Watkins Advisory – Development Economics & Climate Policy for LAC

Tag: costa-rica

  • How Costa Rica Made EVs Scale

    How Costa Rica Made EVs Scale

    In 2015, Costa Rica registered fewer than 500 electric vehicles. By 2024, EVs accounted for more than 1 in 10 new registrations—powered almost entirely by renewable electricity. The country did this without oil money, without a massive industrial base, and across two major political transitions. That is the puzzle this blog tries to explain—and to translate for policymakers elsewhere in the region.

    Costa Rica shifted toward high-value manufacturing and knowledge-based services after 2015. Services accounted for most output and export earnings, and export earnings concentrated in sophisticated segments. Real GDP growth averaged about 3.5% before 2020, contracted sharply when the pandemic hit, then rebounded strongly in 2021 and remained solid through 2023–2024. The free trade zone (FTZ) platform and foreign direct investment (FDI) in life sciences and corporate services anchored export performance and modern-sector jobs.

    The core argument is simple: Costa Rica’s transformation since 2015 did not come from a single policy or sector. Three enabling systems reinforced each other—an export platform anchored in FTZ-led sophistication, a renewable electricity base that enables low-carbon electrification, and a state able to digitize high-volume services. The lesson for policymakers elsewhere in Latin America is not to copy a flagship reform, but to focus on sequencing and reinforcement: what changes when these systems are built in parallel rather than in isolation.

    The sections that follow show how the systems compounded: first, shifts in capital stocks, institutions, and economic structure; second, how variation, selection, and diffusion turned pilots into routines; and third, how laws, market rules, coordination, and adaptive management helped reforms persist across political cycles.

    What is transferable—and what is not

    Costa Rica is a structural outlier in Latin America: it is small (roughly 5 million people), has maintained an overwhelmingly renewable power mix, lacks a hydrocarbon sector, and, since 2021, has been anchored by OECD accession standards. The point is not that other countries can replicate these conditions, but that many can adapt the mechanisms that turned them into durable change. Read the case by separating transferable policy design from context-dependent enablers:

    Broadly transferable lessons (mechanisms): stabilize incentives with a clear glidepath (e.g., extend EV incentives to 2034 with phased adjustments rather than abrupt reversals); run charging rollout as a service network with spacing and reliability targets; start digital transformation with one or two high-volume services (such as digital health) before pushing interoperability across government; and coordinate an export platform (investment promotion, skills, and supplier development) so tradable upgrading can finance and legitimize longer-horizon transitions.

    Context-dependent lessons (starting conditions): a near-zero-carbon power system makes transport electrification immediately low-emissions; countries with fossil-heavy grids may need to pair EV rollout with a credible power-sector decarbonization and reliability plan. OECD accession provided an external governance anchor (a credible external commitment that raises the cost of backsliding on institutional reforms); where that is unavailable, governments can mimic the effect through domestic fiscal rules, independent regulators, performance compacts, and peer-review partnerships. Costa Rica’s small geography and concentrated corridors simplified charging rollout; larger countries may need phased corridors (freight and bus depots first, then intercity routes, then nationwide coverage) and stronger subnational execution capacity.

    Three systems, not one policy, drove the shift

    Costa Rica shifted its capital stock toward knowledge-intensive production amid persistent physical infrastructure constraints. Electricity generation remained overwhelmingly renewable after 2015, anchored in hydropower and complemented by geothermal and wind power, laying the groundwork for low-carbon electrification. Fiscal reforms strengthened buffers, with debt declining from pandemic peaks and international reserves reaching historically high levels by mid‑2025. In tradables, the economy deepened its specialization in advanced manufacturing—especially medical devices—supported by FTZ infrastructure and sustained FDI inflows that recovered after the 2020 shock and reached high levels by 2024. Transport energy use remained dominated by liquid fuels because most vehicles still relied on internal combustion engines, even as new registrations shifted. The distinction is between rapid electrification in new private vehicles and slower, operations‑constrained electrification in high‑utilization segments such as buses, taxis, and delivery fleets. Those segments often deliver larger emissions and air-quality gains per vehicle but require depot charging, route planning, financing, and maintenance capacity. The dual reality is a clean-electricity base and fast-moving EV adoption at the margin, alongside a legacy fleet and public-transport systems that still drive emissions and dependence on fuel imports.

