing across institutions remains limited. Co-ordination is weak, in part, because of the fragmentation of authority across institutions and the MAG’s limited authority to play an overarching co-ordination role: some institutions are attached to MAG, but others are decentralised and, moreover, may have their own separate legislative mandate and the ability to generate their own resources through the sale of services. Effective governance is also impeded by the fact that the agricultural sector and its institutional structure are regulated by several hundred laws and ministerial decrees. The government is now making a number of efforts to address these challenges, and several institutions are currently reviewing their functions and operational structure – including MAG, INTA, SFE and CNP – in an effort to strengthen co-ordination among themselves.

Co-ordination challenges also extend to sanitary and phytosanitary measures (SPS). SPS issues are not always promptly resolved, due to fragmented co-ordination across SFE, SENASA, the Ministry of Health and the Ministry of Trade. Given the perishable and higher-value niche product nature of many of Costa Rica’s agricultural exports, and the tensions that have arisen with trading partners over SPS measures, effective dialogue mechanisms and co-ordination mechanisms to resolve SPS issues in a timely manner are critical.

Box 3. Institutional Structure of the Agricultural Public Sector (APS)

The Agricultural Public Sector (APS) is comprised of eleven institutions which fall under the responsibility of the Minister for Agriculture. One of these institutions is the Ministry of Agriculture (MAG), which is responsible for the management of the APS and the formulation and implementation of agricultural policies, as well as the agricultural extension system.

Of the eleven institutions in the APS, five are under the direct control of MAG: The National Institute of Innovation and Transfer of Agricultural Technology (INTA), the National Animal Health Service (SENASA), the State Phytosanitary Service (SFE), the National Seed Office (ONS) and the National Council Club 4-S (CONAC). These institutions receive financial resources from MAG, with the exception of SFE, which is largely funded by user fees. Only two of these institutions – ONS and INTA – have their own Board of Directors, while the others are governed directly by MAG.

The other five institutions in the APS are decentralised and have an important degree of political independence. These are: The Rural Development Institute (INDER), the National Production Council (CNP), the National Irrigation and Drainage Service (SENARA), the Comprehensive Agricultural Marketing Programme (PIMA), and the Costa Rican Fishing Institute (INCOPESCA). PIMA and INDER are financially independent from MAG, but the others may receive transfers.

In addition to these eleven institutions, the Minister for Agriculture is also responsible for five other administrative and co-ordination bodies: the Executive Secretariat for Agricultural Sector Planning (SEPSA), the National Agricultural Council (CAN), and the Agricultural Sectoral Technical Committee (COTECSA); and the working bodies for public-private dialogue and consultation for joint solutions (the Joint National Forum, the Joint Regional Forum, and the Regional Agricultural Sector Committees, CSRA). The most important body is the CAN, a consultative advisory and sectoral co-ordination body that approves the agricultural sector plan. The Minister for Agriculture also chairs the National Joint Private-Public Forum and the Regional Joint Private-Public Forum, stakeholder bodies comprising representatives of organisations representing small and medium agricultural producers.

The agricultural private sector is represented by a range of supply chain organisations. Some, called “corporations” (corporaciones), have important government involvement, having been created by legislation and with the Minister for Agriculture as a member of the board of directors. There are six corporations: ICAFE (for the coffee sector, as mentioned in Box 2), LAICA (for the sugarcane sector), CORBANA (banana sector), CORFOGA (livestock sector), CONARROZ (rice sector, also mentioned in Box 2), and CHN (horticulture sector). Corporations have an important role in the negotiation of policies and in the provision of services to agriculture, and some have also been in charge of implementing public agricultural policies. Although the corporations initially received some government support, they are currently solely funded by their members.

Co-ordination issues also contribute to excessive bureaucracy. In particular, the registration process for a new agrochemical can take up to four years – more than double the registration period in most other Latin American countries. Although extensive controls are aimed at environmental protection, long registration periods actually slow the introduction of more efficient inputs and leave outdated inputs in use longer than necessary. Long waiting periods for procuring licenses – for instance, to change crops, diversify into processing or to dig a well – also impede productive decisions: licence applications can take 2-3 months in the best case scenario, and up to 6-12 months when several ministries are involved.

In addition, low levels of budget execution by some institutions are contributing to broader challenges in implementation. Budget execution rates average 80% across all institutions of the APS but some disburse considerably less. The timeframe of the national budget planning and the late arrival of resources to certain institutions means that several programmes are not implemented on time or not at all (e.g. some INDER and INTA programmes). Coupled with implementation challenges resulting from weak co-ordination and heavy bureaucracy among public agencies, services provided to farmers are limited and not always timely.

Moreover, the allocation of budgetary resources within the agricultural sector does not seem to match the importance that the government assigns to each objective and pillar. Only a small budget allocation is directed towards agriculture innovation systems, while resources for agricultural infrastructure, market information systems and a strategic information system for the sector are also very limited. The absence of systematic impact assessment of public expenditure in agriculture – particularly in the provision of services – makes it difficult to determine whether the budget is being allocated where it can have the greatest impact. Finally, potential investment in the agricultural sector is limited by the intensification of budgetary restrictions since 2013 in line with Costa Rica’s fiscal situation.

Strengthening the effectiveness of general services will be key for raising productivity.

Extension services are a core function of the APS, but capacity constraints and misallocated resources constrain their effectiveness. Although extension services receive nearly one-third (30%) of the MAG budget, personnel lack sufficient training, for instance, in new production systems, and managerial capabilities. The growing deficit in technical capacity is partly due to the age of most of its employees – 32% of staff are eligible to retire in the next three years – as well as to the non-renewal of technical positions: only one new hire is allowed for every seven retirees. The inclusion of numerous administrative tasks within the responsibilities of technical personnel also limits the effectiveness of service provision, as extension staff are often diverted from core advisory tasks. Extension services also suffer from limited co-ordination between R&D, knowledge generation and farmers’ needs.

