Development trajectories and new comparative advantages: Costa Rica and the Dominican Republic under Globalization

World Development 34, No. 6, pp. 996–1015, 2006 Ó 2006 Elsevier Ltd. All rights reserved 0305-750X/$ - see front matter www.elsevier.com/locate/worlddev

doi:10.1016/j.worlddev.2005.11.012

Development Trajectories and New Comparative Advantages: Costa Rica and the Dominican Republic under Globalization DIEGO SANCHEZ-ANCOCHEA University of London, UK

*

Summary. — This paper compares the experiences of Costa Rica and the Dominican Republic in creating new comparative advantages in manufacturing exports and its impact on economic development. It makes three main arguments. First, the apparel sector is currently unlikely to act as an engine of economic development. Second, high public spending in health and education and selective targeting of foreign investment have been fundamental in the creation of comparative advantages away from apparel into exports with higher technological content in Costa Rica. Third, the new export sectors still lack sufficient linkages to the rest of the economy and most of their value added goes into profits for the transnational corporations. Ó 2006 Elsevier Ltd. All rights reserved. Key words — exports, national development, free trade zones, Latin America, Costa Rica, Dominican Republic

1. INTRODUCTION The promotion of new exports through free trade zones (FTZs) and other incentives has become a key policy goal of countries in Latin America and beyond. New exports were to become the engine of economic growth and contribute to the expansion of other sectors of the economy (Bulmer-Thomas, 2003). Manufacturing exports could also contribute to the expansion of productivity and to the generation of foreign exchange to pay for imports of capital goods (Reinhart & Peres, 2000). Apparel exports have played a central role within this policy model. Countries in Central America and the Caribbean, Southeast Asia, and Eastern Europe have increased their participation in the apparel global commodity chain, exporting to Europe and, especially, the United States. In nurturing the apparel sector, countries were trying to follow the experience of early industrializers, where apparel was an engine of industrial transformation and economic growth (Mortimore, 2002). In latecomers like Korea and Taiwan, apparel production contributed not only to the expansion of exports, but also to the development of local suppliers 996

that produced numerous inputs for the final product (Gereffi, 1999). This paper explores the development effect of apparel exports from the FTZs through a comparison of the experience in Costa Rica and the Dominican Republic, two small countries that become major apparel suppliers to the United States in the 1990s, but are experiencing increasing problems in the face of Chinese competition (IDB, 2005; USITC, 2004). The paper also analyzes their policy responses to the observed limitations of apparel through the attempt to diversify into sectors with higher technological content, and the shortcomings of this new strategy. Costa Rica and the Dominican Republic constitute two excellent cases for comparison (Itzsigsohn, 2000). Both countries used FTZs * I am grateful to Janine Berg, William Milberg, Andrew Schrank, Ken Shadlen, and two anonymous referees for valuable comments and suggestions. Research support from the Instituto de Investigaciones en Ciencias Economicas, Universidad de Costa Rica is also gratefully acknowledged. Final revision accepted: November 16, 2005.

DEVELOPMENT TRAJECTORIES AND NEW COMPARATIVE ADVANTAGES

earlier than other countries in Central American and the Caribbean to move away from their traditional comparative advantage in primary goods, into exports of apparel and other manufactures. This helped them to achieve higher rates of economic growth than most of their neighbors during the 1990s. At the same time, however, differences between both countries are also striking. While Costa Rica benefited from its long-term commitment to social spending to move into new exports with higher technological content, it was less successful than the Dominican Republic in expanding value added in the apparel sector and experienced lower rates of economic growth until 2002. This paper draws three major conclusions from the comparative case study of Costa Rica and the Dominican Republic. First, it reinforces with new data the finding presented by Kaplinsky (1993), Mortimore (2002), Schrank (2004), and others that the apparel sector, while creating new jobs and a new source of foreign exchange, is unlikely to act as an engine of economic development when it is based on dependent relations with the United States and other developed countries. The sector has three main shortcomings that both the Dominican Republic and, to an even larger extent, Costa Rica have suffered: apparel exports generate low domestic value added, behave ‘‘like commodities’’ (i.e., they have limited long-term growth and a tendency to reduce its prices in the long run), and do not create the productive assets required to generate a virtuous circle of exports. Second, a long-term commitment to the accumulation of human capital constitutes a key factor in the ability of countries to move away from apparel into exports with higher technological content and higher long-term growth of demand. The comparison between Costa Rica and the Dominican Republic also reveals the importance of effective institutions for the attraction of transnational corporations (TNCs) in high-tech sectors. Third, the new export sectors may not resolve one of the key limitations of the apparel sector and, more generally, of the current export-led model adopted in Latin America and other regions of the world: the lack of integration between the export sector and the rest of the economy. In Costa Rica, the arrival of Intel and other TNCs has contributed to the expansion of exports and direct employment; however, linkages have been limited and the main beneficiaries have been the TNCs themselves through

997

the expansion of profits. In the Dominican Republic, where diversification has been incomplete and concentrated into less technology intensive sectors, the expansion of profits has also been the main result of the process. Costa Rica’s inability to use high-tech exports to trigger a sustained process of economic growth raises some doubts on well established assumptions in the development literature. It shows, for example, that export success may be insufficient to promote economic growth, unless it is accompanied by the creation of productive capabilities in other sectors of the economy. 1 The fact that Costa Rica has been unable to reap the rewards of a long history of investment in human capital and a relative success in implementing a targeted policy of foreign investment attraction is also a challenge for the proponents of the developmental state such as Chang (1998) and Evans (1995). Determining why economic growth in Costa Rica was not higher than in the Dominican Republic and performance in some sectors such as apparel was poorer may require looking beyond state intervention, incorporating variables such as the role of different countries in global commodity chains, and the characteristics and interests of domestic firms. This paper is organized in four sections, beginning with a discussion of the differences and similarities in development trajectories and comparative advantages in Costa Rica and the Dominican Republic and the general limitation of the FTZs in terms of value added. I then explore the importance of the apparel sector in both countries and illustrate three key shortcomings of the sector in its contribution to economic development. The next section discusses the attempts that both Costa Rica and the Dominican Republic have made to move into exports with higher technological content. It also discusses some of the unresolved problems of the strategy and questions its long-term sustainability by comparing Costa Rica with Singapore. The paper concludes with a brief discussion of policy options. 2. DEVELOPMENT TRAJECTORIES AND NEW COMPARATIVE ADVANTAGES IN COSTA RICA AND THE DOMINICAN REPUBLIC Costa Rica and the Dominican Republic constitute excellent case studies for comparison