    Costa Rica focused institutional reforms on three domains: fiscal governance, decarbonization policy, and digital government coordination. In 2018, the legislature passed a major fiscal reform that introduced a spending cap and broadened taxation through a value-added tax framework, reshaping what the state could fund and how it could finance it. Also in 2018, lawmakers enacted an EV incentives law that created tax exemptions for EVs and charging infrastructure and assigned responsibilities for charging rollout and fleet transitions. In 2019, the executive launched a long-horizon decarbonization plan that set economy-wide direction and embedded transport electrification targets within a broader net‑zero pathway. In public administration, successive digital transformation strategies culminated in a 2023–2027 framework, and the state created a national digital government agency to coordinate interoperability and service delivery across institutions. These moves turned political intent into enforceable rules, multi-year plans, and implementation mandates that could survive electoral cycles.

    Economic and social outcomes shifted unevenly: growth strengthened alongside persistent labor-market duality and regional disparities. In 2020, tourism and contact-intensive services collapsed, unemployment surged, and household vulnerability increased. After reopening, export manufacturing, corporate services, and tourism drove the recovery, with unemployment falling to low single digits by late 2025. Informality remained high—about 40% of workers in several recent years—showing that productivity gains in the modern sector did not automatically translate into broad formalization. High-skill jobs and the export platform stayed concentrated in the Greater Metropolitan Area, while regional inequality motivated new territorial policy instruments, including a regional development law designed to strengthen regional planning and financing. The period combined macro stabilization and modern-sector dynamism with distributional frictions that complicate inclusive growth and the politics of sustained reform.

    The pandemic sorted winners and losers — and Costa Rica was ready

    By 2019, Costa Rica’s public health system had implemented a single nationwide digital health record, changing how clinics recorded visits, handled referrals, and interacted with patients. In transport, an EV incentives law and early charging corridors lowered the perceived risk of owning an EV and attracted private investment in EV models, chargers, and maintenance services. After the 2022 cybersecurity crisis, agencies improvised new coordination and operating practices under pressure, accelerating changes in how the state managed digital systems. When the pandemic hit in 2020, these were not contingency measures—they were already operating routines, which made them resilience assets rather than emergency responses. In evolutionary terms, these were sources of “variation”: policy experiments and shocks that introduced new routines in public services, mobility, and administrative coordination. The takeaway is that the highest-impact pilots were not symbolic; they were designed (or forced) to touch high-volume transactions and operational bottlenecks, so learning could accumulate quickly and be institutionalized.

    Selection is the filter that decides which experiments scale and which fade. In Costa Rica, the 2018 EV incentive law tilted relative prices toward battery-electric vehicles and helped EVs outcompete conventional vehicles where exemptions and operating costs mattered most. As more global manufacturers offered EV models and prices fell, competition expanded choice and lowered entry barriers. The pandemic acted as an economy-wide selection event: it punished tourism in 2020 while favoring export manufacturing and digitally enabled services that could keep operating. Fiscal rules and IMF-supported stabilization limited room for recurrent spending expansions, pushing the state toward reforms that improved compliance and efficiency rather than simply adding programs. OECD accession reinforced institutional upgrades by tying governance standards and peer expectations to membership. These filters favored tradable upgrading, digital service modernization, and electrified mobility—while making infrastructure delivery, skills supply, and implementation capacity the binding constraints.

    Diffusion is where Costa Rica’s story is most useful for implementation-minded readers: it shows how a pilot becomes “the way the system works.” In digital health, a single record and workflow moved from partial rollout to near-universal use by 2019. Clinics and hospitals stopped treating digitization as an add-on and treated the digital record as the default system of record for visits, prescriptions, and referrals. That shift required a multi-year bet: standardized processes and an implementation owner able to roll the system out site by site until coverage became routine. In electric mobility, diffusion looked like an ecosystem: as registrations rose, charging points expanded, dealerships broadened model lines, and early user experience reduced perceived risk for the next cohort of buyers. Diffusion sticks when rules are stable enough for private actors to invest, the service platform is visible to users (a record they must use, a charger they can find), and an accountable owner sustains execution through the unglamorous years of rollout. But diffusion at this scale doesn’t happen by accident — it requires a state that has converted political intent into durable rules and institutions, which is the subject of the next section.

