October 2006 · Number 96 38739 A regular series of notes highlighting recent lessons emerging from the operational and analytical program of the World Bank`s Latin America and Caribbean Region. Costa Rica Recapturing Momentum for Poverty Reduction Andrew D. Mason and Carlos Sobrado Introduction consistent economic growth over the period. The report was undertaken as part of an ongoing dialogue between Costa Rica is well-known for its socio-economic the World Bank and the Government of Costa Rica on achievements with low levels of poverty and inequality by economic and social policy. Latin American standards. It also performs well in health, access to improved water supplies, suitable housing and What is the Current Poverty Situation in Costa Rica? other basic services, including electricity and sanitation, relative to comparable countries. Poverty in Costa Rica is low by Latin American standards. If poverty is defined as households with income of $2 or Nonetheless, the country faces important challenges in the less per person per day (purchasing power parity, PPP), on-going fight against poverty. then 9 percent of Costa Rica's people are found to live in poverty, a lower rate than for any Latin American country · Following a period of significant decline in the except Uruguay and less than half the regional average of 1990's, the poverty rate has not declined over the 25 percent. Applying a $1-per-day poverty line (PPP), the last decade; in 2004, 23.9 percent of the Costa Rican poverty rate in Costa Rica is only 2 percent, one-fifth of the population was still considered poor. Latin American average. · Income inequality has been rising. While still relatively low by regional standards, inequality in Poverty declined significantly between 1989 and 1994, Costa Rica, as measured by the gini coefficient, a but has remained essentially constant since then. The widely used indicator of income equality, rose from proportion of the population that is poor declined from 31.7 0.44 in 1989 to 0.48 in 2004 ­ an increase that is to 22.9 percent between 1989 and 1994, and has hovered economically significant. in the 23-24 percent range since 1994. Similarly, extreme · Costa Rica lags behind the Latin America and poverty fell from 9.9 percent in 1989 to 6.8 percent in 1994, upper-middle income country averages for access but remained at 6.6 percent in 2004. This lack of progress and attainment at the secondary school level, despite over the last decade is surprising given that per capita GDP growth averaged 2.4 percent over the 1994-2004 period. considerable investment. Moreover, the poor still Indeed, many empirical studies show that economic growth lag behind the non-poor in educational access and is normally associated with declining poverty. attainment, and this adversely affects their ability to participate in and benefit from economic growth. · Poverty has distinct geographic patterns with the highest Even though Costa Rica has a relatively well poverty rates occurring in the less populous Brunca and developed set of social protection programs, many of Chorotega regions but the highest concentration of poor its poor still fall outside the reach of the safety net. people occurring in the more densely populated Central region, home to nearly half of Costa Rica's poor and about The study referenced in this note1 examines recent 40 percent of the country's extremely poor people. These developments on the poverty front in Costa Rica, with regional differences in the incidence and concentration particular emphasis on examining why poverty rates have of poverty have important implications for policy and not declined over the last 10 years, despite relatively investment approaches to reducing poverty at the local level. 1- This note is extracted from the study "Costa Rica: Poverty Assessment - Recapturing Momentum for Poverty Reduction", Report No. 35910-CR, October 2006 . Download from http://www.worldbank.org/lacpoverty Box 1 ­ Who are the Poor in Costa Rica? Analysis indicates that people are more likely to be poor in Costa Rica if they come from: · Larger households­particularly those with more members under the age of 18. · Households headed by women, especially those in rural areas. · Households in which the head (or his or her companion) work in the informal sector or in agriculture. · Rural areas in the two poorest planning regions, Brunca and Chorotega (this may reflect poorer infrastructure or weaker local economies in those areas). If a household head (or companion has completed secondary education, the probability a household will be poor is reduced by half, while having higher education reduces the probability of being poor by 75 percent. In rural areas, even having some primary education (a proxy for literacy) reduces the probability of being poor, controlling for other factors. Health outcomes are generally good by regional standards. Why Hasn't Poverty Declined in Costa Rica over the Last Infant and child mortality rates are significantly lower than Decade? in comparable countries, while the average life expectancy The absence of progress in poverty reduction in Costa Rica is substantially higher. While there are some measurable since 1994 presents something of a puzzle, at least at on the differences in heath status between the poor and non-poor, surface, as poverty has stagnated in the face of consistent the differences are not as pronounced as in other countries in economic growth during most of the period. Nonetheless, Central America. Levels of health insurance and other social the evidence indicates that several factors combined to security coverage are also relatively high in Costa Rica, reduce the impact of growth on poverty over the last decade among the highest in Latin America. Nonetheless, coverage ­ factors related to the levels and patterns of growth, as well rates are significantly lower among the poor than the non- as to recent developments in Costa Rica's labor market. poor. In 2004, more than 30 percent of the extremely poor and 25 percent of all poor still lacked health insurance Growth in average per capita household income declined coverage, in contrast to only 16 percent of the non-poor. over time. After rising by nearly 5 percent per year from Moreover, recent declines in measles and poliomyelitis 1989 to 1994, it