Income inequality is on the rise in Costa Rica. Despite the fact that Costa Rica has been very successful over the years in lifting the standard of living of the population it has recently seen an increase in income inequality . The decisions made by leaders after the 1948 revolution to abolish the army and invest in education and healthcare have provided great dividends for the country. The country has a highly educated population with a high life expectancy. However, somewhere along the way the country lost its compass and a growing government bureaucracy slowly started dominating the country. Political favors from the traditional political parties resulted in government agencies being run by political cronies. Once in control of government institutions they all started to legislate lucrative pension and salary bonuses which continued to grow over the years. The system as it now exists is no longer sustainable. However, instead of seriously looking at how to cut government waste and inefficiency the current government is focused on raising taxes to address the issue. The increased regulation has negative effect on job creation and business startup. Costa Rica needs to urgently review its business incentive structure to stimulate business startups and not ch0ke them from the start. See the graph that indicates how government regulation in Costa Rica restricts competition.
When you have more regulation you increase the cost of doing business and you force businesses to leave the formal structured sector and gravitate to the informal sector. This is clearly what is happening in Costa Rica and instead of providing more revenue by attracting business into the formal tax regulated structure the incentive is to leave the system with the corresponding loss of revenue for the government.
The next troubling sign is the growth of income inequality in Costa Rica. This was a country that has always been proud of the “equality” of their citizens. It has been the core that has provided social stability in Costa Rica for over 60 years. It is what distinguished Costa Rica from its Central American neighbors where just a few families controlled the entire wealth in countries like Guatemala, El Salvador, Nicaragua and Honduras. Costa Rica was very successful at providing a level playing field where opportunities for those that worked hard prevailed regardless of the social class they were born into. Recent indicators show a troubling trend where income inequality in Costa Rica is rising to a point where the top 10% now earn 32 times more then the poorest 10% (Source OECD). Clearly the country has lacked the leadership and vision for the future to maintain and preserve what the leaders after the revolution of 1948 had implemented. The country has many positives going for it but the inability of government to lead and move the country in the right direction is troubling. If the local municipal elections are any signal of the direction the country is headed for in the national elections it would appear that Costa Rica is returning to a bi-partisan system dominated by Liberacion Nacional (PLN) and the Social Christian Party (PUSC). It seems the electorate got tired of promises for “change” and now is clamoring to go back to the old 2 party system.