    Rules outlast governments: how policy survived three elections

    Costa Rica made the transition durable by embedding long-horizon objectives in rules, standards, and market architecture rather than relying on ad hoc programs. The 2019 decarbonization plan defined a pathway to net‑zero by 2050 and translated it into sectoral commitments, with transport electrification as a central pillar. The EV law established a concrete incentive regime—tax exemptions and institutional obligations—that altered relative prices and clarified the responsibilities of agencies and utilities. The 2018 fiscal reform created binding constraints through a fiscal rule and tax base changes, narrowing the feasible set of public choices while strengthening credibility with lenders and investors. OECD accession in 2021 added a governance anchor, reinforcing continuity across areas such as competition policy, statistics, and institutional standards. These actions reduced uncertainty for investors and households and created a predictable environment for adoption and upgrading.

    The state backed the rules with enabling infrastructure and platforms, even as infrastructure quality remained a constraint. The national electricity utility (ICE) and the broader electricity system maintained near-universal access and a renewable generation base, giving Costa Rica a backbone for electrifying end uses without increasing power-sector emissions. After the EV law set rollout expectations, utilities and partners expanded public charging points as EV demand rose. In health, the public system financed and rolled out nationwide digital records and supporting applications through a multi-year effort. Telecommunications policy and regulator-led programs expanded broadband coverage, widening the user base for digital public services. In tradables, the state sustained the FTZ framework and export promotion institutions that helped attract and retain investment in life sciences and corporate services. Coordination across ministries, regulators, utilities, and promotion agencies aligned rules, investments, and execution—and often shaped outcomes as much as budget spending did.

    Costa Rica’s institutions learned by adjusting policies, carrying out reforms across administrations, and changing implementation practices after shocks exposed weaknesses. In 2022, policymakers revised the EV incentive regime and extended it through 2034, phasing benefits as the market matured and reducing the risk of abrupt withdrawal. After the 2022 cyber crisis, agencies changed how they govern and operate digital systems by introducing new coordination mechanisms and strengthening operational security for cross-agency response. Successive digital transformation strategies signaled a shift from isolated digitization projects to whole-of-government interoperability. In macro-fiscal management, the fiscal rule and post-pandemic consolidation kept stabilization mechanisms in place as debt ratios declined from their peaks. Institutions learned by recalibrating incentives as markets evolved, strengthening governance after failures, and retaining reforms that improved credibility and reduced fiscal risk.

    One episode illustrates crisis-driven learning: the 2022 cybersecurity attack disrupted core government digital services and forced leaders to treat cyber resilience as an operational problem rather than an IT add-on. Agencies responded by tightening incident-response routines (who declares an incident, who communicates, and how systems are isolated and restored), increasing cross-agency coordination, and strengthening continuity planning for critical services. Digital government scales safely only when the state invests in the backbone—security standards, shared monitoring, clear authority in a crisis, and practiced recovery procedures—alongside visible user-facing platforms.

    The lesson for LAC: sequence matters more than ambition

    The compounding dynamic shows up in outcomes. Growth dipped sharply in 2020 but rebounded with record growth in 2021 and remained robust through 2023–2024, reflecting resilience in tradables and recovery in services. EV adoption moved from near zero to a sizable share of new registrations by 2023–2024, supported by a stable incentive regime and expanding charging availability. Digital delivery proved feasible at scale in health services, where nationwide digital records and high usage normalized citizen interaction with state systems through digital channels. These outcomes show how an export base, clean power, and state capacity reinforce one another—while also revealing where constraints (skills, infrastructure delivery, and electricity-system resilience) become binding as adoption grows. The sequence that worked in Costa Rica—stabilize the fiscal position, anchor a renewable power base, build export sophistication, then layer in electrification and digital transformation incentives—is not a universal template, but the logic is: don’t let adoption outrun the infrastructure and institutions that make it durable. That is why the next phase is harder: as electrification and digital government move from early wins to economy-wide coverage, fiscal space, digital service capacity, and electricity-system resilience increasingly determine whether progress continues.

