Real Progress: Fifty Years Of USAID in Costa Rica

USAID Program and OperationsAssessment Report No. 23

Real Progress: Fifty YearsOf USAID in Costa Rica

by

James W. FoxCenter for Development Information and Evaluation

U.S. Agency for International Development

November 1998

Introduction .............................................................................................................................. iii

1. Why Foreign Aid to Costa Rica? ........................................................................................ 1Why Costa Rica? ................................................................................................................... 2How Much Aid Was Provided? .............................................................................................. 4

2. Costa Rican Development, 1945–95 .................................................................................. 5Costa Rica Before 1945 ......................................................................................................... 5Costa Rica in 1945–50 ........................................................................................................... 6Development, 1945–95 .......................................................................................................... 7Costa Rica in 1995 ................................................................................................................. 9Costa Rica in Microcosm: Two Rural Villages ........................................................................ 10

3. Validity of the Development Concepts ............................................................................. 15Pre-1961: Technical Assistance ............................................................................................. 16High Development: USAID and the Alliance For Progress (1961–72) .................................... 19Basic Human Needs and Poverty Reduction (1972–81) ........................................................ 22Macroeconomic Restructuring/Reactivation (1982–92) .......................................................... 24

4. Which Activities Produced Results? ................................................................................. 29Sectoral Successes:Activities With Big Payoffs or Problems ................................................... 31Evaluation in Foreign Policy Terms ........................................................................................ 33Evaluation of Macrolevel Performance .................................................................................. 33Was Costa Rican Development Inevitable? ............................................................................ 36

5. Lessons Learned ............................................................................................................... 39The Bottom Line: Was It Worth It? ....................................................................................... 41

Appendix ............................................................................................................................... A1

Bibliography .................................................................................................................... Biblio1

Contents

OVER THE PAST 50 YEARS, the U.S. gov-ernment provided Costa Rica $2 billion

in economic aid. Did it make a difference? Cer-tainly Costa Rican conditions have improved:ordinary citizens live longer, healthier lives; arebetter educated; have far higher incomes; andlive in a vibrantly democratic society. A high-way built largely with U.S. government fundsnow links the formerly isolated central part ofCosta Rica to both its coasts and to neighboringcountries Nicaragua and Panama. But thechanges that took place in Costa Rica were theresult of actions by millions of Costa Rican citi-zens acting in their own interests, by successiveCosta Rican governments, by the opportunitiesprovided by the international economy, and byactions of a variety of multilateral and foreigngovernment assistance programs. The U.S. gov-ernment foreign assistance programs were thelargest single outside factor, but this influencecannot be separated from all of the rest.

The volume of programs of the U.S. gov-ernment—perhaps a thousand separate activi-ties, each carried out by a combination of Ameri-can and Costa Rican implementers—precludesevaluation of impact by analyzing each one. Thisstudy instead attempts to assess impact by look-

ing at the main emphases of U.S. assistance andtheir relation to Costa Rican development.

The report is organized as follows: Chap-ter 1 poses a question seldom asked: why theU.S. government would tax its citizens to raisemoney for such a purpose in the first place.Chapter 2 provides an overview of Costa Ricafrom 1945 to 1995, both in general terms byexamining aggregate data, and in microcosm byexamining how life changed in two rural com-munities between 1950 and 1995. Chapter 3critically reviews the four broad conceptual ap-proaches the U.S. Agency for InternationalDevelopment used in Costa Rica (and else-where) and assesses the success of each. Chap-ter 4 draws conclusions about the overall effec-tiveness of USAID assistance, identifies suc-cesses and failures in narrower sectors, and dis-cusses unanswered questions. Chapter 5 offerslessons for USAID in its future programs.

This study was managed by the Center forDevelopment Information and Evaluation(CDIE), an arm of USAID, drawing on a seriesof sector studies carried out by Costa Rican re-searchers. These Costa Rican sector specialistsstudied USAID’s involvement in each of 10 sec-

Introduction

iv Real Progress: Fifty Years of USAID in Costa Rica

tors: agriculture, democracy, education, health,family planning, finance, infrastructure, macro-economic policy, natural resources, and tradepolicy.* Three crosscutting studies (a compari-son of economic and social conditions in tworural communities in 1950 and 1995, an analy-sis of USAID’s involvement with three privatevoluntary organizations, and a study of the ef-fects of nontraditional export growth) also werecarried out. The researchers used available docu-mentation on USAID programs† and CostaRican development from 1945 through 1995.The record was incomplete for the early part ofthe period, however, and evaluations or projectcompletion reports were often unavailable, evenfor recent periods. The researchers also wereprovided with summaries of interviews withabout 100 Costa Ricans knowledgeable aboutspecific USAID programs and 25 Americanswho had worked for the Agency in Costa Rica.The draft sector studies were then reviewed atworkshops in Costa Rica and Washington. Thesector studies, listed in the appendix, providethe necessary background and analysis for manyof the conclusions in this report.

Conclusions

It is impossible to adequately characterizethe impact of an enterprise with so many di-verse elements. Rather, the result of assistancewas more a mosaic that emerged from the inde-pendent decisions of large numbers of peoplespread over decades. Some broad generaliza-tions do emerge from looking at this mosaic:

1. Assistance programs were collaborativeand well intentioned, and most achieved theirintended purpose. Costa Rican economic andsocial progress was faster as a result of theseefforts.

2. For the most part, USAID pushed inthe correct direction. The policies and orienta-tions that were pursued were generally betterthan those existing at the time.

3. The most evidently successful activitiesincluded the Inter-American Highway, whichprovided the backbone for Costa Rican trans-portation; collaborative rural health programs,which produced spectacular successes and wereadopted elsewhere; and the macroeconomic re-form program of the 1980s.

4. In retrospect, two large mistakes are evi-dent: encouraging Costa Rica to participate inthe Central American Common Market, withits high barriers to trade with other countries;and trying to enlarge governmental social pro-grams in the late 1970s, when an economic cri-sis loomed.

5. In these and other cases, USAID ap-proaches did become better over time. Lessonsfrom past failures, in Costa Rica and elsewhere,were gradually incorporated into new projects.

6. All in all, U.S. economic assistance toCosta Rica met both the developmental and theforeign policy goals it was intended to serve.

†This paper uses “USAID” as shorthand for all U.S. government economic assistance programs to Costa Rica.USAID was established only in 1961, and earlier programs operated under different names. The largest singleproject, the Inter-American Highway, was administered by a U.S. domestic agency, the Bureau of Public Roads.

*Ricardo Monge and Eduardo Lizano of the Academia de Centroamérica coordinated the sector studies andprovided many insights, both conceptual and factual, to the study.

OFFICIAL FOREIGN AID is a post–World War II phenomenon. Before that, though

the U.S. government sometimes provided tem-porary relief in response to both natural and man-made catastrophes, during most of U.S. history,annual government appropriations for “charity”to foreign countries had been a foreign idea. Yetbetween 1945 and 1995, the United States pro-vided $2 billion in economic aid to Costa Rica—on average, about $20 per year, or $1,000 intotal, for each Costa Rican. The average Ameri-can citizen paid $40 dollars (80 cents a year) intaxes to provide for Costa Ricans, who wereamong the most favored recipients of U.S. for-eign aid during the period. Only citizens ofIsrael, Vietnam, Egypt, and Jamaica receivedmore per capita. What was there about theUnited States, and about Costa Rica, that wouldpersuade 10 successive American presidents totake money from U.S. citizens to give to CostaRicans?

Two basic arguments have traditionallybeen used to support U.S. foreign aid: Ameri-can self-interest and American altruism. Sostated, these two lines of argument are mutuallyexclusive. If a course of action is justified byreal benefits to the United States, it is not, bydefinition, altruistic. An altruistic reason is onefrom which no benefit can be expected otherthan the satisfaction of having done “the rightthing.” Aid proponents in the United States havesought to marry these two purposes, assertingthat U.S. national security interests are bestserved by economic aid programs that benefitpoor people in developing countries.*

For most of the period since 1945, U.S.foreign policy has been based on the belief thatthe United States was locked in a global strugglewith international communism, a powerful forceantithetical to U.S. purposes and interests.Until the collapse of the Soviet Union in the

*Despite this national security rationale for USAID’s presence in Costa Rica, Costa Ricans interviewed werevirtually unanimous in believing that the American USAID employees were there for altruistic reasons.

Why Foreign AidTo Costa Rica?1

2 Real Progress: Fifty Years of USAID in Costa Rica

early 1990s, U.S. foreign policy maintained aconsistent world view—one articulated byGeorge Kennan in the famous “X” article inForeign Affairs in 1947. Even though Kennanlater repudiated some aspects of the policy, 10presidents consistently followed it. U.S. foreignpolicy interests believed national security de-pended on “winning” this struggle, and foreignaid was seen as one element of the program toensure that outcome.

An unadorned national security rationalewould give no emphasis to the recipientcountry’s use of the foreign aid. U.S. foreignpolicy, however, saw the struggle with theUSSR also in moral terms. Buying the supportof corrupt dictators was both suspect and un-likely to be a successful long-term policy. Un-less the United States were to use its foreignpolicy to promote economic development, com-munism would become more attractive as a forcefor modernization. Thus, the sophisticated se-curity rationale linked the U.S. goal of nationalsecurity with economic and social progress inthe aid-receiving country. The United Stateswould do well by doing good.

Why Costa Rica?

Costa Rica was a highly favored recipientof U.S. assistance. On a per capita basis, CostaRica received eight times as much as LatinAmerican countries generally from 1945 to 1993,and far more than Asian or African nations. Ona worldwide per capita basis, Costa Rica wasfifth among U.S. aid recipients. Why?

Pre-1972:A Developing Country

Prior to 1972, U.S. assistance to Costa Ricawas about equal to that of other Central Ameri-can countries, and moderately higher on a percapita basis than U.S. assistance to the largerLatin American countries. Latin America re-ceived more aid than other regions because theUnited States considered it “America’s back-yard.” On one hand, Costa Rica’s longstandingcommitment to mass education and democracy,and the relatively high quality of governmentinstitutions, favored aid to Costa Rica. On theother hand, its relatively high level of develop-ment made it a questionable claimant, and thattrait led USAID in 1970 to plan to phase outassistance to Costa Rica.

Basic Needs (1972–80):Costa RicaAs Residual Claimant

The proposed phaseout of aid to CostaRica brought declines in Mission staffing andprogram levels, but a firm decision to actuallyterminate the program was continually deferred.A shift in the overall USAID approach to “ba-sic human needs”—emphasizing help to thepoorest people in the poorest countries—shouldespecially have accelerated the close of the Mis-sion. Aid levels were reduced, but less so thanmight have been expected. Programs in LatinAmerica were cut, while those in Asia and Af-rica were increased. Though planned levels forCosta Rica were low, that country consistently

Why Foreign Aid to Costa Rica?

received more than its planning figure. Whenproposed projects failed to materialize in othercountries for technical or for political reasons(such as a coup d’etat), Costa Rica was alwaysconsidered a safe place to put extra resources atthe end of the fiscal year, and thus was a “re-sidual claimant” for available resources in LatinAmerica. Costa Rican institutions could developand manage projects well and ensure thatprojects would benefit poor people.

The 1980s:The Sandinista Windfall

Costa Rica’s fortunes as a claimant for U.S.economic aid improved dramatically during1982–92. Measured in 1994 dollars, it receivedmore than $1.4 billion during this decade, com-pared with $0.8 billion in the previous 35 years.The debt crisis of the early 1980s hit Costa Ricahard, but no harder than it struck the rest of thedeveloping world. The special justification forassistance to Central America was the leftistSandinista government in Nicaragua. TheReagan administration, which took office in1981, adopted a foreign policy stance towardNicaragua of isolation and hostility. The admin-istration feared Sandinista support for guerrillagroups elsewhere in Central America, a viewgiven credence when the outgoing Carter ad-ministration cut off U.S. aid to Nicaragua be-cause of mounting evidence of Sandinista sup-port for Salvadoran insurgents. The UnitedStates gave great currency to the boast attrib-uted to one of the Nicaraguan comandantes thatCentral American countries would fall like rip-

ened fruit to revolution, with Costa Rica com-ing last, as dessert.

The Reagan administration sought addi-tional aid for Central America and in 1983 es-tablished a bipartisan commission chaired byformer Secretary of State Henry Kissinger torecommend a longer term program. TheKissinger Commission proposed a five-year pro-gram of $1.2 billion in annual economic aid tothe region, along with substantial military aid.Congress appropriated about $1 billion annu-ally for the rest of the decade.

