Download Panama Economy

NS4540
Winter Term 2017
Panama Economy
Overview I
• Panama’s geographical location has enabled the country
to be one of the most important sipping crossroads and
ports in the world
• Richly endowed with natural resources, fishing grounds,
mineral deposits and forests
• Economy based largely on services
• 2014 services accounted for 64.1% of GDP
• In recent years Panama has invested heavily in public
infrastructure to position itself as a maritime and air transport hub
• Country also region’s international trading, banking and services
center
• Trade liberalization and a series of free trade agreements
have increased efficiency and stimulated growth
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Overview II
• Panama’s dollar based economy eliminates foreign
exchange risk (with debt denominated in dollars rather
than local currency)
• These factors help account for country’s impressive rates
of economic growth since controlling of Canal in 1999
• GDP growth averaged 6.9% between 2000 and 2014
• Between 2007 and 2014 growth accelerated to 8.7%
placing Panama as one of the fastest growing countries
in the world
• High rates of growth in recent years not accompanied by
a corresponding increase in skills of workforce
• Led to a reliance on immigrants
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Overview III
• Growth not benefitted all Panamanians
• Youth unemployment substantially higher than overall
unemployment rate
• Social indicators improving slowly
• Inequality in income remains fairly high -- Gini 0.53
• Many sections of rural population, especially indigenous
communities do not receive basic services such as education,
electricity and sanitation.
• Panamanian Government aware of problems and has
made attempts toward alleviation
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Overview IV
• However in recent years authorities have been more
focused on
• Sustaining high rates of economic growth
• Increasing country’s importance as a regional trade hub
• Strengthening growth in areas such as tourism and mining
• Strategy has involved large infrastructure projects such
as the expansion of the Panama Canal
• Evidence that public investment has had a positive
impact not only on growth but also private investment
(crowding-in)
• Going forward, sustaining strong growth performance
will depend more on productivity and human capital
accumulation
• Quality of macroeconomic policies and structural reforms
will remain crucial
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Panama: Economic Patterns I
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Panama: Economic Patterns II
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Panama: Economic Patterns III
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Sources of Growth I
• Deposition of growth suggests that labor has been
relatively stable
• Employment increased as the economy grew while
education indicators improved over the years
• Enrollment rates compare favorably with peers in region
• In particular, tertiary education enrollment accelerated
since the 1990s, and doubled from 22.7% in 1991 to 45.7%
in 2010
• Average years of schooling of population 15 years and
older increased from 7.7 years in 1990 to 9.6 years in
2010.
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Sources of Growth II
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Sources of Growth III
• However quality of education could be a constraint to
human capital accumulation
• Student assessment scores relative to other countries
suggest that the country performed below what its
income and investment in education would predict
• The quality of education and the mismatch between
demand for skilled labor and supply could be an
impediment to medium term growth
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Sources of Growth IV
• Capital contribution to output increased over time
• While 1980s were marked by a lack of investor
confidence, private investment surged with remarkable
strength in 1990s
• Since 2000 both private and public investment have
boosted growth
• In the period between 2007 and 2014 output growth
averaged 8.7%, with fixed investment by both public and
private sectors contributing to almost half of output
growth.
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Sources of Growth V
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Sources of Growth VI
• TFP did not contribute to output growth until 2004
• TFP had a negative contribution to growth in 1980s and
1990s
• Suggests weakness in improving economic efficiency
during the period.
• In last decade, TFP, contributed about ¼ of output
growth.
• Positive TFP also corresponds with intensive reforms
carried out in period of positive contribution
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Structural Reforms I
• Structural reforms over the years helped to improve the
competitiveness of the economy
• Beginning in the 1990s authorities adopted an economic
strategy aiming at a permanent reduction of public
indebtedness and an economy-wide increase in
productivity
• Structural reforms were implemented in the 2000s to
remove impediments to
• Productivity growth and
• Private sector investment and to
• Enhance the pubic sector capacity
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Structural Reforms II
• These reforms include
• Significant efforts in privatization
• Trade and market liberalization
• Strengthening financial supervision and
• Promotion of private sector investment
• As part of the institutional improvements to attract
foreign investment, an agency for the Attraction of
Investments and Promotion of Exports (Proinvex
Panama) was established as a one stop shop
• Potential investors can identify all the relevant information on
investing in Panama
• Measures have also been taken to increase labor mobility
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Structural Reforms III
• Investor confidence high because of
• Improvements in the efficiency of the economy as well as public
finances
• Better climate for private sector activities
• The investment opportunities opened up by privatizations and
• The reverting of the Panama Canal and neighboring land
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Private sector investment averaged
22% of GDP in 1990-2012
Increase from 9% average for 1980-1990
Today Panama ranks among the top Latin American
countries in the major competitive indicators
• Most competitive economy in Latin America after Chile
• Improved its ranking in the ease of doing business from
65 in 2008 to 52 in 2014
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Panama: Public Investment I
• Impact of public investment on real GDP and private
investment
• Results from an econometric exercise indicate that pubic
investment has had a positive impact on output growth
as well as private investment – crowding in effect
• Economy has been in an investment boom since 2007
• Number of sectors have been identified as the growth
engines of the economy:
• Logistics,
• Tourism
• Agriculture, and
• Financial services
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Panama: Public Investment II
• The vision was for Panama to become a hub for logistics
services, financial services and tourism.
• Consistent with the growth strategy authorities identified
areas which public investment and government action
would yield better returns in terms of sustained eocnomc
growth and job creation
• The Strategic Plan of the government realsed in January
2015 plans to invest US$19.5 billion over 2015-19 most of
which would be invested in long term infrastructural
projects
• New highways, airports, roads ports, urban
infrastructure, new subways, sewage systems and
healthcare facilitis.
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Going Forward I
• Projections next five years suggest 6-7% rate of growth
• Based on public sector investment plans 2015-19
• Assumes other factor contribution and TFP follow past trends
• Quality of public investment and accompanying
macroeconomic policies will remain critical
• Investment should be sustainably financed to avoid buildup of
public debt
• Structural reforms to improve the business climate would
encourage complementary private sector investment
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Going Forward II
• large public investment is expected to slow-down in the
medium term,
• growth will depend more on productivity and human capital
accumulation
• With the increase of public capital stock and the
normalization of public investment challenge is to
develop the strategy to maintain a more sustainable and
inclusive growth
• Imperative to increase the efficiency of education
investment and further reform of the labor market to
alleviate skill mismatches and ensure better job
opportunities.
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