    The desired future state is an economy that sustains export upgrading while turning electrification and digitalization into broad productivity gains rather than enclave performance. That requires transport electrification to move beyond early adopters toward high‑utilization segments—buses, taxis, ride-hailing, municipal fleets, and logistics—while maintaining electricity reliability as hydrological variability increases pressure on the generation mix. It also requires digital government to move from flagship systems to routine, cross-agency interoperability so firms and households face lower transaction costs and better everyday service. On the labor side, narrowing skill mismatches and reducing informality would help tradable sophistication translate into broader income security and tax capacity. The practical question is not just “train more,” but “build pathways”: competency-based technical programs aligned with employer demand, paid work-based learning (apprenticeships/internships), portable certifications, and placement mechanisms that connect graduates—especially from outside the main metropolitan area—to formal jobs in export-linked firms and their suppliers.

    Policymakers can act by prioritizing measures that strengthen infrastructure-to-adoption feedback loops, reduce duality, and improve execution capacity across institutions—while adapting choices to national starting conditions (power mix, geography/scale, and available governance anchors). First, align workforce development with the export platform’s needs by moving from “training supply” to “training-to-job pathways”: co-designed curricula with employers, paid apprenticeships, short modular credentials in priority occupations, and placement support that connects trainees to formal jobs (including in supplier networks and outside the capital region). Second, protect the credibility of EV incentives while tightening delivery on charging corridor coverage and reliability so adoption does not outpace infrastructure—and treat public transport and fleets as the scale lever by pairing vehicle incentives with operator-ready enablers (depot charging, grid connections, maintenance training, and financing/procurement models that pay for uptime). In countries with fossil-heavy grids or weak reliability, pair EV scaling with a power-sector plan that improves firmness, affordability, and emissions intensity. Third, scale digital government by enforcing interoperability standards and institutional workplans, using platforms like digital health as templates for other high-volume services. Fourth, preserve macro-fiscal credibility by maintaining fiscal rule discipline while prioritizing high-return public investment to relieve infrastructure bottlenecks, strengthen electricity system resilience, and support productivity.

  • Costa Rica (1950-2010): a Distinctive Development Trajectory.

    Costa Rica (1950-2010): a Distinctive Development Trajectory.

    In 1948, Costa Rica redirected the money it had been spending on its military into schools and hospitals. Emerging from a brief civil war in 1948, the country abolished its army, redirected public resources to schools, health, and infrastructure, and developed a policy mix that combined social inclusion with environmental protection. 

    Between 1950 and 2010, Costa Rica built one of the most distinctive development trajectories in Latin America. Life expectancy rose from the mid-50s in 1950 to around 79 years by 2010. Adult literacy increased from roughly 80–85% in 1970 to about 95% by 2010, while GDP per capita approximately tripled between 1960 and 2010. This 60-year period matters for today’s green transition because it shows how a small, middle-income country can reshape its institutions, firms, and social norms and rebuild natural capital.

    During these decades, Costa Rica moved from an economy based on coffee, bananas, and cattle to one increasingly driven by services, ecotourism, and higher-value manufacturing, while recovering forest cover and decarbonizing its power system. Forest cover initially declined to around 20–25% by the mid‑1980s and recovered to over 50% by 2010. Public agencies such as the Instituto Costarricense de Electricidad (ICE), the national parks system, and later forest and climate institutions played central roles in steering investment and learning. By 2010, protected areas covered about 28% of land, and renewables accounted for roughly 85% of electricity generation.

    This blog explores that story through three lenses: what changed, what drove those changes, and what the state did to make them possible.

    From frontier expansion to forest recovery

    From 1950 onward, Costa Rica expanded human capital while undertaking a rapid boom‑and‑then‑recovery in natural capital. The country showed significant gains in literacy, life expectancy, and access to public services. At the same time, it experienced rapid deforestation between 1960 and 1980, followed by one of the most effective examples of tropical forest recovery in the world. Costa Rica maintained stable democratic institutions and built strong public service and environmental stewardship norms. Inequality and informality persisted, and fiscal pressures grew, especially around the 1980s debt crisis. By 2010, electricity and water access were both close to universal, and the country had held uninterrupted competitive elections since 1950.