Agricultural innovation – a key determinant of productivity growth – is constrained by (i) low expenditure on research and development (e.g. INTA receives only 1% of the total APS budget), (ii) a fragmented research agenda and (iii) limited integration with extension services. Agricultural research is also undertaken by universities and agricultural supply chain organisations, among others – however, research agendas are not co-ordinated, and results are not systematically shared. Furthermore, information-sharing between farmers, INTA and the Extension services programme is not institutionalised. The government has taken recent steps to address this, issuing a set of guidelines in 2016 with the aim of improving co-ordination between INTA and Extension services and better meeting producers’ needs.

Costa Rica is working towards a risk management approach, though agricultural insurance is still in the early stages of development. In line with the “National Risk Management Policy 2016-2030”, the National Commission of Risk Prevention and Emergency Response (CNE) works closely with the agricultural sector to assess current risks, reduce risk exposure, and prepare for emergency response. Such efforts include monitoring of weather phenomena in high-risk areas and management of a public online portal to bring together data generated by universities and research centres. CNE also operates an early warning system with support from active community participation (Sancho, 2016). Moreover, in the event of a disaster, CNE provides some financial support to farmers; this includes access to financing (or extended loan periods) and provision of inputs, machinery and emergency cash payments. At the same time, agricultural insurance markets are underdeveloped in Costa Rica. For several decades, crop insurance was provided almost exclusively by INS – the former state insurance institution – to rice producers. In 2015, INS initiated efforts to expand its coverage, with a crop insurance product for several of Costa Rica’s main crops. Currently, only 1.3% of agricultural land is insured, but plans for expansion are under development.

Public-private efforts, such as by sector corporaciones (agricultural supply chain organisations or “corporations”, see Box 3), complement a number of government services, including technical assistance, research, supply chain development and marketing for certain products. These services have had a positive impact on the development of sectors such as coffee, banana, and sugar cane. However, not all farmers have access to the support provided by corporations: less than 30% of total farmers belong to any type of farmer association, including corporations (INEC, 2014).

Broader constraints in the enabling environment also need to be addressed.

Infrastructure, in particular transport infrastructure, is identified by various indices4 as one of the strongest constraints to Costa’s Rica’s competitiveness, and poor road, warehouse and irrigation infrastructure constrain agricultural productivity. Limited investment in the transport system, combined with increasingly severe natural hazards, has led to the deterioration of roads: while investments in the 1960s and 1970s resulted in an extensive road network, road quality is now ranked below the Latin American average (WEF, 2015). The poor quality of rural roads increases transport costs and production losses, constraining the competitiveness of large producers and preventing small-scale producers from accessing markets. The lack of distribution centres and cold-chain facilities in certain regions is also increasing transport costs and limiting the ability of producers, including smallholders, to connect to marketing chains. Lastly, poor development of agricultural infrastructure, such as drainage and irrigation, is also decreasing productivity at farm level – a problem set to worsen with increasing natural disasters resulting from climate change.

Access to financial tools is also limited. In particular, access to farm credit is very low, ranking below other Latin American countries such as Chile, Mexico, Brazil and Colombia. In 2014, less than 14% of farmers received financing. The Banking Development System (BDS) was established in 2008 to improve access to finance, with preferential interest rates for qualifying farmers, but bank financing remains insufficient. Stringent requirements impede small-scale farms from taking advantage of available credit sources, and private commercial banks lack incentives to enter the market. As discussed previously, the market for agricultural insurance is also underdeveloped, but expanding.

Increasing value from agriculture also means exploiting opportunities to expand niche products.

The Costa Rican government has prioritised strengthening of exports and increasing the contribution of agriculture to the economy. With land availability constrained, increased value from agriculture rests on further exploiting Costa Rica’s niche in producing premium products and its strong reputation for environmental awareness. Key opportunities for the next wave of export success lie in the expansion of niche or differentiated products, such as organic produce and the further development of the processed foods industry. Both these areas also have the potential to reduce dependence on existing concentrated export commodities and to increase employment in rural areas, including – in the case of food processing – for relatively low-skilled labour moving out of agricultural production.

Organic production is a niche market that can capitalise on the sector’s reputation for both quality and sustainability. However, despite being an early mover in this sector – the first law related to organic production was passed in 1995 – organic production remains limited, at around 1.6% of total production (PEN, environmental database 2016; SFE 2015). Costa Rica’s share of organic production area is below the world average, and lower than in many other countries in the region (FAOSTAT, 2016). Contributing factors include underdeveloped marketing, distribution and commercialisation channels; lack of public and private support, in the form of extension services and innovation systems; and lack of confidence by producers that they will attract the price premium for organic produce (PEN, 2015a; IBS Soluciones Verdes, 2013).

The agro-industry is growing, but there is scope for further expansion. Processing enterprises also exist for other products – meat and meat-products, fruits and vegetables, dairy products, soft drinks and juice, confectionary and chocolate, and fish and seafood processing (USDA, 2015) – but not all are well-developed. The government is also currently exploring opportunities for diversification into new by-products, for instance, such as those from palm and rice, to further develop agro industry.