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when evaluating the export-led development strategy in their export structure and their prospects for long-term growth. They are both small, middle income countries, which achieved respectable average rates of growth during a significant period of time when compared to many of their neighbors. According to Maddison (2001), during 1950–98 GDP per capita grew at an annual average rate of 2.3% in the Dominican Republic and 2.1% in Costa Rica, compared to 1.2% in El Salvador, 0.9% in Honduras, and 1.7% in Latin America (44 countries) as a whole. 2 Costa Rica and the Dominican Republic have also followed roughly similar development policies with regard to trade and industrial promotion and have shared a similar insertion in the global economy. Since the 1960s both countries promoted import substitution industrialization (ISI) through protection of the domestic markets and subsidies for domestic production, while remaining specialized in primary goods such as sugar, coffee, and bananas. After the debt crisis of the early 1980s, which resulted in severe economic and social tensions, Costa Rica and the Dominican Republic moved toward the promotion of non-traditional exports. Costa Rica concentrated its policies on the reduction of tariffs, the expansion of export subsidies, and the creation of other special regimes for the promotion of exports, while the Dominican Republic promoted the expansion of FTZs (created initially in 1969). Both countries also devalued their currencies significantly. Similar rates of economic growth and similar industrial policies should not obscure the differences in the patterns of social spending and advances in human development. Costa Rica’s conscientious effort to expand spending in health and education and consolidate a welleducated middle class contrasts sharply with the exclusionary features of the Dominican model (Sa´nchez-Ancochea, 2004). Table 1 illustrates the different pattern of social spending in each of the two countries. Costa Rica, which had instituted public and mandatory primary education at the end of the 19th century, was spending nearly 60% more on social services as a proportion of GDP in 1958 than the Dominican Republic was in 1966. During the 1960s and 1970s, Costa Rica expanded its social spending even more from 9% of nominal GDP in 1958 to 24% in 1980, with particularly high levels in health and education. Despite the negative effects of the crisis of the 1980s, Costa

Rica was still one of the Latin American countries with higher social spending (both as a proportion of GDP and also per capita) at the end of the 1990s. By contrast, in the Dominican Republic, social spending as a proportion of GDP remained stagnant at around 5% during the 1960s and 1970s with spending in education at less than 3% during the whole period. It was not until the 1990s, after economic growth accelerated, that social spending increased moderately, but still reaching just 7.6% in 2001, one of the lowest levels in Latin America. The result of these different policies is well reflected in Table 2, which compares Costa Rica and the Dominican Republic in a series of indicators. Despite higher rates of economic growth in the Dominican Republic during the 1990s, the effect of a half century of a more socially oriented model of development in Costa Rica translated into much higher human development. Costa Rica is ranked 45th in the world in the UNDP’s human development index, while the Dominican Republic is ranked 98th. The differences between the two countries are particularly striking in secondary education (a vital element for the creation of comparative advantages in high-tech sectors) and life expectancy. As Figure 1 indicates, during these last two decades the weight of the leading traditional primary exports in the total exports of goods steadily declined in both countries, accounting for less than 10% in the Dominican Republic and less than 15% in Costa Rica at the beginning of the 21st century. 3 Such reduction has been mainly caused by a significant expansion of manufacturing exports. While both countries have followed the same general pattern, there have been significant differences in the type of new exports that they have developed, which are the result of different export promotions and human capital policies. This is evident when the structure of exports of goods to the US market from each of the two countries is compared. 4 Table 3 reflects the composition of Costa Rican and Dominican exports to the US market for the period 1998 and 2004 as well as the aggregate for the seven years. Exports from the Dominican Republic to the United States are still primarily concentrated in consumer goods, with apparel accounting for 68% of the total. In Costa Rica, on the other hand, exports are more evenly distributed among three different items: consumer goods, capital goods, and food and beverages.

DEVELOPMENT TRAJECTORIES AND NEW COMPARATIVE ADVANTAGES

999

Table 1. CR and DR; evolution of some human development indicators (% of nominal GDP), 1950–90

Public social spending Health Education

1958

1966

CR

DR

CR

1971 DR

CR

1980 DR

CR

1991 DR

CR

1995 DR

CR

2001 DR

8.7 2.6 4.9

5.5 2.7 2.3

16.4 5.2 6.1

5.8 2.6 1.9

23.6 6.2 8.7

5.2 2.1 2.0

15.0 3.7 5.0

3.1 0.8 0.9

15.2 3.8 4.6

4.4 1.5 1.2

19.0 4.3 5.5

7.6 2.6 1.7

Source CR: For the period 1950–80, Quesada et al. (1999). For 1990–2000 Estado de la Nacio´n (various years). Source DR: For the period 1966–80, Marti (1998), for 1980–94 CEPAL (2001) and for recent years Secretaria de Estado de Finanzas web page. Note: In CR the lower numbers for the period 1990–2000 are partly the result of a change in the value of GDP as a result of a revision in the methodology to elaborate the National Account Statistics. In the DR, according to the Secretaria de Estado de Finanzas, the percentages for total public social spending, education, and health for 1995 were 5.5, 1.8 and 1.1, respectively. Table 2. CR and the DR; a comparison of levels of development, 2002–04

GDP, 2002 (billions US$) Population, 2003 (millions) GDP per capita, 2002 (US$, PPP) Rate of growth, 1990–2002a HDI rank, 2002 Adult literacy, 2002b Net primary enrollment, 2002c Net secondary enrollment, 2002c Life expectancy, 2003

CR

DR

16.8 4.0 8,840 4.7 45 95.8 90.4 49.9 78.6

21.7 8.7 6,640 5.6 98 88.4 92.4 35.5 67.1

Source: UNDP (2004) and World Bank webpage (Country at Glance on Costa Rica and the Dominican Republic) and own calculations from Central Bank webpages. a Average annual rate of growth of GDP in constant local prices. b Percentage of people who are 15 years or older. c Percentage of relevant age group.

Two other differences stand out. First, primary exports in Costa Rica are much more important than in the Dominican Republic both in relative and absolute terms as a result of their export promotion policies adopted during the mid-1980s, which were particularly beneficial for non-traditional primary exporters (Sa´nchez-Ancochea, 2004). Second, Costa Rican exports of capital goods increased significantly during this period. During 1998–99, for example, exports of capital goods more than doubled and became the most important generator of foreign exchange. As will be seen in Section 4, this was the result of an active policy of manufacturing export diversification as well as a positive consequence of the long-term emphasis on education. The expansion of manufacturing exports in both countries has also been facilitated by the

100 90 80 70

%

60 50 40 30 20

0

1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

10

CR

DR

Figure 1. CR and the DR. Traditional exports of goods as percentage of the total, 1950–2000. Source: for CR, Central Bank webpage; for the DR, Marti (1998) and Banco Central de la Republica Dominicana (2003). Note: Traditional exports include banana, coffee, sugar, and meat in CR and coffee, sugar, cocoa, and tobacco in the DR. Exports valued in current dollars.

1000

Table 3. CR and DR. Main exports of goods to the US (million of US dollars), 1998–2002 2004

Aggregate 1998–2004

DR

% total

CR

% total

DR

% total

CR

% total

DR

% total

CR

% total

Foods, feeds, and beverages Industrial supplies and materials Capital goods, except automotive Automotive vehicles, parts and engines Consumer goods Other goods

304.6 216.3 669.8 5.8 3,133.7 109.8

6.9 4.9 15.1 0.1 70.6 2.4

787.8 145.5 700.9 8.5 1,040.2 59.4

28.7 5.3 25.6 0.3 37.9 2.2

225.9 472.9 817.5 42.7 2,830.1 136.9

5.0 10.4 18.1 0.9 62.5 3.1

890.1 222.1 1,257.9 103.9 721.4 137.5

26.7 6.7 37.7 3.1 21.6 4.2

1,586.5 2,055.2 5,085.1 144.7 20,705.7 839.5

5.2 6.8 16.7 0.5 68.1 2.7

4,161.3 777.9 5,732.4 83.1 5,002.0 511.5

25.6 4.8 35.2 0.5 30.7 3.2

Total

4439.9

100.0

2,742.4

100.0

4,528.4

100.0

3,332.9

100.0

30,419.3

100.0

16,268.3

100.0

Source: Foreign Trade Statistics from the US Census Bureau webpage.

