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Structural Adjustment in Costa Rica: Sapping the Economy

Extract from Karen Hansen-Kuhn, Structural Adjustment in Central America: The Case of Costa Rica

The Development GAP, June 1993

Under structural adjustment: 1982 - present

Costa Ricans living in poverty increased from 21 percent of population in 1989 to 28 percent in 1991.

Real wages declined 16.9 percent between 1980 and 1991.
85 percent of public-sector workers fired were women.
Infectous diseases are spreading, and infant mortality rates are rising for the first time in decades, as spending on public health decreases.
Crime is on the increase.

In the 1980s, Costa Rica became the first country in Central America to undergo a process of structural adjustment under the guidance of the International Monetary Fund (IMF), the World Bank and the United States Agency for International Development (USAID). Declaring "mission accomplished," USAID is shutting down in Costa Rica this year, while the country is hailed by the Bank and the Fund as one of their adjustment successes due to improvements in some economic indicators. But other measures of the country's well-being paint a troubling picture.

Under a series of structural adjustment programs (SAPs), Costa Rica's trade deficit has increased enormously despite aggressive export-promotion efforts. The fiscal deficit and inflation, two main targets of SAPs, also continue at historically high levels. Real wages have fallen sharply while poverty has increased dramatically. Income distribution has worsened significantly, particularly in the rural areas, where many small and medium-scale farmers have seen support for domestic food production cut just when they are being shut out of new government programs that emphasize exports. Environmental degradation has accelerated as land under cultivation in bananas and new "non-traditional" export crops, all heavily chemical dependent, increases.

These problems now represent a threat to the country's longstanding democracy and political stability. The case of Costa Rica demonstrates the urgency of the need to re-examine adjustment policies and the institutions that have promoted them and to search for democratic alternatives that will lead to equitable and sustainable development.


Costa Rica stands out in Central America because of its near half-century history of stable democracy and well-functioning government that has featured the region's largest middle class and the absence of both an army and a guerrilla movement. A Scandinavian-type social-welfare system that still provides free health care and education has helped produce the lowest infant- mortality rate and highest average life expectancy (72.6 years) in all of Central America.

The country's post World War II development model -- emphasizing food self-sufficiency, financial and technical support to small and medium-size farmers, import-substitution industries and trade with other Central American countries -- led to a steady rise in the Gross Domestic Product (GDP) and a relatively equitable distribution of income.(1) However, an overreliance on the export of coffee yielded an economic crisis when coffee and other commodity prices fell and oil prices rose in the 1970s. By late 1981, Costa Rica had one of the world's highest levels of debt per capita, and debt-service payments amounted to 60 percent of export earnings. Deciding to defend its social-service system, the government suspended debt payments to nearly all of its creditors, predominately commercial banks. Cut off from new commercial bank loans -- and desperate for foreign exchange to meet its debt- service obligations -- the Costa Rican government turned to the World Bank, the IMF and USAID for assistance.

The World Bank, IMF and Structural Adjustment

Costa Rica's relationship with the IMF and World Bank has not been a particularly smooth one. The first two Fund agreements, in 1980 and 1981, were cancelled due to government noncompliance with austerity measures.(2) The country's economic situation continued to deteriorate throughout 1982, with inflation rising to 109 percent and real GDP falling by seven percent. President Luis Alberto Monge signed a new loan agreement with the IMF in December of that year.

In 1985, besides signing another Standby Arrangement with the Fund, the government received its first Structural Adjustment Loan (SAL I) from the World Bank to support longer-term changes in the economy. It received a second adjustment loan (SAL II) of US$100 million in November 1989 along with a matching loan from the government of Japan. After releasing a tranche under SAL II, however, the Bank suspended further disbursements in early 1990 when both the inflation rate and the government budget deficit ex- ceeded the specified targets.

The signing of a new agreement with the IMF in April 1991 freed further SAL disbursements while committing the government to reduce drastically both inflation and the budget deficit. It also required the government to increase the sales tax by a staggering 30 percent, which has hurt the poor disproportionately. SAL III, currently in effect, requires massive cuts in the government payroll.

Economic Indicators of Failure

After more than a decade of stabilization and structural adjustment, massive amounts of U.S. economic assistance, which jumped 16-fold during the U.S.-sponsored Contra War in neighboring Nicaragua, and significant sacrifices by the population, Costa Rica's economy appears to be in the process of further decline rather than gradual improvement. Even in strictly macroeconomic terms -- that is, on the very narrow basis upon which the Bank and Fund want SAPs to be judged -- the economic program has failed. While GDP growth has resumed after a sharp fall during the economic crisis of 1981-82, GDP per capita still has not reached pre-crisis levels. Furthermore, inflation has not been brought under control and has been fluctuating widely through the early 1990s.