International linkages have been an important factor in the expansion of Costa Rican exports to date and will continue to be key for the promotion of agricultural exports. Encouraged by Costa Rica’s open investment policy, investment from international companies has helped to strengthen integration within international markets, and changed the production structure of the sector towards export crops. Foreign investment is particularly high in the cultivation of bananas, pineapples and palm – more than 50% of plantations for these crops are controlled by foreign investors (FAO, 2010a). International linkages in more processed products and non-traditional tropical fruits are currently more limited and could be encouraged through more investments in, for example, technical assistance and agricultural infrastructure, as well as efforts to promote contract farming schemes and strategic alliances with international partners to further integrate into international markets, as well as market development efforts.

Promoting rural development and reducing poverty will require greater efforts to foster the inclusion of smallholders, where possible, and options outside of agriculture over the longer term.

The Costa Rican government has highlighted rural development as a critical priority for the agricultural sector. This requires attention to the needs of smallholders across the range of issues identified in this review: improved general services, such as extension and market information; better infrastructure and access to finance; and the development of value-added markets. Efforts are also needed to ensure the effective integration of smaller producers into supply chains, along with increased investment in skills and education.

Service provision is a critical foundation for inclusion, but the aforementioned challenges in extension – limited technical capacity and competing responsibilities for advisory staff – dilute the benefits of extension for poor farmers. The uneven distribution of market information also constrains agriculture development. While agricultural supply chain organisations can complement public services, public-private efforts are not co-ordinated and overall service provision remains insufficient.

Broader enabling environment factors, such as infrastructure and access to finance, also have implications for inclusion. Recent investments in infrastructure notwithstanding, poor quality rural roads are a particular barrier to access to markets by smallholders, particularly in flood-prone regions. Insufficient distribution centres and cold chain facilities in certain regions are another key obstacle to the connection of poor farmers to markets. Moreover, limited access to credit and insurance are particularly debilitating for smallholders, constraining investments and impeding income-smoothing.

Inclusion is additionally limited by the uneven integration of smallholders into supply chains. Linkages between small-scale producers and agro-food chain actors further downstream do exist for a few products, coffee in particular: with support from the agricultural organisation ICAFE, many coffee producers are involved in bean processing, marketing and exporting, for example. However, other products – including those with large industries, such as pineapple and banana – do not include small-scale producers in commercialisation. Limited skills, barriers to credit and insufficient organisation preclude smallholders from participating in the early stages of processing. Finally, the uneven development of regional markets also impedes market access for small-scale producers.

In other cases, productivity growth and opportunities for small-scale producers are also constrained by limited competition in supply chains for certain products. For example, the sugar and rice sectors have concentrated market structures. According to Law 7818, LAICA, the sugar producer association, can regulate all activities involved in the supply chain, from the purchase, import, export, storage to the commercialisation at retail level of sugar in Costa Rica. The same situation is observed in the rice sector: CONARROZ (Law 8285) fully controls the rice market. This lack of competition impedes the competitiveness of the sectors and reduces opportunities for smallholder producers.

Lastly, low education levels in rural areas impede inclusive agricultural growth. While decades of investment in public education and healthcare have resulted in near universal access to these services, at times, Costa Rica’s educational outcomes for the agricultural sector are poor, particularly among those employed in traditional agriculture. Compared to the national average of nine years, the average school level of those employed in agriculture for the domestic market and the traditional export sector is 5.5 years and the average school level of those employed in the non-traditional agricultural export sector is 6.1 years (PEN, 2013). The low skill and educational levels of the rural workforce pose challenges for the improvement of agricultural productivity and movement up the supply chain. For example, while shifts into organic production have the potential to increase smallholder involvement in supply chains, these producers can face challenges in adopting new practices and meeting standards. Low skill and education levels also impede the movement of labour out of agriculture, posing challenges for adjustment.

Indeed, ultimately, not all smallholders will survive within the agricultural sector (not least due to rising fragmentation of farms), so attention needs to be given to issues of adjustment for this group in the context of the larger structural adjustment process in the sector and the economy. These include declining share of agriculture in GDP as the economy develops and diversifies and a declining share of agriculture in employment as some labour is released from the sector and labour demand in non-agricultural sectors increases with, all the time, rising agricultural output. For some smallholders improving productivity and competitiveness is a viable option (which may also need to involve some means for consolidating the outputs of smaller farms). For others, diversifying income sources (within and outside of the agricultural sector) will be critical; and for an important number leaving the sector altogether for non-agricultural jobs will be the only feasible solution. This implies an important role for social policies in addressing the needs of those unable to adjust (discussed further below), as well as improvements in rural education to position rural communities to create and take advantage of new income alternatives (e.g. Costa Rica has a strong base of ecotourism on which to build in this regard). Government policy to address rural poverty cannot only focus on agriculture-led development; agricultural policies need to be situated within broader rural development policies aimed at creating non-agricultural opportunities in rural areas and avoid mass migration to the cities (OECD, 2008, 2012).

Tackling poverty also means addressing some existing policies that harm poor households and hinder a managed transition to more open markets.

While Costa Rica’s overall level of support to agricultural producers is relatively low, it takes a form which is particularly damaging to efforts to tackle poverty and promote smooth adjustment to changes in markets or the climate. Market Price Support (MPS) was the largest component (85%) of the total support estimate (TSE) to agriculture in 2013-15 (Figure 5). Budgetary transfers, on the other hand, have been relatively small (15%). General services (as measured by the GSSE) is the predominant category of budgetary transfers (80%).

Producer support, as measured by the PSE, generated an average of 10.1% of gross receipts of agricultural producers in 2013-15. While this is not high compared to the OECD average of around 17.6%, this support is almost entirely (97%) based on the most trade distorting form: MPS. While aimed at food security and enacted through a reference price for rice and tariffs on several products (products contributing the most to MPS are rice, poultry, pigmeat and sugar), this support has a number of negative consequences for the objective of reducing poverty.

