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Panama - ECONOMY

Panama - The Economy


SEVERAL DISTINCTIVE FEATURES characterized Panama's economy in the late 1980s; the most striking was its internationally oriented services sector, which in 1985 accounted for over 73 percent of the gross domestic product (GDP), the highest such percentage in the world. That distinctiveness was best symbolized by the Panama Canal, which has dominated the country's economy in the twentieth century. The scope of the services sector has expanded and broadened through increased government services and initiatives such as the Col�n Free Zone (CFZ), a trans-isthmian oil pipeline, and the International Financial Center.

Another distinguishing feature was Panama's paper currency, the United States dollar. The local currency, the balboa, was tied to the United States dollar but was available only in coins. Panama's money supply was determined by the United States Federal Reserve System; therefore, the country could neither print money nor devalue the currency. Because its monetary instruments are limited, Panama has avoided the cycle of exchange-rate devaluations and the accelerating inflation that have typified most Latin American economies. The balboa has remained on par with the United States dollar, and Panama has enjoyed the lowest average annual rate of inflation in Latin America--7.1 percent in the 1970s, and only 3.7 percent between 1980 and 1985.

The third economic distinction is that the Panamanians have one of the highest levels of per capita income in the developing world. Construction of the Panama Canal across the isthmus in the early 1900s and expanding world commerce have combined to foster rapid economic growth in the country throughout the twentieth century. By 1985, per capita gross national product (GNP) reached US$2,100, twice the average in Central American countries, greater than all South American countries except for Venezuela (US$3,080) and Argentina (US$2,130), and on a level with Mexico (US$2,080). Panamanians, however, have not shared equally in the rising living standards, because the distribution of income has been highly skewed.

The military leaders who seized control of the government in 1968 under the leadership of General Omar Torrijos Herrera instituted economic policies that aimed at greater equity as well as integration of various facets of the country's fragmented economy. By the time of Torrijos's death in July 1981, they had achieved some remarkable results, but at the expense of a low rate of private investment, increased urban unemployment, continued rural poverty, and growing external public debt. A document entitled Towards a More Human Economy was published in 1985 by Panama's Archbishop Marcos Gregorio McGrath, revealing a society in which 38 percent of the families lived in poverty and in which 22 percent of the population failed to earn at least US$200 a month--the minimum amount considered necessary to purchase a basic basket of goods. The document went on to criticize many measures taken by the Torrijos government in the 1970s. At the same time, however, the publication recognized that remarkable progress had been made in other areas, such as a decline in infant mortality rates, a rise in the literacy rate, and social security coverage for 60 percent of the population as compared with only 12 percent in 1960. Indeed, the economic policies instituted by the Torrijos regime (1968-81) were pivotal in Panama's history, but the results were mixed.





Since the early 1500s, Panamanians have relied on the country's comparative advantage--its geography. Exploitation of this advantage began soon after the Spanish arrived, when the conquistadors used Panama to transship gold and silver from Peru to Spain. Ports on each coast and a trail between them handled much of Spain's colonial trade from which the inhabitants of the port cities prospered. This was the beginning of the country's historical dependence on world commerce for prosperity and imports. Agriculture received little attention until the twentieth century, and by the 1980s had--for much of the population--barely developed beyond indigenous Indian techniques. Industry developed slowly because the flow of goods from Europe and later from North America created a disincentive for local production.

Panama has been affected by the cyclical nature of international trade. The economy stagnated in the 1700s as colonial exchange via the isthmus declined. In the mid-1800s, Panama's economy boomed as a result of increased cargo and passengers associated with the California gold rush. A railroad across the isthmus, completed in 1855, prolonged economic growth for about fifteen years until completion of the first transcontinental railroad in the United States caused trans-isthmian traffic to decline. France's efforts to construct a canal across the isthmus in the 1880s and efforts by the United States in the early 1900s stimulated the Panamanian economy.

The United States completed the canal in 1914, and canal traffic expanded by an average of 15 percent a year between 1915 and 1930. The stimulus was strongly felt in Panama City and Col�n, the terminal cities of the canal. The world depression of the 1930s reduced international trade and canal traffic, however, causing extensive unemployment in the terminal cities and generating a flow of workers to subsistence farming. During World War II, canal traffic did not increase, but the economy boomed as the convoy system and the presence of United States forces, sent to defend the canal, increased foreign spending in the canal cities. The end of the war was followed by an economic depression and another exodus of unemployed people into agriculture. The government initiated a modest public works program, instituted price supports for major crops, and increased protection for selected agricultural and industrial products.

The postwar depression gave way to rapid economic expansion between 1950 and 1970, when GDP increased by an average of 6.4 percent a year, one of the highest sustained growth rates in the world. All sectors contributed to the growth. Agricultural output rose, boosted by greater fishing activities (especially shrimp), the development of high-value fruit and vegetable production, and the rapid growth of banana exports after disease-resistant trees were planted. Commerce evolved into a relatively sophisticated wholesale and retail system. Banking, tourism, and the export of services to the Canal Zone grew rapidly. Most importantly, an increase in world trade provided a major stimulus to use of the canal and to the economy.

In the 1970s and 1980s, Panama's growth fluctuated with the vagaries of the world economy. After 1973, economic expansion slowed considerably as the result of a number of international and domestic factors. Real GDP growth averaged 3.5 percent a year between 1973 and 1979. In the early 1980s, the economy rebounded with GDP growth rates of 15.4 percent in 1980, 4.2 percent in 1981, and 5.6 percent in 1982. The acute recession in Latin America after 1982, however, wreaked havoc on Panama's economy. GDP growth in 1983 was a mere 0.4 percent; in 1984 it was negative 0.4 percent. In 1985 Panama experienced economic recovery with 4.1-percent GDP growth; the corresponding figure for 1986 was estimated to be 2.8 percent.

Changing Structure of the Economy

The structure of Panama's economy in the twentieth century has been characterized by the dichotomy of a large internationally oriented services sector and a small inward-looking goods sector. The major change in that structure has been the rapid growth of the services sector. In 1950 services accounted for about 57 percent of GDP; that share rose to 63 percent in 1965 and to over 73 percent in 1985. Given Panama's geographic location, modern infrastructure, and an educated population trained in commercial and financial activity, services will likely remain the leading sector of the economy.

In contrast, the goods sector has declined in relative terms. Although efforts have been made to stimulate agriculture and industry--and both registered substantial growth--their share of GDP has fallen as that of the services sector has risen. In the late 1980s, one of the greatest challenges facing Panamanian policymakers was that of using the services sector as a springboard for growth, primarily in industry but also in agriculture.

During the Torrijos administration, the economy was stimulated in several areas. The principal stimulus to the services sector was banking, articularly offshore banking. Transportation also increased rapidly, along with expansion of the road network. Substantial investments were made in the communications system in an effort to meet international standards expected by the extensive network of foreign businesses. Storage and warehousing grew rapidly in response to the economy's own needs and particularly to the foreign business conducted in the CFZ.

