An Economic Analysis of Archaic Transportation Infrastructure in Costa Rica
Alex Bleich – 20257429
Department of Economics, Queen’s University
ECON 239: Economic Development
Dr. Huw Lloyd-Ellis
November 21, 2023
Section I – A Problem with Costa Rica’s Economic Development
Despite Costa Rica’s reputation for developmental improvement over the past few decades, a
major issue that still exists is the state of its physical infrastructure. Costa Rica has categorically
underinvested in its transportation systems of land, air, and sea.1 It is spending 0.8% less GDP
than the average OECD country on its transport infrastructure, with multiple reasons for this
neglect: institutional fragmentation, unclear project prioritization, and a limited capacity for
project execution (Pisu & Villalobos, 2016). One of the most glaring problems with Costa Rica’s
infrastructure is its roads. Although its road network is very extensive and well-developed
compared to its Latin American peers, the quality is extremely poor. The entire network is nearly
43,000 kilometers long, with 84 km of roads per 100 square km of land in the country, yet 62%
of roads show deficient or very deficient conditions, and 0% are in very good condition (Pisu &
OECD, 2016). One reason the roads suffer from poor maintenance is due to multiple institutions
responsible for upkeeping roads. Under 20% of the roads are maintained by the national
institution called the National Roads Council, while the remaining 80% of roads are maintained
by municipalities. It seems obvious that allocating responsibility of maintaining roads to
municipalities is bound
to fail the network as a
whole, as different
geographical locations
have different incomes,
which can affect how
much utility a community gets out of maintaining transport infrastructure versus spending their
low public budget on other things, such as healthcare and education. It also perpetuates a clearer
1
(Pisu & OECD, 2016), (MOPT, 2011), (MOPT, 2014), (ECLAC, 2014), (OECD dataset, n.d.)
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rural/urban divide; since rural regions tend to be poorer, less money is allocated towards the
upkeep of roads, leading to a higher cost of transporting capital and labor to/through rural
regions. This is a reason for the urbanization movement that has taken place over the past few
decades, as 81% of Costa Rica’s population lives in urban areas, an increase of 22% since 2000
(World Bank Open Data, n.d.). This makes accessing healthcare and education more difficult and
thus traps the people living in rural regions in a cycle of poverty that is nearly impossible to
escape unless they relocate to an urban place. The lack of quality physical infrastructure in Costa
Rica puts a higher economic burden on low-income households because non-reliable
transportation increases transport times and costs, which in turn decreases the amount of
disposable income available for these families to spend on other needs such as food, clothes, and
other necessities. Additionally, the fact that it is more difficult for people living outside of urban
centers to access a competitive labor market means the lack of viable transportation routes within
Costa Rica inhibits the growth of the broader economy and puts a much higher strain on the
urban economy to pick up the slack of rural economies.
In addition to the roads being underdeveloped, the railway system was shut down by the
government in the late 1990s which only adds to road congestion due to no other valid way to
travel by ground in Costa Rica (the number of vehicles in circulation rose by 68% from
2003–2014). That decision was reversed a few years later with the first services returning in
2005, but the tracks are still being restored and routes reopened as of today. Nevertheless,
advancements in train services exhibit disparities as routes were reopened without conducting
demand analyses. There are no established methods to gather and analyze demand statistics, no
way to ensure the quality of services, and no modern information/communication technology
(Pisu & Villalobos, 2016). For rail transport to be a sufficient method of travel within the
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country, there must be steps taken to improve the quality of rail services, implement methods of
data collection and analysis of demand statistics, and more railways must be opened2 and
maintained to encourage
people to use trains
instead of personal
vehicles.
Airports and seaports, on the other hand, are seeing marginal developmental
improvements. “In 2015, the Grain Terminal of Caldera Port was inaugurated and the
construction phase of the Moin Container Terminal was started in the Caribbean coast”. Both of
these projects were achieved through private investment, as were the Juan Santamaria
International Airport (modernized and expanded) and the Passenger Terminal of the Liberia
International Airport (inaugurated) (Pisu & Villalobos, 2016). This improves the country’s ability
to trade internationally and increases the chances of private investment in these facilities being
viable to creditors, both domestically and abroad.
The impact of inadequate transportation routes on the economic development of Costa
Rica is profound. Inefficient roads and connectivity within the country more broadly hinder the
movement of both labor and capital, which restricts the growth of various industries and
increases the opportunity cost of foreign investment. One of the biggest contributors to Costa
Rica’s economy is tourism, as services & other industries account for almost 80% of the
country’s employment structure (Sandoval et al., 2017). Because tourism is such a crucial
contributor to the Costa Rican economy, the inadequate transportation infrastructure is a
significant challenge as it impedes the ease of movement for tourists within the country. If
transport infrastructure was systematically improved, productivity in the private and public
2
(Pisu & Villalobos, 2016), (CGR, 2014)
3
sectors would increase because private capital would be more effective given that the people
operating it can travel more efficiently. Additionally, the allocation of labor would be improved
because viable employment opportunities rise with the ease of travel. Finally, the higher
productivity of the private capital stock will likely lead to an increase in private investment,
which will create a positive ongoing feedback loop where the increased productivity brings in
more investment, and that investment increases economic productivity.