First, producer support for rice is imposing a significant burden on consumers, especially the poorest. Costa Rica has one of the highest domestic rice prices in the world. Consumers – low-income households in particular – allocate a significant part of their income to purchase this staple at prices higher than in the international market. According to the Consumer Support Estimate (CSE), policies to support agricultural prices generate an implicit tax on consumers (first buyers of the product), and increased expenditure on consumption by 21% in the (2013-15 period). As poorer households spend a higher proportion of their income on food, this in effect functions as a regressive tax, and, contrary to the stated aim, it has the effect of weakening the food security of poor households.

Second, the current support measures primarily benefit a handful of large landowners and rice millers. Rice production is dominated by large scale farms, which account for more than 76% of the planted area (INEC, 2014), while small farmers largely (72%) produce for their own consumption. Moreover, as many small-scale rice farmers are net buyers of rice, they are actually harmed by the higher prices for this staple food. This preferential support is drawing resources away from productive and sustainable activities. It also risks slowing the process of adjustment in the sector, a process that is needed given scheduled liberalisation under free trade agreements.

Costa Rica has committed to phasing out tariffs under the CAFTA-DR by 2025. In this context, the current producer support for rice impedes the smooth management of the adjustment challenge for producers – not all of whom will be competitive in a more open market – and reduces incentives for rice producers to adopt more efficient practices. Experience suggests that smooth adjustment can be facilitated by:

Clear signals of policy direction: Clear signals from the government about future support measures are important in ensuring informed decision-making by farmers about their prospects for remaining competitive in a more open market. Reforms to the minimum price took place in 2015, when it became a reference minimum price, however, in reality; this reference price continues to work as minimum price. While this reform is still new, to date there is no foreseen timeframe for phasing out this reference price.
Gradual phase-out of market support: The gradual phase-out of market support creates incentives to increase efficiency and become more competitive prior to market opening. The tariff phase-out has a set timeline, and the government is now taking specific measures to indicate that support will decline. Subsidised insurance policies for rice producers were cancelled in 2015, for example, and in 2019, SENARA will eliminate cross-subsidies from other crops to rice producers in the water pricing system.
Efforts to increase productivity growth: Increases in the range and effectiveness of services for farmers, R&D and extension services include; the provision of support for farmer organisations and co-operatives; improved infrastructure; and access to timely and affordable financing and tools for fostering resilience and risk management are all key to enabling producers to be well-positioned to face increased competition.
The fostering of alternative opportunities for those unable to compete: Support for supply chains and services from co-operatives are only available for certain crops in each region, and technical assistance and financial incentives to encourage diversification into alternative products are not readily available. To date, targeted programmes to develop the rural non-farm economy – in particular, by facilitating shifts into ecotourism or agro-food processing – are limited.

While there has been good progress on climate adaptation, untapped opportunities remain.

Climate change-induced losses in agricultural production are projected to reduce agriculture’s contribution to GDP by between 8% and 12% by 2100, relative to 2007 (Ordaz et al., 2010). In recognition of the agricultural sector’s vulnerability to climate change, the Costa Rican government is already making noteworthy strides to promote adaptation among farmers. Nevertheless, there remain untapped opportunities for further development to achieve the sector’s objectives of productivity growth and poverty reduction in a changing climate. Both progress and remaining challenges can be seen across four dimensions of adaptation policy: (i) strategic prioritisation, (ii) information generation and dissemination, (iii) rule-based regulations, and (iv) financial incentives.

Costa Rica has identified adaptation as a key political priority in several strategies, although misalignment with other objectives and mismatched funding limit its implementation and impact. Costa Rica has prioritised adaptation in national and sectoral strategies. Adaptation measures may also benefit indirectly under the government’s integrated approach with sustainable development and mitigation. At the same time, progress has been slowed by misalignment with other priorities – such as food sovereignty – which promote the production of crops that are not adapted to the changing climate of all regions. Moreover, budget allocations do not cover all of the adaptation-related objectives identified by the government, limiting the sector’s capacity to adapt.

Noteworthy steps can be seen in both information generation and dissemination about vulnerability to climate change and adaptive solutions, but an adaptation research agenda has not yet been developed, and dissemination to farmers is limited. A range of public and private institutions are researching some adaptive solutions, yet vulnerability assessments for Costa Rica’s main crops remain incomplete. Moreover, a co-ordinated, cross-institutional research programme on adaptive solutions is lacking, with institutions pursuing fragmented research activities. While a number of programmes are ongoing on dissemination and technical assistance, farmer awareness about long-run climate changes and adaptive solutions remains uneven. Reasons for this include a focus on current vulnerabilities, co-ordination weaknesses and capacity shortfalls in government institutions, and public resource misallocations.

Many rule-based regulations indirectly affect adaptive practices. However, their impact is often limited by the absence of clear adaptation objectives, in addition to limited implementation and lack of enforcement. For instance, while a number of environmental regulations to ensure land and soil quality have helped to improve resilience against extreme events, their impact has been hindered by implementation challenges. Other recent reforms have strengthened water resource management, but co-ordination and monitoring and enforcement challenges reduce the impact of these improvements. In addition, climate-proofing of infrastructure is encouraged, but not mandated, for private projects – an important oversight that leaves the agricultural sector exposed to significant losses. Finally, farmer efforts to adapt through crop diversification are impeded by lengthy permit application processes.

