Executive summary

Costa Rica’s economic, social and environmental achievements are impressive
It is urgent to restore fiscal sustainability
Policy and institutional reforms will contribute to stronger and more inclusive growth

Costa Rica’s economic, social and environmental achievements are impressive

Costa Rica succeeds in combining rising living standards with sustainable use of natural resources. Incomes per capita have nearly doubled in real terms over the past three decades. Almost universal access to health care, education and pensions has been achieved. Careful management of natural resources has emphasised the protection of forest and the development of renewable energy sources, providing foundations for the strong eco-tourism industry. As a result, the well-being of most Costa Ricans is high, as attested by long life expectancy, poverty rates low by Latin American standards and above-average perceptions of life satisfaction.

It is urgent to restore fiscal sustainability

The public deficit and debt have risen since the start of the 2009 global crisis. Rating agencies have downgraded Costa Rica’s debt to below-investment grade and its country risk spread has risen. To restore the fiscal balance it is urgent to raise more tax revenue and curb spending, notably the fast-increasing public-sector wage bill. Improving the fiscal framework by enhancing its transparency and predictability, and reinforcing central government control over public finances would strengthen public-finance management.

Policy and institutional reforms will contribute to stronger and more inclusive growth

Despite strong performance, socioeconomic challenges remain. Policy reforms and institutional changes could put Costa Rica on a path of stronger and more inclusive growth. The main priority is to improve the framework of competition policy and state-owned enterprises’ governance. Productivity would be enhanced by promoting innovation, access to finance and transport infrastructure. Such reforms need to go hand in hand with making Costa Rica a more inclusive society, especially for women, by improving the quality of education and enhancing the effectiveness of cash transfers in reducing poverty, thus expanding opportunities and sharing prosperity more widely.

MAIN CHALLENGES
MAIN CHALLENGES	KEY RECOMMENDATIONS FOR 2016-17
Restore fiscal sustainability and enhance monetary credibility
Tax revenues are low and spending is rising fast, pushing public debt to high levels. The public administration is highly fragmented and the Ministry of Finance has limited control over total public expenditure	Cut the central government deficit by 2% of GDP during 2016-17 and an additional 1.5% thereafter by approving and implementing the proposed tax reform, combatting tax evasion, eliminating tax exemptions without an economic or social rationale, and curbing expenditure growth.
	Introduce a medium-term fiscal framework with a clear and verifiable expenditure rule.
	Improve public spending efficiency by strengthening the authority of the Ministry of Finance to control overall public-sector expenditure and introducing performance-based budgeting.
The central bank’s independence in the conduct of monetary policy can be improved	Strengthen the effectiveness of monetary policy to achieve price stability with appropriate institutional reforms, especially by delinking the designation of the President of the Central Bank from the political cycle, and improving accountability rules such as clear motives for his/her dismissal.
Banking-sector competition and financial systemic risks remain concerns	Establish a deposit-insurance scheme covering all banks to help level the playing field in the banking sector, accelerate the adoption of Basel III principles, and release publicly the results of banks’ stress tests.
Make growth more inclusive, especially for informal workers and women
The labour-market gender gaps are high	Increase the supply of publicly-funded childcare services to facilitate women participation in the labour market.
The minimum wage structure is very complex. One out of three workers is being paid below the minimum wage	Simplify the minimum wage structure and enforce compliance with the law.
The share of informal employment is high by OECD standards and increasing	Adopt a comprehensive strategy to reduce high labour market informality by strengthening enforcement, reducing administrative burdens to entrepreneurship, and enabling the poor to become formal workers.
Spending on education is high, but outcomes are poor. Repetition and drop-out rates are high	Establish better educational outcomes as the main policy target, with special emphasis on improving the performance of disadvantaged students and schools.
	Develop an apprenticeship system that closely involves employers.
Adopt policy and institutional reforms to boost productivity growth
Competition is weak and the role of state-owned enterprises is pervasive in many sectors	Give the competition commission more independence and eliminate anti-trust exemptions.
	Improve the corporate governance of state-owned banks and enterprises by adopting the OECD Guidelines on Corporate Governance of State-Owned Enterprises.
Low productivity growth and barriers to entrepreneurship are hampering income convergence	Strengthen the institutional design to align policies to boost productivity, improve the business environment and reduce barriers to entrepreneurship.
Transport infrastructure is deficient due to a complex institutional setting	Streamline the institutional and legal framework of public-work agencies to achieve better policy design and execution in transport and other infrastructure sectors.