#DevTalks: The Case of Knowledge-Intensive Services in Costa Rica

Speaker: Andres Valenciano, John F. Kennedy Fellow, HKS MC/MPA '23

Moderator: Alejandro Rueda-Sanz, Research Fellow, Growth Lab

About the speaker: Andres is currently a John F. Kennedy Fellow at the MC/MPA program at Harvard Kennedy School. Previously he was the Minister of Foreign Trade of Costa Rica, responsible for Costa Rican foreign trade policies, export promotion, and attraction of foreign investment, as well as the official representation before several multilateral organizations, such as the World Trade Organization (WTO). During his tenure, he was responsible for leading the final stage of the accession process for Costa Rica to become the 38th member of the OECD. In this period, Costa Rica became the number one country in the world in greenfield foreign direct investment (FDI) attraction. Before becoming Minister, Andres was the Executive President of the Instituto Nacional de Aprendizaje, where he oversaw technical and vocational education in Costa Rica and led the most important and far-reaching transformation the organization has undergone since its foundation in 1965. Previously, he was Executive Director of local and international NGOs, and worked in education, health, social housing, and economic development projects in over 12 countries in 3 continents, in partnership with IADB, UNDP, PAHO, ILO, among others. Andres is an Industrial Engineer from the University of Costa Rica, with a Master’s degree in International Business from The Fletcher School - Tufts University, and a Lee Kuan Yew School Senior Fellow from the National University of Singapore.

Transcript (Part I)

DISCLAIMER: This webinar transcript was loosely edited and there may be inaccuracies.

(Andres) Well thank you very much especially to the Growth Lab for the invitation to present what has been the experience in Costa Rica. I hope by the end of the conversation it would be a really interesting case to promote the debate around how countries especially in Latin America can diversify and become less poor less unequal and less volatile.

In the sense of the agenda I'm going to briefly make the case of why is it that we're talking about Costa Rica in the first place, why is it an interesting case to talk about, second, I'm going to talk about how we have been working on solving constraints particularly around the diversification of services because as you’ve all seen, Costa Rica has diversified beyond services, but I thought we're going to be focused on what we did particularly for that for that sector and then some future challenges and opportunities which is going to be just some talking points that we can hopefully later engage in the discussion of how do countries will be able to adapt to some of the challenges that I at least I foresee will be the main ones in countries like ours and obviously then Q&A.

So some facts and figures about Costa Rica - as you can see, for the people who are familiar with  the Atlas of Economic Complexity, Costa Rica has really diversified in exports. You can see in the top corner we had in the textile industry that basically completely disappeared and what are we going to be focusing on today is this big portion of exports which are very knowledge intensive services and how Costa Rica was able to move beyond some traditional export commodities to more, not only knowledge intensive but with a lot more value-added exports.

Costa Rica became the number one country in the world in the attraction of Greenfield Investments relative to the size of their economy. That means that given the size of our economy we're attracting more times of work that was expected of us so that's part of why Costa Rica is an interesting case to discuss. And in terms of export services we are exporting right now, two times the average of What the OECD countries ratio is and we have the top companies in it that are in Costa Rica. this is for us I mean a relatively small economy with a GDP of billion. are basically from knowledge intensive Services exports and we are number one export of IT Services per capita.

This is just a small representation of the type of companies that are located in the country that are operating there. When I was Minister, this was the slide that I used the most when I was going to pitch to other companies why they should invest in Costa Rica. This was the best proof of the concept that Costa Rica offers the right conditions for a company like the ones that I was speaking to, to be able to operate in a successful way. But it's just going to give you an idea there's a mix of good exporting and service exporting companies but just as you can see the diversity of companies, I have been able to attract and grow in a small country like ours and then just so you can see the growth because the way that we measure when we're talking about FDI and expert promotion we want to make sure that this is measured not only of capital flows to the country we want to make sure that it actually creates jobs.

As you can see there's been a minute very meaningful growth in the number of jobs that have been created in this sector and several companies that are operating within that sector in this period of the last years and it has been having a very you know High average annual growth rate this is the volume of experts that I mentioned before but as you can see it's a sustained growth that we've been having for almost  years and interesting is the share of knowledge intensive services versus other traditional services that continue to grow in the country but just represent less of what we do, and this is the comparison of business and I.T Services versus tourism as you can see how they have been flipping around um that the amount that they contribute to the overall exports of services in the country um this slide just to make a point that when we are trying to study the impact of FDI and diversification of exports we are also very critical about how this is helping our economy grow in different ways so what we're trying to study in the country because this has been studied in many countries around the world and you get very different results in the case of Costa Rica.

