OECD Economic Survey of Costa Rica 2020 - Presentation

2020 OECD ECONOMIC SURVEY OF COSTA RICA Keeping the reform momentum 15 July 2020, Paris – San José

http://www.oecd.org/economy/costa-rica-economic-snapshot/

Key messages • Timely and well targeted measures are helping to contain the impact of the COVID-19 crisis.

• Reform momentum has been extraordinary. Going ahead with further reforms is key.

• As soon as the recovery is established, full implementation of the fiscal reform is critical.

• Simplifying business regulations and reducing bureaucracy would boost competitiveness and jobs.

• Improving public spending efficiency, reducing informality and boosting financial inclusion would improve inclusiveness.

2

COVID-19 is taking a toll on the economy

3

The economy is in recession Real GDP, y-o-y % change Y-o-y % change 10

Y-o-y % change 10

8

8

6

6

4

4

2

2

0

0

-2

-2

-4

-4

-6

2000

2004

2008

Note: Data for 2020 refer to an average over Q1 and Q2, which are forecast.

Source: OECD Economic Outlook 107 database.

2012

2016

2020

-6

4

Unemployment is surging % of labour force 20

% of labour force 20

16

16

12

12

8

8

4

4

0

2000

2004

2008

Note: Data for 2020 refer to an average over Q1 and Q2, which are forecast.

Source: OECD Economic Outlook 107 database.

2012

2016

2020

0

5

Sovereign risk premia have increased EMBI sovereign bond spreads, basis points 1000

BRA

900

CHL

COL

CRI

1000

MEX

900

800

800

700

700

600

600

500

500

400

400

300

300

200

200

100

100

0 Jan-13

Jul-13

Source: Refinitiv.

Jan-14

Jul-14

Jan-15

Jul-15

Jan-16

Jul-16

Jan-17

Jul-17

Jan-18

Jul-18

Jan-19

Jul-19

Jan-20

0

6

Inflation is subdued Y-o-y % changes Y-o-y % changes 16 14

Central bank target range

Headline inflation

Policy rate

Y-o-y % changes 16 14

12

12

10

10

8

8

6

6

4

4

2

2

0

0

-2 2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Note: Shaded area represents the central bank target range. Data are based on monthly averages. Latest value refers to May 2020.

Source: Banco Central de Costa Rica.

2019

2020

-2

7

The recovery will be very gradual Single-hit scenario

2020

2021

Gross domestic product

-4.1

2.7

Unemployment rate

15.9

13.9

Fiscal deficit (% of GDP)

-8.9

-7.1

Primary fiscal deficit (% of GDP)

-3.9

-1.7

Gross public debt (% of GDP)

67.9

70.6

Double-hit scenario

2020

2021

Gross domestic product

-4.9

1.5

Unemployment rate

17.0

15.5

Fiscal deficit (% of GDP)

-9.1

-7.7

Primary fiscal deficit (% of GDP)

-4.0

-2.1

Gross public debt (% of GDP)

68.8

73.1

Note: GDP refers to annual percentage growth. Unemployment rate is per cent of labour force.

Source: OECD Economic Outlook 107 database.

8

Recommendations to cope with the COVID-19 crisis • Any support to firms and households during the coronavirus crisis should be temporary and targeted at the most affected sectors.

• Prepare for increases in healthcare demand, including by boosting testing and tracing capabilities.

• Be ready to ease monetary policy further to support the economy during the COVID- 19 crisis.

• Continue to provide liquidity to the banking system to preserve its integrity and support confidence and continue to adjust prudential regulation during the crisis.

9

Economic progress has been significant but significant gaps with OECD countries persist

10

The export basket has become increasingly diversified Economic complexity and diversity 230

0.4 Number of products

Economic Complexity Index (RHS)

220 210

0.3 0.2 0.1

200 0.0 190 180

-0.1 -0.2

170 -0.3 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Harvard University Center for International Development Atlas of Economic Complexity.