Despite claims that adjustment programs help countries ease their external debt, Costa Rica's burden actually increased during the eighties, from US$2.7 billion in 1980 to US$3.8 billion in 1990. This rise occurred despite the country's participation in the U.S. "Brady Plan" debt-relief scheme under which Costa Rica was able to "buy back" much of its outstanding commercial debt at a discount. Furthermore, debt reduction has been conditioned on continued implementation of adjustment measures and adherence to an economic model that increases the country's dependence on foreign markets, imports and loans.

The economic model has benefitted narrow commercial interests at the expense of much-needed government revenues. Under the SAP, import duties have been reduced and tax concessions and other subsidies granted to tourism, agriculture and manufacturing for export. These measures have drained resources from the government while rapidly increasing imports. As a result, inflation and the trade and fiscal deficits have grown to unacceptable levels. Costa Rica's trade deficit increased more than 400 percent in six years, from US$134.9 million in 1984 to US$568.7 million in 1990. While the government did manage to lower inflation and to cut the fiscal deficit in 1992 to meet the IMF requirements, it did so mainly through desperate stopgap measures, such as delaying public-sector investment, that are clearly unsustainable.

Agriculture of Change

The adjustment programs promoted by USAID, the Bank and the IMF during the second half of the decade had export promotion as their major focus. Under SAL II, the government introduced a new agricultural policy, "Agriculture of Change," designed to promote the production of commodities for export.

USAID prepared a list of crops that would find a market in the United States. The same list was used throughout the Americas with no regard to local climatic or soil conditions. Farmers who grew the new crops under the "Agriculture of Change" received incentives that included the removal of export taxes, the dropping of import duties on farm inputs, exemption from income taxes on production for export, preferential interest rates, special access to foreign exchange and export-incentive bonds.

Jorge Hernandez of the Union Nacional de Pequenos y Medianos Productores Agropecuarios (UPANacional), Costa Rica's largest farmers' union, estimates that between 80 and 90 percent of the benefits of export incentive bonds have gone to five transnational corporations, including a local subsidiary of Del Monte that received nearly 25 per cent of total benefits.(3) Over a period of five years, the value of the bonds increased some 1,900 percent. In 1991 they were equivalent to 43 percent of the fiscal deficit at a time when expenditures for education, health services and the support of food production were being cut.(4)

Forcing Small Producers off the Land

Small farmers were reluctant to give up the security of growing food crops, such as rice, beans and corn, that they could use to feed their families in hard times. Many of the new crops required substantial infrastructure investment, such as irrigation systems, that were beyond the financial capabilities of small producers. Because they could no longer receive financing for traditional crops, many small farmers have been forced to sell their land and go to work for large producers or migrate to the cities.

Not surprisingly, therefore, foreign investors and some local elites, dominate both the production and export of non-traditional crops. Forty percent of macadamia production, 52 percent of cut- flower production, and 46 percent of pineapple cultivation is controlled by foreigners.(5)

While crop production has been diversified under the "Agriculture of Change," markets have not. Earnings from non-tradi- tional agricultural exports increased from US$51 million in 1985 to US$153 million in 1990, but most of these goods went to the United States.(6) The vulnerability of an export strategy that relies on a limited number of outlets was highlighted in 1987 when Costa Rican cut-flower producers found themselves barred from the U.S. market.

For Costa Rica's small domestic-market producers, the "Agriculture of Change" has been a disaster. According to farmers' organizations, the emphasis on export production has led to a deepening dependence on imported food, including subsidized U.S. food aid, that competes with local production. Since the early 1980s Costa Rica has gone from near self-sufficiency in food production to importing over one half of all cereals consumed. Corn and beans imported under USAID's P.L.480 food assistance program have undercut national production, and wheat imports, though not in competition with local crops, have altered consumer tastes.(7) The result of adjustment measures imposed by the World Bank and the food aid administered by USAID in Costa Rica has been greater debt and a loss of food security.

The Environmental Cost

Production of the new export crops in Costa Rica typically involves massive use of agrochemicals because many of the non- traditional crops are not native to the country and are highly susceptible to pests and diseases. CECADE, a rural education project, studied melon producers using such agrochemicals as Tamaron, Paraquat and Lannate (Metomil) and found that more than 70 percent of them reported witnessing domestic or wild animals die after spraying, and 58 percent knew of water supplies poisoned by the agrochemicals. Three-quarters of the farmers reported having health problems that they attributed to the insecticides and fungicides.(8)

The push to export has also threatened Costa Rica's forests and its internationally acclaimed national parks system. Illegal logging has been reported on Indian reservations and in areas bordering national parks. Today, Costa Rica has one of the world's highest rates of deforestation. According to a recent survey by the World Bank, all unprotected forests in Costa Rica are rapidly disappearing. Rural workers driven off their land by the new agricultural policies, have invaded parks, cut down trees, and squatted on underutilize land outside the parks.

