Human capital formation and the linkage between trade and poverty: the cases of Costa Rica and Nicaragua

We combine different analytical instruments to assess the impact of human capital and trade policies on macroeconomic aggregates and poverty, and how both sets of policies complement each other in Costa Rica and Nicaragua. We use a top-down approach —i.e. a dynamic CGE model and microsimulations— to assess the effects of two FTAs: DR-CAFTA and EU-CAAA on production and poverty. Moreover, we use a human capital satellite model to evaluate the impact of human capital formation. Combining the satellite model with the CGE model and the microsimulations, we construct a rich analytical framework to assess the direct effect of each set of policies on poverty and how these policies complement each other. We find that human capital policies have a significant and permanent effect on growth and this is associated with poverty reductions. On the other hand, the static efficiency changes associated with trade liberalization have positive but small growth and poverty effects.