In the early years of the Kissinger program,USAID, the administration, and Congress gen-erally agreed on allocation of aid to the CentralAmerican countries. By the late 1980s, how-ever, discrepancies appeared. By 1987, USAIDproposed lower funding levels to Costa Rica,for two reasons: the progress being made andthe concern that continued high levels wouldcreate permanent dependence. Congress fearedsuch cuts would signal dissatisfaction with theCentral American peace efforts of then-presi-dent Oscar Arias, and it specified continued highlevels of funding for Costa Rica. By 1991, how-ever, the Sandinistas had been voted out ofpower in Nicaragua, economic recovery waswell under way in the rest of the region, andU.S. aid to Central America began to declinesharply. In 1994, USAID declared Costa Ricaan aid “graduate” and established a timetablefor phaseout of programs there by 1996. USAIDoffices closed in September 1996, though somemodest activity has since continued throughUSAID’s Central American regional programs.

3


How Much AidWas Provided?

The U.S. government provided slightlymore than $1.7 billion in direct bilateral aid toCosta Rica during 1946–95. Measured in con-stant 1994 dollars, the total amounts to $2.9 bil-lion. Additional U.S. aid flowed to Costa Ricathrough other channels. Perhaps $150 millioncame from USAID’s Regional Office for Cen-tral America and Panama, and another $100million or so came from activities funded byUSAID/Washington. Finally, multilateral orga-nizations carried out programs in Costa Rica,including $903 million in loans from the WorldBank, $1.72 billion in loans from the Inter-American Development Bank (IDB), and $27million in grants from United Nations programs.All these multilateral agencies depend on U.S.government support, ranging from 20–25 per-cent for World Bank and UN programs to halffor IDB loans through its Fund for Special Op-erations. Nevertheless, most of the funding fromthe multilateral banks is not foreign aid in the

usual sense. The banks obtain most of their re-sources by using guarantees from membercountries to raise funds in capital markets to bere-lent at commercial interest rates to recipientcountries.

Altogether, then, bilateral U.S. aid to CostaRica aggregates to about $2 billion in congres-sionally appropriated dollars, or about $3 bil-lion in constant 1994 dollars—or nearly $1,000for each Costa Rican citizen alive in 1994. U.S.economic assistance funded a thousand or soremarkably diverse activities, ranging from smalltechnical assistance projects—that, for example,provided experts on such mundane subjects assharpening sawmill blades or constructing wa-ter systems—to massive macroeconomic policyefforts. Perhaps 300 USAID employees hadtours in Costa Rica, and the Agency broughtthousands of U.S. consultants for short- andlong-term work in the country. More than 5,000Costa Ricans were sent abroad (usually to theUnited States) for training, and far larger num-bers were trained in Costa Rica in courses fi-nanced or designed by USAID.

Costa Rica Before 1945

THE GOVERNOR OF COSTA RICA in 1719wrote the king of Spain:

This province is the poorest and most mis-erable in all America. . . . Its inhabitantsgrow more backward every day. . . . Thecurrency is the cacao bean, and silvercoins are unknown. . . . It has been im-possible to discover from where derivesthe name of rich coast [Costa Rica], sinceit is so enormously poor.

At the time, 180 years after the first Spanishsettlement, Costa Rica’s central plateau washome to about 3,000 Spanish settlers, for whomland was plentiful. Costa Rican settlers differedfrom those elsewhere in Central America, in thatthere was no significant indigenous populationthat could be subjugated and forced to do thephysical labor necessary to support the settle-ments. The governor’s letter continued, “[E]achinhabitant has to plant and raise that which hespends and consumes in his home every year,and this is also done by the Governor, since oth-erwise he would perish.”

A century later, newly independent CostaRica was still the poorest and most isolated Cen-tral American state. The first coffee exportsaround 1830 signaled the beginning of a newera. Even with the country’s isolation and con-sequent high transport costs, coffee could beexported profitably. Exports put silver coins insome pockets, introducing greater differencesin wealth than in the precoffee days when therewas an “equal distribution of poverty”(Rottenberg 1993, 387). Later, building railroadsfrom the central valley to the coasts reduced thecountry’s isolation. The search for products totransport on the railroad led to development ofthe second major export crop, bananas.

Support for mass education in Costa Ricadates to the latter part of the 19th century. Illit-eracy was estimated at 89 percent in 1864(“Dirección General de Estadística y Censos”1953, 5). Soon after, the government made edu-cation a national priority, making primary edu-cation free and compulsory. Illiteracy graduallydeclined: to 69 percent by 1892, 32 percent by1927, and 21 percent by 1950.

2Costa RicanDevelopment,1945–95


At the end of World War II, Costa Ricawas still a relatively poor agricultural country.Isolation still limited prospects for economicgrowth. No all-weather roads linked the centralvalley, where most of the population was con-centrated, to either coast or to its neighbors,Panama and Nicaragua. Coffee and bananascontinued to account for nearly all export earn-ings. Economic growth was circumscribed.Available data suggest that per capita incomesstagnated between 1920 and 1945 (Bulmer–Thomas 1987, 312).

By Central American standards, though,Costa Rica was prosperous. Its yeoman farm-ers had long since surpassed their Central Ameri-can neighbors in productivity, so its per capitaincome exceeded the other Central Americanrepublics by 15 to 40 percent. Government wassmall, as it had been throughout the 19th cen-tury, but it effectively maintained public order,provided a stable legal system, and financededucation. Its emphasis on education also dis-tinguished Costa Rica from its Central Ameri-can neighbors.

Costa RicaIn 1945–50

The government’s role began to broadenin the early 1940s with establishment of a so-cial security institute to provide health care andretirement benefits for covered workers. It ac-celerated in the late 1940s, when a brief civilwar was followed by the first Figueres admin-istration. José Figueres Ferrer, the leader of theinsurgents during the civil war, has cast hisshadow over economic and social policy ever

since. Figueres nationalized the banking system,promoted the concept of government-ownedenterprises for public services (the first was anelectricity company), and abolished the small(and institutionally insignificant) army. From thispoint, the government assumed a steadily largerplace in the society as guardian of the welfarestate; its share of total employment rose steadilyfor three decades.

In 1950, more than half the labor forceworked on farms, and 41 percent of total pro-duction originated in agriculture. More than halfof agricultural production was exported, withcoffee and bananas constituting more than 90percent of exports. Manufacturing existed, butmostly by small firms engaged in food process-ing and clothing and shoe production.

One third of the population lived in urbanareas, while the other two thirds lived in ruralareas with varying degrees of remoteness. Whilevirtually all urban dwellers benefited from pipedwater, nearby schools, health care services, masstransit, and other amenities, rural residentslargely did not. The gap in health and educa-tional standards was wide. Rural infant mortal-ity was probably several times the urban rate.More than half of urban 14-year-olds went toschool, but only 17 percent of rural children ofthe same age did so.

On average, Costa Ricans were poor andunhealthy. Life expectancy was 46 years, equalto that in the United States in 1890. Infant mor-tality had been improving for decades but still was110 per thousand live births: more than 1 babyin 10 died during the first year after birth. Fertil-ity was high—about seven children per woman.

Costa Rican Development, 1945–95

By Central American standards, CostaRicans were well educated. The 1950 censusputs literacy at 79 percent of the adult popula-tion. Primary education, virtually universal inurban areas, had gradually been extended tomore remote areas. Of those born during 1940–44, only 9 percent completely missed out onformal schooling.* Some 33 percent had someprimary schooling, while 58 percent completedprimary school. About 22 percent of this cohortcompleted secondary education, and 15 percenthad some university training. There were only17 public high schools in the country, all in themain urban centers, so secondary education wasmuch more common for urban children. Highereducation was a recent phenomenon in CostaRica. The University of Costa Rica was estab-lished in 1941, though teachers colleges andsome schools of the university had existed ear-lier as independent units.

Besides the broad geographic coverage ofCosta Rican education, the other notable fea-ture of the educational system was its equalityof access and educational attainment for women.In 1950, attendance rates were slightly higherfor females than for males through high school.Women also outnumbered men at the univer-sity level (in contrast to the situation at that timein most of Latin America), because of largenumbers of women training to be teachers. Thehigh level of women’s education probably con-tributed significantly to the rapid improvementin health conditions once modern approacheswere disseminated and to the rapid spread incontraceptive use for family planning in the1960s.

Development, 1945–95

From 1945 to the present, Costa Rican pro-duction has increased steadily. The country suf-fered a severe recession in 1980–82 but other-wise has had almost uninterrupted growth ofgross domestic product (GDP). Total produc-tion increased ninefold in 45 years. Some of thegrowth came from increased employment, butmuch of it came from better productivity. Out-put per worker more than doubled. Productiv-ity increased across all sectors of the economy,linked presumably to increased use of scientificknowledge, expansion of infrastructure, andimproved organizational techniques—all areaswhere USAID programs sought to contribute.

Costa Rica followed the usual course ofdeveloping countries. (Table 1 summarizes thechange in key economic and social indicatorsduring 1950–95 including trends in the struc-ture of employment during this period.) The la-bor force quadrupled over the period, and itsstructure changed dramatically. The share of ag-riculture in total employment declined sharplyand continually, falling from 55 percent of theemployed labor force in 1950 to 21 percent in1995. The total agricultural work force contin-ued to grow until the mid-1980s, though at aslower rate than in other sectors. Manufactur-ing employment grew rapidly, climbing from11 percent of the labor force to 18 percent. Thelargest shift was into service employment: from30 percent of the labor force to 60 percent. Gov-ernment services in particular flourished, risingfrom 6 percent to 19 percent of the labor force

7

*This figure is based on self-reported education levels for the 1984 population census.


between 1950 and 1984, before receding to 15percent by 1995.

Infrastructure

Dramatic improvements took place inCosta Rica’s internal transportation and commu-nication, as well as in its interaction with the restof the world. New roads linked previously iso-lated villages with the rest of the country andfavored the wider marketing of agricultural prod-

ucts and manufactures. National electrical andtelephone grids were established; they now pro-vide access to virtually all significant popula-tion concentrations in the country. Clean watersystems and sanitary waste disposal systemswere also established nationwide.

The largest and most important infrastruc-ture project was the Inter-American Highway,for which construction began in the 1940s. Itnot only provided access to Panama and Nica-

Table 1. Economic and Social Indicators, Costa Rica, 1950 and 1995

1950 1995

Distribution of Labor Force (%)

Agriculture 54.7 21.4Manufacturing 11.3 18.1Services 34.0 60.5

Distribution of Production (%)

Agriculture 40.9 18.3Manufacturing 13.4 21.9Services 45.7 59.8

Social Indicators

Infant mortality rate (per thousand) 110.0 13.0Total fertility rate (births/woman) 6.7 3.0Malaria death rate (per 100,000) 60.0 0.02nd and 3rd degree malnutrition (%) 13.7 3.6Adult illiteracy 27.0 7.0Life expectancy at birth (years) 51.0 76.0Primary school enrollment rate (%) 100.0 102.0Secondary enrollment rate (%) 20.0 42.0

grams became part of the usual business of gov-ernment agencies or received financing on alarger scale from one of the multilateral banks.

The Size and RoleOf Government

Dramatic changes in physical and socialinfrastructure were made in substantial part byexpanding the size and role of government. Thegovernment’s share of GDP rose from less than10 percent in 1950 to around 35 percent by 1980,where it remained through 1995. Two main ac-tions led to the government’s increasingly domi-nant role: provision of what economists call“public goods” (largely infrastructure and so-cial services), and policy actions and regulationsthat directly affected the private sector. For ex-ample, government policy became a force in de-termining sectoral distribution of credit and invarying the amount of protection from foreigncompetition faced by individual sectors or en-terprises. Government became a direct producerin a number of sectors.

Costa Rica in 1995

Costa Rica in 1995 reflected the dramaticchanges that had taken place over the previoushalf century. Though fertility fell by more thanhalf over the period, population quadrupled, pro-ducing rapid urban growth but also spreadingagriculture into remote areas previously coveredwith forests. In terms of purchasing power, CostaRica’s per capita GDP in 1995 was on the or-der of $5,800, about 70 percent higher than theworld average. Its per capita income growth out-paced that of its Central American neighbors,who fared poorly in recent years. Average in-

ragua, but also linked the central valley to therest of Costa Rica.

Social Services

The social infrastructure of the country ex-panded rapidly though perhaps lagged a decadebehind the buildup in physical infrastructure.During the late 1960s and 1970s, health insur-ance coverage under the social security systemexpanded rapidly for modern sector workers.Government programs in public health com-bined water and sewerage infrastructure withdissemination of improved health practices toproduce dramatic declines in infant mortality andimprovements in other health indices (see table1).

