Costa Rica's Economic Crisis of the 1980s and Structural Adjustment Programs

The 1980s Economic Crisis in Costa Rica

At the beginning of the 1980s, Costa Rica experienced a profound economic crisis characterized by a sharp rise in inflation. This phenomenon was triggered by several converging factors: the soaring cost of energy resources, specifically petroleum; a decrease in the international prices of Costa Rican export products; and a regional sociopolitical crisis that destabilized Central America. These elements necessitated radical shifts in social policy and the fundamental role of the State. The international economic system had already begun to falter in the mid-1970s due to an excessive rise in raw material prices. Petroleum prices illustrate this shock vividly: in the early 1970s, a barrel of oil cost approximately $3$ dollars, but by 1979, the price had surged to about $35$ dollars.

Costa Rica’s heavy dependence on imported crude oil for key economic sectors directly fueled an increase in external debt and a significant fiscal deficit. The immediate domestic effects were severe, including a marked deterioration in the quality of life for the citizenry, widespread scarcity of food products, the decline of public services, and the devaluation of the national currency. A fiscal deficit occurs when the State's expenditures exceed its income, a condition that became chronic during this era. Furthermore, the crisis resulted in increased social inequality due to rising unemployment, a reduction in available credit for productive sectors, and the weakening of the Central American Common Market.

External and Internal Debt Dynamics

The fiscal deficit has remained a persistent challenge for consecutive Costa Rican governments. To finance essential public infrastructure projects—such as roads, buildings, and hospitals—as well as to cover public sector salaries and the purchase of goods and services, the State resorted to international loans, leading to the accumulation of external debt. External debt is defined as the procedure by which the State, public entities, or large national companies obtain resources from capital markets outside the country. This debt is typically denominated in foreign currency, primarily the United States dollar, which necessitates a constant outflow of foreign exchange (divisas) and subjects the State to interest rates that can become unmanageable. Consequently, starting in the 1980s, the State was forced to significantly reduce public investment.

In addition to external obligations, Costa Rica utilizes internal debt to address international arrears and fund state services. Internal debt represents the total credits approved for both the public and private sectors that are generated within the country's borders. Unlike external debt, internal debt is repaid within the country using the national currency (the col#243;n). The rise of internal debt in Costa Rica was largely a defensive measure to maintain the continuity of the State during periods of international financial instability.

Underlying Causes and Exhaustion of the Development Model

The crisis of the 1980s signaled the exhaustion of the Import Substitution Model (also known as the substitutive model), which had been the cornerstone of national development since the 1950s. This collapse also triggered a crisis for the Benefactor State (Estado Benefactor). Experts argue that the severity of the crisis was exacerbated by inadequate economic policies. The governments of the time failed to capitalize on the coffee boom of the early 1970s or the initial successes of the substitution process. Economic mismanagement during the administration of Carazo Odio ($1978$-$1982$) is frequently cited as a factor that worsened the situation, which became evident in 1979 and reached its peak in 1982.

External factors contributing to the crisis included the global recession caused by high hydrocarbon prices, which increased the cost of both imported and domestic goods. International financial organizations—including the Inter-American Development Bank (IDB), the Central American Bank for Economic Integration (BCIE), and the World Bank—which previously offered low-interest loans with long grace periods, began to view the region as a "risky business" and denied new credits. Additionally, rising international interest rates made debt servicing more expensive. A global oversupply and decreased demand for agricultural products led to price fluctuations for Costa Rica's primary exports. Regional political instability also hindered trade with neighboring Central American economies, combined with the ongoing inflation and devaluation of the col#243;n against the dollar.

Internal factors were primarily rooted in State mismanagement. Public resources were often used in an uncoordinated manner, failing to target productive investments or profitable projects like electricity plants, telecommunications, or road infrastructure. A monetary imbalance was fueled by an exchange rate policy that did not reflect economic reality, characterized by constant government intervention and continuous currency devaluation. The economy was further hampered by excessive protectionism and government subsidies that stifled competition. The state apparatus grew excessively due to a concentration of capital and employment, along with a rising burden of state-funded pensions. Private investment plummeted by $34.7\%$, leading to a deterioration of the international trade balance where exports stagnated while imports of consumer goods continued to grow. Finally, pressure from public bureaucracy and social sectors regarding salary demands consumed a large portion of fiscal resources.

