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Decent Work Pilot Programme
Country Brief: Panama
I.
National Context
With per capita national income of nearly $4,450 in 2004, Panama is a middle-income
country of just over 3 million people. A member of the WTO, Panama has an open
economy and liberalized trade. As is the case for most countries in Latin American,
Panama has been deeply affected by global economic integration and structural
adjustment.
Global Economy
Globalization was a feature of Panama’s history long before the term became
common currency. The Panama Canal, opened in 1914, remains a lifeline of
international maritime transport. Its reversion to national control in 1999 has, if
anything, underscored its global character. Panama also lends its flag to a sizeable
merchant shipping fleet, most of which is owned and operated by non-residents. And
Panama has woven tight linkages with the international financial community through
its banking centre.
Panama adopted the U.S. dollar as its currency early in the 20th century. It has no
central bank and is not exposed to foreign exchange risk. As a result, its rate of
inflation is low by international and regional standards.
While these features distinguish Panama from other Central and Latin American
countries, there are also many similarities with the rest of the region. It had sluggish
economic growth during the 1980s, a decade that ended with a military invasion
deposing a military dictatorship, partly due to a mounting fiscal deficit and external
public debt. Panama also entered into a structural adjustment process with the
assistance of the IMF.
Following a deep recession in 1987-89, macroeconomic stability returned in the 1990s
along with positive rates of economic growth. GDP growth was on average higher in
the 1990s than the previous decade. Nonetheless, growth has been well below rates
needed for employment generation to keep up with growth in the labour force. In
addition, governments have tended to view employment as a residual of economic
policy-making.
Unemployment, Poverty and Debt
As a result, Panama’s unemployment rate has remained stubbornly high, averaging
13.9 per cent during the 1990s. The employment situation recently began to show
some improvement, however. Unemployment was estimated at 9.6 per cent in 2005,
down from 11.8 per cent in 2004 and 13.1 per cent in 2003.
Lack of adequate job creation also has meant a burgeoning informal economy,
particularly in urban areas, which involves jobs with low incomes and productivity.
This is part of a wider picture of poverty and inequality, with about half of Panama’s
labour force eking out a living in both rural and urban areas. Income inequality is
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among the highest of Latin America. Despite the country’s middle-income status,
World Bank surveys estimated that 37 per cent of the population lived in poverty in
1997. More recently, an October 2005 survey by the Comptroller General’s Office
showed that 66.3 per cent of Panamanian workers earned less than $400 a month. This
included 14.9 per cent earning less than $125 a month, less than half the statutory
minimum wage of $242 for urban workers. There were wide regional variations in
wages.
Also of major concern is the national debt, which increased throughout the 1990s
despite economic growth and adjustment policies. Total public debt, including
domestic debt, was equivalent to 72 per cent of estimated GDP in 2005. The late
1990s also brought a big expansion in the current account deficit on the balance of
payments. This reflected soaring imports following the reduction of tariffs in 1997,
which were accompanied by only marginal growth in exports.
More recently, a favourable global environment has helped to boost Panama’s
exports, particularly of services. This is bringing down the current account deficit,
which the Economist Intelligence Unit expects to total 3.6 per cent of GDP in 2006
compared with more than 8 per cent in 2004. However, the EIU cautions that the
dominance of service exports and earnings from transhipment makes Panama’s
external accounts particularly sensitive to regional and global trade patterns. A
slowdown in world trade could therefore lead to a serious deterioration in the
country’s external accounts.
Shift to Services
Panama has become a service economy over the past three to four decades, with
agriculture and manufacturing gradually relegated to marginal roles. By 2003,
services accounted for 76.2 per cent of GDP, compared with 16.3 per cent for industry
and 7.5 per cent for agriculture.
Panama opted for a “big bang” approach to trade liberalization, with the aim of
introducing greater competition into its domestic economy. In the event, however,
reductions in tariffs helped fuel demand for imports, but did not succeed in boosting
exports or stemming the decline in manufacturing and agriculture. Moreover,
Panama’s use of the dollar meant the country could not resort to exchange-rate
policies to stimulate exports and restrain imports. The country’s problems were
compounded by a strong dollar in the 1980s.
