Sri Lanka should look to Costa Rica, not Singapore

Sri Lankans have long been obsessed with the question, why can’t we be as successful and developed as Singapore? As a development economist, this preoccupation with Singapore strikes me as odd, a comparison that would have made sense only if the Colombo district (which is the same size as Singapore) were its own country, if we had an entirely urban population with a history of immigration and entrepreneurship, and if we had a high tolerance for authoritarian politics and a culture of discipline. A much more meaningful role model for Sri Lanka is a little country at the other end of the world, in Central America, that many Sri Lankans know little about. Costa Rica is similar to Sri Lanka in many ways, yet it has managed to become one of the greatest development success stories.

On both occasions that I visited this beautiful country, I was amazed at how much it reminded me of Sri Lanka. It is roughly the same size as Sri Lanka; it is not an island, but has two coasts on either side, with a spine of high mountains in the middle; the vegetation, the wildlife, the landscape, and the rhythms of life are shaped by a humid tropical climate; there is even a distinct Dry Zone in the north and a Wet Zone in the south. The similar geographies produced similar colonial economies. Although the Spanish optimistically named the colony the Rich Coast (Costa Rica), they (and subsequently the Americans) had to settle for coffee and banana plantations, as they never found the gold they were hoping to find. 

Long after colonial rule ended, both economies remained dependent on a handful of cash crops. As recently as 1980, about half of Sri Lanka’s export earnings (inclusive of service exports) came from commodities, such as tea and rubber. At that time, Costa Rica was even more dependent on agriculture, accounting for two-thirds of its exports, with just two crops, bananas and coffee, making up as much as half of export earnings. Even with this narrow economic base, both countries managed to build vibrant social democracies and invested heavily in health and education. For instance, they reached an average life expectancy of 65 years at the same time in 1970, seventeen years before the world did. They were hailed as development outliers and beacons of progress and democracy in their troubled and impoverished neighbourhoods. Yet, the ambitious task of building a social democracy on the back of an undiversified cash crop economy proved unsustainable, leading to serious fiscal problems in the 1970s and 80s, when both countries were forced to seek help from the IMF and the World Bank to restructure their economies. 

As their economies liberalised, Costa Rica and Sri Lanka explored export possibilities in the same sectors - tourism, garments, shipping, and the trusted cash crops. But, the economic trajectories of the two countries soon began to diverge. Four decades after liberalisation, Sri Lanka is stuck with pretty much the same industries; its leading foreign exchange earners are garments, worker remittances, cash crops, and tourism, and the competitiveness of the economy is derived from low-skilled labour. Besides a small ICT sector, there is hardly any high-technology industries that could compete internationally.

Costa Rica – ranks number 1 in FDI 

Meanwhile, Costa Rica has transformed itself into the unlikeliest of all technology powerhouses. When I travelled through the San Jose airport recently, I suddenly felt a tinge of sadness and envy. Every year when I visit Sri Lanka, one of the first sights that greet me are migrant workers, anxiously saying goodbye to their families, as they seek a better life overseas, as housemaids and construction workers. As soon as I leave the Katunayake airport, I see young women hurrying in and out of garment factories along the access road. The scene in and around the San Jose airport was such a jarring contrast. The airport is full of tourists, but there are no migrant workers lining up to leave the country. All around it are massive free trade zones, but in place of garment factories, I saw an Intel plant, several medical equipment factories, and state-of-the-art business parks, adorned with logos of blue-chip global firms like McKinsey, Deloitte, DHL, Citi and Experian. What I saw personally in real life is backed up by data. FDI Intelligence recently ranked Costa Rica number 1 in the world for the amount of Foreign Direct Investment it attracts in relation to the size of the economy. In 2022, it attracted 12.7 times more FDI than what an economy of its size should. In comparison, Sri Lanka attracts 20% less than what is expected for an economy of its size. For each Costa Rican, there is $700 of foreign direct investment; for each Sri Lankan, there is just $27. The difference is staggering.

I had known about Costa Rica’s economic miracle, but seeing a flurry of top global companies operating in this sparsely populated small country, better known for exotic wildlife and off-road adventures, was a real eye-opener. So, how did Costa Rica attract foreign investors and high-technology industries to the Central American rainforest? How could two countries, both of which were once hailed as poster children for human development, end up in such different places? What did Costa Rica do right that Sri Lanka didn’t?