grew only 1.5 percent per year from 1994 to vaccination rates, as well as sharp increases in the incidence 2000; between 2000 and 2004, average per capita household of malaria, dengue and tuberculosis, signal emerging income barely changed (incomes grew by less than one- challenges for the health sector. tenth of one percent per year). The country continues to face important challenges in The poor have benefited less from the growth that did education. Costa Rica lags behind Latin America and other occur. While from 1989 to 1994, average per capita upper-middle income country averages in net secondary household income among the poor grew 25 percent , nearly school enrollments, despite considerable progress since the same as the national average of 28.0 percent, from 1994 the country experienced significant education setbacks in to 2000, average per capita household income among poor the wake of the 1982 financial crisis,. Moreover, while households grew only 3 percent, roughly one-third of the education gaps have narrowed, the poor still lag well national average (9.2 percent). Since 2000, average income behind the non-poor in a number of important areas. In growth among the poor has been slightly negative; only 2004, primary school net enrollment rates were still only households in the top income quartile experienced positive 70 percent among children in the poorest income quintile, income growth (a relatively small 2.2 percent between 2000 compared to 95 percent among those in the wealthiest and 2004). In general, growth has been faster in relatively quintile; secondary-school net enrollment rates were only wealthy counties (cantones) and in sectors that tend not to 33 percent among those in the lowest quintile, compared to employ much poor or low-skilled labor ­ such as finance, over 70 percent for those in the highest quintile. Drop-out commerce, and public administration. rates remain higher for poor students, and completion rates remain low, particularly at the secondary level. The quality Shifts in relative demand and supply of skilled and of education in poor areas lags considerably behind that in unskilled workers have resulted in greater earnings non-poor areas. 2 · October 2006 · Number 96 inequality and significantly higher unemployment among GDP, Costa Rica's overall social sector spending is higher the poor and extremely poor since the early-to-mid 1990s. than the Latin America average and the highest of any other Changing patterns of investment and trade, along with Central American country. Public spending in several sectors technological changes, led to increased local demand for ­ including in basic education, health, and social assistance relatively skilled labor at a time when Costa Rica experienced ­ is also pro-poor. These factors have helped contribute in a decline in the relative supply of such workers (a long-term important ways to Costa Rica's socio-economic progress. effect of the 1982 financial crisis on education levels in the labor force). Increases in female labor force participation along with Nonetheless, there is considerable scope for increasing a surge in the supply of Nicaraguan immigrant labor in the mid- the efficiency and impact of social sector spending and to-late 1990s, further contributed to an increase in the supply of policy. Analysis of public spending on education in 16 low-skilled labor relative to demand. Latin American countries shows that primary and secondary school outcomes in Costa Rica are significantly lower An increasing number of poor women are working less than would be expected given the level of spending (as a than full-time. The data show an increase in the proportion percentage of GDP). Moreover, while Costa Rica's social of workers ­ specifically poor, female workers ­ working safety net is relatively well developed by Latin American less than the standard work week (40 to 48 hours) since the standards, a significant proportion of the poor are neither end of the 1980s. The increase appears to reflect the rapid covered by social security nor have access to basic social increase in the share of female headed (largely single-parent) programs, such school feeding (Comedor Escolar), child households in the population between 1987 and 2004 ­ from care (Centros Infantiles) or social assistance pension benefits 17.0 percent of all households to 26.4 percent ­ and an even (Pensiones no Contributivas). larger increase in the share of female headed households among poor households over the period ­ from 19.7 percent There are potentially large gains to spending "better". There to 33.6 percent. Because part-time workers earn less than is thus considerable scope for increasing the impact of the full-time workers for any given hourly wage, these trends social sector on poverty reduction through concerted efforts have almost certainly contributed to the observed increase in to increase access to quality services by the poor, particularly poverty among female-headed households over the period. in education and social protection. Given already high levels of public spending, the evidence suggests that significant Certain labor market policies also may have contributed gains could be made within current budget settings through to stagnating poverty rates, for example: (i) while Costa strategic reallocations of resources to areas of high impact (e.g., Rica's complex, multi-tiered system of minimum wages secondary education for all Costa Ricans), through greater increases hourly wages for many workers already employed internal efficiency of public spending (e.g., increased spending in the formal sector, evidence indicates it also reduces on quality enhancing inputs), and through the strengthened use formal sector employment among poor and near-poor of targeted approaches to reaching the poorest, most vulnerable, workers; and (ii) regulations that restrict women's ability to Costa Ricans (as a complement to Costa Rica's universal work non-standard hours ­ specifically night work ­ may programs). Given Costa Rica's current fiscal constraints, be contributing to the rising levels of part-time work among spending "better" ­ as opposed to spending more ­ will be poor female workers and poverty among predominantly critical to its success in harnessing the social sectors for effective single-parent, female