Maquiladoras and Free-Trade Zones

The expansion of non-traditional industrial exports has been a principal feature of Costa Rica's adjustment program. The country's "industrial reconversion" program began as part of the government's 1986-1990 National Development Plan, which was deepened with inclusion in the 1989 SAL II agreement.(9) Similar in intent to the "Agriculture of Change", the industrial- reconversion policy has been directing production toward increasing exports through the promotion of maquiladoras and free-trade zones (FTZs).

Export-assembly plants, known as maquilas or maquiladoras, receive the same incentives as non-traditional agricultural production, including preferential interest rates and exemption from income taxes. Under the incentive programs, the number of maquilas tripled over the adjustment period. About two-thirds of the investment in maquilas is domestic rather than foreign, but those firms and employment in them tend to be much more unstable than the better capitalized foreign-owned plants.

FTZs have also been part of the industrial-reconversion plan supported by the World Bank under SAL II. Plants that operate in these zones and export over one half their production are exempt from taxation for ten years and benefit from the priority given by government to the construction of the infrastructure that they require.

Labor rights in the FTZs and maquilia industries are being undermined by the establishment of "solidarista" associations, funded by monthly contributions from members and employers. They are based on the belief that workers, management and owners have a common interest. The associations usually have savings-and-loan plans and sell consumer goods, in addition to offering health services and access to housing, recreation, investment, small- enterprise-creation and pension programs.(10) While these associations are not legally permitted to represent workers in collective bargaining, the International Labor Organization (ILO) found that companies had used direct settlements with such groups of workers to undermine unions and collective bargaining agreements.(11) Without independent unions to help balance employees' interests with those of plant owners, it seems highly unlikely that significantly improved labor standards and wages will be seen in the maquiladoras or FTZs.

Wages Fall, Poverty Spreads

Costa Rica's adjustment programs have led to increasing economic polarization, which many observers are concerned is beginning to seriously undermine the country's relatively egalitarian structure and democratic tradition. Until 1980, Costa Rica had a long history of constantly rising real wages, a factor which helped produce the nation's relatively high standard of living. Otton Solis, Minister of Planning under President Oscar Arias, points out that the period since 1985 is the first time in the country's history that GDP has grown while wages have decreased, showing that the benefits of that growth are not being distributed evenly. This has created a vicious cycle, he believes, that will continue to widen the gap between rich and poor.(12)

Under the adjustment programs real wages declined 16.9 percent between 1980 and 1991.(13) In 1990 alone, real incomes of commercial, agricultural and professional workers decreased 5.1, 3.5 and 3.4 percent, respectively.(14) The following year, purchasing power fell another 10 percent.(15)

The burden of adjustment has fallen disproportionally on the poor and on women. According to Mario Lungo of Centro Superior Universitaria Centro Americana (CSUCA), "The 1980s generated a high proportion of jobs of inferior quality, of great instability and low income, which could explain the fact that employment levels have risen again [to their 1980 levels] while incomes fell and poverty increased." The statistics bear him out. Sources within the Ministry of Labor recently leaked a confidential study that shows that poverty has increased dramatically since the implementation of the adjustment program. Acording to the study, the number of Costa Ricans living in poverty -- defined as those who lack the minimum income needed to meet their basic needs -- increased from 415,853 in 1987 to 599,528 in 1991, i.e., from 21 to 28 percent of the population. The report concludes that the groups benefitting most from the adjustment measures have been exporters of non-traditional products, importers, and those linked to the financial-services sector.(16)

The reduction of thousands of government jobs, due to the requirements of the country's adjustment program, have hurt women disproportionally. In the past, the public sector provided women both greater opportunity and fairer wages. However, during the first few months of the government's "labor mobility" program in 1990-91, 85 per cent of public-sector workers who were fired were female.

As the poor become more desperate, crime of all types is increasing. Tourists are favorite targets and guidebooks warn visitors to be extremely cautous.(17) Corruption is also increasing and some books warn tourists to be warry of shakedowns by police.(18)

Decline in Social Services

As wages declined and poverty spread during the 1980s, the Costa Rican government was also cutting social-service expenditures in line with World Bank and IMF requirements to reduce the current- account deficit. A 1992 Bank report on adjustment lending shows government budgets for health, nutrition and sanitation programs declining 35 percent in real terms between 1979 and 1988, while real expenditures per capita fell by 45 percent during the same period.(19) The government has had to postpone new investments, such as the construction of clinics and schools, while the demand for social services continues to rise with the increased impoverishment of the population.