Costa Rica – oasis of peace, stability, good governance

The first point of divergence is peace, stability, and good governance. Ever since the Civil War of 1948, Costa Rica has been an oasis of peace and stability in one of the most volatile regions of the world. The vibrant social democracy it built in the postwar era is not much different from what Sri Lanka started out with after independence. Unlike Sri Lanka, however, Costa Rica has not allowed its politics and governance to deteriorate. While Sri Lanka has had three constitutions since 1948, Costa Rica still has its 1949 constitution, a radical document that abolished the army, the second nation to do so after Japan, and dedicated much of the budget previously used for the military towards education, health, and culture. Like most Latin American countries, Costa Rica has a Presidential system, which we Sri Lankans like to blame for our political ills, but it has managed to retain checks and balances on executive power. To take one example, the President can run for a second term only eight years after concluding the first term, and only two modern-day Presidents have been elected to a second term. Whatever the system, a government is only as good as those who are elected to lead, and Costa Ricans have done an amazingly good job of picking highly qualified people as leaders. The current President is a Ph.D. economist and a former World Bank official. His four immediate predecessors had experience in the private sector, international organisations, NGOs, or public service before they entered politics. All had a Master’s or Ph.D. from the US or UK, and all were trained in economics, public policy or development studies.

The quality of Costa Rica’s government is reflected in the rare success of its state-owned enterprises. Government-owned Grupo ICE dominates the electricity and telecommunication sectors. Yet, Costa Rica has managed to become a net exporter of electricity while relying almost exclusively on renewable sources. It has also been a leader in adopting 4G, 5G, and fiber optic technologies. Petroleum imports and distribution are also controlled by a public monopoly. Like Singapore, Costa Rica dispels the myth that state-owned enterprises are necessarily stagnant and inefficient. In fact, well-run public companies can help overcome market failures and unlock linkages and externalities to spur private sector growth. In sectors where it saw private sector potential, the government was quick to divest. The national airline was privatised in the 1990s, and the airport, one of the best I have seen in a developing country, is managed by a private consortium. Export promotion is handled by CINDE, a non-profit organisation that is neither government nor private, a neutral intermediary that has been able to earn the trust of different stakeholders. While the government is deeply committed to public education, private schools and universities are constitutionally protected and encouraged.

 Broad policy consensus across party lines

Although the government changes hands frequently, there is a broad policy consensus across party lines; the political leadership is committed to maintaining an open economy, encouraging trade and foreign investment, investing in human development, and ensuring good governance, peace, and democracy. Successive governments have maintained a stable regulatory and incentive structure for foreign investment. Tax incentives are granted by law, not negotiated individually, and all investors, regardless of the sector or origin, receive the same incentives. Successive governments have also promoted free trade, negotiating free trade agreements with around 60 countries. Unlike many of its Latin American neighbours, it has shrewdly maintained a close and stable relationship with the US, by far its most important economic partner. Unlike its Sri Lankan counterpart, the Costa Rican government has also stood by its commitment to public education, investing 6.7% of GDP in education in 2019, compared to just 1.9% in Sri Lanka. Similarly, the healthcare system is considered one of the best in the developing world, so much so that the country is now well-known among medical tourists and retirees from Western countries. In short, Costa Rica is one of very few developing countries, Mauritius being another that has been deeply and continuously committed to European-style social democracy and market socialism.

Investments in electronics through Intel

Peace, stability, good governance, and a healthy and educated workforce set the stage for Costa Rica’s economic growth. But, this promise was by and large not fulfilled until 1996, when Intel, the American semiconductor chip giant, made a stunning decision to set up a large microprocessor assembly and testing plant near the airport, just outside San Jose. This was the turning point Costa Rica had patiently waited for. The investment was so large, “a whale in a swimming pool” as an Intel executive called it, that electronic integrated circuits accounted for a remarkable 40% of the country’s export earnings by 2014.