WORLD DEVELOPMENT

1998

DEVELOPMENT TRAJECTORIES AND NEW COMPARATIVE ADVANTAGES

creation of FTZs and similar special regimes. Exports from FTZs accounted for more than 80% of total exports in the Dominican Republic during the 1990s. Costa Rica has developed two different special export regimes since the early 1980s. The FTZ regime (which is used by all high-tech firms) is very similar to the one in the Dominican Republic and includes exemption of all income taxes in addition to duty-free imports of raw materials and intermediate goods. Costa Rica also has a regime of temporal admission (RTA) in which there are zero tariffs on imports, but income taxes must be paid. At the same time, however, while FTZs have to be located in specific areas within the country, firms in the RTA can locate their production activities anywhere. In Costa Rica the participation of maquilas—term that I use to refer to both FTZs and RTA—in total export earnings has not been as large as in the Dominican Republic, but steadily increased over time, from 23% in 1990 to 56% in 2002. While this limitation of the new specialization in Costa Rica and the Dominican Republic will be further explored in subsequent sections, it may be useful to give some initial details at this point. Given the lack of reliable statistical information for the FTZs in most developing countries, measuring value added is not easy and can only be done through approximations. The trade balance (exports minus imports) in the FTZs probably gives the most accurate approximation. Table 4 shows the trade balance of the FTZs as a proportion of total exports. In the Dominican Republic, the trade balance has been remarkably stable at around 30% of total exports until the mid-1990s, and then increased substantially from 31% in 1996 to 39% in 2002. As will be seen in the following sections, this was the result of some diversification in the FTZs since the late 1990s and to the development of full package in the apparel sector. In Costa Rica, value added as a proportion of total exports measured through the trade balance seems less reliable. It varied a lot depending on the year and it even had a negative value in 1991. In any case, value added is lower than in the Dominican Republic for most of the period. For 10 of the 17 years during 1986–2002, value added constituted less than 25% of total exports. By comparison, domestic value added in the Korean of Massan was 52% already in 1979, up from 28% in 1971 (Esquivel, Jenkins, & Larrain, 1998). In 1998 and 1999, value added in Costa Rica increased significantly due to a tremendous expansion of new

1001

Table 4. CR and the DR; value added (measured through the trade balance) as a proportion of total exports in the maquila sector, 1980–2002

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

CR

DR

12.41 12.52 16.67 23.62 22.50 2.21 28.44 24.60 9.41 16.60 25.40 21.45 31.57 50.55 43.17 24.09 25.77

31.51 31.52 31.51 32.57 32.52 32.62 32.56 32.56 32.55 32.54 32.66 32.66 32.66 28.75 29.62 31.00 30.93 32.80 34.13 34.57 35.80 36.93 39.00

Source: Own calculations from data from CNZF (2002, 2003) and Costa Rican Central Bank. Note: In the case of CR, imports include raw materials and intermediate goods only. In the case of DR, it is not reported whether imports also include capital goods.

exports (primarily semiconductors), but then decreased to the 25% level again in 2001 and 2002. 5 3. SHORTCOMINGS OF APPAREL SPECIALIZATION The production and export of apparel products was a fundamental force behind the expansion of FTZs and other special export arrangements during the 1980s and 1990s. In 1992, for example, apparel production amounted for 68% of total exports from the FTZs in the Dominican Republic. In Costa Rica, apparel exports concentrated initially in the RTA (where apparel value added increased fivefold during 1985–95), but later extended to the FTZs as well. In 1994, apparel represented 36% of total exports from the Costa Rican FTZs. The expansion of apparel in the FTZs had some positive effects. During the 1980s apparel

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WORLD DEVELOPMENT

production was one of the main forces behind the diversification of exports, thus contributing to a reduction in dependence on primary goods. Apparel production for export also contributed to job creation, as the work is relatively laborintensive. A study from the Foundation Economia y Desarrollo estimated in 1994 that in the Dominican Republic the labor share coefficient in the production function of the FTZs was 0.79, while in the rest of the economy, it was only 0.39 (CEPAL, 1998, p. 53). In 2003, the apparel sector generated nearly 120,000 jobs in the Dominican FTZs, or 69% of total FTZ jobs. Apparel job expansion, which mostly favored female workers, has eased the financial constraints of low-income families and has reduced the negative impact of high unemployment (Willmore, 1995). Despite these positive effects, the overall contribution of apparel production in the FTZs to capital accumulation and long-term growth in Costa Rica and the Dominican Republic has been limited. The development strategy based on apparel has shown three key shortcomings: (1) the apparel sector is partly responsible for the low value added generated in the FTZs; (2) the apparel sector has decreasing long-term prices, high dependence on low wages, and intense competition from many countries (i.e., it behaves increasingly like a commodity); and (3) it has not created an endogenous virtuous circle of exports. (a) Limited value added One of the main reasons behind the low value added generated by the FTZs is that apparel, the most important sector in the Dominican Republic and one of the most important in

Costa Rica, generates low value added. Although time series on value added exclusively for the apparel sector does not exist for any of the two countries, different data illustrate this problem. Table 5 contains information on the characteristics of apparel production in the Dominican FTZs for the period 2000–03. The foreign exchange generated by the apparel sector, which represents all payments that require exchanging dollars for pesos (including payments to workers and local suppliers but excluding profits), amounted to a maximum of 24% of total exports during this period. Since total wages represented between 10% and 16% of total exports, the amount received by local suppliers was minimal, amounting to less than 7% of total exports in three of the years. In Costa Rica, low value added in apparel can be measured indirectly, through the analysis of value added in the RTA regime as a whole. Since apparel represents a large share of exports from RTA (between 75% and 80% of total exports from this regime in the period 2002–04), we can consider the behavior of this regime as a good approximation of the performance of apparel exports. The average figure of value added from the RTA (measured as exports minus imports) for the period 1984– 2004 was only 18.7% with no increasing tendency over time. The low value added in the production of apparel for exports in Costa Rica is confirmed by Table 6, which indicates the amount of local purchases as a proportion of total exports for a selected number of sectors in the period 1994–97. In the textile and shoes sector, local purchases were only 2.7% of exports, lower

Table 5. DR; exports, foreign exchange, and wages in the apparel sector of the free trade zones, 2000–03

Apparel exports (millions of US dollars) Apparel workers Total wage bill (millions of US dollars)a Foreign exchange (FE) generated through apparel exportsb FE in apparel/apparel exports Local spending/apparel exportsc Total wage bill/exports

2000

2001

2002

2003

2,456.7 141,945 387.2 588.5 24.0 1.5 15.8

2,274.4 121,895 342.0 528.7 23.2 1.5 15.0

2,173.4 118,652 320.2 496.9 22.9 1.5 14.7

2,193.4 119,101 218.9 454.0 20.7 1.3 10.0

Source: CNZF (2005). a The total wage bill is calculated from data on weekly wages in pesos and the exchange rate. b Foreign exchange in apparel (FE) includes wages and other local expenditures done by apparel producers in the FTZs. It does not include profits and thus it is lower than total value added. c Local spending includes spending in water, payments to the Institute for Technical Training, electricity, and social security.

