Chapter 1. The agricultural policy context in Costa Rica

This chapter examines the key characteristics of the agricultural sector in Costa Rica. It includes a brief overview of the political, economic, social, and geographical factors that constitute the broad context for the development of the agricultural sector. The sector’s role in the economy is outlined, including structural change over the last two decades, farm structure and producer characteristics and trends in agricultural productivity. The chapter concludes by examining trade flows in the agricultural sector, as well as the structure of upstream and downstream sectors and marketing chains at national level.

  

1.1. Introduction

Costa Rica’s political, economic, social and environmental achievements over the past thirty years have been significant, providing favourable conditions for the development of the agricultural sector. The country’s sustained economic growth and long-standing commitment to social development have resulted in high living standards and poverty rates that are among the lowest in Latin America. At the same time, the government has prioritised the protection and conservation of the environment, reversing much of the deforestation that occurred from the 1950s to the 1980s, and preserving Costa Rica’s abundant biodiversity. The agricultural sector has benefited from these favourable conditions and continues to constitute an important part of the Costa Rican economy, particularly in terms of exports and employment.

Building on Costa Rica’s outward-oriented growth strategy of the 1980s, the agricultural sector has transformed and developed a successful and dynamic export sector. Prior to the reforms of the mid-1980s, the traditional1 agricultural export sector was penalised by policies that supported the domestic industrial sector. In opening the economy, Costa Rica sought to expand and diversify agricultural exports by promoting non-traditional products in which it had a comparative advantage. The result was the emergence of a dynamic, non-traditional agricultural export sector. Today, Costa Rica is the world’s larger exporter of pineapples (world market share of 55% in 2015), but also remains a successful supplier of traditional products, such as bananas, coffee and sugar.

Nevertheless, economic performance across the agricultural sector is uneven, and a number of challenges remain. There have been limited spillovers from the successful non-traditional export sector – and, to a lesser extent, the traditional export sector – which is dominated by large farms, to the domestic market, mostly served by small and less competitive farms. This dualistic structure is contributing to rising inequality and persistent poverty in rural areas.

Furthermore, productivity growth has stagnated across the sector in recent years, with impacts on inclusive growth as well as international competitiveness. This is compounded by Costa Rica’s current macroeconomic performance, particularly the growing fiscal deficit. Given the importance of agriculture for rural development, these challenges are pressing, demanding policy responses.

This chapter outlines the characteristics of the agricultural sector, and assesses the factors that enable and constrain future productivity growth and development. It sets out the broad context for the development of the sector (Section 1.2), including political stability; economic growth, openness to trade and foreign direct investment (FDI); social indicators; and the natural resource endowment, climate and environmental context for agriculture. The chapter then discusses the sector’s importance in terms of its contribution to exports and employment (Section 1.3), before turning to structural change in the agro-food sector (Section 1.4), outlining key trends in agricultural land use and production patterns, including farm structures (Section 1.5), land concentration and ownership. Drivers of production and productivity growth are also discussed (Section 1.6), along with the related issues of structural changes, and new opportunities and challenges brought about by agricultural trade flows (Section 1.7). Lastly, the chapter explores upstream and downstream sectors (Section 1.8), analysing the linkages between farmers and domestic and international markets. It concludes (Section 1.9) by summarising the key findings.

1.2. Context

The development of the agricultural sector in Costa Rica has been facilitated by a broad set of factors, including political stability, a rich natural resource endowment and fertile climate, a strong foundation of social services, and a generally high overall level of economic development and openness. Nevertheless, ongoing policy reform is required to address challenges in productivity growth and to ensure continued competitiveness, while maximising the sector’s contribution to rural development, against a backdrop of continued fiscal and unemployment pressures following the global economic crisis.

Political characteristics

Costa Rica’s tradition of democracy and political stability has played a key role in its economic success. With secure human and political rights, the country has developed into one of the most stable democracies in Latin America. Democracy also supported the structural and trade reforms of the mid-1980s – pushed forward by a wide consensus among Costa Rican policy makers on the adoption of an outward-oriented development strategy (Ferreira and Harrison, 2012). Political stability has also been a key factor in the country’s success in attracting FDI.

As a presidential democracy with a Legislative Assembly, the central government administration is comprised of three branches – executive, legislative and judicial – and an electoral branch, the Supreme Tribunal of Elections. Control of the legislative agenda is shared between the Executive and the Legislative Assembly. Geographically, the country is divided into seven administrative divisions (or provinces) – Alajuela, Cartago, Guanacaste, Heredia, Limon, Puntarenas, and San Jose – and 81 cantons (local governments) (Figure 1.1).

Figure 1.1. Map of Costa Rica (province level)
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Source: INEC (2016).

In 2006, Costa Rica shifted from a bi-partisan to a multi-party system, which has contributed to slowing reform processes in the last decade. Reform processes have become complex and lengthy, as rules designed for a two-party system still apply (IDB, 2011). The OECD (2016a) and the World Bank (2015) note that the increasing difficulties in obtaining timely approval for comprehensive reforms, particularly on sensitive issues such as fiscal reforms, pose a risk to continued economic growth.

General features of the Costa Rican economy

Costa Rica is classified by the World Bank as an upper-middle-income country. Gross Domestic Product (GDP) was USD 51.1 billion in 2015 (current prices). Per capita income was USD 15 377 (in purchasing power parity [PPP] terms) in 2015, above the average for Latin America and the Caribbean, and more than double the figure from 1995 (OECD, 2016a). Costa Rica ranks 69 out of 188 countries in the United Nations’ Human Development Index (HDI), placing it in the high human development category.

On average, economic growth has been positive, with real GDP growth measuring around 4.6% per annum over the last 25 years (Figure 1.2). In the 1990s, growth was high, reaching up to 9.2% (1992) and 8.4% (1998). In the early 2000s, there was a significant slowdown (1.1% in 2001), but growth rebounded from 2005 to 2007 (an average of 7.5% per annum). The global economic crisis hit Costa Rica hard, and the economy contracted (-1% growth) in 2009, as decreasing demand both globally and in the United States led to a decline in agricultural exports. However, the economy has recovered relatively quickly, growing at 3.6% per annum on average over the last five years.

Figure 1.2. Costa Rica: Selected macroeconomic indicators, 1990-2015
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Source: International Monetary Fund (IMF) (2016), World Economic Outlook Database (WEO) (2016).

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Compared both to other Latin American countries and the OECD average, Costa Rica’s growth performance has been well above average (Figure 1.3). Between 2000 and 2015, Costa Rica’s average economic growth rate of 4.2% was similar to that of Colombia and Ecuador, and larger than those of Brazil or Chile. Of all Central American states, only Panama displays higher growth rates.

Figure 1.3. Average annual real GDP growth rates of selected Latin American countries, 2000-15
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Notes: 2000-15 average annual percentage growth rate of GDP at market prices, based on constant 2010 US dollars. Where 2015 data was not available, closest year was used.

Source: World Bank (2016), World Development Indicators.

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Inflation in Costa Rica has been on a declining trend since 1990. Notwithstanding some peaks in 1995, 2005 and 2008, inflation decreased from 19% in 1990 to 0.8% in 2015. Very low inflation in recent years is due to falling commodity prices, spare capacity in the economy, and exchange-rate appreciation (OECD, 2016a).

Fiscal space for new policies in Costa Rica – including in the agricultural sector – is limited. The budget balance has been negative, averaging around -5.2% in the last five years. In 2015, the central government’s fiscal deficit reached around 6% of GDP. Increases in government spending (and the public-sector wage bill in particular) have been key contributors to the sharp increase in public debt, from 28% of GDP in 2009 to more than 40% in 2015. As a result, rating agencies have downgraded Costa Rica’s debt to below-investment grade (OECD, 2016a).

Unemployment, low for many years, surged during the global economic crisis, and has not recovered since. From 1990 to 2008, unemployment averaged around 5%. However, in the wake of the crisis, the unemployment rate has remained around 8% since 2009. The creation of new jobs has neither been uniform nor sufficient to recover those lost during the crisis (PEN, 2012). Furthermore, structural unemployment has increased because of shifts away from labour-intensive activities to higher value-added activities in services and industrial exports, increasing the demand for higher-skilled labour but releasing low-skilled labour (OECD, 2016a). Unemployment has also been consistently higher in rural areas, with the exception of 2015 (INEC-ECE, 2016) (Section 1.3 provides more detail on employment in agriculture).

Costa Rica’s economic growth has been fuelled in part by its integration within global markets. Costa Rica is active in the multilateral trading system, both as a GATT member since 1990 and a founding member of the WTO in 1995. Costa Rica currently has 14 free trade agreements (FTAs) in force with 49 trading partners, both individually and as a member of the Central American Common Market (CACM). These agreements include Costa Rica’s largest trading partners (the United States, the European Union and the People’s Republic of China – hereafter “China”), and cover almost 93% of exports and almost 83% of imports (COMEX, 2016c; OECD, 2015a). The most important regional agreement is the 2009 Free Trade Agreement between the Dominican Republic, Central America (El Salvador, Guatemala, Honduras, Nicaragua and Costa Rica) and the United States (CAFTA-DR). As a result of these agreements and Costa Rica’s unilateral process of phasing-out and reducing tariffs, average tariffs have fallen by 39% over the last 15 years, while tariffs faced by Costa Rican exporters have fallen by 37.5% (OECD, 2015a) (for a more in-depth analysis, see Chapter 2).

Costa Rica’s location in Central America and integration into regional and other trade agreements have enabled it to overcome the constraints of its small domestic market and benefit from its comparative advantage in exportable crops. While Costa Rica’s domestic market is limited by its small population (4.77 million in 2014), it has access to export markets in North and South America, and direct ocean access to Europe and Asia. Proximity to the United States has been particularly important, both as Costa Rica’s main export market and as a factor in attracting FDI. Moreover, as a member of the Central American Common Market, Costa Rica benefits from geographical proximity to – and the economic complementarity of – signatories to that agreement (Trejos, 2013).

FDI has also played an important role in Costa Rica’s outward-oriented development. According to the OECD FDI Regulatory Restrictiveness Index2 , Costa Rica’s FDI policy is slightly more open (with an index score of 0.05 in 2012) than the OECD average (0.07). This openness has encouraged FDI from the United States (accounting for around 60% of cumulative inflows between 2000 and 2012), as well as from Spain, Canada, Mexico and Colombia, among others (OECD, 2013). While FDI initially focused on the agro-industry, textiles and apparel sectors, it has since diversified towards more technology-intensive sectors and services. The opening of INTEL plant, for example, during mid 2000s was an important foreign investment in the country that had a signalling effect on other investments. Between 2000 and 2012, agriculture and agro-industry accounted for only 4% of cumulative inflows (OECD, 2013), although there are no limits on FDI in agriculture and forestry (OECD, 2014b). Although FDI has been fundamental to Costa Rica’s growth strategy and economic success and continues to be important, it is challenged by skilled labour shortages (World Bank, 2015).

Due to its achievements in democratic stability, economic reform, trade openness, social indicators and the environment, Costa Rica is often ranked highly in international competitiveness rankings in comparison with other countries in the region; however, some major challenges remain. According to the Global Competitiveness Index (2015–16) (WEF, 2015), Costa Rica has increased its relative competitiveness in recent years. Costa Rica now ranks 52nd of 144 countries (compared to 56th in 2010-11), and is considered to be in transition from an efficiency-driven to an innovation-driven economy. Within Latin America, Costa Rica is a top performer, after Chile (35th) and Panama (50th). Costa Rica scores highly with respect to higher education, and institutions and innovation also rate well. However, the country scores poorly in other areas, such as market size, infrastructure, labour market efficiency and financial market development. An inefficient bureaucracy and inadequate infrastructure were cited as the two most problematic factors for doing business (WEF, 2015), and increase transaction costs along the agricultural marketing and supply chains. Other factors affecting competitiveness are domestic cost pressures from high energy costs, high labour costs, a lack of skilled labour, high logistics costs (infrastructure), and the appreciation of the exchange rate (SEPSA, 2015; World Bank, 2015).

