Panama’s geography is at the very heart of her industrial cycle. The country has long been the jumping off place between North and South as well as East and West. And it’s legacy is people from North, South, East and West who are still struggling to find balance. The original indigenous people that the Spanish encountered five hundred years ago are now, for the most part mixed by blood with both Spanish and African people, although in rural areas there are isolated indigenous groups. There remains a wealthy Spanish merchant sector that tend to own the larger land holdings and run the government. The canal is now owned and operated by the Panama government and is being rebuilt to accommodate much larger ships. Almost 80 percent of the country’s GDP comes from services that are directly or indirectly involved with transportation and canal transit.
A Service-Based Economy
There remains a group of subsistence farmers, but farming has become a smaller and smaller part of Panama’s economy after the canal was constructed. At the beginning of the twentieth century small-holding agriculture represented over fifty percent of the population’s employment, by 1950 that had dwindled to less than thirty percent and currently it is less than eight percent. Also, farming has become mechanized and far more sophisticated than in the past. Agricultural exports from Panama are bananas, shrimp, sugar and coffee. While the service side of the economy has lifted Panama’s GDP, wealth distribution remains a problem, and Panama has the second worst income distribution in Latin America.
Among the services in Panama are operating the Panama Canal, shipping logistics, banking, the Colón Free Zone, insurance, container ports, flagship registry, and tourism. In recent years the free-trade zone in Colón has been more carefully regulated. Panama has been removed from the Organization of Economic Development’s list of tax haven countries by signing double taxation treaties with other countries. The largest users of the Panama canal are the United States and China. In 2015 the new expanded canal is scheduled to open and that will encourage more shipping transit. The services sector of the economy represents 78.4 percent of GDP and employs 64.4 percent of the labor force. Agriculture represents 3.7 percent of GDP and employs 17 percent of the labor force. It’s the combination of industrial farming and subsistence farming that makes that labor usage so high. Over a quarter of the population live below the poverty line.
An industrial cycle is founded on the ability of an economy to broadly distribute economic growth opportunity throughout society enough so that the larger population supports the hierarchical institutions at the center of society. In Panama there has been a slow evolution towards a more equitable society, but the service and industrial sectors of the economy do not distribute opportunity to everyone. Those who remain involved with traditional subsistence farming still languish outside the major wealth generating activities. According to a World Bank Report, “Panama’s poorest are very poor and the richest are very rich. Although inequality is higher in rural areas, it is more obvious in urban areas, such as the city of Colón, where the close physical juxtaposition of the modern, dynamic, wealthy sector with poor city slums accentuates the perceived gap between rich and poor.”
With one of the fastest growing economies in Latin America, Panama’s government directs substantial funding to reduce poverty. The indigenous population are among the very poorest part of Panama society, while the non-indigenous rural poor are more successful than the indigenous poor at rising out of poverty by migrating to cities and finding jobs. The government previously (prior to 2007) made indirect subsidies for water, electricity and fuel improvements for the poor. These efforts were mostly ineffective, but more recent cash transfer programs have shown better results at decreasing extreme poverty among the indigenous population. Panama has expanded their education and clean water programs with some success, but availability of sanitation and electricity remain poor. The real question is will skilled jobs become available for the rural poor who do not migrate to cities?
Panama also has a growing industrial sector that produces construction, brewing, cement and construction materials, sugar milling, manufacturing of aircraft spare parts, drinks, adhesives, and textiles. There is a shortage of skilled labor and an oversupply of unskilled labor. Since the United States turned over the canal and military bases to Panama, there has been a lot of government sponsored construction. There is the canal expansion and a new metro system in Panama City. While the economy is growing it is vulnerable to swings in the international economy that reduce shipping thereby lowering revenue from canal use. Since Panama’s economy is so significantly tied to service industries the country’s industrial cycle swings with international demand for those services.
As the new construction projects reach completion (the canal expansion is scheduled to by complete in 2015 and the metro project in Panama City is scheduled to be complete this year, 2014) more shipping should pass through Panama, which should stimulate more economic growth. As the economy expands there is good reason to believe the government will continue to work at poverty reduction and expanding opportunities for the indigenous poor. Panama’s tourist industry is also growing, which gives the government further reason to continue focusing on balancing the broad distribution of economic growth opportunities throughout society along with regulation of high growth industries so they meet international standards as they have done with tax regulations in the Colón Free Zone.