Industrialization progressed rapidly after 1950, with industrial production rising from 10 percent of GDP in 1950 to 19 percent in 1965. This expansion was based primarily on import substitution. Industry continued to grow at an average annual rate of 5.9 percent from 1965 through 1980, but registered negative 2.2- percent average annual growth between 1980 and 1985.

As a result of the lack of growth as well as the rapid rise of the services sector, industrial production had dropped slightly as a percentage of GDP in 1985--to just under 18 percent. Manufacturing accounted for about half of the industrial sector, followed by construction, energy, and mining. Given the small size of the domestic market, observers believed that future industrial growth would rely primarily on foreign markets. Success, therefore, would depend to a large extent on Panama's ability to make its industry internationally oriented and competitive.

Although the agricultural sector continued to expand and to employ the largest number of workers, its share of GDP declined substantially, from 29 percent in 1950 to 18 percent in 1965 and about 9 percent in 1985. This sector grew at a respectable average annual rate of 2.4 percent between 1965 and 1980, and 2.7 percent between 1980 and 1985, but it could not keep pace with the rapid growth rate of the services sector. Bananas, shrimp, and sugar continued to lead the list of export items. The expansion of the agricultural sector hinged on exports and product diversification.

Recent Economic Performance

The Torrijos era (1968-81) stands as a dividing point in Panama's economic history. Under Torrijos, the state took a more active role in the economy and initiated ambitious social projects. The public sector expanded to an unprecedented degree, as did the fiscal deficit and the external debt. In the 1980s, Panama was forced to address some of the excesses of the 1970s, and to adjust its policies, often under the aegis of the International Monetary Fund (IMF) and the World Bank.

In the 1960s, Panama experienced buoyant growth in virtually all areas of the economy as a result of the boom in canal-related activities and the growth in private investment. GDP expanded at an average of 8 percent per year. Employment grew at 3.5 percent per year, well above the population growth of about 3 percent a year. Most of the new jobs were generated by the private sector.

In the 1970s, Panama's average annual growth rate of GDP fell to 3.4 percent. Many factors contributed to the decline. In the international arena, reduced canal use (especially after the Vietnam war), rising oil prices, international inflation, and recession in the major industrial countries had a negative impact on Panama's economy. Domestically, investment fell in response to government policies of agrarian reform, expropriation of private power companies, creation of state industries, protection of labor, controls on housing, subsidies, and high support prices. In addition, the prolonged negotiations between the United States and Panama over the canal adversely affected investor confidence. The government sought to regain private investment by investing in large infrastructure projects and by expanding or acquiring productive enterprises. Two-thirds of the new jobs created in the 1970s were in the public sector. The public-sector deficit expanded, and the government was forced to borrow money from abroad. By 1980 the external debt had reached 80 percent of GDP.

In 1982 Panama, like most of Latin America, felt the impact of the world recession. Once again, the government sought to remedy the declining private-sector investment through increased public expenditures. In the same year, the public-sector deficit reached 11 percent of GDP. In 1983 and 1984, the government imposed a severe austerity program, which had the imprimatur of the IMF. Public investment was reduced by 20 percent in 1983 and by a further 8 percent in 1984. The public deficit was also cut, to about 6 percent of GDP in both years. In addition, the government undertook structural adjustment measures in the areas of industry and agriculture and instituted changes to streamline the public sector. The simultaneous recession and reduction in public expenditures caused GDP to fall in 1984, the first decline in more than twenty years. In the following years, however, Panama, avoiding the economic slump that plagued most Latin American countries, experienced moderate growth.




The government has played a limited role in economic matters throughout most of Panama's history, restricting its activities to infrastructural development and creating a climate conducive to private investment. The government's role expanded dramatically after 1968, when the National Guard, now called the Panama Defense Forces (Fuerzas de Defensa de Panam�--FDP), took control of the government under Torrijos's leadership. Members of the National Guard tended to be provincial, racially mixed, and lower- or middle-class in background and thus provided an outlook different from that of the urban-oriented elite that had dominated Panamanian politics in the twentieth century.

The National Guard implemented policies that attempted to reduce the most glaring discrepancies between the urban and rural economies. In 1968 economic activity was heavily concentrated in the two provinces of Panam� and Col�n, which accounted for over two-thirds of GDP, and an even larger share of the country's manufacturing, construction, trade, transport, and communications. Residents of the metropolitan areas had access to relatively well-developed education, health, and other services. Their consumption pattern was closer to that of affluent developed countries; they owned most of the country's cars, refrigerators, telephones, and television sets. Their tastes and aspirations were patterned on those of United States citizens in the Canal Zone and the many international visitors. In contrast, rural residents had access to far fewer services, and their living conditions were substantially below those of urbanites. The majority of the population in the countryside had incomes of less than one-third of those in Panama City and Col�n, and many had little more than one-tenth. The economic policies of the military leaders aimed at continued high growth of the urban economy, from which resources could be channeled to the poorer elements of the society to bring about greater economic and social integration.

High growth of service industries in the terminal cities was considered essential because of several constraints: canal-related activities were not expected to provide much of a growth stimulus; import substitution opportunities in manufacturing had been largely exhausted; and expansion of banana exports appeared limited by international conditions. Panama became a regional financial center after 1970, when the government created the International Financial Center. Tourism was bolstered by construction of additional airports, a convention center, new hotels, and resorts. The CFZ was upgraded, and transportation and warehousing facilities were also improved.

Under Torrijos the government became more active in the goods sectors. In agriculture, land reform was accelerated, and cooperative farming was promoted. In industry, state-owned companies expanded, most notably in sugar refining, cement production, and electric power. Torrijos intervened more forcefully in other areas of the economy, such as in the setting of wages and prices; a 1972 labor code increased job security and promoted union organization.

These measures created a more equitable society, but often at the expense of efficiency and overall growth. Government expenditure rose sharply, and the public sector became bloated with a proliferation of new government agencies. In the service sector, construction declined in the mid-1970s, in part because of the disincentive created by rent controls. In agriculture, considerable improvements in social conditions were not accompanied by increased incomes. Moreover, greater government participation and prolonged canal negotiations created difficulties and uncertainties for private investors, and private investment declined precipitously.

After 1975 the government became more pragmatic and modified its programs to stimulate economic activity. Incentives to investors were increased. The 1972 labor code was modified in 1976 to meet some of the objections by employers. A freeze on collective bargaining agreements was established that in effect prohibited wage increases. Government-set prices were raised to encourage production.

Under a structural adjustment program in 1983 and 1984, Panama reduced the scope of the public sector in the economy. In March 1986, and as preconditions for two structural adjustment loans from the World Bank, the government passed several major laws that revised its labor code, removed protective tariffs, changed the price structure for agricultural goods, and encouraged foreign investment. In August 1986 the government launched a privatization program and proposed the sale of state assets worth US$13 million.

Monetary Policy

Panama's monetary system is unique. United States dollar notes serve as the paper currency and are legal tender in Panama. The local currency is the balboa, which, since its creation in 1904, has remained tied to and equal to the United States dollar. Panama issues only coins corresponding in size and metallic content to United States coins. No foreign exchange restrictions existed in Panama in the mid-1980s.