Section II – History of Transport Infrastructure Issues
The colonial past of Costa Rica likely had an impact on the state of transportation infrastructure
today. The country was a Spanish colony from 1522–1821, which was 300 years of colonization.
The Spanish expected a “rich coast” for the exploitation of natural resources, but did not find
what they had hoped; thus Costa Rica received less attention and administrative presence from
their colonizer (Vogt, 2019). Therefore there was poor transport infrastructure under the rule of
the Spanish and the natives were forced to modernize their economy at the same time as building
their infrastructure for transporting goods and labor.
The first railway contract signed with the government was in the late 1800s by a US
entrepreneur named Henry Meigs to build a railway from the Caribbean to the capital, San José.
The purpose of this rail infrastructure was to move coffee beans to the coast where they could be
exported, but the project was severely delayed due to disease and other factors, eventually being
completed in 1890. Another rail infrastructure project was contracted in 1897 and was completed
in 13 years. By 1932 the first electric railroad was in service to the Pacific and was a source of
national pride. However, in 1995 due to the railways losing the government millions of dollars
per year with aging infrastructure, the Costa Rican Railway Institute was closed because the
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government was unwilling to invest in repairing/maintaining the existing infrastructure (Zúñiga,
2021). After three years, the railways reopened but on a much smaller scale, the routes were
condensed to a small passenger route around the San José area and a small freight route in the
Caribbean because the whole system couldn’t be afforded.
Ultimately, the colonial history of Costa Rica displayed a limited focus on the
development of transportation infrastructure. The historical neglect in developing this
infrastructure has put the country at an economic disadvantage and highlights the importance of
transportation networks for economic progress.
Section III – Institutional Involvement
Institutions have played both a positive and negative role in the issue of physical infrastructure in
Costa Rica. There are over a dozen formal and informal institutions that have responsibility for
different things relating to transportation infrastructure. These different responsibilities include
planning projects, issuing regulations for different types of transportation, promoting private
participation through concessions and public-private partnerships (PPPs), building and
maintaining the infrastructure directly, managing the railway system, and two different
authorities for ports (one for the Atlantic, one for the Pacific). Because so many institutions are
in charge of different things, the multiple layers of bureaucracy slow down decision-making and
action, which increases the lifetime of infrastructure projects and further decreases the efficiency
of transportation. For example, the Ministry of Public Works is in charge of planning projects,
but the National Road Council is tasked with actually building (some) roads while municipalities
are in charge of others; furthermore, the Public Transportation Council is responsible for issuing
regulations relating to public road transport and the Road Safety Council is responsible for
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issuing different regulations for roads purely related to safety. To make matters more
complicated, the National Environmental Office has jurisdiction over environmental impact
assessments and must approve the projects before they can begin. All of the bureaucratic red tape
that is in place severely restricts the ability of the Costa Rican government to efficiently plan,
budget for, and complete infrastructure projects.
A study done by the Comptroller General of Costa Rica found, through an analysis of 15
transport infrastructure projects, that there are delays between three and ten years from the time
the contractor is selected to start the construction, and some are over 20 years (CGR, 2012). The
same report found that projects funded in the past have significant amounts of available funds
that remain unspent. For instance, a “credit contract for the First Road Infrastructure Program
with the Inter-American Development Bank was signed in 2009, however almost 6 years later
[the project] has only 69% of financial progress” (Pisu & Villalobos, 2016). Since project
approvals are uncertain (and even when approved they are financially risky), potential investors
and contractors are deterred from engaging in relations with the government to finance and
complete projects. The bureaucratic inefficiencies create a risky environment for private actors to
participate in. The unpredictability of project approvals and spending is harmful for these actors;
in turn, the potential for private sector funding is drastically smaller than it could be if there were
not so many institutional obstacles.
The involvement of all the different agencies concerning transport infrastructure projects
brings forth coordination issues. Since each agency has a different set of responsibilities, they
will each prioritize their own objectives and not collaborate as productively as possible which
leads to conflicts of interest and a lack of teamwork to achieve the stated goal. This can result in
poor/delayed decision-making and lower-quality project outcomes. Therefore, improved
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coordination between these agencies is critical for solving the issue of bureaucratic inefficiency.
If the agencies in charge of transport infrastructure could mesh together more productively, there
would also be more private sector involvement and thus a higher budget to work with, which
would result in a positive feedback loop. If this is achieved, economic development in Costa
Rica will noticeably thrive. This likely requires institutional reform because the current state of
institutions in Costa Rica has proven to be ineffective.
