Why Latin American governments spend money badly

IN COSTA RICA’S rainy season, bright mornings yield with deceptive suddenness to tropical downpours. So it was on September 10th, when the country’s civil servants went on strike. They oppose a fiscal reform that raises some taxes and limits automatic wage increases. Universities and public offices were deserted. After blocking roads and a railway, many went home before the afternoon shower. Two months later, some are back at work. But teachers are still on strike and many state schools remain shut. With reform stalled, the currency is under pressure and investors have pushed up the cost of servicing the public debt. Unless Carlos Alvarado, a social democrat elected as president in April, wins this trial of strength, Costa Rica may follow Argentina into the arms of the IMF.

This is in a country that, like its weather, in many ways sparkles. Its long-established democracy and new industries, such as ecotourism and medical instruments, make it a model for Latin America. But its fiscal clouds may represent the region’s future, too. Costa Rica spends badly. And it finds it hard to raise the taxes necessary to pay its bills. The fiscal deficit stands at 7% of GDP. Past governments ramped up public employment. Costa Rican civil servants are unusually well rewarded. The public wage bill is 12% of GDP. That is above the Latin American average of 8.4%, which is itself high by international standards, according to data from the Inter-American Development Bank (IDB).