PANAMA PANAMA WHAT NEEDS TO BE DONE TO MAKE IT A HIGH GROWTH ECONOMY January 27, 2005

THE GREAT GLOBAL EXPERIMENT In the last 60 years, every form of political/economic system that could be devised by the mind of man has been tried. The evidence is now in: free market democratic capitalism works far better than other system ever devised. free market democratic capitalism works far better than other system ever devised. Panama should be a high growth country. It should be growing at 7% per year or more given its current state of development What does Panama need to do to achieve high growth? Understand the world is made up of variables rather than constants

NECESSARY CONDITIONS FOR HIGH ECONOMIC GROWTH 1. RULE OF LAW Coupled with minimum corruption and an honest judicial system

2. PROTECTION OF PRIVATE PROPERTY: This forms the basis of a financial system

3. FREE TRADE In both goods and services In both goods and services

4. FREE MARKETS No price control No price control

5. LOW TAX RATES Must be internationally competitive with countries in a similar state of development; Must be internationally competitive with countries in a similar state of development; Ideal tax system should tax consumption rather than labor and capital; Ideal tax system should tax consumption rather than labor and capital; The difference between tax rates and tax revenues. The difference between tax rates and tax revenues.

6. MINIMAL ECONOMIC REGULATION All regulations should have benefits that greatly outweigh costs; All regulations should have benefits that greatly outweigh costs; Excessive regulation leads to corruption. Excessive regulation leads to corruption.

7. LOW LEVELS OF GOVERNMENT SPENDING Most countries, includingPanama, have levels of governmentspending that exceed the welfaremaximizationrate

8. STABLE MONEY

9. MINIMAL IMPEDIMENTS TO BUSINESS CREATION Clear rules Clear rules Minimal time Minimal time and Low fees and Low fees

The Cayman example: Was a poor country that became rich in two generations: 1.3 Trillion dollars in bank assets 1.3 Trillion dollars in bank assets 640 insurance companies 640 insurance companies 6000 mutual funds including 54% of the worlds hedge funds 6000 mutual funds including 54% of the worlds hedge funds Reasons for Success: Rule of law Rule of law No tax on individual or business income No tax on individual or business income Minimal corruption Minimal corruption Free trade Free trade Free markets Free markets Stable Money Stable Money Clear and simple regulations Clear and simple regulations

What should Panama do to achieve high growth? A systematic audit of all of the tax, regulatory, trade, and legal obstacles to achieving high growth needs to be complied. A systematic audit of all of the tax, regulatory, trade, and legal obstacles to achieving high growth needs to be complied. A program of fundamental reform to correct or remove the obstacles needs to be undertaken in a rapid way. A program of fundamental reform to correct or remove the obstacles needs to be undertaken in a rapid way. To succeed in the reform plan, an aggressive public relations campaign would need to be undertaken so that the citizens and the business community understand that Panama can achieve the high growth now being experienced in other countries by reducing taxes and regulations. To succeed in the reform plan, an aggressive public relations campaign would need to be undertaken so that the citizens and the business community understand that Panama can achieve the high growth now being experienced in other countries by reducing taxes and regulations.