By more than one measure, Costa Rica is the wealthiest country in Central America. It has the highest Gross National Product per capita, and wealth is probably more equitably distributed here than in any other Central American country. The country has enjoyed steady annual economic growth ever since the government enacted a series of reforms in the mid 1980s. (The relatively equitable distribution of wealth in Costa Rica is due in part to the unique history of the development of coffee agriculture in Costa Rica. Here, in contrast to the other coffee growing countries in Central America, the size of farms tended to be smaller, and the number of farm owners larger.)

Historically, Costa Rica was an overwhelmingly agricultural society. Coffee and bananas were the principal export crops, though coffee was by far the more important component of the economy. From 1843, when the first boatload of coffee beans left Costa Rican waters, until the 1990s, coffee was the backbone of the local economy (and it still plays an important role). Today, all agricultural production accounts for about 8.6% of GDP.

Today, tourism is by far one of the most important sectors of the economy—it represents about 20% of GDP (estimates vary considerably, as economists often disagree about what constitutes a tourism-related purchase). Beginning in the late 1980s, tourists started to trickle into the country, but things really took off during the 1990s. Some indicators suggest that the rate of growth has begun to level off, but that may not be an entirely bad thing, since many people question the capacity of this small country to absorb greater numbers of tourists without sustaining irreparable damage to its environment. One of the key ways that tourism benefits the country is that a high percentage of the tourism dollars flow to a large number of small, independently owned businesses. Small hotels, travel agencies, guiding services, transportation services, souvenir shops, corner supermarkets, and a host of other small businesses are all able to succeed thanks to tourism. Of course, tourism almost always brings with it a number of unwanted side effects, including cultural distortion, environmental degradation, and wear and tear on roads and other infrastructure. While it’s hard to imagine that tourism in Costa Rica will ever wither away, it’s also true that this is a notoriously volatile industry. Some experts worry that increasing levels of crime in the country could some day scare off tourists, and, if oil prices continue to rise, then prices for plane tickets might become prohibitively expensive. People also speculate that a change in government in Cuba—and the resulting boom in tourism in that country—could lure away tourists from Costa Rica (at least in the short term).

To protect itself from the volatility of the tourism industry—and to simultaneously grow the economy—the government has been eager to increase the size of the manufacturing sector. For a time, however, it appeared that this was going to be a challenge. As Costa Rica’s economy began to heat up, labor rates started to rise. On the one hand, this was a sign of success, but rising labor costs induced a number of manufacturers (including many of those in the textile industry) to move their factories to Honduras and other countries with cheaper labor rates. The solution, of course, was to convince businesses that require an educated, technically-trained workforce to open up facilities in Costa Rica. In 1997, Intel chose Costa Rica as the site for a new microprocessor plant (six other countries had been in the running, including Mexico). In perhaps the single most important chapter of recent economic history, the world’s largest maker of computer chips had decided to invest $600 million in Costa Rica. The impact of this investment on the economy continues today. In fact, the exportation of Intel microprocessors is a significant contribution to the manufacturing sector, which—at about 22% of GDP—is the largest sector of the Costa Rican economy.

The arrival of Intel created a lot of high paying jobs for Costa Ricans. And Intel’s commitment to the country helped to instill in other foreign companies that were looking to move overseas the confidence to invest in Costa Rica, with the result that today an estimated 80 new foreign companies have set up operations here. Many of these new companies, including Hewlett Packard, Amazon.com and Visa, have established call centers in the country, where bilingual employees handle customer service and technical issues from customers around the world. Some foreign companies are contributing to the local economy without ever setting up offices here; instead, they outsource work to Costa Rican companies. Software programmers here, to cite one example, perform software development projects for U.S. companies, and this is happening on an increasing basis.

