ECON 772:
TRADE AND DEVELOPMENT

Foreign Trade Policy and Growth
A Comparison of Mexico and Costa Rica

by

Fabian Barthel

3 October 2005

Table of Contents

I. INTRODUCTION ...  1

II. THE COMPARABILITY OF MEXICO AND COSTA RICA  ...  2

III. ILLUSTRATION OF THE FOREIGN TRADE POLICIES IN MEXICO AND COSTA RICA  ...   3

1. Mexico
1.1. The four decades of import-substituting industrialisation  ...   3
1.2. The era of extensive trade liberalisation  ...   6
1.3. NAFTA and the post-liberalisation era ...   9

2. Costa Rica
2.1. Implementation of a strategy of import-substitution  ...  11
2.2. Import liberalisation and the export-led-growth strategy  ...   12
2.3. Trade policy since the accession to GATT  ...   14

3. Similarities and differences  ...  15

IV. GROWTH  ...  16

1. Mexico  ...   16
2. Costa Rica  ...  17
3. Comparison  ...  17

V. CONCLUSION  ...  18

Graphics and Tables
Chart 1 Mexico: Fuel Exports (% of merchandise exports)
Chart 2 Mexico & Costa Rica: inflation in % p.a.
Chart 3a Mexico: External Total Debt, current billion USD
Chart 3b Costa Rica: External Total Debt, current million USD
Chart 4a Mexico: Exports and imports of goods and services 
(constant 2000 USD) – in billion USD
Chart 4b Costa Rica: Exports and imports of goods and services
(constant 2000 USD) – in billion USD
Chart 5a Mexico: External Balance on Goods and Services (current million USD)
Chart 5b Costa Rica: External Balance on Goods and Services
(current USD) – million USD
Chart 6 Costa Rica: averaged import tariff
Chart 7 Trade as percentage of GDP
Chart 8 Mexico: Annual Growth of GDP in Percent
Chart 9 Costa Rica: Annual Growth of GDP in Percent
Chart 10 GDP: constant 2000 USD (1960=100)

Table 1 Liberalisation of trade restrictions
Table 2 Growth & Openness in Costa Rica and Mexico

Foreign Trade Policy and Growth
A Comparison of Mexico and Costa Rica

I. Introduction

There has been a lot of work on the relation between openness and economic growth, with results being ambiguous. A study done by Sachs and Warner (1995), using a sample of 135 countries, has shown that there is a positive correlation between openness and growth, e.g. that trade liberalisation fosters economic performance. The assumptions and country categorisations of this study have been criticised by Rodriguez and Rodrik (2000); they concluded that low tariff rates do not necessarily imply higher growth rates but that tariff protection exceeding a certain level stifles growth. Dollar and Kray (cited in Santos-Paulino and Thirlwall, 2004) compared different sets of countries with each other and found out that changes in growth rates are positively correlated with the share of trade and thus greater openness has accelerated economic growth.

This essay compares the foreign trade policy of Mexico and Costa Rica. Even though both countries pursued the same policies, some differences can be found. Both implemented a strategy of import-substituting industrialisation until the serious crisis at the beginning of the 1980s, followed by a period of extensive trade liberalisation. This was due to pressure put on by the international institutions such as IMF or World Bank. While Mexico opened up its market, Costa Rica went further and lowered the import barriers. They put a strong emphasis on attracting foreign direct investment. With an average annual growth rate of 4.78 percent in Costa Rica and 4.43 percent in Mexico over the last four decades both countries achieved a strong economic growth exceeding the average of all other Latin American countries. However a positive interrelation between openness and growth could not be found in this study.

This essay is structured in four main parts. Section II of this paper deals with the fundamental comparability of Mexico and Costa Rica. Section III portrays the foreign trade policies of both countries and illustrates the main similarities and differences. The development of growth is outlined in Section IV. Section V concludes the paper.

II. The comparability of Mexico and Costa Rica

A variety of factors influence the economic performance of a specific country. Economic policy forms only a fraction of this. Trade policy in turn encompasses only a portion of these policy-setting levers. Therefore the exclusive examination of trade policy measurers and economic growth has to be observed critically. Even more if the comparison is based on two countries only. Political issues aside, there are a multitude of other aspects affecting the economic development. Examples of these are the geographical position, the endowment with natural raw materials, the existence of functioning institutions and the size of the domestic market, just to mention a few. Because of these multiple linkages it is hard to disentangle the effect of trade policy from other policies and influencing factors.

Mexico and Costa Rica have some similarities but also show a couple of important differences. For similarities, both are situated in Central America in a tropical climate. They both obtained their independence from the European colonial power in 1821 as a part of the viceroyalty of New Spain. Both Mexico and Costa Rica are members of the GATT and the WTO. The most important trade partner for both countries is the USA.

Some notable differences would be that the domestic market of Mexico exceeds the Costa Rican market by far with a population of 102 million and GDP of 626 billion USD. Mexico has the biggest economy in Latin America and the number eight economy worldwide in terms of exports. Costa Rica has 4 million inhabitants and a GDP of 17 billion USD. This makes it an unimportant country from a global perspective. Also the GDP per capita in Costa Rica is 4.300 USD lower compared with 6.230 USD in Mexico (World Bank, 2005a). Whilst Mexico disposes of extended natural resources like oil, gas and coal Costa Rica is dependent on importing resources. Mexico shares a border of more than 3.000 km with the United States, the richest nation worldwide, while Costa Rica abutts to the poor nations Nicaragua and Panama.

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