Education continued to expand. The re-maining gaps in access to primary educationwere filled by building and staffing schools inthe most remote areas. Secondary schoolssteadily expanded, with the total number of highschools rising from 13 in 1950 to 230 in 1995.Nevertheless, secondary education has yet toacquire the universal appeal or access that char-acterized primary education a generation ago.Only half of Costa Rican youths go on to highschool. University education has increased dra-matically, though, from the province of a fewelites in 1950 to a plausible aspiration of mosthigh school graduates.

As with physical infrastructure, USAIDinvolvement was most significant in the earlystages of expansion—through providing train-ing to Costa Ricans, bringing in foreign expertsto assist in system design, and financing pro-grams of increased access to social services.Gradually, USAID reduced support as such pro-

Costa Rican Development, 1945–95 9


come was more than double that of Honduras,El Salvador, and Nicaragua, and had overtakenPanama.*

The United Nations Development Programhas developed a composite indicator of socialdevelopment, the Human Development Index.The HDI attempts to capture the social dimen-sion of development in the same way that percapita GDP provides a composite estimate ofthe economic dimension. By this index, in 1995Costa Rica was the most advanced country inLatin America.

Poitically, too, Costa Rica topped the list.Its democratic political system weathered eco-nomic crises of the 1970s and 1980s with nosignificant social conflict and no interruption ofcivil liberties or individual rights. While CostaRicans, like democratic citizens everywhere,expressed dissatisfaction with various aspectsof their political system, its resilience is a con-firmation of Winston Churchill’s assertion thatdemocracy is the worst form of government—except for all the others.

Costa RicaIn Microcosm:Two Rural Villages

To provide a more tangible perspective onchange in Costa Rica over the last half century,researchers for this study resurveyed two vil-lages that had been studied extensively in the

late 1940s (Loomis 1953). The two villages, SanJuan Sur and Aquiares, are located in easternCosta Rica near Turrialba. Though the two vil-lages are culturally similar, San Juan Sur wasoriginally populated by small farmers, whileAquiares is a hacienda, where families lived untilrecently in estate-owned housing and workedas employees.

Economic Changes

Both communities prospered between theperiods of study. In both places income andpopulation rose. San Juan Sur was the moredynamic, with population rising 167 percent,compared with 34 percent growth in Aquiares.Potential for gainful employment in coffee pro-duction probably accounts for most of the dif-ference. Almost the entire area of the Aquiaresestate was already largely planted in coffee in1950, so the area planted increased only slightlyover time. In San Juan Sur, coffee acreage in-creased sixfold, as farmers converted land pre-viously in pasture, forest, or other crops. Part ofthis change reflects increased specialization incoffee; farmers stopped growing vegetables fortheir own consumption and purchased them in-stead. While the increased area planted withcoffee provided more employment, the deter-mining factor in increased incomes was higherproductivity in coffee. Yields quadrupled overthe period. Coffee prices declined in real termsover the period, offsetting some of the yieldgains, but a hectare of coffee produced about2.5 times more in purchasing power in 1995

*These comparisons are based on estimates of purchasing-power parity, or PPP. Exchange rate–based estimatesdiffer significantly, though the relative standing is not affected. By the more common measure of GDP, usingexchange rates, Costa Rica’s per capita GDP in 1995 was approximately $2,600.

than it did in 1950. This is about the averageincrease in real wages and incomes of the peoplein the two villages.

Thus, Aquiares and San Juan Sur pros-pered economically because they produced cof-fee much more efficiently in 1995 than in 1950.They also prospered because of extension ofpublic utilities such as water and electricity totheir communities, and from improvements inhealth and education facilities. While per capitaincome is often used as the proxy for well-being, the link from some of the important wel-fare-improving developments to incomes istenuous. Access to water and electricity wasmore affordable in 1995, but it was also dra-matically cheaper in real terms because a publicgrid was in place. Much of the health improve-ment came from better treatment of humanwaste, which eliminated a major source of diar-rhea. Although water and sewerage servicesplayed an important role in improving health,education was critical. People were healthier in1995 because they knew more.

Changes in Living Conditions

The 1950 data show relatively primitiveliving conditions. Most people lived in simpleone- or two-room houses of wood or rancho*

construction. In San Juan Sur, 84 percent of thepeople had no toilet, even outdoors; the samewas true of 97 percent of people in Aquiares.One third of the houses in each village had dirtfloors; less than one household in 20 had a ra-dio. Running water and electricity were almosttotally lacking in the two communities. Fewer

than half of the houses contained any books,and wall decorations were few and simple—pictures of saints or interesting scenes, often cutfrom a newspaper or magazine.

Although the San Juan Sur/Aquiares studydid not include health data, a health survey of abroader rural area around Turrialba in 1953 bysome of the same researchers indicates that healthconditions in the region were abject. This studyfound infant mortality to be 170 per thousandlive births, with miscarriages and stillbirths re-sulting from another 14 percent of pregnancies.Trichocephalus infections appeared in 96 per-cent of the researchers’ sample and hookwormin 62 percent. Doctors assisted at 2 percent ofchildbirths, with midwives (66 percent) the mostcommon attendants.

Long before 1995, ranchos had disap-peared. Most houses in both communities werenow made of concrete, with concrete or tilefloors. All had electricity, and nearly all hadpiped water and indoor plumbing.

Health conditions also had improved dra-matically, as both villages were brought intomodern medical-care networks. Nearly all birthsnow take place in hospitals, mainly through thesocial security system, to which more than 70percent of households are affiliated.

Communication with the outside world hasbeen revolutionized. While less than 5 percentof the households had radios in 1950, more than80 percent in each village owned color televi-sions in 1995. Residents of the two villages have


*The least expensive form of housing, a rancho was a one-room house with dirt floor and thatched roof.


been integrated into a wider world. They are intouch with events elsewhere in Costa Rica, andaware of events, trends, and cultural norms inthe evolving global culture.

Some social values within the communi-ties have been constant—notably, respect forhard work and for collaboration within the com-munity—while others have changed. Most strik-ing is the increased tolerance of people whodeviate from community norms. For example,Protestants and unmarried couples living to-gether are stigmatized far less than they were in1950. The status and freedom of women in-creased substantially over the period. In 1950,women typically needed permission to leavetheir houses. By 1995, social rules were far lessrestrictive. For example, both villages fieldedwomen’s soccer teams. Women in 1995 werealso more likely to attain leadership positions inthe community than in 1950, though they haveyet to achieve full social equality with men.

Some customs have changed because ofencroaching values from outside the village. Im-proved conditions have spurred other changes.For example, community rituals, including a pro-cession, associated with the death of an infantwere a weekly occurrence in San Juan Sur in1950. This has disappeared as improved healthconditions have transformed this from a normalpart of village life to a rare event.

Independent Small FarmersVersus Employees

Though similar in many ways, the two vil-lages provide an interesting contrast that high-lights the multidimensional character of devel-

opment. Contrary to standard assumptions aboutthe exploitative nature of plantation life, the ha-cienda workers in Aquiares were consistentlybetter off in some respects than small farmers inSan Juan Sur. Aquiares children had six yearsof school when the latter had only three; theyhad water, electricity, and health care earlier, too.Even today, water availability is better inAquiares, and all have health care coverageunder the social security system, while some inSan Juan Sur do not. Contrarily, incomes arehigher in San Juan Sur, and long traditions ofcommunity self-help and political activism havecreated a more self-reliant social pattern.

In sum, both communities have providedpaths to better economic and social conditionsfor their residents. But those paths meander overdifferent portions of the steep hillside of devel-opment. Even progress in the organization ofthe household can be attained in substantiallydifferent ways. In Aquiares, the woman of thehousehold alone manages family finances in 44percent of homes, while the man alone does itin only 19 percent. In San Juan Sur, the manalone does so in 48 percent of the households,while the woman does it in 29 percent. Thiscould be related to the fact that household fi-nances are closely tied to farm management andinvestment decisions in the latter case. Or it mayindicate that farm ownership reinforces patriar-chal traditions in a way that the wage system ofemployment at Aquiares does not.

What Progress Has Done,And What It Has Not

While all objective indicators of develop-ment are positive, we cannot conclude that de-

velopment has been an unmixed blessing in SanJuan and Aquiares. We cannot say that residentsare happier, though we can confidently say thatthey have more years of life to experience hap-piness or misery; and any misery they face is atleast more comfortable.

Several further observations might bemade. First, while the changes in both villagesare dramatic, one cannot expect the citizens tobe aglow with the progress already made.People have sufficient problems that peopleeverywhere have—love, marriage, money, rais-ing children—to make life challenging and frus-trating. Even modern conveniences become asource of frustration. For example, electricityquickly becomes “essential.” Once this happens,any power interruption becomes a source of dis-tress, not an occasion for contemplation of howbeneficial it is to have electricity most of thetime.

Second, increased access to the outsideworld almost necessarily weakens the commit-ment of people to the community as a socialnetwork and repository of values. Young peopleacquire foreign ideas from television and mov-ies that make them less willing to accept the tra-ditional norms and customs of their own com-munity. Schoolteachers are no longer commu-nity leaders or progressive elements. Beforethere was a road, they had no choice but to livein the village; now they live in Turrialba andarrive only for school hours.

Third, people are worried about the future.They worry about politicians in the capital city,about powerful economic interests that mighthurt the small producer or the employee, about

deterioration in the quality of education for theirchildren. In sum, they worry about the samethings most Americans worry about.

Has USAID Made a DifferenceIn Aquiares and San Juan Sur?

When it comes to ultimate beneficiaries ofdevelopment assistance, such as the residentsof Aquiares and San Juan Sur, the causal role ofUSAID cannot be separated from other factors.Nevertheless, Agency activities left discerniblefootprints. In coffee, the quadrupling of yieldssurely owes a significant amount to USAID-promoted initiatives. First, U.S. agronomistsintroduced scientific approaches to coffee pro-duction by identifying nutrients lacking in thesoil. This knowledge apparently led to signifi-cant and rapid increases in yields. Second,USAID and other U.S. government assistanceto coffee research helped develop and dissemi-nate new coffee varieties that produced higheryields and required less care. These improve-ments were probably introduced into the com-munities through a variety of channels—exten-sion agents, 4-S clubs (the local equivalent of4-H clubs), fertilizer salesmen, and word ofmouth from farmer to farmer. San Juan Sur haslong had a 4-S club, the product of an early or-ganizational effort by U.S. agricultural adviserswho organized 158 clubs in the 1950s.

Collaborative efforts by USAID and theCosta Rican government in rural roads, publichealth, education, and water and sewerage alsotouched the communities, at least indirectly. Inall these areas, important advances occurredin directions that USAID was workingcollaboratively to promote. In more recent years,


the restoration of macroeconomic stability to thecountry has provided a more favorable environ-ment for people in the villages. A seriously over-valued exchange rate prior to U.S.–assisted sta-bilization in 1982–84 heavily penalized coffeeproducers and was probably a factor in the bank-ruptcy of the Aquiares Hacienda during thatperiod. Coffee producers received substantiallyless for their product than they would have if

the exchange rate had been adjusted for infla-tion; this probably led to the temporary declinein the number of people living and working onthe hacienda. The creation of alternative sourcesof employment, such as at the factory inTurrialba producing baseballs for export (a dozenwomen from both villages work there), is alegacy of USAID-assisted export and invest-ment promotion efforts.


THE WIDE VARIETY of activities and ap-proaches USAID employed in Costa Rica

makes a wide range of evaluation approachespossible. At one extreme, the effect of each of athousand activities the Agency promoted couldbe assessed and all the effects combined. At theother extreme, one could treat USAID flows asa financial transfer, and use an econometricmodel to calculate impact. This study rejects bothextremes: limited time makes the first alternativeimpossible, while the second is too simplistic.Instead, this study adopts two more modest strat-egies. First, this chapter looks at the basic con-cepts USAID applied. Were they appropriate toCosta Rican conditions, or were they simply ideo-logical constructs or fads? The next chapter looksat sector and project activities for evidence ofsuccess or failure, drawing mainly on sector stud-ies by Costa Rican researchers.

Some claim that USAID country strategiesvary widely, depending on the particular orien-tation of the Mission director in the country orthe plans of the government in power. Certainlythese factors have some influence. Nevertheless,

a review of USAID documentation for CostaRica makes clear that broad conceptual ap-proaches were stable for relatively long peri-ods of time and that those periods correspondedclosely to the current development paradigm.Conceptually, U.S. economic assistance strat-egy in Costa Rica can be divided into fourphases, each answering differently the samequestion: What is economic development, andhow is it achieved?