What I'm going to argue afterwards is that deliberate policies have been aiming at making sure that we can bring companies that are able to link to the local economy, create positive spillovers and as you can see from some of the results of the studies that have been done in country, they create linkages that improve productivity and improve job creation with companies that become suppliers of those multinational corporations and we also have been able to understand where those companies are coming from and where they're exporting.

And this is an important part of the story because in the end what this translates is into resilience because we are not depending on companies just coming from one country and not companies exporting just to one destination makes us way more resilient. Not only is diversifying away from Commodities that makes us resilient is also moving into different markets not depending on one End Market or one  country of origin for where the FDI inflows are coming this is also an important part of the resilience aspect of diversification very briefly this is a slide that just says how much of the procurement from those companies have become too local suppliers as you can see it has been increasing and this is very positive, and this is slightest in Spanish but what it says is out of those local suppliers who are linked  to the multinational corporations are those other foreign companies that are in the country that are supplying or they're local Costa Rican companies.

As you can see just by the Numbers here these are the local Costa Rican companies so the story is not only that we bring multinational corporations and then other multinational corporations become their suppliers but it's local companies who are being able to link to those multinational corporations and link themselves to the global value chains and have all those positive impacts of spillovers and linkages that I that I saw so that I'm sorry that went fast I was just painting the picture that it makes an interesting case I'm going to go a little bit slower just when you're talking about how we went about solving constraints and how we went about becoming um what I would argue is a global leader in services so I'm going to mention a couple of reasons a couple of variables that go beyond services and just explain what Costa Rica has been able to diversify and then I'm going to go deep into very specific things that relate mostly to services but you can tell the story of services without understanding what happened  back in the s as some of you may know we had a big crisis the so-called last decade of Latin America in the case of Costa Rica,

We had a very we failed with an import substitution strategy we had high levels of debt that eventually led to a crisis that blew inflation through the roof unemployment and poverty and that really made us question our development model and then that was the turning point is we recognized that as a small country with a very small domestic Market we needed an export driven model we needed a way to connect to the global economy because we couldn't be self-sufficient that was the conclusion around the s and what happened was there were decisions around institutional design, and this is a very important part of the story because the institutional design and capacities that were created in that moment is that like the thread throughout the past  years that have been part of what Costa Rica has been able to come up with very successful policy not only designed but implementation and very quickly what was thought now is that we needed a Ministry of Foreign trade with two with two implementing arms our export promotion agency and our investment promotion agency. And there were three things that we're going to link them budgeting governance and obviously the Labor Relations which is a small but important caveat so, the ministry of foreign trade is also the executive president of the export promotion agency okay but the expert promotion agency the board is mostly from the private sector and that was deliberately made because people thought that we need to be able to do long-term policy implementation and that requires a private sector to be able to you know provide a counterbalance to what elections every four years can do to policy making.

And then the way that procurement our expert promotion agency was going to finance itself is through attacks on exports and through our free trade zone regime where I'm going to mention about because that is also part of the story part of the financing from that  regime and the exports also Finance us import promotion agency and the finance the ministry of foreign trade so that creates a very integrated way of understanding the whole sector of foreign trade but at the same time um it has the private sector representation in the board of procurement and Cindy is a non-profit that is run like a private sector and what I mentioned about Labor Relations Labor Relations is that protomer as an expert promotion agency has a different labor relation contract than the rest of the government so it's basically almost run like a private company but it's still a public institution so that's part of the story as you can as you hopefully will see in the next slides so what did they do these three organizations they decided Well Costa Rica needs to integrate to the world so what we did is we set out a long-term planning of how we're going to do a liberalization process of connecting us to the world and maybe you can see  the whole process but the important thing is now Costa Rica has  free trade agreements and connects us basically to  percent of the global economy.

That's important because if you're an expert in Costa Rica or if you're a company that wants to invest in Costa Rica when you  open operations there you're automatically have preferential access to basically the whole the whole world that translates a market of  million people to a market of billions and as you can see from the dots there that means not only throughout whole Americas but the European Union the UK China Singapore South Korea basically a company now looks to Costa Rica because it can reach those markets in a very preferential way and then I could talk about you know these across-the-board policies that have been made in Costa Rica  to describe why is it a success story and there's a lot of things that we can talk about.

