Why are poverty and inequality not declining in Costa Rica?

Costa Rica’s development success is widely and rightly celebrated. The country is a beacon of social and political stability in Central America. It implements an outward and tourism-oriented growth strategy, with considerable achievement. As one of the very few countries to expand its forest cover in recent decades to about 60% of the country, it is a global example in terms of safeguarding its environment. Its poverty rates are also among the lowest in the Latin America and Caribbean region, after Chile and Uruguay.

Yet, Costa Rica lost the momentum for poverty reduction towards the end of the twentieth century. This makes Costa Rica an outlier in a region that continued to experience generally declining poverty and inequality rates . We wanted to analyze the factors behind this lost momentum in our report “Opportunities for Reducing Poverty and Inequality in Costa Rica”. Below we highlight the most important aspects.

The lack of poverty reduction and the perennial challenge of inequality are clear from Figure 1 below. It shows the evolution in Costa Rica’s poverty rate (blue line) and Gini coefficient (orange line) over the period from 2010 to 2021.

There is no clear evidence of declining poverty, even if Costa Rica experienced positive economic growth in all displayed years except for the economic contraction in 2020 induced by the COVID-19 pandemic.  Moreover, if anything, inequality appears to have increased.

Figure 1. Poverty and inequality trends from 2010 onwards

Note: The displayed poverty rate is based on Costa Rica’s national poverty definition. The Gini coefficient is a commonly used measure for inequality. A higher coefficient indicates higher inequality.

Source: Authors’ calculations based on the “Encuesta Nacional de Hogares” (ENAHO) (2010–21) for Costa Rica.

The livelihoods of historically disadvantaged groups, moreover, continue to be precarious. Let’s examine:

Although there are significant data constraints, it is fair to conclude that Nicaraguan migrants, Afro-descendants, and indigenous populations have structurally higher poverty rates. Poverty rates of Nicaraguan migrants were already about 10 % higher among migrants before the start of the pandemic. And they shot up to over 50 % during the pandemic.

Single mothers are another group that clearly experiences fundamental challenges. Their labor market income tends to be low and public and private transfers do not make up for this. More than half of all single mothers can be classified as poor, according to Costa Rica’s national poverty definition, and their situation deteriorated over the past decade.

So, what explains stagnant poverty and high inequality in Costa Rica?

Several factors counterbalanced the benefits of economic growth over the past decade: income generation opportunities for less-educated workers eroded in virtually all sectors; population ageing led to an increasing dependency ratio in many households; and labor force participation rates of women continued to be among the lowest in the region.

These factors put downward pressure on income from labor in many households. As can be seen in Figure 2 below, the contribution of labor to household income declined especially in the poorest quintile, from over 70 % in 2010 to about 55 % in 2021. A dramatic change.

Inequality increased, as the plight of higher-educated workers continued to improve over this same period.

Figure 2. Contribution of labor to household income by income quintile (2010 and 2021).

Source: Authors’ calculations based on the “Encuesta Nacional de Hogares” (ENAHO, 2010 & 2021) for Costa Rica.

Are there no positives?

Yes, there are. One of them is the performance of Costa Rica’s social assistance system. Non-contributory old-age pensions and public transfers to households with children played a critical role over the past decade. Non-contributory pensions are especially well-targeted. The amounts are high enough to increase the incomes of the poorest households by about 50 %. Together these pensions and transfers offset the declining contribution of labor in the bottom of the income distribution and thus helped avoid an increase in poverty. Emergency transfers helped to offset the worst impacts of the 2020 economic contraction. Improvements in the identification of the poor through the social registry known as SINIRUBE were instrumental to enable the social assistance system to support those most in need.

There are more opportunities for Costa Rica to return to a path of poverty reduction . While school attainment has increased considerably, the quality of education will also have to improve to better respond to the demand for skilled labor. Labor market opportunities will have to improve for less-skilled workers, to avoid increasingly dichotomous labor market outcomes. And social assistance will have to effectively deliver to those who are excluded.  Significant challenges, also considering reduced fiscal space and impending years of austerity.

Want to learn more? Download our new report: Opportunities for Reducing Poverty and Inequality in Costa Rica.