Demographic and social characteristics

Costa Rica’s population of 4.8 million is ageing and increasingly concentrated in urban areas. Estimates suggest that Costa Rica will become an aged economy3 in 2024, due to falling fertility rates in recent decades (OECD, 2016a; ECLAC, 2013). Urbanisation is also a rising trend: 76% of the population (3.6 million) lived in urban areas in 2014, a significant increase from 45% (1.2 million) in 1984 (World Bank, 2014). Much of the urban population is concentrated in the province of San José.

Costa Ricans have a generally high standard of health as a result of economic growth and sustained government commitment to the provision of basic public services. In 2015, the average life expectancy in Costa Rica was 80 years (INEC, 2016). Decades of investment have contributed to this outcome and also resulted in near universal access to healthcare, clean water and sanitation (BTI, 2014). Current public spending on health amounts to 10% of GDP (OECD, 2016a).

Costa Rica’s commitment to universal education has ensured high literacy rates and nearly full enrolment in primary education. Public spending on education amounts to 6.9% of GDP (OECD, 2016a), and the country is considered to have one of the best higher-education and training systems in the Latin American region (WEF, 2015). Costa Rica’s well-educated labour force remains an important factor in attracting FDI in technology and skill-intensive industries, although skills shortages remain (World Bank, 2015).

However, educational levels have declined recently, and the gap relative to OECD and several other Latin American countries is large. For instance, the average level of schooling in Costa Rica is lower than in Chile, Colombia, Venezuela and Panama (OECD, 2016a). Educational levels in rural areas are particularly low: around 80% of 18-year olds have not finished secondary school (Fernández and Del Valle, 2014).

Low levels of education are one of several factors that are perpetuating poverty. By international standards, poverty in Costa Rica is low. The poverty headcount ratio at USD 1.90 a day (2011 Purchasing Power Parity [PPP]) has been less than 2% since 2010 and, at USD 3.10 a day (2011 PPP), has not exceeded 4% since 2010 (WDI, 2016). That said, while Costa Rica’s poverty rate is lower than in most Latin American countries, the percentage of households living under the national poverty line has not improved over the last 20 years (Figure 1.4). Following a sharp decline in the early 1990s, the poverty rate measured by the national poverty line averaged around 20% of all households between 1994 and 2006. Although the poverty rate decreased to 17% in 2007, it returned to 22% in 2010. While the increase in poverty can be largely explained by a change in the methodology for calculating poverty rates in 20104 , the legacy of the global economic crisis was also a factor. Rural poverty rates continue to be above the national average.

Figure 1.4. Percentage of households living under the national poverty line, 1991-2016
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Notes: The definition of poverty includes all households that are unable to meet their basic needs (non-food consumption basket), using the Orshansky coefficient (INEC, 2015a, 2010a). Values from 2010 onwards are not directly comparable with previous years, due to changes in the sample and in the questionnaire, and methodological adjustments in measuring poverty.

Source: INEC (from the Multipurpose Household Survey [EHPM]) until 2009, and the National Household Survey (ENAHO) from 2010 onwards.

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At the regional level within Costa Rica, poverty is most prevalent in the northwest and southeast (Figure 1.5), regions in which a large share (50-71%) of the population is employed in agriculture (INEC, 2013). The North, Northern Guanacaste and Northwest Alajuela regions, which border Nicaragua, have the largest percentage of households living below the national poverty line (more than 45%). In other cantons in Northern Alajuela, between 33% and 44% of households are living below the national poverty line. In the South, cantons close to Panama also have high poverty levels, such as Talamaca (Limón) (more than 45%) and Buenos Aires and Coto Brus (Puntarenas) (between 33% and 44%). The central region has the lowest share, with less than 12% of households living in poverty in certain cantons.

Figure 1.5. Poverty map: Percentage of households living under the national poverty line (2011)
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Note: At canton level.

Source: INEC (2016).

Although inequality, as measured by the Gini coefficient (48.6% in 2012), is lower than in most Latin American countries, it is high by OECD standards (31.6% in 2012). Moreover, inequality increased between 1990 and 2012, and now exceeds levels in Ecuador, Peru or Argentina (Figure 1.6).

Figure 1.6. Inequality in Costa Rica and selected Latin American countries
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Note: Based on GINI coefficient (World Bank estimate).

Source: World Bank (2016), World Development Indicators.

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Natural resource endowment and climate

Located between Nicaragua and Panama, Costa Rica is a small Central American country that borders the Caribbean Sea and the North Pacific Ocean. Coastal areas (the Pacific and Caribbean regions) are separated by mountain ranges that run from the northwest to the southwest and by many plateaus in the north and northwest of the country.

Land is scarce in Costa Rica. The country’s total land area is 51 100 km2, including 40 km2 of surface water and over 26 500 km2 of forest cover5 (World Bank, 2015). Competition for land resources has increased in recent decades, with pressure to convert farmland to non-agricultural uses, such as tourism, residential areas and reforestation. As a result of governmental programmes, for instance, forest cover increased from 21% of land in the late 1980s, to over 50% in 2013 (World Bank, 2015). Around 25% of the country is under some category of protection (INBio, 2016), a contributing factor to its successful development of ecotourism. The total agricultural area – including pastures – is currently 1 589 257 ha, or around 31% of total land area (47% when forest area on farm land is included).

Costa Rica is a water-abundant country; however, water scarcity is a growing challenge in certain agricultural regions. The total amount of water available is estimated at almost 112 million cubic meters per year; discounting losses for evaporation, infiltration and other processes, net available water is 75 million cubic meters per year (Pomareda, 2015). More than 90% of water concessions (by volume) are granted to the agro-food sector as a whole: 85% to agriculture and 6% to agroindustry (DNA, 2013). Costa Rica’s topography and abundant rainfall have permitted construction of hydroelectric power plants, generating 66% of the country’s energy. At the same time, water scarcity is a concern in some regions – the Northern Pacific in particular. Overuse exacerbates these concerns: according to a MINAE study on the hydrological balance in 15 of the country’s 34 watersheds, inefficient water use is a significant challenge (Pomareda, 2015).

Costa Rica’s diverse climate has fuelled its success in the export of a wide range of commodities. The climate is generally mild in the central highlands, arid in the northwest, and tropical and subtropical in the coastal areas, with different spatial and temporal precipitation patterns. Much of the land available for farming is topographically rugged and unsuitable for the mechanised production of grains and commodity bulk crops. Nevertheless, the land is highly fertile as a result of volcanic soils, high biomass and altitude, and abundant rainfall (Trejos, 2010).

Costa Rica is, however, one of the most exposed countries to natural hazards. According to the World Risk Index (ADI, 2014), Costa Rica has the seventh-highest risk of disasters worldwide. Droughts and floods due to El Niño and La Niña6 are of particular concern, triggering national emergency declarations on a frequent basis. Climate change is expected to worsen these conditions (Chapter 3).

High levels of biodiversity have also contributed to the agricultural sector’s success. Despite its small land area, Costa Rica represents 3.6% of the world’s biodiversity (Box 1.1). Biodiversity has also contributed to the successful development of the eco-tourism sector.

Box 1.1. Biodiversity

Costa Rica is world-renowned for its rich biodiversity. While representing only 0.03% of the world’s land surface, Costa Rica hosts 3.6% of the world’s estimated biodiversity (between 13 and 14 million species). In 2005, there were around 94 753 registered species, or about 5% of all known species in the world, placing it among the 20 countries with the highest rate of biodiversity (Obando, Herrera, and Ugalde, 2013).

Due to its contribution to genetic variety and ecosystems, biodiversity is important for agriculture and the environment in Costa Rica. For example, numerous wild varieties of potatoes grow in the country, and can be used as genetic resources to create better varieties with greater resilience to climate change. Furthermore, biodiversity plays an important role in developing ecotourism. Nature and biodiversity are the main attractions in this sector, which contributed around 5% to Costa Rican GDP (approximately USD 1 357 million) in 2009 (Moreno et al., 2010).

However, biodiversity is threatened by waste, water and air pollution, resource exploitation, illegal hunting, and urbanisation. Intensive agriculture is one of the most important factors in terms of increased pressure on biodiversity. Intensified agricultural activity through the expansion of pineapple, sugar cane and palm oil production has encroached on protected river zones and led to numerous violations of the Forest law (Programma del Estado de la Nación (PEN), 2012). In response, the government has taken measures to increase biodiversity protection, including initiation of the National Biodiversity Strategy (Estrategia Nacional de Conservación y Uso Sostenible de la Biodiversidad) under the National Biodiversity Programme framework (INBio, 2016).

Source: SINAC (2014); INBio (2016); Pomareda (2015); Politica Nacional de Biodiversidad (2015).

1.3. The role of agriculture in the Costa Rican economy

In recent decades, as a growing services sector has altered the structure of the Costa Rican economy, agriculture’s share in GDP has declined (Figure 1.7). Agriculture’s contribution (crops and livestock) to GDP declined from 13.7% in 1994 to 5.6% in 2013. The share of industry also decreased from 29.6% to 25% over this period. Meanwhile, the share of services increased from 57% of GDP in 1994 to 69.4% in 2013. Nevertheless, the absolute value of all three sectors has increased in real terms, despite their falling share in GDP.

Figure 1.7. Agriculture’s contribution to the economy
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Note: Agro-food trade data include fish and fish products.

Source: World Bank (2016), World Development Indicators; UN COMTRADE Database (2016).

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While the agricultural sector’s contribution to GDP has been relatively low over the last 20 years (Figure 1.7), it nonetheless plays an important role in the Costa Rican economy, due to its contribution to export earnings (Section 1.7). Until the mid-1990s, the share of agricultural exports in GDP was higher than manufacturing exports, and increasing. This share declined sharply in the late 1990s, due to growing exports from firms located in Costa Rica’s free trade zones (FTZs), in high technology exports – including electronics, medical devices, automotive, aerospace/aeronautics and film/broadcasting devices – and in services (business outsourcing) (OECD, 2016a). That said, agricultural exports have remained between 31.1% and 37.2% of total exports since 1999, aside from a dip in 2009 due to the global economic crisis.

The agricultural sector’s contribution to employment is also noteworthy. At 12.7% of employment in 2013 (WDI, 2016), the agricultural sector was the second-largest source of employment in the economy – exceeded only by services (INEC – Encuesta Contínua de Empleo (ECE), 2016). Moreover, agriculture is the largest employer in rural areas, accounting for 31.7% of rural employment in 2013. It is also a major source of employment in several regions: Chorotega (20.1%) and Huetar Norte (34.9%) in the north, and Brunca (32.3%) in the south and Huetar Atlantica (35.6%) in the east (INEC-ENH, 2016).

Overall, however, the share of agriculture in total employment has fallen significantly in recent decades, a common trend during structural transformation of the economy. The share of agriculture in total employment has fallen by more than half, from 27.4% in 1980 to 12.7% in 2013.7 Over the same period, agriculture’s contribution to Costa Rican GDP also declined, from 13.9% to 5.6% (Figure 1.8). Although other countries in the region have experienced similar declines, Costa Rica’s transformation has been faster than for some major Latin American countries, such as Brazil or Mexico.

Figure 1.8. Evolution of agriculture’s share of GDP and employment in selected countries, 1980-2013
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Note: 2013 or latest available year. Where 1980 data was not available, closest year was used.

Source: World Bank (2016), World Development Indicators; National data (2015), SEPSA (2016).

