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Costa Rica's Wrong Turn

January 31, 2014 in Economics

By Juan Carlos Hidalgo

Juan Carlos Hidalgo

On Sunday, Costa Ricans will go to the polls in what many consider the most important presidential election in a generation.

At stake is the future of an economic model that over the last 25 years has produced robust economic growth but has failed to significantly reduce the poverty rate. Unfortunately, a bad reading of the economic policies implemented by a succession of conservative and social-democratic administrations over the last three decades could lead voters to follow the siren song of populism.

Many Costa Ricans mistakenly believe that economic liberalization is to blame for the country’s social woes.”

The groundwork for a populist shift has already been laid. Rampant corruption, social stagnation and growing inequality have provided fertile soil in other Latin American nations for the rise of populist candidates — and Costa Rica is no exception.

The lead-up to the election has been marked by widespread national dissatisfaction, and according to surveys, corruption is voters’ main concern. After eight years in power, the National Liberation Party has become synonymous with cronyism and embezzlement.

This is the reason that a Socialist congressman, José María Villalta, is one of the leading candidates. His platform calls for policies similar to those disastrously implemented in Venezuela, like land distribution, punitive taxes on big corporations, price controls and the nationalization of key industries.

His claim that the country’s economic liberalization of the last 30 years has failed the masses resonates among a large segment of the electorate. But Mr. Villalta’s policy prescriptions are based on a wrong diagnosis of Costa Rica’s economic model.

After an acute crisis from 1980 to 1982 swelled the poverty rate to 54 percent, Costa Rica put in place reforms to move the economy toward an export-oriented model. The country set exchange rates to provide more certainty to exporters and established free-trade zones and entered into free-trade agreements with the United States, the European Union and China, among others. It also privatized inefficient state-owned enterprises and opened certain industries to competition.

These reforms brought significant growth. Since 1987, Costa Rica has been growing an average of 4.7 percent a year, one of the fastest rates in Latin America.

But since 1994, poverty has remained stagnant and income inequality is on the rise. In fact, Costa Rica is one of only three Latin American countries where inequality has risen since 2000.

And this has happened despite the fact that Costa Rica has one …read more

Source: OP-EDS

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