Central America’s Rising Economic Star

More than four years have passed since U.S. and Panamanian negotiators signed a bilateral free-trade agreement (FTA). During this period, Panama has taken concrete steps to expand labor rights and to increase the transparency of its tax and banking systems. Last November, for example, it signed a tax-exchange sharing agreement (TESA) with the United States, and a few weeks ago the OECD formally added Panama to its “white list” of countries that have “substantially implemented the internationally agreed tax standard.”


Unfortunately, even though the U.S.-Panama FTA now commands strong bipartisan support on Capitol Hill, it has gotten bogged down in partisan disagreements over the extension of Trade Adjustment Assistance.

Meanwhile, the Panamanian economy roars ahead: It is growing faster than any other economy in Latin America, expanding by 9.7 percent (year on year) in the first quarter of 2011. According to a Latin Business Chronicle analysis, Panama is now the region’s top recipient of foreign direct investment as a share of GDP. Within the past month, BCP Securities economist Walter Molano has written that “Panama is on track to becoming a major logistics, transportation and tourism hub for Latin America”; the Economist has declared it a potential “Singapore for Central America”; and Standard & Poor’s has boosted its sovereign-rating outlook from “stable” to “positive.”

One of the biggest factors driving Panamanian growth is a seven-year, $5.25 billion expansion of the country’s famous canal. Launched in 2007 and scheduled for completion in 2014, the project is “perhaps the largest remodeling job in history,” as journalist Tim Rogers has written. An estimated 15 percent of all U.S. trade passes through the canal, and U.S. companies are eager to profit from the ongoing construction work.


In other words, the FTA represents a golden opportunity for the United States to bolster its trade relationship with the rising economic star of Central America. To let the deal fall victim to domestic labor spats would send a terrible signal about U.S. political dysfunction. Again, it’s important to remember that (1) Panama has made the reforms demanded by U.S. lawmakers and (2) the FTA would deliver significant benefits to U.S. exporters.

As Democratic Senate Finance Committee chairman Max Baucus has noted, “Panama’s dynamic and growing economy provides lucrative new opportunities for American ranchers, farmers and manufacturers to help them create jobs here at home. This trade agreement will level the playing field for U.S. workers and exporters by eliminating tariffs and easing customs restrictions on U.S. goods, making it easier for our small businesses to grow and create jobs.”

Securing final U.S. approval of the trade pact would be a major victory for Panamanian President Ricardo Martinelli, a supermarket tycoon whose first two years in office have been decidedly rocky and more than a bit disappointing. While the conservative businessman has pursued pro-growth economic policies, he has often governed in a heavy-handed and quasi-authoritarian manner, which has raised serious concerns among U.S. officials.


These concerns were highlighted in an August 2009 cable from the U.S. embassy in Panama City, which was published by WikiLeaks late last year. The cable reported that Martinelli had “reached out to the Embassy, among other actors, to request help in building infrastructure to conduct wiretaps against ostensible security threats as well as political opponents” (emphasis added). It also warned that the Panamanian president had “autocratic tendencies” and “may be willing to set aside the rule of law in order to achieve his political and developmental goals,” adding: “His penchant for bullying and blackmail may have led him to supermarket stardom but is hardly statesmanlike.”

Indeed, while Martinelli dreams of turning Panama into a Singapore-style dynamo, cronyism, corruption and political intimidation are hindering its progress. The country needs stronger institutions, and its current government is not doing nearly enough to build them. In the World Economic Forum’s 2010–11 Global Competitiveness Index, Panama ranks 73rd out of 139 countries or economies in the category of “institutions” (behind Swaziland and Azerbaijan), 76th in the category of “health and primary education” (behind Saudi Arabia and Ecuador), 82nd in the category of “higher education and training” (behind Jamaica and Guyana), and 106th in the category of “labor market efficiency” (behind Sri Lanka and the Ivory Coast).


This coming December will mark the 22nd anniversary of the U.S. invasion that toppled Manuel Noriega, and the twelfth anniversary of the moment when Panamanians assumed full control of the canal. Today, their young democracy is growing like an Asian tiger economy. But without better institutions and more responsible political leadership, Panama will never achieve its loftiest ambitions.

Read this article in Spanish here.



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