Journal Issue
Share
Article

Panama: Selected Issues

Author(s):
International Monetary Fund. Western Hemisphere Dept.
Published Date:
November 2016
Share
  • ShareShare
Show Summary Details

Inclusive Growth In Panama1

A. Executive Summary

1. Panama’s exceptional growth performance has contributed to significant reduction in poverty, and a decline in income inequality. While economic growth has been biased toward the poorer segments of the population, certain parts of the population, particularly the indigenous groups, saw relatively smaller declines in poverty and continue to face substantially higher poverty rates. In addition, the indigenous persons that live in the semi-autonomous comarcas face significantly higher poverty incidence than indigenous persons that reside outside the comarcas.

2. Education spending and student performance scores have been lagging behind regional peers. Education indicators, such as school enrollment and school desertion rates, seem to be strongly associated with differences in poverty rates across regions.

3. Addressing challenges related to the indigenous groups and the education sector is an important venue for achieving more inclusive growth. In this context, actions that improve education outcomes, particularly those focused on the specific needs of the indigenous population, seem to have a high potential to strengthen overall inclusiveness.

B. Introduction

4. The importance of inclusive growth can be emphasized along several dimensions. First, there is a moral dimension, as a process that allows larger share of the population to contribute to and to benefit from economic growth can be considered fairer. Second, there is a socio-political dimension, as more equal sharing of benefits from economic growth may be associated with higher social stability. Third, there is economic rationale as lower income inequality and more sustainable growth may be considered as two sides of the same coin over longer horizons (Berg and Ostry, 2011). Finally, in Panama’s context, achieving a more inclusive country is a key objective of the Government’s Strategic Plan 2015–2019.

5. While inclusiveness is a multidimensional concept, the emphasis in this study is placed on documenting two aspects of inclusive growth in Panama: poverty and education prospects. Doing so, particular attention is paid to the indigenous population, which faces substantial challenges toward achieving higher inclusiveness. The analysis presents some facts about Panama’s growth performance, poverty, inequality, shared prosperity, and education outcomes. In turn, it presents differences between indigenous regions and the rest of the country and provides some insights on venues for improving inclusiveness in the future.

C. Context and Developments

6. Panama had the highest growth in LAC over the last two decades. Supported by robust public investment in recent years, including the expansion of the Canal, economic growth was significantly higher than the median for emerging markets and among the highest in the world (Chart 1). In addition, the impact from the economic and financial crisis of 2008-2009 seems to have been limited as the economy grew faster in the post-crisis compared to the pre-crisis period.

Chart 1.Panama’s Growth Performance

7. Convergence of income per capita has been exceptional. While GDP per capita (in PPP-adjusted terms) in Panama was less than a quarter of the level in advanced economies two decades ago, it reached almost half of the level in advanced economies in 2015. Panama’s convergence to the income level of the U.S. was exceptional, as income per capita increased from less than 20 percent two decades ago to about 40 percent now. Similarly, it went from about 70 percent in 1995 to over 130 percent of the income level in LAC in 2015.

8. Strong growth performance contributed to a significant reduction in poverty. Vibrant economic activity and the execution of important investment projects were reflected in steady job creation and increase of household incomes. Overall poverty, measured according to the national definition, dropped by a third over the last decade. Similarly, internationally-comparable definitions, such as those used in the World Development Indicators, suggest a significant decline in poverty headcount (Chart 2).

Chart 2.Poverty and Inequality

Sources: World Development Indicators database.

9. Income inequality decreased somewhat. Measured through the Gini coefficient, income inequality declined somewhat over the last decade, though it still remains elevated. At the same time, the income distribution ratio that compares the richest quintile to the poorest quintile of the income distribution indicates a comparable reduction in inequality. Nonetheless, income of the richest quintile still remains about 15 times higher than income received by the poorest quintile, which is among the highest differences in a regional context.

