Determinants of Development: Costa Rica and Guatemala
Anti-immigration discourse in the Global North operates from the assumption that a migrant’s first instinct is to leave their home country.
Almost no matter the issue, Western governments have decided that immigrants are the problem. It is said that foreigners steal jobs, leach off welfare and contribute to the cultural degradation of civilised society; some even eat pets! Such rhetoric, coupled with low wage growth and the systematic dismantling of social safety nets, have led to popular support for harsher immigration legislation across Europe and North America. Even individuals who do not subscribe to the great replacement theory and who see immigration as a net positive are increasingly in favour of closed borders.
Beyond the humanitarian aspect—liberal democracies should practise what they preach—anti-immigration discourse in the Global North operates from the assumption that a migrant’s first instinct is to leave their home country. Despite severe income variations between regions, most people do not migrate. Individuals willing to uproot their lives and risk death by migrating to a country where they will most likely be ostracised are not stupid or view the West as El Dorado—they weigh their options and make an extremely tough decision. What further complicates matters is that the very states shutting their borders are largely responsible for the conditions in migrants’ home countries.
An illustrative example is comparing the Central American countries of Costa Rica and Guatemala. In 2021, 1 million Guatemalan-born people lived in the United States, or about 6 individuals per 100,000 Guatemalans in Guatemala. The number for Costa Rica is around 1.5 individuals in the US per 100,000 Costa Ricans residing in their native country.
Why this discrepancy? Because it is easier to live a comfortable life in Costa Rica. It has one of the best Human Development Index scores in Latin America, slightly higher than Serbia, and the fourth-highest GDP/capita in the region. Guatemala ranks considerably lower in both categories, not least because the country experienced a 36-year civil war between 1960 and 1996, killing over 200,000 people. Costa Rica has been peaceful since 1948.
Economic and security factors do not explain all migration, but it would be easy to guess which of the two nations has seen the most outflow.
The question now becomes why Costa Rica is more developed than Guatemala. The recipients of this year’s Nobel Prize in economics—Daron Acemoglu, Simon Johnson and James Robinson (AJR)—argue that long-term economic development is caused by a state having the right institutions. Specifically, those that “allow and encourage participation by the great mass of people in economic activities that make best use of their talents and skills and that enable individuals to make the choices they wish”. These are called inclusive institutions. Alternatively, a country can have extractive institutions, meaning they ignore human output, over-rely on natural resources and waste human potential.
AJR posit that different types of European colonialism have determined which institutions form in a particular territory. In each instance, over time, minor variations in inherited institutions interact with critical junctures, leading to growing economic divergence. How Europe colonised the United States differs from Brazil. The authors have popularised their thesis in the book Why Nations Fail?
The argument is far from perfect. It has been criticised for being Eurocentric in how it describes development and for ignoring that “inclusive” institutions are also a legacy of extractive colonialism, such as slavery in the US. Nonetheless, AJR deserve credit for reintroducing the developmental impacts of colonialism and class struggle through institutions in mainstream economics. I will not be operating from the inclusive-exclusive dichotomy here, but the differences between Costa Rica and Guatemala have historical roots.
The lands of modern-day Guatemala were first colonised by the Spanish in 1524. Labour relations in the territory were initially overtly violent, with indigenous people forced to work as slaves. This practice was banned across the Spanish Empire in 1542 and replaced by a form of organised serfdom called the encomienda system—whereby a Spanish person was given a monopoly on the labour and tax revenue of particular indigenous groups. In return, the Spanish provided “protection” and “education”.
The plentiful supply of serf labour and favourable geographical conditions saw the consolidation of agriculture under large estates dominated by an ethnically Spanish elite. As the capital of Spanish Central America, Guatemala was firmly connected to the global economy, increasing the wealth of these elite groups through trade. Coffee cultivation, Guatemala’s main export after independence, started in the mid-1700s and followed the same pattern of severe inequality, even by colonial standards.
A higher prevalence of tropical diseases and resistance from the local population delayed a permanent Spanish colonial presence in Costa Rica until 1561. The distance from the administrative centre in Guatemala meant the territory was largely free of colonial institutions and less integrated in the global economy. Moreover, the low concentration of indigenous people in the area limited the effectiveness of the encomienda system. By the end of the 1600s, much of Costa Rica’s Spanish population engaged in subsistence farming. Consequently, vast agricultural estates like those in Guatemala did not develop.
Coffee was brought to Costa Rica from Cuba in the late 18th century and soon became the country’s most important export. Contrary to the case in the rest of Central America, the expansion of coffee cultivation wasn’t based on large-scale exploitation of the peasantry, preserving its property and relative strength. Costa Rica was far from a peaceful, egalitarian colony of poor farmers. Structural factors did, however, contribute to less class antagonism and lower levels of violent conflict than in neighbouring territories.
After independence, the dual processes of state centralisation and expansion of coffee economies in the 19th century were consistent with existing class dynamics in both countries. These processes, in turn, produced the context for later authoritarianism and civil war in Guatemala and democracy in Costa Rica.
The changes occurred during the so-called liberal reform era when all Central American countries experienced an expansion of commercial agriculture due to increased world demand for exports such as tobacco, bananas and coffee. To participate in the boom, conservative groups agreed to liberal demands for land privatisation.
In Guatemala, the liberal era started in 1871 with the ascension of President Justo Barrios. The army was expanded and modernised—granting Barrios personal power and providing the coffee growers a coercive mechanism to maintain order on the plantations. Guatemala then pursued extensive privatisation of communal lands, distributing almost 1 million acres between 1871 and 1883. In line with colonial class tensions, the country institutionalised one of the most repressive labour systems in post-independence Latin America, with forced labour and debt peonage commonplace. Only a sharply unequal and antagonistic society could grow from such a system.
The trigger for the horrors Guatemala would experience in the 20th century was the ousting of social democratic reformer Jacobo Árbenz—elected to the presidency in 1950 on a platform of breaking with the past by politically incorporating the urban middle classes and redistributing wealth and power in the countryside. His policy package included nationalising lands held by big landlords, including the American United Fruit Company. Always quick to support free trade, the CIA backed a military coup in 1954 to protect the company’s holdings. Leftist resistance against the military dictatorship prompted the civil war.
Opposition from Guatemala’s armed forces and private interests might have stopped Árbenz regardless, but we will never know.
For Costa Rica, the liberal reform era began when the country gained independence in 1821. Limited natural resources and few indigenous peoples to work as serfs meant that standard conservative landowners—the church, colonial institutions and traditional landed elites—were absent in Costa Rica. As a result, land privatisation followed a pattern of giving preference to those already occupying it, structuring Costa Rica’s coffee economy around small farms. The lack of an indigenous workforce also made landowners favour wage labour on the coffee plantations, further decreasing inequality.
A Costa Rican oligarchy did exist, but it drew power from the financing, processing and sale of coffee. Consequently, class dynamics became less tense. Elite groups repressing labour and controlling large swaths of land did not unify against the lower classes in fear of revolt—unlike in Guatemala. The presence of non-polarised class structures enhanced elite divisions, leading to the emergence of electoral politics to settle disputes in Costa Rica after 1889.
This democratisation process culminated in the 1940s, when a faction of the traditional elite made a pact with political parties representing urban middle-class and working-class people to promote social welfare legislation. Since a brief civil war in 1948 over a contested election, Costa Rica has been a peaceful, democratic state.
In a 2019 paper titled Democracy Does Cause Growth, Daron Acemoglu and James Robinson—A and R in AJR—collaborated with two other economists to show that being democratic has a positive effect on countries’ long-term GDP per capita. The effect they find is small, however. The difference is only $415/capita on average over 25 years.
This thesis and, indeed, AJR’s body of work is criticised for overestimating the impact of democratic institutions per se on economic growth. In fact, the positive effect of democracy is offset when accounting for sanctions placed on non-democracies by the United States and its Western allies. In other words, the wealthiest nations today happen to be democracies and in using their advantage they skew the numbers.
Similarly, it could be argued that the difference in development between Costa Rica and Guatemala since 1948 cannot be fully explained by the mere appearance of democratic politics in Costa Rica. There are at least two additional factors to consider, both relating to the West’s dominance of the world economy.
First, it’s important to remember that Jacobo Árbenz was democratically elected. He was ousted because Guatemala’s electoral institutions produced an unacceptable outcome for the United States from an economic and ideological perspective; he wanted to nationalise lands held by US firms and was a left-wing politician. Again, colonial class relations might have prevented his reform programme, but he was not given the chance to find out.
The case is not unlike the 1973 CIA-backed military coup against Chilean president Salvador Allende. Allende’s left-wing policies did lead to inflation. But his development programme was, from the start, subjected to sabotage by Chilean elites and the United States, including the CIA and American business interests assisting in the 1972 “bosses’ strike”, which caused inflation to soar.
Neither Allende nor Árbenz’s policies were allowed to fail on their own volition. Their programmes threatened local elites. Crucially, they also presented a challenge, however small, to the international division of labour and production—which required and still requires steep inequality between the Global North and South. The difference is that Árbenz’s resignation thrust Guatemala into civil war and genocide.
Second, Costa Rica, by virtue of its colonial conditions, was allowed by the powers that be to develop as a democracy in the second half of the 20th century.
During the Latin American debt crisis in the 1980s, the country’s economy contracted over 9%, and average inflation reached 90%. The crisis pushed the government to reform Costa Rica’s economy towards an export-led development model—meaning a nation seeks growth by promoting and increasing the production of goods for export to international markets.
In the 1990s, Costa Rica implemented market-friendly policies to this end, including establishing free trade zones (FTZs) where companies would pay no tax as long as their production was solely for export.
Today, FTZ firms disproportionately drive the country’s economy. Information and communication technology, electronics, and medical instruments are the country’s most valuable exports. As a result, the Costa Rican economy has become more diversified, reducing exposure to the ups and downs of coffee prices.
Yet, despite solid GDP growth and attracting the most foreign direct investment (FDI) in the world for its size, Costa Rica has failed to reduce poverty since 2000. There are several reasons, such as low female labour force participation and few opportunities for less-educated workers in almost all sectors. Widespread privatisation and neoliberal policies have also contributed to rising inequality and insecurity. Migration from Costa Rica to the US grew 56% between 2000 and 2021.
The export-led development model in Costa Rica promotes a type of capitalism conducive to Western interests, which is why it has been allowed to develop. The strategy involves a race to the bottom, where Costa Rica competes with other developing countries to see who can offer the biggest tax breaks for multinational corporations. The liberal export policies, meanwhile, have not been accompanied by facilitating business for local firms. Instead, these are crowded out of the market due to international competitors playing by different rules.
Whether democratic institutions are needed for this is unclear, as the United Arab Emirates attracted the third-most foreign investment globally last year, adjusted for the size of its economy. Costa Rica’s status as a beacon of social and political stability in Central America has not altered its position in the unequal global value chain.
History does not doom you. Countries can escape the spectre of colonialism. It would, however, be unfair not to admit that structural factors have made it much harder for Guatemala to break out of the poverty trap. With opportunities scarce at home, some people emigrate to the US in search of work. Instead of demonising these individuals, Western nations should take accountability for their role in underdeveloping migrants’ home countries—a practice that continues to this day.
// Adrian