DEVELOPMENT TRAJECTORIES AND NEW COMPARATIVE ADVANTAGES

1003

Table 6. Local purchases as a proportion of total exports from each sector Exports

Local purchases

US millions

% of total

US millions

% of exports

Textiles and shoes Electric Health Electronics Jewelry Metal-mechanic

221.2 58.3 52.2 103.0 34.0 30.0

38.2 10.1 9.0 17.8 5.9 5.2

6.0 6.2 1.8 7.6 0.3 1.1

2.7 10.6 3.5 7.4 0.8 3.8

Total

578.5

100.0

37.3

6.4

Selected sectors, 1994–97. Average per year for the four-year period. Source: PROCOMER (1998). http://www.bea.gov.

than in any other sector other than jewelry assembly. The main reason why value added is low and linkages between the FTZs and the rest of the economy are minimal is that production of apparel in the FTZs is based on simple assembly operations. The incentive structure in the US market was designed to encourage the process of assembly alone. Until the approval of the Caribbean Basin Trade Initiative Act of 2000, apparel firms that invested in the Caribbean Basin could only use US inputs in order to benefit from preferential access to the United States. As a result, firms had little incentive to place activities other than sewing and stitching in countries like Costa Rica and the Dominican Republic. Even after the approval of the Caribbean Basin Trade Initiative Act, which allowed apparel producers to use inputs from all countries within the Caribbean Basin (something that Mexico had been allowed to do since the approval of NAFTA), linkages have remained relatively low. In the Dominican Republic, for example, only 10 firms in the FTZs acquired imports from local suppliers in 2003, while 241 bought from US sources. The lack of efficient domestic producers (there is, e.g., only one large yarn producer in the Dominican Republic and none in Costa Rica) is probably the main reason behind this absence of linkages between companies inside and outside the FTZs; irregular electric supply is also a major problem in the Dominican Republic (Conde et al., 2004). 6 (b) The commodification of apparel The apparel sector is a traditional, mature sector where competition takes place through prices and where there are low barriers to entry (Lall, 2000). This becomes particularly clear

when the US clothing market (where apparel and textile exports from Costa Rica and the Dominican Republic concentrate) is analyzed. The price of clothing and shoes in the US domestic market lagged behind the average price index so that its domestic terms of trade steadily decreased as Figure 2 indicates. During 1950–95, the price index for personal consumption of clothing and textiles increased by an annual average rate of 1.6%, while the price index for aggregate personal expenditures increased by 3.6% per year. In 2000 and 2002, prices of clothing and shoes actually decreased by a combined 4.5%. 7 As a result of this long-term price drop, the share of clothing and shoes in total US consumption decreased in value, despite an expansion in quantity. During 1950–89, the share of clothing and shoes in value went from 10.2% to 5.5%. During 1990–2002, it decreased from 5.3% to 4.4% in nominal terms despite an increase from 3.9% to 4.5% when price changes are not taken into consideration. 8 The reduction in prices and thus in the share of clothing in total nominal consumption expenditure in the United States was not a problem for developing countries until recently. Since domestic production of apparel has decreased in value at even higher rate than demand, imports steadily increased. During 1961–99, US domestic production of apparel and other textiles grew by an annual average rate of 5.7% in value, while US imports of these goods grew by an annual average rate of 21.0%, from only US$283 million in 1961 to more than US$59 billion in 1999. As a result, the market share of imports in total domestic consumption of apparel (defined as total production plus imports minus exports) increased from 2.1% to 52.2% (Ross, 2002).

WORLD DEVELOPMENT

3

2.5

2

1.5

1

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

1976

1974

1972

1970

1968

1966

1964

1962

1960

1958

1956

1954

0

1952

0.5

1950

Price index clothing and shoes expenditure / price index aggregate personal consumption expenditure

1004

Figure 2. US. Decreasing domestic terms of trade for clothing and shoes, 1950–2002. Source: Own calculations from original data from the BEA web page at www.bea.doc.gov.

The situation, however, may not be sustainable in the near future. The expansion of the number of countries producing apparel goods for export is leading to what Blecker (2000) has called ‘‘diminishing returns to export-led growth.’’ As the rate of growth of demand increases only slowly in nominal terms and less domestic producers remain in developed countries, developing countries can only expand their share in the global apparel market by displacing other developing countries. In such setting, countries with particularly low labor unit costs are hard to beat. This is particularly the case of China, which has benefited from very low labor unit costs to become the largest apparel exporter in the world with more than US$32 billion in 1999. Costa Rica and the Dominican Republic have already suffered the effects of increasing competition and demand slowdown in the apparel sector. Figure 3 illustrates the evolution of the Costa Rican and Dominican market share in US imports of apparel for the period 1989–2004. In 1993, Costa Rica had a market share of 1.8% after several years of moderate expansion. From 1993 to 1997 exports kept growing, but the market share started decreasing. From 1997, both exports and market share decreased continuously and in 2004 the market share was only 0.6%. The Dominican Republic was initially more successful in maintaining the competitive position within the apparel US market that it had achieved during the second half of the 1980s. The market share went from 2.5% of total US

apparel imports in 1989 to 4.2% in 1997. Overall Dominican apparel exports to the United States grew significantly until 1998, tripling during 1989–98. Since 1998, Dominican exports to the United States and its market share have steadily decreased. During 1998–2004, apparel exports to the United States decreased from US$2.4 billion—863 millions of square meters—to US$2.1 billion—772 millions of square meters; meanwhile, the market share in value terms fell from 4.2% to 2.5% in the same period. The elimination of all quotes in the apparel sector in January 2005 is likely to worsen the competitive position of Costa Rica and the Dominican Republic even further because of its high labor costs when compared to China (USITC, 2004). China benefits from both higher productivity and lower real wages. According to a US producer interviewed for a report by the US International Trade Commission, ‘‘productivity in CBERA [Caribbean Basin Economic Recovery Act] countries [is]. . . about 50 percent of that in China,’’ (USITC, 2004, pp. 3–34). At the same time, a Costa Rican worker in the apparel sector receives US$2.7 per hour and a Dominican one US$1.6, while a Chinese one receives only between US$0.68 and US$0.88. Though Costa Rica, the Dominican Republic, and the rest of the countries in Central America have tried to confront Chinese competition by negotiating the Central American Free Trade Agreement (CAFTA) with the United States, even if approved this may not be a solu-

DEVELOPMENT TRAJECTORIES AND NEW COMPARATIVE ADVANTAGES

1005

4.5

4

3.5

% of total imports

3

2.5

2

1.5

1

0.5

0 1989

1990

1991

1992

1993

1994

1995

1996 DR

1997

1998

1999

2000

2001

2002

2003

2004

CR

Figure 3. CR and the DR. Market share of their exports in the US apparel market (US dollars), 1989–2004. Source: Otexa web page at www.otexa.ita.doc.gov.