With no need for a bank to issue and protect the paper currency, Panama did not have a central bank. The National Bank of Panama (Banco Nacional de Panam�--BNP), a state-owned commercial bank, was responsible for nonmonetary aspects of central banking. The BNP was assisted by the National Banking Commission, which was created along with the country's International Financial Center, and was charged with licensing and supervising banks. In 1985 the level of M1 (currency and demand deposits) was US$410 million, while M2 (M1 plus time deposits) was US$1.95 billion.

In a sense, Panama could not have a monetary policy, because it lacked the instruments to implement such a policy, such as money creation and exchange-rate manipulation. In effect, Panama's money supply was determined by the balance of payments, by movements in interest rates, and by the United States, which controlled the number of dollars available for the country's international transactions.

Panama's monetary system has benefited the country in numerous ways. The country has enjoyed almost automatic monetary and price stability. International transactions have been facilitated by the use of the United States dollar. No short-term transfer problems are associated with the balance of payments. The foreign exchange constraint felt by most developing countries has been obviated by the dollars circulating in the economy and the ability to borrow.

In the late 1980s, the financial system consisted largely of banking. Panamanian businesses relied relatively little on public stock or bond issues. No formal stock exchange existed; supervised, independent brokers handled the limited trading in regulated financial certificates, stocks, and bonds. In addition, some insurance companies, savings and loan associations, and unregulated consumer-finance companies were formed. The country's social security fund invested in government bonds and various development projects.

Fiscal Policy

Panama's financial stability and international credit standing were determined not by monetary policy, but principally by fiscal policy and balance of payments. Fiscal policy was thus more important for Panama than for most other countries, and as a result, public-sector deficits were especially problematic for the government.

From 1971 through 1975, the annual average for the consolidated public-sector deficit was 6.5 percent of GDP. That figure nearly doubled to 12.9 percent between 1976 and 1980, at the height of government spending on infrastructure and ambitious social programs. In the 1980s, the figure has declined, from 10.8 percent in 1982 to 5.8 percent in 1984. The 1982 figure represented an aberration, brought about by the political uncertainty and lack of fiscal restraint following Torrijos's death. Most impressively, the deficit was reduced to 2.5 percent of GDP in 1985, a figure even lower than the 3.5 percent targeted by the IMF. The reduction was brought about by increased revenues, reduced expenditures, and streamlined administration.

Budget Process

Panama developed an efficient and centralized budgetary system in the mid-1960s. By law, the budget had to balance, so increasing recourse was made to handle some expenditures outside the budget. One such device was the creation of autonomous government agencies. These agencies increased in numbers and importance in the 1960s and 1970s. Their areas of operation included banking, the national electrical system, welfare, tourism, and gambling. Their budgets were excluded from that of the central government, although various transfers were made.

The collection of direct taxes (on income, businesses, and corporations) was relatively efficient in Panama. Direct taxes totalled 7 percent of GDP in 1983. Although this figure is high compared with those of other countries in the region, direct taxes have brought stability to Panama's budget system and avoided the fluctuations that occurred in neighboring countries, which were more dependent on import and sales taxes. In the late 1980s, only a fraction of Panama's revenue was derived from taxes levied on foreign trade.




A 1985 World Bank study concluded that in spite of a relatively well-educated work force, unemployment was Panama's "gravest economic and social problem." The unemployment rate climbed steadily, from 8.1 percent in 1978 to 11.8 percent in 1985. The study predicted that the unemployment situation would further deteriorate unless the government took forceful measures to change structural rigidities in the labor code and market. Legislation approved in March 1986 addressed some of the rigidities in the 1972 labor code. Those changes may have been responsible, at least in part, for the lowering of the unemployment rate in 1986 to 10 percent.


As a result of declining birth rates and stabilizing mortality rates, Panama's overall population growth rate fell from an annual average of 2.6 percent between 1965 and 1980 to 2.2 percent between 1980 and 1985. The working-age population (15 years and over) increased from 1,011,700 in 1978 to 1,256,800 in 1985, at a rate of approximately 4 percent a year. From 1970 through 1984, the rate of job creation was less than half the growth rate of GDP. Analysts have estimated that the economy would have to grow indefinitely by 7.5 percent a year to absorb new entrants into the labor market--a level almost impossible to sustain and far above Panama's average annual growth rates in the past.

Panama's experience suggested that a government's ability to improve the employment situation through direct intervention in the labor market is severely limited. In the 1960s, an average of 13,000 new jobs were created each year. During the recession in the 1970s, unemployment rose dramatically. In late 1977, the government sought to reverse the deteriorating employment situation with an emergency jobs program. As a result, 28,000 new jobs were created within a year--20,000 of which were in the public sector. The employment program drained government resources, however, and in 1980 it was terminated. Only 11,000 jobs were created annually between 1979 and 1982.

In 1985 the sectoral distribution of the labor force reflected shifts that had taken place since the 1960s. The services sector, led by financial services, continued to grow and accounted for 57.4 percent of the total labor force in 1985. Agriculture (including forestry and fishing) consistently experienced a relative decline, but still furnished 26.5 percent of the jobs. Industry's share of the labor force grew slightly between 1965 and 1980, but dropped to 16.1 percent in 1985.

The public-sector share of total employment rose slightly from 11 percent in 1963 to 13.1 percent in 1970. With the expansion of the public sector in the 1970s under Torrijos and the Emergency Employment Program in 1977, that share peaked at 25.1 percent in 1979. In 1982 the public sector still accounted for 25 percent of total employment.

Wage Policy and Labor Code

Panama's salaries were high by regional standards in the mid1980s . In a 1982 study comparing salaries in manufacturing, Costa Rica's average monthly salary was only 41 percent that of Panama's; Guatemala's, 71 percent, and Honduras's, 84 percent. In 1985 the average monthly salary in Panama was US$450, but that figure was influenced by salaries in the canal area, which averaged US$1,300 per month. In 1985 the minimum wage in the metropolitan area was US$0.82 per hour; that wage was adjusted for location and type of industry.

In the 1970s, the government became heavily involved in labor matters and intervened actively to increase wages. Although a labor code had existed for many years, only the minimum wage provisions were consistently enforced. In 1971 two decrees were issued; the first imposed an education tax and the second required employers to pay workers an extra month's wage each year.

In early 1972 a broad labor code, patterned after that of Mexico, substantially changed labor-management relations. Workers' security, benefits, and bargaining power were increased considerably. Collective bargaining and unionization were encouraged and resulted in rapid growth of union membership.

Although the 1972 labor code contributed to political stability in the 1970s, it substantially raised costs for employers, especially those in labor-intensive activities. The code also created disincentives to further hiring and private investment. Employers were prohibited from reducing a worker's salary. Therefore, piecework and assembly-type industries could not reward workers on the basis of productivity. As a partial result of these rigidities, Panama's labor costs were among the highest in the Caribbean Basin. According to a 1984 World Bank report, the annual cost of running a textile plant with 500 workers was US$588,300 in Haiti; US$789,800 in Costa Rica; US$919,700 in the Dominican Republic; US$1,048,500 in Colombia; US$1,057,600 in Mexico; and US$1,156,700 in Panama. Only Jamaica's costs were higher (US$1,828,300).

