How Panama went from a declining economy to a business star in a decade.
Can Panama become the first developed Latin American country? The notion may seem unlikely to those who remember Panama as the ultimate “banana republic,” a serpentine-shaped isthmus known for its canal, a military strongman named Manuel Noriega and not much else. But today, the country has a growing list of projects aimed at proving that it has turned a corner: It is becoming a hub for corporate headquarters, the site of the tallest building in Latin America, the city with the first metro system in Central America and the home to one of the largest engineering projects ever undertaken.
Then there's the old U.S. Howard Air Force base, a swath of land that sat strategically between the Panama Canal and Pacific Ocean across the Bridge of the Americas from Panama City. During the decades that United States controlled the canal, few places in Latin America were as important to the U.S. military. It was a hive of activity from which the North Americans planned counter-narcotics, humanitarian and military missions for throughout the hemisphere. For Panamanians, the tightly controlled base was one of many reminders of the U.S. influence over their country. By 1999, when the United States turned the canal over to the Panamanian government and pulled out its military, the base had gone dark; dozens of low-slung barracks with their Spanish tile roofs emptied. The military base, much like the country in which it sits, faced an uncertain future.
“Those were difficult times,” recalls José Rivera, who nearly had to close his small construction outfit in the years that followed. “After the Americans left, there was a lot of uncertainty. A lot of people were very pessimistic. A lot of people were out of work.” Unemployment hovered around 12 percent. Foreign debt was high. The country trailed the rest of Latin America in nearly every social indicator, from child mortality rates to school enrollment. Even the vaunted Panama Canal was falling behind as more super tankers, too big to fit through the locks, hit the high seas.
Fast-forward a decade. The base is again teeming with activity. Construction crews are scurrying to erect office buildings, warehouses, condominiums and storefronts -- the first buildings of what will become a 3,500-acre city. “There’s no other development like it in Latin America,” says Juan MacKay, a representative for London & Regional Properties, a U.K.-based property developer. “When this was an air force base, hardly any Panamanians were even allowed on the property. Now, it’s part of the country’s economic future.”
Offices and warehouses are replacing the drab barracks for international powerhouses like Dell Computer, 3M Company and Caterpillar as companies receive tax incentives, including exemption from several duties, and special legal, customs, immigration and labor benefits within the designated Special Economic Area.
All that activity speaks volumes about the country's latest transformation. In 2009, businessman Ricardo Martinelli was elected president with a promise of turning the tiny Central American country into an economic powerhouse. “The most important thing is to promote Panama as the only country in the world that is driven by entrepreneurs, not by politicians,” he said last year. Panama is “a country where we have made significant advances to bring it into the first world.”
Even skeptics have to concede that at least the government is putting money where its mouth is. The Ministry of Finance and Economy says the country will spend roughly $19 billion by 2014 on public projects, including the expansion of the Panama Canal. The focus is on areas in which the government believes it has big advantages: Logistics, tourism, agriculture, banking, offshoring services, maritime services, health care, corporate headquarters and oil refineries. The nine areas represent 55 percent of the country's GDP, which is around $27 billion. With public investment in those sectors, ministry forecasts say the economy will grow between 6 percent and 9 percent annually, along with "the creation of 860,000 new or better jobs, from now until 2020." The economy has been growing some 6 percent annually since 2005, except for last year, when it grew by 2.4 percent. Expected growth for 2011 is 7.5 percent.
“It’s truly phenomenal what they have done and what they’re trying to do. They’re building pyramids,” says Michael Conniff, director of the Silicon Valley Center for Global Innovation and Immigration at San Jose State University in California. He attributes much of the country's success since 1999 to its management of the Panama Canal. "Early on, they decided to run it like a business," he says.
That meant creating an autonomous authority to control the waterway, protecting it from politics. Last year, the tolls paid by ships passing through the waterway contributed roughly US$1.5 billion to Panama’s coffers, the Panama Canal Authority stated in its annual report. Compare that to the 74 years during which the U.S. controlled the canal, when Panama received a total of US$1.9 billion.
The authority is spending $5.2 billion to build new locks so that supertankers can traverse the waterway. The canal’s current locks, at 110 feet wide and 1,050 feet long, are too small to accommodate today’s supertankers. So-called post-Panamax ships (meaning those built to dimensions that exceed the size of the locks) are cheaper to operate, hence their popularity among shipping companies.
A stone's throw from the Miraflores Locks just outside Panama City on a recent day, construction crews ripped through hills and dug through the earth. Hundreds of dump trucks lined up to carry away the soil as thousands of workers, from backhoe operators to engineers, toiled in the blazing Panamanian sun.
They are on a tight deadline. The new locks are to open in 2014. When they do, the canal will accommodate double the amount of cargo that it can currently handle, or about 6% of the world's goods. The country is paying for the expansion by increasing toll rates and through a hefty batch of loans -- from the Japan Bank for International Cooperation ($800 million), the European Investment Bank ($500 million), the Inter-American Development Bank ($400 million, Andean Corporation for Development ($300 million) and the International Finance Corporation ($300 million). However, rather than the government guaranteeing any of the loans, the canal itself is paying for its expansion as additional revenue that the expansion will generate will more than cover the cost of the work, say government officials. By 2025, the canal should earn $30.6 billion over time.
