Panama-Chapter 3 - The Economy

Cuna Indian mola design of a San Blas interisland oat at dock

SEVERAL DISTINCTIVE FEATURES characterized Panama's economy in the late 1980s; the most striking was its internationally oriented services sector, which in 1985 accounted for over 73 percent of the gross domestic product (GDP--see Glossary), the highest such percentage in the world. That distinctiveness was best symbolized by the Panama Canal, which has dominated the country's economy in the twentieth century. The scope of the services sector has expanded and broadened through increased government services and initiatives such as the Colón Free Zone (CFZ--see Glossary), a trans-isthmian oil pipeline, and the International Financial Center.

Another distinguishing feature was Panama's paper currency, the United States dollar. The local currency, the balboa, was tied to the United States dollar but was available only in coins. Panama's money supply was determined by the United States Federal Reserve System; therefore, the country could neither print money nor devalue the currency. Because its monetary instruments are limited, Panama has avoided the cycle of exchange-rate devaluations and the accelerating inflation that have typified most Latin American economies. The balboa has remained on par with the United States dollar, and Panama has enjoyed the lowest average annual rate of inflation in Latin America--7.1 percent in the 1970s, and only 3.7 percent between 1980 and 1985.

The third economic distinction is that the Panamanians have one of the highest levels of per capita income in the developing world. Construction of the Panama Canal across the isthmus in the early 1900s and expanding world commerce have combined to foster rapid economic growth in the country throughout the twentieth century. By 1985, per capita gross national product (GNP--see Glossary) reached US$2,100, twice the average in Central American countries, greater than all South American countries except for Venezuela (US$3,080) and Argentina (US$2,130), and on a level with Mexico (US$2,080). Panamanians, however, have not shared equally in the rising living standards, because the distribution of income has been highly skewed.

The military leaders who seized control of the government in 1968 under the leadership of General Omar Torrijos Herrera instituted economic policies that aimed at greater equity as well as integration of various facets of the country's fragmented economy. By the time of Torrijos's death in July 1981, they had achieved some remarkable results, but at the expense of a low rate of private investment, increased urban unemployment, continued rural poverty, and growing external public debt. A document entitled Towards a More Human Economy was published in 1985 by Panama's Archbishop Marcos Gregorio McGrath, revealing a society in which 38 percent of the families lived in poverty and in which 22 percent of the population failed to earn at least US$200 a month--the minimum amount considered necessary to purchase a basic basket of goods. The document went on to criticize many measures taken by the Torrijos government in the 1970s. At the same time, however, the publication recognized that remarkable progress had been made in other areas, such as a decline in infant mortality rates, a rise in the literacy rate, and social security coverage for 60 percent of the population as compared with only 12 percent in 1960. Indeed, the economic policies instituted by the Torrijos regime (1968-81) were pivotal in Panama's history, but the results were mixed.

Data as of December 1987