From 1980 to 1982, Costa Rica was battered by its worst economic crisis since the great depression. Inflation soared, and the normally complacent citizens of Central America's most prosperous nation were shocked by unprecedented scenes of children singing for coins on buses, beggars going door to door, and homeless families huddled under bridges. As the heavily indebted country went into a tailspin, it appeared that Central America's model democracy might slide into chaos or authoritarianism.
Today, however, just a decade later, President Rafael Angel Calderón Fournier can trumpet the “stability” of Costa Rica's “transformed” economy and boast that “the World Bank, the Inter-American Development Bank and the International Monetary Fund ... describe us as a human and economic miracle.”[1] Foreign Minister Bernd Niehaus now claims that Costa Rica is becoming a “locomotive pulling the other economies of Central America toward... development.”[2] Echoing Oscar Arias—President from 1986 to 1990—and Eduardo Lizano—Central Bank director between 1984 and 1990—Niehaus maintains that this small Central American republic of fewer than three million people could soon be the first developed country in Latin America.[3]
Indeed, Costa Rica has become something of a showcase of market-oriented economic development, and is now a regular stop on the U.S.-sponsored neoliberal tour of the Americas. When the Bush Administration attempted to convince Bolivian peasants to stop growing coca, for example, it arranged to have a few farmers sent to Costa Rica to learn how to grow and export macadamia nuts. Hilario Claros, one of those farmers, made the switch after his Costa Rican tour. “The Costa Rican trip convinced us that this can work,” he told a New York Times reporter upon his return to the Andes. Costa Rican macadamia trees soon began growing across Bolivia's Chapare rain forest.[4]
Costa Rica's “agriculture of change”—based on the export of macadamia nuts, pineapple, citrus concentrates, coconut oil, and other tropical products—is part of a radical turn to free-market economics that has endeared the country not only to a handful of favored Bolivian peasants like Claros, but to U.S. policymakers and champions of neoliberalism throughout the hemisphere. Even the United Nations’ International Labor Organization (ILO), hardly a bastion of right-wing zealots, points to Costa Rica, together with Chile and Mexico, as a Latin American success story that demonstrates how free-market economics may actually improve the situation of workers.[5]
Advocates of neoliberal policies point to the country's moderate inflation, healthy growth rates, and booming non-traditional export sector as evidence that stabilization and adjustment programs can work wonders in dependent, heavily indebted Latin American economies. But the recent economic history of Costa Rica contains lessons that are a good deal more ambiguous. Much of Costa Rica’s recent economic “success” has hinged on its strategic geopolitical position, on the legacy of the socialdemocratic and statist model that preceded the free-market “revolution,” and on the redefinition of key indicators and statistics.
Costa Rica 1980’s crisis had roots both in the downturn of the world economy and in a 30-year reformist experiment that gave the country the highest living standards in Central America, and health and literacy indices approaching those of developed, industrialized countries.[6] In 1942, social Christian President Rafael Angel Calderón Guardia, father of the current chief executive, alienated his elite backers by implementing a labor code and a broad social-reform program. He sought support from the country's progressive archbishop, and from the Communist Party, which had gained strength during the 1930s depression. In 1948, however, an alliance of social democrats and upper-class conservatives, angered by official corruption and suspicious of electoral fraud and Communist influence in the government, launched an armed insurrection that toppled Calderón's successor, Teodoro Picado. The social democrats under José Figueres, who controlled the weapons of the winning side, ruled by decree for 18 months. Figueres’ junta, while persecuting its vanquished social Christian and Communist foes, also took measures that deepened the reforms the latter had initiated in the period 1942-48. In an effort to limit the strength of the traditional upper class, the junta nationalized the banks. It also abolished the army in order to forestall a conservative restoration and to free up resources for social programs.[7]
