Panama ULE(Pv Specialeconomic Report

ReportNo. 3833-PAN Panama ULE(pv SpecialEconomic Report

Public Disclosure Authorized MetropolitanUnemployment

June7, 1982 Latin America and the CaribbeanRegional Office FOR OFFICIALUSE ONLY Public Disclosure Authorized Public Disclosure Authorized

Public Disclosure Authorized Document of the World Bank

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosedwithout World Bank authorization. Currency Equivalents

US$1.00 = 1.00 Balboa (B/.)

Panama uses the U.S. Dollar as currency and has no Central Bank. The emission of Balboas is restrictedto coins.

Glossary of Abbreviations

CAT - Certificadode Abono Tributario (Tax' ertificate)

CFZ - Colon Free Zone A0"f0 (Zona Libre de Colon)

COkINA - CorporacionFinanciera Nacional (Finance Corporation)

ILO - InternationalLabor Organization

IMF - InternationalMonetary Fund

Fiscal Year

January 1 to December 31 FOR OFFICIAL USE ONLY

SYNOPSIS

The Panamanian economy has recovered from the recession of the mid-1970s, mainly as a result of renewed private sector confidence. The public sector deficit has been reduced and the growth of the public external debt in relation to GDP has been reversed. However, recent changes in the internationalenvironment could slow the growth of the dynamic sectors and of the economy as a whole. Meanwhile, Panama is facing a problem of high unemploymentin the MetropolitanArea and this could become worse if output growth and job generationare not increased. The report identifiesthe main changes in policy needed to reduce the constraintsof a small domestic market and the anti-employmentbias inherent in the present system of incentives and labor regulation. These changes, coupled with an appropriatepublic investmentprogram, could enhance growth and employmentprospects in the 1980s.

PANAMA

SPECIAL ECONOMIC REPORT

METROPOLITAN UNEMPLOYMENT

Table of Contents

Page Number

COUNTRY DATA

SUMMARY AND CONCLUSIONS ...... i-ix

I. INTRODUCTION ...... 1

II. RECENT ECONOMIC PERFORMANCE ...... 2

III. UNEMPLOYMENT IN METROPOLITAN PANAMA ...... 11

A. Why Focus on the Metropolitan Area ...... 11 B. Composition of the Unemployed ...... 14 C. Metropolitan Labor Force in the 1980's ...... 15 D. Trends in Metropolitan Employment ...... 20 E. Employment Policy Implications ...... 25

IV. GROWTH AND EMPLOYMENT PROSPECTS IN THE INTERNATIONAL SERVICE SECTORS ...... 28

A. The Financial Sector ...... 28 B. Tourism ...... 31 C. Colon Free Zone ...... 33

V. The Manufacturing Sector ...... 37

A. Recent Trends in Growth and Employment ...... 35 B. Propects for Growth ...... 36 C. The Prospects for Employment in Manufacturing .... 42

This report was produced by an economic mission to Panama in September and October 1980 and a short updating mission in January 1982. The draft report was discussed with the Government in late March 1982. The members of the 1980 mission were Gladstone Bonnick (Chief); Ismael Dalla (the Manufacturing Sector); Marienne Lehwing (Human Resources Specialist); Luis Garcia (Public Investment Program); Miren Etcheverry (Research Assistant); and Bertha Cassorla (Secretary). TABLE OF CONTENTS (Continued)

Page Number

VI. THE PUBLIC SECTOR AND THE INVESTMENT PROGRAM ...... 46

A. The Need for Austerity in Public Investment ...... 46 B. The Public Investment Program 1982-1985 ...... 50 C. The Employment Impact of the Program in the Metropolitan Area ...... 51 D. Key Decisions to be Made ...... 53

VII. ECONOMIC GROWTH PROSPECTS AND CREDITWORTHINESS ...... 57

STATISTICAL APPENDIX ...... 60

MAP Page 1 of 2 COUNTRY DATA - PANAMA

LAND AREA POPULATION DENSITY (mid-1980) Total 77.1 thousand km2 1.8 million (mid-1980) 23.8 per km4 Agr. 17.3 thousand km2 Rate of Growth: 2.5% (from 1970 to 1980) 106.1 per km2 of Arable Land

POPULATION CHARACTERISTICS HEALTH Crude Birth Rate (per 1,000) 27.1 Population per Physician 1,008. Crude Death Rate (per 1,000) 4.1 Population per Hospital Bed 250 Infant Mortality (per 1,000 live births) 21.2

INCOME DISTRIBUTION DISTRIBUTION OF LAND OWNERSHIP % of National Income, Highest Quintile 52.7 % Owned by Top 10% of Owners Lowest Quintile 2.1 % Owned by Smallest 10% Owners

ACCESS TO SAFE WATER ACCESS TO ELECTRICITY (1980) % of Population 79.7 % of Population 64.8

NUTRITION EDUCATION (1980) Calorie Intake as % of Requirements 101.0 Adult Literacy Rate 88.1% Per Capita Protein Intake 61.0 gms. Primary School Enrollment 88.0%a/

GNP PER CAPITA IN 1980 b/ US$ 1730

GROSS NATIONAL PRODUCT IN 1980 ANNUAL RATE OF GROWTH (% constant 1960 prices) US$ Mln. % 1965-70 1970-75 1975-80 .GDP at Market Prices 3,390.9 100.0 7.7 4.9 4.5 Gross Domestic Investment 926.3 27.3 16.5 5.1 0.6 Gross National Savings 694.3 20.4 17.6 12.4 -1.7 Current Account Balance -232.0 6.8 - - - Exports of Goods, NFS 1,614.8 47.6 7.8 3.5 - Imports of Goods, NFS 1,702.9 50.2 9.1 1.6 -

OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1980

Value Added Labor Force V. A. Per Worker US$ Mln. % Thou. % US$ %

Agriculture 559.5 16.5 142 27.3 3,940 60 Industry 796.9 23.5 65 12.5 12,260 188 Services 2,034.5 60.0 313 60.2 6,500 100 Total/Average 3,390.9 100.0 520 100.0 6,520 100

PUBLIC FINANCE PUBLIC SECTOR (Bl. Mln.) % of GDP 1981 1981 1978-80

Current Receipts 1,185 30.8 26.9 Current Expenditure 1,024 26.6 26.3 Current Surplus 161 4.2 0.6 Capital Expenditures 395 10.3 10.9

a/ Since partial change to eight years of basic school allocated students from primary to secondary track the enrollment ratios do not accurately reflect percentage of relevant age cohorts actually in a school. b/ 1981 World Atlas Methodology. Not available Page 2 of 2 COUNTRY DATA - PANAMA

MONEY, CREDIT AND PRICES 1977 1978 1979 1980 1981 (Million B/. outstanding, end period)

Money and Quasi Money 792.2 944.9 1,162.4 1,454.4 1,718.2 Bank Credit to Public Sector, Net 315.1 167.3 257.7 265.1 390.1 Bank Credit to Private Sector 1,369.5 1,537.3 1,839.4 2,215.8 2,617.9

(percentage or index numbers)

Money and Quasi Money as % of GDP 36.5 38.4 40.9 42.9 44.6 Consumer Price Index (1977 = 100) 100.0 104.2 112.5 128.0 137.4 Percentage changes in: Consumer Price Index 4.5 4.2 8.0 13.8 7.3 Bank Credit to Public Sector 0.6 -46.9 54.0 2.9 47.2 Bank Credit to Private Sector 7.8 12.2 19.7 20.5 18.1

BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1978-80) 1970 1975 1981 US$ Mln. (Millions US$) Bananas 66.4 Exports of Goods, NFS 383.2 851.5 1,608.1 Refined Petroleum 71.6 Imports of Goods, NFS 422.5 992.1 1,785.7 Sugar 37.5 Resource Gap -39.3 -140.6 -177.6 Shrimp 39.6 Beef 2.3 Factor Income (net) -28.4 -20.8 -180.5 All other goods 116.7 Net Transfers 4.0 -5.0 -26.1 Total 334.1 Balance on Current Account -63.7 -166.4 -384.2 EXTERNAL DEBT, DECEMBER 31, 1980 Direct Foreign Investment (net) 33.4 10.2 30.0 (Million US$) Net MLT Borrowing 86.4 175.8 76.3 Public Debt, Incl. Guaranteed 2,276.9 Other Capital (net) -52.1 -149.5 114.3 Non-Guaranteed Private Debt - Total Outstanding and Disbursed 2,276.9 Increase Net in Reserves -4.0 129.9 163.6 = increase) DEBT SERVICE RATIO FOR 1980

30.9%

RLATEOF EXCHANGE IBRD) LENDING, MARCH 31, 19-82 (Million US$) US$ 1.00 - B/. 1.00 B/. 1.00 = US$ 1.00 Outstanding and Disbursed 166 Undisbursed 145 Outstanding inc. Undisbursed 311

June 2, 1982 PANAMA

SPECIAL ECONOMIC REPORT ON

METROPOLITANUNEMPLOYMENT

SUMMARY AND CONCLUSIONS

A. Recent Performance i. The history of the Panamanian economy before 1978 has been amply documentedin earlier Bank reports and need not be repeated in detail here. 1/ The period 1960 to 1981 may be divided into three sub-periodsaccording to the behavior of the economy. Between 1960 and 1973 GDP grew at an average rate of 7 percent, and employment expanded rapidly. In the period 1974 to 1977 economic growth fell to an average of under 2 percent per annum and job creation came to a standstill. Subsequently,growth recovered to an average of 5.5 percent during 1978 to 1981 with a salutary effect on job generation. During the first period, buoyant demand for internationalcommercial and financial services permitted the expansion of the Colon Free Zone and the establishmentof internationalbanking, while a strategy of import substitution encouraged the developmentof an industrial sector. The private sector flourished and a constructionboom transformedthe capital city. Unfortunate- ly the collapse of this constructionboom and the oil price rise in 1973, falling private sector confidencedue to the Canal negotiationswith the U.S., labor and price policies, and the Government'sinvestments in commercial ventures (sugar, citrus, and cement) provoked a recession in private investmentwhich lasted until early 1978. ii. By the beginning of 1976 the rapid increase in the public external debt and rising unemploymentbegan to cause concern among policymakers. In December of that year the Government suspended some provisionsof the labor code and introducedadditional tax incentives to stimulate private investment. In 1977 the Governmentcurtailed the growth of current expenditures,cut public sector investment,and increased taxes and public utilities tariffs in an effort to reduce the public sector deficit and slow the growth of the public debt. Public finance improved in 1977, but the private investment response was limited by continuinguncertainty over the protracted canal negotiationsand anxiety over the role of the private sector, which the more frequent Government- business dialogue failed to reduce. Before the end of 1977 Governmentintro- duced a special employment program providing employment/incomesupport of B/lOO per month for nearly 25,000 workers. Early in 1978 the uncertainty over Canal negotiationswas dispelledwith the signing of the new Panama Canal Treaties providing for the reversion of the former Canal Zone to Panamanian control on October 1, 1979. Later in 1978, the reins of public administration passed from the military to a civilian Government. The new administration

1/ See Report on the Economy of Panama - No. 275-PAN; Nov. 1973; Updating Report on the Economy of Panama - No.1066a-PAN,May 1976; and Panama's Development in the 1980's: A Special Economic Report - No. 2306-PAN; July 1979. - ii - quickly affirmed its intention to continue to stimulateprivate investment by enhancing business confidencethrough an improved dialogue among government, business, and labor; and early in 1979 it initiatedefforts to strengthen the public finances. iii. The Panamanian economy showed signs of recovery beginning in 1978, although the recovery slowed after 1979, along with the world economy. GDP growth was 6.5 percent in 1978, 7.0 percent in 1979, 4.9 percent in 1980 and 3.6 percent in 1981. The public finances have shown a marked improvement, with current revenues of Central Government increasingby 95 percent between 1978 and 1981, compared with 37 percent between 1976 and 1978, and the public sector's deficit falling from 15 percent of GDP in 1978 to about 6 percent in 1980 and 1981. Prices acceleratedduring 1979 and 1980, but slowed in 1981. With the resurgence in economic activity there has been a rise in employment in the private sector, notably in construction,services and manufacturing,but no hard data are yet available for after 1980. The net improvementin total employment,if any, was small because of discontinuance of the Government'sspecial employmentprogram, which at its terminationin February 1980 employed over 17,000.

B. UnemploymentSituation and Outlook iv. The current rates of unemploymentin Panama and the outlook for the near future point to an increasinglyserious problem. Adjustment of the 1980 Census data to include some economicallyinactive population,who are clearly part of the hidden unemployed, leads to an estimatedunemployment rate of 15 percent for Panama and 16 1/2 percent for the metropolitanarea. The correspondingabsolute numbers of the unemployed would be 87,600 and 53,800 respectively. These estimates are consistentwith those unofficial surveys which have always showed much higher rates than surveys which exclude the 'discouragedworker" effect. Projectionssuggest that the metropolitan rate might exceed 20 percent by the end of 1985, if certain tendenciesin the Panamanianeconomy or affecting it from outside do not change. First, there has been a decline in self-employedworkers (small farmers) in agriculture during the seventies and a high rate of rural to urban migration. Second, external circumstancesdo not favor the continued rapid growth of the dynamic, internationallylinked sectors. Third, over time the employment per unit of output has been decliningand the investmentcost per job has been rising. This last in part reflects the effect of domestic economic policies relating to labor, taxation, price regulation,and incentives. v. The Governmenthas indicated that it will follow a "balanced rural/ urban growth" approach, and this approach which seems to guide its public investmentprogram, is probably justifiableon grounds of inter-regional equity and national integrationover the longer term. This approach correctly and realisticallyrecognizes the importance of the relationshipbetween migration into the metropolitanarea and the rural disadvantagein employment opportunity. However, the solution of the unemploymentproblem over the medium term also requires recognitionof the fact that the majority of the - iii - unemployed are in the metropolitanarea, are mostly young, include a large proportionof females, have no farming skills or interest,and would be reluctant to move out of the metropolitanarea. It should also be recognized that the outlook for rural job generation in the near/medium term is very limited, and any realisticassumption regarding it would still leave a large requirementfor job generation to be met within the metropolitanarea. Thus, even with successful rural developmentabout three quarters of the total additional jobs required over the next few years will have to be found in the metropolitanarea. Fortunately,much of the new opportunityfor Panamanian growth and job generationderives from the land and infrastructure in the canal area, which have recently reverted to Panama, as well as from infrastructurebeing built in the metropolitanarea. These additional resources are mainly complementaryto the expansion in the internationalservice sectors - which may be less dynamic in the future but have not exhausted their potential - and to manufacturing,which has been less dynamic in the past but which could now play a greater part in Panamanian growth and employment generation. It is important to make developmentpolicy consistent with these opportunitiesand objectives.

C. Development Strategy vi. The Government of Panama places major emphasis on investment and production by the private sector as the primary source of future employment and GDP growth. This is partly based on the recognitionthat a larger role for the public sector would not be consistent with the objective of further reducing the level of the public external debt from the near 80 percent of GDP reached in 1978, and partly on the persistentlypoor profitability record of public sector commercial investmentsmade during the seventies. Given the role assigned to the private sector, the main focus of Government involvementis in determining the policy environmentwithin which the private sector operates, and in conducting a program of public investment in infrastructure which is complementaryto and supportive of private economic activity. This study has sought to review the main elements of the policy environmentin order to identify apparent inconsistencieswith the goal of procuring vigorous and sustained growth in GDP accompaniedby adequate employment expansion, and to suggest appropriate changes. It also examines the Government'svery tentative and preliminarypublic investment program for 1982-86 to determine both its feasibilityand orientation toward growth and employment objectives. vii. The need for changes in both the policy environmentand investment program is partly justifiedby the fact that, given past trends and or recent changes in internationalconditions, the Panamanian economy is unlikely to grow sufficientlyfast to generate enough additional jobs to prevent a rapid and potentiallydestabilizing increase in unemploymentin the metropolitan area by the middle of this decade. Panama's internationalservice sectors, which have been the main source of growth in employment in the seventies, are expected to slow down in the eighties. The financial sector, which already has 110 banks, is likely to be adversely affected by recent changes in United States and Japanese banking regulationsfacilitating the development - iv - of free zones for internationalbanking activitieswithin their borders. Such zones will not only make it unnecessary for their banks to locate their internationalbusiness in offshore centers, but will compete with established centers like Panama in providingalternative locationsfor offshore activities of banks with head offices in other countries. The Colon Free Zone, one of the importantpoles of developmentof the internationalsector, formerly constrainedby the unavailabilityof land, now is expandingrapidly. Over a four year period it could well generate 3,000 additional jobs to be added to a similar amount provided in the past three years. A drydock at Balboa and port developmentsat Cristobal and Coco Solo could generate as many as 1,500 new jobs. In tourism, additional room capacity warranted by growth opportunities created by a new convention center could generate 3,000 additional jobs directly within the sector and additional indirect employmentof 2,000 in food service, transport, entertainmentand commercial activities between 1982 and 1986. However, the additional 3,000 jobs per year forthcomingin the international services sector over the next few years would leave over three-quarters of the annual increment to the metropolitanlabor force to be absorbed in other, usually less dynamic sectors. In the constructionindustry the outlook is affected by the fact that Panama now appears headed into the downswingof a constructioncycle after an upswing which began in 1979 and lasted into 1981. At best, this industry is unlikely to do more than retain its labor force, albeit with greater underemployment. In commerce, the low responsivenessof employment to increased activity and the fact that the recent vigorous recovery would already have had its impact on employmentmake it unlikely that future expansionwill be accompaniedby significantjob generation. Manufacturing has been an important source of metropolitanemployment, but during the seventies the annual average increase in the number of jobs was only about 1,000. This suggests that unless past trends are changed the unemployment situationwill become worse. viii. It is clear that there remain untapped opportunitiesto improve GDP growth and employment generation. By and large the importantmarket oppor- tunites lie in exports. Expansion in exports will generate employmentdirectly in the exporting industries and in linked industries supplying inputs, as well as indirectlythrough the multiplier effect as income earned by Panamanians from exports is spent, increasing demand and employment in industriesproduc- ing for the domestic market. Obviously, the constraint of a small internal market remains. The market constraint can be relaxed only through a fundamental re-orientationtoward exports, a verity which the Government has recognized in its assembly industriesprogram. With favorable geographic location, superior financial and communicationservices, and an important external commercial sector, Panama can gain access to necessarymarkets provided it will produce for export at competitivecost. The US-proposedCaribbean Basin Initiative- if it moves from proposal to legislation- would only accentuate the possibilities behind such a strategy. The Government correctly accepts that foreign entrepreneurs and enterprisescould play a useful role in the developmentof the export sector along with a reactivateddomestic private sector. Present infrastructure requires only minimal upgrading to provide adequate sites, transportation, water and power for industrialexpansion. And in metropolitanPanama there is available labor with a good basic education. The industrialdevelop- ments in Colon expect to generate 1,000 new jobs yearly. With suitable policies v

three times this number of jobs in industry can be provided in other parts of the area. However, a more comprehensivereview of taxes, incentives,labor and price regulationsis required in order to identify and undertake needed change to give impetus to a continuationand intensificationof the recent recovery trend. ix. The present policy environment is characterizedby the existence of a system of incentives,price regulations,a labor code and wage regulations, and manpower developmentarrangements. Panamanian developmentstrategy has emphasized the use of investment incentives. Incentiveshave been used to encourage investment in manufacturing,exports, tourism, banking, re-insurance, the Colon Free Zone, and more recently special temporary incentiveswere given for constructionand creation of employment. The usual mechanism for granting incentives is a contract between the Government and the investor under which the investor undertakes to carry out a given investmentproject according to an agreed timetable in return for which the Government grants certain benefits. These benefits include a wide range of facilities for reduction of tax liability, e.g., exemptions and exonerationsfrom income tax and import duties, reduced rates, tax credit certificates,accelerated depreciation and loss carry forward arrangements. In addition, benefits usually include protection against foreign competitionthrough import tariffs and quotas, technical and financial assistance,and subsidizedphysical facilities,e.g., industrial parks and subsidized training of the labor force in response to specific needs of the investor. The system is in many ways inconsistentwith the present day objective of rapid growth with adequate employment creation. Some of these are the following:

(a) Some incentives such as re-investmentallowances and accelerated depreciationfavor the intensiveuse of capital relative to labor. This bias against labor could be reduced if favorable tax treatment were extended to working capital as it is to fixed capital. Profit re-investedin working capital could be exempted from tax to an extent related to the additional employment generated. Duty-free entry of capital equipment also introducesa bias which would be reduced if a minimum tariff were also extended to capital goods. This minimum tariff without exonerationswould provide additional revenues to finance the above-mentionedextension in incentives.

(b) The provision that interest earned on savings and time deposits be tax free to the depositor creates a bias in favor of investment in such forms and against investment yielding a taxable profit, as in the case of manufacturing. Also, the exemption from tax of that interest earned on loans to the National Governmentand any of its autonomous institutionsputs the private sector at a disadvantagein getting bank financing, especially since banks have ceilings on country exposure.

(c) Effective protection of Panamanian final goods productionhas often been excessive and has probably dampened interest in exporting. Exonerationsfrom tariffs on intermediategoods and inputs have not favored the developmentof backward linkages. The Government already is consideringa proposal to replace quotas with tariffs. - vi -

This step would be a useful first one in a sequence involving the elimination of exonerations and duty-free importation of intermediate goods and raw materials by the establishment of a minimum tariff, followed by the reduction of high tariffs toward a low uniform band.

(d) Regarding the administration of incentives, the popular perception is that the individual formal contract allows entrepreneurs to receive different levels of benefit depending on their strength in negotiating with the state. Present application procedures are too complicated; too much information is requested and not used. This raises the cost of access to incentives, discriminates against small firms and delays investment projects. General rules allowing all to benefit from tax or other incentives would reduce uncertainty, give the appearance of fairness, and reduce the time and cost of negotiating a contract. x. While incentives have had an important influence on development, other Government policies, e.g., price regulation and labor policy, have also had a profound impact on the policy environment, and require modification to better serve a development policy of growth with employment. Price regulation involving the control of prices, the ensuring of "adequate supplies," and the control of quality is regarded by the Government as an instrument of social justice; but is viewed by businessmen as eroding profitability, favoring consumption over savings, and discouraging investment. The effects of price regulation are pervasive, partly by reason of the large number of items and sectors affected as well as the wide powers of the regulatory agency including the control through quotas of imports and exports of necessities. Perhaps more important is the frustration of the role of prices as signals to both producers and buyers, which in a market economy increases the element of uncertainty in investment decisions. This is exacerbated by the long time lapse between an application for adjustment and a ruling by the Price Regula- tion Office. If the main objective is to protect the poorer classes from exploitation, then the focus should be on a limited list of necessities. In setting prices of necessities, a uniform and reasonable rate of return on capital consistent with production policy should be used. Once tariffs replace quotas, both price regulation and quality monitoring will become less necessary since the availability of competing imports will provide local producers with the impetus to keep quality and prices reasonable. As an interim measure, allowing businessmen greater freedom to raise prices, subject to review by the Price Regulation Office, may help to defuse business opposi- tion to price regulation. xi. The regulation of the labor market in Panama is a negative factor in private development decisions, and very likely discourages foreign investors by reinforcing Panama's relatively high wage levels. While the bias of the labor code is generally pro-labor, it is the high severance pay, the curtail- ment of the freedom to adjust employment, and wage-based welfare taxes increasing the cost of labor by more than 26 percent, which are cited as the main discentives to employment expansion. Minimum wage regulations are not regarded as pushing up wage costs but are unduly detailed. The minimum wage could relate to sectors in which no other official body is involved in setting rates, and could be a single - vii - figure for urban and another for rural, based on the cost of procuring a determined minimum standard of living. With tripartite commissions now involved in wage negotiations it can be left to such negotiations to determine the hierarchy of rates in industries like construction as well as the regional differences warranted by differences in cost of living. Ad hoc increases in wages decreed by the Government and intervention in collective agreements introduce a source of uncertainty which probably leads entrepreneurs to use higher expected wage costs in their project planning, and could lead to a preference for capital intensive technological options as well as reduced profitability expectations and lower investment. Such policies conflict with the policy of increasing employment by attracting new firms to locate in Panama. xii. There are also positive aspects of labor policy tending to increase productivity and reduce labor costs, and these should be reinforced where possible. The recently stressed tripartite approach to industrial disputes has been successful in maintaining a high level of peace in industrial relations. Expansion of training in response to identified needs of firms does reduce the cost of establishing industrial activities. Recent improvements in the National Employment Service making it more accessible to both workers and employers should reduce recruitment/placement costs and lower frictional unemployment. Also, some recent labor legislation, e.g., the provision that new firms are not obligated to enter collective agreements during the first two years of operation, and the exemption of small firms from some severance requirements, are clearly desirable improvements in the policy environment.

