Import Substitution in Costa Rica

Import Substitution in Costa Rica

• Costa Rica implemented import substitution policies between 1960 and 1982.
• The government limited imports to encourage local production of goods and services.
• Import substitution was intended to provide incentives for domestic and foreign investors.
• However, the Costa Rican market was too small to support large-scale production.
• To address this, Costa Rica joined the Central American Common Market (CACM) with El Salvador, Guatemala, Honduras, and Nicaragua.
• The CACM allowed free trade among member countries, providing access to a larger market.
• The results of import substitution were mixed, with some sectors benefiting while others struggled.
• Despite the policy shift, Costa Rica’s agricultural dependence continued to decline.
• Most manufacturers focused on the domestic market rather than the larger CACM market.
• Import substitution helped attract pharmaceutical investment but not due to market size, as small-scale production is efficient for pharmaceuticals.

Export Promotion and Foreign Investment

• By the early 1990s, Costa Rica shifted towards export promotion and attracting foreign investment.
• This shift was influenced by the success of Asian countries competing in international markets.
• The government removed import barriers to encourage competition and attract foreign expertise.
• The U.S. Caribbean Basin Initiative provided lower tariffs for Caribbean goods, creating an opportunity for Costa Rican exporters.
• Costa Rica formed CINDE (Coalición Costarricense de Iniciativas de Desarrollo) to attract foreign direct investment.
• This private organization was funded by the government and U.S. grants.
• An export processing zone (EPZ) was established, offering tax incentives for exporting companies.
• By 1989, the EPZ attracted 35 companies, primarily textile and footwear producers seeking cheap labor.

High-Tech Industry Development

• Costa Rica focused on attracting high-tech companies, particularly in the medical device sector.
• This strategy involved high-level government outreach and incentives for companies like Intel, Abbott Laboratories, Baxter, and Procter & Gamble.
• High-tech products now constitute the backbone of Costa Rica’s economy and export earnings.
• Manufacturing goods now account for about 60 percent of Costa Rica's merchandise exports, while coffee and bananas remain important.

Trade Theory Framework

• The case study of Costa Rica’s trade policy demonstrates the application of various trade theories.
• The import substitution phase was driven by protectionist measures and interventionist policies.
• The shift towards export promotion and foreign investment reflects the principles of comparative advantage and specialization.
• The country’s focus on high-tech industries highlights the importance of technology and knowledge-based industries in a globalized economy.

Export Concentration

• Costa Rica's exports are concentrated in a few countries, as shown by over 50 percent going to just three countries.
• This concentration can be explained by various trade theories, including:
  • Gravity Model: Trade is more likely between countries that are geographically closer and share similar economic sizes.
  • Comparative Advantage: Countries tend to export goods they produce most efficiently, creating trade patterns based on specialized production.
• The concentration also reflects the role of regional trade agreements and historical relationships in shaping trade flows.

This quiz explores the import substitution policies implemented in Costa Rica from 1960 to 1982. It covers the intentions behind these policies, the formation of the Central American Common Market (CACM), and the outcomes of these economic strategies. Delve into how these decisions impacted local production and the broader economy.