The labor code caused the effective cost of wages to rise, fueling inflation and discouraging private investment. The government, unable to devalue the currency, was forced to address the root of the problem--high labor costs. Law 95, which became effective in 1977, modified provisions of the labor code that related to job security and benefits. Previously, employers could only dismiss workers during their first two years on the job; that term was extended to five years. New provisions inhibited union actions, such as strikes, and imposed a two-year moratorium on collective bargaining agreements, which froze wages.

As a condition for the disbursement of a structural adjustment loan, the World Bank in 1985 recommended making the code more flexible. Panama's then-President Nicol�s Ardito Barletta Vallarino (October 1984-September 1985) fully backed the World Bank recommendations. Opposition from unions and from within his own party, the Democratic Revolutionary Party (Partido Revolucionario Democr�tico--PRD), forced Ardito Barletta to withdraw the proposed changes and contributed to his resignation. His successor, Eric Arturo Delvalle Henr�quez, was more successful. In March 1986, the Legislative Assembly approved major reforms in the labor code, in spite of widespread protests and a ten-day work stoppage by the unions. The changes included production-based wages, uniform rates of overtime pay, piecework provisions, removal of protective measures in industry, and flexible agricultural pricing. On the whole, the labor code modifications were aimed at making Panama's industry and agriculture more competitive internationally and expanding employment opportunities. Nonetheless, the economy was deemed likely to continue to experience high unemployment, especially in the metropolitan area, where unemployment rates tended to be much higher than the national average.

Income Distribution

One of Torrijos's major goals was to address the problem of unequal income distribution, which during the 1960s was one of the most skewed in the world. In 1970 the richest quintile (20 percent) of the households received 61.8 percent of the income; in stark contrast, the poorest quintile received only 2 percent of the income. Results of a study conducted in 1983 by the Panamanian government suggested that the Torrijos policies did, in fact, make income distribution more equitable. The income share of the richest quintile fell to nearly 50 percent, while all other income groups increased their share: the fourth quintile (second-to-richest) from 20 percent to 23 percent; the third quintile from 11 percent to 15 percent; the second quintile from 5 percent to 9 percent; and the first (poorest) quintile to 3 percent. Nevertheless, despite the program's success, the 1983 study confirmed a continuing pattern of a relatively prosperous metropolitan area and poor rural provinces.




The Panama Canal continued to play a central role in world trade and Panama's economy in the mid-1980s. Some 5 percent of the world's trade in goods passed through the canal, contributing 9 percent of Panamanian GDP in 1983. This canal's location at one of the crossroads of international trade has spawned a plethora of other service-oriented activities, such as storage, ship repair, break bulk (the unloading of a portion or all of a ship's cargo), transshipment, bunkering, and distribution and services to ship travelers. The dynamism of the canal also was instrumental in the development of the CFZ, the trans-isthmian pipeline, and offshore financing. Evidence suggests, however, that the canal's relative importance to world trade is likely to continue to experience a small relative decline in the future, which has led Panama, together with the United States and Japan, to study alternatives for improving or replacing the canal.

Role of the Canal From 1903 to 1977

In 1903 the United States secured the right, by treaty, to build a canal across Panama. The United States rejected plans to build a sea-level canal similar to that attempted by the French and opted instead for a system based on locks. Construction began in 1907 and was facilitated by medical work that largely eradicated yellow fever and reduced the incidence of malaria.

Construction of the canal involved damming the R�o Chagres to create the huge Gatun Lake in the middle of the isthmus. Channels were dug from each coast, and locks were built to raise and lower ships between sea level and Gatun Lake. Three sets of locks were constructed: Gatun Locks on the Atlantic side, and the Pedro Miguel and Miraflores Locks on the Pacific side. The lock chambers were 303 meters long by 33 meters wide, which limited vessel size to approximately 287 meters in length and 32 meters in width. Distance through the canal is eighty-two kilometers, and in 1987 transit took about fifteen hours, nearly half of which was spent in waiting. The canal began commercial operations in 1914.

The United States operated the canal and set tolls from the beginning of operation. Tolls covered operation costs but were kept low to encourage canal use. Direct benefits to Panama were minimal, consisting of annual annuity payments that increased infrequently, usually in response to Panamanian demands. In the 1975 to 1977 period, the annuity payments reached US$2.3 million a year. Indirect benefits to Panama's economy were substantial, however, and included the jobs of its citizens working in the Canal Zone, value of goods and services sold to the Canal Zone and to passing ships, and expenditures by visitors.

Economic Implications of the 1977 Treaties

The 1977 treaties and the related documents, which became effective October 1, 1979, signaled important changes for the Panamanian economy. The most obvious benefit was in receipts from operation of the canal. Under the terms of the treaties, the government of Panama receives from the Panama Canal Commission: a fixed annuity of US$10 million; an annual payment of US$10 million for public services such as police and fire protection, garbage collection, and street maintenance, which Panama provides in the canal operating areas and housing areas covered by the treaties; a variable payment of US$0.30 per Panama Canal net ton for each vessel transiting the canal (in 1986 this amounted to US$57.6 million); and an additional annuity, not to exceed US$10 million, to be paid only when canal operations produce a profit. In 1986, for example, US$1.1 million was paid; in 1984, on the other hand, canal operations registered a US$4.1-million loss, and no payment was made.

The United States controls the tolls because of its majority (five members) on the nine-member Panama Canal Commission, which will operate the canal until December 31, 1999. In order to encourage use of the canal, tolls have remained relatively low, although high enough to cover costs. (Under the United States law that implemented the canal treaties, the canal must be operated on a self-sustaining basis.) Maximum use of the canal is in Panama's interest, because its annuity depends on transit tonnage. Tolls were raised by nearly 30 percent in October 1979 and by an additional 9.8 percent in March 1983.

Under treaty provisions, the canal administrator is an American and his deputy is a Panamanian. In 1989, a Panamanian will become administrator and the deputy an American. In order to prepare Panama to assume operation of the canal in the year 2000, the Panama Canal Commission has encouraged the hiring and training of Panamanians for all types of canal-related work. The commission's work force was approximately 82 percent Panamanian in 1987.

According to the treaty provisions, Panama also received substantial assets in the former Canal Zone, including three large ports (Col�n, Crist�bal, and Balboa), the railroad across the isthmus, two airfields, 147,700 hectares of land (including housing, utility systems, and streets), a dry dock, large maintenance and repair shops, and service facilities formerly operated by the Panama Canal Company. Ownership and operation of the canal ports of Balboa and Crist�bal were transferred to Panama in October 1979, but a portion of these port facilities will continue to be used by the Panama Canal Commission for canal operations until the year 2000. Panama also received housing that belonged to the former Panama Canal Company, but will continue to supply housing to the Panama Canal Commission and the United States Department of Defense in decreasing amounts until 2000. Some assets and functions of the government of the former Canal Zone, such as schools and hospitals, are maintained by the United States Department of Defense. The Panama Canal Commission continues to operate utilities in the zone areas that it received under the treaty.