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Today, traditional agricultural products for export and the domestic market are the main sources of employment in the sector, underscoring the importance of agriculture for rural development. In 2014, the shares of total employment in traditional products for export and the domestic market were 38.1% and 46%, respectively. In the same year, non-traditional agricultural exports generated 15.4% of agricultural employment (INEC, ENH, 2014). Nevertheless, despite the importance of traditional agriculture as a source of employment, it has struggled to generate higher-skilled jobs, an important path for rural development. Agricultural production for the domestic market, in particular, is less dynamic, and employs mostly unskilled labour – workers with low levels of education and thus a lower capacity to move to other sectors. Low skill levels also potentially constrain structural changes that would otherwise lead to higher-value production (INEC, 2014).

In some sub-sectors, agricultural employment is variable and vulnerable to contractions in production and exports. For example, the outbreak of rust in coffee plantations in 2013, which resulted in a nearly 30% decrease in exports, had a significant impact on agricultural employment. According to the International Coffee Organization (ICO), almost 14 000 workers were affected (PEN, 2014). Such variability is particularly serious when sub-sectors are regionally concentrated (as is the case for bananas and coffee), as it can have significant regional and local impacts on employment.

Informality is also high in agriculture, contributing to vulnerability and higher poverty in the sector (OECD, 2016a). Informal employment has been increasing and accounted for 45% of total employment in 2014 (OECD, 2016a; OECD, 2016b). Informal labour in the agricultural sector is even higher, at 60% of all agricultural employment in 2014 (INEC-ECE, 2016). Important informal labour comes from Nicaragua, the largest immigrant group in Costa Rica (75% of all immigrants). That said, in 2015, around 12% of the formal agricultural labour force also came from Nicaragua (INEC, 2016), most of whom (62%) work in the plantations of permanent crops8 (INEC-ECE, 2016). PEN (2015a) and OECD have argued that high social services contributions are a factor driving informality in agriculture, and are also potentially constraining employment growth, including in agriculture (e.g. as farms and rural small or micro-enterprises seek to expand).

1.4. Structural change in the agro-food sector

Due to favourable underlying conditions and reforms, the Costa Rican agricultural sector has grown and diversified in the last decades; however, growth has been unequal across the sector. The agricultural sector in Costa Rica is characterised by a dualistic structure, with a successful and dynamic export sector and a more traditional, less competitive, domestic agriculture, characterised by small-scale farms.9 The export sector has typically focused on products such as bananas, coffee and sugar; more recently, production has expanded to include non-traditional exports, such as pineapple and palm oil. Meanwhile, the domestic sector focuses on grains, fruits and vegetables.

Prior to the reforms of the mid-1980s, Costa Rican agriculture was already characterised by two distinct sectors: one composed of large-scale industries producing traditional products almost exclusively for export (including bananas on plantations managed by transnational companies), and the other producing for the domestic market. Export taxes were applied to agricultural commodities in which Costa Rica had a strong comparative advantage (bananas and coffee) (Cattaneo, Hinojosa-Ojeda, and Robinson, 1999). At the same time, the food and basic grains industry for the domestic market did not receive support in the form of productive development policies nor the foreign investment necessary for development.

The dualistic structure was reinforced by the trade liberalisation reforms of the 1980s, which enabled the emergence of several new export crops. In the mid-1980s, agricultural policy reflected the broader government objective of trade opening, and policies sought to foster skills and private initiatives that would promote exports of new products in which Costa Rica had a comparative advantage and thus enable the economy to take advantage of greater openness to trade. Tariffs were reduced dramatically, quotas were eliminated, government controls over land use and crop allocations were removed, and, in many cases, support to agriculture ceased to be linked to import-substituting crops (Trejos, 2010). Other agricultural reforms included the improvement of markets for agricultural inputs, credit and products, and the closure of some government-administered agribusinesses (Trejos, 2013a) (reforms in the sector are covered in more detail in Chapter 2).

Production trends

Following trade opening, agricultural output increased (Figure 1.9), predominantly due to impressive growth in the production of non-traditional exports as well as less land-intensive livestock products (Figure 1.10). Pineapples increased their share in total agricultural value at the expense of bananas and coffee in particular, from 9% in 1995-97 to 24% in 2013-15. The share of livestock products (beef, pig meat, poultry and milk) increased from 17% to 27% over the same period. Milk production increased its share of total value from 4% to 11% and surpassed beef, which fell from 6% to 5%.

Figure 1.9. Growth in Costa Rica’s agricultural output, 1990-2013
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Notes: FAO indices based on the 2004-06 period have been recalculated taking indices for 1990 as 100. GAO = Gross Agricultural Output. Years with negative growth, such as 2007-08, were characterised by adverse climatic conditions and diseases.

Source: FAOSTAT (2016), World Bank (2016), World Development Indicators.

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Figure 1.10. Evolution of the structure of Costa Rica’s agricultural sector, 1995-2015, value
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Note: The value of agricultural production by commodity is a result of the multiplication of volumes produced and domestic farm gate current prices.

Source: OECD (2016a), “Producer and Consumer Estimates”, OECD Agriculture Statistics Database.

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The impressive growth of non-traditional export crops and the stagnation of growth in traditional crops can also be seen in absolute terms (Figure 1.11). Pineapple production more than quintupled in the last 20 years (from 424 480 tonnes in 1995 to 2 758 593 tonnes in 2015), notwithstanding setbacks in 2013 and 2014, due to severe flooding (Gonzales, 2014). Palm oil production almost doubled from 490 000 tonnes in 1995 to 816 000 tonnes in 2015, in spite of a disease outbreak in 2014, known as “Flecha Seca”. Traditional export crops (coffee and banana), by contrast, have remained close to their initial production levels. After a brief increase (up to 2004), coffee production fell below 1995 levels, due to the declining productivity of ageing plantations, increasing competition from other countries, and the outbreak of rust in 2013 (PEN, 2016; MAG-MIDEPLAN, 2016). Of the traditional crops, sugar cane production increased over the same period, from 3 233 000 tonnes in 1995 to 4 260 000 tonnes in 2015. Paddy rice also increased from 165 866 tonnes in 1995 to 195 319 tonnes in 2015. Following the food price crisis, rice production experienced noteworthy growth over 2008 to 2011 as a result of agricultural policies aimed at promoting grain production through greater provision of services to rice producers, and minor subsidies. Rice production also increased as a consequence of high international prices that, when transmitted to domestic prices, motivated farmers to produce more rice (SEPSA, 2016).

Figure 1.11. Growth in crop production, 1995-2015 (index)
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Note: This Index is derived from the total national production of the crops selected.

Source: SEPSA (2016).

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All livestock products, with the exception of beef, have seen a significant increase in production (Figure 1.12). The most noteworthy increase has been for pig meat, followed by egg and then poultry production. Dairy production has also increased: from 1995 to 2015, it grew by 105%, due to the conversion of stock from beef to milk production and to double-purpose systems (milk and meat). Beef production, by contrast, has experienced negative growth in certain years, due to the conversion of agricultural area to forest or to export products – such as pineapple or dairy – as well as unfavourable conditions for fodder production, due to droughts in the Guanacaste area (CORFOGA, 2000). Although beef continues to dominate (42% of the national herd in 2014), the shares of combined milk and beef production (32%) and milk production (26%) in total livestock production have gained in importance since 2000 (CORFOGA, 2015).

Figure 1.12. Growth in livestock production, 1995-2015
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Note: This Index is derived from the total national production of the livestock products selected.

Source: SEPSA (2016).

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Consistent with the variations in climate and topography across Costa Rica, agricultural production varies across regions (Box 1.2). Certain products are highly concentrated in particular areas: for instance, as of 2014, around 80% of the total banana cultivation area is located in the province of Limón in the Southern Caribbean region, and pineapple production is also mainly located in this province.

Box 1.2. Agricultural production by region

Each region is characterised by different agricultural activities (Figure 1.13):

  • Production in the Northern region includes export crops (pineapple, citrus, and ornamental plants) and cattle. Pineapple production is dominant. Farms in this area tend to be dual-purpose and dairy cattle farms. The area is also important for rice. The Northern region, together with the Pacific North, comprise more than 50% of total farm area.

  • The Pacific North (Guanacaste province) is characterised by extensive cattle production. The beef industry, for example, is located primarily in this area. Rice production is extensive, with 28% of all rice production located in Guanacaste. Other important crops include pineapple, sugar cane and maize.

  • The Central Pacific region is dominated by palm oil plantations, with some areas of rice production. Some coffee cultivation can also be found inland.

  • Coffee and vegetable production is concentrated in the Central Valley region. 41% of coffee production is located in San José. Around 92% of the total coffee cultivation area is located in the central provinces of San José and Cartago, together with Alajuela and Puntarenas in the Northern and South Pacific Regions. Vegetables cultivated in the Central Valley include onions, potatoes, tomatoes and carrots. More than half of all farms with vegetable production are located in Cartago.

  • The South Pacific region has extensive areas of mechanised pineapple and oil palm cultivation, as well as coffee and sugar cane. Palm oil production is predominantly located in the southern coastal regions, whereas pineapple production is located in the central part of this region.

  • Export crops (such as bananas and pineapples) dominate production in the Northern and Southern Caribbean regions, although basic grains are also grown in the Southern Caribbean region. As of 2014, around 80% of the total banana cultivation area is located in the Limón province, in the Southern Caribbean region. Pineapple production in this region is also mainly located in Limón.

Figure 1.13. Main agricultural activities across climate regions
picture

Note: Map received from IMN and edited by authors, INEC (2014).

Source: INEC (2015b), INEC (2014).

Costa Rica’s long-term commitment to sustainable development has also led to interest in the development of organic production. While Costa Rica has been an early mover in this field (the first law pertaining to organic production was passed in 1995), organic production remains marginal, at around 1.6% of total production in 2014 (Box 1.3).

Box 1.3. Organic production in Costa Rica

Organic production in Costa Rica emerged in the early 1980s, starting with the organisation of co-operatives of small-scale vegetable farmers. In the late 1990s, several important organisations were founded to promote organic production, including the National Association of Organic Agriculture (ANAO) and the National Programme of Organic Agriculture (PNAO). The first law on organic agriculture was passed in 1995.1 More recent laws include the Phytosanitary Protection Law in 1997 and the Law on Encouragement of Organic Agriculture in 2007 (Law No. 8591). In general terms, the agricultural policies that promote the organic agriculture include financial and tax incentives; free inspections, certifications and training; articulation of public-private efforts to facilitate research, credit and training for producers; and consumption promotion of organic products (MAG, 2016).

Despite these policies, the amount of certified area has not significantly increased (Figure 1.14). Currently, organic farming accounts for 1.6% of total production2 in Costa Rica. In total, the country’s share of organic production area is below the world average, and lower than in many other countries in the region (such as Argentina, Peru, Honduras, Panama, Nicaragua, Mexico and El Salvador) (FAOSTAT, 2016).

Figure 1.14. Organic production area in Costa Rica
picture

Source: PEN, Environmental database (2016); SFE (2015).

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Various reasons have been given for the limited development of the organic sector, including cultural obstacles and prejudices (Barquero, 2010) or the global economic crisis and fluctuating prices for organic products (Amador and Cussianovich, 2002). A study on organic agriculture in Costa Rica for the National Programme for Organic Agriculture (IBS Soluciones Verdes, 2013) attributes the decline to a lack of resources, and of public and private support particularly in areas such as extension services, technical assistance and innovation systems (PEN, 2015a). Other identified barriers have been the high cost of certification, stringent requirements on traceability, low levels of mechanisation and limited production techniques, high cost of labour and organic fertiliser (MAG, 2016).

Another set of problems have been identified within the marketing and commercialisation channels. Despite support from various international organisations, farmers encounter difficulties in receiving price premiums for their organic products (PEN, 2015a). Although the majority of organic production (69%) is oriented towards exports, there is no national strategy to simplify access to international markets for small-scale farmers. According to the study by IBS Soluciones Verdes (2013), 38% of organic farmers face problems finding support to market and distribute their products. While 2015 saw another increase in organic production, these obstacles will need to be addressed if this trend is to be sustained.

