Panama’s Growth Story
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Panama has achieved more rapid income convergence to US standards in the past 25 years than most other countries in Latin America and is now the richest country in Latin America.

Abstract

Panama has achieved more rapid income convergence to US standards in the past 25 years than most other countries in Latin America and is now the richest country in Latin America.

Panama’s Growth Story1

Panama has achieved more rapid income convergence to US standards in the past 25 years than most other countries in Latin America and is now the richest country in Latin America.

In terms of demand factors, much of Panama’s strong growth was the result of a sharp increase in the investment to GDP ratio. As the consumption to GDP rate dropped sharply, consumption grew much more slowly than GDP.

In terms of supply factors, output growth was driven by rapid growth of capital and labor inputs rather than a rise in total factor productivity (TFP). In fact, TFP fell sharply in the past decade.

While Panama has grown rapidly in the past two decades, when assessed over a longer time period it has not converged as rapidly as the Asian Tigers. South Korea and Taiwan saw faster growth because of rapid TFP growth while Singapore—which like Panama saw little TFP growth—had faster growth of human capital and employment per capita.

In the past two decades growth came from investment and construction: with the private construction boom ending and major development projects now completed, future growth will need to come from other sectors.

A. Introduction and Background

Brief Historical Overview

1. Panama’s economy has always depended on international trade and transitory flows across the isthmus. Following their arrival in Panama in 1501, the Spanish turned Panama into a principal crossroads and marketplace of the great Spanish Empire. They built a major road, Camino Real, to link settlements on the Pacific and Atlantic coasts and used it to transport treasures from the west coast of South America to Spanish galleons waiting on the Atlantic coast for transport to Spain. Until the 18th century, Panama’s economy benefitted from the colonial exchange. In the mid- 19th century, the California Gold Rush spurred both cargo and passenger traffic through Panama as the alternative cross-continental route across vast plains and rugged mountain terrain was too dangerous. The Panama Railroad Company, founded in 1847, completed its railroad track in 1855, which followed the path of the present Canal, generating income from supplying travelers with meals and lodging, and establishing the city of Colón, Panama’s second largest, at the railroad’s Atlantic terminus. Thereafter, France’s attempts to construct a canal across the isthmus in the 1880s and, subsequently, its successful completion by the United States over 1904-14 stimulated the Panamanian economy, despite limited direct spillovers to Panama during its construction.2

2. Over the course of the 20th century, Panama’s GDP growth was volatile. International trade and Canal traffic declined during the US Great Depression of the 1930s. During World War II, the presence of US military forces3 temporarily stimulated economic activity. In 1968, a military coup overthrew the long succession of aristocratic oligarchs controlling the economy, with Brigadier General Torrijos embarking on a program of public works and agrarian reform to develop rural areas, where much of his supporters came from. Initially, Panama enjoyed an economic boom under his presidency, when with the passage of secrecy laws Panama became an international banking center, and the Colon Free Zone became the world’s second largest free-trade zone (after Hong Kong). In the 1980s, the country experienced a deep political crisis surrounding the administration of General Noriega, eventually leading to the United States suspending all military and economic assistance to Panama in 1987 and freezing Panamanian assets in United States banks, withholding its monthly payment for the use of the Canal, and suspending trade preferences on imports from Panama in 1988. This led to massive capital flight amid already-high unemployment rates and a stagnating economy, yielding Panama’s deepest pre-Covid recession of 1988. Amid the crisis, Panama defaulted on its IMF debt in 1987. The US invaded Panama for over a month (between December 1989 and January 1990), deposing Noriega. Panama’s output rebounded and it regained access to IMF funds in 1992.

uA002fig01

Panama’s Real Output

Annual GDP growth in percent

Citation: IMF Staff Country Reports 2023, 129; 10.5089/9798400236662.002.A002

Source: World Bank.

3. In the last three decades, a construction boom led to a period of unprecedented growth. In 1996, the administration of President Balladares embarked on an economic liberalization program, passing a number of reforms4 that stimulated activity in most sectors. In December 1999, the Canal, along with all American military bases, was passed to the Panamanian government, and between 2007 and 2016 it underwent a major expansion project, doubling the Canal’s capacity. In addition, the 2000s witnessed an unparalleled construction boom, with large-scale public investment projects coupled with privately funded residential and commercial property development. The majority of Panama City’s skyscrapers were built between 2005 and 2014, while Cobre Panama and the Canal expansion represented the largest investment projects in the country’s history (see table below). The rapid scaleup of construction activity and related investment contributed to Panama’s remarkable GDP growth over the last three decades, with real annual output expanding on average by 5.9 percent (see discussion in Section D and the 2022 Article IV Staff Report) between 2000 and 2019.