Steven Ropp, a political science professor at University of Wyoming, says the expansion is more than just a smart business move. It's an essential pillar of the economy from which other sectors feed. “The country is getting back to basics. It’s putting its strategic advantages first,” he says. “And its biggest advantage is the canal."
WHAT’S THE RUSH?
The canal may be central to the country's future, but under Martinelli's plan, it will be just one of several economic drivers. The first step is having infrastructure to accommodate the plan. The finance ministry's five-year, $13.5 billion strategic plan calls for spending $4.3 billion to update the country's transportation network. It is building a new highway system and bridges, while expanding airports, and it has started digging what will become the first underground metro line in Central America, a 13.7-kilometer north-south connection in Panama City that will cost an estimated $1.8 billion. Another $2.3 billion will be spent on improving education, $1.7 billion on health facilities, $618 million on agriculture and more than $400 million on tourism projects.
Can the plan be accused of being overly ambitious? "I really don’t understand what the rush is,” says Ropp. “The money is coming in, the canal is getting built.… Why is there this feeling to do it all now?”
There's plenty working in the plan's favor, however. For example, the country's debt-to-GDP ratio has fallen substantially in recent years, to 45 percent from 66.2 percent in 2005. Credit ratings agencies upgraded the country's foreign debt to investment status recently, the first time since the country took over the canal. "Financially, the country seems pretty sound. Part of that is due to the revenue that the Panama Canal brings in," says Brendan Wolters, a banker helping foreign firms set themselves up in Panama for The Solace Group, a local consultancy. "There is a sense that Martinelli wants to get all this stuff done before the end of his term, by 2014," since the constitution prevents him from running for president again.
Indeed, Panama's risks may be more political than fiscal. In a region marked by drastic political shifts, Panama has maintained "a fairly stable political environment in the last decades," says Ropp. "That has certainly been a key factor in the country's transition."
Given all the activity, the biggest challenge facing the country might be labor supply and demand. The unemployment rate that troubled Panamanians at the turn of the century is now 4%, the finance ministry announced in May. But if nothing else, falling unemployment has also put more money in the pockets of average Panamanians. On a per capita basis, the GDP has risen to $5,616 from $4,347 just five years ago, an increase of 29 percent. Still, more than one-fourth of residents live in poverty, suggesting that while Martinelli’s developed country vision for Panama is getting closer, it’s still just a vision.
Martinelli has been both praised and derided for his rush to transform the country. His take-charge style, perhaps something honed during as a businessman, led a U.S. diplomat voice concerns over his "autocratic tendencies," according to information released by whistleblower site Wikileaks. According to fears aired in one diplomatic cable, Martinelli “may be willing to set aside the rule of law in order to achieve his political and developmental goals.”
Opponents have already dealt him political setbacks, which have had a direct affect on his economic plans. One run-in last year involved his notorious "Sausage Law," which crammed reforms into sectors as unrelated as aviation, labor and judicial codes. Amid fears that the law would affect their ability to unionize, plantation workers in the banana business, one of Panama's chief agricultural exports, called a strike and took to the streets.Violent crashes between demonstrators and authorities ensued, leaving more than 100 people injured and at least two dead and the law was dropped. Also meeting resistance was the law Martinelli pushed through to turn Panama into the world's second-largest copper producer, behind Chile. After sporadic protests over the environmental impact, he repealed the law in March.
But for all its critics, the Martinelli administration seems to have pleased the business community. "I think that this administration gets it. It understands the realities of doing business here in Panama," says Roger Khafif, president of K Group, a development firm in Panama. Discussing the administration from the lobby of the new Trump Ocean Club, it's easy to see why Khafif is pleased with his government. His US$400 million building -- containing a hotel, condominiums and commercial units including a casino and 38 elevators -- will be the tallest building in the hemisphere south of the U.S. when it opens this summer. At 72 floors, with a dramatic sail shape, the tower stands out in a skyline already packed with enormous towers.
Just a decade ago, the land where the tower stands didn't exist. It was part of the Pacific Ocean. But as the city grew, the government allowed a highway construction company to fill in the site and developed a 15-year plan to make it a home to high-end residences. That has actually happened faster than expected. Retirees have poured into the area where they can "get a second home or a retirement house for a fraction of what a condo costs in Miami," Khafif says. Buyers also receive 20 years of property tax exemption, underscoring a strategy the government is pursuing to promote Panama as a magnet for expat retirees.
From his perch, Khafif sees few risks for the country, which he says is much different than when he arrived as a young man. "Should the country slow down? Are we going to fast? Maybe," Khafif says. "What's the real risk? It has money coming in. People are moving here. We have the canal, and that's like our big 'oil well,' just pumping money."
Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania