Learning from the Chinese Dragon: Towards Costa Rica Inc.

This op-ed ran in El Financiero on Monday, February 22, 2010.

By Eva Paus

To achieve sustained growth and well-being the Costa Rican government needs to leave a free trade agreement with China aside and instead embrace the lessons of China’s development success. The driver behind the Chinese dragon and the Asian Tigers has been an unwavering commitment to local capability building. That has to be the core of Costa Rica Inc., a new comprehensive development strategy.

An unrestricted free trade agreement with China will significantly reduce Costa Rica’s prospects for sustained economic development. Large segments of Costa Rica’s local productive sector will be unable to compete with exporters from China. Costa Rica’s trade deficit with China will reach currently unforeseen heights. And the hoped for foreign direct investment from China is no more likely to lead to sustained growth in Costa Rica than past FDI from the United States and other Western countries. The main reason is the insufficient development of local capabilities. Domestic capabilities to absorb technology spillovers are inadequate, and the quantity and quality of human capital does not permit foreign investors and competitive domestic producers to move up the value chain on a broad scale.

Both China and Costa Rica have introduced considerable market reforms over the past three decades; but the focus of their strategies has been very different, and so have the outcomes. Costa Rica, like most of Latin America, has relied primarily on trade liberalization and foreign investment to generate growth and structural change, with the development of local capabilities as an occasional and half-hearted afterthought. China, in contrast, introduced market reforms in the context of a development strategy whose main goal was to advance technological capabilities, first mainly through foreign investment but increasingly also through the promotion of indigenous innovation capabilities. Strategic planning and proactive policies were critical in developing China’s competitiveness in high tech goods. For example, through the Torch Program, the government set up science and technology parks throughout the country, and through the Spark Program it established technology demonstration stations, especially in rural areas. Between 1995 and 2005, China doubled the share of research and development in GDP, from .7 percent to 1.4 percent, an unprecedented feat in development history.

The point here is not that China got everything right. China’s growth has been accompanied by a sharp deterioration in the distribution of income and severe environmental destruction. In Costa Rica, income distribution has also gotten worse, but environmental sustainability has been taken much more seriously. Rather, the point is the main lesson that the success of China and the Asian Tigers offers for other countries that want to achieve sustained structural change: an unequivocal and ongoing focus on developing domestic capabilities, with policies in all major areas subservient to that goal.

To be sure, the size of China’s economy bestows advantages of scale and bargaining power that small countries like Costa Rica will never have. But that does not change the need to make capability building the top priority in any development strategy. And there is no necessary relationship between political regime and continuity in economic strategy, as examples of other latecomers like Ireland demonstrate. Indeed, a critical element for the implementation of a national economic vision are institutionalized processes for ongoing negotiation and cooperation between the public and private sectors in strategic areas, where the government plays an active role in shaping and implementing strategic priorities aimed at moving production up the value chain.

That element is missing in Costa Rica. The country has some excellent research institutions, for example, but they are not part of a coherent fabric of research and development. CINDE has had remarkable success in attracting foreign investors in higher value added activities, but it is not an integral part of a multi-institutional network focused on the coordinated advancement of local and foreign firms. Costa Rica has a noteworthy institution to promote linkages between foreign investors and local companies, but Costa Rica Provee is small, decoupled from financing for local firms and not part of a larger strategy of building local capabilities. And much of Costa Rica’s education and training system still basks in the glory of its past, but there are no institutionalized mechanisms in place to ensure that it responds to the necessities of the present.

China’s rise has increased the urgency for Costa Rica to embrace Costa Rica Inc. Negotiations about a free trade agreement with China should wait until more advanced local capabilities have increased Costa Rica’s productivity growth and competitiveness.

Eva Paus is Professor of Economics at Mount Holyoke College, Massachusetts. Her recent publications include Global Giant. Is China Changing the Rules of the Game? (Palgrave Macmillan 2009) and Inversión extranjera, desarrollo y globalización. Puede Costa Rica emular a Irlanda? (Editorial UCR 2007).

Related Links:

Aprendiendo del dragón chino (Spanish version)

Eva Paus Faculty Profile

Economics at MHC