Presentation of the 2018 OECD Economic Survey of Costa Rica

OECD ECONOMIC SURVEY COSTA RICA 2018 Sharing the benefits of growth more widely San José, 17 April 2018 www.oecd.org/eco/surveys/economic-survey-costa-rica.htm

@OECDeconomy @OECD

Living standards are rising

Source: OECD Productivity Database.

2

Costa Rica’s social achievements are impressive: Education Primary education net enrolment rate 2016 or latest available year

% 98

% 98

96

96

94

94

92

92

90

90

88

88

COL

LAC

CHL

MEX

CRI

OECD

Note: LAC refers to Latin America and the Caribbean. OECD is a simple average of 32 OECD member countries with available data.

Source: UNESCO Statistics.

3

Costa Rica’s social achievements are impressive: Life expectancy Life expectancy at birth (years) 2016 or latest available year 82

82

80

80

78

78

76

76

74

74

72

72

70

70

COL

MEX

LAC

CHL

CRI

Note: LAC refers to Latin America and the Caribbean.

Source: OECD Health Statistics database and World Bank World Development Indicators.

OECD

4

Costa Rica’s social achievements are impressive: Absolute Poverty Rate Absolute poverty rate 2015 or latest available year

% 6

% 6

5

5

4

4

3

3

2

2

1

1

0

0

CHL

CRI

MEX

LAC

COL

Note: LAC refers to Latin America and the Caribbean. Absolute poverty rate is based on an international poverty line of 2011 PPP $1.90 a day.

Source: World Bank World Development Indicators.

5

Costa Rica’s social achievements are impressive: Life Satisfaction Life satisfaction Mean values on a 0-10 scale, 2014-2016

7.2

7.2

7.0

7.0

6.8

6.8

6.6

6.6

6.4

6.4

6.2

6.2

6.0

6.0

5.8

5.8

COL

OECD

MEX

CHL

CRI

Note: The OECD average is population weighted and excludes Iceland and Luxembourg.

Source: OECD calculations based on Gallup World Poll, www.gallup.com/services/170945/world-poll.aspx.

6

However, inequality is high and has increased Income distribution, S80/S20

14

14

12

12

10

10

8

8

6

6

4

4

2

2

0

0

CZE

SVK

SVN

HUN

POL

PRT

LVA

GRC

MEX

CRI

Note: The S80/S20 ratio represents the share of all income received by the top quintile divided by the share of the first. Data refer to 2015 except for Hungary (2014), Mexico (2014) and Costa Rica (2016).

Source: OECD Income Distribution Database.

7

Employment rates are low % of total working-age population

%

% 70

70 OECD

CRI

LAC-4

65

65

60

60

55

2000

2002

2004

2006

2008

Note: LAC-4 refers to Brazil, Chile, Colombia and Mexico.

Source: OECD Labour Force Statistics database.

2010

2012

2014

2016

55

8

Unemployment remains high % of labour force

Unemployment rate

% of labour force

12

12

10

10

8

8

6

6

4

4

2

2

0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: OECD Labour Force Statistics database.

0 9

Unemployment affects primarily the young and low skilled Unemployment by worker characteristics (for groups with high unemployment rates), 2017 % of labour force 25

% of labour force 25

20

20

15

15

10

10

5

5

0

0

Women

15-24

25-34

Source: INEC, Encuesta Continua de Empleo.

Less than primary education

Less than secondary education

Less than tertiary education

10

Labour productivity is low GDP per hour worked, 2016

USD

USD

90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

0

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

90

Source: OECD Productivity Database.

11

Labour utilisation is high due to long working hours Hours worked per person employed, 2016 Hrs

2300

2300

2200

2200

2100

2100

2000

2000

1900

1900

1800

1800

1700

1700

1600

1600

1500

1500

1400

1400

1300

1300

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

Hrs

Source: OECD Productivity Database.

12

Achieving Fiscal Sustainability

13

Fiscal performance continues to deteriorate % of GDP

% of GDP 8 6

8

Budget balance

Primary balance

6

4

4

2

2

0

0

-2

-2

-4

-4

-6

-6

-8

-8

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Note: Data refer to the central government only.

Source: Ministerio de Hacienda.

14

Public debt is growing rapidly Central government gross debt

% of GDP

% of GDP

60

60

50

50

40

40

30

30

20

20

10

10

0

0

2008

2009

2010

Source: Ministerio de Hacienda.

2011

2012

2013

2014

2015

2016

2017

15

Public debt is high relative to tax revenues Public debt stock % of total revenues, 2016 400

400

350

350

300

300

250

250

200

200

150

150

100

100

50

50

0

EST CHL CZE TUR LVA PRY NIC SVK PER POL ARGHUNHND PAN COL SVN URYGTMBRA MEX PRT CRI SLV GRC

Note: Data refer to central government.

Source: IMF World Economic Outlook Database.