But I'm just going to focus on the ones that have played a particular role for services. The first one is Intel is a case of what Professor Hausmann likes to call a strategic bets approach. In one sense Costa Rica made a big jump because we there wasn't like a growing sector of electronics Manufacturing in the country and it wasn't like the country decided Well let's just improve our education and improve you know a laundry list of items and then Intel will come. It wasn't like that; we reached out to Intel and said what is it what would you need to be able to go to Costa Rica and open your new manufacturing plant in Costa Rica what would it take for us, so it was very demand driven and it was a lot of things it was with education it was with infrastructure it was with custom controls with airports connectivity it was a long number of things that helped us have this collateral impact of improving our business climate of signaling because that's sent a strong signal to the world saying Costa Rica is open for business because if intel is there then it has to offer certain things that a company like that can operate and then it had positive economic growth.

There has been tons of studies like trying to understand what the effect in Costa Rica this has been just one this is a synthetic control method  for those economies out there that was done  to compare the Costa Rica with Intel versus the Costa Rica without Intel what would have happened and as you can see  this this line is the dotted line um vertical dotted line is where Intel arrived the black line is the Costa Rica with Intel and the dotted line, the black dotted line is the Costa Rica without Intel, so it had a big impact in economic growth in the country but again the important thing to rescue is this put us on the map for companies throughout every sector then at that moment at the end of the s start of the s service companies started putting an eye on us and when they were starting to look for where to invest now Costa Rica was part of that list a free trade zone regime has played a very important role not only in attracting Intel but particularly for services because I think the key takeaway here is that we have been evolving in our free trade zone regime and it has been evolving not only to comply with you know international regulations like the OECD standards there's now a global discussion around but what is called base erosion and profit Shifting the pep Spillers at the OECD which is basically a way of trying to say how can we get companies to avoid  tax loopholes and for us and this is a very deliberate policy we created the free trade zone regime not to bring shell corporations we did we didn't create the free trade zone regime in a way that allows companies to say they're operating without creating Economic Development and jobs and that's a very deliberate policy because it automatically rules companies who are not in that space to want to invest but what was required because this as you can imagine started with a focus on companies who we’re manufacturing companies but then when we started talking like I mentioned to the services companies they said Well we also want to be part of this but how do we comply with the free trade zone regime if we don't have the same measures of a manufacturing company we can't be measured by the amount of physical Goods that get out of the door nor by the physical space that we what we use so what we did, and this is something that sounds trivial, but these are the type of things that make all the difference when happening doing policy making, we had to take the Customs officials to do a tour of the companies so they could understand the business dynamics of a Services Company besides and compare it with a with a manufacturing one and then in  we had to create update us index because some of the companies the services companies were trying to find loopholes in a way that they were allowed to say we're operating in Costa Rica Without Really creating jobs so what we did is we created an index we create an index to evaluate the companies and if they don't comply with what's the Strategic nature of the firm the number of linkages that


could be created what's your payroll the Investments the number of jobs that are created and if you comply with those then you can get access to the free trade zone regime and for example in  early  one of the last things that I was deeply involved in was how do we modify this free trade zone regime to get more investments in less developed areas of the country so, we created another set of incentives trying to say well companies if you are going to be located outside let's say the capital or in an area which apparently doesn't have the productivity factors that are required for you to operate we're going to try to subsidize that in ways that not only helps us bring investment to those areas but at the same time help us drive an agenda that is very coherent with our development model so we're pursuing for example incentives for companies that are um using renewable energy who are providing access to education labor costs Etc.

The other big, big policy decision here was the private industrial parks in Costa Rica industrial parks are privately run and they are competing against each other and they are competing against industrial parks around the world on how to attract companies because when a company wants to invest in Costa Rica hopefully  they will have like we called it jawan Manu which means like a build to operate in a sense that industrial parks have now not only sophisticated their services so much that they're able to offer a whole range of services for a company when it gets located in Costa Rica, so they say well you need Clinical Services you need a supermarket you need Education and Training centers that's all going to be located within the industrial park were your company operates and that's a very important aspect because not only it helps us compete with other parts around the world and as you can see there's evaluations of what are the best parts around the world we have one in the top  around the world but more and more companies are looking for additional Services which are privately provided um that can complement what comes from the public sector then when we started talking with companies back in like I mentioned early s there was a big issue in the country around connectivity as you can imagine if you're a Service Company connectivity is very important part of the equation. 

