(Developmental Pathways to Poverty Reduction Series) Juliana Martínez Franzoni, Diego Sánchez-Ancochea (Auth.)-Good Jobs and Social Services_ How Costa Rica Achieved the Elusive Double Incorporation-P

Good Jobs and Social Services
Developmental Pathways to Poverty Reduction Series

Series Editor: Yusuf Bangura
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GROWTH, INEQUALITY AND SOCIAL DEVELOPMENT IN INDIA
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POLICY REGIMES AND THE POLITICAL ECONOMY OF POVERTY REDUCTION IN
MALAYSIA
Onalenna Selolwane (editor)
POVERTY REDUCTION AND CHANGING POLICY REGIMES IN BOTSWANA
Juliana Martínez Franzoni and Diego Sanchez-Anochea
GOOD JOBS AND SOCIAL SERVICES
How Costa Rica Achieved the Elusive Double Incorporation
Forthcoming titles are:
Jeremy Seekings and Nicoli Nattrass

POLICY, POLITICS AND POVERTY IN SOUTH AFRICA
Yusuf Bangura (editor)
DEVELOPMENTAL PATHWAYS TO POVERTY REDUCTION
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Basingstoke, Hampshire RG21 6XS, England
Good Jobs and Social
Services
How Costa Rica achieved the elusive
double incorporation
Juliana Martínez Franzoni

University of Costa Rica
and
Diego Sánchez-Ancochea
University of Oxford
©United Nations Research Institute for Social Development, Geneva 2013
Softcover reprint of the hardcover 1st edition 2013 978-1-137-30841-2
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To Silvia, Maite and Maya,
hoping but doubting that their world will be one of
dual incorporation for all
This page intentionally left blank
Contents
List of Figures viii

List of Tables x
Acknowledgements xi
List of Acronyms xiv
1 A Country That Tamed an Elusive Challenge 1

2 The Economic Policy Regime and the
Two Phases of Market Incorporation 28
3 The Social Policy Regime: Creation, Expansion
and Resilience 64
4 The State as the Central Actor: Elites, Ideas and Legacies 102
5 Conclusion: What Can We Learn from the
Costa Rican Case? 133
Notes 145
References 154
Index 170
vii
List of Figures
1.1 Evolution of the incidence of poverty, percentages,

1980–2005 15
1.2 Evolution of income inequality, Gini coefficients,
1980–2005 17
2.1 GDP per capita, US dollars and as a share of world and
Latin American average, 1960–2008 30
2.2 Exports to Central America and non-primary exports,
percentage of total exports, 1954–1985 35
2.3 Public investment, percentages of GDP and of total
public spending, 1980–1995 40
2.4 Latin American exports per capita, US dollars,
2000 and 2008 49
2.5 Productivity in total manufacturing, FTZs and all other
manufacturing activities, 1991–2005 52
2.6 Sectoral distribution of FTZs exports, share in the total,
1997–2008 53
2.7 Sectoral distribution of employment in the FTZs,
1997–2008 54
3.1 Total public spending in basic social services,
millions of US$ of 2000, 1950–2005 67
3.2 Public spending per capita in basic social services,
US$ of 2000, 1950–2005 67
3.3 Social expenditures: total, healthcare and pensions,
millions of colones of 2000, 1950–2006 68
3.4 Healthcare coverage: insurance and social assistance,
percentages, 1980–2006 69
3.5 Life expectancy at birth and infant mortality rate,
mortality rate per thousand live births and life
expectancy in years, 1950–2005 69
3.6 Social incorporation as reflected in infant mortality
under 1 and under 5 years of age, mortality rate
per 1000 live births, 1972–2006 70
viii
List of Figures ix
3.7 Evolution of access to primary and secondary

education, percentages, 1915–1999 74
3.8 Social expenditures: total, per capita and private,
1980–2008 84
3.9 Evolution of gross and net rates of enrollment
in secondary schools, 1970–2006 85
3.10 Multilayer pension regime for old age, mortality
and disability 90
3.11 Pensions coverage: insurance and social assistance,
percentages, 1969–2006 91
3.12 Population served with piped water ranked by
potability for income and region, 2004 92
3.13 Evolution of payroll tax rates for social policy,
percentages, total and by sectors, 1942–2010 96
3.14 Average wages and contributions among the occupied
labour force, colones of 2006, 1985–2008 99
List of Tables
1.1 Weight of informal employment in the total in

various Latin American countries, 1950–1980 11
1.2 Income inequality before and after social income,
1988 and 2004 18
2.1 Gross domestic product, real colones of 1966,
annual average rate of growth, 1950–2008 30
2.2 Distribution of nominal GDP by sector, 1950–1990 33
2.3 Total assets of public and public banks, millions
of colones, 1986–2007 46
2.4 Costa Rica and Latin America (without Mexico),
export structure by technological content, percentage
of total exports, 1987–2008 49
2.5 Annual average rate of growth of GDP and GDP
per capita, 2000 US dollars, 1990–2008 50
2.6 Value added, employment and labour productivity in
Costa Rica, annual average of growth, 1987–2007 51
2.7 Monthly wages in real colones and annual average
rate of growth, 1997–2008 56
2.8 Nominal value added, employment and productivity
in the FTZs, annual average rate of growth, 1991–2007 56
2.9 Average monthly income, current colones, 2001–2008 58
2.10 Local purchases from the FTZs, percentage
of total purchases, 1997–2008 60
3.1 Indicators of the nutritional conditions of children,
1966–1996 71
3.2 Comparison between Costa Rica and 94 other developing
countries in terms of human development, 1960–1987 71
3.3 Structure of funding for social policy and basic
social services, 1988–2004 97
3.4 Structure of funding for basic social services,
1988 and 2004 98
x
Acknowledgements
Due to our many obligations during the past two years, the writing of
this book had to be postponed several times. That it finally sees the
light is entirely due to Yusuf Bangura’s persistence. Yusuf coordinated
the comparative UNRISD research on poverty and public policy regimes
which led to several papers on the Costa Rican case. What was ini-
tially to be an edited book ended up becoming part and parcel of our
collaborative research at the Universities of Costa Rica (Institute of
Social Research) and Oxford on the building of universal social policy
and its links to the economic regime. All along Yusuf was very support-
ive of our decision to write a monograph that could place Costa Rica’s
success in comparative perspective and also illustrate how achievements
and tension tend to go hand in hand. Yusuf also pushed us to clarify
the role of South Korea and rethink the role of democratic institutions
in our account.
We are much in debt to Jorge Vargas Cullell and to Aaron Schneider for
their time and perceptive inputs. Jorge accompanied this project from
the very beginning. His take on the interrelations between the Partido
de Liberación Nacional (PLN) elite and the process of state building has
been particularly valuable to work on our argument around market and
social incorporation. From him we have learnt a lot about how to think
about politics in Costa Rica and other parts of Latin America. Aaron
Schneider read our manuscript at a late stage in record time – a sign of
his impressive generosity. We really appreciate his positive reaction but
also his ability to identify key weaknesses of the book and offer solu-
tions. Thanks to him, we hope to offer a more sophisticated discussion
of what market incorporation is, a clear statement of how the process of
state building took place and a more rigorous presentation of conflicts
within the elite and the role of international factors.
Benedicte Bull went out of her way to take time from her busy sched-
ule to read two of the chapters and make invaluable comments about
the role of industrialists and their relation to the PLN. In a very pleas-
ant dinner conversation in San Francisco while we attended the LASA
conference, we received great encouragement from Fabrice Lechouq,
who rightly pressed us to strengthen the empirical bases of our argu-
ment and consider parts of his own work and that of others that we
have missed. Jose Cordero read chapter 2 and provided useful inputs
xi
xii Acknowledgements
to be more precise in various sections of the chapter. His input on eco-

nomic theories and debates is most welcome always. Ciska Raventós
was one of several colleagues who asked uncomfortable questions
about how international ideas entered the Costa Rican policy process.
James McGuire provided valuable last minute insights that helped us
improve our understanding of social incorporation among East Asian
countries.
Juan Diego Trejos, Jorge Vargas Cullell, Alberto Cortés, Andrés León,
Isabel Román and initially Juan Manuel Villasuso prepared drafts address-
ing different aspects of the problems we discuss. Our book owns much
to all of them but draws extensively on the chapters written by Juan
Diego Trejos on basic social services and by Jorge Vargas Cullell on the
institutional dynamics of Costa Rica’s policy regime.
A previous version of chapter 4 was submitted to the Journal of
Development Studies, where Ken Shadlen and three anonymous reviewers
gave us valuable input that improved our empirical argument, particu-
larly on how elite preferences are translated into public policy. Ken’s
generous support, sharp criticism and continuous encouragement are
always much appreciated. We are only sorry that we did not end up
resubmitting the paper to the journal! Rosemary Thorp also read that
paper and gave us the kind of encouraging, perceptive and intelligent
comments that have always characterized her.
External reviewers Manuel Riesco and Enrique Peruzotti provided
extremely useful comments that fed into the final revision of our argu-
ment. Manuel helped us to nuance our comparative argument regarding
the role of social incorporation among East Asian countries, particularly
Korea. His comments were also helpful to recognize that Costa Rica’s
trajectory has to be located within a broader process of modernization
in the periphery as a whole. Enrique’s precise summary of our argument
made us think that we might have succeeded in explaining the role of
the elite and international ideas properly. His observation on the absent
role of popular sectors in our argument helped us explain better why
we were focusing on the elite but also recognize that social movements
were never passive. Enrique Valencia provided us with relevant feedback
about Korea that helped us fine tune our argument.
Héctor Solano did not work directly on this book but has been a
great partner in our umbrella project on the creation of universal social
policy. Donna Harrington and Diana León did a great job helping us
with editorial matters. Many other colleagues and friends have provided
ideas that have fed into this book in one way or another and will, we
hope, participate in future collaborative work. Of course, none of our
Acknowledgements xiii
talented and committed colleagues can be blamed for any shortcomings

the book may have.
As extremely useful as information technologies are to overcome
geographical distance and support collaboration, nothing still beats
face-to-face interaction. The British Academy and the CAF-Development
Bank of Latin America gave us generous support for two trips, the first
to San José, where we also undertook fieldwork for this project and
another on social policy, and the second to Oxford, allowing us to work
together on this manuscript. The British Academy and the University of
Costa Rica also funded the research assistants who participated in the
project. Juliana is very thankful for all the support she has received from
the director and the staff of the Institute of Social Research. FLACSO and
the research network Designaldades.net have been very encouraging in
our use of the notion of dual – market and social – incorporation as
well as our interest in how peripheral countries can establish universal
policies.
Our biggest thanks, however, go to our partners Mauricio and Rosa:
without parity in care taking we would not be able to equally set aside
time to enjoy our families and spend so much time involved in our
work.
Last but not least, by looking at how policies can succeed at being
inclusive, we hope that this book contributes to efforts to make the
world a better place for most.
List of Acronyms
ANFE National Association for Economic Promotion

CACM Central American Common Market
CARICOM Caribbean Community
CAT Tax Break Certificates
CCSS Costa Rican Social Insurance Board
CINDE Costa Rican Investment Promotion Agency
CEN Nutrition and Education Centers for Children’s
Comprehensive Care
CEN–CINAI Child Care Centers
CINAI Children’s Comprehensive Care Centre
CODESA Costa Rican Development Corporation
COMEX Ministry of Foreign Trade
CTAMS Technical Board of Medical Social Assistance
DR–CAFTA Dominican Republic–Central America Free Trade
Agreement
EAP Economically Active Population
ECLAC Economic Commission for Latin America and the
Caribbean
FAO Food and Agriculture Organization
FDI Foreign Direct Investment
FODESAF Family Allowances Program
FTZ Free Trade Zones
GDP Gross Domestic Product
GNP Gross National Product
ICAA Costa Rican Institute of Water Supply and Sewage
ICE Costa Rican Institute of Electricity
IFI International Financial Institution
ILO International Labour Organization
xiv
List of Acronyms xv
IMAS Mixed Institute of Social Assistance

IMF International Monetary Fund
INA National Learning Institute
INS National Institute of Insurance
ITCO Institute of Land and Colonization
MOH Ministry of Health
MEP Ministry of Public Education
NC Nutrition Centres
NICs New Industralized Countries
OECD Organisation for Economic Co-operation and
Development
PLN National Liberation Party
PROCOMER Trade Promotion Corporation of Costa Rica
RNC Social Assistance Pension Program
RTA Régimen de Admisión Temporal
RIVM Disability, Old-Age and Survival Regime
SAP Structural Adjustment Program
SJMA San Jose Metropolitan Area
SMEs Small and Medium Enterprises
SNE National Electricity Service
STAP Technical Secretariat of the Budgetary Authority
TNC Transnational Corporation
UCCAEP Union of Private Business Chambers and Associations
UNCTD United Nations Conference on Trade and Development
UNICEF United Nations Children’s Fund
UNRISD United Nations Institute for Social Development
USAID United States Agency for International Development
WHO World Health Organization
1
A Country That Tamed an Elusive
Challenge
1.1 The elusive challenge of the double incorporation
In the path-breaking, 2010 flagship report, the United Nations Institute

for Social Development (UNRISD) argues that countries “that have suc-
cessfully reduced poverty in relatively short periods of time had purpose-
ful growth-oriented and welfare-enhancing political systems” (UNRISD,
2010: 6). The report stresses the need to combine a rapid expansion of
well-paid formal jobs with a more universal and generous social system.
While this may indeed be desirable, it is unclear that many countries in
the periphery have ever achieved both simultaneously. Under East Asia’s
developmental success, for example, economic growth and structural
change were impressive but the expansion of social programmes inde-
pendent from market participation we address below, was not.
To systematically explore the double process of job creation and
the expansion of social services, we draw on the concepts of market
and social incorporation. Market incorporation refers to people’s par-
ticipation in the cash nexus, which requires the creation of a sufficient
number of formal, well-paid jobs (private and public). Social incorpora-
tion refers to people securing their well-being independently of the cash
nexus. If governments want to increase the well-being of a majority of
the population living in a country, they should promote this double
incorporation simultaneously. However, market and social incorpora-
tion are analytically independent processes that need not take place
hand in hand: countries may secure social incorporation by decoupling
it from people´s participation in the labour market. By the same token,
countries may seek to secure market incorporation as the primary
means for people to individually cope with social risks.
1
2 Good Jobs and Social Services
Let us explain in more detail what we mean by incorporation.

According to the 1913 edition of Webster’s dictionary, incorporation
refers to becoming a member of a larger body already in existence. In
here, we refer to people’s participation over a long period of time in two
key institutions: formal labour markets and public social services. Notice
that our notion of double incorporation is normative: we do not mean
here just any participation in labour markets or any access to social serv-
ices, as the process of urbanization and the creation of markets of social
services such as healthcare and education bring along. Instead, we are
interested in a specific kind of participation, one that succeeds in provid-
ing a “floor” of cash, labour and social protection and services for most.
In using the term incorporation, we are preceded by very fruitful
research – in the social sciences in general and in the study of Latin
America in particular. In their already classic work, Ruth and David
Collier (1991) explain how incorporation, in their case into the political
arena, replaced the repression of the working class as a political actor. As
a result, across Latin America during the first half of the twentieth cen-
tury, this emerging class entered politics. The specific pattern of incor-
poration (state or party-led, whether by traditional, populist or radical
parties), accounted for regime change and had long-term repercussions,
reaching the democratic breakdowns of the 1970s, when exclusion
replaced incorporation.
Luis Reygadas and Fernando Filgueira (2010) borrow the term and
follow the earlier discussion to review recent events. They argue that
Latin America currently faces a second social incorporation crisis and
that new policy efforts are attempting to address it. Both are equivalent
to the first incorporation crisis addressed by Collier and Collier. In the
present day, however, those badly in need of incorporation are not the
working class but the informal and the self-employed. It is precisely
those millions of Latin Americans lacking market and social incorpora-
tion who demand better jobs and minimum services. The wave of left
and left-of-centre political parties replacing right and right-of centre
governments is, they argue, an indication of unattended demands for
social incorporation.
This book discusses Costa Rica’s experience as one of the most success-
ful in securing the double incorporation over the last six decades among
developing countries. Unemployment and underemployment in Costa
Rica were low, the formal sector grew steadily, and universal social pro-
grammes expanded between the 1950s and the early 1980s. By the early
1980s, most Costa Ricans had access to relatively well-paid jobs and to
high quality healthcare, education and pensions (Sandbrook et al., 2007).
A Country That Tamed an Elusive Challenge 3
Costa Rica’s case is also relevant because since the 1980s it has experi-
mented growing tensions and struggles to maintain the double incor-
poration. During the last three decades, Costa Rica’s economic policy
regime has experienced contradictory transformations, particularly in
its economic landscape. On the one hand, the country has built more
dynamic comparative advantages. On the other hand, the number of
informal, poorly paid jobs (that is, inappropriate market incorpora-
tion) has expanded rapidly. The social policy regime has remained
more stable in terms of guiding principles and formal design, but the
quality of services has diminished and the presence of private services
has increased. Costa Rica’s overall performance is still more satisfactory
than that of many other developing countries – including those that
embraced neoliberalism more enthusiastically – but sustaining the
country’s past record is proving harder than ever.
How has Costa Rica achieved its unique success in accomplishing
the double incorporation? Why has the social policy regime been more
resilient than the economic regime in recent times? What lessons can
other small developing countries learn from Costa Rica? This book
addresses these questions by looking at the policy regimes adopted
between 1950 and 1980, during Costa Rica’s period of expanding
incorporation (which Solís (1992) and Rovira (2001) addressed as the
“Golden Age”), and examining the changes the country has undergone
during the more recent period we refer to as stagnant incorporation. We
first describe policies from both periods and then explore the underly-
ing factors that determined those policies.
The economic policy regime involves a set of policies and institu-
tions that are relatively stable, influencing the characteristics of the
economic structure and thus the process of market incorporation. An
economic policy regime may be driven by various primary goals (like
growth or distribution) and rely on various funding sources. By social
policy regime we refer to the set of policies and institutions that shape
social incorporation through transfers and services and are relatively
autonomous from people´s participation in the economy. These may
rely on various guiding principles to allocate resources (such as needs
or citizenship); types of programmes (based on transfers or services);
means for services delivery (whether public, private or mixed); levels of
benefits (more or less generous) among others. Policies and institutions
interact in complex ways that may change over time.
In explaining why the Costa Rican state adopted these policies, we
acknowledge the importance of long-term, historical factors and also
the role of democracy. Yet we consider and attach more importance to
three central conditions. Without these, neither long-term factors nor

a democratic political regime would have resulted in double incorpora-
tion. These factors are: (a) the nature of Costa Rica’s emerging elite and
its changes over time: from a group with a highly unified set of interests
around state expansion to one with growing fragmentation, moving
away from being closely intertwined with the public bureaucracy to
experiencing a growing split; (b) the ideas internationally available
from which domestic elites drew their own agendas; and (c) the role
of policy legacies the period of stagnant incorporation inherited from
the previous period. Below, this introductory chapter fleshes out these
ideas. We start by defining the notions of market and social incorporation
and their contribution to reduced poverty and inequality. In section 1.3
we argue that most developing countries (even successful countries like
South Korea, Taiwan and Singapore in East Asia) have never fully achieved
the double incorporation and in section 1.4 we outline why we consider
Costa Rica an exceptional case. Section 1.5 briefly reviews the literature
on the role of the state in market and social incorporation, arguing
that few studies consider both processes simultaneously and offer our
own explanation of Costa Rica’s trajectory. The chapter concludes with
a brief summary of the rest of the book and a discussion of its main
contributions.
1.2 Income inequality, poverty and the challenge of the

double incorporation
Since the 1980s and until very recently, much of the mainstream lit-
erature on poverty and inequality focused on the need to improve
social conditions through community-based projects and redistribution
policies and did not pay sufficient attention to the labour market. The
Millennium Development Goals, for example, had employment as a
target but not as a primary goal and the literature on multidimensional
poverty has tended to downplay the role of income generation. This is
unfortunate because in any market economy, good jobs do represent
the fastest and most stable way out of poverty. As Alice Amsden puts
it in a provocative 2010 article “A job is a ticket out of misery and
into the middle class… [For example] [i]n all of India’s manufacturing
industries except one (‘machine repair’), the ‘formal’ sector, where paid
employment predominates, is almost three times more productive than
the ‘informal’ sector, where most anti-poverty money goes” (Amsden,
2010: 58). Yet many developing countries have failed to promote
employment-creating growth paths. In many parts of the world the
informal economy still accounts for half of the total gross domestic
product and low-productivity services and subsistence agriculture
remain employers of last resort. The lack of incorporation to formal
employment leaves workers with low wages, vulnerable labour condi-
tions and limited access to skill upgrading and social rights.
The relationship between well-paid employment and income inequal-
ity is also clear, albeit complex. In Latin America, for example, high lev-
els of inequality can be partly explained by the existence of segmented
labour markets in which a selected minority has access to good jobs in
manufacturing or modern services while a majority is condemned to
the informal sector. Good jobs, however, may not be enough to reduce
income inequality. We can easily envision scenarios under which new
formal jobs expand rapidly but wages of skilled workers and profits
grow as fast or even faster, therefore leading to less equity. Exclusive
dependence on market income will also leave low- and middle-income
groups exposed to unpredictable and costly risks (for example, accidents
and sickness), to risks that are hard to cope with on an individual basis,
such as aging and disability, and therefore to sharp reductions in living
standards. This is why social incorporation through social services is
also important.
In summary, the reduction of poverty and inequality over the long
run depends simultaneously upon incorporation in the market and
protection from the market. People need to secure a stable income to
increase their level of consumption and meet household demands;
market incorporation does not simply refer to having a job but to the
successful creation of well-paid, formal jobs for a majority of the popu-
lation. Under this definition people in informal and/or badly paid jobs
have not been successfully incorporated in the labour market. Economic
growth is a necessary condition for market incorporation but must go
hand in hand with structural change and attention to job creation as
an objective in and of itself.
At the same time, people also long for certainties that cannot be eas-
ily purchased on an individual basis and thus involve access to social
income as a matter of right, regardless of market participation. The
latter is important for a number of reasons. At any given point in time
most people do not participate directly in the market economy either
because they are too young, too old, sick or disabled. Economic cycles
are also unstable: they come and go and people need to have safety
nets as a buffer against economic uncertainty. Incorporation into the
market economy requires the formation of “human capital”, something
most people may not be able to afford privately and/or are not always
provided effectively by the market. Last but not least, each country
explicitly or implicitly sets a certain “floor” of social rights, whether
thin or thick, that cannot be left up to market forces or be solely tied to
firm-based benefits.
Social incorporation requires both basic social services and social pro-
tection. Basic social services are designed to create basic skills and capaci-
ties; social protection includes provisions to cope with sickness, old age
and other events that enable people to engage in income-generating
activities. The former comprises basic education, primary healthcare
(including reproductive health, population and nutrition programmes),
and potable water supply and sanitation (Ganuza et al., 1999). The lat-
ter involves contributory and non-contributory pensions and health
insurance. A large body of literature argues that the delivery of basic
social services and social protection should follow universal principles
to maximize its positive effect on social incorporation. This well-estab-
lished scholarly work defines universalism in terms of high coverage,
assuring that everyone benefits from high quality and generous income
transfers and services (as understood in that particular context), under
unified, nation-wide systems (Esping-Andersen, 1990; Huber and
Stephens, 2001; Korpi, 1983).
According to UNRISD (2010: 139), “the more universal a programme
becomes in terms of coverage, rules of access and membership, and
adequacy of benefits, the greater the potential for redistribution, risk
pooling, cross-subsidization, efficiency gains and quality control.”
Universalism has at least three advantages over other approaches to
social delivery. First, whether it is schooling or healthcare, individu-
als from all income levels and personal characteristics end up sharing
a similar treatment based on their condition as citizens. Second, the
middle class is more likely to support services they benefit from – and
the social spending associated with these services – whether these ser-
vices are tailored for specific groups or the population at large. When
the middle class supports universal policies their mobilization capacity
ends up benefiting low-income groups as well. Third, this cross-class
alliance is helpful not only to broaden access to state policy but also to
guarantee good quality. Thus, the resulting expansion of transfers and
services in health and education would have a substantial redistributive
effect, thus creating a virtuous circle for social incorporation (Huber,
2003; Mkandawire, 2006).1
In many instances, the expansion of universal policies is not enough
to guarantee access by low-income groups. Those most vulnerable may
require affirmative action to assure their effective incorporation into
universal transfers and services. For instance, children from low-income

families may need uniforms, transportation and complementary nutri-
tion to benefit fully from free and high-quality schools. Whether tied to
universal measures or as stand-alone programmes, reaching the previ-
ously unprotected population has been a key role of social assistance at
large. As we will see, Costa Rica succeeded in combining universal social
policies and more targeted anti-poverty programmes as early as the
1970s – much before the current debate on conditional cash transfers
emerged.
1.3 Failures to secure double incorporation
Beginning in the 1930s and accelerating after the Second World War,
many developing countries experienced significant processes of trans-
formation. Driven by a rapid process of urbanization and increasing
state intervention, new manufacturing and service jobs were created
and new social institutions were founded, particularly in the largest
Latin American countries and in some East Asian growth miracles. In
an influential book on Latin America’s socio-economic development,
Draibe and Riesco (2007; 2009) address what they refer to as “state devel-
opmentalism” and its success. In their view, “a number of states explic-
itly assumed the twin challenges of bringing both economic and social
progress to societies that were mostly agrarian… Developmentalism
shows quite impressive achievements on both counts in many coun-
tries. By the 1980s, many states had built basic institutions, infrastruc-
ture and industries. Most importantly, they were remarkably active in
changing the region’s social structures” (Draibe and Riesco, 2009: 332).
State developmentalism was even more successful in South Korea and
other East Asian countries where a rapid process of structural change
and economic growth moved countries out of poverty.
The importance of this process of rapid urbanization and social change
and its impact on market and social incorporation in large parts of the
developing world is unquestionable. In particular, there is no doubt that
the East Asian newly industrializing countries (South Korea, Taiwan,
Hong Kong and Singapore) achieved impressive outcomes in terms of
market incorporation driven by rapid economic expansion. All four
countries witnessed a fast expansion of employment and real wages:
between 1960 and 1973, total employment grew by an annual average
of 11 per cent in South Korea and 8 per cent in Taiwan, compared to
less than 2 per cent in Argentina and less than 1 per cent in Chile (Lin,
1988). Rapid economic expansion in these economies resulted in labour
shortages by the late 1970s and “social marginality appear[ed] to be

empirically insignificant” (Chen and Gereffi, 1994: 212). Improvements
in East Asian labour productivity also resulted in a sustained expansion
of real wages. From 1975 to 1992, hourly compensation for produc-
tion workers in manufacturing increased 15 times in South Korea,
13 in Taiwan and six times in Singapore (data from the US Department
of Labor cited in Huff, 1995).
Economic growth also provided resources to expand social services.
Infrastructure investment in water, sanitation and transportation
was high and the quality of services increasingly comparable to that
in developed countries. Taiwan and South Korea’s attention to basic
health during the 1960s and 1970s was impressive and contributed to
sharp reductions in infant mortality (McGuire, 2010). The expansion
of spending in education was also impressive and was behind a rapid
accumulation of human capital. In short, a majority of the population
in the four East Asian countries were incorporated to the market and
also witnessed improvements in social development.
Nevertheless, the social policy regime in these East Asian countries
had two important limitations that downplayed their ability to secure
social incorporation independently of the market. Public spending in
social services was low. According to the ILO (2007: 17), “there is clear
evidence of under-investment in social protection” in Asia generally and
the newly industrializing countries, NICs (South Korea, Taiwan, Hong
Kong and Singapore) in particular. This was clear in the case of pen-
sions, which in South Korea were provided through firm-based schemes.
Without disregarding their importance, these types of schemes benefit-
ted a relatively small share of the population and were implemented
along an underdeveloped public safety net (Goodman and Peg, 1996).
The East Asian welfare system was also skewed because social
policy – with the partial exception of basic health – concentrated
almost exclusively on supporting economic transformations through
the accumulation of human capital. Public social spending initially tar-
geted primary education and, as a result, East Asian countries achieved
universal coverage earlier than most Latin American countries (Haggard
and Kaufman, 2008). The expansion of services towards secondary and
college education targeted engineering and science with dropout rates
lower than in Latin America (Szekely and Montes, 2006).
While acknowledging East Asia’s low levels of social spending,
Kim (2010) claims these welfare states to be larger than normally
acknowledged. Adopting the term “surrogate social policy” introduced by
Chang (2004), Kim incorporates dimensions like agricultural subsidies
(for instance, public subsidies for rice were high), protection of specific
sectors, and firm-based entitlements in his analysis of the welfare state.
Yet most of these interventions are commodification (and thus aimed at
market incorporation) rather than decommodification strategies (aimed
at social incorporation): agricultural subsidies depended on people’s
production strategies and firm-based entitlements were only received
by workers in large firms.2 In many areas, such as pensions and pro-
poor subsidies, social policy did not allow East Asians to reduce risk
and vulnerability independently of the labour markets with negative
consequences on people’s well-being (Deyo, 1989).3
The process of social and economic development in Latin America
was less impressive than in East Asia and market and social incorpo-
ration was incomplete. During the post-Second World War era, low
agricultural productivity led to rapid migration to urban settings where
new, capital-intensive industries failed to create enough jobs. Levels of
informality and underemployment remained high (although less so in
Argentina, Chile and Uruguay than in Brazil or the Andean countries)
and by 1980, two-fifths of Latin American jobs were in the informal sec-
tor (Tokman, 2001). Wage growth was uneven but, overall, lower than
in East Asia: between 1960 and 1973 real wages grew by an annual aver-
age of 1.8 per cent and 1.3 per cent in Chile and Argentina compared to
7.4 per cent in Taiwan and 5.7 per cent in South Korea (Lin, 1988).
Social incorporation in Latin America, particularly in the pioneer-
ing countries of Argentina, Uruguay and Chile, was in many respects
stronger than in East Asia. By the 1970s, more than two-thirds of the
population benefited from social security systems and almost all chil-
dren were vaccinated against tuberculosis in their first year, attending
primary school by the age of 6 (Filgueira, 2005). In terms of social
spending, these three countries, along with Brazil, had the largest wel-
fare states in the periphery; between 1973 and 2000, social spending was
above 14 per cent of GDP, compared to just 5.7 per cent in Singapore
and 4.3 per cent in South Korea (Segura-Ubiergo, 2007).
Unfortunately, like market incorporation, social incorporation was
truncated along occupational status (Huber, 1996). The Latin American
“Bismarckian” welfare regimes created “occupationally fragmented
schemes” (Seekings, 2008: 25) pivoting around formal employment
and excluding the urban and rural poor. Public servants, professionals
and formal, urban employers were incorporated first to social secu-
rity, benefiting from the more generous benefits. Self-employed and
informal workers entered into the system later if at all (Filgueira, 2005).
In Argentina, social insurance programmes “for less influential and
organized groups, particularly rural and domestic workers, were largely

ineffective in enrolling affiliates and the benefits they offered were usu-
ally minimal” (Lewis and Lloyd-Sherlock, 2009: 116). In the early 1970s,
Chilean social security involved 150 programmes with different benefits
for different occupational groups.
Other regions of the global periphery fared even worse. In Sub-
Saharan Africa, both market and social incorporation have been weak.
In many countries, the public sector is the largest formal employer and
the informal sector has accounted for at least 60 per cent of all the jobs.
Sub-Saharan African countries are also characterized by informal welfare
regimes, which Wood and Gough (2006, 1699) define as “institutional
arrangements which generate gross insecurity and block the emergence
of stable, formal mechanisms to mitigate, let alone rectify, these.” Social
policy in these countries is dependent on foreign aid and primarily
benefits formal employees (Cerami, 2010).
1.4 Costa Rica’s exceptional path and growing tensions
Although many other developing countries have made significant

advances in market and social incorporation in the last decades, Costa
Rica’s performance has been particularly impressive and the country can
be regarded as an exceptional case. Between 1950 and 1979, Costa Rica
benefited from a healthy rate of economic growth in a comparative per-
spective. GDP per capita in real dollars expanded at an annual average
rate of 3.2 per cent, higher than any other Latin American country but
Brazil.4 Yet what made Costa Rica unique was not the expansion of pro-
duction as much as how this contributed to formal employment for a
majority of the population and to healthy real wage growth. To illustrate
Costa Rica’s success in employment creation during this period, Table 1.1
compares the weight of self-employment (commonly used as one of the
proxies for informal employment) in various Latin American countries
between 1950 and 1980 (see also Chapter 2). Compared with the rest
of the region, and because the working population in non-agricultural
jobs was scarce, Costa Rica started off the period with relative low self-
employment. Still, between 1950 and 1980, the country improved its
performance even more, while the levels of self-employment in the rest
of Latin America either increased or remained high. By 1980, less than
11 per cent of the economically active population outside agriculture
were self-employed in Costa Rica compared to 14 per cent in Argentina
(a significantly richer country), more than 15 per cent in Venezuela and
Uruguay and 22 per cent in Latin America as a whole.
Table 1.1 Weight of informal employment in the total in various Latin American countries, 1950–1980
1950 1960 1970 1980
1 2 1 2 1 2 1 2
Argentina 9.5 13.2 8.8 11.3 9.5 11.6 12.1 14.3

Bolivia 10.5 43.6 12.2 42.4 14.5 41.0 18.1 44.0
Brazil 6.9 17.6 10.8 22.9 9.3 17.4 10.7 17.2
Chile 13.8 21.9 12.3 18.9 11.5 16.5 13.9 18.7
Colombia 8.5 21.7 10.4 23.1 11.5 20.4 16.3 25.1
Costa Rica 6.3 15.0 6.9 14.4 7.3 12.8 7.1 10.9
Ecuador 7.7 23.2 14.0 37.2 13.7 33.5 15.4 32.0
Honduras 4.5 23.8 6.7 23.6 9.8 27.5 14.0 32.7
Mexico 9.7 28.1 10.0 21.9 14.5 27.8 18.3 29.8
Panama 6.3 13.5 6.8 13.7 10.4 17.4 12.1 18.3
Peru 9.8 27.2 12.8 30.8 17.0 33.7 24.4 34.7
Uruguay 9.0 11.6 10.0 12.6 11.1 13.7 13.0 15.8
Venezuela 11.4 22.3 14.1 22.3 16.0 22.4 12.2 15.4
17 countries total 8.7 20.0 10.6 21.0 11.5 20.3 13.8 21.6
1 = share of self-employment in the economically active population (%).

2 = share of self-employment over the non-agricultural employment (%).
The seventeen countries included are these thirteen plus the Dominican Republic, Guatemala, El Salvador and Nicaragua.
Source: Galli and Kucera (2002).
11
The comparison between Costa Rica and the Dominican Republic

is also illustrative (Itzigsohn, 2000; Sánchez-Ancochea, 2004). During
the post-Second World War period both countries expanded at similar
rates. Yet between 1952 and 1980 average real minimum wages grew
at an annual compound rate of almost 2 per cent in Costa Rica, while
decreasing slightly in the Dominican Republic. In the 1970s the unem-
ployment rate was above 20 per cent in the Dominican Republic, while
in Costa Rica it remained below 6 per cent and just 7 per cent of all jobs
were in the informal sector (Seligson, 1996).
Costa Rica’s success is rooted in a period of expanding incorporation.
Between 1950 and 1980, Costa Rica’s modernization took place in two
steps.5 Initially, agricultural production diversified and productivity
increased rapidly. As the main export product, coffee yields measured
in kilos per hectare expanded dramatically, from 373 in 1950 to 801
at the beginning of the 1970s. Real value added in the primary sector
oriented to the domestic market more than doubled between 1950 and
1960, while export agriculture grew by 10 per cent (Bulmer-Thomas,
1987). Participation in the recently created Central American Common
Market in the early 1960s triggered a gradual process of industrialization
around the Central Valley. Manufacturing production more than dou-
bled between 1960 and 1970 in real terms, accounting for more than a
quarter of total GDP growth. By 1979, the sector employed 16 per cent
of Costa Rican workers.
The importance of small and medium-sized firms and their com-
paratively high level of productivity added to the uniqueness of Costa
Rica’s modernization. These firms employed a large share of the total
population and increased productivity faster than larger companies for
part of the period. Cooperatives also grew rapidly thanks to active state
support.
A new economic policy regime was at the heart of the process of
market incorporation. Public incentives promoted first the upgrading of
the coffee sector and later the process of industrialization through the
Industrial Protection Law of 1959. The government also relied on nation-
alized banks to allocate credit to specific sectors and companies while the
prominence of public investment grew steadily during this period. Its
share in total capital accumulation went from 21 per cent in 1960 to 23
per cent in 1970 and almost 40 per cent in 1980 (Vargas, 1998).
Meanwhile, the public sector became one of the largest nationwide
employers as civil servants tripled their participation in the economically
active population in three decades. Jobs in the central government and
autonomous agencies relating to healthcare, telecommunications and
utilities were a major driver of Costa Rica’s successful market incorpora-

tion. Public jobs were not only numerous but also stable and well-paid.
In 1972, for example, average monthly real wages in constant colones of
1975 were 1,178 in the private sector, 2,106 in the central government
and 2,284 in autonomous public institutions (Rottenberg, 1993).
Costa Rica’s record in state-driven social incorporation was even more
impressive. A growing number of people benefited from free access to
healthcare, education, pensions and extended and affordable social serv-
ices such as water and electricity (Trejos, 2008). Universal coverage of
potable water was achieved as early as 1970, long before Latin America’s
large economies. In 1980, life expectancy at birth was almost 73 years,
higher than in the United States and other high-income countries.
Between 1940 and 1980, the country became “the closest case to a
universalistic egalitarian social state or even more an embryonic social
democratic welfare state” (Filgueira, 2005: 21). Social security coverage
among the urban population increased from just 8 per cent in 1950
to 70 per cent in 1980 (Román, 2008). Contrary to what happened in
other successful Latin American countries like Argentina, Chile and
Uruguay, access to healthcare and pension benefits increased across all
income groups.
The creation of a universal social policy regime took place in three
stages. In the 1940s, Costa Rica created a unified system of social insur-
ance built upward from low-income groups. Social protection targeted
the working class first, slowly expanding coverage by successive increases
in wage ceilings (Rosenberg, 1983). During the 1950s and 1960s, there
was a gradual expansion of social programmes, including healthcare and
pensions, as well as education at all levels. The system was completed
during the 1970s with the creation of preventive and primary healthcare
measures along with an ambitious, cutting-edge social assistance pro-
gramme enabling social incorporation among the very poor.
The economic policy regime has changed significantly in the last
three decades. Costa Rica simultaneously implemented market-friendly
policies of external liberalization and domestic deregulation and more
interventionist policies to promote non-traditional agricultural exports
and foreign investment in high-technology activities. The main objec-
tive of the policy reforms, particularly in the 1990s, was the crea-
tion of comparative advantages in high-tech exports so as to use the
accumulated human capital more effectively (Ciravegna, 2012). Costa
Rica has indeed succeeded in this area: the arrival of Intel and other
transnational corporations, together with the expansion of tourism,
have generated technological upgrading. At the same time, many other
sectors have suffered from trade liberalization and the lack of state
support and have experienced limited productivity growth. Informal
employment has increased faster than formal employment and mar-
ket incorporation has not improved nearly as much as in the previous
period (see Chapter 2).
The changes in social policy regime have been less significant, with few
parametric reforms in pensions (Mesa-Lago, 2007), managerial changes
in healthcare (Martínez Franzoni and Mesa-Lago, 2003) and the intro-
duction of additional targeted measures like a conditional cash transfer
programme. At the same time, insufficient funding has affected the qual-
ity of many social services like health and secondary education and, in
many cases, has led to a reduction in the total value of pensions.
Despite these changes and challenges, Costa Rica was less affected
than many other Latin American countries by the neoliberal reforms.
While countries like Argentina and Chile experienced dramatic revers-
als in their previous developmentalist trajectory (Draibe and Riesco,
2007), Costa Rica was able to preserve many of its previous achieve-
ments. Informality is still lower than in neighbouring countries and
the middle class larger. The record in terms of social incorporation
is particularly remarkable and most people maintain access to public
education, health and pensions. Yet tensions within and between the
social and economic policy regimes are growing and could ultimately
question the survival of one of the most exceptional cases in the devel-
oping world.
Poverty and inequality outcomes