1. Technical assistance, 1946–61. Theearliest programs assumed that technicalknowledge was the key to development andemphasized training Costa Ricans and trans-ferring knowledge to them through foreign ex-perts.

2. High development, 1961–72. By 1961the answer was broadened to incorporate: aleading role for government investment; atten-tion to the macroeconomic concepts of savings,investment, and internal and external balances;and the sociological concepts of modernizationand “takeoff.”*

*Takeoff refers to the stage at which a society has achieved a certain momentum in the pace of change, whereby itcan soar like an airplane into sustainable growth.

3 Validity of theDevelopment Concepts

3. Basic human needs and poverty reduc-tion, 1972–81. Disillusion with macroeconomicconcepts, and with the apparent failure of mac-roeconomic growth to “trickle down” to thepoor, set in during the 1970s. The United Statesretreated to a concept of development as directhelp by government agencies (often workingtogether in “integrated rural development”projects) to the poorest people, and avoidingmacroeconomic issues.

4. Stabilization and restructuring, 1982–95. The tidal wave of macroeconomic imbal-ances in the early 1980s led to a renewed con-centration on macroeconomic balances, togetherwith a concern for microeconomic efficiencythat had been lacking earlier. Compared withthe 1960s, big government shifted from beingseen as the solution to being seen as the prob-lem.

Table 2 shows total USAID bilateral fund-ing to Costa Rica during each of the four peri-ods, by major type of expenditure, using dol-lars of constant value.

Pre-1961:Technical Assistance

Official U.S. government assistance toCosta Rica began in 1942 under the auspices ofthe Institute of Inter-American Affairs, an affili-ate of the State Department. Initial efforts in-volved technical assistance to public health andagriculture. Agricultural technical assistancecontinued on a unilateral basis until 1948, whena bilateral agreement was signed establishingthe Servicio Técnico Interamericano deCooperación Agricola (STICA), to be operated

jointly by the two governments. Health assis-tance was formalized in 1951, when the ServicioCooperativo Interamericano de Salúd Pública(SCISP) was established.

These two servicios operated under theprinciples of the Point IV legislation passed bythe U.S. Congress in 1950. They were staffedby Americans and Costa Ricans and workedclosely with, but outside the normal structureof, relevant ministries. Point IV provided tech-nical cooperation based on formal requests fromthe participating government and required cost-sharing and clearly defined, time-limited objec-tives. U.S. resources were to be used for sala-ries and expenses of U.S. technicians, costs oftraining Costa Rican technicians, and materialsused in demonstration projects.

A huge exception to “aid as technical as-sistance” was funding the Costa Rican portionof the Inter-American Highway. U.S. fundingof this infrastructure project was not carried outby any aid agency but by the U.S. Bureau ofPublic Roads. Altogether, the United States spent$50 million on the Costa Rican portion of theroad—more than $36 million of it during the1950s. Most of the remainder was expended inthe late 1960s in rebuilding portions of the road.

STICA originally concentrated on estab-lishing an agricultural extension service and 4-S clubs to transfer technology. By 1955 the ex-tension service had 30 offices around the coun-try, and management was transferred fromSTICA to the Ministry of Agriculture. STICAalso developed irrigation and erosion controlprojects and later concentrated on agriculturalresearch, both directly and through a contractwith the University of Florida for research andthe training of Costa Ricans.


Validity of the Development Concepts 17

Table 2. U.S. Economic Assistance to Costa Rica, 1946–95(In Millions of Dollars—1994 Equivalent)

Sector 1946–61 1961–72 1973–81 1982–95 TotalAgriculture 20 164 57 57 298Natural resources 0 0 19 32 51

Education 4 16 13 64 96Export development 0 6 0 15 51

Finance/industry 5 48 11 71 135

Democracy 5 40 19 20 85Health 22 76 34 14 145

Infrastructure 195 120 9 27 350Housing 2 16 12 2 31Macro stabilitya 0 4 0 1,409 1,413Population 0 8 8 12 28Reg. Agri. School 0 0 0 42 42

Totals 253 499 181

1,764 2,697

Local Currency Programming, 1982–95b

(In Millions of Dollars—1994 Equivalent)

Sector AmountHealth 9Education 32Population 0Environment 23Food and agriculture 78

Economics/tradec 664

Infrastructure/housing 196Governance 73

Regional agricultural school 122Other 72

Total 1,268

aDollar amounts were used mostly for private sector imports, with local currency proceeds programmed by USAID and the Costa Rican government as shown on the next pages.

bMostly funds generated by sale of dollars provided for balance-of-payments support. These local currency funds were owned mostly by the Costa Rican government, but were jointly programmed.

cIncludes $337 million that was sterilized and $227 million for credit, much of which would havegone to agriculture.


road was conceived as part of a multinationalnetwork, its importance as a domestic MainStreet actually far outweighed its importance forinternational traffic through Costa Rica. Thereis some question whether the part of the high-way connecting Costa Rica with Panama wasworth the cost to the United States (especiallysince the vision of connecting Alaska to Tierradel Fuego by road ended in the 1970s with thedecision not to traverse the Darién Gap inPanama), but its value to Costa Rica was im-mediate and large.

Much of the technical assistance providedduring this period had large payoffs for CostaRica, and older Costa Rican officials recall thosedays as a period of excitement and greatachievement. STICA activities were relativelysimple, but they introduced a variety of tech-niques to the region’s farmers. Because theywere profitable, their use spread rapidly. STICAtended to identify and work with the most pro-gressive farmers under the assumption that theirsuccessful innovations would be copied.

In general, technical assistance seems tohave succeeded because it represented the firstintroduction of scientific approaches into a tra-ditional environment. The relative isolation ofCosta Rica, its poor communications with therest of the world, and a lack of alternative meansof transmitting information made for big gainsin knowledge. Nevertheless, servicios run byAmericans outside the formal structure of min-istries were not a viable long-term approach, andthe transfer of Americans into advisory roles toCosta Rican ministries was inevitable.

SCISP worked on water and sewer sys-tems, health centers, and epidemic control. Someassistance was also provided for nursing edu-cation and slaughterhouse design. U.S. help sup-ported construction of Costa Rica’s first twomodern water systems, including fluoridationfor San José (the first in Latin America), designof an integrated water system for the centralvalley, and designs for community water sys-tems (built in 20 communities per year in thelate 1950s).

The United States also financed studies,foreign advisers, and training abroad by CostaRicans in a number of other sectors, includingeducation, transportation, industry, housing, la-bor, and public administration. U.S. aid financedstudies of tax administration and local govern-ment, helped create the central statistics office,and gave advice on establishing a formal civilservice. In 1959 the first “public safety” pro-grams began. They included police training andinternal security training, which were to con-tinue until 1973.

Assessment

Both the technical assistance programs ofthe 1946–61 period and construction of theInter-American Highway had a major impacton Costa Rica. Probably the single most criticalinfrastructure project undertaken during the pe-riod, the Inter-American Highway brought sub-stantial benefits to the country. It ended thenation’s physical isolation and dramatically in-creased internal communication. Although the

Validity of the Development Concepts

High Development:USAID and the AllianceFor Progress (1961–72)

By the end of the 1950s, the era of eco-nomic development had arrived. The MarshallPlan had revived Western Europe’s economymuch faster than anyone had expected. West-ern European economic integration was pro-ceeding, and free trade in the region seemed tobe an important factor in its growing prosperity.The post–World War II decolonization effort hadevolved into a global war on poverty. The UNlabeled the 1960s the Decade of Development.

In the United States, foreign aid became acampaign issue in the 1960 presidential elec-tion, when candidate John Kennedy called forexpanded aid to fight the communist threat byreducing poverty in developing countries. InMarch 1961, President Kennedy proposed cre-ating the U.S. Agency for International Devel-opment, a considerable expansion from its pre-decessor, the International Cooperation Admin-istration. U.S. concern for communism and pov-erty was particularly acute in Latin America,where riots during Vice President Nixon’s visitin 1958 and the Cuban revolution of 1959 madevivid impressions on the U.S. public. With itsproposal to create USAID, the Kennedy Ad-ministration also proposed a multilateral Alli-ance for Progress in the Western Hemisphere.

One of Kennedy’s leading advisers, WalterRostow, was particularly influential. He be-lieved the administration should eliminate stric-tures placed on economic growth by traditionalattitudes and interest groups. Once these bonds

were broken, the economy would “take off” intothe blue skies of modernization. The resultingmass education and advance of modern tech-nology would make economic growth almostautomatic. The apparent success of the U.S.government’s Operation Bootstrap in PuertoRico in the 1950s buttressed this optimism.Teodoro Moscoso, father of Operation Boot-strap, which achieved rapid growth and indus-trialization in that self-governing common-wealth, was brought on as U.S. coordinator forthe Alliance for Progress and head of USAIDfor Latin America.

This view of quick-and-easy moderniza-tion was paired with a perception of govern-ment as capable of being a modernizing force,and of the private sector as a reluctant partner inmodernization. The Rostow view (shared bymany economists, including senior USAIDeconomists Hollis Chenery and Alan Strout)also regarded investment as the key determinantof economic growth. Developing countries werepoor because of low investment rates, and eco-nomic growth rates could be predicted by con-sulting the investment rate. The incrementalcapital–output ratio seemed to mechanisticallylink investment to growth. In this formulation,government investment in infrastructure wouldbe the leading sector, stimulating private invest-ment in its train. Government economists, writ-ing national development plans that would iden-tify how much investment should be made ineach sector, became the high priests of devel-opment strategy.

The alliance required participating LatinAmerican governments to undertake several ac-tions, including land reform, increased invest-ment in education and health, and development

19


of a national planning capability. Country per-formance under the Alliance for Progress wasto be monitored by a committee of the Organi-zation of American States: the Comité Inter-americano de la Alianza Para el Progreso, orCIAP.

Development thinking at that time, particu-larly within the alliance, was strongly influencedby the “development planning” concept. Theapparent success of economic planning undercommunism, memories of the Depression, anda faith in technocrats led to a belief that eco-nomic development required substantial govern-ment leadership and that reliance on privatemarkets would lead, if not to stagnation, at leastto cyclical instability and to maintenance of the“old order,” where oligarchies controlled mostresources.

These grand ideas replaced the hands-onapproach of the previous era, and USAID/CostaRica staffing shifted away from technical ex-perts working directly on activities to programofficers and economists who theorized about de-velopment and promoted it indirectly throughassistance to Costa Rican institutions. In theparlance of the day, the “programmers” replacedthe “well drillers.”

Costa Rica responded to the new ideaswith enthusiasm, quickly establishing a nationalplanning office and a land-reform agency, andrapidly expanding government programs in so-cial and economic infrastructure with financingfrom the newly created Inter-American Devel-opment Bank and Central American Bank forEconomic Integration. Costa Rica initially re-sisted economic integration with the rest of Cen-

tral America in a Central American CommonMarket (CACM). But combined pressure fromthe U.S. government and the integracionistas,led by Raul Prebisch at the UN Economic Com-mission for Latin America, eventually provedirresistible. In 1963, Costa Rica joined theCACM.

Major projects during this period includedfunding for a new land-reform agency for landtitling and colonization; low-income housingthrough a new government housing agency;credit for agriculture and establishment of a sav-ings and loan system through the state bankingsystem; highway maintenance; and establish-ment of a private investment bank. With the ex-ception of the investment bank, all the majorprojects of this period attempted to strengthenexisting government institutions or to create newones. USAID also began grant assistance forfamily planning in 1967 through ties to the CostaRican Demographic Association, a privategroup fearful of adverse effects of rapid popu-lation growth. The most complex project wasthe $20 million agricultural sector loan, whichprovided funding for a dozen government enti-ties involved in agriculture to expand programsand to improve coordination among governmentagencies.

USAID also strongly supported Costa Ricathrough its large Central American regional pro-gram. Funding was provided for highways, in-dustrial credit, electrical and telephone intercon-nection with neighboring nations, expanded re-gional institutions for public administration,nutrition, and business administration, and a re-gional bureaucracy to promote economic inte-gration.


Assessment

Costa Rica met most of the goals set bythe Alliance for Progress. In most dimensions,including social indicators and growth of GDP,the country exceeded targets set by the Alliancefor Progress during the 1960s. New institutionswere created, taxation was increased to financehigher levels of public investment, and CostaRica rapidly increased its trade with the rest ofCentral America. By the late 1960s, USAIDbegan debating when to close the Costa RicaMission.

