San José, Costa Rica, since 1956

New Poverty Rate Lowest in Decades

President Oscar Arias can speak more credibly about poverty at a summit in Chile this week now that Costa Rica has seen the greatest drop in poverty in 13 years.

The fraction of Costa Rican households living in poverty dropped to 16.7% from 20.2% in one year, the National Statistics and Census Institute (INEC) announced last week after tallying the results of its annual Household Survey. President Arias is expected to tout those numbers at a three-day summit in Chile for leaders of Latin American countries, Spain and Portugal, which started yesterday.

“If we continue like this, we could eradicate extreme poverty by 2010,” Arias told reporters. “I’m really proud to have been able to do something for the humblest people.”

After surveying more than 14,500 homes across the country in July, the institute also found that the fraction of Costa Rican households living in extreme poverty fell to 3.3% from 5.3% within one year. A family living in an urban area had to make less than $104 per month per person to qualify as poor, and $48 per month per person to qualify as extremely poor.

Victor Hugo Céspedes, vice-president of the institute’s council of directors, said the decrease in poverty was largely caused by steady economic growth and a decrease in inflation. Gross domestic product (GDP) has grown at least 6% annually for the past three years, and inflation dropped from 12% in the year ending July 2006 to 8.7% in the year ending July 2007. When inflation rates decrease, households make more money in real terms.

The steady GDP growth also boosted incomes by creating more jobs. Some 54.4% of Costa Ricans over age 12 were working in July 2007 – a historic high, the institute found. Unemployment decreased to 4.6% in 2007 from 6% in 2006.

The economic growth stems partly from foreign investment, and partly from prudent monetary and fiscal policies dating back years, said Pablo Sauma, an economist at the University of Costa Rica (UCR).

Céspedes also gave the Arias administration some credit. Cash transfer programs from the state were responsible for about one-third of the decrease in poverty, Céspedes said. He pointed to the Avancemos program, an Arias administration initiative that gives poor families a monthly average of $67 per child as an incentive for youth to stay in high school (TT, Aug. 17).Nearly 90,000 students were enrolled in the program as of late October.

Céspedes said the pension program administered by the state Social Security System (Caja) also helped. The program gives health care and a monthly cash transfer to senior citizens, invalids, widows and orphans living in conditions of extreme poverty. The Arias administration doubled the transfers to about $67 a month in 2006, and then further increased them to about $96 a month in 2007. Nearly 74,000 people are now enrolled in the program, said director Roy Retana.

Céspedes said Arias’ programs account for between 1-1.4 percentage points of the reduction in poverty. The three previous administrations implemented anti-poverty initiatives, but they were not as focused or as massive as Arias’ programs, said María Elena González, the institute’s assistant director.

“There are some people who think poverty is reduced by ideological rhetoric,” said Housing Minister Fernando Zumbado, who leads the Arias administration’s antipoverty efforts. “Poverty is reduced by social programs and an economy that works for everyone.”

Still, the boon hasn’t been equal across all areas. The poorest 20%, who benefit most from state transfer programs, and the richest 20% have seen their monthly incomes increase more than the rest of the population.

Nearly half of total income last year went to the richest fifth of the population.

Nor has the job boom hit all sectors equally. The country saw a 30% increase in financial sector jobs, a 20% increase in construction jobs, and an 11% increase in jobs at hotels and restaurants. Céspedes said more demand for skilled labor could further increase inequality, unless more people have access to quality education.

Critics regularly question INEC’s methodology in this annual survey, and this year is no exception. Researchers figured that families must spend about $48 per person per month in urban areas and $42 per person per month in rural areas to cover basic nutritional needs. Families making less were labeled as “extremely poor.”

The Caja’s Roy Retena said that figure is too low.

“It’s tiny. It would be hard for a person with ¢24,000 ($46) to cover their basic nutritional needs,” he said. Under the Caja’s pension program, families making up to 50% more qualify as extremely poor.

INEC’s González said the basket of basic goods used to define nutritional needs, known as the canasta básica, represents surveys conducted in 1987-8. González said the basket would be updated by the next annual survey – a promise the institute has been making for years (TT, Dec. 3, 2004).

If the basket is updated, “it’s hard to know what will happen,” she said. “It could be that the poverty line goes up,” which means more families would qualify as poor.

Caveats aside, the institute’s poverty figures are good news for Costa Rica. The challenge, analysts said, will be to sustain or even further reduce them.

“It’s a double challenge – maintain the social policies and maintain the level of economic growth. Neither is easy,” said Miguel Gutiérrez, director of the State of the Nation report produced annually.

President Arias said the country could further reduce poverty by passing progressive tax reform. Arias supports a tax on “luxury” houses worth more than about $192,182, to be used to create housing for poor people. He is also pushing for a development bank that would lend money under favorable conditions to small and mediumsized producers.

But both projects depend on the notoriously slow Legislative Assembly, which is postponing any talk of a social agenda until March, after the deadline for 11 laws required to implement the recently ratified Central American Free-Trade Agreement with the United States (CAFTA).

Arias says that treaty – and a free-trade agreement with Europe and possibly China – will help Costa Rica further reduce poverty. He has argued that CAFTA will sustain economic growth, create jobs and increase incomes by lowering prices of imported goods.

The President’s detractors are equally vehement that the treaty will have the opposite effect.

The UCR’s Pablo Sauma says time will tell.

“We think the free-trade agreement will help a lot. That is the bet, right?” Sauma said. “But things don’t always turn out as one hopes. There are no magic recipes (for economic growth).”


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