Costa Rica - Public Expenditure Review : Enhancing the Efficiency of Expenditures

Abstract

Costa Rica, an upper middle-income developing country of 4 million inhabitants, is well known for its socio-economic achievements. Costa Rica's economic growth has averaged 4.7 percent annually over the last 15 years, about 2 percentage points above the rest of Latin America, reflecting its stable macroeconomic and political environment, strong institutions, and a well-educated work force. Costa Rica has followed a successful strategy of outward oriented export-led growth, openness to foreign investment, and gradual trade liberalization that transformed the economy from one highly dependent on agriculture and agro-industry to one that is now led by high-tech computer and electronic industries, services such as transport, communications and banking, non-traditional agriculture, and tourism. The government of Costa Rica realizes that continued economic growth and poverty reduction require an improvement in the quality of infrastructure and social sector services, particularly if Costa Rica is to take full advantage of the greater global market opportunities in the context of Dominican Republic-Central American Free Trade Agreement (DR-CAFTA) and other free trade initiatives. To improve the quality of public services while simultaneously reducing its fiscal vulnerability is challenging, especially since reaching a political consensus on revenue enhancing tax reform has proven difficult. This report is the outcome of the government's request to the World Bank (WB) and Inter-American Development Bank (IADB) to identify possible reforms in policies and institutions to enhance the effectiveness, efficiency, and equity of public expenditures. Such reforms will support Costa Rica's efforts to ensure sustainable fiscal balances and establish effective and transparent mechanisms to allocate public resources so as to promote broad-based economic growth, improve social indicators, and reduce poverty.