Lastly, most of Costa Rica’s financial incentives are non-distortive measures and may generate positive spillovers for adaptation if complemented with information on climate change projections. Costa Rica is a model of good practice in terms of avoiding most input subsidies – financial incentives which can have a distortive effect on adaptation. Adaptation could also be indirectly encouraged through a number of other financial incentives. For instance, environmental benefits programmes, Nationally Appropriate Mitigation Actions (NAMAs) and credit schemes may indirectly stimulate a wide range of adaptive measures; although they focus on current vulnerabilities and do not factor in climate change projections. Recent developments in Costa Rica’s agricultural insurance programme have also removed a number of barriers to adaptation – some remaining distortions notwithstanding. However, other incentive-based regulations – namely, reference prices and trade restrictions – distort incentives and may encourage maladaptive choices.

Policy recommendations

Drawing on the analysis undertaken in this Review, this section proposes measures to support the government’s efforts to promote productivity growth and tackle poverty in the context of market opening and climate change.

The first set of recommendations focuses on increasing productivity through improvements in the effectiveness of services provided to farmers, the enhanced efficiency of governmental co-ordination and budgetary execution, the strengthened role of the private sector and agricultural supply chain organisations, and the addressing of constraints in the broader enabling environment – notably in infrastructure and access to finance. Enhanced productivity underpins efforts to combat rural poverty amongst farm households, ensure the ongoing competitiveness of the agricultural export sector, position producers to compete in more open markets, and strengthen the resilience of the sector to climate change.

The second set of recommendations identifies opportunities to enhance value and inclusiveness in the agricultural sector. The recommendations initially focus on new opportunities to expand agricultural exports into higher-value, niche products, capitalising on Costa Rica’s strong environmental record and reputation. They then address the need to increase the share of value captured by producers, and to promote the greater inclusion of smallholders into marketing chains through reforms to these chains and improvements to rural education and skill levels. Together with recommendations on productivity, these aim to create a competitive, productive and inclusive agricultural sector that is better positioned to meet new market and climatic conditions.

The third set of recommendations focuses on aligning incentives and promoting adjustment to market opening. Recommendations focus on the need for clear and credible signals of policy direction, coupled with phased market opening, in order to provide the right signals and incentives for producers regarding the future of the market. Recommendations specifically address the issue of market price support for rice, and the need to address the perverse incentives created for rice production and the negative impact of this policy on poor households. Effective transition planning also requires the provision of adjustment support for those farmers that will not be competitive under more open market conditions.

Lastly, a final set of recommendations proposes a number of opportunities to further develop the agricultural sector’s efforts to adapt to climate change. These build on Costa Rica’s already active engagement by proposing better alignment of policy and funding with longer-term adaptation needs, strengthening awareness of climate vulnerability and adaptation options, improving the enforcement of key regulations, and using existing financial tools to incentivise adaptive behaviour.

Where possible, the recommendations suggest those measures which may be tackled more readily in the short-term and those that are likely to be more focused on in the medium- or longer-term. These also sometimes reflect areas where the agricultural sector has primary responsibility and those where other ministries may play a greater role. These recommendations are not exhaustive, and should be interpreted as a starting point for government consideration, refinement, and further elaboration.

1. Increasing productivity

Increase the effectiveness of government services to the agricultural sector

Review and reform extension services to increase their effectiveness. Given the current shortage of technical capacity and the misallocation of resources to non-advisory tasks, an evaluation could be a useful first step to identify where increases in technical staff and skills are most needed. Limits on the replacement of retirees, while constraining human resources at present, also create an opportunity for skill renewal and restructuring.
Strengthen public R&D and its connection with extension services. The enhancement of the agricultural innovation system is crucial for the achievement of sustainable productivity growth. Moreover, strengthened linkages between R&D and extension services provided to farmers will increase the relevance and impact of research findings. There is a need for greater budget prioritisation of agricultural R&D, matched by efforts to replicate successful public-private partnerships with agricultural supply chain organisations on R&D and technology transfer for specific crops. Increasing efforts on international co-operation are both a relatively cost-effective and important way of supporting innovation, both in terms of R&D per se and in terms of learning from others with a view to technology adaptation.
Reduce red tape. Slow and complicated bureaucratic procedures curb productivity growth. Shortening the registration process for agrochemicals is critical in the short-term, given the very low rates of approval and complaints by both trading partners and domestic producers about lengthy, onerous and unpredictable processes. Some trading partners have also complained about the system for importing registration resulting in a lengthy process, as well as the delays in the emission of sanitary import permits. There is also a need to shorten and simplify applications for permits to change crops and establish small-scale processing businesses. For example, the online permit application system that MINAE is currently introducing for water-related permits could be extended to other permit systems.
Bolster the role of agricultural supply chain organisations (e.g. corporations) to complement government services. In principle, agricultural supply chain organisations provide a range of services, including research, extension, access to credit, training on international standards and regulations, legal advice, transport and storage, marketing and export. But in practice services provided vary across organisations, and there is scope to strengthen the role of these organisations in some sectors that are key for smallholders. For some products, new organisations could be developed; for others, such as livestock and palm, both the number of farmers covered and the range of available services could be expanded. A useful first step in the short-term would be an evaluation of the existing services provided by current agricultural supply chain organisations to identify gaps and overlaps. Based on this evaluation, targeted measures can be implemented to strengthen the role of these organisations as a strategic complement to public services in the agricultural sector.