1. Ley Orgánica del Ambiente 7554.

2. Cultivated area of main agricultural activities (permanent and annual crops).

Land use

Structural change in production has been accompanied by shifts in land use. In particular, total agricultural area – including pasture, permanent crops, and annual crops – has decreased, from 2 305 000 ha in 1990 to 1 817 000 ha in 2013 (Figure 1.15). This reduction is largely attributable to the decrease in permanent meadows and pasture: in 1990, 77.9% of total agricultural land was dedicated to permanent meadows and pasture, but this share decreased to 69.8% in 2013. While most former pasture area was afforested (PEN, 2015b) (Box 1.4), some pasture and land for annual crops was reallocated to permanent crops, the area for which increased from 10.8% of total agricultural land in 1990 to 17.4% in 2013.

Figure 1.15. Agricultural land use in Costa Rica
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Note: Permanent crops includes crops that are not destroyed when harvested, but are able to produce again, such as coffee, sugar cane, palm, pineapple and bananas.

Source: FAOSTAT (2016).

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Box 1.4. Forestry

Between 1800 and the 1960s, around 40% of Costa Rican territory was deforested, a trend accelerated by the expansion of farming and population growth. The largest periods of deforestation occurred between 1960 and 1979, with around 35 000 ha lost per year, and between 1979 and 1986, with around 39 000 ha lost per year. In the 1980s, at the peak of deforestation, only 41% of Costa Rican territory was under forest cover. In an initial, sustained effort, from 1986 to 2000, however, 17 000 ha were recovered per year, increasing to 26 000 ha from 1986 to 2000 (PEN, 2009).

Indeed, in contrast to other Central American countries and global trends, Costa Rica’s forest recovery efforts have been significant. Forest cover increased from 42% in 1997 to 53% of total land surface by 2013 (SINAC, 2015). Compared with other Central and South American countries, Costa Rica is the only country that has fully recovered its 1990-levels of forest cover – with the exception of Chile, which had a lower initial rate of forest cover (23%) (Figure 1.16).

Forest and conservation programmes have played a critical role in the reforestation process. In particular, the FONAFIFO programme, created by the Forest Law 7575 in 1996, offers financial incentives for owners of natural forests – around 600 000 ha are currently under the environmental services payment system (SINAC, 2014; Chapter 3). Reforestation is also encouraged by training and information programmes operated by MINAE and several NGOs. Furthermore, MAG assists producers in forest conservation practices, and provides technical assistance for the management of silvopastoral systems. Lastly, since the beginning of the 2000s, the fall in international meat prices, increasing tourism, and migration towards urban areas have also facilitated the process of forest restoration (PEN, 2009).

Figure 1.16. Evolution of forest cover in selected countries
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Source: World Bank (2016), World Development Indicators.

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The shift toward land use for permanent crops reflects the increase in land dedicated to new export products, in particular the growth in pineapple and palm oil, as well as to sugar cane production. Between 1990 and 2013, the area dedicated to pineapple grew seven fold. A similar trend can be observed for palm production, for which the area more than tripled, and sugar cane, which doubled in area. Although the area dedicated to coffee decreased by 18.5%, it still constitutes the largest production area, accounting for 93 774 ha in 2013 (SEPSA, 2015).

1.5. Farm structures

The majority of agricultural land is held by only 3% of all farms. The number of farms is decreasing overall, as the share and number of medium and large-scale farms has decreased. However, the number of small-scale farms is increasing. Medium and large-scale farms produce products oriented towards the high-value export market, while small-scale farms continue to produce more traditional products.

Farm size

Recent trends suggest that while medium and large-scale farms are consolidating, small farms are fragmenting – deepening the dualistic structure of the agricultural sector (Figure 1.17). Between 1984 and 2014, large-scale farms (defined as those with more than 200 ha of land) accounted for only 2.8% of all farms but owned 47.1% of agricultural land. Small-scale farms (with less than 5 ha) made up 45.3% of all farms but only 1.9% of total farm area in 1984; these shares increased to 52.1% and 3.6%, respectively by 2014. Over the same time period, the share of other medium and large-scale farms has declined (INEC, 1984; INEC, 2014).

Figure 1.17. Evolution of land concentration
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Source: INEC, Agricultural Census (1984, 2014).

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This fragmentation and the increase in small-scale farms over recent decades are leading to a decline in average farm sizes. While the average farm size in 1984 was 30.1 ha per farm, this decreased to 25.9 ha by 2014 (Table 1.1). One explanation could be that several farms sold small plots (quintas), which are used for agricultural activities, but are no longer registered as farm land. Urbanisation has also led to the division of farm land and its integration into urban areas (Pomareda, 2015). Fragmentation is also increasing due to inheritance customs, which see farms divided among heirs.

Table 1.1. Evolution of farm structure 1950-2014

National census

Number of farms

Area of farm land (1 000 ha)

Average farm size (ha)

1950

43 086

1 815

42.1

1955

47 286

1 854

39.2

1963

64 621

2 671

41.3

1973

81 562

3 123

38.3

1984

101 938

3 070

30.1

2014

93 017

2 406

25.9

Source: INEC (2014), Agricultural Census.

Small-scale farms produce a broad range of products, though the majority specialise in coffee, fruits, livestock and basic grains (Table 1.2). More than one third (36.3%) of small-scale farms (defined as farms with fewer than 5 ha) produce coffee as their principle activity. 12.3% of small-scale farms specialise in fruits, which includes pineapples, as well as oranges and mangoes. Cattle (10.6%) and basic grains, including rice, beans and maize (9.8%) are also common. Other products, such as bananas (2.8%), sugar cane (1.9%), palm oil (0.6%), poultry (3.5%) and pigs (1.1%) are rare as main activities for small-scale farmers. Large shares of the production of small farms are used for private consumption (Pomareda, 2015); for example, 72% (i.e. 3 204) of the total number of rice farmers (i.e. 4 467) produce for their own consumption. A similar trend can be observed for maize (71%) and beans (65%) (INEC, 2014).

Table 1.2. Number of farms by main activity and farm size, 2014

Farm size (ha)

Total farms

Coffee

Banana

Sugar cane

Palm oil

Fruits1

Basic grains2

Poultry

Pigs

Cattle

Other3

<5

48 472

17 585

1 338

905

278

5 973

4 765

1 676

555

5 160

10 237

5-10

14 453

2 727

400

394

555

1 511

1 211

125

119

4 808

2 603

10-50

20 789

2 245

547

416

857

1 313

1 566

137

140

10 630

2 938

50-100

4 774

251

94

59

113

162

236

18

24

3 127

690

>100

4 529

153

206

100

129

167

192

7

20

2 791

764

Total

93 017

22 961

2 585

1 874

1 932

9 126

7 970

1 963

858

26 516

17 232

1. Includes pineapples, oranges and other fruits.

2. Includes rice, beans, maize and other basic grains.

3. Including vegetables, aquaculture, tourism and others.

Source: INEC (2014), Agricultural Census.

Large-scale farms dominate the production area for several crops for export (pineapple, banana, sugar, palm) and domestic consumption (rice). More than 90% of the area for pineapple production is held by large-scale farms of 100 ha or more. Bananas and sugar cane are also predominantly produced on large-scale farms, with 86% and 81% of production area belonging to such farms, similar to palm oil (67%). Rice, which is not an export crop but is instead directed towards the domestic market, is also dominated by large-scale farms, which account for more than 76% of the planted area (INEC, 2014).

Land concentration has increased for most products in recent decades (Table 1.3). While the area allocated to pineapples and sugar has increased, the number of farms has declined by 61.6% for pineapple and 33.8% for sugar cane. The number of coffee, rice and cattle farms decreased by more than their production area. Only for the production of bananas did the share of farms increase by more than the production area. Concentration in pineapples and palm oil may be due to foreign investment. More than 50% of pineapple plantations are controlled by Chiquita, Dole and Fresh del Monte. For palm, 60% of the cultivated area is controlled by foreign investors (FAO, 2010a).

Table 1.3. Number of farms and farm area (ha) of selected crops in 1984 and 2014

Area of farms

Number of farms1

1984

2014

% change

1984

2014

% change

Coffee

89 881

84 133

-6.4

34 464

26 527

-23.0

Palm

16 830

66 420

294.7

NA

2 169

NA

Sugar cane

47 287

65 062

37.6

7 377

4 880

-33.8

Rice

86 439

58 540

-32.3

15 205

4 467

-70.6

Banana

32 316

51 758

60.2

4 229

15 924

276.5

Pineapple

2 497

37 660

1 408.2

3 197

1 228

-61.6

Cattle

1 651 561

1 278 817

-22.6

51 745

37 171

-28.2

1. As more than one crop can be cultivated in a farm, this can increase the total number of farms.

Source: INEC, Agricultural Census (1984, 2014).

Land ownership

Land ownership is generally high: almost 95% of all farm area is owned by the producer and property rights are secure10 . The remaining 5% includes different forms of tenure, such as rent, payment in kind, or gratis use. The share of property ownership is slightly lower for farms with less than 10 ha (92% own their farms) and farms with less than 1 ha (87%). Nevertheless, of the 266 465 people employed in agriculture in the first trimester of 2016, 24% were self-employed, which leaves more than 200 000 as salary workers, i.e. most likely landless agricultural workers. The percentage of self-employed workers in agriculture has remained around 25% for the last five years (INEC-ECE, 2016).

The majority of farmland is under the control of private individuals as opposed to companies. The legal status of producers shows that in nearly all provinces, less than half of the area is managed by enterprises (de jure and de facto). San José is the province with the highest share of farmland run by private individuals (75%). In Guanacaste and Heredia, on the other hand, most farms are under some form of organisation. Not surprisingly, the share of ownership by individuals or households declines with farm size. While more than 90% of small scale farms (ha) of smaller than 5 ha are run by households, only 32% of the area of large-scale farms are so (INEC-ECE, 2016).

Indigenous farmers constitute only a minority of owners (6%) (INEC, 2014). However, given that indigenous people represent only 1% of the total population (INEC, 2013), this is a high percentage. The eight different indigenous peoples in Costa Rica hold 24 indigenous territories (INEC, 2013), each of them led by an Indigenous Holistic Development Authority (ADII) (Borge, 2008). Within the indigenous territories, there are 4 813 farms, of which 63% are managed by indigenous producers.

One-sixth of private farm owners are women. The agricultural census (2014) showed that 12 598 farms (13%) are managed by women, holding only 8.1% of farm area. Including farm land owned by legal entities, women manage only 4.4% of all farmland. 95% of all farmland run by women is private property.

1.6. Agricultural productivity

Despite the success of the export sector, a slowdown in Total Factor Productivity (TFP) growth over the last decade has decreased Costa Rica’s competitiveness in comparison with other Latin American countries. While TFP grew faster in Costa Rica than Brazil, Mexico and Chile during the 1990s, Costa Rica now has the lowest TFP growth of the group (Figure 1.18). Between 2003 and 2012, almost 90% of output growth could be attributed to TFP growth in Brazil and Mexico; in Chile, TFP growth offset decreasing inputs. For the same time period, TFP growth in Costa Rica accounted for only 27.7% of output growth. This decline in productivity growth not only threatens international competitiveness but also indicates difficulties regarding both the productivity of the domestic sector and the inclusion of many small-scale farmers in the growth path (Fuglie and Rada, 2015).

Figure 1.18. Trends in total factor productivity, 1992-2012
picture

Source: Fuglie and Rada (2015), International Agricultural Productivity Dataset, ERS, USDA.

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Growth in TFP at sector level has also decreased when compared with previous decades (Figure 1.19). During the 1980s and 1990s, productivity growth drove output growth. Resource reallocation was a significant factor in the increase of TFP, as land and other resources – namely pastures previously used for livestock – were reallocated to production of non-traditional exports. However, between 2001 and 2012, output growth was driven by input use, and TFP growth declined to 1.2% a year on average.

Figure 1.19. Output growth attributable to productivity growth and growth in inputs, by period
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Source: Fuglie and Rada (2015), International Agricultural Productivity Dataset, ERS, USDA.

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The slowdown in TFP in the last decade could be attributed to a range of factors, including limited capacity for mechanisation, due to the agricultural terrain, as well as to farm size, the expansion of some activities into more marginal land, low labour productivity (due to low education levels and lack of skills) in rural areas, limited access to credit for productivity-enhancing investments, limited access to new and more efficient agrochemicals, and poor-quality infrastructure. Several of these constraints are also identified in the Agricultural Growth Enabling Index (AGEI), a benchmarking indicator for the assessment of the enabling environment for agricultural growth across developing and emerging countries (Box 1.5).

Box 1.5. Agricultural Growth Enabling Index

According to the Agricultural Growth Enabling Index (AGEI),1 Costa Rica’s enabling environment for the agricultural sector performs above average, ranking seventh out a sample of 32 developing and emerging economies (see Figure 1.20 for a depiction of countries’ normalised scores). Costa Rica is the top performer in the political stability component of the AGEI, contributing to a relatively stronger performance in the governance index compared with the other indexes of the AGEI. Costa Rica’s performance is weakest in the agriculture/sustainability index, reflecting below-average scores for access to farm financing and capital intensification. Costa Rica also scored relatively lower (but nevertheless above average) for the financing of agricultural research and development, and land rights and access.

Figure 1.20. The AGEI and its sub-component blocks (normalised), 2010-14
picture

Notes: The AGEI is comprised of four index blocks, with 40% of the weight on agriculture/sustainability factors and 20% each on broader economy-wide governance, capital and market operation. The selected indicators measure circumstances within each country around the early 2010s. To account for the differences in averages of scores of the 32 countries and the variances of these scores across the index and its blocks, this figure shows the normalised score of each country in the AGEI index and in each component block. Specifically, for the AGEI and each of its four blocks, the average for the 32 countries has been subtracted from each country value and the resulting country value divided by the standard deviation for the series, to create series with zero mean and unit standard error. For example, a value of 2 means that the observation for a given country is 2 standard deviations above the average (which is zero) for the 20 countries.

Source: Diaz-Bonilla et al. (2014).

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1. The Agricultural Growth Enabling Index (AGEI) can be used to assess the enabling environment for agriculture in a given country and to compare it with other countries (OECD, 2014a). The index and its four subcomponent blocks are available for 32 developing and emerging economies, including Costa Rica.

Land

Land use change has significantly impacted productivity growth. The structural reforms of the 1980s led to the conversion of pasture land for beef production to permanent crop land (for the cultivation of pineapples, among other crops) in the 1990s (Section 1.4). This shift in production towards export crops may have been the driver for land productivity growth, which has remained above the Latin American average for the last twenty years (Figure 1.21). After a slowdown between 2000 and 2003, land productivity increased at a faster pace until 2008, but has dropped in more recent years. This may reflect the end of productivity gains from land as land allocation has met the production frontier. This is the case, for example, in pineapple production, which, given constraints on overall land availability, has been extended to less well-suited areas. Severe droughts and floods in 2008, 2009 and 2010 could also be contributing factors (Trejo, 2015).

Figure 1.21. Growth in land productivity in selected Latin American countries
picture

Note: Land productivity is measured as total agricultural output (constant global-average prices from 2004-06 at constant USD 2 005) divided by the total agricultural land in “rain-fed cropland equivalents”.

Source: Author’s tabulation, based on Fuglie and Rada (2015), International Agricultural Productivity Dataset, ERS, USDA.

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Average yields per ha have not increased for the main crops in Costa Rica since 1994, with the exception of pineapples (Figure 1.22). Coffee, rice, sugar and palm yields have remained close to their 1990 levels. For pineapple, average yields increased rapidly in the mid-1990s, but then decreased in the last ten years, possibly due to the extension of production to less well-suited areas. Weather events may also be playing a part; severe flooding in the Caribbean curtailed pineapple yields, especially in 2013 and 2014. Banana yields have increased to a certain extent, although flooding in the Caribbean in 2001, 2005, 2009 and 2015 slowed production (Gonzales, 2014; PEN, 2009).

Figure 1.22. Growth in average crop yields, 1995-2014 (index)
picture

Source: SEPSA (2015).

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Labour

Agricultural labour productivity has grown more slowly in Costa Rica than in many other Latin American countries over the last 15 years (Figure 1.23). Until 1997, Costa Rica’s labour productivity in the agricultural sector was higher than that of most Latin American countries, including Brazil, perhaps reflecting increased productivity in the Costa Rican export sector. From 1999 to the early 2000s, however, labour productivity growth slowed in Costa Rica. Brazil, Chile and Argentina achieved higher growth rates over the same period, mainly due to mechanisation and contractions of the agricultural labour force. In addition to low levels of skills and education, the limited scope for mechanisation in some of Costa Rica’s most valuable export crops (labour-intensive tropical fruits and coffee) may also be contributing to slower growth in labour productivity.

Figure 1.23. Labour productivity in agriculture in selected Latin American countries, 1990-2012
picture

Note: Labour productivity is measured as total agricultural output (constant global-average prices from 2004-06 at constant USD 2005), divided by the total number of economically-active persons in the sector in a given year.

Source: Author’s tabulation based on Fuglie and Rada (2015), International Agricultural Productivity Dataset, ERS, USDA.

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Levels of real agricultural value-added per worker have shown little increase between 1990 and 2012, mostly due to the large share of low-skilled workers that produce traditional crops. Until the late 1990s, Costa Rica had higher levels of value-added per worker than most Latin American countries (except Argentina) (Figure 1.24) because of its relatively high-value export products. From 2000 onwards, Costa Rican value-added growth rates remained low, but other economies – namely Brazil – achieved rapid increases. Although labour productivity is high for non-traditional crops in Costa Rica, the relatively large workforce in traditional products with lower value-added decreases the agricultural value per worker for the overall sector. The large contribution of informal labour – especially in the production of non-traditional crops – may also mean that these figures are possibly even overestimates. Nevertheless, Costa Rica is still above the Latin American average, and currently has higher estimated value-added per worker than Mexico, Chile and Colombia.

Figure 1.24. Gross agricultural output per farm worker in selected Latin American countries, 1990-2012 (USD 2005)
picture

Note: Labour productivity is measured as total agricultural output (constant global-average prices from 2004-06 at constant USD 2005), divided by the total number of economically-active persons in the sector in a given year.

Source: Author’s tabulation based on Fuglie and Rada (2015), International Agricultural Productivity Dataset, ERS, USDA.

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Low labour productivity growth and increases in value-added per worker are constrained by the low skill and education levels of the agricultural workforce. Compared to the national average of 9 years, the average schooling of those employed in agriculture for the domestic market and the traditional export sector is 5.5 years, and for those employed in the non-traditional agricultural export sector is 6.1 years (PEN, 2013). The low skill and educational levels of the rural workforce pose challenges for the improvement of agricultural productivity and movement up the supply chain or to other sectors of the economy. Low skill levels may constrain farmers in adopting more efficient and sustainable practices, in obtaining certifications required by overseas buyers, or in selling through more profitable and sophisticated channels, such as supermarket chains and hotels.

Capital

The level of capital investment in Costa Rican agriculture is low. Limited access to credit is a significant barrier, but low investments in mechanisation may also be due in part to the composition of Costa Rica’s agricultural production and its terrain both of which afford more limited scope for mechanisation). Poor-quality infrastructure – namely roads, trade logistics, warehouses and irrigation systems – also constrains productivity growth. Furthermore, although Costa Rica no longer has trade restrictions and has several national producers of agricultural inputs, the registration of new and efficient agrochemicals is problematic, and the use of certified seeds is small, thus decreasing productivity growth.

Access to credit

Less than 14% of farmers receive financing. State banks and co-operatives provide most of the credit (around 5% each). Other sources include microfinance and private banks. The share of agricultural loans in total national credit is 2.5% (SEPSA, 2016). Comparing access to farm financing in other countries in the region, Costa Rica scores lower than Chile, Mexico, Brazil and Colombia (OECD, 2014a) (see Box 1.5 on enabling environment). The relatively low levels of agricultural finance limit farmers’ ability to invest in mechanisation, innovative production methods, or to transition to alternative or higher-value products (see Chapter 2 for more information on agricultural credit).

Machinery

The degree of mechanisation remains relatively low in Costa Rica. Only 12% of all farms use tractors, 8% ploughs, and 1% harvesters. Even for large farms of more than 50 ha, these percentages increase marginally (28%, 12% and 4%, respectively). Small machines, such as backpack spray pumps (78%) and chainsaws (34%) are more common. Only a small share of farms – mainly large-scale farms – has bio-digesters (2%) and solar panels (2%) (INEC, 2014). While some of this low level of mechanisation is not surprising, industry also argues that intensive machinery use is discouraged by high energy prices.

Infrastructure

The quality of infrastructure in Costa Rica is poor relative to other countries in the region. Although the road network is extensive, as a result of investments made during the 1960s and 1970s (OECD, 2013), and small towns have paved entry roads (Trejos, 2013), chronic underspending since the 1980s has led to inadequate extension of this network and poor maintenance in general. With around 68% of the national road system and around 19% of local roads paved (MOPT, 2014 and LANAMMEUCR, 2015), the WEF Global Competitiveness Index survey ranks Costa Rica 103rd in the world for overall quality of infrastructure, and below the Latin American average for roads, ports and railroads (WEF, 2015) (Figure 1.25).

Figure 1.25. Quality of infrastructure in Costa Rica, 2015
picture

Source: World Economic Forum Global Competitiveness Report (2015/16) Database.

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Agricultural exports are especially affected by poor international and regional transport facilities and trade logistics. The World Bank’s Logistic Performance Index (2014) – which evaluates customs, transportation infrastructure, international shipments, logistics competences, tracking and tracing, and timeliness – ranks Costa Rica 87th out of 160 countries. Despite improving its score between 2007 and 2014, Costa Rica has declined in the global ranking. Costa Rica’s lowest scores are for customs, international shipments and transport infrastructure; its best scores are in logistic competences. Compared with other Latin American countries, Costa Rica ranks below Chile, Mexico, Argentina, and Brazil, but higher than Colombia. Poor shipping services and inadequate port conditions at the main port, Puerto Limón, previously caused delays (Schwartz, 2012b), but this has been addressed with the large extension of Terminal Moín. Intra-regional trade – e.g. between Costa Rica and Nicaragua – is also delayed by poor infrastructure, as bottlenecks at the region’s border crossings, mostly attributed to customs delays, increase trade costs for perishable goods (World Bank, 2011). According to the OECD Trade Facilitation Indicators (TFI), Costa Rica’s performance in the area of external border agency co-operation and on governance and impartiality falls below best performance with 0.5 and 1.63 points respectively, where “0” is the worst performance and “2” is the best performance (OECD, 2016).

Insufficient distribution centres and cold chain facilities in some producing regions also reduce the agricultural sector’s export competitiveness and constrain rural development. Transport costs and production losses are increasing due to lack of warehouse facilities, particularly for time-sensitive horticultural products, such as pineapples and dairy products. For instance, for pineapples exported to Europe, the World Bank estimated that product losses from time delays, rough rural roads and a lack of cooling facilities were 50% higher during transport from the farm to the distribution centre than during transport from the distribution centre to the final market in the Netherlands. Overall, the World Bank estimates that logistical costs of Costa Rica’s pineapple export supply chain to the Netherlands were around 45% of the cost, insurance and freight (CIF) price in Holland, despite it being one of the most established supply chains in Central America (World Bank, 2012).

Uneven and inefficient irrigation systems also constrain productivity growth, notwithstanding recent off-farm improvements. Of all farms, only 20% use irrigation systems, mainly due to sufficient rainfall in large parts of the country. The largest share of irrigated farms is found in Catargo, with 29.8% (INEC, 2014). The most common technique is sprinkler irrigation, especially for pineapple production (18% of all pineapple farms). In most drought-prone areas, Costa Rica has installed large-scale irrigation systems. For example, the Distrito de Riego Arenal Tempisque (DRAT) project in Guanacaste, a drought-prone area, aims to improve sustainable water use and to increase farmer’s resilience to droughts (Chapter 3). However, the efficiency of on-farm irrigation methods is reportedly low (SENARA, 2016).

The degree of Internet penetration is also relatively low. According to the 2014 agricultural census, only 30% of producers have access to the Internet, and only 15% use it as their main source of information. Increased internet coverage could assist in the improved dissemination of information on production practices and access to marketing channels.

Agrochemicals

Extensive use of agrochemicals – which are often obsolete – is one factor underlying soil degradation, a significant barrier to sustainable productivity growth. In 2000, Costa Rica was the largest user of agrochemicals in Central America, and one of the largest users among all developing countries (IMN, 2000). Nevertheless, the country has increased its efforts to curb the overuse of inputs and to decrease their impact on water and soil (Chapter 3). According to the National Phytosanitary Service (SFE), pesticide use has declined by nearly half11 – from 20.1 kg of active ingredient per ha in 2008 to 10.2 kg in 2014 – since the issuance of Decree 33495-MAG-MINAE-MEIC for the Regulation on Registration, Use and Control of Synthetic Pesticides, Technical Grade Active Ingredients and Related Substances of Agricultural Use. This decree mandates procedures for the registration and control of chemical, biological or related substances for agriculture. However, according to PEN (2015), official limits on the use of pesticides are still inadequate and are not monitored by any institution.

Overuse of agrochemicals may be driven in part by limited access to new agrochemicals, arising from difficult registration processes. Between 2004 and 2009, only four new products were registered, due to strict import restrictions. Although a new law was issued in 2009 (Ley 8702), and import restrictions were removed, the processing of new registrations did not significantly accelerate. Since 2009, SFE approved only eight of 170 technical active ingredients and eight of 178 formulated synthetic pesticides (SFE, 2016). The registration process often takes more than four years, whereas other countries in the region – such as Chile, Mexico or Colombia – have significantly shorter registration periods of two years or less. The long registration process in Costa Rica has led to the inefficient use of agrochemicals, and may contribute to negative impacts on the environment and productivity. Some of the challenges of getting products registered may be related to environmental concerns and to high levels of bureaucracy in the registration process. In 2016, a new regulation was proposed by both the Ministry of Agriculture and the Ministry of Environment, which is currently subject to public consultation. However, there is scepticism among farmers that much will be achieved by the new regulation, as the main challenges are seen as coming from the bureaucratic process rather than from regulation per se.

Certified seeds

Only a small percentage of seeds in Costa Rica are certified, leading to lower yields and deteriorating quality (ONS, 2016). Palm and coffee producers tend to buy certified seeds (INEC, 2014; IICE, 2013), but many small-scale banana, pineapple and rice producers use seeds from their own production. In contrast, 90-95% seeds in the United States and the European Union are certified (OECD, 2015b). The production of certified seeds is supervised by the National Seed Office (Oficina Nacional de Semillas, ONS), which is attached to the Ministry of Agriculture (MAG). The seeds used for the production of certified seeds are supplied by the National Institute of Innovation, Transfer and Agricultural Technology (INTA) (IICE, 2013). Another supplier of certified seeds is the National Production Council (Consejo Nacional de Producción, CNP).

1.7. Trade flows

Costa Rica’s stable political and economic conditions, relatively high social development indicators, outward-oriented path and structural change of the agriculture sector towards new export crops have helped to position it as a competitive supplier on the world market. However, the recent decline in productivity growth may threaten the country’s strong trade position.

Agriculture plays an important role in Costa Rican trade. Between 2000 and 2015, agricultural exports (including fish and fish products) comprised between 26% and 45% of total exports (UN COMTRADE, 2016). A net exporter of agro-food products, Costa Rica has doubled its agro-food trade balance over the last 20 years (Figure 1.26). However, the gap between exports and imports also decreased over this period, despite the steady growth in the value of pineapple exports. In 1994, the export value of agri-food trade was more than three times higher than the import value. The value of exports decreased to almost double the import value in 2015, due to rising imports since the mid-2000s and declining export values between 1998 and 2002. Declines in export value were driven by the coffee price crisis12 in 2001; international price falls for bananas, beef and sugar; and decreasing production in Costa Rica, due to large floods and droughts (Section 1.4). The global crisis in 2008 saw a contraction in demand from main trading partners (United States, Central America and European Union) and triggered a dip in the 2009 trade balance.

Figure 1.26. Costa Rica’s agro-food trade, 1994-2015
picture

Note: Agro-food trade includes fish and fish products.

Source: UN, UN Comtrade Database (2016).

 http://dx.doi.org/10.1787/888933451675

Integration of the agricultural sector within international markets is strong, and has increased over the last two decades, especially for exports (Table 1.4.). The ratio of agro-food exports to agricultural GDP increased from 127% in 1995 to 167% in 2013. By contrast, the ratio of total exports to total GDP was only 23% in 2013. For imports, integration is lower but growing, representing 25% of agricultural GDP in 1995 but 79% in 2013. Across the economy overall, the agricultural sector has become less important relative to other sectors. Agro-food exports still play an important role, but have declined from 69% of total exports (by value) in 1995 to 45% in 2015. This is indicative of the move away from the export of agricultural commodities and towards a large range of diversified and technologically-advanced products and services, such as electronics and medical equipment (ECLAC, 2016). The share of agro-food in total imports (13% in 2015) has changed little over time.

Table 1.4. Integration of agro-food sector within international markets, 1995-2015

1995

2000

2005

2010

2011

2012

2013

2015

Agriculture, Gross Domestic Product (GDP), current prices

USD billion

1.5

1.4

1.6

2.4

2.4

2.5

2.5

n.a

Agro-food exports

USD billion

1.9

1.8

2.4

3.3

3.8

4.1

4.2

4.3

Agro-food imports

USD billion

0.4

0.5

0.6

1.3

1.7

2.1

2.0

1.9

Agro-food trade balance

USD billion

1.5

1.3

1.7

2.0

2.1

2.0

2.2

2.3

Coverage degree of imports by exports

%

518

382

383

255

227

194

210

220

Share of agro-food trade in total trade

Exports

%

69

33

33

37

37

36

37

45

Imports

%

11

8

7

9

9

11

11

13

Ratio of agro-food exports to agricultural GDP

%

127

132

145

141

159

162

167

n.a.

Ratio of agro-food imports to agricultural GDP

%

25

35

38

55

70

84

79

n.a.

Ratio of total exports to total GDP

%

23

34

36

25

25

25

23

19

Ratio of total imports to total GDP

%

27

38

46

38

44

41

37

30

Note: Agro-food trade includes fish and fish products.

Source: OECD calculations based on UN, UN Comtrade Database (2016); WB WDI (2016).

 http://dx.doi.org/10.1787/888933451683

Exports

The fact that Costa Rica’s agricultural export success is concentrated in a few commodities is a potential source of vulnerability for the sector (Figure 1.27). In 1995 more than 60% of exports were traditional export commodities, such as bananas (37%) and coffee (22%). By 2015, the share of bananas and coffee had fallen to 20% and 7%, respectively. The share of new export commodities – pineapples and palm oil – were 19% and 3% respectively in 2015. Melons and sugar and its derivatives also became important exports in absolute terms.

Figure 1.27. Composition of agro-food exports (values, USD), 1995-2015
picture

Source: UN, UN Comtrade Database (2016).

 http://dx.doi.org/10.1787/888933451695

Although exports are dominated by commodities, processed goods have also gained in importance. Amongst industrial exports, the food industry was the second-largest exporting sector, at 22% of the total. Food industry exports have grown dramatically in the last decade, achieving a growth rate of 4% in 2014-15 (PROCOMER, 2016). Main food exports are syrups and concentrates (20%), juice and concentrates (13%), palm oil (7.8%), sauces and preparations (6.9%), pastry (5.4%) and sugar (6%) (PROCOMER, 2016). The number of products exported increased from 289 in 2006 to 342 in 2015 for the whole food industry (PROCOMER, 2016).

Costa Rica is the world’s top pineapple producer, with a world market share of 55% in 2015 (Figure 1.28). Since 2004, it has also increased its share of pineapple derivatives, such as juice: in 2015, its share of pineapple juice reached 19.5% of total world exports. Nevertheless, the increasing number of competitors, such as Thailand and the Philippines, may challenge the advances made by Costa Rica, especially if productivity growth continues to slow.

Figure 1.28. Costa Rica’s share in world exports of selected commodities, 1994-2015
picture

Source: UN, UN Comtrade Database (2016).

 http://dx.doi.org/10.1787/888933451703

Apart from pineapples, Costa Rica’s share in world exports has decreased for most agricultural products in recent years. The country’s world market share of bananas decreased from 19.2% in 1994 to 9% in 2015. Other products that had large world market shares have also seen decreases; for instance, manioc and melons in the last decade. Although production of sugar cane and crude palm oil has increased in recent years, Costa Rica’s world market share for these products has stagnated or even declined. The share of unprocessed but high-quality coffee – a main export product – has also decreased, from 3.6% in 1994 to 2% in 2015. One explanation is the large boost in coffee production by Asian countries such as China and Viet Nam, which compete on low-quality coffee (ICC, 2015; PEN, 2015b). This has led Costa Rica to orient towards higher-quality production for the export market (PEN, 2015b) (Figure 1.28).

Costa Rica’s main export destination is the United States, although exports to other countries in Latin America are increasing. In 2015, 35% of agro-food exports went to the United States. However, exports to Latin America have increased from 9% at the beginning of the 1990s to 26% in 2015. Trade agreements seem to have played a large role in the diversification of export destinations: all other member states of the Central American Free Trade Agreement-Dominican Republic (CAFTA-DR) – the United States, Nicaragua, Guatemala, Honduras, El Salvador and the Dominican Republic – are now among the top 15 export markets for Costa Rica, and account for 52.1% of all trade (UN Comtrade database, 2016). Meanwhile, the share of European destinations has been decreasing, from 45% of exports in 2009 to 26% in 2015. The main European destinations in 2015 were the Netherlands (8%), the United Kingdom (4%), and Belgium (5%) (Figure 1.29).

Figure 1.29. Main export markets for Costa Rican agro-food products, 2015
As percentage of total agro-food exports.
picture

Source: UN, UN Comtrade Database (2016).

 http://dx.doi.org/10.1787/888933451717

Imports

Agro-food imports have increased significantly over the last two decades. Imports rose from USD 0.3 billion in 1995 to USD 1.9 billion in 2015 (UN Comtrade database, 2016). Growth accelerated particularly sharply between 2004 and 2015, excluding a slowdown in 2009 due to the global economic crisis.

Basic staples for domestic consumption dominate imports, although their shares in agro-food imports are declining. Maize, soya, wheat and rice were the most important agro-food imports in 1995; their shares declined in 2015 (Figure 1.30), but volumes increased in absolute terms. For instance, the share of maize decreased from 15% in 1995 to 8% in 2015. Nevertheless, it has remained the largest component of Costa Rica’s import composition. Wheat and soya beans imports, dominant from 1995 (10% and 12% respectively), fell to 4% and 6% in 2015.

Figure 1.30. Composition of agro-food imports (values, USD), 1995-2015
picture

Source: UN, UN Comtrade Database (2016).

 http://dx.doi.org/10.1787/888933451729

Despite declining import shares, Costa Rica still relies on grain imports to satisfy domestic consumption of wheat, yellow maize, and soybeans. Other key imports are chicken, pork, and dairy (included under the “other” category), as well as bakery products. Significant imports of rice and dried beans are also necessary to meet local demand. In 2011-12, 31% of rice consumption (in value terms) had to be imported (IICE, 2013). Moreover, prepared and preserved fish imports have increased from a marginal share in 1995 of 0.3% to 3% in 2015 (see more details in Box 1.6). Rising imports signal a greater dependency on international markets, especially for grains (PEN, 2015b). One explanation for the rise might be a change in consumption patterns towards more processed goods, such as prepared fish. Furthermore, as imports also often underpin exports, part of this growth could be associated with export growth.

