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November 2003 No. 35

A regular series of notes highlighting recent lessons emerging from the operational andanalytical program of the World Bank‘s Latin America and Caribbean Region

COSTA RICASOCIAL SPENDING AND THE POORSOCIAL SPENDING AND THE POORSOCIAL SPENDING AND THE POORSOCIAL SPENDING AND THE POORSOCIAL SPENDING AND THE POOR

Helena Ribe and Roxana Víquez1

Costa Rica has made substantial progress in reducing povertyand improving social sector indicators over the past decade.Headcount poverty declined from 27 percent in 1990 to 21percent in 2000, and there is near universal access tohealthcare and primary education. Life expectancy has risen,while infant mortality rates have fallen. However, there arealso worrying signs that progress in these areas is stalling, andthat future improvements may be harder to achieve. The paceof reduction in income poverty slowedduring the second half of the nineties,and between 1990 and 2000, Costa Ricafell from 28th to 48th in the Index ofHuman Development. In education,there has been an increase in the grosssenrollment rate to 61.2% of the population,although there was also an increase inrepetition rates. Across the board, educa-tion levels are worse for those in the lowerincome quintiles. In health, performancecontinues to improve in terms of life ex-pectancy, infant mortality and health sys-tems performance, but there is increasingdissatisfaction with the system, as waiting lists grow, andpatients requiring more sophisticated treatment for chronicdiseases are turned away. In Social Protection, Costa Rica hasa well-established social assistance network to protect vulner-able groups, but it does not adequately reach the very poor.

Costa Rica is not likely to be able to rely on favorable eco-nomic conditions to reverse these trends. Macroeconomicprojections do not show signs of the consistent growth thatcharacterized the past ten years, and which allowed the gov-ernment to continue increasing investment in the social sec-tors. Relative to GDP, Costa Rica already spends more onsocial services overall than other countries in Latin America,and considerably more than the average for other countriesat similar stages of development outside the region. More-

over, fiscal pressures will not only limit the government’s abil-ity to increase social spending, but could also act as a drag onreal growth prospects for the economy as a whole (see Table 1).This underscores a key finding of the report: that social sectorchallenges can not be resolved only through the allocation ofmore resources, but that they will require reforms which im-prove management and efficiency in the use of available re-sources. New instruments and approaches will be required that

focus on obtaining value for money in the social programs.

There are three key questions which frame the analysis of thesefactors in the new World Bank report, “Poverty and SocialSpending in Costa Rica”. First, who are the poor and vulner-able groups in Costa Rica? The report addresses this byproviding an in-depth, multi-dimensional analysis of poverty.Over 65 percent of the poor in Costa Rica reside in rural areas,although only 49% of the total population live there. Povertyincidence is highest in families where the head of household isworking in agriculture, or self-employment, micro enterprise ordomestic service, or is under- or unemployed. Poor families areyounger, have higher dependency rates and most have no oronly one income earner. Poor families are larger than non-poorfamilies (4.7 family members vs. 3.7 for non-poor) and have ahigher number of people below 12 years of age (1.7 vs. 0.9).Women head an estimated 48 percent of families in extremepoverty compared to 33 percent in near-poor families. One of

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1 Full report prepared by Tarsicio Castañeda, James Cercone, LuisaFernández, Fabio Durán, Rodrigo Briceño, Stephan Brunner, Juan

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the most striking facts regard-ing extremely poor families isthe very high unemploymentrate for all family members.The extreme poor and poor,when occupied, work prima-rily in temporary activities,while the near-poor work pri-marily in permanent activities.Furthermore, 16 percent of theincome-poor families in CostaRica have no income earner inthe family. Education levelsare much lower for the popu-lation in the lowest incomequartile group. Health condi-tions also vary considerablybetween the non-poor andthe poor, and despite a univer-sal health system, roughly 30percent of poor have troubleaccessing programs (the CajaCostarricense de Seguro So-cial (CCSS)) for the unin-sured.

