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


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SUMMARY
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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.

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INCOME GAP IS WIDENING
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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.

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WHY IS COSTA RICA BACKSLIDING?
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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
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.

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WORLD BANK RECOMMENDATIONS
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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