Why did Intel choose Costa Rica? In a 1998 World Bank paper, Harvard Business School Prof Debora L. Spar, provides a ball-by-ball commentary of the decision, which I think is a must-read for anyone interested in how to attract foreign direct investment to a developing country. As Spar points out, Intel would probably not have even known about Costa Rica, if not for the fact that CINDE (Costa Rica’s version of Sri Lanka’s BOI) had been aggressively courting technology multinationals for several years. Like Sri Lanka and many other developing countries, Costa Rica had initially shifted from agricultural exports to garment manufacturing. But, by the mid 1990s CINDE realised that Costa Rica’s workforce was too educated and too expensive to be competitive in the garment industry and made a strategic decision to pursue investments in electronics, following the example of the Asian Tigers. Costa Rica’s President at the time, a graduate of West Point and Harvard who himself had extensive private sector experience in agribusiness and renewable energy before entering politics, personally involved himself in the process, much like Lee-Kwan Yew had done in Singapore. Interestingly, the government did not promise Intel any special tax concessions other investors could not obtain. All it offered was a stable and transparent policy environment, a well-trained and relatively low-cost workforce, and a promise to address several infrastructural bottlenecks that Intel worried about. These infrastructure investments, at the port, airport, highways, and the telecommunications network, accommodated Intel’s needs, but they also improved the FDI climate as a whole. In fact, CINDE aggressively promoted technological spillovers and backward linkages by encouraging suppliers of Intel, both local and foreign, to set up operations in its Free Trade Zones.

Technology shifts to medical equipment

In 2015, Intel left Costa Rica as abruptly as it entered, as footloose multinationals tend to do. Losing such a dominant player would have devastated most small economies, but Costa Rica weathered the storm surprisingly well. Intel had already shined a bright light on the country and helped produce a high-technology ecosystem; some investors came as suppliers to Intel, while others came looking to emulate its success. Once Intel left, technology investments pivoted from microprocessors to medical equipment. Yet again, this transition didn’t happen automatically, the government and CINDE orchestrated it. They had three reasons to bet on medical equipment: First, this sector could relatively easily absorb the technological knowhow, infrastructure, and skills previously employed for microprocessor production; second, the success of Baxter, an American manufacturer of medical products that was one of the earliest multinationals to set up shop in Costa Rica, even before Intel, could be leveraged to attract further investments; third, medical devices were seen to have a stable demand and high growth potential worldwide, with the aging of the global population. The bet paid off handsomely. Today, there are over 70 medical device companies in Costa Rica, producing everything from cardio medical devices and optics to orthopedics and needles. This sector became the country’s top exporter in 2017 and now accounts for over 20% of export earnings.

As the technology sector matured, it has become less dependent on a few products and firms. The medical equipment industry is embedded in a larger tech environment, which includes over 400 multinationals, producing everything from computer chips to corporate services. The ICT sector has also grown leaps and bounds, accounting for 23% of export earnings. In 2021, Boston Consulting Group (BCG), one of the top consulting firms in the world, established a hub in the outskirts of San Jose, creating more than 400 highly skilled jobs, in business intelligence, software engineering, legal services, advanced graphics, research and administration, and 99% of its employees are locals. Intel has recently reentered Costa Rica, in response to the US government’s pivot away from technological dependence on Asia, and revived its old manufacturing facilities with a $1b new investment. Just in 2021, 103 new FDI projects were announced, and among the investors, besides Intel and BCG, were Amazon and Bayer.

 Transition from agriculture to high tech

Meanwhile, the garment export industry, which reached a peak of 15% of export earnings in 1995, has pretty much disappeared. Coffee and bananas, the two traditional exports, account for just 7% of export earnings, and the agricultural sector has also diversified to more sustainable high-value crops, such as ornamental plants. The transition away from plantation agriculture to a largely urban, high-tech based economy has also helped Costa Rica protect its natural environment. It is the first tropical country to reverse deforestation, and now over 59% of its land is covered by forests. The government has also implemented innovative programs, like paying ranchers to protect forest cover and using a special tax on fossil fuels to finance this incentive. The unspoilt natural environment has in turn helped build a thriving eco-tourism industry. Costa Rica attracts more tourists than Sri Lanka (3.1 million vs 1.9 million in 2019), but its economy is diversified enough to withstand the ups and downs of that industry.