Panama’s experience points to the need for trade liberalization to be part of a wider
set of policies and measures aimed at supporting exports and strengthening sectors
and enterprises that compete with imports. Moreover, the sequencing of liberalization
and other policies can help determine their success. For example, the big bang method
adopted by several Latin American countries stands in stark contrast to the experience
of East Asian nations, which first pursued selective export promotion policies before
gradually liberalizing imports.
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I.1
National Priorities
In the second half of the 1990s, Panama’s government focussed on improving the
country’s international competitiveness through a structural adjustment package. This
aimed at economic stability, growth and diversification to overcome dependence on
the canal.
Since then, this agenda has widened to include social and economic development
goals. The government elected in 1999 as well as its successor, which took office in
2004,∗ both faced the challenge of fighting poverty and inequality in an increasingly
open economy.
Key objectives have been to raise growth and productive investment, spread the
benefits of growth more widely and cut unemployment. It is also necessary to tackle
obstacles to growth, most notably falling labour productivity, which reduced the
competitiveness of Panama’s economy.
The ILO’s Decent Work Pilot Programme (DWPP) in Panama began in late 2000
with the aim of supporting such efforts. In addition to providing analysis, policy
options and proposals, the DWPP sought to encourage government, employers and
workers to forge a consensus on specific policies and measures. The latter was
especially important given the tradition of conflict among Panama’s stakeholders,
particularly between unions and top government officials as well as between
governing and opposition politicians.
Decent work is relevant in a number of ways to the drive to make Panama more
internationally competitive. Most prominent of these are expanding productive
employment and investment, improving skills and fostering good relations between
government, employers and unions.
I.2
Decent Work Trends
The ILO decent work agenda provides a framework for development that promotes
opportunities for women and men to obtain decent and productive work in conditions
of freedom, equity, security and human dignity. It calls for policies and measures in
four inter-related areas:
• Respect for, and protection of, basic human rights at work;
• Promotion and creation of opportunities for full, productive and remunerative
employment;
• Broad social protection;
• Sustained social dialogue among social partners representing workers,
employers and government.
∗
The Partido Revolucionario Democratico (PRD) of President Martin Torrijos was elected in 2004,
replacing a coalition government led by the Partido Arnulfista (PA). The previous government had
been in office since 1999 and was led by the country’s first female president, Mireya Moscoso.
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The DWPP aims to help countries integrate decent work into their policy agenda,
structures and wider society. By fostering decent work, countries can bolster
economic growth and ensure that its fruits are spread more widely.
An important part of the DWPP involves reinforcing the capacities of governments,
employers and workers through various activities. The pilot programmes are
developed together with these constituents and tailored to each country’s specific
needs.
This process includes gathering and analysing information on the decent work trends
in participant countries. Such fact-finding is often a component of the DWPP,
typically through the commissioning of papers by academics or other experts,
discussions with the social partners and work by the ILO secretariat. In addition to
helping to ensure that pilot programmes are tailored to the needs of individual
countries, the research is part of the ILO’s efforts to develop and test statistical
indicators for decent work.
In Panama’s case, there was particular emphasis on research and analysis because the
DWPP focused on helping the country position itself better in the global economy.
Papers were commissioned as part of an extensive multi-disciplinary effort to provide
the basis for a national dialogue on policy options.∗∗ The papers were wide-ranging,
covering the economic and social situation in Panama. Their findings are included in
the National Context section as well as below.
Informality Grows
As mentioned earlier, Panama has had persistently high unemployment. This reflects
economic growth that is not fast enough to generate jobs as well as a decline in the
manufacturing and agriculture sectors. Employment in services and construction has
expanded, however.
One consequence of unemployment is an increasingly large informal economy.
Informal work represented 30 per cent of non-agricultural employment in 1986,
before the country’s severe recession, 33 per cent at the peak of the economic cycle in
1993 and 37.5 per cent in 1999. Four out of every ten new jobs generated in 1989-99
were informal. In parallel, between 1991 and 2000 non-agricultural employment saw
an increase in the share of own-account workers. During the same period, the share of
those employed in small companies and domestic work declined. This is a sign of
excess labour generating its own jobs in the informal sector, with low entry costs.