Panama’s Large-Scale Construction Projects

article image
Sources: Wikipedia and Panamanian press.

Income Convergence and Distribution

4. Since 1970, Panama’s GDP per capita has increased from 22 percent of US GDP to near 50 percent currently,5 making it the 16th fastest growing economy in per capita terms during that time period. Currently, Panama is classified as an emerging market, upper-middle income economy. Its per capita GDP adjusted for purchasing power parity (PPP) stood at US$29,879 in 2019, the 30th highest in the Penn World Table sample of 114 countries.6

uA002fig02

Real GDP Per Capita Relative to United States

Citation: IMF Staff Country Reports 2023, 129; 10.5089/9798400236662.002.A002

Sources: Penn World Table 10, IMF staff calculations.

5. Its convergence path, however, has not been uniform:

  • Panama’s relative (to the US) GDP per capita declined from 1970 (21 percent) to 1989 (16.5 percent) amid political instability and US sanctions.

  • Panama’s growth rate significantly recovered in the 1990s, although relatively fast growth in the United States meant that its relative GDP per capita only slightly improved to around 20 percent in 2000.

  • Post-2000, Panama’s rate of convergence increased rapidly, peaking at 49 percent in 2017 (48 percent in 2019). Amid the pandemic, Panama’s relative GDP per capita ratio slipped, as in many other countries, to about 48 percent this year, but is expected to recover in the near term.

6. Despite the rapid convergence since 2000, when seen over a longer period and compared to other fast-growing countries, Panama’s convergence has been relatively slow. Panama’s growth has been sluggish when compared to Asian Tigers. For example, Singapore’s (Hong Kong’s) per capita output was about 28 percent (42 percent) of the United States in 1970, but surpassed the United States in 2005 (2004).7 Similarly, Panama’s relative per capita GDP ratio was about the same as Taiwan’s in 1970 and three times that of Korea, but both of those Asian countries converged to advanced economy living standards significantly faster than Panama amid their export-driven development policies.8

uA002fig03

Average Growth in Output per Capita by Decade

Units of 0.01 log points

Citation: IMF Staff Country Reports 2023, 129; 10.5089/9798400236662.002.A002

Sources: Penn World Table, IMF staff calculations.

7. Panama’s recent growth has been driven by rapid growth in investment amid declining TFP and low levels of human capital accumulation. The single most important driver of Panama’s recent decoupling from the rest of Latin America and the Caribbean (LAC) in output per capita is growth in investment, particularly due to a boom in construction—the bulk of which is commercial real estate—which cannot outpace growth in the rest of the economy forever. In addition, human capital per worker9 is low (compared to Asian Tigers) and did not grow in the last decade, and TFP declined by 20 percent in the 2010s, nearly double the amount of TFP growth of the previous 40 years. While there are various possible explanations for the decline in TFP (which we will review below), it appears most likely that Panama’s economy has been hitting decreasing returns to scale in capital accumulation.

8. The regional income distribution within Panama remains highly skewed, with most resources concentrated in Panama City and Colon and rural areas remaining relatively poor. Panama’s development in terms of both location of economic activity and concentration of population has followed an axis across the isthmus between Colon at the Atlantic terminus of the Panama Canal and Panama City on the Pacific coast. Over half of the population and most nonagricultural economic activity have historically been located there. Despite Panama’s spectacular output growth which expanded the middle class and contributed to significant reductions in poverty and inequality in the recent decades, rural areas remain underdeveloped and rural poverty remains high and is particularly elevated and persistent in the comarcas: territories inhabited by indigenous peoples.10 In other words, convergence to US income level is a more distant reality for some of Panama’s residents than for others.

B. Regional Perspective and Cross-Country Context

Growth Performance Comparison

9. Since the 2000s, Panama has decoupled from the rest of the region. In 1970, Panama’s per capita output was roughly equal to the aggregate Latin America and the Caribbean (LAC) region and below the level of Chile, Costa Rica, Uruguay, Mexico, Ecuador, Jamaica, Nicaragua, and Barbados. However, since 1990, Panama’s growth performance has been very strong and, by 2019, Panama had higher per capita output than any other LAC country.

10. Panama has the highest per capita income in Latin America.11 In 2021, Panama’s per capita income adjusted for PPP (US$29,131), although markedly lower than before the pandemic, still outpaced that of Uruguay (US$22,058) and Chile (US$24,312) and remained well above such comparator countries as Costa Rica (US$20,537) and the Dominican Republic (US$19,646). Among advanced economies, Panama’s closest comparators are Greece and Latvia.

uA002fig04

Panama’s Output Per Capita in Regional Context

Citation: IMF Staff Country Reports 2023, 129; 10.5089/9798400236662.002.A002

Sources: Penn World Table 10, World Economic Outlook, and IMF staff calculations.

