Costa Rica’s Economic Crisis and Recovery: 1980s-1990s

Posted on Oct 23, 2024 in Economy

Costa Rica’s Economic Crisis (1980s)

Debt and Deficit Crisis (Mid-1970s)

Costa Rica’s external and internal debt and deficit grew rapidly in the mid-1970s, leading to a severe economic crisis. The country faced the following challenges:

1. GDP declined to 50% of its previous levels.
2. Inflation rose to 65% in 1981 and exceeded 82% by 1982.
3. Unemployment skyrocketed.
4. Agricultural and industrial production fell drastically.
5. The currency (colón) fluctuated against the dollar, dropping from 8.60 to 60.00 colones per dollar.

Impact of the Crisis

The crisis led to food shortages and long lines at distribution centers. The government was forced to pay only the interest on its debt.

Monge Álvarez Administration (1982-1986)

The Monge Álvarez government implemented several policies to address the crisis, including:

1. Agrarian reform
2. Technology transfer and support
3. Creation of socioeconomic regions to promote development
4. Controls on market margins
5. Assessment systems for internal and external consumption

Arias Sánchez Administration (1986-1990)

The Arias Sánchez administration focused on social harmony and economic recovery through state reform and Structural Adjustment Programs (SAPs). Key priorities included:

• Industrial Reconversion:

  Modernizing industries to improve international competitiveness.

• Financial Modernization:

  Banking reform to modernize the system and allow for the opening of private banks.

State Reform

1. Signing of the Structural Adjustment Program (SAP I) in 1988 to remove obstacles to production, stimulate growth, and generate jobs.
2. Strengthening private banking to promote exports.
3. Signing of SAP II in 1989 to further trade liberalization, reduce tariffs, restrict public spending, and eliminate agricultural subsidies.
4. Debt reduction: demanding payment of 60% of the value of exports.

• Social Initiatives:

  A project to eliminate slums and provide decent housing through family housing bonds.

• Education:

  Establishment of national tests and the introduction of computer science education.

• Health:

  Expanding social insurance coverage to 91.2% through clinic construction and combating drug trafficking. Establishment of the Constitutional Chamber (Room VI) in the justice system.

Calderón Fournier Administration (1990-1994)

Key developments during this period included:

1. Import restrictions
2. Increased devaluation
3. Sales tax increase
4. Decline in international coffee and banana prices
5. Approval of the Pension Act to eliminate pension privileges

Structural Adjustment Programs (SAPs)

What is a SAP?

A set of economic measures implemented by a government to adjust its economy. Loan money is used for development projects and improving quality of life.

SAP I (1984-1985)

Focused on production diversification and third markets. Funded by the World Bank ($80 million). Key measures included:

1. Mini-devaluations
2. Elimination of export taxes
3. Incentives for growing non-traditional products
4. Public spending controls: a) Public sector job freeze, b) Wage limits, c) Improved tax collection, d) Infrastructure repairs (including the train)

SAP II

Focused on improving efficiency and productivity in the export sector through tariff reductions and elimination of the CAT (a tax). Funded by the Japanese government and the World Bank ($200 million). Key points included:

1. Exports, industrialization policies, and CAT elimination
2. Agricultural pricing policy

SAP III

Promoted greater economic growth. Funded during the Figueres administration by the Inter-American Development Bank and World Bank ($350 million). Key aspects included:

1. Trade Openness:

   Tariff reduction/elimination, removal of export/import licensing, and CAT elimination.

2. Internal Liberalization:

   Decontrol of prices and profit margins.

3. Financial System:

   Central bank autonomy and modernization of the state bank.

4. State Reform:

   Privatization of state-owned enterprises (e.g., FERTICA, lanterns, CEMPASA).

SUGEF (General Superintendence of Financial Entities) was created to regulate financial institutions.

Social Impact of SAPs

• Increased unemployment
• Decreased state role
• Fiscal imbalance and continued inflation
• 13% sales tax
• Increased human poverty

Social Indicators: Health, Education, Housing, and Jobs

Health: Long waiting times for medical attention and resurgence of eradicated diseases.

Education: Low performance, high dropout rates, and deteriorating infrastructure.

Housing: Growing housing shortage and increased slum formation.

Employment: Increased self-employment and child labor.

Peace in Central America

The Search for Peace

Driven by the need for national development, peace, respect, and freedom.

Peace Processes

Focused on free elections and democratic governance. Esquipulas II agreement (August 7, 1987), proposed by President Oscar Arias Sánchez, had the following characteristics:

1. Commitment to democratization
2. Cessation of internal hostilities/guerrilla warfare

Commitments of Esquipulas II

1. Link between peace and democracy
2. Political will to overcome the crisis
3. Promoting repatriation of displaced persons
4. Scheduling agreements for verification

Outcomes of Esquipulas II

1. Free elections throughout Central America
2. Formation of civilian governments
3. Disarmament of armed groups
4. Respect for human rights