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Panama, Economy

Colon Free Zone, Coco Solo, northern terminus, maritime services, Manzanillo

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 $9.89 billion in 2000, equal to $3,460 per person. Commerce, finance, and business services constituted the core of Panama’s economy, contributing 76 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.

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