C. Growth Decomposition

By Expenditure

uA002fig05

Shares of Real GDP by Expenditure and Year

Percent

Citation: IMF Staff Country Reports 2023, 129; 10.5089/9798400236662.002.A002

Sources: UN, INEC, and IMF staff calculations.

11. Since the 1970s, the share of Panama’s household consumption in GDP has declined significantly, while investment has increased as a share of GDP. The share of household consumption in GDP had declined from 75 percent in 1970 to around 55 percent in the mid-1990s. After increasing to 65 percent over the following decade, since the mid-2000s it has again declined steadily to around 50 percent amid a boom in investment. Consistent with this, demand-side growth accounting by decade38 shows that the direct contribution to output growth from investment was at its peak in the 2007-19 period. This rapid scaleup in investment was the most important growth driver during 2000-19: Panama’s peak growth period as well as the time of its fastest rate of convergence to the United States and decoupling from the LAC average.

12. The prominence of investment in output means that growth in per capita income significantly overstates improvements in living standards. Ultimately, the goal of economic growth is to increase consumption (including consumption of leisure). While both household and government consumption have increased since 1970 (and since 1990), their share of GDP has significantly decreased, so that while Panama’s output per capita is half of the United States’, its consumption per capita is only one third of that of the United States.39

uA002fig06

Decomposing Panama’s Output by Expenditure Type

Citation: IMF Staff Country Reports 2023, 129; 10.5089/9798400236662.002.A002

Sources: UN, INEC, and IMF staff calculations.

By Industry

13. The construction share in Gross Value Added (GVA) increased from an average of about 5 percent in the 1990s to 20 percent in the second half of the 2010s. This is consistent with the dynamics of gross fixed capital formation, which increased from 25 percent to 45 percent of GDP during the same time period, showing that construction was the driver of growth in investment. At the peak, about 39 percent of investment was going to construction.

uA002fig07

Decomposing Panama’s GVA

Citation: IMF Staff Country Reports 2023, 129; 10.5089/9798400236662.002.A002

Sources: UN, IMF staff calculations.

14. Since 1970, the share of manufacturing declined steadily, reflecting a structural change in the Panamanian economy. In 1970, the share of manufacturing in GVA was 20 percent; in the mid-1990s, 15 percent; and by 2020, 5 percent. At the same time, the share of transport, storage, and communications (which includes toll revenue from the Canal as well as value added from related logistics activities) increased from 5 percent in 1970 to 10 percent in the mid-1990s and 15 percent in 2020. Low- and middle-income countries in Latin America have since the 1980s generally exhibited a pattern of declining GVA and employment share in manufacturing, consistent with the case of Panama.40 However, since the 2000s, Panama was able to leverage its role as a trade and logistics hub (e.g., the Panama Canal and complementary economic activities) for East-West trade to continue its fast rate of output growth.

15. The share of agriculture has also declined consistently since 1970, similar to other economies undergoing a structural transformation and diversifying into higher-value-added activities. Labor in Panama is four to five times less productive in agriculture than in, for example, construction.41 However, the agricultural sector is still the largest employer in Panama, suggesting that there are factors preventing agricultural workers from supplying labor to other sectors.

16. Finally, the mining industry has developed substantially in the last ten years. Wholesale mining and utilities shows an increase from essentially zero42 to 7 percent of gross value added, reflecting the opening of a very large copper mine. Later in this report we will discuss the mine in more detail, but as a preview, known ore reserves in Panama suggest the mining industry is unlikely to continue expanding at the current rate in the medium term.

By Input Type

17. A growth accounting exercise confirms that total factor productivity (TFP) in Panama has been slightly negative since 1990—though there are various plausible interpretations of this result with varying implications for Panama’s TFP growth outlook. TFP growth was positive (but small) in the 1990s and 2000s and very negative in the 2010s. During this period, growth acceleration was driven primarily by residential and commercial construction, the development of one of the largest copper mines in the world (Cobre Panama), and public investment projects like the Panama Canal expansion and the expansion of the Tocumen International Airport. Such investments take time to reach full utilization—for example, the new copper mine was operating at below 50 percent maximum output in 2019.43 Neoclassical growth accounting mechanically attributes underutilization of capital to TFP,44 leading to negative estimated TFP growth. To the extent that the decline in TFP reflects this channel, the former should be expected to reverse in the coming years (i.e., TFP should grow rapidly) as the capital becomes fully utilized. However, to explain a decline in TFP of 20 percent since 2009 given a capital income share of 2/3, it must be that around 40 percent of the increase in the capital stock was not yielding output as of 2019,45 which seems implausible, suggesting that other factors also contribute.

uA002fig08

Panama’s GDP by Input Type since 1990 and 2010, with Peer Countries

Citation: IMF Staff Country Reports 2023, 129; 10.5089/9798400236662.002.A002

Sources: Penn World Table 10, IMF staff calculations.