headed households. poverty reduction as well as for increased economic growth. Has immigration from Nicaragua hindered poverty reduction Policy Options: A Strategy for Recapturing Momentum for since 1994? Despite popular perceptions that the influx of Poverty Reduction poor Nicaraguans has contributed to stagnating poverty rates in The evidence presented in the report argues for a Costa Rica, the data suggest that inflows of immigrants to Costa multidimensional strategy for poverty reduction to ensure that the Rica have been too small to have had much of an impact on poor are better able to participate in and benefit from future socio- aggregate levels of poverty, particularly since 2000. economic progress. Elements of such a strategy would include: Can the Social Sectors be a More Effective Force for Promoting economic growth. Robust economic growth Poverty Reduction? is critical for sustained poverty reduction in the long-term. Costa Rica has had a long-standing commitment to Indeed, economic growth is critical to providing expanded social development and to universal access to core social economic opportunities for all Costa Ricans, including for programs in education and health. At 15.5 percent of the poor. Key areas for attention include: investments in October 2006 · Number 96 · infrastructure, financial sector deepening, increased trade extremely poor who currently fall outside the system. openness, strong macro-economic and fiscal management, The latter can be accomplished through greater and strengthening of the country's education, research and emphasis on targeted programs to complement exiting innovation systems. Yet, as Costa Rica's recent experience universal approaches and through strengthening indicates, growth alone will not engender poverty reduction. program targeting mechanisms. It will be critical to create conditions in which the poor are adequately prepared to take advantage of new and emerging It should be noted that there is a special role for "demand- economic opportunities through: side" programs to help poor families overcome financial constraints to investing in their children. Demand-side Strengthening human capital, with special emphasis on the programs, such as conditional cash transfers, provide poor. At the core of any poverty reduction strategy for Costa financial support to poor households provided they ensure Rica, efforts should focus on investments and policies to: that their children attend (and complete) secondary school. They have been effective in raising educational enrollment · Improve secondary school outcomes. This will and attainment among the poor in such Latin American require reallocation of education-sector resources and countries as Mexico, Colombia, and Brazil. Such programs attention toward increasing secondary school access hold considerable potential in Costa Rica. and achievement among the poor, particularly in rural areas, and enhancing education relevance and quality Creating an enabling environment for poor female workers: (both at the primary and secondary levels). Key priorities include: (i) providing greater social support, in · Increase the capacity and employability of poor, the form of affordable child care options, for female workers, low-skilled workers. Bridging the skills gap between whether poor single mothers or female spouses, so that low-skilled workers and the growing demand for they can work full-time and generate higher earnings, and higher skilled labor will be critical to reducing (ii) reducing legal barriers to women working non-standard unemployment and raising earnings among the poor. hours, so they have the same working-hour flexibility as men. · Address emerging health risks. Health sector resources should be aimed toward reversing Defining regionally differentiated investment strategies. the decline in vaccination rates for measles and Differences across regions in the levels of poverty and poliomyelitis, and at preventive health measures and concentrations of poor people suggest that regionally public information to deal with malaria, dengue, and differentiated policies and investments may be warranted. tuberculosis. In areas like the Central Region, where the poverty rate is low but concentrations of poor people are high, investing in Ensuring social protection for the poorest, most vulnerable infrastructure and improving the investment climate could be groups. Social protection systems should reduce people's particularly effective in raising labor demand for poor workers. vulnerability to poverty, and increase the economic mobility In places where the poverty rate is high but the concentrations of the poor by ensuring that even the poorest families have of the poor are low, investments or targeted support for access to basic services and the ability to invest in human education, training, and technical assistance, all of which raise capital. This will require: people's economic mobility, may be more effective. · Strengthening the strategic focus of Costa Rica's social Strengthening information systems and improving protection system on areas of particularly high returns, transparency. Costa Rica's poverty reduction efforts would such as early childhood interventions and programs that benefit from strengthening and increasing the transparency of increase human capital development among poor children, data, information and management systems, most notably by · Rationalizing and consolidating existing social- (i) improving poverty measurement and monitoring, and (ii) assistance programs to increase the impact of public strengthening mechanisms for targeting interventions to the poor. spending, consistent with strategic priorities for poverty reduction, and About the Authors · Expanding social protection coverage (including Andrew D. Mason is a senior economist in the Human Development support for human capital development, and health Department and Carlos Sobrado is an economist in the Poverty Reduction and Economic Management Department, both in the Latin insurance and pension coverage) to the poor and America and Caribbean Region of the World Bank "en breve" is produced by the Knowledge Team of the Operations Services Department of the Latin America and the Caribbean Region of the World Bank - http://www.worldbank.org/lac · October 2006 · Number 96