D. The Public Investment Program xiii. Given the financial constraint on the public investment program and the expanded role required of the private sector, complementarity with private expansion and employment generation should be given a high priority among criteria for project selection. A very preliminary 1982-86 public investment program, examined by the mission to determine whether it is of realistic size, appears to be too large, given the goals of further reduction of the public sector deficit and of the public external debt relative to GDP. A more prudently financed program would be closer to B/ 650 million yearly compared to the present B/ 800 million under preliminary consideration. xiv. Since Panamanians already enjoy a high level of social services and the main social problem is now unemployment, which can only be solved through economic expansion, economic infrastructure (including skill creation) should have a distinct priority over social investment. Within the economic group, those infrastructure projects which would remove obstacles to economic expansion should have higher priority over those which do not, and among obstacle removers those associated with greater job generation should have highest priority. - viii -

E. Main Recommendations xv. The changes in the policy environmentwhich seem useful may be summarized as follows:

(a) The structure of effective protectionwould be adjusted by replacingall import quotas with tariffs, by introducinga minimum tariff without provision for exoneration except through a duty drawback on imported inputs embodied in exports, and by reducing high nominal tariffs. The Government is consideringmost of these proposals very seriously.

(b) State interventionin wage determinationcould be reduced in the future, except in the framework of tripartite negotiations.

(d) The system of severance pay should be revised to redistributethe burden and to provide for contributionson a current basis into a central fund. Again, the Government has begun considerationof such a scheme.

(e) To reduce the capital intensive bias inherent in present tax incentives it is suggested that favorable tax treatment, e.g., investment allowances, be extended to working capital.

(f) The favorable tax treatmentof interest on bank deposits could be extended to interest paid by firms (say, up to (LIBOR) in manufacturing and agriculture in order to reduce the bias against investment in productive capacity.

(g) Price controls could be restricted to a short list of necessities, with greater reliance on competitionfrom imports to regulate price and quality. In administrationof prices the review rather than the prior consent approach should be used wherever possible.

(h) Training assistancenow being offered to foreign investorscould be extended to all firms presenting a valid program for employment expansion.

(i) The individual contract for incentives should be replaced by a simpler applicationprocedure and incentives should be granted under clear, uniform rules.

(j) It seems desirable to increase the promotional efforts overseas to attract industry to Panama. The Government is keen to both simplify incentives and promote new exports. Nevertheless,it - quite correctly - is approachingwith great care the establishmentof an export promotion institute. All to often, an export promotion institute quickly becomes another layer of bureaucracythat retards export growth. The Government prefers to stress, at this stage, the sending of dynamic individualsabroad to promote Panama's exports and investment potential. - ix -

(k) Panama should also determinewhether availabilityof sites and primary infrastructureis likely to be a bottleneckto hotel expansion,and if so make provision for site acquisitionand developmentprojects in Panama City for later resale or lease to hotel developers.

F. Growth, Employment and Creditworthiness xvi. It is difficult to predict the quantitativeimpact all these adjustments in policy would have. While the experience in other countries suggests that over time GDP growth and employmentwill be favored by these changes, the exact impact will also depend on the growth of the internationaleconomy. Unfortunately the outlook for the developed countries for the near term is not optimisticand Panamaniangrowth and job generationcould be adverselyaffected. Nevertheless, Panama could continue to have GDP growth in the 4 to 5 percent range, possibly higher if the indicatedadjustments are made. Yet this higher growth is unlikely to be attainablesoon enough to prevent some increase in unemployment. Hence provision should be made to assist the unemployed,possibly through greater opportunityfor productive self employment,for example, loans to purchase tools for artisanal activities. xvii. Because of its use of the US dollar currency,Panama's creditworthiness is more a function of its public finances than its balance of payments. During 1980-81, Panama's public finances improved dramatically,and they improved as a result of determinedGovernment effort. While the present, very tentative,public investment program appears too high to be financed without increasing the now greatly reduced public deficit, the Government shares the mission's concern for expenditurecaution, and is reviewing the 1982-86 program and its possible financing. Panama's creditworthinesshas recently improved;in spite of a more limited growth prospect its creditworthinessis likely to continue to improve if the cautious and careful policies of 1980-81 continue.

I. INTRODUCTION

1. The developmentof the Panamanian economy before 1978 has been amply documented in earlier World Bank reports and there is no need to repeat this material here. 1/ The present report, based on the findings of an economic mission to Panama in September 1980 and of a brief updating mission in January 1982, reviews the economy's recent behavior,examines employment requirements and job creation possibilitiesin the MetropolitanArea, and analyzes the industrial and labor policy environmentto identify adjustmentsto enhance job creation.

2. Panama's future economic developmentfaces two formidable tasks. These are the reduction of dependence on imported sources of energy and the provision of employment for a rapidly growing labor force. Panamanian dependence on imported petroleum and the large increases in its price have had a negative effect on real income, while the slowdown in economic growth, for a variety of reasons, includingrecession in the world economy triggered by the massive oil price increases of 1973/74, has reduced the rate of growth of employment to well below the growth of the labor force. Solution of the energy problem has consistentlyreceived a high priority; significantprogress has been made in the shift of electricitygeneration from a thermal to a hydropowerbase and in the slowing of demand for transportationfuel through vigorous conservationmeasures. Unemploymentwas addressed through a special, public employment program, a high level of public investment and the provision of incentivesfor private investment.

3. The special employmentprogram has been discontinuedand the level of public investment has been reduced in keeping with the need to curtail further growth of what has become a large and burdensome public external debt. Hereafter the outlook for job creation will depend much more than previously on the growth of the private sector, which in turn may be affected by its perception of the policy environmentwithin which it operates as well as by the degree of complementaritybetween public and private investment.

1/ Report on the Economy of Panama, No. 275-PAN, November 13, 1973; Updating Report on the Economy of Panama, No. 1066a-PAN,May 13, 1976; and Panama's Developmentin the 1980's: A Special Economic Report, No. 2306-PAN,July 20, 1979. - 2 -

II. RECENT ECONOMIC PERFORMANCE

4. During the period 1978 to 1981 the Panamanian economy made a significant recovery from the slump of 1973-77. GDP grew by 6.5 percent in 1978, by 7 percent in 1979, about 5 percent in 1980, but by less than 4 percent in 1981. This compares with an average annual growth of only 1.6 percent during 1974-77.

Table 1: SELECTED SECTORAL GROWTH RATES, 1970-81 (percent per year)

1970-73 1974-77 1978-81

GDP (market prices) 7.2 1.6 5.5

Agriculture 3.4 2.5 -0.6 Manufacturing 6.3 -4.5 5.6 Construction 12.2 -5.9 3.6 Public Utilities 4.0 7.1 8.7 Transp., Storage, Communications 10.5 10.8 9.5 Commerce 6.7 -2.2 10.2 Financial Intermediation 16.3 10.2 12.0 Public Administration 5.8 6.5 5.0 Other Services 6.4 2.9 4.7 Services to Canal Area 2.1 -1.0 -1.7

Source: Table 2.1

5. The growth of the economy was favored throughout the seventies by the persistent and growing demand for internationaltransport, communications, and storage services, as well as the continued growth in internationalbanking and reinsurance. General recovery has been due principallyto the strengthening of confidence associatedwith the signing of the new treaties governing the Panama Canal, the smooth transition to a civilian government,and the delayed effects of the change in economic policies at the end of 1976, involving the suspension of parts of the labor code and the introductionof new incentives. The improvementin confidencewas reflected in greater responsivenessof local entrepreneursto opportunitiesin commerce,manufacturing, and construction--thevery sectors which had slumped during the mid-seventies. In 1978 commerce, which had declined by over 2 percent during 1973-77, grew by nearly 14 percent; manufacturing,which had declined by 4.5 percent, grew by nearly 6 percent; and construction,which had fallen at the rate of nearly 6 percent, ceased to decline. The turn-aroundin these sectors and in sale of services to the canal area, coupled with continuingbuoyance in the internationalservice economy were the basis for recovery in 1978. In 1979, intensifiedconstruction activity and rapid expansion in manufacturing and public utilities were more than adequate to offset a slowdown in growth of financial intermediationand of services to the canal area. Although constructioncontinued to improve and banking showed renewed vigor, the growth of GDP slowed during 1980-81 as a result of a decline in sales of services to the canal area and the effect of the 1979 oil price increases on the demand for outputs of manufacturing,commerce and transport,etc. In 1981 manufacturing and constructionfell; but banking, public utilities, and international commerce continuedbuoyant. The agriculturalsector, with a record of output stagnation since 1975 has not contributedto the recent improvementin the economy.

Table 2: DISTRIBUTIONOF EXPENDITURESON GDP (AT CURRENT PRICES) (percent)

Est. 1976 1977 1978 1979 1980 1981

Consumption 74.3 80.3 76.6 81.7 75.3 76.2 Private Sector 58.7 64.8 61.5 66.2 60.0 61.9 Public Sector 15.6 15.5 15.1 15.5 15.3 14.3

Gross Investment 33.0 23.6 28.9 26.6 27.3 28.3 Private 15.3 6.8 13.0 14.7 13.3 12.9 Public 16.3 15.4 13.3 7.8 10.0 11.5 Variation in Inventories 1.4 1.4 2.6 4.1 4.0 3.9

Exports of Goods and Services 41.9 42.6 39.6 40.2 47.6 41.8 Imports of Goods and Services -49.2 -46.5 -45.1 -48.5 -50.2 46.4

Total GDP 100.0 100.0 100.0 100.0 100.0 100.0

Net factor income from abroad -2.7 -2.8 -2.0 -2.8 -4.2 -4.7

Gross National Saving/GDP 23.0 16.8 21.3 15.4 20.5 19.1 (not included net tranafers from abroad)

Source: Table 2.2 and mission estimates.

6. Viewed from the expenditureside, the early dynamic factor in the recent behavior of the Panamanian economy was gross private fixed investment. After declining graduallybetween 1973 and 1976 priva-tefixed investment fell dramaticallyfrom 15 percent of GDP in 1976 to 7 percent in 1977. It recovered to 13 percent of GDP in 1978, reached almost 15 percent in 1979 and fell back to about 13 percent in 1980-81. The recovery was begun by an office building boom. There was an 85 percent increase in real investment in non-residential construction in 1978 and a further increase of 56 percent in 1979. Also, there was a significant increase in purchases of machinery and equipment and a buildup in inventories in 1978 and 1979 which was also confirmed in the growth in imports of machinery and transport equipment and manufactured goods. Meanwhile, gross fixed investment in the public sector reached a peak of over 15 percent of GDP in 1975-76, declined to under 8 percent of GDP in 1979, and recovering to 10-11 percent of GDP in 1980-81. The recovery in private investment was financed by a significant rise in gross national private savings and by an increase in use of foreign savings, the latter partly reflected in higher banking system net credit to Panamanian customers.

7. The recent intensification of economic activity has been accompanied by an increase in the deficit on current account of the balance of payments from 7.2 percent of GDP in 1977 to almost 12 percent in 1979; in 1981 the deficit was still 10 percent of GDP, about 2.5 times as high in dollars as it was in 1977. Part of this deterioration was due to the increase of about US$100 million in petroleum imports resulting from oil price increases in 1979. Further price increases in 1980 added US$85 million to the cost of oil imports, but with the reduced fuel consumption associated with increased hydroelectric generating capacity the volume of oil imports in 1981 fell by almost 30 percent; the value fell by US$40 million. The indifferent export performance in 1979 attributable to hurricane damage to bananas also contributed to the deterioration in the current account. In 1980 exports increased by 19 percent thanks to high sugar prices and increased shipments of fish meal, lobsters, coffee, and textiles, but with a 13 percent increase in prices of imports and a 7 percent increase in the quantity of imports the merchandise deficit may have widened. Estimates for 1981 suggest that although imports slowed, the volume of many exports fell. Domestic exports likely fell by 5-10 percent in dollar terms. This does not mean that Panama has a payments problem, for by using a convertible foreign currency as its domestic circulating medium, the supply of money and in turn the level of money income automatically undergo continual adjustment to close a gap in the current account if this were necessary. In reality, the development of Panama as an important international banking center as well as the public sector's ability to borrow abroad have made capital flows very important in reducing the need for adjustments in expenditure and income in response to deficits in the current account. In short, although adjustment would be automatic, Panama can postpone it by borrowing and has apparently done so to a certain extent. - 5 -

Table 3: GAINS AND LOSSES FROM TRADE (conventional approach)

Gain/loss GDP $ million (proxy 1975 base) Gain as a Terms of Trade 1975 prices $ millions GDP percent

1975 100.0 0 1934.2 0 1976 94.5 -14.9 1876.2 -0.8 1977 84.7 -45.3 1962.5 -2.3 1978 77.0 -72.0 2090.0 -3.4 1979 94.7 -14.2 2236.3 -0.6 1980 114.7 +39.3 2345.9 +1.7

Sources: Controller General and mission estimates.

8. The increase in the current account deficit was not entirely due to the resurgence in economic activity. Part was due to changes in the terms of trade against Panama, which resulted in real income losses reaching a peak of 3.4 percent of GDP in 1978, according to the conventional measurement of the decline in purchasing power of exports. Indeed, alternative methods focussing on the purchasing power of imports or on price-related increases in merchandise deficit suggest a loss in 1978 of 7 percent to 10 percent of GDP. 1/

9. Panama's adjustment to the deteriorating terms of merchandise trade consisted partly in increased exports of non-factor services associated with the Colon Free Zone, tourism, and international banking; and partly in a reduction of expenditures. Public sector real capital formation was reduced by a half between 1976 and 1980, and the growth of real consumption in the public sector was slowed significantly, although the pattern of growth of the public debt suggests that initially there was an effort to postpone the adjustment by borrowing overseas. Private investment and consumption were spared the main burden of adjustment and continued to increase slightly in real terms after 1977.

1/ See Annex A - Gains and Losses from Trade. Table 4: COMPARISON OF PANAMANIAN/USA PRICE MOVEMENTS 1975 = 100

Wholesale Consumer Wages: Hourly (MFG) USA Panama USA Panama USA Panama

1975 100.0 100.0 100.0 100.0 100.0 100.0 1976 104.6 107.8 105.8 104.0 108.1 105.4 1977 111.0 115.5 112.7 108.7 117.6 110.3 1978 119.7 121.8 121.2 113.3 127.7 113.7 1979 134.7 138.8 134.9 122.3 138.7 122.6 1980 153.6 160.2 153.1 139.2 150.5 133.6 1981 167.5 176.2 169.0 149.3 165.3 n.a.

Sources: Office of the Controller General, and International Financial Statistics.

10. Although a significant acceleration of prices has been a feature of the recent recovery, Panama does not have a problem of persistent internally generated inflation, and in 1981 there was a marked deceleration in price increases. Whereas in 1980 wholesale prices rose by 15.3 percent and the consumer index by 13.8 percent, in 1981 the increases dropped to 10 percent and 7.3 percent respectively. The trend in wholesale prices is close to that of the US. This is not surprising, given the openness of the economy and absence of control over its money supply. Panama's consumer prices have moved more slowly than in the US due to price controls. However, the unfreezing in 1979 and 1980 of various items, especially food, formerly under rigid control, and the reduction in food subsidies given by Government through the Agricultural Marketing Institute contributed to the acceleration in the Panamanian index and should lead to closer movement of the Panamanian and US indices. Production costs in Panama have not been a source of inflationary pressures. Wage movements have tended to lag behind those of the US, in spite of the influence of US wage lavels paid in the Canal area. This is probably due to the more rapid growth of the Panamanian labor force, the lower influence of trade unions, and more recently to the two-year pause in negotiation of labor contracts mandated in late 1976. Since the entry into force of the Panama Canal Treaties in 1979, new Panamanian employees in canal operations are paid at Panamanian rates resulting in a reduced upward pull of the canal area on the country's wage structure.

11. Looked at from the point of view of the overall public sector deficit, there has been a marked improvement in Panama's public finances. After reaching a peak of 18.6 percent of GDP in 1976, during a period (1975-78) when fiscal policy was essentially compensatory, the deficit fell to an average 5.8 percent of GDP in 1980-81. The improvement has been due mainly to a reduction in public investment, reduced deficits of non-financial public - 7 - enterprises,the eliminationof an emergency employmentprogram, the effects of the new canal treaties, and growth in Central Government revenues. Capital expendituresfell from 19.1 percent of GDP in 1976 to 9.6 percent in 1980-81 as the 1976-80 public investmentprogram came to a close and there was shift in emphasis toward renewed private sector investment. Public savings rose dramaticallyto 4 percent of GDP in 1981 and the overall deficit of public enterprisesdisappeared as it declined from over 10 percent of GDP in 1976, reflectingthe effects of high sugar prices on the financial situation of the state sugar corporation,of rate increases on the state utility companies, and of higher capacity utilizationin the cement company. In the first quarter of 1980 the Emergency EmploymentPlan was discontinued,after having been in operation for just over two years at an annual cost of about $24 million. Beginning in 1979, revenues of the Social Security Agency benefitted from expansion of coverage to workers in the Canal area and from the general economic recovery; its surplus increasingby about $15 million.

Table 5: OPERATIONS OF THE NON-FINANCIALPUBLIC SECTOR (as percent of GDP)

1976 1977 1978 1979 1980 1981

Public Sector Total Revenue 23.4 24.7 24.2 24.9 30.5 30.8

Total Expenditure 42.0 37.2 39.1 37.1 35.8 36.9 of which Capital 19.1 14.4 13.8 10.6 8.9 10.3

Overall Deficit 18.6 12.4 14.9 12.2 5.4 6.1

State EnterprisesDeficit 10.3 6.1 5.3 1.4 -0.8 0.2 Remaining Overall Deficit 8.3 6.3 9.6 10.8 6.2 5.9

Sources: Tables 2.2, 5.4 and 5.5

12. The improvementin Central Governmentfinances occurred almost exclusivelyin 1980, when current expenditurewas brought under tighter centralizedcontrol and the new Panama Canal annuity provided under the new treaties was received for the first time. During 1976-79 the buoyancy in revenue deriving from the introductionof value added taxation in 1977, improvementsin administrationand revival of economic activity, was more than offset by a sharp rise in current expenditureassociated with increaaed interest payments and current transfers. Interest payments on the public - 8 - external debt tripled during that period due to the growth in the debt and the rise in interest rates, while current transfers to the rest of the public sector doubled to help defray the losses of public enterprises. But in 1980 Central Government revenues rose from 16.8 percent of GDP to 20.5 percent reflecting not only the impact of the new canal revenues,accounting for 2.4 percent, but also new tax measures including increasedbanana export taxes and cigarette excise duties as well as higher ship registrationfees and, very significantly,the resurgence in economic activity. Meanwhile, there was almost no growth in current expendituresdue to the reductionin the subsidy on a number of products handled through the AgriculturalMarketing Institute, the eliminationof the public sector exemptions from taxes on petroleum products and the value added tax on imported goods, to the discontinuationof the emergency employment plan, and to tighter controls on expenditure.

Table 6: CENTRAL GOVERNMENTREVENUE AND EXPENDITURES (percent of GDP)

1976 1977 1978 1979 1980 1981

Total Revenue 14.8 17.0 16.5 16.8 20.9 20.5

Tax Revenue 12.0 14.0 13.8 14.3 14.9 15.1

Direct Taxes 6.0 6.8 5.9 6.5 7.0 7.9 of which Income Tax 4.8 5.4 4.9 5.4 6.0 6.7 Taxes on Foreign Trade 2.7 2.6 2.9 2.8 2.7 2.6 Taxes on Domestic Transactions3.3 4.6 5.0 5.0 5.2 4.6 of which Value Added -- 1.4 2.0 1.9 2.0 2.0

Non Tax Revenue 2.8 3.0 2.7 2.5 5.9 5.4 of which Canal Annuity ------2.5 2.0

Current Expenditure 16.2 16.3 18.3 19.5 20.1 19.9

Sources: Controller General, Tables 2.2 and 5.1

13. The ratio of the public external debt to GDP has been reduced from 78 percent in 1978 to about 65 percent in 1981. The improved public finances have reduced reliance on external financing at a time of high interest rates on commercial loans. Panama will also derive relief from future debt burden due to the recent greater share of institutionalfinancing at rates far below commercial rates. Also, having met the conditions of an IMF Standby - 9 -

Arrangementin 1980 and 1981 Panama has not only been able to use Fund resourceswhich are also cheaper than commercialones, it may be able to negotiate better rates from commercialsources. The importance of these considerationsis directly related to the fact that in 1981 interest payments on its debt accounted for nearly one-quarterof Central Government expenditure. The interest on all public sector debt equalled about 7.5 percent of GDP in 1981.

14. There are indicationsthat the post-1977resurgence of activity in the Panamanian economy has been accompaniedby a slight increase in employment, but it is unlikely that the generationof additional jobs has kept pace with the growth of the labor force. Employment is estimated to have increasedby 29,000 between October 1977 and August 1978, with about 20,000 of the increase attributableto the emergency employmentprogram launched by the Government toward the end of 1977. Between August 1978 and August 1979, a similar household survey estimated the increase in the number of jobs at 28,000, of which 11,000 were in agricultureand probably reflects to a large extent a decline in underemployment. Early in 1980 the emergency employment plan was terminated,thereby returning about 14,000 of those employed in 1977-78 to the ranks of potential job seekers. With the slower rate of economic growth in 1980-81 compared with 1978-79, the additional employmentgenerated is likely to have been well below the annual rate of 13,000--the1977-79 average after adjustmentfor the special employmentprogram and the dubious job creation in agriculture. Including about 4,000 emergency program workers who continued in public sector employment,the total job generationover the period 1977 to 1980 was probably around 40,000. At the same time the labor force is estimated to have grown by at least 60,000. Thus unemploymentin absolute and possibly relative terms very likely continued to increaae during the recent recovery.

15. Although they show a more than 50 percent increase in the unemployment rate between 1974 and 1979, official estimates of unemploymentmay underestimate the deteriorationin the employmentsituation because of a quite pronounced decline in labor force participationrates especiallyafter 1974.

16. As in many other countries,the decline in economic activity led to a decline in the participationrate; that proportion of working age people either working or seeking work. This decline is commonly called the "discouragedworker" effect; the unemployed or possible new entrants to the workforce become discouragedby the limited prospects of finding a job and do not seek employment. In Panama, however, the decline in the participation rate, from an average 60.7 percent during the relatively high growth years of 1970-72 to 55.0 percent during 1976-78, occurred during a period of great expansion of the secondary and tertiary education systems. It would be impossibleto discern what proportionof the decline was due to the increased educationalenrollment, and what proportionwas due to the discouragedworker effect. 1/ For policy purposes, this effect creates two problems: first, the

1/ If the growth in the student body were factored out, such an exercise would omit the important (but incalculable)effect of students who remained in school rather than enter the workforce as they so desired. - 10 - upwardly sticky unemploymentrate tends to underestimatethe costs to workers of an economic recession,and secondly, the economic recovery often leads to an equally rapid rise in the participationrate. The latter, common phenomena often means that it takes quite a few years of economic resurgencebefore unemploymentrates return to historic levels.