Poverty and inequality have generally mirrored the process of mar-
ket incorporation: rapid improvements during the first period and a
less striking record in more recent times. In both stages, performance
in terms of poverty reduction was more impressive than in income
distribution – where Costa Rica fares well when compared to other Latin
American countries but less so when compared to some East Asian new
industrializing countries.
Although poverty trends for Costa Rica are scattered for the period
1950-1980, we know that Costa Rica underwent sustained poverty reduc-
tion. Poor families went from representing 51 per cent of all families in
1961 to 29 per cent in 1970 and 19 per cent in 1980, right before the
economic crisis took a harsh toll on living conditions (Céspedes and
Jiménez, 1995; Román, 2008). The severe recession of the early 1980s
brought about a significant yet temporary increase in poverty which
involved almost half the households in the country (see Figure 1.1).
Poverty decreased in the 1990s and remained stable in the 2000s, around
21 per cent. In 2004 there were, in absolute numbers, 234,000 poor
households and one million poor people in the country (Estado de la
Nación, 2004).
Available studies offer useful descriptions of contemporary poverty
and show that market incorporation is currently less successful than
social incorporation. The poor are predominantly members of rural
families with a large number of children and, in many instances,
headed by women. Poverty is also associated with less successful entry
into the labour market, especially among low educated males. Poor
people tend to work in temporary, informal or agricultural jobs, espe-
cially in traditional activities. In general, children of poor families do
attend primary school while enrolment in secondary school is more
limited and exhibits shortfalls when compared with other income
levels and regional performance. On the other hand, when it comes to
healthcare, poor households do have access to the full range of health
services (Rama, 1994; Sauma 2004; Taylor-Dormond, 1991; Trejos and
Montiel, 1999).
Between 1950 and 2005, inequality underwent two primary phases:
drop and stability until the 1970s followed by moderate increases from
the mid-1970s to the mid-1990s and more persistent and significant
expansions in the last decade. The Gini coefficient was first measured in
Costa Rica in 1962 for the metropolitan area of San Jose. Values reported
were 0.29 for inequality among people and 0.31 for inequality among
families (Quintana, 1962). There are questions on data reliability since,
at the same time, the Economic Commission for Latin America (now
Economic Commission for Latin America and the Caribbean, ECLAC)
60%
50%
40%
30%
20%
10%
0%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Figure 1.1 Evolution of the incidence of poverty, percentages, 1980–2005

Source: Trejos (2005).
reported a Gini coefficient of 0.48 for the same metropolitan area and
of 0.52 for the country at large. The latter was similar to the coefficient
reported for France; less equitable than the coefficient reported for
Norway, the United Kingdom, the United States and the Netherlands;
and more equitable than the Latin American countries in the sample
(Mexico, El Salvador, Venezuela and Peru) (ECLAC, 1970).6
Ten years later, in 1971, the University of Costa Rica reported an
improvement in income distribution as compared to ECLAC’s previous
measure. The Gini coefficient was 0.44 for both the country and the
metropolitan area. The study indicated that the 10 per cent of fami-
lies with the highest income had average earnings that were 16 times
greater than those of the 10 per cent of the poorest families in the coun-
try. The top 10 per cent had earnings that accounted for a third of the
total income of the country while the earnings of the lowest 10 per cent
accounted for only two per cent of total income (Céspedes, 1973).
Between 1961 and 1971 the 60 per cent of the families with the low-
est income had gone from securing 34 per cent to securing 44 per cent
of the total national income. Meanwhile, the better off had experienced
a reduction from 46 per cent to 34.4 per cent and the 30 per cent of fam-
ilies within the lowest income level did not experience any significant
changes (9.6 per cent in 1961, 9.8 per cent in 1971) (Céspedes, 1973).
Between 1971 and 1974 levels of inequality showed no significant
changes. Costa Rica maintained an intermediate place within the world
ranking in terms of both relative and absolute inequality (Céspedes,
1979). In 1974 the families with the highest income level had monthly
earnings 23 times greater than those with lowest earnings (9,458 colones
versus 417 colones).
Inequality increased in the late 1970s and even more during the
1980s – when our statistical series become more precise. At the begin-
ning of the 1980s income inequality was 0.35 with a temporary rise
between 1981 and 1982 (Figure 1.2). During these years Costa Rica
confronted its worst economic crisis in recent history, one associated
with increases in the price of petroleum and the external debt as well
as a fall in production and an increase in unemployment. Still, the
Gini coefficient reflected a more moderate concentration of income
than in most other Latin American countries at this time (Trejos and
Elizalde, 1986).
At the peak of the economic crisis, the poorest 10 per cent of house-
holds received less than 2 per cent of the total income and the richest
decile, 37 per cent. More than half of all household income was appro-
priated by the richest 20 per cent, while close to 70 per cent of all
0.440
0.420
0.400
0.380
0.360
0.340
0.320
0.300
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Figure 1.2 Evolution of income inequality, Gini coefficients, 1980–2005
households earned less than the average household income (Trejos and
Elizalde, 1986). The poorest families were mainly from rural areas and
were salaried agricultural workers and small subsistence agricultural
producers who worked independently to satisfy family-consumption
needs. The urban poor were salaried and non-salaried workers employed
mainly in the service sector. In all cases family income received an
important complement from governmental subsidies.
The middle class was made up principally of salaried urban and rural
workers as well as independent non-salaried workers. The sectors with
the highest income levels were comprised of both employees with high
wages and independent producers. The urban rich were more frequent
recipients of capital and governmental support than were their rural
counterparts who received private transfers and undertook high levels
of production for self-consumption (Trejos and Elizalde, 1986).
In the 1990s, Costa Rica was the second most egalitarian country
in Latin America after Uruguay (ECLAC, 2005). The country also
ranked high in the human development index: in 1998 Costa Rica was
second in Latin America (following Chile and right before Uruguay
and Argentina) and 34th in the world (UNDP, 1998). Unfortunately, in
the last 15 years Costa Rica has been experiencing a faster growth of
inequality than any other Latin American country. Between 1988 and
2004 the distribution of primary income increased from 0.37 to 0.48
(see Table 1.2) (Trejos, 2006b).7 Meanwhile, social income became more
progressive, decreasing inequality by 6.0 per cent in 1988 and 8.8 per
cent in 2004. Despite this improvement in the progressiveness of social
policy, overall inequality increased sharply due to decreasing market
incorporation, from 0.3 in 1988 to 0.4 in 2004.
Table 1.2 Income inequality before and after social income, 1988 and 2004
(Gini coefficients)
Year Primary distribution Impact of social Secondary

policy in inequality distribution
1988 37.3 –6.0 31.1

2004 48.7 –8.8 40.4
Source: Adapted from Trejos (2006b), tables 5 and 11.
1.5 Explaining the state role and the rationale for

public policy
Several theories have sought to explain regional variations and perform-

ance in market and social incorporation across peripheral countries.
Various authors have emphasized differences in patterns of colonization
(Rueschemeyer, Huber and Stephens, 1992), democratic rule and politi-
cal ideology (Huber and Stephens, 2012), the social structure and the
role of the bourgeoisie (Moore, 1966), in the nature of policies (Seekings,
2008; Valenzuela, 2011), and in initial endowments (Engerman and
Sokoloff, 1997) among other factors. Yet dominant explanations in
social science revolve around differences in the nature of the state and
its relations with various domestic actors (Filgueira, 2007) and this is
also where we place our contribution in this book.
The state and state–society relations have been central variables in
explaining why East Asian countries succeeded in securing market
incorporation when compared with Latin America and other parts
of the world (Amsden, 2001; Evans, 1995; Jenkins, 1991; Kay, 2001).
South Korea, Taiwan and Singapore benefited from a developmental
state that concentrated on the promotion of high economic growth and
structural transformation. States gave subsidies and other incentives to
private firms in exchange for performance standards such as production
and export targets.
The term ‘developmental state’ was actually first used by Johnson
to describe the Japanese public sector. For Johnson, the Japanese state
was characterized by “a small, inexpensive, but elite state bureaucracy”,
which had sufficient autonomy to “take initiative and operate effec-
tively”, used “market-conforming methods” of intervention and was
led by a “pilot organization” ( Johnson, 1999: 38 and 39). The develop-
mental state pursued primarily and overall a project of structural change
and economic growth. Not surprisingly, in that process the business

elite became the state’s closest partner. As Evans (1995) rightly puts it,
“for developmental states, connections with society are connections
with industrial capital” (234). Industrial capital received incentives for
investment in new sectors and benefited from high profits (Akyuz and
Gore, 1996). In his critical interpretation of South Korea’s transforma-
tion, Chibber (2003) goes further and see the relationship between busi-
ness and the state as one of equals.
The nature of the state and state–society relations was also central to
explain Latin America’s segmented market incorporation. In the largest
countries of the region, the state promoted new sectors oriented to the
domestic market but was less successful in making economies more com-
petitive internationally. Politicized bureaucracies failed to design long-
term development plans or impose credible performance standards on
either transnational corporations or domestic entrepreneurs. Domestic
capitalists in the urban sector lobbied the government for new tariffs
and – together with a relatively small number of workers – pressured
the government to maintain strong exchange rates. The landowning
elite may not have been strong enough to secure devaluation, but did
prevent land reforms and high levels of taxation (Hirschman, 1968).
The literature on welfare regimes and social incorporation also high-
lights the role of the state and, particularly, its links to different social
actors in explaining degrees of social incorporation. Social policy is seen
in most instances as a way to reduce social conflict and secure support
from various segments of the working class. The real and/or perceived
strength of trade unions and other organized urban groups – and how
the political elite copes with it – helps to explain social policy outcomes
in various parts of the world (Heller, 1999; Huber and Stephens, 2001).
Haggard and Kaufman (2008)’s recent comparative study of welfare
states in Latin America, East Asia and Eastern Europe offers a compre-
hensive discussion of how state–society relations impact social policy. In
Latin America, reformist political elites aimed to co-opt the urban work-
ing class and to secure military support through public social insurance
for specific groups. Import substitution industrialization helped to secure
popular support but also created space for further expansion of social
policy. In East Asia, on the other hand, the political elite were notori-
ously anti-communist and used military means to weaken trade unions.
Social policy became an instrument to support rapid capital accumula-
tion but not to reduce vulnerabilities of any specific social group.
In their discussion of the Latin American case, Evelyne Huber, John
Stephens and their collaborators emphasize the state’s role in determining
different degrees of social incorporation – although they do not use this

term. Their statistical analysis of 15 Latin American countries shows
that sustained democracy coupled with left-wing parties in the execu-
tive branch accounts for more universal health and education policies
(Huber and Stephens, 2011). In the same spirit, Huber (2005) attributes
Costa Rica’s success to the length and quality of democracy – a claim we
try to problematize in this book.
What is most striking about the literatures on developmental and wel-
fare states in the periphery is their overall lack of links. The state is either
treated as an actor of economic transformation or an actor of redistribu-
tion but its two roles are seldom explored simultaneously. Sometimes
developmental states are assumed to be active in the social realm as well –
South Korea and Taiwan come to mind (Mkandawire, 2012; Sandbook
et al., 2007) – but there is little evidence that in these cases social policy
aimed at decommodifying labor. There is also an unexplored assumption
that the welfare state will arrive hand in hand with a developmental one.
But what explains the state’s willingness to promote market and social
incorporation simultaneously? Is it necessary to have both a develop-
mental state and a redistributive state to achieve this double result?
These are some of the questions we explore in Chapter 4 of this book
and introduce now.
1.5.1 Explaining the Costa Rican state

A dominant explanation of Costa Rica’s success is that relatively equal
patterns of land distribution since colonial times resulted in a more
equal society with a weaker elite than in other parts of Latin America
(Rueschemeyer, Huber and Stephens 1992). The country gradually cre-
ated a relatively large middle class which supported an increasingly
interventionist state since the early twentieth century and was behind
the consolidation of democratic institutions. Democracy in turn
explains recent positive outcomes in market and social incorporation:
Lehoucq (2010), for example, emphasizes the positive impact of pro-
portional representation, autonomous institutions and the nature of
political institutions on socioeconomic results.
These factors were all preconditions for Costa Rica’s success in the
period we study. There is little doubt, for example, that Costa Rica
entered into the post-Second World War era with more effective institu-
tions and a larger middle class than neighbouring countries in Central
America and beyond (Schneider, 2012). Yet, these factors cannot, in and
of themselves, explain how and why the economic and social policy
regimes were shaped as they were during the period 1950 to 1980 and
how and why they have changed since the 1980s. During the period of
expanding incorporation, Costa Rica experienced a significant process
of state building understood, following Schneider (2012: 31), as a proc-
ess through which new actors “press for political access to advance a
policy agenda that will help them sustain their dynamism, including
administrative adaptations and the construction of new political insti-
tutions, where necessary, as well as creating new state–society linkages
to link themselves to the state and manage relations among rising, fall-
ing, and excluded groups”. The book highlights the need to understand
who these actors are, how they put the state at their service and where
their ideas come from.
In Chapter 4, we explain the preferences of the emerging elite and
the enabling international policy ideas starting in the 1950s. An emerg-
ing class of small and medium-sized businesses and urban professionals
clustered around the National Liberation Party (PLN). The PLN took on
a dominant role, drawing on the state to expand its economic oppor-
tunities. Market and social incorporation over the long run were thus
less a result of a particular ideology and more the consequence of the
economic preferences of a new elite in the process of creating a new
state and a new society. Nourishing and adapting international ideas – a
variable often forgotten in political economy debates – these actors also
utilized public policy in the service of managing conflict and weakening
opposition. Our book thus highlights the importance of who leads the
process of state-building and calls attention to interactions between the
elite, the bureaucracy – in charge of state affairs on everyday bases – and
international ideas. In doing so, we stress the long-term, structural proc-
esses behind policy formation rather than the very relevant policy cycle
that has been our focus elsewhere (Martínez Franzoni and Sánchez-
Ancochea, 2012).
Following much recent work within the political economy of devel-
opment (Therkildsen and Whitfield, 2011), we thus pay particular
attention to the emergence of a new elite. The concept of the elite has
a long tradition in social science and it would not be possible here to
review even a small part of the literature on elites in the process of
development. Yet a few words on its definition will be useful. Following
the classic work of Mills (1957), by the elite we refer to a group of people
who, by way of holding scarce power resources, make or shape the main
political and economic decisions in a country. In a loose way, we place
this group in a class structure: the elite that led Costa Rican market and
social incorporation between 1950 and 1980 were, in broad terms, part
of the middle class. In other words, it was neither the traditional coffee
oligarchy, nor the rural peasants or the urban working class. Most of
them owned land yet lacked credit; had education yet lacked access to
public policy formation. Although we presume no necessary relation-
ship between economic and political elites, we do argue that behind the
PLN there was a group who managed to ascend and become economic
elite, precisely because it was able to put the state and its public policies
to the service of its economic interests. In so doing, it benefitted and
engrossed a middle class.
In securing their objectives during the period of expanding incor-
poration, the PLN elite used both economic and social policies. While
economic policies played a relatively large role in shaping market incorpo-
ration and social policies in shaping social incorporation, it is important
to acknowledge the complex interrelations between them all. By creating
public jobs for teachers and doctors, for example, social policy facilitated
market incorporation for significant segments of the middle class. By
expanding tax revenues, the economy had an indirect effect on the social
incorporation achieved.
We are aware that, by looking at the link between the state, policies
and outcomes, we are ignoring many other relevant intervening vari-
ables such as global economic conditions and demographic changes.
While important as departing conditions, these variables themselves
cannot be considered drivers of the economic and social policy regimes
behind market and social incorporation which account for Costa Rica´s
unique trajectory.
The growing fragmentation in the interests of the elite, together with
changes in the international policy menu, go a long way in explaining
recent modifications in the state’s role, which has been particularly
intense in the economic policy regime.8 Regarding the elite and its
interests, on the one hand, most of the PLN’s constituency endorsed
the state’s role in supporting the private sector through export incen-
tives and the targeting of foreign direct investment (FDI) in selected
sectors. On the other hand, splits within the PLN around the optimum
development model, which had already emerged in the second half of
the 1970s, intensified in the early 1980s (Lizano, 1999). New leaders
like Oscar Arias, president of the Republic in 1986–90 and 2006–10,
Eduardo Lizano, president of the Central Bank on several occasions,
and others promoted a quantitative and qualitative change in the state
participation in economic affairs.
The initial shift in policy promoted deep structural changes. The
literature shows a broad consensus around the idea that there is a grow-
ing and substantial differentiation of the middle class (Castro, Gutiérrez
and Rodríguez, 2007; Vargas, 2009; Vega, 2007) which has led to some
winners and many losers, not only in the middle but at the bottom
of the social structure (Mora and Pérez Sáinz, 2009). As the middle
class became more heterogeneous, it also became more difficult if not
impossible to implement state policies capable of promoting economic
opportunities for the middle class as a whole. Instead, policies that
benefit the new and ascending middle class, linked to well-paid private
jobs and increasingly reliant on private social services, are very different
from those favourable to the old middle class employed in the public
sector and that relies on public social services (Castro, Gutiérrez and
Rodríguez, 2007).9 The PLN increasingly concentrates on promoting
high-productivity sectors (including high-tech and finance) and hopes
for a trickle-down effect to the rest of the economy. Social policies
have gained a renewed political importance by redistributing income
and compensating losers of economic reforms among low-income and
lower-middle income groups. Meanwhile, the PLN has fewer incentives
to promote state-led employment and to protect the quality of public
social services for the middle class.
Changes in international ideas also explain the direction of Costa
Rican policies. Worldwide, the Washington Consensus provided a
theoretical rationale for trade liberalization and financial deregula-
tion, while traditional social-democratic ideas were challenged. Yet the
actual menu of ideas internationally available was broader than crit-
ics of the Washington Consensus sometimes assume: Singapore and
Ireland, for example, became powerful examples of the positive results
of targeting specific foreign companies and providing incentives to par-
ticular sectors (Mortimore and Vergara, 2004; Sánchez-Ancochea, 2009).
Following these experiences, the PLN enthusiastically supported the
promotion of foreign investment in high tech – a policy that increased
competitiveness but did relatively little to promote market incorpora-
tion at the macro level.
What is significant, however, is that many of the features of the
economic policy regime and, in particular, social policy have remained
the same. For example, the tendency to face new problems with the
creation of a public, autonomous institution remains, and the number
of public institutions (but not the number of its workers) has increased.
New social rights have been created and social policy institutions have
only experienced a moderate change. To explain continuity, we must
introduce a third key variable: the legacies inherited from the previous
period. The tendency to create institutions to overcome new problems
and the existence of a powerful bureaucracy shaped the type of policy
responses that the elite could implement and has reduced the likelihood
of radical change in the short run.
Contrary to what happened in the 1940s, when state institutions
underwent major changes transitioning from a liberal to an interven-
tionist state in social affairs, in Costa Rica we do not see the 1980s as a
turning point that radically modifies core features of a previous stage.
Regional political instability and the economic shock of the early 1980s
could have led to such a turning point, leaving the crisis with totally
different conditions than those under which the country had entered
it. Yet the enduring presence of legacies has resulted in a considerable
degree of continuity. In the presence of much international aid, the
country overcame the crisis very rapidly, leading the way to piecemeal
rather than radical transformations. During this period the state became
an arena of conflict, where expansion and retrenchment, continuity
and reform coexisted.
1.6 A methodological note
This book originated in the UNRISD’s project “Poverty Reduction and

Policy Regimes in Costa Rica” under the umbrella of comparative
research that included other countries like Brazil and South Africa. The
country case involved six reports, two of them our own and the other
four written by distinguished Costa Rican scholars.10 These reports
tackled different angles of the overall question of what made Costa Rica
successful at social and market incorporation. They focused in turn on:
Costa Rica’s economic performance and social trajectory; the nature
of the basic social services and social protection involved; and state
institutions and political and social conflicts. The reports offered raw
data and many descriptive insights upon which we have drawn in the
writing of this book. Credits are made explicit in each of the chapters
that follow. Yet we have gone well beyond those inputs in building our
analytical interpretation of Costa Rica’s trajectory and the nature of its
tensions.
In doing so, we have relied on our own research project into Costa
Rica’s universal welfare regime and its links to the production regime,
which began in 2009 and should result in another book. Rather than
accounting for market and social incorporation, our other research
seeks to explain the economic and political determinants of an equally
rare outcome, namely Costa Rica’s universalism. Data from our own
previous studies as well as the aforementioned reports are both statisti-
cal (based mainly on national accounts and household surveys) and
qualitative (a set of interviews to policymakers, academics and former

politicians).
We are aware of the problems of using single-country case studies
to draw theoretical insights and policy lessons but believe they can be
extremely informative in the area of development literature. On the one
hand, studies of exceptional experiences can make enormous contribu-
tions to theory building (Amsden, 1989; Wade, 1990). On the other
hand, case studies need not (and must not) leave comparative analysis
aside. In this book we draw from the comparative political economy
literature to make sense of an exceptional case, providing a theoreti-
cally informed explanation of how dual incorporation was achieved
and proposing general lessons that should be applied to other contexts
with care.
1.7 Plan of the book and main contributions
The book begins with two chapters focused on market and social incor-
poration, respectively. Both of them demonstrate Costa Rica’s success
in the last six decades, while also addressing differences between the
periods of expanding and stagnant incorporation. Chapter 2 discusses
Costa Rica’s economic policy regime and its main outcomes in terms of
market incorporation. We show the central role of the state in securing
full employment within formal markets through direct and indirect
channels. While the model shifted significantly since the 1980s with
the adoption of some neoliberal policies, the state remained active in
several areas, including industrial policy.
We then address the social policy regime and its outcomes regarding
living conditions and access to services (Chapter 3). To this purpose
we discuss the role of basic social services and social protection, deeply
intertwined in the Costa Rican case, as reflected in education, health,
pensions and water and nutrition. We conclude with an overview of
how the social policy regime evolved from the period of expanding
incorporation to the period of stagnant incorporation. Being resilient
is the most remarkable feature; tensions have also resulted from more
demands with fewer resources per person, along a growing supply of
private provision which competes for public resources.
After documenting market and social incorporation, we move on to
explanatory variables, highlighting the role played by the state in simul-
taneously securing market and social incorporation (Chapter 4). We stress
three factors. The first is the nature of Costa Rica’s emerging elite and
how it pursued increasing economic opportunities, social support, and
conflict management. In pursuing all three goals a growing bureaucracy

played an important role.
While the interests of the elite around the PLN may have driven the
general direction of policy, they cannot alone explain the specific fea-
tures of those polices. To do so, we need to consider where ideas come
from and how they change over time. International ideas map out the
range of possible options at different points in time and influence the
specific characteristics of new programmes. Therefore, the second factor
is the role of ideas internationally available during each period.
Third, we address the erosion of key components of the previous
political model to explain the changes in the social and, especially,
economic policy regimes since the 1980s. In the context of changing
international ideas, we show two key transformations the elite has
undergone, namely its fragmentation and its loose relationship with
the bureaucracy.
Economic and social transformation remains country specific.
However, our analysis of the Costa Rican case leaves a set of policy
lessons which we summarize in Chapter 5. We highlight key ideas for
a better understanding and intervention on poverty reduction strate-
gies based on our analysis in the previous three chapters. These lessons
emphasize the importance of the state as an employer and provider
of social services; the role of universalism and the ways it can be con-
structed; the need to consider ongoing tensions between employment
and upgrading and between the economic and social policy regimes;
and the need to account for the role of the elite in the process of
state-building. Although lessons from one country do not travel well
to others, we believe that the case of Costa Rica demonstrates the
opportunities and tensions for market and social incorporation in the
developing world.
The contribution we make in this book is not primarily empirical as
we largely build from well-established contributions by Costa Rican
(and some foreign) researchers. Jorge Rovira’s work has been particularly
influential for many of the political arguments we make here – even if
we do not adopt his explicitly Marxist approach. In a book first pub-
lished in 1982, he showed the relationship between the economic poli-
cies adopted between 1948 and 1970 and the interests of the emerging
elite. He argued that “the configuration of a new type of state in Costa
Rica by the National Liberation Party does not respond… to a simple
objective of “public welfare” or “national development”. It is instead a
response to class interests” (Rovira, 2000: 82). The class he talks about
is an emerging elite made of “representatives of small and medium
bourgeoisie companies which gained power. Building from the state

they pushed for reforms that made them new groups within the Costa
Rican capitalist class” (p. 46). Rovira has also written his own interpreta-
tion of the changes during the period or stagnant incorporation, which
emphasize modifications in elite priority but also in the nature of the
political system, the relationship between political parties and other
institutional variables (see, for example, Rovira, 1987, 1992 and 2004).
We also borrow from many other authors who have discussed the role
of the PLN, the determinants of the Civil War, the nature of Costa Rica´s
socioeconomic success and other key dimensions of our analysis.
The book makes four different contributions to the literature on Costa
Rica and, more importantly, to debates on the policies and politics of
development. First, we place available evidence concerning the Costa
Rican case in the comparative political economy literature. This is, we
believe, very important in so far as much of the Costa Rican literature
that has produced primary data tends to stay away from such compara-
tive debates. We feel strongly about the importance that case studies
engage with and speak to such debates. To the extent that we have been
successful, this study may be useful for scholars who are unfamiliar with
Costa Rica but are eager to learn about a country that succeeded where
most fail.
Secondly, while most available contributions focus on either 1950-80
or the post 1980s, we systematically trace the dual incorporation across
both periods. We acknowledge significant continuities in terms of
policy regimes (particularly in the social realm) and some outcomes (for
example, high life expectancy; low infant mortality) but also highlight
Costa Rica’s growing problems to maintain market and social incorpora-
tion. The complexity of Costa Rica’s trajectory makes the case particu-
larly interesting: initial gains remain and new opportunities emerge but,
overall, globalization brings growing challenges. Costa Rica illustrate
the fact that development is by no means a linear process, but instead
one with tensions, contradictions and changes. Third, we give the same
weight to market and social incorporation and do not consider one as
a function of the other: we consider them as two interrelated processes
and discuss some of their most important interrelations. In this way, we
begin to overcome an artificial separation in the literature between the
economic and social realms.
Last but not least, we link successful policies with key policy determi-
nant and highlight the interaction between interest and ideas, between,
as Heclo (1974) taught us, “powering” and “puzzling”.
2
The Economic Policy Regime
and the Two Phases of Market
Incorporation
2.1 The success and growing tensions of Costa Rica’s

market incorporation
Market incorporation is a primary requirement for equitable economic

development. The creation of well-paid, formal employment provides
access to a stable income, helps people to plan for the future and reduces
the level of uncertainty. Securing market incorporation for low-income
groups can also contribute to reduced income inequality, particularly if
it is accompanied by a process of wage compression.
This chapter discusses Costa Rica’s success in promoting market
incorporation. It shows how high economic growth – at least compared
to other Latin American countries – together with a transformation of
the economy away from agriculture has steadily improved the labour
market opportunities for a majority of the working population. We
concentrate on the nature of the economic policy regime and highlight
the influence of the state through different and changing roles: as direct
employer, lender, promoter of small and medium-sized firms, and leader
of economic transformation. Our accent on state intervention does not
imply that national and foreign private producers have not been impor-
tant. Costa Rica has been a successful example of a mixed economy
(Mesa-Lago, 2003) in which the state and markets have worked together
effectively, creating opportunities for a diverse set of private actors, from
large domestic business groups and transnational corporations (TNCs),
to small and medium-sized firms and cooperatives.
While Costa Rica’s achievements over the past six decades have been
impressive, the country’s path has not been without conflicts and prob-
lems. Throughout the period 1950–80, the years of expanding incorpo-
ration, the economy grew rapidly, formal employment was prevalent
28
Economic Policy Regime and Market Incorporation 29
and the fruits of development were relatively well distributed. Yet the
process of modernization brought limited technological upgrading and
the country remained dependent on coffee, bananas and a few other
primary goods.
Beginning in the 1980s, Costa Rica has undertaken a piecemeal trans-
formation of its economic policy regime based on trade liberalization,
financial deregulation, a freeze in public employment and the extensive
promotion of foreign direct investment (FDI). The results of this new
policy regime are contradictory. On the one hand, the country has ben-
efited from export diversification and a more dynamic incorporation
to the global economy. On the other hand, the new regime has led to
growing tensions and shortcomings – including increasing inequality
and economic duality – that may challenge Costa Rica’s future perform-
ance in market incorporation.
The chapter is divided into three sections. Section 2.2 discusses
Costa Rica’s long-term performance, highlighting differences in out-
comes between the periods of expanding and stagnant incorporation.
Section 2.3 describes the characteristics of the economic policy regime dur-
ing the first period, highlighting the central role of the state. Section 2.4
demonstrates the devastating effect that the debt crisis of the early 1980s
had in Costa Rica, discussing the main feature of the economic policy
regime during the last three decades and reviewing its contradictory
results. It pays particular attention to the expansion of the free trade
zones (FTZs), documenting their contribution to export upgrading as well
as their lack of linkages to the rest of the economy. The chapter concludes
with lessons to be drawn from the Costa Rican case for our understanding
of the challenges of market incorporation in developing countries.
2.2 Costa Rica’s long-term process of market incorporation
Before discussing the nature of the economic policy regime during the
periods of expanding and stagnant incorporation, we overview the per-
formance of the economy over the last six decades. Real gross domestic
product (GDP) in local currency increased at an annual average rate of
5 per cent between 1950 and 2007, as shown in Table 2.1. As a result,
income per capita expanded faster than both the Latin American and
world averages. Costa Rica’s GDP per capita in real US dollars of 2000
(4,973 in 2007) increased from 87 per cent of the Latin American
average in 1950 to 110 per cent in 2006. The country also converged
towards the world average in that same period, although at a lower
speed (Figure 2.1).
30
Table 2.1 Gross domestic product, real colones of 1966,

annual average rate of growth, 1950–2008
Annual average Variance
1950–1960 5.75 5.14

1960–1970 6.05 3.06
1970–1980 5.64 2.58
1980–1990 2.41 4.45
1990–2000 5.20 2.99
2000–2008 4.97 2.70
1950–1980 5.82 3.63
1950–2008 5.00 3.71
Note: We use base numbers to link the series with 1966 prices and
the more recent series with 1991 prices.
Source: Authors’ calculations from Vargas (1998) and Central Bank’s
webpage.
GDP per capita World Latin America & Caribbean
120 6000
Share of world and Latin American average
100 5000
80 4000
US dollars 2000
60 3000
40 2000
20 1000
0 0
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Figure 2.1 GDP per capita, US dollars and as a share of world and Latin American
average, 1960–2008
Source: Own elaboration with data from the World Development Indicators.
Behind this positive, long-term trend, however, hides a more complex

and, in many ways, worrisome reality. The period 1950–78 was one of
rapid social and institutional progress which resulted in rapid market
incorporation. Formal employment was high and real wages expanded
steadily. In the 1970s, for example, the rate of unemployment was just
5 per cent and informal jobs accounted for only 14 per cent of the non-
agricultural, economically active population (Villasuso, 2008). Between
1950 and 1979, the minimum wage increased at an annual average rate
of 1.9 per cent (Sánchez-Ancochea, 2004).
Economic outcomes during the last three decades are more ambigu-
ous and Costa Rica has struggled to remain an exceptional case. The
external shocks of the late 1970s affected Costa Rica even more than
other Latin American countries and, as a result, it suffered a process of
divergence from the regional average (Figure 2.1). Successive govern-
ments responded to the crisis by promoting a new economic policy
regime aimed at reducing the involvement of the state in the economy
while aggressively promoting non-traditional exports. The new poli-
cies succeeded in creating new exports and received high praise from
observers. UNCTAD (2002) considered Costa Rica to be the most suc-
cessful example of export upgrading through the selective promotion
of FDI. A background paper for UNDP’s 2001 Human Development Report
stated “over the last decade Costa Rica has experienced a tremendous
leap forward in the development of a technology and knowledge-driven
economy” (Rodríguez-Clare, 2001: 1), insisting on the importance of
Intel’s investments. Yet the expansion of high-tech activities and mod-
ern sectors (tourism and finance) has been accompanied by problems
in many other parts of the economy. As a result, during the 1990s and
early 2000s, between 50 and 70 per cent of new jobs were in the infor-
mal sector (Martínez Franzoni and Sánchez-Ancochea, 2013). In 2006,
the informal sector accounted for 35 per cent of the working popula-
tion, compared to slightly over 20 per cent in the early 1980s.
2.3 The period of expanding market incorporation
During the three decades spanning 1950 through 1980, Costa Rica
succeeded in securing full formal employment and a steady growth in
the level of real wages. The public sector played a central role in pro-
moting market incorporation through three different channels: (1) the
promotion of the manufacturing sectors through import substitution;
(2) the expansion of public employment in both the central government
and a growing number of autonomous institutions; and (3) a moderate
redistribution of land and an incomplete modernization of the rural sec-

tor. Unfortunately, however, the economic policy regime was unable to
significantly upgrade Costa Rica’s comparative advantages and showed
increasing limitations during the 1970s.
2.3.1 The late 1940s as a breaking point

The origins of Costa Rica’s successful economic policy regime can be
found in the reforms introduced after the 1948 Civil War. The Provisional
Government ( Junta Fundadora de la Segunda República), which held power
between May 1948 and November 1949, implemented some measures
that influenced the subsequent path of Costa Rica’s economic policy
regime:
• The nationalization of the banking system was implemented to

democratise access to credit, promote new sectors and firms, limit
the economic power of finance (which had close ties with the coffee
sector) and increase the influence of the state on credit allocation.
The importance of this measure, which was enthusiastically sup-
ported by trade unions and university professors and students, can-
not be underestimated. Although credit allocation did not change
as dramatically as expected, nationalization gave access to resources
for investment to new segments of the Costa Rican population. It
also took a profitable source of wealth accumulation away from the
traditional elite.
• A 10 per cent tax on capital assets and a negotiated 15 per cent tax on
profits of the United Fruit Company, the dominant banana producer
and exporter in Costa Rica at that time (Rovira, 2000).
• A rising wage policy. The leader of the Provisional Government, José
Figueres, was personally committed to securing real wage growth in
order to improve workers’ living standards and deepen the domes-
tic market. In June 1948, he announced a 10 per cent increase in
nominal wages for workers in the coffee and sugar sectors and for
many public servants. He also created the National Wage Council,
a forum where trade union representatives, employer associations
and the state could negotiate minimum wages across all sectors of
the economy.
• The nationalization of the Institute for the Defence of Coffee and the
creation of the Costa Rican Institute of Electricity (ICE for its Spanish
Acronym). The Institute for the Defence of Coffee was renamed
Oficina del Café and charged with the task of setting the price ben-
eficios had to pay small coffee growers. The ICE was responsible for
electricity production and soon became a key instrument for the

promotion of economic development.
• The abolition of the army in December, 1948, eliminated military
influence in public affairs.
2.3.2 Sectoral policies, import substitution and the

Central American Common Market
During the 1950s, when the traditional, rural oligarchy was still strong,
public policy stressed the diversification of the agricultural sector and,
in particular, the modernization of coffee production. In 1957, more
than one-third of total credit still went to the agricultural sector and
basic grains such as beans, rice and corn were promoted through the
Consejo Nacional de Producción (National Production Board) (Brenes,
1990). Coffee growers received 50 per cent of all credit provided to the
primary sector and benefited from public support for the use of fertiliz-
ers, the introduction of better coffee plants and the development of new
techniques (Rovira, 2000).
The emphasis on agriculture resulted in its significant diversification.
According to data collected by Bulmer-Thomas (1987) real value added
in the primary sector oriented towards the domestic market (measured in
1970 prices) more than doubled between 1950 and 1960 while export agri-
culture grew by 10 per cent.1 In 1960, in addition to coffee and bananas,
the country also produced significant amounts of basic grains, sugar, milk
and cattle. Nevertheless, the weight of the primary sector in the overall
economy decreased substantially during the 1950s (see Table 2.2); this
is explained in part by significant improvements in productivity. For
example, coffee yields measured in kilos per hectare experienced a dra-
matic expansion: from 373 in 1950 to 801 at the beginning of the 1970s
(cited in Bulmer-Thomas, 1987).
Table 2.2 Distribution of nominal GDP by sector, 1950–1990
1950 1955 1960 1965 1970 1975 1980 1985 1990
Agriculture 40.94 38.32 26.35 23.52 22.52 20.34 17.80 18.87 15.79
Manufactures 13.44 13.30 14.61 16.79 18.27 20.40 18.60 22.09 19.38
and mining
Trade 19.15 19.50 21.20 20.19 21.02 19.06 20.08 20.47 20.09
Public sector 5.38 7.71 8.98 9.75 10.62 12.40 15.19 13.02 14.90
Construction 3.40 4.30 4.35 4.72 4.25 5.17 6.24 3.57 3.21
Other services 17.69 16.87 24.52 25.04 23.31 22.63 22.09 21.98 26.63
Source: Central Bank.

The approval of the Industrial Protection Law (Ley de Protección Industrial)

in 1959 shifted the focus of economic policy towards the promotion of
the industrial sector. The Law established incentives such as a tax that
increased the tariffs levied on those imports competing with domestic
production by 300 per cent; a 99 per cent exemption on import duties for
machinery, raw materials and intermediate inputs used to produce manu-
facturing goods; tax exemptions for municipal taxes; corporate taxes (100
per cent exemption during the first half of a period agreed upon between
the government and the company, 50 per cent during the second half)
and export taxes.
These new incentives took place simultaneously with Costa Rica’s
incorporation into the Central American Common Market (CACM) in
1963. Both processes together opened the door for the emergence of a
new manufacturing class and the expansion of foreign investment. TNCs
played a very active role in the regional-based process of industrializa-
tion. From 1962 to 1969, around 19 per cent of the resources devoted to
fixed and working capital came from FDI (Bulmer-Thomas, 1987). Many
large manufacturing TNCs such as Merck Sharp, Dohme and Pfizer
(pharmaceuticals), S.C Johnson (other chemical products), Firestone
(tires), Polymer (plastics) and GTE Sylvania (electric appliances) arrived
during the 1960s and, to a lesser extent, the 1970s (Ulate, 1993).
The CACM became a central piece of the region’s industrialization
efforts, promoting the expansion of regional manufacturing exports.
In fact, between 1962 and 1974, the behaviour of other exporters,
mainly manufacturers, followed exactly the same evolution as that of
exports going to Central America (Figure 2.2). This close association,
however, weakened in the second half of the 1970s and ultimately dis-
appeared during the 1980s. The expansion of the regional market and
the Industrial Promotion Law of 1959 contributed to rapid industrial
growth in the 1960s. Industrial production in real terms more than
doubled between 1960 and 1970 and contributed to around one-quarter
of total economic expansion during this period.
2.3.3 The broadening of business opportunities

When compared to neighbouring countries, one of the most impressive
achievements of the Costa Rican economic policy regime was its success
in creating economic opportunities for small and medium-sized produc-
ers. This does not mean that large producers were unimportant. Quite
the contrary: state-led structural change encouraged the appearance of
relatively large investors with interests in several sectors. For example,
such was the case of the Jiménez Borbón family who dominated the
Other products Exports to CA
50
45
40
35
% of total exports
30
25
20
15
10
0
1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984
Figure 2.2 Exports to Central America and non-primary exports, percentage of

total exports, 1954–1985
Source: Vargas (1998).
most important Costa Rican newspaper (La Nación), sugar and cattle
production, and one of the leading industrial firms, Florida Ice and
Farm (which had a monopolistic position in the beer market).
Yet large capitalists in Costa Rica were not as large or as powerful
as those in neighbouring countries such as the Dominican Republic,
El Salvador or Guatemala. Small and medium-sized enterprises (SMEs)
were important, vibrant economic actors. On average, SMEs employed
half of the total occupied population during the 1960s and 1970s
and were responsible for 40 per cent of production (OFIPLAN, 1982).
More significantly, between 1958 and 1980, labour productivity in
manufacturing SMEs grew more rapidly than that of larger firms –
9.5 per cent and 7.4 per cent per year, respectively. The state-owned
banking system made an invaluable contribution to the expansion of
small and medium-sized producers: while domestic credit remained
more concentrated than expected, access to subsidized credit was
a major factor in opening the door for new capitalists (Rovira, 1993).
The strength of small and medium-sized producers was further facili-
tated by the promotion of cooperatives. The 1949 Constitution made
the government responsible for promoting cooperatives “with the aim
of facilitating better standards of living for workers” (article 64). Between
1959 and 1963, the number of cooperatives rose from 42 to 218 and by
1985, the number had risen to 464, accounting for 11 per cent of total
GDP and 15 per cent of total exports (Reding, 1986). In the 1970s, the
government created the National Institute for Cooperative Promotion,
which was in charge of providing technical assistance and access to
credit for cooperatives. Cooperatives were particularly important in the
coffee and dairy sectors. In 1962, the Federation of Coffee Cooperatives
(Federación de las Cooperativas del Café) was created and received generous
support from the public banking system. The Federation had 33 affiliates
in 1985, selling 40 per cent of their harvest directly to the world markets
(Brenes, 1990). Meanwhile the Cooperativa Dos Pinos, producing milk and
other dairy products since 1947, grew rapidly to become one of the most
important firms in the country (Meléndez, 1998).
2.3.4 The growing role of the state as employer

The public sector grew rapidly since the 1950s. Public spending from
the central government as a share of GDP went from 8.8 per cent in
1950 to 13.1 per cent in 1960, 14.9 per cent in 1970 and 21.7 per cent
in 1980 (Vargas, 1998). The expansion of autonomous institutions was
even more spectacular. Between 1948 and 1977, 119 new institutions
were created and, by 1980, there were 185 different public institutions
in the country (Rottenberg, 1993). That number included institutions
as important as the ICE and the National Learning Institute (created in
1965), which played an active role in the country’s transformation.
This dramatic expansion of the state resulted in the creation of
a large number of stable jobs regulated by the Civil Service Law or
similar arrangements. Public employment grew at an annual average
rate of 7.3 per cent (more than twice that of total employment), rising
from 6.2 per cent of total employment in 1950 to 18.5 per cent thirty
years later (Castro, 1995). Since public jobs were comparatively well
paid and received social recognition, public employment became one
of the main engines of middle-class growth. During the 1970s, average
wages in the autonomous institutions (the best-paid jobs within the
public sector) were twice as large as the average wage in the private
sector.
The growth of public employment was driven by the rapid expansion
of public spending in health and education. Per capita spending in real
terms tripled in the health sector and multiplied by a factor of eight
in the education sector between 1940 and 1980 (Trejos, 1991; see also
Chapter 3). As a result, many jobs for physicians, teachers, nurses and
related personnel were created. Between 1950 and 1990, the number of
physicians per 1,000 people more than doubled, from 3.1 to 7.8.
2.3.5 The redistribution of land and incomplete

modernization of the rural sector
Despite successive efforts to meet the growing demand for land from
smallholders during the first half of the twentieth century,2 land
concentration and insufficient economic opportunities in the rural
sector remained a problem. In 1963, small landholdings of 50 hectares
represented 84.6 per cent of the total number of farms but only 23.1
per cent of the total number of hectares, whereas holdings of 100 hec-
tares or more accounted for 6.5 per cent of the total number of farms
but represented 62.4 per cent of the land. In the same year, around
16,000 households (almost 10 per cent of the Costa Rican total popula-
tion) participated in land occupations in different parts of the country
(Picado and Silva, 2002).
The unequal distribution of land and the growth in social conflicts
in the rural sector led to the creation of the Institute of Land and
Colonization (ITCO for its Spanish acronym) in 1961. This body was
created with support from the Alliance for Progress and aimed to
expand the number of landowners in the country, reduce social conflict
between small and large farmers and gradually modify land distribu-
tion. Between 1963 and 1986, the state purchased 1,384 hectares and
distributed them among more than 60,000 peasant families (Román
and Rivera, 1990). The state also promoted the creation of agricultural
cooperatives to support rural families.
These reforms made a positive contribution to market incorporation
in the rural sector. On the one hand, land distribution experienced a
moderate improvement. Between 1973 and 1984, the share of land in
the hands of small holders increased from 20 per cent to 24 per cent,
while that of large holders decreased from 67 per cent to 61 per cent. At
the same time, the share of self-sufficient peasants who did not receive
an income for their work in the total rural labour force decreased from
52 per cent in 1950 to 45 per cent in 1984 (Rodríguez, 1993). On the
other hand, the state helped farmers through the National Production
Council, which set local prices above international levels for corn,
beans and rice, and also supported smaller farmers through preferential
credit and technical assistance (Botella, 2013).
In any case, the importance of the agricultural sector on market
incorporation decreased rapidly over time as Costa Rica accelerated its
process of urbanization and concentrated most jobs in the cities of the
Central Valley. Between 1965 and 1980, the city of San Jose, for exam-
ple, multiplied its size in hectares by a factor of 19. The percentage of
the population that worked in the primary sector declined steadily from
54 per cent in 1950 to 27 per cent in 1984 – when it was no longer the
largest employing sector in the country.
2.3.6 The limitations of Costa Rica’s path and the policy

changes in the 1970s
During the period 1950–70, Costa Rica was unique in its combination
of high economic growth, democratic institutions and rapid advances
in human development (Rovira, 1992). Costa Rica’s economic policy
regime generated rapid growth, which benefited workers through
formal employment and higher wages. Yet Costa Rica’s economy also
had significant limitations, resulting from the country’s insufficient
industrialization and over-reliance on state institutions for jobs. Costa
Rica was unable to secure technological upgrading and its comparative
advantages remained concentrated in primary goods. In 1970, banana
and coffee still constituted 75.6 per cent of total extra-regional exports
in Costa Rica, limiting the country’s ability to generate foreign
exchange.
Dependence on FDI and, especially, overdependence on US aid to
maintain the CACM’s institutional structure weakened the regional
integration process fuelling industrialization.3 At the same time,
Central American countries did not create adequate mechanisms to
assure an even distribution of the benefits of the process of integra-
tion. Honduras and Nicaragua benefited little from industrial develop-
ment and suffered a growing imbalance with the other members of the
Common Market – a shortcoming that eventually contributed to the
demise of the regional integration project.
During the 1970s, successive governments tried to confront the
country’s economic limitations by deepening the role of the public sec-
tor. In 1972, the second Figueres administration (1970–74) created the
Costa Rican Development Corporation (CODESA) to encourage private
and, especially, public investment in newer sectors of the economy.
Within the framework of CODESA, a large number of new firms were
created in different sectors, including sugar, cacao, wood, cement and
other activities. Theoretically, these were public–private partnerships.
In practice, the public sector became sole investor, competing directly
with domestic firms. Unfortunately, CODESA did not achieve the mag-
nitude its founders had hoped, never having had the time to develop
and grow. By 1978, the long-term survival of the public corporation and
its numerous firms was in question due to both deteriorating economic
conditions and the opposition of a significant part of the business elite
(Rovira, 1993; see also Chapter 4).
During the 1970s, the size and economic influence of the state also
increased through other means. New autonomous institutions were
created in different sectors of the economy: between 1970 and 1979,
the PLN in power created 66 new public agencies (Vargas Cullell, 2009).
By 1980, the public sector accounted for around a quarter of GDP,
compared to 18 per cent in 1970. This growth was particularly fast in
construction and transportation, where public participation increased
from 6 per cent to 18 per cent and from 28 per cent to 37 per cent,
respectively (OFIPLAN, 1982).
2.4 The period of stagnant incorporation: changes,

continuities and results
Costa Rica became one of the first victims of the crisis that affected
Latin America during the late 1970s and early 1980s. A combination of
the second oil price hike in 1978,the deterioration in the price of coffee
and other primary resources, and the recession in developed countries
created severe economic problems. The crisis of the CACM, which had
supported domestic industrialization for nearly two decades, made
things even worse. Civil wars in El Salvador, Guatemala and Nicaragua
converted regional exports to risky ventures for domestic and foreign
producers.
From August 1980 to May 1982 the colón suffered a devaluation
of more than 600 per cent and short-term foreign debt grew rapidly
(Villasuso, 2008). Between 1981 and 1982, real GDP decreased more
than 10 per cent and it did not return to its 1980 level until 1985.
Market incorporation deteriorated as unemployment increased and real
wages stagnated. Minimum wages decreased by more than 15 per cent
in real terms between 1980 and 1983 and by 1989, they were still at the
1980 level. Unemployment doubled in three years and in 1982, it was
9.5 per cent among the working-age population (18 per cent among
those between 15 and 19 years of age).
The crisis had significant long-term effects on the economic policy
regime. The state ceased to be the engine for employment creation.
Export incentives and the deregulation of the banking sector favoured
large producers with links to new export activities. Attention to SMEs
and to the quality of employment decreased.
The new economic policy regime consolidated over the past 25 years
is characterized by three major components: (a) a reduction in the direct
role of the state in the economy as employer and producer; (b) the pro-
motion of exports as an engine of economic growth; and (c) a gradual
privatization of the financial sector, which has reduced the capacity

of the state to influence the production process.4 The entry into force
of the Central American Free Trade Agreement (DR-CAFTA) with the
United States at the beginning of 2009 represented a consolidation
of this new policy approach, demanding new reforms and locking-in
previous ones.
The results of this intense transformation have been mixed. Costa
Rica has succeeded in modifying its export structure – an unmet chal-
lenge during the previous period – and sustaining economic growth.
Outcomes in terms of market incorporation, however, have been
more problematic: growing structural heterogeneity has contributed
to the expansion of informal jobs and a process of social polarization,
challenging Costa Rica’s earlier achievements.
2.4.1 The reduction in the role of the state as producer and

employment
The crisis forced the government to reduce its public deficit. While there
were some cuts in social spending, public investment carried the larg-
est share of the adjustment burden. According to the data drawn from
Vargas (1998), public investment fell from 2.6 per cent of GDP in 1984
to 0.8 per cent in 1990 (see Figure 2.3). The reduction was also signifi-
cant in terms of investment participation in total public spending; its
share in 1990 was one-third of that in 1984.
% GDP % total public spending
3 14
2.5 12
10
% public spending
2
8
% GDP
1.5
6
1
4
0.5 2
0 0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
Figure 2.3 Public investment, percentages of GDP and of total public spending,
1980–1995
Source: Vargas (1998).
The approval of the Financial Equilibrium Law (Ley de Equilibrio

Financiero) in 1984 deepened the commitment to reduce the public
deficit and stabilise the economy. This law contained a broad set of
measures to adjust and reform the economy, including a fiscal reform,
the reorganization of export incentives, a restructuring of some state
institutions and a freeze in public employment. This last objective was
also included in the letter of intent that Costa Rica signed with the
International Monetary Fund (IMF) in 1984 and in the country’s first
structural adjustment program (SAP) (Ulate, 2000). Public employment
remained stable at around 155,000 employees and its contribution to
total employment decreased by more than three per centage points
between 1985 (19.1 per cent) and 1991 (15.9 per cent). The freeze in
public employment significantly eroded the bargaining position of
trade unions and reduced the influence of labour in policy design.
The attempts to shrink public sector and increase its flexibility were par-
ticularly intense during the Calderón administration (1990–94) (Aguilar,
1995; Villasuso, 1999). In 1991, the government reached an agreement
with the IMF to reduce public employment by nearly 20 per cent (25,000
employees) and changed the programme of forced labour mobility to
a voluntary one. Despite some protests from within and outside the
government, the programmes of voluntary mobility continued from
1991 to 1994 with funding from USAID (Villasuso, 1999). They entitled
public workers who retired from their posts to generous benefits, includ-
ing a one-time payment equivalent to three months’ salary with a maxi-
mum of 200,000 colones.5 Voluntary mobility (movilidad voluntaria) had
a negative effect on civil service quality, affecting the autonomy and
long-term performance of the public service. As a high ranking official
of the Civil Service explained, “[the programme of voluntary mobility]
allowed a lot of good workers to leave because they could find a job
somewhere else. The bad workers remained”.6
While privatization and domestic market liberalization took place in
Costa Rica at a slower pace than in other countries like Argentina or
El Salvador, it nonetheless contributed to the reduction of the state’s
participation in the economy. The privatization of the public industrial
conglomerate CODESA was completed with the sale of the last two
firms in the late 1980s. The efforts to reduce public monopolies intensi-
fied after 1995 with particular attention being paid to the deregulation
of the telecommunication sector. The first step in this direction was
the arrival of Millicom International to provide mobile telephone serv-
ices throughout Costa Rica. Millicon’s services were cut off when the
Constitutional Court ruled its operations illegal. In 2000, the Rodríguez
Administration (1998–2002) introduced a proposal to reform the ICE,

opening up the telecommunication sector to private producers, and
expanding private involvement in the generation and production of
electricity (Programa Estado de la Nación, 2001). The proposed law was
approved by the Legislative Assembly but after facing massive street
protests and demonstrations, was finally declared unconstitutional. The
failure of this reform, however, was only momentary: the entry into
force of DR-CAFTA in 2009 finally introduced competition in telecom-
munications and insurance.
2.4.2 Trade liberalization and the promotion of exports

From 1985 to 1990, tariffs were gradually reduced in several stages
(Lizano, 1999). First, all non-tariff measures were converted into ad
valorem tariffs and the maximum tariff for final goods was established
at 80 per cent. Second, the maximum tariff dropped, first to 40 per cent
and then to 20 per cent. At the same time, the minimum tariff rate was
slowly reduced until it reached 5 per cent. According to Herrera (1992),
the result of this measure was a reduction in the average tariff rate, from
27.0 per cent in 1986 to 19.7 per cent in 1990 and a reduction in the
standard deviation from 24.4 per cent to 16.5 per cent at the end of the
period (cited in Lizano, 1999: 77).
Trade liberalization was preceded by a sharp devaluation. The mount-
ing of trade deficits in the second half of the 1970s led to an increasing
gap between the official exchange rate and that of the black market. In
December 1980, after several attempts to avoid devaluation, the govern-
ment was forced into action: it floated the exchange rate, followed by
the adoption of a system of mini-devaluations, reducing the value of
the currency.7
To compensate for the tariff reduction, the government used funds
from the SAPs for a programme of industrial restructuring, though the
plan was never as ambitious as some public and private actors wanted.8
The government also reorganized and expanded its programme of export
promotion; making it the central component of the growth strategy from
1985 to 1995. Each interested firm signed an export contract with the
public sector defining all applicable incentives including tax breaks (certi-
ficado de abono tributario or CAT for its Spanish acronym). While most of
these incentives had been in existence since the early 1970s, the contract
grouped them together, increasing the transparency of the system. The
export contract incorporated the following measures (Arriagada, 1992):
• Expansion of the CATs, reducing taxes for exports with at least 35 per
cent of domestic value added;
• Duty-free imports of raw materials, inputs and capital goods used by

exporters in the production process;
• A 100 per cent tax exemption for profits generated by export
activities.9
The CATs were the most important component of this export promo-
tion package. They provided a tax credit amounting to between 15 to
25 per cent of the free on board value of exports. The CATs, valid for up
to 42 months after the time foreign currency from exports was received,
could be sold to other companies. The CATs increased the profit margin
of any export by more than 15 per cent.
The total amount of CATs granted experienced a dramatic expansion:
between 1985 and 1996, they increased by more than 300 per cent in real
terms, from 973 million colones to 24,551 million.10 The CATs made a
central contribution to the growth of Costa Rican exports. According to
a survey that Corrales and Monge (1990) carried out among 16 agricul-
ture firms and 38 industrial firms, 87 per cent of the firms considered
the CATs as very important in their decision to export. On the other
hand, only 18 per cent of the firms rated overall trade liberalization as
very important for their export decision.
During the 1980s Costa Rica created or expanded other export
regimes, primarily aimed to promote the manufacture of exports for
the US market. In 1981, the government approved Law 6695 for the
promotion of export processing zones and industrial parks (Ley de Zonas
Procesadoras de Exportación y Parques Industriales). Law 6695 created a
public corporation to build FTZs and established generous incentives for
firms located in the new zones, including partial exemption of income
and municipal taxes for five years (the exemption decreased from 80
per cent the first year to 15 per cent the last) and preferential loans to
national firms generating at least 35 per cent of value added domes-
tically (Arriagada, 1992). The FTZ regime came to complement the
regime of temporal admission (Régimen de Admisión Temporal or RTA for
its Spanish acronym), originally created in 1972. The RTA, which was
granted only to firms exporting their production to countries outside
Central America, allowed the duty-free import of all goods that were to
be re-exported back in the following year after being stored, repaired
or assembled in Costa Rica (Arriagada, 1992). The regime, which was
created to promote simple assembly operations in all regions of the
country, also established duty-free import of capital goods used by
exporting firms.
Parallel to these incentives, the Costa Rican government created new
institutions to manage the process of liberalization and the promotion of
exports. Both the Ministry of Foreign Trade and the National Investment
Board were founded to coordinate trade policy and promote foreign
investment in the early 1980s. In 1983, the Costa Rican Investment
Promotion Agency CINDE for its Spanish acronym was created with
financial assistance from USAID. CINDE was part of the US government’s
efforts to stimulate a new production model in Central America through
the promotion of FDI and the expansion of manufacturing exports
(Ulate, 2000; Villasuso, 2008).
In the early 1990s, the Costa Rican government realized that it could
no longer expand apparel exports and other low-wage assembly prod-
ucts. Costa Rica decided then to actively promote foreign investment
in other sectors – a strategy that was accelerated during the adminis-
tration of José María Figueres Olsen (1994–98). His government aimed
to develop “an aggressive policy of investment attraction” in sectors
making “a sophisticated and well paid use of productive resources and
not extensive and poorly rewarded use of cheap labour” (MIDEPLAN,
1998: 51).
The attraction of Intel in 1997 constituted the most significant
achievement of this strategy. Intel’s decision, which was partly facili-
tated by the government’s commitment to high-tech investment and by
the professional marketing efforts of CINDE, led to a rapid expansion
of new exports and helped to later attract other TNCs such as Abbot,
Procter and Gamble and Microsoft. Costa Rica slowly became a regional
leader not only in electronics but also in medical devices, medicines,
back-office services and other high-tech goods and services (see next
section). In the particular case of electronics, the country has gradually
developed a successful cluster, with 47 different foreign firms in the
FTZs specializing in telecommunications, semiconductors and assembly
of electronic products. By the late-2000s they generated 12,000 direct
jobs and accounted for approximately 30 per cent of the total exports
of goods.
The expansion of non-traditional exports has also been supported
by an ambitious agenda of preferential trade agreements. In the last
few years, Costa Rica has signed agreements with Mexico, CARICOM,
the Dominican Republic, Chile, Panama, Canada and the United States
(DR-CAFTA). The signing of DR-CAFTA remains the most important
not only because it includes Costa Rica’s largest trading partner but also
because it requires a radical agenda of institutional reform. New regula-
tions in areas such as intellectual property rights and the liberalization
of telecommunications were particularly controversial and contributed
to the erosion of Costa Rica’s traditional economic policy regime.
2.4.3 Financial deregulation and the transformation of the

banking sector
On the financial front the Central Bank, with support from USAID,
pushed for the deregulation of the financial sector and the development
of new private intermediaries.11 USAID funds were used to support trou-
bled financial institutions (CODESA), expanding private banks (Banex)
and new institutions (Corporación Financiera de Inversiones) (Lizano,
1999: 70). The Central Bank, with contributions from the private banks,
created an emergency fund to be used in periods of crisis. Of greater
importance were measures to facilitate the private banks’ access to for
their activities. In 1984, the Central Bank received permission to use
resources from foreign institutions to undertake discounted window
operations with private banks ( Jiménez, 1993). Between 1987 and
1989, private banks were also permitted to issue bonds at increasingly
shorter terms. In 1987, private banks could only obtain resources after
180 days and by 1989, the Central Bank was offering credit overnight
(Lizano, 1999). In 1992, interest rate subsidies were eliminated and
the current account liberalized, giving banks access to new financial
resources. In 1995, private banks were allowed to offer checking and
savings accounts.
The impact of the break in the public monopoly of the financial sec-
tor cannot be underestimated. In just few years, private banks increased
their participation in the economy dramatically; according to Gonzalez-
Vega and Mesalles (1993), the participation of private banks in total
credit increased from 4.6 per cent in 1983 to 15.3 per cent in 1986 and
29.1 per cent in 1990. This expansion of private banks reduced the
dependency of large companies on state financing, promoted the crea-
tion of new ties between the financial and the productive sector and led
to the consolidation of a few export-oriented business conglomerates.
By providing loans to export projects managed by the new private
banks, USAID played a key role in the process.12 The loans promoted
the creation of new banks by large companies with diversified economic
interests. Banco del Comercio and Banex constitute excellent examples.13
The Banco del Comercio was founded in 1978 by the owner of the largest
automobile importing company and other members of the Costa Rican
Chamber of Commerce. During the 1980s, Banco del Comercio concen-
trated its activities in trade and other services (nearly two-thirds of total
lending went to the tertiary sector in 1987) and grew, thanks to foreign
resources from USAID and other institutions.14 Banex was founded in
1981 by the Chamber of Industries and large coffee growers. Among
Banex’s most important investors were the owners of leading Costa
Rican firms, including Florida Ice and Farm and Atlas Eléctrica (Sojo,
1995). Nearly 80 per cent of Banex’s credits during the 1980s went to the
agro-industrial and industrial sectors, including projects for the devel-
opment of non-traditional exports. In addition to support from USAID,
Banex received financial assistance from the World Bank’s International
Finance Corporation.15
By the early 1990s, the move from a state-owned financial sector,
where the allocation of credit was determined by political and develop-
ment objectives, to a more deregulated system with closer links between
private banks and large corporations, was complete. Although the larg-
est banks have remained in public hands, private banks have grown
more rapidly, as reflected in Table 2.3. At the end of 2007, public banks
had only 1.6 times more assets than private banks, down from 5.1 in
1989 and 2.8 in 1996.
Within the private banking sector, Costa Rica experienced a simultane-
ous process of concentration and transnationalization of capital. Between
1997 and 2007, the share of the three largest private banks in the total
assets of the private sector increased from 31 per cent to 60 per cent. This
process took place through a succession of large merger and acquisitions,
where foreign banks were more active than ever before. In recent years,
the Scotia Bank bought Banco Mercantil and Interfin, thus becoming the
second-largest private bank and the fifth overall. In 1999 Banex (once
the third-largest Costa Rican bank) was purchased by Panama’s Grupo
Banistmo, which in turn was sold to HSBC in 2006. The Salvadoran giant
Grupo Cuscatlán, which entered into the Costa Rican market in 1999,
was bought in 2007 by Citigroup, who also acquired Grupo Uno (León,
2008; Sánchez-Ancochea, 2005).
Table 2.3 Total assets of public and public banks, millions of colones, 1986–2007
Private Public Banco Public / Private BN / Total (%)

Nacional
1986 17,900 104,483 48,266 5.84 39.44

1989 39,115 199,461 95,613 5.10 40.08
1993 130,993 441,216 207,314 3.37 36.23
1997 315,328 873,064 387,978 2.77 32.65
1999 502,687 1,242,336 566,528 2.47 32.47
2003 1,314,112 2,141,493 911,686 1.63 26.38
2007 4,086,551 6,435,179 2,634,086 1.57 25.03
Note: The data for 2003 are from May.

Source: Authors’ elaboration with data from Actualidad Económica (various years).
2.4.4 Land use and the evolution of the rural sector

Agriculture has followed a pattern of transformation similar to other
sectors. The reduction of the state’s involvement in the economy con-
tributed to a reduction in the incentives received by basic crops produc-
ers (for example, subsidized credit and high and secured prices). At the
same time, trade liberalization and export incentives shifted production
towards non-traditional products and strengthened the role of large
producers and TNCs.
During the 1980s, small farmers experienced growing problems to
adapt to the changing domestic and international environment. The lack
of credit, technical assistance and training in marketing and technology,
and the deterioration of basic infrastructure prevented the expansion of
economic opportunities for a large number of households living in rural
areas (Rivera and Román, 1990).
Since the middle of the 1980s, the rural-urban transition has intensi-
fied within the framework of the new development strategy. The changes
experienced in the rural sector have been significant and, in general,
have resulted in higher inequality and weaker market incorporation for
a significant share of the rural population. Some of the most significant
changes are:
• A larger share of rural employment in commercial and service activi-

ties. Between 1990 and 2008, the share of the rural labour force work-
ing on non-farm activities increased from 53 per cent to 67 per cent
(Botella, 2013).
• A steady reduction in the share of agriculture in total production, from
18 per cent at the beginning of the 1980s to less than 10 per cent in
the 2000s.
• A fall in the production of basic grains, especially corn and beans.
• The emergence of new exports such as pineapple, melons, palm oil,
foliage for floral arrangements and ornamental plants, and a parallel
crisis in traditional crops. The new products utilized large amounts of
land and imported inputs, received foreign capital investments and
special incentives, and exhibit weak links to the rest of the economy.
The reduction in the production of basic grains has had a particu-

larly negative effect on small farmers. Unable to diversify into other
capital-intensive sectors, they have faced a sharp drop in their income
compared to other formal workers. In many cases, this has resulted in
the loss of assets, especially land, further contributing to poverty and
inequality.
Unfortunately, the reduction in the production of basic grains has

not been balanced by better job opportunities in other activities. On
the contrary, the number of agricultural jobs dropped by about 2,500
per year during the 1980s and has remained low since then (Sauma,
2004). In many cases, agricultural diversification contributed to higher
productivity growth and, as a result, less employment generation
(Sauma and Sánchez, 2003). Low levels of education and low participa-
tion rates of women in many rural areas have also been a significant
obstacle for the improvement of living conditions among the rural
population.
2.4.5 The contradictory results of the new economic

policy regime
The new economic policy regime succeeded in upgrading Costa Rica’s
export structure, thus beginning to resolve one of the country’s most
significant long-term weaknesses. This is evident when considering
changes in the export structure, which moved first from traditional to
non-traditional primary goods and later to high-tech manufacturing (see
next section). In 1982, coffee and bananas accounted for 56 per cent of
total exports. In 1995, the share of these two commodities was reduced
to just 40 per cent and new exports to third markets (for example,
tropical fruit, flowers and jewellery assembly) appeared in the list of
top exports.
Between 1996 and 2008, exports grew at an annual average rate of 7.9
per cent in real colones – surpassing US$13.6 billion in nominal terms
in 2008. During this period, Costa Rica became one of the best export
performers in Latin America (Figure 2.4): in 2008 it ranked fourth in
terms of exports per capita after Chile, Venezuela and Panama. Costa
Rica’s exports also enjoyed a higher technological content than the
Latin American average (excluding Mexico): as Table 2.4 indicates, in
2008, high-technology exports accounted for 29 per cent of all exports
of goods from Costa Rica as compared to only 4 per cent in the entire
region (excluding Mexico).
Export expansion coincided with the growth of FDI, which became a
primary source of capital accumulation. FDI increased from an average
of US$323m per year between 1992 and 1997 to an average of US$575m
between 1998 and 2005. In 2004, foreign inflows were US$617m, equiv-
alent to 3.3 per cent of GDP and 15.3 per cent of gross capital forma-
tion. The stock of foreign investment that year was US$4,815m.
Foreign companies have gradually become the main drivers of export
upgrading. Most large exporters are foreign firms located in the FTZs,
49
2000 2008
6000
5000
4000
US dollars
3000
2000
1000
0
ge n
Bo a
Br a
C l
om C olo ile
an ta R ia
R ica
Ec blic
G lva r
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Figure 2.4 Latin American exports per capita, US dollars, 2000 and 2008
Source: Own calculation with data from the World Development Indicators.
Table 2.4 Costa Rica and Latin America (without Mexico), export structure by
technological content, percentage of total exports, 1987–2008
Exports 1987 1990 1995 2000 2008
CR LA CR LA CR LA CR LA CR LA
Primary goods 68.4 46.3 57.6 49.7 58.3 39.4 26.0 40.9 23.9 52.0
Manuf. based 8.7 27.0 11.4 24.5 15.6 27.7 11.1 27.6 16.3 18.7
on natural
resources
Manuf. low 12.1 10.6 12.8 10.3 10.8 12.1 14.0 8.6 14.1 6.2
technology
Manuf. medium 5.2 12.7 6.1 12.2 7.1 16.1 12.0 14.0 17.6 15.6
technology
Manuf. high 3.2 2.2 3.2 2.0 2.9 2.2 36.5 6.0 27.6 4.0
technology
Other 2.4 1.2 9.0 1.3 5.3 2.0 0.5 2.9 0.8 3.5
transactions
Source: Authors’ elaboration with data from ECLAC.

where Costa Rican firms are in the minority. Of the 25 largest exporters
in 2001, just 10 firms produced outside the FTZs and only three (one of
them public) were Costa Ricans (Sánchez-Ancochea, 2004).
The rapid expansion of both exports and FDI had some welcome effects,
including relatively high rates of economic growth and a diversification
of the sources of foreign exchange. Costa Rica was one of only four Latin
American countries to grow more than 5 per cent (in dollars of 2000) in
the 1990s and 2000s (Table 2.5). Its annual average rate of GDP and GDP
per capita between 1990 and 2008 was 5.1 per cent and 2.9 per cent, well
above the Latin American averages of 3.4 per cent and 1.9 per cent.
Though economic growth has been high, the problem of unequal
distribution among economic sectors contributes to both uneven and
unequal levels of market incorporation. The processes of financializa-
tion and export promotion have resulted in the creation of two dif-
ferent Costa Ricas: one based on non-traditional exports and some
modern services and the other – where most new jobs are still created –
dominated by low-productivity services and manufacturing activities
that can no longer compete with cheap exports.
Table 2.5 Annual average rate of growth of GDP and GDP per capita, 2000 US
dollars, 1990–2008
GDP GDP per capita Abs. value 2008
Argentina 4.39 3.26 9,936

Bolivia 3.81 1.71 1,182
Brazil 3.02 1.62 4,479
Chile 5.43 4.02 6,240
Colombia 3.43 1.69 3,146
Costa Rica 5.10 2.86 5,184
Dominican Rep. 5.69 3.97 3,731
Ecuador 3.33 1.54 1,710
El Salvador 3.80 3.00 2,674
Guatemala 3.96 1.51 1,892
Honduras 4.05 1.76 1,439
Mexico 2.99 1.44 6,346
Nicaragua 3.35 1.56 905
Panama 5.70 3.70 5,644
Paraguay 2.63 0.46 1,518
Peru 4.83 3.25 2,962
Uruguay 3.04 2.64 8,401
Venezuela, RB 3.11 1.15 5,923
LA average 3.39 1.88 4,794
Source: Authors’ calculations with data from World Bank (2008).

Table 2.6 offers some indication of this trend at the aggregate level.
The primary and secondary sectors show high levels of productivity
growth between 1987 and 2007 but poor employment performance.
This is particularly clear in the agricultural sector, where productivity
expanded by 4.3 per cent per year but employment stagnated. The
service sector, however, has become an “employment buffer” for those
workers not able to find employment in more productive sectors.
A similar trend of growing productivity divergence can be found
within the manufacturing sector. Productivity in the FTZs – where most
high-tech activities are concentrated – was 7.5 times higher in 2005
than in 1991, while it remained almost stagnant across the rest of the
manufacturing sector (Figure 2.5).
In the case of the manufacturing sector, the problem has been that
high-tech manufacturers are de-linked from the rest of the economy and
create few positive effects on aggregate productivity and wages (Ernst
and Sánchez-Ancochea, 2008; Paus, 2005; see also the next subsection).
TNCs, while receiving generous tax incentives, have few incentives
to build supply arrangements with domestic firms, thus reducing the
potential positive aggregate impact. Meanwhile, small and medium-
sized Costa Rican companies are generally incapable of providing the
type of inputs demanded by TNCs because they lack the financial
and technological support to accumulate knowledge-based assets (Paus,
2005).
This pattern of dual development has been one of the factors contrib-
uting to the expansion of inequality, outlined in the previous chapter,
and the acceleration of social polarization in Costa Rica. Debates about
Table 2.6 Value added, employment and labour productivity in Costa Rica,
annual average of growth, 1987–2007
Production Employment Labour productivity
Gross value added / 5.0 3.7 1.3

Total employment
Agriculture, sylviculture 4.2 –0.1 4.3
and fishing
Manufacture and mining 5.6 2.3 3.3
Electricity and water 5.1 3.1 1.9
Construction 5.3 5.3 0.1
Transport, storage and 8.9 6.1 2.6
communication
Other services 4.0 5.4 –1.3
Source: Authors’ calculations with data from the Central Bank.

Total FTZs Outside FTZs
800
700
600
500
1991=100
400
300
200
100
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Figure 2.5 Productivity in total manufacturing, FTZs and all other manufacturing
activities, 1991–2005
Note: Data on employment come from two different sources and are calculated differently.
Results should be interpreted with care.
Source: Own calculations based on data from PROCOMER, MIDEPLAN and Central Bank of
Costa Rica.
the liberalization of telecommunication and insurance and about the

fate of DR-CAFTA have dominated the policy agenda, which no longer
concentrates on securing market incorporation in equal terms for the
entire population.
2.4.6 The mixed contribution of export upgrading

The process of export expansion and technological upgrading just
discussed has concentrated in the FTZs. The growth of these zones
has made Costa Rica an example for the World Bank and other inter-
national institutions. This section reviews the impact that the FTZs
have had on market incorporation. We show that: (a) the expansion of
high-tech exports and services resulted in high-paid jobs; but (b) the
aggregate impact of the FTZs was minimal due to their limited aggregate
size and their lack of linkages with the rest of the economy; and (c) the
expansion of the FTZs has most likely contributed to worsening income
distribution.
Market incorporation in the FTZs in comparative perspective

The share of exports from the FTZs in the total has grown rapidly in recent
decades, increasing from 12 per cent in 1986 to 55 per cent in 2008. This
expansion took place in two different stages. Between 1986 and 1994,
apparel products drove the growth of the FTZs as Costa Rica became the
leading Central American apparel exporter to the US.16 Foreign investors,
particularly from the United States, were responsible for this expansion
of apparel (Mortimore and Zamora, 1998). Unfortunately, the number
of domestic suppliers was low; they all concentrated in basic assembly
operations with short-term contracts and failed to develop “full pack-
age” (that is, the process by which firms find their own fabrics, cut, sew,
add necessary complements and send the finished products to the client)
and remain competitive in the long run.
The second stage began in the mid-1990s when Costa Rica made
an important qualitative jump in the type of goods it produced – one
that neighbouring countries like the Dominican Republic did not start
until a decade later (Sánchez-Ancochea, 2012). Figure 2.6 illustrates this
change in the technological content of exports from the FTZs. In 1997 –
just before Intel’s factory began working at full capacity – the apparel
sector exported US$337 million (38 per cent of the total) compared to
US$271m (30 per cent) in the case of machinery, electrical material and
its parts. Two years later, exports from machinery, electrical material
and its parts accounted for US$2,812 million, more than 75 per cent
of all exports from the FTZs, while apparel exports had stagnated in
Machinery, electrical material and its parts Textiles, apparel, leather and shoes
Medical equipment Chemical and pharmaceutical products
Services Agroindustry
Plastics, rubber and its manufactures Metal manufactures
Agriculture Others
100.0
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Figure 2.6 Sectoral distribution of FTZs exports, share in the total, 1997–2008
Source: PROCOMER (various years).
absolute terms and plummeted as a proportion of the total. In recent

years, agroindustry – linked to the production of non-traditional pri-
mary goods that began in the early 1980s – and medical equipment
have become the most dynamic sectors within the FTZs. Performance
in the apparel sector, on the other hand, has remained disappointing:
in 2008 apparel exports were US$196 million – just 4 per cent of the
total. Services have also increased rapidly, but this is not apparent in the
export data because their gross production is low due to the limited use
of intermediate inputs. When one considers the number of companies
and employment shares, the growing importance of services is clearer:
the number of companies increased from 54 to 112 between 2004 and
2008, and in 2006 services became the largest employer in the FTZs.
Figure 2.7 presents the distribution of employment per sector in the
FTZs. The arrival of Intel and other companies resulted in a significant
increase in employment in the sector of machinery and electrical mate-
rials. Its sharein total FTZs employment increased from 24 per cent
in 1997 to 42 per cent in 2005 with Intel alone creating 2,217 jobs
between 1997 and 1999 (Larraín, López and Rodríguez, 2001). At the
same time, the share of apparel in total employment decreased rapidly,
from 54 per cent in 1997 to 30 per cent in 2003 and just 13 per cent in
Machinery, electrical material and its parts Textiles, apparel, leather and shoes
Medical equipment Chemical and pharmaceutical products
Agroindustry Plastics, rubber and its manufactures
Metal manufactures Agriculture
Services Others
60000
50000
Number of workers
40000
30000
20000
10000
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Figure 2.7 Sectoral distribution of employment in the FTZs, 1997–2008

Source: Procomer (2006 and 2009).
2008. The total number of apparel jobs more than halved between 2001
and 2008, going from 12,200 to just 6,500.
Although total employment in the FTZs stagnated between 2001 and
2004 due to the dot.com crisis and its impact on high-tech exports,
it increased by 50 per cent in the subsequent four years. The recent
recovery has been driven by Costa Rica’s consolidation as a destina-
tion for service outsourcing. The expansion of tertiary employment in
the FTZs has been explosive, going from just 3,922 (12 per cent of the
total) in 2002 to 21,736 (45 per cent) in 2008. Costa Rica has attracted
a broad array of services, from customer service centres for companies
like Sykes, Fujitsu and Hewlett Packard to back-office tasks for Procter &
Gamble and others.
The changes in the level and structure of employment just described
have had a significant impact on the demand for skilled labour, wages,
productivity and income distribution in Costa Rica. Although we do not
have adequate data on the changes in the skill composition of the labour
force in the different sectors within the FTZs, some studies offer sugges-
tive approximations. Ernst and Sánchez-Ancochea (2008), for example,
use data from the International Standard Industrial Classification (ISIC)
revision 2 to measure the skill composition of offshore manufactur-
ing activities, which include apparel goods and electrical and medical
equipment.17 Since most of the production of these sectors is located in
the FTZs, Ernst and Sánchez-Ancochea’s calculations constitute a good
approximation to recent changes in these zones. Between 1995 and
2005, the share of workers with only primary education in outsourced
manufacturing activities decreased from 52 per cent to 34 per cent,
while the share of those with secondary education increased from 37
per cent to 45 per cent and that of workers with a university degree
from 7 per cent to 21 per cent. Jenkins (2005) uses data from Procomer
to explore the skill composition of the labour force in all activities
within the FTZs. In the mid-2000s, 24 per cent of workers had only
primary education, 51 per cent had secondary education, 7 per cent
some kind of technical education and 17 per cent at least one year of
tertiary education.
Table 2.7 compares average real wages in 1997 and 2008 and presents
the annual average rate of growth between the two years. Real wages
increased particularly fast in the sectors of metal manufacturing, medical
equipment, plastics, electrical machinery and its parts and services – all
intensive in skilled labour. On the other hand, the wage performance was
more disappointing in unskilled labour-intensive sectors such agroindus-
try and apparel. The poor performance of chemical and pharmaceutical
Table 2.7 Monthly wages in real colones and annual average rate of growth,
1997–2008
1997 2008 Growth rate
Services 2312 4812 6.89

Agro-industry 3236 2421 –2.61
Plastics, rubber and its manufactures 1967 3839 6.27
Machinery, electrical material and its parts 1857 3590 6.18
Metal manufactures 1122 3228 10.08
Medical equipment 1194 2534 7.08
Chemical and pharmaceutical products 3469 2178 –4.14
Textiles, apparel, leather and shoes 1618 1856 1.25
Others 2455 1282 –5.74
Total 1912 3601 5.92
Source: Authors’ calculations with data from Procomer (2009).
Table 2.8 Nominal value added, employment and productivity in the FTZs,
annual average rate of growth, 1991–2007
Years Value added Employment Productivity
1991–2007 27.01 9.80 15.68

1991–1997 29.67 14.85 12.91
1997–2007 25.44 6.88 17.37
Source: Authors’ calculations with data from the National Accounts and Procomer (2009).
products is not particularly relevant since the sector only generated 135
jobs and had three companies in 2008.
The structural change that began in 1997 impacted the relationship
between productivity and employment. Table 2.8 disaggregates the
growth of nominal value added in the FTZs between employment and
productivity growth.18 Nominal value added grew at similar rates during
the periods 1991–97 and 1997–2007, but its sources were very different.
In the first period, productivity and employment both expanded at
similar rates, while in the second period, productivity growth was much
more important.
The rapid expansion of labour productivity in the recent period is
partly a result of the growing technological content of exports from
the FTZ. Companies in the FTZs are no longer competing through
low wages, and process and product innovation and investment in
machinery have become increasingly important. At the same time,
however, the slowdown in employment growth is worrying and signals
the existence of a trade-off in the Costa Rican FTZs. Technological

upgrading away from apparel products reduces unskilled employment
growth, thus diminishing the opportunities for the market incorpora-
tion of low-income workers. This is a problem that other countries
such as the Dominican Republic are just now beginning to confront
(Sánchez-Ancochea, 2012).
In any case, it is important to recognize that the contribution of FTZs
to total employment in Costa Rica has been limited. In 2008, the sec-
tor accounted for only 2.7 per cent of economy-wide employment and
only 15 per cent of the jobs generated by export activities. On a more
positive note, the contribution of the FTZs has increased rapidly in the
last two decades.19 The expansion has concentrated in two distinct peri-
ods: between 1991 and 1996, when the total employment share of the
FTZs doubled (from 1.1 per cent to 2.2 per cent), and between 2003 and
2008, when it expanded at a more moderate rate.
Regarding wages, a systematic comparison between the FTZs and the
rest of the economy can only be undertaken for the period 2001–08 and
even then with significant limitations. Wage differentials may simply be
the result of differences in skill composition of the labour force between
sectors, but the data do not allow us to account for this.20 Nevertheless,
Table 2.9 provides a useful approximation to sectoral wage differences:
in 2008, monthly wages in the FTZs were 66 per cent higher than the
economy-wide wages, compared with just 26 per cent in 2001. The dif-
ferences are particularly significant in the case of machinery and electri-
cal material and in the service sector where the monthly average was
twice that of the economy-wide one – the two most dynamic sectors.
An additional problem for market incorporation: the lack of linkages

and spillovers
The lack of linkages and spillovers between the FTZs and the rest of the
economy has limited the contribution of this sector to economy-wide
market incorporation. Since the FTZs behave like enclaves, the techno-
logical upgrading they generate has mainly favoured workers within the
zones and nobody else.
Sánchez-Ancochea (2011) summarizes the most important studies
of linkages and spillovers in the Costa Rican FTZs. The 11 studies dis-
cussed are based on statistics collected from interviews and surveys and
on the experience of specific companies like Intel. Most of the stud-
ies concentrate on the high-tech sectors, particularly machinery and
electrical material and medical equipment. In evaluating these studies,
Sánchez-Ancochea distinguishes between vertical linkages – that is,
58
Table 2.9 Average monthly income, current colones, 2001–2008
2001 2002 2003 2004 2005 2006 2007 2008
Absolute values
Total in the economy 126753 136183 150217 159173 174430 203201 241576 281667
Manufacturing sector 121804 139171 155549 161912 181218 198771 237664 258607
FTZs 159985 183266 217134 265031 292247 336632 368743 467979
Machinery and electrical material 200988 210248 237175 269066 303223 328242 357138 466591
Apparel, textiles, leather and shoes 118892 128148 147129 166984 182352 195039 199638 241127
Medical equipment 172846 192232 221260 267553 259565 275468 295323 391214
Services 273340 313009 333205 382618 416520 503187 528634 625287
Agroindustry 133586 183041 228832 319013 309481 252318 268526 314560
In relation to average monthly income in the economy
FTZs 1.26 1.35 1.45 1.67 1.68 1.66 1.53 1.66
Machinery and electrical material 1.59 1.54 1.58 1.69 1.74 1.62 1.48 1.66
Apparel, textiles, leather and shoes 0.94 0.94 0.98 1.05 1.05 0.96 0.83 0.86
Medical equipment 1.36 1.41 1.47 1.68 1.49 1.36 1.22 1.39
Services 2.16 2.30 2.22 2.40 2.39 2.48 2.19 2.22
Agroindustry 1.05 1.34 1.52 2.00 1.77 1.24 1.11 1.12
Note: In the case of the FTZs, the annual average income is calculated by multiplying the wage in dollars published by Procomer by the annual
exchange rate at the end of December.
Source: Central Bank (2008) Encuesta de ingresos y gastos and own calculations with Procomer data.
local purchases of inputs from the FTZs – and spillovers generated through
mechanisms like local purchases, commercial relations between competi-
tors in the same sector and technological transfers through workers that
change jobs.
Even the most optimistic studies acknowledge the lack of linkages
between the FTZs and the rest of the economy. A World Bank (2006)
study, for example, shows that in 2000 only 2 per cent of Intel’s inputs
came from local suppliers and just 13 Costa Rican companies sold
goods and services to companies in the electronics cluster. Studies by
Ciravegna and Giuliani (2007) and Giuliani (2008) also illustrate the
lack of linkages between the high-tech companies in the FTZs and the
rest of the economy: in 2001 just 5 per cent of total inputs in the elec-
tronics and medical equipment sectors came from local firms. Jenkins’
(2005) estimations of linkages is higher, but his study is based on a small
sample and includes all local purchases (including electricity and other
services) and not only inputs.
Table 2.10 offers additional evidence on the lack of linkages. Between
1997 and 2008, only 11 per cent of all inputs purchased by companies
in the FTZs come from local firms, while 89 per cent were imported
from abroad. High-tech sectors were less likely to purchase local prod-
ucts than more traditional sectors like agriculture and agro-industry for
at least two reasons: (a) differences in the technological content of the
inputs demanded; and (b) the fact that domestic firms (which concen-
trate in sectors like agro-industry) tend to create more linkages than
foreign ones (Paus, 2005). On a more positive note, between 1997 and
2008, the share of local inputs in the total increased in eight of the ten
sectors included in Table 2.10.
Linkages can contribute to aggregate demand and can create indirect
jobs. They can also support a process of learning and generate techno-
logical spillovers. In principle, the more complex the inputs purchased
from local firms, the higher the level of technological transfer and
knowledge diffusion. Unfortunately, however, the limited linkages
that the Costa Rican FTZs create with the rest of the economy are con-
centrated in basic activities like packaging, labelling and cleaning and
security services. In a study of 60 foreign firms located in the FTZs, for
example, Ciarli and Giuliani (2005) found that just 17 per cent of all
domestic linkages contributed to the diffusion of technical progress.
In a more recent study, Giuliani (2008) also shows that the correla-
tion between the level of local inputs and what she calls ‘knowledge
spillovers’ (through technical assistance and other collaboration) was
low. Moreover, the creation of linkages does not usually result into close
Table 2.10 Local purchases from the FTZs, percentage of total purchases,
1997–2008
1997 2008 Average

1997–2008
Machinery, electrical material and its parts 6.6 2.0 3.2

Textiles, apparel, leather and shoes 5.4 9.6 7.8
Medical equipment 5.7 12.8 8.2
Chemical and pharmaceutical products 54.8 49.6 40.6
Services 17.9 37.6 22.7
Agroindustry 63.1 83.5 75.9
Plastics, rubber and its manufactures 15.7 18.9 24.1
Metal manufactures 33.2 45.5 24.2
Agriculture 0.0 96.9 66.0
Others 4.4 19.5 18.6
Total 7.8 15.1 10.7
Source: Authors’ calculations with data from Procomer (2009).
collaboration between foreign firms and suppliers: less than one-third of

Costa Rican supply firms received training (Monge-González et al, 2005)
or technical assistance (Ciarli and Giuliani, 2005) from the TNCs.
There is thus a consensus within the literature on the lack of linkages
that can create knowledge diffusion and spillovers. Nevertheless, some
authors have identified other channels through which FTZs contribute
to technological upgrading – even if no consensus has been reached on
the size and importance of these channels. Several studies, for example,
emphasize Intel’s positive impact on the creation of new engineer-
ing and technical programmes in local universities and on the links
between companies and universities (Cordero and Paus, 2009; Larraín,
López and Rodríguez, 2005; World Bank, 2006). These programmes may
have increased the level of human capital in Costa Rica, but they have
failed to solve the growing shortage of skilled labour in the country. In
fact, a recent study by FLACSO warns against the negative effect that
the growing demand for skilled labour from the FTZs can have on Costa
Rican firms in high-tech sectors such as software. These local firms face
problems when hiring skilled workers and have been forced to pay
growing wages (Pinto et al, 2009).
Labour mobility between foreign companies in the FTZs and local
companies constitute another potential source of spillovers. If engineers
who work for Intel and other high-tech companies or white-collar pro-
fessionals in services create their own companies or start working for
Costa Rican firms, a transfer of knowledge with benefits to the whole
economy could take place. Monge-González (2009) explores the level

of labour mobility with data from Procomer and from social security
contributions. According to these estimations, 39 per cent of the 41,000
workers that left a foreign firm in the FTZs between 2001 and 2007
moved to national companies or public institutions, 27 per cent were
hired by other foreign companies and 24 per cent left the labour market
altogether – creating their own company, moving to another country
or stopping work. Monge-González also found that almost half of those
workers who moved to national companies were employed by SMEs and
that a third were hired by companies in their original sector – a fact that
could contribute to knowledge transfers.
Although Monge-González’s main conclusion is that some spillovers
have been generated through this channel, the evidence is ultimately
inconclusive. On the one hand, his study does not offer any informa-
tion (either qualitative or quantitative) on the type of transfers that
labour mobility may have generated in Costa Rica. On the other hand,
other studies concentrating exclusively on high-tech sectors, such as
Ciarli and Giuliani (2005), found that most workers moved from one
foreign firm to another.
Potential consequences of the FTZs on inequality

From 1990 to 2009 the Gini coefficient increased by 13 per cent and the
income gap between the lowest and highest decile also expanded (see
Chapter 1). The worsening of the distribution of income was particularly
fast during the period 1997–2001 when Intel arrived in the country. The
expansion of high-tech activities in the FTZs has probably contributed
to this negative trend, although the data are not conclusive.
Gindling and Trejos (2005) calculate the changes in the income level
of workers with different skills – a vital piece of information to evaluate
the potential impact of the FTZs on the distribution of income in recent
times. Between 1996 and 2002, the level of income of workers with a
university education increased by 17 per cent in real terms, compared
to just 3 per cent for those workers with secondary education and 0 per
cent for workers with lower levels of education. Gindling (2007) found
that the increasing gap between high-skilled and low-skilled workers
resulted from the rapid growth in the demand for skilled labour dur-
ing this period as well as the growing supply of low-skilled workers.
The expansion of employment in high-tech activities probably con-
tributed to the first process, something that Garnier and Blanco (2010:
201, authors’ translation) illustrate well: “the inequalities that these
data show are a reflection of the labour market fragmentation already
discussed and results from a process of economic growth that provides

high quality, highly paid jobs to those groups who can access them
thanks to their level of skill, capacity, education and general abilities.”
2.5 Conclusions
Costa Rica has experienced a dramatic process of economic transforma-

tion since the middle of the twentieth century. Real GDP per capita
more than tripled between 1960 and the late 2000s – a faster expansion
than recorded in Latin America or the global economy. During this
period, the country became urban and service-oriented and also suc-
ceeded in upgrading its comparative advantages and creating a vibrant
middle class.
Yet what has made Costa Rica unique is not the growth of GDP per se
but its translation into market incorporation for a growing number of
people. According to data from the International Labour Organization
(ILO), 70 per cent of Costa Rican workers were wage-earners in 2007
compared to only 63 per cent for Latin America as a whole. The country
has also maintained a low level of unemployment for most of the last
sixty years (ILO, 2010).21 Costa Rica succeeded in expanding its middle
class and in using the minimum wage, public employment and other
policy tools to create opportunities for the majority of the population.
This process, however, has not been without its tensions and short-
comings. While countries like South Korea and the other Asian new
industrializing countries succeeded in securing formal employment
growth and economic upgrading at the same time across several dec-
ades, Costa Rica has never been able to achieve the same. Between 1950
and 1980, the country sustained a rapid process of market incorporation
that benefited all social classes. At the same time, Costa Rica faced dif-
ficulties in increasing aggregate productivity over the long run and in
developing new comparative advantages. During the last two decades,
the opposite process has taken place: foreign investment in high tech
and the growth of modern activities such as tourism and finance have
contributed to economic upgrading, but the overall outcomes in the
labour market have been unequal and disappointing.
What then are the lessons of the Costa Rican trajectory for other
developing countries that want to increase market incorporation? We
would like to highlight two. First, the state has always played an active
role in the development process. Costa Rica’s success is to a large extent
the result of a set of public policies to manage conflict, promote the
transformation of the economy and create public employment. Even
in recent decades, the Costa Rican state has been active in selectively
targeting foreign investment and in promoting other exports.
Secondly, however, the state has not been able to secure rapid growth
in formal employment and economic upgrading simultaneously. As we
will discuss in Chapter 4, the characteristics of the group that control-
led the state during the period 1950–80 – which was more interested
in creating business and job opportunities for the middle class than
in promoting rapid technological accumulation – can partly explain
this contradictory outcome. Yet, we would argue, it also reflects the
more general difficulties that small peripheral countries face in sus-
taining both well-paid, formal employment growth and dynamic
transformation – objectives that have become increasingly difficult to
achieve with the emergence of China as a global manufacturing power
(Kaplinsky, 2005; Paus, 2012).
3
The Social Policy Regime: Creation,
Expansion and Resilience1
3.1 Introduction
Despite its solid record in market incorporation, Costa Rica is better

known for its success in expanding basic services and social protec-
tion, thus securing social incorporation for a majority of its popula-
tion. Sandbrook et al. (2007: 9) includes Costa Rica within a sample of
four “social-democratic pioneers” that expanded universal social pro-
grammes and achieved rapid improvements in human development.
Filgueira (2007) praises Costa Rica as the only Latin American country
to have established universal social policies. An array of both income
and outcome indicators demonstrate Costa Rica’s remarkable perform-
ance in this area: high spending in health and education; the creation
of a universal system of healthcare and highly unified pensions; and the
early and rapid expansion of social assistance programmes, all resulting
in a high accumulation of human capital, low infant mortality and
impressive levels of life expectancy.
Costa Rica built its social policy regime between the 1940s (a foun-
dational decade) and the 1970s (a decade of rapid expansion). Three
features made Costa Rica’s system the one with the highest universal
coverage and scope of services in Latin America (Filgueira, 1998;
Martínez Franzoni, 2007). First, Costa Rican social protection was built
upward from the poor and the lower-middle classes. Since the early
1940s, social protection revolved around one institution, the Caja
Costarricense del Seguro Social (CCSS for its Spanish acronym), home of
two primary programmes: sickness, maternity and disability, and old-age
and survival.2
Secondly, Costa Rica took an earlier and broader perspective towards
basic social services than most other developing countries. It included
64
The Social Policy Regime 65
general education (pre-school, primary and secondary), and healthcare

services (primary, secondary and tertiary) under state funding and pro-
vision. In doing so, basic social services and social protection became
tightly intertwined, increasing opportunities for social mobility and
overcoming deprivation.
Third, these universal social provisions were complemented during
the 1970s with targeted programmes and institutions geared towards
the social incorporation of the poor. The Mixed Institute of Social
Assistance (IMAS, for its Spanish acronym) was created in 1971, and
was primarily funded by payroll taxes. IMAS implemented monetary
transfers for people living in extreme poverty. More importantly for the
overall social policy regime, the misleadingly named Family Allowances
Program (FODESAF for its Spanish acronym) followed in 1974.3 Funded
both by payroll and consumption taxes, FODESAF supported nutrition
programmes, non-contributory healthcare and old-age social insur-
ance targeted at the poor, and other services run by sectoral agencies.
FODESAF preceded by a decade the Bolivian Social Emergency Fund.4
Unlike emergency funds, however, FODESAF complemented rather
than competed with other universal programmes. From its beginning,
1.4 per cent of the GNP was channelled into the programme (Trejos in
Rovira, 1987) and between 1975 and 2000, it funded 52 institutions and
many more programmes (Montiel, 2001).
The economic crisis of the early 1980s addressed in Chapter 2 had a
significant impact on the Costa Rican social policy regime and, there-
fore, upon social incorporation as well. Education spending was par-
ticularly hard hit as real public spending per capita decreased by 25 per
cent during the decade. Tensions mounted alongside the loss of quality
and rapidly growing private services. Yet the social policy regime proved
to be more resilient than the economic policy regime. In fact, many
social policies deepened their universal reach. Healthcare insurance
and pensions for non-salaried workers became mandatory; return rates
following maternity leaves were increased; and healthcare medicine for
chronic diseases like HIV were made available to all.
This chapter addresses the creation, expansion and resilience of this
unique social policy regime as well as its implications for social incor-
poration. We show Costa Rica’s success in reaching a majority of the
population in the provision of education, health and pensions, largely
thanks to the universal design of social programmes. We also discuss the
evolution of water provision and nutrition programmes. We distinguish
between three stages: (a) the regime’s origins during the 1940s; (b) the
expansion during the stage of expanding incorporation (1950–80); and
(c) the period of resilience and growing tensions during the last three
decades. Before doing so, however, it is useful to review the changes in
overall social spending and several key positive outcomes.
3.2 A first look at success in inputs and social outcomes
To demonstrate Costa Rica’s impressive performance in social incor-

poration, we first describe the evolution of spending and coverage of
social services and other key outcomes over time. Available estimates
of resources invested in these services over the long run are scarce.
The first published data on public expenditure date to 1962 reporting
on the period between 1950 and 1958 (IICE, 1962). At the beginning
of the 1970s, the Comptroller General of the Republic estimated gov-
ernment expenditure by function for the period 1969 to 1973 (CGR,
1977). However, these estimations were discontinued and not resumed
until 1998. The Ministry of National Planning and Economic Policy
estimated total public expenditure by function for the years 1975, 1980
and 1985 (MIDEPLAN, 1987). Unfortunately, its estimates were also dis-
continued in 1982 when government created the Technical Secretariat
of the Budgetary Authority (STAP for its acronym in Spanish) to address
growing fiscal imbalances. STAP began a process of systematization
and consolidation of total public expenditure by function from 1987
onwards. This series was supplemented by the Second Committee of
State Reform, which considered a range of social spending from 1980
to 1992 (Coto, 1992).5
Based on these data, Trejos (2008) developed several indicators of
public social spending in basic services (primary and secondary edu-
cation, health at all levels, water and nutrition). Although the data
should be interpreted cautiously, it does help us grasp the rapid expan-
sion of social spending during the 1960s and 1970s, when resources
devoted to social policy increased by six (see Figure 3.1). The crisis
of the early 1980s and subsequent stabilization policies reduced the
resources available and triggered spending cuts. These policies tended
to primarily affect the quality of services, with the quantity and cov-
erage suffering in only a few programmes (for example, secondary
education).
With the main financial imbalances resolved, spending rebounded in
1986 but it did not begin to grow again in a sustainable manner until
1991. During the second half of the 1990s, spending again expanded,
only to shrink once more after 2002. In 2005, total social spending
aimed at basic social services was nine times larger than in 1950.
1,700
1,500
Millions of US$ of 2000
1,300
1,100
900
700
500
300
100
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Figure 3.1 Total public spending in basic social services, millions of US$ of 2000,
1950–2005
550
500
450
400
US$ of 2000
350
300
250
200
150
100
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Figure 3.2 Public spending per capita in basic social services, US$ of 2000,
1950–2005
The differences between the periods of expanding and stagnant

incorporation are even clearer when one considers spending per capita
(Figure 3.2). Per capita resources devoted to basic social services grew
during the 1960s and 1970s and peaked at US$485 dollars in 1979
(2.6 times more than in 1950), before dropping by 38 per cent between
1980 and 1985. During the following decade, per capita expenditure
on basic social services ranged between US $300 and US$350 in real
terms. After 1995 it rose more rapidly but by 2005, basic social spending
per capita was still 29 per cent lower than in 1979.
Unfortunately, quantitative evidence on the evolution of pensions
and expenditures from the CCSS more generally is scarce. Based on the
available data, the pattern is similar to the data for basic social services
previously discussed (see Figure 3.3). Pensions measured in real colones
of 2000 increased rapidly in the second half of the 1970s and have stag-
nated since then. Healthcare (a component of basic social services but
channelled through the social security system) follows a similar disap-
pointing path, a partial explanation for the growing dissatisfaction with
the quality of services.
The evolution of coverage mirrors the evolution of social spending in
both sectors (Figure 3.4). Nearly 70 per cent of all salaried workers were
insured before the 1980s crisis – a very high proportion compared to
other countries in Latin America and in any other part of the world. In
the period of stagnant incorporation, the percentage of insured salaried
workers remained at 64 per cent but the country expanded social rights
among non-salaried workers.
The expansion of the social policy regime’s different components con-
tributed to a rapid process of social incorporation as reflected in different
outcome indicators. The data below point to one of the most impres-
sive features of Costa Rica’s performance: equality in outcomes between
the urban and rural sectors as well as between different income groups.
Figure 3.5 shows the evolution of two internationally recognized out-
come indicators of health since 1950: life expectancy at birth and infant
mortality rates. Both improved significantly between 1950 and 1980,
but have slowed since then, reflecting both an indirect result of the crisis
and the obstacles to sustain such high levels of improvement.
Total Health-care Pensions
300000
250000
200000
150000
100000
50000
0
Año
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Millions colones of 2000
Figure 3.3 Social expenditures: total, healthcare and pensions, millions of

colones of 2000, 1950–2006
Source: STAP.
Total EAP * Salaried workers *

Non-salaried workers * State-insured poor population **
Economicaly dependent family insurance **
90
80
70
60
Percentage
50
40
30
20
10
0
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2001
2003
2005
Figure 3.4 Healthcare coverage: insurance and social assistance, percentages,
1980–2006
Source: CCSS (various years).
120 85
100 80
Life expectancy at birth
Per thousand born alive
80 75
Years
60 70
Infant mortality
40 65
20 60
0 55
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Figure 3.5 Life expectancy at birth and infant mortality rate, mortality rate
per thousand live births and life expectancy in years, 1950–2005
Source: Own elaboration based on INEC, Ministry of Health, and the Central American
Center of Population (various years).
Figure 3.6 offers additional information on infant mortality between

1972 and 2006. These figures illustrate the remarkable convergence
between the urban centre and the rest of the country and between the
poor and the rich. Success was initially due to the state-led introduction
of new, low-cost and highly efficient health technology, such as vaccines,
antibiotics and insecticides. Rosero (1983), for example, shows that the
Region
Central Urban Rural
70
60
50
40
30
20
10
0
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Socio-economic strata
Lowest quintile Highest quintile
70
60
50
40
30
20
10
0
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Figure 3.6 Social incorporation as reflected in infant mortality under 1 and

under 5 years of age, mortality rate per 1000 live births, 1972–2006
Source: Own elaboration based on the Central American Center of Population.
reduction in the infant mortality rate in the 1970s is explained by a

41 per cent increase in primary care programmes and a 32 per cent
increase in secondary care. Unlike many other countries in Latin
America, the drop in infant mortality rates was especially pronounced
in low-income populations (Rosero, 1985).
Data on malnutrition complement data on infant and child mortality.
In 1966, the first nutritional survey showed 57 per cent of all children
with some degree of malnutrition (Table 3.1). By 1979 this percentage

had decreased to 46 per cent and continued to decline even in the most
acute period of the economic crisis. According to the last survey avail-
able, by 1996 malnutrition had been halved (22 per cent of all children),
and the height of primary school children rose significantly. The expan-
sion of various nutritional programmes, particularly the delivery of milk
Table 3.1 Indicators of the nutritional conditions of children, 1966–1996
Indicator 1966 1975 1979 1982 1996
Children with low weight at birth (%)1 n.d. n.d 6.4 6.6 7.3
Malnutrition on children below
6 years of age (%)2
Severe malnutrition 1.5 1.1 0.5 0.3 0.4
Moderate malnutrition 12.2 11.2 8.5 6.0 4.7
Light malnutrition 43.7 40.9 36.8 24.6 17.3
Overweight n.d. 7.8 11.3 2.5 4.2
Students with insufficient height (%)3 n.d. n.d 20.4 11.3 7.4
Notes:
1
Percentage of children born alive treated by the CCSS with less than 2,500 grams.
2
Based on the national surveys of nutrition.
3
Students of first grade according to the national census of height.
Source: MIDEPLAN (1998).
Table 3.2 Comparison between Costa Rica and 94 other developing countries in
terms of human development, 1960–1987
Infant Life Adult

mortality1 expectancy illiteracy
1960 1987 1960 1987 1960 1987
Number of countries 13 2 5 0 3 4
with better
Indicators than CR
Low income countries 0 0 0 0 0 0
in Latin America 0 0 0 0 0 0
Medium income countries 3 0 1 0 0 1
in Latin America2 1 0 1 0 0 1
Medium-high income 10 2 4 0 3 3
countries
in Latin America 6 1 3 0 3 3
Notes:
1
Refers to children younger than five years.
2
This group includes Costa Rica.
Source: Trejos (1991) with data from UNICEF and the World Bank.
and food parcels to families with malnourished children, was a major

factor behind this positive outcome.
We conclude this section with a comparison between Costa Rica and
other developing countries in terms of infant mortality, life expectancy
and adult literacy. Costa Rica’s social accomplishments between 1960
and 1987 were greater than those of most other peripheral countries, as
Table 3.2 illustrates. In 1987, of the 96 countries in the periphery ana-
lysed, only two had a lower infant mortality rate than Costa Rica; only
four had lower illiteracy rates, and none had a better life expectancy. In
all three areas, between 1960 and 1987, Costa Rica’s comparative posi-
tion improved.
3.3 The foundational period of the 1940s
The historical literature highlights Costa Rica as having an active state

long before the 1940s. Palmer (1999: 100), for example, depicts “an
educating State, a sociological State, a therapeutic State and a mother
State.” Since independence in 1821, Costa Rica established policies
aimed at generalizing primary education and eradicating illiteracy.
Between 1880 and 1950, the success of education reforms can be seen in
the growth of the literacy rate, from about 10 per cent of the population
above 10 years of age in 1880 to 79 per cent by 1950 (Seligson, Martínez
Franzoni and Trejos, 1996). Government involvement in healthcare
dates to the mid-1920s when the National Insurance Bank (1924) and
the Ministry of Health (1927) were created. Initially, medical interven-
tions were limited to services offered by charity institutions as well as
some basic interventions to control certain epidemics (Rosero, 1983;
Miranda, 1988). By the late 1930s, the Costa Rican state had broken
away from a liberal state (Palmer, 1999).
Yet the foundation of a real “social” state and policy regime took place
in the 1940s rather than before.6 It was then that a more ambitious
approach to health and education was adopted and modern institu-
tions were created. In 1941 the University of Costa Rica was established,
replacing the University of Santo Tomas, which had closed 53 years
earlier. A general regime of social insurance was formally established
in 1941 with the creation of the CCSS and reformed in 1943 to grant
greater institutional autonomy to the social security agency. The govern-
ment created two programmes: maternity and sickness insurance and
old-age and disability insurance (pensions), both targeting the working
population under a wage ceiling. While the new pension system coex-
isted alongside special pension regimes for teachers and other public
servants, health insurance became a single regime for the entire popu-
lation. These initial characteristics of the programmes constituted the
building blocks of Costa Rica’s later success in building a universal social
security system (Martínez Franzoni and Sánchez-Ancochea, 2012).
In 1949, a new Constitution introduced significant innovations in
education: the creation of an integrated public education system, from
pre-school to higher education, led by the Higher Educational Council;
the establishment of free, although not yet compulsory secondary edu-
cation; and the consolidation of the University of Costa Rica’s manage-
ment and financial autonomy (Rodríguez, 1994).
3.4 The period of expanding incorporation, 1950–1980:

remarkable growth of social programmes
Between 1950 and 1980 Costa Rica witnessed an unprecedented growth

of social policy when most programmes systematically experimented
incremental reforms. The expansion was particularly rapid during the
1970s and was coupled with a growing domestic market, a constant
increase in real wages and a rapid development of other public services
(Barahona, 1999: 99; see also Chapter 2).
State capacity by the 1970s was remarkable. For example, in its first
year FODESAF distributed as much as 1.1 per cent of the gross national
product (GNP) in subsidies and social services. Five years later in 1980,
expenditures by FODESAF accounted for 2.5 per cent of GNP (Trejos,
1983). Similarly, the rural and urban primary healthcare programmes
created in the 1970s managed to achieve significant reductions in child
mortality in just five years. As a result, Costa Rica became an international
showcase for preventive and primary care; by the time international pol-
icy prescriptions were developed at Alma Ata in 1978, the country had
already accomplished most recommendations. Health insurance, which
at first expanded slowly, by 1970 was managing the “Hospital Mexico”,
one of the most sophisticated hospitals in Central America.
This section reviews the changes in four different areas: education,
health, pensions and other basic services (water and nutrition) during
this unique period in Costa Rica’s history.
3.4.1 Education
During the 1950s coverage of primary and secondary education grew
rapidly. However, by 1960, 72 per cent of schools were still lacking
all six grades. As a result, the government launched a new policy that
included the selection of just one teacher for the six grades along with
training, new teaching materials and improved infrastructure. The

number of schools without the six grades decreased by 14 per cent dur-
ing the 1960s and by 1970, Costa Rica had attained nearly universal
access to primary education for the entire population under school age
(MEP, 1971).
Figure 3.7 provides more detail on coverage rates for primary and sec-
ondary education. By 1960, access to first grade had become universal.
That same year 30 per cent of 14-year-olds had completed at least one
year of secondary education.7 For secondary school, the incremental
expansion continued until 1980, when the economic crisis reversed
the positive trends. While in subsequent years coverage continued to
expand, it remained far from universal.
During the 1970s, the management of the school system improved
significantly. Between 1971 and 1973, Costa Rica drafted its first
National Plan for Educational Development, drawing on planning tech-
niques promoted under the Alliance for Progress and UNESCO’s exper-
tise (MEP, 1973). The 1949 Constitution was amended to make basic
education (up to the first cycle of secondary education) compulsory.
100
90 Primary1/
80
70
60
Percentages
50
40
30 2/
Secondary
20
10
0
1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995
Figure 3.7 Evolution of access to primary and secondary education, percentages,

1915–1999
Source: Trejos (2007) based on INEC.
1/ Population of 7 years of age that has completed at least one year of primary eduation
according to the year in which they entered primary education (at 7 years). 2/ Population of
14 years of age that has completed at least one year of high school the year in which they
entered high school (at age 14).
At the same time, three new universities and the first public technical
college were created.
3.4.2 Healthcare
During this period two primary institutions were involved in the
delivery of healthcare services: the social insurance agency and the
Ministry of Health. The former was in charge of services for the insured
population. The latter looked after the poor and oversaw charity medi-
cal facilities and, for very specific services, out of pocket payments for
the better off. In the 1970s, the process of social insurance expansion
resulted in the unification of the system (with the CCSS as provider of
all healthcare), a process that was further consolidated in the period of
stagnant incorporation.
The 1949 Constitution maintained the social guarantees amended
to the Constitution in 1942 and reaffirmed the role of the CCSS as the
institution charged with solidary and universal social insurance, paving
the way for the expansion of coverage. Yet during the 1950s and 1960s,
public health services expanded only slowly. Services first reached all
urban areas and coffee-producing zones of the Central Valley, cover-
ing low-income workers and in 1956, family coverage was introduced:
mandatory for wives or companions, children initially under 12 years of
age, and economically dependent parents.8
In 1951 the Ministry of Health created an area in charge of preven-
tive medicine (the General Directorate for Health), and another one
in charge of supervising hospitals (the Directorate of Medical Social
Assistance) (Rosero, 1983: 39). The latter was to administer the finan-
cial resources of all public hospitals (operated by the Boards of Social
Welfare), with resources coming from special revenues, the national
lottery and the central government’s budget.
In 1961, for the second time since the 1940s, the Political Constitution
was amended to strengthen state intervention in social affairs. The
amendment established that social insurance programmes were to
become universal within the following ten years (see further discus-
sion on this below). Through the 1960s, change continued to be incre-
mental but in the early 1970s, statecraft intensified: wage ceilings to
access social insurance were removed gradually, forcing higher-income
employees to insure; hospitals run by Boards of Social Welfare under the
supervision of the Ministry of Health were transferred to the CCSS; and
a unified healthcare system was put in place. The Ministry of Health
began focusing solely on prevention and primary care, while facilities
run by the social security agency were devoted to all curative services.
From then on, in a given community, people could access either agency
depending on the type and availability of services required.
More specifically, the First National Health Plan of 1971 established:
(1) the creation of a national health system; (2) the national coverage
of primary healthcare programmes by the Ministry of Health through
rural and community programmes; and (3) the project to make medi-
cal attention universal among the entire population through the CCSS.
The plan was gradually implemented between 1971 and 1974 and then
extended until 1980. In order to achieve the stated goals, the General
Health Act was enacted and the Organic Law of the Ministry of Health
amended in 1973. The Constitutional Law of Costa Rican Social Security
was also amended in 1971 to reach independent workers (initially in a
non-mandatory fashion) and serve the poor through non-contributory
programmes, gradually eliminating the contribution ceilings of higher
income employees.
The universalization of services brought various changes and chal-
lenges. It forced the CCSS to confront the shortage of medical services
necessary to remove the wage ceiling. This was the argument to pass
the 1973 law that, by ordering the gradual transfer of all hospitals from
the Ministry of Health to the CCSS, centralized all curative public serv-
ices under one single agency (Miranda, 1994). This change was largely
driven by CCSS’s need to reach three unprotected groups: the well-off,
the self-employed, and the poor. The reform had a “snowball effect” on
the expansion and unification of health services under what was now a
two-pronged social security system – that is, social insurance and social
assistance.
The 24 hospitals from the Ministry of Health, administered by the
Social Protection Boards, and the 3 hospitals of the Banana Company,
were gradually passed onto the CCSS, a process that concluded in the
mid-1980s. In 1970, 77 per cent of hospitals and 81 per cent of the beds
and expenditures were under the command of the Ministry of Health.
Fifteen years later, the CCSS managed 85 per cent of hospitals, 95 per cent
of the beds and 96 per cent of hospital discharges (Miranda, 1988). This
helped to integrate the system and make it more efficient. During this
period, the private sector had a limited role in the delivery of hospital
services, even if it did refuse to transfer hospitals run by the banana
companies to the CCSS. In 1970, only 4 per cent of beds and hospital
discharges were private. Sixteen years later, only 2 per cent of beds and
less than 3 per cent of discharges were private.
Outpatient services were split between the Ministry of Health and the
CCSS. In 1970, two-thirds of out-patient consultations were already in
the hands of the CCSS. Fifteen years later, the CCSS offered 90 per cent
of the consultations, and the number of consultations per person grew
by 55 per cent from 1.95 to 3.03 consultations per person (Miranda,
1988). The rate at which CCSS-sponsored health insurance reached the
entire population (both the direct insurance and family dependents)
was extraordinary: it rose from 47 per cent in 1970 to 84 per cent in
1979 (Seligson, Martínez Franzoni and Trejos, 1996) – more than in
most other developing countries.
In order to expand primary healthcare coverage during the 1970s,
the Ministry of Health, drawing on its experience with the malaria
eradication programmes, launched rural health programmes in 1973
and community health in 1976. These programmes provided immuni-
zation, complementary food, family planning, latrines and sanitation.
During the 1970s, the rapid expansion of primary care also expanded
coverage by the CCSS: the more rural and urban communities reached
by primary care programmes , the more people were also transferred to
the CCSS for access to curative and more complex services. With the
creation of the FODESAF in 1974, additional resources were channelled
to the primary healthcare programmes run by the Ministry of Health,
including nutrition programmes, thus fuelling the expansion social
incorporation once again.
3.4.3 Pensions
For pensions, the primary programme is the Disability, Old-Age and
Survival Regime (RIVM for its Spanish acronym). In contrast to the
majority of other Latin American regimes, RIVM was created as a par-
tially funded, defined-benefit system and has never operated as a pure
‘pay-as-you-go’ system.
As two insurance programmes under the same institution, the evolu-
tion of pensions went hand in hand with the transformations in health
insurance addressed above. During the 1950s and 1960s, bureaucrats at
the CCSS repeatedly requested legislators to take action in addressing
the financial shortages faced by the social security fund. Two matters
were particularly controversial; the first was overall funding, and spe-
cifically, raising wage ceilings to provide insurance to workers at higher
wage levels. The second was the optimum level of fiscal contributions
to social insurance by the private sector; increasing business’ share and
diminishing that of the government was considered critical to solving
the state’s chronic indebtedness with the CCSS.
In the midst of negotiations to introduce changes in these areas in
1961, PLN legislators, then on the political opposition, raised a concern: if
additional resources were granted to the CCSS, what was the guaran-
tee that the resources would, in fact, be allocated to social insurance?
The unexpected outcome was the Constitutional Amendment of 1961
granting the CCSS ten years to universalize social insurance (mentioned
above). Vaguely stated and lacking funding, the amendment seemed
fairly innocuous. With time, however, it became a powerful political
tool for those that aimed to expand social protection to all.
Successive raises in wage ceilings increased mandatory contributions
among salaried workers, strengthening both the regime’s financial
capacities and coverage. Legislation to gradually eliminate the wage
ceiling was finally passed in 1971 and implemented during subsequent
years. This 1971 reform also introduced a non-contributory insurance
for the poor, who gained access to the same services as those with
contributory insurance. In 1975, the new social assistance pension
programme (RNC for its Spanish acronym) reached 20 per cent of the
elderly and within the following two years, 30 per cent of people 65
years and over received these transfers.9 During the 1970s, voluntary
affiliation was established for the self-employed and, during the 1980s,
collective insurance for non-salaried workers (for instance, rural co-
operatives) was introduced. By allowing labour organizations to collect
monthly fees, the CCSS reduced administrative costs and could charge
fees lower than those for workers individually insured.10
In 1974 contributions were reallocated from the state to business to
tackle the long-term problem of public debt to the CCSS. The state’s
contribution dropped from 2 per cent to 0.25 per cent while business
contributions increased from 5 per cent to 6.75 per cent.
Business opposed both reforms but with weak arguments and an inef-
fective advocacy strategy. By the time they made the argument that there
would be dangerous increases in labour costs, legislators had already
passed the reform (Rosenberg, 1983). The business sector had to settle for
an incremental elimination of wage ceilings defined by the CCSS’s ability
to provide health-care services. Concern for financial sustainability rather
than universal coverage made this possible (Martínez Franzoni, 1998).
By the 1980s, direct insurance for healthcare and pensions reached
nearly 70 per cent and almost 50 per cent of the economically active
population, respectively. Available statistics for healthcare coverage
(starting in 1950) and for pensions (starting in 1969) indicate a steady
yet incremental increase up to the 1970s, at which point it began to
expand at a much greater rate11 (see Figure 3.10). Starting in 1955, avail-
able data demonstrate a gradual expansion to family members through
the mid-1960s and rapidly thereafter.
Rather than the two-tiered system (one system for the middle class
and another one for the poor) typical of most other developing coun-
tries where public regimes were established, Costa Rica’s social security
agency expanded to simultaneously care for a clientele that had already
gained access to its services (such as low-income salaried workers), a
potential clientele (such as the poor and the self-employed), and a larger
and better-off segment of the salaried population that could make such
coverage financially feasible. In doing so, it followed a logic of universal
social protection.
3.4.4 Other basic services: water and nutrition

The provision of other basic services, particularly water and nutrition,
also increased significantly during the 1950s, 1960s and 1970s. Two of
the most significant factors affecting health are potable water supply
(suitable for human consumption) and the proper treatment of sewage.
In 1950, the central government was responsible for providing drink-
ing water. Only 44 per cent of the Costa Rican population had piped
water, though even that was not necessarily potable (Mora and Feoli,
2007). Tariffs charged barely covered operating costs; maintenance,
replacement or expansion was beyond the central government’s reach.
Investment in infrastructure was low and the few sewage treatment
plants available had been abandoned and sewage discharges made
directly into rivers. During the 1950s the combination of inadequate
investments and rapid population growth led the system to collapse.
Local urban governments gradually took responsibility for developing
community water systems; major cities established sewage disposal sys-
tems and treatment plants (ICAA, 2003). Overall, urban populations did
well but the rural populations, particularly those in remote or dispersed
communities, did not.
This commitment to construct new or improve existing treatment
plants was soon abandoned. Septic tanks or pit toilets were used instead.
Projects increasing water flow to the networks were not carried out
during this period and existing water supplies and networks were used
to share the limited running water supply with new neighbourhoods.
The scarce water resources were directed to urban centres with the most
critical problems; programmes designed to reach populations without
services came to a halt. Most major cities rationed water service (ICAA,
2003) and the growing water supply shortage had a particularly effect
on the San Jose metropolitan area (SJMA).
The situation improved significantly in the 1960s with a push towards
the modernization of water and sewage services. In 1961, agencies
responsible for water and sewer services were grouped under a sin-
gle autonomous public body, the National Water Supply and Sewage
Association (later renamed the Costa Rican Institute of Water Supply
and Sewage, ICAA for its Spanish acronym). During the first half of the
1960s, ICAA focused on water supply for the capital city of San Jose,
interconnecting pipelines and increasing the flow of water in the area.
With the emergency of the metropolitan area resolved, attention during
the second half of the 1960s through 1973 was focused on the extension
of sewer systems and a programme of aqueducts and sewers for urban
health. This effort began with those 11 municipalities with both the
greatest problems and the willingness to delegate authority to ICAA.
An expansion of rural aqueducts, partially funded with foreign
resources, benefited nearly 1,000 rural communities. Because rural
communities were small, latrine programmes rather than sewage sys-
tems were created by the Ministry of Health. A system for administra-
tion was contracted with local boards, requiring the participation of
the communities both in the construction and subsequent operation
of latrines.
At the same time, the groundwork was laid for a tariff system cover-
ing operational costs and allowing for the replacement and expansion
of the network. The responsibility for designing and implementing the
new tariff system was assigned to the National Electricity Service (SNE
for its acronym in Spanish), which was responsible for setting rates
on electricity and telecommunications. Self-financing was achieved
through a grant from the central government, later used to repay the
foreign loan received for the rural aqueducts.
Water provision improvements during the 1970s were less significant
than in other areas of the social policy regime (ICAA, 2003). FODESAF
provided additional resources to strengthen rural aqueducts but in
1975, these were transferred to local non-governmental committees,
weakening the state’s capacity to ensure their proper funding and main-
tenance. When new municipal aqueducts were established, these local
committees often lacked the ability to manage them. In 1978 ICAA was
forced to create an Urban Water Revolving Fund aimed at funding local
governments experiencing low, late or non-payment for services.
During the 1970s, three significant projects located in the metro-
politan area were co-financed between the central governments and
international loans: the second phase of the sewer system in the metro-
politan area; the second phase of the aqueduct (Orosi Project); and the
beginning of the third stage of the Orosi Project. Since 1974, there has
been very little progress, with only some essential work being carried
out, such as the reconstruction of the aqueduct and sewer in Limon