Strengthen institutional co-ordination and budgetary mechanisms

Improve consultation and co-ordination mechanisms within the APS. The large number of institutions in the APS risks fragmenting responsibility, slowing decisions and duplicating functions. Co-ordination among the APS institutions could be strengthened – in the short-term, the priority should be improving the operation of existing co-ordination mechanisms such as CAN.
A regular and systematic collection of strategic information could also contribute to better co-ordinated decision-making by providing all participants with a common and up-to-date overview of the performance of the sector and a consistent evidence base for policy decisions. As the secretariat to CAN, SEPSA could serve as a logical collection point for such information. In the medium-term, a review could be undertaken of the mandates of institutions, in order to reduce duplication and ensure coverage of new challenges.
Strengthen dialogue mechanisms and increase transparency to resolve SPS issues efficiently. Co-ordination between SFE and other institutions such as COMEX and customs in relation to SPS measures is currently limited. Improved co-ordination on SPS measures among the different agencies involved in agricultural trade could help to manage potential tensions with trading partners and domestic producers. Effective leadership and transparency are also key to improved co-ordination.
Improve budget allocation on key priorities. Although 80% of budgetary expenditures go to general services, resources are limited for agricultural innovation, technology transfer and technical assistance programmes, agricultural infrastructure, agricultural product safety and inspection services, market information systems, food safety systems, animal and plant health, etc. Greater alignment of budgets with stated policy goals will be key to improving performance in the sector.
Increase budget execution. Budget execution rates should be increased across agricultural institutions in order to maximise the impact of available resources. Timely disbursements of funds will enable better planning and improved service provision. Better co-ordination mechanisms within and outside the APS, could also help to reduce heavy bureaucracy that also hampers budget execution.

Strengthen the enabling environment for productivity growth and poverty reduction

Improve infrastructure. A functioning transportation infrastructure is needed to connect producers to the processing industry and national and international markets. Improving the transport network – main rural roads, in particular – will help to secure market access, decrease post-harvest losses and encourage farmers to shift to fragile but higher-value products. Further development of regional warehouses would improve market access and income opportunities for smallholder farms. Lastly, efficient irrigation systems are also needed to ensure productivity growth and prepare for future water scarcity. To reconcile these investments with the current fiscal deficit, Public-Private-Partnerships could be sought.
Increase access to finance. Increasing access to credit – through mechanisms that avoid moral hazard – is critical for boosting productivity growth amongst smallholders. Existing credit programmes by agricultural organisations could be expanded as a first step. Incentives and mechanisms can also be introduced for private banks to engage with small borrowers, for instance through the use of stored products in storage facilities as collateral. Moreover, stringent loan requirements for smallholders should be made more flexible.

2. Enhancing value and inclusion

Promote value-added production and reform marketing chains to boost producer share and smallholder participation

Enable diversification into niche or differentiated products. The APS has identified organic products as an important growth market: demand for organic products is growing globally (already, 69% of organic production in Costa Rica is aimed at exports) and domestic opportunities are also increasing as the urban middle class grows and eco-tourism hotels and restaurants develop. Capitalising on these markets will require investments in the commercialisation of organic products. Products benefiting from Ecolabels have good export potential for Costa Rica, given the country’s reputation for environmental protection and there are already initiatives upon which to build (such as Brand Costa Rica). Lastly, further development of by-products – such as frozen pineapple, and biofuels from rice straw – offers promising opportunities.
Integrate small-scale farmers into supply chains. Smallholder (including women and youth) integration into supply chains is key to helping raise incomes. Agricultural supply chain organisations can play an important role; for instance, the ICAFE model of including small-scale farmers within the supply chain could be expanded to other crops, such as beans. Improving mechanisms to distribute market information – by increasing the coverage of current mobile phone information systems, for example, will also help small producers integrate into markets. Lastly, smallholder farmers could also be trained in the early stages of processing for certain products, such as slicing, packaging, drying or sugaring, etc.
Consider ways to foster greater competition within the market structure in order to increase benefits for producers. The current low levels of competition in some agricultural markets is potentially constraining productivity and negatively impacting opportunities for small producers. Addressing competition issues in marketing chains are an important element to consider in the context of sectoral reform.

3. Reducing market price support and promoting adjustment

Send credible policy signals and manage the transition

Announce a timetable for the reduction of market support (e.g. rice reference minimum price). This should be a short term priority for action and front-loading of reform, given the negative impact that the current market price support for rice has on poor households and on the adjustment challenge in future.
Announce a timetable for phase out of agricultural tariffs to facilitate orderly adjustment. Producer support is still provided in the form of tariff protection for several products, namely rice, poultry, pigmeat, milk and sugar, thus deterring the cultivation of more productive or more adaptive products. Costa Rica has signed several FTAs under which tariffs for a number of these products are due to be phased out5 . Conveying to producers the precise timetable for a gradual phase-out of protection will aid forward planning.
Identify alternative paths for those that may struggle to compete. Not all small-scale farms are economically viable or able to join marketing chains. Alternative economic opportunities in areas such as ecotourism or agro-food processing will be important to combat unemployment in the rural sector. Targeted information and assistance programs may be needed in order to help producers adapt and shift to non-farm economic activities.
Ensure sufficient social safety net measures for displaced farmers. Building on Costa Rica’s strong record of investments in and provision of social services, measures to protect and assist those displaced from agriculture may include both specific adjustment assistance and training, as well as ensuring continued access to health and education services in rural areas. Costa Rica’s existing social protection programmes (such as the cash transfer programme operated by IMAS) could also play an important role. Agricultural policies need to be framed within an economy-wide approach including other policies (and ministries), such as regional initiatives (territorial economic development) and social development and protection. Economy-wide social programmes, like cash transfers, are more efficient, effective and targeted at transferring income to the poor than price policies or input subsidies.
Facilitate movement out of agriculture by improving rural education and skills. The improvement of education in rural areas would create opportunities for a diverse range of economic activities in rural and urban areas, contribute to increasing incomes and facilitate movement out of agriculture as needed.