Socio-Economic Impact and Consequences of the 1980s Crisis

The economic consequences were devastating. Inflation rose by nearly $80\%$ annually, causing consumer prices to skyrocket by up to $225\%$; the accumulated inflation exceeded $100\%$ by 1982. Food shortages and speculation became common, forcing citizens to queue at state-run supply centers (estancos) managed by the National Production Council (CNP). In 1982, open unemployment reached $23.8\%$. Real wages dropped sharply, with purchasing power falling by approximately $42\%$ compared to 1979 levels. While social achievements in education and health were threatened, some indicators remained resilient: life expectancy reached $72.6$ years, infant mortality decreased, and basic hygiene conditions like potable water and public sewage were maintained.

In financial terms, savings in colones decreased in favor of dollars, and capital flight (sending savings abroad) became a major issue. The government lost international monetary reserves, and intra-regional trade fell by $50\%$. The col#243;n was eventually allowed to fluctuate, leading to a massive devaluation of $600\%$; the exchange rate shifted from $8.6$ colones per dollar to $45$ colones per dollar. This devaluation made the import of raw materials and capital goods expensive, causing national production to fall by $10\%$. The public sector deficit reached $19.1\%$ of the GDP, and foreign debt tripled. By 1983, debt payments required $45\%$ of all export earnings. In July 1981, Costa Rica declared a moratorium on its external debt, interrupting international financing and causing the GDP per capita to drop by $10\%$ and private consumption per capita by $20\%$.

Transition to Neoliberalism and Structural Adjustment Programs (PAEs)

Starting in 1982, Costa Rica transitioned toward a Neoliberal State, reorienting its development model through Structural Adjustment Programs (Programas de Ajuste Estructural, or PAEs). These programs were designed for economic recovery via debt renegotiation and the transformation of priority areas, such as industrial and agricultural reconversion, financial modernization (opening the banking system to private entities), and State reform. This period marked Costa Rica’s full immersion into globalization, characterized by the removal of protectionist barriers and participation in the World Trade Organization (OMC).

A central component of this new model was the privatization of state-owned enterprises that had expanded during the "State as Manager" (Estado Gestor) era. The goal was to reduce the size of the State through personnel layoffs, institutional mergers, and spending cuts. Institutions targeted for privatization or restructuring included the ICE (telecommunications and electricity), the INS (insurance), and AyA (water and sewage). The government also aimed to resolve the internal debt crisis by limiting public spending and selling state assets. Additionally, these policies incentivized new economic drivers such as ecological tourism and non-traditional exports like flowers and citrus fruits.

Comparative Overview of the Three PAE Phases

The Structural Adjustment Programs were implemented across three distinct administrations. PAE I ($1982$-$1986$) under Luis Alberto Monge #191;lvarez focused on diversifying production into non-traditional goods, modernizing the financial system, and liberalizing prices so internal costs would align with international levels. A significant step was the freezing of public sector employment and the sale of companies belonging to CODESA, such as Cementos del Pac#237;fico S.A. and Central Azucarera del Tempisque S.A.

PAE II ($1986$-$1990$) under #211;scar Arias S#225;nchez emphasized opening the economy to international markets. It sought to improve the efficiency of the export sector by reducing tariffs and further shrinking the government to generate savings. This phase also included banking reforms to allow private sector participation and modified the role of the CNP by fixing prices for agricultural products.

PAE III ($1990$-$1994$) under Rafael #193;ngel Calder#243;n Fournier aimed to promote higher economic growth and utilized social mobility programs to further reduce the State's role. It favored private investment and privatized more state entities. To mitigate the impact on the disenfranchised, this phase saw the creation of social compensation funds, such as housing bonds (bonos de vivienda).

Societal Consequences and Contemporary Challenges of PAE Implementation

The implementation of PAEs had a mixed impact. While they encouraged new models of development like tourism and non-traditional exports, they also led to a reduction in essential services like health, education, and housing. The agricultural sector saw a significant decrease in state aid. The productive structure remains fragile and susceptible to international market shifts, partly because the State fails to collect taxes from large tech firms like Intel. Wages have deteriorated; for example, in the mid-1990s, the minimum wage was only $30,580$ colones. As of 2008, open unemployment stood at $4.9\%$, with women making up the majority, and subemployment at $3.8\%$.