Table 7: REPORTED AND HYPOTHETICALLABOR INDICES (Annual average)

Reported Hypothetical Possible Unemployment Unemployment Job Years Rates Rates Backlogs (percent) (percent) (jobs)

1970-72 7.2 8.0 4,300

1973-75 6.4 10.8 19,500

1976-78 7.8 17.3 58,600

1979 8.8 14.4 44,200

Sources: Tables 1.2 and 1.3

17. The participationrate is unlikely to fall further. Indeed, during 1979 the rate increased, along with economic growth. Many women attracted into the labor force by the now discontinuedemergency employent program have joined the job seekers and registeredfor placement. Official estimates from household surveys as well as ad hoc studies have detected that the unemployment problem is becoming acute in the metropolitanarea, where the majority of the unemployedlive. The situation outside the metropolitanarea where agriculture provides the main source of employmenthas not benefitted from the relative stagnationin this sector during 1977 to 1981; and the tendency of labor force to migrate from the rural to the metropolitanarea can be expected to continue. - 11 -

18. Unemployment is now the most serious economic problem the country faces. Moreover, the possible job backlog--those people not now in the workforce who could join it--is likely to be over 40,000 potential workers. The recent experience demonstrates that economic growth rates can be improved, that the public finances can be brought under control, that there is no independent source of inflationary pressure inherent in the economy, and that with political stability monetary inflows could be adequate to balance the current account deficit in the balance of payments and permit adequate growth in the money supply. However, it is not clear that growth will be adequate and technology appropriate to absorb in meaningful employment, especially in the metropolitan area, the increments to the labor force comprised in large measure of relatively unskilled workers from urban slum areas and immigrants from rural areas. The situation merits careful analysis and a growth accelerating development strategy addressed specifically to it.

III. UNEMPLOYMENT IN METROPOLITAN PANAMA

A. Why Focus on the Metropolitan Area

19. The spatial emphasis of employment policy is determined by the selection of objectives, the nature of the constraints and the relevant time horizon. The choice usually involves a compromise among objectives; e.g., maximizing employment creation, avoiding excessive concentration of population and economic activity, ensuring an adequate presence in certain areas for strategic purposes, and satisfying regional political representation. There are usually differences in the perception of the opportunities and obstacles in pursuing these objectives, as well as in the time horizon for certain levels of achievement. This report presents the view that the mid-1980s will be a decisive period for Panama's urban employment needs. During the first half of the eighties the rate of accession to the labor force will continue to reflect high pre-1970 birth rates. Declining birth rates after 1970 will temper the growth of demand for jobs during the latter part of the eighties. The period to 1985-87 would seem to be the relevant time horizon, and, in the light of the potential risk which high unemployment poses for the climate of social stability that has been a major positive factor in Panama's growth, the creation of employment at a reasonable economic cost should be the overriding priority in development policy for the next few years. Assuming perfect mobility of the labor force, maximization of employment as the singular objective would require that spatial emphasis be determined by the opportunities for expanding and starting job generation activities. The inclusion of other objectives and departure from the assumption of perfect mobility would lead to a modification of this requirement; the more immobile the labor force the more weight would have to be given to the residence of the workers and less to the most cost effective location of economic activity. - 12 -

12. The case for emphasizingthe metropolitanarea, assuming the primacy of the employment objective, rests on the better opportunitiesfor economic expansion and the larger number of unemployed there, coupled with the low relative mobility of workers from metropolitanto rural Panama. There is no need to trade off mobility and job creation in this situation. The recent reversion of the former canal zone to Panamanian control has relaxed the land constraint on urban, commercial,and industrial development and has added to the area's capital stock in the form of ports, a railway, airports, and buildings. No comparable change has altered so dramatically the developmentpotential in rural Panama. Moreover, the metropolitanarea of Panama, comprised of parts of the Provinces of Panama and Colon adjacent to the canal, contains over half of the nation's population and four fifths of its unemployed. A 1979-80 survey of four poor neighborhoodsin Panama City and Colon found the unemploymentrate was 24 percent, and among low income families almost 40 percent. Official estimates appear slightly more optimistic by focussingon open unemployment,which in a 1978 survey was put at 10.4 percent, but the rate would be 14 percent if persons wanting jobs but not actively seeking work during the survey week are added. On the contrary, for the remainder of Panama the correspondingrates were 4.8 percent and 7 percent respectively. Preliminaryunadjusted estimates from the 1980 Census indicate an unemploymentrate of 10.5 percent in the metropolitanarea. However, if adjustment made for the potential entrants from the inactive labor force (who were not keeping house, not students,not invalids,not pensioned, not retired, not receiving unearned income, and not institutionalized;the majority or whom were in the age group 15-29 years), the unemploymentrate would be 16.5 percent. Comparable estimates for non-metropolitanPanama are 5.2 percent (unadjusted)and 13.1 percent adjusted. These lower rates reflect the fact that many in the rural labor force are underemployed,due to the seasonalityof the demand for labor in agriculture,and are not unemployed as such. - 13 -

Table 8: DISTRIBUTION OF UNEMPLOYMENT BY REGION: 1979 (AUGUST)

Area Total Males Females

Total 50,732 26,919 23,813 Metropolitan 40,687 21,142 19,545 Oriental 471 127 344 Central 6,504 3,707 2,797 Occidental 3,070 1,943 1,127

In percentage

Total 100.0 100.0 100.0

Metropolitan 80.2 78.5 82.1 Oriental 0.9 0.5 1.4 Central 12.8 13.8 11.7 Occidental 6.1 7.2 4.8

Source: Office of the Controller General (official estimates based on the sample survey of households).

21. While employment policy aimed at maximum job creation should emphasize the metropolitan area there are considerations which argue against exclusion of rural Panama from sharing in new job creation. In addition to the objectives of avoidance of undue concentration of population and maintaining a presence in border areas one other consideration is the mobility of rural labor, specifically the high propensity to migrate to the metropolitan area. Between 1970 and 1979 when the country's labor force was growing at an average rate of 1.9 percent, the metropolitan area labor force grew at 3 percent. This higher growth rate was due mainly to migration into the area accounting for 30 percent of the growth in the area's working age population. Although the availability of employment is not the only pull factor, it is probably the most important, and the increased availability of jobs in the metropolitan area without some increase in the rural parts could precipitate a higher rate of rural to urban migration than now occurs, and could make the problem of metropolitan area unemployment more intractable over the longer term. It is also true that the cost in additional investment in urban social infrastructure makes it more desirable to provide opportunities where people are, rather than encouraging them to move. There are opportunities for economic growth and employment generation outside the metropolitan area which appear to be attain- able within the relevant time horizon, and these should be pursued both to reduce migration into the metropolitan area and to facilitate the establishment of linked industries using rural inputs. However the most optimistic, yet realistic assumptions regarding job generation fall short of providing for the number entering the labor force from non-metropolitan areas. The expectation aaoma wi continue to migrate to the metropolitan area and there join - 14 -

22. The formulation of employment policy goes beyond the determination of geographical emphasis. It must identify the unemployed according to relevant characteristics, examine the dynamics of supply and demand for labor over the appropriate time period, and specify the measures through which adjustment toward equilibrium may be procured.

B. Composition of the Unemployed

23. Employment policy is usually concerned with the provision of jobs for those who are currently unemployed as well as for new entrants to the labor force. An appreciation of the characteristics of the unemployed is necessary in designing a strategy for their employment. It also gives some idea of the factors which may affect the absorption of new entrants into job situations and of the desired adjustments in their preparation for entry into the labor market.

24. According to the 1980 census 60 percent of the unemployed were male. However, earlier surveys suggest that females are more likely to be unemployed for a longer period than males. Data on occupational distribution based on the 1979 household survey showed that--excluding first time job seekers (46 percent of the unemployed)--48 percent of the jobless women were domestic servants, 22 percent were office workers and 15 percent sales workers. Occupational distribution for unemployed males showed a distinct concentration in the artisans, machine operators category with 36 percent; the remainder were fairly well spread among all categories.

25. The distribution of unemployment by age showed very clearly that unemployment is a problem of the young. About one-half of the unemployed males were below 25 years of age according to 1980 census data, while among females the young accounted for an even greater share of the unemployed. The young (15-24) constitute a large proportion of the unemployed not only because they constitute 28 percent of the metropolitan labor force but because they experience higher unemployment rates. In the 15-19 and 20-24 age cohorts the unemployment rates consistent with the 16.5 percent metropolitan rate estimated for 1980 was 42 percent and 25 percent respectively. There is no significant difference between the sexes in this regard. Also, if the hard core unemployed are defined as those unemployed for three or more years, then 12 percent of women were in this category but only 4.5 percent of unemployed men would be included. These men were mostly over sixty years old while the women were in the childbearing ages 20 to 39 or had reared their children and had re-entered the labor market in the 50 and over age group. A 1976 survey which attempted to classify the unemployed by skill level indicated that less than 30 percent of the unemployed with prior experience were "low-skills", while almost 20 percent were "high skills". The picture that emerges is that the unemployed are young, literate, not utterly lacking in skills, and--in the case of men--usually with some previous experience. - 15 -

Table 9: DISTRIBUTION OF UNEMPLOYMENT BY AGE, SEX AND DURATION OF UNEMPLOYMENT: 1976 METROPOLITAN AREA

(in percentage)

Area, Sex, Age Total Length of Unemployment Less than 6-11 1-2 3 No 6 months months years years + spec.

Metropolitan Area 100.0 60.2 11.8 16.1 7.7 4.2

15-19 17.5 63.1 11.0 14.9 1.8 9.2 20-24 33.9 59.3 10.5 18.2 6.7 5.2 25-29 18.0 52.3 15.2 18.2 13.4 .9 30-57 28.4 64.3 12.5 13.1 7.9 2.2 60 + 2.1 62.3 - 15.1 22.6 -

Males 100.0 65.9 14.3 12.1 4.5 3.1

15-19 15.5 64.9 5.4 11.3 3.6 14.9 20-24 34.8 68.6 14.1 14.1 .8 2.4 25-29 14.6 53.1 27.3 12.0 7.6 - 30-59 31.5 70.1 14.6 10.0 5.3 - 60 + 3.4 59.2 - 16.3 24.5 -

Females 100.0 52.8 8.4 21.2 12.0 5.5

15-19 20.1 61.3 16.7 18.5 - 3.6 20-24 32.7 46.5 5.5 23.8 23.8 9.1 25-29 22.3 51.6 4.9 23.6 23.6 - 30-59 24.4 54.7 8.9 18.2 12.3 5.9 60 + 0.4 100.0 - - - -

Source: Controller General.

C. Metropolitan Labor Force in the 1980's

26. The growth of the metropolitan labor force will reflect trends in working-age population as well as in participation rates. Although the metropolitan working age population has been growing relatively faster than for the rest of the country, the trend in growth rates has been downward. Fast population growth before 1970 coupled with considerable rural/urban - 16 -

migration of people in the 15-35 age group /1 brought about an annual average increase of 4.7 percent in the working age population of the metropolitanarea in the period 1965-70, and a 4.5 percent average annual increase between 1970 and 1979. This downward trend is expected to continue to 1984. Birth rates began to fall in the late 1960's and much more rapidly after 1970. The rate of new accessions to the working age populationwill show the same tendency in the 1980's with the significantslowdown occurring after 1985.

Table 10: BIRTH AND MORTALITY RATES, 1955-80

(per thousand inhabitants)

Period Birth Rate Mortality Rate

1955-60 41.44 10.85 1960-65 40.05 9.35 1965-70 38.09 8.22 1970-75 35.13 6.92 1975-80 31.35 5.96

Source: Office of the Controller General.

The future behavior of rural-urbanmigration is less certain. The rate seems to be related to the level of economic activity and the perception of relative job opportunitiesin the metropolitanarea. The decline in migration into metropolitanPanama in the mid seventieswas very likely due to the recession after 1973 and would not reflect the expected trend during a period of greater buoyancy. A higher rate of migration up to the end of 1985 and the age specificityof immigrantswill contribute to a higher rate of growth of the working-agepopulation in the near future than was the case in the mid seventies. The settlementof the Darien and the start-up of the massive Cerro Colorado Copper project could tend to slow down migration into the metropolitan area. For projecting the 1985 labor force two alternativerates of growth of working age population (4.0 percent and 3.5 percent) have been used, assuming high and low migration respectively.

27. While metropolitanarea participationrates fell from 63.6 percent to 56.2 percent during the seventies there is no clear reason to expect a continuationof this trend to 1985. The usual determinantsof participation include age, sex, fertility, educationalsystem, migration, and availability

/1 According to the 1970 Census, 49.6 percent of the people who had migrated in the previous five years were between 15 and 24 years of age; another 25.6 percent were between 25 and 34 years of age. - 17 -

of job opportunities. Among these, age and sex distributionof the working age population are unlikely to undergo dramatic shifts over the short term. In general, falling fertilityrates in a predominantlyurban populationwill be associatedwith rising female participationrates, but in Panama this tendency may have been masked by deterioratingjob opportunitiesduring the mid 1970's. Further dramatic declines in fertilityare unlikely within the immediate future, but the expected effect of the earlier decline in fertility may be felt as job opportunitiesimprove. Quite apart from its impact on the growth of the working age population and its age structuremigration tends to increase average participationrates in the target destinationsbecause migrants usually move in search of jobs and almost all are labor force participants. Again the effect of migration may have been reduced during the recession of the mid seventiesbut with the recent recovery the situationmay change. Sketchy evidence from the registrationdata collected by the National Employment Service, which finds that migrants comprise the majority of regis- trants, suggests that their participationrate is very high. 28. A slight digression to relate the phenomenon of internal migration to the growth in labor force may be appropriateat this point. Overall national and metropolitanarea participationrates are not significantly different, but there are significantdifferences between the sexes and among age groups. Migrationwhich did not change the age and sex distributions would not affect the growth of the labor force. Female participationrates in the metropolitanarea are in general higher than outside the area, the difference being especially significantfor those in the 20-59 age group. To the extent that migrants adopt the participationtendencies of the metropolitan area their movement will increase the labor force countrywide. For males, average participationrate outside the metropolitanarea is slightly higher (though perhaps not significantlyso) than within the area, with the important difference being the lower rates for metropolitanarea males in the 15-19 age group due no doubt to more school attendance and their reduced role as unpaid family labor. Indeed, 1970 census data revealed that the majority of persons who had migrated in the last 5 years were in the 20-34 age group which with no significantdifference between the sexes would raise countrywideparticipation rates. Survey data show females becoming an increasingpercentage of the metropolitanworking age population. This suggests a stronger tendency of females to migrate, which is no doubt due to the higher unemploymentrate among rural females compared with the metropolitan,and which is the opposite of the male unemploymentrural/metropolitan comparison. This tendency, combined with the age specifityof migrants, makes for greater labor force growth in the metropolitanarea and countrywide. - 18 -

Table 11: COMPARISON OF NATIONAL AND METROPOLITAN AREA LABOR FORCE PARTICIPATION RATES

1974 _ 1976 1979 Age and Sex National Met. Area National Met. Area National Met. Area

TOTAL 59.5 61.8 55.0 55.8 57.6 59.6

15-19 34.0 30.6 30.0 24.7 31.7 28.9 20-59 68.8 73.3 64.8 67.8 68.5 73.3 60 + 38.8 33.6 34.8 28.0 30.5 24.1

Males 87.2 84.3 79.5 75.2 79.9 77.8

15-19 48.7 38.7 40.3 28.1 42.8 34.3 20-59 98.9 98.5 93.4 91.4 94.5 95.2 60 + 68.2 56.2 58.8 46.1 51.8 39.7

Females 32.0 40.8 30.7 37.8 35.3 43.0

15-19 20.7 23.7 19.5 21.6 20.2 23.9 20-59 38.2 49.2 36.8 45.8 43.4 52.9 60 + 9.6 12.4 9.9 11.3 9.0 9.9

Source: Controller General; some 1979 categories interpolated by mission.

29. Improvements in the educational system in coverage of students and range of facilities tend to be associated with reduced participation rates especially among the younger age cohorts of the working age population. In the metropolitan area the participation rate of the 15-19 age group decreased from 42 percent in 1970 to 29 percent in 1979, the decline coinciding with significant improvement in the educational system. Again it must be cautioned that the depressed job market during the mid seventies undoubtedly reduced the opportunity cost of remaining in school and intensified the responsiveness of participation rate to educational opportunity. By calculating what the labor force in the younger age cohorts would have been in 1979 had the participation rate remained at the 1970 level and by comparing the difference from the actual labor force with the increase in school enrollment, it is seen that the decline in labor force participation has been more than compensated by the increase in enrollment. This effect may have been essentially a once and for all time event. Further dramatic educational expansion before 1985 such as would reduce participation by this age group is unlikely. At the same time, improvement in job opportunities by increasing the opportunity cost of school attendance could increase the participation rate, especially if educational facilities are extended for part-time and night school attendance. Another source of increase in average participation rates could be the re-entry of potentially active population. In the 1979 survey, over 8 percent of the metropolitan area inactive working age population signified its intention to - 19 - seek work within six months. These did not include the 34 percent of the inactive populationwho were students,almost all of whom would ordinarilybe expected to enter the job market upon terminationof their schooling. Partici- pation by those from the presently inactive group is very likely responsive to the availabilityof jobs. Altogether,the above-mentionedinfluences on average participationrates would not appear to suggest a downward trend in the near future.

30. While improved opportunitiesfor employment tend to encourage higher participationby the usually inactive, the reverse does not appear to occur as quickly and as extensively. The data for 1976-79 suggest that the EmergencyEmployment Program brought many inactive into the labor force. In 1980, when the program was discontinuedthere was a surge in registrationswith the National Employment Service which suggests that the beneficiariesdid not plan to leave the labor force. There is probably a rachet effect on this group which makes for increasing responsiveness of labor force to employment opportunities. 31. The projectionsof the metropolitanlabor force have been based on assumptionsregarding Panama's labor force and regardingmigration into the metropolitanarea. Panama's labor force is expected to reach 680,000 in 1985 if population grows at 2.5 percent per annum, if the age structure is such that the working age population remains at 58.3 percent of total population,and if the global labor force participationrate remains at 56.2 percent. It is assumed that the level of migration of the working age population into the metropolitanarea will be what is needed to prevent the unemploymentrate outside of the area from rising above the estimated 1980 figure of 13.1 percent. In short, when the unemploymentsituation tends to worsen the working age populationwill tend to join the metropolitan labor force. Thus if non-metropolitanjob generationwere just under 4000 per year between 1980 and 1985 the working age populationof the metropolitan area would grow at 3.1 percent per year, while if only 1500 additional jobs per year were being generated the metropolitanworking age populationwould grow at 4 percent per annum. A rate of growth of the metropolitanworking age population in the 3-1/2 percent - 4 percent per year range seems reasonable in the light of the experience in the seventies. Assuming the average participationrate remains at the 1980 level, the average annual increment in the area's labor force would range between 12,500 and 14,500; and the 1985 metropolitanlabor force would be between 399,000 and 414,000. - 20 -

Table 12: PAIAMA METROPOLITAN AREA - PROJECTIONS OF THE LABOR FORCE

(Unit - 1000)

Working Age Labor Working Age Population Force Population Labor Force Year A /a A /b B /c B /d

1980 591.3 336.4 597.0 339.7 1981 612.0 348.2 620.9 353.3 1982 633.0 360.2 645.8 367.5 1983 655.6 373.0 671.6 382.1 1984 678.5 386.1 698.4 397.4 1985 702.3 399.6 726.4 413.3

/a Working age population assumed to grow at 3-1/2 percent p.a. from a 1978 base. /b Labor force assuming participation rate remains constant at 1978 overall rate, which is the same as the rate based on the 1980 Census adjusted for potential participants among the economically inactive working age population. /c Working age population assumed to grow at 4 percent p.a. /d Assumes /c and /b above.

D. Trends in Metropolitan Employment

32. During the seventies there was a distinct slowdown in employment creation in Panama, especially in the metropolitan area. In 1970-73 employment in the area grew at 3.7 percent per annum, then fell at the rate of 1.5 percent per annum during 1974-77. The figures for 1977-79 indicate growth of 8.5 percent per annum, reflecting the economic recovery. While there is only sketchy data for the period after 1979, there are indications of positive growth in employment in such sectors as financial intermediation, construction and manufacturing as a result of the continued resurgence in economic activity. However, the discontinuation of the Emergency Employment Program at the end of February 1980 may have adversely affected net employment creation. Based on preliminary data from the 1980 Census, metropolitan area employment grew at an average rate of just under 2 percent per year between 1980 and 1981, while the comparable figure for labor force growth was 2.75 percent.

33. The behavior of employment during the seventies was mainly a result of the slump in the Panamanian economy between 1974 and 1978. This slowdown was particularly acute in sectors which normally provide a large part of the metropolitan area's employment; eg., manufacturing, commerce, construction, - 21 - services to the canal area, and miscellaneous services (mainly personal and repairs), which account for about three-quarters of the total. Most of these sectors had negative growth during the mid-seventies. Compensatory public investment helped to cushion the downturn but the rapid increase in debt and in debt burden as international interest rates rose, imposed severe limitations on the level of government spending after 1978. Fortunately, the economy started to recover at that time.

Table 13: ANNUAL GROWTH RATES OF EMPLOYMENT: 1970-79 METROPOLITAN AREA

Sector 70-73 74-77 77-79

Total 3.7 -1.5 8.5

Agriculture -3.5 -3.6 12.3 Manufacturing 4.2 -2.1 6.0 Construction 16.1 -9.9 16.0 Utilities 10.4 4.3 7.5 Commerce 3.6 -1.6 5.6 Transportation/Storage/Communication 6.6 .3 7.6 Finance 9.5 -.2 13.0 Services 3.4 1.2 10.7 Canal Zone -3.8 -3.9 -2.2

S-ource: Controller General

34. Employment creation was also influenced by employment/output elasticities which appear to have peaked and are tending downward. During 1965-70 the average elasticity was 0.57 while for 1974-78 the comparable figure was a 0.19. This lower elasticity implied greater stability of employment which may have seemed desirable, but it also meant that more rapid growth would have been necessary to meet the job requirements of the quite vigorous growth in the area's labor force. The decline in employment/output elasticity was well-marked in the construction sector during the 1974-78 period of negative growth, probably because workers did not lose jobs permanently but had to wait longer periods between projects and got fewer days work each time they were called. To the extent that this occurred the impact of the recession as well as the recent recovery on the area's unemployment rates may have been muted. The stimulation of investment and construction may be more effective in reducing underemployment of the construction labor force than in creating new jobs. - 22 -

Table 14: EMPLOYMENT/OUTPUT ELASTICITIES METROPOLITAN AREA

Finance and Total Banking (2) t (1) Construction (4) (1) (1) (2) (3) (4) (5)

1960-65 .36 .47 1.3 .98 2.7 1965-70 .57 .91 1.6 1.04 1.8 1970-74 .48 1.01 2.1 .68 1.4 1974-78 .19 .77 4.0 .35 1.8

Source: ILO/PREALC

35. The demand for labor has also been influenced by the changing sectoral pattern of growth. The dynamic sectors throughout most of the decade of the seventies were relatively small, e.g., financial intermediation, public utilities and transportation, which together accounted for only one- quarter of metropolitan employment in 1976. This means that, given the small base, large percentage increases did not cause sufficiently large employment growth in absolute terms to offset the decline in employment in agriculture associated mainly with migration of the self-employed and unpaid family workers to the urban parts, and in the canal area as the number of United States nationals and facilities were reduced just prior to reversion of most of the former Canal Zone to Panamanian control. The education/skill mix required for new jobs has also been affected by the higher levels required by the more dynamic sectors, especially financial intermediation and public utilities. Based on 1976 data the financial sector's employees have the highest number of years of schooling - 7.9 years - followed by those of utilities with 6.3 years. At the bottom of the scale are manufacturing and construction in which average schooling was between 4 and 5 years. The mission gained the impression that the competition for highly skilled people within banking has been pushing up salaries and encouraging frequent movement from job to job. The significance for employment policy is that continued expansion in the dynamic sectors will require expansion in the supply of people with the requisite education. At the same time the employment of the relatively uneducated and unskilled who constitute the majority of the unemployed will require the upgrading of their capacities as well as sustained recovery of the sectors using this level of manpower.

36. An analysis of employment in the metropolitan area should not ignore the self-employed. The self-employed (not including employers) numbered 46,000 and comprised 6 percent of the labor force in 1976. Over 60 percent were in non-agricultural activities. Of these, 31 percent were in retail commerce, 22 percent were in transport, 14 percent in construction, and - 23 -

7 percent in repair services. Data for the country as a whole suggest that the number of self-employed in non-agricultural activities declined during the seventies. The explanation for this is not immediately obvious and the likely future is uncertain for a number of reasons. First, the apparent decline may have been due partly to the Emergency Employment Program. Second, a decline in self-employment may be due to an improvement in job opportunities or to deterioration in the returns to self-employment. In the latter case the capital for self-employment may be consumed and the individual cannot continue in business. Third, a decline in availability of jobs may actually induce the formerly employed to join the ranks of the self-employed. During the rapid economic expansion up to 1974 some self-employed may have moved into jobs. Then in the recession of 1974-78 others faced with a deterioration in returns from their self-employment activities may have reported themselves as unemployed instead of underemployed in their self-employment. After 1977 some may have joined the Emergency Employment Program. The availability of self-employment opportunity depends in part on the technology chosen. Mass production methods and the design of articles to be thrown away rather than repaired or recycled all militate against the opportunity for self-employment and may have played some small part in the Panamanian situation. While it may be difficult to project the number of self-employed it is reasonable to assume that as long as the economy cannot generate enough jobs, the availability of opportunity for self-employment has an important role to play in providing access to income and variety in economic activity for a group of people the majority of whom share the vulnerability of that 40 percent of the population earning only 10 percent of metropolitan income.