10. Poverty rate in Panama is slightly below the average in LAC. A comparison based on consistent cross-country definitions indicate that the poverty rate is slightly below the average for LAC. Nonetheless, this finding partly reflects the fact that Panama’s income is relatively high compared to the region. In particular, when one accounts for the countries’ income per capita levels, the poverty rate in Panama is somewhat above trend for countries in the LAC region with similar levels of income per capita.2

Chart 3.Poverty in LAC

11. Beyond reduction in poverty and inequality, Panama achieved progress in terms of shared prosperity. On average, real income per capita increased by close to 7 percent over the last decade. At the same time, real per capita income of the bottom 40 percent of the income distribution increased even more, by about 8 percent annually. These findings suggest that growth has not only been very robust, but it has been biased toward the poorer segments of the population. While average per capita income growth for the bottom 40 percent in Panama has been the highest among the countries in LAC over the last decade, this mainly reflects Panama’s outstanding overall growth performance. In fact, growth in countries such as Bolivia, Peru, and Ecuador has been significantly more biased toward the poorer segments, with average income per capita for the bottom 40 percent growing by 1.5–2 percentage points faster than overall income per capita.

Chart 4.Shared Prosperity in Panama and LAC

D. Indigenous Groups

12. Panama is home to significant indigenous population. There are eight separate indigenous groups that account for about one tenth of Panama’s population. Close to half of the indigenous population lives in the semi-autonomous self-governing comarcas, three of which have the status of provinces3. These comarcas comprise close to one quarter of the country’s territory and are governed by indigenous congresses and councils.

13. Poverty significantly declined in recent years, but stark differences in poverty rates persist across regions in Panama. The drop in the national-wide poverty rate to 23 percent in 2015 (from about 28 percent in 2011) reflects poverty reduction across all provinces and comarcas. Nonetheless, poverty in the 10 provinces dropped to about 19 percent of the population, while poverty in the three semi-autonomous comarcas settled at a significantly higher level of about 85 percent of the population in 2015.

Chart 5.Regional Differences in Poverty within Panama

(percent of population)

Sources: Ministry of Economy and Finance (MEF) and National Institute of Statistics and Census (INEX)

14. Reduction in extreme poverty was less pronounced compared to overall poverty. According to the national definition, a lower share of the population lived in extreme poverty in 2015 compared to 2011 in all regions with the exception of Panama province, where it remained unchanged at 3.2 percent. Similar to the overall poverty findings, substantial differences persist between provinces and comarcas. While extreme poverty affects about 10 percent of the population in the provinces, about two thirds of the population in the three comarcas lives in extreme poverty. The contrast is particularly striking between the Ngöbe Buglé comarca, where about two thirds of the residents live in extreme poverty, and the provinces Los Santos and Panama, where extreme poverty affects 2.5 percent and 3.2 percent of the population, respectively.

Chart 6.Regional Differences in Extreme Poverty within Panama

(percent of population)

Sources: Ministry of Economy and Finance (MEF) and National Institute of Statistics and Census (INEC)

15. Changes in poverty across provinces and comarcas varied widely. Considering the monetary income as a starting point, poverty rates declined on average by about 4.5 percentage points for both provinces and comarcas over the last five years, which represents a much larger reduction in poverty for the provinces as they have substantially lower poverty rates than the comarcas. For instance, the decline of 4.5 percentage points represents a reduction in poverty of almost 19 percent in the provinces, while the same drop in the poverty rate translates in poverty reduction of only 5 percent in the comarcas. Similarly, the comarcas have benefitted relatively less from the reduction in extreme poverty as well. The average fall of 2.5 percentage points in the comarcas’ extreme poverty rate represents a reduction of less than 4 percent of their extremely poor population, significantly less than the 11 percent reduction in the provinces’ population living in extreme poverty that was implied by the rate drop of 0.8 percentage points.

Table 1.Changes in Poverty (2011-2015)
PovertyExtreme poverty
change in rate

(percentage points)
change (percent)change in rate

(percentage points)
change (percent)
Total−4.6−16.7−0.8−7.2
Provinces−4.4−18.9−0.8−10.8
Comarcas−4.6−5.2−2.5−3.7
Sources: Ministry of Economy and Finance (MEF), National Institute of Statistics and Census. *overall poverty figures refer to period 2011-2015, extreme poverty to period 2012-2015.
Sources: Ministry of Economy and Finance (MEF), National Institute of Statistics and Census. *overall poverty figures refer to period 2011-2015, extreme poverty to period 2012-2015.

