Latin America finds lessons in Irish approach to economy

Sat, Feb 4, 2006, 00:00

World View: 'Can Costa Rica become Ireland?" was the provocative question discussed last week at a conference in the economics department of the University of Costa Rica in San José. Attracting not just academics but also senior government officials, it is yet another sign of the widespread interest in Latin America in the success of what they label "the Irish model".

Prof Eva Paus of Mount Holyoke College, Massachusetts, gave a lengthy presentation on her recently published book on foreign investment, development and globalisation and which carries the subtitle Can Costa Rica become Ireland? I was invited to address the social deficits of the Irish model, thereby broadening the debate to include its social impacts.

The similarities between Costa Rica and Ireland are telling. With almost exactly the same populations, both have had to cope with situations of major civil conflict on their northern borders while pursuing active strategies to attract foreign investment, particularly from the US.

As one former Costa Rican government negotiator told me, it was not easy to help US investors distinguish peaceful and stable Costa Rica from its neighbours Nicaragua, El Salvador and Guatemala, which collapsed into brutal civil wars in the 1980s after decades of severe government repression.

Costa Rica managed to attract a major investment by US multinational Intel in 1997 that has brought 3,000 high-tech jobs to the country. This has raised major expectations that it is following the path of Ireland's success in which the same US company played a key role in the early 1990s.

In her contribution to the conference, Prof Paus emphasised the importance of the different regional contexts in which both countries find themselves.

While Ireland received high levels of structural funds from the EU to help it upgrade its infrastructure and workforce, Costa Rica was dependent on aid from the US during the 1980s which came with far more strings attached.

High levels of US aid to Costa Rica were part of Reagan's policy to combat insurgency in other Central American countries in the 1980s. Washington's plan was to make Costa Rica into a showcase for free-market economic success in contrast to the policies of the left-wing Sandinistas in neighbouring Nicaragua.

Yet, in fact, this helped dismantle what Prof Jorgé Rovira Mas described to me as "the 30 glorious years from 1950 to 1979", when Costa Rica achieved through determined state action what no other country in the developing world managed - high economic growth rates, a stable political democracy and a developed welfare state.

Their country in those years was far more successful than Ireland at the time.

As part of the liberalisation of Costa Rica's economy, advisers from Ireland's Industrial Development Authority (IDA) were brought in to advise on attracting foreign investment.

Yet Costa Rica has had more modest success than has had Ireland in the 1990s in attracting US investment. Prof Paus attributed this to the subsidies that Ireland provides in addition to the low-tax regime for foreign companies that both countries offer. If Costa Rica is unlikely to become Ireland, the conference also heard how both countries face ever more intense competition to build on their successes to date.

Many are now worried that the imminent approval of the Central America Free Trade Agreement (Cafta) with the US will further undermine the advantages Costa Rica has enjoyed in the region. And, as Prof Paus put it, if the challenge for Costa Rica is to become Ireland, the challenge for Ireland is to become Singapore, as it loses its advantage of being a relatively low-wage economy and sees companies moving to other locations.

She told her Costa Rican audience that she was impressed by Ireland's proactive approach to addressing the challenge of investing in its own research capacity while also seeking to lure multinationals to do more research and development here. She saw some success to this strategy but admitted that it was far too early to judge whether it will manage to continue the Irish "miracle".

For, apart from similarities in industrial policy, what both countries also have in common are low tax rates that have undermined investment in social services. My Costa Rican audience was astonished when told of people waiting on trolleys in Irish hospitals; on the other hand, Costa Rican reports point to a decline in the quality of education, especially in secondary schools.

These social deficits have dominated a lacklustre Costa Rican general election campaign over recent weeks, which is almost certain to see former president Oscar Arias return to the presidency in tomorrow's vote. A winner of the Nobel Peace Prize in 1987 for his efforts to resolve the Central American civil wars at the time, an Arias victory will see a return of the social-democratic Party of National Liberation (PLN) to government.

The PLN was the architect of the highly successful Costa Rican model of the 1950s but, paradoxically, also led the liberalisation of the economy in the 1980s that is widely seen to have dismantled that model.

Observers now see the party as returning to its more centre-left traditions and point to plans by the Arias team to implement a tax reform that would significantly increase resources for the state.

If there is one lesson from our deliberations last week, it is that national politics still count amid the pressures of globalisation.

Dr Peadar Kirby is a senior lecturer at Dublin City University.