37. The future prospect for employment expansion in the metropolitan area will depend on the growth of the economy and sectoral contribution to that growth, as well as on the trends in employment/output elasticities. Growth during the period up to the end of 1985 will depend mainly on the intensity of use of capacity, which will be determined by the buoyancy of demand; and to a lesser extent on growth in capacity through investment during the next two or three years. Average employment/output elasticity will depend both on the sectoral contribution to growth and the trend of the elasticity for each sector. On purely theoretical grounds one would expect the trend in sectoral elasticity to reflect the availability of technological options and the relative cost of labor. The cost of labor will reflect the behavior of wages and labor productivity, but relative cost would also take into consideration the cost of substitute inputs and their productivities. Theory provides no guide to how rapidly the employment/output elasticity will adjust to changes in relative labor cost, but does suggest the direction of desirable change in costs. It is safe to assume that if trends in wages and productivity are not changed the average elasticity is unlikely to reverse its trend of the seventies and its average value in the near future would be unlikely to be above the 0.42 of the seventies. If the prospect for growth cannot be improved during the first half of the eighties compared with the second half of the seventies and if the average elasticity cannot be increased, the metropolitan unemployment situation is likely to deteriorate rapidly. The table below shows that with a 5 percent average rate of growth and with an average elasticity of 0.42 percent the metropolitan economy will generate just over 6,000 net additional - 24 -

jobs per year during 1981-85. At the same time the labor force would be increasingby an average of 12,850 to 15,000 per year, which would mean the unemployedwould increase by over 7,000 per year resulting in a large increase in the unemploymentrate by 1985. In order to keep the unemploymentrate from rising above the estimated 1980 level, the metropolitanarea should generate between 12,000 and 14,000 additional jobs annually over the next four years.

Table 15: PROJECTEDMETROPOLITAN AREA UNEMPLOYMENTAND UNEMPLOYMENTRATES

(Thousands)

Unemployment Year Employment Labor Force Unemployment/d Rate (%) A /b B /c A B A B

1978 281.2 314.0 -- 32.8 -- 10.4 -- 1979 289.5 325.1 326.7 35.6 37.2 10.9 11.4 1980 283.0 /a 336.4 339.7 53.4 56.7 15.9 16.7 1981 288.9 348.2 353.3 59.3 64.4 17.0 18.2 1982 295.1 360.2 367.5 65.1 72.4 18.1 19.7 1983 301.2 373.0 382.1 71.8 80.9 19.2 21.2 1984 307.5 386.1 397.4 78.6 89.9 20.4 22.6 1985 314.0 399.6 413.3 85.6 99.3 21.4 24.0

/a Fall in 1980 reflects discontinuationof the Emergency Employment Program which assumed to have resulted in a less of 14,000 jobs among 17,500 employed at tie of discontinuationof the program. /b Labor force based on 3-1/2 percent per year rate of growth of working age population,with participationrate constant at 1978 level. /c Labor force based on 4 percent per year rate of growth of working age population,with participationrate assumed constant at 1978 level. /d UnemploymentA and B are related to Labor Force A and B respectively. See Table 12.

Clearly, the response of the unemployed may well be to seek out more ways of self-employmentso that there could be a trade-offbetween higher rates of open unemploymentand higher rates of self-employment. Given the low expected income associated with most of the likely available opportunitiesfor self- employment and the low marginal social product of most of these activities self-employmentwill be a poor substitute for jobs and could lead to greater skewness in income distribution. Income distributiondata for 1970 indicate that in the metropolitanarea of Panama the bottom 40 percent of households earned 10 percent of household income, which means that the average income for this group was one-fourth that of all households in the area. With the deterioration in employment during the seventies the distributionin 1980 was very - 25 - likely less favorable to this bottom 40 percent; and it has been estimated that more than half of this group fell below the absolute poverty income level estimated at B/.349 per capita. The problem of inadequate job generation resides in the failure of increasing numbers to get above the level of absolute poverty whether they are openly unemployed or hide their employment by resort- ing to low productivity self-employment. Nevertheless, the preceding analysis has reviewed the dynamics of the unemployment problem as a basis for suggesting the need for attention to employment policy, as well as to identify the general directions for employment policy. However, detailed analysis of sectors will be necessary to form a judgement as to the additional employment that each will generate, and the sectoral policies which may accelerate growth and increase the marginal employment/output elasticities.

E. Employment Policy Implications

38. The primary objective of metropolitan employment policy must be to increase the rate of job generation in the very near future, if a serious increase in unemployment and the attendant risk of social instability are to be avoided. If the metropolitan unemployment rate is to be kept from rising above the 1980 estimate of 16.5 percent, between 12,500 and 14,700 jobs must be generated annually during 1980-85. Assuming that migration into the area will be affected by the growth of employment opportunities outside it, the lower figure would be consistent with a 4,000 per year "rural" job generation rate and the higher figure with a 1,500 per year rate. This range of job generation in non-metropolitan Panama requires some improvement over the average of less than 1,300 per year during the seventies. While the relatively near to medium term focus of this report has made it more realistic to assume the continuation and direction of migration (although allowing for some vari- ability in magnitude) and to assume that the feasible range of non-metropolitan job generation is 1,500 - 4,000 per year, these assumptions need not be valid for long terms analysis. The colonization of the eastern half of the country on a massive scale could well divert migration from the metropolitan area into a rural to rural pattern, and a concentration of projects such as the trans- isthmian oil pipeline, Chiriqui - Bocas del Toro road, and agro-industries in the west will likely provide a new pole of development,--particularly in the underdeveloped province of Bocas del Toro--and a new target destination for migrants. However, these possibilities are unlikely to materialize soon enough to avert the concentration of job seekers in the metropolitan area within the next 5 years.

39. Increased job generation will require more vigorous economic growth. In this connection, perhaps the important lesson from the experience of the seventies is the need to orient the Panamanian economy toward the international market and thereby relax the constraint imposed by the small domestic market. Orientation toward the external market requires that Panama, and especially the metropolitan area, offer advantages of a cost competitive location for production of goods and services for export. Because Panama cannot modify the exchange rate of the United States dollar which it uses as its.medium of exchange, cost competitiveness has to be achieved by influencing absolute - 26 -

productioncost. This can be done by providinggood infrastructure,competitive wage cost, taking into account both wage rates and productivityof labor, and reasonableprices for other domestic inputs. In addition, the preservation of the climate of social stabilityand economic freedom will continue to be a basic requirement for growth. All these are required to enhance the expectation of profitability,which must be followed by higher levels of investment. Improvementin growth will therefore depend on the removal or reduction of all impedimentsto investment,bureaucratic and otherwise.

40. Employment policy should also be concernedwith the need to increase the marginal employment/outputelasticity mainly by restrainingthe increases in labor cost. This can be approached by improvementin the quality of labor through education and training, and by restraint of increasesin wages. In the Panamanian situation,movements in metropolitanwages are determined by intermittentincreases decreed by the Government,through collective bargaining, and in the minimum wage process. The linking of other cost components-- e.g., social security contributions-- to the wage bill adds significantlyto perceived labor cost. At the very least, wage policy could involve greater caution in the use of Government-decreedincreases, moderation in public sector increasesand the modificationin the base of social security taxes. The emphasis on wages policy can be justified by the fact that the relative cost of labor and the average cost of production would be affected in the same direction,and the impact on expected profitabilityis without ambiguity. The employment/outputelasticity may also be increasedby removing artificial subsidiesin the cost of labor substitutes,e.g., by eliminating duty exonerations on capital goods imports and modifying incentives favoring capital intensity. However, care must be exercised in this approach since the average cost of production may be raised as the relative cost of labor is lowered and the employmentimpact of one cost change may offset that of the other. Theo- retically the reduction in taxation of inputs complementaryto labor could enhance employment creation. The situation is far less clear in actual practice since capital goods may be complementsto and substitutesfor labor and to separate these would require complicatedadministration systems. Nevertheless the principle is useful in analyzing the employment effects of future decisions in the taxation, subsidy, and price regulation areas.

41. The adjustment of manpower supply to meet the demand rather than attempting to be selective in the technology of industrieswould appear to be a more feasible strategy for Panama. This is so because the international market tends to fix the technology along with product specifications;Panama would thereforebe curtailing options for productive activity by being selective. Consistentwith its policy of relative openness and freedom Panama should wel- come all legal activities.This is feasible because with its highly developed connectionsto internationalcapital markets, capital would not appear to be a limiting factor. Such an approach is necessary in providing a variety of opportunitiesfor the variety of skills and tastes among the labor force, and has the merit of not quickly resulting in a bottleneck for particular capacities. However, it does not lend itself to economiesof scale in training, and training in response to small identifiedneed may have to be conductedwith foreign personnel. Specializedtraining in anticipationof uncertain-need is not - 27 - recommended. Panama is already following a pragmatic approach involving general education and training in schools, and government supported and often conducted specialized training in response to requests from firms with demon- strated commitment to establish operations in the country. The extension of placement services and the coordination of placement with training already underway in the metropolitan area will further facilitate the matching of the unemployed labor force with emerging vacancies.

42. Policy makers must face the reality that even with a successful job generation effort, more effective balancing of skills and better placement, there are likely to be many unemployed over the medium term, and that these must be assisted in fending for themselves. This seems preferable to special public employment programs which burden the budget and rarely develop any capital infrastructure of permanent benefit to society, and to relief transfers which are not tailored to the final achievement of a self-supporting status for the beneficiaries. Employment policy should include a component aimed at enhancing the opportunities for self-employment. This component would need to include provision of technical assistance, credit, and sites for artisanal activities and small business, as well as support for cottage industries to facilitate availability of inputs and access to markets. Undoubtedly, there are significant risks of non-recoverability of loans; but the expected loss may be regarded as a transfer justifiable on social grounds. Since the unemployed do not cease consuming there must be a transfer from those involved in production, and some transfer through the budget could well be closer to the socially optimal transfer mechanism than less monitorable alternatives. The fundamental justification for supporting self-employment is that the beneficiaries energies are channelled toward production, however small, rather than being focussed on mechanisms for transferring income from the rest of society. The unemployed who are not benefitting from unemployment insurance nor receiving assistance for self-employment should be regarded as an appropriate target group for social services including counselling, retraining, and material assistance. The ultimate objective should be to prevent loss of dignity, breakdown of the personality, resort to undesirable social behavior, and permanent loss of productive capability.

43. In concluding this overview of the necessary components of employment policy it should be observed that many of these components especially in the areas of training, support for self-employment, placement and conciliation of disputes already exist in metropolitan Panama. However, they exist and are seen almost independently, rather than within the framework of a compre- hensive package of measures to address the emerging unemployment problem. Seen within this framework, many adjustments, including the creation of mechanisms for more effective coordination of policies and responsible institutions, will no doubt be recognized as necessary to better employment policy. - 28 -

IV. GROWTH AND EMPLOYMENT PROSPECTS IN THE INTERNATIONAL SERVICE SECTORS

44. A near to medium term developmentstrategy for employmentin the metropolitanarea must be based on the prospects for growth of the international service sectors, which have proven their dynamism and resilience during the seventies,and must include measures to ensure their maximum future contributionto employment generation. The financial sector, tourism and the Colon Free Zone are the likely important contributors. The Panama Canal, already near full capacity utilization,is unlikely to be a source of expanding employmentto Panamanians;ship repairing and other activities which may result from port developmentprojects are expected to provide some employment but are unlikely to have a significantimpact before 1986.

A. The Financial Sector

45. Financial intermediationrealized an average annual rate of growth in GDP of 11 percent during the decade of the seventies. The sector's contribution to total GDP rose from 3.9 percent to 7.8 percent. Expansion in international banking and re-insurancewere the main sources of the sector's growth. The banking system, which comprised 27 banks in 1970 and over 110 banks by the end of 1980, also grew both in terms of funds handled and the range of services offered. Investmentbanking involving the packaging of projects and the underwritingand placement of stocks and bonds, as well as export financingare now part of the regular activities.Total assets of the system have increasedrapidly from about $10 billion in 1975 to $35 billion in 1980, with liabilitiesto overseas depositorsamounting to about 83 percent of this amount. More than 25 re-insurancefirms are now operating in Panama. In the two years after Law No. 72 of 1976 establishedthe regulatoryframework for this industry,re-insurance premium income doubled, rising from $25 million to $50 million. - 29 -

Table 16: NUMBER OF BANKS BY TYPE OF LICENCE, 1970-80

General International Representation Year Licence Licence Licence Total

1970 24 2 1 27 1971 26 2 2 30 1972 27 13 3 43 1973 34 14 4 52 1974 44 19 4 67 1975 46 16 4 66 1976 48 19 5 72 1977 48 24 8 80 1978 51 24 10 85 1979 52 27 8 87 1980 (June) 60 35 12 107

Source: National Banking Commission.

46. Employment in the sector grew at an average rate of 8 percent per year during the seventies. During 1976 to 1978 employment in the financial sector increased by 3,840 new jobs - over 1,200 per year, making it the largest contributor to employment (excluding the recently discontinued Emergency Employment Program) during a period of slow job generation in the economy. By 1980 over 7,000 Panamanians were employed in banking, the majority of these servicing the domestic banking business.

47. The outlook for growth and job creation in the sector must be based on an assessment of the permanence of factors which favor Panama as an international banking and re-insurance center, and on the outlook for the growth in the Eurodollar market of which the Panamanian international banking center is an offshoot. It must also take into account certain structural considerations, e.g., the relative labor intensity of domestic versus international operations. Some factors favoring Panama, such as its central geographic location and efficient international communication and transportation, are essentially permanent. Others are potentially within the reach of Panamanian policy makers but are not expected to be substantially modified within the near future. These include the use of the United States dollar as the medium of exchange (thereby eliminating risks of convertibility while putting exchange rate adjustment outside Panamanian control), the absence of controls on the international movement of capital, the exemption from taxes on interest on bank deposits and on profits from international transactions, and the existence of a stable regulatory framework provided by the Banking Law of 1970 and prior corporate legislation. However, Panama's relative advantage can be eroded to the extent that foreign policymakers succeed in making competing locations more attractive. - 30 -

48. A recent change in the banking regulations of the United States permitting the establishment of "offshore" banking facilities or "free trade zones for banks" on U.S. soil will profoundly increase the relative attractive- ness of American banking centers vis a vis Bahamas, Cayman, Panama, Singapore etc. Because these facilities will be equivalent to foreign branches, dollars deposited in them will be considered Eurodollars and unlike ordinary domestic deposits will require no legal reserves. This will tend to enhance profits in these branches, which will not be subject to federal or state income taxation. Based on the number of applications for permits filed with relevant authorities, over 70 facilities will soon be established, areas of heavy concentration being New York, Chicago, California, Texas and Miami. California and Miami are likely to become attractive alternative locations for Japanese and South American banks respectively, which formerly would have located in Panama. More recently, Japan has announced plans to establish a free trade zone in international banking. This may also reduce the number of Japanese banks seeking offshore locations. The outlook is that future growth of the Panamanian banking system through the entry of new banks is likely to taper off both because of competition from continental U.S.A. and Japan, and because Panama already has most of the important banks.

49. The Eurodollar market is likely to continue to grow during the eighties. The growth of international banking has been closely linked to international trade and capital movements. Over 80 percent of world trade is ordinarily conducted in U.S. dollars. In addition to dollars needed for trade, large amounts have been required to facilitate the recycling of the surpluses of oil exporting countries since 1973, thereby giving an important role to the U.S. dollar as an internationally accepted liquid asset and to the Eurodollar market as the single most important market in which this asset is traded. World exports of goods and non-factor services are expected to increase by nearly 300 percent during the eighties and periodic oil price increases are likely to continue the need to recycle surpluses from time to time, although both world trade and oil surpluses are likely to grow more slowly in the 1980's. The outlook is that expansion of the Eurodollar market will continue during the eighties. In turn there should be continued expansion in the Panamanian banking center, reflected primarily in the growth of those banks already located there.

50. In addition to growth generated by expansion of the Eurodollar market, there are opportunities for growth by extending the range of activities and services provided by the Panamanian banking center. There is the possibility of expanding the syndication of large loans and of further development of markets for bankers acceptances, bonds and other financial assets. The role of Panamanian policymakers in realizing these possibilities for further development of the sector can essentially be limited to updating the legal framework in order to remedy any inadequacies. Experience with the development of banking and re-insurance has underlined the importance of a stable framework of legislation and the maintenance of an open financial sector. Besides the opportunities for increasing the range of services, the growth of the financial sector is also favored by the expansion of Panama's dynamic international commercial sector, specifically the Colon Free Zone, and to the new industrial free zones being established at Colon, near Tocumen airport and elsewhere. - 31 -

51. Growth and employmentgeneration in the sector will be tempered by the fact that the relativelylabor intensive domestic operations of the banking system are not expected to expand rapidly. Indeed the banks' domestic operationsmay have been over-expandedin the seventies,and some banks have been reducing their branches, especiallyin rural areas. The 11 percent average annual rate of growth and 8 percent average increase in employment during the seventies is unlikely to be achieved in the eighties. Such a performancewould have provided additionalemployment of about 1,300 per year. A more realisticexpectation is that growth during the eighties will be about 8 percent and employment generationabout 1,000 jobs per year. Secondary employmentgeneration in construction,formerly of much importance,is unlikely to equal past performanceif entrants turn out to be smaller banks and the emphasis representational.

52. Even these modest expectationswill require that Panama act to avoid the potential constraint on growth inherent in the limited availability of Panamanianprofessional and skilled workers at reasonable cost. There is evidence that intense competitionfor managers and data processorshas induced frequent turnover with high dislocationcosts and has bid up salaries beyond internationalnorms. Over time banks have moved to computerizetheir operations requiringpeople with data processingand computer skills. To maximize job creation the Panamanianeducational system must produce enough adequately schooled/trainedworkers and must be flexible in respondingto the change in skill mix required by the changing technology of the sector. Trends in enrollment in commercial programs in second cycle secondaryeducation as well as in the universityduring the late seventieswould suggest that the labor force available and suited to this sector could increase by only 1,500 per year over the next four years. This may not be sufficientto allow employmentperformance of the late s..ventiesto be repeated when account is taken of the demand for these skills in other sectors such as commerce, transport,communications and storage, and in manufacturing.

B. Tourism

53. The expansion of tourism, another internationalservice, could make some contributionto growth and employmentin metropolitanPanama. Although not regarded as a major tourist destination,Panama had 386,000 visitors in 1979 after an average annual increase of 10.6 percent during the seventies. Real earnings from tourism measured in terms of command over imports grew at 11 percent per year during the second half of the decade. The distributionof tourist expenditures,with 40 percent for shopping, 24 percent on lodging, 18 percent in restaurantsand bars, 6 percent each in casinos and for transport, 4 percent on entertainmentand 2 percent in tips, suggests that tourism has had a significantemployment impact outside the hotels subsector. The impact within the subsector can be gauged, albeit crudely, from the number of rooms and the estimatedaverage employment per room. At June 1980 there were 4,619 hotel rooms in Panama according to data from the PanamanianTourism Institute (IPAT), of which over 3,200, or 70 percent, were in the metropolitanarea. - 32 -

Direct employmentusually varies between 1 and 2 employees per room, varying directly in relation to size and quality of hotel. Assuming the lower figure of one employee per room as an average (a figure consistentwith an estimate for hotel projects financed by COFINA), direct employment in hotels may be set between 4,000 and 5,000 with about 3,000 in the metropolitanarea. By 1984 another 1,000 high class hotel rooms are expected to become available, given projects underway or under discussion,e.g., the 400 room Marriott was nearing completion;and with additional lower class rooms (number uncertain)an increase of 1,500 jobs could be generated.

54. This estimate does not take into account the potential increment to room capacity warranted by recent improvementsin infrastructure,specifically the recently completed convention center and the new international airport. The convention center, with a meeting capacity for 6,800 persons, is equipped with an advanced electronic communicationssystem, offers 32,000 square feet of multipurposeexhibition space, and a 3,000 seat auditorium equipped for simultaneoustranslation in six languages. By September 1980 it had attracted bookings from 36 users in the 1980-82 period. However, lack of adequate hotel room capacity could be a serious deterrent to the full use of the center. The existing stock of hotel rooms in Panama City was enjoying occupancyrates of 70 percent in absence of the center. Full use of the conventionfacility could require 3,000 first class rooms in addition to those already planned. If investmentdecisions to build these rooms were expedited, and additional tourist attractionssuch as sport fishing, canal and city sightseeing,museums and accessible beaches were developed to encourage longer stay, the increase in direct employment in hotels could well be of the order of 2,500 by 1985, or about 600 per year. Indirect employment in food service, transport,entertainment, and commerce associatedwith this expansion could be an additional 400 per year.

55. The profitabilityof such an expansion in rooms, which could cost between $100 million to $150 million in 1980 prices, would depend directly on the intensityof use of the conventionfacilities. Most hotels require an occupancy rate of 50-60 percent to break even. Since not all conventions would be large enough to occupy all rooms, the center would need to book an average convention size of about 2,500 to generate the required hotel occupancy. To most hoteliers the build-up of room capacity to serve a new center may seem too speculativeand it may well be necessary for the Government to provide some guaranteedhelp to private investors to handle cash deficienciesin the early years. Given the size of the public debt and Government involvement in some losing tourist developments,one is reluctant to recommend further Government involvement,but since the viability of the center in the absence of adequate room capacity is doubtful, the center and necessary rooms must be regarded as together comprising the project. The question which the Government now faces is whether or not it makes economic sense to make a further investment to complete the project. The guarantee to private investors could well be the least costly route, but all the relevant alternativesneed to be studied. The Government should study the economic feasibilityof undertaking primary developmentfor tourism on sites to be resold or leased to hotel developers. In view of the advanced booking of the center, even in absence of - 33 -

a full promotionaleffort, some additionalrooms could already be justified. Intensifiedpromotional work to develop fairly firm bookings two and more years in the future would seem to be an urgent requirementif investors in hotel developmentsare to be stimulatedby the new prospectscreated by the center.

C. Colon Free Zone

56. The Colon Free Zone (CFZ) is one of the importantpoles in Panama's internationalservice sector. Establishedin 1948 and opened for business in 1952 with 10 companieson six hectares of land, the warehousing,display, and transshipmentcomplex at the end of 1979 occupied 44 hectares with fully developed facilitiescontracted to 350 companies. The value of merchandise trade handled by the Zone is now over two billion dollars per year, and grew at the rate of 35 percent per year between 1975 and 1978. Panamaniansemployed in the CFZ numbered over 6,000 by 1979, the number having grown at 8-1/2 percent per year in the second half of the seventies.

