Abstract
This paper gives an insightful preview of the Panama's economy. It analyzes key data from the current major economic indicators to comprehend the state or nature of Panam. The analyzes espouse data and statistics drawn from the Panamanian Bureau of Statistics and Economic portfolios. It analyzes both the endogenous, exogenous economic factors, as well as their impact on the Panamanian economy. One of the most conspicuous endogenous factors is the Panama’s unsustainable development growth models. Its economic growth mostly focuses on the economic indicators while ignoring critical and pressing aspects such as social as well as environmental problems. Moreover, Panama has significantly tight or compressed labor market, characterized by considerable wage pressures as well as high labor needs or demand. This is anticipated to affect the inflation rates in the medium or long term perspective, posing a possible risk of the economy overheating. While on the other hand, the exogenous factor, which attributed to relatively low economic growth was deterioration or dwindling global trade volumes, causing significantly low demand for services drawn from the Canal. This is given the expansion of the Panama Canal with the intent of increasing or expanding global trade as well as sustaining growth or projections in revenues tapped from services in the Panama’s Canal Free Trade Zone.
The Panama’s Business Cycle
Introduction
It is a phenomenon that every country reaps from global economic progress, and they are inclined to depend on each other at one point or another. Besides, in cases of fluctuations or dwindling in world's economic prosperity, the countries equally feel the heat caused by economic recession. However, each country suffers uniquely when they are subjected to economic uncertainties, which they must address individually. They bear responsibility for the misfortunes or unpredictable dynamics in world’s economy. The two economic determinants are broadly classified as, endogenous as well as exogenous factors. Besides, these factors vary from one nation to the other (Cooke, Kose, Otrok, & Owyang, 2015). In Panama, there have been manifestations of both endogenous and exogenous, causing a variation in the macro-economic outcomes. Hence, despite the fact that Panama has had a progressive economic growth in the recent past, it has also been faced with uncertainties.
Therefore, a detailed analysis of Panama’s national outlook: social, economic, political, as well as cultural factors analysis can give a clear understanding of the state of affairs in this strategically positioned country. Besides, critical analysis of its internal determinants as well as its external measures geared towards addressing economic shocks, the paper gives insights or comprehensive awareness of the present macro-economic status of Panama. Moreover, the immediate review of the Panama’s economic growth reduction is integral in formulating or recommending avenues or measures ideal for sustainable growth in the Panama’s economy.
Panama’s Overview and a Brief Recount of its History
Panama was a colony of Spain; the place called Darien by the conquistadors was the site where the first Spanish settled off the mainland. The settlement was established in 1510, far in the West Coast of the Gulf of Uraba. The first Spanish to settle here is called Santa Maria la Antigue. Panama became a significant place in marshaling the Spanish empire. Goods were ferried on caravans of both mules and boats approximately 50 miles passing through the isthmus all the way to Portobello (which is a harbor referred to as beautiful by the Columbus) in 1502. It is in Portobello where trade thrives and becomes a magnificent trade fair zone. At this zone, there were massive business transactions, where each year fleets of Spanish galleons docked to deliver goods from the European markets for the colonies while taking home substantial wealth drawn from Latin America. This business transaction ended in 1748 (Hanratty & Meditz, 1989).
In 1830, Panama was rumpled up to form part of Colombia. In 1846, the Colombian state entered into a treaty with the U.S. as the guarantor to build a railway line linking one coast with the other. The introduction of the railway line bolsters trade and makes it more commercially viable as well as attractive. In 1879, there were serious plans for the construction of the Canal to link or connect the Atlantic with the Pacific. The first Canal construction began in 1903 and ended up in 1914, hence, opening up shipping activities in the Canal region. Moreover, there has been a strong tie between the U.S. and Panama following the Hay-Bunau-Varilla agreement, which was signed in 1903 (Sullivan 2012). Thus, the U.S. involvement in the Panamanian has been evident, encompassed with administrative rights and obligations in the Canal Zone. Besides, Panama has had some of its political leaders who are democratically elected, but it has suffered from the Latin American culture or traditions of caudilos, thus stagnating economic growth. Besides, just like countries such as the U.S., Panama’s recent tales depict turbulence and progress. It has encountered political instability, repression, and economic collapse. Moreover, the current Panama has been faced by foreign invasion, national growth or development as well as democratization, which have played a role in shaping the current Panamanian state and its societal outlook (Sullivan, 2012).
