2009 Index of Economic Freedom

Quick Facts

Population:

• 4.4 million

GDP (PPP):

• $42.1 billion
• 8.8% growth
• 5.6% 5-year compound annual growth
• $9564 per capita

Unemployment:

• 4.6%

Inflation (CPI):

• 9.4%

FDI Inflow:

• $1.5 billion

Costa Rica's economic freedom score is 66.4, making its economy the 46th freest in the 2009 Index. Its overall score is 2.2 points higher than last year, reflecting improved scores in freedom from corruption and financial freedom. Costa Rica is ranked 8th out of 29 countries in the South and Central America/Caribbean region, and its overall score is higher than the global and regional averages.

Economic growth has risen by over 5 percent annually over the past five years, and the economy ranks above the world average in seven of the 10 components of economic freedom, including fiscal freedom and government size. Personal and corporate tax rates are moderate, and the overall tax burden is not high. Costa Rica's trade freedom also scores moderately well because of a low average tariff rate.

However, bureaucratic procedures discourage more dynamic entrepreneurial activity, and further privatization and fiscal reform have been slowed by popular opposition. Monetary stability is another concern, as inflation rates have been hovering at around 10 percent. The court system, while transparent and not corrupt, is time-consuming and complicated.

Background Back to the top

An important producer of bananas, pineapples, and coffee, Costa Rica has benefited from industrialization in electronics and health care, and per capita income is high by regional standards. Former President Oscar Arias (1986–1990) was elected for a second time in February 2006 and pledged to break up state monopolies, especially in telecommunications and insurance, though unions have resisted his gradual “openness” approach to privatization. In October 2007, a slender majority of Costa Ricans voted for the Central America–Dominican Republic–United States Free Trade Agreement, but as of mid-2008, the Legislative Assembly had not enacted all of the implementing legislation. With a strong tradition of respect for human rights, Costa Rica for over 50 years has avoided the political violence that has afflicted other Central American countries.

Business Freedom 60.3 Back to the top

The overall freedom to start, operate, and close a business remains limited by Costa Rica's regulatory environment. Starting a business takes an average of 60 days, compared to the world average of 38 days, although obtaining a business license requires less than the world average of 225 days. The process for closing a business is relatively lengthy.

Trade Freedom 81.8 Back to the top

Costa Rica's weighted average tariff rate was 4.1 percent in 2005. Peak tariffs, some export controls, services market access restrictions, burdensome sanitary and phytosanitary requirements, export-promotion programs, bureaucratic customs administration, and issues involving the enforcement of intellectual property rights add to the cost of trade. Ten points were deducted from Costa Rica's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 82.8 Back to the top

Costa Rica has moderate tax rates. The top income tax rate is 25 percent, and the top corporate tax rate is 30 percent. Other taxes include a general sales tax and a tax on interest. In the most recent year, overall tax revenue as a percentage of GDP was 14.0 percent.

Government Size 88.4 Back to the top

Total government expenditures, including consumption and transfer payments, are low. In the most recent year, government spending equaled 19.7 percent of GDP. Privatization, when allowed, has been successful, particularly in sugar production and transportation infrastructure. Government intervention is highest in utilities, education, and hydrocarbons.

Monetary Freedom69.7 Back to the top

Inflation is relatively high, averaging 10.3 percent between 2005 and 2007. The government controls the prices of goods on a basic consumption list, including energy, petroleum, telecommunications, and water. Ten points were deducted from Costa Rica's monetary freedom score to adjust for measures that distort domestic prices.

Investment Freedom70.0 Back to the top

Costa Rica treats foreign and domestic investors equally. Investment faces restrictions in certain sectors that are reserved for state companies or that require participation of at least a certain percentage of Costa Rican citizens or residents (electrical power generation, broadcasting, professional services, and wholesale distribution). Costa Rican laws, regulations, and practices are generally transparent, although bureaucratic procedures are frequently burdensome to investors. There are no controls on capital flows, but reporting requirements are mandatory for some transactions. There are no restrictions or controls on the holding of foreign exchange accounts, which are readily transferable and available at market rates. There are no restrictions on land purchases, although some expropriation of land owned by foreign investors has occurred.

Financial Freedom50.0 Back to the top

Costa Rica's small financial sector functions relatively well and is growing. Three state-owned banks dominate the banking sector, accounting for around 45 percent of the financial system's total assets. In recent years, consolidation of private banks has occurred, and there are now 12 private commercial banks with combined assets representing around 30 percent of the country's total. Procedures for foreign banks to operate in Costa Rica have been simplified and streamlined by legislative changes in recent years. Credit is generally available on market terms, although the government retains some influence over lending. Accounting has become more transparent and compatible with international norms. Earlier financial reforms have liberalized Costa Rica's capital account and guarantee the free exchange of foreign currency.

Property Rights50.0 Back to the top

The judicial system can be slow and complicated. Contracts are generally upheld, and investments are secure, but it takes an average of more than 1.5 years to resolve a contract-related legal complaint. Resolution of squatter cases can be especially cumbersome; the system quickly recognizes rights acquired by squatters, especially when land is rural and not actively worked. Although the legal framework governing intellectual property is basically in place, enforcement is often ineffective.

Freedom From Corruption50.0 Back to the top

Corruption is perceived as present. Costa Rica ranks 46th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. The government does not emphasize enforcement of anti-corruption laws, regulations, and penalties. Some foreign firms have complained of corruption in the administration of public tenders.

Labor Freedom61.2 Back to the top

Costa Rica's relatively flexible employment regulations could be further improved to increase employment opportunities and productivity growth. The non-salary cost of employing a worker is high, but dismissing a redundant employee is relatively inexpensive. Regulations on modifying working hours are flexible.