0

16

Spending keeps outpacing revenues Total revenues

% of GDP 25

Total expenditure

% of GDP 25

20

20

15

15

10

10

2006

2007

2008

2009

Source: Ministerio de Hacienda.

2010

2011

2012

2013

2014

2015

2016

2017

17

Debt will soar without urgent measures % of GDP 100 90 80

% of GDP 100

A. No Consolidation B. Reform to strengthen public finances C. 3% fiscal adjustment

90 80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032

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

0 18

Public employment is low % of employment

Public employment 2016 or latest available year

% of employment

35

35

30

30

25

25

20

20

15

15

10

10

5

5

0

0

Source: ILOSTAT.

19

The public sector wage bill is high % of total revenues

Compensation of government employees 2016 or latest available year

% of total revenues

60

60

50

50

40

40

30

30

20

20

10

10

0

0

COL CZE HUN TUR SVK GRC PEER PRT SVN POL LVA EST CHL BRA HND SLV CRI Source: IMF Government Finance Statistics database.

20

Tax revenues can be further increased Total revenues % of GDP

Costa Rica

LAC-5

Central America

OECD

% of GDP

40

40

35

35

30

30

25

25

20

20

15

15

10

10

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Note: LAC-5 is an unweighted average of: Argentina, Brazil, Chile, Colombia and Mexico. Central America is an unweighted average of Belize, Guatemala, Honduras, Nicaragua, Panama, El Salvador.

Source: OECD Revenue Statistics; OECD/IDB/CIAT Revenue Statistics in Latin America (2018).

21

Income and profit tax revenues are low Income and profit taxes, 2016 % of GDP 12

% of GDP 12

10

10

8

8

6

6

4

4

2

2

0

0

CRI

COL

CHL

BRA

MEX

PEER

OECD

Note: PEER is an unweighted average of the 10 non-Latin American OECD countries with the lowest GDP per capita and available information. OECD is an unweighted average of 2015 data.

Source: OECD Revenue Statistics; OECD/IDB/CIAT Revenue Statistics in Latin America (2018).

22

VAT tax collection is low Value added taxes, 2016 % of GDP 12

% of GDP 12

10

10

8

8

6

6

4

4

2

2

0

0

MEX

CRI

COL

OECD

BRA

PEER

CHL

Note: PEER is an unweighted average of the 10 non-Latin American OECD countries with the lowest GDP per capita and available information. OECD is an unweighted average of 2015 data.

Source: OECD Revenue Statistics; OECD/IDB/CIAT Revenue Statistics in Latin America (2018).

23

Recommendations to restore fiscal sustainability •

Implement immediate measures to reduce the budget deficit by 3 percentage points of GDP during 2018-20 to stabilise the debt-to-GDP ratio, through a comprehensive package of measures to: - raise revenue, - curb spending, - strengthen the fiscal rule.

•

Reduce budget rigidities stemming from legally mandated spending and earmarking of government revenues.

•

In the medium term take actions to reduce the debt-to-GDP ratio to prudent levels while building fiscal space to address contingencies.

•

Streamline public sector employment to better control payroll costs.

•

Assess contingent liabilities.

•

Create a fiscal council and introduce a multi-year expenditure framework.

•

Modernise debt management by reducing the number of benchmark securities and improving communication with markets.

24

Fostering competition

25

FDI restrictions are relatively low overall FDI Regulatory Restrictiveness Index, 2016 (0-1 from open to closed) 0.20

0.20

0.15

0.15

0.10

0.10

0.05

0.05

0.00

0.00

Note: LAC-5 is a simple average of Argentina, Brazil, Colombia, Chile and Mexico.

Source: OECD FDI Restrictiveness Index.

26

Services trade restrictions are high A. Overall STRI 2017 Scale 0-1 from least to most restrictive 0.4

0.4

0.3

0.3

0.2

0.2

0.1

0.1

0

0

Note: LAC-4 refers to a simple average of Brazil, Chile, Colombia and Mexico.

Source: OECD Services Trade Restrictiveness Index (STRI).

27

Regulations are stringent

3.5

OECD Product Market Regulation Indicator (higher=more stringent)

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

0.0

Note: LAC-5 is a simple average of Argentina, Brazil, Chile, Colombia and Mexico. PEER is a simple average of the 10 OECD lowest GDP per capital countries excluding Latin American countries.

Source: OECD-WBG Product Market Regulation database for all LAC countries except Brazil, Chile and Mexico; OECD Product Market Regulation database.

28

State controls restrict competition 0

1

2

3

State control (Overall) Scope of state-owned enterprises

4

5

6 Costa Rica LAC-5

Government involvement in network sectors Direct control over business enterprises

OECD

Governance of state-owned enterprises Price controls

Command & control regulation Level of PMR score Note: LAC-5 is a simple average of Argentina, Brazil, Chile, Colombia and Mexico.

Source: OECD-WBG Product Market Regulation database for all LAC countries except Brazil, Chile and Mexico; OECD Product Market Regulation database.

