Diana Van Patten and Esteban Méndez on the role of technology and trade in Costa Rica’s economic transformation

June 9, 2023

This article was originally published at the EGC site. Due to its relevance to CLAIS, we reproduce it here with their permission.

By Bomi Okuyiga

Costa Rica’s ambitious development agenda in trade, foreign investment and digital inclusion has solidified its status as one of the most innovative economies in Latin America. Backed by a referendum, a landmark free trade agreement with the United States – the CAFTA-DR – strengthened the country’s relationship with its main trading partner.

On the digitalization front, in 2015, Costa Rica created the National System of Electronic Payments for Mobile Payments, known as SINPE Móvil. SINPE Móvil is an electronic payment system that works across different banking entities, allowing users to send money to peers.

Several international institutions and academics have heralded Costa Rica as a prime example of the power of open and innovation-friendly economies in facilitating economic transformation. What is even more notable about Costa Rica’s progress is the central role government institutions have played in creating these products and markets – the Central Bank of Costa Rica developed and rolled out SINPE Móvil.

This rollout is the focus of ongoing research by Diana Van Patten, an Assistant Professor of Economics at Yale University’s School of Management, and Esteban Méndez, a researcher at the Central Bank of Costa Rica. In an interview with EGC, Van Patten and Méndez discussed the role of incentives in promoting digital payments in Costa Rica, as well as their analysis of a national referendum on whether to approve a free trade agreement. The two economists originally met as undergraduate students in Costa Rica, became longstanding research partners – and Méndez recently spent time in New Haven as part of EGC’s Kuznets Visitors Program, which launched in the 2022-23 academic year. 

Your latest area of research brings Costa Rica’s digital payment system to the spotlight. Can you say more about the question you’re exploring?

Van Patten: Our latest paper analyzes the adoption of digital payments in developing countries, focusing on Costa Rica. Along with three other co-authors, we study the mobile payment system that the Central Bank of Costa Rica launched in 2015, which over 70% of the adult population now uses. It’s used intensively – last year, transactions in the platform accounted for over 15% of Costa Rica’s GDP. The central bank has detailed data on adoption of the app, so we’ve been studying those issues. For instance, what determines whether a new technology is adopted widely? In particular, we quantify the growth of user networks – also known as strategic complementarities – in determining adoption. We also study if the current adoption level is optimal, if there should be a subsidy for it, and how to quantify that subsidy.

A statue of common people in front of a large, modern building​​​​​​“Presentes” (“The People Present”) a monument by Fernando Calvo, stands in front of the Central Bank of Costa Rica in San José. Cover photo by oleprophoto, Shutterstock. 

How did the relationship you both have with the Central Bank of Costa Rica help you to undertake this research?

Méndez: After receiving my Ph.D. in economics from Cornell University, I returned to Costa Rica and now I work in the central bank’s research department. I split my time between doing academic research (like my work with Diana), and doing policy work. Since the data we are using is confidential, one of the requirements for using it is working through the central bank. My policy work at the Central Bank also plays an important role in developing the research ideas we continue to work on.

Van Patten: Esteban is at the core of Costa Rica’s work on these policies and has so much institutional knowledge. For example, he regularly talks to the professionals who oversee the payment system. This means we can ask questions firsthand. 

Méndez: It’s very good to understand the institutional context – and that can also give you insights into what things are working or what can be done.  

You’ve both been co-authors on multiple papers. How did you start working together? 

Van Patten: We met during our undergraduate studies in Costa Rica, more than twelve years ago – Esteban was actually my TA in microeconomics! After graduating, we both started a program at the Central Bank for students interested in pursuing a Ph.D. program in economics – they allowed you to take math classes and other Ph.D. prerequisites while working at the bank. Esteban and I would take the same bus from the bank to classes, then come back to the bank together. That was a real bonding experience, and then we applied to Ph.D. programs at the same time. Since then, we’ve just kept working together. 

Aside from researching technology adoption in Costa Rica, you have also collaborated on studies related to trade reform. What have the findings of that work revealed?

Méndez: We co-authored a paper focused on the determinants of trade preferences in Costa Rica. We were able to use a natural experiment: in 2007, the government conducted a national referendum to determine whether the population supported a free trade agreement with the United States, Costa Rica’s main trading partner.

Van Patten: While research often uses surveys to determine whether people support trade reforms, that approach has shortcomings. For instance, they typically ask respondents about hypothetical scenarios. A survey might ask “Do you think international trade is good for you?” which is informative, but of course, the details matter. Trade with China, for instance, is going to have very different winners and losers than trade with Canada. The nice thing about this experiment is that it was a very well-defined shock to the economy – a free trade agreement with the United States. And in the referendum, every voter had to say either yes or no, and there was only one question on the ballot: Do you want this trade agreement to be approved? 

We were then able to match very disaggregated referendum results to employment data. That allows us to analyze how different firms are exposed to the trade agreement, depending on what the firm is trading, how that would affect employees at the firm, and then whether that affects how a person chooses to vote. We found that a person’s employer does seem to have an important role in whether they supported the trade agreement. This actually goes against a large body of previous literature, which found that people focus on non-economic factors when they determine their trade preferences. 

But after measuring it very precisely, we found that self-interest and economic determinants do matter – particularly when voters think the firm where they work will be positively or negatively impacted by the trade agreement. 

Mendez speaking to people at a busy receptionMéndez (center) speaking with Aishwarya Lakshmi Ratan and Gaurav Chiplunkar at the 2023 Kuznets Memorial Lecture reception. Photo by Julia Luckett.

How has the EGC’s new Kuznets Visitors Program helped take your joint research further? Esteban, how else have you been making the most of your time here?

Van Patten: I think it’s a great program. Many of my colleagues have joked, “Oh, we finally get to meet the legend!” Because they’ve heard so much about Esteban – he’s been a co-author on many of our papers, but they hadn’t met him yet. For one of my classes at Yale SOM, we also had a guest presentation by a former trade minister from Costa Rica who is now at the Harvard Kennedy School, and we organized a Costa Rican dinner that week. It was nice to have so many Costa Ricans in the same place, and to have the chance for the Yale community to get to know this extended family of economists and policymakers.

Méndez: It’s different when your colleagues are right next to you, since you can immediately talk about ideas or sit on the same computer to work through the research – it makes a lot of things easier. I’ve also presented to Diana and Kevin Donovan’s students, talking about Costa Rica’s digitalization of payments, the Central Bank’s policies to increase financial inclusion, and the reduction in the use of cash in Costa Rica’s economy. I also attended the Kuznets Lecture and mini-conference, which gave me the chance to talk to other people about my research and receive feedback. That kind of engagement is very important, and being part of this program has been a really great experience.