Two groups appear particu-larly vulnerable. About84,000 children aged between 0 and 5 (95% of the poor group)are not attending CEN-CINAI or Hogares Comunitarios cen-ters. Similarly, those over 65 years of age living in extreme pov-erty can also be considered highly vulnerable because of theirill health and low incomes. About 46 percent of extremely poorpeople older than 65 years of age reported permanent or tem-porary physical or mental limitation with about 14,000 elderly ofthem (about 50 percent) not being covered by contributory orassistance pensions.

The second key question is: what has been the impact of so-cial spending on programs that aim to improve the wel-fare for the poor? The report addresses this by examiningthe effectiveness of government policies and spendingin thesocial sectors on the poor. During the 1990’s, Costa Ricamade impressive progress in making social spending a prior-ity and increasing the allocations to priority programs. As aresult, the main indicators improved significantly. Coverageof primary and secondary education improved substantiallyand illiteracy dropped to only 5 percent of the populationover 12 years of age. Life expectancy at birth is above 76years, the infant mortality rate dropped from 15 to 13 for ev-ery thousand live births (10.3 in 2001) and access to drinkingwater is practically 100 percent.

Despite these accomplishments, the analysis indicatesthat the national averages hide discrepancies betweenthe income levels and that Costa Rica’s performance inkey areas lags considerably behind comparator coun-tries in the Region (see Table 2). In some areas, notablyhealth care, Costa Rica’s striking performance is comparable

to that in some OECD countries. However, in other areas,such as secondary education, progress has been uneven. Inprimary education, despite high levels of absolute coverage,there have been increases in repetition and drop-out rates.Although access to services for poor groups has improvedconsiderably, a lack of effective targeting mechanisms re-duces the cost-effectiveness of social programs. For ex-ample, the share of social assistance programs resources re-ceived by the poorest 25 percent of the population just ap-proximates their share in the population, implying little orno re-distributive impact of spending. More spending alonewill not solve these problems.

Finally, given these problem areas, and the limited capacity toincrease public expenditures on social services, we ask: howcan government spending be used more effectively to reachthe poor and to contribute to reducing headcount poverty?While the objective of the report was not to prescribe solu-tions, it provides both sector-specific and general policy op-tions that the government can consider. A common theme inthe sector specific recommendations is the need for greaterflexibility in the implementation of existing programs, coupledwith more efficient coordination and administration to improvetargeting and respond to the needs of the poor. For example,one of the key channels for the provision of social assistance(FODESAF) is obliged to allocate funds to low priority spend-ing under outdated legislation. More generally, the report ad-vocates the creation of a policy-making mechanism—chargedwith setting social policy, evaluating the costs, benefits andimpact of social programs, exploiting synergies, and reducingprograms overlaps. The government should consider possibili-

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ties for improving coordination of social policies, define priori-ties and regularly evaluate the impact and targeting of socialprograms.

The Road Ahead: Policy Suggestions

EducationSome of the actions recommended for primary education in-clude the following: (i) strengthening the teaching and learn-ing of reading, writing and math skills in first through sixthgrades; (ii) making more effective use of learning assessmentfindings; (iii) improving in-service teacher training; and (iv)strengthening community and parental participation in school-related matters.

To ensure efficient use of available resources, the followingstructural changes should be sought: (i) update the curricula; (ii)improve teacher training; (iii) increase the supply of secondaryeducation through several options thatinclude traditional schools tele-secundarias, distance learning, open-ac-cess education, virtual schools and voca-tional training; (iv) promote collaborationwith the private sector to improve therelevance of secondary education; and (v)help parents and students, especially inrural areas, to finance part of the opportu-nity costs of studying through scholar-ships, conditional cash transfers, andother supplemental financing schemes.

During the past five years, less progresshas been made among the poor than inhigher-income groups. For this reason,and in addition to the coverage and qual-ity improvement efforts described above,the Ministry of Education should aim toimprove the targeting and equity ofschool food programs, transportation andscholarships.