    After abolishing military spending in 1948, Costa Rica redirected resources to education, health, and electricity generation. In 1949, ICE began investing in large-scale hydropower, later expanding into geothermal and wind power, laying the foundation for the country’s renewable power base in 2010. 

    Rapid agricultural expansion and cattle ranching between 1960 and 1980 drove massive deforestation, but this was reversed by the creation of protected areas from the 1980s onwards and the establishment of payments‑for‑environmental‑services schemes in the mid‑1990s. By 2010, more than a quarter of the country was protected, and forest cover had substantially recovered – serving as a base for a booming ecotourism sector and repositioning tropical forests as productive environmental assets.

    The Intel plant established in Costa Rica in the 1990s was the clearest signal that the country’s decades of social investment had paid off in ways the original policymakers hadn’t anticipated. Intel chose Costa Rica over larger, cheaper neighbors not because of low wages but because of workforce quality, political stability, and — critically — the environmental reputation that made the country attractive to a company that needed to be seen operating responsibly. 

    The country underwent structural transformation, shifting from primary commodities to services, tourism, and high-value manufacturing and business services. The share of services in GDP was over 60% by 2010, and FDI inflows reached more than 5% of GDP in the 2000s. Much of this shift was supported by foreign direct investment in electronics and medical devices. Costa Rica has built comparatively high levels of trust in institutions and political stability compared to its regional peers. The 1980s crisis and some later reforms reintroduced new inequality and employment pressures.

    Variation, selection, and diffusion in Costa Rica

    Costa Rica’s transformation was not planned from the beginning. It was the outcome of a series of experiments, some of which worked and many of which didn’t, with the market, political coalitions, and periodic crises doing the selecting. The country established new public agencies, introduced new environmental regulations, and explored new export‑promotion regimes. The private sector initially responded through natural‑resource‑extraction enterprises, which later shifted to eco‑lodges and tech clusters. Domestic political coalitions favored certain strategies, which were reinforced by changes in commodity prices and cycles of foreign direct investment. Social and environmental policies were retained through various coalitions, while a focus on frontier agriculture and import substitution was abandoned. Hydropower electrification, protected areas, payments for environmental services, and export services diffused across territories and sectors through replication, learning, and deliberate Costa Rica branding. The connections among clean energy, ecotourism, and high-tech assembly plants were synergistic, accelerating adoption.

    The 1980s debt crisis hit Costa Rica hard. Real wages fell, imports dried up, and the import-substitution industrial model that had underpinned the previous decade’s growth became fiscally unsustainable almost overnight. The debt crisis drove structural adjustment, leading to the failure of fiscally unsustainable and protectionist approaches. Social and environmental programs remained, and politically supported models of human‑capital investment, ecotourism, and grid-scale renewables were reinforced. Low productivity and extensive cattle expansion became less attractive from both national policy and market perspectives.

    The Costa Rica model did not stay inside Costa Rica. Today, Central America as a region stands out globally for its terrestrial protected area coverage of around 30 percent — a figure that reflects decades of regional learning and policy diffusion, substantially inspired by the Costa Rican example. Costa Rica has also historically led the storyline of a renewable-dominated power system and has linked its green agenda and brand to tourism, foreign direct investment, marketing, and diplomacy. Renewable energy accounted for around 80% of electricity generation by 2010, rising to more than 95% by 2015. This narrative has been crucial in shaping expectations amongst citizens, firms, and investors.

    The state as mission setter, investor, and learner

    The Costa Rican state was neither a passive observer of this transformation nor an omniscient planner. It set broad missions, built institutions capable of pursuing them, and then learned from what worked and what didn’t over the course of six decades. Post-1950 governments defined broad goals for social services, territorial integration, and environmental conservation, and established semi-autonomous public enterprises and ministries to deliver them. Over six decades, the state invested in dams, transmission lines, and roads, expanded social protection, and created regulatory frameworks for water, forests, and electricity that favored a shift toward low-carbon, nature-based development.

