COSTA RICA'S INCREASING ECONOMIC INEQUALITY

UNCLAS SAN JOSE 002004 SIPDIS SIPDIS DEPT FOR WHA/CEN JASON MACK E.O. 12958: N/A TAGS: ECON PGOV CS SUBJECT: COSTA RICA'S INCREASING ECONOMIC INEQUALITY -------------- SUMMARY -------------- ¶1. The World Bank's recent report on poverty in Costa Rica stressed the widening gap in incomes between skilled and unskilled workers. The report cited external as well as internal factors as the cause. The World Bank recommended increasing the quality of secondary education; a wiser, more targeted use of Costa Rica's limited fiscal resources; and more open trade policies. Two Costa Rican cabinet ministers echoed these recommendations. Costa Rican officials appear fully aware of the negative consequences this widening income gap could bring, but it remains to be seen if the current government can deliver the needed changes. End Summary. -------------- INCOME GAP IS WIDENING -------------- ¶2. On August 31, a World Bank delegation, headed by Director for Central America Jane Armitage, presented a report about Costa Rican poverty titled "Recovering the Momentum in the Fight Against Poverty" to representatives from the GOCR, various non-governmental organizations, and members of the local diplomatic community. Highlighting the list of speakers at the conference were Finance Minister Guillermo Zuniga and Housing Minister Fernando Zumbado. ¶3. The report notes that although Costa Rica stands out amongst its Central America peers in almost every socioeconomic indicator, Costa Rica,s fight against poverty stalled after 1994. From 1989 to 1994 Costa Rican poverty rates dropped from 32% to 23%. However, during the following ten years, despite modest economic growth that averaged 2.4% of GDP per year, Costa Rican poverty began inching up to the current level of 24%. As the fight against poverty stalled, increased income inequality developed between educated, skilled professionals and unskilled laborers. -------------- WHY IS COSTA RICA BACKSLIDING? -------------- ¶4. According to the World Bank report, changes in the world economy as well as conditions within Costa Rica explain much of what ails the Costa Rican poor. Externally, the world economy is demanding fewer unskilled workers from middle-income countries such as Costa Rica. At the same time, Costa Rica has been producing increasing numbers of these workers. The World Bank faults deficiencies in the Costa Rican educational system, especially at the secondary �A;level, for much of the increase in unskilled workers. These deficiencies are both in the funding of the school system and the quality of education offered. Costa Rican spending on education is more highly skewed toward primary education than secondary education, in comparison with its neighbors. Compared to other Latin American countries that spend a similar percentage of GDP on education, about 5%, Costa Rica only graduates about 53% of its youths from high school as opposed to 64% in the other countries. A recent report by the Costa Rican Ministry of Education indicated that even with a high school diploma, a Costa Rican worker could expect to earn less than half the salary of a college-educated professional. -------------- WORLD BANK RECOMMENDATIONS -------------- ¶5. The report made several recommendations. Obviously, increasing the quality of secondary education was considered crucial. Also, the government should provide job skills training for older workers. The government should strive to lower the number of people who fall through the social safety net Costa Rica tries to provide to its poorest citizens. Recognizing the fiscal bind Costa Rica is in, the report suggests streamlining the social service system, making it more efficient by avoiding duplication of service. ¶6. The World Bank report also suggests greater investment in infrastructure, strengthening the financial sector, and opening of markets (without specifically mentioning CAFTA) as ways to fight poverty. However, during a related interview, a World Bank representative did stress the necessity of CAFTA for Costa Rica's poor as well as fiscal reform to fund poverty eradication projects. ¶7. The Costa Rican cabinet ministers both called for fiscal reform to help fund poverty-eradicating projects. Housing Minister Zumbado called for a return to the commitment to economic equality Costa Rica once possessed, listing several social programs that he believed served the Costa Rican poor in times past. ¶8. COMMENT: Costa Rica has always taken pride in its relative economic equality in comparison to its regional and hemispheric neighbors. However, the benefits of this more egalitarian society are starting to erode. Costa Ricans in general are uneasy about this growing income disparity and how it could deteriorate security and general livability. Costa Rican contacts in recent weeks have also acknowledged to us the weaknesses in the educational system, an historic strength and source of Tico pride. Recognizing these problems is only the first step, however. The Arias government will need to take action if Costa Rica is to help the increasing number of poor being left behind. END COMMENT. LANGDALE