18. The decline in TFP may also reflect declining returns to scale or misallocation, in which case the decline should not be expected to reverse. Low, or even negative, TFP growth during times of fast expansion of the capital stock is not unusual—this was also seen in Singapore since 1970.46 Declining TFP could reflect decreasing returns to scale in aggregate production, which would mechanically lead to lower estimated TFP as productive inputs increase if the production function is counterfactually assumed to have constant returns to scale. Indeed, the presence of land as a fixed factor in a constant returns to scale aggregate production function implies that production has declining returns in other inputs (see Bakker 2022). However, other explanations are conceivable as well. First, it may be that investment in Panama exhibits smaller spillover externalities to the rest of the economy than previously existing capital (i.e., it has no knowledge spillovers); however, this seems unlikely given that densely populated cities are associated with high productivity due to positive externalities from more frequent economic interactions. Second, construction investment could be misallocated due to distortions affecting firm incentives to expand or contract. Third, it could be that the construction yields output which is not measured in GDP (for example, due to the use of real estate as a store of value).47 Under all of the explanations covered in this paragraph, the decline in measured TFP would be permanent in that it would not mechanically predict a rapid recovery in the short to medium term. Note, however, that in the last possibility, persistently low measured TFP reflects persistently underestimated output rather than low actual output.

19. Compared to other Asian Tigers, or even the fast-growing regional peer Dominican Republic, Panama has had significantly lower growth in TFP. While the experience of Singapore shows that it is possible to converge to the United States without any growth in TFP, other fast- growing economies in Asia (e.g., Taiwan and South Korea) which have converged faster than Panama, as well as the Dominican Republic which has converged slightly faster (though from a lower base in 1970), did so largely due to faster TFP growth (in addition to, like Singapore, exhibiting larger contributions from human capital per worker). If Panama had had the TFP growth of Korea or Taiwan since 1970 (2 percentage points per year), its output per capita would be nearly three times what it is today, above the level of Singapore. Even if Panama had had the TFP growth of the Dominican Republic since 1970, its output per capita would be 60 percent higher than it is today, around 75 percent of the United States.48 South Korea, Taiwan, and the Dominican Republic are in some ways more suitable comparators to Panama than Singapore as they have more similar land area, whereas Singapore is much smaller and thus may be expected to see more severe decreasing returns to scale and hence lower TFP growth.49

20. Compared with Singapore, lower growth of GDP per capita is mostly due to lower contributions from human capital (both employment per capita and human capital per worker). Panama has seen extraordinary rates of growth in physical capital stock per worker, driving much of the increase in output per capita, partly due to rapid accumulation and partly due to an economy with relatively high returns to physical capital. But while human capital has also grown substantially, it has contributed significantly less to growth in output per capita than in Singapore, making up 40 percent of the gap in output per capita growth since 1970. Similarly, the quality of Panama’s labor force has increased less since 1970, making up 35 percent of the gap in output per capita growth.

uA002fig09

Growth Accounting in Selected Countries

Annualized contributions since 1970, units of .01 log points

Citation: IMF Staff Country Reports 2023, 129; 10.5089/9798400236662.002.A002

Sources: Penn World Table 10, IMF staff calculations.

21. The comparisons with other fast-growing economies point to a need to further develop human capital and total factor productivity. While the construction boom has been able to productively employ the labor force during the 2010s (subject to the caveats discussed in the previous paragraph), convergence to the United States will likely require a more educated and larger workforce relative to the population. While the Panamanian labor force receives a relatively high (compared to regional peers) and growing number of years of schooling, the quality of this schooling appears to be low, with a very small fraction of students achieving the highest levels of performance in internationally standardized math and science exams.50 Moreover, there are many highly technical professions which foreigners are barred from working in, preventing the beneficial inflows of human capital and knowledge spillovers, although loopholes in such regulations mitigate their negative impact.51 In the medium to long term, the quality of education must be improved; in the meantime, Panama should facilitate the flow of highly educated foreign workers and encourage female labor force participation to supply human capital for high-value-added industries and induce knowledge spillovers to the domestic economy.

Neoclassical Growth Accounting

Neoclassical growth accounting methodology attributes the contributions to per-capita real output growth in Panama since 1970 of physical capital per worker, human capital per worker, hours worked per worker, and employment per capita. This approach estimates and then uses a production function to assess the contributions of each factor. As is standard in the literature, aggregate output is assumed to be produced from physical and human capital following a Cobb-Douglas production function.

