From Coffee Beans to Microchips: Export Diversification and Economic Growth in Costa Rica

During the early 1980s Costa Rica experienced its worst economic crisis since World War II, which led to the abandonment of the import substitution model of development adopted in the 1960s. This severe economic downturn also spurred the implementation of a series of new policies supporting foreign investment in high-value-added industries and the diversification of the nation’s exports. As a result, Costa Rica has diversified its economic activity, moved away from its historical dependence on agricultural exports, and gained new competitive advantages in the manufacturing sector. This study presents a straightforward generalization of the model proposed by Herzer and Nowak-Lehnmann’s (2006) to test the hypothesis that export diversification has influenced economic growth in Costa Rica via externalities of learning-by-exporting and learning-by-doing. To examine whether a long-run relationship exists between export diversification and economic growth, two types of statistical methodologies are used: the bounds test to cointegration within a distributed lag (ARDL) framework and the dynamic OLS (DOLS). Overall results sufficiently conclude that, at least in the Granger’s sense, there is no long-run causality between export diversification and economic growth in Costa Rica over the period of 1965 to 2006