The 1977 treaties had important provisions concerning employment and wages. Panamanians would gradually replace United States citizens in the operation of the canal. Perhaps most important was the provision that former Canal Zone employees who became employees in Panama under the treaties were guaranteed wages and conditions similar to those that their position in the zone had commanded. In 1979 a zone employee received about twice the wages of someone employed in a similar position elsewhere in the economy. The canal areas will therefore continue to exert a pull on other domestic wages, making the country less competitive internationally.

Current Use and Future of the Canal

In both the short and the long term, the impact of the 1977 treaties on the economy will depend to a large extent on canal traffic. Since 1979, when the treaties went into effect, the amount of canal traffic has stagnated. In 1979 the canal was transited by 13,056 ships; by 1984 that number had fallen to 11,230--the lowest number in 2 decades. Cargo tonnage also dropped during the same period, from about 154 million to about 140 million tons. Despite the decline in the number of ships and cargo tonnage, toll revenues expanded over the period from US$208 million to US$298 million, because of the toll increase in March 1983.

The decline in canal traffic was in large measure a result of the opening of the trans-isthmian oil pipeline, which carries Alaskan North Slope oil. In 1983 the pipeline diverted 30 million tons of oil from the canal. In terms of Panama's economy, the diversion of oil from the canal to the pipeline did not cause alarm as it was little more than a transfer of services.

Some observers expressed concern that the canal had seen its best days and that it would decline in importance over the long run. Latin American trade, much of which passes through the canal, has stagnated because of prolonged regional recession and balance of payments constraints resulting from the regional debt crisis. Many supertankers and bulk cargo carriers are too big for the canal. Even some smaller vessels sought to avoid the delays associated with transiting the canal. Increased tolls also lowered the demand for canal usage. Many coal and banana producers shunned the canal and shipped to Europe from the Caribbean Basin and to the Pacific Basin from the west coast of Latin America. In addition, the canal faced competition from Mexican and United States land bridges (roads or railroads linking Atlantic and Pacific ports). Standardized cargo containers have made land bridges an increasingly attractive option, even though the distances involved are much greater (the United States land bridge is over 5,600 kilometers long) than across the canal. The concern over the future of the canal was partially allayed by the increase in total canal traffic between 1984 and 1986. In 1986 11,925 ships transited the canal, carrying 139 million long tons of cargo and generating US$321 million in tolls and revenues. In 1987 canal tolls and revenues totaled US$330. The increase in 1986 was due in large measure to increased automobile trade.

In 1982 Panama joined the United States and Japan, the two principal users of the canal, in an agreement to establish a tripartite commission aimed at studying improvements in or alternatives to the canal. The US$20-million study was expected to be ready in 1991. One modest proposal, at a cost of US$200 million, was that of widening the canal at the Gaillard Cut, its narrowest channel. The Gaillard Cut measured approximately 100 meters when the canal opened in 1914, and in the 1960s it was broadened to about 165 meters. The proposal called for doubling the width of the Gaillard Cut. A more extensive plan, at a cost of US$500 million, proposed widening the entire canal by 16 meters to allow for uninterrupted 2-way traffic along the waterway. The canal's existing capacity was forty-two vessels a day; the less expensive proposal would accommodate fifty ships. The most ambitious plan, however, was that for a second, sea-level canal, which could handle even the largest supertankers without the use of locks. This plan's estimated cost was US$20 billion, considered prohibitive in the light of foreseeable toll revenues. Alternatives to a second canal included an improved railroad system, an express highway for container traffic, and additional pipelines.




For centuries, agriculture was the dominant economic activity for most of Panama's population. After construction of the canal, agriculture declined; its share of GDP fell from 29 percent in 1950 to just over 9 percent in 1985. Agriculture has always employed a disproportionate share of the population because of its laborintensive nature. Nevertheless, the percentage of the labor force in agriculture has also dropped, from 46 percent in 1965 to 26 percent in 1984.

In 1985 crops accounted for 63.3 percent of value added in agriculture, followed by livestock (29.5 percent), fishing (4.3 percent), and forestry (2.9 percent). Despite its relative decline, agriculture was the main supplier of commodities for export, accounting for over 54 percent of total export earnings in 1985. The agricultural sector satisfied most of the domestic demand. The principal food imports were wheat and wheat products, because climatic conditions precluded wheat cultivation. In 1985 the value of food imports was US$108.7 million (8.8 percent of total imports), only half that of food exports.

Between 1969 and 1977, the government undertook agrarian reform and attempted to redistribute land. The expanded role of the state in agriculture improved social conditions in rural areas, but longterm economic effects of the agrarian reform were modest. In the early and mid-1980s, the government sought to reverse the decline of agriculture by diversifying agricultural production, lowering protection barriers, and reducing the state's role in agriculture. In March 1986, the government instituted major changes in the agricultural incentives law and removed price controls, trade restrictions, farm subsidies, and other supports.

Land Use

Panama's land area totals approximately 7.7 million hectares, of which forests account for 4.1 million hectares, followed by pasture land (1.2 million hectares), and permanently cultivated fields (582,000 hectares). About 2 percent of the land was used for roads and urban areas. Nearly all of the cultivated and pasture land was originally forested. A large amount of virgin land has been opened up for cultivation by the Pan-American Highway.

Panama's climate and geology impose major constraints on the development of agriculture. Heavy rainfall throughout the year prevents cultivation of most crops on the Atlantic side of the continental divide. The Pacific side has a dry season (December to April) and accounts for most of the cultivated land. The mountainous terrain also restricts cropping. In addition, the country does not have highquality soils. Most of the areas classified as cultivable are so considered on the assumption that farmers will practice conservation measures, but many do not. The topsoil is thin in most areas, and erosion is a serious problem. Most of the nearly level areas conducive to cultivation are in the provinces of Los Santos, Cocl�, Veraguas, and Chiriqu�.

A further constraint on production is the practice of slash-and-burn cultivation, in which trees, brush, and weeds are cut and then burned on the patch of ground selected for cultivation. Indians utilized the slash-and-burn method for centuries, and the Spanish made few changes in techniques. In the 1980s, most farmers practiced a slash-and-burn type of shifting cultivation. The thin and poor-quality topsoil yielded an initially good harvest, followed by a smaller harvest the second year. Typically, the land was cultivated for only two years, and then the farmer repeated the process on another plot, allowing the first plot to rest ten years before refarming.

Much of the farming was of a subsistence nature and accomplished with a minimum of equipment. Plowing was generally not practiced on subsistence farms; the seeds were placed in holes made by a stick. Tree cutting, land clearing, weeding, and harvesting were accomplished with a few kinds of knives, principally the machete and the axe, which comprised the major farm implements.

Land Tenure and Agrarian Reform

Before the 1950s, land was readily available to anyone who was willing to clear and plant a plot. The cutting and clearing of forests greatly accelerated as the population increased. By the 1960s, subsistence farmers sometimes reduced the rest period of cleared plots from ten years of fallow to as few as five years because of the inavailablity of farm land. The reduced fallow period diminished soil fertility and harvests. Consequently, cropped acreage peaked during the 1960s. The hard life and low income farmers accelerated the exodus of workers from the countryside to the cities.

The long period when new land was easily obtainable contributed to a casual attitude toward land titles. In 1980, only 32.9 percent of the 151,283 farms had such titles. The decline in available agricultural land has made land titling more necessary. Moreover, insecure tenure has been a particularly severe constraint to improved techniques and to commercial crop production. The cost of titling a piece of land, however, has been too high for most subsistence farmers.

Between 1969 and 1977, the government attempted to redistribute land. In the late 1980s, however, the distribution of land and farm incomes remained very unequal. In 1980, 58.9 percent of farms had an annual income below US$200. The issue of unequal land distribution, however, has not been as explosive in Panama as in many other Latin American countries. This was because of the service-oriented nature of the economy and because about half of the population lived in or near Panama City. Also, about 95 percent of all farm land was owner-operated, and virtually all rural families owned or occupied a plot.

In an effort to redistribute land, the government acquired 500,000 hectares of land and expropriated an additional 20 percent of the land. About three-quarters of the land acquired was in the provinces of Veraguas and Panam�. By 1978 over 18,000 families (about 12 percent of rural families in the 1970 census) had access to either individual plots or collectively held land as a result of the redistribution. The land acquisition created uncertainty, however, and adversely affected private investment in agriculture, slowing production in the 1970s.

As part of its agrarian reform, the government placed heavy emphasis on organizing farmers into collectives for agricultural development. Several organizational forms were available, the two most important being asentamientos (settlements) and juntas agrarias de producci�n (agrarian production associations). The distinctions between the two were minor and became even more blurred with time. Both encouraged pooling of land and cooperative activity. In some instances, land was worked collectively. Other organizational forms included marketing cooperatives, state farms, and specialized producers' cooperatives for milk, chickens, or pigs. Growth of these agricultural organizations slowed by the mid-1970s, and some disbanded, as emphasis shifted to consolidation.

The cost of agrarian reform was high. The government channeled large amounts of economic aid to organized farmers. Rural credit was greatly increased; farm machinery was made available; improved seeds and other inputs were supplied; and technical assistance was provided. Cooperative farm yields increased, but these higher yields were not impressive, considering the level of investment. Despite the high costs of the government programs, incomes of cooperative farmers remained low. After the mid-1970s, the government changed its policy toward cooperatives and stressed efficiency and productivity instead of equity.

Although the economic results of agrarian reform were disappointing, the social conditions of most farmers improved. The number of rural residents with access to safe water increased by 50 percent between 1970 and 1978. Improved sewerage facilities, community health programs, and rural clinics reduced mortality rates considerably. Major expansion of educational facilities, including education programs for rural residents, helped rural Panamanians become better educated and more mobile.


The crops category is the largest within agriculture, but its share has fallen slightly, from 66.1 percent in 1980 to 63.3 percent in 1985. During that period, crop production was erratic, and annual growth averaged a mere 1.7 percent. The major crops and foreign exchange earners were bananas and sugar. In the 1980s, however, crop production became increasingly diversified. The production of corn, coffee, beans, and tobacco has increased, as has that of such nontraditional products as melons and flowers. Fruits (especially citrus), cacao (the bean from which cocoa is derived), plantains, vegetables, and potatoes were produced on a minor scale; nevertheless, they were important cash crops for small farms.

Bananas were the leading export item, and in 1985 accounted for 23 percent (US$78 million) of total exports. In that year, the Chiriqu� Land Company, a subsidiary of United Brands (formerly United Fruit Company), produced 70 percent of all bananas, followed by private Panamanian producers (25 percent) and the state-owned Corporaci�n Bananera del Atl�ntico (5 percent). The volume of bananas produced in Panama peaked in 1978 and slowly declined in the 1980s. Observers doubted that United Brands would expand its production in Panama because bananas could be produced more cheaply in Costa Rica and Ecuador.

The history of banana production in Panama virtually coincides with that of United Brands, which has been in Panama since 1899. The company built railroads, port facilities, and storage areas for the processing and export of bananas. In the 1930s, a disease seriously curtailed banana production. In the 1950s diseaseresistant plants were developed, and production increased rapidly. In the early 1970s, a "banana war" erupted when banana-producing countries disagreed among themselves and with United Brands about an export tax on bananas. Panama threatened to take over United Brands' plantations. An agreement was reached in 1976 to tax banana exports. In that year, the tax provided the government with US$10 million, nearly 4 percent of all revenues. In addition, United Brands sold all 43,000 hectares of land that it owned in Panama to the government; payment was in tax credits. The government leased back to United Brands over 15,000 hectares for banana production and export operations. Part of the excess land went to the government's newly established banana companies.

Sugar has traditionally been Panama's second largest crop in terms of production and export value. Panama consumed about half its sugar output and exported most of the rest to the United States. The production of sugar in Panama increased during the 1970s, peaked in 1982 at 260,000 tons, and fell to 165,000 tons in 1986. The dramatic decline after 1982 was because of low world prices and the rapid reduction in the United States quota from 81,200 tons in 1983 to 26,390 tons in 1987. Annual sugar exports earned an average US$40 million from 1975 through 1981 but fell steadily from US$41.3 million in 1983 to US$33 million in 1984, US$27.3 million in 1985, and US$22 million in 1986.

The state has been heavily involved in Panama's sugar production. Under the 1983-84 structural adjustment program, however, the state has privatized, closed, and tried to sell numerous sugar mills. Nonetheless, of the six major sugar mills in Panama, four were still under state control in 1987. The largest was the Corporaci�n Azucarera La Victoria, which in 1985 accounted for 64 percent of total sugar production. Several small mills operated throughout the country, but their output was for domestic consumption only.

The production of coffee has steadily expanded, from 7,000 tons in 1981 to 11,000 tons in 1985. Coffee was Panama's third-largest crop export earner. In 1985 it earned US$15.6 million, which was 4.6 percent of total export earnings.

Rice and corn production also increased in the early 1980s. Panama imported rice in the 1970s but by the mid-1980s experienced a surplus, as a result of the expansion of production in the early 1980s, from 178,000 tons in 1982 to 200,000 tons in 1985. Panama produced 75,000 tons of corn in 1985, but in the same year it imported about 40 percent of the corn it consumed, some of which was used for poultry feed. The government granted incentives to increase corn production.

<> Livestock


Panama - Livestock


Panama was virtually self-sufficient in livestock production, which included cattle, pigs, chickens, eggs, and milk. Beef was by far the most important product and output was growing slowly in the 1980s. Between 1981 and 1985, the number of cattle slaughtered rose from 239,000 to 295,000; during the same period, the total stock of cattle increased only slightly, from 1.43 million head to 1.44 million head. Milk production remained steady between 1981 and 1985, averaging 89,140,400 liters a year.

Cattle raising for both meat and milk was common on land on the Pacific watershed and was concentrated in the provinces of Chiriqu�, Los Santos, and Veraguas. Most ranches produced both meat and milk, although some specialized in dairy farming. The majority of ranches had fewer than 100 hectares. Cattle were almost entirely grass fed. The grasslands were not particularly productive, lacking added nutrients and other improvements; on average, more than one hectare is required for each head of cattle. Low government credits, competition from regional cattle producers (especially Colombia), and United States market restrictions have hindered the growth of Panama's cattle production.

From 1982 to 1985, poultry production grew rapidly, from 4.5 million chickens to 6.1 million. During the same period, annual egg production also increased, from 28,859 dozen to 31,205 dozen. Pork production has remained steady; the number of pigs in 1985 totalled 210,000.




Industrial development has been uneven in Panama. Between 1965 and 1980, industry grew at an average annual rate of 5.9 percent; between 1980 and 1985, that rate was negative 2.2 percent. In 1985 industry accounted for nearly 18 percent of GDP. Within the industrial sector, manufacturing (based primarily on the processing of agricultural products) and mining contributed 9.1 percent to GDP, followed by construction (4.7 percent) and energy (3.4 percent).

Several factors contributed to the rapid expansion of industry between 1950 and 1970. A 1950 law granted liberal incentives and protection from imports to investors, including those in manufacturing. An agreement in 1955 phased out a number of manufacturing activities in the Canal Zone and opened a market for such Panamanian products as bakery goods, soft drinks, meats, and bottled milk. Foreign investment went into relatively large plants for oil refining, food processing, and utilities. The government invested in the infrastructure, especially in roads and the power supply. A building boom increased the demand for construction materials and furniture, further stimulating manufacturing. Management gained experience during the period, and labor productivity increased.

The stagnation in industrial growth during the 1970s resulted from external and internal causes that reduced private investment. Externally, the rise of oil prices, recession in the industrialized countries, and uncertainty relating to the future status of the canal clouded the investment climate. Domestically, a recession reduced construction activity and lowered the demand for manufactured goods. The government built cement and sugar mills to compete with privately owned mills; it also implemented an agrarian reform program, instituted a liberal labor code, and enforced rent control laws. These measures created apprehension on the part of investors, and although the government granted tax holidays, export incentives, and protection from imports, private investment declined. A key goal of the structural adjustment program of the mid-1980s was to increase private investment in industry and to make Panama's industry competitive internationally.


In 1984 the value added in manufacturing totaled US$344 million, distributed approximately as follows: food and agriculture, 42 percent; textiles and clothing, 11 percent; chemicals, 8 percent; machinery and transport equipment, 1 percent; and other manufacturing, 37 percent. Manufacturing was almost completely oriented toward the domestic market; manufactured goods accounted for a mere 2.5 percent of the value of exports of goods and nonfactor services. Production was concentrated in Panama City (over 60 percent of establishments), with smaller industrial centers at David (10 percent) and Col�n (5 percent).

Industrial development has faced the serious constraints of the small size of the domestic market, lack of economies of scale, high labor and unit costs, and government policies of high protection against imports. The greatest growth in manufacturing occurred in response to import- substitution industrialization in the 1960s and 1970s. By the 1980s, however, the "easy phase" of importsubstitution industrialization was over; a second phase, that of industrial deepening, was more difficult to carry out in such a small economy. The economy's obvious limitations in manufacturing have been partially offset by an educated labor force, highly developed internal and external transport and communication links, extensive financial facilities, the country's centralized location, and relatively few restrictions to foreign investment. The Panama Canal treaties provided additional space for expanding the CFZ, an ideal location for light industry and assembly plants.

During the 1970s, the public sector took the lead in manufacturing by building a cement plant, sugar mills, and iron and steel works. The structural adjustment program of the mid-1980s sought to reduce the state's role in the economy and to make the private sector the engine of manufacturing growth. The industrial incentives legislation of March 1986 encouraged manufacturers to be export-oriented by removing tax exemptions for those firms that produced for the domestic market. The legislation also provided for maintaining tax exemptions on imported inputs, income, sales, and capital assets for those firms that produced exports. The legislation also lowered import barriers over a period of five years in an effort to increase the productivity and competitiveness of local manufacturing. In addition, new companies were given tariff reductions of up to 60 percent for the first 7 years, and 40 percent thereafter.

Since the early 1970s, industrial expansion and job creation have lagged behind the growth of the labor force. In the 1960s, an average of 2,400 jobs was created each year in manufacturing. The rigidities of the industrial incentives law in 1970 and the labor code in 1972 contributed to a decline in manufacturing employment; an average of only 530 new jobs were created each year in manufacturing during the 1970s. The changes introduced in the labor code in March 1986 sought to reverse the antiemployment bias in manufacturing. The slight reduction in the overall unemployment rate in 1986 may be partially attributed to the labor code revisions.

Despite government measures to stimulate manufacturing, Panama's becoming a major industrial center seemed unlikely. Under the CBI, some potential arose for the development of twin-plant operations, especially in association with firms in Puerto Rico, where labor costs were higher than in Panama. In general, however, Panama was unable to compete effectively with Mexico, given the latter country's low labor costs and proximity to the United States market. Also, the possibility existed that industries from East Asia, especially clothing manufacturers, might increasingly relocate to Panama, in an attempt to circumvent United States quotas. This possibility was limited by uncertainty over the United States response. The United States Department of Commerce had called for the reduction of United States imports from Panama, precisely in those products manufactured by Asian investors.


Despite the variety of mineral deposits and the potential of copper production, the contribution of mining to GDP was negligible, accounting for only US$2.5 million in 1985, down from a 1982 peak of US$4.1 million (both figures at 1970 market prices). The production was restricted to the extraction of limestone, clays, and sea salt. A state company, Cemento Bayano, produced limestone and clay, and operated a cement plant with an annual capacity of 330,000 tons.

In the 1970s, several copper deposits were discovered. The largest was Cerro Colorado, in Chiriqu�, which if developed would be one of the largest copper mines in the world. Commercial development of the Cerro Colorado project was in the hands of the state-owned Corporaci�n de Desarrollo Minero Cerro Colorado, which had a 51-percent stake in the operation, and of R�o Tinto-Zinc, with 49 percent. In the 1970s, ore reserves at Cerro Colorado were estimated at nearly 1.4 billion tons (0.78 copper content). In the late 1970s, the cost of developing the mines was estimated at US$l.5 billion, nearly equal to total GDP at that time. Commercial exploitation was postponed because of low copper prices on the world market but could be undertaken if copper prices rose substantially.


Energy is generally considered a part of industry, to the extent that it is an intermediate input in the production process. In Panama, however, the largest shares of energy are sold to the consumer and to commerce. Therefore, a significant portion of energy used in Panama should be considered a part of the services sector; for the sake of this analysis, however, energy is placed under industry, following conventional practice.