In subsequent decades, even though the social democrats in the National Liberation Party (PLN) usually alternated in power with the conservative opposition, the nationalized banks channeled massive flows of subsidized credit to regions of the country and sectors of the economy where loans had previously been scarce. The state invested in energy, transport and communications infrastructure, housing, education, health and nutrition services, and generous pension and savings programs for public— and private—sector employees. These policies spawned a burgeoning, affluent class of professionals, small-scale entrepreneurs, and state functionaries, as well as a large number of peasant and artisan cooperatives. In the 1960s, the Central American Common Market spurred industrialization, as local and transnational corporations sought to supply expanding regional demand for consumer goods while safely ensconced behind high tariff walls. In the 1970s, when rapidly rising oil prices slowed expansion, the state increasingly made direct investments in manufacturing and agroindustrial enterprises. During the 1950s and 1960s, Costa Rica's economic growth rates were the highest in Latin America, and even during the 1970s they were still among the continent's four highest.[8]
The Costa Rican model, though, had growing costs. Industry relied on imported inputs and technology, exacerbating a chronic trade imbalance. Subsidized prices for food staples combined with high farm-support prices fueled the public sector deficit. National Banking System loans at below-inflation rates encouraged speculation and consumption instead of investment. While the state's expenditures rose from 15% of GDP in 1970 to 22% in 1980, its income remained constant at roughly 13% of GDP.[9]
In the 1970s, commercial banks were recycling petrodollars, and Latin American governments eagerly sought short-term credits to cover budget shortfalls. But the loans often had variable interest rates that unexpectedly skyrocketed when oil prices soared again in 1979. Costa Rica was caught in the debt trap: its terms of trade fell by one third and its debt service quadrupled between 1977 and 1981. By mid-1980, dollar reserves covered only one week's imports and the colón began a rapid downward spiral that in 18 months resulted in a 500% devaluation.[10]
Costa Rica declared a moratorium on debt payments in July, 1981, over a year before Mexico caused world consternation with its announcement that it could not meet its interest obligations. Although Costa Rica had one of the highest per capita debts in the world ($2,021 in 1980), as a “small debtor” its problems attracted little attention or sympathy in the international financial community.[11] Commercial banks were initially reluctant to negotiate at all with Costa Rica for fear of establishing precedents that might influence talks with Mexico and Brazil. [12] Yet sandwiched between Sandinista Nicaragua and Noriega's Panama, Costa Rica combined small size with a pivotal position in Washington's geopolitical strategy for the region. Even before the country emerged from the severe economic crisis of 1980-82, it started to receive favored treatment from U.S.AID, which began to provide large amounts of “economic support funds” intended to shore up its balance of payments. As the decade progressed, this partiality was also reflected in the policies of U.S.-dominated multilateral lenders, especially the IMF and the World Bank.
In 1980-81, two IMF accords with president Rodrigo Carazo's government broke down in the face of public opposition. But by late 1982, as inflation neared 100%, the newly-elected PLN government of Luis Alberto Monge had little alternative but to sign a $100 million IMF stand-by accord, committing itself to a package of measures intended to reduce inflation, cut the public-sector deficit, and bring order to the foreign-exchange market. To free up resources for paying the foreign debt, the IMF required Costa Rica to slash public-sector spending and investment, and to raise taxes, interest rates and utility rates.
IMF actions in Costa Rica, however, suggested uncharacteristic sensitivity to the importance of political stability in the economic-stabilization process. In a striking departure from monetarist orthodoxy, the IMF allowed National Banking System interest rates to remain below inflation and permitted the Central Bank to maintain a monopoly of foreign-exchange transactions. Unification of the overvalued official exchange rate with the free-market one was to occur gradually, rather than through sudden, disruptive “shocks.”
