1. NS4540 Winter Term 2017 Panama Economy
Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

2. Overview I
Panama’s geographical location has enabled the country to be one of the most important sipping crossroads and ports in the world
Richly endowed with natural resources, fishing grounds, mineral deposits and forests
Economy based largely on services
2014 services accounted for 64.1% of GDP
In recent years Panama has invested heavily in public infrastructure to position itself as a maritime and air transport hub
Country also region’s international trading, banking and services center
Trade liberalization and a series of free trade agreements have increased efficiency and stimulated growth

3. Overview II
Panama’s dollar based economy eliminates foreign exchange risk (with debt denominated in dollars rather than local currency)
These factors help account for country’s impressive rates of economic growth since controlling of Canal in 1999
GDP growth averaged 6.9% between 2000 and 2014
Between 2007 and 2014 growth accelerated to 8.7% placing Panama as one of the fastest growing countries in the world
High rates of growth in recent years not accompanied by a corresponding increase in skills of workforce
Led to a reliance on immigrants

4. Overview III Growth not benefitted all Panamanians
Youth unemployment substantially higher than overall unemployment rate
Social indicators improving slowly
Inequality in income remains fairly high -- Gini 0.53
Many sections of rural population, especially indigenous communities do not receive basic services such as education, electricity and sanitation.
Panamanian Government aware of problems and has made attempts toward alleviation

5. Overview IV
However in recent years authorities have been more focused on
Sustaining high rates of economic growth
Increasing country’s importance as a regional trade hub
Strengthening growth in areas such as tourism and mining
Strategy has involved large infrastructure projects such as the expansion of the Panama Canal
Evidence that public investment has had a positive impact not only on growth but also private investment (crowding-in)
Going forward, sustaining strong growth performance will depend more on productivity and human capital accumulation
Quality of macroeconomic policies and structural reforms will remain crucial
Growth accounting from IMF Panama Selected issues August 2015

6. Panama: Economic Patterns I

7. Panama: Economic Patterns II

8. Panama: Economic Patterns III

9. Sources of Growth I
Deposition of growth suggests that labor has been relatively stable
Employment increased as the economy grew while education indicators improved over the years
Enrollment rates compare favorably with peers in region
In particular, tertiary education enrollment accelerated since the 1990s, and doubled from 22.7% in 1991 to 45.7% in 2010
Average years of schooling of population 15 years and older increased from 7.7 years in 1990 to 9.6 years in 2010.

10. Sources of Growth II

11. Sources of Growth III
However quality of education could be a constraint to human capital accumulation
Student assessment scores relative to other countries suggest that the country performed below what its income and investment in education would predict
The quality of education and the mismatch between demand for skilled labor and supply could be an impediment to medium term growth

12. Sources of Growth IV
Capital contribution to output increased over time
While 1980s were marked by a lack of investor confidence, private investment surged with remarkable strength in 1990s
Since 2000 both private and public investment have boosted growth
In the period between 2007 and 2014 output growth averaged 8.7%, with fixed investment by both public and private sectors contributing to almost half of output growth.

13. Sources of Growth V

14. Sources of Growth VI
TFP did not contribute to output growth until 2004
TFP had a negative contribution to growth in 1980s and 1990s
Suggests weakness in improving economic efficiency during the period.
In last decade, TFP, contributed about ¼ of output growth.
Positive TFP also corresponds with intensive reforms carried out in period of positive contribution

15. Structural Reforms I
Structural reforms over the years helped to improve the competitiveness of the economy
Beginning in the 1990s authorities adopted an economic strategy aiming at a permanent reduction of public indebtedness and an economy-wide increase in productivity
Structural reforms were implemented in the 2000s to remove impediments to
Productivity growth and
Private sector investment and to
Enhance the pubic sector capacity

16. Structural Reforms II These reforms include
Significant efforts in privatization
Trade and market liberalization
Strengthening financial supervision and
Promotion of private sector investment
As part of the institutional improvements to attract foreign investment, an agency for the Attraction of Investments and Promotion of Exports (Proinvex Panama) was established as a one stop shop
Potential investors can identify all the relevant information on investing in Panama
Measures have also been taken to increase labor mobility

17. Structural Reforms III
Investor confidence high because of
Improvements in the efficiency of the economy as well as public finances
Better climate for private sector activities
The investment opportunities opened up by privatizations and
The reverting of the Panama Canal and neighboring land
Private sector investment averaged
22% of GDP in
Increase from 9% average for
Today Panama ranks among the top Latin American countries in the major competitive indicators
Most competitive economy in Latin America after Chile
Improved its ranking in the ease of doing business from 65 in 2008 to 52 in 2014
Imf selected issues page 46

18. Panama: Public Investment I
Impact of public investment on real GDP and private investment
Results from an econometric exercise indicate that pubic investment has had a positive impact on output growth as well as private investment – crowding in effect
Economy has been in an investment boom since 2007
Number of sectors have been identified as the growth engines of the economy:
Logistics,
Tourism
Agriculture, and
Financial services

19. Panama: Public Investment II
The vision was for Panama to become a hub for logistics services, financial services and tourism.
Consistent with the growth strategy authorities identified areas which public investment and government action would yield better returns in terms of sustained eocnomc growth and job creation
The Strategic Plan of the government realsed in January 2015 plans to invest US$19.5 billion over most of which would be invested in long term infrastructural projects
New highways, airports, roads ports, urban infrastructure, new subways, sewage systems and healthcare facilitis.

20. Going Forward I
Projections next five years suggest 6-7% rate of growth
Based on public sector investment plans
Assumes other factor contribution and TFP follow past trends
Quality of public investment and accompanying macroeconomic policies will remain critical
Investment should be sustainably financed to avoid buildup of public debt
Structural reforms to improve the business climate would encourage complementary private sector investment

21. Going Forward II
large public investment is expected to slow-down in the medium term,
growth will depend more on productivity and human capital accumulation
With the increase of public capital stock and the normalization of public investment challenge is to develop the strategy to maintain a more sustainable and inclusive growth
Imperative to increase the efficiency of education investment and further reform of the labor market to alleviate skill mismatches and ensure better job opportunities.