tion for the apparel sector in the medium term. CAFTA establishes rigid rules of origin, which require the use of regional textile inputs for apparel goods to benefit from duty-free access to the United States. The prohibition of using cheaper cloth and raw materials from Asia will increase the price of the final goods, thus Central America and the Dominican Republic are likely to remain uncompetitive vis-a`-vis China. (c) Lack of an export virtuous circle building from apparel The apparel sector in Costa Rica and the Dominican Republic has not made a significant contribution to the creation of the knowledge and organizational assets required for the expansion of exports into sectors with higher technological content and higher value added. In Costa Rica, domestic apparel firms have been generally unsuccessful and the sector has been unable to remain competitive. In the Dominican Republic, full package—the process by which firms find their own fabrics, cut them, sew them, add all the complements, and send the final product to the client—has been developed and successful local firms have appeared. However, full package in the Dominican Republic has been a defensive strategy and is

unlikely to generate significantly domestic productive capacities in the long run. According to a census from the CNZF, in 2001, 136 of the 289 apparel firms located in the Dominican FTZs produced full package. Firms are responsible for finding efficient US suppliers, cutting the fabric and washing the final product, and sending it to its US clients. The most successful companies are also able to offer some support to the designers through pre-production services, such as pattern development. Nevertheless, as managers from Grupo M and from Bratex—two leading Dominican firms in the FTZs—pointed out, full package operations also increase the risk that suppliers producing in the FTZs have to bear and the working capital they require. 9 Additionally, since the fabric and many of the accessories that firms use are imported (contrary to full package in Asia where most inputs were produced domestically), the increase of domestic value added generated by the introduction of full package is still limited. Costa Rican apparel firms have been much less successful in developing full package. Though foreign apparel manufacturers arrived in Costa Rica earlier than in other Central American countries, they have changed little since then. A 1998 CEPAL study did not find

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any apparel-exporting firm in Costa Rica producing full package (CEPAL, 1998, p. 48), and in 2004 there were only six firms (12% of all apparel exporters) doing it (Conde et al., 2004). The development of full package in the Dominican Republic and not in Costa Rica is partly explained by wage differentials and its evolution over time. During 1981–95, real wages in the apparel sector in Costa Rica increased by 21.2%, while they fell in the Dominican Republic by 1.7% (Arroyo, Cordero, & Larudee, 2001). Increasing labor costs in Costa Rica could have only been compensated through the development of full package; however, the lack of commitment of the state and domestic capital to further development of the apparel sector prevented that from happening. The existence of a significant number of footlose foreign firms that moved away from Costa Rica into cheaper countries like the Dominican Republic also prevented full package from expanding in Costa Rica. Since the mid-1990s, the Costa Rican government decided that apparel production had limited positive effects on economic development and was unlikely to continue growing in the long run. CINDE, a non-profit agency that promotes foreign investment in Costa Rica and collaborates closely with the government, also shifted its sectoral focus from apparel to electronics, medical devices, and services. 10 In the Dominican Republic, close ties between the Dominican Association of Free Trade Zones and the National Commission of Free Trade Zones—a very efficient public institution by Dominican standards—resulted in a continuous support for the apparel sector. 11 The different behavior of domestic firms in the two countries is also useful to explain the development of full package in the Dominican Republic and its absence in Costa Rica. In Costa Rica, domestic capital remained concentrated on exports of manufacturing goods to the Central American market and of non-traditional primary goods to the rest of the world, while its involvement in the apparel sector was never high and decreased over time. At the same time, Costa Rican financial institutions saw apparel as a ‘‘high risk’’ sector and were unwilling to finance the expansion into full package-which requires large loans for working capital. 12 Meanwhile, Schrank (2005) demonstrates that in the Northern region of the Dominican Republic, apparel production benefited from

the positive interaction between new domestic entrepreneurs, financial capitalists, and the regional elite and resulted in the creation of efficient Dominican firms like D’Clase corporation, Bratex Dominicana, Interamericana Products, and Grupo M. All these firms appeared during the 1980s with exclusive orientation to exporting and became leading apparel producers in Central America and the Caribbean. Bratex International, for example, was for a long time the leading Dominican exporter of brassieres. The company, which is owned by Peter Weinerth, was created in 1988—two years after D’Clase Corporation. The company grew steadily during the early 1990s, doubling the number of workers from 3,000 in 1993 to more than 6,000 in 1996. In 2002, it employed around 3,500 people and offered three types of services: simple assembly, full package for brand manufacturers or for department stores, and full package ‘‘with technology.’’ Bratex has its own patent for a model of brassier, which requires special machinery for its production, and has reached an agreement with Dupont for its commercialization. 13 Interamericana Products International began its operations in 1985 and has offered full package since 1995. In 2002, it produced 600,000 units of clothing per week with 30% of its business in full package. Interamericana, which has all its production facilities in the FTZ of Santiago, employs around 8,300 workers and has Liz Claribone, Lee, Levi’s, and Eddi Bauer among its clients (Gonzalez, 2002). In 2002, the company established a production site called Caribe One Sewing in the FTZ of Port Prince, Haiti. The site in Haiti, which concentrates on simple assembly, had 350 operators in 2002. 14 Interamericana is not the first Dominican apparel group that has invested abroad. Grupo M was actually the pioneer in investing in Haiti and was also one of the first to open a subsidiary in the United Sates. Grupo M is probably the largest apparel conglomerate in the region. 15 It is made of 24 different firms located in the Dominican Republic, Haiti, and United States and has more than 12,000 workers. The group produces around 400,000 pants and 1.2 million t-shirts per week for some of the bestknown brands in the world, including Polo Ralph Lauren, Liz Clairbone, Tommy Hilfinger, Hugo Boss, Banana Republic, Timberland, and Nike. In the early 2000s, its total yearly sales averaged US$200 million. Grupo M has also built joint ventures with the main global

DEVELOPMENT TRAJECTORIES AND NEW COMPARATIVE ADVANTAGES

suppliers of zippers, chemical producers, and other intermediate inputs and began producing intermediate products such as yarn, certain fabrics, and labels. 16 Grupo M has followed a very aggressive strategy since its creation in 1986. The company became a conglomerate in 1993 and during the 1990s grew at around 12–15% per year for several years. In 1994, Grupo M introduced full package, which currently constitutes more than 60% of its production. Despite the growth, size, and financial strength of these firms, it is not clear to what extent they can be considered real engines of development (Schrank, 2004). National leading firms in successful countries like the East Asian NICs—and according to Bair and Gereffi (2002) even in Mexico—are leading forces within a long-term process of institutional learning and skill upgrading. Domestic firms slowly gained knowledge and preparation locally to be able to later compete in the global market. They gradually entered into increasingly profitable activities within a sector and also in more profitable sectors. This has, however, not been the experience of the most successful Dominican firms so far (Schrank, 2004). Most successful Dominican firms in the FTZs were created during the 1980s and acquired all its knowhow and technology from abroad in a very short period of time by building close ties with foreign firms. 17 Their movement into full package was more a survival strategy demanded by their own suppliers than an autonomous search for higher profits. Moreover, it is not clear to what extent they are in a position to create their own brands or enter into new sectors in the near future. Instead, its current strategy seems to concentrate on devising new ways—such as investing on Haiti or in less developed regions within the Dominican Republic—to keep costs low. The impact of leading firms in the domestic apparel sector is also limited. Bratex’s experience in this regard is interesting. Its principal owner, Peter Weinerth, participated in a small apparel company that has been producing for the domestic market since 1967. This domestic company maintained little interaction with Bratex, it learnt little from Bratex’s exporting success and mastering of new technologies and lost significant market share in the domestic market during the 1980s and 1990s. 18 Costa Rica has not been able to develop national leading firms in apparel and the sector has been dominated by renowned TNCs. Mor-