29

Barriers to entrepreneurship are high 0

1

2

3

4

5

6

Barriers to entrepreneurship (Overall) Licence and permits system Communication and simplification of rules and procedures

Administrative burdens for corporations Administrative burdens for sole proprietor firms Barriers in services sectors

Costa Rica LAC-5 OECD

Legal barriers to entry Antitrust exemptions Barriers in network sectors Level of PMR score

Note: LAC-5 is a simple average of Argentina, Brazil, Chile, Colombia and Mexico.

Source: OECD-WBG Product Market Regulation database for all LAC countries except Brazil, Chile and Mexico; OECD Product Market Regulation database.

30

The insolvency process is lengthy and the debt recovery rate is low World Bank Doing Business: Resolving insolvency, 2017 Distance to the frontier (100=best practice) 100

100

90

90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

0

Source: : World Bank Doing Business 2018 database.

31

Recommendations to foster competition • Adopt and implement the bill reinforcing the powers, independence and funding of the competition commission.

• Continue implementation of the action plan to increase consistency with the OECD Guidelines on Corporate Governance of StateOwned Enterprises.

• Continue with the planned 25 sector studies evaluating the exemption from competition and eliminate unjustified exemptions.

• Establish a one-stop-shop for business registration and licensing.

Introduce performance targets. Continue to improve the insolvency regime and trade facilitation.

32

Making labour markets more inclusive

33

Informality remains stubbornly high Share of workers with informal jobs

%

%

50

50

45

45

40

40

35

35

30

30

25

25

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 2010

2011

2012

2013

Source: INEC Encuesta Continua de Empleo.

2014

2015

2016

2017

34

Informality is widespread Informality by worker characteristics (for groups with high informality rates), 2017 % 100 90 80 70 60 50 40 30 20 10 0

Women

Over 60

Less than primary education

Less than secondary education

Rural

Self-employed Part-time

1. Low income refers to hourly earnings of less than the lowest minimum wage.

Source: INEC Encuesta Continua de Empleo.

Low incomeยน

% 100 90 80 70 60 50 40 30 20 10 0

35

The minimum wage is high and complex and discourages formalisation %

Minimum wage as a percentage of the median wages of full-time workers, 2016 100

90

90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

0

USA MEX ESP CZE JPN EST NLD IRL CAN DEU SVK GRC GBR BEL KOR LVA HUN AUS POL LUX ISR PRT SVN FRA NZL CHL CRI TUR COL

100

Note: For Costa Rica, the calculations use the minimum wage of unskilled workers.

Source: OECD Labour Force Statistics Database.

36

Recommendations to reduce high informality • Implement a comprehensive plan to reduce informality, including greater enforcement of obligations to pay contributions. • Continue moving to a smaller number of minimum wages.

37

Enhancing education outcomes

38

Education spending is high Public expenditure on education, 2015 % of GDP

% of GDP

2017

Note: Expenditure on primary, secondary, post-secondary and tertiary education. LAC-5 is a simple average of Argentina, Brazil, Colombia, Chile and Mexico.

Source: OECD Educational Finance Indicators; Ministerio de Hacienda.

NOR

CRI

NZL

0

NLD

0

OECD

1

KOR

1

LAC-5

2

PRT

2

MEX

3

EST

3

LVA

4

SVN

4

POL

5

COL

5

TUR

6

CHL

6

ESP

7

ITA

7

SVK

8

HUN

8

JPN

9

CZE

9

39

Education outcomes are low Student performance in PISA, 2015 Mean of reading, science and mathematics scores

600

600

Note: LAC-5 is a simple average of Argentina, Brazil, Colombia, Chile and Mexico.

Source: OECD Programme for International Student Assessment (PISA).

JPN

EST

KOR

SVN

NLD

NZL

NOR

POL

PRT

OECD

ESP

300

CZE

300

LVA

350

ITA

350

HUN

400

SVK

400

CHL

450

LAC-5

450

TUR

500

CRI

500

MEX

550

COL

550

40

Educational inequalities are high Relationship between student performance and socio-economic status Variation in PISA scores explained by socio-economic status,2015 % points

% points 30

25

25

20

20

15

15

10

10

5

5

0

0

EST LVA TUR ITA JPN KOR MEX BRA NLD GRC OECD DOM POL ESP PEER NZL COL PRT CRI LAC-5 SVK URY CHL CZE HUN PER ARG

30

Note: LAC-5 is a simple average of Argentina, Brazil, Colombia, Chile and Mexico.

Source: OECD (2016): PISA 2015 Results.

41

Recommendations to improve education outcomes • Increase the supply of publicly-funded childcare services.

Classify all spending on early-childhood education and care under the constitutionally-mandated spending on education.

• Rebalance education spending towards early childhood and secondary education. Strengthen targeted support for at-risk students, and teachers’ training.

• Establish better educational outcomes as the main policy target, instead of a focus on spending, and develop performance indicators.

42