UN DESA | DPAD | Development Policy Analysis Division
Capacity Development and Advisory Services
Macroeconomic policy, external shocks and social protection
Costa Rica highlights
Costa Rica is a well diversified economy, but it is also very open and must be ready to react to external conditions
In the event of either a 50% fall in the price of Costa Rica’s main exports or a 50% drop in non-FDI net capital inflows, the country’s GDP growth would fall by 4% annually and poverty would increase by 4 percentage points. Employment in formal sectors, which are more closely linked to international markets, would fall by half of the GDP rate, and informality would increase. The net effect is negative, and affects women in particular. In another simulated shock, an increase in world food prices would have a small effect on poverty since the country is a net-exporter of these products. Rural households would gain from higher incomes, while urban households would suffer.
External shocks have a large effect on poverty rates due to Costa Rica’s open economy and links between labour markets and exports
Social policies are effective, but carry a large cost
In terms of social public policy simulations, the results show that, while they can have an important short term benefit and help to alleviate poverty, they are fiscally expensive. The financing for these policies requires an important domestic component which crowds-out of private domestic investment. Nonetheless, the policies with the larger impact on household poverty following an external shock are those that transfer income directly, such as a grant to poor households with school-age children and unemployment grants. In less drastic, and more realistic, external shocks, these policies are sufficient to completely compensate for the negative effects of the shock on poverty rates.