1007

timore and Zamora (1998) in a detailed analysis of the Costa Rican clothing industry found three different types of firms: US-based transnational producers of underwear, smaller US companies, and a limited number of local firms. Costa Rican firms are small and control a smaller share of exports and employment in the apparel sector than foreign firms. They were originally created during the import substitution era and used the local market for their expansion. The process of liberalization that began in the 1980s, however, resulted in decreasing shares in the local market and forced them to shift their competitive strategy. They began searching for foreign clients, mainly US large department stores or brand manufacturers. Costa Rican firms have concentrated on short-term assembly contracts in which price is the main determinant. Increasing wages in Costa Rica, however, have eroded their cost advantage and have put their own survival into question. 4. MOVING INTO HIGH TECH: THE COSTA RICAN SUCCESS? The public and the private sector in both countries recognized the limitations of apparel assembly at some point during the 1990s (earlier in Costa Rica than in the Dominican Republic). In the words of a manager from Grupo M, ‘‘the free trade zones for laborintensive sectors like apparel and shoes are in decline.’’ 19 In the Dominican Republic, both government officials and business leaders believed that the expansion of full package and the attraction of US textile producers were key ingredients for the survival of the sector and the generation of higher value added. In Costa Rica, full package together with the move into design and branding was seen by producers as the only chance to reinvigorate the apparel sector, but not enough steps were taken for their promotion. 20 In the Dominican Republic, the attempt to upgrade within the apparel sector was accompanied with timid attempts to promote investment in high-technology sectors. In 1998, the Fernandez administration created the Parque Ciberne´tico of Santo Domingo to promote investment from domestic and foreign firms in high-tech sectors such as medical machinery and new services—software, consulting, call centers, and others (Khelladi, 2003). Yet the initiative never receives much support from

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the Dominican Association of Free Trade Zones or from foreign investors, and the subsequent Mejia administration did not place promotion of the park at the top of its agenda. In 2003, there were only three firms with 32 workers in the Parque Ciberne´tico and 70% of the constructed space had not been occupied. Leonel Fernandez’s return to power in 2004 resulted into the revival of the project, but significant results are yet to be achieved. Despite the failure to attract export-led foreign investment in high tech, the Dominican Republic has recently experienced a slow process of diversification within the FTZs. The weight of apparel production has declined from 55% in 1993 to 48% in 2003. In 2002, the assembly of electronic products and jewelry together with production of tobacco products and medical equipment and health-related products amounted for half of total exports from the FTZs (Table 7). This moderate diversification may be behind the recent expansion of value added in the Dominican FTZs observed in Table 4 of Section 2. 21 The expansion of value added, however, has been the result of an increase in gross operating surplus (GOS) more than to the growth of linkages between the export sector and the rest of the economy. An indirect way of showing the expansion of GOS is by comparing total value added with the foreign exchange generated, which includes all value added with the exception of profits (UNDP, 2005). 22 Figure 4 shows how value added and foreign exchange as percentage of total exports in the FTZ have experienced diverging trends, thus signaling a significant increase in total profits (see Figure 4). 23 In Costa Rica, the government was more active and more successful in its attempt to attract high-tech firms in its FTZ. During the

1990s, the government came to the realization that development would not come through specialization in apparel. The Figueres Administration (1994–98) focused on‘‘an aggressive policy of investment attraction’’ in sectors that make ‘‘sophisticated and well paid use of productive resources and not extensive and poorly rewarded use of cheap labor’’ (MIDEPLAN, 1998, p. 51). The subsequent administrations of Miguel Angel Rodriguez (1998–2002) and Abel Pacheco (2002–06) have shared Figueres’s goal of attracting high-tech FDI for export (Nelson, 2003). The Costa Rican government received continuous support in its new strategy from CINDE. The new strategy’s most impressive achievement was its success in luring Intel to invest in the country. In 1997, after more than a year of careful analysis, the US producer of semiconductors chose Costa Rica for its new assembly and test operation. Costa Rica’s stable and business-friendly economic and political conditions and its well-educated labor force (and a non-union work environment) were primary factors behind Intel’s decision (Spar, 1998, p. 8). The commitment of the government and CINDE to the expansion of high-tech foreign investment was also important. Intel’s decision triggered a significant wave of FDI that included investment from Abbot, Procter and Gamble, and Microsoft, all attracted in part by the pool of skilled workers. Costa Rica’s long-term investment in human capital has apparently paid off, moving the country into a new specialization in technologically more complex activities (Miranda & Vargas, 2001) and resolving some of the problems derived by the loss of competitiveness in the apparel sector. The new specialization in high-tech products, however, has not contributed to a significant

Table 7. DR; exports and foreign exchange in selected sectors of the FTZs (millions of US dollars and percentage), 2002 X

% of total

FE

FE/X

Textiles Tobacco and derivatives Medical equipment and other health-related products Electronics Shoes and components Jewelry

2,226.8 303.2 317.9 497.9 201.4 438.1

51.6 7.0 7.4 11.5 4.7 10.1

489.9 85.4 31.1 73.2 49.8 19.5

22.0 28.2 9.8 14.7 24.7 4.5

Total

4317.4

100.0

886.5

20.5

Note: X is equal to exports and FE is foreign exchange generated. Source: CNZF (2003).

DEVELOPMENT TRAJECTORIES AND NEW COMPARATIVE ADVANTAGES

1009

45

40

35

30

25

20

15

10

5

0 1990

1991

1992

1993

1994

1995

1996 VA/X

1997

1998

1999

2000

2001

2002

2003

FE/X

Figure 4. DR. Value added (VA) and foreign exchange (FE) as percentage of total exports (X) in the FTZs, 1990– 2003. Source: CNZF (2003).

acceleration of economic growth and has had a limited impact on the rest of the economy. This is so because Intel and other high-tech firms of the FTZs are even less linked to the rest of the economy than ever before, as the evolution of local purchases as a percentage of total exports shows. Local purchases decreased significantly as a proportion of total inputs in the late 1990s. They amounted for US$56.6 million in 2001 up from US$30.7 million in 1994, yet as a proportion of total imports, local purchases decreased from around 10% in 1994 to less than 3% in 2001. This percentage is similar to that of other Central American countries, but much lower than in Korea and Taiwan. According to the data collected by Esquivel et al. (1998), the proportion of local purchases in total raw materials and intermediate goods in 1996 was 3.5% in Guatemala and 5.7% in El Salvador, while at the beginning of the 1980s Korean local purchases were 44% and in Taiwan were 46%. The production operations that companies like Intel, Abbot, or Baxter locate in countries like Costa Rica are still simple assembly operations and firms face difficulties in finding reliable suppliers. The pharmaceutical producer Baxter, for example, has been committed since its arrival in Costa Rica to finding new local

suppliers for simple activities as a way to improve the quality of its inputs, manage inventory more effectively, increase flexibility, and reduce costs. During the late 1990s, Baxter found a local supplier of injection molding and helped to develop its productive capabilities. Baxter is also building close links with local packing suppliers in a process that has taken more than two years to complete. Despite all these efforts, however, Baxter only buys 8% of its input materials locally, although that share is expected to go up to 10% or 12% soon. More significantly, one of the managers of the company believed that it would be hard to increase this percentage over 20% because most inputs and raw materials are produced by Baxter itself or come from a single global supplier. The difficulties to expand local suppliers also come from the fact that they have to meet a number of requisites established at the corporate level that require headquarters’ approval. 24 Intel’s case is similar. 25 Intel-Costa Rica purchases a significant share of its packages and services, such as cleaning and security from local firms. It has also created a few joint ventures with software firms. Nevertheless, its ability to establish linkages is limited by the fact that most inputs that Intel uses are produced