Informality is commonly associated with lower levels of productivity, earnings and
protection. In Panama, for example, average informal income represented 40.8 per
cent of average formal sector earnings in the 1991-99 period. Surveys also find a
close overlap between poverty and informality.
Gender Gap
There are clear male/female differences in Panama’s labour market, with women
often segregated in informal and badly paid work. Women accounted for 35.4 per cent
∗∗
A summary of the analysis is provided in Globalization and Decent Work: Options for Panama,
Working Paper No. 3, Philippe Egger, ILO, 2002.
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of the labour force in 2000, with poor urban women less likely to find jobs than those
who are not poor.
Unemployment is higher among women than men, especially among young women.
There are proportionately more women in the informal sector, particularly in wage
employment. More than 40 per cent of women employed outside of agriculture are in
informal work. Women are twice as likely than men to find employment in the
services sector. Women earn on average 10 per cent less than men, but this gap varies
according to profession and type of employment. With women much less likely than
men to be private sector wage workers, there are proportionately more low-paid men
than women in private wage employment. However, the reverse is true for ownaccount workers, where women make up a much higher proportion of the poorest 40
per cent than men.
Given the low participation rate of poor women and the overlap between poverty and
informality, helping poor women find employment is a priority.
Declining Productivity
Labour productivity fell during 1985-99, with job creation outstripping growth in
economic output. Agriculture, mining and electricity were the only sectors where
productivity increased, and these account for less than 13 per cent of Panama’s
economic output. Moreover, rising labour productivity in agriculture reflected
migration from rural areas to cities.
Growth has been highly labour intensive in Panama, especially outside of agriculture.
Declining productivity implies that each employed person is adding less value to the
economy, which translates into lower wages and labour earnings. Less productive
jobs are also lower in quality, requiring fewer skills and offering less protection. The
decline in manufacturing and agriculture is a factor in lower productivity, as is the
increase in the informal economy.
Real wages stagnated in Panama during the 1990s, but labour costs rose when
measured per unit. Combined with the data on productivity, this suggests that more
than a labour cost problem, Panama has a labour productivity problem. While both of
these reduce economic competitiveness, they involve different remedies. Panama
would not gain much in terms of competitiveness by reducing its labour costs. In
practice, such a move could even hurt labour productivity. There are a variety of ways
to make economies more productive. These include investment in new technology,
training, better health and working conditions, improved organization of work through
greater cooperation and participation of workers and reduced absenteeism.
Social Policy
Panama spends comparatively more in social areas as a percentage of GDP than the
Latin American average, coming fourth out of 17 countries in 1998-99. While health
standards and provision are relatively good for the population as a whole, there is a
big gap between rich and poor. For example, life expectancy average almost 74 years
in 1999, but the figure was 63 years for those living in poverty. Similarly, health
statistics are less good in rural areas.
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Similarly, Panama ranks in sixth place among 19 countries in Latin America and the
Caribbean when it comes to social security coverage as a percentage of the labour
force. But coverage levels vary enormously according to region. Moreover, 46 per
cent of the labour force has no old-age, invalidity and death insurance, while 32 per
cent has not health and maternity insurance.
The pension system is relatively generous in spite of a reform in 1991 that
substantially curtailed the benefits for early retirement. A study carried out by the ILO
in 1998 at the request of Panama’s tripartite partners forecast a deficit in the social
security system, particularly the pension fund, by 2013-2015. That led the government
to propose reforms, which were the subject of a national dialogue among business,
union and civil society leaders. An amended reform plan is expected to be adopted in
2006.
While public spending on education is high in Panama, it is spread in a way that
benefits the better off. The poor represent 34 per cent of the school age population (524 years), but receive only 28 per cent of total public spending on education. This
reflects relatively high levels of spending on university education, which benefits
almost exclusively the non-poor, as well as concentration of funding in urban areas.
