Boosting productivity to sustain income convergence

In the latest 30 years, Costa Rica's real GDP per capita has more than doubled, driven by increasing labour utilisation. Labour productivity has instead stagnated at around 30% of the more advanced OECD countries. Productivity growth has been lacklustre despite the opening up of markets to international competition and large FDI inflows. Several obstacles continue to hamper the development of domestic firms and markets. They have fostered a dual speed economy characterised, on the one hand, by an innovative, productive and export oriented FDI sector – increasingly focussing on high value added sectors – and, on the other hand, a domestic sector – dominated by small firms and focused on traditional industries – that is neither innovative nor very productive. Boosting national productivity to sustain the convergence process towards OECD countries living standards will hinge on creating the right conditions for domestic firms to thrive and become more innovative and productive, while maintaining the long-standing commitment to open international markets and investment. To make this happens the government should: 1) encourage innovation and improving links between domestic and foreign firms by better enforcing and implementing intellectual property rights, shifting public R&ampD spending towards tertiary education institutions, and improving the coordination of public programmes promoting innovation of local firms and linkages with foreign affiliates 2) strengthen competition in product markets and ease access to finance for SMEs by eliminating anti-trust exemptions, empowering the competition commission and giving it more independence, reducing barriers to entrepreneurship, ameliorating the corporate governance of state-owned enterprises and creating a level-playing fields between state-owned and private banks 3) enhance the institutional and legal framework of the transport and other infrastructure sectors by reducing the number of agencies involved in policy development and project executions, and establishing an institutional framework to reduce policy uncertainty and attract more private investment.