Today, ODI releases a new report, Bridging the Green Growth Gap in Costa Rica, assessing whether Costa Rica has achieved the green growth outcomes that its policies were designed to achieve. Authors Ilmi Granoff; Monica Araya, Philipp Ulbrich, Sam Pickard and Caroline Haywood introduce the report, which was co-sponsored by CDKN.

Costa Rica’s track record on economic, social and environmental issues is second to none. It has strong comparative advantages, from its skilled and educated population to its political stability, and from its robust economy to its abundant natural resources. It has weathered numerous financial and economic storms and remains competitive on the global stage. Therefore, Costa Rica is regarded by many as an economic and environmental success story, with an admirable record of ‘green growth’—economic growth that minimizes pollution and uses and manages resources efficiently.

Yet Costa Rica is also a victim of its own success: its leadership in some areas may have blinded it to its green growth gaps. As Costa Rica approaches a crossroads in its economic and environmental journey, its choices could provide the model for others to follow. A new report, co-funded by CDKN, looks at concrete results, first in the economy and then in the environment, rather than listing the country’s policies and projects. Where results are poor, it examines root causes for under-performance, and the prospects for synergies to improve economy and environment together.

Costa Rica’s current economic model is characterised by an industrial economy, trade liberalisation, the export of goods and services and the inflow of foreign direct investment. This shift has had some significant benefits to the economy, including steady GDP growth. Costa Rica has also invested heavily in education and health care. Today, however, it must respond to slowing industrial growth, increasing rural unemployment, and demand for a workforce to bolster innovation-driven economic growth. The choices that are made on which activities to support are crucial for the country’s industrial policy, which needs to build on the hard-wired comparative advantage of a well-educated workforce and reduce its economic and environmental vulnerabilities, making new jobs into green jobs. Costa Rica’s natural capital investment, through the protection of forests and biodiversity, has also paid off.

Two of the country’s biggest environmental successes – biodiversity and eco-tourism – have fuelled macroeconomic growth, while the biggest gaps – wastewater management and rising emissions of greenhouse gases – are largely the result of low spending on sustainable public infrastructure. Key areas of public infrastructure have suffered as a result of slashes in spending, particularly public transport and wastewater treatment. Private vehicles have rushed to fill the gap left by limited public transport, resulting in higher greenhouse gas emissions. There had been little or no new investment into wastewater treatment since the 1980s until the development of the country’s mega-project at los Tajos, which aims to treat just over half of the residential wastewater from the country’s capital, San José. But there is still no credible strategy for the long-term financing of other projects to meet growing demands. If macroeconomic fundamentals like public infrastructure and employment continue to deteriorate, so too will the economy and the environment. The pursuit of green growth in the medium and long term will also be undermined.

The potential consequences are alarming: foreign investors may leave Costa Rica if its infrastructure does not improve, its industries may watch jobs slip away to foreign markets, and Costa Rica’s bold goal of leading the international community on carbon neutrality could succumb to poor urban planning and the lack of investment in mass transit. Costa Rica’s ability to close its green growth gap will depend on whether it can rebalance its economy to deliver higher levels of public goods via public investment. Higher levels of public spending, and therefore public revenue, are vital to provide the public infrastructure, planning and governance needed to improve its macroeconomic and environmental performance. Costa Rica will need to deliver these public goods despite its high and rising fiscal deficit. ODI’s analysis highlights the deep structural challenges to the organisation of Costa’s Rica’s economy. We also however, suggest some ‘quick wins’ that will propel Costa Rica towards long-term approaches to better align its economic and environmental performance.

These include concrete measures to:

• close the infrastructure gap sustainably, such as feasibility studies and political economy analysis of the transport sector and institutional changes among relevant ministries;

• improve resilience, both in terms of economic vulnerability, diversity of the energy mix and the forecasting of climate impacts;

• plan green industrial policy, including better incorporation of the Chamber of Industry’s sophisticated green industrial policy proposal into national planning;

• reduce the fiscal deficit, through targeted taxation and fiscal policy reforms, and possibly green fiscal tools, and even by changing the national conversation about public budgets and public services.

Read the full report: Bridging the Green Growth Gap in Costa Rica.