Two internal problems and one outsideevent later emerged to cast a shadow on theCosta Rican success story. First, expansion ofthe public sector was not the unmixed blessingexpected by architects of the Alliance. Govern-ment organizations are easier to create and ex-pand than to eliminate or adapt to changing cir-cumstances. USAID and the Costa Rican gov-ernment made too strong an assumption that“public sector” was synonymous with “publicgood.” Construction of new roads was favoredover the workaday task of road maintenance.Agricultural credit and extension became bu-reaucratic—more involved in internal govern-ment politics and less connected to the needs offarmers.

National planning as a key technocratictool to long-term development also proved a mis-

take. In Costa Rica, the National Planning Of-fice (now a ministry) emerged as a political en-tity committed to implement the specific pro-gram of the administration in power.

Second, Costa Rican entry into the Cen-tral American Common Market probably en-hanced efficiency of industrial companies ini-tially, because it introduced Costa Rican firmsto greater regional competition. But as timepassed, new investments were made in high-cost production aimed at the regional market. Ahigh external tariff created high rates of effec-tive protection from import competition andmade adaptation to newer and higher qualityproducts produced abroad unnecessary. Thisprotection stagnated product designs and qual-ity, making eventual export of manufacturedgoods outside the region unlikely. Industrialistsresisted lowering import tariffs, which wouldhave spurred competition, led to greater special-ization, and made the region better able to ex-port manufactures to the rest of the world. CostaRican participation in the common market wasinitially judged by economists to have been fa-vorable for economic growth.* More recentwork suggests that the beneficial effects on in-vestment and employment were only temporaryand led to a dead end. In the longer run, theCACM probably slowed economic growth byreducing the region’s links to international com-petition and technological evolution (Sachs andWarner 1995).

21

*Nugent (1974) estimates that the CACM added about 0.6 percent each year to Central American GDP (or morethan 7 percent over the period 1960–72), while Cline and Delgado (1978) offer the somewhat lower estimate of anaddition of 3–4 percent to regional GDP during 1960–72.


The outside event that colored perceptionsof Costa Rican development happened in EastAsia. To some extent success is necessarily rela-tive, linked to expectations of what is possible.In the 1960s, Costa Rican GDP annual growthrates of around 6 percent were viewed as highlysatisfactory, for there was little evidence thatcountries could grow any faster on a sustainedbasis. (In the United States, clearly a develop-ment success, per capita GDP has grown rela-tively consistently at an annual rate of 1.7 per-cent for two centuries.) Costa Rica consistentlyexceeded this rate in the 1950s and 1960s. Butthe goalposts shifted in Asia after World War II.The postwar experience of Japan and rapidgrowth in the 1960s in other Asian countries—notably Korea, Taiwan, and the city–states ofHong Kong and Singapore—have set a newstandard. Six percent is no longer rapid growthif 8 percent or 10 percent is consistently pos-sible.

Basic Human NeedsAnd Poverty Reduction(1972–81)

By 1970, the Agency had begun to viewCosta Rica as a development success. Itseconomy had grown rapidly for some years,fueled by rapid growth of industrial exports toCentral America and agricultural exports to theUnited States and Europe. Exports of coffee,bananas, sugar, and beef were growing rapidly.A large alumina deposit was expected to be-come a new major export. USAID/Costa Ricabegan planning for gradual phaseout and startedreducing staff. USAID Mission submissions toWashington began to emphasize the Mission’s

“unfinished agenda” and activities looking to-ward a post-aid relationship with Costa Rica.

For a decade after 1972, the Agency shiftedits primary work in Costa Rica away from broadmacroeconomic and sectoral concerns towardthe social and economic problems of the poor-est sectors of society. Initially, this was a responseby the Costa Rican Mission to perceptions inWashington that Costa Rica was on a very sat-isfactory growth path and that its relatively highincome and favorable social indicators made aidunnecessary. Later, it represented a change inthe USAID ideology, toward direct poverty re-duction—an emphasis of a new developmentparadigm called “basic human needs.” Some de-velopment experts were skeptical of the basic-needs approach, but the prevailing view wasthat no major shifts in macroeconomic policywere required. The two problems mentionedearlier—stagnation of the import-substitutionapproach, and the end of the developmentalistidea of government—had not yet been gener-ally recognized as major obstacles to continuedgrowth. Consequently, the lack of attention toeconomic policy issues during this period re-flected more ignorance in the prevailing wis-dom than a turning away by USAID from it.

The new development paradigm cameabout in the mid-1970s, when congressional dis-illusion with the Vietnam War and with theNixon administration’s increasing concentrationof aid in Southeast Asia led the House of Rep-resentatives to vote down an appropriation forUSAID. Critics charged the Agency with trans-ferring resources “from poor people in Americato rich people in developing countries” andcalled on USAID to redesign its programs tounderscore activities directly benefiting poor


people. A House–Senate compromise that per-mitted renewed funding for USAID includedredirecting U.S. development aid on “basic hu-man needs,” limiting USAID’s ability to carryout programs that had no direct link to the poormajority in developing countries.

The USAID program in Costa Rica fit wellwith the new mandate. Its 1976 strategy paperdescribes the development challenge as “socio-economic disparities, including increased migra-tion and growing urban poverty; economic de-pendence; rising unemployment; institutionalweaknesses; poor land use; and financial con-straints.” Later, the goal of USAID assistancewas described as “to narrow the socioeconomicgap by increasing the real incomes of the poor.”The perceived development challenge was toget resources directly to poor people. Broad theo-retical constructs and long chains of deductivereasoning about the impact of overall economicdevelopment on poverty were rejected as“trickle-down economics.”

The major projects from this period in-cluded a follow-on to the 1970 agricultural sec-tor loan, a science and technology developmentproject, a nutrition loan, establishment of a na-tional poverty information system, a low-costhousing and urban improvement project, and areforestation and natural resource conservationproject. As earlier, the public sector was the maintarget of assistance.

The quality of Costa Rican economicpolicy also deteriorated during this period, par-ticularly after the 1973 oil shock. Costa Ricachose to finance the higher costs of oil ratherthan adjust its economy to this new reality. For-

eign debt climbed rapidly, as the end of theCACM investment boom was replaced by in-creased government spending. While lip servicewas paid to exports, an overvalued exchangerate, a variety of institutional obstacles, and thedisincentives to export from participation in theCACM all meant that rapid export growth wasunlikely.

Assessment

Just as in the other periods, USAID pro-grams paid for study abroad by Costa Ricans,provided advisers in a variety of technical spe-cialties, and financially supported numerous ben-eficial activities, such as family planning andagricultural research. These programs yieldedbenefits to Costa Rica as in other periods. Nev-ertheless, this period, 1972–81, was USAID’sleast successful in Costa Rica. Most majorprojects failed to achieve their objectives. Mostinvolved expanding some government agencyand required significant amounts of counterpartfunding from the Costa Rican government. Withsevere budgetary constraints during 1980–82,counterpart funding was often not forthcoming,and the programs were implemented with sub-stantial delays. In addition, projects were usu-ally built with the expectation that governmentagencies carrying out activities would be restruc-tured into more dynamic “change agents.” Suchoptimism usually led to disappointment, asprojects added responsibilities to governmentagencies already unable to carry out their man-dates.

Although the USAID activities during thisperiod were harmonious with Costa Rican gov-ernment priorities, they suffered from two stra-

23


*As noted earlier, many development economists were not convinced that there were any serious problems with thedevelopment strategy being pursued during this period. Developing-country economic growth has been rapidand sustained for nearly two decades, and the emerging calamity was seen with much greater clarity in hindsightthan it was at the time.

tegic shortcomings. First, the diagnosis of whichactivities deserved support was ill suited toCosta Rican realities. The Costa Rican devel-opment path had been inclusive and broadbased, and already a plethora of governmentinstitutions aimed to reduce poverty. Thecountry’s principal development challenge wasto ensure rapid and sustained economic growth.*

Second, by the end of the decade, USAID failedto understand the implications of the country’srapidly deteriorating finances. Emerging fiscalshortfalls were sure to compromise new socialinvestments.

USAID and U.S. Embassy officials whoworked in Costa Rica during this period haveargued that USAID resource levels were toolow to make the Agency a player in economicpolicy, and the Mission accordingly took littleinterest in such matters.† Moreover, the conven-tional view of development experts was thatmajor changes in economic policy were not es-sential. Nevertheless, the USAID Mission couldhave undertaken steps to protect USAID pro-grams from the impending financial collapse.More ambitiously, the Mission might have ei-ther actively promoted changes in governmentpolicy or stopped providing financial supportto Costa Rica.

MacroeconomicRestructuring/Reactivation (1982–92)

Despite usually favorable coffee prices inthe late 1970s, the country was borrowingheavily from abroad to finance its deficits, in-duced by oil prices. This unsustainable policybecame unmanageable in 1979, when Eurodol-lar interest rates (on which a significant amountof Costa Rican borrowing was based) rose rap-idly from 6 percent to 19 percent. World pricesof Costa Rica’s major exports also fell sharplyafter 1980 and did not recover for more than adecade. By 1981, severe external payment im-balances were evident, and Costa Rica sus-pended payments of both principal and intereston its international debts.

Several factors induced USAID to raisefunding levels in Costa Rica. First, the newReagan administration was committed to sub-stantially increased aid for Latin America, whichit charged Democrats with ignoring. In this con-text, Congress regarded Costa Rica with sub-stantial interest as the region’s leading demo-

†USAID/Costa Rica did not completely ignore such issues. The strategy paper it submitted to Washington inJanuary 1981 recognized that the Costa Rican government was making unreasonable forecasts of macroeconomictrends, but it did not recommend any action to address the unreality.


cratic experiment. Second, and even more im-portant, U.S. opposition to the Sandinista gov-ernment in Nicaragua led to efforts to supportthe rest of Central America against Sandinistaexpansion in the region. President Reagan andmuch of his Cabinet visited Costa Rica in De-cember 1982 to pledge U.S. support. In 1983,the president established a commission underHenry Kissinger to study Central America’sproblems, which resulted in a 1984 report call-ing for a massive increase in U.S. assistance tothe region. A third factor in the high level ofaid, which brought Treasury Department sup-port, was heavy Costa Rican debt to U.S. com-mercial banks. Costa Rica’s visibility as a debtormade the country important in maintaining theU.S. strategy of promoting resumption of debtservice wherever possible.

After 1982 the program’s purpose becamemacroeconomic support. Nine annual EconomicStabilization and Restructuring programs pro-vided U.S. dollars to the central bank so thatadditional imports could be financed. This “pro-gram financing” gave USAID and the govern-ment of Costa Rica an additional resource, lo-cal currency programming, which had beenavailable only to a very limited extent before1982. During the 1960s and 1970s, mostUSAID resources had directly funded theplanned activities: importing equipment, pay-ing salaries, and covering other direct projectcosts. Financing in the 1980s was different.

Dollars USAID provided the central bankwere used mainly for private sector imports. Theimporter paid the central bank (or a commercialbank operating on its behalf) the equivalent incolones of the dollars required for imports.

USAID could have ignored those colones, treat-ing the dollar transfer as the intended purposeof the aid. In that case, colones acquired by thecentral bank would have been just another partof its resource base for setting domestic creditand monetary policy.

Instead, USAID and the government choseto treat the colones as a resource available toallocate for development purposes. These colo-nes, it should be emphasized, were not an addi-tional resource for Costa Rica. The only resourcetransfer to Costa Rica took place with importa-tion of the goods and services paid for by theUSAID dollars. Local currency was used forthe whole gamut of activities undertaken byUSAID. Massive amounts of colones gaveUSAID and the government sufficient resourcesto support numerous initiatives in economic andsocial development. Local currency funding be-came the provider of last resort for initiatives,such as a new series of textbooks for Costa Ricanschools, for which the Costa Rican governmentlacked funds. This large pool of funds wasjointly programmed by USAID and the CostaRican government, but agreements were oftenreached at high policy levels with little publicdiscussion. This led some to charge that USAID/Costa Rica constituted a “parallel state.”

The primary goal of the USAID programwas first to stabilize and then to transform themacroeconomic policy regime and institutions.USAID’s approach to stabilization was ortho-dox and mainly involved following the lead ofthe International Monetary Fund, reinforcing theIMF’s efforts to control the public sector defi-cit, monetary aggregates, and the external bal-ance.