(which was destroyed by a major earthquake), and the completion of
work already underway.
Despite the problems, however, water and sewage delivery experienced
advances during the period 1950–80, with Costa Rica having a better
system than neighbouring countries. In 1963, 67 per cent of the popu-
lation had piped water, which resulted in a nearly universal access in
urban areas and coverage of nearly 50 per cent in rural areas. During
the following two decades significant progress was made in the cover-
age of water aqueduct for rural regions, benefiting those who did not
previously have access. In 1984, 73 per cent of the rural population had
piped water. The use of septic tanks has also expanded rapidly – from
16 per cent of the population in 1963 to 47 per cent 21 years later. This
expansion, combined with increased access to piped water in urban
dwellings, implied a gradual replacement of the use of pit toilets or
latrines, while rural areas went first from less adequate means to the
latrine and only then, from the latrine to the septic tank.
In short, during this period the country made significant progress in
the provision of drinking water but did not achieve universal cover-
age. This lack of coverage affected the poorest and most rural residents
disproportionally. Additionally, progress was precarious due to the lag
in treatment of sewage and limited protection of water resources. Costa
Rica was faced with both problems of underdevelopment (water con-
tamination by organic factors), and new phenomena of development
(chemical contamination from agricultural activities) – one of the few
shortcomings of an otherwise successful social policy regime.
In sharp contrast, during the period of expanding incorporation, nutri-
tion programmes showed remarkable progress. There were three impor-
tant programmes: the Child Care Centers for children under six years
(CEN-CINAI for its acronym in Spanish), Nutrition and Education Centers
for Children’s Comprehensive Care (CEN), and School Lunchroom
Programs, all targeted at poor children. Attention to child nutrition can
be traced to Article 82 of the 1949 Constitution, “the state will provide
food and clothing to needy schoolchildren, according to the law”, thus
establishing conditions for school lunchrooms. Yet the real expansion
occurred during the 1950s, 60s and 70s.
In 1950, an agreement between the Ministry of Health and the United
Nations Children’s Fund (UNICEF) resulted in the creation of the Costa
Rican Supplemental Food programme to provide food for the most
vulnerable groups. In 1951 the Department of Nutrition of the Ministry
of Health was established. The department began by opening Nutrition
Centres (NC) for supplementary feeding with the active participation of

communities and external financial support.
The agreement between the Ministry of Health and UNICEF resulted
in the creation of CEN-CINAI, which sought to deliver complementary
food to children under eight years of age and pregnant and nursing
mothers. Recipients were identified by the 1966 nutritional survey,
the country’s first, which confirmed the problem of severe malnutri-
tion (Rivas, 1999). The first centres were located in the most populated
communities of central provinces and offered a daily glass of skimmed
milk, supplemented with a portion of meat, egg or cheese with tortilla
cooked with lye to incorporate calcium. Subsequently, the diet was
supplemented with butter, cereals and other foods, depending on their
availability (Mora, 1989). In 1963 additional resources were allocated
(6 per cent sales tax on liquor) and by the end of that decade the pro-
gramme included centres and clinics of nutritional rehabilitation for
the care and monitoring of children under six years with moderate and
severe malnutrition.
In 1961 a Cooperative Nutrition Program was established with fund-
ing from the Alliance for Progress and participation from the Ministries
of Education, Agriculture and Health with UNICEF, the Food and
Agriculture Organization (FAO) and the World Health Organization
(WHO). With this programme school and family gardens were pro-
moted to increase production, improve food handling, food habits, and
nutritional status (Rivas, 1999).
In 1971, a nutritional education component for children and parents
was implemented with the support of retired teachers in the nutritional
recovery centres and clinics, giving birth to the CENs. During the 1970s,
following the creation of FODESAF, nutrition programmes received
enormous support and expanded across the country (MIDEPLAN,
1998). Some of the programmes continued to be located under the
Ministry of Health; others under the Ministry of Public Education.
In 1975, pre-school education by the CEN was given further support
through an agreement with the Ministry of Public Education (Rivas,
1999) and, a year later, the first Children’s Comprehensive Care Centre
(CINAI) were opened with extended hours to accommodate the chil-
dren of working mothers. During 1977 a component of comprehensive
care for preschool attention was added (Rivas, 1999).
FODESAF contributed to the expansion of the school lunch program;
in 1975, 1,194 public schools had lunchrooms and approximately
154,000 students were served by the program. By the end of the 1970s,
the numbers of lunchrooms and students served had more than
doubled (2.5 times). The annual growth rate of the program, which
was close to 25 per cent, was more than that of resources, resulting in a
decrease in spending per beneficiary.
3.5 The period of stagnant incorporation 1980–2008:

resilience but with growing tensions
During the last three decades, the Costa Rican social policy regime
has demonstrated a remarkable resilience, particularly in terms of the
prominent social policy funded by payroll taxes. Overall, Costa Ricans
began this stage with universal health insurance and medical services
available to all, either through contributory or non-contributory means.
Contributory insurance was mandatory for waged and non-waged
workers and reached all economically dependent family members. It
was complemented by voluntary insurance for individuals with unpaid
work such as housewives or students who were neither family depend-
ent nor poor. Social assistance targeted the poor and individuals with
serious disabilities. Medical services were standard for all, but illness and
maternity subsidies were restricted to paid workers and were higher for
waged than for non-waged workers.12
At the same time, welfare arrangements experienced growing tensions
due to the need to do more with fewer resources per capita. Overall, the
social policy regime has thus shown resilience in terms of its guiding
principles and growing tensions in its policy instruments and outcomes.
For example, access to services, from vaccination to heart transplants,
remains universal. However, paperwork and lines to access outpatient
services push people across income groups to pursue different combina-
tions of private and public services. Figure 3.8 provides striking data on
the growing role of households’ private spending.
3.5.1 Education
The crisis of the 1980s did not have a serious impact on primary edu-
cation but did reverse the expansionary trend of secondary school-
ing. Basic education services, mostly dependent on the government’s
budget, were neither as stable nor as fast to recover as programmes
funded by payroll taxes. Instead these services paid the toll of the fiscal
discipline that followed the crisis. They competed for resources with
other services which involved more powerful stakeholders (for example,
higher education).
Between 1980 and 1985, public spending allocated to primary educa-
tion fell by 28 per cent while secondary education dropped on average
16,000.0 1,000.0
Per capita social spending (US$ 2000) 900.0
14,000.0
800.0
12,000.0
700.0
Millions of dollars
10,000.0
600.0
Dollars
8,000.0 500.0
Houehold private spending (millions 400.0

6,000.0
US$ 2000)
300.0
4,000.0
200.0
2,000.0
Total social spending (millons 100.0
US$ 2000)
0.0 0.0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Figure 3.8 Social expenditures: total, per capita and private, 1980–2008
Source: Own elaboration based on INEC.
by 44 per cent. University spending grew by 3 per cent (Ulate et al.,

2004). This dramatic reduction of public resources coupled with lower
household incomes increased the opportunity costs of keeping young
people in school (see Figure 3.9). Between 1980 and 1985, gross and net
coverage dropped by 10 and 5 percentage points respectively. It would
take at least a decade to return to the pre-crisis coverage: the 1980 levels
of net and gross enrolments were only regained in 1990 and 2000. Still,
midway into the 2000s, 40 per cent of all youth between 13 and 17
years of age were dropouts.
Gender gaps are practically non-existent indicating that early access
to school was not gender biased and suggesting that co-ed schools have
been common for some time. Since poverty has historically been more
widespread in rural areas, early gaps by region are important to note
as indicators that the coverage extension favoured the rural areas and
more marginalized groups (Trejos, 2008).
In addition to coverage, the shrinking of resources impacted quality. The
number of annual school days was dropped to compensate for the reduction
in teachers’ salaries (MIDEPLAN, 1998) and there was hardly any invest-
ment devoted to school maintenance: over ten years not a single secondary
school was built (Programa Estado de la Nación, 2004). Regaining cover-
age entailed relaxing quality as well: new policy instruments like so-called
90
80
Gross rate
70
60
50
40
Net rate
30
20
10
0
1970 1975 1980 1985 1990 1995 2000 2005
Figure 3.9 Evolution of gross and net rates of enrollment in secondary schools,
1970–2006
Source: MEP (various years).
“open education” helped young people complete high school with less
demanding requirements.
During the second half of the 1980s coverage recuperated. Spending
growth and several international loans helped improve infrastructure
and equipment. The volatility of social spending was also tackled with
a 1997 Constitutional amendment mandating that at least 6 per cent of
the GDP be allocated to education (Trejos, 2007). This mandate has not
yet been fully implemented but it does reflect the growing importance
given to state-run education facilities.
Concerns regarding the quality of services are reflected in various
measures such as the introduction of computer science classes in the
curricula (Fonseca, 1991); the creation of standardized tests as a prereq-
uisite for passing from one level to the next, including a mandatory test
to graduate from secondary school; the growth in the number of school
days; and the improvement in foreign language courses. Yet the reduced
number of school hours, the lack of suitable materials, unsatisfactory
teachers’ training, politically influenced staffing, and a highly central-
ized management have continued to undermine the quality of service
delivered. Meanwhile, private services have expanded and diversified.
Today Costa Rica still lacks international standardized tests that estab-
lish quality in a comparative perspective. In a regional test performed
in 1990, the country scored among the highest and shows only minor
differences among schools for children with various socioeconomic
backgrounds. However, the results were poor when compared to devel-

oped countries and those in Southeast Asia (Larrañaga, 1997).
3.5.2 Healthcare
The crisis of the early 1980s found health services at a peak of expand-
ing services and increasing coverage. Unfortunately, services were deeply
impacted by the sudden and dramatic shrinking of available resources.
National hospitals went from extravagant habits, such as subscribing
to unlimited numbers of French, English and other international medi-
cal journals, and the purchasing of all medical equipment requested
by physicians, to sudden cutbacks in basic supplies (Miranda, 1994).
Overseeing about two dozen hospitals in a context of diminishing
resources, the CCSS increased payroll contributions and buffered the
crisis more easily than did basic education (Trejos et al., 1994; Sauma
and Trejos, 1999). That in the midst of such a terrible crisis the govern-
ment was able to increase payroll taxes and that powerful actors, as well
as the general public, accepted it, demonstrates the wide support social
insurance had following the impressive record of previous decades.
Still, wages and supplies were cut and resources devoted to mainte-
nance and infrastructure badly hurt. Coverage dropped, particularly in
primary care, and services lost quality. As was the case with education,
cutbacks in real wages were offset by a decrease of working days, result-
ing in fewer services in the short term and lower discipline and effec-
tiveness in the long term.
The economic crisis was not long enough to alter health indicators
but important enough to alter the balance between public and private
practice: a larger number of physicians began combining public service
with private practices. Health insurance started to rely more on pri-
vate provision through business-based doctors, mixed medicine, and
medical cooperatives – the latter particularly appreciated by the insured
population (Mesa-Lago, 1992) – along with efforts to better integrate
outpatient services run by the CCSS and the Ministry of Health.
In the mid-1990s, the remaining primary services under the Ministry
of Health were transferred to the CCSS, which became responsible for
the whole sector. The Ministry of Health ceased to deliver services and
became the supervisory and regulatory agency of healthcare services at
large, whether public or private.
The CCSS, in turn, announced two significant changes to be funded
through international loans by the World Bank and the Inter-American
Development Bank – none of which, however, modified significantly
the nature of the social policy regime. The first had to do with a new
preventive rather than curative healthcare model, which suited a new

epidemiological profile with an increasing presence of chronic degen-
erative diseases. This transformation helped to ease the rising costs
accompanying the much longer life expectancy. The second change
sought to improve management efficiency by replacing the historical
allocation of resources with evidence-based mechanisms suited to link-
ing needs with resources and services. Decentralization was part of the
managerial reform: hospitals and clinics were given further discretion-
ary decision-making over budgets, human resources and the purchase
of medical supplies.
Nearly two decades after implementation began both reforms in
services and management have been truncated (Martínez Franzoni and
Mesa-Lago, 2003). Services provided by the CCSS are curative, as always.
Decentralization has led to overpricing, loss of economy of scale and
an overall weakening of state capacities in the face of a growing and
barely regulated market of health services, opening the door to illegal or
unethical practices and threatening rights and increased costs (Martínez
Franzoni and Mesa-Lago, 2003). Aside from the financial costs involved,
the main outcome has been a blurring of boundaries between private
and public actors that lies at the heart of the current crisis of the system.
Framed in financial terms, such an unprecedented crisis became public
in 2011, challenging the architecture of the system and its universal
principles.
Similar to education, there has been a drop in the quality of public
health services. Waiting lists, a worrying indication of quality loss, have
grown, leading to mounting dissatisfaction with the system – although
not so much as to reduce the overall public support for collective social
insurance. Such waiting lists have taken place hand in hand with an
expansion of services and rights, which has made their reduction more
difficult. For instance, people demanding access to high cost HIV-related
medicines or patients facing fatal illness went to the Constitutional
Court, won their cases and had social insurance take care of their needs
(Vargas Cullell in Seligson and Martínez Franzoni, 2010).13
The loss of quality in public services both prompted and led to a
larger and more diversified supply of private services. Between 1991
and 2001, for example, public spending in healthcare showed a 5 per
cent annual increase, lower than the 8 per cent average increase in pri-
vate spending (Picado, Acuña and Santacruz, 2003). In only five years,
between 1993 and 1998, the share of out-of-pocket spending in health-
care in the total increased five times (Herrero and Durán 2001). In the
last decade, the share of private spending among the population has
systematically expanded, from 23.2 per cent in 2000 to 32.6 per cent
in 2009.14 The growth of private provision has mostly (although not
exclusively) been driven by middle and upper-middle income groups.
For example, almost 60 per cent of all private healthcare spending in
the early 2000s came from the wealthiest 25 per cent of the population
(Picado, Acuña and Santacruz, 2003).
The most important factor in fuelling the expansion of private services
was contracting out by the CCSS. During the 1990s the CCSS stopped
investing in new equipment and, instead, paid private providers to
cover advanced diagnosis (for example, diagnostic tests and cancer
treatment). In some cases the CCSS waited two years before purchasing
required equipment, paid fees that doubled the cost of the equipment,
and when finally obtaining the equipment, did not use it (Ombudsman
Office, 2000). Over the course of a few years, the private supply of medi-
cal services changed dramatically. Moreover, private practices rooted in
the co-optation of public services were well established: all across the
CCSS public service became difficult to disentangle from market rela-
tion. Increasingly, the same personnel simultaneously worked in the
private and public spheres.
Provided that social insurance offers every service people may need,
why rely on out-of-pocket private services? Why pay 5.5 per cent of
one’s salary in mandatory contributions and, additionally, at least
20 dollars for a private physician? Growing numbers of the population
argue that the primary cause for exiting public services are access issues
(needing to stand in line since dawn to get a doctor’s appointment or
finally receiving an appointment only to have it interfere with work
obligations); the timing of services (due to long waiting lists in the
face of life threatening illness) and decreased quality of services (due to
medical personnel being in a rush to see four to six people per hour in
addition to their co-existing and often conflicting agenda with their pri-
vate practice). Still, private services, particularly most specialized ones,
remained restricted to upper-income groups of the population (Picado,
Acuña and Santacruz, 2003). This means that the universal health sys-
tem has incrementally become a targeted system for those who cannot
afford private services.
The fact that lower-income groups cannot afford to exit social insur-
ance does not mean they are less dissatisfied than other groups, as
shown by a qualitative study among 84 people below the poverty line,
living in various urban and rural areas of the country undertaken in
the mid-2000s (Martínez Franzoni, 2006). Primary sources of dissatis-
faction were shared with other groups. They boiled down to poor and
discretionary treatment (by staff, social workers and medical personnel),

access barriers and lack of human interest in people’s problems. People
under non-contributory insurance were most affected: one person was
protected one day but not the following; people were denied access in
one medical facility but not in another; two people with similar circum-
stances were treated differently. The insurance card had to be renewed
several times a year, each time involving the same costly paperwork,
and still, card in hand, people felt treated as “second class” citizens.
People interviewed mostly wanted personnel at the social insurance
agency to care more (Martínez Franzoni, 2006).
Still, nationwide, everyday millions of people in Costa Rica go to
public healthcare facilities and receive a broad array of services, from
primary care to very sophisticated diagnostic and treatment proce-
dures. Accessing these services is not just an abstract notion but a very
concrete matter that is still highly valued: a public opinion survey in
2001 showed that more than 80 per cent of the population supported
the maintenance of healthcare insurance contributions (Oviedo,
2011).
3.5.3 Pensions
In the 1980s there were enormous international pressures in Latin America
to increase private participation in pensions following the Chilean model
and most countries introduced pro-market changes. Although Costa Rica
was not an exception, it was part of a cluster of countries together with
Uruguay and Brazil that did so in a heterodox fashion. Among these coun-
tries, Costa Rica’s pension system shows the greatest resilience, in part
because its regime did not undergo a financial crisis and transformations
reflected private pressures rather than an ineffective public performance.
Complementary individual accounts, at first voluntary and later
compulsory for salaried workers, were established in the 1990s and
early 2000s, respectively. The Workers’ Protection law made the general
pension regime (RIVM) and the remaining regimes for specific occupa-
tions, part of a multilayer system (see Figure 3.10). The first layer was
already mandatory for salaried workers and later became mandatory
for non-salaried workers as well. The second layer was complementary,
mandatory and for salaried workers alone.15 Unlike the rest of the
region, individual accounts were funded with a reallocation of payroll
taxes already in place rather than by establishing new fees. The third
layer was also complementary, voluntary and available to everyone
who contributed. The social assistance pension established during the
1970s continues to target the elderly (65 years of age or older) under
Social protection Social assistance

(contributory) (non-contributory)
Salaried Non-salaried Poor
Optional Optional
individual individual
accounts accounts
Mandatory
individual
accounts
Mandatory Mandatory Minimum

collective account collective account pension
Figure 3.10 Multilayer pension regime for old age, mortality and disability
Source: Own elaboration.
the poverty line and non-eligible for contributory pensions.16 However,

the Workers’ Protection law introduced non-discretionary criteria to set
levels of non-contributory pensions as no less than half the minimum
contributory pension.
Until the 1990s, healthcare and pensions were both mandatory
(for salaried workers), yet involved two separate individual decisions.
As expected, insurance coverage was higher for medical services than
for old age (Figure 3.11). Current coverage among salaried workers is
approximately 10 per cent lower than before the economic crisis of
the early 1980s (under 60 per cent now and approximately 70 per cent
then). Among non-salaried workers, however, current coverage is the
highest it has ever been at 30 per cent of coverage. This explains why
total coverage is more or less the same as it was in 1979 per cent despite
lowered coverage among salaried workers. Considering the increasing
importance of the self-employed, this is a positive trend reflecting a
negotiated reform between business, labour and government.
It is noteworthy that despite shrinking resources, the percentage of
the elderly under the RNC did not decline during the economic crisis of
the 1980s. Coverage of non-contributory pensions dropped during the
early 1990s and has been unstable since that time, reaching nearly 40
per cent of the elderly in the mid-1990s and early 2000.
In summary, pensions in Costa Rica continued expanding exception-
ally fast with increased opportunities to access the system. Rather than
retrenching, the system has either remained as generous as before or
even expanded.
Total EAP Salaried EAP

Non-salaried EAP
Social assistance (over pop. 65 yrs and more)
80
70
60
Percentage
50
40
30
20
10
0
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Figure 3.11 Pensions coverage: insurance and social assistance, percentages,
1969–2006
Source: CCSS.; INEC (various years).
3.5.4 Other basic services: water and nutrition

The evolution of water services and nutrition programmes in the last
three decades has been uneven. Successive administrations have com-
mitted to maintaining these services, but have faced financial problems
and thus failed to guarantee the quality and universality of the serv-
ices. This has been clearly the problem in water provision and school
lunches and less so in other nutrition programmes.
In the case of water delivery and sewage, the lack of progress since
the 1980s is partially due to the impact of the economic crisis, which,
among other things, reduced external credit for investment projects
significantly. However, the situation also reflects a tariff system that,
although improved, is still insufficient to provide the institution with
additional resources for investment. Belatedly the rates have been
adjusted to recover losses associated with inflation and the amount cor-
responding to depreciation is used for operating costs. This process has
eliminated the difference in rates between regions and between levels
of consumption, both with regressive effects.
The process of centralization has in effect failed. ICAA has been
unable to effectively lead, administrate, or supervise the water service.
Results are poorer still in terms of adequate sewage treatment. The
protection of water resources, also under its legal mandate, is a pending
task despite recent new efforts like the Ecological Blue Flag Program and
Seal of Sanitary Quality. The result is a system for providing this basic
service with a variety of suppliers, quality and costs to the public.
Some statistics are useful to illustrate this diversity. In 2006 there
were 2,235 aqueducts, of which 81 per cent were small rural aqueducts
that supplied 27 per cent of the served population. The municipalities
managed 11 per cent of aqueducts servicing 19 per cent of the popula-
tion, while larger and higher-quality aqueducts were the responsibility
of ICAA and a local public enterprise based in Heredia. The two were
responsible for 8 per cent of aqueducts, covering almost half the coun-
try’s population, and less than 1 per cent of aqueducts serving 5 per
cent of the population. The local public enterprise offers the highest
percentage of potable water service.17
Although access to piped water is fairly widespread, there are signifi-
cant socioeconomic gaps (Figure 3.12): of the poorest 20 per cent, 79
per cent of the households receive piped water. Only 60 per cent of
those households receive potable water. On the other hand, 96 per cent
of the richest 20 per cent of households receive piped water and 86
per cent of them receive potable water. The gap is still higher between
regions.
In terms of nutrition, the CEN-CINAI of the Ministry of Health
(MOH) continues to provide day care and food in preschool to poor
children 7 of age or less, thus making it easier for poor mothers to enter
Potable Non potable
100
90
80
70
60
50
40
30
20
10
0
Q1 Q2 Q3 Q4 Q5 Total Urban Rural
Figure 3.12 Population served with piped water ranked by potability for income
and region, 2004
Source: Trejos (2008) based on INEC and Mora and Feoli (2007).
the labour market. CEN-CINAI also provides supplementary feeding

to mothers who are breastfeeding or pregnant, along with a control of
their physical and nutritional state. The programme also includes food
aid (milk and food parcels) to families with malnourished children who
are referred by primary healthcare.
The School Lunchroom Program of the Ministry of Public Education
(MEP) provides supplementary feeding and nutrition education for chil-
dren living in poverty who attend public schools, and also to a small
percentage of college students. The food service may include breakfast,
lunch, or a snack, depending on the time and priority assigned to each
school, although the quota allocated by the central government is for
lunch.
To compensate for the negative effects of the economic crisis, in 1983
the Stamp Act for Education and Culture established a 1 per cent tax
on the custom value of imported goods to fund the expansion of the
CEN-CINAI.18 The programme was extended through CEN-Rural Health
Posts for the distribution of whole milk in areas without lunchroom
programmes, leading to the creation of the Education and Nutrition
and Lunchroom School Centre (Rivas, 1999).
During the 1990s, the CEN-CINAI remained within the Ministry of
Health with no major progress in coverage. In 2006 the programme
had 617 centres and 23 Rural Health Posts supporting the distribu-
tion of milk. In two out of every three centres comprehensive care was
offered. In the remaining third only the supplementary feeding pro-
grammes took place, inside and outside of the centre (MS, 2007). That
year, 22,000 children received comprehensive attention and almost
125,000 children, students, and mothers were enrolled in extramural
programmes (food and milk) and meals programmes.
The economic crisis at the beginning of the 1980s led to school clo-
sures and fewer children being served school lunches. The crisis also
decreased real resources, especially those intended for the purchase of
food. The remainder of the 1980s showed a recovery of coverage in a
context of declining resources and services, moving from a breakfast
and lunch programme to providing only a snack.19 During the 1990s
there was a real increase in resources, particularly those aimed at pur-
chasing food, in a context of increased but limited coverage. Since 2000,
the coverage continues to rise slightly despite a reduction in funding.
The increased coverage, along with decreased resources, has contributed
to a reduction in staff costs in favour of purchasing food.
Drawing on resources from FODESAF, the school lunchroom pro-
gramme was redefined as a universal programme. The programme
sought to avoid the stigmatization of students in need by reaching all

students enrolled in any given school. Given the limited resources avail-
able, in the second half of the 1980s the programme introduced geo-
graphic targeting. Schools were ranked according to the socioeconomic
background of students and grants per student were allocated accord-
ingly. The higher the priority, the larger the grant per capita allocated.
Between 2000 and 2003, there were four priority levels and in 2006,
only two. In 2007, the programme operated in 4,109 primary schools
(98 per cent of public schools) across the country, spending 83 per cent
of the budget on primary schools.
3.6 The evolution of public funding sources
At first, the Costa Rican social policy regime was primarily funded by
the national budget. As time passed, however, the national budget lost
ground to an array of new agencies, each of them in charge of their
own funding sources, largely based on payroll taxes. In 1950 the cen-
tral government accounted for 69 per cent of all social public spending
(IICE, 1962) while during the 2000s it accounted for just a third (Trejos,
2007b). Consistently, local governments played a minor role, allocat-
ing 4 per cent of public expenditure in 1950 and less than 5 per cent
today.
The expansion of formal employment during the period of expanding
incorporation (discussed in Chapter 2) was important because of the
social policy regime’s reliance on payroll taxes paid by salaried work-
ers. Since almost all Latin American countries followed the continental
model of social insurance, Costa Rica was not alone in the dependence
on workers’ contributions. Where Costa Rica departed from other coun-
tries was in making payroll taxes a funding source for non-insurance,
social assistance programmes. This dependence on salaried workers
and payroll taxes became a relatively effective mechanism to solve the
political constraints inherent to taxation expansion faced by all Latin
American countries during this period.
Payroll taxes were increasingly important in healthcare and other
basic social services. During the period of expanding incorporation,
the Ministry lost its prominence in healthcare to CCSS. In 1950 the
CCSS contributed 12 per cent of all health spending. By 1980 the CCSS
was contributing to more than half of the spending and it currently
accounts for about 90 per cent. In terms of water supply, the burden of
funding relies largely on the central and local governments in charge of
tariffs based on consumption. With the creation of FODESAF, nutrition
programmes were funded mainly through payroll taxes. Education

is the exception. It continues under the umbrella of the Ministry of
Education for the last six decades and nearly all of its funding is still
provided by the central government.
Expanding payroll taxes, which were relatively easy to collect, was a
more convenient strategy for politicians than creating a truly progres-
sive and effective income tax or new, indirect taxes from scratch.20 In
fact, Costa Rica was not particularly successful at raising non-payroll
taxes: in 1970, for example, its tax burden was just 12 per cent of GDP
compared to almost 15 per cent in the Dominican Republic a country
with lower public spending, particularly in social affairs (Sánchez-
Ancochea, 2004). Some segments of the business elite – especially those
who were competing in regional markets – did complain about the
payroll tax hikes of the early 1970s, but most were benefiting from high
levels of state protection and were not particularly concerned about
raising payroll taxes. In the meantime, formal workers suffered from
the tax burden but simultaneously receiving growing real wages and
relatively good social services.
Figure 3.13 shows the evolution of payroll tax rates between 1941 and
the present day. After almost two decades of stability, payrolls tax rates
increased rapidly since 1965 to fund new social programmes, including
the National Institute of Learning, the IMAS and FODESAF. By the end
of the 1980s, payroll taxes were higher than before the economic crisis
and have been fairly stable since then.
From 1971 to 1978, business’ financial contributions to social policy
increased by 7.25 per cent: 0.5 per cent for poverty alleviation, 5 per cent
for family allowances, and 1.75 per cent and 2.25 per cent for transfer-
ring social security contributions from the state to employers in health-
care and pensions, respectively. In addition, for healthcare alone, between
1975 and 1982, employers’ contributions increased from 5 per cent to
9.25 per cent, where they have remained since then. Since Costa Rica
has one of the most open economies of Latin America, such a central
role of payroll taxes runs against expectations.
Table 3.3 explores the funding sources for basic social services, demon-
strating the importance of payroll taxes but also the role of other taxes.
It concentrates on two years for which particularly detailed household
surveys were conducted: 1988, a year close to the beginning of economic
reforms, and 2004, when business taxes were markedly reduced.
Direct taxes and specifically payroll contributions prevail. Between
1988 and 2004 the contribution of direct taxes rose driven by the
income tax. Indirect taxes remained at approximately 30 per cent of
Health insurance Pension insurance Training (INA)

Social assistance (IMAS) Social assistance (FODESAF)
Total
30
25
20
15
10
0
42
50
55
60
65
70
75
80
85
90
95
00
05
10
19
19
19
19
19
19
19
19
19
19
19
20
20
20
Figure 3.13 Evolution of payroll tax rates for social policy, percentages, total and
by sectors, 1942–2010
Source: Own elaboration.
total revenue, but with a rearrangement of the taxes on international

trade to taxes on domestic sales. The other non-tax revenue flows
become insignificant, while income from capital (sale or transfer of
assets) is almost non-existent.
Table 3.4 presents the changes in this structure for specific basic social
services. In education, funding reflects changes in the structure of the
central government. It focuses increasingly on indirect taxes over domes-
tic sales taxes, with some revenue from direct taxes, in particular from
income taxes, and a small amount of revenue from other sources. The
vulnerability in the funding of these services will depend on the fiscal
constraints facing the central government and the internal power play.
In the 1980s, these services were badly affected both by fiscal constraints
and the greater bargaining power displayed by public universities (Ulate,
et al., 2004). Despite fiscal constraints, in last decade, however, basic
social services have become less vulnerable (Trejos, 2007).
In health services, the weight of social security contributions has
increased even more: from 69 per cent in 1988 to 86 per cent of total
revenues in 2004. This source could reduce the fiscal vulnerability of
Table 3.3 Structure of funding for social policy and basic social services,
1988–2004
(% of the total)
Funding source Overall social Basic social services

policy
Composition Composition Weight of

each source
1988 2004 1988 2004 1988 2004
Total revenue 100.0 100.0 100.0 100.0 48.8 50.1

Direct taxation 50.0 54.4 55.0 60.5 53.7 55.7
Payroll taxes 42.5 41.8 49.4 48.2 56.7 57.8
Income tax 5.7 10.2 5.3 10.6 45.3 52.2
Property tax 1.8 2.4 0.3 1.6 8.5 34.0
Indirect taxes 30.3 30.7 29.7 30.0 47.8 49.0
Goods and services 20.4 27.3 20.2 26.4 48.5 48.6
Foreign trade 10.0 3.4 9.5 3.5 46.3 52.3
Current non-tax income 19.1 14.2 15.2 9.4 38.7 33.1
Sell of goods and services 6.5 6.0 7.9 6.8 59.4 56.5
Interests and other income 10.8 7.1 5.8 1.5 26.4 10.7
Current tranfers 1.9 1.0 1.4 1.1 37.2 52.1
Capital income 0.5 0.7 0.1 0.2 8.9 12.6
Source: Trejos (2008) based on STAP.
these services, as occurred in the 1980s, when the rates were increased.
However, in the last decade this has not occurred and the decrease in
central government participation has led to a reduced income. The con-
tributions are also limited in that they are pro-cyclical and depend on
the performance of the formal labour market, which has been declining
(see Chapter 2 and discussion below).
In terms of water supply, in 1988 the central government maintained
a significant transfer of funds to the ICAA, the only institution that
supplemented the tariffs. In 2004, tariffs accounted for 96 per cent of
total revenues, reducing the vulnerability of service in the face of fiscal
restraint, although adding problems associated with collections (delin-
quencies), or the disparity in rates.
Finally, nutrition programmes funded by FODESAF still depend on
social security contributions and the sales tax. It was initially believed
that this funding source, based on specific taxes, reduced programme vul-
nerability. However, in reality they have been the most affected because
98
Table 3.4 Structure of funding for basic social services, 1988 and 2004
(% of the total)
Funding source Total social Education Healthcare Water Nutirition

basic services
1988 2004 1988 2004 1988 2004 1988 2004 1988
Total revenue 100.0 100.0 22.7 37.3 64.9 54.1 7.0 5.7 5.4
Composition of total income 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Direct taxation 55.0 60.5 17.7 28.6 71.6 88.3 6.5 0.3 75.8
Payroll taxes 49.4 48.2 2.6 0.0 69.2 85.9 2.6 0.0 69.6
Income tax 5.3 10.6 14.4 24.8 2.3 2.1 3.7 0.3 5.4
Property tax 0.3 1.6 0.8 3.8 0.1 0.3 0.2 0.0 0.8
Indirect taxes 29.7 30.0 75.5 69.3 15.1 5.9 20.9 0.8 23.6
Goods and services 20.2 26.4 48.8 61.1 10.8 5.2 14.1 0.7 21.8
Foreign trade 9.5 3.5 26.7 8.3 4.4 0.7 6.8 0.1 1.8
Current non-tax income 15.2 9.4 6.8 2.1 13.2 5.5 71.8 98.9 0.6
Sell of goods and services 7.9 6.8 0.6 0.3 4.8 2.2 66.9 96.0 0.1
Interests and other income 5.8 1.5 2.6 0.4 7.6 2.2 4.0 2.8 0.3
Current tranfers 1.4 1.1 3.6 1.3 0.8 1.0 0.9 0.0 0.3
Capital income 0.1 0.2 0.0 0.0 0.0 0.3 0.9 0.0 0.0
Source: Trejos (1998) based on STAP.

the fiscal constraints of the central government have led to a systematic

failure of the sales tax transfer. As a result, between 2000 and 2005,
FODESAF lost a quarter of its resources in real terms (Trejos, 2006b).
At first sight, the resilience of a universal social policy regime seems
to be – and is indeed – good news. However, in recent years the high
dependence on payroll taxes in the context of a growing segmenta-
tion of the labour market has created significant funding shortfalls.
Over the long run, unemployment has not increased but informal
work has expanded to become the primary source of new jobs and the
labour market is more segmented than ever. This is due to fundamental
changes in the economic policy regime discussed in Chapter 2: peasants
were displaced from traditional agriculture while well paid professional
and managerial jobs were created. In 1994 the wealthiest 10 per cent
earned about 25 per cent more than the poorest 10 per cent. However,
by 2004 the gap had increased up to 35 times (Villasuso, 2008).
Figure 3.14 presents the evolution of average wages and average con-
tributions.21 By 2008, contributions had just regained their 1985 value
(10.85 per cent and 10.07 per cent, respectively) despite the increase in
payroll tax rates. The downside is that, simultaneously, social benefits
have expanded, and the percentage of informal workers who do not
contribute to social policy but receive social assistance has increased
considerably.
300,000.0 30,000.0
Wages
250,000.0 25,000.0
Average contribution
Contributions
200,000.0 20,000.0
Average wages
150,000.0 15,000.0
100,000.0 10,000.0
50,000.0 5,000.0
0.0 0.0
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Figure 3.14 Average wages and contributions among the occupied labour force,
colones of 2006, 1985–2008
Source: Own elaboración based on INEC and BCCR (various years).
3.7 Conclusion
Costa Rica’s social policy regime has been geared towards social incor-
poration rather than towards fighting poverty alone. This successful
social incorporation has been accomplished by a social policy regime
remarkable in at least three ways: endurance, comprehensiveness of
programmes and broad scope of benefits. Together these features turned
an average country into one with lower infant mortality rates and
higher life expectancy than any other country in Latin America during
the second half of the twentieth century. Income poverty has remained
stubbornly stable over several decades; approximately a quarter of the
population reflects the central role played by social services rather than
by targeted cash transfers. Likewise, services rather than transfers have
brought people with different socioeconomic backgrounds on board for
state provisions.
The comparative literature on social policy tells us that social insur-
ance cannot lead to a universal social policy regime. It also tells us that
in open economies, general revenues, rather than payroll taxes, are
more efficient income sources because they do not threaten competi-
tion in the global market. The accomplishments of the Costa Rica social
policy regime challenge both expectations. The building of universalism
around social insurance during the period of expanding incorporation
tells us that under certain circumstances, contributory arrangements
can reach a majority of the population (Martínez Franzoni and Sánchez-
Ancochea, 2012). In the case of Costa Rica, this was done by intertwin-
ing social insurance and social assistance, both in terms of funding
through payroll taxes and in terms of entitlements. More specifically,
most financial resources entering the social policy regime benefited the
poor as much as the non-poor. This was particularly the case in health
services. The resilience experienced by the social policy regime during
the period of stagnant incorporation also tells us that the interaction
between the economic and social policy regimes may be more complex
and more strongly mediated by institutional and political factors than
expected.
What lessons does Costa Rica provide for countries trying to establish
an effective social policy regime? A key lesson is that it can be done
incrementally and over the long term. A second lesson is that the loss or
weakening of synergies between the economic and social policy regimes
will eventually translate into insufficient resources and therefore vari-
ations in coverage and quality. This is particularly problematic in the
context of an aggressive expansion of market services that commodify,
and therefore stratify, social incorporation. A lingering question is

whether the boundaries between public and private provision can be
redrawn and their interactions regain transparency and strengthen
social rights. This may require changes in the tax system away from
payroll taxes and towards higher income taxes, better management of
public programmes and a tougher regulation of the private sector in
health, pensions and education. If this does not happen, incremental
change could end up undoing universalism, this time through the ero-
sion of quality and cross-class coalitions. Such an incremental under-
mining of universalism would in turn create conditions to differentiate
basic services for all from more comprehensive services for some, thus
redefining the architecture of the social policy regime yet further away
from universalism.
4
The State as the Central Actor:
Elites, Ideas and Legacies
4.1 Introduction
What explains Costa Rica’s overall success and increasing tensions?