Table 17: PANAMA: OPERATIONSOF THE COLON FREE ZONE

Est. 1976 1977 1978 1979

(Millionsof U.S. dollars)

Total net receipts from Colon Free Zone 80.0 101.6 129.4 179.8 Wages and salaries 18.8 21.3 24.4 34.0 Depreciation 2.2 2.4 2.4 3.3 Profits 36.6 45.9 68.3 94.9 Other services 22.4 32.0 34.3 47.6 Imports (f.o.b.) 560.3 786.8 1,080.4 ... Food products 12.3 16.5 21.3 Beverages and tobacco 21.0 26.9 36.4 Chemical products 101.4 118.1 135.1 ... Manufactures 293.9 395.5 576.4 ... Machinery and transportgoods 131.2 213.5 282.1 ... Other 0.6 16.3 29.1 ... Exports (f.o.b.) 649.2 905.5 1,205.1 ... Food products 16.3 28.0 26.9 ... Beverages and tobacco 24.7 31.6 38.7 ... Chemical products 146.1 164.5 196.9 Manufactures 342.2 487.9 683.7 Machinery and transportgoods 118.9 188.3 252.8 Other 1.0 5.2 6.1 ... Residual /a -8.9 -17.1 4.7

(Number of employees) Panamaniansemployed in Colon Free Zone 3,795 4,192 4,655 5,157

/a Changes in inventoriesand nonresidentvalue added. Sources: Office of the Controller General; and Fund staff estimates. - 34 -

57. Prior to October 1979 when the new Canal Treaties came into effect the growth of the CFZ was constrainedby the availabilityof land. However, with the reversionto Panama of nearby lands in Old France Field, France Field and Coco Solo, the expansionof the Free Zone across Manzanillo Bay became feasible,and is being undertakenas part of the general development of the area. This component,estimated to cost about US$30 million, is physicallyan extension of the 13-ha site currentlyunder developmentat Old France Field, and will consist of a 35 ha duty free warehouse and commercial operations developmentsimilar to that already establishedin the Free Zone. Sites will be leased by the CFZ to investorswilling to take the responsibility of constructingthe buildings. About 3,000 additional permanent jobs have been created by end-1981 as a result of this component. 58. Given the developmentsin train or likely in the main international service sectors, the average annual increase in employment in these sectors could be of the order of 3,000 jobs. These sectors (financial,tourism, and the Colon Free Zone) together employed about 30,000 in 1978 so that higher than average growth and employment/outputelasticity have to be achieved if the increase in jobs is to reach 3,000 per year. While Panamanian employment on the canal itself is unlikely to grow, additional employment in the canal area is possible when projects like the drydock at Balboa and port developments on the Atlantic side are undertaken,but the number of additional jobs per year would hardly be more than 300. This would mean that, with about 14,000 additions to the metropolitanlabor force each year, expansion of the international services sectors will absorb less than one quarter of the increment, leaving a major task of job creation to the less dynamic sectors oriented toward the domestic market for goods and services.

59. While the demand for labor in these sectors, viz. wholesale and retail commerce,manufacturing, construction, domestic transport,and social and personal services,will respond to growth, the outlook is that their likely rate of about 5 percent per year will be inadequateto provide the required 11,000 jobs per year. The direct employmentprovided by these sectors in the metropolitanarea was estimated at 210,000 for 1978. For these sectors the employment/outputelasticity can be expected to be the average of 0.42 assumed for the economy as a whole, and therefore a rate of growth of 5 percent would not provide more than 5,000 additional jobs leaving about 6,000 additionalunemployed each year. It would require an average rate of GDP growth of nearly 12 percent per annum during 1979-85 to generate the 14,000 additional jobs needed to match the growth of the metropolitanlabor force each year. Alternatively,an increase of the employment/outputelasticity to 1.0 would be needed to generate the required jobs with a 5 percent average rate of GDP growth. During 1979 and 1980 average GDP growth was around 6 percent and it is very likely that the economy failed to provide employment for the incrementallabor force. With the public sector unable to finance job creation the problem is to see which sectors can be freed of market and other constraintsand made to grow faster, and to see in what ways employment/output elasticitiescan be raised without loss of competitivenessof Panamanian production. Of these sectors, manufacturingseems the most likely candidate for further scrutiny. - 35 -

V. THE MANUFACTURINGSECTOR

60. Emphasis on manufacturingas a source of future employmentis justifiedby the sector's relativelyhigh employment/outputelasticity and by the prospect for achieving and sustaining a higher rate of growth. Intersec- torial comparisonsindicate that manufacturingis of higher than average elasticity,ranking above constructionand very much above commerce. During 1970-74 the employment/outputelasticity reached a peak of about 1.4 compared with an average of 0.6 during the sixties and 0.8 during 1974-78. The decline during the 1974-78 recession does not indicate an irreversibletrend, reflecting as it does how firms adjusted employment in response to declining output. In 1979 manufacturingemployment grew by 11 percent as the sector recovered. The future behavior of the elasticitywill depend on the labor intensityof new activities,on the mix between expansionof existing activities and new activities,and on productivitychanges. While the future elasticity is uncertain, the selectionof new industry can be influencedby policy measures and it is not unreasonableto assume that continuing decline in the elasticity could be avoided during the near term.

A. Recent Trends in Growth and Employment

61. Manufacturingvalue added grew rapidly during the sixties, averaging 11 percent per annum, while the sector's contributionto total GDP increased from 13 percent to 17 percent during the decade. The sector's gross value added in constant 1960 prices reached a peak of $184.6 million in 1973 and declined to $153.5 million in 1975. After a slow recovery, the sector by 1981 exceeded its earlier peak by only 2.7 percent. Employment in manufacturing nationwidegrew at an average annual rate of over 6 percent during the sixties, and at under 2 percent during 1970-78. In 1978 the sector provided about 49,000 jobs or 10 percent of total employment in Panama. Two-thirds of these jobs were in the metropolitanarea, and accounted for 13 percent of total employment (excludingthe EmergencyEmployment Program). 62. The rapid growth of Panamanianmanufacturing during the sixties and early seventiesreflected the success of a strategy of import substitution, a favorable economic and investmentclimate, and businessmenkeen to seize the advantage of integratingbackwards from their traditionalcommerce. Slower growth after 1973 was due to: (i) the deflationaryimpact of the 1973 and subsequentoil price increases on domestic demand, (ii) the collapse of a contructionboom in 1973; (iii) a less favorable investmentclimate as Governmentregulations became pro-labor and pro-consumer;(iv) the uncertainty regarding the canal negotiations;and (v) the decrease in easy import substitution possibilities. By the mid seventies the easy options in food processing and beverages,paints and other constructionmaterials, wearing apparel, and petroleum refining had already been taken. This did not go unrecognizedby policy makers and efforts were made to encourage export-orientedindustry. - 36 -

B. Prospects for Growth

63. The more favorable prospectsfor growth lie in the expansion of exports. The strategy directed to this end involves making Panama an attractive location for foreign-owned,export-oriented industry, and emphasizes the improvementin infrastructure-- e.g., developmentof industrialfree zones, the simplificationof the procedures for the granting of incentives, and active promotionoverseas. The incentives to exporters are mainly income tax exemptions on profits and duty free importationof inputs, machinery and equipment, spare parts, containers,and packaging materials. These incentives are about the same as those offered by most other competing Caribbean locations and probably do not create a net advantage for Panama.

64. One potential disincentiveto export industry derives from Panama's labor policies,which make difficult the dismissal of workers, provide for large severancepayments by the employer,and prescribe wage based social insuranceand other benefits which increase the average cost of labor by more than 28 percent over the nominal wage.

Table 18: DIRECT SOCIAL BENEFIT COSTS FOR PANAMANIAN WORKERS

Type /a Percent of Basic Wage

Basic wage 1.0000 Thirteenth month .0833 Social Insurance /b .1025 Educational Insurance .0125 ProfessionalRisk Ins. .0259 Indemnifications .0577

TOTAL 1.2819

/a In case of construction,add unemploymentinsurance of .0600 and increase professionalrisk insurance to .0567.

/b Including 1.5% to take effect during 1982.

Source: ILO - Determinationof the cost of manpower in Panama 1980 (prelim.),and MIPPE.

65. The intermittentintervention of Government in setting wages, for instance mandating across-the-boardincreases for workers earning less than B/.300 per month and more recently by requiring a 25 percent increase in wages determinedunder collective bargaining,also serves to push up wages and to put - 37 - their wage bill outside of the control of businessmen. Such adjustments, determinedon cost of living and labor welfare considerations,are not necessarily justifiedby productivityincreases nor do they take into account wage adjustment and productivitychange in competinglocations. Panamanian wage rates in industry are higher than those in Guatemala and most competing Caribbeanlocations due partly to the effect of US wage levels paid in the canal area and partly to a relativelyhigher minimum wage. 1/

Table 19: COMPARATIVEAVERAGE MINIMUM WAGES - 1978

(US$ per hour)

Panama 0.98 Barbados 0.90 Colombia 0.45 DominicanRepublic 0.50 El Salvador 0.51 Haiti 0.30 Honduras 0.27 Jamaica 0.51 Nicaragua 0.50

Source: ILO - Determinationof Manpower Cost in Panama 1980 (prelim)

In 1978 the Panamanianminimum wage averagingUS$1.00 was double that of the DominicanRepublic, Colombia,El Salvador,and Jamaica, and triple that of Haiti. One element of labor policy has tended to have the opposite effect. This is the provision of subsidized training of workers in response to identified demand by firms locating in Panama, although to the extent that similar programs exist elsewhere the Panamanian effort would be necessary to maintain competitiveness and would not confer a relative advantage.

66. An assessment of the realistic potential for growth of export industry cannot be made by looking only at Panama. Recession, inflation, and slow growth in most of the industriallydeveloped economies at this time does not favor the availabilityof capital and interest in expansion of plants overseas. However pessimisticthe overall prospects may seem at a cursory glance, Panama's chance of success in attracting such firms as are now seeking to establish plants overseas may be enhanced by the situation in Singaporeand Hong Kong. Singaporehas been so successful that it is not now welcoming any but high technology industries in order to avoid further pressure on labor supply, and Hong Kong will have a labor shortage if growth continuesat recent rates. Panama can offer advantages of a central geographis location,

1/ While comparisonsof minimum wages do not necessarilyreflect actual relative wages, they do give an indication of the relative levels of wage structures gauged by their floor, and are very likely used by investors in forming preliminary judgementsregarding relative wages. - 38 - a highly developed internationalcommercial and banking center and the availabilityof good industrialinfrastructure--sites, water, power, communications and transportation-- all in a relatively stable political environment. Some large firms have shown interest and some contracts have been signed. In the absence of a labor cost advantage over alternativelocations in the Central American and Caribbean region, Panama should be able, at the very least, to attract the less labor intensive operations. Facilitiesbeing developed at Colon, the focus of the drive to attract assembly industries, could be adequate for operations generating 1,000 jobs per year over a 5-year period. Nevertheless,even if this is achieved, the growth of the metropolitan labor force will require greater job generation from the industrial sector. It would seem that a more vigorous drive to attract foreign investors in export industry is needed; but this program emphasizingdevelopment of an enclave assembly industry will not be enough. It will also be necessary to seek out opportunitiesfor growth which lie in deepeningdomestic industry and in developing exports based on domestic raw materials. 67. The opportunitiesPanama's future export oriented industries could encounterwill surely be expanded if the Caribbean Basin Initiative proposed by the U.S. President is passed by the U.S. Congress. Panama is likely to be one of the preferred investment locations for foreign investors eager to receive the U.S. tariff exemptions which would become part of the initiative. The ongoing expansionof the Colon Free Zone, improvementin Panamanian ports, and training of Panamanianworkers, combined with excellent banking and communicationfacilities may, however, need to be supplementedby some policy and institutionalchanges if Panama is to take even further advantage of this initiative in the near future. 68. Further import substitutionof final goods, on the other hand, is unlikely to provide significantimpetus to future growth of manufacturing. With a polulation of less than two million, attainment of relative self-sufficiency or saturation of the domestic market has not been difficult. Table 20: MANUFACTURING: NATIONAL PRODUCTIONAS A PROPORTION OF TOTAL SUPPLY

Type of Goods 1959-1961 1968-1970 1974-1976

Food Products 85.9 89.9 90.4

Beverages Non-alcoholic 99.9 99.9 99.9 Alcoholic 70.0 84.2 80.4

Tobacco 91.5 97.8 99.0

Clothing and other Personal Effects 54.5 54.3 52.6 Shoes 70.1 72.8 64.1 Clothing 69.3 55.4 55.2 Other 3.3 4.0 8.5

Light and Fuel 81.3 99.7 99.5

Furniture and Domestic Appliances 18.3 34.2 29.9

TOTAL 73.9 79.5 87.9

Source: Controller General - 39 -

For a fairly wide range of consumer goods national productionprovided an average of 88 percent of total supply in 1974-76, with higher percentagesfor foods, non-alcoholicbeverages and tobacco and lower ones for clothing and other personal effects; the lowest being furniture and domestic appliances. By 1981 the percentagefor clothing and furnituremost likely was above the 53 percent and 30 percent estimated for 1974-76. These percentagesrelate to gross values of final product and not to domestic value added, and therefore do not indicate the opportunityfor growth which may reside in deepening the productiveprocess through greater domestic productionof intermediategoods and inputs. Yet for a small market, with limitationsof the resource base and with technologicalconstraints, these opportunities,while quickly exhaustible, should not be ignored.

69. The fiscal incentivesto manufacturersserving the domestic market are exonerationfrom import duties similar to those provided exporters, exemption from income tax on part of net profits invested in expansion of plant capacity,and loss carry forward and accelerateddepreciation privileges. In addition there is a special incentive to their exports in the form of freely transferabletax credit certificates(CAT) redeemablenine months after emission in payment of direct taxes and customs duties.

70. The original and basic incentive to domestic manufacturingis the regime of tariff and non-tariff protectionset up under Law No. 25 (1957), which provided that adequate protection against internationalcompetition be given to products of national manufacturewhich fill the country'sneeds in quantity, quality and price. In practice the form and extent of protection is essentiallyleft to be decided by the appropriateauthorities on a case by case basis. Because of the relativelylow levels of Panamanian tariffs "adequate"protection has been provided through quantitativerestrictions on imports. One-half of all producersunder incentive contractswith the state are protected by quotas involving about 260 items. Price controls imposed to limit the exploitationof consumers determine the level of nominal protectionassociated with the quotas. As a guide to setting control prices, the domestic price is ordinarilynot to exceed the c.i.f. value of the imported equivalentby more than 20 percent for non-agriculturaland 50 percent for agriculturalproducts, but there are cases in which differencesas high as 75 percent exist. The exonerationof inputs and equipment from import duties means that for final goods the price advantage created by the quota is not eroded by the protectionof other items, and because the ratio of domestic value added to gross value of productionis relativelylow, effective protection is quite high. Average value added for manufacturersemploying 5 or more persons in 1978 was probably of the order of 30 percent, the data indicatinga downward drift over time from nearly 50 percent in 1961 and around 40 percent in 1970. Assuming that on the average controlledprices of items on quota are set at 35 percent above the c.i.f. value of equivalentimports according to the guidelinementioned above, the implied effective protectionwould be over 100 percent. This does not rule out the possibilitythat for individualitems the level of effective protectioncould be much higher, e.g., if the items enjoying 75 percent nominal protectionare associatedwith a 30 percent domestic value added then the effective protectionwould be 250 percent. - 40 -

71. This high level of effective protection of domestic final goods manufacturemay have been useful in the import substitutionstrategy of the late sixties and early seventies,but it has fostered the development of industrieswhich do not produce competitiveexports. This may be because of relative inefficiencyor because the lower rates of profit from exportation are unattractiveto entrepreneursaccustomed to high rates of return in the domestic market and access to tax-free return on deposits in the banking system. At the same time, the low level of nominal protectionand frequent exonerationof inputs from import duties has not provided encouragementto the developmentof intermediategoods industries. A high degree of protection of final goods as a temporarymeasure can be justified in the case of infant industries,but temporarymeasures tend to become permanent and many infant industriesnever mature. With the extension of all developmentincentive contracts in 1977 by ten years, contracts will now last until 1987 and up to 1997 in some cases, by which date some firms will have enjoyed 40 years of benefits. If the bias against exportation is to be reduced and if the industrial structure is to be deepened, the level of effective protection to final goods must be reduced, and there must be greater uniformity in the nominal protectionafforded all goods. In the absence of a significantre-orientation toward exports, growth of domestic manufacturingis unlikely to be higher than that warranted by population growth and by the rate of growth in per capita real income, about 5 percent per annum.

72. While the adjustment of protection would reduce distortionsin resource allocation and be conducive to growth over the longer term by allowing resources to revert to sectors which can use them more efficiently,there is risk that in the near term some activitieswould be adversely affected. In order to minimize this risk, the adjustment should begin with the reduction of protectionto final goods by raising the protection on intermediategoods and inputs which have hitherto not been protected. This would involve discontin- uing duty exonerationson such imports and the impositionof a uniform minimum tariff. Such an action would provide some impetus for the deepening of the industrial structure by the developmentof intermediategoods production. Then the protectionof final goods could be further reduced by replacing quotas with tariffs and programmingthe gradual reduction of tariffs. Undoub- tedly, firms will be under pressure to become more efficient and technical and financialinputs to assist this process should be made available, especially to smaller firms. Where the reduced protectioncannot be accommodatedby cost reduction through improvementin efficiency,payments to factors will have to be depressed, which would not necessarilyinvolve a reduction in wage rates, but perhaps a pause or a slower rate of increase. In some activities,however, the reduction in protectionmay reduce profitabilityto the point where domestic production has to be cut back or eliminated,resulting in either case to the release of resources,especially labor. In this case, programs for re-trainingworkers could help their absorptionin other industries. The objective of all these measures would be to minimize the adjustment cost, and to allow the economy to reap the benefit of having the resources diverted to sectors which have not been protected and in which Panama may have comparative advantage. - 41 -

73. While the identificationof opportunitiesfor growth by widening the range of activities and by deeping processes--producingintermediate goods--meritsits own careful study, it is possible to select some promising cases for early examinationand as way of suggestingthat such opportunities exist. One approach is to look at the resource base and potential growth areas in agricultureand other sectors to see what inputs these could provide for industrialactivities. The possibilitiesfor expansion of food processing are good for meat and milk products, given the potential for expansion in grass-fedbeef and dairying. Reorganizationof slaughteringcould permit renderingof offal into glues, gelatine and fertilizer,for example. Leather goods using inputs from a domestic leather industry based increasinglyon domestic hides should also have good longer run potential. High quality leather goods for export would not be faced with significantmarket constraints, and, with the backward linkages and opportunityfor labor intensive techniques, both domestic value added and employment generation could be significantif appropriateskills are developed. Indeed these opportuntiesare already being used, and leather goods production showed a clear upward trend during the seventies. Wood products and furniture represent another category of manufactures in which Panama could have a comparativeadvantage, given the possibility of product differentiation,availability of indigenous tropical woods, and the potential for forestry. Furniture and fixtures is well below self-sufficiency and local demand has been expanding as housing is improved. Although not having a tradition as wood workers, Panamanianscould be trained to become skilled craftsmen, eventually able to produce high quality pieces for export using exotic domestic woods. Besides industrial opportunitiesbased on inputs from agricultureand forestry, Panama may have other opportunitiesbased on its hydroelectricresources. Compared with many competingCaribbean locations where electricitygeneration is based almost exclusivelyon increasingly expensive petroleum,Panama could offer over time relativelycheaper electricity, which could give it a comparativeadvantage in industrieswhich need much power, e.g. electroplating. Apart from the opportunitiesdetermined by access to resources there are likely to be others based on access to market. One such market could be ships passing through the canal. Repair facilities for such ships could provide a basis for foundry and machine-shopactivities. Recent political dislocationsin Central America adversely affecting industry have created market opportunitiesfor Panama's food processing industry. These opportunitiesmay be only temporarybut Panamanian suppliers responded quickly to them. This may have whetted the appetite for profit to be made in exportationwhile giving local producers valuable export experience. Cursory examinationis not sufficient to identify all the possibilities. Detailed analysis and survey would not only help to identify them but to form the basis for developmentsin infrastructureand adjustmentsin policy in order to bring them within reach.

74. In summary, the prospects for growth of the sector during the near future seem to rest on the entry of enclave export industries,the start of activities in response to emerging markets, and the deepeningof domestic industry by exploiting possibilitiesfor backward linkages. The behavior of Panamanian wage rates will be crucial in determiningthe attractivenessof Panama as a location for export industry, hence Government interventionin - 42 - interventionin labor markets on behalf of workers should be approached with caution. More uniform protection could help deepen industrial development,but re-orientationtoward exports is the only way around the constraintof a small domestic market and this re-orientationrequires reductionin the level of protection. The first stage involving the replacementof quotas with ad valorem tariffs has already been announced by the Government. This said, it should be recognizedthat the perception of the Panamanian policy environmentcould be as as importantas the policies themselves. In this regard the system of price control is perceived by entrepreneursas being essentiallyanti-business. Because controls will become less necessary as protection is reduced, the early relaxationof controls may have a positive announcementeffect with minimum compromise of future policy options. The administrationof the system of incentivesrevolving around a formal contract is presently very cumbersome and inefficient. On the average, processing an applicationfor incentives takes four months. Although a more efficient system is contemplatedfor enclave export industry, as the level of protection is reduced the distinction between enclave export and domestic industry will become less well marked, and a uniformily simple system could be applied across the board.

C. The Prospects for Employment in Manufacturing

75. The prospects for employment expansion in manufacturingwill depend not only on the sector's growth and subsector participationin that growth, but on the restraint of the downward trend in employment output elasticity. Among many factors underlying this trend are possibly some which are determined or can be affected by policy in Panama. These are factors which operate through the relative cost of labor. Some affect the perceived cost of labor mainly wages and wage related benefits, and labor market regulation;and some tend to lower the cost of capital, e.g. re-investmentallowances, accelerated depreciation,and duty-free importationof machinery and equipment.

76. In addition to its dampening effect on expected profitability, Panama's high wage structurewith its wage-relatedbenefits is very probably conducive to a less labor-intensivefactor mix than would otherwise be the case. This would tend to reduce employment first by making it unprofitable for more labor intensive operations to locate in Panama, and second by inducing those locating there to select a more labor saving (or avoiding) technology where possible. The restraintof the downward trend in the employment/output elasticitywill require measures to keep money wage rates from rising out of line with productivityincrease in Panama and with labor cost in competing locations. The Government has from time to time decreed increases in wages to recipientsof incomes below a specified figure and has recently revised upward increasesagreed in collective bargaining. The future avoidance of such interventioncould help moderate money wage increases. With the change in Canal wage policy involvingthe payment of new Panamanian employees on the basis of domestic rather than United States rates, the upward bias usually coming from this source will be lessened. Moderation of wage adjustments in the public sector could also help to set the tone for wage increases nationally. To the extent that present wage-relatedbenefits could be more widely based the bias against employment may be reduced. The possibilityof doing so shoul be studied. - 43 -

77. The regulationof the labor market in Panama, cited frequently by local businessmenas an important negative factor in their developmentand employment decisions, provides for the setting of minimum wages, supports the developmentof trade unions, ensures job security for workers, regulateshours of work, determinesvacation and other benefits, and prescribes procedures for settlement of disputes.While the pro-laborbias is generally offensive to businessmen,it is the curtailmentof their freedom to lay off workers and the large contingent liability inherent in the severance pay requirementswhich is cited as the main disincentiveto employment expansion. Indeed, the employer may only lay off workers for economic reasons if he can satisfy the labor authoritiesof the need to do so. Thus what is perceivedas a business decision has been taken out of the entrepreneurshands and given to bureaucrats. Businessmenfeel that the high and temporally progressive indemnificationrequirement is an adequate safeguard against unnecessary dismissal of workers and by itself would not abrogate their freedom to make business decisions. Yet, they also consider the severance pay obligationas an onerous burden, sufficient to make them reluctant to hire new workers. This attitude has been reinforcedby the fact that recently banks have been requestingand using informationon length of attachment of employeesin order to take account of the contingent liabilityfor severance pay in determining company creditworthiness,thereby putting labor-intensiveoperations at a disadvantagein getting credit.

78. Recent changes in labor legislation(specifically Law 8 of 1981) include some which will tend to reduce the disincentiveto employment,but on the whole they do not reflect a belief in expanding job opportunitieswithin the context of a rapidly growing economy as the best way of providing employment/ income security to workers. The inclusion of small manufacturerswith 15 or less workers, agroindustrieswith 20 or less workers, farms with 10 or less workers, and sales and service firms with 5 or less workers among the excep- tions where workers can be dismissed for economic reasons without the employer having to justify cause to the authoritiesis one change which will restore a measure of freedom in employment decisions formerly lost to small businessmen. A new clause allowing businessmento pay a surchargeon the prescribed severance indemnificationrather than re-employ a dismissedworker in a confidential capacity who has procured a judgementin favor of his re-employment,also restores greater freedom to employers. The change allowing an employer in difficulteconomic circumstancesto spread severancepayments over six months will make the adjustment of labor input less burdensome,thereby assist- ing firms to remain viable and at the same time increasingthe likelihoodthat dismissed workers will be indemnified. Regarding collective labor agreements, the retentionin Law 8 of the recognitionof the employers' right to determine the number of workers necessary for the normal functioningof the firm, formerly provided under the repealed Law 95 of 1976, and the dropping of the stipulationthat the collectiveagreement specify the classificationof posts, are further reductionsof the dysfunctionalpro-labor bias in the labor code. The new provision that no firm is obligated to enter into a collectivelabor agreement during the first two years of operations,construction companies excepted, could well turn out to be a very positive signal to new businesses studying alternativecountry locations in the Caribbean basin. On the other - 44 - hand, the Minister of Labor can no longer authorize a moratorium in the payment of increasesdue under a collective agreement even where the economic viabilityof the firm would be imperiled by such payments. Also, there is a provision specifyinga surcharge of ten cents on the minimum wage for workers working less than twenty hours per week, which raises the wage cost in a manner favoring the employment of fewer full-time /1 instead of part-time workers, thereby discouragingthe spreading of work opportunity.