25


USAID’s concentration on economictransformation flowed from a diagnosis that theCosta Rican economy suffered from three mainproblems: the government was too large; the fi-nancial sector was incapable of delivering fi-nancial services needed for a dynamic economy;and the country needed to shift from import sub-stitution toward exports. The bulk of USAIDresource transfer during the 1982–92 period wasallocated to support broad economic policychanges in response to these three priorities.

Assessment

As in previous periods, a shift in theUSAID approach was matched by a similar shiftby the Costa Rican government. The severityof the 1980–82 crisis made popular a majorpolicy shift, and sharp cuts in government spend-ing, the dismantling of the government holdingcompany known as CODESA, and devalua-tion of the currency were all widely seen as nec-essary.

At the macroeconomic level, USAID as-sistance during the 1980s was an unqualifiedsuccess. This conclusion is based on three fea-tures of Costa Rican structural adjustment:

1. The adjustment was quick and (rela-tively) painless. No other Latin American coun-try undertook a major adjustment program wherethe recovery of employment levels and realwages for unskilled workers was faster. Exceptfor Chile, which went through a far more se-vere recession in the early 1980s, Costa Ricahas had the fastest economic growth in LatinAmerica since 1982. The government of Presi-dent Luís Alberto Monge Álvarez moved reso-

lutely in 1982 to reduce the fiscal deficit anddevalue the currency. Inflation was quickly con-trolled, and the recovery of production was un-der way by 1983. By 1986, real wages for un-skilled workers had recovered to their precrisislevel. The key to this success was the relativelylarge amount of resources provided by USAIDto cushion the shock—about $200 million peryear, or 18 percent of commodity export earn-ings.

2. The adjustment favored low-incomeworkers. The change in the structure of produc-tion resulting from the shift away from importsubstitution to export-led growth created largenumbers of jobs for unskilled workers. This wasparticularly true in rural areas, where nontradi-tional exports were much more labor-intensivethan the crops they replaced (Céspedes andJiménez 1995; Morley 1995).

3. The adjustment was sustainable, botheconomically and politically. Economically, de-clining USAID assistance occurred without adecline in economic growth because earningsfrom new exports could replace lost foreign ex-change earnings. Politically, the reforms con-tinued to have broad support, and subsequentgovernments have continued to implement andbroaden them. In 1996, the Costa Rican gov-ernment finally permitted private banks to ac-cept demand deposits, thus completing a pro-cess initiated by USAID in the early 1980s andending a half-century of government monopolyover basic banking functions.

USAID played the leading role in the mac-roeconomic restructuring in two key respects.It made common cause with a group of Costa

Rican economists to convince political leadersof particular policy changes needed. Second,the resources USAID provided during 1982–85 were critical to minimizing the severity ofthe adjustment; the multilateral agencies pro-vided much smaller net flows of resources dur-ing this period.

Although the program succeeded at thestrategic level, the presence of massive amountsof local currency created problems. While offi-cially this resource was jointly programmed, inpractice USAID took the lead. During the earlyyears, the funds supported the macroeconomicreform program, providing funds for private sec-tor development, particularly for nontraditionalexports. As time passed, the accumulation of

local currency funds led to reduced disciplinein the use of such resources and a large USAIDpresence in monetary policy. Ultimately, the useof local currency reduced the effectiveness ofthe Costa Rican central bank’s monetary policyand led to higher inflation. Left on its own, thecentral bank would have slowed the rate ofgrowth of the monetary base, thus reducing in-flation. It also allowed local currency to be usedfor activities that might not meet careful scru-tiny. A spacious new USAID office buildingwas constructed largely with local currencyfunding. An agricultural college received nearly$60 million in local currency funding, thoughits regional mandate caused some to questionthe reliance on this funding source.

Validity of the Development Concepts 27

THE RELATIONSHIP between USAID strate-gies and Costa Rican priorities was rela-

tively harmonious, as chapter 3 shows. Therewere no major strategic conflicts betweenUSAID and the Costa Rican government, asidefrom the local-currency use issue discussed ear-lier. This chapter draws conclusions about whichprograms were most effective. Except for the1980s, USAID assistance between 1945 and1995 was subsidiary, providing a modest incre-ment to Costa Rican efforts. The first part of thechapter discusses the USAID contribution inspecific sectors, where it played an incrementalrole. The massive scale of the assistance duringthe 1980s, however, requires that it be exam-ined in terms of overall results, and the secondpart of this chapter deals with that period.

Most foreign assistance activities makeonly incremental contributions to activities un-der way in the recipient country. The bulk ofthe resources for most activities comes from therecipient country, and other donors may also con-tribute. This makes the specific contribution ofalmost any U.S. assistance activity hard to iso-late. Nevertheless, the review of U.S. assistanceprograms in each major sector shows USAID

working with Costa Ricans to pioneer activi-ties. In general, USAID programs providedearly support for new directions in Costa Ricangrowth, and they appear generally to haveplayed a catalytic role. This can be illustratedby looking at the evolution of USAID assis-tance in two specific sectors: agriculture andnatural resources, and population and familyplanning.

Agriculture and natural resources. Fromthe beginning in 1942, U.S. assistance gave highpriority to agriculture. Until the 1960s, USAIDsought mainly to transfer modern agriculturalpractices through hands-on demonstrations andadvice by American experts, who also trainednumerous Costa Rican agronomists. The em-phasis was on finding farmers who were will-ing to experiment and encouraging better prac-tices and on encouraging a wide range of insti-tutional changes. Through 35 agricultural ex-tension offices, education activities such as the158 4-S clubs established around the country,and collaboration with providers of agriculturalinputs, USAID was able to promote a more sci-entific approach to agriculture.

4 Which ActivitiesProduced Results?

By 1963, when the agricultural serviciowas folded into the Ministry of Agriculture,many of the practices encouraged by USAID—experimentation, standardization of seed, use offertilizers, contour farming—had become partof the normal features of Costa Rican agricul-ture. Middle-class farmers prospered, andUSAID subsequently narrowed its attention tosmall farmers and targeted its assistance on rais-ing their productivity. From the late 1970s, whenlow prices for traditional exports were limitingprospects for existing crops, USAID encour-aged experimentation with nontraditional agri-cultural export products. These were initiallyunsuccessful, but improvements in Costa Ricanpolicies, better understanding of technical re-quirements, and support for export associationsgradually produced results. During the 1980s,USAID also gave attention to environmentalissues, financing much of the early studies ofthe environmental problems facing Costa Rica,and encouraging attention to the dangers posedby soil erosion and deforestation.

Population and family planning. CostaRica had a long history of very high fertility,averaging, in 1950, seven children per woman.Alarm about the potential consequences of con-tinued rapid population growth led to the cre-ation of private organizations promoting familyplanning in Turrialba, San José, and in a fewrural areas. A national association, establishedin 1966, provided information and eventuallyservice and contraceptive delivery. In 1967,USAID began supporting this effort, both di-rectly and through the International PlannedParenthood Federation.

Over the next two decades, USAID un-dertook five bilateral projects, each supportingsome aspect of institutionalizing family planning.The first project helped establish an office ofpopulation in the Ministry of Health. A secondproject in 1970 pushed for universal coverageby including funding for the social security in-stitute and a program of research at the Univer-sity of Costa Rica. Subsequent projects centeredon disadvantaged rural women and on address-ing weaknesses in availability of services, coun-seling, and commodities. By the time USAIDdeparted, there was broad knowledge in thecountry of alternative fertility control technolo-gies. Means of fertility control were availablewithin the public and private sector.

It is not possible to draw firm conclusionsabout the contribution of USAID to Costa Ricandevelopment from the sector analyses. Whatwould have happened without USAID? Whatone can say, however, is that USAID concen-trated on pushing the envelope of progress ineach sector. USAID helped address problemsfor which no institutional mechanism was inplace. As an institutional framework grew up,USAID projects pushed into new areas. CostaRica is a different place as a result. How differ-ent, it is not possible to say. Modernizationwould have come to Costa Rica withoutUSAID. What can be said, however, is thatUSAID programs for the most part were push-ing in the proper direction; promoting institu-tions that eventually became well established;and were identified by knowledgeable CostaRicans as contributing to the country’s devel-opment.


Sectoral Successes:Activities With BigPayoffs or Problems

Looking over all of the sector studies, thestory is usually similar to the two cases above.USAID provided resources that helped incre-mentally push in a positive direction. In somecases, however, the USAID contribution seemssufficiently large that its role was more than in-cremental. It was associated with changes solarge or dramatic that it made an unmistakablecontribution to a changed reality in the country.Specific cases where this occurred include

1. The Inter-American Highway. Majorinfrastructure projects can play a key role in na-tional development. Although not funded byUSAID, this may be the single most importantU.S. government–financed investment in CostaRica. The Bureau of Public Roads spent $60million on the road between 1942 and 1972,with Costa Rica contributing about $20 million.Before the road was built, motor vehicle trafficwas feasible only in the central valley. Commu-nication with the ports of Limón (on the Carib-bean coast) and Puntarenas (on the Pacific) wasonly by railroad, and transport to Nicaragua orPanama was by boat or airplane. The Inter-American Highway provided the backbone ofthe Costa Rican transport system and ended theisolation of much of the country. It created anational market for agricultural products, broad-ening the diet of Costa Ricans considerably. Itmade possible real Costa Rican participation inthe Central American Common Market. U.S.training of Costa Rican engineers established

procedures still in use for contracting publicworks projects.

2. The agricultural servicio. The impactof U.S.–financed technical assistance during the1940s and 1950s was very high. The peopleprovided were hands-on agronomists, and theyworked in an environment where little effort hadbeen made to use scientific approaches to agri-culture. The changes they introduced were gen-erally simple, but they proved highly profitableto farmers, who rapidly disseminated them toone another. The cost of the program was mod-est, as U.S. agronomists earned $5,000–$10,000 a year, and overhead support costs wereprobably far lower than they came to be whenUSAID became bureaucratized.

3. Health projects. Between 1945 and1980, life expectancy and other health indicesimproved dramatically. As Mata (1996) hasshown, the Costa Rican achievements were dueto the sustained efforts of a group of sociallyconscious Costa Rican medical professionals,who were able to count on substantial resourcesand similarly dedicated professionals in USAIDand other organizations such as the World HealthOrganization. The success of the effort, how-ever, goes back decades earlier, when a senseof purpose and esprit de corps in the Ministryof Health gradually became institutionalized.

4. Export promotion. Economists are di-vided about whether policy alone can producedesired results, or whether promotion activitiesare also helpful. In Costa Rica, promotionclearly reinforced and sped up the growth anddiversification of export production. The evi-dence is overwhelming that USAID played a

Which Activities Produced Results? 31

key role in ending Costa Rica’s dependence oncoffee, bananas, sugar, and beef exports. Themajor share of Costa Rican exports—as well asthe most dynamic part—are now exports ofmanufactured products to the industrial coun-tries, nontraditional agricultural exports, andtourism. In all three areas, Costa Rica’s exportsin 1982 were modest, and no institutional basefor developing exports was in place. USAID

worked collaboratively to create the institutionalbase, and the export results were spectacular (seebox).

5. Scholarships. USAID sent more than5,000 Costa Ricans abroad, mostly to the UnitedStates, for study. Unquestionably this substan-tially increased the number of highly trainedpeople in the society. The upper levels of gov-


Nontraditional Exports

Costa Rican exports have boomed since 1982, rising from $870 million in that year to $2.5billion in 1995. Though higher volumes of the traditional products of coffee and bananas contributed tothis result, the real dynamism came from production for export of a wide range of new products.

The primary vehicle for developing these new exports was the National Coalition for EconomicDevelopment (CINDE), a private nonprofit organization established in 1984 to promote exports andforeign investment. Its foreign investment program was the more unqualified success, attracting hun-dreds of foreign firms to Costa Rica into export processing zones, where they used local labor toassemble products for export, usually from imported components. These assembly firms initially werelargely in the apparel industry but gradually expanded into a broad range of sectors, including electron-ics, home appliances, sporting goods, and computer chips. CINDE also helped promote a number ofhigh-value agricultural exports, including melons, pineapples, cut flowers, and ornamental plants.

At first, USAID’s emphasis on assembly firms and nontraditional agriculture was controversial.A 1987 Government Accounting Office report criticized USAID for excessive optimism in projecting thatnontraditional exports to the United States would grow at an average rate of 18 percent a year. Actualgrowth turned out to be considerably faster, averaging 25 percent a year through 1995. A 1987 WorldBank study was also pessimistic, conceding only that contingent on adoption of a long list of policychanges, it was “not inconceivable” that Costa Rican nontraditional exports to all non-CACM marketsmight grow by as much as 10 percent a year in real terms. This also proved off the mark. Even exclud-ing exports from assembly operations, the actual growth rate through 1995 was more than 12 percenta year.

