Costa Rica, an upper middle-incomedeveloping country of 4 million inhabitants, is well knownfor its socio-economic achievements. Costa Rica'seconomic growth has averaged 4.7 percent annually over thelast 15 years, about 2 percentage points above the rest ofLatin America, reflecting its stable macroeconomic andpolitical environment, strong institutions, and awell-educated work force. Costa Rica has followed asuccessful strategy of outward oriented export-led growth,openness to foreign investment, and gradual tradeliberalization that transformed the economy from one highlydependent on agriculture and agro-industry to one that isnow led by high-tech computer and electronic industries,services such as transport, communications and banking,non-traditional agriculture, and tourism. The government ofCosta Rica realizes that continued economic growth andpoverty reduction require an improvement in the quality ofinfrastructure and social sector services, particularly ifCosta Rica is to take full advantage of the greater globalmarket opportunities in the context of DominicanRepublic-Central American Free Trade Agreement (DR-CAFTA)and other free trade initiatives. To improve the quality ofpublic services while simultaneously reducing its fiscalvulnerability is challenging, especially since reaching apolitical consensus on revenue enhancing tax reform hasproven difficult. This report is the outcome of thegovernment's request to the World Bank (WB) andInter-American Development Bank (IADB) to identify possiblereforms in policies and institutions to enhance theeffectiveness, efficiency, and equity of publicexpenditures. Such reforms will support Costa Rica'sefforts to ensure sustainable fiscal balances and establisheffective and transparent mechanisms to allocate publicresources so as to promote broad-based economic growth,improve social indicators, and reduce poverty.
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