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Since colonial times, Panama’s location has made it a crossroads for trade and transit. This role assumed worldwide significance in the 20th century with the completion of the Panama Canal, which dominated Panama’s economy for decades and tied it closely to the United States.
Panama’s gross domestic product (GDP) was $17.10 billion in 2006, equal to $5,200.60 per person. Commerce, finance, and business services constituted the core of Panama’s economy, contributing 73 percent of the GDP. Most economic activity was concentrated in the urban area of central Panama surrounding the canal. In the 1990s the rural economy accounted for 10 percent of the GDP and was primarily agricultural, producing farm and ranch commodities. Spending by the United States on military bases added another 5 percent, or $366 million, to the GDP, but that ended when Panama assumed control of the canal in 1999.
Business related to the Panama Canal plays a major role in this sector, but its importance has declined as the economy has become more diverse. International banking, maritime services, manufacturing, and shipping combine to provide more jobs and tax revenue than the canal. Economic growth planned in the late 1990s was expected to further reduce the country’s dependence on canal-related business.
The economy suffered a serious decline in the late 1980s, when the United States imposed a series of restrictions on trade and financial dealings with Panama and eventually invaded the country to overthrow the government of Manuel Noriega. The embargo caused a sharp drop in the GDP and higher unemployment. It also hurt tourism, manufacturing, and commerce, and made it difficult to maintain roads, power utilities, and communication equipment. Since the 1989 invasion the GDP has grown substantially, fueled by U.S. reconstruction funds, an end to the embargo, restored international credit, and the return of investor confidence.
A major factor in Panama’s industry and foreign commerce is the Colon Free Zone, an international trade facility that allows businesses to operate without paying import duties or taxes. Established in 1948 near the northern terminus of the canal, this zone is the largest of its kind in the Western Hemisphere and second only to Hong Kong in the world. In 1995 its 1,600 businesses generated $11 billion in sales and employed 14,000 people. Companies in the zone import raw materials and other components for manufacturing, or operate warehouses that break down large shipments from Asia and distribute them in nations bordering the Atlantic. In the 1990s the free zone doubled its area and has benefited from new container ports at Manzanillo and Coco Solo.
Since the 1970s, when it borrowed large sums for social and economic programs, Panama has had one of the highest levels of debt per capita in the world. In 1995 the nation’s foreign debt was $7 billion, or $2,600 per person, much of it overdue. In 1996 the government settled outstanding commercial debt claims against Panama through negotiations, reducing pressure on the government and allowing it to seek new credit. However, payments on the debt were the largest government expenditure in 1995, taking 28 percent of the $1.9 billion budget.
Since taking office in 1994, President Ernesto Perez Balladares has relaxed labor controls, reduced government regulation of business, and sold off major public enterprises. These actions aimed to reduce spending on state-run industries and payrolls, curb the power of unions, and encourage private enterprise and investment, in hopes of revitalizing the economy.
Panama Canal Brief
The Panama Canal continues to generate more jobs, contracts, and government revenues than any other single source in the nation. It contributes more than 10 percent of the nation’s GDP.
From 1979 to 1999 the canal was operated jointly by the United States and Panama, with four Panamanians serving on the nine-member board of directors of the Panama Canal Commission. After 1990 the canal administrator was also Panamanian. After Panama assumed control of the canal in 1999, the commission became the Panama Canal Authority, a public Panamanian corporation, and took over the operation of the canal.
Panama’s labor force includes about 1.5 million people. The largest group, 67 percent, works in services, including government, finance, and trade. Agriculture, forestry, and fishing employs 16 percent. Industry, including manufacturing, mining, and construction, employs 17 percent. Unemployment was 12.3 percent in 2004, and underemployment has also reduced the earning power of workers.
The leading labor federations are the National Council of Organized Workers (CONATO) and the Workers Confederation of the Republic of Panama (CTRP).
Agriculture employs one in four Panamanians, but much of that labor is absorbed in subsistence farming. Panama’s productivity is too low to export many agricultural goods. The only crops sold abroad are bananas, coffee, and sugar, which is protected by a U.S. quota system. Among the more important products are fruit, corn, rice, timber, some vegetables, and livestock. A large percentage of these goods are processed in towns and cities outside the transit zone. Panama imports cereal and fresh vegetables.