Economic System for Panama
Panama’s economy heavily relies on the country’s geography positioning, which has comparatively endowed it with endless opportunities and economic advantages. It has exploited this advantage since the arrival of the Spanish colonials as early as the 1500s. Moreover, the Spanish conquerors or conquistadors transited gold as well as silver through Panama from Peru to their country, Spain. Besides, Panama faced major repercussions in its economy in the 1700s following a cyclical nature of the global trade (Hanratty & Meditz, 1989). This was attributed to the decline in the colonial exchange or trade via the isthmus. It further got a boost in its economy following the California gold rush business, which increased its cargo transactions and passengers. Besides, the country has a total area of 78,200 km square, which covers its land and waters (ECLAC, 2014).
Currently, Panama’s economic growth is ranked the fastest in expansion in Latin America for the past decade (WEF, 2015). In the last quarter of the year 2015, its economy grew by 5.3% compared to the 5.7% growth recorded in quarter three, the same year (World Bank, 2016). Last year marked a significant decrease in the economic growth rate, as it decreased from 8.4% rise in the last half of the decade to 5.8%. Besides, Panama has a total population of 3.9 million people with a GDP per capita of USD 12,517. Its gross domestic product is 49.2 billion dollars. It has an annual GDP variation in its economic growth of 11.8% in 2011, 9.2% in 2012, 6.6% in 2013, and 6.1% in 2014 (WEF, 2015). Its current consumption annual variation, that is, at 31st December, 2014 was 4.3% compared to 3.9% in the previous year. Its investment annual variation was 9.8% in 2014 compared to 20.4% in 2013 and 25% in 2011. In 2014, Panama had an unemployment rate of 4.8% compared to 4.1% rate in the previous consecutive three years. It had a fiscal balance of -4.2% in its GDP compared to -2.4% in 2013. Besides, Panama had Public Debt of 37.1% in 2014 compared to 35.0% in 2013 (WEF, 2015).
Moreover, its GDP expanded in an aggregate of 8.4% between the years 2004 and 2013. It further performed comparatively well during the international economic recession span; it tallied 4% growth in the year 2009, at a time when many other nations in the region encountered contractions in their economies (ECLAC, 2014). Its economy accelerated or progressed in the subsequent years recording a double-digit expansion rates in 2010 as well as 2011. Besides, Panama’s economy is based on highly-developed and multifaceted services sector, which accounts for 75% of the GDP (Scowsill, 2015). The country's Canal Zone and the adoption of the use of the dollar as its currency have strengthened its internationally oriented services or goods economy (ECLAC, 2014).
However, the country’s human capital growth and developmental inequalities is majorly stark, with serious disparities noted in both rural and urban populations. Its urban populace is highly educated compared to the rural population; hence, they enjoy long as well as healthy lives, unlike the rural fork, which lack basic health amenities and quality education. They engage in daily struggles to fend for themselves as well as their families. This magnificent gap or disparity is not only detrimental to the individual Panamanians but the entire country, because of the importance of human capital in the wider picture of sustainable economic progress or growth (King, 2013). Moreover, the merging of the Panama’s two varying economies (the urban and rural economies) is ideal for a country where its citizens do not fully benefit from its assets as well as growing wealth. Nevertheless, Panama stands out to be a distinct country where there are no major population challenges as it has been the case in other developing countries found in Asia or Africa. Therefore, the political class should strive to check or balance the population trends as well as the demographic shifts by designing programs and policies aimed at achieving or realizing sustainable development (King, 2013).