As a preliminary, suppose that aggregate output in year t, denoted Yi, is given by

Yt=AtKtαHt1α

Where At denotes total factor productivity and Kt and Ht denote physical capital and effective hours of human capital applied to production, respectively; and where α ∈ (0,1) is a parameter determining the optimal mix of physical and human capital in production.1/ Dividing both sides by population Nt and dividing and multiplying the right hand side by employment Lt yields

YtNt=AtLtNtKtLtαHtLt1α

Letting Mt denote annual hours worked per employed worker, dividing and multiplying the right-hand side by Mt1α yields

YtNt=AtLtNtKtLtαHtMtLtMt1α

Define ht=logHtMtLt as the logarithm of human capital deployed per hour worked (i.e., a measure of the average level of human capital of workers), Kt=logKtLt as the logarithm of physical capital per worker, lt=logLtNt as the logarithm of employment per capita, and using lower case letters to denote logs of the other variables, we have

ytnt=at+lt+αkt+1αht+(1α)mt

The final equation above thus decomposes the logarithm of output per capita into contributions from the logarithms of TFP (αt), employment per capita (lt), physical capital per worker (αkt), human capital per worker ((1 - α)ht), and hours worked per worker ((1 - α)mt). In changes,

ΔytΔnt=Δat+Δlt+αΔkt+1αΔht+(1α)Δmt

That is, the change in log output per capita is a weighted sum of changes in TFP, employment per capita, physical capital per worker, human capital per worker, and hours per worker. 2/

1 In perfectly competitive equilibrium, α is equal to the share of aggregate income going to owners of physical capital, with the remainder accruing to owners of human capital (i.e., workers). With imperfect competition, there is also a profit share owing to non-zero markups. 2 While illustrative, the above is not exactly the approach we follow. We instead use the decomposition used by the Penn World Table to estimate the contributions to growth in output per capita, which is more general in that it allows for the possibility that the capital share α is time-varying, as estimated by the changing labor share of GDP. Specifically, letting Δxt – xt–1 for any variable and denoting α˜˜t=αt+αt12, growth of log TFP is estimated by Rearranging, we have Δat=ΔytΔntΔltα˜tΔkt1α˜tΔht(1α˜t)ΔmtΔyt=ΔntΔatΔltα˜tΔkt1α˜tΔht(1α˜t)Δmt Note that this approach does not generally estimate exactly the value of αt required to make the Cobb-Douglas production function hold. It is instead based on a more general approach. See the documentation of the Penn World Table here: https://www.rug.nl/ggdc/docs/the_next_generation_of_the_penn_world_table2013.pdf.

D. Drivers of Growth Over Time

The Panama Canal and Logistics Activity

Panama Canal Significance

article image
Source: Panama Canal Authority.

22. The interoceanic Panama Canal is the most distinctive feature of Panama’s economy and a transportation artery of global significance. The Panama Canal accounts for the passage of nearly 3 percent of the world trade volume—an estimated 2 percent of total global trade. Passing through the Panama Canal saves cargo ships nearly 28 days of travel at 12 knots (about 8,000 nautical miles, or approximately 60 percent of the journey around Cape Horn in South America). The Canal lies at the core of Panama’s Transport, Storage and Communications sector, whose output share averaged 12.5 percent in 2010-21. In 2019, net income from the Canal alone accounted for about 2.3 percent of GDP and toll revenue equaled 3.8 percent of GDP, with the majority of operating expenses attributable to labor. Beyond direct benefits to the economy (including by providing jobs and purchasing goods and services from local suppliers), the Canal provides potable water to the cities of Panama and Colon, promotes tourism activities, and contributes to the development of the national maritime sector, professional training, and environmental protection52). In addition, the Canal has complementarities with many other forms of economic activity, such as logistics, financial services, and multinational corporate headquarters.

23. Canal toll receipts have increased since Panama took over the Canal administration. Tolls are assessed on the basis of the number of containers it’s carrying (added to a fixed toll based on the ship’s size), and there is a slightly higher rate for occupied (“laden”) volume as opposed to unoccupied (“ballast”).53 Although tolls were based on the ship’s carrying capacity (not actual cargo volume or weight) through 2022, here was a positive relationship between cargo weight and toll revenue, with toll revenue rising from about US$100 million in the 1970s to about US$3 billion in the last reading. In addition to seeing greater usage, the Canal has become more commercially viable since its transfer to the government of Panama. In terms of profitability, while the Canal was administered by the United States, it generally recorded near-zero net income, with toll receipts offset by operating expenses and depreciation. After the Torrijos-Carter Treaties was signed, however, the Canal remitted about US$70 million per year to the Panamanian government until the handover was completed in 2000. By 2004, net income from the Panama Canal reached nearly US$1 billion. In 2021, it was around US$2 billion, about 3 percent of Panama’s GDP.