4. Adapting to climate change

Align objectives, institutions and funding with a longer-term perspective to prepare for climate change

Adopt a longer-term perspective in all objectives, to align with climate change goals. A systematic evaluation of the extent to which agricultural policies are aligned with adaptation would help to maximise the impact of existing resources by strengthening synergies and minimising trade-offs in the long term. In particular, current objectives – such as food sovereignty – need to take future changes in climate vulnerabilities into account. The National Adaptation Strategy scheduled for 2018 may be a useful vehicle for this alignment process.
Improve co-ordination on the adaptation agenda. Strengthened information sharing and co-ordination – in particular among IMN, DCC, MAG, agricultural extension and agricultural organisations – is needed to build momentum on the adaptation agenda. DCC’s plans to expand across sectors, and MAG’s initiative to mainstream adaptation across institutions are both important first steps. Within MAG, a clear lead should be identified for the adaptation agenda in the agricultural sector to co-ordinate adaptation initiatives. Agricultural supply chain organisations must also be better integrated into the adaptation agenda. The National Adaptation Plan could help to formalise responsibilities and strengthen co-ordination across institutions.
Strengthen alignment of adaptation spending and objectives. Clear government roles and objectives should guide budget spending on adaptation. Tracking adaptation expenditures across the budget is difficult, but nevertheless key to revealing funding gaps. The systematic labelling of programmes with adaptive components is also a first step in a longer-term objective of evaluating Costa Rica’s adaptation efforts through development of a monitoring and evaluation programme.

Strengthen awareness of vulnerability to climate change and adaptive solutions

Co-ordinate research efforts by universities and the private sector to develop vulnerability assessments and adaptive solutions for all major agricultural products. Review of current public and private adaptation research and the development of an overarching research agenda are key to filling knowledge gaps and reducing duplication. Information-sharing across institutions should also be strengthened to facilitate this process – in particular, IMN’s historical weather data and climate change projections should be made publicly available. A range of projects across the government, universities and agricultural organisations already focus on current vulnerabilities and could extend their scope if the necessary data is made available. Continued efforts to promote international co-operation will also help to expand the knowledge base on the vulnerability of the agricultural sector and opportunities to adapt.
Increase farmer awareness of the effects of climate change and adaptation by integrating adaptation into existing technical assistance programmes. Extension services should systematically incorporate information on climate change vulnerabilities and adaptive alternatives (e.g. more resilient varieties, efficient irrigation techniques, alternative farming practices and crops) into current programmes. The provision of technical advice through mobile phones is one potential cost-effective tool to increase awareness. The National Strategy for Education and Development Communication on Climate Change proposed in the Third National Communication, produced by MINAE and IMN, could be used to advance such efforts.

Improve the enforcement of regulations to encourage adaptive behaviour

Strengthen the enforcement of regulations on soil quality and conservation. Increased enforcement of land and soil regulations is needed to reduce vulnerability of the agricultural sector to climate change. The government’s intention to conduct a comprehensive assessment of the legal framework and institutional responsibilities regarding soil legislation is an important first step.
Increase the monitoring, enforcement and co-ordination of water resource management. As climate change exacerbates water stress, the improved monitoring and enforcement of water-related regulations is critical. Such efforts will require strengthened co-ordination across the broad spectrum of institutions involved, as envisioned by the current development of a joint SENARA, MAG and MINAE DCC strategy on water protection and maintenance.
Implement and enforce minimum standards for climate-proof infrastructure. Climate change impacts are considered for public infrastructure projects, but private infrastructure projects remain unregulated in this respect. The enforcement of minimum standards for climate-proofing infrastructure is key to reducing economic losses during future extreme events.

Encourage adaptation through existing financial tools

Align existing voluntary payment programmes and direct payment schemes with adaptation. Financial incentives that encourage maladaptive practices should continue to be avoided. Current financial incentives could also help to prepare farmers for climate change by incorporating explicit adaptation components. In particular, eligible programmes could be linked with region- and crop-specific climate change projections. These include the Recognition of Environmental Benefits of Sustainable Production programme, the NAMAs, preferential credit programmes, and direct payment programmes for low-income farmers to purchase farming equipment and invest in irrigation.
Continue to develop and align the new insurance programme with adaptation. Insurance is important for enabling productive investments and for raising awareness of vulnerability to climate change and the need to reduce risk exposure. At the same time, by providing pay-outs when disasters occur, insurance also runs the risk of undermining incentives to choose more resilient agricultural products. The current agricultural insurance scheme could more closely aligned with adaptation and productivity growth by combining with area-yield insurance to develop a “hybrid” product to provide more timely pay-outs and reduce moral hazard. To limit the encouragement of maladaptive choices, coverage should continue to be priced according to risk exposure and should be accompanied by extensive information campaigns to raise risk awareness and continued efforts to increase take-up rates.

References

ADI (2014), World Risk Report 2014, Alliance Development Works (ADI).

COMEX (2016), Estadísticas COMEX, www.comex.go.cr/estadisticas/exportaciones.aspx.

FAO (2010a), The Land Market in Latin America and the Caribbean: Concentration and Foreignization, FAO, Santiago, Chile.

FAOSTAT (2016), FAOSTAT Database, http://faostat3.fao.org.

Fuglie and Rada (2015), International Agricultural Productivity Dataset, USDA Economic Research Service, www.ers.usda.gov/data-products/international-agricultural-productivity.

IBS Soluciones Verdes (2013), “Estudio sobre el Entorno Nacional de la Agricultura Orgánica en Costa Rica”, prepared for Programa Nacional de Agricultura Orgánica, C.R.

IMF (2016), World Economic Outlook Database (WEO), www.imf.org/external/ns/cs.aspx?id=28.