Panama’s Business Cycle
The present state of the economy shows a drop in growth, the last quarter of 2015 showed an economic growth deceleration of 5.3% compared to 5.7% growth rate in Q3 in the same year. The year 2015 showed a significantly reduction in economic expansion rates since 2010, with a record of 5.8% compared to 8.4% in 2010 (Seidel, 2013). This is can be attributed to the economic headwinds facing Panama’s regional neighbors, hence, impacting on the GDP expansion due to contraction of all vital services sectors. However, despite the reduction in the economic growth rates, the economy is projected to remain vibrant as well as resilient. This is due to the expansion of the mining as well as the quarrying components done in Q4; further, the construction industry recorded a double-digit economic growth (ECLAC, 2014). Moreover, the state resumed construction on the stalled large-scale infrastructural projects, with merger plans of initiating new major constructions in this year. The economy is expected to remain vibrant as well as robust; more so with the opening of the Panama Canal construction expansion project in the middle of 205. This will aid it to fetch more revenue (BBVA, 2013).
Gradual or nearly stagnating correction or bridging of the current account deficits experienced in 2014 is a clear indication of unsustainable development. The current-account deficits were closed at 9.8% compared to the previous year’s 9.8% (WEF, 2015). However, the result is distinct as it indicates healthy adjustments of its external imbalance because of improved economic growth of 49.2 billion dollars GDP compared to the previous year’s 44.9 billion dollars (ECLAC, 2014). Besides, Panama has a relatively elevated structural inflation index because of its dynamic or sophisticated economy as well as unemployment rates noted to be low at every time. The country tallied an unemployment rate of 4.8% in 2014 compared to 4.1% in 2013 (WEF, 2015). This is anticipated to grow unless the country invests in education and research to improve the status of its populace.
Causes of Business Cycles in Panama
However, despite such meaningful prospects and economic trajectories in the coming years, the lowered economic growth noted in 2015 can be attributed to both the endogenous and exogenous economic determinants facing Panama’s economy. Its tight labor market causes a major concern for investments, compounded by wage pressures as well as increased labor demand, and could be the driving force behind increased inflation shortly (WEF, 2015). Moreover, unsustainable development blueprint for Panama has caused imbalances in its social and environmental fronts (Rojas, 2012). Thus, causing a significant reduction in growth as the most rural population is uneducated. The exogenous determinants, which impacted on the economy were the over-dependence on the Panama Canal, which was expanded to increase the country’s overall revenues base (WEF, 2015). It was expected to thrive on an increased international trade. However, the current financial crisis experienced in the world impacted by the trade as well as other business transactions at the Panama Canal as its regional peers were significantly affected.
The Determinants’ effect on the Panama’s GDP or Output
Despite the economic turbulence and contracted operations at its Canal due to the impact of economic recession on the neighboring economies, Panama has posted impressive economic results with a GDP of 49.2 billion dollars in 2014 in comparison with 2013 44.9 billion dollars (World Bank, 2016). This is courtesy of its diversified economy, ranging from the transport, housing, to banking sectors.
Determinant’s effect on Inflation or Prices of Commodities
The country’s inflation index (CPI) yearly variation stood at 2.9% in 2014 compared to 4.0% in 2013 and 5.7% in 2012 (BBVA, 2013). The reduction was due to ease in the global cereal prices. However, the high inflation rates experienced in 2015 of 3.2% was due to statistical as well as structural factors (WEF, 2015). Statistically, the inflation fell in 2014 due to a reduction in costs of cereals and fuel at the global arena, while structurally; Panama’s economic growth remained high despite fall in the employment rates (ECLAC, 2014).
Determinants’ effect on Employment Rates
The country tallied an unemployment rate of 4.8% in 2014 compared to a flat rate of 4.1% in the previous three consecutive years; this increase is attributed to high inflation rates, which in turn has resulted in a real appreciation in the nation's currency (WEF, 2015). The real bilateral trade exchange rates, based on the Panama’s balboa against the U.S. dollar hiked by 17% from 2006-2013 (BBVA, 2013). The annual exchange rate progressed by 2.2% during the same period (BBVA, 2013). Economic analysis critically shows that the current high rates of unemployment in Panama is temporary as the country's current expansive growth will absorb most people shortly.