Washington was setting out to build a democratic, prosperous and stable “showcase” next to Sandinista Nicaragua. Given the severity of the economic crisis, it had to move fast. Between 1983 and 1985, the $592 million in U.S. economic aid was equivalent to a staggering 35.7% of the Costa Rican government's budget, one fifth of export earnings, and about 10% of GDP. By 1985, Costa Rica was the second highest recipient of U.S. assistance in Latin America, after war-torn El Salvador, and the second highest per capita recipient in the world, after Israel.[13] To stem “non-productive” social-welfare spending and losses from oversized publicly owned enterprises, U.S.AID insisted on sweeping changes in the country's economy: an expanded role for private banks, the auctioning off of state companies and the creation of new non-public organizations from agricultural schools to export promotion offices that intentionally duplicated functions of public-sector institutions. All this weakened the state and accelerated Costa Rica's embrace of neoliberalism.[14]
Washington put intense pressure on Costa Rica to comply with these demands. In 1984, for example, U.S.AID said it was holding up disbursement of desperately needed funds until the legislature—sequestered during an exhausting 20-hour debate—approved banking and cutrency reforms that permitted loans in dollars and that allowed private financial institutions to receive credit from the Central Bank. U.S. money also went towards founding a new Coalition for Development Initiatives CINDE)—staffed by Costa Ricans and North Americans, with offices in San José and several U.S. cifies—which provided funds for non-tradifional export projects, training, private-sector “educational” activities, and opening new markets abroad. CINDE and U.S.AID) in turn played key roles in establishing and staffing a new Ministry of Exports. In 1985, U.S.AID created the Transitory Investments Fund (FINTRA), a trust that was to support the buy-out of state-sector companies.[15] Washington also pushed for and received reductions in Central American extra-regional tariffs and generous incentives for producers of non-traditional exports. Meanwhile, the IMF, alarmed that Costa Rica was not fully complying with promises to slash public spending, conditioned continued support on the signing of a structural-adjustment agreement with the World Bank.
In 1985, Costa Rica signed a new IMF stand-by accord, new agreements with the commercial banks and the creditor nations in the Paris Club, and its first structural adjustment loan (SAL) with the World Bank. Thanks in part to the huge flow of U.S. assistance, the economy had stabilized since the debacle of 1980-82: inflation had dropped below 20%, growth had been positive for two years in a row, and the public-sector deficit stood at about 6% of GDP—short of the IMF target, but less than half the 1982 level. The adjustment phase initiated with SAL I meant a continuation of measures adopted in the 1983-85 stabilization period. But it also portended a series of more profound, long-term changes in Costa Rican society.
SAL I—an $80-million long-term loan from the World Bank sought to redirect Costa Rican industrial development from domestic and Central American markets to new international ones.[16] According to World Bank officials, this shift would allow Costa Rica to sustain the recovery initiated in 1983. Lower tariffs would fince local industries to be “competitive” and would facilitate the technology imports necessary for modernizing manufacturing; more tax breaks would encourage retooling and investment; and continued “mini-devaluations” of the colón would boost exports, dampen consumption and keep trade deficits in check.
In agriculture, the World Bank program required the reduction and eventual elimination of crop price supports, subsidized production credit, restrictions on food, input and machinery imports, and subsidized consumer prices for maize, rice and beans. It also called for a reorientation of investment and research away from food crops for domestic consumption and toward “non-traditional” exports like those that had so impressed the Bolivian coca growers who had toured Costa Rica at U.S. expense. In order to encourage new exports—agricultural as well as industrial—producers were urged to take advantage of Washington's Caribbean Basin Initiative (CBI), which provided greater access to the U.S. market.
The World Bank also prescribed a fundamental transformation of the Costa Rican state. Rather than intervening directly in the economy, as in the 1970s, the state was to divest itself of unprofitable enterprises, slash its deficit, improve the efficiency of its administrative activities, and limit itself as much as possible to guaranteeing social stability and facilitating the activides of the private sector. The nationalized banks, which previously budgeted credits to meet the needs of specific economic sectors and social groups, were told to make loans only according to profitability—not social development—criteria.[17] Finally, the World Bank sought to reduce the growth of the foreign debt, to restrict new loans to those with favorable, “concessionary” terms, and to assure that “fresh” loans were not used for paying debt service.