79. Further changes need to be considered in order to minimize the anti- employmentbias associatedwith the effort to protect workers. High priority review of severance indemnificationarrangements seems warranted by the extreme sensitivityof employers to these provisions. The review should decide whether the principal objective should be to enhance job security or income security of the worker. A necessary condition for both is economic growth with expandingemployment opportunity. The best way of providing for the worker when his job security or income security is threatenedmust be consistentwith this necessary condition. This means that the rules for determiningbenefit (or compensation)which the worker receives,as well as the bases for distributionof the associated burden, must not discourage economic growth and the employment of labor. A priori a system that places the full burden of job or income security on the employer in the face of adverse economic circumstancesis flawed by ignoring the employer'sability to pay. Usually economic circumstancesare not equally adverse for all employers at once; thereforethere would seem to be merit in having a system based on collective sharing of the burden of severance benefits. Weak firms would be helped by strong ones and the workers would be more certain of the benefit. Usually economic circumstancesvary over time for individual enterprises; therefore there is merit in spreading over time the contributionto severance rather than concentratingit when the firm is in difficult economic circum- stances and wishes to reduce its labor force. Firms could actually do this under present arrangements,but, unless their contributionis put beyond their reach on a current basis, there is no assurance that workers will be adequately protected. Presently the system is benefit based; the employer is assumed to benefit from the worker to an extent related to the wage paid. However the ability to contributedepends on the surplus which the firm derives from all the resources it employs, of which labor is only a part. Contributionon the basis of ability to pay, as measured by the total revenue or by the surplus, would not raise the cost of labor and would not discourageemployment. These cursory considerationssuggest that a change toward a pay-as-you-go,profit or revenue based, collective severance fund may be an alternativeway of providingworkers better protection through more certain indemnificationfor job or income interruptionand greater likelihood of finding new employment. Clearly, a review of the system should also address the structure of indemni- fication; i.e. the rules for determiningthe amount, installmentsetc., of payments to the worker.

/1 Full-time in this sense means more than 20 hours per week and part-time means less than 20 hours per week. - 45 -

80. A review of the minimum wage system, startingwith its objectives, should aim at the simplificationof what is now a far too detailed structure. With tripartitecommissions now involved in wage negotiationsit can be left to such negotiationsto determine the hierarchy of rates in industries like constructionas well as the regional differenceswarranted by differences in cost of living. The minimum wage could relate to sectors in which no other official body is involved in setting rates, and could be a single figure for urban and another for rural, based on the cost of procuring a determinedminimum standard of living.

81. There are some positive aspects of labor policy tending to increase productivityand reduce labor costs. These should be reinforcedwhere possible. The recently stressed tripartiteapproach to industrialdisputes has been successful in maintaininga high level of peace in industrialrela- tions. Expansion of training in response to identifiedneeds of firms does reduce the cost of establishingindustrial activities. Recent improvements in the National Employment Service, making it more accessible to both workers and employers, should reduce recruitment/placementcosts and tend to lower frictionalunemployment.

82. The relative cost of labor is also high because of subsidies to the use of capital. These inhere in the tax incentives and duty free entry of capital goods. The extension of re-investmentallowances to working capital and the impositionof a minimum tariff on capital goods imports would tend to reduce the bias against labor without creating a net burden on the fisc, since the additional revenue from the tariff could finance the tax loss due to the additional re-investmentallowance.

83. These measures could be helpful in ensuring that future growth in manufacturingwill be accompaniedby substantialemployment generation. Some of the recent modificationsin the labor code will assist in reducing the bias against employment. The involvementof employers and labor in consultations with Government on matters of policy affecting relative labor cost could facilitatean understandingand acceptance of needed policy changes. Given these changes the outlook for expansion and employment creation in manufacturing must be rated as fairly good compared with the latter half of the seventies. An additional 2,000 to 4,000 jobs per year could well be forthcomingfrom the sector by 1985, mostly in the metropolitanarea. This would require a rate of growth of employment of 4 to 8 percent per year. Given the employment/ output relationshipof the second half of the seventies the associated growth rates would have to be 8 percent to 16 percent per annum. Although a sector growth rate of 14 percent was achieved in 1979, growth was negative in 1981 and sustained growth with an average over four of five years in excess of 8 percent has not been attained in recent times. While higher growth would be made possible by an infusion of export industry and by the accompanyingmultiplier effect on domestic industry, it is clear that higher employment growth will require changes favoring an increase in employment/growthelasticity over the recent 0.5 value. The realizationof the employment objectivewould, of course, require that the infrastructureprovided by the public investmentprogram is consistent with this requirement. - 46 -

VI. THE PUBLIC SECTOR AND THE INVESTMENT PROGRAM

84. Panama's fiscal policy during the mid seventies was expansionary. Until 1976 this policy took the form of increased capital expendituresto acquire and expand the public utilities, to undertake commercial ventures -- e.g., in sugar, cement and tourism -- and to improve transport and other infrastructureto support private sector expansion. Between 1970 and 1976 public sector investment grew at the rate of 18.7 percent yearly in constant terms and declined at almost the same rate during the next three years. This rapid increase in public investment was unmatched by public sector savings, with the result that the public sector deficit went from 4.6 percent of GDP in 1970 to 18.6 percent in 1976, and the public external debt rose from 18.5 percent of GDP to 55.3 percent during the same period.

85. In a shift in policy in December 1976, it was decided that the private sector had to be induced to play a greater role in the recovery of the economy and in generating jobs, if further growth of the already large debt and attendant debt burden were to be avoided. Public sector investmentwas considerablyreduced in 1977 and special tax incentives to employmentwere given to the private sector. However, the private sector response was inadequate to offset the contractionin the public sector. Facing rising unemploymentin the period of uncertaintyjust prior to the signing of the new Panama Canal treaties,the Government introduceda special employmentprogram in November 1977. This program, under which, at its peak, nearly 25,000 persons received B/ 100 per month, continueduntil the end of February 1980. Direct employment by the Government (including decentralizedagencies and public utilities but not public enterpriseslike La Victoria and Bayano Cement) grew by about 1 percent per annum during the seventies and reached about 100,000 or 21 percent of total employment in 1977 just before the start of the special program. It was not until 1980-81 that the sector deficit was reduced to 6 percent of GDP as a result of the economic recovery, lower public investment,increased Canal revenues, the eliminationof the special employmentprogram, and a generally more prudent fiscal policy.

A. The Need for Austerity in Public Investment

86. The future role of the public sector in employment expansionmust be limited by the continuing need for austerity in Panamanianpublic finances, especially in public investment. This is so because of the limited public savings potential, and the intention of reducing the relativelyhigh level of the public external debt and debt burden.

87. Traditionally,public sector savings have been low. During the seventies,savings reached a maximum of 3.8 percent of GDP in 1974, becoming negative in the latter half of the decade. - 47 -

Table 24: PUBLIC SECTOR SAVINGS DURING THE SEVENTIES

(millionsof balboas)

1970 1975 1976 1977 1978 1979 1980 1981

Public Sector

Current Savings 23.0 52.2 -4.2 35.8 -31.7 -42.4 118.7 160.7 Central Government 4.2 -9.6 -27.0 16.0 -45.0 -71.8 29.3 24.9 Social Security Fund } } 15.4 15.2 11.5 31.6 38.7 66.0 DecentralizedAgencies} 18.8 } 61.8 -5.4 -4.0 5.2 -5.8 -3.1 -3.9 Public Enterprises } } 12.4 8.6 -3.4 3.6 53.8 73.7

Central Government

Current Revenue 160.1 295.0 296.7 369.0 405.4 477.0 707.8 790.5 Current Exp. 155.9 304.6 323.7 353.0 450.4 553.8 680.3 766.2 Savings 4.2 -9.6 -27.0 16.0 -45.0 -76.8 27.5 24.3

Central Government (Percent of GDP)

Current Revenue 15.3 15.3 14.8 17.0 16.5 16.8 20.9 20.5 Current Exp. 14.9 15.7 16.2 16.3 18.3 19.5 20.1 19.9 Savings 0.4 -0.4 -1.4 0.7 -1.8 -2.7 0.8 0.6

Public Sector Savings 2.2 2.7 -0.2 1.6 -1.3 -1.5 3.5 4.2

Source: Tables 5.1, 5.5.

These negative savings reflected, in part, sharp increasesin current expenditure by the Central Government,associated with the rising interest burden of the debt, the Special Employment Program, higher oil prices and salaries,together sufficient to offset growth of 12.8 percent per annum in current revenues. There was a sharp increase in Central Government savings in 1980; during 1981 public savings reached a record level. This was due to an increase in revenues from the Canal, by about B/ 80 million in 1980, due to the inclusionof the former Canal Zone within Panama's tax jurisdiction,the discontinuationof the special employmentprogram, the reductionof food subsidies through the AgriculturalMarketing Institute,and a major increase in the savings of the Social Security Fund. While part of the increase in the revenues from taxes on income and on domestic transactionswere due to improvementin the economy, many of these increaseswere once-and-for-all jumps; in the future such revenue growth is unlikely to do more than compensate for increases in expenditure. The great jump in Social Security savings stems - 48 - from the inclusionof Canal workers in the system; as these workers claim health benefits from the system its savings should fall. Indeed Central Government savings fell slightly in 1981. The outlook for improving future public savings is unlikely to be enhanced through the addition of new taxes since Panama's tax load is now high; Central Government and Social Security taxes reached over 21 percent of GDP in 1981. Tax administrationis of fairly high quality, so that revenue growth through better enforcementwill be limited. Some improvementin buoyancy could result from the replacementof specific import duties by ad valorem duties, the impositionof a minimum tariff and the reduction in exonerationsfrom existing tariffs in the case of some goods.

88. Reduction in savings by public enterprisesalso contributedto the poorer savings performanceof the public sector during the latter part of the seventies. This has been primarily attributableto the losses of La Victoria Sugar Corporation- B/30 million to B/ 40 million per year, Bayano Cement - about B/5 million per year - and the Tourism Institute - nearly B/ 4 million per year. In 1980 there was a significantincrease in savings due mainly to a 118% percent increase in average sugar prices, which cut La Victoria's losses by a half; and to a B/ 3.8 million current surplus in Bayano Cement as problems in private sector production resulted in greater access to the domestic market by the state company. During 1980 and 1981, the Electricity Instituteand the TelecommunicationsInstitute had larger surpluses due to higher tariffs and also to greater use of hydropower in case of the former. However, the medium term outlook is not particularlyfavorable. Recently sugar prices have fallen by a half in the main export market and no strong upward trend is expected in the near future. Also, rising average cost as productionfalls due to smut and rust disease is expected to exacerbate La Victoria's losses. The impendingslowdown in constructionand the resurgencein cement supplies from the private sector could reverse the recent improvementin the savings of Bayano Cement. Likewise the Tourism Institute'slosses are likely to increase until the new convention center gets closer to break-evenutilization.

89. The outlook, though not optimistic,would be improved if the Govern- ment could divest itself of some losing enterprises. But if this solution is not available, close and detailed studies of each case will have to be done in order to identify ways to minimize losses and ultimatelymake profits or close the enterprises. While in the case of sugar there is reason to doubt whether the country could become sufficientlyefficient to survive as an exporter, the cement plant is efficient if used to capacity but the domestic market ordinarily available to Bayano is too small to permit full use of capacity. One possible solution here is to sell the plant to the private sector interests making it unnecessaryfor them to invest in convertingwet process plants into the more efficient dry process ones; but the Governmentwould have to be prepared to take a capital loss. In the case of the conventioncenter, the solution would appear to lie in the direction of further investment in complementaryhotel- bed capacity in order to permit fuller utilization of the center. This future investmentneed not necessarilybe undertakenby the State if suitable encourage- ment of private investmentcan be designed. - 49 -

90. In summary, the outlook for continued high public sector savings is not particularly good. The 4 percent of GDP saved by the public sector during 1980-81 is unlikely to be surpassed in the next few years. Indeed, depending on how much La Victoria, Bayano Cement and the convention center lose, the percentage of GDP saved could well fall. The implications of this would be that the level of public sector investment would essentially be limited by the targets set for the relationship between the public external debt and GDP, which would determine the annual overall deficts that could be tolerated.

Table 25: PANAMA'S PUBLIC EXTERNAL DEBT

Outstanding at Dec. 31st 1970 1975 1976 1977 1978 1979 1980

Amount Disbursed (US$mn) 194 774 1,101 1,345 1,898 2,090 2,277

Percent of GDP (%) 18.5 40.0 54.9 62.0 77.2 73.6 67.2

Public Sector Deficits (US$mn) 48.4 196.6 373.6 270.6 365.7 346.0 182.5

Percent of GDP 4.6 13.7 18.6 12.4 14.9 12.2 5.4

Source: Tables 4.3, 5.5, 2.2.

91. The table above shows that Panama's public external debt went up more than 11 times during the 1970's. This debt has become a matter of great concern, and the Government has made its reduction a major policy goal. The growth of this debt is no more than a reflection of the deficits of the public sector, since by the nature of the Panamanian financial system--totally open and using an international currency as the domestic medium of exchange--all public sector borrowing creates an obligation to repay U.S. dollars or some other foreign currency. The dramatic reduction in the deficit in 1980 and the associated slowdown in growth of the debt, as well as its fall relative to GDP, are due partly to the surge in public sector savings, and partly to restraint of capital expenditure. This restraint continued during 1981. The degree of restriction would have to be determined in the face of specific targets for the debt, but if the debt is to fall relative to GDP, the deficit and capital outlays as a percent of GDP should not exceed the growth in GDP at current prices, unless there is a radical change in the public savings prospects. With an inflation rate of about eight percent and real GDP growth of four to five percent the growth of capital expenditures will most likely have to be held within 13 percent per year as a maximum. Any target calling for a reduction in the debt/GDP ratio would require smaller annual increases in capital expenditures, given the assumptions regarding savings, inflation, and growth. - 50 -

92. In addition to the concern provoked by the size of the debt, there, is that associatedwith the interest burden, which increasinglyreduces the freedom of the Government to deploy the resources commanded through current revenues. Interest on the public external debt during 1980-81was equivalent to 7.5 percent of GDP; this representeda significantleakage of Panamanian national savings. Public sector interest payments abroad now will exceed the net external financing received. In the Central Government,interest payment on the external debt used 30 percent of current revenues in 1981 compared to four percent in 1970. The burden in relation to merchandiseexports also increased in the seventies, but this is of less significancegiven Panama's open financialsystem and the relatively greater importance of service exports compared to merchandisein the current account of the balance of payments. Returning to the Central Government,it can be seen that with wages and salaries already absorbing nearly half of current revenues and interest another 30 percent, there is little scope for an employment objective to be pursued as a charge on the current budget, even if this were otherwise desirable. Likewise if the Government continues to borrow heavily, especiallyat high commercial rates, interest payments will absorb an increasing share of current revenues,possibly thwartingdesirable growth of the administrativeapparatus.

93. The maturity structure of the public debt will also constrain Panama's ability to foster employment through public spending. This is so because with over three-quartersof the public external debt maturing within ten years, nearly three-fifthsmaturing within 5 years, and a significant bulge in repaymentsin 1983 because of heavy refinancingwith five year money in 1978, there will be need for large refinancingin 1982/83 and possibly in the years after. This would mean going to the market for about US$300 million per year to re-finance old debt plus an amount ranging from US$230 million to US$400 million per year in respect of deficits between 1981 and 1985, if the public external debt is to be held constant in relation to GDP. What this means is that even with a modest level of capital expenditures,Panama will have to borrowed large amounts over the next few years. To pursue an employment objective simultaneouslywith that of avoiding renewed deteriorationin its indebtednessrelative to GDP it must focus on the content of its public investmentprogram rather than attempting to enlarge it.

B. The Public Investment Program 1982 - 1985

94. As of mid-1982 the Governmenthad not yet finalizeda Public Invest- ment Program. The Ministry of Planning and Economic Policy staff had compiled a very tentative project list of public investment,financial and physical, amounting to B/ 4.1 billion over the years 1982 to 1986. Of this total B/ 0.9 billion comprised financial investments. The financial investmentsare essentiallyloans to agriculture,commerce and industry,education, and housing, which ostensibly should be self-liquidating(but frequentlyare not), but since these investmentswill be financed by the public sector, borrowingmust be within the constraint imposed by targets for the public external debt. They must, therefore, be included in any analysis of the size of the program. - 51 -

95. Although neither the program nor its financinghas been finalized, it may be instructiveto compare the present proposal with the immediately precedingversion for which a financing structure had been determined. The preceding version of the program covering the years 1982-85 proposed total public investmentof B/2,850 million, while the present version calls for the investmentof B/3,300 million during the same period. The financing of the earlier program called for public sector savings varying between 8 percent of GDP in 1982 to 5.3 percent in 1985. These levels of public sector savings are optimistic. As stated earlier, there was a jump in 1980-1 to 4 percent of GDP due to circumstancesnot likely to be repeated in the future. If public savings fall in relative terms in the 1980's, the present ambitious program could lead to far larger deficits than now expected. The problem of over-optimismregarding savings is especially serious in 1982, implying as it does a large increase in savings by decentralizedagencies and public enterprises. A smnoothincrease in savings over the period predicated on the assumption of measures being taken and having effect gradually would seem preferable. But, in the absence of a package of measures to take immediate effect, a reductionin the program will be necessary if consistencywith debt goals is to be retained.

96. The feasibilityof reducing the program will depend on the stage reached by the projects. Nearly 50 percent of the proposed expenditure is for projects already started, about 20 percent is for projects under negotiation, and the remainder is for projects less advanced in the planning process. While this is the distributionfor the five years of programmed expenditure, in the earlier years there is a larger proportion of projects already started. The Government shares some of this concern, and is now reconsideringthe size of a public investment program and its financing. Indeed, at the time of discussing the draft of this report, the Ministry of Planning had only completed a first run of possible financing for the revised but still very tentative program. The concerns, both of the Government and the mission will likely be addressed as further iterations of the program and its financing are made.

C. The Employment Impact of the Program in the MetropolitanArea

97. Since the real level of public investment in the next few years may be no more than the average for the last few years, the incrementalemployment generatedmay be minimal . The main employment impact is likely to be indirect, deriving from the improvementof expected profitabilityof enterprisesdue to better infrastructureand other factors. For this reason knowledge of sectorial distributionof the program and the relative rural/urbanspecificity would help in gauging the effect on metropolitanemployment. In order to pin down these effects within a specifiedtime frame, knowledge of the responsivenessof business expansionplans to improvementsin infrastructurewould also be necessary. Unfortunatelythis knowledge is not available but reasonable assumptions can be made for particular projects. - 52 -

Table 26: SECTORAL DISTRIBUTION OF PUBLIC INVESTMENT

(in percent)

1971-1975 f976-1980 1982-1986 /a

Agriculture 18.4 13.6 18.4 Commerce and Industry 8.4 15.9 10.8 Education 15.8 3.7 4.6 Electrification 15.5 19.1 16.5 Health 9.5 4.2 6.6 Telecommunications 1.9 3.5 3.6 Transport 14.6 14.2 12.0 Tourism 0.5 1.8 1.7 Housing 23.8 17.6 15.3 Multisectoral 1.8 6.6 10.5

/a Tentative and preliminary version.

Source: Ministry of Planning and Economic Policy

98. A closer look at the programs for Commerce and Industry, Transport, Tourism, and Housing reveals some important projects for metropolitan employment generation. Regarding Commerce and Industry, the program focusses more on infrastructure than on direct public investment in commercial ventures as was the case in the seventies when La Victoria Sugar and the Bayano Cement plant were developed, although in the new program provision has been made for acquisition by Government of shares in Petroterminales of Panama, the company which is developing the Chiriqui - Bocas oil pipeline and petroleum ports. The centerpiece of the new program is the Colon project, involving the expansion of the Colon Free Zone and the development of an industrial free zone on lands made available under the new Canal Treaties. Other projects of potential importance to metropolitan employment include the commercial and industrial park at Albrook field, a free port at Telfers Island just south of Colon, and loans to industry administered by the Ministry of Commerce, the National Bank of Panama and the Development Finance Corporation (COFINA). In transport, the major metropolitan project is concerned with the re-development of the ports of Balboa and Cristobal and establishment of a cabotage port at Coco Solo. While project analysts expect that lower port costs will attract more users, the employment impact may be negligible since cost savings must essentially come from improvements in labor productivity. However, the re-development of the dry dock at Balboa to permit ship repairing to become a new industry could create jobs for as many as 2,000 by the end of 1985. The main tourism project for 1982 is the completion of the convention center absorbing about 1/3 of the investment program of the Tourism Institute, the remainder going for sight-seeing tourist attractions -- restoration of the old center of Panama City and of ruins at the original city of Panama. The investment program in the housing sector takes on added importance as a result of the slowing down in construction activity late in 1981 and the potential decline in employment which this implies. Its importance is reflected in the fact - 53 - that the sector has received the largest allocation among all sectors during 1982. The substantial urban renewal component along with new housing projects will have its major employment impact within the metropolitan area. Although agriculture and energy will receive the larger allocations after 1982, housing will remain important, getting 15 percent of the proposed program over the period of 1982-86.

99. All these projects will provide very important improvements in the economic infrastructure of the area which are essential to growth and job creation in the international service and manufacturing sectors earlier mentioned, but of themselves are unlikely to provide jobs in addition to those already estimated. This is not inconsistent with the general strategy which places reliance on a resurgence of growth in the private sector to provide the additional employment, but it does require a complementary promotional package to inform domestic and foreign business interests of the benefits derivable from the new infrastructure. However, the more fundamental problem which the Government must face is that it is unlikely to afford the total public investment program as contemplated, and it will be necessary to make some key decisions about cuts in the near future.

D. Key Decisions to be Made

100. The fundamental decisions which must be made soon affect the extent of reduction of the public investment program and the spatial and sectoral distribution of the reductions. The extent of reduction can be determined on the basis of a trade-off between debt reduction and employment creation. Given the reduction in the debt/GDP ratio in 1980 and 1981 and the likelihood of a serious rise in metropolitan unemployment in the near future, the stabil- izing of the debt at about two thirds of GDP and determining the level of deficits and hence investment program consistent with this debt/GDP ratio would seem prudent. Spatially, the distribution of cuts should as far as possible spare the metropolitan area,while sectorially it should spare economic infrastructure for commerce, industry, and international services.

101. Specific projects to be studied for deferral could include new highways, further investments in sugar, rural housing, and the container facility at Telfers island. Given the importance of hotel-room availability to the full use of the convention center, and taking account of the long gestation period of hotel projects, it is now time to study the economic feasibility of the development of primary infrastructure for hotels in Panama City within the near future. In the social services Panama has already attained a high level of delivery capability, especially in education and health, and postponement of further net investment in this area need not endanger the levels achieved.

102. From an employment standpoint, the approach to the decision regarding deferrals and reductions is more important than the amount of reduction in each area or sector. It will be undoubtedly easier to push back projects that are not far advanced in the sequence of planning and execution, since the decision is essentially political and vested interests tend to cumulate - 54 - with the advance of the project. But, if employment generation is to be given high priority,as this report recommends,the nature of the budget balancing exercise should include a restructuringrather than mere postponementof expenditure. It also means that while natural slippages could go far to achieve financialbalance, the employment objective may require positive effort to avoid slippage of some programs and projects, especially economic infrastructurein the metropolitanarea. This has implicationsfor the deploymentof administrative,managerial and technical resourcesavailable for the public investmentprogram.