Box 1.6. The importance of fisheries in Costa Rica

The Costa Rican fishing industry has social and economic importance as a source of foreign exchange, and as a contributor to employment in the generally economically-depressed and marginal coastal areas of the country.

From 2000 to 2010, the contribution of fisheries and aquaculture to GDP was 1.4% (INCOPESCA, 2016). Fish exports have more than doubled – from USD 61.3 million in 1990 to USD 157.2 million in 2013. Fish imports have increased six-fold – from USD 15 million to USD 95.1 million – over the same period (Figure 1.31). Rising imports are consistent with rising domestic consumption1: per capita consumption of fishery and aquaculture products (kg/person/year) has increased from 9.04 kg per capita in 2000 to 13.77 kg in 2010 (INCOPESCA, 2016).

Figure 1.31. Fisheries production and trade in Costa Rica, 1990-2014
picture

Source: FAOSTAT (2016).

 http://dx.doi.org/10.1787/888933451738

Marine fisheries continue to be important, both socially and economically. Within the fisheries sector, marine fisheries create not only the majority of jobs, but also the most foreign exchange. Total volume of fisheries capture grew from 18 370 tonnes in 1990 to a peak of 35 463 in 2000, and then declined to 19 508 in 2013. On the Pacific coast of Costa Rica, there are five main landing points for fishery products and many other smaller ones in the surrounding area (INCOPESCA, 2016).2 In the Caribbean, there are two main product landing sites near the border with Nicaragua and Puerto Limon.

Aquaculture has increased significantly in recent decades, from 573 tonnes in 1990 to 31 972 tonnes in 2014 (primarily of tilapia, trout, shrimp and prawn). Taking advantage of the DRAT’s irrigation canals in Guanecaste, aquaculture has become an important industry. Although production is concentrated in that region, tilapia is cultivated throughout the country. Production is mainly exported to the United States. Other cultivated species in Costa Rica are marine shrimp, giant Malaysian shrimp, trout, catfish, and several species of carp. Although efforts have been made to improve marine fish cultivation, there are no major commercial projects (INCOPESCA, 2016)

Responsibility for the fishing sector lies with two state institutions. The Costa Rican Institute of Fishing and Aquaculture (INCOPESCA) manages marine fisheries resources and encourages the development of aquaculture in inland and marine waters. The Ministry of Environment and Energy (MINAE) manages inland fishery resources, the use of which is restricted to sports fishing and subsistence. In 2012, the Vice Ministry of Water, Oceans, Coasts and Wetlands was created to improve the governance and management of oceans and freshwater.

For many years, small-scale fisheries, particularly on the Pacific coast, have been absorbing labour from the agricultural and livestock sectors as these underwent structural reforms. This increase in fishery activities has imposed significant pressure on coastal fishery resources, but has reduced poverty on the periphery of major cities, especially San José. In the small-scale artisanal fisheries found along the coastal areas, more than 2 421 vessels are properly registered, although there are undoubtedly more vessels that are operating informally (INCOPESCA, 2016).

1. Consumption is calculated based on whole fish as the raw material. Consumption does not include tuna, which are captured by foreign fleets. However, according to representatives of the canned tuna industry, consumption of tuna is high.

2. Cuajiniquil, Coco Beach, Puntarenas, Quepos and Golfito.

Source: INCOPESCA (2016).

Similar to exports, imports – while still concentrated on products from the United States – have shifted to Latin America and China to some extent (Figure 1.32). The United States’ share of imports was 40% in 2015, falling from 54% in 1995. Imports from other Latin American countries increased from 30% of total imports in 1995 to 35% in 2015. Mexico was the largest provider (7%), followed by Nicaragua (5%) and Guatemala (4.5%) in 2015. In aggregate, the CAFTA-DR countries accounted for 53% of all imports in 2015. Imports from China have also increased, reaching 3% in 2015 (see Chapter 2 for a more detailed discussion on trade policy).

Figure 1.32. Main suppliers of agro-food products to Costa Rica, 2015
As percentage of total agro-food exports.
picture

Source: UN, UN Comtrade Database (2016).

 http://dx.doi.org/10.1787/888933451748

1.8. Upstream and downstream sectors

Marketing channels for major commodities

Marketing channels connect farmers with the commercialisation of their products. Figure 1.33 displays the market chain linkages for agricultural commodities in Costa Rica. The main stages include producers, wholesale markets and distributors, and retailers. Depending on the commodity, additional stages can include industrial processors and/or exporters to international markets. Although agricultural production has diversified towards more processed goods in recent years, agricultural commodities are still often directly marketed without further processing (Hidalgo, 2009). The marketing channel for each commodity depends on the individual characteristics of the product market, and can be significantly more complex than the standard model.

Figure 1.33. Standard marketing channel for agricultural commodities in Costa Rica
picture

Source: Based on MAG (2007a), MAG (2007b) MAG (2007c).

The dualistic structure of the domestic and export sectors is also evident in the marketing channels, with the majority of small-scale farmers poorly integrated into marketing chains and receiving only a small share of the price paid by consumers. According to the agricultural census, many farmers produce small amounts of basic grains, such as rice (72% of all farmers have some sort of rice production), or fruits for own consumption. For the non-traditional exports, the share of farmers producing small amounts for personal consumption is lower – for example, 35% for pineapples and 45% for sugar cane (INEC, 2014). Furthermore, according to MAG (2016), farmers receive a relatively small share of the price paid by consumers for certain products. For example, potato farms receive 37% of the price paid by consumers, with the balance (63%) captured by intermediaries; the farmer share is similar for beans (35%) and onions (around 30%).

Linkages between small-scale farmers and the agro-food industry are limited for most agricultural products, but have improved in the case of a few industries, such as coffee. For some large industries – such as pineapples and bananas – production and commercialisation are largely separated. Constraints to farmers’ participation at more advanced levels of these marketing chains could relate to infrastructure, notably storage facilities and transport, as well as education levels. Varied levels of support from agricultural supply chain organisations also have implications for farmer participation in the supply and marketing channel (Chapter 2). In the case of coffee, for instance, support from the coffee organisation ICAFE has helped to integrate more farmers into the marketing channel (Box 1.7).

Box 1.7. Case study of marketing chains

Pineapple

The pineapple supply chain in Costa Rica is highly standardised and – similar to bananas – an example of a successful export product. Production can either be oriented towards the local market or, alternatively – directly or indirectly – for exports. Figure 1.34 illustrates the different linkages for the pineapple marketing chain.

Figure 1.34. The pineapple marketing chain
picture

Source: Based on World Bank (2012), MAG (2007c), SEPSA (2010).

In 2014, there were around 1 230 pineapple farms (INEC, 2014). Just over a third (35.5%) of pineapple farmers – but only a small percentage of total production, at 9% – produce for local markets. If not directly sold on local markets, most producers deliver their products to collection centres (centros de acopio), often owned by large supermarkets or producer organisations (CPN, 2015). Alternatively, producers can deliver to packaging companies, which often have their own quality control, and often review the production process and provide technical support (MAG, 2007c). Seventeen of these packaging farms are located in Huetar Norte, a region with more than 90% of small and medium-scale farms.

From the packing plant, pineapples go directly to certified exporters. In total, 47% of pineapple production was sent to exporters in 2007 (FAO, 2007). Pineapples that are rejected for export are sold on local markets or go into the agroindustry for further processing, either for the international or the local market (MAG, 2007c). Some farms (13%) also sell directly to agroindustry (INEC, 2014).

The separation of the production and processing stages of the marketing channel leaves little opportunity for pineapple producers to gain from potential value added. To improve the situation, MAG is planning to increase producer participation in the processing process within the country (MAG, 2011).

Coffee

Vertical integration is more present within the coffee industry. ICAFE is the corporation that has contributed to the integration of the value chain, by providing services such as technical assistance, extension, research and development and marketing and promotion services. In 2014, there were 26 527 coffee farms (INEC, 2014), 88% with less than 10 ha. Typical coffee processing consists of milling and roasting. Of 215 processors, 147 are “microprocessors”, processing 4.3% of national production (ICAFE, 2015). There are 172 millers, of which 57 are small with an output of less than 3 000 bushels, and the number of small millers is increasing. New farms that were built with the support of a MAG programme, the National Program for Sustainable Agricultural Production, installed micro mills directly on their farms (FAO, 2010b). These represent 3% of coffee produced; 38% is produced by medium-scale producers, which also process more than half (52%) of the total harvest. Large millers represent only 5% of coffee production, but nevertheless also process 44% of the harvest (IDB, 2014). 30% of mills also roast coffee. In total, there are 57 roasters registered, of which 16% are co-operatives, thus increasing the market power of producers. The increasing number of roasting mills reflects producers’ efforts to capture the value added by roasting and branding (IDB, 2014), thereby supplying the national market with several coffee brands.

Coffee for export, however, remains unprocessed. Small-scale coffee farmers also participate in the export of their products. 70% of all exporters are small-scale operations. Of 336 coffee exporters, 7% are co-operatives (IDB, 2014). For those coffee farmers that are integrated into processing, profit margins are higher compared to those in other coffee-producing nations. In 2010, producers that ceased to deliver to large-scale processing farms, and instead installed their own processing mills, obtained prices per quintal (46 kg) that were up to USD 100 higher than on the New York Mercantile Exchange (FAO, 2010b). Furthermore, legislation ensures that producers profit from the high profit margins that can be achieved by processing the beans. Profit margins are set at 9% for millers and at 2.5% for exporters. Producers receive around 80% of the international reference price (IDB, 2014).

Rice

In contrast with pineapple and coffee, rice is not an export commodity in Costa Rica. Hence, fewer producers and more importers participate in the marketing channel. Commercial rice is grown by 940 farmers (although, according to the 2014 agricultural census, the total number of rice producers is 4 467), with a total of 58 197 ha, around 4% of agricultural land (CONARROZ, 2016).

The rice processing industry receives special protection and is highly concentrated. There are a total of 15 rice mills located near producing areas, especially in Guanacaste. In 2011-12, 15 agro-industrial enterprises, two mills and four factories were owned by the State National Production Council (CNP). Producers and millers are represented by CONARROZ, an influential group which has lobbied to maintain the import tariff and additional protection for the industry (Chapter 2). The owners of the mills are represented by ANINSA, a body focused on the interests of the rice industry (IICE, 2013). Since the 1960s, market concentration in the rice industry has increased (IICE, 2013). The largest four rice processing enterprises increased their market share from 54.4% in 1999-2000 to 70.3% in 2004-05. While their market share decreased to 50.7% in 2012 (IICE, 2013), this still represents a high degree of market concentration.

Some rice processing companies have linkages to rice production through their own or rented farms, or by financing in exchange for production (IICE, 2013). A 2012 study conducted by IICE in the area of Chorotega and the Central Pacific region in general found that 21% of the farmers interviewed received some kind of financing from the rice industry (IICE, 2013). Other rice processors are also involved in the wholesale and retail process.

Source: World Bank (2012), MAG (2007c), SEPSA (2010), IICE (2013), FAO (2010), IDB (2014), ICAFE (2010).

Agro-industry

The agro-industry is growing, and is increasingly playing an important role as an alternative source of employment for agricultural workers (USDA, 2015). The local food industry consists of 20% large companies and 80% small- and medium-sized companies (USDA, 2016). Bakery products represent the largest percentage of products produced by processing firms. Additional processing activities include milling, the processing of meat and meat-products, fruits and vegetables, dairy products, soft drinks and juice, confectionary and chocolate, and fish and seafood processing (USDA, 2015).