Panama's energy production has increased substantially, from an average annual growth rate of 6.9 percent between 1965 and 1980 to 11.1 percent between 1980 and 1985. The expansion of hydroelectric generating capability has been responsible for most of the growth. Per capita energy consumption has increased, from 576 kilograms of oil equivalent in 1965 to 634 kilograms in 1985. This figure is higher than that of Nicaragua (259 kilograms) and Costa Rica (534 kilograms) but lower than that of Colombia (755 kilograms) and Mexico (1,290 kilograms).

Panama depended on petroleum for 80 percent of its domestic energy needs in the late 1980s. Petroleum exploration has been underway since 1920, but without success; as a result, the country is dependent on imported petroleum. Saudi Arabia and Venezuela were the primary suppliers until 1981, when Mexico replaced Saudi Arabia and joined Venezuela in the San Jos� Agreement of 1980, under which the two countries supply oil to Caribbean Basin countries on concessionary terms. Panama nearly halved its imports of oil between 1977 (20.5 million barrels) and 1983 (11.8 million) in response to rising oil prices. Oil imports have declined as a share of the total value of imports, from 33 percent in 1977 to 19 percent in 1985; in the latter year, the value of oil imports was US$19.2 million.

The country's only oil refinery, near Col�n, has a capacity of 100,000 barrels per day. Since 1976 it has been operating far below capacity, because greater use has been made of hydroelectricity. Refinery products supplied the domestic fuel for thermal power plants, most of the transportation system, and other minor uses. In 1977 about 64 percent of the imported crude was reexported after refining, mostly to ships' bunkers; by 1983 that figure had fallen to 35 percent. The government has approved the construction of a second refinery, also near Col�n, with a capacity of 75,000 barrels per day.

Hydroelectricity accounted for 10 percent of energy consumption and was the country's main domestic energy resource in the late 1980s. Panama has been substituting hydroelectric power generation for petroleum-based thermal generation since the late 1970s. By 1980, some 30 sites had been identified on the country's numerous rivers, which, if developed, could generate 1,900 megawatts of power. The capacity for generating electricity was 300 megawatts in 1979; in 1984 it had increased to 980 megawatts, of which 650 megawatts was hydroelectric and 330 was thermal. The increase was due in large measure to the Edwin F�brega Dam, on the R�o Chiriqu�, which began operation in 1984 with a generating capacity of 300 megawatts.

In 1985 the Institute of Hydraulic Resources and Electrification, responsible for power generation and distribution, initiated a five-year program to expand Panama's electrical generating capacity. At the time, there were 275,429 electricity consumers. A major goal of the program was to increase the distribution of electricity to an additional 12,000 people in rural areas.

Other energy sources, such as bagasse, charcoal, and wood, accounted for the remainder of energy demand. Firewood supplied half of the country's energy requirements as late as the 1950s but declined rapidly thereafter, partly because of the deforestation it engendered. Bagasse was used as fuel at sugar mills. Coal reserves were discovered in the Bocas del Toro region in the 1970s, near the border with Costa Rica. If commercially exploitable, the coal in the region could be used for generating electricity. In August 1985, the government announced plans to explore the reserves, with funding from the United States Agency for International Development and the United States Geological Survey.




In the 1980s, Panama has struggled to adjust to the constraints imposed on its economy by a high external debt. To compensate for a deficit in the capital account, its current account has registered a surplus since 1983, because the service sector has maintained a surplus. Debt has remained high in per capita terms, but the actual debt burden has fallen.


The value of Panama's merchandise exports has always lagged behind imports. The level of imports relative to the size of the economy has remained large. Panama's consumption standards have been high for a developing country. In the early 1900s, nearly everything consumed in the metropolitan areas was imported because little agricultural surplus and virtually no manufacturing existed. By the mid-1980s, the country was largely self-sufficient in foods except for wheat, temperate-zone fruits and vegetables, and oils and fats. Domestic manufacturing provided a growing share of consumer goods, but the country still imported a wide range of commodities.

With the decline of commodity prices on world markets in the 1980s, the terms of trade have steadily moved against Panama. Based on a terms of trade index of 100 in 1980, Panama's index stood at 82 in 1985, meaning that it had to export considerably more in order to import the same value of goods it had previously imported.

Panama controlled trade by issuing import and export licenses. Since 1983 tariffs have gradually replaced quantitative restrictions on imports. Taxes were levied on some imports, and incentives were given to nontraditional exports through tax credit certificates.

In 1985 merchandise exports totalled US$414.50 million (excluding reexports from the CFZ) down from US$526.10 million in 1980. Refined petroleum topped the list of export items, at US$100.60 million, but its net contribution to the trade balance was much smaller, given that Panama's crude oil is imported. Bananas, traditionally the largest export item, accounted for US$78.1 million in exports, followed by shrimp (US$53.4 million), manufactured goods (US$45 million), sugar (US$33.3 million), coffee (US$15.6 million), and clothing (US$11.5 million).

About 75 percent of Panama's exports went to industrial countries; Latin America received the other 25 percent. The United States was by far the largest single market, and in 1985 received 60.5 percent of Panama's exports. Most of the remaining exports went to Costa Rica (7.5 percent), the Federal Republic of Germany (West Germany) (5.5 percent), Belgium (4.9 percent), and Italy (4.5 percent). The CBI was expected to increase Panama's exports to the United States. The CBI seeks to provide long-term trade, aid, and investment incentives to promote the economic revitalization of the Caribbean Basin. The most significant incentive is twelve-year, duty-free access of most goods to the United States market. Some omitted goods were footwear, textiles, leather and general apparel, canned tuna, petroleum and petroleum products, rubber and plastic gloves, luggage, and handbags. In addition, special rules limited the eligibility of sugar for duty-free treatment. Twenty countries, including Panama, were granted this access in January 1984. In 1987 judging the long-term CBI benefits for Panama was premature. Critics charged that few new trade benefits would accrue from the CBI beyond those under the Generalized System of Preferences, which already accommodated 87 percent of Caribbean Basin exports to the United States. In the initial years of CBI implementation, the share of Panama's exports going to the United States remained unchanged.

In 1985 Panama's merchandise imports amounted to US$1.34 billion, or about 30 percent of GDP. In that year, manufactured goods were the largest import item (US$348.6 million), followed by crude oil (US$271.8 million), machinery and transport equipment (US$266.7 million), chemicals (US$158.0 million), and food products (US$142.6 million). Crude oil has traditionally been the largest import item, but in the 1980s its share of imports fell as petroleum prices declined and hydroelectric energy capacity increased.

About one-third of Panama's imports came from the United States, another third from other industrial countries, and onethird from Latin America. In 1985 Panama's imports came from the United States (30.8 percent), Japan (8.9 percent), Mexico (8.2 percent), Venezuela (6.8 percent), and Ecuador (7.2 percent). Mexico and Venezuela supplied 70 percent of Panama's crude oil under the San Jos� Agreement.


CITATION: Federal Research Division of the Library of Congress. The Country Studies Series. Published 1988-1999.

Please note: This text comes from the Country Studies Program, formerly the Army Area Handbook Program. The Country Studies Series presents a description and analysis of the historical setting and the social, economic, political, and national security systems and institutions of countries throughout the world.

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