24. Panama has benefitted from global growth and in particular growth in Asia, both on the input side (natural resources such as fuel shipped to Asia) and on the output side (finished products shipped back to the US and LAC east coast), without being as dependent on the whims of commodity market cycles as some other Latin American countries. This is not only due to Canal transits per se, but the logistics activity that sprang up around it: while the share of toll receipts in the economy has been declining gradually, the share of complementary activities such as transport, storage and communication has increased significantly since 1970,54 with the increase concentrated in the 1970s and the 1990-2005 period (the latter may in part reflect the economic liberalization of the 1990s).

25. The Canal’s supportive infrastructure and related activities help solidify Panama’s comparative advantage in facilitating world trade. The quality of Panama’s logistics sector compares favorably to both its regional peers and the peers in its income group across all measured dimensions (such as timeliness, tracking and tracing, logistics competence, international shipments, infrastructure, and customs), according to the World Bank’s Logistics Performance Index.55 Moreover, it improved in all dimensions over time, enhancing Panama’s role as a regional logistics center. The sector is supported by port, road and railway infrastructure that facilitates distribution and an international airport that enhances physical connectivity while the optical fiber cables passing through the Canal increase digital connectivity. These factors taken together, along with financial intermediation and other corporate services, boosted Panama’s transformation into a transportation and logistics hub building on the value of its main asset—the transoceanic canal.

26. After the 2016 expansion, the Canal’s toll revenues and tonnage progressively increased. The expansion of the Canal doubled its capacity by adding a new lane of traffic allowing for a larger number of ships and increasing the width and depth of the lanes and locks allowing larger ships to pass. The increase in transit capacity has led to a rise in both passenger and container flows, reflected in higher toll revenue and shipping tonnage. The Canal expansion allowed ships laden with over 15,000 containers (triple its previous capacity) to gain access to new markets, in addition to opening the Canal to large cruise ships and expanding hydrocarbon gas liquids transit by allowing liquified natural gas (LNG) tankers to pass through56 and facilitating the transit of the liquified petroleum gas (LPG), mainly from the US to Asia.

uA002fig10

Panama Canal: Tonnage and Toll Revenue

On a fiscal year basis

Citation: IMF Staff Country Reports 2023, 129; 10.5089/9798400236662.002.A002

Sources: Haver, INEC, and IMF staff calculations.

Construction Activity

27. Construction has boomed during the 2000s, particularly in the last decade, driving the increase in fixed capital accumulation. Since 2000, annual real gross fixed capital formation has increased by a factor of about 5. During the same time period, the share of construction in fixed capital formation increased from 50 percent to 75 percent. Viewed another way, of the 382 percent net growth in fixed capital formation, 328 percent was due to construction and only 54 percent to capital goods investment.

uA002fig11

Decomposition of Real Gross Fixed Capital Formation

Percent, vertical lines indicate reference year changes

Citation: IMF Staff Country Reports 2023, 129; 10.5089/9798400236662.002.A002

Sources: UN, INEC, and IMF staff calculations.

28. While the construction boom since 2000 has included several large public construction projects, about 75 percent of it was in private construction of residential and commercial buildings. The construction boom began in the 2000s with rapid increase in the share of residential construction alongside a decline in the share of other construction. Public construction also began to increase rapidly since 2009, reaching a peak of one third of overall construction (see figure below), with the airport expansion, new metro line, and Canal expansion occurring simultaneously. Since then, public construction returned to its pre-boom share of construction of around 20 percent. The bulk of the increase in construction since 2008 reflects commercial real estate. Initially, this reflected the construction of skyscrapers, with 37 of Panama City’s 50 largest skyscrapers, including the largest, being built between 2008 and 2014.57 By contrast, the last wave of commercial real estate was not driven by tall skyscrapers, with only one of the 50 tallest buildings being constructed since 2014 (in 2017).

29. The construction boom began to wane even pre-pandemic while during the pandemic, construction activity declined dramatically. Overall construction activity started to ease even before the pandemic, with the share of GVA plateauing at around 17.5 percent in 2017 and starting to decline gradually in 2018, reaching 17 percent of GVA in 2019. During the pandemic, construction was locked down, explaining the large short-term decline in construction output in 2020. However, since the pandemic restrictions were lifted (including all of 2021), construction has only recovered to about 11.5 percent of GVA, with real ouptut of the industry at about 2/3 of its pre-pandemic level. It is not yet clear if this reflects the end of the constructiom boom or lingering effects of the interruption of construction activity in 2020 due to lockdowns.

uA002fig12

Construction Investment Shares

Citation: IMF Staff Country Reports 2023, 129; 10.5089/9798400236662.002.A002

Sources: UN, INEC, and IMF staff calculations.