 

Costa Rica’s success earned by hard work

Of course, no comparison is perfect, and there are clear differences between the two countries that might explain their divergence. Costa Rica is much less populated (5.15 million), much more ethnically and religiously homogeneous, and benefits from proximity to the large American market, not to mention it is in a similar time zone to the US. But none of these differences alone can explain the country’s remarkable development success. Nicaragua, just across its northern border, shares many of these similarities, but it has struggled to diversify and grow its economy. Daniel Ortega and his wife rule over an increasingly corrupt and mismanaged country, and over half a million Nicaraguans, by some estimates, have crossed over to Costa Rica, looking for a better life. Costa Rica’s success is not predestined. It was earned by hard work.

 Following the Costa Rican recipe will not take us to our promised land of Singapore. In fact, Costa Rica is not at all a Singapore. Even with all the spectacular progress it has made, its GDP per capita of 12,472 USD is still a bit short of earning a spot in the club of high-income countries. Its income inequality is even worse than Sri Lanka’s, with the top 10% of the population taking home 36% of income (compared to 31% in Sri Lanka). Belying its reputation for peace, stability and “puravida” (pure life), as the famous tourism slogan proclaims, the country is facing an unprecedented wave of organised crime and gang violence, due to its position at the crossroads of American narco trafficking routes. Corruption is not unheard of, and political leaders are routinely accused, and sometimes convicted, of various transgressions. In 2021, Costa Rica received a $1.78b loan from the IMF to stabilise its public debt after Covid (and has been praised by the IMF for meeting all its targets). At the same time, Costa Rica, unlike Singapore, is a vibrant multiparty democracy, a pioneer of sustainable development, and one of the most tolerant and socially progressive societies in the developing world. The point is, Sri Lanka should never aspire to become Singapore, nor should it blindly mimic Costa Rica. But it can try to learn from the example of Costa Rica, with all its warts.

 Education and skill development is one area that offers important lessons. The highly educated, trainable, tech-savvy, and bilingual workforce was produced through intense collaboration between the government, the private sector, and investment promotion agencies. Like Sri Lanka, Costa Rica is firmly committed to free education, but it has not turned its back on private sector participation. Despite being a proudly Spanish-speaking country, it has actively promoted English language literacy. The publicly-owned Costa Rica Institute of Technology (TEC) has worked closely with CINDE, the government, and Intel to launch specialised degree and certificate programs in semiconductor manufacturing and the English language. In response to shifting industrial needs, it established Latin America’s first Master’s degree in medical devices engineering, in collaboration with an American university. Of course, no amount of educational investments and export promotion would work, unless Sri Lanka follows the example of Costa Rica and returns to the basics it once had, such as, political stability, low corruption, transparency, etc. As we have sadly witnessed in the past few years, investments in education will only lead to a brain drain, unless basic political and economic foundations are in place for investment and job creation.

During my recent trip, I stayed at a beautiful little inn at the edge of the rainforest; it is run by a young couple, both of who grew up in rural areas, studied sustainable tourism at public universities, worked in a national park where they met, and now run this business together, with so much passion, knowledge, and respect for the natural environment. While running the inn, the young woman also works remotely, answering customer service calls for an American company. Both speak excellent English, although they come from a country that has no historical connection to that language. Neither has ever considered leaving their home country. At present, the US is facing an unprecedented crisis, with thousands of Central and South Americans risking their lives to come here. Sri Lankans are doing the same, all over the world. But there are no Costa Ricans among these waves of desperate immigrants. In fact, Costa Rica has always received more immigrants from the world than it sends out; contrast that with the ever-exploding numbers of Sri Lankans, like me, who have left their motherland. It is no surprise that Costa Rica has the highest level of life satisfaction among developing countries, according to the World Happiness Report, while Sri Lanka ranks among the lowest. 

 Costa Ricans may not have achieved “puravida” yet, but they have come close to it. It would serve us Sri Lankans well to take a good look at this humble country many of us know very little about. It is not a glamorous place with skyscrapers, casinos, and freeways. But it offers an attractive blueprint for building a society that is economically competitive, ecologically sustainable, and genuinely democratic at the same time.  

 

(The writer is a development economist and Associate Professor of Economics at Bard College, New York. He holds a Ph.D. in Economics from Yale University.)