11

Costa Rica is one of the few countries that reversed deforestation Land covered by forest, % of total land area

Source: OECD Environment database; Worldometers.info 12

The income gap with advanced economies remains large Thousands of PPP-adjusted 2015 USD per capita 50 45

CRI

OECD

LAC OECD

50 45

40

40

35

35

30

30

25

25

20

20

15

15

10

10

5

5

0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Note: LAC OECD refers to the simple average of Chile, Colombia and Mexico.

Source: OECD Economic Outlook 107 database; World Bank World Development Indicators.

13

Inequality is high Gini coefficient, 2019 or latest year available 0.6

0.6 Before taxes and transfers

After taxes and transfers 0.5

0.4

0.4

0.3

0.3

0.2

0.2

0.1

0.1

0.0

0.0

ISL SVK CHE CZE SWE EST KOR SVN NOR POL DNK HUN BEL CAN JPN NLD DEU OECD ISR LVA AUS TUR AUT FIN LTU ITA PRT FRA ESP LUX GBR GRC USA IRL MEX COL CHL CRI

0.5

Source: OECD Income Distribution database.

14

Macroeconomic policies have improved but the fiscal framework should be reinforced

15

The fiscal deficit remains large Government financial balance, % of GDP 6

6 Budget balance

4

Primary balance

4

2

2

0

0

-2

-2

-4

-4

-6

-6

-8

-8

-10

2006

2008

2010

2012

2014

2016

2018

2020

Source: OECD Economic Outlook 107 database; and Ministerio de Hacienda. Data for 2020 are projections based on the single-hit scenario in the Economic Survey of Costa Rica 2020.

-10

16

Public employment spending is high Compensation of government employees % of total revenue, 2018 or latest available year 60

60

50

50

40

40

30

30

20

20

10

10

0

DEU

COL

MEX

FRA

OECD

PRT

SWE

NOR

Source: ILOSTAT; OECD Analytical database; and IMF Global Finance Statistics.

ESP

AUS

CHL

USA

CAN

BRA

PER

CRI

0

17

Public procurement is not widely used % of general government expenditure less salaries and interest payments, 2018 or latest available year

Note: Data for Costa Rica refer to 2017.

Source: Calculations based on the OECD Government at a Glance database.

NLD

AUS

ISR

KOR

CAN

JPN

TUR

SWE

GBR

DEU

IRL

FIN

POL

0

NOR

0

DNK

10

USA

10

CHE

20

FRA

20

BRA

30

ESP

30

COL

40

MEX

40

PRT

50

GRC

50

ITA

60

CRI

60

18

The government’s interest expenditure is high Interest expenditure % of GDP, 2019 or latest year available 4.5

4.5

2008

4.0

4.0

3.5

3.5

3.0

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

DEU

CHL

POL

FRA

OECD

ESP

USA

TUR

COL

PRT

ARG

ITA

GRC

Source: IMF World Economic Outlook, Oct. 2019. Data on interest expenditure for Costa Rica are from Ministerio de Hacienda.

MEX

CRI

0.0

19

Full implementation of the fiscal rule is critical for debt sustainability Central government debt scenarios, % of GDP 100

100

90

90

80

80

70

70

60

60

Single-hit scenario

50

Double-hit scenario

40

40

Incomplete implementation

30 20 2010

50

30

Structural reform (double-hit scenario) 2015

2020

2025

2030

2035

Note: Evolution of central government debt-to-GDP ratio under the alternative scenarios as described in OECD Economic Survey of Costa Rica 2020.

Source: OECD calculations based on data from Ministerio de Hacienda.

2040

20

20

Key recommendations to further improve macroeconomic policies • Ensure that the fiscal reform is fully applied once the recovery is established.

• Eliminate tax exemptions benefiting more affluent tax payers.

• Adopt a single salary scale for public employment.

• Increase the use of public procurement.