Why did Costa Rica create a state-centred economic policy regime along
with a universal social policy regime between 1950 and 1980? Why did
the economic policy regime change significantly since the 1980s, pay-
ing increasingly less attention to market incorporation, while the social
policy regime remained basically unchanged?
Perhaps the most widespread explanation for Costa Rica’s success dur-
ing the period centres on the role of democracy, which is linked in turn
to historically equitable social relations. According to this view, con-
tinuous electoral competition between right and left forced the elite to
accept higher social spending and the type of redistribution demanded
by the median voter (Gutiérrez Saxe and Straface, 2008). There is little
doubt that Costa Rica’s democracy opened spaces for public debate and
forced the political elite to respond, at least partially, to social demands.
Sharp reversals in areas like social policy may have also been difficult
under periodic elections. Yet the direct role of formal democracy may
have been less significant than commonly believed. In fact, many of the
most radical changes in the economic policy regime were undertaken
by the winners of a war (the 1948 Civil War), which at that moment had
little democratic legitimacy per se.1
The transformation of the social-democrats from an irrelevant group
to Costa Rica’s dominant political force was partly the result of processes
that had little to do with democracy. The PLN was a tiny electoral force
in 1951, coming from two consecutive defeats in elections for legisla-
tors and member of the Constitutional Assembly, respectively.2 It was
also surrounded by a broad array of oppositional forces, from the coffee
102
The State as the Central Actor 103
oligarchy to the communists. However, within a short period of time,

due to a combination of factors including the repression of opposi-
tion leaders, the banning of the army, the policy promises in the 1953
electoral campaign and important mistakes made by the political oppo-
sition, the PLN became the prevailing political force. In the 1953 elec-
tions, electoral defeat was put behind the party when Figueres obtained
65 per cent of the electoral turnover (Hernández, 2009). Between 1950
and 1978, the PLN controlled the presidency in four o the seven periods
and was always the largest force in the National Assembly – thus reduc-
ing the opposition’s opportunities for policy reversals.
In explaining policies leading to the double incorporation, we go
beyond the role of democracy and instead concentrate on key actors
determining the direction of the state, their interests, and the inter-
national policy menus that influenced their ideas. We argue that the
economic and social policy regimes created during the period 1950–80
responded to the interests of the emerging elite of small and medium-
sized producers and urban professionals who depended upon the state to
secure their own productive growth and economic influence. Clustered
around the newly created PLN, these emerging elites relied on policies
aimed at simultaneously promoting market and social incorporation
with three objectives: (1) advancing their own strategy of accumula-
tion; (2) gaining support from different groups; and (3) managing and
suppressing conflict.3 In that process, they created a public bureaucracy
sympathetic to many of the PLN objectives, which, over time, became
a powerful actor in its own right.
Many of the policies implemented by the PLN can only be understood
in the context of ideas that were internationally available. Policy forma-
tion hardly went against prevailing views, especially those endorsed by
the United States, but drew on different international policy menus.
The PLN took different ideas selectively and adapted them to domestic
conditions and to its own political objectives. Before the 1980s, these
policies centred on the importance of import substitution and (univer-
sal) social security, the latter involving both social insurance and social
assistance.
All of these policy drivers underwent significant change during the
1980s. At the international level, new ideas of liberalization and deregu-
lation emerged in the economic and social realm. As centre stage of the
Cold War in the context of the Central American conflicts, the United
States played a key role in promoting these ideas and supporting them
with resources from USAID. During the 1990s, when the economic crisis
had been overcome and Central America was undergoing widespread
democratization, international financial institutions were heavily

involved in “second generation” reforms.4 These reforms involved sig-
nificantly more technical expertise than the first generation and were
influenced ideologically by the World Bank and the Inter-American
Development Bank, as argued by Madrid (2003) in the case of pen-
sions. “Through publications, workshops, conferences, technical assist-
ance, and formal and informal contacts with policymakers” the Work
Bank persuaded policymakers of the benefits of privatization (Madrid,
2003: 234). Similar to domestic actors, international organizations were
involved in powering (that is, having the policy process go their own
way) and puzzling (that is, in raising questions and providing answers
to policy problems). As the literature on reforms during the period of
stagnant incorporation has shown, policy prescriptions promoted by
international institutions constrained but did not determine the type
of policies available to domestic actors. Financial institutions frequently
had less influence than expected and domestic actors (for example,
policy specialists inside the public bureaucracy) had ample room
to manoeuvre (Weyland, 2004) so that models were far from being
homogeneously implemented. In the case of Costa Rica this interplay
between international financial institutions and domestic actors led to
a more tempered type of Neoliberalism than the one prescribed under
the so-called Washington Consensus (Williamson, 1990).
At the national level, during this period, the political elite became
more diversified in their interests, with some groups supporting state-
centred incorporation and others, pushing for economic liberalization
and deregulation. The crisis of the 1980s and the parallel changes in the
international environment gave the latter the opportunity to become
increasingly powerful and influential in policy design. As the elite split
up around different takes on the state role, the three primary objectives
they had previously pursued (supporting a strategy of accumulation,
gaining support and managing and suppressing conflict) also split up
with the economic policy regime, primarily helping to create economic
opportunities for some. The social policy regime focused on building
social support and managing conflicts.
As a result of these changes, the economic policy regime became more
liberal while the social policy regime displayed resilience, leading to a
state reform that by no means was unidirectional towards liberalization.
We highlight the role of political legacies (including the bureaucracy’s
veto power) in slowing down change and giving shape to a specific type
of policy reform, one focused much more on layering than on retrench-
ment. The vast and robust network of decentralized institutions and
public utilities, relatively insulated from partisan meddling by consti-

tutional and/or legal norms, succeeded in opposing radical reforms.
Meanwhile, the newly created Constitutional Court guaranteed the
enforcement of a range of rights, both old and new. The result is an
increasingly incoherent state with weak financial capacity. It is also
one in which new, well-funded institutions in areas like foreign invest-
ment and exports promotion coexist with old, weakened ones in areas
like agriculture, support to small and medium-sized firms, and labour
relations.
In focusing on the interests of powerful state actors, we follow but
also modify prevailing explanations in the political economy of devel-
opment. Many recent studies from different traditions, from Marxism
(for example, Chibber, 2003) to historical institutionalism (for example,
Mahoney, 2002) and neoclassical economics (for example, Acemoglu
and Robinson, 2012), focus on the preferences of the political elite
and how they evolve over time. Influential recent work by Acemoglu,
Robinson and collaborators emphasize the role of economic and
political power in shaping institutions and thus opportunities for eco-
nomic development. In a 2005 review of their own work, they argue
that economic institutions – which determine the long trajectory of
economies and the opportunities for redistribution – are shaped by
actors with political power de facto (due to control of resources) or de
jure (due to their control of political institutions) (Acemoglu, Johnson
and Robinson, 2005). Powerful actors will not only define the specific
character of the policy regime for their own interests, but will also limit
the possibilities of change. This may all be true, but the characteristics
of those actors in power matter (the traditional oligarchy will behave
differently than an elite based on small and medium-sized producers)
and the changing character of policy ideas also matter (the same elite
will act differently when confronted with different international policy
menus). The Costa Rican case also shows the importance of institu-
tional legacies and how incremental change can, over time, erode yet
hardly remove these legacies.
Below we demonstrate the importance of our two key variables
(emerging elites and internationally available ideas) in explaining Costa
Rica’s policy regimes. We also show the importance of legacies and insti-
tutional inertia in confronting the liberal agenda in recent times. We
focus first on the period of expanding incorporation to then explain the
changes that followed. Before, however, we critically explore dominant
explanations of Costa Rica’s policy approach which concentrates on
long-term, historical preconditions.
4.2 The literature’s accent on the path-dependent

building of democracy
Dominant explanations of Costa Rica’s success focus on relatively

equal patterns of land and income distribution leading towards the
consolidation of democracy and an effective state. Despite its name
(“rich coast”) Costa Rica was poor in natural resources, lacked a large
indigenous population to exploit and was far from the Spanish political
centre in Guatemala. As a result, land distribution was less unequal and
social distance between classes smaller than in other Central American
countries (Hall, 1982; Torres Rivas, 1975). In a mirror image of Latin
America’s typical trajectory, low levels of inequality helped to consoli-
date democracy, promote human development, and expand education
from early on.5 For Rueschemeyer, Huber and Stephens (1992: 234),
what distinguished Costa Rica was “the relative weakness of the oli-
garchy and relative strength of the rural middle class which had their
roots in colonial times” and gradually institutionalized “responsible
government and contestation” and a more active state. According to
this view, alleged consolidation of democratic institutions after the
1948 Civil War allowed for the emergence of a social democratic party
that in turn expanded social policy and built a stronger bureaucracy
(Itzigsohn, 2000).
A relatively equal pattern of land distribution, divisions within the
traditional elite and, later, the creation of democratic institutions were
indeed preconditions for the process of state-building that we discuss in
the following section. History matters and countries with worse initial
conditions surely face more obstacles in building a more responsive
state and modifying their economic and social policy regimes.
Costa Rica may have done better than neighbouring countries dur-
ing the late nineteenth and early twentieth centuries (Bulmer-Thomas,
1987; Schneider, 2012), but by the early 1940s it was still a rural and
underdeveloped society. Biesanz and Biesanz (1944: 44) describes the
majority of its population as “barefoot farmhands that work in the cof-
fee plantations and sugar cane fields, some without land of their own,
others with a couple of acres, a modest house and a team of oxen” and
relatively high levels of education did not promote structural change.
Biesanz and Biesanz also show how salaries and inadequate diet led to
high mortality rates (Biesanz and Biesanz, 1944: 4). Similarly, Hytrek
(1999) argues that in 1940, infant mortality, at 159 per 1,000 chil-
dren born alive, was higher than in Ecuador, El Salvador, or Mexico.
Land may have been more equally distributed than in the rest of
Latin America, but land concentration was still high in absolute terms
(Bowman and Baker, 2007).6 Thus, long historical trends cannot be con-
sidered a driver of the economic and social policy regimes that followed
the Second World War.
The extent to which Costa Rica was a fully functioning democracy
during most of this period is also questionable. For example, when
social insurance was established in the early 1940s, elections were not
free and a single, elite-driven party dominated the system. Other build-
ing blocks of modern Costa Rica were created by a de facto, non-elected
transitional government that ruled for 18 months after the 1948 civil
war. During the 1950s, partisan opponents and union activists were
exiled or jailed. Additionally, other long-standing democratic countries
in Latin America (for example, Chile and Uruguay before the 1970s) and
elsewhere failed to secure dual incorporation.
Between 1949 and 1975 the Costa Rican political system excluded sig-
nificant groups. The second paragraph of article 98 of the Constitution
allowed the Legislative Assembly to ban political parties deemed “anti-
democratic”. Although the extent and intensity of the exclusion dimin-
ished towards the end of the period, it did mean that a group of citizens
lacked the same freedom of thought, organization, or voting options
that the rest of the population enjoyed. When this prohibition was
repealed in 1975, it put an end to the long process of creating a demo-
cratic political system that met all the requisites of a polyarchy.7 Thus,
the democratic consolidation that occurred between 1950 and 1980,
neither preceded nor caused social and economic transformations but
took place simultaneously (Programa Estado de la Nación, 2001; Vargas
Cullell and Rosero Bixby, 2005). Overall, electoral competition has at
times promoted and at times impeded social policy, hand in hand with
other factors such as bureaucratic initiative and the role of international
organizations (McGuire, 2010).
A more sophisticated version of the democratic argument relies on the
nature of Costa Rica’s political institutions (Gutierrez-Saxe and Straface,
2008; Lehoucq, 2010; Wilson, 1998). According to these authors, after
proper electoral rules were enacted (in 1946 for Lehoucq or in 1948 for
Wilson) political actors had confidence in elections and viewed the only
“game in town” (Lehoucq, 1998; Wilson, 1998). Following this line of
argument, Straface (2008: 18) summarizes the consequences of this
democratic regime “this two-party system with social links, together
with the expectations of political alternation, led political parties to
develop programmes for the “median voter”, that is, they focused on
the centre of the political spectrum. At the same time, the delegation of
a significant part of the policymaking process in autonomous institu-

tions reduced the space for competition in essential areas of the political
and economic model.” The expansion of autonomous institutions was
primarily the result of the stalemate between the main political par-
ties, none of which had decisive control over the political system, and
resulted in good policies (Lehoucq, 2010).
Institutional dynamics are clearly important and we consider them
particularly when exploring legacies in the recent period of stagnant
incorporation. Yet the institutional/democratic explanation is not
totally convincing and somewhat incomplete to account for the nature
of the economic and social policy regimes. First, autonomous institu-
tions were never totally autonomous; the PLN, in particular, made an
effort to influence them directly and indirectly. In the early 1950s, for
example, social actors with close ties to the PLN (such as the trade union
Rerum Novarum, business and other civil society organizations) had an
active participation in the appointment of the Management Board of
several autonomous institutions, like banks and the agency in charge of
electricity and telecommunications (Brenes, 1990). Second, as Lehoucq
shows, the PLN has created the majority of all Costa Rican autonomous
institutions in the last six decades, thus becoming the real driver of
state-building in the country. The PLN has also been the only party that
has run in all presidential elections and the one with a majority in the
Legislative Assembly in most periods (Hernández, 2005; Rovira, 1987).
Third, the separation between political parties and the state bureauc-
racy was not at all clear-cut, particularly for the period 1950–79. Many
of those appointed in top positions of autonomous institutions were
PLN sympathizers and supported PLN’s policies and political project
(Denton, 1969).8
Alternative explanations of Costa Rica’s success stress the quality of
state institutions: Costa Rica’s success reflects Weberian bureaucratic
capacities. Again, this is an important explanatory factor to take into
consideration. Costa Rican civil servants were indeed more effective
than their peers in neighbouring countries and certainly benefited
from the Constitutional reforms introducing the Civil Service in 1946
and 1949 and the Civil Service Law, enacted in 1953. In fact, in Evans
and Rauch’s 1999 classification of bureaucratic quality, Costa Rica was
the highest-ranked Latin American country and the tenth among the
35 sampled countries (Evans and Rauch, 1999). However, state capac-
ity was built in parallel to the establishment of the new economic and
social policy regimes. Indeed, the first measures that prompted the new
public policy regimes were implemented when the state was still small
and highly politicized. Moreover, South Korea and Taiwan exhibited

stronger institutions but never adopted particularly generous social
policies.
Sandbrook et al.’s (2007) interpretation of Costa Rican success also
centres on the role of the state, considering it both a developmental
(à la East Asia) and a social state. Describing the Costa Rican state
as developmental is misleading. During the period 1950–80, it did
promote industrial employment and structural change. Yet, similar
to many of its Latin American neighbours, Costa Rica was unable to
impose performance standards on domestic capitalists who had few
incentives to become competitive in global markets, diversifying, and
moving away from primary products. In their book, Sandbrook et al.
discuss many of the policies we refer to in this book and correctly
depict the 1940s as a critical juncture, with the 1950s and 1960s as
decades where new institutions were established. However, they tend
to pay more attention to the preconditions for Costa Rica’s success (for
example, a dynamic class of small-holders, the nature of the state) than
to the forces that actually drove policy formation during the years of
social-democratic expansion.
4.3 The emergence of a new elite
Costa Rica’s success in market and social incorporation between 1950

and 1980 cannot be understood without considering the country’s eco-
nomic and political changes in the 1940s. During the first half of the
decade, governments led by the Social Catholic wing of the traditional
elite introduced significant social reforms. The creation of social insur-
ance (see Chapter 3) was followed by the addition of a chapter on social
guarantees in the Constitution. This chapter established workers’ rights
such as minimum wages, an eight-hour working day and the right to
strike. Social reform was further enhanced in 1943 when a new Labour
Code was approved. These labour-friendly policies, echoing Roosevelt’s
New Deal, were sponsored by the Social Catholic government and were
strongly advocated by the Communist Party. The alliance between the
two world powers, the USA and the Soviet Union against Germany
created favourable conditions for this rather awkward alliance which
followed a rather anti-Communist electoral campaign.
Despite these significant changes, Costa Rica was far from having a
modern state in a Weberian sense. Evident shortcomings were a weak
fiscal basis, poor technical capacities and insufficient institutional
development. The main source of fiscal revenues were low taxes levied
on foreign trade (Román, 1995), made even more insufficient due to

the prolonged periods of weak trade during the 1930s and part of the
1940s. Costa Rica lacked a civil service providing stability through a
cadre of well-trained professionals. Not only could the Costa Rican
president appoint and remove public servants as he pleased, but until
the Constitution of the 1949, the financing of the party in power was
defrayed by contributions of those same public servants.
The Executive branch had broad political, constitutional and legal
powers and until 1946 (when the Electoral Court was created) was in
charge of organizing the country’s electoral processes. Congress had
limited influence and there were no entities responsible for oversee-
ing the Executive Office (the Contraloría General de la República, CGR,
was not created until after the 1948 War). The constitutional, legal and
financial autonomy of the Judiciary was only accomplished between
1949 and 1952. Before then, the separation of powers was indeed
acknowledged but the lack of mechanisms to enforce it made the judici-
ary quite vulnerable (Vargas Cullell, 2009). Finally, for the most part, in
about half of the national territory that had not yet been settled or was
in the process of colonization, state institutions played a weak or non-
existent role. A case in point was banana enclaves, which were beyond
the jurisdiction of the Costa Rican legal authority.
The reforms introduced by Catholic governments during the 1940s
confronted opposition from the traditional agro-exporting and import-
ing elite struggling to maintain the status quo. They were also opposed
by an emerging, small group of middle-class urban professionals and
small rural entrepreneurs. Organized intellectually and politically
around the Centro para los Estudios Nacionales and the Social Democratic
Action Party, these people felt marginalized from public policy. Their
lack of influence contrasted with the increasing role the Communist
party had gained in public affairs. While the Calderón administration
had introduced reforms which directly tackled redistribution, intel-
lectuals and politicians opposing the government were driven by mod-
ernization rather (or at least much more) than redistribution (Winson,
1989). In fact, some of the most vocal people involved, like their soon
to become leader José Figueres, were entrepreneurs dissatisfied with
their lack of opportunities for more rapid accumulation. Unlike the oli-
garchy, which had been electorally successful throughout the twentieth
century, this sector of the opposition had hardly any chance of shaping
public policy through electoral means.
A conflict around who had won the 1948 Presidential elections and
the burning of electoral ballots that could help clarify the matter in the
context of a highly polarized society, created conditions for an anti-

government alliance and an armed insurrection. Simply put, Figueres
and his group had the arms; the oligarchy had the economic resources
and claims of having won the election. Through a military interven-
tion, the latter aimed at re-establishing the status quo while the former
sought to broaden the political space for the middle-classes – space that
at the time they could not secure by electoral means (Schifter, 1986).
The Civil War ended with the agro-exporter, importer elites and, espe-
cially, Figueres and his group, as winners of the armed confrontation.
The Communist Party was banned, former President Calderón forced
to leave the country and Figueres, until then a little-known political
figure, was appointed president of a de facto provisional government.
As part of negotiations leading to the end of the Civil War, the win-
ning side committed to keep all social reforms set in place during the
1940s: the creation of social insurance, adoption of a Labour Code, and
a Constitutional amendment guaranteeing social rights. In the so-called
“Pacto de Ochomogo”, the victors also committed not to take meas-
ures against the political opposition. Figueres ended up respecting the
first commitment but sending the primary Social Catholic leaders and
Communist cadres to jail or into exile. We can therefore assume that
he had reasons other than his word to follow through with social and
labour reforms.
The de facto government (the Junta Fundadora de la Segunda República)
was expected to turn the government over to the president-elect in the
1948 elections. Instead, and despite lacking an electoral mandate, this
government held power between May 1948 and November 1949, and
adopting significant reforms that included the nationalization of the
banking system, the elimination of the army, a 15 per cent tax on the
United Fruit Company and, months later, a Civil Service Law (see also
Chapter 2).9 These initial measures represented a direct attack on the
traditional elite (even though many of their members had supported
Figueres during the Civil War) and an attempt to open new opportuni-
ties for capital accumulation for emerging groups.
This is particularly clear in the case of the bank nationalization, a
decision that did not respond to ideological principles but to political
and economic calculations. The measure had not been previously pro-
posed by the Centro para los Estudios Nacionales or the Social Democratic
Action party; largely lacked international resonance; was clearly not
endorsed by some of the intellectual social-democratic leaders; and
did not become part of PLN political manifestos until the late 1960s
(Brenes, 1990). Instead, the nationalization had only political aims: to
expand resources for the public sector, help new groups access credit
and weaken the opposition. According to Alberto Martén – Economic
Minister of the Junta – “a reason that led me to promote the measure
was to take resources that could fund a counter-revolution from dissatis-
fied groups” (cited in Brenes, 1990: 32) and it is also clear that Figueres
was particularly worried about his own access to credit.10 The Junta
was well aware that this measure would face strong opposition; in fact,
the decision was taken a day after the suspension of civil guarantees
(Bowman and Baker, 2007).
The elimination of the army responded to the need for self-preserva-
tion. Figueres and the Junta were worried about a potential coup and
knew that the army could easily become an opposing force (Bowman
and Baker, 2007). Their fears were probably justified. In November
1948, less than six months after the approval of these measures, the
newspaper La Nación – which had always represented the interests of
the traditional, agricultural elite – denounced the Junta arguing that
it “counts with the unanimous opposition of commerce in the coun-
try, which has felt heavy on its shoulders a series of dispositions and
tributes that each day are made more difficult to comply with” and
pleaded a return to pre-Figueres days (cited in Bowman and Baker,
2007: 31). These reforms, undertaken during an exceptional, non-
democratic moment, constituted the basis for subsequent expansion of
the state and adoption of policies towards social and, especially, market
incorporation.11
4.4 The role of the new elite in promoting market and

social incorporation
This section demonstrates the importance of the emerging elite sur-

rounding the PLN, and their promotion of policies making market and
social incorporation possible. We show how the expansion of the state
had three objectives: (a) increasing economic opportunities; (b) gaining
social support; and (c) managing and supressing conflict.
4.4.1 The new elite and state expansion, 1950–1970

Figueres and his group founded the PLN in October 1951. The party’s
primary objective since its inception was the creation of economic
opportunities for small and medium-sized landowners and urban pro-
fessionals (Bodenheimer, 1970). This goal, however, required that the
PLN became an electoral force. It did so relatively quickly by combin-
ing repression of the left-of-centre opposition (which doubled the level
of electoral abstention in 1953), promising social benefits (like health

and education), and capitalizing on anti-communist sentiments (when
denouncing the alliance between the traditional oligarchy and the
Communist Party). The first big success was the election of Figueres by
an overwhelming majority of 65 per cent of the voting electorate in
1953. Once in office, Figueres expanded public jobs (which rose from
6 per cent of the active labour force in 1950 to 10 per cent by 1958),
introduced the thirteenth monthly extra salary among public servants
and promoted pro-PLN unions (Winson, 1989).12
Since small and medium-sized landowners such as Figueres were
badly in need of funding, the PLN also expanded credit and promoted
the modernization of the agricultural sector. In 1957, more than one-
third of total national credit was still channelled to the agricultural
sector; the production of basic grains (for example, beans, rice or corn)
was promoted through the Consejo Nacional de Producción (National
Production Board) (Brenes, 1990). Agricultural policies benefited the
group around Figueres directly. Several PLN leaders had growing inter-
ests in cattle ranches and received cheap credit in abundant quantities
(Aguilar and Solís, 1988). The same year he became president, Figueres
and his brother became owners of one of the largest coffee farms
located in Turrialba (Winson, 1989). Although the traditional elite also
benefited from public support of coffee modernization, they were still
attacked through other means. For example, as a result of the introduc-
tion of a new tax in June 1954, “the ninety largest companies in the
country would see their taxes increase from five million colones a year
to fourteen and a half million colones a year” (cited in Bowman and
Baker, 2007: 38).
With the approval of the Industrial Protection Law in 1959 and Costa
Rica’s incorporation to the CACM in 1963, the focus of economic policy
shifted towards the promotion of the industrial sector. Both measures
were promoted by the PLN elite as an opportunity to expand its own
accumulation opportunities as well as to create urban middle-income
jobs. This economic strategy faced fierce domestic opposition: the tra-
ditional agro-export oligarchy, in power when the CACM was signed,
refused to be part of the agreement.13 The conservative administration
of President Echandi (1958–63) did not sign the General Treatment of
Central American Economic Integration in December 1960, arguing
that integration was moving too fast.
The victory of the PLN in the 1962 elections finally led to the incor-
poration of the country into the CACM in 1963. Formed by a member-
ship reliant on public subsidies and protection measures, the Chamber
of Industrialists became an active supporter of the PLN. A majority of

its members supported the PLN. According to a survey undertaken by
Vega (1982) in the late 1970s, more than two-thirds of the members of
the Chamber’s Management Board were PLN supporters.
Both the nationalization of the banking sector and the protection
of the domestic market generated significant rents – that is, income
opportunities over and above free market levels (Akyuz and Gore,
1996). González-Vega (1990) estimates that in 1974 preferential access
to cheap credit resulted in “an implicit subsidy rate of 30 per cent per
year” (p. 21). He also shows that in agriculture, the implicit transfer
from the public banks was equivalent to around one-fifth of total value
added. Although most of the available data on the level of protection
concerns the late 1970s and early 1980s, tariffs were similarly high since
the 1960s. In 1980, the effective rate of protection for the industrial
sector as a whole was 139 per cent with a variance between 45 per cent
and 388 per cent depending on the activity. Textile and leather prod-
ucts, furniture and wood products were particular beneficiaries (Salazar,
1990). According to calculations by Monge González and González-
Vega (1995: 134), the resulting transfer from consumers to producers
was equivalent to 16 per cent of GDP in 1996 and probably larger in
previous decades.14
This creation of rents does not make Costa Rica unique, as many
other states in the developing world were also contributing to high
profits through an array of interventions (Amsden, 2001). Like the rest
of Latin America, successive PLN and conservative governments were
relatively ineffective in translating these rents into new comparative
advantages and productivity growth in the manufacturing sector over
the long run. The Costa Rican state was never quite capable of impos-
ing performance standards to private producers and was therefore far
from developmental (Brenes, 1990; Lizano, 1999). What did make
Costa Rica unique, however, was how these rents were put to use and
the political economy structure created with their contributions. Even
if most rents probably went to a relatively small part of the new elite,
small and medium-sized producers all over the country also benefited.
For example, in 1952 the National Bank (through its rural boards for
economic development) gave 20,000 loans benefiting a quarter of all
agriculture producers and in 1976 it gave more than 24,000 loans dur-
ing a time when the total number of producers had actually dropped
(González-Vega, 1990). A large share of all loans also went to different
public agencies which were thus able to rapidly expand and create a
growing amount of jobs. Protectionism also resulted in the creation of
new businesses. In fact, in the late 1970s, 40 per cent of industrial busi-
ness owners had a father who had not been a business owner himself
(Garnier and Hidalgo, 1991). In short, the state-led economic policies
promoted by the PLN during this period helped strengthen the new
elite and, at the same time, facilitated market incorporation for a grow-
ing middle class of public employees and small business owners in all
sectors of the economy (Rodríguez, 1997).
During the 1950s and 1960s, social policy was less of a priority
for the PLN as economic modernization. In fact, “most of the social
welfare infrastructure had been established before the Revolution of
1948” and “there were no radical innovations” (Bodenheimer, 1970:
71, see also Winson, 1989).15 Even though, in the 1953 electoral pro-
gramme, the PLN included plans to improve education, housing and
welfare, after winning the election Figueres focused on the economic
realm (Bowman and Baker, 2007). Yet social spending and coverage did
increase gradually, driven by three different forces. First, the PLN used
it as an instrument to expand its own basis of support. This is clear
when one considers the approval of a law requiring the universaliza-
tion of social insurance in 1961, a measure driven by PLN legislators
under a government run by the conservatives. According to the main
proponent of the law and then PLN deputy, Enrique Obregón Valverde,
Figueres wanted to make sure that the PLN was responsible for the
consolidation of social security – and thus compensate the fact that the
institution had been created by a different group in the 1940s.16 Second,
the bureaucracy in charge of pensions and healthcare policies pressured
for an expansion of its own programmes and new funding mechanisms
to secure their sustainability (Rosenberg, 1983). Third, many of the few
new social initiatives that the PLN promoted were at the intersection
between social and economic policy regimes – and simultaneously con-
tributed to market and social incorporation. This is the case of housing
programmes and is even more clearly evident in the case of the National
Learning Institute (INA for its Spanish acronym).
The creation of the INA in 1965 sought to support the process of
industrialization by improving training among the working classes.
It also contributed to the expansion of the state itself. The law that
created the INA was proposed by the Minister of Labour, Alfonso
Carro Zúñiga, with advice from the ILO and Israeli experts (Congreso
Constitucional, 1965). Carro Zúñiga, a prominent leader of the
PLN and some of the PLN Congressmen who participated in the
debates defended the law for two reasons: the need to increase skills
among the labour force, particularly in the manufacturing sector;
and the potential contribution of the INA to employment opportuni-

ties for low-income, young workers with limited labour market oppor-
tunities. For the PLN leadership the new institution would become an
important component of both the social and economic policy regimes,
and could simultaneously increase profits for manufacturing companies
and social support for the party. The law was enthusiastically supported
by the Chamber of Industries both in the media and in Congress.
Social and political opposition to the INA was weak and the founda-
tional law was approved almost by consensus. There was some debate
about which sectors should bear the financial burden, but most of the
criticisms had to do with how the creation of the INA would impact
the size of the public sector. The Chamber of Commerce criticized the
steady growth the bureaucracy was experiencing, a criticism echoed by
the opposition’s Congressman Víquez Ramírez. He viewed the INA as
part of a pattern of PLN-driven expansion of the state: “Costa Ricans are
tired of so many autonomous institutions… The country does not have
economic resources to create a series of autonomous agencies because it
then takes money away from the private sector – which needs it to cre-
ate jobs for Costa Ricans” (Congreso Constitucional, 1965: 157–8).
One way of creating jobs was the promotion of cooperatives.
Cooperatives were, first and foremost, used to expand income opportu-
nities for different groups around the PLN. In 1953, the National Bank,
one of the largest public banks in Costa Rica, created the Department
for the Promotion of Cooperatives to transfer resources to this sector
(Aguilar and Fallas, 1990). Between 1953 and 1962, 76 new cooperatives
were established, mostly in the financial (savings and credit) sectors.
In 1962, the PLN boosted cooperatives further with the creation of the
Federation of Cooperatives of Coffee Growers (FEDECOOP) at the initia-
tive of the Department of Cooperatives. FEDECOOP succeeded in con-
fronting the highly monopolized coffee exporting business: by the late
1960s FEDECOOP managed to export about 70 per cent of all the coffee
produced by its members and there were 31 cooperative processing
plans. By 1975, cooperatives were responsible for one third of all coffee
exports (Winson, 1989). As cooperatives and most rural jobs expanded,
a growing social and electoral support for the PLN was secured.
The state’s efforts to expand public and private employment took
place along an active management of labour opposition both through
co-optation and repression. Formally, unionization in the public sector
was protected and even promoted. However, the absence of protection
for union leaders against anti-union dismissals led trade unions in the
private sector to be systematically repressed and in the public sector,
to be either repressed (when sympathetic to still banned left-of-centre

parties) or co-opted (Castro Méndez and Martínez Franzoni, 2010).
Union rights were never enforced, especially with regard to banning
the firing of union leaders. In fact, in 1971 the Secretary of Labour
recognized that “trade union freedoms as such do not exist” (Aguilar,
1989: 174; our translation). By the mid-1970s only 5 per cent of private
employees were trade union members. The law limited union organi-
zation and collective bargaining at the firm level. When the right to
strike was established, requirements were so high (for example, support
from 60 per cent of all workers involved) that its practice was severely
limited. It also made virtually all strikes illegal, with severe implications
for all those involved (Castro Méndez and Martínez Franzoni, 2010).
Between 1972 and 1983, there were 182 strikes and 159 strikes between
1990 and 1998. However, all but 5 were declared illegal (Rojas and
Donato, 1987; Estado de la Nación, 2001).
4.4.2 The elite promotes further state expansion in the 1970s

In trying to cope with the international economic crisis and the increas-
ing domestic limitations faced by manufacturing production, the PLN,
in power between 1970 and 1978, pursued measures that gave way to
a new role for the public sector. Expanding the state as an economic
actor became more important than promoting opportunities for private
accumulation. The creation of the CODESA in 1972 was the first step in
this new strategy towards market incorporation. CODESA was initially
expected to encourage public–private partnerships and expand invest-
ment in new sectors of the economy. It had representatives of business
associations (including the Chamber of Industries) on its Management
Board and initially did not compete with the private sector. By 1975,
however, CODESA had expanded into an increasing number of sectors,
including sugar, cotton, cement and even the stock market. CODESA
also received ample support in terms of credit: by 1983 the loans from
the Central Bank to CODESA represented half of all loans to the private
sector and 18 per cent of total domestic credit. The PLN’s ultimate aims
with this institution were to involve partisan members in the making
of a “bureaucratic bourgeoisie” and simultaneously to expand public
employment at a time when conditions in the labour market were
particularly difficult (Sojo, 1984). The private sector opposed the expan-
sion of CODESA, gradually becoming more critical of Liberación policies
(Vega, 1980).
The overall expansion of the state provided new economic opportuni-
ties for the PLN elite, and also created more jobs for the urban middle
class, which was by then enthusiastic supporters of the party’s project

and the new jobs created. Whereas in 1960 (the earliest recorded infor-
mation available) public employment represented less than 10 per cent
of the economically active population, twenty years later it had increased
to about 18 per cent. In absolute terms, this was an increase from 30,000
to 150,000 public sector jobs (CLAD, 2007).
In the late 1960s and 1970s, the PLN elite relied on a renewed and
expanded social policy to confront increasingly popular mobilization in
the poorest areas of the country (for example, the Pacific Coast). Until
then, efforts to increase market and social incorporation focused on
the Central Valley and primarily benefited the middle class. As a result,
between 1963 and 1973, the income share for people in the middle of
the social structure (deciles 4 through 8) increased from 30 per cent to
40 per cent, but that of the bottom 20 per cent decreased slightly from
6 per cent to 5.4 per cent (OFIPLAN, 1982).17 Attempts to redistribute
land during the 1960s failed and landless rural workers voiced growing
social demands.18 For all the reforms that sought to incorporate the
rural populations, by the early 1970s, the people left behind in the mod-
ernization process were primarily landless peasants outside the Central
Valley (Seligson, 1980).
Social conflict accelerated during the 1970s: for example, between
1971 and 1974, more than 91,000 hectares were illegally occupied by
2,240 households (Cortés and León, 2008). Progressive movements with
ties to the still illegal Communist Party and other small, left-of-centre
parties became increasingly active in the rural sector; social protests
around foreign investment projects also intensified in the urban sector.
During the first half of the 1970s, these protests challenged the PLN,
which responded with the introduction of novel social programmes. In
1971, the Figueres Administration created the IMAS allocating subsidies
to people living in extreme poverty.
Even more significant than the IMAS was the creation of FODESAF
by the Oduber administration in 1974. FODESAF was an innovation
in Latin America: it created benefits for previously excluded people by
providing extra funds to already existing public agencies through exist-
ing and new social interventions. Following plans and demands from
different institutions, FODESAF also funded new programmes, includ-
ing non-contributory pensions and School Dining Halls.
The approval of FODESAF took two years, longer than any other
policy initiatives the PLN promoted during the 1960s and 1970s due to
social opposition but, more importantly, splits within the party itself.
It was Figueres’ initiative to establish a family allowance programme

that, following international trends, could transfer cash benefits per
child to the spouses of socially insured workers. This initiative – which
did not focus on the very poor nor the expanding of state intervention
in any significant way – was not actively supported by a majority of
PLN legislators who, led by the President of the Legislative Assembly
Daniel Oduber, endorsed a totally different image of the programme.
The clash between these two views was so strong that Figueres did not
manage to pass the bill, even though during his presidency the PLN had
a Congressional majority. Instead, soon to be President Daniel Oduber
prepared a radically different bill, starting negotiations with the opposi-
tion to pass it under the new Legislative Assembly in which the PLN
lacked congressional majority.19
The law that created FODESAF was finally approved in December 1974
and the new fund quickly became powerful tool that Oduber used to
jump-start state initiatives. As discussed in Chapter 3, FODESAF resources
helped purchase land, fund nutrition programmes, create school din-
ing rooms, expand primary care services and, overall, strengthen public
resources of state agencies and, through them, of people living in pov-
erty. FODESAF was thus not simply a social policy intervention, but a
tool that solidified the state-centred economic policy regime. It was an
integral piece of the estado empresario promoted by a majority of the
PLN, steering the economy while creating financial gains for them and
their partners. The business sector – always dependent on state leader-
ship during this period – also benefited by providing public agencies
with all sorts of inputs and services (from milk to houses to uniforms
to land).
Emerging manufacturing groups were suspicious of this expansion
of social policies but were divided and unable to create an opposition
front in time to effectively oppose it. As a thesis on the Chamber of
Industries explains, the lack of confrontation between the state and
the manufacturing elite was a result of “the Chamber’s dependence
on state intervention after the approval of the Industrial protection
law” (Oreamuno, 1977: 153). Oduber and his team were also careful
in discussing major reforms broadly, making minor changes to satisfy
various groups. For example, in the initial draft FODESAF was to be
funded only with payroll taxes. Eventually, the government agreed
to a more moderate increase in payroll taxes than initially expected
in exchange for a moderate increase in consumption taxes (Solano
Chavarría, 2009).
4.5 The role of international ideas between

1950 and 1980
While the interests of the elite around the PLN may have driven the
general direction of policy, they cannot alone explain the specific fea-
tures of those polices. Instead, we also need to consider where ideas
came from and how they changed over time. We argue in this section
that international actors and the ideas they promoted were extremely
important in the creation of opportunities and constraints for domestic
policy formation.
One excellent example is that of the social and labour reforms of
the 1940s, which were promoted under a policy environment heav-
ily influenced by the anti-Communist reformism of Roosevelt’s New
Deal (Acuña, 1995). An equally far-reaching illustration is the case of
healthcare insurance. Created in 1941, Costa Rica’s universal healthcare
policy was Latin America’s first unified system; it was built from the bot-
tom up, with urban, low-wage workers the first to enrol in the system
(Martínez Franzoni and Sánchez-Ancochea, 2012). This policy design
was deeply influenced by international prescriptions: at the time, the
ILO was promoting unified systems with similar entitlements for all
(Seekings, 2010).
During the following three decades, regional and/or international
paradigms continued to shape policies towards structural change and
social policy. Contrary to pioneering South American countries where
import substitution had initially been an economic structural process
leading to a new policy paradigm (Thorp, 1998), in Central America,
import substitution was shaped after international ideas: a policy
paradigm sought to transform the economic structure. ECLAC and the
US government played a fundamental role in the implementation of
import substitution through the CACM. Similar differences between
Costa Rica and South American countries are evident in the area of
social insurance: in the Southern Cone it was partly created to respond
to bottom-up pressures from the expanding working class. In Costa
Rica, the European and Southern Cone experiences combined with
policy prescriptions by the ILO played a fundamental role in promoting
social insurance systems at a later stage.
In the 1950s ECLAC proposed a system of ‘limited integration with
reciprocity’ to promote industrialization (Bulmer-Thomas, 1987).
Regional, state-regulated monopolies were proposed to distribute
new industries in an equitable manner among all member countries.
ECLAC’s model, which excluded many agricultural products from free
trade (for example, basic grain, cotton, coffee, sugar), was behind the
Multilateral Treaty on Free Trade and Central American Economic
Integration. The Integration Industries Convention was signed in the
late 1950s.The final design of the CACM also reflected the ideas of the
US government. The Eisenhower Administration favoured free trade
among all member countries and rejected the idea of planned regional
monopolies
In Central America the actual translation of external ideas about
import substitution into domestic policies differed from country to
country. Costa Rica was unique and more successful than the rest for at
least two reasons. First, protection contributed to a piecemeal expan-
sion of labour-based social policy. Most of the business sector needed
not to worry about high payroll taxes because they did not compete
internationally (Lizano, 1999). The situation of agro-exporters was
more worrisome, but many of them (particularly those with tempo-
rary workers) received exemptions from payroll taxes. It thus became
easier to expand public spending in Costa Rica than in East Asia where
“strategies dependent on exports of labour-intensive manufactures...
made governments and firms highly resistant to social insurance
schemes that would increase labour costs” (Haggard and Kaufman,
2008: 9). Second, import substitution did not just benefit large com-
panies but also small and medium-sized enterprises and cooperatives,
something exceptional when compared to most other countries in
Latin America.
International ideas also influenced the formation of social assist-
ance programmes in the mid-1970s. Following the example of France,
Uruguay and others, as well as well-established ILO policy prescriptions
at the time, Figueres and his Minister of Labour, Jiménez Veiga, proposed
to create family allowances. His plan, however, was at odds with a dif-
ferent stream of policy prescriptions following the Cuban revolution of
1959. Such a stream stressed the need to go beyond transfers and adopt
integrated and multidimensional responses to poverty and reflected in
Kennedy’s Alliance for Progress and Johnson’s War on Poverty to the
World Bank and the Socialist International.
President Oduber (1974–78) and his vice-president, Castillo, were
more attuned to these ideas than Figueres. Oduber had been vice-
president of the Socialist International and Castillo had worked for
the ECLAC and for the Central America Integration System. After win-
ning the elections, they actively pursued a Congressional overhaul of
Figueres’s family allowances project with the more innovative social
development fund we described in Chapter 3.
4.6 Actors and ideas in recent decades
In this section, we concentrate on the erosion of key components of

the previous political model to explain the changes in the social and,
especially, economic policy regime since the 1980s. We highlight the
growing fragmentation within the elite and the growing power of those
holding a more liberal agenda. We also describe changes in interna-
tional ideas and how these ideas entered domestic debates in Costa Rica
and other Central American countries. Finally, we argue that legacies
from the previous period (particularly in terms of institutional rules and
the role of the bureaucracy) slowed down the rate of change.
4.6.1 Fragmentation within the elite and the role of its

(neo)liberal segment
Tensions within the elite around the economic model emerged dur-
ing the 1970s. The business sector split between those who continued
to rely on state support and those who were threatened by further
state intervention. In 1973, the Costa Rican Union of Private Business
Chambers and Associations (UCCAEP for its Spanish acronym) was cre-
ated, incorporating major organizations across all sectors. At the time,
together with the National Association for Economic Promotion (ANFE
for its Spanish acronym) (created in 1958), UCCAEP became the locus
of increasing anti-PLN sentiments within the business sector. UCCAEP
would constantly clash with the industrialists over the role of the state
in economic affairs during the 1970s.20
On the other hand, the PLN faced growing internal tensions around
the convenience of expanding the social and economic role of the state.
President Oduber pushed for new economic institutions like CODESA
and new social institutions like FODESAF. Both expanded the public
realm and threatened the interests of significant segments of the private
sector, the former because it created new state enterprises and the lat-
ter because it was funded by yet more payroll taxes. Other groups both
within and outside the party resented this development option and
warned against the excessive size of the public sector.
The economic crisis of the early 1980s deepened the split within the
PLN around how much state was needed and for what, gradually tilting
the balance in favour of the pro-liberalizing segment.21 All influential
groups agreed that stabilization policies were needed to control the public
deficit. There was also a broad consensus on the state’s role in support-
ing the private sector through export incentives. There was much more
disagreement in other areas, including the speed of trade liberalization,
the role of CODESA, the convenience of having public firms directly

involved in production and the role of private banks within the finan-
cial system. President Monge’s initial cabinet between in 1982 illustrated
these tensions: Eduardo Lizano, in Planning, soon to become Costa Rica’s
liberalization guru, sat next to Alfonso Carro, Minister of Government
(loosely thought of as the cabinet’s coordinator), a traditional PLN leader
who had been behind the creation and expansion of social policies dur-
ing the second half of the 1960s and 1970s.
A new cadre of leaders like Oscar Arias (president of the Republic in
1986–90 and 2006–10) and Eduardo Lizano himself became increas-
ingly influential within the party and built links to international
financial institutions and with new business groups (Robinson, 2003).
Many had already been part of previous administrations in less power-
ful positions as members of the conservative wing of the PLN. In the
late 1960s, Lizano, for example, was already criticizing the excessive
expansion of the bureaucracy and the positions of more leftist groups
within the party. In a 1975 book, he warned that the bureaucracy could
weaken “the sources of economic growth (lower savings), hurt social
mobility (lack of interest in the growth of the middle class) and reduce
political stability” in Costa Rica (Lizano, 1975: 50). In addition, business
leaders who had been active anti-PLN activists were now appointed by
PLN governments to run prominent institutions like the Central Bank
and the Finance Ministry.22
The career of Rodrigo Madrigal Nieto (1924–2006) reflects some of the
changes within the PLN elite, particularly that with closer connections
with the business sector. A long-term member of the PLN, Madrigal
was president of the Chamber of Industries in the late 1950s when the
Industrial Protection Law was approved. He was then an enthusiastic
supporter of the PLN’s modernization agenda, even if he was more
sympathetic to transnational corporations than others within the party
(Rovira, 2000). Madrigal Nieto was member of the Management Board
of the CCSS and Costa Rican delegate to ILO conferences. In the late
1970s, however, he abandoned the PLN in protest for the expansion
of CODESA and other interventionist measures and ran successfully
for Congressman of the conservative opposition. In the late 1980s he
rejoined the PLN as Foreign Ministry in the Oscar Arias administration
and became a key member of the government.23
In this context, anti-unionism deepened through a combination of
repression and the promotion of a different kind of civil society organi-
zation: in 1984 solidaristas associations were established as self-help
organizations involving workers and employers. These organizations
had the blessings of the business sector and played a key role in fight-
ing back communist organizations in the midst of the Central America’s
bloody conflicts of the 1980s. While solidaristas could have comple-
mented unions, they instead began seeking to compete with unions in
representing workers in collective bargaining even though they lacked
the autonomy from management necessary to represent labour collec-
tive interests (Castro Méndez and Martínez Franzoni, 2010).24
The initial shift in policies and the structural changes that went along
with it led to a substantial differentiation in the composition of the mid-
dle class, further weakening the largely unified interests previously held
by the political elite. The middle class became more heterogeneous in
terms of labour market participation and income levels (Vega, 2007).25
The number of blue-collar workers in the agricultural, service and manu-
facturing sectors decreased from 32 per cent in 1987 to 20 per cent in
2008, while the number of white-collar and small entrepreneurs grew
significantly (Programa Estado de la Nación, 2009). In so far as the
middle class became more heterogeneous, state policies promoting
economic opportunities for the middle class were increasingly difficult
to establish. A direct consequence has been weakened incentives for
the PLN to promote state-led employment. Instead it has increasingly
concentrated on promoting high-productivity sectors (including high
tech and finance), hoping for a trickle-down effect on the rest of the
economy.26
Since the 1990s, groups within the PLN in favour of liberalization
have gained even more influence. These groups were partly responding
to what they saw as appealing new opportunities in sectors like non-
traditional primary exports, tourism and high-tech assembly. In doing
so, however, they paid scare attention to the barely positive effects that
such opportunities would have for market incorporation among the
majority of the population. These groups have gradually abandoned
the economic policy regime that aimed to promote production for the
domestic market from all types of companies (including small ones) and
have pushed for a redefinition of the state’s role.
The liberalization of the financial sector reduced the amount of subsi-
dized credit and the support for small agricultural producers was all but
eliminated. Constrained by institutional legacies (see discussion below),
the Costa Rican government by and large shied away from closing
down institutions but selectively reduced budgets, particularly among
agencies that were emblematic of the previous productive regime,
and created new ones. For example, in 1993, the National Council for
Production had only one-third of the resources it had in 1990. The
Ministry of Agriculture and Livestock, in spite of having more affiliated

agencies, underwent a slight budgetary decline (in real terms) through-
out most of the period. In the last twenty years, employment involved
in key agricultural institutions has also declined from 4 per cent to less
than 2 per cent of the total public sector.
Yet the overall social and economic agenda has never been purely
neoliberal for at least three reasons. First, significant members of the
Liberacionista elite still support a more interventionist agenda so the
overall policy direction has never been totally coherent. Even influential
cabinet members of the Figueres Olsen (1994–98) and Arias (2006–10)
governments like Leonardo Garnier have criticized some free trade agree-
ments and the liberalization of telecommunications. Second, even the
liberalizers have been aware of the importance of targeted state interven-
tion in key areas like foreign investment and export promotion. They
have promoted new institutions – some public and some semi-public –
to support exports and FDI in new sectors. Entities that had been created
in previous decades were revitalized and new legal, administrative and
financial mechanisms were developed, including the regime of free trade
zones discussed in Chapter 2, as a basis for attracting FDI and to promote
exports. In the 1990s, a governing entity, the Ministry of Foreign Trade,
was founded and other institutions with more links to the private sectors
emerged. Significant examples include the Trade Promotion Corporation
of Costa Rica (PROCOMER for its Spanish acronym) and CINDE, a leader
in attracting transnational corporations.
Third, the rationale behind social policy has been more complex,
with simultaneous pressures towards change and resilience. Social poli-
cies have continued to be important electoral tools to gain support for
PLN candidates, as in 2010, and during the referendum on the ratifica-
tion of the DR-CAFTA. In the run-up to the referendum, public sector
wages and social benefits like non-contributory pensions were increased
and thousands of new positions were created. Social policies have also
gained a renewed political importance as an instrument to compensate
the losers of economic reforms among lower- and lower-middle-income
groups. The main goal of social policy has become the affirmative
action of the worst off rather than, as formerly, the social incorporation
of the majority of the population. In this way, social policy compensates
the growing number of people who cannot have proper market incorpo-
ration and the country’s record has weakened gradually. Unfortunately,
the market has also gained a prominent role in most social services,
from education and pensions to health, therefore creating a much more
stratified social policy regime.
4.6.2 New international ideas and domestic adaptations

