Costa Rica Striving to Counter Inequality

    To eradicate extreme poverty, this is today a fundamental objective of Sustainable Development that the Central American country has, given the panorama of social inequality that has been growing worldwide

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    The gap between the poor and the rich has been increasing in the last two decades and this makes Costa Rica today one of the countries that shows substantial inequality in terms of the balanced distribution of its economic income.

    As recently pointed out in a report by Economic Studies of the Organization for Economic Cooperation and Development (OECD), Costa Rica continues to be a very unequal nation in Latin America, although the country has presented significant economic growth in the last 30 years, however, the growth of social inequality has been maintained in the nation.

    The report also highlights that poverty has remained virtually unchanged at around 20% (according to the national definition) in the last 25 years. A situation that can be aggravated by the crisis, since people in poverty and vulnerability will be particularly affected by the pandemic.

    The study also reveals that the country’s fiscal situation was already presenting financial weaknesses before the emergence of the pandemic, however with the economic slowdown that the world is experiencing, the country is exposed to a more complex situation with lower positive growth rates and larger fiscal deficits.

    Three axes

    The growing inequality is based on three axes, “Unemployment whose figures are quite high and worrying, the distribution of wealth and poorly focused social programs.”

    Although international projections do not indicate favorable data for the Central American nation, Costa Rica plans to direct government public policies in order to achieve higher levels of economic growth in the region that allow it to obtain a more equitable fiscal distribution in social programs; health, education, employment, pension system among other plans that contribute to reduce the levels of material and cultural poverty that still persists in the nation, thus raising the quality of life of all its citizens.

    Despite the negative panorama of social inequality recently described by international organizations, the nation has experienced a positive economic recovery during 2022, that probably will extend to 2023 with the increase of investment in the tourism sector and the good moment that high technology exports are experiencing specially the medical and digital sectors.

    This helps reduce unemployment and poverty a little, although the biggest challenge that Costa Rica currently faces is to combat the inequality gap that widened with the global health crisis of Covid-19, added to the war between Russia and Ukraine that impacts the prices of energy resources on a global scale, negatively affecting the country’s economic self-sustainability.

    What can Costa Rica do to change this social reality?

    According to the Organization for Economic Cooperation and Development, the country must deal with additional spending on health and the provision of temporary subsidies to affected households and companies, necessary to reduce the long-term impact of the crisis. It also proposes that an in-depth fiscal reform be fully implemented, to help restore fiscal sustainability in the medium term.

    At the same time, it affirms that the distribution of public spending must be more efficient and equitable with economic growth, mainly in key policies such as education, reducing informality, and increasing female participation in the labor market. Increase productivity, applying a series of structural reforms that allow it to accelerate the nation’s financial development.

    Among other recommendations, the report outlines that the country has the possibility of expanding the tax base without increasing tax rates, thus reducing the benefits of the exempted sectors.

    Specifically, the report speaks of the need to start taxing the income of cooperatives, eliminate tax exemptions that benefit high-income households, and optimize VAT rates with a reduced rate (education and health.

    Room for improvement

    Additionally, the report explains that the country has room to improve the current tax structure, since it is excessively dependent on social security contributions —which represent a third of total income—, but the country collects little in income and property taxes, so the tax burden could be gradually shifted from social security to property tax. This would help reduce informality and inequality in the country.

    Regarding debt management, through the issuance of debt in foreign currency, the report warns that although this measure may reduce interest costs in the short term, it increases exchange rate risks.

    Data D+: The country expects to reduce the costs of servicing the debt with financings from multilateral financial institutions that provide funds to the Government (as of 2020 for 2% of the Gross Domestic Price), with which it is planned to raise the economic and social growth of the nation.

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