But in Costa Rica we had one National provider it was a monopoly by the state it was a stay known Enterprise. So, we created a Workforce basically in which we brought the vice presidents of Telecom from those big services companies to tell us exactly what they needed to be able to operate and that meant they we had to come up with agreements with contracts with our Telecom provider easy to be able to identify the potential points of failure and make sure that they were getting the service that that was required again this was a big update part of our national provider and it helped ironically it helped us  that state-owned Enterprise be better prepared because we were already discussing our free trade agreement with the with the United States which was signed in  which by  required the opening of the Telecom Market so once other companies arrived in the country providing connectivity became easier because there was competition but in that moment it was working with a state-owned Enterprise to make sure it understood what do these multinational


corporations needed to be able to operate efficiently in terms of connectivity in the country then the other big thing that happened was we were working before that with the Ministry of Education in Ina which is a technical education institution to provide skills for manufacturing but services companies said Well we're going to be providing services to clients outside of Costa Rica and what that ended happened was that throughout this last  years we have been working to develop basically, On Demand by the industry programs that are taught both in high schools at the technical education level less so at the universities but that respond directly what companies are looking for talent and the one example in the early we were not training accounting people to understand you know generally accepted accountant principles that are used in the US we thought accounting for Costa Rica, but nobody knew that so we had to bring people to teach that to develop a curriculum to be studying high school so people could already enter the workforce and obviously that helped with  the skills and labor connection we did we still have and continue to develop hundreds of custom-made trainings programs that are done even within the companies so not only is that we have the training centers we have been able to move those programs into the companies because of the need for re-skidding and retooling that needs to happen in place and not only for new um  people who are looking for a job and just so you get an idea of  not only accounting principles have been

taught these have been evolving so this is just a list so you can get an idea of the number of things that have been now these are the things the skills and the type of jobs that are doing  people who work in the services sector as you can see and there's lists and lists but each one of them required sometimes tweaking what was being taught in the universities in high schools and the technical centers and why that what I mean is this is not only trade policy this is a lot of coordination along a lot of Institutions to be able to provide this type of a business climate that companies require then one of the last issues that has been very critical is our value proposition we have been updating our value proposal because we want to make sure that the trade agenda is also very aligned with the vision of development that the country has and that doesn't happen organically  we want to make sure that our value proposition that we call people planet and prosperity helps not only our sector meaning export

diversification and FDI flows um move towards this agenda but also helps the multinational corporations with their agenda we want to make sure there's a match so when we go out and talking to companies this is part of what we tell them this is type of slides that we use, and this is not only nice


slide for example in Costa Rica electricity is generated . from renewable energy what does that mean for a multinational corporation now the moment it sets food in Costa Rica and switches the light on its operating on Renewables that's a very competitive Advantage not only because they're competing with other sites across the world on their internal kips around sustainability they can tell investors they can tell customers that whatever is it is that it's produced in Costa Rica is producing renewable energy right, so this makes sense for companies, but it helps also create a self-selection of the type of company that wants to go to Costa Rica because of this which is part of us value proposal and then something that might seem trivial, but it is not that when you want to bring companies to operate you're bringing managers you're bringing vice presidents of operations you're bringing outside people and people were going to ask where I'm going to put my kids to study what happens if I have an accident is their access to a hospital what will I do during the weekends and those things create a big difference.

So making sure that Costa Rica continues to offer quality of life for not only us local people but from  investors is a big difference especially with remote work nowadays. So obviously they're looking for connectivity they want to be able to move from their headquarters to Costa Rican they're from Costa Rica to were they have operations so having direct flights to U.S to Europe to latam to airports this plays a big role and this is some something that you can already tell that if Costa Rica for many years already had a big tourism strategy this is where things become complementary right have been offered the infrastructure and the connectivity for tourism now is playing a dual role for attracting the sea suit and the managers that are required to come to the country and finally the evolution of trade institutions since they started being an investment advisory as things evolved more recently for example it has been named one of the best or the best investment promotion agency in the

world by the ITC for many years it now for example offered other type of services especially  what we call retention expansion which is aftercare we started thinking well if the company is already here who's working with that company to solve all the issues on the day-to-day issues around Skilling issues around new bandwidth needs issues around

certifications who's going to be working to provide a communication between the companies and the policy makers so a whole unit was created around that same with linkages that I'm going to mention briefly same with procomer Pro comment has evolved as an expert promotion agency to make sure that companies are able not only to keep

exporting locally, I mean local companies keep exporting but also help the multinationals with their exports and how do we create more linkages how we keep working on that so now for example this is very recent that we launched a couple of years ago is  it might seem like we're duplicating roles but both teamed and procurement are now working  both seeing there from the multinational corporations trying to understand what they would need to be linked with more local suppliers and procomer with the small and medium Enterprises that are local how what do they what do they need to be able to link to the big corporations

