# **_1.a What was the motivation for the liberalization of the economy?_**

During the 1980s, many events contributed to precipitating the deepest economic crisis in Costa Rica’s recent history. This crisis—which, according to González (1989), resulted from a combination of structural and other short-term factors—made it necessary to review the development strategy pursued until then. The structural determinants of the crisis reflected a contradiction between the country’s main characteristics (a small domestic market, a relative abundance of a highly-specialized workforce and of natural resources) and the policies adopted as part of the import-substitution development strategy. The commercial policies generated a series of distortions of relative prices, giving rise to an anti-export bias as well as a reduction in the domestic consumers’ welfare and in the efficiency of domestic production (Taylor, 1984; Monge and Corrales, 1988). The short-term determinants of the crisis included, most importantly, the oil crisis and the coffee boom of the mid 1970s, followed by the unfortunate domestic policies adopted in response to these events and the international inflation and recession of the late 1970s and early 1980s (González, 1984).

The major macroeconomic indicators deteriorated rapidly between 1981 and 1982. Inflation reached 80% per year, the open unemployment rate amounted to 9% of the workforce, the GDP dropped by 10% in only one year, there was a sharp devaluation of the colon vis-à-vis the US dollar and the fiscal gap increased significantly (Lizano, 1992). Thus, both the groups that benefited from the import-substitution model and those that were adversely affected by it saw a need for a change of strategy. This situation fostered the adoption of a new economic development plan, the so-called “economic liberalization model”, which to this day has not yet become fully effective in Costa Rica.<sup>1</sup>

# **_1.b What did the economic liberalization mean and how was it implemented?_**

The economic liberalization model adopted by Costa Rica since the second half of the 1980s seeks a greater integration of the country’s economy into the world economy. The objectives are to increase Costa Rica’s economic competitiveness in international markets and to provide it with an adequate price system. In order to attain these objectives, a set of reforms was established, which includes a greater opening of the economy to foreign competition by reducing protection for the activities which compete against imports and by eliminating the distortions in the domestic goods and factor markets, all of which reduced directly unproductive, profit-seeking activities (Bhagwati, 1982 and 1991); downsizing and modernizing the state, so that instead of hindering the growth of the private sector it would facilitate its development; granting compensatory subsidies and other incentives to non-traditional exports on a temporary basis, with the purpose of offsetting the anti-export bias generated by the import-substitution model; adopting stable macroeconomic policies, consistent with the liberalization model (Edwards, 1990; IMF,

> 1 There are still important reforms pending, such as the liberalization in utilities, telecommunications and insurance fields, tax exceptions for some agricultural products and State modernization.

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