The economy of Costa Rica heavily depends on tourism, agriculture, and electronics exports. Poverty has been reduced over the past 15 years, and a social safety net put into place. Economic growth rebounded from -0.9% in 1996 to 4% in 1997, 6% in 1998, 7% in 1999.
According to the CIA World Factbook, Costa Rica's GDP per capita is US$11,100; however, this developing country still faces the second highest inflation rate in Latin America, lack of maintenance and new investment in infrastructure, over 610,000 (16%) people below the poverty line and just over 270,000 (6.6%) unemployed. The Costa Rican economy grew nearly 5% in 2006 after experiencing 4 years of slow economic growth.
Inflation rose to 22.5% in 1995, dropped to 11.1% in 1997, 12% in 1998, 11% in 1999 and 9% in 2007. Large government deficits - fueled by interest payments on the massive internal debt - and inefficient administration by government monopolies have undermined efforts to maintain the quality of social services. Curbing inflation, reducing the deficit, and improving public sector efficiency through an anti-corruption drive, remain key challenges to the government. Political resistance to privatization has stalled liberalization efforts.
Costa Rica's economy emerged from recession in 1997 and has shown strong aggregate growth since then. After 6.2% growth in 1998, GDP grew a substantial 8.3% in 1999, led by exports of the country's.
The strength in the nontraditional export and tourism sector is masking a relatively lackluster performance by traditional sectors, including agriculture. Inflation, as measured by the Consumer Price Index, was 10.1% in 1999, down from 11.2% the year before. The central government deficit decreased to 3.2% of GDP in 1999, down from 3.3% from the year before. On a consolidated basis, including Central Bank losses and parastatal enterprise profits, the public sector deficit was 2.3% of GDP.
Controlling the budget deficit remains the single biggest challenge for the country's economic policy makers, as interest costs on the accumulated central government debt consumes the equivalent of 30% of the government's total revenues. This limits the resources available for investments in the country's deteriorated public infrastructure, investments in many cases that would result in higher quality infrastructure if they were better planned.
Costa Rica used to be known principally as a producer of bananas and coffee. Even though coffee, bananas, pineapple, sugar, lumber, wood products and beef are still important exports, in recent times electronics, pharmaceuticals, financial outsourcing, software development, and ecotourism have become the prime industries in Costa Rica's economy. High levels of education among its residents make the country an attractive investing location.
The country has successfully attracted important investments by such companies as Intel Corporation, which employs nearly 3,500 people at its custom built $300 million microprocessor plant; Procter & Gamble, which is establishing its administrative center for the Western Hemisphere in Costa Rica; and Abbott Laboratories and Baxter Healthcare from the health care products industry likewise. Manufacturing and industry's contribution to GDP overtook agriculture over the course of the 1990s, led by foreign investment in Costa Rica's free trade zones. Well over half of that investment has come from the U.S. In 2006 Intel's microprocessor facility alone was responsible for 20% of Costa Rican exports and 4.9% of the country's GDP
Tourism is booming, with the number of visitors up from 780,000 in 1996, through 1 million in 1999, to 1.9 million foreign visitors in 2007, allowing the country to earn $1.9-billion in that year. Tourism now earns more foreign exchange than bananas and coffee combined. In 2005, tourism contributed with 8,1% of the country's GDP and represented 13,3% of direct and indirect employment.
The country has not discovered sources of fossil fuels--apart from minor coal deposits-- but its mountainous terrain and abundant rainfall have permitted the construction of a dozen hydroelectric power plants, making it self-sufficient in all energy needs, except oil for transportation. Costa Rica exports electricity to Central America and has the potential to become a major electricity exporter if plans for new generating plants and a regional distribution grid are realized. Mild climate and trade winds make neither heating nor cooling necessary, particularly in the highland cities and towns where some 90% of the population lives.
Costa Rica's infrastructure has suffered from a lack of maintenance and new investment. The country has an extensive road system of more than 30,000 kilometers, although much of it is in disrepair. Most parts of the country are accessible by road. The main highland cities in the country's Central Valley are connected by paved all-weather roads with the Atlantic and Pacific coasts and by the Pan American Highway with Nicaragua and Panama, the neighboring countries to the North and the South. Costa Rica's ports are struggling to keep pace with growing trade. They have insufficient capacity, and their equipment is in poor condition. The railroad didn't function for several years, until recent government effort to reactivate it for city transportation.
The government hopes to bring foreign investment, technology, and management into the telecommunications and electrical power sectors, which are monopolies of the state. However, political opposition to opening these sectors to private participation has stalled the government's efforts.
Costa Rica has a reputation as one of the most stable, prosperous, and among the least corrupt in Latin America. However, in fall 2004, three former Costa Rican presidents (Jose Maria Figueres, Miguel Angel Rodríguez, and Rafael Angel Calderon) were investigated on corruption charges related to the issuance of government contracts, and several of the legal proceeding are still open.
The poor state of public finances and the maladministration by state monopolies will continue to limit the state's ability to try to modernize these sectors in the absence of a political consensus to permit private investment. Failure to act soon on telecommunications could prove an obstacle to the government's desire to attract more world-class foreign investment.
Some large sectors such as utilities and telecommunications are nationalized and/or are government supported monopolies.
Although there are no formal capital controls, it has been claimed that the prevalence of state-owned banks have had the same effect. They are also blamed for the rampant inflation that currently runs at around 11%.
The quality of these industries, particularly power and communications, have been sharply criticized for the outages that occur nearly daily in some areas.
The large amount of government intervention and support for these industries has been blamed for the lack of funding for and virtual non-existence of police.