Mining Activity

uA002fig13

Cobre Panama Copper Production Projection

(2019)

Citation: IMF Staff Country Reports 2023, 129; 10.5089/9798400236662.002.A002

Sources: Cobre Panama and IMF staff calculations.

30. Cobre Panama is one of the largest new copper mines in the world and in 2021, operating at close to full capacity, generated about 7 percent of gross value added. The opening of the Cobre Panama copper mine has increased aggregate real mining output by a factor of three, with its share of gross value added increasing from about 2.5 percent to 7 percent. This has played a significant role in offsetting the decline in construction since 2019. However, as of 2021 the mine was operating at about 75 percent of full capacity, so it is unlikely to be a major source of growth in the medium term. In the longer term, output from the mine is expected to peak in around 2023 and remain roughly constant until around 2030, after which point is declines until becoming exhausted in about 2050. The scope for scaling up mining operations in Panama is limited and the sector is unlikely to become a major contributor to national output.58 However, Panama’s experience with Cobre Panama—namely, its dispute over the royalties structure and corporate taxation—sets an important precedent, not just for future mining operations in the country but also for the general investment climate, which is key for attracting new industries.

E. Conclusion

31. Panama has seen a period of remarkable growth and accelerted income convergence, but the drivers of growth may change going forward. Panama has benefitted from its geography, and timely infrastructure development coupled with market liberalization reforms and trade openness59 have contributed to its economic performance and income convergence with the US ahead of regional peers. Growth decomposition shows that much of the scaleup in output came from investment, especially in construction, in the recent years, while mining activity emerged as a new source of GVA with the development of Cobre Panama. Throughout Panama’s history, its transportation capacity, namely via the Panama Canal, has remained a significant and sustained source of the country’s revenue and development. Going forward, diversifying the economy should be a priority, in particular due to the risk of de-globalization hindering growth in world trade (particularly East-West) as a result of growing geopolitical tensions. Thus, Panama’s ability to maintain resilient and rapid growth, and perhaps become the first advanced economy in Latin America, may depend less on investment in construction projects and physical capital, and more on human capital and TFP-enhancing innovation.

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  • Feenstra, Robert C., Robert Inklaar and Marcel P. Timmer, “The Next Generation of the Penn World Table” (American Economic Review, 105(10), 3150-3182), 2015. Available for download at www.ggdc.net/pwt.

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  • Hausman, Ricardo, Luis Espinoza, and Miguel Angel Santos, “Shifting Gears: A Growth Diagnostic of Panama” (CID Working Paper No. 325), 2017.

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  • Hausman, Ricardo, Miguel Angel Santos, and Juan Obach, “Appraising the Economic Potential of Panama: Policy Recommendations for Sustainable and Inclusive Growth” (CID Faculty Working Paper No. 334), 2017.

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  • Maurer, Noel and Carlos Yu, “What Roosevelt Took: The Economic Impact of the Panama Canal, 1903-37.” (Harvard Business School Paper 06-041), 2006.

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  • Meditz, Sandra and Dennis Hanratty, “Panama: A country study” (Federal Research Division, Library of Congress), December 1987.

  • Rodrik, Dani, “Premature Deindustrialization” (NBER Working Paper 20935), 2015.

  • Rousset, Marina and Paola Aliperti, “Social Issues in Panama: Background and Policies”, IMF Country Report No. 20/125, April 2020.

1

Prepared By Nicolas Fernandez-Arias and Marina Rousset (WHD).

2

In “What Roosevelt Took: The Economic Impact of the Panama Canal, 1903-37”, the authors argue that the US- operated Canal Zone deliberately avoided employing Panamanian labor and explicitly prohibited Panamanian businesses from providing services to the Canal Zone or ships transiting through the Zone.

3

In addition to defending the Canal, the US military established an airfield at Rio Hato, the naval base on Isla Taboga, and several radar stations.

4

These included the privatization of two seaports (Cristóbal and Balboa), the promulgation of an antimonopoly law, the renegotiating of foreign debt with commercial banks, the privatization of the electricity and water companies, and a banking reform law, according to the Encyclopedia of the Nations.

5

See IMF Country Focus blog “Panama’s Story of Convergence” (November 2021): https://www.imf.org/en/News/Articles/2021/11/17/na111821-panamas-story-of-convergence

6

Using a more complete set of 192 countries from the October 2022 IMF World Economic Outlook, Panama ranks 53rd.

7

Singapore’s (Hong Kong’s) GDP per capita was 30 percent (95 percent) higher than Panama in 1969 and is now nearly 3 times (2 times) that of Panama.

