What is needed to reactivate the economy?

To achieve economic reactivation, any proposal must include measures with the capacity to provoke growth in the short term, structural reforms that allow increasing the growth of the economy, and measures to regain the confidence of consumers, producers, and investors.

The rhythm of the Costa Rican economy has been falling for four years. The Monthly Index of Economic Activity (IMAE), which measures the growth rate of the physical production of goods and services, regardless of their monetary value, reached a peak in August 2015, when it marked a year-on-year growth of 5.3%.

From that moment on, a prolonged decline began — with small jumps and shocks, but an undoubted downward trend — until reaching a meager 1.5% last June. In May, the IMAE posted its slowest growth since December 2009, when the country began to recover from the international financial crisis of 2008.

Of the fifteen activities detailed by the IMAE, five contracted in the year ending in June 2019, another five slowed down and five more showed positive, but low growth (simple average: 0.84%). Driven, the latter, by the manufacturing industry, with a year-on-year growth of 1.7% that should not be misleading.

Said growth was the result of the dynamism of the export sector (free zones and other special regimes), which enjoys exemptions and other benefits; the non-export manufacturing industry decreased by 2.5% and has been in recession for 13 months in a row. Agriculture, commerce, and mining are also in recession, while construction accumulates five continuous months of contraction.

One of the most visible effects of the economic slowdown is its impact on unemployment:

When the economy grows weakly and entire sectors contract or stagnate, the creation of new jobs becomes insufficient to absorb the people entering the labor market.

But not everything is due to the slowdown: unemployment has averaged 9.8% since the third quarter of 2010, five years before the IMAE will reach its last peak. Interestingly, average unemployment was almost identical between the third quarter of 2010 and the third of 2015 (last peak of the IMAE), and between the fourth quarter of 2015 and the second quarter of 2019. In contrast, unemployment averaged 6% between 2001 and 2008, before the crisis, although measured with a different methodology that does not allow direct comparison of the data.

It is still worrying, however, that unemployment has grown to an average of 11.7% in the last three quarters. In the last year, production growth, measured by the IMAE, fell by half.

Higher unemployment is usually associated with higher poverty; so we will get an unpleasant surprise when the INEC updates the poverty data soon. If before the crisis of 2008, with a more dynamic economy tuition in Singapore and unemployment at the half, we cannot reduce the poverty of 20% of the population, we will be less able now. It simply is not enough.

The observation that unemployment has remained high since mid-2010 is relevant when talking about reactivation measures:

The problem is not merely temporary, nor is it the product of worsening international conditions, as the Central Bank and the government have emphasized. In fact, we wasted years of a favorable environment (dynamic growth of our trading partners, low prices of raw materials, very low-interest rates) without making the reforms that would allow us to grow at a higher rate and lower unemployment to reasonable levels.

To achieve economic reactivation, any serious proposal must contemplate measures of three types: those with the capacity to cause growth in the short term, structural reforms that allow raising the growth potential of the economy, and, not least, measures to regain the confidence of consumers, producers, and investors.

Among the measures with short-term effects, in addition to continuing with the welcome regulatory simplification efforts, we must consider eliminating the tariffs that make basic basket products and construction more expensive, and a significant tax simplification that repeals taxes that collect less than what it costs to administer, reduce the marginal rates of the remaining taxes and eliminate most of the current exemptions to thus broaden the base. Both provisions would improve the purchasing power of Costa Ricans, causing a virtuous cycle of consumption and investment.

The immediate gratification of the Pacific Alliance, an ideal market for the small businesses that make up the bulk of the country’s business park, would also help. In 2017, 85% of the exporters to South America were SMEs and, by value, their sales constituted 70% of the exports to that region.

The necessary structural reforms will tend to improve the productivity of workers and the competitiveness of companies and the economy. We must consider measures to reduce the cost of energy by introducing competition in the electricity market, reduce intermediation margins by promoting more effective competition in the banking market (including the sale of a state bank to a leading international bank), reduce social security costs that make the hiring of labor so expensive, modernize the Labor Code to adapt it to the demands of the 21st century and the ICT era, and an aggressive plan for the development of public works through public-private alliances to no further stress on state finances

Our educational system deserves a separate chapter:

Which should reinforce the teaching of science, technology, engineering and mathematics, and promote entrepreneurship.

Regarding the recovery of confidence, which was already in the doldrums and received a severe blow with the agreement that ended the CCSS strike, the government must show a strong will to bring order to public finances. With a recent tax hike passed, there is a need for a public employment law to end abuse and profiteering, and a downsizing of the state Leviathan, announcing the closure of outdated institutions and programs and the merger of duplicates.

Only the correct combination of measures will allow us to make a qualitative leap to start growing at rates above 5% per year, which will allow us to generate enough quality jobs to reduce unemployment and poverty.