And just to wrap up, as you can imagine this not only has been a success story there's lots of challenges the first one is what Professor Broderick here calls the good jobs bad jobs Paradox there's a lot of companies and jobs that have been created here but in Costa Rica we also have another economy right companies who can be connected to the global value chains have higher levels of productivity has a way have a wage premium create lots of jobs but there's a lot of small and medium Enterprises that are not

connected to the global value chains are not exporting and that creates a dual economy and there's an issue of inequality that then creates political tensions that then puts into question this whole model so it's something that you can't just avoid sustainability is both an opportunity and a challenge I would say for example now Financial Services corporations in Costa Rica are telling us Well we need our financial analysts to provide Consulting and advice on ESG standards to all of us clients can you come up with a curriculum can you train them for people to know how to do that so then we could create a hub around sustainability that's an opportunity the next two things are what I believe

is the biggest challenge that we have and the biggest challenge that I would say many countries in the region will have is around skills because a green transition or the orange

economy or the blue economy or the purple economy or any economy requires skills transformation and this is a break in the Paradigm both for Education because education what has been doing historically is we get young people we educate them, and we send them to the labor market they still have that pressure especially in Latin America a lot of young people who are outside schooling but now all those companies that I mentioned are knocking the door on the education system saying hey these people have been out of out of university or other technical school they graduated three years ago them

skills are obsolete we need to retrain them what can you do to train them so at the education system is having not only the pressure of the young people that need to be educated but of older people

whose skills are becoming obsolete at a faster rate private sector can do it alone public sector needs to understand the nannies from the private sector, so this is going to be a big, big challenge for whatever  policy around you know structural transformation in any country and how do you keep up with that and then we have Global discussions around minimum taxes and new trade agreements for example the depot which is something that we want to be part of we started analyzing it it's a digital

economic partnership agreement is how to use trade to promote more exchange of in this case of services in the digital economy and then challenges for linkages as you can imagine intellectual property rights certificates are still a challenge to be done but if I were to focus here on one big challenge that

we have is the Skilling reskilling be tooling challenge of any structural transformation that any economy around the world is going to be having and we have we don't have that many examples around the world of how to do that in a

way that is inclusive and that it provides the skills for people to keep up um in the labor market so, I'll stop there, and I'll open for questions

okay well Andres thank you so much  that was very interesting um so yeah, we're going to follow with  a couple of  questions from us from our discussion  and then like we'll pass

along the mics for the audience  to participate um so like oh that was our first question so as a Latin American I'm especially fascinated and that admirer of Costa Rica because we're like discussing  before I started starting the event because um that Costa Rica has been a Pioneer in many sectors like starting with Environmental Conservation as probably  most of  the people not probably are feeling most of the Latin Americans share  towards your country and one of the things um I always think it was a lot of Latin American countries I've tried diversification strategies

um with varying degrees of success um but maybe some have been either over

ambitious or not strategic enough at targeting the right sectors  or even

maybe have been oblivious of a capability or a skill-based um approach  as it has been done so

one of the questions I had because the strategy seemed to work very well was which trade-offs did the country make and how was the strategy narrowed down not to be something extremely either over ambitious or very vague that could


Transcript (Part II)

One of the things that I've always said and we always say is that we've always had this Boutique approach to the sectors and the areas in which we thought we could compete. This meant that everything from the companies that we target as our trade organizations have been evolving. For example now the city uses Ai and machine learning to understand what the best people are to reach out to in which companies that are going to be able to respond positively to our value proposal. So it's very targeted and that also responds again to what is it that a country can offer. That's one thing it's the boutique approach and making sure to understand that we can't compete in everything and we're not good in everything so we must focus we can't just go out to every International Affair looking for whoever wants to invest it's very specific. 

But at the same time on the other end from the policy perspective and this is something that Professor mentions a lot we didn't work with a laundry list approach of let's try to do everything and try to you know game every index out there we were very specific in terms of setting the right spaces for this public private discussion to happen to be able to really understand what the drivers behind the investment decisions were of companies and Target those after we understood which were the sectors that we really wanted to Target instead of saying well if we improve in whatever things that we believe is what drives the interest of companies we went the other way around so a very Boutique approach and a very  you know very proactively unconscious way of creating the spaces for having the public and private discussions around what are the driving factors behind the investment decisions that will get the company to invest and reinvest in the country fascinating and then well.