Section IV – Attempted Solutions
The main attempt at addressing the problem of archaic transport infrastructure in Costa Rica has
been the National Transport Plan, which is an official governmental policy that recognizes the
challenges faced by the transportation systems in the country and aims at the long-term
development of all facets of transportation in the country including roads, railways, ports,
airports, and public transportation. The vision of this plan is to develop efficient, modern, and
sustainable transportation systems in a holistic approach that ideally increases the economic
capacity of the country. The plan includes annual investment requirements in terms of the
percentage of GDP that must be allocated to the different sectors listed previously in two time
periods: from 2011-2018 and 2019-2035. It has a higher percentage in the first period for sectors
that require more immediate investment due to their poor conditions and a higher percentage in
the second period for sectors that can afford to wait a few years before major projects must be
undertaken. These investment requirements target the upgrading and expansion of existing
transportation infrastructure so there is improved connectivity within the country and decreases
the opportunity costs of domestic and international trade alike. This timed framework for
monitoring and evaluating the progress of transportation infrastructure projects facilitates the
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plan and streamlines the process of development. Due to financial constraints, the plan
encourages PPPs that involve the private sector in funding public infrastructure projects.
Privately owned money is thus invested in public infrastructure and helps with maintenance,
development, and operation costs. Another important thing to note is that part of the plan
involves allocating funds towards institutional reforms. However minimal that allocation is, it
still indicates a commitment to achieving their economic goals by reforming their institutions,
which is not a simple task.
Another attempt at addressing the problem of transportation infrastructure is the use of
fuel3 and vehicle ownership taxes4 to fund infrastructure projects. Because funding sources are
insufficient, this is
the government’s
way of gathering
funds to address the
problems observed
regarding the
transportation
networks in Costa Rica. However, political disagreements have meant the money collected from
these taxes is not directed where infrastructure projects are needed most; the money is used
elsewhere. The fuel tax is a lump-sum tax that requires 30% of its revenues to be used for road
infrastructure investment, but public expectations are that 100% is used for this purpose, which
reduces the citizens’
willingness to pay tolls
3
4
(Pisu & Villalobos, 2016), (CGR, 2013), (CGR, 2015)
Ibid.
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and these taxes in general. This is a hurdle for the use of toll routes, which could increase the
government's budget to spend on improving road infrastructure. Similarly, the vehicle ownership
tax is a 1.2%–3.5% tax per vehicle based on respective market values. This tax requires that 50%
of revenues go towards paying for road infrastructure projects, yet public expectations once
again are that 100% go towards this cause. This decreases public opinion in the government and
likely discourages them from using more than one vehicle.
Finally, external actors including the Inter-American Development Bank (IADB), the
Development Bank of Latin America and the Caribbean (CAF), the Central American Bank for
Economic Integration (CABEI), and the Chinese-owned Eximbank have all made significant
investments in different infrastructure projects.5 While a vast amount of money has been given,
the average percentage of disbursement of the six projects in the table below comes out to
26.85%. That means only $429 million out of $1.6 billion has been used to improve
infrastructure as of 2015. Additionally, the rehabilitation and expansion of Route 32 (funded by
Eximbank) has been postponed due to political and contract issues, leading to more construction
delays and problems in general.
5
(Pisu & Villalobos, 2016), (Ministry of Finance, 2015)
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Section V – Suggested Solutions
Despite Costa Rica’s incredible levels of economic development compared to its peers in recent
years, it is still very far behind concerning its transportation infrastructure. There are a few
potential methods of improvement that have been mentioned throughout this paper that will be
reiterated and expanded upon in this section.
Firstly, although the National Transport Plan is a promising move forward, there are still
challenges associated with the implementation of the plan. Bureaucratic impediments and delays
in project execution have been observed as discussed in the previous section. The makeup and
allocation of responsibility of transportation institutions could be simplified by merging several
of them. Consolidating similar institutions to encourage broader goals would likely streamline
the process of planning and execution of projects, especially in the long run. Reducing the
number of layers of administrative structure would simplify the process of infrastructure
development and make easier improvements in economic development.
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Institutional reform more generally is a significantly beneficial action that Costa Rica
could take to improve their transport infrastructure in both the short and long-run. Addressing
systemic inefficiencies is crucial for encouraging effective economic development. Through
reform, decision-making and real progress could take place much more quickly. Budgets could
be optimized; the government would not need to split funding as widely as it must right now.
Reforms could also attract more private investment than before. When private actors see a
commitment to a modernized approach to improving infrastructure, they will likely want to
participate in the government’s new approach to completing projects. This influx of private
capital will help close the gap between needed and available funding and increase the rate of
development of transportation systems in Costa Rica. A potential obstacle in implementing this
reform is a lack of commitment to it; to achieve reform there must be a complete devotion to the
cause. If there is not, politically the idea of reform is doomed to fail.
Finally, establishing a pipeline for decision-making that falls outside the jurisdiction of
elected political figures would serve to depoliticize infrastructure decisions. I suggest giving that
authority to a newly reformed institution whose sole purpose is planning long-term projects that
have consistent funding regardless of the current administration in charge. This would convey to
the citizens the government’s dedication to attracting international and domestic investments to
categorically improve their country’s transportation systems. This would increase transparency
and build citizens’ trust in their government as there would be more accountability given the
public nature of the decision process.
Overall, there are many different ways the Costa Rican government could improve their
country’s transport infrastructure, and while only a few potential solutions are discussed, the
implementation of any institutional reform would prove to be quite difficult. However, that is
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likely the most efficient method of streamlining infrastructure reform and promoting economic
development.
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