SAL II, signed in 1988, was a $200-million loan agreement with the World Bank and Japan that contained an extensive list of measures designed to continue the “reassignment” of resources to the private sector and export activities, and the “reordering” and slimming down of the state that began under SAL I.[18] The accord committed the Costa Rican government to bring domestic prices for grains, sugar, milk and other basic foods into line with lower international ones, thus encouraging “efficiency” but also opening the market to a flood of imports and undermining many peasant producers. It also called for improving cold-storage facilities, containerized ports, and transport and irrigation infrastructure—all necessary concomitants of the “agriculture of change.” Public-sector services were to he transferred to the private sector when they were “not indispensable for the functioning of the government.” Key policymakers, such as Central Bank head Lizano, argued that state enterprises had to be privatized even when, as with the telephone company and the oil refinery, they were running “healthy” surpluses.[19]
Within two years of SAL II, Costa Rica, Japan and the World Bank began discussions for a third structural adjustment loan linked to further economic liberalization. New IMF accords in 1991 and 1992 kept the free-market juggernaut on track, committing the Costa Rican government to a complete liberation of exchange and interest rates. In late 1992, Costa Rica and the World Bank finally hammered out the details of SAL III a continuation of the free-market restructuring initiated in the mid-1980s.
It has not been easy to achieve consensus about the adjustment process—as the lengthy discussions over SAL III suggest. Measures to “privatize,” “correct distortions,” and “improve the allocation of production factors” have created new winners and losers and forced virtually every group in society to redefine its strategies for survival. These processes also raise questions about how closely structural adjustment actually conforms to neoliberal concepts and how effective it has been in meeting its professed goals.
The main beneficiaries of the rush to the free market have been the export and private-banking sectors and foreign investors, especially those who have come to dominate key parts of the “agriculture of change” and the flourishing maquila assembly industry. By the late 1980s, almost half of Costa Rica's foreign exchange came from “non-traditional” exports—those other than the established mainstays of coffee, bananas and sugar. Nonetheless, all the tax breaks, financial backing, new industrial parks and free-trade zones, and support for foreign marketing and promotion have not brought high-value-added industries or vertical integration of production (linkages between suppliers, producers and distributors) to Costa Rica.
The key tax break did aim at generating more value-added, a necessity for a more dynamic and autonomous accumulation process. But it set the required level rather low, and was costly. Producers of non-traditional exports to non-Central American markets receive tax-credit certificates called CATs if their output contained 35% national value-added in the form of local raw materials, labor or energy. Established in 1972 during the heyday of the social-democratic model, CATs cost the government $150,000 to $200,000 for each $1 million worth of exports. Ironically, this “statist” subsidy has been crucial to the “success” of the new, supposedly free-market strategy. But by 1990, with the export fever generated by structural adjustment, CATs ate up 10% of the government budget and contributed significantly to continuing deficits. [20] Their distributional effect has also been highly regressive. In an 18-month period in 1988-89, 27% of the approximately $72 million in CAT subsidies went to only eight firms; a mere 26 companies received over half the CAT subsidies; and a single transnafional—PINDECO, the pineapple subsidiary of Del Monte, received almost 10% of the certificates.[21] In recent surveys, a majority of exporters indicate that if CATs were eliminated, they would reduce or cease their activities. [22]
Since the crisis broke in the early 1980s, diverse social groups have opposed free-market stabilization and adjustment policies. Industrialists who produced goods for the domestic and Central American markets, large and small grain farmers, the urban poor, government employees, and students, faculty and workers at the public universities have all been on the losing end, as the radical restructuring of Costa Rican society assigned resources to other sectors.
Each of the last three administrations has faced major protest movements that forced modifications in particularly draconian policies. Costa Rica's first “letter of intent” to the IMF, in late 1982, specified that the state utility company would boost electricity rates 90%, a measure intended to raise revenue for debt service and to eliminate wasteful “distortions” caused by arfificially cheap energy.[23] By early 1983, Monge's government had to contend with demonstrations and highway blockades by outraged consumers, many of whom publicly burned their electricity bills, and announced their inability to pay the increases. In June, the government caved in and signed an accord with the protesters that, IMF notwithstanding, rescinded many of the rate hikes and provided generous payment terms for those consumers who had fallen into arrears.[24]
Between 1986 and 1988, after SAL I slashed resources for grain producers, peasant organizations, allied at times with wealthy rice farmers, staged marches, road blockades and building occupations to call for the restoration of price supports and credit and extension programs. President Oscar Arias, though he won the 1987 Nobel Peace Prize for brokering the Central American peace accords, found the political problems generated by structural adjustment in agriculture an impossible challenge. During his four-year term, two of his three ministers of agriculture quit, squeezed from both sides by pro-free-market policymakers and agriculturalists’ organizations.