The cost implications of the actions recommended for pri-mary and secondary education are relatively modest whencompared to the resources currently allocated to education.Overall, it is estimated that the efforts suggested will increasecosts in the order of 6 to 7 percent of current expenditures.This cost increase could be financed through internal effi-ciency improvements, for instance by reducing grade repeti-tion rates and poorly targeted programs that provide resourcesto less needy populations. General estimates suggest that thecosts involved in primary grade repetition amount to approxi-mately US$21.2 million/year, about 10% of the budget for pri-mary education; the costs involved in secondary repetitionrates are of about US$14.8 million/year.

HealthCosta Rica needs to continue with the reform processlaunched in the mid 90’s in order to cut inefficiencies and im-

prove services. This includes, (i) consolidating the Ministryof Health’s role as steward and policy maker and strengthen-ing health education and public health programs; (ii) consoli-dating the Basic Teams for Integrated Health Care (EBAIS)model and improving access in order to reach the 12 percentof the population that are still not covered; (iii) improvingadministrative and budgeting procedures in the CCSS, andpromote a culture of performance agreements with hospitalsand other health care providers, in order to increase cover-age of primary health care and improve overall system effi-ciency; (iv) promoting changes in the system in order to im-prove the financial and management autonomy of the healthcare providers, under the 1999 Deconcentration Act; (v) re-ducing current disparities in expenditures levels by region;(vi) introduce changes in the drug procurement systems tocut down storage and purchase costs; (vii) strengtheningthe CCSS’s collection system and promoting changes in fi-nancial information systems; and finally (viii) establish alter-native service arrangements through public-private partner-

ships that complement the public ser-vices supplied by the CCSS, to gradu-ally introduce managed competition inthe health care market.

The cost implications of the continuedreform process have been estimated atabout US$70 million over five years,but these costs are about half the sav-ings that can be obtained from the re-forms over the same period. The CostaRica Health Sector Strengthening andModernization Project will producesubstantial savings for the sector, pri-marily through reductions in hospital-ization costs resulting from ambulatorysurgery ($12 million per year), phar-maceutical management, and reducedoverhead from increasing decentraliza-tion ($12 million per year). Improve-ments in pharmaceutical supply chainmanagement alone could save over $30

million per year by reducing unnecessary inventory costs.Even under conservative assumptions regarding the effec-tiveness and speed of change, direct benefits would exceed$24 million per year.

Social ProtectionPensions. The country still faces major challenges goingforward: (i) to reduce replacement rates and future costs ofthe public scheme and introduce incentives that increasecontributions in the early years of the earnings cycle, in or-der to get them to an affordable level and to guarantee theirfinancial sustainability; (ii) to expand coverage, improvethe membership management and the control of contribu-tions; (iii) to increase coverage and improve targeting ofnon-contributory pensions, and (iv) to strengthen the re-forms that will guarantee the long-term sustainability ofpension schemes for civil servants. If reforms are not under-taken, as the population ages sharply over the next 30

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Want to Know More?

The report “Social Spending in Costa Rica” starts with a pro-file of the poor. Poor families tend to be younger, larger andhave higher dependency rates than non-poor families, withmost having no, or only one, income earner. On average, theyare disproportionately rural and headed by women. The poorbenefit less from educational opportunities, and may havetrouble accessing healthcare. The report provides both sector-specific and general policy options to improve the impact ofsocial spending and to ensure that poverty reduction is not tiedexclusively to rapid economic growth. Clearly, improvementsshould focus on how to improve the impact of existing re-sources and ensure that any additional resources that may beallocated to the social sectors are effectively targeted at thepoor. Download the report from http://www.worldbank.org/CR

About the Author

Helena Ribe is a Sector Leader within the Human Develop-ment Department of the Latin America and Caribbean Re-gion, based in Washington D.C. Roxane Viquez is the ex-President of IMAS in Costa Rica.

years—due to falling fertility rates and rising life expect-ancy—the increasing financial imbalance could lead to pen-sion fund insolvency.