    These efforts were pursued despite limited fiscal space, reliance on external finance, and persistent tensions between conservation, agriculture, and urban expansion. The transformation required coordination among sectoral ministries, including energy, environment, agriculture, and planning. 

    Costa Rica’s decision to integrate energy and environment into a single ministry is worth considering. In most countries, these portfolios sit in separate ministries with separate budgets and often conflicting mandates — energy agencies prioritize generation and grid expansion. In contrast, environmental agencies resist the infrastructure required. Putting both under one roof forced those conflicts into the open, where they could be resolved at the policy level rather than being paralyzed by bureaucratic turf wars. The result was an energy strategy that treated hydropower, geothermal, and wind not just as power sources but as components of a national environmental identity. That institutional design choice — deliberately creating productive tension rather than administrative separation — is one of the most transferable lessons in the Costa Rica story.

    The Costa Rican state has been particularly strong in learning and course‑correction in forest policy and environmental regulation. Symbolic early moves—the abolition of the army and the establishment of robust social security, healthcare, and education systems—set a long-term trajectory focused on developing people, not war, while decisions to create national parks and protected forests embedded natural capital into the national mission.

    The state also guided public investment and rulemaking toward a green‑growth model. Agencies such as ICE focused on renewable energy infrastructure, building technical capacity, and attracting investment to ensure high electricity access rates while producing clean energy. Rules in forestry, land use, and environmental‑impact assessment progressively restricted environmentally destructive practices while creating financial incentives for forest conservation and restoration through payments for environmental services that blended national and climate finance with carbon markets. For example, payments for the environmental services scheme were supported by a fuel tax, while an airport arrival fee partly supported the protected areas system.

    The state also experimented and learned, ensuring co-evolution between the state and the market. Different governments have experimented with policies such as payments‑for‑environmental‑services schemes, ecotourism development and promotion, and free‑trade zones to test approaches to mobilizing private capital with public steering. Some experiments were not fully inclusive or financially sustainable, but the state has progressively aligned development with environmental and human‑capital objectives.

    Lessons for Latin America’s green transition

    From 1950 to 2010, Costa Rica did not follow a linear pathway. It went through severe deforestation, debt crises, and distributional challenges. It remains a middle-income country with real development challenges. Yet over 60 years, it combined institutional stability, social investment, and environmental recovery in ways that altered its asset base and contributed to development. Electricity shifted from fossil fuels to renewables; the economy shifted from commodities to knowledge-intensive services, driven by strong human capital and environmental conservation.

    Three lessons stand out. First, green transitions are cumulative and path-dependent: Costa Rica’s renewable power system in 2010 was only possible because ICE started building hydropower dams in 1949, before anyone called it a green transition. Decisions made under one set of conditions create capabilities that enable entirely different decisions a generation later. Countries that want to lead the next technological wave need to start making foundational investments now. Second, state capability matters more than state size. What made ICE effective was not that it was public but that it was technically competent, financially autonomous, and given a clear long-term mandate that survived changes of government. Building that kind of institutional capacity takes decades and cannot be shortcut. Third, natural capital can be rebuilt faster than most models assume: Costa Rica’s forest transition occurred within 30 years of peak deforestation, suggesting that ecosystems are more resilient than standard development economics credits them with — provided the incentive structure changes and the political will holds.

    For policymakers and investors, the Costa Rica model suggests it is possible to anchor growth in human capital, services, and environmental assets through public utilities, protected‑area systems, payment incentives, and green branding to engage global markets and attract foreign direct investment. Costa Rica’s path cannot be copied. It is a small, unusually politically stable country with no oil wealth, and a foundational decision in 1948 that most countries will never take. But its logic can be borrowed: invest in people alongside infrastructure, price environmental destruction honestly, build public institutions that learn, and treat the natural environment as an economic asset rather than a constraint on growth. 

    The countries that will lead Latin America’s green transition are not those that try to replicate a model built on six decades of choices they didn’t make — they are those that find their own version of these commitments, starting with the decisions available to them today.