The new Costa Rican government slogan should be “create more productive employment!”

We constantly hear that Costa Rica has become an expensive country compared to other nations. From an economic standpoint, the problem can be explained from the perspective of tradable goods and services which are exchanged internationally (exports and imports), and non-tradable goods and services, which are only sold domestically.

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It is argued that as a nation is enriched, the rate of productivity growth tends to be faster in the tradable sector.

Hence a country is more expensive than another if the average price of its non-tradable goods is higher than abroad.

Moreover, there is evidence to say that the higher the relative income of a country, the higher the relative price level in that country.

This last argument would give us the answer to why Costa Rica is more expensive than the rest of Central America. Precisely, in 2014 the per capita income was $14,700, much higher than those recorded El Salvador ($7,700), Guatemala ($6,800), Honduras ($4086) and Nicaragua ($4,100). However, this argument would find no explanation for why many of our products sold domestically are nearly as expensive than those in countries with much higher incomes like the US ($55,200).

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For example, prices of many properties in upscale residential areas of Costa Rica are similar to those found in Florida or Long Island, a region with some of the wealthiest people in New York.

Also, in many cases, private education in Costa Rica can cost the same or more than in the United States, the same applies to a middle-class family going out to a restaurant or to the beach.

Meanwhile, according to The Economist’s Big Mac Index, in July 2015 the average price of Big Mac in Costa Rica was $4.03, similar to the Euro zone ($4.05) which has a per capita income of $40,028 which is well above ours.

What’s the cause? In general, high prices in an expensive country occur because job earnings are also high, which affects production costs and final prices of goods and services (in Costa Rica remuneration represent more than 50 % of GDP).

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The incidence becomes more palpable when the higher labor costs are not offset by increases in productivity. In our case, the tramitomanía, excessive bureaucracy, poor infrastructure and the appreciation of the colon, are factors that adversely affect productivity and competitiveness.

Which is reflected in the data. In 2015 Costa Rica has the highest minimum wage in Central America: $675. It is followed by Honduras ($337), Guatemala ($311), Nicaragua ($164) and El Salvador ($162).

To find empirical support to economic explanations for the productivity of goods and services tradable and non-tradable, we perform an exercise using national accounts data and employment surveys. For this industry is classified by economic activity.

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Overall, agriculture and manufacturing are typically the most traded, while the construction and services, with exceptions, have lower tradability. In the period July-September 2010-April to June 2015, the results show that the tradables sector was, on average, 1.7 times more productive than non-tradable.

In other words, the higher labor costs in the tradable sector were offset by increases in labor productivity to a greater extent than in the non-tradable sector, making products traded internally more expensive and the country more expensive.

It is highly recommended that any effort made by the government to create more jobs is complemented by programs to improve productivity of the labor factor by way of greater efficiency, quantity and quality in production processes.

The new Costa Rican government slogan should be “create more productive employment!”

This ‘Costa Rica: un país caro‘ article was written in Spanish by the Costa Rica economist Carlos Blanco Odio and is summarized here in English by Scott Oliver, author of 1: How To Buy Costa Rica Real Estate Without Losing Your Camisa, 2: Costa Rica’s Guide To Making Money Offshore and 3. ¿Cómo Comprar Bienes Raíces en Costa Rica, Sin Perder Su Camisa?

Scott Oliver's Four Books

Scott Oliver’s Four Books.

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