Probably no reader of this book will be surprised to learn that the real estate market is a newly important (and surging) component of the Costa Rican economy. Although many forward-thinking investors started to buy land as early as the 1970s and 1980s, it was only a little more than a decade ago that land prices initiated their upward assent. This first land buying spurt was stimulated in part by tourism; time after time, tourists arrived here, fell in love with what they saw, and decided to buy property. The opening in December 2002 of the Daniel Oduber International Airport in Liberia, Guanacaste, also spurred real estate investment. Previously, air travelers who wanted to visit the popular beaches of Guanacaste were forced to first land in San Josè and then drive five hours to their final destination over pothole-filled roads (or drive from the international airport in San Josè to a domestic airport in order to take a puddle-jumper flight). Tourism in Guanacaste has surged since the opening of the new airport. Many tourists, it turns out, are loathe to drive for longer than one hour after disembarking from a tiring, international flight. Now tourists can land in Liberia and then drive to beach towns such as Hermosa, Coco, Panama, and Tamarindo in less than an hour. This has spurred real estate development in two ways. First, hoteliers have built new hotels to meet increased demand; second, the area has become more attractive to foreign home-buyers. Another event that stimulated demand for real estate in Guanacaste (and that sent prices spiraling upward) was the completion in 2004 of the Four Seasons Hotel in the Papagayo Peninsula. This $400 million investment—replete with a brand-name golf course—was a first-of-its-kind project in Costa Rica. It was, to cite one of its unique features, the first luxury mixed-use resort in the country: the extensive grounds of the project include both the hotel and private homes (with villas selling for as much as $10 million!). Consequently, land prices in the area skyrocketed and development along the coast—from Papagayo south—has continued at breakneck pace. (Rene Castro, a professor at INCAE, a top Latin American business school that is affiliated with Harvard University, figures that most of the FDI [foreign direct investment] in Costa Rica right now is allocated for real estate projects directed at the tourism market.)

As impressive as this story sounds, these events are really just a prelude for the next phase of real estate investment in Costa Rica. In the U.S. alone, nearly 80 million baby-boomers have just begun to reach retirement age. Like those who have already chosen to retire here, many baby-boomers are going to decide that the natural beauty and warm temperatures of Costa Rica, along with lower housing and general costs, are an attractive option. But what implications does this coming real estate boom have for the Costa Rican economy and society as a whole? Costa Ricans who sell their properties—many of which are priced at inflated values—will benefit greatly, at least in the short run; whether they continue to prosper in the long run, of course, depends on what they do with their money. Then too, expatriates living in Costa Rica will spend money here that they earned outside the country, thus generating a net flow of capital into the country. On the other hand, as foreign money flows into the country, the price of land (and other things) will continue to increase, thus making it more difficult for many Costa Ricans to buy land themselves. Who knows whether some Costa Ricans will begin to feel resentment toward their expatriate neighbors? How will new construction projects affect the environment? And, finally, as the population of the country grows, this will mean increased use of roads and greater demand for water and electricity, which brings us to our next topic, infrastructure.

Using the word infrastructure at a cocktail party is a good way to clear the room, but this unglamorous topic is of critical importance to the economic prosperity of a country. As things now stand, unfortunately, Costa Rica gets a C minus for infrastructure. The roads are terribly maintained; many bridges are in need of repair; internet and telephone services are good but not great; power outage, if not frequent, are common; and, during the dry season, some homes are left without water for extended periods of time (this happens more frequently in rural towns than it does in the four main cities of the Central Valley: San José, Heredia, Alajuela, and Cartago). The truth of the matter is that Costa Rica can ill afford anything less than a first rate infrastructure: This small country receives not infrequent visitations from El Niño; the tail end of Caribbean hurricanes often lash its coasts; the country is very seismically active; and, once in a great while, it witnesses the eruption of one of its many volcanoes.

What is to be done? The current administration has wisely placed tax reform high on its agenda. The idea is to increase property taxes above their current, ridiculously low rates, to reform other areas of the tax code as well, and to improve the efficiency of the tax assessment and collection process. Meanwhile, as the Arias administration works toward accomplishing its plan, more and more people are building houses, which means that the size of the taxable base continues to grow. Reforming the tax code—and growing the taxable base—should thus result is more government funds available to spend on new roads and bridges and to improve water utility infrastructure. But it may take more than spending tax money to improve other forms of infrastructure, particularly telephone and internet service. In October 2007, Costa Ricans voted to ratify CAFTA (the Central American Free Trade Agreement), a treaty with the U.S. that promises to open up the state-owned telephone and internet services to competition. However, trying to predict how the complexities of CAFTA will affect the many dimensions of the Costa Rican economy is nearly the exclusive province of experts in econometric modeling. Even they may get it wrong—time will tell.