Primary and preventive health-care services have been particularly hard hit. For the first time in decades, infant mortality rates have begun to rise, and the incidence of infectious diseases, such as malaria, dengue fever, tuberculosis and measles, has increased dramatically; reported cases of malaria, for example, rose from 168 in 1981 to 3,247 in 1991.(20) Referring to the public-health system's inability to deal with these problems, Jose Sanchez of the Ministry of Health comments, "Those are the great achievements of SAL I and II. Thanks a lot."(21)


Costa Rica's political stability and relatively high standard of living should have made the country a "best-case scenario" for the application of adjustment policies. Despite these favorable conditions, SAPs have not led Costa Rica out of economic crisis and toward stable, equitable development. Rather, the social and economic decline in Costa Rica over the past decade and a half is jeopardizing the country's democratic tradition, a concern consistently expressed during interviews conducted with Costa Rican academics and NGO and popular-movement leaders.

Despite the accumulated evidence of a failed economic policy in Costa Rica, the Calderon Administration (1990-1994) intensified the implementation of the country's adjustment program. Jose Maria Figueres won the 1994 presidential election on the promise not to implement SAL III, by far the largest and most ambitious adjustment program to date. However, several months after taking office, Figueres, under pressure from the international financial institutions, broke his campaign promise and agreed to implement the new adjustment program.

Rather than learning from Costa Rica's experience, the promoters and financiers of the program -- the World Bank, the IMF and USAID -- continue to insist on government compliance with SAPs throughout Central America. In a region emerging from years of civil war, with fragile democracies and pervasive poverty, this is a foolish and short-sighted policy, not only for the countries themselves, but also for the United States, given its stake in long-term peace and stability in the region.


  1. Between 1965 and 1973, for example, the country's Gross Domestic Product (GDP) grew at an average rate of seven percent.
  2. Maureen Taft-Morales, "The Effect of Structural Adjustment on the Poor in Costa Rica," in CRS Report for Congress: World Bank/IMF Adjustment Loans and the Poor in Developing Countries (Washington: Congressional Research Service, 1991), p. 71-73.
  3. Author's interview with Jorge Hernandez, 22 April 1991. Information on Del Monte subsidiary from Centro de Estudios para la Accion Social, Ajuste Estructural y Desajuste Social (San Jose: CEPAS, 1990), p. 19.
  4. Reported by the Facultad Latinoamericano de Ciencias Sociales (FLACSO) in Central America Update, 11 August 1992.
  5. Rine Vermeer, "La Politica Agraria de la Administracion Arias en el Marco del Ajuste Estructural," in Los Campesinos Frente a la Nueve Decada, ed. William Reuben Soto (San Jose: Editorial Porvenir/CECADE, 1990), p. 57.
  6. Alvaro Rivas Villatoro, Las Exportaciones Agricolas No Tradicionales Costarricenses 1989-1990 (San Jose: Centro de Capacitacion para el Desarrollo, 1991).
  7. Op. cit., International Development Networker, p. 2.
  8. Author's interview with Maria Tribelato of CECADE, 19 April 1991, and Rivas Villatoro, p. 45.
  9. Mario Lungo, Las Transformaciones en la Economia del AMSJ (San Jose: Confederacion Universitaria Centroamericana, 1990), p. 37.
  10. International Labour Office, "Report of the Committee on Freedom of Association (278th Report) Case No. 1483: Complaint Against the Government of Costa Rica Presented by the International Federation of Free Trade Unions," International Labour Office Official Bulletin, Vol. LXXIV, 1991, p. 63.
  11. Ibid., p. 80.
  12. Author's interview with Otton Solis, 16 April 1991, and "PAE: los resultados," La Nacion, 17 November 1990.
  13. Economic Commission for Latin America and the Caribbean (ECLAC), Balance Preliminar de la Economia de America Latina y el Caribe 1992, (Santiago: ECLAC, 1992), p. 46.
  14. "Structural Adjustment III: The Squeeze Continues," Central America Report, 20 September 1991, p. 280.
  15. Carlos Roverssi, "El 28 por ciento de los ticos vive en la pobreza," La Republica, 20 February 1992, p. 1-2.
  16. Ibid., p. 2.
  17. Beatrrice Blake and Anne Becher, The New Key to Costa Rica, 10th Edition, (San Jose, Publications in English, 1991), p.68-69.
  18. The Tico Times ed., Exploring Costa Rica (San Jose: The Tico Times, 1993), p. 33.
  19. World Bank, Adjustment Lending and Mobilization of Private and Public Resources for Growth (Washington: World Bank, 1992), p. 62.
  20. Ibid., p. 68.
  21. Edgar Cabrera, Jorge Corrales, Miguel Gutierrez and Francisco Hernandez, Para el Debate: El impacto del ajuste sobre la vida del pueblo (San Jose: Universidad Nacional Heredia, August 1991), p. 72-73.