INBio (2016), “Biodiversity in Costa Rica”, Instituto Nacional de Biodiversidad.

INEC (2016), Statistical Database, Instituto Nacional de Estadística y Censos (INEC), www.inec.go.cr.

INEC (2015a), “Índice de Pobreza Multidimensional: Metodología”, Instituto Nacional de Estadística y Censos (INEC), San José, CR.

INEC (2014), Censo Nacional Agropecuario XI 2014, Instituto Nacional de Estadística y Censos (INEC), San José, CR.

INEC-ECE (2016), Encuesta Continua de Empleo (ECE), Instituto Nacional de Estadística y Censos (INEC), San José, CR.

MIDEPLAN (2014), Plan Nacional de Desarrollo [National Development Plan 2015-2018 (NDP)], San José, Costa Rica.

OECD (2016a), OECD Economic Surveys: Costa Rica 2016: Economic Assessment, OECD Publishing, Paris, https://doi.org/10.1787/eco_surveys-cri-2016-en.

OECD (2016b), Agricultural Policy Monitoring and Evaluation 2016, OECD Publishing, Paris, https://doi.org/10.1787/agr_pol-2016-en.

OECD (2015), OECD Review of Agricultural Policies: Colombia 2015, OECD Publishing, Paris, https://doi.org/10.1787/9789264227644-en.

OECD (2014), “Enabling Environment for Agricultural Growth and Competitiveness: Evaluation, Indicators and Indices”, by Diaz-Bonilla, E., D. Orden and A. Kwiecin´ski in OECD Food, Agriculture and Fisheries Papers, No. 67, OECD Publishing, Paris, https://doi.org/10.1787/5jz48305h4vd-en.

OECD (2012), Agricultural Policies for Poverty Reduction: A Synthesis, OECD Publishing, Paris, https://doi.org/10.1787/9789264167698-en.

OECD (2008), OECD Review of Agricultural Policies: Chile 2008, OECD Publishing, Paris, https://doi.org/10.1787/9789264042247-en.

Ordaz, J.L. et al. (2010), Costa Rica: Efectos del Cambio Climático sobre la Agricultura [Costa Rica: Climate Change Effects on Agriculture], Comision Economica para America Latina y el Caribe (CEPAL), D.F. Mexico.

PEN (2015), Vigésimo Primer Informe Estado de la Nación en Desarrollo Humano Sostenible, Programa Estado de la Nación (PEN), San José, CR.

PEN (2013), Decimonoveno Informe Estado de la Nación en Desarrollo Humano Sostenible, Programa Estado de la Nación (PEN), San José, CR.

PROCOMER (2016), Estadísticas de Comercio Exterior Costa Rica 2014, Promotora del Comercio Exterior de Costa Rica (PROCOMER), San José, CR.

Sancho, F. (2016), “Role of Policies in Supporting Adaptation to Climate Change of the Agricultural Sector”, Background Report.

SEPSA (2016), Sector Information Provided by SEPSA from the Ministry of Agriculture and Livestock for the OECD Review of Agricultural Policies: Costa Rica, July 2016.

SEPSA/MAG (2014), Políticas para el Sector Agropecuario y el Desarrollo de los Territorios Rurales 2015-2018 (Policies for the Agricultural Sector and Rural Territorial Development 2015-2018), San José, Costa Rica.

SEPSA/MAG (2011), Política de Estado para el Sector Agroalimentario y el Desarrollo Rural Costarricense 2010-2021 (State Policy for the Costa Rican Agri-food Sector and Rural Development 2010-2021), San José, Costa Rica.

UN (2016), Comtrade Database, http://comtrade.un.org/.

USDA (2015), “Costa Rica Exporter Guide”, Global Agricultural Information Network (GAIN) Report, Nr. 3/12/2015, USDA Foreign Agricultural Service, San José, CR.

WDI (2016), World Development Indicators Database (WDI), The World Bank Group, Washington, DC.

WEF (2015), The Global Competitiveness Report 2015–2016, http://reports.weforum.org/global-competitiveness-report-2015-2016.

Notes

← 1. A higher number when compared to OECD average of 0.32 or to Denmark (one of the most equal countries) with 0.25, for the same year.

← 2. A goal of increasing agricultural value added share to GDP by 2 percentage points from 6% in 2014 to 8% in 2018 has been established.

← 3. The definition of food sovereignty used in the short-term strategy (Policies for the Agricultural Sector and Rural Territorial Development 2015-2018, p. 23) is: “La soberanía alimentaria será entendida como el derecho que tiene el país de definir sus propias políticas y estrategias de producción sostenible, distribución, acceso, consumo y utilización biológica de los alimentos; así como promover legislación que garantiza el acceso a los recursos de producción para la pequeña y mediana agricultura; esto da prioridad a la producción nacional para la demanda local, respetando la diversidad cultural y la conservación de los sistemas productivos y la diversidad biológica. Para lograr este objetivo, el gobierno propone una política de fuerte apoyo a la pequeña y mediana agricultura productora de alimentos”. [Food sovereignty will be understood as the right of the country to define its own policies and strategies for sustainable production, distribution, access, consumption and biological utilisation of food; and to promote legislation guaranteeing access to productive resources for small and medium agriculture; this gives priority to national production for domestic demand, respecting cultural diversity and the conservation of productive systems and biodiversity. To achieve this goal, the government proposes a policy of strong support for small and medium-scale agriculture].

← 4. Such as the World Economic Forum’s Global Competitiveness Index 2015 and the Agricultural Growth Enabling Index-AEGI (OECD, 2014a).

← 5. For example, under CAFTA-DR (important trade partner), all agricultural products will have zero tariff by 2025 except potatoes and onions.