• Create a public debt management agency.

21

Boosting productivity and improving regulations

22

Labour productivity is relatively low 1000s of PPP-adjusted USD per capita, 2018 or latest available year 70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

COL

CRI

CHN

MEX

CHL

POL

HUN

PRT

SVK

CZE

ESP

Note: OECD average calculated as the simple average across OECD countries with available data.

Source: OECD Productivity database.

NZL

FRA

OECD

AUS

DEU

USA

0

23

Regulations are very stringent Overall PMR score, index from 1 to 6 (most restrictive) 2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

0.0

GBR DNK ESP DEU NLD SWE AUS NOR LTU NZL EST LVA SVN CZE HUN ITA PRT FIN OECD IRL CHL ISR ISL POL AUT JPN CHE SVK GRC FRA MEX LUX BEL KOR CAN COL TUR CRI

2.5

Note: Data refer to 2018.

Source: OECD Product Market Regulation database.

24

Establishing a company is highly bureaucratic Number of bodies to contact A. Limited liability company

B. Personally-owned enterprise, no employees

9

7

8

6

7

5

6 5

4

4

3

3

2

2

1

1 0

OECD

CHL

MEX

Note: Data refer to 2018.

Source: OECD Product Market Regulation database.

COL

CRI

CHL

OECD

MEX

COL

CRI

0

25

Prices of goods are high Rice, PPP-adjusted USD, 2018 4

4

3

3

2

2

1

1

0

Spain

Chile

Note: Prices are converted to PPP dollars by using 2018 conversion rates.

Source: OECD computations based on Numbeo and OECD data.

France

Mexico

Costa Rica

0

26

Boosting competition in the rice sector would benefit low-income households Potential gains in purchasing power by income decile % 2.5

% 2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

1

2

3

4

5

6

7

Note: This illustrative scenario shows the impact across the income distribution of a decreased by 40% in rice prices Source: OECD calculations based on Costa Rican Households and Consumption surveys.

8

9

10

0.0

27

Costa Rica lags behind in digital government Share of government transactions that can be completed on line (%) 80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

CRI

COL

ARG

BRA

URY

CHL

MEX

0

Source: IDB 2018 publication, "Wait no more: Citizens, red tape, and digital government". Benjamin Roseth, Angela Reyes and Carlos Santiso.

28

There is room to improve the governance of public enterprises Index from most (0) to least (6) competition-friendly regulation A. Scope of SOEs

B. Governance of SOEs

4.0

4.0

3.5

3.5

3.0

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

CHL

MEX

OECD

Note: Data refer to 2018.

Source: OECD Product Market Regulation database.

CRI

OECD

CHL

CRI

MEX

0.0

29

Recommendations to boost productivity and improve regulations • Introduce online one-stop mechanisms and ensure physical ones cover all licenses and permits and are present in all major cities.

• Eliminate the requirement for using a notary to register a company.

• Make the electronic signature mechanism more user-friendly.

• Widen the scope of silent is consent rules and remove the need to require administratively its application.

• Ensure a full and timely implementation of the competition reform road map.

• Gradually phase out remaining exemptions to competition law in rice, sugar, coffee, maritime services and professional services.

30

Reducing inequality and promoting financial inclusion

31

Poverty rates have room to decrease further % of households 30

% of households 30 Total poverty

Extreme poverty

25

25

20

20

15

15

10

10

5

5

0 1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

0 2019

Source: INEC Encuesta Nacional de Hogares (ENAHO) and Encuesta de Hogares de PropĂłsitos MĂşltiples (EHPM).

32

Female labour market participation is low 90

Female labour force participation rate % of female population aged 15-65

90 80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

0

TUR MEX CRI ITA CHL KOR GRC BRA COL POL BEL HUN SVK IRL LUX FRA USA ISR OECD CZE ESP SVN AUT JPN PRT AUS GBR DEU LVA CAN EST NOR DNK FIN NLD NZL LTU CHE SWE ISL

80

Note: Data refer to 2019 or latest year available.