An important objective for Panama is to aim for complete secondary schooling within
the next decade, with emphasis on ensuring that children of poor families enrol in and
complete basic education. Resources currently directed to university education should
be diverted toward primary and secondary schooling. In addition, Panama needs to
extend and improve vocational training.
Organization, Dialogue and Rights
Panama has separate national federations representing employers and trade unions.
Estimates of the percentage of the labour force belonging to unions vary widely, with
one source putting the union density rate at 11 per cent at the end of the 1990s and
another source citing a rate of 21.1 per cent. Employers’ and workers’ organizations
are represented on various bodies, such as the minimum wage commission, the
national vocational training institute, the Social Security Agency and the InterOceanic
Authority.
Since the early 1990s, there have been a series of consultations and national dialogues
aimed at bringing workers and employers closer together. Results have been mixed,
with accord proving elusive on some key issues, such as labour reform. The DWPP
has helped to intensify efforts at promoting social dialogue. An encouraging
development was the agreement reached in November 2005 on reforming the
country’s social security system.
Panama is a founding member of the ILO and has ratified 74 Conventions, of which
67 are in force. These include all eight “core” conventions on fundamental principles
and rights at work. Between 1987 and 2001, there were 19 cases concerning Panama
submitted to the attention of the Committee of Freedom of Association. The experts
who oversee application of ILO Conventions and Recommendations have also issued
a number of observations regarding Panama, many of which concern maritime
conventions. Given the large merchant fleet operating under Panamanian flag,
working conditions for many seafarers depend on Panama’s laws and regulations.
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About 8 per cent of children aged 10 to 14 were estimated to be working in Panama in
1997. Two thirds combine work and school attendance, with just 36 per cent working
full time. But few working children are likely to enter or complete secondary school.
As a result, child labour lowers education levels and helps to perpetuate poverty.
Child labour is concentrated in rural areas, predominantly in agriculture and
commerce. But some children work in community services and manufacturing,
particularly girls.
II
Focus of the DWPP
Given its small and increasingly open economy, Panama’s future depends on its
ability to compete internationally. However, falling labour productivity and
insufficient investment have led to declining competitiveness in much of the
economy. Poverty and inequality persist and are linked to high levels of
unemployment, an expanding informal economy and inequalities affecting women
and indigenous peoples.
The DWPP centres on helping Panama improve its competitive position by pursuing
policies that bolster growth and reduce poverty. This means including decent work
elements, such as employment, poverty reduction and equality, in broader economic
and social policies and investment strategies. The focus of the programme is on
formulating such policies and on the negotiations required to build a national
consensus for their adoption.
II.1
Priorities and Policy Responses
The DWPP undertook a broad analysis of the economic and social situation in
Panama by carrying out 11 individual studies. These explored a range of issues linked
to employment, poverty, social exclusion and vulnerable groups. Based on these
studies, the DWPP put forward a medium to long-term vision and strategy combined
with concrete proposals for immediate action.
Faster, Pro-Poor Growth
In the medium to long-term, it is essential for Panama to have rates of economic
growth of about five to six per cent a year to generate a sustained increase in
productive employment. This can be achieved with higher levels of investment in
sectors that are most likely to provide employment for the poor, such as agriculture,
manufacturing and construction.
It is equally important to enable poor people to contribute to economic growth by
facilitating their access to productive resources, such as land, credit and physical
infrastructure. Extending and improving health and education also helps to increase
the economic contribution made by the less well off.
Such efforts entail public infrastructure programmes as well as better targeted social
spending.
Areas for Action
To deliver this overall strategy for growth, employment and poverty alleviation, the
DWPP called for action in at least five areas.
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•
•
•
•
•
II.2
Reversing neglect of agriculture and industry. Panama cannot afford to turn its
back on two sectors that could contribute significantly to exports and
employment as well as poverty reduction. To promote agriculture, the country
could increase the level of public investment in infrastructure in rural areas, as
well as in basic services, technical assistance. Appropriate land titling
procedures would also help. Faster growth in manufacturing could be achieved
through public support measures that are compatible with the WTO. Greater
support for small enterprises is also needed.