For some farms, agro-industry is the main purchaser. Agro-industry is especially important as a buyer for palm (62.6% of farms), coffee (61.7%), and sugar cane (34%). Fresh fruits, such as pineapple (12.9%) and banana (2%), are less likely to be purchased by the processing industry (INEC, 2014).

Wholesaling and retailing trade

Short marketing circuits minimise marketplace intermediation and connect local food suppliers directly to demand. Traditional markets, for example, are often the easiest way for farmers to directly distribute their products, especially for vegetables and fruits. There are about 13 000 traditional markets in Costa Rica (USDA, 2016), including around 70 farmer markets run by the CNP (CNP, 2015).

The most important traditional market is the national wholesale market (Centro Nacional de Abastecimiento y Distribución de Alimentos, CENADA), which is the main wholesale market for fresh agricultural produce and an important connection between small-scale farmers and the domestic market. It is located close to Heredia, about 11 km outside of the capital San José, which connects CENADA to the main roads in the country. CENADA has a well-developed infrastructure, including different market halls with storage areas for wholesalers and fixed selling areas for different products (Jansen, 1996). Around 250 000 tonnes of produce are sold annually at this market, of which 42% are fruits, 56% vegetables, and 2% fish and seafood (PIMA, 2015). Three new large wholesale markets at the regional level are also planned13 (PIMA, 2015).

However, only around 20% of final consumers purchase directly on local markets, and retailers such as local shops and supermarkets are more important. A study conducted by PIMA (2013) found that in 2012, 22.1% of households continued to prefer buying fruits and vegetables at farmers’ markets. A roughly equal percentage of households (21.2%) purchased these goods from supermarkets. The next group of households (19.1%) purchased fruits and vegetables from independent greengrocers, which in turn often purchase their goods from large wholesalers or at CENADA. Other retailers in the same category – such as municipal markets, mini-supermarkets, peddlers, or smaller traditional stores (pulperías) account for around 8% of purchases. To support small-scale farmers, there are also wholesale companies under the state programme (PAI) that purchase from small- and medium-scale farmers in order to supply the public sector (CNP, 2015).

Supermarkets have become increasingly important, importing a rising share of their products directly. At present, 40% of food purchases by Costa Rican consumers are made at supermarkets (USDA, 2016), and the sector is growing. Supermarkets have reported sales growth of 20% in the last two years (USDA, 2016). The five main supermarket chains, with more than 350 supermarkets are Wal-Mart (United States), Gessa (Costa Rica), AutoMercado (Costa Rica), Price Smart (United States), and Megasuper (Colombia). 55% of the food sold in supermarkets is imported (USDA, 2016). Products from national producers are often purchased via collection centres that are managed by the supermarkets (Pomareda, 2015).

Smaller traditional stores (pulperías) are also common, but their number is decreasing. There are more than 20 000 traditional stores across Costa Rica (Pomareda, 2015). They have a more limited selection of goods, but are located in more remote areas. Nevertheless, the presence of small convenience store chains, such as AMPM, Fresh Market and Vidi, is increasingly replacing the traditional pulperías (USDA. 2016).

1.9. Summary

  • Costa Rica’s democratic tradition and economic strength have provided a stable environment for the development of the agricultural sector. Political stability, strong social indicators and secure land property rights have helped to attract foreign direct investment (FDI). Costa Rica’s economic performance has been above the regional average, with low inflation and low unemployment. The global crisis in 2009 hit Costa Rica hard, however, and although the economy recovered rapidly, high unemployment has persisted and the budget deficit has significantly increased, limiting fiscal space for further investments, including in agriculture.

  • While Costa Rica’s poverty rate is lower than in most Latin American countries, the incidence of poverty – as measured by the national poverty lines – has not improved over the last 20 years. Rural poverty rates remain above the national average, and have even increased in recent years.

  • Costa Rica is rich in biodiversity, and fertile land and climate conditions are favourable for a diverse range of tropical crops, including pineapple, bananas and coffee. However, Costa Rica is highly vulnerable to climatic events, and agricultural land remains scarce. Competition for land resources has increased in recent decades, with pressure to convert farmland into non-agricultural uses, such as tourism, residential areas and reforestation. While Costa Rica is a water-abundant country, water scarcity is also a growing challenge in certain agricultural regions.

  • The agricultural sector continues to play an important role in the Costa Rican economy, particularly for exports and employment. In 2013, the share of agriculture in GDP was 5.6%, while 12.7% of the labour force was employed in the agricultural sector, and agricultural exports accounted for 37% of all exports.

  • Building on the country’s outward-oriented growth strategy in the 1980s, the agricultural sector has transformed and developed a successful and dynamic export sector. Costa Rica is a leading exporter of pineapples, but also remains a successful supplier of traditional products, such as bananas, coffee and sugar.

  • The agricultural sector is characterised by a dualistic structure. There have been limited spillovers from the successful non-traditional export sector (and, to a lesser extent, traditional export sector), dominated by large farms, to the domestic market, mostly served by small and less competitive farms. This dualistic structure is contributing to rising inequality and persistent poverty in rural areas. This suggests that attention needs to be given to issues of adjustment for smallholders in the context of the larger structural adjustment process in the sector and the economy.

  • Land ownership is concentrated: 47.1% of the land is held by 2.8% of large-scale farmers (with more than 200 ha). Farmland for successful export crops is owned by large-scale farms. The only exception is coffee, where most of production comes from small-scale farmers. The number of farms with fewer than 5 ha has increased, and smaller farms are fragmenting even further.

  • Following trade opening, agricultural output increased, predominantly due to impressive growth in the production of non-traditional exports as well as less land-intensive livestock production. For example, pineapples increased their share in total agricultural value at the expense of bananas and coffee in particular, and the share of livestock (beef, pig, poultry and milk) also increased. While Costa Rica was an early mover in the organic sector, organic production remains marginal, at around 1.6% of total production.

  • Productivity growth has also stagnated in recent years across the sector, and is low compared to other Latin American countries. Causes include increasingly severe natural hazards, use of more marginal land (for pineapple production, for example), low labour productivity, poor infrastructure, limited access to credit and the ineffective use of agrochemicals due to delays in registration. Infrastructure, in particular transport infrastructure, is identified by various indices (WEF, AGEI) as one of the strongest constraints to Costa Rica’s competitiveness. Limited investment in the transport system against a backdrop of rising natural hazards has led to the deterioration of road quality. Although Costa Rica has historically had a high-skilled labour force, which has contributed to its competitiveness, educational outcomes for agricultural sector workers are poor. The level of capital investment in Costa Rican agriculture is also low, with limited access to credit and low investments in mechanisation, partly explained by the composition of the country’s agricultural production basket.

  • Costa Rica is an open country, a net exporter of agricultural goods and world leader in pineapple exports, with a world market share of over 50%. Exports as well as imports strongly rely on the United States as a trading partner, although the CAFTA-DR regional trade agreement with several Central American countries, the Dominican Republic and USA has led to intensified trade among this group. Agricultural exports have significantly increased in the last decade, chiefly for pineapples and pineapple by-products. Costa Rica’s imports are heavily commodity based (maize, soya, wheat and rice).

  • The majority of marketing channels are characterised by very limited, if any, integration of farmers in the further processing stages. One exception is the coffee sector, where several farmers have begun to process and market higher-value products. Generally, the agro-industry is growing, but continues to be specialised in a few products such as concentrates and juices. Supermarkets are meanwhile gaining more influence in the local marketing channel.

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Notes

← 1. The Costa Rican traditional agricultural export sector is characterised by products such as bananas, sugar and coffee. Non-traditional agricultural export products include pineapple or palm oil. Traditional domestic agriculture is meanwhile characterised by staple foods such as rice, beans, local fruits and vegetables (SEPSA, 2016).

← 2. The index ranges from zero (least restrictive regime) to one (most restrictive). The higher the value of the index, the more obstacles there are for inward FDI (OECD, 2014b). In Costa Rica, the manufacturing sector was found to have the least restrictive regime (0.017), followed by the tertiary sector (0.05). The primary sector was found to be the most protected (0.10), mainly due to the high protection of the mining sector (0.34). Fisheries displayed low levels of restrictions for FDI (0.05).

← 3. ECLAC (2013) estimates that by 2024, the elder generation’s (60 years and older) national consumption will overtake that of the 19 years and younger category.

← 4. The Orshansky coefficient is the inverse of the income share spent on food items. The coefficient was updated from 2.07 to 2.5 for urban areas, and from 1.97 to 2.30 for rural areas, based on income and expenditure surveys conducted in 1988 and 2004. Another modification included the update of the food consumption basket, including 16 (11) new items and excluding 8 (6) items in urban (rural) areas. The cost of the non-food consumption basket is obtained by multiplication of the cost of the food basket and the corresponding Orshansky coefficient (INEC, 2010a). This increased the cost of the urban consumption basket by 13% and of the rural consumption basket by 10%. Based on data from an experiment using the new methodology with 2009 data (INEC, 2010b), the methodology change accounts for almost all of the change in poverty in urban areas (98.9%) but for less than half (46.3%) of the change in rural areas.

← 5. This includes forest conservation land on farms.

← 6. The El Niño Southern Oscillation (ENSO) consists of three phases: El Niño (warm phase), La Niña (cold phase) and the neutral phase. On average, El Niño and La Niña occur every three to five years. At the extreme, they happen every two to seven years. Normally, El Niño lasts nine to 12 months. In exceptional cases, it can last up to four years (1991-94). La Niña is more persistent, lasting from one to three years. Both phenomena typically start between March and June, and reach their maximum effect between November and February (see Chapter 3 for more details).

← 7. This trend is consistent with a widening wage gap between agricultural income and the national average wage. In 2010, average monthly agricultural income corresponded to 70% of the national monthly average; this figure declined to 61% in 2014. A similar trend can be seen in rural areas: the monthly average wage in the agricultural sector decreased from 84% of the national average in 2010 to around 74% in 2014 (INEC-ECE, 2016).

← 8. Permanent crops refers to crops that are not destroyed when harvested but able to produce again, such as coffee, sugar cane, palm, pineapple and bananas.

← 9. “Traditional” in this context should be understood to mean agriculture that involves the use of traditional agricultural practices and machinery, as opposed to the production of “traditional” product types previously referred to in this report. Furthermore, traditional agriculture is also associated with smallholder agriculture, poorly capitalised and with relatively low levels of productivity (OECD, 2015).

← 10. Costa Rica has a clear legal framework on property (FAO, 2010a). Legally, property in Costa Rica can be distinguished between private property and communal property. For the latter, two models can be identified: agricultural settlements and local indigenous communities. Agricultural settlements were established in Costa Rica in the early 1950s, but it was only in 1962, with the creation of the ITCO (Institute for Lands and Colonization), that the process became regularised and protected by law. Later, in 1982, with the creation of the Institute of Agrarian Development (IDA), the process of titling was accelerated. It is currently estimated that there are 780 land settlements and almost 40 000 parcels of 5 to 7 ha each. The exact number is unknown, as many of those who received the parcels sold these after a few years, as authorised by law (Pomareda, 2015). Nevertheless, there are some deficiencies in property rights. Ramirez and Villalobos (2014) have analysed the cantonal regulation plans (PRC) and identified various legal and institutional factors that limit the territorial system, such as deficiencies in institutional co-ordination, absence of institutional resources and conflicting norms.

← 11. According to FAOSTAT, fertiliser levels have also declined dramatically, from 259 tonnes per 1 000 ha in 2005 to 129 tonnes in 2010 – however, these statistics are estimates based on purchase levels – including imports-exports and fertiliser for non-agricultural purposes – and thus are not reliable measures of fertiliser use. SFE is currently reviewing the measurement methodology.

← 12. Coffee prices dropped sharply in 2001, due to an imbalance between supply and demand for coffee (ICO, 2002).

← 13. The three new markets are planned for the regions of Chorotega, Brunca and Huetar Caribe. A previously-planned fourth market in Huetar Norte has been cancelled.