The other question I had I think it's partly an observation from the talk  and like probably other people. I found it fascinating how you labeled  tourism as a sector that is traditional for Costa Rica well there's like many countries that are willing to have a world-class like tourism sector  like the like the one you have um so one of the questions I had was what role was doing tourism play like you partly like mentioned in terms like the quality of life but from the capabilities you had constructed from the tourism industry what the display in the country's transformation that  you just exposed well, it wasn't planned out but as you can imagine there's a lot of you know second ordered effects that be having a strong tourism industry in the country played out and tourism continues to play a very important role in our development of our economy because as they say the dollar the tourism dollar is very Democratic right it's gotten gets spread out in many different places in the country it reaches many small communities it's many many suppliers many types of services but by building a tourism industry it meant that we already had invested in in infrastructure as you saw the flights those flights were initially created for tourists but then it became a way of luring in Sea suits and managers into the country and the other interesting thing are English the level of English is one very big you know defining Factor for those companies and where to invest and a lot of it was driven initially because we needed people to speak English to be able to work in the tourism industry and that later I mean it's not it's not the same level of English and but the whole idea of the importance of having a second language then played an important role  and that is one of the one of the factors that gets played out because you can have great software developers you can have great people who know about cloud computing but most of the clients if you're a multinational corporation if you're exporting Services you need to be able to do that in English um and that's a big, big thing and that was partially of Tourism and um yeah, I would say those two things really played a role now and they continue to bounce you know mutually and then the like I mentioned our value proposal is the same that us tourism um institution and Ministry use when they go out to you know promote the country the value proposal is very consistent, and that coherence also provides you no assurance that this is not only a bluff that the country really sticks to what we're trying to offer because at the end of the day investors what they look for is certainty right so in long-term certainty great thanks and I'll yeah, I'll just take one last small, big question um before we  we go for Q an um which is basically what is next inCosta Rica strategy oh that's a big question one of the things that we that we had a big discussion planning like the strategic planning for these three institutions that I mentioned for the trade sector was that we could double down on the medical devices on the services and keep going down that path or we could try to do something riskier.

But I think it's more important which is how do we play a bigger role in the inclusion question that I put up put out there and what we ended up thinking is that we needed to shift not stop doing you know all that I mentioned around services and I didn't mention it but the main good that we export right now is medical devices and we keep bringing companies around that but we made a very conscious decision of saying how can this group of Institutions support the agricultural transformation that a country needs to go through and that's complex because um agriculture  as you can imagine is an industry that obviously is in rural areas in areas where there's least development and it requires a lot of investment in technology that sometimes displaces a lot of people so how do we your account for job creation in that sector you must start thinking bigger picture in terms of Food Services and how can Costa Rica become a better player in that there is a part in terms of creating new export capabilities moving traditional agriculture to Agri tech and Groveport and we made that conscious effort and now that's what we're working on we're trying to see how Costa Rica can better compete because I mean we know that

Latin America has a role to play internationally you know as the food basket of the world potentially but also in terms of climate change how do we climate proof agriculture that also has to do with how we make it more productive how can it you know have better practices because most of agriculture in Latin America is unsustainable it's very low productivity  there's a lot of small and medium landowners so how do we work around these questions from the perspective of the trade sector are what we were working on and that I would say that's a future that departs a little bit from the things that I've already mentioned that we've been doing excellent thank you so much let's see if first question from the audience so here

I believe on the third row ums thank you thank you for the very insightful talk I have two quick questions so the first one is  foreign direct investment comes with a flip side

right, which is the legal constraints that effectively come with the agreements how did Costa Rica deal and how are you doing for example with regulatory chill effects that those bring to the country and may impede like other policies that you want to take on that's the first one and the second one is I was just curious to see how else

did you manage to gain those spillovers from the foreign direct investment other than for example the indexes you

mentioned in the free trade zones so that's the first question is a very big debate globally around the collateral effect of trade liberalization what does that mean in terms of regulatory or rules of the game that now the country abides you