8

Taiwan’s (Korea’s) relative GDP per capita reached 74 (67) percent in 2019.

9

In this report, “human capital per worker” means the following: all else equal, a worker with twice as much human capital produces twice as much per hour worked. Empirically, this is measured by the Penn World Table using years of schooling as well as country-specific wage-schooling Mincer regressions to estimate the effect on wages (hence productivity, all else equal) of each additional year of schooling in each country. For example, if an additional year of schooling is found to increase wages by x percent in a given country, then increasing the average level of schooling in the working population of that country by one year is assumed to increase human capital per worker by x percent.

10

See April 2020 Selected Issues Paper “Social Issues in Panama: Background and Policies” by Marina Rousset and Paola Aliperti F. Domingues, IMF Country Report No. 20/125.

11

Using IMF World Economic Outlook data.

38

The period 2006-2007 is shown separately as the base year for prices changed. Similarly, the period 2019-2020 is shown separately as it reflects the government mandated shutdown of construction during the COVID-19 pandemic.

39

International Comparison Program, World Bank | World Development Indicators database, World Bank | Eurostat- OECD PPP Programme. And Staff calculations. The ratio is calculated by comparing multiplying the ratio of PPP- adjusted real income by the ratio of household consumption to GDP for Panama and the United States.

42

The contribution in early time periods is negative, likely due to utilities being priced below cost. Data from INEC, which is more disaggregated than what is shown here, shows that mining output was less than 1 percent of GVA in 1995.

43

In 2022 it operated at an output level which is close to its maximum, which will be sustained for several years, and it has doubled its contribution to GVA since 2019.).

44

See April 2020 Selected Issues Paper “Structural Policies in Panama: Background and Policy Recommendations” by Julia Faltermeier, IMF Country Report No. 20/125.

45

Capital per worker increased by about 0.7 log points. The labor force grew by about 0.2 log points, so the physical capital stock increased by about 1 log point (170 percent). With a capital income share of 2/3, an increase in unutilized capital per worker of 0.3 log points translates into a reduction in TFP of 0.2 log points, or about 20 percent. Hence, one can rationalize the fall in TFP if the effective increase in capital worker was instead of 0.4 log points, with the remaining 0.3 unutilized. Rather than doubling, effective capital per worker increases by 50 percent, and the effective capital stock doubled instead of increasing by 170 percent. The difference in the effective capital stock compared to 2009 according to this approach is 60 percent of what it would have been had the capital been fully utilized, hence the number in the main text above.

46

From 1969 to 2019, TFP declined by 7 percent in both Panama and Singapore.

47

In the case that construction is used a store of value, part of its output would be the service flow associated with holding a safe asset, rather than rental income, and thus would not be measured in GDP according to traditional GDP accounting methodologies. This is analogous to the value provided to the global financial system from US treasury bills is not counted in US GDP.

48

Both of these calculations hold the path of capital per worker constant; however, higher TFP with a constant investment rate would likely lead to more capital accumulation per worker, amplifying the effect.

49

Panama’s land area is 29,157 square miles. Dominican Republic, South Korea, and Taiwan are of the same order of magnitude, at 18,704, 38,691, and 13,976 square miles, respectively. Singapore is much smaller, at 281 square miles. One caveat, however, is that Panama’s growth is concentrated in Panama City.

51

Ibid. Professions with such restrictions include history, geography, and civism; nursing; barbering and cosmetology; odontology; architecture; agricultural sciences; pharmacy; civil engineering; chemical engineering; chiropractic; nutrition; medicine; psychology; medical assistantship; accountability; journalism; laboratory technicians; public relations; speech therapists; medical radiology; economics; social work; veterinary medicine; physical therapy; law; dental assistance; sociology; and chemistry.

52

Panama Canal article “Contributions and Benefits of the Canal to the Republic of Panama.”

53

The Canal’s new toll structure takes effect from January 2023 onwards.

54

Transport, storage, and communications increased from 5 percent of GVA in 1970 to 15 percent of GVA in 2019.

56

LNG tankers never crossed the Canal before the 2016 expansion.

58

The only other known mining development is a 2021 pre-feasibility study done by Orla Mining (a Canadian mining company) for a Cerro Quema project in Los Santos, Panama. The project contains probable reserves of gold, silver and copper with US$117 million in investment and an estimated six-year mine life (for comparison, Cobre Panama has US$6.3 billion in investment and had, as of end-December 2021, the mine life is 34 years), so this is a much smaller operation, currently awaiting mining permits from the government.

59

Panama has concluded over a dozen free-trade agreements that cover trade relations with over 40 countries and territories.

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Panama: Selected Issues
Author:
International Monetary Fund. Western Hemisphere Dept.