In health and education, infrastructure has suffered. Though indicators like infant mortality remain low, diseases such as dengue have re-emerged. The education system faces a widening gap between public and private sectors, increasing inequality. Public universities and private ones produce similar human resources for a shrinking job market, meaning education is no longer a guaranteed path to social mobility. Housing access has also declined due to high interest rates and low wages, leading to the growth of slums (tugurios). State housing programs are often criticized for being politicized and used as tools of political clientelism. Poverty remains a persistent issue: the total poverty rate increased from $16.7\%$ in 2007 to $17.7\%$ in 2008, with the Huetar Atl#225;ntica and Pac#2237;fico Central regions being the hardest hit.

Diversification of the Economic Structure: Non-Traditional Products and Free Trade Zones

Since the 1980s, Costa Rica has promoted non-traditional agricultural products to expand its global market reach. These include flowers, foliage, ornamental plants, pineapple, watermelon, melon, chayote, and plantains. These goods are primarily exported to the United States, Canada, and Europe. While this has diversified the agricultural sector and created jobs, the primary beneficiaries have been medium and large-scale entrepreneurs.

Industrial production also shifted toward the "maquila" and Free Trade Zones (Zonas Francas). A traditional maquila is an industry that uses imported inputs and technology to assemble goods using local labor for export. A Free Trade Zone is a specific area where customs controls are relaxed and goods are exempt from duties and taxes. In the last decade, "technological maquilas" have become prominent. Intel is the prime example, establishing a microprocessor plant in Bel#233;n de Heredia in 1997. Intel received significant incentives, including increased cargo flights, reduced electricity costs, and access to a highly qualified workforce. Although Intel contributes significantly to exports and employment, critics note that the majority of profits flow to foreign capital, while the country primarily benefits from the secondary services and jobs generated around the plant.

Questions and Discussion

Working Practice No. 1

1. What were the three aspects that caused the increase in inflation in the country at the beginning of the 1980s?

2. Comment in general terms on the immediate effects produced in our country as a result of the oil price crisis.

3. Define, according to the text, the concepts of external debt and internal debt.

4. What aspects did the economic crisis of the 80s reveal in our country in relation to previous decades?

5. Refer to three of the external factors of the crisis of the 80s.

6. Highlight four internal factors that contributed to the economic crisis of the 80s in our country.

7. Highlight three social consequences and three economic consequences of the crisis of the 1980s.

Working Practice No. 2

1. What was the name of the new political model put into practice in the country since 1982? Highlight three characteristics of this model.

2. What are the so-called Structural Adjustment Programs?

3. Refer to the results generated in the country with the application of the PAEs.

4. Highlight, according to your criteria, for each area of Costa Rican society, the main impact generated with the application of the PAEs.

5. What was the name of and what did the agricultural economic model implemented as part of the PAEs consist of?

6. Define the following concepts related to the economic diversification implemented in our country since the end of the last century: Traditional Maquila, Technological Maquila, and Free Trade Zones.

7. What are the two main characteristics of the free trade zones implemented in the country?

8. Why has the technological maquila model gained relevance in our country in recent years? Which company has been one of the most representative of this economic model, and what impact has it had on national economic development?

Association Exercise (Matching)

• PAE I corresponds to: Proposed in the government of Luis A. Monge #191;lvarez; Promoted the sale of some CODESA companies; Generated the freezing of employment in the public sector; Achieved diversification of production with non-traditional products; Sought to stimulate exports and modernize the national financial system.

• PAE II corresponds to: Established in the #211;scar Arias S#225;nchez administration; Sought to improve the productivity of the export sector; Achieved the opening of the economy to the international market; Reformed the financial system with the opening to private banking.

• PAE III corresponds to: Tried to favor private investment; Sought to privatize state companies; Promoted the creation of the housing bond; Generated the reduction of the size of the State; Proposed in the government of Rafael A. Calder#243;n Fournier; Tried to promote better economic growth.