In 1991, the current administration of Rafael Angel Calderón Fournier trimmed budgets at the four public universities and tried to shift much of the cost of higher education to students. The expansion of public postsecondary education had been a major accomplishment of the social-democratic development model; by 1980, a remarkable 27% of the population of university-student age was enrolled in institutions of higher learning.[25] Calderón's budget cuts prompted a wave of student protest that caused the government to retreat and the Treasury Minister—who had advocated a hard line against “pressure groups”—to resign.
Although economic policymakers championed free-market ideology, in practice their attainments owed much to Costa Rica's social-democratic legacy. Together with CATs and other subsidies, the availability of a literate, disciplined workforce and a large corps of highly trained managers and technicians the product of the social democrats’ 30-year-long public investment in “human capital”—constituted one of Costa Rica's main attractions for the export-oriented investors that flooded in after 1982.
The continued capacity of the Costa Rican state to absorb discontent and the worsening divisions within opposition forces have also been crucial to the “success” of the model. The labor movement—riven by doctrinal disputes, debilitated by poorly planned strikes in the early and mid-1980s, and facing growing competition from employer-worker solidarista associations—has lost much support and largely ceased to be an effective defender of workers’ standard of living. Housing movements, which in the early 1980s led land invasions in the cities, weakened after the Arias Administration promised to build 80,000 new homes, giving priority to the most militant squatter settlements. Peasant organizations, whose militant actions contributed to the resignation of two of Arias’ three ministers of agriculture, nonetheless signed agreements with the Arias Administration to secure social-security health coverage for their members.
Under Calderón, the peasant movement, boosted by significant aid flows from foreign governments and non-governmental organizations (NGOs), has shifted from challenging free-market policies to attempting to carve out “economic space” for its members within the new system. Even industrialists, once adamant defenders of protectionism and overvalued exchange rates, have been lured into backing the free-market model by generous subsidies for plant reconversion and export promotion and by the possibility of buying discounted CATs from producers of nontraditional exports.
The absortion of opposition has been part of a state and lending-agency strategy to blunt the negative social impact of stuctural-adjustment policies. Foreign aid agencies, NGOs, and even the multilateral lenders began to provide “social-compensation” funds to ease the crisis caused by large-scale dismissals of public employees, declining real wages, and cutbacks in state services. As early as 1983, U.S.AID, European governments, and Catholic Charities helped the Monge government to begin indexing public-sector salaries to inflation and to institute a food-distribution program that benefited 42,000 of the poorest families.[26] Soon after, the European Economic Community launched a major aid effort directed at the poorest sectors of the population throughout Central America. By the mid1980s, NGOs and foreign aid organizations proliferated in Costa Rica, incorporating personnel dismissed from the public sector and attempting, albeit with mixed results, to mitigate the social hardships brought on by the rush to the free market. In 1990, the Calderón government introduced a “food bond” for needy families which, despite its good intentions, reached fewer than half of those in the “extreme poverty” category.
Economic adjustment in Costa Rica has had a “trickle down” effect, but largely in the form of low-paying jobs in assambly industries or agroindustrial-export enterprises. After a decade of stabilization and adjustment, per capita GDP, a key indicator of living standards, had not regained its 1980, pre-crisis level. The real minimum wage (i.e., adjusted for inflation), an important gauge of the living standards of the poor, jumped in 1983 as the country recovered from the devastating devaluation-inflation of 1981-82. But it has declined every year since, with the exception of 1985 and 1989, both pre-election years, when governments in Costa Rica typically expand spending to garner votes and good will (knowing too, that their successors will have to pick up the tab).[27]
And, to make matters worse, employers increasingly flout wage legislation, knowing that the state's enforcement capacity has been weakened by budget cuts and dismissals of public employees. By 1991, an estimated 37% of workers were paid less than the legal minimum [28] In agriculture, industry and construction, the percentage of the workforce receiving below minimum wages has risen well above 1980 pre-crisis levels; a particularly large number of complaints come from women employed in new garment assembly plants.[29]
Average real wages recovered to pre-crisis levels in 1987, though the gain largely evaporated by 1991. Even the initial post-crisis rise likely reflects increased upward skewing of the income distribution.[30] Real private consumption per head, often a better indicator than real wages of the burden of adjustment, has not recovered from the 1980-82 downturn and has fallen nearly one-quarter from its pre-crisis level. Many categories of social spending fell sharply in the mid-1980s, although some have since recuperated. Measured as a percentage of GDP, the budgets of the ministries most critical to basic well being—among them, health and education—remain considerably below 1980 levels.[31]
The percentage of the population below the poverty line has also climbed over the last five years, from 18.6% in 1987 to 24.4% in 1991.[32] The rise, however, is not simply quantitative; living in poverty is increasingly precarious in today's Costa Rica, with the unravelling of the social-safety net.