I think given that we've made a very conscious effort of making sure that we understood that trade liberalization per se was not going to be the Panacea right that was going to solve all our development problems we had to make sure that  our free train Zone regime and all the investment really translated into development so for example we've been very conscious of measuring what is the impact of offering tax exemptions to companies in the country we've been very conscious about measuring that and we every year the index get we come up with an index it gets updated and we can demonstrate that for every dollar that we give a company to invest we get two dollars back and why do I say that because as you said it comes with a cost if you're not able to demonstrate to that all the citizens in the country that this improves that either tax revenues that it improves the capacity of creating jobs and opportunities for people this model can really get  you know debated politically and get torn down so at the same time, we understood that if we're going to have a long-term strategy in trade liberalization

what a lot of companies look for and what we want to make sure that you know people perceive from Costa Rica is we that is that we play by the rules so  the way that you know trade agreements are structured in Costa Rica legally and all that it follows a very rigorous process that it must end up in

Congress and Congress must approve that and um there's um it doesn't mean that Costa Rica hasn't been you know in legal debates around companies that want to invest and then when they want to sue us you know that happens all the time but being very sure that one on one end we're playing by the rules sends a very positive message but at the same time this needs in one way or another to be able to translate those trade-offs into more positive things and if we are not able to convey that message and demonstrate technically that this at the end favors that whole development of the country it would be just a nice effort that gets politically turned down very quickly um right and the second question was oh, a lot of it what we've been doing is I mean getting spillovers and linkages depends a lot on every sector every sector is very different some sectors have a way of understanding them suppliers that have so high levels of regulations that is very hard for people to link to for example  medical devices as you can imagine the certifications that are required to be able to become a provider of at least in their core supply chain is very hard but you can get you know on not only on the core but on other activities that are generated that you can link that so it's about also picking which sectors we understand that there can be

more linkages and then a lot of it has to do with we've been doing everything from doing technical assistance providing capital for small and medium Enterprises making sure, that the spaces are created for the multinational corporations to really explain what is it that they need from local providers and then see how we close those gaps so there's a lot of programs that are again providing technical assistance and financing to close the gaps between what they want and what the country can offer  and that doesn't happen overnight it sometimes it's been long-term planning and getting local companies to achieve certifications which sometimes are very expensive that's  let's say something that a lot of the time the government is willing to provide that capital for companies to do that but it again it's very specific tailor-made and not in every sector the pecking order is clear no its three quick questions the first one is um there's a tell us about your headaches in designing a free trade zone to make it compatible with WTO the second question is in a since Jose Maria figure is attracted

Intel to Costa Rica there's been enormous political change in Costa Rica in terms of the number of presidents and the number of parties that have been in power and so on um everybody in Latin America complains about the inability to maintain policies between you know when governments change um you mentioned a little bit in your presentation because is there a secret of how to make more longer-term policies last and number three how do you make how do you prevent these very detailed customer-based policies and solutions not to be captured or what was the first question about WTO right yeah, so this has been a complex issue and that's why I mentioned we went through six diff we have been different six different  models of our free train Zone regime to be able to comply with those standards because we have, I think it would have been bigger

challenge if we were having a free trade zone regime that attracted companies for the purpose of being a tax Haven or attracting shell Corporation then it becomes tricky because we're trying to game the system because you have the WTO and the OECD telling you no you're not you're using it this just as a tax loophole and companies are pressuring you for to move that way so by being very explicit that say no this index is very rigorous in the way that we evaluate when a company says I'm going to invest, and I want to apply for the free trade

zone regime you must demonstrate like I said a level of investment a level of job Creations you have to demonstrate how many of your  general managers are going to be based in the country how many local jobs are going to be how many local suppliers are going to be linked to so it's very rigorous so just by that


it's very like also a self-selection process that it's done with a dual purpose it helps us comply with those things but it helps us also bring um real compatible with what yes oh yeah no that's the thing how do we comply with those standards without providing that tax loophole that the WTO and the WTO probably what they're going to be focusing on a lot is that we're providing you know any type of support for exporters that are not you know  in legal competition with others right, so we want to make sure that we comply with those. But I think at the core it goes back to making sure that there's this is coherent because by making sure we do that we make sure that people understand the benefits and we have concrete benefits of Economic Development. By that model otherwise politically going back to know to the other question politically would be very hard to sustain and every time there's a new government inevitably this discussion happens  that's what that was with my case as well when I when I arrived and that was one of the first questions that you know the media asked what you are going to do with the free trade zone regime.