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in-house and are imported from other subsidiaries. At the same time, the need to protect its patents and its industrial property constrains Intel—one of the most secretive firms in the world according to Jackson (1997)—from collaborating with Costa Rican software firms. The ability to create linkages with domestic firms is even more limited in the case of service firms located in the FTZs (not included in the statistics presented in this paper) because production relies almost exclusively on the use of labor. Operations like Procter and Gamble’s global business services, which is in charge of office support activities such as accounting for all subsidiaries of Procter in the Americas, depend almost exclusively on the work of the nearly 1,000 workers. Procter and Gamble does collaborate with one Costa Rican software company, but does not generate any other relevant linkage. Even the furniture that the company uses was purchased from a global supplier. 26 Like in the Dominican Republic, in Costa Rica the recent expansion of value added is mainly the result of the expansion of profits. Figure 5 uses statistics from the Costa Rican national accounts to illustrate the expansion of the GOS in the FTZs since the mid-1990s. During 1991–2001, GOS in the FTZs grew by an annual average of 71%, nearly twice that of wages; as a result, the share of GOS in total value added increased from only 18% in 1991 to 64% in 2001. The concentration of a large share of the value added in profits has contributed to the

low generation of foreign exchange in the Costa Rican FTZs. This is so because a large share of the profits generated by Intel and other large TNCs has been repatriated. Net investment income outflows in the Costa Rican balance of payments increased from US$187 million in 1996 to US$1.8 billion in 1999 and US$1.2 billion in 2000, precisely the years that showed an increase in value added as a percentage of exports in the FTZs. Given all these problems, a key question is whether Costa Rica will be able to continue attracting large amounts of foreign investment in the near future and will succeed in building new linkages between the export sector and the rest of the economy. In this process, Costa Rica would be following the experience of successful small countries like Singapore. 27 Singapore achieved high rates of growth of production and exports, thanks to the sustained attraction of high investment and the creation of new productive capabilities (Mathews & Cho, 2000). Singapore’s success was led by an efficient state, which heavily invested in education and infrastructure, created successful public enterprises in key sectors like telecommunication, and followed a clear, long-term project of development. The state was also very active in promoting the integration of domestic suppliers and TNCs, particularly since the mid-1980s (Huff, 1994). Both external and internal factors may make Costa Rica’s attempt to follow Singapore’s steps relatively difficult. On the external front,

600,000.0

Millions current colonies

500,000.0

400,000.0

300,000.0

200,000.0

100,000.0

0.0 1991

1992

1993

1994

1995

1996

Value added

1997 Wages

1998

1999

2000

2001

GOS

Figure 5. CR, value added, wages, and gross operating surplus (GOS) in the FTZs (current colons), 1991–2001. Notes:Data for 2001 is preliminary. GOS includes resources for consumption of capital goods. Source: Costa Rican Central Bank National Account Statistics obtained from the Costa Rican Central Bank webpage.

DEVELOPMENT TRAJECTORIES AND NEW COMPARATIVE ADVANTAGES

Singapore benefited from several advantages that Costa Rica does not have. Singapore passed its Economic Expansion Incentives Act in 1967 at a time when some TNCs in the electronics sector were beginning to reallocate labor-intensive stages of its production process in developing countries (Huff, 1994). As Blecker (2000) argues, the number of countries following the same strategy is now much larger. It is much harder to attract substantial amounts of capital and even more to sustain high wage growth in the long run. 27 Costa Rica has already suffered the negative consequences of this ‘‘fallacy of composition’’ in the apparel sector and may be starting to do so in high tech also. Since 1997, inflows of FDI to Costa Rica in the electronics sector have decreased and several large companies have abandoned plans to invest in the country (Seagate, Lucent) or have left the country all together (Motorola, DSC Communications Corporation) (RodriguezClare, 2001). Singapore is also at the heart of Southeast Asia, one of the most dynamic regions of the world in the last three decades. The development of new industrial capabilities in several Asian countries contributed to the consolidation of a regional, dynamic network in electronics and resulted in the expansion of foreign investment from US and Japanese firms in Singapore (Lall, Albaladejo, & Zhang, 2004). Lack of knowledge-based assets and a less effective state prevented Latin America from initially building a similar regional network in electronics. Later on, path dependence and cumulative effects led to accelerate economic growth in Singapore and other Asian countries, making it harder for other developing countries to catch up (Lall et al., 2004; Mathews & Cho, 2000). Even more important for the consolidation of an export-led growth strategy based on FDI may be Costa Rica’s internal shortcomings. While Costa Rica has been relatively successful in allocating resources to education and targeting new foreign investors, it has also faced increasing difficulties to adapt to the challenges of globalization (Sanchez-Ancochea, 2005). There are various groups in society with different views of the long-term path the country should follow, and the government has been unable to impose a coherent direction on them. The evolution of the telecommunication sector is a good example. While the government has not yet privatized the sole public telecommunication provider as most of its neoliberal elites

1011

would want, it has been unwilling to modernize it through higher investment. Fiscal difficulties have also prevented the country from allocating enough resources to promote linkages between TNCs and domestic firms. According to statistics on the sectoral distribution of the budget, only 0.27% of total public spending went to the area of industry and trade in 2004—down from 2% in 1997. The government did launch in 1999 a project, inspired by Singapore’s Local Industry Upgrading Program, to make small and medium-sized firms capable of becoming competitive suppliers for TNCs. The program, called Costa Rica Provee, involves visits to selected TNCs to jointly determine what products can be supplied locally. Managers from Costa Rica Provee later search for the most adequate domestic firms to produce the selected products and help them technically—and financially when needed- to become official suppliers of the TNC. Costa Rica Provee, however, has functioned with only five workers and has involved a relatively low number of firms. Despite being much more successful recently than in the period 1999–2003, Costa Rica Provee only promoted 42 interactions with TNCS, involving 72 small and medium firms in 2004. 5. CONCLUSION Given the shortcomings of the apparel sector discussed in Section 2 and the competitive advantage of China in this sector, small developing countries must move toward comparative advantages in new products. The comparison between Costa Rica and the Dominican Republic reveals the importance of long-term policy outcomes, particularly with regard to investment in human capital and public capacities. Costa Rica’s success in attracting Intel and other TNCs has its roots in the public commitment to high levels of public spending in health and education; selective targeting by public and private institutions has also been important. In the Dominican Republic, however, apparel specialization is hard to overcome because of the limitations of the labor force. Developing more dynamic comparative advantages in activities located in the FTZs is, however, no panacea. Costa Rica’s difficulties to promote long-term growth and reap the benefits of foreign investment in high tech clearly show that the policy challenges are even larger.