The international policy environment also changed significantly in
the 1980s and early 1990s, influencing internal political debates and
contributing to the strengthening of some domestic actors and the
weakening of others. Worldwide, the set of policy prescriptions bun-
dled under the so-called Washington Consensus (Williamson, 1990)
provided a theoretical rationale for trade liberalization and financial
deregulation. Meanwhile, traditional social-democratic ideas were
challenged.
Like in most other developing countries, the new policy menu entered
into the domestic debate through different channels. International
financial institutions (IFIs) like the World Bank and US-based institu-
tions like USAID shaped the debate through their global advocacy
work and direct interventions in the region (Honey, 1994). USAID
insisted on the state taking measures to auction off CODESA’s compa-
nies, foster currency reforms, establish private sector banks and non-
traditional export enterprises, and create private institutions – from
agricultural schools to export promotion offices – that competed with
(and frequently undermined) state institutions. USAID used finan-
cial resources aggressively to push for its reform agenda and support
changes within the elites: as Sandbrook et al. (2007: 107) notes, “the
scale of this U.S. aid, as well as the way disbursements were tied to
the fulfillment of specific reforms, greatly strengthened those sectors
of the elite sympathetic to neoliberalism and hostile to the social-
democratic model.”27
Between 1984 and 1994, Costa Rica also signed two structural adjust-
ment loans with the IMF and the World Bank that shaped policies
around trade liberalization, financial deregulation and shifts in the role
of the state as employer. At the same time, national think-tanks became
bridges between neoliberal ideas at the global level and specific applica-
tions to the Costa Rican context. The Academia de Centroamérica – where
many influential economists with training in foreign institutions
undertook research projects – was particularly influential and published
numerous proposals for a more liberal economic model (see, for exam-
ple, Jiménez, 1998; Lizano, 1999).
Yet by the 1990s the range of economic ideas available internation-
ally went well beyond neoliberalism. Small countries which had grown
rapidly through the promotion of high-tech exports like Singapore and
Ireland became influential examples for the rest of the world (Mortimore
and Vergara, 2004; Sánchez-Ancochea, 2009). These countries offered
interesting public policy lessons regarding the role of selective targeting
of leading TNCs and the importance of autonomous foreign investment

promotion agencies. The examples of Ireland and Singapore informed
how the PLN elite framed the process of development, particularly since
the Figueres Olsen administration (1994–98), and the way CINDE sup-
ported the government in attracting Intel and other large companies.
In 2006, President Oscar Arias best summarized the powerful influence
of these examples when he argued that he wanted to transform Costa
Rica into “a small Ireland”.28
In the area of social policy, options across Latin America included
policy prescriptions by the IFIs. Following the economic crises of the
1980s, the IFIs at first promoted mere cutbacks. By the early 1990s,
however, second-generation reforms defined earlier in the chapter
pushed for privatization, decentralization and targeting of social
spending. Their specific recommendations for what Costa Rica was
to do were much more heterodox regarding health than concerning
pensions – even though IFIs funded the former but not the latter. Under
the modernization of the healthcare sector, the World Bank left wide
margins for adaptation (Martínez Franzoni, 1999), but in pensions it
pushed for the implementation of the Chilean radical model. Yet this
policy approach was rejected by the government which, instead, gave
individual savings a much smaller role next to the collective pension
regime (Martínez Franzoni, 2010). Such alternatives were not shaped
by appointed officials alone, but reflected a very active role played by
career bureaucrats.
Changes in social assistance clearly illustrate the links between
international forces and domestic actors: the conservative Calderón
Fournier administration, representing an anti-PLN partisan alliance,
aimed to emulate the Chilean approach to anti-poverty programmes.
Chilean experts visited the country and advised on how to establish
an information system that would redirect social assistance to the
extreme poor. Information systems were indeed designed and imple-
mented, yet social spending continued to stress geographical priorities
rather than individual targeting. Moreover, PLN experts like Juan Diego
Trejos and Rebeca Grynspan argued that the Costa Rican approach to
social policy did not rely on targeted social spending but on selective
measures that complemented universal policies. For example, nutrition
programmes were created to help lower-income children benefit from
public education as much as middle-class children. By the same token,
non-contributory access to social insurance was not linked to medi-
cal services for the poor alone but to support their access to universal
medical services for all.
4.6.3 The role of legacies and the growing incoherence of the

policy agenda29
The increasing influence of political actors with a liberal agenda trig-
gered significant changes in policy as well as the downsizing of public
employment but did not result in an across-the-board retrenchment of
the state role. In fact, the state has become an arena of conflict where
expansion and retrenchment, continuity and reform have coexisted.
These contradictory trends can be explained by two simultaneous
factors: on the one hand, the coexistence of different vested interests
within the PLN elite discussed in the previous section and the role of
historical legacies shaping institutional affairs discussed here. Below, we
focus on three simultaneous processes: the rapid creation of new agen-
cies that added to rather than replaced the old ones making for a specific
kind of state reform; top-down and continuous expansion of rights and
veto powers, and the conflict between growing demands and stagnant
fiscal capacity. Altogether these trends partially explain continuities in
the economic and, especially, the social policy regime. At the same time,
they resulted in growing tensions and erratic policy formation.
State reform has taken place through layering rather than retrenchment
In spite of the increasingly influential neoliberal rhetoric, the last two
decades have witnessed the creation of government agencies without
the simultaneous elimination of pre-existing ones. Despite having
been announced in the 1990s, ten years later state downsizing had not
taken place. The only entities that were closed were CODESA and its
companies in the 1980s (Sojo, 1984) and the Anglo-Costa Rican Bank
in the 1990s. At the same time, between 1990 and 2004, the Legislative
Assembly created 107 new public institutions, more than 25 per cent of
those created since the country’s independence in 1821, and more than
those created during the largest expansion of the state, between 1960
and 1979. Unlike the 1960s and 1970s, when the creation or reform of
public institutions targeted the delivery of goods and services, the most
recent expansion pursued greater administrative and budgetary flex-
ibility in managing specific programmes. Some institutions were also
created to regulate either other state agencies (for example, in pensions)
or specific markets (for example, finance).
As a result, despite legal transformations, neither an explicit and clear-
cut privatisation of public services nor a robust functional modernization
of the overall Costa Rican state has occurred (Chong and López de
Silanes, 2005). Examples of failed or truncated modernization can be
found in roads as well as the healthcare sector, both of which were
initiated in the mid-1990s. Exceptional cases of successful modernization

took place in the judicial branch, the external sector and the financial
services. In the financial sector, market liberalization was accompanied
by the reform and expansion of public agencies. This intensified process
of institutional creation was concentrated in two areas and took place
sequentially. First, entities related to market regulation were established
(1995–97), followed by others that allowed public banks to engage in
new areas of the financial market such as investment and pension funds
(1997–2000).30 Additionally, in the 1990s the role of the Central Bank
was modified to reinforce its supervisory role. The rest of the public
sector reflects the patchwork pattern mentioned above and lacks clear
redefinition of the direction of the state, its purpose and its project.31
The expansion of state bureaucracy has increased rights and veto powers
During the period of stagnant incorporation, Costa Rica was resilient
in guaranteeing rights in a top-down fashion: state obligations to
citizens expanded, offering access to information as well as new and/or
more effective services. This significant expansion of civil, political,
social and environmental rights was reflected in constitutional amend-
ments, the ratification of international treaties and the passing of new
laws. This expansion was accompanied by a significant innovation: a
Constitutional Court created in 1989, providing an accessible mecha-
nism for citizens to assure the compliance of state institutions.32
Simultaneously, a network of institutions with powerful constitu-
tional, political, legal and administrative mandates for state account-
ability were created or strengthened. For instance, the until then only
agency in charge of horizontal accountability, the CGR, was awarded
new functions (Villarreal, 2004). Costa Rica gave these agencies unusu-
ally broad capacities when compared with equivalent agencies in other
Latin American countries.
The growth of agencies with different responsibilities has also increased
the number of places where decisions are made and the number of veto
powers. One recurrent pattern has been that public agencies in charge
of social services (healthcare) deny a given service (let us say a treatment
to HIV patients); people then recourse to the Constitutional Chamber,
who blocks, reverses or at least credibly threatens the initial decision.
This has become an ordinary way to defend entitlements and services
inherited from the period of expanding incorporation.33
The expansion of veto powers within the state apparatus goes beyond
entitlements and is reflected in obstacles to state reform. For example,
when the Figueres Olsen administration (1994–98) sought to reform
FODESAF to increase its control over programme design and evalua-

tion, institutions in charge of implementing programmes with partial
funding from FODESAF opposed such measures. Other efforts to make
FODESAF’s resource allocation more flexible have also failed.
The Executive’s branch’s informal powers have also been severely cut
through controls exercised by the Constitutional Court. A Court deci-
sion prohibited the practices that the Executive branch had utilized to
compensate for its weak constitutional and legal powers.34 The growing
role and activism of the Constitutional Court contributed to a reduction
of power of political forums compared to the entities that had the legal
capacity to modify any decision (or inaction) of the Legislature35 or the
Executive branch.36 The growth in the veto points within the state has
complicated decision-making significantly.
Changed political preferences and bureaucratic legacies have led to

deteriorated fiscal capacities
Most of the new agencies have been established as part of the central
government which faces the greatest fiscal restrictions and the least
amount of funding for public spending/programmes. In contrast, the
decentralized sector has remained stable. The consequence of this
expansion without much rationalization is a greater fragmentation and
decentralization of public management in the context of a weakened
Executive branch.
The inability to reform the tax system and increase tax receipts sig-
nificantly has created constraint not only for social policy (Chapter 3)
but also for all other areas of public policy. Between 1998 and 2002
Congress approved 70 laws, creating new rights or state obligations
and requiring new funding sources.37 If during the period of expanding
incorporation Costa Rican taxes were below expected levels given the
country’s income per capita, the gap increased even more during the
more recet period of stagnant incorporation despite various attempts
at tax reform (Lora and Panizza, 2002). Between 1994 and 2004, the
revenues collected from taxation by the Ministry of Finance fluctu-
ated between 11 per cent and 13 per cent of GDP. The dependence on
Congress to approve new taxes partly explains reform failure. As long as
the approval of new taxes remains in the hands of Congress, it is subject
to open-ended (and generally failed) political agreements.
The state’s inability to raise taxes to fund the democratization of
rights has lowered the effectiveness of public institutions. This dimin-
ished capacity is one of the primary reasons why Costa Rican citizens
turn to the Constitutional Court. Unfortunately, the result has been a
vicious circle: the state lacks the material basis to honour constitution-
ally and legally established rights and obligations but when the state
fails to guarantee a right or an obligation, individuals and groups can
make a legal claim in the Constitutional Court. There political rights are
discussed and awarded without the need for recourse to political inter-
mediaries such as legislators or political parties and without the need to
consider financial implications.
The government has made successive attempts to improve its fiscal
position through various measures, including more effective tax collec-
tion, mandatory investment in government bonds by the decentralized
sector,38 cutbacks in public spending; and the pre-eminence of fiscal
over sectoral policies. The government has also benefited in recent years
from the reduction in interest rates and thus the debt burden, which
was above 30 per cent of the current government income during the
1990s but is now significantly lower. Although more effective tax col-
lection relieves fiscal pressures in a sustainable fashion, the remaining
options do not: they generate revenue in the short run at the expense
of the provision of sound public services in the medium and long term.
In addition, they cause serious judicial insecurity.
In short, the political failure to broaden the tax base to fund public
policy has led to increasingly rigid budgets, an excessive accent on
cutbacks to secure fiscal stability and increasing conflicts over budget
allocation. At the same time, the state has become an arena of conflict
between many actors with different preferences, vision and needs.
4.7 Conclusion
This chapter has discussed the determinants behind the adoption of a

social and economic policy regime that supported market and social
incorporation. Costa Rica benefited from more positive initial condi-
tions than neighbouring countries as it had a less unequal land distri-
bution and a more active state. By the 1940s, however, Costa Rica was
still an underdeveloped economy and there was no reason to expect the
successful process of state building that was to come.
Instead, we have argued that during the period of expanding incor-
poration, two primary factors played a key role in the process of state
building: (a) an emerging elite that relied on the state to expand its own
economic opportunities, secure support and manage and suppress con-
flict; and (b) the influence of international ideas, which were adapted
and reflected into specific policies by domestic policymakers. In addi-
tion, the expansion of state intervention, which was fundamental to
the securing of market and social incorporation, consolidated a new

bureaucracy with growing influence in the policy process.
After the crisis of the early 1980s, changes in both the elite and inter-
national ideas led to continuities and tensions in the social and economic
policy regimes. All over the world the so-called Washington Consensus
radically changed the terms of the policy debate, even if some countries
embraced it with more enthusiasm than others. The elite has fragmented
between those seeking to maintain the main features of the previous
policy regimes and those – more dominant, partly due to the 1980s crisis
itself – working to reduce a direct involvement of the state in economic
affairs and social policy. At the same time, however, institutional inertia
and powerful pressures for continuity within the bureaucracy have slowed
down some changes and turned the state into an arena of conflict.
As we develop further in the next, concluding chapter, the main les-
son from Costa Rica’s experience is the importance of understanding
the elite’s preferences and interests as well as the interactions they build
with other state actors over time. We must avoid definitions of good
and bad elites and, instead, reconstruct how their specific interests and
demands shape policy and state formation. In thinking about Costa
Rica’s future, the potential to rebuild a policy regime that continues to
promote the double incorporation once again depends on changing the
preferences and interests of the current elite and/or the emergence of a
new elite with more interest in long-term employment creation.
5
Conclusion: What Can We Learn
from the Costa Rican Case?
In this book we have argued that securing the double incorporation,

ensuring good jobs and social services for all should be a primary objec-
tive of public policy. Market and social incorporation are the best vehi-
cles for poverty eradication, in terms of both income and capabilities
like health and education. Good jobs will give poor families the stable
income they need to improve their living standards, save and plan for
the future. Public social services should help them confront risks and
volatility and the accumulation of additional human capital. Improving
access to the labour market and social policy for the less fortunate (the
poor and lower-middle income groups) would make a significant con-
tribution to income distribution.1
In most developing countries, market and social incorporation is as
desirable as it is difficult to attain. In the labour market, most modern
activities in manufacturing and services create only a few formal jobs
while traditional activities have low productivity and pay comparatively
low wages. In social policy, governments do not have the resources
or the capacity to implement much needed programs successfully.
Promoting financially costly universal policies may be particularly hard
under the budgetary constraints that most countries in Africa, South
Asia and Latin America face. The lack of cross-class coalitions endemic
to these regions constitutes an additional problem.
Yet some developing countries succeeded in achieving the double
incorporation after the Second World War. This book has addressed the
case of Costa Rica, a country that over the past six decades was able
to attain healthy rates of economic growth together with almost full
(formal) employment, wage growth and universal social services. These
milestones were achieved from low initial levels of development: in
133
1940 Costa Rica’s GDP per capita (real US$1,763) was less than half of
that in Argentina, Uruguay, Venezuela and just two-thirds of that in
Guatemala.2
Without giving in to the temptation of making extrapolations out
of economic and social transformation processes that are always coun-
try-specific, in this concluding chapter we outline eight lessons drawn
from the Costa Rican case. These lessons should not be read as theoreti-
cal contributions but as empirical stylized facts that emerge from our
inductive research. Our lessons, like the rest of the book, concentrate
on the analysis of what states can and cannot do and what motivations
drive their interventions.
Lesson 1: State intervention can drive employment growth

How did Costa Rica achieve an intensive in formal employment when
others did not? In Chapter 2, we saw that the state played a central
role in employment creation by: (a) promoting import substitution
industrialisation through measures similar to neighbouring countries;
(b) providing incentives for cooperatives in production and distribu-
tion; (c) distributing credit among small and medium-sized firms; and,
probably most importantly, (d) creating public employment both in the
central government and in a growing number of autonomous institu-
tions. Public employment was driven not only by the expansion in the
productive role of the state (in diverse areas like telecommunications,
insurance and manufacturing activities) but also by the expansion of
public social services.
Public employment has been considered unproductive and excessive
by many. A World Bank economist, for example, argues that “bloated
bureaucracies and over-staffed public enterprises are indeed among
the less tackled legacies of a long history of state-led development”
(Rama, 1997: 2) and shows how the “problem” is particularly prevalent
in Latin America. This view is too simplistic: where countries create
public employment and with what objectives matter. In Costa Rica,
a large share of public employment was located in highly productive
public companies (such as the Costa Rican Institute of Electricity) or
contributed to the accumulation of human development (for example,
doctors, teachers).
Evidently, in no economy can the government be the only source of
formal employment. Economic growth needs to be driven by employ-
ment creation in different sectors of the economy and create further
employment. This balanced strategy, where the public and private
sector and small, medium-sized and large firms are all important, as
Conclusion 135
in the case of Costa Rica, is unlikely to take place without active state
intervention.3
Lesson 2: An employment-creating state does not necessarily

make a developmental state
As we discussed in our theoretical review in Chapter 1, the experience
of East Asia has been used to highlight the role of the developmental
state in sustaining market incorporation over time. A successful devel-
opmental state is one that is able to drive structural change and gear the
entire economy towards high-productivity sectors. State intervention in
South Korea, Taiwan, Singapore and, to a lesser extent, Hong Kong was
based on the principle of reciprocity (Amsden, 2001). The state “artifi-
cially” increased profits above free market levels through subsidies and
other market interventions. At the same time it was able to impose
performance standards such as export targets to assure that a substantial
share of these profits would be reinvested.
Not all sectors, however, received the same amount of assistance.
The state acted as entrepreneur, discriminating in favour of sectors
with high productivity and/or high-income elasticity of demand in
developed countries. It used a variety of instruments to benefit specific
industries such as financial subsidies, subsidized loans, technical and
administrative support and protection of the domestic market. The
creation of public companies was also important, especially in Taiwan.
In South Korea and Taiwan public institutions also contributed to
technological learning and later to technological innovation in an
attempt to increase overall productivity, promote long-term export
expansion and sustain employment growth. Governments in both
countries made large investments in technical education, thus creating
a substantial pool of engineers and a cheap, but skilled labour force
(Amsden, 1989). They also established public agencies that initially pro-
moted technology acquisitions from abroad and later devoted signifi-
cant resources to research and development (Evans, 1995). Moreover,
the state always considered the expected contribution of a sector to
future technological innovation when “picking winners” (Chang,
1994). Developmental states have been able to secure upgrading and
employment growth at the same time by moving workers from low-
productivity sectors like agriculture and informal urban activities to
high-productivity manufacturing employment and have done so over
several decades (Ocampo, Rada and Taylor, 2009; Rodrik, 2011).
Sandbook et al. (2007) describe Costa Rica as a developmental state
because of its success in promoting structural change and human
development. Yet this may be a misleading use of the term. Like most
other Latin American countries, Costa Rica did succeed in promot-
ing some degree of structural change but was never able to impose
performance standards on local producers. Quite the contrary: the
country provided protection, subsidies and cheap credit to many small,
medium-sized and large producers during the period 1950–80 without
effectively demanding much in return (Lizano, 1999). The public finan-
cial sector provides a very good example: Brenes (1990) shows how sub-
stantial amounts of credit went to the PLN leadership or to some of its
supporters, even in cases where repayment levels were low. There is also
ample evidence that Figueres and his allies benefited from the largeness
of the state without generally being forced to invest in technological
upgrading and innovation (Solís, 2006).
The point of this lesson is not to rehearse neoliberal arguments
against state intervention; to argue that the Costa Rican state was
totally inefficient or to support a reduction in the productive role of
the state. In fact, we know that the Costa Rican state promoted some
technological learning in sectors like electricity and telecommunica-
tions and that that neoliberal reforms actually harmed its role in
promoting both market and social incorporation. Rather, the Costa
Rican trajectory has three implications for our understanding of what
states can do in developing countries, which we think should receive
further attention: (a) having a state capable of creating jobs is a neces-
sary but not sufficient condition for the creation of a developmental
state; (b) a state that is able to create and sustain employment growth
over several decades can make a substantial contribution towards
people’s welfare, even if it is simultaneously less successful in promot-
ing economy-wide upgrading; and (c) states respond to historically
specific contexts and to the interests of particular elites; in some coun-
tries, it may be easier to create an employment-creating state than a
developmental one.
Lesson 3: In recent years, Costa Rica has faced a trade-off

between upgrading and formal jobs for most
The Costa Rican state has never been able to secure market incorpora-
tion and sustained economic upgrading simultaneously. While between
1950 and 1980 the country succeeded in creating better jobs and
effectively funding its social policy regime, it also failed to upgrade its
comparative advantages. In 1980 57 per cent of total manufacturing
production was concentrated in food processing and beverages and in
apparel and Costa Rica’s main exports were still coffee and bananas. The
Conclusion 137
economy was in full employment, but the amount of leading sectors

with capacity to create knowledge and innovation was limited.
Since 1980, Costa Rica has managed to develop new leading sectors
(particularly but not only in the FTZs) and thus become a successful
development example for many. The establishment of Intel and other
powerful TNCs in high tech and services has been particularly praised as
an effective way to secure export upgrading (Nelson, 2009; Spar, 1998).
For many inside and outside the Costa Rican government, selective attrac-
tion of FDI through marketing and generous tax incentives, together
with trade liberalization and the signing of free trade agreements, were
instrumental in developing a high-road to development (based on high
wages). Unfortunately, however, this strategy has gone hand in hand with
increasing structural heterogeneity and the growth of informality.
Of course, the growth of informality can be partly explained by global
forces. Global competition has increased the number of bad jobs – what
Standing (2011) calls the “precariat” – all over the world. Yet informality
has also been driven by at least two policy changes: the reduction in the
role of the public sector as employer and the concentration of the state
in attracting foreign investment and promoting exports while paying
less attention to other sectors. As a high-ranking official in the Ministry
of Trade explained, support for economy-wide innovation and for small
and medium-sized firms received little attention in recent years as the
government concentrated in developing the leading sectors instead.4
An strategy centred on FDI attraction and the expansion of leading
sectors has several problems. The new leading sectors, particularly those
high-tech exports from the FTZs, have created limited linkages with the
rest of the economy – a point discussed in Chapter 2. The government
has tried to confront this problem, particularly through the creation
of Costa Rica Provee – a programme that promotes interaction between
TNCs in high tech sectors and potential local suppliers. Costa Rica Provee
has succeeded in promoting some linkages: between 2001 and 2009 it
created 881 linkages and identified more than 400 local suppliers.5 Yet
it is a small program, which cannot by itself lead a large effort to link
the FTZs with the rest of the economy. In 2007, it employed only seven
workers and had a budget of US$275,000 (Paus, 2010) and all the link-
ages it created in the last ten years accounts for just 1 per cent of total
local purchases (Monge-González, Rosales and Arce, 2010).
The government has failed to develop a coordinated strategy to pro-
mote the technological capacity of those Costa Rican firms that could
potentially build positive partnerships with FTZs (Paus, 2005). Active
support to companies in the rest of the economy in areas like training,
credit, inter-firm collaboration and the accumulation of knowledge

has also been timid, inconsistent and incoherent. As Paus (2010: 44–5)
explains, “accumulation of local capabilities was neither central nor
integral to the free market-based NEM [new economic model]. (…)
The focus of the development model has to shift toward a long-term
strategy that puts the accumulation of local technological capability
at the centre and derives all other policies from it in a coherent and
continuing way.”
The Costa Rican experience thus has significant lessons for the many
developing countries that are trying to compete in a global economy
increasingly dominated by China (Kaplinsky, 2005; Paus, 2012). First,
a selective policy of investment promotion can contribute to the
advancement of high-tech sectors, thus overcoming excessive depend-
ence on low-skilled activities like clothing or primary goods. Second,
however, this type of economic upgrading may result in high economic
growth but not in market incorporation. The challenge of promoting
learning and innovation must thus be linked to the challenge of creat-
ing employment for all.
Lesson 4: Social insurance can contribute to the building of

more inclusive social policy regimes
Most of the literature on the nature and determinants of universalism
expects all countries that establish social insurance to end up with
stratified corporative rather than universal arrangements (Esping-
Andersen, 1990; Filgueira, 2005). Yet the Costa Rican case demon-
strates that the specific way in which social insurance (pensions and,
particularly, healthcare) is designed may help or deter universalism.
Two key features discussed in Chapter 3 were particularly important in
building universalism through social insurance in this case: first, the
programme was built from the bottom up, meaning that initially only
people with wages under a certain level were eligible and had manda-
tory social insurance. Consequently, the system was never hijacked
by upper-middle -income groups already enjoying generous benefits.
Second, the system was unified so that everyone received the same
healthcare benefits.
Even if coverage took decades to become universal, these two
components of the initial 1941 architecture ultimately resulted in
equality of treatment and broad-based solidarity. By the early 1980s a
majority of the Costa Rican population was insured either directly or
indirectly, through contributory or non-contributory means, and life
expectancy was higher than in most other developing countries.
Conclusion 139
Costa Rica’s experience is good news for many developing countries

where policy makers seek to build social policy regimes that reach a
majority of the populations but suffer from weak fiscal bases, restrictive
services and narrowly defined eligibility criteria. In Latin America, this is
the case of more than half of the countries. Under these circumstances,
the creation of more inclusive social policy regimes must figure out how
to: (a) draw from all specific arrangements set in place; (b) go beyond
very specific anti-poverty programs; and (c) bring the middle class on
board. These three conditions require that emerging architectures have
a place for redesigned insurance-based services.
Lesson 5: Social incorporation benefits from a close

intertwining between basic social services and
social insurance
While social insurance and most social assistance programs aim to deal
with risks like old age, sickness and disability among workers and the
poor, most basic social services are designed to create skills and enhance
capabilities for all. While the two are usually separated in policy analy-
sis (see, for example, UNRISD, 2010), any attempt to make clear-cut
distinctions between social insurance, social assistance and basic social
services in the Costa Rican case poses enormous difficulties. One pecu-
liarity of the Costa Rican social policy regime, which contributed to
its success, is the fact that basic services and contribution-based social
policy are highly interrelated. This is particularly clear in healthcare but
also occurs with pensions, where contributory and non-contributory
pensions were managed under the same institutions. Such interrelated-
ness accounts for a comprehensive approach to “basic” social services:
in so far as the poor are brought on board of non-targeted arrange-
ments, they have access to more comprehensive benefits which, in turn,
helps social incorporation.
To make sense of the Costa Rican social policy regime over the period
considered in this book the key distinction is not that between basic
services and contributory social policy but that between universal and
targeted measures that complemented and supported the achievement
of universalism. In particular, the social development and family allow-
ances fund (FODESAF) created in the 1970s funded affirmative action
initiatives (such as school lunches, school uniforms and nutrition pro-
grams) that sought to enhance the poor’s access to universal services.
Costa Rica’s successful embeddedness of anti-poverty programs in the
overall universal social policy regime constitutes a useful lesson for
many other developing countries, particularly in Latin America, that
are currently linking income transfers with social services through con-
ditional cash transfers.
Costa Rica did not establish these successful arrangements over-
night. It took about four decades of incremental state-building with
long periods of piecemeal growth (the 1950s and 1960s) and short
periods of intense statecraft (the 1970s). Sequencing in this gradual
process mattered: under social insurance, the low-income working
class was reached first, followed by higher-income groups. Meanwhile,
basic education and public health services reached the poor. When all
health services were consolidated under one single system, the poor
were assured the same quality and opportunity of services than the
non-poor – something that should be a primary policy objective for
countries trying to establish good social services for a majority of the
population.
Lesson 6: Complementarities between the economic and

social policy regimes are difficult to attain6
Much of the political economy literature on developed countries
considers complementarities between the production and welfare
regimes to be fundamental to support employment growth, techno-
logical innovation and equitable income distribution. In particular,
universal social policies are expected to go hand in hand with produc-
tion regimes that can effectively use skilled workers, improve produc-
tivity and secure stable funding (Hall and Soskice, 2001; Huber and
Stephens, 2001).
The social-democratic model in the Nordic countries constitutes one
of the best examples of these constructive relations – and particularly
influential for the experience of social-democratic peripheral countries
such as Costa Rica. Low inequality and high social spending are com-
bined with successful export performance and dynamic technological
upgrading. Government and firms collaborate to sustain the expan-
sion of manufacturing exports and the modernization of agriculture
(Blomstrom and Meller, 1990). Productivity growth generates enough
resources to fund a universal social policy regime that reduces poverty
more effectively than more targeted regimes (Korpi and Palmer, 1998).
Nordic countries and others in Continental Europe promote high
spending in education and active labour policies that provide firms with
a high-skilled, highly productive labour force (Hall and Soskice, 2001;
Huber, 2003).
In the case of Costa Rica there were positive relations between the two
regimes at various points in time: between 1950 and 1980 a relatively
Conclusion 141
effective funding mechanism based on payroll taxes together with full

employment contributed to the funding of the welfare system. Since
then, the economy has been able to translate human capital into the
upgrading of comparative advantages. Nevertheless, the economic and
social policy regimes were never fully complementary and showed
tensions during the two periods. During the Costa Rican period of
expanding incorporation, the economic policy regime was unable to
transform the newly created human capital into an upgrading in the
leading economic sectors (see lessons 2 and 3). Costa Rica’s comparative
advantages continued to revolve around coffee and bananas, neither of
which required significant amounts of skilled labor.
Since the early 1980s the country underwent a systematic attempt to
develop skill-intensive comparative advantages. New sectors received
generous tax incentives and subsidies and were expected to attract
human capital, expand productivity and support the resilient universal-
istic welfare regime. Although new comparative advantages were indeed
created, the productivity gap between high- and low-productivity sec-
tors grew and posed new challenges upon a social policy regime that
was still largely reliant on payroll taxes.
Therefore, during the recent period of stagnant incorporation, the
severe weakening of synergies between the economic and social policy
regimes has translated into the shortage of resources for social programs
and therefore in coverage and, particularly, in quality (see Chapter 3).
This is especially problematic in the context of an aggressive expansion
of market services that commodify, and therefore stratify, social incor-
poration. The latter suggests that loss of synergies between economic
and social policy regimes can lead to de facto transformation of the
latter.
Costa Rica’s experience thus highlights the importance of finding
ways to transform human capital into productivity growth and, at
the same time, find sustainable mechanisms to fund social policy –
mechanisms that may need to change over time. In thinking about
long-term policies, we should remember that relations between the
social and economic policy regimes are important but inherently prob-
lematic and full of changing tensions.
Lesson 7: Beyond good and bad elites, we need to have

a better understanding of what elites are looking for when
driving state-building7
The study of Costa Rica highlights the need to give serious consideration
to the composition of the political elite and in light of what agendas
it drives the process of state-building. Key actors may seek control of

the state for their own benefit but still contribute to positive results
in terms of market and social incorporation. During the period of
expanding incorporation, Costa Rica’s promotion of public employ-
ment, small and medium-sized firms and of cooperatives were driven
by a new elite around the PLN who needed state support for their
own economic advance. It is not so much that the political elite were
interested in incorporation and the current elite is not. Rather, the
emerging elite of small and medium-sized producers needed the state
to facilitate their process of accumulation and, in so doing, indirectly
created opportunities for the middle class as well. In recent times, a
large share of the current elite relies on the state opening up spaces
for economic activity restricted to a few large operations with limited
employment impacts.
In addition, we should also acknowledge that incentives for the
political elite to promote market and social incorporation do not need
to be simultaneous: there is no reason to expect that a state that aims
to promote economic growth will also promote universal social policies
or vice versa. What makes Costa Rica particularly interesting is the con-
vergence of both rationales. We argue that such convergence revolved
around three goals: accumulation, broadening of support, and conflict
management and suppression, and that policies pursued by the politi-
cal elite helped them accomplish all three goals. There was a political
operation rather than a merely technical policy design.8
Our almost exclusive focus on the elite is partly a function of Costa
Rica’s specific trajectory. Historical circumstances – especially the Civil
War and its aftermath – meant that social movements were less influen-
tial in policymaking than in other countries. Pressures from below did
take place and social movements were not passive actors – protests in
the rural sector, for example, forced the PLN to focus more attention to
land issues and anti-poverty programs. However, the elite´s success in
managing and suppressing conflict meant that social movements were
not a driving force of state-building during these decades.
Yet we still believe that Costa Rica may offer lessons for countries
where politics are more contentious and social movements more active.
Even in those cases, the elite play an important role in the definition of
the policy regime and its evolution over time. In most instances, what
social movements can aspire to do is either shift the incentive structure
of the elite and force it to adopt more inclusionary policies or replace
the elite itself – a process that is bound to create strong tensions as
illustrated by the recent experience of Bolivia or Venezuela.
Conclusion 143
Lesson 8: International ideas play a crucial role in shaping

constrains and opportunities
It is obvious that international conditions – whether ideas or other,
more material, resources – do not, by themselves, determine market
or social incorporation at the national level. What is less obvious is
that these international conditions are indeed a necessary condition
to establish inclusive policy regimes. The Costa Rican case shows that
at various points in time, political elites – and actors mastering knowl-
edge about specific policies – drew on ideas that were internationally
available.
In this book we have tried to avoid excessive simplifications regard-
ing the international policy environment during the last two decades.
Neoliberal ideas did dominate the international discourse, but the
policy menus were broader. There were, in particular, some opportuni-
ties to selectively target foreign investment, to actively promote open
industrial policy (Schrank and Kurtz, 2005) and to conduct heterodox
social reforms.
Nevertheless, the policy space available for developing countries was
narrower than it is desirable and the accent on markets as optimum
institutions excessive (Gallagher, 2005). Fortunately, in the last few
years the debate has gradually reopened: the recent accent on both
industrial policy (Lin, 2010; Lin and Monga, 2011; UNRISD, 2010)
and universal social policies (Mkandawire; 2006; Filgueira et al. 2006)
worldwide represents a unique opportunity for developing countries to
promote policy shifts. The extent to which different countries end up
benefiting from new international policy menus will, of course, depend
on the interests and coherence of the elite and its relations with other
social actors.
To conclude: poverty reduction can only be achieved through

universal market and social incorporation
Good jobs and social services must come together to assure people´s
well-being. The way different countries do it varies and we should avoid
simple slogans such as “let’s liberalise” or “let’s build a developmental
state”. In the Costa Rican case, the expansion of the state as employer,
provider of goods and services and supporter of small, medium-sized
and large firms in the agricultural and manufacturing sector was par-
ticularly important. In recent decades, the fragmentation of the elite
has translated into a more incoherent state which is pushed in many
different directions by different forces.
Costa Rica is thus facing growing tensions to sustain its previous

achievements. The economy is increasingly heterogeneous with some
winners and many losers and the principle of solidarity in the social
policy regime has been eroded by growing marketization and weakened
state capacities. In essence, dual incorporation in the future will require
a strengthening of those segments of the elite with vested interests
in simultaneously constructing a healthy economy with full formal
employment and dynamic comparative advantages, as well as a univer-
sal and effective social policy regime. Can the right incentives be set in
place for a realignment of the elite? Will other social actors be able to
push the elite in such direction? The task is difficult: if successful, Costa
Rica will be once again a model for others; if not, it may end up as just
another average country.
Notes
1 A Country That Tamed an Elusive Challenge

1. International initiatives such as the World Summit for Social Development
have recently promoted universal coverage of basic social services (United
Nations, 2000). See also ILO (2011), PNUD (2010) and UNRISD (2010) for other
statements in favour of universalism from international organizations.
2. Kwon (2005: 22) gives a good explanation of this subordination of social
policy to the growth project before the 1990s: “Because of the selectivity of
the system, the East Asian welfare state had its inevitable downside. Since
social policy programmes covered mainly industrial workers, the welfare
states tended to reinforce socioeconomic inequalities… The vulnerable people
in society not only suffered because of their difficult situation but were also
stigmatized by being excluded from the welfare state….The developmental
welfare state comprises a set of social policies and institutions that are pre-
dominantly structured for facilitating economic development.”
3. Social incorporation as we define it (with decommodification as a central
component) increased significantly in Taiwan and South Korea during the
1990s, when public spending in health and pensions grew rapidly (Haggard
and Kauffman, 2008). By that time, however, both countries were in a
different stage of development with similar income levels than the levels of
developing countries.
4. GDP per capital measured in 1990 International Geary–Khamis dollars comes
from Maddison (2010). We stop in 1979 because in 1980 Costa Rica was
already suffering the consequences of the international economic crises that
two years later affected the rest of the region.
5. As we see in Chapters 2 and 3, some of the foundations of Costa Rica’s sub-
sequent success, particularly in the area of social policy, were already estab-
lished during the 1940s.
6. The study, titled “Income Distribution in the American Hemisphere,” Monthly
Bulletin of Agricultural Statistics, New York, 1970, offers estimations that corre-
spond to the first years of the 1960s (and possibly before), a factor that could
explain the differences with the measurements of Quintana.
7. We consider these two years because available measurements are more precise
than those based on regular household surveys. Data are not comparable with
household surveys. In this specific case, findings are similar for 2004 but fairly
different for 1988.
8. Of course, the transformations of the economic policy regime, at least ini-
tially, were also triggered by the debt crisis of the early 1980s, which took
place earlier in Costa Rica than in other Latin American countries. However,
thanks to its geopolitical position next to Nicaragua during the Sandinista-
Contra war, Costa Rica overcame its economic crisis fairly rapidly. By 1983,
the country had restored fiscal balance and regained economic growth but
significant policy transformations continued.
145
146 Notes
9. Since the 1980s the middle strata has become less state-bureaucratic and
more private-entrepreneurial. While public servants continued to have a
prominent role among the lower-middle and upper-middle class, medium-
size, small businesses and professionals in the private sector grew (Castro and
Gutiérrez, 2007:142). Based on a different methodology, Segura et al. (2010)
show that between 1987 and 2008 medium-sized businesses, experts and
middle-income groups increased from 27 to 37.5 per cent of the occupied
labour force. While the upper class also expanded, during the same period
agricultural and service workers dropped from one-third to one-fifth of the
occupied population during the (from 32.7 per cent to 20.2 per cent).
10. Cortés and León (2008), Román (2008), Trejos (2008) and Vargas Cullell (2008).
In addition to our own reports, we draw primarily from the latter two.
2 The Economic Policy Regime and the Two Phases of