Are we going to put more taxes on it and then because we've been very rigorous in evaluating the return of investment very rigorous in demonstrating the number of jobs that they're created, and this is interesting because we have the breakdown of those jobs’ numbers people say well but that's probably not only the Intensive services that don't that's only people for university what about me who I don't have a university degree well if you look at the jobs for manufacturing medical devices overwhelmingly most of the people that go into those jobs are people from public high schools there's almost a  party between men and women and a lot of those people come from rural areas as well so by having all those information all the data you're able to come up with a good argument of why politically it would be suicide to try to change this because again you would be going against the thousands and thousands of people who work there but also around the private sector who has been a great Ally and sometimes providing the threat between each Administration that this makes sense and you're able to have a narrative that makes it politically very costly to be able to go against this model that has provided so much now the response that we've explicitly did around agriculture is part of that discussion but like politically it you can only do so much you also need to demonstrate well a lot of people are saying well how do we get more of this investment but where I live which is outside the capital so that you saw that we did a modification on a free trade zone regime to go drive investment to those areas with preferential um  you know benefits if you invest outside there but also, please focus on agriculture because it's a very big tension of who ends up benefiting from an initiative like this that drives at the end that is the political discussion and I forgot about it was there a third question oh, the capture incentives well in that case Costa Rica would say is the opposite right as one of the presidents of the of the ohia told us on a visit many years ago he said Costa Rica you have an excess of democracy in the in the sense in the sense that there are so many institutions there's so many video points and control points that captured by the private sector is very hard  our challenge is how do we overcome  you know um the stagnation the inertia of us public institutions that are not moving as fast as the ones that

I just described here so but like yes you saw that trade sector is designed in a way that moves very quickly and we're able to hire people that are run  are very specialized very technical um are very well paid, but they are moving in a way that is way faster than the rest of the institutions, so the challenge is how do we get the rest of Institutions to move as fast and maybe one thing to complement that is that when we're looking for companies to come to the country we're not we're we want to make sure that they are really aligned and they're really responding to our vision of development  not that it doesn't mean that we don't tailor the suit for them when they're you know having to make the decision where to come but we want to attract certain kind of companies that are aligned to this vision that I propose the value proposal that we have foreign

Last question from the room um so the question is how the coordination was needed to

change domestic policy regulations Etc. done did the Ministry of Foreign Affairs lead it a previous slide showed that the extra driven model included the Ministry of Foreign Affairs Why didn't it include the ministry of economy is there an Institutional Arrangement you would have done differently um essentially well in every in every country this is different but in Costa Rica we have a Ministry upon trade and then we have a minister of economy  Ministry of Labor right they're separate we also have a Ministry of Foreign Affairs which is different one from Ministry of Foreign trade again some countries have had it together um this was done again deliberately that way um because well those institutions already existed in the country and at that moment people realize we need a new institution that will basically coordinate this triangle of the trade sector and it was reliably made with those characteristics in terms of governance in terms of budgeting in terms of Labor relationships because we saw that this meant that Costa Rica was going to compete with the rest of the world and we needed to have like this spare head to lead a lot of that now it doesn't mean that all the domestic reforms and policies were not very politically complex  and there has been a lot of debates  there was a very big debate politically a lot of social movement when Costa Rica was debating the kaftan with the with the kaftan Dr with the trade agreement with the US  it brought a lot of people to the streets it ended up being a referendum that  it passed but it was very contentious politically nowadays because people have seen the benefits of it  you know I think it just provided more momentum but if the whole model wouldn't have been able to deliver what it had promised um I think we could have seen a very different trajectory where the country was headed but I think it just by demonstrating the especially our Focus not only of understanding flows in terms of dollars would be on job creation and how this helps the people um it has been a key driver in the discussion of how to maintain and keep modifying domestic policies that allows us to keep competing on a global scale see and thank you  building on one of the questions of Professor houseman  Latin America is having a backlash to populism and with that there's  no continuity of sound public policies do you see it that possibility in Costa Rica or is bulletproof of that of that reality well definitely not bulletproof again there are certain policies that  are more costly politically just to change  because of how ingrained they are in the country or how much value people perceive there are others in which if you change them, you're not going to have organized people around that cause to oppose it  but in this case at least in what we've been speaking today there's a lot of organized consensus and momentum that if a politician would try to change this direction and this model around expert diversification he would immediately feel the political about a lot of backlash a lot of social unrest and a lot of coordinated movements  that would make it very costly to oppose it's not the same with other policies which are easier to change because again there's not an organized group of actors around it or the benefits are just felt across the board so you don't have someone who has the voice  the political voice to provide prevent that backlash and then maybe that's more vulnerable to political populism but not does not bulletproof.

I mean one of the lessons that we've been seeing is that no country is safe from this populism rising and tendencies of democracy to backlight HKS community and thank you everybody for attending.