The recent ILO report that celebrates Costa Rica's adjustment experience notes that between 1980 and 1990 the country conducted the second-sharpest reduction of public-sector employment in the hemisphere (after Chile). In contrast to the rest of Latin America, it claims, the expansion of the informal sector—street vendors, sidewalk food and shoe repair stands, and so on—has been negligible. The report lauds the large increase—from 14% to 22% of the urban workforce—in employment in “small private enterprises.”[33]
These conclusions highlight one way in which changing, politically influenced definitions of key indicators have been used to cast a favorable light on troubling economic processes. The entrepreneurial energy embodied in “microenterprises” has been an article of faith for neoliberal theorists at least since the publication in 1986 of Peruvian economist Hernando de Soto's influential treatise The Other Path. [34] Microenterprises have become a cornerstone of neoliberal strategies for economic recovery and growth. In Costa Rica, interest in charting this new sector led to changes in 1987 in the surveys used to measure employment, income and living standards. After holding virtually constant between 1980 and 1986 at around 17%, the “self-employed” category was broadened to include more kinds of informal-sector workers and, not surprisingly, leaped 3.6% in 1987 to 22.9% of the labor force, and climbed to 24.9% by 1991. Yet these “independent workers” are hardly something for neoliberals to crow about—53.5% were below the poverty line in 1991, in contrast to 39.8% of workers who were wage earners.[35]
Changes in definitions of other indicators have also affected understanding of the impact of adjustment. This is most evident in data on social spending. In 1987 methods were modified fof recording some transfers of funds and services between public-sector agencies. These accounting shifts tend to “consolidate” certain kinds of public spending, an effect consonant with IMF and World Bank objectives, so that funds sent by one ministry to another would not count twice as income. But some key kinds of social spending, such as the Family Aid program, which involved disbursements to numerous other public sector organizations, cortinued to be counted with the old methods. This makes it difficult to tell to what extent the apparent recuperation of some kinds of social spending is real, and to what degree it simply reflects accounting changes.[36] In some cases too, apparten fiscal health obscures disquieting realities. The budget of the social-security system, for example—responsible for public clinics and hospitals as well as old-age and disability pensions—recovered its pre-crisis share of GDP by 1987 and retained it through 1991. The institution nonetheless increasingly suffers from severe shortages of equipment, medicines and personnel, as the central government delays disbursement of promised funds in an effort to hold down its deficit.[37]
The greatest “success” of economic structural adjustment in Costa Rica has been the boom in non-traditional exports. Yet this expansion hardly resulted from giving free play to market forces. Indeed, the traditional neoliberal tools—lowered tariffs on imports, interest-rate liberalization, privatization, and cuts in public spending—have been less important in fueling the growth of new exports than the huge subsidies given exporters, the expansion of U.S. quotas for key products under the CBI and the constant currency devaluations demanded by the international lending institutions and pro-export lobbies in Costa Rica. The fragility of the new strategy is highlighted by the exporters’ anxiety after Bill Clinton’s election about increased U.S. protectionism and by the candidate’s promises that taxpayers’ money will not be used to modernize companies abroad which are potential competitors of U.S.-based industries.[38]
Moreover, the boom shows signs of slowing—nontraditional export growth was only 3.8% in 1991,dramatically l