Market Incorporation
1. It is important to acknowledge that GDP figures by sector in Bulmer-Thomas
(1987) and in our tables (taken from Vargas, 1998) differ in absolute terms:
compare Table 2.2 below with Tables 12.2 and 12.3 in Bulmer-Thomas’s book.
Nevertheless, there are no differences in the direction of change between both
data sets.
2. These efforts included the Law of Heads of Families in 1909; the Law of
Unoccupied Lands in 1939; the Law of Untitled Land in 1942; and the Law of
Rented/Leased land and Public Economic Development.
3. US official aid, partly through the Alliance for Progress, was incorporated into
the budget of most regional institutions. In some cases, the contributions
of member countries were close to zero, affecting the level of commitment
(Bulmer-Thomas, 1987).
4. See the study funded by ECLAC and edited by Anabelle Ulate in 2000 (espe-
cially Chapters 1 and 2) for an excellent discussion of the economic reforms
in Costa Rica during the 1980s and 1990s (Ulate, 2000).
5. Interview with a high-ranking Civil Service official San José (Costa Rica),
October 2002.
6. Quoted in Spanish from an interview: “Yo creo que permitió que mucha gente
buena se fuera porque podía conseguir empleo en otro sitio. La gente mala no se fue,
se mantuvo.” (Summer 2002).
7. The system of mini-devaluations continued during the rest of the decade, but
could not prevent a systematic appreciation of the colon in real terms. A real
exchange rate index constructed with consumer price index and exchange
rate data collected from the Central Bank shows the real exchange increas-
ing from 79.9 in 1980 to 245.7 in 1981 and then decreasing steadily until it
reached 100.0 in1991.
8. Interview with an economist and former minister, San José (Costa Rica),
September 2002.
9. Export contracts included other less important measures such as the simplifi-
cation of procedures to export (which was achieved through the creation of a
single window), special port rates and subsidized interest rates. The last two,
unfortunately, were never implemented.
Notes 147
10. The original data came from PROCOMER and can be found in COMEX
(1997).
11. The reforms of the financial system in the 1980s and 1990s were the culmi-
nation of a long struggle between the defenders of the nationalized bank-
ing system and its opponents. Prior episodes included a failed attempt to
eliminate the public banks’ monopoly on the creation of deposits during the
Trejos administration (1966–70) and the creation of non-banking financial
firms ( financieras) in 1972. See Jiménez (1993).
12. Interview with a former Minister of Planning and Costa Rican academic, San
José (Costa Rica), September 2002. See also Sojo (1995) and Villasuso (1990).
13. Other private banks were also created at the beginning of the 1980s by inves-
tors with primary interests in other sectors of the economy. The Aizemann
family, a large importer of cars and other consumer goods, created the Banco
Mercantil. The Banco de San José was owned primarily by foreign investors as
well as expanding domestic firms such as Durman Esquivel and Lachner and
Sáenz. See Sojo (1995) and Actualidad Económica (several issues).
14. Information from Actualidad Económica, 3 (9), March–April 1989 and Actualidad
Económica 10 (8), 1995.
15. Information from Actualidad Económica, 3 (10), April 1989 and 5 (10), 1991.
16. Apparel production for exports was not only located in the FTZs. A large
share of apparel exports benefited from the RTA regime discussed above.
17. Unfortunately Ernst and Sánchez-Ancochea (2008) do not include the skill
composition of the service sector due to the lack of available information.
18. Value added X = (X/L)*L so that changes in value added ΔX = Δ(X/L) + ΔL
where L is equal to the total number of workers and Δ represents growth (in
percentage terms).
19. This calculations use data from Procomer (2001), which is also replicated by
Monge-González, Rosales and Arce (2005). If one considers data from other
sources, the sector experienced higher growth during the second half of the
1990s than in the first half. In any case, the growing trend of employment
is unquestionable.
20. Our analysis for the period 2001–08 has an additional problem: it compares
data from household surveys (for the economy as a whole) with data from
Procomer’s company surveys (for the FTZs).
21. The percentage of wage-earners constitutes a common proxy for formal
employment since most non-waged workers are self-employed and thus
unlikely to receive social benefits or the official minimum wage.
3 The Social Policy Regime: Creation, Expansion and

Resilience
1. This chapter, particularly those sections related to basic social services, draws
extensively from Trejos’s (2008) discussions, especially the work addressing
water and nutrition programmes.
2. In addition, in 1942, a chapter on social guarantees was added to the Political
Constitution.
3. In the 1990s the label “and Social Development” was added, giving a better
sense of the purpose of the fund.
148 Notes
4. The Bolivian Social Emergency Fund was created in 1986 as the first in a fam-
ily of similar agencies following the economic crises of the 1980s. It funded
an array of anti-poverty programmes.
5. See also Rosero (1983) for an estimation of spending on health and educa-
tion per capita in 1970 dollars for the period 1910–82 and Sauma and Trejos
(1999) for a review of spending on basic social services from 1980 to 1996.
6. As discussed in the previous paragraph, we are aware that much had hap-
pened before 1940 but previous, incremental change only crystallize in a
qualitative modification of the social state in the 1940s when for the first time
social risks became a primary objective of the state in Costa Rican history.
7. We use age 14 to allow a lag time in enrollment follow-up.
8. Initially, medical services covered only children under 12 years. Family cov-
erage had started in three communities about a decade earlier when it was
strongly demanded by the insured who claimed that children were involved
in productive affairs as much as their parents. In at least one case the com-
munity had a co-op (Miranda, 1994).
9. This is based on the total number of people 65 years and over, although the
programme only targeted the poor with no contributory pension. Pensions
were also granted to individuals younger than 65, such as poor widows and
heads of households with serious disabilities.
10. Collective insurance was made available to groups of non-salaried workers
(for example, unions, cooperatives, associations). Over time, the CCSS has
only signed about 150 agreements, reaching around 2 per cent of the occu-
pied population. There could be several reasons for such poor performance.
One reason may be group size: the minimum of 50 workers is a difficult
requirement to achieve in a country where 7 of every 10 businesses employs
fewer than 5 workers.
11. For pensions, CCSS data concerning the total number of individuals con-
tributing is available prior to 1969 but figures cannot be weighted by the
economically active population.
12. For instance, monetary transfers among salaried workers reached 100 per
cent of their regular wages, but for non-salaried workers only a percentage
of stipulated daily subsidies.
13. The Constitutional Court (Chamber IV) of the Supreme Court hears all mat-
ters related to constitutional rights. This robust control of constitutionality
issues has converted the judicial branch, and in particular, the Constitutional
Court into a key public policy actor in Costa Rica (Vargas Cullell, 2009).
14. Estimations from the World Health Organization can be found at http://
www.who.int/nha/country/cri/en/ (last accessed on 17 October 2011).
15. Similar to other regimes, the first collective pillar has defined benefits and
contributions, while the second individual pillar has undefined benefits
with defined contributions.
16. The first pillar is administered by the CCSS, the Judicial Branch, Junta de
Pensiones y Jubilaciones del Magisterio Nacional (National Teachers’ Assembly
for Pensions and Retirement), and, in the case of the transition system,
Ministries of Labor and Finance. Corporations created by public (for exam-
ple, CCSS and Bancrédito and Banco Popular) and private institutions, all
regulated by the state, administer the second and third pillars (Legislative
Assembly, Law 7983).
Notes 149
17. Drinking water must meet certain physical, chemical, and microbiologi-
cal requirements and whose quality is determined by the National Water
Laboratory, a part of the ICAA (MS, ICAA and PAHO, 2003).
18. Until 2000, these funds were administered by another financial entity
attached to the MOH, the Technical Board of Medical Social Assistance
(CTAMS for its acronym in Spanish).
19. Meanwhile, the proportion of resources devoted to human resources
increased: the kitchen staff increased its percentage of budgetary costs from
14 per cent in 1979, to 52 per cent in 1990.
20. The government finally introduced a sales tax in 1967, but only after several
years of negotiations with the business elite. The initial tax rate was only
5 per cent and the law included several exceptions that diminished the
revenue capacity.
21. Average contributions to total wages consolidate workers and employers’ con-
tributions. From the point of view of employers, both are part of labour costs.
4 The State as the Central Actor: Elites, Ideas and Legacies

1. Although the PLN presented itself as democracy’s saviour after its creation in
1951, the fact is that its most significant leaders had promoted a civil war,
removed Constitutional powers, ruled the country with a de facto governing
board and took 18 months to give the presidency to the elected president.
2. In the Constitutional assembly of 1949, Social democrats gained four of 45
representatives (Rovira, 1987). In the ordinary elections to renew half the
legislative Chamber later that same year, they gained three of 45 legislators.
3. Our accent on the elite does not mean that social movements were pas-
sive and pressures from below totally absent. In fact, the PLN was forced to
respond on numerous occasions to popular movements, particularly in the
urban sector, as we show when discussing the 1970s. Yet the process of state
building during the 1950s, 1960s and 1970s was primarily a state-driven
one. This can be partly explained by the result of the 1948 Civil War when
progressive trade unions and other social movements supported the losers
and, as a result, were persecuted and lost most of their political influence.
4. First-generation reforms included macroeconomic stabilization, tariffs
and budget cuts and privatization. Second-generation reforms encompass
broader reforms of the state: the civil service and the delivery of public serv-
ices, including institutions that generate human capital and the environ-
ments within which private firms operate (Naím, 1994).
5. This is also the dominant explanation provided by influential intellectuals
and political actors when interviewed in San José during July–August 2011.
See also Bodenheimer (1970).
6. Bowman and Baker (2007: 48) offer a good summary of different positions
with regard to the role of land distribution: “The conventional wisdom
of agriculture dominated by small farms has been challenged by Kantor
(1958), Seligson (1980), and Winson (1989), and supported by Hall (1982)
and Torres-Rivas (1975). More recent studies by Samper (1994) and Paige
(1997) disagree on the distinctiveness of land-holding patterns of Costa Rica
from the rest of Central America, but it is an undeniable fact that land was
150 Notes
highly concentrated in Costa Rica long before competitive and fair elections
emerged.”
7. Rovira (1991) notes that democracy consolidated in 1958 when partisan
alternation took place. However, we place consolidation in the 1970s
because until then the Communist party remained banned.
8. In a set of 52 interviews with bureaucrats at OFIPLAN and ITCO conducted
by Denton in 1969, half of all respondents said they not just adhered but
belonged to the PLN. Denton believes a that among the 36 per cent that
did not respond there were pro PLN people as well. Besides, 62 per cent of
respondents identified ideological and programmatic differences between
parties rather than mere differences in personalities (Denton, 1969: 422).
9. The Costa Rican army was small in size prior to the decision to eliminate it;
the new elite worried that the traditional, agro-exporting elite might use it
to undertake a coup and regain power (Edelman, 2005).
10. Personal communication with Muni Figueres ( José Figueres’s daughter),
October 2010.
11. The provisional government also kept many of the institutional reforms
introduced by the previous two social Catholic governments, including
social insurance, later an instrument of state expansion.
12. During the period of expanding incorporation, Costa Rica’s political system
had two main blocks: the PLN and various other conservative groups that
at times succeeded in creating anti-PLN coalitions. Conservatives won two
presidential elections between 1951 and 1978 but never held a majority in
the Legislative Assembly. Before the 1970s, the Communist Party was pro-
scribed and, as a result, the PLN did not face any electoral threat from the
left.
13. The 1959 Law was approved during a conservative administration but its
design responded to the pressures and interests of the PLN. According to
Rovira (1993: 114), “it was the Partido Liberacion Nacional [the one] that led
all the process. Several of its deputies, like the then leader of the opposi-
tion [in Congress] Daniel Oduber but mainly Hernán Garrón Salazar, an
industrial member of the Industrial and Trade Commission of the Assembly,
played a very important role in all the sessions in which the Law was dis-
cussed.” Contrary to what some within the PLN had initially intended and
mainly due to US pressures, the law established few performance standards
for local companies, eliminating, for example, all requirements on local
content.
14. The calculation of these transfers (and, more generally, the welfare losses
resulting from protectionism) is based on a set of somewhat questionable
assumptions. See Taylor (1991) for valid criticisms. Nevertheless, it provides
some sense of the size of the subsidies that many producers received –
subsidies that may or may not have led to welfare losses over the long run.
15. Interview in Escazú (Costa Rica), 10 August 2011.
16. Data are based on households’ monthly income in nominal colones. Data
should be dealt with cautiously since the reliability of household surveys
conducted during this period is uncertain.
17. By the mid-1970s, the new institution charged with redistribution trans-
ferred only 3 per cent of arable land, benefiting 1.7 per cent of landless
households (Seligson, 1984).
Notes 151
18. Noteworthy, when approved, Figueres made a public statement praising

his initial bill. “Figueres verá asignaciones con Oduber y los diputados”, La
República, 24 November 1974, 44 and “En qué la dejarán los diputados? Lo
que dijo don Pepe”, La Hora, 15 November 1974, 11, 15.
19. Personal communication with Rafael Carrillo, former president of UCCAP,
March 2012.
20. At the same time, there was a rupture between the PLN and large segments of
the business sector. In the stronghold of pro-PLN business elite, the Chamber
of Industry, Bull (2008) reports that PLN sympathizers dropped from
70 per cent of board members in 1977 to 44 per cent in 1978, which she
takes as an indication of elite fragmentation triggered by the increasing eco-
nomic role of the state. In the aftermath of the debt crisis, tensions between
UCCAEP and the Chamber of Industries were largely overcome.
21. Costa Rica’s political system also experienced significant changes during
this period. During the 1980s and 1990s, the two-party system consolidated
with the creation of the Partido Unidad Social Cristiana (PUSC) as a perma-
nent, right-of-centre party. Between 1990 and 2006, the PUSC won three
presidential elections and reached significant agreements with the PLN on
key policy issues. Since 2006, the political system has become more fluid
with the crisis of the PUSC and the emergence of a new left-of-centre party,
the Partido de Acción Ciudadana (PAC), which in 2006 lost by just two per-
centage points to the winning PLN. These changes eroded the power of the
PLN at different points, but have not challenged its central place in Costa
Rican politics.
22. Some of these data come from http://www.asamblea.go.cr/Centro_de_
informacion/Sala_Audiovisual/Presidentes per cent20de per cent20la per
cent20Asamblea per cent20Legislativa/Forms/DispForm.aspx?ID=129 (last
accessed 20 April 2012).
23. When the solidaristas extended to the public sector, they did tend to focus
on their self-help role. Despite unions being backed by the ILO in their con-
flict with the solidaristas over workers’ representation, solidaristas have had
considerable support from the political elite and tensions between the two
types of organization has intensified over time.
24. The increasing heterogeneity of the middle class was the result not only of
policy shifts but also of the growing globalization of production. The latter
created opportunities for new export products and exposed several sectors of
the economy to increased competition.
25. Interview of a high-ranking official in the Ministry of Trade (San José, March
2010). The official argued that free trade agreements and trade liberalization
have created opportunities for leading companies and sectors that with time
will also help the rest of the economy.
26. Between 1983 and 1989, US aid flows to Costa Rica amounted to a staggering
4.1 per cent of GDP (Lizano, 1999, annex 5).
27. See http://www.semanario.ucr.ac.cr/index.php/noticias/mundo/3089-cuando-
todos-queriamos-ser-como-irlanda (last accessed 23 March 2012).
28. This section draws on Vargas Cullell (2009).
29. In tandem with each public bank (and the National Institute of Insurance/
INS) government companies (legally incorporated entities) specializing in
the management of investment and of pension funds appeared.
152 Notes
30. Between 1990 and 2003, new economic institutions were created predomi-
nantly for exerting control or aimed at specific purposes. 10 of the 36 new
supervisory entities had authority over markets, especially in infrastructure,
finance and public services. Among those created for specific purposes, 22
of the 36 were, for example, related to public banks that were created for
managing investment and pension funds. This profile contrasts with the
1950–79 period when prevailing institutions had responsibility over entire
sectors.
31. In 2001, 310 cases per 100,000 inhabitants were presented to the
Constitutional Court, a figure 20 times higher than those registered in
El Salvador (15.6 per 100,000), Guatemala (13.3), Honduras (15.4) and
Nicaragua (17.1). Sources are PEN (2003), Wilson (2004), Hammergren
(1998), Domingo and Sieder (2001) and Volio (2000).
32. For information about the concept of “actors with veto power”, see Tsebelis
(2000). For its application in Costa Rica, see Lehoucq (2005).
33. Prior to the creation of the Constitutional Court, challenging the constitu-
tionality of public actions/activities was exceedingly difficult, allowing the
Executive branch a relatively free reign.
34. See Jurado (2003) and Rodríguez (2003) for a discussion of how the creation
of the Constitutional Court has cut the powers of the Legislative Assembly.
35. In itself the reduction of the informal power of the Executive branch may
well be beneficial and allow for more transparency and respect for legal and
constitutional norms. Yet the Executive branch had created these informal
practices to promote its own priorities more effectively and that option is no
longer available.
36. Costa Rica has been more successful in maintaining high fees for services
provided by a broad and diversified network of decentralized institutions
and public sector companies. Since 1996, the management of fees is a
responsibility of the Regulatory Authority of Public Services, an entity that is
formally independent from legislative and executive power. This institution
has succeeded, constantly updating fees to match rises in operating costs and
revenues from tariffs, fees and other sources have been above 20 per cent of
GDP in recent years.
37. From 1997 to 2006 the total portfolio of financial investments of all the
public sector entities fluctuated between 10 per cent and 14 per cent of GDP.
Of these investments, 70–80 per cent was invested in bonds issued by the
Ministry of the Treasury and the Central Bank. These latter resources gave
additional liquidity to the Executive branch and allowed for the financing
of losses of the issuing body.
5 Conclusion: What Can We Learn from the

Costa Rican Case?
1. Market and social incorporation, however, may not be enough to improve
income distribution. Given that in Latin America the rich control a higher
share of GDP than in any other part of the world (Sánchez-Ancochea, 2009;
World Bank, 2003), a sustained reduction in inequality will demand a drop in
the income share of the economic elite.
Notes 153
2. GDP per capita measured in 1990 International Geary–Khamis dollars from

Maddison (2010).
3. Public employment may be particularly useful in post-conflict societies where
the creation of income opportunities for the young is urgent and the economy
is still growing slowly. This point is raised by Stewart (2011) in a recent analysis
of employment challenges in post-conflict countries like Sierra Leone, Nepal
and Kosovo. The challenge for these societies and many other developing
countries may be how to move public employees from low-productivity to
high-productivity activities.
4. Personal interview, San José (Costa Rica), 25 March 2010.
5. Data obtained in an interview with Albán Sánchez, director of Costa Rica
Provee, San José (Costa Rica), 27 March 2010.
6. See also Martínez Franzoni and Sanchez-Ancochea (2011), which furthers the
policy implications of complementarities in Costa Rica and lessons for other
Latin American countries.
7. We thank Jorge Vargas Cullell for this insight on the need to depart from the
notion of good and bad elites.
8. The creation of FODESAF in 1974 is a good example (see Chapter 3). FODESAF
allowed the government to buy and distribute land in the South Pacific and
support productive initiatives (and the accumulation of human capital)
around African palm. As a result of these (economic as well as social policy)
measures, within a few years anti-government unions were replaced with pro-
government cooperatives.
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Index
Acemoglu, D. CCSS, Costa Rican Social Insurance

and Robinson, J., 105 Agency, 64, 72, 75, 76–8, 86–7,
Johnson, S. and Robinson, J., 105 88, 123
agriculture, Costa Rica, 12, 33, 47–8, CEN-CENAI, Child Care Centres, 81,
113, 114 82, 92, 93
Amsden, Alice, 4, 18, 25, 114, 135 CEN, Nutrition and Education
Arias, Oscar, 22, 123, 125, 127 Centres for Children’s
Comprehensive Care, 81
Baker, B. Céspedes, V.G., 14, 16
and Bowman, K., 107, 112–13, 115, Chang, H.-J., 8, 135
149n Cheng, L.L. and Gereffi, G., 8
banking in Costa Rica, 45–6, 128 Chibber, V., 19, 105
financial deregulation, 45–6 Ciarli, T.
nationalization, 32, 111–12, 114 and Giuliani, E., 59, 60, 61
Biesanz, J. CINDE, Costa Rican Investment
and Biesanz, M., 106 Promotion Agency, 44, 125, 127
Blomstrom, M. Ciravegna, L., 13
and Meller, P., 140 and Giuliani, E., 59
Bodenheimer, S., 112, 115, 149n CODESA, Costa Rican Development
Bowman, K. Corporation, 38, 41, 117, 122,
and Baker, B., 107, 112–13, 115, 123, 126, 128
149n coffee production, Costa Rica, 12, 29,
Brenes, L., 33, 36, 108, 112–13, 114, 32, 33, 36, 38, 109, 113, 116
136 Collier, R. and D., 2
Bull, B., 151n Comptroller General of the Republic
Bulmer-Thomas, V., 12, 33, 34, 106, (CGR), 66, 110, 129
122, 146n Congreso Constitucional, 115
bureaucracy, Costa Rica Corrales, J.
growth of, 12–13, 36, 111, 116, 117, and Monge, R., 43
123 Costa Rica
influence/power, 103, 104, 115, 1940s social reforms, 72–3, 109–11,
127, 128–30, 132 115
average income (2001–2008), 58
CACM, Central American Common Civil War (1948), 102, 106, 110–11,
Market, 12, 34, 38, 39, 113, 121 142
Calderón[Guardia], Rafael Ángel, 41, Communist Party, 109, 110, 111,
110, 111 113, 118
Calderón Fournier, Rafael Ángel, 127 Constitution (1949), 73, 74, 75, 81,
CARICOM, Caribbean Community, 107
44 Constitutional Court, 105, 129–31
Carro Zúñiga, Alfonso, 115, 123 continuity in policies, 24, 128, 132
Castillo, Carlos Manuel, 121 economic performance, 29–31, 33,
CAT (tax break certificates), 42–3 50
170
Index 171
elimination of army, 33, 111, 112 Draibe, S.

equality/inequality, 15–18, 20–1, and Riesco, M., 7, 14
29, 50–2, 61–2, 68, 69 DR-CAFTA, Central American Free
GDP per capita, 62, 134 Trade Agreement, 40, 42, 44, 52,
historical background, 106–7, 125
109–11
Provisional Government, 32–3 Echandi, Mario José, 113
Social Catholic reforms, 109 ECLAC, Economic Commission for
Social Democratic Action Party, Latin America and the Caribbean,
110, 111 120–1
traditional oligarchy, 21–2, 102–3, economic policy regime, Costa Rica,
105, 106, 109, 110, 111, 112, 113 3, 12, 28, 32
see also double incorporation, Costa 1948–9, 32–3
Rica; PLN, National Liberation apparel products/exports, 53, 54,
Party; the state 55, 57
Costa Rican elite, 4, 21–3, 25–6, changes, 102, 103, 126–7
102–3, 105, 109–12, 141–2 coffee production, 12, 29, 32, 33,
accumulation, 103–4, 110–11, 113, 36, 38, 109, 113, 116
117 cooperatives, 35–6, 116, 134
bank nationalization, 32, 111–12, employment, 51, 54–5, 56–7
114 export promotion, 42–4
credit expansion, 113–14 export structure, 48–50
fragmentation within, 122–5, 132 financial deregulation, 45–6, 103–4,
managing conflict, 102–4, 112, 126
116–17 foreign investment, 44, 137
neoliberal segment, 122, 123–5, high-tech exports/manufacturing,
126–7 44, 48, 51, 52, 53, 54, 57, 59, 60,
preferences & interests, 39, 112–13, 62, 137, 138
115–17, 132, 136, 142 import substitution, 34, 103
role in incorporation, 21–3, 112–19 labour mobility, 60
state expansion, 39, 112–17, 117–19 manufacture and trade, 34–6
support, 103–4 market-friendly policies, 13–14
nationalization, 32–3
democracy, role in Costa Rica’s privatization, 41, 104
success, 20, 102, 107, 112 productivity divergence, 51–2,
developmental state, 18, 109, 114, 56–7
135–6 public investment, 40–1
Costa Rica, 135–6 rising wage policy, 32
Dominican Republic, 12, 53, 57, 95 rural sector, 37–8, 47–8
double incorporation, market and service sector, 44, 52, 54, 55, 137
social, 1–2, 103, 133 shortcomings, 38–9, 136–7
complementarities, 140–1 skilled labour, 60, 61
Costa Rica, 2–4, 7, 12–14, 24–7, SMEs, 35
133–4 state as employer, 36
East Asia 1, 7–8, 9, 18, 19 tax system, 130–1
poverty reduction, 143–4 TNCs, Transnational Corporations,
social-democratic model, 140 44, 51, 137
see also market and social trade liberalization, 25, 29, 42–4,
incorporation 103, 126, 137
172 Index
economic policy regime, Costa Rica – Figueres Olsen, José María,

continued administrations, 125, 127, 129–30
see also Cost Rican elite, state attraction of FDI, 44
expansion; FDI in Costa Rica; FTZ Filgueira, Fernando, 2, 9, 13, 18, 64,
(Free Trade Zones) 138, 143
see also financial deregulation, Costa Rica,
education, Costa Rica, 72, 73–5, 83–6, 45–6, 126
95 FODESAF, Family Allowances
primary/secondary coverage, 74 Program, 73, 80, 93–4, 99, 139
employment, 4–5 creation of, 65, 77, 118–19, 122
Costa Rica, 10–12, 25, 38, 54–5, nutrition programmes, 82–3, 95,
55–7, 62, 134–5 97, 139
creation, 116, 117 as policy tool, 119
see also market incorporation reform of, 129–30
equality/inequality, 4–5 FTZs, Free Trade Zones, 43, 44, 48, 50,
Costa Rica, 15–18, 20–1, 29, 50–2, 52–7, 125, 137
61–2, 68, 69, 138 employment, 54–5, 55–7
Ernst, C. employment, sectoral distribution,
and Sánchez-Ancochea, D., 51, 55, 54
147n exports, sectoral distribution, 53
Esping-Andersen, G., 6, 138 high-tech activities, 44, 51, 52, 57,
Evans, P., 19, 135 59, 61
and Rauch, J., 108 inequality, 61–2
explanation of Costa Rica’s knowledge spillovers, 59, 60–1,
success, 20–4, 25–6, 102–5, 137–8
106–9 linkages to rest of economy, 51, 52,
1940s social reforms, 109, 111 57–61, 137, 137–8
legacy/continuity, 4, 23–4, 104, local purchases, 59, 60
105 market incorporation, 52–7
post-Civil War reforms, 111–12 skill composition of labour, 55, 57
see also Costa Rican elite wages, 55–8
exports see economic policy regime,
Costa Rica Gallagher, K., 143
Garnier, L., 125
FAO, Food and Agriculture and Blanco, L., 61
Organization, 82 and Hidalgo, R., 115
FDI, Foreign Direct Investment, Costa Gereffi, G.
Rica, 29, 31, 38, 44, 48, 50, 62, and Cheng, L.L., 8
125, 137 Gindling, T., 61
FEDECOOP, Federation of Cooperatives and Trejos, J.D., 61
of Coffee Growers, 116 Giuliani, E., 59
Figueres Ferrer, José, 110, 113 and Ciarli, T., 59, 60, 61
administration, 38, 44 and Ciravegna, L., 59
Civil War, 111 González-Vega, C., 114
election victory, 103, 113 and Mesalles, L., 45
and the Junta, 112 Grynspan, R., 127
Provisional Government, 32
social policies, 118–19, 121 Haggard, S.
see also PLN and Kaufman, R., 8, 19, 121, 145n
Index 173
Hall, P. international policy ideas, 4, 21, 22,

and Soskice, D., 140 23, 103, 105, 120–1, 126–7, 131,
healthcare, Costa Rica, 65, 68, 69–70, 143
75–7, 78, 86–9 Ireland, 23, 126
changes and reform, 86–7, 127
funding, 94, 96–7 Japan, developmental state, 18
insurance, 72, 73, 88, 89 Jenkins, M., 55, 59
preventive and primary, 73, 75, 77 Jiménez Veiga, Danilo, 121
private practice/provision, 86, 87–8 job creation, 113, 114, 116, 117,
user dissatisfaction, 88–9 134
Heclo, H., 27 Johnson, C., 18
Herrera, C., 42
historical preconditions, 105, 106–7, Kaplinsky, R., 63, 138
109–11 Kim, P.H., 8–9
Huber, E., 9, 18, 20, 140 Korea, 8, 19, 109
and Stephens, J., 6, 19–20 state developmentalism, 7–8, 18,
Hytrek, G., 106 135
Korpi, W., 6
ICAA, National Water Supply and and Palmer, J., 140
Sewage Association, 80, 91–2, 97 Kurtz, M.
ICE, Costa Rican Institute of and Schrank, A., 143
Electricity, 32–3 Kwon, H. J., 145
ideas
see international policy ideas labour market, significance of, 4–5
IFIs, International Financial land issues, 37, 47, 118, 142
Institutions, 126, 127 Latin America
ILO, International Labour exports per capita, 49
Organization, 115, 120, 121, 123 export/technological content, 49
IMAS, Mixed Institute of Social GDP growth (1900–2008), 50
Assistance, 65, 95, 118 human development comparisons,
IMF, International Monetary Fund, 71–2
41, 126 incorporation, 2, 9, 19
import substitution, 34, 103, 120, inequality, 5
121, 134 informal employment, 9–11
INA, National Learning Institute, social services, 64
115–16 socioeconomic development, 7,
incorporation in Costa Rica 9–10
lessons from, 26, 100–1, 134–43 state and society, 19–20
market and social, 10–18, 21–2, welfare regimes, 9–10, 13
112, 118, 132 Latin American Debt Crisis, 24, 31,
see also double incorporation 39–40, 65, 104, 122–3
informal employment, 2, 3, 5, 9–10, Lehoucq, F., 20, 107–8, 152
10–11 Lewis, C.
Costa Rica, 10–11, 14, 31, 76, 78, and Lloyd-Sherlock, P., 10
137 Lin, C.-Y., 7, 9, 143
Intel, 44, 53, 54, 57, 61, 127, 137 Lin, J.
Inter-American Development Bank, and Monga, C., 143
104 Lizano, Eduardo, 22, 42, 45, 114, 121,
international organizations, 107 123, 126, 136, 151n
174 Index
Madrid, R., 104 Palmer, S., 72

Madrigal Nieto, Rodrigo, 123 Paus, E., 51, 59, 60, 63, 137–8
market incorporation, 1, 3, 5, 7–8, payroll taxes, 119, 121, 122, 141
28 pensions, Costa Rica, 67–8, 77–8,
market incorporation, Costa Rica, 3, 89–91, 118, 127
10, 12–13, 28–31, 62, 136 insurance coverage, 90–1
CODESA, 117 multilayer regime, 89, 90
expanding phase, 29, 31–9, 62 social assistance, 89, 90, 91
impact of FTZs, 52–61 Workers Protection law, 89, 90
redistribution of land, 37 PLN, National Liberation Party, 21,
role of new elite, 21–2, 112–19 22, 39, 77, 102–3, 103–5, 108,
role of the state, 28, 36, 39, 62–3 112–17, 118–21, 122–7, 142
rural sector, 37–8 see also Costa Rican new elite
stagnant phase, 29, 39–63 the poor in Costa Rica, 65, 70, 78,
uneven incorporation, 50–2 92–3, 100
see also economic policy regime, policy legacies, 4, 23–4, 104, 128–31
Costa Rica political institutions, 107–8
McGuire, J., 8, 107 poverty, 4–5, 133
Martínez Franzoni, Juliana, 64, 78, reduction, 139–40, 142–4
88–9, 127 PROCOMER, Trade Promotion
and Castro Méndez, M., 117, 124 Corporation of Costa Rica, 125
and Mesa-Lago, C., 14, 87 public bureaucracy, 103, 104, 107,
and Sánchez-Ancochea, 21, 31, 73, 108
110, 120, 153n
Meller, P. Rama, M., 134
and Blomstrom, M., 140 Rauch, J.
Mesa-Lago, C., 14, 28, 86, 87 and Evans, P., 108
Mesalles, L. resilience, Costa Rican social policy,
and González-Vega, C., 45 65, 66, 83, 104
MIDEPLAN, 44, 52, 66, 71, 82, 84 Reygadas, L.
Millicom International, 41 and Filguiera, F., 2
Mills, C.W., 21 Riesco, M.
Monge, Luis Alberto, 123 and Draibe, S., 7, 14
Monge, R. Rivas, P., 82, 93
and Corrales, J., 43 RIVM, Disability, Old-Age and
Monge-González, R., 60–1 Survival Regime, 77, 89
and González-Vega, C., 114 Robinson, J.
and Acemoglu, D., 105
Nelson, R., 137 Rodríguez, Miguel, administration,
nutrition programmes, Costa Rica, 41–2
81–3, 92–4, 138, 139 Rodríguez-Clare, A., 31
funding, 95, 97, 99 Rosenberg, M., 13, 78, 115
Rosero, L., 69–70, 72, 75, 148n
Obregón Valverde, Enrique, 115 Rovira, Jorge, 3, 26–7, 32, 33, 35, 38,
Oduber, Daniel, 118, 119, 121, 122, 65, 108, 123, 149n, 150n
150 Rueschemeyer, D., Huber, E. and
FODESAF, 119, 121 Stephens, J., 18, 20, 106
OFIPLAN, 35, 39, 118, 150n rural sector, Costa Rica, 37–8,
Oreamuno, F., 119 47–8
Index 175
Sánchez-Ancochea, D., 12, 23, 31, 46, water supply, 79–81

50, 53, 57–8, 95, 126, 152n water supply and sewage, 91–2
and Ernst, C., 51, 55, 147n see also targeted programmes, Costa
and Martínez Franzoni, J., 21, 73, Rica
100, 120, 153n social programme funding, Costa Rica
Sandbrook, R. et al., 2, 20, 64, 109, business contributions, 95
126, 135 education, 95
Schneider, A., 20–1, 106 health, 94, 96–7
Schrank, A. nutrition programmes, 95, 97, 99
and Kurtz, M., 143 payroll taxes, 94–5, 96, 100
Seekings, J., 9, 18, 120 structure of, 95–7, 98
self-employment, 10–11 water supply, 94–5, 97
see also informal employment social protection, 6, 13, 64, 79
Singapore, 18, 23, 126, 135 social spending, Costa Rica, 66–7
SNE, National Electricity Service, 80 Sojo, A., 117, 128
social incorporation, 1, 3, 5–7, 8–9, Solís, M., 3, 113, 136
133 Soskice, D.
social incorporation, Costa Rica, 3, and Hall, P., 140
13, 14, 100–1, 139–40 Spar, D., 137
expanding period, 73–83 Standing, G., 137
fluctuations in, 66–7 state, the, Costa Rica
human development achievement, current conflict/incoherence, 105,
71–2 128–32
infant mortality, 68, 69–70, 73 as driver of employment, 134–5, 136
life expectancy at birth, 68, 69 as employer, 36, 126
malnutrition/nutrition, 70–2 expansion, 112–17, 131–2
outcomes, 68–72 institutions, 108–9, 126, 128–9
of the poor, 65, 70, 78, 100 role, 25, 122, 126, 128–9
role of the state, 19, 25, 75 and society, 18–20, 122
social expenditure, 83, 84 state developmentalism, 7, 18, 20,
stagnant period, 83–99 135–6
social insurance and assistance state institutions, 108–9
intertwined, 65, 76, 100, 139–40 Stephens, J.,
social policy regime, Costa Rica, 3, 13, and Huber, E., 6, 19–20, 120, 140
14, 25, 26, 64–5, 65–6, 94–9, 136, Stewart, F., 153n
139–40 Straface, F., 107
education, 72, 73–5, 83–6 and Gutiérrez Saxe, M., 102
Family Allowances Program, 65
healthcare, 65, 68, 69–70, 75–7, 78, targeted programmes, Costa Rica, 7,
86–9 13, 14, 23, 65, 88, 125, 127, 139
health insurance, 72, 73 tensions, Costa Rican state and
nutrition, 81–3, 92–4 policies, 14, 24, 66, 102, 128,
pensions, 67–8, 77–8, 89–91, 127 132, 144
private spending on welfare, 83, 84 traditional oligarchy, 21–2, 102–3,
the poor, 78, 92–4 109, 110, 111, 113
school lunch program, 82–3 Trejos, J.D., 13, 15, 16, 17–18, 36, 61,
universalism, 100, 101, 103 65, 66–7, 71, 73–4, 84, 86, 92, 94,
universal social provisions, 64, 65, 96–7, 98, 99, 127
73, 75, 78, 139 and Gindling, T., 61
176 Index
UCCAEP, Union of Private Business Vargas Cullell, J., 40

Chambers & Associations, 122 and Rosero Bixby, l., 107
UNICEF, United Nations Children’s Vega, M., 23, 114, 117, 124
Fund, 81, 82 Víquez Ramírez, Congressman, 116
United Fruit Company, Costa Rica,
32, 111 Washington Consensus, 126, 132
universalism, social policy, 6–7, 100, water supply, Costa Rica, 79–81
101, 138, 140 international loans, 80
Costa Rica, 7, 24, 64, 65, 138, 139, poor and rural coverage, 81
140 Weyland, K., 104
universal social provisions, 64, 65, 73, Williamson, J., 104, 126
75, 78, 139 Wilson, B., 107, 152n
UNRISD, United Nations Institute for Winson, A., 110, 113, 115, 116,
Social Development, 1, 6, 139 149n
Flagship report, 1 Wood, G. and Gough, I., 10
“Poverty Reduction and Policy World Bank 46, 50, 52, 59, 60, 71, 86,
Regimes in Costa Rica”, 24 104, 152n
universalism, 6, 143 and Costa Rican policies, 126,
USAID, United States Agency for 127
International Development, 44, International Finance Corporation,
45, 46, 103 46
reform agenda, 126 view of public employment, 134
US influence on Costa Rica’s policies, World Health Organization (WHO),
120–1, 126 82

(Developmental Pathways to Poverty Reduction Series) Juliana Martínez Franzoni, Diego Sánchez-Ancochea (Auth.)-Good Jobs and Social Services_ How Costa Rica Achieved the Elusive Double Incorporation-P

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(Developmental Pathways to Poverty Reduction Series) Juliana Martínez Franzoni, Diego Sánchez-Ancochea (Auth.)-Good Jobs and Social Services_ How Costa Rica Achieved the Elusive Double Incorporation-P

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Good Jobs and Social Services

Developmental Pathways to Poverty Reduction Series

Rayaprolu Nagaraj (editor)

Forthcoming titles are:

Jeremy Seekings and Nicoli Nattrass

Developmental Pathways to Poverty Reduction Series

Juliana Martínez Franzoni

Typeset by MPS Limited, Chennai, India.

List of Figures viii

1 A Country That Tamed an Elusive Challenge 1

1.1 Evolution of the incidence of poverty, percentages,

3.7 Evolution of access to primary and secondary

1.1 Weight of informal employment in the total in

to be more precise in various sections of the chapter. His input on eco-

talented and committed colleagues can be blamed for any shortcomings

ANFE National Association for Economic Promotion

IMAS Mixed Institute of Social Assistance

1.1 The elusive challenge of the double incorporation

In the path-breaking, 2010 flagship report, the United Nations Institute

Let us explain in more detail what we mean by incorporation.

three central conditions. Without these, neither long-term factors nor

1.2 Income inequality, poverty and the challenge of the

universal transfers and services. For instance, children from low-income

1.3 Failures to secure double incorporation

shortages by the late 1970s and “social marginality appear[ed] to be

organized groups, particularly rural and domestic workers, were largely

1.4 Costa Rica’s exceptional path and growing tensions

Although many other developing countries have made significant

1950 1960 1970 1980

Argentina 9.5 13.2 8.8 11.3 9.5 11.6 12.1 14.3

1 = share of self-employment in the economically active population (%).

The comparison between Costa Rica and the Dominican Republic

utilities were a major driver of Costa Rica’s successful market incorpora-

Poverty and inequality outcomes

Figure 1.1 Evolution of the incidence of poverty, percentages, 1980–2005

Year Primary distribution Impact of social Secondary

1988 37.3 –6.0 31.1

Source: Adapted from Trejos (2006b), tables 5 and 11.

1.5 Explaining the state role and the rationale for

Several theories have sought to explain regional variations and perform-

and economic growth. Not surprisingly, in that process the business

different degrees of social incorporation – although they do not use this

1.5.1 Explaining the Costa Rican state

1.6 A methodological note

This book originated in the UNRISD’s project “Poverty Reduction and

qualitative (a set of interviews to policymakers, academics and former

1.7 Plan of the book and main contributions

conflict management. In pursuing all three goals a growing bureaucracy

bourgeoisie companies which gained power. Building from the state

2.1 The success and growing tensions of Costa Rica’s

Market incorporation is a primary requirement for equitable economic

2.2 Costa Rica’s long-term process of market incorporation

Table 2.1 Gross domestic product, real colones of 1966,

Annual average Variance

1950–1960 5.75 5.14

GDP per capita World Latin America & Caribbean

Behind this positive, long-term trend, however, hides a more complex

2.3 The period of expanding market incorporation

redistribution of land and an incomplete modernization of the rural sec-

2.3.1 The late 1940s as a breaking point

• The nationalization of the banking system was implemented to

electricity production and soon became a key instrument for the

2.3.2 Sectoral policies, import substitution and the

Table 2.2 Distribution of nominal GDP by sector, 1950–1990