In 1994 agriculture grew at a rate of 3.9 percent, more slowly than industry and services. Principal problems facing the rural sector are concentration of land ownership in the hands of few farmers, high labor costs, and low levels of mechanization on all but the largest farms. Some 7 percent of the land is cultivated, with another 20 percent used for grazing.
Forestry and Fishing
Logging and fishing are significant activities in some parts of the country. The Darien area produces a large amount of mahogany for export, and teak is grown in plantations in other regions. Most construction lumber used in Panama, however, is imported from temperate-zone producers.
Panama’s fishing fleet works the rich grounds in the Pacific Ocean, using refrigerated ships. Most of the large shrimp and prawn catch is frozen and exported to the United States. A wide variety of other fish are harvested in the rich currents offshore.
Panama has a small mining industry, which contributes only 0.2 percent to the GDP and employs about 2,000 people. Activities include some gold mining, silver mining, and quarrying. Major copper reserves have been identified at Cerro Colorado in western Panama and could be developed by international firms if world prices warranted. Panama imports crude oil for processing and electric generation near Colon, and it exports some refined petroleum products.
Manufacturing, amounting to 9 percent of the GDP, is mostly light and destined for construction and domestic markets. Products include fabricated metal, petroleum products, building materials, cement, chemicals, paper and paper products, printing, household consumer goods, processed food and beverages, furniture, and clothing. Virtually all the products manufactured in the Colon Free Zone are exported.
Hydroelectric power is generated from dams on Lake Bayano, Lake Alajuela, and a few smaller dams, and supplies 51.78 percent of Panama’s electricity requirements. The remainder is generated from imported petroleum.
Panama’s foreign trade in 2004 included exports worth $890 million. Some 84 percent of exports were food products such as bananas, shrimp, sugar, and coffee. The major buyers were the United States, Germany, Costa Rica, Sweden, and Belgium.
Panama imported $3.1 billion in goods in 2003. Manufactured goods accounted for 72 percent percent of imports, fuels were 12 percent, and food 14 percent. Sellers were the United States, Ecuador, Japan, and Mexico.
Panama traditionally resisted joining tariff-reducing organizations, in particular the Central American Common Market. In 1995, however, the new government decided to subscribe to the General Agreement on Tariffs and Trade (GATT) so it could join the World Trade Organization (WTO). This required pledging to reduce duties on a wide range of protected items. Panama is one of the founding members of the Union of Banana Exporting Countries and belongs to the Inter-American Tropical Tuna Commission.
Currency and Banking
Panama’s financial sector has more than 100 banks, with combined assets of more than $30 billion. This sector arose after a 1970 law permitted secret bank accounts and advantageous tax terms. Over the years, the banks have been alleged to handle illegal cash operations, a practice called laundering, on behalf of narcotics organizations in South America. The United States has pressured Panama into tightening rules regulating bank accounts and transfers. Panama has not given full access, arguing that the money would simply be moved to other protected havens, such as The Bahamas and Grand Cayman.
Panama’s official monetary unit is the balboa, whose value is fixed at one U.S. dollar. Panama has no paper currency of its own; the only paper money is the dollar. Fractional coins, based on 100 centesimos per balboa, are almost identical in denomination to U.S. coinage.
The nationalist and dictatorial regimes of the 1970s and 1980s made Panama unattractive to U.S. citizens and Europeans who could afford to travel there. More recently, however, the country has actively promoted tourism. The number of tourist arrivals more than doubled in the 1990s. In 2003, 566,000 tourists (not including stopover arrivals) visited Panama, generating $960 million in revenue. The construction of new hotels, tourist villas, and resorts has coincided with the growing tourism industry. The Panama Canal is the major tourist attraction within Panama, and many major cruise lines include a trip through the canal as part of their itinerary. In October 2000 the country inaugurated its first cruise-ship terminals, one at either end of the Panama Canal, to promote more stopover tourism.
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