16. There are substantial differences in welfare levels between the indigenous population in the comarcas and the indigenous persons residing outside the comarcas. Poverty incidence is much higher among indigenous persons living in the comarcas than among indigenous persons residing in the provinces (Chart 7), which partly reflects difficulties to properly value production for own consumption. For instance, only 14 percent of the indigenous population that lives in the comarcas is not considered (extreme) poor, while about 56 percent of the indigenous population living outside the comarcas is not affected by (extreme) poverty4. In fact, there are not any extremely poor among the indigenous persons that live in certain provinces, such as Los Santos and Herrera.

Chart 7.Distribution of Indigenous Population Welfare Levels

(percent of population, 2015)

Sources: Ministry of Economy and Finance (MEF) and National Institute of Statistics and Census (INEC)

E. Education

17. Education spending has lagged behind regional peers. With about 3 percent of GDP allocated to the education sector, Panama ranks below the average for the LAC region. Moreover, public education spending falls short of other countries in the region with similar levels of income per capita. In fact, Chart 8 suggests that an increase in education spending of 1.5–2 percent of GDP is needed to place Panama close to the region’s trend.

Chart 8.Education Spending in LAC

18. Education quality and student achievements have been relatively weak along with stagnating spending on public education. Notwithstanding continued efforts to put emphasis on education as a priority sector, spending on public education has been declining as a share of overall government spending since 2000. In addition, student achievement scores, such as those measured by UNESCO, indicate that Panama continues to underperform regional peers despite some improvement over the last decade. Similarly, the results from 2009 Program for International Student Assessment (PISA) suggest that education quality has trailed behind peer countries5.

F. Education in Indigenous Areas

19. Provinces and comarcas with weaker education indicators are associated with higher poverty levels. Looking at a cross-regional comparison, higher net enrollment rates are associated with lower levels of (extreme) poverty (Chart 9). In addition, higher middle-school desertion rates are related to higher (extreme) poverty rates (Chart 10).

Chart 9.Education Spending and Student Performance in Panama

Chart 10.School Enrollment and Poverty in Panama

20. Indigenous comarcas stand out as a group with substantially weaker education indicators and higher poverty than the rest of the country. While the evidence does not imply any causal relationship, it suggests that lowering school desertion rates or raising net enrollment in middle school is an important factor associated with poverty reduction6. Hence, an emphasis on specific programs that improve education outcomes in the comarcas seems to have the potential for improving broader social outcomes in these regions, bridging their gaps with the rest of Panama.

Chart 11.School Desertion and Poverty in Panama

G. Concluding Remarks

21. Panama’s outstanding economic growth over the last decades has helped the country reduce its income gap relative to advanced economies. Beyond facilitating income convergence, this stellar growth performance has contributed to significant reductions in poverty and inequality. Economic growth has been biased toward the poorer segments of the population that saw their incomes grow faster than the rest of the country. In sum, there has been progress with shared prosperity and overall inclusiveness improved. Nonetheless, certain parts of the population, particularly the indigenous groups, saw relatively smaller reduction in poverty and continue to face substantially higher poverty rates than the rest of the country. In addition, the indigenous persons are not uniformly affected by poverty, as those living in the semi-autonomous comarcas face significantly higher poverty incidence than the indigenous persons that reside outside. Education spending has been declining as a share of total government spending and remains lower than the average in the region. In turn, student performance and education quality scores have been lagging behind peers. Basic education indicators, such as school enrollment and school desertion rates, seem to be strongly associated with differences in poverty rates across regions. In this context, actions that improve education outcomes, particularly those focused on the specific needs of the indigenous population, seem to have a high potential to strengthen overall inclusiveness as well.

References

Prepared by Metodij Hadzi-Vaskov (WHD).

Similar result is obtained when countries are compared on the basis of their income per capita in PPP-adjusted terms.

Panama is organized into 10 provinces and 3 provincial-level comarcas. The three comarcas with province status are Emberá, Kuna Yala, and Ngäbe-Buglé, while two comarcas Madugandi and Wargandi are considered equivalent to municipalities.

There are striking differences between provinces and comarcas. For example, 85.6 percent of the indigenous population living in the most populous comarca lives in poverty, while only 5.8 percent of the indigenous population that resides in Panama Oeste province is facing the same problem.

Panama is set to undergo the next PISA assessment in 2018.

Various sources report different figures for school desertion rates across regions. Figures employed here come from the MDG database.

Other Resources Citing This Publication