Recommendations
Despite the country’s superb performance, such as a score of 64.8% in 2016 Economic Freedom (+0.7% improvement), a global ranking of 66th, as well as a regional ranking of position 13th in the entire south as well as Central America. The success is engraved in its openness to international commerce, pro-economic growth reforms such as the simplifications of investments rules, business jump-starts, as well as decline in the corporate tax rates. Nonetheless, there are ubiquitous weaknesses the country must address urgently. These include property rights, dual economy, corruption, unsustainable development, as well as labor freedom (World Bank, 2016).
Firstly, the country political elites have a moral obligation to strengthen checks as well as balances to bolster transparency and accountability to control run away corruption cases in the country, which has corruption index at 15.3% (World Bank, 2016). Moreover, the judicial system, which has perennially remained inefficient, ineffective, overburdened, politicized, as well as subject to corruption manipulations must be overhauled, to reconstitute competent and pro-reforms justice system, hence protection of human rights as well as their properties.
Additionally, the state must address the problem of public debt, which currently equals or closes the GDP. The country's top personal or individual income, as well as corporate tax charges or rates, stand at 25%. Some other taxes entail the value-added duty as well as the capital gains levy. The overall or combined tax burden adds up to 17.7% of the total domestic income (WEF, 2015). However, the government’s expenditures add up to 27.2 of the GDP (WEF, 2015). Hence, a considerable budget deficit more so on the non-monetary public sector, which has widened (World Bank, 2016).
Thirdly, the state must quickly address the regulatory inefficiencies more so on the licensing. The country had earlier enhanced its reforms agenda by strengthening the regulatory body and policy framework, but the pace at which reforms are enacted is relatively very low. For instance, licensing needs are time-consuming as well as costly. The labor markets are inflexible as well as the non-salary or wages costs of hiring an employee is comparatively high. The state should address with redress these bureaucratic bottle-necked procedures lowering efficiency, hence becoming cumbersome to investors or private developers (World Bank, 2016).
Moreover, the government must urgently address the disconnect existing between Panama’s chronological as well as projected growth patterns to match them with inequality, especially in human development (Toure, 2012). It is evident that the country has ‘dual economy’, which provides a platform for dynamic services or goods export while has meager linkages or poorly connected with the better portion of the economy, hence inequality in resource distribution. Panama Canal being the country’s significant economic landscape offers employment to approximately 1% of the nation’s employment opportunities (King, 2013). This creates a disparity between the few people who are employed earning wages 10-20 times the country’s average, constituting a none-significant portion of the entire population, thus poor representation or sharing of the national resources (King, 2013). Moreover, the country had a poverty rate of 39.9% in 2007, which by 2012; it had reduced to 26.2% (World Bank, 2016). It further had an extreme poverty rate 15.6% in 2007, which it lowered to 11.3% (World Bank, 2016). These values are substantially unwarranted owing to the country’s levels of wealth. Nevertheless, the Colon Free Trade Zone, offer income to series of people in the region, its effect is non-proportionally represented in the national domain (King, 2013).
In conclusion, Panama has had a fully fledged economic prosperity in the last decade founded on the above analysis. This has been aided by the country’s macro-economic stability engraved by its adoption of the full dollarization, which has in turn promoted the expansion of the domestic services, as well as other activities, found within the Panama Canal or the Colon Free Zone. A well-orchestrated policy measures, as well as an ideal fiscal consolidation, has enabled the country to reduce the gross national or public debt from an average of 66.2% of its GDP in the year 2005 to 39.2% of the GDP in the year 2012 (Seidel, 2013). Moreover, the country’s resilience to exogenous economic determinants has been reinforced by its economic diversifications, such as the transport industry, which the Panama has the best airlines with strong connections in the region, tourism sector, housing sector, as well as the banking sector. These diversified ventures enabled the country to withstand the recent international financial crisis (Cedeno, 2012).
Therefore, it is instrumental that Panama should implement the above recommendations to have a balanced, sustainable, and equal representation in its economy. It must comply with the environmental policies requirements, integrate its population with its wealth or resources, and uphold the rule of law, hence property protection, as well as integrity, accountability and transparency in its judicial system.
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