Panama should set a target of universal secondary enrolment this decade. This
implies shifting resources from universities to secondary schools as part of a
wider effort to raise enrolment rates and the quality of teaching. Moreover, the
system for vocational training should be reformed to ensure a better link with
employers’ needs and increase the number of people in initial or continuing
training. One option would be to offer all interested youth an opportunity to
train for at least six months, followed by a temporary position as an
apprentice.
Better labour market policies. Given that Panama is an open economy without
an autonomous monetary policy, wage adjustments should reflect the realities
of international trade as well as labour productivity. This implies taking
specific measures to stimulate sustained rises in productivity, as well as a
capacity to measure trends in productivity at national, sectoral and firm level.
One way to do this is to link wages to actual performance. It is also necessary
to have much greater transparency in the labour market regarding vacancies
and job seekers.
Extending social protection. Universal coverage is within Panama’s reach and
should be considered a major objective. This may imply introducing more
flexible options for the self-employed. While social protection has a financial
cost, it is important in facilitating changes between jobs, simulating the
workforce and enhancing an overall sense of security. It also plays a role in
poverty alleviation. For example, a benefit could be provided to low-income
mothers on the condition that children attend school. The government should
also consider adopting a basic tax-financed pension scheme for the elderly
without pensions. This could be means-tested and directed to poor households.
Promoting social dialogue and improved management-labour relations.
Panama has a history of tense relations among the social partners –
government, employers and workers. The country’s high level of income
inequality reflects this weak social cohesion. Social dialogue can be a means
to decide on measures to reduce such income inequality, particularly if strong
economic growth can be combined with sustained productive employment
generation. Progress on this front depends on defining a negotiating agenda in
which all three parties have a stake and in which all three can obtain
significant results.
Programme Implementation
The DWPP was officially launched in late 2000. The first phase was devoted to
analysis and formulating policy options. This extensive, multi-disciplinary analytical
effort provided the basis for a national dialogue on ways to position the country better
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in the global economy. Options were widely shared with constituents, national and
regional governments, parliament and presidential candidates.
The pilot programme’s own evaluation showed that the process adopted was just as
important as the policy proposals and agreements reached. Employers, workers and
government were involved in the programme from its inception. The Ministry of
Finance took part, as did the UNDP, for some activities. The discussions strengthened
the capacity of the social partners to undertake collective negotiations in a difficult
social climate.
For the first time, it has been possible to sustain a process of constructive social
dialogue around a common agenda. The programme has been successful in fostering
national ownership across the political spectrum at national and local levels.
The DWPP coincided with a lengthy pre-election period, which slowed down
discussions and delayed progress. Nonetheless, the run-up to the 2004 elections
prompted the programme to broaden ownership, holding discussions and distributing
findings to a range of political and parliamentary figures. This demonstrates the way
in which pilot programmes can adjust to changing circumstances.
Given the wide-ranging nature of the analysis and discussion, the programme has
produced some concrete results as well as helped to influence the national policy
environment.
Agreement was reached on an infrastructure investment programme of $200 million,
which includes the aim of employment promotion. It is based on DWPP
recommendations. There was also an accord on the basket of goods to be used as the
basis for determining minimum wages. The country has set numerical targets for
growth and job creation. For example, the government is seeking to bring down
unemployment by 1 per cent a year.
Although the agreement reached in November 2005 among national dialogue
participants on social security reform may not be a directly linked to the DWPP, it
reflects the important progress in social dialogue taking place in Panama.
Under the DWPP, work is continuing in Panama in a number of different areas. This
includes discussions on extending social protection to the informal economy,
measures to increase productivity at enterprise and sectoral levels and programmes to
promote equality between the sexes and among peasant and indigenous communities.
Other activities involve: promotion of employment-intensive economic sectors; use of
labour-intensive methods for infrastructure projects; development of small and
medium-sized enterprises; and moving toward productivity-oriented wages.
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References
Globalization and Decent Work: Options for Panama, Philippe Egger, ILO, 2002.
Decent Work Pilot Programme, Country Briefs, ILO, July 2003.
Economist Intelligence Unit, Country Report, December 2005.
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