CINDE’s investment and export promotion operations succeeded because of close hands-oncollaboration between USAID staff and Costa Rican leaders. Ambitious but verifiable goals were set,and flexible and creative management by CINDE was encouraged. Similar organizations elsewhere inthe Isthmus copied CINDE’s approach to investment promotion for assembly operations, producingsimilar results. Altogether, Central American exports of “assembly type” exports rose from less than$100 million in 1982 to more than $3 billion by 1995.

ernment, academia, and other institutions arefilled with ex-USAID scholars. In some years,40 percent or more of all Costa Ricans studyingin the United States (or more than one third ofall those studying abroad) were financed byUSAID. Agency approaches appear to havebeen sound—selecting both strong candidatesand people who would return to Costa Rica af-ter completing their studies.

6. Structural adjustment. Costa Rica fol-lowed terrible economic policies during 1978–81. The economic situation in 1982 was cata-strophic, and without large-scale U.S. supportthe country would have had a prolonged de-pression, from which it still might not haveemerged by 1995. Close personal and profes-sional relationships between USAID personneland Costa Rican government officials appearto have been a major factor in achieving suc-cess. This suggests a comparative advantage forUSAID in such programs, in contrast to the rela-tively arm’s-length approach of the multilateralagencies, which frequently leads to open con-flict and slow reform.

Evaluation inForeign Policy Terms

To what extent did the aid in the 1980sachieve broad U.S. foreign policy goals? Theanswer appears to be: completely. CentralAmerica today has democratically elected gov-

ernments in every country; economic policiesare generally satisfactory; social tensions haveeased; and armed conflict has disappeared fromthe region except in Guatemala, where low-levelguerrilla activity has been going on for morethan three decades. In sum, Central America isno longer a policy headache for the U.S. gov-ernment—the outcome sought by most mem-bers of Congress who voted for aid to the re-gion.*

EvaluationOf MacrolevelPerformance

Aid to Costa Rica during the 1980s mayhave satisfied U.S. foreign policy concerns, butthe aid sought an additional goal: promotingdevelopment. The best test of development im-pact is to compare what happened with whatwould have happened without USAID assis-tance. Though this is impossible to know withcertainty, the two most useful approaches forthis comparison are economic modeling andcomparison with similar countries that did notreceive USAID assistance. The first approachis not feasible with the current state of economicknowledge and sophistication of economicmodels. Alternative models come to wildly var-ied, but equally defensible, conclusions aboutthe effects of foreign aid. Thus, this studyavoided this approach.


*While there may be general agreement that the outcome was satisfactory, there would likely be sharp division onthe reasons for this. Some would argue that military aid to the Contras in Nicaragua was an important part of thesolution, whereas others would argue that the right outcome was achieved by congressional action to limit the roleof the Contras and to emphasize peaceful approaches.

The second approach is also flawed, sinceall countries differ each other in myriad ways,any one of which might be responsible for per-formance differences. Nevertheless, this ap-proach provides at least an approximation ofperformance. For example, all Central Ameri-can countries share important similarities in eco-nomic structure, location, history, and culture.Each country could reasonably be expected tohave similar economic performance. Any coun-try deviating significantly from the regional av-erage in economic performance can be assumedto follow significantly better or worse policies.

But use of Central American averages as abasis for judging the impact of USAID on CostaRica suffers from the problem that USAID alsogave substantial aid to all countries in the re-gion during the 1980s except Nicaragua. EachUSAID-supported country in Central Americaoutperformed Nicaraguaby a wide margin on vir-tually all indicators of sus-tainable development.Nevertheless, this test istoo easy. Most econo-mists, including manysympathetic to socialism,consider Nicaragua’spolicy set during the1980s to have been quitepoor. Moreover, Nicara-gua suffered from the ac-tive hostility of the UnitedStates.

Because comparisonwith Central Americanneighbors is not feasible,

the next closest approximation is with LatinAmerica as a whole, despite the greater diver-sity of country conditions there, including size.Most of Latin America followed relatively simi-lar policies during the 1960s and 1970s, em-phasizing import substitution and building largepublic sectors. All suffered severely from thedebt crisis and collapse of commodity prices inthe early 1980s, and nearly all eventually movedto the kinds of policy regimes espoused byUSAID in Central America—greater opennessto international trade, financial liberalization, anappropriate exchange rate for the currency, andcutbacks in the public sector, includingprivatization of government enterprises.

Accepting that it may be useful to com-pare Costa Rican performance with the rest ofLatin America, the next question is how to doso. The most widely accepted measure of over-


all performance is growth of GDP. This is anattempt to measure all economic activity—ac-tivity undertaken for market purposes—in agiven year. GDP growth is difficult to measureunder the best of circumstances, and more so incountries undergoing major structural change.GDP for any particular year is also affected bytemporary external events, such as world pricefluctuations for major exports. Moreover, it isdesirable to measure steady-state, or sustainable,GDP. But many countries, like most of LatinAmerica during the late 1970s, may haveachieved artificially high GDP levels by mort-gaging their future. Thus, the nominal GDP fig-ure for a given year may not be a proper repre-sentation. Nevertheless, it is the best single mea-sure available.

Figure 1 (facing page) compares the over-all GDP growth of Costa Rica, Central America,and Latin America as awhole, since 1982 (whenlarge-scale USAID assistancebegan). It shows Costa Ricagrew substantially faster thanthe Latin American average.While Latin America as awhole saw its GDP rise 33percent from 1982 through1995, Costa Rica’s jumped 74percent over the same period.In other words, Costa Rica’s1995 economy was 32 per-cent larger than what it wouldhave been had it grown at theregional average. By 1994,Costa Rica was producing an-

nually about $1.5 billion more than if it hadgrown at the average Latin American rate.* Ifthis estimate could be equated to the impact ofUSAID, this would produce a satisfactory rateof return on the U.S. government’s foreign as-sistance investment.

While Costa Rica did grow much more rap-idly than the rest of Latin America, it is also truethat the Latin American region has been sur-passed in economic growth by the countries ofEast Asia. Figure 2 (below) adds the four “Asiantigers” to the comparison of Costa Rica withLatin America. As noted earlier, Costa RicanGDP rose by 74 percent during 1982–95. Thatof the Asian tigers rose by 140 percent. Thissuggests that Costa Rican economic growthmight have been much faster had Costa Ricaadopted more future-oriented policies (e.g., byincreasing public investment and reducing gov-


*These estimates are based on exchange rate–based estimate of GDP. Using estimates based on purchasing powerparity, value of the annual addition to production would be substantially larger.

ernment consumption spending). More rapideconomic growth would have permitted CostaRicans to enjoy a higher standard of living, in-creasing the availability of both private and pub-lic goods. For the public sector, Costa Ricangrowth at the rate of the Asian tigers from 1982through 1995 would have permitted Costa Ricato simultaneously increase public investment by50 percent, eliminate the fiscal deficit, and re-duce tax rates. In sum, faster growth would havemade choices easier.

Was Costa RicanDevelopmentInevitable?The ChallengeOf Evaluating History

Costa Rica by 1995 was surely a develop-ment success. Ordinary citizens live longer,healthier lives; are better educated; and live in avibrantly democratic society. It is difficult to treathistory without addressing causality and inevi-tability. Some have argued that Costa Rica’s de-velopment success is an inevitable outcome ofits previous history. For example, its long demo-cratic tradition, an emphasis on public educa-tion sustained for more than a century, and rela-tive socioeconomic equality among its yeomanfarmers all make this a credible story. If this isthe full story, however, then organizations likeUSAID are largely pointless. Taken one stepfurther, there is no role for heroic Costa Ricanstatesmen; each Costa Rican leader simply be-comes a cog in the machinery of historical in-evitability.

The problem with inevitability is that it isbased on hindsight. Certain features of the his-torical situation are seen as determining the fu-ture, while others that would suggest other fu-tures are seen as irrelevant or minor. The 1948civil war might have been the start of a half-century of internecine violence, but it was not.It is also easy to forget how historically contin-gent is much else that happens in the world. Forexample, was it inevitable that Beirut would be-come an international symbol of anarchy, eth-nic warfare, and the law of the jungle? After all,it was the “Paris of the Middle East” in the early1960s—where Muslims, Christians, and Jewscould live in harmony; where oil sheiks couldescape the rigors of Ramadan; and where pros-perity, based on the growing oil wealth of theregion and the entrepreneurial spirit of the Leba-nese, seemed almost inevitable.

Ideally, the historian or evaluator of for-eign assistance programs would work with aninfinite number of cases, each varying from oth-ers in one or two specifics that can be isolatedand compared. For example, USAID evalua-tors would have available a country identical toCosta Rica in all particulars in 1945, but thatreceived no funding from USAID in the subse-quent half-century. Whatever differences thatevolved over the decades could then be attrib-uted to USAID assistance.

Of course, no such analytical opportuni-ties exist. A less stringent approach would be tofind a country somewhat similar to Costa Ricain 1945 and observe its evolution since. Theclosest parallel in 1945 would probably be Uru-guay. With approximately the same populationas Costa Rica, it had a long democratic tradi-


tion, an educated population, and a tradition ofbenign and socially conscious government. Uru-guay was sometimes called “the Switzerland ofSouth America,” just as the corresponding titlehas sometimes been used for Costa Rica. (Thename also had a racial overtone, denoting alargely European stock that settled and workedland where few Indians had lived.) The similar-ity of the two countries led to their being di-rectly compared as part of a set of case studiesfor a World Bank research project (Rottenberg1993).

If historical inevitability holds true, bothcountries should have continued their similar tra-jectories from 1945 until the present, except forthe effect of differing external factors. A sig-nificant one is that Costa Rica received about10 times as much economic assistance fromUSAID as Uruguay. Of course, there was amultiplicity of other external differences aswell—in the trends in commodity prices for bothcountries’ exports, in the behavior of their neigh-boring countries, and in myriad other factors.

In any event, the two countries divergedsubstantially during the 50 years after 1945. Uru-guay was unable to address internal social andeconomic conflicts within a climate favorableto economic growth (Favaro and Bensión 1993).Heavy taxation of the main exports (beef andwool) gradually undermined prosperity by low-ering production and export of these products.Consequently, the country was increasinglyunable to pay for the extensive social welfaresystem that had grown up in previous decades.Political conflicts over how to cover the short-falls could not be resolved amicably. Populistpolicies, such as price controls that reached

down to the price of a slice of plain pizza, andelectricity rates that left the utility unable to fi-nance expansion or adequate maintenance, fur-ther undermined the basic productive structure.

Social tensions in Uruguay graduallymounted through the 1960s; conflicts becamemore open and hostile, leading to a significantguerrilla movement in opposition to the gov-ernment. This was followed by repression, amilitary coup in 1973, more political repression,political prisoners, torture, and exiles. Demo-cratic rule was finally restored in 1985, after 12years of military rule. Sustained economicgrowth occurred neither during the years ofmilitary rule nor in the decade since, and eco-nomic and social conflict continues to charac-terize the country.

Rottenberg’s study was based on datathrough 1985; it predicted a poor economic fu-ture of Costa Rica, going by “striking” similari-ties in the public policy regimes in the two coun-tries. Both offered extensive protection to theirdomestic manufacturing sector, both taxed therural sector for the benefit of urban dwellers,and both redistributed income significantlythrough a variety of public means, includingpublic employment and redistributive (and un-funded) social security systems. The main dif-ference between the two countries, inRottenberg’s view, was when the policy setswere initiated. Uruguay’s policy set, adoptedgradually in the decades after 1918, producedstagnation from the early 1950s onward. CostaRica adopted the same policies gradually after1948, and in Rottenberg’s view, achieved stag-nation in the late 1970s. (In Rottenberg’s model,the rapid buildup of external debt after 1975 that


led to the debt crisis in the early 1980s wouldhave been a symptom, rather than a cause, ofCosta Rica’s economic problems in the 1980s.The foreign debt was acquired because the statewas seeking to deliver more to the people thanthe country produced.)

The Rottenberg study provides one test ofthe impact on Costa Rica of USAID assistanceduring the 1980s: it predicted overcommitmentof the state, inability to provide growing for-eign exchange earnings, and an incapacity toadapt to its economic circumstances. Thus,Rottenberg would have expected the decline inUSAID funding from about $200 million peryear around 1985 to near zero 10 years later to


lead to intensified economic stagnation. An over-all improvement would have to be associatedwith a change in the basic economic model fol-lowed by Costa Rica.

Costa Rican history after 1985 did not fol-low this inevitability, at least through 1996. Per-haps Costa Rican policymakers were wiser thantheir Uruguayan counterparts, or Costa Ricancitizens more farsighted. Costa Rica is differenttoday because of the presence of U.S. govern-ment economic assistance programs, among amass of other factors. How much different de-pends on judgments about what happened andwhy.

THIS CHAPTER draws a few lessons from theCosta Rican experience that may be rel-

evant for foreign assistance programs in othercountries. It asks whether, overall, USAID as-sistance to Costa Rica was worth the cost.

1. Foreign aid can work. The evidencestrongly supports the conclusion that USAIDplayed a strong positive role in Costa Rican de-velopment. The fact that successive Costa Ricangovernments were committed to broad-basedgrowth and to democratic processes made therelationship between the Costa Rican govern-ment and USAID consistently one of sharedpurpose. Indeed, a collaborative style and jointdecision-making are perhaps the most notablecharacteristics of U.S. aid to Costa Rica.

2. “Development science” has pro-gressed. Looking at the prescriptions andprojects undertaken by USAID over time, itseems clear that development practitioners havemade considerable progress in understanding thedevelopment process, though it remains rudi-mentary in many areas. Many mistaken ap-proaches of the past have been identified andabandoned. Lack of knowledge flawed the high-development and basic human needs ap-

proaches. Two cases of this ignorance are worthnoting. First, while economists were well versedin the concept of “market failure,” they hadthought little about the possibility of “govern-ment failure.” Second, they failed to understandthe key role of markets, and particularly thatfrom international trade, in promoting efficiency.When better knowledge showed that existingconcepts were inadequate, the better conceptswere gradually embraced. At the same time, de-velopment policy by no means has become anexact science. Nevertheless, USAID and otherdevelopment agencies are more effective nowthan earlier, because they work from a strongerknowledge base.

3. Country experience pays off. TheUSAID comparative advantage comes in sub-stantial part from the trust that USAID staffmembers engender in host country officials. Toa substantial degree, this can come only fromextensive in-country experience. In the techni-cal offices, people who spent long periods (fiveto seven years) in the country seem to haveachieved the most. Of the four Mission direc-tors who were most successful, three were “re-cycled”: they had previous experience in thecountry.

5 Lessons Learned


4. Aid doesn’t work in a bad policy re-gime. The most unsuccessful period in USAID/Costa Rica’s history was in the late 1970s, whenprograms tended to reinforce government poli-cies that were largely unsustainable. MostUSAID projects during this period left few per-manent results. They presupposed that CostaRican government resources would grow suffi-ciently to complement funds provided byUSAID and, subsequently, to finance recurrentcosts associated with USAID-sponsored activi-ties. Neither assumption was justified. The gov-ernment was forced to cut back sharply on ex-isting programs, and the welfare of poor peoplein Costa Rica dropped rapidly during the pe-riod when USAID’s commitment to direct pov-erty reduction was strongest.

5. Institution building is harder than itlooks. Costa Rica provided a relatively favor-able environment for development, yet institu-tion building still proved difficult. The Ministryof Agriculture received substantial support overthree decades but never became the develop-ment institution envisioned by USAID. Effortsto institutionalize highway maintenance in theMinistry of Transport never completely suc-ceeded. The Costa Rican government recentlyabolished two institutions USAID had a sub-stantial role in creating—a municipal financingand advisory institute and a national technologi-cal research institute. USAID assistance to anenvironmental nongovernmental organizationbuilt up the organization’s finances much fasterthan its institutional stability warranted, and theNGO self-destructed in battles over leadershipand direction. The poor performance in this areaseems due to simplistic ideas about how institu-tions should work. USAID staff sometimes as-

sumed that the right organizational structurewould lead to decision-making on technicalrather than political grounds. This is unlikely tohappen, because the operation of an institutionwill be strongly affected by the unwritten rulesof the society in which it is embedded.

6. USAID sometimes jeopardizes its suc-cesses by staying too long. USAID work inexport promotion during the early years of CostaRica’s structural adjustment was critical to itssuccess. Nevertheless, the continuing abun-dance of resources and USAID’s desire to buildon this success led the Agency to maintain alonger, higher profile involvement in export pro-motion than was appropriate. While the earlyyears were catalytic, the eventual result was anoversized institution too dependent on contin-ued USAID resources. On a larger scale, thislesson probably applies to the entire local cur-rency program, where USAID micro-management continued too long.

7. Failure sometimes looks like success.Costa Rica’s participation in the Central Ameri-can Common Market looked like a success in1970, and reputable economists had models thatpurported to prove it. With a longer term per-spective, it now seems likely that the commonmarket hindered Costa Rican growth. Disputeswithin USAID and Central America aboutwhether the CACM was useful should havebeen replaced by debates about how the CACMshould have been structured to promote devel-opment. USAID’s efforts during the 1970s tolower the CACM’s external tariff—which theWorld Bank achieved during the 1980s—wouldhave helped prevent the sharp regional crisis ofthe early 1980s.

Lessons Learned 41

8. USAID has a comparative advantageover other donors in policy reform. CostaRica is the most successful case of structuraladjustment in Latin America. Although Chile isacknowledged as currently having the sound-est policy regime, it was achieved at great so-cial cost. Chile applied policies espoused by theInternational Monetary Fund and World Bankmore resolutely than Costa Rica did, with un-necessary pain. The Costa Rican case may beunique, though, because of the high level of U.S.assistance provided during the 1980s.

9. Institutional change is critical to de-velopment. The Costa Rican experience sup-ports the hypothesis of Douglass North, theNobelist in economics, that economic develop-ment depends on efficient and flexible institu-tions as well as on correct economic policies.By institutions, North means the informal rulesand procedures as well as the formal ones. Dia-log by USAID with Costa Rican intellectualsand politicians, particularly during the last twodecades, has done much to change the wayCosta Ricans have perceived their situation andprospects, and consequently to adapt their insti-tutions to meet the challenges of a changingworld environment.

The Bottom Line:Was It Worth It?

U.S. economic assistance to Costa Rica sig-nificantly contributed to Costa Rican welfare.Costa Ricans are healthier, wealthier, and bettereducated than they would have been withoutU.S. assistance. Income distribution is more

equal than it would have been, and the country’senvironmental base is maintained better than itwould have been without U.S. assistance. Earlytechnical assistance and training were key fac-tors, because they established collaborative re-lationships between Costa Ricans and Ameri-cans, which speeded the flow of ideas. Suchideas embodied more productive ways of work-ing that were critical to building up the capacityof Costa Rican institutions to deliver basic ser-vices to the people, and ways of increasing theproductivity of the economy. But these benefitscame at a cost to American taxpayers. Did theyget their money’s worth?

The best way to answer this question is tocompare the expectations Congress had whenit appropriated the money with the outcome ofthe aid. In the broadest terms, Costa Rica hasmet expectations. It continues as a vibrant de-mocracy with respect for human rights, a modelfor other countries. After a rocky period in theearly 1980s, its economy has successfullyadapted to a changed world economy. It is aworld leader in ecosystem management. If alldeveloping countries had matched Costa Rica’sprogress on economic, social, and political in-dices, there would be fewer complaints aboutthe effectiveness of foreign aid.

The assessment is even more strongly posi-tive with respect to the large-scale assistance theUnited States provided during the 1980s. CostaRica used U.S. resources effectively, and itsleaders, notably then-president Arias, took thelead in formulating an approach that restoredpeace to Central America.

Finally, the U.S. Congress and the Ameri-can people would consider the economic assis-tance successful to the extent that Costa Ricano longer requires U.S. economic aid. If CostaRica were itself later to offer a helping hand to

contribute to the development of its poorerneighbors, that would be the ultimate evidenceto the American public that U.S. assistance hadsucceeded in broad moral terms.


SectoralAnd CrosscuttingEvaluation Reports

1. Macroeconomic Policy, by Thelmo Vargas(26 pages).

2. Financial Sector Programs, by Miguel Loría(30 pages).

3. Trade Policy and Programs, by EdnaCamacho (30 pages).

4. Health Sector Activities, by Leonardo Mata(66 pages).

5. Family Planning Programs, by Víctor Gómez(29 pages).

6. Education Activities, by María Cecilia Doblesand Juan Manuel Esquivél (38 pages).

7. Agricultural Programs and Policies, byCarlos Pomareda (26 pages).

8. Natural Resource Activities, by Rafael Celis(43 pages).

9. Democracy and Governance Activities, byDaniel Masis (20 pages).

10. Infrastructure Programs, by Enrique Anguloand Ricardo Echandi (32 pages).

11. Life in Two Costa Rican Villages, 1950 and1995, by Ivelina Romagosa and AmilcarCastañeda (77 pages).

12. Impact of Costa Rican Nontraditional Ag-ricultural Exports, by Kathleen Horkan (30pages).

13. USAID/Costa Rica and PVOs: Three Cases,by Kristin Goss (28 pages).

BackgroundDocuments1. USAID in Costa Rica: An Overview, by James

Fox, provides a summary of USAID pro-grams and strategies from 1945 to 1995(20 pages).

2. For an economist’s interpretation of the eco-nomic forces at work and economic poli-

Appendix

A2 Real Progress: Fifty Years of USAID in Costa Rica

cies tried in Costa Rica between 1945 and1995, see Ricardo Monge’s EconomicOverview of Costa Rica (38 pages).

3. Interview Summaries with American FormerUSAID/Costa Rica Staff. 1- to 2-page sum-maries with a 18 Americans about their ex-perience in Costa Rica (25 pages).

4. Interviews With U.S. Ambassadors. Long in-terviews with five ambassadors who servedin Costa Rica, from the State Departmentoral history project (80 pages).

5. Interviews With Costa Rican Professionals.Summaries of some 50 interviews (6–7pages each, in Spanish) of Costa Ricanswho worked on, or were knowledgeableabout, USAID activities (300 pages).

6. AID and Multilateral Assistance to CostaRica, 1946–63, by Sasha Muench. A sta-tistical summary of assistance flows fromUSAID and the other principal sources (36pages).

7. Costa Rica Impact Assessment Issues andMethodology, by James Fox. This summa-rizes the evaluation approach and the mainquestions to be addressed in each of thesector evaluations (10 pages).

8. Costa Rican Students Who Have StudiedOutside the Country, by Sasha Muench.This is a statistical compilation of data onforeign study by Costa Ricans (8 pages).

Bulmer–Thomas, Víctor. 1987. The PoliticalEconomy of Central America Since 1920.Cambridge, England: Cambridge Univer-sity Press.

Céspedes, Víctor Hugo; and Ronulfo Jiménez.1995. Apertura Comercial y MercadoLaboral en Costa Rica. San José, CostaRica: Academia de Centroamérica.

Cline, William R.; and Enrique Delgado. 1978.Economic Integration in Central America:A Study. Washington: Brookings Institu-tion.

“Dirección General de Estadísticas y Censos.”1953. In Atlas Estadístico de Costa Rica.San José, Costa Rica: Casa Gráfica.

Favaro, Edgardo; and Alberto Bensión. 1993.“Uruguay.” In The Political Economy ofPoverty, Equity, and Growth: Costa Ricaand Uruguay, edited by Simon Rottenberg.New York: Oxford University Press.

González–Vega, Claudio; and Víctor H.Céspedes. 1993. “Costa Rica.” In The Po-litical Economy of Poverty, Equity, andGrowth: Costa Rica and Uruguay, editedby Simon Rottenberg. New York: OxfordUniversity Press.

Loomis, Charles Price, ed. 1953. Turrialba: So-cial Systems and the Introduction ofChange. Glenco, Ill.: Free Press.

Morley, Samuel A. 1995. Poverty and Inequal-ity in Latin America: The Impact of Ad-justment and Recovery in the 1980s. Bal-timore and London: The Johns HopkinsUniversity Press.

Nugent, Jeffrey B. 1974. Economic Integrationin Central America: Empirical Investiga-tions. Baltimore: Johns Hopkins Univer-sity Press.

Rottenberg, Simon, ed. 1993. The PoliticalEconomy of Poverty, Equity, and Growth:Costa Rica and Uruguay. New York: Ox-ford University Press.

Sachs, Jeffery D.; and Andrew Warner, “Eco-nomic Reform and the Process of Glo-bal Integration.” In Brookings Papers onEconomic Activity, 1995 1: 1–117.

World Bank. 1992. Costa Rica: StrengtheningLinks to the World Economy. Trade PolicyDivision, Country Economics Depart-ment. Washington.

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