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Targeting specific TNCs and investing in education will not be enough. The main policy challenge for small, middle income countries in Latin America and beyond is thus not only to attract new investment in high-tech sectors but also to increase linkages between the new sectors and the rest of the economy (Buitelaar & Padilla, 2000). The insistence on achieving better market access to the United Sates and other developed countries through free trade agreements like CAFTA is unlikely to move them into that direction; instead it may limit its policy autonomy to expand the level of productivity of domestic

firms (Shadlen, 2005). Revisiting the experience of Singapore and Taiwan, which succeeded in promoting exports through a state-led, selective promotion of foreign investment and generous incentives for small and medium local firms, may be more useful. While acknowledging the current constraints in the global economy to follow the East Asian example, countries in Central America, the Caribbean, and beyond should make an effort to significantly upgrade the capabilities of the state to implement industrial policy, expand domestic firms’ knowledgebased assets, and build a social consensus around a national project of development.

NOTES 1. For a similar argument on Mexico, see UNCTAD (2003). 2. Maddison measures GDP per capita in 1990 international Geary–Khamis dollars. 3. Unless otherwise stated all the statistics presented in this paper refer to the export of goods and thus not include services. 4. I use this data source instead of the overall export structure to all countries because of its higher quality and because it makes the comparison between the two countries more homogenous. Since the United States constitutes the main trade partner of both countries, accounting for more than 50% of exports of goods in both cases, the use of exports to the US market alone is not likely to introduce any bias. 5. For the period 1995–2002, the Costa Rican Central Bank also gives statistics on imports of capital goods from firms in the FTZs and in the RTA regime. When capital goods are included, value added measured through the trade balance is even lower. It averages only 24.5% for the period 1995–2002 (as opposed to 31% if capital goods are excluded) and remains below 21% for six of the eight years. 6. Information coming also from interview with manager from Grupo M (Santiago de los Caballeros, Dominican Republic, June 2002). 7. Data come from the Bureau of Economic Analysis (BEA) webpage http://www.bea.gov 8. Data come from the Bureau of Economic Analysis (BEA) webpage http://www.bea.gov

9. Interviews with managers from Grupo M (Santiago de los Caballeros, Dominican Republic, June 2002) and Bratex Dominicana (Santo Domingo, Dominican Republic, July 2002). 10. Interview with Pilar Madrigal, representative of CINDE in New York, April 2002. Also, interview with a Justo Aguilar, director of the Institute for Research in Economics, Universidad de Costa Rica, and former advisor for several administrations, San Jose, August 2002. 11. Interviews with a manager from the Dominican Association of Free Trade Zones (Santo Domingo, Dominican Republic, May 2002) and with a manager of the National Commission of Free Trade Zones (Santo Domingo, Dominican Republic, June 2002). 12. Interview with Maria Aminta Quirce, director of the Costa Rican Textile Chamber, San Jose, Costa Rica, August 2002. 13. Information for this paragraph comes from an interview with a manager from Bratex Dominicana (Santo Domingo, Dominican Republic, July 2002) and the article ‘‘La Industria Textil. So´lido pilar de la economı´a nacional,’’ Revista Mercado, 3(10). 14. Listı´n Diario, December 27, 2002. 15. Grupo M is one of the only three textile firms—the other two are Hilasa from El Salvador and Textiles Rio Lindo from Honduras—among the 75 more admired firms from Central America and the Dominican Republic in a ranking elaborated by the magazine Empresa y Negocios. The ranking is based on interviews with

DEVELOPMENT TRAJECTORIES AND NEW COMPARATIVE ADVANTAGES bankers, venture capitalists, businessmen, and other analysts from the region. See Empresa y Negocios, September 2000. 16. Information for this paragraph and the next comes from Empresa y Negocios (September 2000), Mexcostura, 6(26), August–October 2002, ‘‘Tiempos difı´ciles para las zonas francas,’’ Revista Mercado (March 2002), and interview with a manager from Grupo M (Santiago, Dominican Republic, June 2002). 17. In many cases, these close ties were initially built by working in other companies of the FTZs. The President and majority owner of Grupo M, Fernando Capella´n, for example, began working as a pilot for another firm in the early 1980s. Later he worked for three years as a Plant Engineer and three more years as the General Manager of the same firm. 18. Interview with a manager from Bratex Dominicana (Santo Domingo, Dominican Republic, July 2002). The company, however, hoped that interactions between both firms would increase now that ownership for both companies has been completely consolidated. 19. Interview with a manager from Grupo M (Santiago, Dominican Republic, July 2002). Managers from the Dominican Association of Free Trade Zones, the National Commission of Free Trade Zones, and Bratex Dominicana also expressed the same idea in interviews done in Santo Domingo in July 2002. 20. Interview with Maria Aminta Quirce, San Jose, Costa Rica, August 2002 and Bobbin Magazine, several issues.

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21. Another important factor has been the introduction of full package in the apparel sector, which has contributed to an increase in the value of apparel per square meter equivalent (see Section 3). 22. Since value added is equal to foreign exchange generated + profits, the difference between value added and foreign exchange should be equal to the profits generated by the FTZs. 23. Decreasing foreign exchange as a percentage of exports is partly the result of the expansion of new sectors like electronics and jewelry. Electronics, jewelry, and medical equipment generate less foreign exchange per unit of export than apparel (see Table 7), because they are less labor-intensive and buy fewer inputs from domestic firms. 24. Information for the preceding paragraph comes from an interview with a manager from Baxter-Costa Rica, Cartago, Costa Rica, September 2002. 25. Information for this paragraph comes from an interview with a manager from Intel-Costa Rica, Heredia, Costa Rica, September 2002. 26. Information for this paragraph comes from an interview with a manager from Procter and Gamble, Santa Ana, Costa Rica, September 2002. 27. Electronic communication with members of Costa Rica Provee. I thank its director, Roberto Calvo Retama, for all his collaboration. See also the excellent comparative analysis of Costa Rica and Ireland in Paus (2005).

REFERENCES Arroyo, L., Cordero, J. A., & Larudee, M. (2001). Climbing the skill ladder: Costa Rica’s export processing zone, 1995–2000, unpublished manuscript, University of Kansas, Kansas. Bair, J., & Gereffi, G. (2002). NAFTA and the apparel commodity chain: Corporate strategy, interfirm networks, and industrial upgrading. In J. Bair, G. Gereffi, & D. Spener (Eds.), Free trade and uneven development. The North American apparel industry after NAFTA. Philadelphia, PE: Temple University Press. Banco Central de la Republica Dominicana (2003). Balanza de pagos de la Repu´blica Dominicana, 1996– 2001. Santo Domingo: Banco Central de la Repu´blica Dominicana. Blecker, R. (2000). The diminishing returns to export-led growth. A paper from the project on development, trade and international finance. Washington, DC: Council on Foreign Relations.

Buitelaar, R., & Padilla, R. (2000). Maquila, economic reform and corporate strategies. World Development, 28(9), 1927–1942. Bulmer-Thomas, V. (2003). The Economic History of Latin America since Independence (second edition). Cambridge, UK: Cambridge University Press. CEPAL (1998). Centroame´rica, Me´xico y Republica Dominicana: Maquila y Transformacio´n Productiva. Me´xico, DF: Comisio´n Econo´mica para Ame´rica Latina y el Caribe. CEPAL (2001). Desarrollo econo´mico y social en la Repu´blica Dominicana: los u´ltimos veinte an˜os y perspectivas para el siglo XXI. Santo Domingo, DR: Pontifica Universidad Cato´lica Madre y Maestra. Chang, H.-J. (1998). Transnational corporations and strategic industrial policy. In R. Kozul-Wright, & R. Rowthorn (Eds.), Transnational corporations and the global economy. New York, NY: McMillan Press.

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