Source: OECD Labour Force Statistics. Data for Costa Rica are from INEC and refer to 2019.

33

Informality is high % of total employed population 60

60 Own-account

Employees

50

50

40

40

30

30

20

20

10

10

0

III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Note: Informality is defined as the percentage of workers in employment 1) not contributing to the social security system, 2) unpaid workers or 3) selfemployed workers and employers who have companies that are not registered in the National Property Registry and do not keep a formal accounting.

Source: Instituto Nacional de EstadĂ­stica y Censos: Encuesta Continua de Empleo.

0

34

Spending on education is high Expenditure on educational institutions, % of GDP Latest available year

8

8

7

7

6

6

5

5

4

4

3

3

2

2

1

1

0

JPN

ESP

DEU

MEX

CHL

COL

OECD

PRT

USA

FRA

ARG

BRA

SWE

FIN

NOR

CRI

Note: Data for Costa Rica is based on 2020’s budget of Education Ministry and the Vocal Education Agency (INA). Including teachers pensions, spending in Costa Rica reaches 9% of GDP. Data for all other countries are for 2017.

Source: OECD estimate; OECD Education at a Glance database; and OECD PISA database.

0

35

Returns to education are low PISA average score 520

520 CHL

COL

CRI

MEX

URY

OECD

500

500

480

480

460

460

440

440

420

420

400

400

380 2009

2012

2015

380 2018

Source: OECD PISA database.

36

A pension reform is needed Central government public debt, % of GDP 130

130

Single-hit scenario

110

110

Single-hit scenario with ageing costs Increase in number of years to calculate benefits

90

90

Increase in retirement age

70

70

50

50

30

30

10 2015

2020

2025

2030

2035

2040

2045

2050

2055

10 2060

Note: Evolution of central government debt-to-GDP ratio under scenarios that take into account ageing costs and alternative pension policy changes as described in OECD Economic Survey of Costa Rica 2020.

Source: Carranza and JimĂŠnez (2019); OECD calculations.

37

There is room to increase financial account ownership % aged over 15 with account at financial institution, 2017

Note: Latin America and Caribbean (LAC) includes: Argentina, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru and Venezuela.

Source: World Bank Global Findex database.

DEU

LUX

BEL

CHE

JPN

AUT

EST

SVN

GBR

0

IRL

0

KOR

10

FRA

10

ITA

20

ESP

20

LVA

30

USA

30

ISR

40

PRT

40

OECD

50

POL

50

GRC

60

SVK

60

LTU

70

CZE

70

HUN

80

CHL

80

CRI

90

TUR

90

LAC

100

MEX

100

38

Financial inclusion levels are low in many counties

Note: The county-level Financial Inclusion Index is a normalised indicator as defined in the OECD Economic Survey of Costa Rica 2020. The county of Rio Cuarto, which was created in 2017 is excluded from the analysis for consistency.

Source: Banco Central de Costa Rica; Instituto Nacional de EstadĂ­stica y Censos; and Superintendencia General de Entidades Financieras.

39

Household indebtedness has increased rapidly Household debt, loans and debt securities, % of GDP 35

35

30

30

25

25

20

20

15

15

10 2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

10 2018

Source: IMF Global Debt database.

40

Recommendations to boost inclusiveness and financial inclusion • Improve targeting and focus social spending programmes on low-income individuals.

• Continue to increase the supply of affordable childcare.

• Reduce informality by shifting part of the tax burden from social security contributions to property taxes.

• Strengthen teacher recruitment, selection and training based on regular teachers evaluations.

• Link the retirement age to increases in life expectancy.

• Grant FinTech companies full and direct access to the national payments.

41

For more information Disclaimers: This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

http://www.oecd.org/economy/costa-rica-economic-snapshot/

OECD Economics OECD 42