In social assistance, the spending priorities require urgentreform. Priority measures involve the following three areas:(i) changing legislation (the FODESAF law) to permit gov-ernment to vary spending priorities in accordance withneeds, and to allow the allocation of more resources to vul-nerable groups, and be able to respond to crises; (ii) im-proving the coordination among programs to prevent dupli-cations; (iii) improving the targeting, coverage and designof social assistance programs such as CEN-CINAI; and (iv)completing the coverage for poorer groups through non-contributory pension schemes.

The cost implications of expanding pre-school educationprograms for poor children and non-contributory pensionsfor the poor elderly are also relatively low and may becovered within the existing social assistance budget. As es-timated, expanding pre-school coverage to all childrenthrough care programs offered by centers and parents-com-munity would amount to approximately US$26 million peryear. The current annual budget for the CEN-CINAI pro-gram is around US$19 million and an additional US$11million would be required to cover all poor children. Theseare general estimates based on the assumption that non-poor children will not benefit from public programs. Costscould be cut even further if the CEN-CINAI programs aremodified to reduce food and health care subsidies providedby the CCSS. If the programs were to reach the 7,000 poorelderly that are still not covered, total annual costs wouldamount to US$3.1 million, which could be paid with the re-sources currently used to benefit non-poor pensioners.

Improving Institutional CoordinationThe impact of social spending in Costa Rica could be im-proved, particularly its impact on the poor, with the cre-ation of a policy-making mechanism charged with settingsocial policy, exploiting synergies, and reducing programsoverlaps. The government should consider possibilities forimproving coordination of social policies by exploring thecreation of a Council for Social Policy Coordination underthe direction of the President, with a technical secretariat todefine priorities and regularly evaluate the impact and tar-geting of social programs. Such an entity would define pro-grams and their goals, beneficiary populations, and the in-stitutional arrangements to carry out key strategies. Effortsin this direction have been undertaken in recent administra-tions, but they have been hampered by institutional rigidi-ties and laws which have undermined coordination effortsand the reform or elimination of ineffective programs or in-stitutions. In this regard, allowing FODESAF greater flex-ibility to channel resources to vulnerable groups and to re-spond to changing conditions, particularly during crisis,will greatly contribute to improving the effectiveness of so-cial spending.

Strengthening, monitoring and evaluationsystems

The lack of an effective monitoring and evaluation systems sys-tem for the social sectors is an impediment to ensuring value formoney in social spending. This is most evident in programssuch as the CEN-CINAI where—had a good evaluation pro-gram existed—resources could have been saved by finding themost cost effective alternative for child care. Different modali-ties of child care, some including only parental education, oth-ers—including center-based stimulation and early child educa-tion—could have been evaluated to determine their impacts andrelative costs. Monitoring and evaluation is key to evaluateprogress, evaluate impact of programs and make more efficientdecisions on programs to improve social indicators of the poor.The practice of establishing base-lines and measuring the im-pact of specific programs should be implemented routinely inorder to draw lessons from experience—which can be used tomodify programs and improve their impact. In addition, instru-ments such as Living Standards and Measurement Surveys andimproved household surveys provide valuable information onkey target groups and on the outcomes of the main social pro-grams, complementing the annual household surveys currentlycarried out by the Statistical Institute. At the same time, evalua-tion should include ex-ante and ex-post evaluation of social sec-tor programs using cost-effectiveness and cost-benefit analysisto assess programs.

The collective impact of the actions presented in the reportwould contribute to progressive improvements in the impact ofsocial spending and to ensuring that poverty reduction is nottied exclusively to rapid economic growth. Clearly, improve-ments should focus on how to improve the impact of existingresources and ensuring that additional resourcesthat may beallocated to the social sectors are disproportionately targeted tothe poor.