19
Jul

By Diego Sánchez de la Cruz

Situated on the isthmus connecting South America with North America, Panama has become a great story of development and growth. A fully dollarized free market economy, Panama has enjoyed the fastest growing rate in the Americas over the last five years, with an average of 6% and peaks of 12.1% in 2007 or 10.7% in 2008.

Panama’s economy has reinvented itself throughout the years. As of 2011, services make up around 80% of national GDP. Interesting experiments like the “Colón Free Trade Zone” (1) and infrastructure like the “Panama Canal” (2) benefit from the country’s geography, which constitutes a key comparative advantage.

According to The Economist, “Panama will soon overtake Costa Rica and Venezuela in GDP per head. Accounting for purchasing power, it is one of the five richest countries in mainland Latin America” (3). The Human Development Index, which ranks the country in the 54th position, has seen Panama outperform global and regional average results since 1980, with continuous improvement in areas such as health, education and income (4).

Commerce is pivotal to understand Panama’s evolution: the country has some of the lowest import tariffs in Latin America. The Index of Economic Freedom explains that Panama “is benefiting from its liberal trade and investment regime. Its service-oriented economy is a dynamic international business hub for such activities as maritime transport, distribution services, and banking” (5).

Important challenges remain open:

-  The ease of doing business in Panama needs to be improved. The country is only ranked at 72 in the latest “Doing Business Report” of the World Bank (6).

-  Institutional underperformance hurts the evolution of Panama. The rule of law is still weak, and corruption remains a problem.

-  The educational system is not doing very well according to the latest studies, which results in lower productivity and fewer opportunities.

-  The reduction of poverty remains a challenge. It should be noted, however, that poverty in Panama has decreased over the last several years. Recent studies by the United Nations highlighted progress in this area: from 2001 to 2007, overall poverty went from 37% to 29%, while extreme poverty fell from 19% to 12%. (7)

The current President of Panama, businessman Ricardo Martinelli, had outlined plans to bring all taxes down to 10% by the end of his presidency. So far, Martinelli’s government has reduced the personal income tax from 27,5% to 15%, while the corporate tax rate has decreased from 30% to 25% (8).

At the end of the day, Panama may still have a lot of challenges ahead, but its performance in the last several decades has been very positive, enabling important socioeconomic progress.

Comments

Alberto de Panama February 28, 2012 - 4:25 pm

People should know that Panama economy grew 3%, 2.2% and 1.1% in the first, second and 3th quarter of year 2009 respectively. Panama remains one of the few countries in LatinAmerica that grew in 2009. However, the economic growth plummeted from 12.1% and 10.7% in 2007 and 2008 respectively.

Regards.

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