103. This part of the investment program may be essential if the potential for employment in the area is to be realized. But the program should contemplate the possibility that the realizationof this potential may not meet the job requirements in the medium term. This means that some projects should be designed to assist those who remain jobless to cope with all aspects of the problem. Credit to small businessmenalready provided in the program can help to improve acess to self-employment,and so can physical facilitiesand technical assistance.Unfortunately, the record of performanceof these componentshas not been a good one, and does not augur well for the expanded role that may well fall to them within the near future. Careful assessment to determine where weaknesses lie and to assist the design of improvementsshould be initiatedwithout delay. The preservationof social and political stability, which has been a keystone in Panama's developmentthus far, may well depend on the success of employment generation in the next few years as well as on the adequacy of arrangementsto help the unemployed to cope without resort to anti-socialbehavior.

VII. ECONOMIC GROWTH PROSPECTSAND CREDITWORTHINESS

104. Given the importance of the internationalservice sectors the prospects for economic growth in Panama during the next four or five years will continue to be strongly influencedby the performanceof the international economy. The growth of the canal subsectorand services of the Colon Free Zone will be affected by the growth of world trade, while that of the financial sector will depend on the growth of internationalfinancial mediation. In these areas adequate capacity either already exists or is being put in place. The outlook for growth in world trade in the near term is not buoyant due to the depressed state of many of the developed economies, but with the new oil pipeline there should be positive growth in income from transisthmiantransit. The Colon Free Zone should also show positive growth given the backlog of demand for space which ensures that the additional capacity being developed will be utilized. While the outlook is that internationalbanking will continue to grow, recent changes in banking regulationsin the United States of America and Japan permitting the developmentof "offshore" banking onshore are likely to slow the entry of new banks into Panama thereby reducing the financial sector's growth below the 11 percent per year achieved in the seventies.

105. Growth in the industrial sector, specificallymanufacturing, will depend on the expansionof the domestic market and on the degree to which production can be re-orientedtoward the external market. This, in turn, will - 55 -

depend on changes in industrialpolicy to give greater encouragementto exports and on the entry of new, mostly foreign, investors. This last will depend not only on the passage of U.S. tariff and investmentlaws as part of the Caribbean Basis Initiativeand the relative attractivenessof Panama compared with other locations,but on the economic climate in source countries. Higher investment will also have a multiplier effect on income, thereby expanding the domestic market. In the case of the constructionindustry the major determinantwill be the level of investmentin offices, hotels, factoriesand housing. Here the outlook is affected by the fact that Panama has been on the downswing of a constructioncycle after an upswing which began in 1979 and lasted into early 1981. Given the financial constrainton public investment in the near future, constructionactivity will depend mainly on the effectivenesswith which private investment can be stimulated,while the large housing component in the Government'sprogram serves to cushion the downswing.

106. Although dramatic improvementsin agriculturalvalue added are unlikely in the short term, there could be some recovery from the recent poor performance in some products e.g., bananas and beef; while projects in shrimp farming and increases in the area under sorghum and maize could also have an impact. Since Panama is already close to self-sufficiencyin food production, the main opportunitiesfor growth lie in exports.

107. The impetus to growth deriving from the expenditures,or demand-side shifts, are not likely to come from increasedpublic consumptionor investment, given the goal of reducing the relative public sector debt, and autonomous shifts in private consumptionare also unlikely. Significant increases in demand for traditionalexports are also unlikely and, even were they to occur, the short term supply constraintsmight not easily be relaxed. The demand for service exports could remain buoyant in spite of the pessimistic internationaloutlook, since Panama has not exhausted its advantages in this area. Thus the major impetus must come from private investment,substantially externally financed,and oriented toward the expansion of exports. With appropriatepolicies Panama could attract this type of investment.

108. Overall, growth of GDP during the next four or five years is likely to be in the 4 - 5 percent range; with agriculturegrowing between 2 and 3 percent, industry between 5 and 7 percent and services between 4 1/2 and 6 percent. The associated increase in employment would range between 1.7 and 2.1 percent if the employment output elasticity remains at the average of 0.42 which obtained during the latter half of the seventies. Since labor force growth of at least 3 percent is expected, the unemploymentsituation would worsen if the elasticitycannot be raised or the rate of growth pushed above this range. The aim of policy suggestionsmade in this report is to achieve growth and unemploymentin excess of what now seems likely on the basis of recent trends.

109. The current account deficit of the balance of payments as a ratio of GDP is unlikely to increase significantly,given constraintson public sector borrowing, unless there is a significantinflow of foreign investment in which case there would be offsetting importsinflows. Because of the open financial system and the use of the U.S. dollar as currency, Panamanian creditworthiness,i.e, capacity to service debt, will turn more on fiscal rather - 56 - than balance of payments considerations. If the Governmentcontinues the present trend of fiscal restraint consistentwith the objectiveof preventing further growth in the relative external debt, and pursues opportunitiesfor improving the buoyancy of revenues e.g., by replacingquotas with tariffs and specific with ad valorem duties, the country will continue to be creditworthy. Whether or not the Government can continue to contain and control public sector outlaysmay well depend on greater job generationby the private sector adequate to remove the need for compensatoryGovernment expenditures and employmentefforts. - 57 -

ANNEX A

Gains and Losses from Trade

110. Gains or,losses in real income arising from changes in the terms of trade are conventionally estimatedas the differencehetween exports expressed as capacity to import - i.e., exports of goods and non-factor services deflated by the import price index - and exports at constant prices. The underlying assumption is that unit prices can be determinedfor the goods traded. Also the existence of a balance in trade is implicitlyassumed. If these assumptionsare not met, the method leads to bias in the estimates.

Ill. In the real world, services account for an important part of the flow of resourcesbetween countries, but it is difficult to determine prices suitable for terms of trade estimates. In the conventionalapproach, which estimates the terms of trade adjustment in income as the difference between capacity to import and exports at constant prices defined as merchandise exports deflated by the export price index plus exports of non-factor services deflated by the import price index, the trade in services does not affect the estimate. The bias which arises as a result, comes from the failure to correctly identify the difference as the loss or gain from changes in the terms of merchandise trade. Inclusionof services using proxy deflators for the changes in the prices of service imports and exports would introduce some bias which could perhaps theoreticallybe reduced by refinementsin defining and measuring standard service units and pricing them. However, there would remain the formidable practical problem that persons involved in service transactionsin the real world do not use such units and prices and the data base is unlikely to lend itself to the applicationof the theoreticalapproach. Until the theoreticalwork is done and appropriatemodifications in data collectionand data base are done, it may be simpler to be frank about limiting ourselves to merchandise trade.

112. The merchandiseaccount between any country and the rest of the world is not usually balanced. Where the deficit is insignificantor temporary the bias inherent in focussing on the changing purchasingpower of exports may not be important. However, in cases like Panama where there is a large and persistent deficit in merchandise exports the focus on the loss in purchasing power of current merchandise exports fails to take into account the loss in the purchasingpower of services and/or of loans needed to cover the merchandise deficit. - 58 -

Table A-1: PANAMA - GAINS FROM TRADE ESTIMATED FROM IMPORTS SIDE

(1975 = base year)

Year Gains /a Gains/GDP $ million in constant prices percent

1975 0 0 1976 -43.0 -2.3 1977 -122.4 -6.2 1978 -208.4 -10.0 1979 -46.5 -2.1 1980 +114.5 +4.9

/a Gain is estimated as the difference between merchandiseimports deflated by the index of import prices and merchandise import deflated by the index of export prices.

Source: Mission estimates.

An alternativeapproach focussing on the increase in purchasing power of imports over exports probably yields a better estimate of the loss of real income, but suffers from bias arising from the implicit assumption that the price movement of service exports and other flows to cover the merchandise deficit is the same as for current merchandise exports. But it can be seen that where the deficit is covered by loans the real loss would be the base year value of future debt service obligations,and if debt service payments are eventuallymade from export earnings the real loss will depend on future behavior of export prices. Since such behavior is unknowable,any calculation of the loss would involve subjective expectationsabout future price behavior rather than objective fact. In the opposite case of a country in persistent surplus in its merchandise trade the argument would be exactly parallel. 113. Part of the difficulty derives from the effort to state income loss in real terms, i.e, in base year prices. However, perfectlymeaningful state- ments can be made in gauging the effect of changing terms of trade by relating the loss or gain to current GDP. Since the deficit/or surplus on merchandise trade can be regarded as a leakage or injectionfrom an economy's expenditure stream, one can calculate the leakage or injectionin a particularyear attributable to changing prices from a specifiedpoint in time and compare it with the GDP. This approach,in contrast to the conventionalone, would lead to more realisticconclusions, where trade is not in balance. For instance,where there is an equal increase in the index of import and of export prices the conventionalapproach would conclude that there would be no change in the terms of trade nor any loss in real income. Yet with no change in real imports and exports a country like Panama would experience an increase in - 59 - the nominal merchandisedeficit. It is not meaningful to argue that the real deficit (in terms of current merchandiseexports) has not increased. The fact is that these additional exports do not exist. Instead, the increasednominal deficit on trade will have to be covered from the surplus on services thereby diminishingtheir command over imports, and/or from other inflows including loans. For any given level of these sources of cover for the deficit, the economy will experiencea leakage equal to the price-relatedincrease in the deficit. Obviously the leakage can be offset by increase in the sources, e.g. more loan inflows; but the expected effect will be deflationary,the ultimate effect on real income dependingon the elasticity of supply curves and the downward flexibilityof prices, about which there is usually considerable uncertainty. However the analysis need not go beyond the leakage.

Table A-2: PANAMA - PRICE-RELATEDCHAiNGES IN THE DEFICIT ON MERCHANDISEACCOUNT

Year Price related Price-related Price related Increase in increase in value of increase on increase in deficit or % GDP merchandise imports the value of merchandise current prices ($ million) /a merchandiseexports deficit (percent) ($ million) /a ($ million) /a

1976 43.0 0 43.0 2.2 1977 106.4 -5.9 112.3 5.2 1978 153.9 -18.8 172.7 7.0 1979 258.6 64.7 193.4 6.8 1980 424.8 184.5 240.3 6.9

/a Current prices

114. Table A-2 shows that the nominal loss or price-relatedincrease in the Panamanian merchandisedeficit was 7 percent of GDP in 1978 due to terms of trade changes over a 1975 base. Clearly revealed is the fact that even in 1980 when the terms of trade appear to have turned in Panama's favor, because of the greater weight of imports relative to exports, the net effect was a net increase in the price-relatedleakage in nominal terms and in proportion to GDP. - 60 -

STATISTICAL APPENDIX

Table of Contents

Table Page Number Number

I. Human Resources

1.1 Total Population, Census Years 62 1.2 Labor Force, Participation Rates and Unemployment Rates 63 1.3 Deterioration in Employment Under Various Assumptions 64 1.4 Distribution of Unemployment by Sectors and by Sex: 1976-79, Metropolitan Area 65

II. National Accounts

2.1 Industrial Origin of Gross Domestic Product at Constant Prices, 1950-81 66 2.2 Expenditure on Gross Domestic Product, 1960-81 67 2.3 Expenditure on Gross Domestic Product in Constant Prices, 1960-80 68 2.4 Private and Public Gross Capital Formation and Stock Changes, 1960-80 69

III. Balance of Payments

3.1 Balance of Payments - Current Accounts, 1960-81 70 3.2 Balance of Payments Current Account - Canal Zone 1960-79 72

IV. Public Debt

4.1 External Public Debt Outstanding as of December 31, 1980, by Creditor 73 4.2 External Public Debt Outstanding as of December 31, 1980, by Borrower 75 4.3 Service Payments, Commitments, Disbursements and Outstanding Amounts of External Public Debt as of December 31, 1980 76

V. Public Finances

5.1 Central Government Operations, 1977-82 77 5.2 Operations of the Social Security Agency, 1979-82 78 5.3 Operations of the Decentralized Agencies, 1977-82 79 5.4 Operations of the State Enterprises, 1977-82 80 5.5 Summary Accounts of the Nonfinancial Public Sector, 1977-82 81 - 61 -

Page Number VI. Monetary

6.1 Summary Accounts of the Private CommercialBanks, 1977-81 82 6.2 ConsolidatedAccounts of the Banking System, 1977-81 83

VIII. Industry

8.1 ElectricityStatistics, 1975-81 84

IX. Prices

9.1 Cost of Living Index, City of Panama, 1975-81 85 9.2 Selected Price Indices, 1970-81 86

X. Other

10.1 Panama Canal Traffic, 1915-80 87 Table 1:1: TOTAL POPULATION, CENSUS YEARS

Provinces National Bocas del Los Year Total Toro Cocle Colon Chiriqui Darien Herrera Santos Panama Veraguas

Population

1911 336,742 22,732 35,011 32,092 63,364 8,992 23,007 30,075 61,855 59,614

1920 446,098 27,239 45,151 58,250 76,470 10,728 28,984 34,638 98,035 66,603

1930 467,459 15,851 48,244 57,161 76,918 13,391 31,030 41,218 114,103 69,543

1940 622,576 16,523 55,737 78,119 111,206 14,930 38,118 49,621 173,328 84,994

1950 805,285 22,392 73,103 90,144 138,136 14,660 50,095 61,422 248,335 106,998

1960 1,075,541 32,600 93,156 105,416 188,350 19,715 61,672 70,554 372,393 131,685

1970 1,428,082 43,531 118,003 134,286 236,154 22,685 72,549 72,380 576,645 151,849

1980 1,830,175 .53,579 140,320 166,439 287,801 26,497 81,866 70,200 830,278 173,195

Annual Average Inter Census Growth Rates (%) 1911 3.17 2.03 2.86 6.85 2.11 1.98 2.60 1.58 5.25 1.24 1920 0.47 -5.57 0.66 -0.19 0.06 2.25 0.68 1.76 1.63 0.43

1930 2.76 0.39 1.38 3.01 3.56 1.04 1.97 1.78 4.05 1.92 1940 2.56 3.02 2.69 1.41 2.15 -0.18 2.71 2.11 3.59 2.28 1950 2.94 3.83 2.45 1.58 3.15 3.01 2.10 1.40 4.14 2.10 1960 3.06 3.12 2.54 2.60 2.43 1.50 1.74 0.27 4.76 1.52 1970 2.51 2.10 1.75 2.17 2.00 1.56 1.22 -0.31 3.71 1.32 1980

Source: Controller General - 63 -

Table 1.2: LABORFORCE 3 PARTICIPATION RATES AND UNEMPLOYMENTRATES

Adjusted Official Adjusted Labor Participation Labor Force Unemployment Unemployment /a Year Force Rates (1970) /a Rates Rates (000) (percent) (000) (percent) (percent)

1970 467.5 61.3 467.5 7.1 7.1 1971 477.6 60.7 482.3 7.6 8.5 1972 488.6 60.2 497.6 6.8 8.5 1973 499.0 59.7 512.3 7.0 9.4 1974 517.4 59.5 533.0 5.8 8.6 1975 492.8 56.0 539.6 6.4 14.5 1976 505.3 55.0 562.7 6.7 16.2 1977 515.2 54.1 582.5 8.7 19.2 1978 543.0 55.8 596.9 8.1 16.4 1979 578.0 57.6 615.4 8.8 14.4

/a Based on labor force estimated on the assumption that 1970 participation rates continued through the 1976-1979period.

Sources: Controller General and IBRD mission estimates. - 64 -

Table 1.3: DETERIORATION IN EMPLOYMENTUNDER VARIOUS ASSUMPTIONS

Constant Population Employed Ratio (1970) Job Year 15 + Years Employed Population Employment /a Deficiency '000 '000 Ratio '000 °000

1970 762.7 434.3 .569 434.3 0 1971 786.8 441.3 .561 447.7 6.4 1972 811.7 455.4 .561 461.9 6.5 1973 835.8 464.1 .555 475.6 11.5 1974 869.5 487.4 .560 494.7 7.3 1975 880.3 461.2 .524 500.9 39.7 1976 917.9 471.6 .514 522.3 50.7 1977 950.2 470.4 .495 540.7 70.3 1978 973.7 499.2 .513 554.0 54.8 1979 1003.9 527.0 .524 571.2 44.2 1980 1035.0 /b 537.0 /b .503 588.9 51.9

/a Employment required to keep constant the ratio of employed to working age population.

/b Estimated.

Sources: Controller General and IBRD mission estimates. - 65 -

Table 1.4: DISTRIBUTIONOF UNEMPLOYMENTBY SECTORS AND BY SEX: 1976-79 METROPOLITANAREA

(in percentages)

Sector 1976 1977 1978 1979

Total 100.0 100.0 100.0 100.0

Agriculture 2.2 3.7 2.6 3.6 Manufacturing 12.1 17.6 11.8 13.1 Utilities .5 - .6 - Construction 20.3 16.0 17.0 14.7 Commerce 20.9 21.4 20.3 23.2 Transp./St./Comm. 6.6 6.9 4.6 4.9 Finance 3.8 5.3 5.9 4.6 Services 28.0 24.6 32.7 31.5 Canal Zone 5.5 4.3 4.6 4.4

Males 100.0 100.0 100.0 100.0

Agriculture 4.3 5.8 4.4 6.3 Manufacturing 12.9 20.8 15.6 14.8 Utilities .9 .8 1.1 - Construction 31.6 25.0 28.9 25.2 Commerce 17.1 17.5 16.7 19.9 Transp./St./Comm. 8.5 6.7 5.6 7.2 Finance 2.6 5.8 6.7 4.9 Services 15.4 11.7 15.6 17.1 Canal Zone 6.0 5.8 4.4 4.5

Females 100.0 100.0 100.0 100.0

Agriculture 6.1 - - - Manufacturing 10.8 11.9 6.3 10.8 Utilities - - - - Construction - - - 0.6 Commerce 27.7 28.3 23.8 27.6 Transp./St./Comm. 3.1 6.0 3.2 1.8 Finance 6.1 4.5 4.8 4.2 Services 52.3 47.8 57.1 50.7 Canal Zone 4.6 1.5 3.2 4.2

Source: Controller General Table 2.1: INDUSTRIAL ORIGIN OF GROSS DOMESTIC PRODUCTAT CONSTANT PRICES, 1950-1981

(millions of 1960 Balboas)

1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 2 1980/2 1981/3

TOTAL GROSS DOMESTIC PRODUCT 415.8 460.9 498.9 541.5 565.5 617.3 664.1 720.9 771.2 836.3 894.5 972.6 1033.8 1101.2 1130.1 1137.2 1133.6 1185.3 1262.2 1351.2 1417.6 1469.3 (at market prices)

Agriculture 95.7 105.4 107.7 113.4 118.5 132.2 139.2 145.6 154.0 162.3 161.1 167.1 172.0 177.9 175.2 183.6 182.4 196.5 195.6 192.1 194.2 191.8

Mining 1.1 1.2 1.5 1.8 1.8 1.7 1.9 2.0 2.1 2.4 2.3 2.6 2.7 3.7 3.5 3.3 2.9 3.1 2.8 3.0 3.2 3.1

Manufacturing 54.5 63.0 75.3 85.6 90.5 98.1 107.0 120.1 131.7 144.0 153.6 166.7 177.1 184.6 176.4 174.9 153.5 153.6 162.4 186.6 194.0 189.5.

Construction 22:9 28.3 28.2 31.7 29.9 34.9 38.4 43.5 46.3 47.5 54.0 64.1 71.8 76.3 79.4 66.5 53.6 59.8 60.0 64.9 73.2 68.1 o.

Electricity, Gas, Water and Sewerage 8.4 9.2 10.0 11.1 12.2 14.5 15.0 16.3 18.9 23.5 26.0 30.4 34.2 38.5 40.3 44.1 48.3 50.8 52.8 61.4 65.6 70.7

Transport, Storage and Commanications 19.3 23.1 24.3 26.6 29.1 32.9 36.7 41.1 43.9 51.5 59.6 68.0 72.2 80.4 92.5 94.5 111.8 123.8 139.1 154.0 163.7 177.4

Commerce 57.9 63.6 71.5 77.4 82.7 85.8 92.0 99.9 106.5 115.7 126.6 135.9 144.4 153.7 161.7 153.7 148.0 141.1 160.6 183.4 198.9 207.5

Financial Intermediation 10.3 11.2 12.5 15.0 15.2 17.6 18.8 21.2 22.5 30.0 34.8 39.9 45.1 54.7 59.9 65.6 70.1 86.7 95.4 99.8 110.9 135.4

Housing 34.5 36.9 37.7 40.3 40.6 43.4 46.1 49.6 52.7 55.4 60.1 66.5 73.7 81.0 84.9 87.6 89.8 91.9 96.4 99.7 105.9 111.7

Public Administration 11.4 11.7 12.9 14.7 14.1 15.7 17.4 19.4 21.3 21.9 23.4 25.3 27.3 27.7 30.0 33.0 35.4 35.7 36.7 38.0 42.0 43.4

Other Public and Private Services 69.4 73.8 77.7 81.2 83.6 89.1 95.6 101.5 105.3 110.8 122.7 132.8 142.0 147.9 157.4 158.5 163.1 170.5 180.6 187.5 194.7 204.6

Canal Zone Services/- 3J.4 33.5 39.6 42.7 47.3 51.4 56.0 60.7 65.6 71.3 70.3 73.3 71.3 74.8 68.9 71.9 72.0 71.8 79.8 80.8 71.3 66.1

/1 While the Canal Zone services include activities in many sectors, Panama allocates the value added by Canal Zone workers in a separate sector.

/2 Preliminary

/3 Estimated

Source: Controller General. Table 2.2: XPE2NDITUREON GROSS DOMESTIC PRODUCT, 1960-1981

(millions of current Balboa.)

1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980/L 1981 /2

Consumption 369.8 393.1 416.7 474.4 513.4 557.3 579.6 638.8 661.5 733.1 804.5 880.1 958.3 1105.7 1502.8 1465.4 1489.3 1744.9 1885.2 2323.7 2552.7 2935.0

Private 322.9 343.3 360.8 407.3 448.1 484.9 492.9 536.2 551.8 614.9 654.7 716.1 766.2 892.1 1237.4 1173.6 1175.9 1407.7. 1503.0 1882.7 2033.4 2385.0 Public 46.9 49.8 55.9 67.1 65.3 72.4 86.7 102.6 109.7 118.2 149.8 164.0 192.1 213.6 265.4 291.8 313.4 337.2 372.2 441.0 519.3 550.0

Investment 67.8 88.4 98.9 109.8 102.2 115.8 157.2 168.4 191.9 222.7 275.9 322.0 407.5 434.0 498.4 607.9 661.9 513.2 710.0 755.8 926.3 1092.0

Private 49.4 58.7 61.2 69.6 62.4 78.0 121.6 123.8 140.0 157.4 187.9 232.9 230.0 300.8 278.8 287.0 305.9 148.5 318.7 416.1 452.7 495.0 Public 12.0 21.7 24.2 27.0 25.4 22.1 20.5 28.9 33.5 43.3 67.7 67.8 153.0 109.5 143.3 281.9 327.0 334.1 328.4 222.9 339.0 445.0 Change in Stocks 6.4 8.0 13.5 13.2 14.4 15.7 15.1 15.7 18.4 22.0 20.3 21.3 24.5 23.7 76.3 39.0 29.0 30.6 62.9 116.8 134.6 152.0

Enporta of Goods and Non-Factor Services 127.3 146.3 179.5 197.0 210.8 240.2 268.2 301.7 330.0 362.9 390.1 432.0 466.9 533.0 766.4 867.0 840.7 925.1 973.7 1140.7 1614.8 1608.0

Imports of Goods and Non-Factor Services -149.1 -164.1 -190.3 -221.7 -225.6 -253.4 -286.0 -308.2 -320.0 -373.3 -424.7 -477.1 -534.9 -600.2 -932.9 -1006.1 -987.9 -1012.4 -1110.7 -1380.0 -1702.9 -1785.0

Gross Domestic Product 415.8 463.7 504.8 559.S 600.8 659.9 719.0 800.7 861.4 945.4 1045.8 1157.0 1297.8 1472.5 1834.7 1934.2 2004.3 2170.8 2458.2 2840.2 3390.9 3850.0 (at market prices)

Factor Payments -12.4 -10.5 -9.2 -8.7 -5.4 -15.8 -16.3 -22.7 -25.3 -25.3 -26.4 -31.3 -33.7 -42.3 -55.0 -20.6 -53.6 -61.0 -48.8 -78.6 -143.9 -180.0

Gross National Product 403.4 453.2 495.6 '550.8 595.4 644.1 702.7 778.0 836.1 920.1 1019.4 1125.7 1264.1 1430.2 1779.7 1913.6 1950.7 2109.8 2409.4 2761.6 3247.0 3670.0 (at market prices)

/1 Preliminary

/2 Estimated

Source: Controller General and IBRD staff. Table 2.3: EXPENDITURE ON GROSS DOMESTIC PRODUCT IN CONSTANTPRICES, 1960-80

(millions of 1960 Balboas)

1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

Consuption 369A 396.3 420.8 465.9 495.9 537.5 530.7 596.6 615.4 682.6 724.2 792.2 810.4 873.0 915.1 869.8 828.1 948.2 969.9 1103.6 1036.9 Private 322.9 346.5 363.9 404.8 432.1 470.5 476.2 514.3 526.7 594.8 621.8 678.6 685.8 741.0 778.1 721.8 674.1 779.0 799.0 923.8 856.6 Public 46.9 49.8 56.9 61.1 63.8 67.0 74.5 82.3 88.7 87.8 102.4 113.6 124.6 132.0 137.0 148.0 154.0 169.2 170.9 179.8 180.3

Investment 67.9 86.1 97.0 109.0 99.4 112.8 150.2 158.5 179.5 205.5 242.2 276.0 333.3 315.8 281.7 310.0 322.3 240.6 321.1 301.1 319.8 Private 49.4 57.4 60.0 69.0 60.6 75.4 115.8 116.1 130.3 143.7 162.9 197.0 186.0 214.1 158.3 133.5 148.8 70.1 141.6 167.3 158.6 Public 12.0 20.7 23.5 26.8 24.4 21.7 19.3 26.6 30.8 39.8 59.0 57.7 122.8 78.0 78.2 161.0 164.8 157.9 150.9 90.9 119.7 Change in Stocks 6.4 8.0 13.5 13.2 14.4 15.7 15.1 15.8 18.4 22.0 20.3 21.3 24.5 23.7 45.2 15.5 8.7 12.6 28.6 42.9 41.5

Exports of Goods and NonFactor Services 127.3 146.3 175.9 195.5 196.0 223.4 245.1 269.4 289.7 309.5 324.5 340.2 345.3 361.7 380.2 385.6 404.7 433.9 470.3 519.9 697.4

Imports of Goods and NonFactor Services -149.1 -167.8 -194.8 -228.9 -225.8 -256.4 -281.9 -303.6 -313.4 -361.3 -396.4 -435.8 -455.2 -449.9 -446.9 -428.2 -421.5 -437.4 -499.1 -573.4 -636.5

Gross Domestic Product 415.8 460.9 496.9 541.5 565.5 617.3 664.1 720.9 771.2 836.3 894.5 972.6 1033.8 1100.6 1130.1 1137.2 1133.6 1185.3 1262.2 1351.2 1417.6

Factor Payments -12.4 -10.5 - 9.2 - 8.7 -5.4 -15.8 -16.3 -22.7 -25.3 -25.3 -26.4 -31.3 -33.7 -42.3 -55.0 - 9.0 -53.6 -61.0 -48.8 -78.6 -143.9

Gross National Product 403.4 450.4 489.7 532.8 560.1 601.5 647.8 698.2 745.9 811.0 868.1 941.3 1000.1 1058.3 1075.1 1128.0 1080.0 1124.3 1213.4 1272.6 1273.7

Source: Controller General. Table 2.4: PRIVATE AND PUBLIC GROSS CAPITAL FORMATION AND STOCK CHANGES, 1960-1980

(millions of 1960 Balboas)

1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979/I 1980/!

Public 11.4 20.3 24.4 27.6 25.0 22.7 16.9 26.2 30.5 41.8 58.8 59.6 125.2 76.9 81.1 157.3 170.3 158.9 150.4 97.0 126.9

Housing 1.6 4.1 5.4 6.2 7.6 2.1 2.5 2.5 2.2 2.4 4.9 7.8 2.3 3.6 1.5 11.4 9.8 21.1 17.7 9.9 5.4 Nonresidential Buildings 3.5 3.7 4.2 3.6 2.7 5.7 4.7 7.3 8.7 10.2 9.3 12.6 24.3 9.8 13.4 22.6 13.2 19.0 28.9 15.7 6.4 Other Construction 5.9 10.9 11.4 15.9 13.1 12.4 9.5 13.8 16.8 14.8 25.6 30.0 32.9 36.9 50.5 71.2 114.4 49.2 68.4 38.6 74.7 Transport and Communication Equipment 0.1 0.1 0.2 0.1 0.1 0.3 0.3 0.3 0.1 0.4 4.3 1.5 1.6 0.4 8.8 8.5 5.3 10.7 12.1 9.5 8.8 Machinery 0.9 1.9 2.3 1.0 1.5 1.2 2.3 2.7 3.0 12.0 14.9 5.8 61.7 27.3 4.0 32.9 22.1 57.9 23.8 17.2 24.4 Change in Stocks -0.6 -0.4 0.9 0.8 0.6 1.0 -0.4 -0.4 -0.3 2.0 -0.2 1.9 2.4 -1.1 2.9 10.7 5.5 0.1 -0.5 6.1 7.2

Private 56.4 65.8 72.6 81.4 74.4 90.1 131.3 137.3 149.0 163.7 183.4 216.4 208.1 238.9 200.6 152.7 152.0 82.6 170.7 204.1 192.9

Housing 13.3 8.2 12.0 21.3 14.2 18.1 24.4 26.6 31.8 36.2 41.5 51.7 71.3 69.7 27.9 22.4 18.2 20.1 24.6 24.6 25.1 Nonresidential Buildings 14.2 10.1 10.9 10.4 12.6 12.5 25.1 20.9 23.1 33.6 30.0 48.9 38.1 49.6 32.0 35.6 27.8 17.4 32.2 50.1 49.8 Other Construction 0.4 0.3 0.4 0.4 0.4 0.5 0.8 0.8 0.8 1.1 1.2 1.6 0.4 2.0 1.0 1.8 0.7 0.7 0.9 1.1 1.1 Transport and Communication Equipment 8.7 10.5 11.9 12.1 11.2 15.0 19.6 16.2 26.2 26.2 41.4 37.8 36.9 52.5 31.3 34.1 26.5 14.1 23.3 26.2 24.0 Machinery 12.8 28.3 24.8 24.8 22.8 29.3 45.9 49.6 48.4 46.6 48.8 57.0 39.3 40.3 66.1 54.9 75.6 17.8 60.6 65.3 58.6 Change in Stocks 7.0 8.4 12.6 12.4 13.8 14.7 15.5 16.2 18.7 20.0 20.5 19.4 22.1 24.8 42.3 4.9 3.2 12.5 29.1 36.8 34.3

Total 67.8 86.1 97.0 109.0 99.4 112.8 150.2 158.5 179.5 205.5 242.2 276.0 333.3 315.8 281.7 310.0 322.3 240.6 321.1 301.1 319.8

Housing 14.9 12.3 17.4 27.5 21.2 20.2 26.9 29.1 34.6 38.6 46.4 59.5 73.6 73.3 29.4 33.8 28.0 41.2 42.3 34.5 30.5 Nonresidential Buildings 17.7 13.8 15.1 14.0 14.7 18.2 29.8 28.2 31.8 43.8 39.3 61.5 62.4 59.4 45.4 58 2 41.0 36.4 61.1 65.8 56.2 Other Construction 6.3 11.2 11.8 16.3 13.5 12.9 10.3 14.6 17.6 15.9 26.8 31.6 33.3 38.9 51.5 72.0 115.1 49.9 69.3 39.7 75.8 Transport and Communication Fquipment 8.8 10.6 12.1 12.2 11.3 15.3 19.9 18.5 26.3 26.6 45.7 39.3 39.5 52.9 40.1 42.6 31.8 24.8 35.4 35.7 32.8 Maelhi--rv 11.7 30.2 27.1 25.8 24.3 30.5 48.2 52.3 51.4 58.6 63.7 62.8 101.0 67.6 70.1 87.8 97.7 75.7 84.4 82.5 83.6 Change in Stocks 6.4 8.0 13.5 13.2 14.4 15.7 15.1 15.8 18.4 22.0 20.3 21.3 24.5 23.7 45.2 15.6 8.7 12.6 28.6 42.9 41.5

/1 Preliminary.

Source: Controller General Table 3.1: BALANCE OF PAYMENTS - CURRENT ACCOUNTS, 1960-1981 Page 1 of 2 pages

(Thousands of Dollars)

1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972

Trade Balance -69,222 -81,994 -84,576 -90,365 -85,716 -99,582 -114,238 -123,059 -128,639 -152,529 -200,665 -226,169 -262,549 Exports /t 38,841 41,148 60,012 72,620 82,005 92,581 103,334 109,203 117,449 132,497 130,349 137,784 146,163 Imports /1 108,063 123,142 144,588 162,985 167,721 192,163 217,572 232,262 246,088 285,026 331,014 363,953 408,712

Services (net) 40,945 57,167 70,722 72,617 71,618 67,713 81,029 93,475 113,393 122,387 132,961 147,028 160,775 Freight and Insurance -13,144 -14,507 17,498 -17,313 -16,894 -19,620 -21,182 -22,323 -24,138 -27,723 -32,064 -38,477 -41,392 Receipts (87) (75) (80) (63) (47) (90) (73) (39) (32) (64) (62) (30) (99) Payments (13,231) (14,582) (17,578) (17,376) (16,941) (19,710) (21,225) (22,362) (24,170) (27,787) (32,126) (38,507) (41,491)

Other Transport 2,686 2,924 3,224 3,701 6,184 7,396 8,532 10,250 18,457 16,456 22,171 33,904 43,558 Receipts (6,446) (6,954) (8,285) (9,509) (12,206) (14,623) (15,843) (19,591) (26,313) (26,635) (35,858) (49,923) (60,776) Payments (3,760) (4,030) (5,061) (5,808) (6,022) (7,227) (7,320) (9,341) (7,856) (10,179) (13,687) (16,019) (17,218)

Travel 21,070 23,839 29,734 27,289 21,192 31,028 33,723 39,995 43,435 48,748 55,515 54,878 56,494 Receipts (27,641) (31,280) (36,781) (35,172) (31,504) (41,044) (45,320) (56,693) (59,402) (65,333) (78,167) (79,695) (82,926) Payments (6,571) (7,441) (7,047) (7,883) (10,312) (10,016) (11,597) (16,698) (15,967) (16,585) (22,652) (24,817) (26,432)

Investment Income -10,183 -6,244 -4,357 -1,587 -2,683 -18,722 -20,300 -21,471 -23,644 -25,577 -28,403 -31,473 -33,869 Receipts (2,250) (2,500) (2,518) (3,162) (2,216) (33) (3,265) (4,822) (6,016) (9,891) (12,585) (27,975) (43,346) Payments (12,433) (8,744) (6,875) (4,749) (4,899) (18,755) (23,565) (26,293) (29,660) (35,468) (40,988) (59,448) (77,215)

Other Services 40,514 51,155 59,619 60,527 63,819 67,631 80,265 87,024 99,283 110,483 115,742 128,196 135,984 Receipts (53,016) (61,468) (70,354) (75,843) (78,006) (81,638) (94,356) (106,856) (118,944) (131,569) (138,752) (154,258) (166,880) Payments (12,502) (10,313) (10,735) (13,316) (14,187) (14,007) (14,091) (19,832) (19,661) (21,086) (23,010) (26,062) (30,896)

Transfers (net) 842 4,105 -125 168 170 4,189 1,919 1,767 297 1,201 3,970 4,433 4,758 Private -5,372 -5,621 -7,383 -9,336 -7,146 -5,787 -6,103 -6,950 -6,107 -5,291 -3,672 -3,530 -4,172 Receipts (3,045) (3,665) (3,807) (3,741) (3,445) (3,929) (4,695) (5,026) (5,883) (6,620) (7,856) (9,177) (10,117) Payments (8,417) (9,286) (11,190) (13,077) (10,591) (9,716) (10,798) (11,976) (11,990) (11,911) (11,528) (12,707) (14,289)

Government 6,214 9,726 7,258 9,504 7,316 9,976 8,022 8,717 6,404 6,492 7,642 7,963 8,930 Receipts (6,445) (9,966) (7,601) (9,944) (7,981) (10,432) (8,962) (10,182) (7,878) (8,009) (9,414) (9,532) (10,878) Payments (231) (240) (343) (440) (665) (456) (940) (1,465) (1,474) (1,517) (1,772) (1,569) (1,948)

Current Account Balance -27,437 -20,722 -13,979 -17,580 -13,928 -27,680 -31,290 -27,817 -14,949 -28,941 -63,734 -74,708 -97,016

/1 Includes non-monetary gold

Source: Controller General Table 3.1: BALANCE OF PAYMENTS - CURRENT ACCOUNTS, 1960-1981 Page 2 of 2 pages (Thousandsof Dollars)

1973 1974 1975 1976 1977 1978 1979 1980'2 198IL3

Trade Balance -296,239 -509,567 491.044 -513.835 -497,147 -558,917 -761,538 -971,178 -1,034,672 Exports /1 161,881 251,013 330,906 270,585 287,041 294,801 334,075 373,432 339,335 Imports /1 458,120 760,580 821,950 784,420 784,188 853,718 1,095,613 1,344,610 1,374,007 Services (Net) 190.580 289.885 326,886 310,591 344,470 350,943 431,205 688,564 676,590 Freight and Insurance -50,380 -69,122 -78,767 -69,967 -85,263 -98,665 -112,964 -164,539 -201,008 Receipts (134) (72) (118) (156) (241) (125) (174) (1,068) (1,281) Payments (50,514) (69,194) (78,885) (70,153) (85,504) (98,790) (113,138) (165,607) (202,289) Other Transport 50,790 142,250 133,860 119,052 110,132 81,128 87,422 481,036 515,880 Receipts (68,219) (162,642) (155,508) (144,414) (136,458) (108,185) (116,295) (537,610) (574,742) Payments (17,429) (20,392) (21,648) (25,362) (26,326) (27,057) (28,873) (56,574) (58,862) Travel 75,725 90,308 100,777 116,574 139,283 162,913 189,351 112,380 106,105 Receipts (102,529) (121,626) (133,010) (150,293) (173,990) (199,763) (228,468) (168,418) (171,229) Payments (26,804) (30,818) (32,233) (33,719) (34,707) (36,850) (39,117) (56,038) (65,124) Investment Income -41,159 -56,721 -21,816 -53,763 -61,396 -49,446 -79,561 -144,627 -180,482 Receipts (87,600) (310,995) (374,274) (411,211) (482,239) (793,219) (985,723) (2,107,082) (2,685,046) Payments (128,759) (367,716) (396,090) (464,974) (543,635) (843,665) (1,065,284) (2,251,709) (2,865,528) Other Services 155,604 182,670 192,832 198,725 241,714 255,013 346,957 404,314 436,095 Receipts (187,239) (216,553) (233,951) (262,140) (311,173) (336,697) (432,936) (484,380) (521,449) Payments (31,635) (33,883) (41,119) (63,415) (69,459) (81,684) (85,979) (80,066) (85,354) Transfer (Net) -4,279 -3,665 -5,042 -3,912 -2,339 -2,069 17,158 -12,614 -26,053 Private -12,975 -13,624 -11,361 -12,611 -11,309 -15,191 998 -53,745 63,332 Receipts (10,320) (12,263) (15,056) (16,134) (21,007) (20,766) (40,561) (2,465) (843) Payments (23,295) (25,887) (26,417) (28,745) (32,315) (35,957) (39,563) (56,210) (64,175) Government 8,696 9,959 6,319 8,699 8,969 13,122 16,160 41,131 37,279 Receipts (11,014) (11,920) (8,620) (11,154) (11,480) (15,871) (19,197) (45,536) (43,195) Payments (2,318) (1,961) (2,301) (2,455) (2,511) (2,749) (3,037) (4,405) (5,916) Current Account Balance -109,938 -223,347 -169,200 -207,156 -155,016 -210,043 -313,175 -295,288 -384,135

/1 Includes non-monetary gold.

/2 Preliminary

/3 Estimate

Source: Controller General Table 3.2: BALANCEOF PAYMENTSCURRENT ACCOUNT - CANALZONE, 1960-1979

(Thousands of Dollars)

1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979

Receipts 63,897 72,556 85,524 93,846 88,312 98,326 106,975 124,987 139,309 151,605 152,004 158,325 163,124 173,127 220,806 236,191 228,715 246,006 280,302 347.443 Merchandise 89894 6,972 12 734 17,409 14,460 17,433 18,187 20,410 21,252 23,456 22,148 23,003 24,395 24.920 62,806 63,660 49,704 51.434 63.298 88,027 Travel 13,264 15.965 19,445 21,109 16,727 21,407 20,494 30,744 33,885 35,796 37,291 38.566 39,108 39,036 40,331 39,636 39,692 42,488 53,455 62,200 Government Services 719 773 1,302 1,308 2,498 3,159 4,157 5,020 4,855 6,419 7,640 5,214 5,341 6,952 7,893 9,953 8,980 8,727 8,734 15,994 Other Services 38,094 43,387 48,607 50,696 51,455 52,836 59,803 64,334 73,809 79,792 77,622 82,850 84,674 92,419 97,789 108,569 115,213 124,959 136,556 143,334 Private Transfers 2,925 3,469 3.436 3,324 3,172 3,491 4,334 4,479 5,508 6,142 7,303 8,692 9,608 9,800 12,067 14,373 15,126 18,398 18,259 37,888

Paym.ents 14,177 14,753 13,624 7,092 4,034 4,716 5,056 5,246 5,878 5,785 6,200 7,206 7,231 6,861 8,282 9,965 20,087 21,576 23,397 26,367 Merchandise 11,031 11,775 10,663 4,911 2,001 2,595 2,990 3,143 3,663 3,567 3,848 4,806 4,682 4,244 5,468 4,845 4,400 5,611 6,455 7,662 Freight 1,555 1,509 1,536 770 624 591 588 605 702 692 781 816 888 952 1,077 1,235 895 859 932 981 Other Transport 216 226 166 165 153 146 153 157 175 1.87 212 220 245 244 266 325 234 234 256 278 Government Services 29 34 16 20 29 23 23 23 23 23 23 24 24 24 24 32 30 30 29 29 Other Services 1,346 1,209 1,243 1,226 1,227 1,361 1,302 1,318 1,315 1,316 1,336 1,340 1,392 1,397 1,447 3,528 14,528 14,842 15,725 17,417

Trade Balance -2,137 -2.803 2,101 12,498 12,459 14,838 15,197 17,267 17,589 19,889 18,300 18,197 19,711 20,676 57,338 58,815 45,304 45,823 56,843 80,365

Services (Net) 48,932 57.147 66,363 70,932 68,647 75,281 82,388 97,995 110,334 119,789 120,201 124,230 126,574 135,790 143,199 153,038 148,198 160,209 181,803 202,823

Transfers (Net) 2,925 3,469 3,436 3,324 2,172 2,491 4,334 4,479 5,508 6,142 7,303 8,692 9,608 9,800 12,067 14,373 15,126 18,398 18,259 37,888

CURRENTACCOUNT BALANCE 49,720 57,813 71,900 86,754 84,278 93,610 101,919 119,741 133,431 145,820 145,804 151,119 155,893 166,266 212,604 226,226 208,628 224,430 256,905 321,076

Note: After 1979 Canal Zone data vasnot compiled in detail since the Zone reverted fully to Panama.

Source: Controller General. Page 1 of 2

Table 4.1: EXTERNAL PUBLIC DEBT OUTSTANDING AS OF DECEMBER 31, 1980, BY CREDITOR

(IN THOUSANDS OF U.S. DOLLARS)

D E B T O U T S T A N D I N G : I N A R R E A R S TYPE OF CREDITOR ------:------CREDITOR COUNTRY DISBURSED :UNDISBURSED: TOTAL PRINCIPAL INTEREST

SUPPLIERS CREDITS ITALY 8,815 1,303 10,118 - - JAPAN 15,449 - 15,449 - - MEXICO 25 - 25 - - NETHERLANDS 1,800 - 1,800 - - SWEDEN 4.008 2,569 6,577 - - SWITZERLAND 435 - 435 - - UNITED KINGDOM 700 - 700 - - UNITED STATES 609 34 643 - - TOTAL SUPPLIERS CREDITS 31,841 3.906 35,747 - -

FINANCIAL INSTITUTIONS AUSTRALIA 66 35 101 - - BAHAMAS 29 309 338 - - BELGIUM 142.000 - 142,000 - - BRAZIL 3,000 - 3.000 - - CANADA 17,475 - 17,475 - - TAIWAN 440 - 440 - - COLOMBIA 1,003 - 1.003 - - FRANCE 7,878 - 7.878 - - GERMANY, FED.REP. OF 31,117 4,999 36,116 - - JAPAN 154,457 - 154,457 - - LUXEMBOURG 6,300 - 6,300 - - MALAYSIA 25,000 - 25,000 - - SPAIN 6,845 1,280 8,125 - - SWEDEN 46,489 15,793 62.282 - - SWITZERLAND 176 - 176 - - UNITED KINGDOM 440 - 440 - - UNITED STATES 375,536 15,203 390,739 1,500 - VENEZUELA 1,411 - 1,411 - - MULTIPLE LENDERS 516,298 - 516,298 - - TOTAL FINANCIAL INSTITUTIONS 1,335.960 37,619 1,373,579 1,500 -

BONDS JAPAN 84,000 - 84,000 - - KUWAIT 35,847 - 35.847 - - LUXEMBOURG 32,585 - 32,585 - - SINGAPORE 29,000 - 29,000 - - UNITED KINGDOM 45,350 - 45.350 - - UNITED STATES 22,837 - 22,837 - - MULTIPLE LENDERS 103,392 - 103,392 - - TOTAL BONDS 353,011 - 353.011 - - Page 2 of 2

Table 4.1: EXTERNAL PUBLIC DEBT OUTSTANDING AS OF DECEMBER 31, 1980, BY CREDITOR

(IN THOUSANDS OF U.S. DOLLARS)

D E B T O U T S T A N D I N G : I N A R R E A R S TYPE OF CREDITOR ------:------CREDITOR COUNTRY DISBURSED :UNDISBURSED: TOTAL PRINCIPAL INTEREST

MULTILATERAL LOANS IBRO t32.736 146,144 278,880 - - IDB 194,121 166.801 360,922 - - LAAD OF CEN. AMERICA 600 - 600 - - TOTAL MULTILATERAL LOANS 327,457 312,945 640,402 - -

BILATERAL LOANS SPAIN 3,073 - 3,073 - - UNITED STATES 160,976 61,254 222.230 - - VENEZUELA 64,573 34,730 99,303 - - TOTAL BILATERAL LOANS 228.622 95,984 324.606 ------_------. TOTAL EXTERNAL PUBLIC DEBT 2.276,891 450,454 2,727,345 1,500 -

NOTES: ONLY DEBTS WITH AN ORIGINAL OR EXTENDED MATURITY OF OVER ONE YEAR ARE INCLUDED IN THIS TABLE. DEBT OUTSTANDING INCLUDES PRINCIPAL IN ARREARS BUT EXCLUDES INTEREST IN ARREARS.

Source: IBRD Debt Reporting Service Table 4.2: EXTERNAL PUBLIC DEBT OUTSTANDING AS OF DECEMBER 31, 1980, BY BORROWER

(In Thousands of U.S. Dollars)

D E 8 T O U T S T A N D I N G : I N A R R E A R S

NAME OF DEBTOR DISBURSED :UNDISBURSED: TOTAL PRINCIPAL : INTEREST

AUTORIDAD PORTUARIA NACIONAL 25,212 - 25,212 - - BANCO DESARROLLO AGROPECUARIO 29.055 15,228 44.283 - - BANCO HIPOTECARIO NACIONAL 39,711 - 39,711 - - BANCO NAC PANAMA 58,970 40,998 99.968 - - CAUA AHORROS PANAMA 518 - 518 - - CORP DESAROLLO MINERO CERRO COLORADO 1,500 - 1,500 - - CORP DESARROLLO BAYANO 6,300 - 6,300 - - CORP. FINANCIERA NACIONAL 21,244 12,282 33,526 - - CORP.AZUCARERA LA VICTORIA 110,139 4,027 114,166 - DIREC AERONAUTICA CIVIL 15,693 - 15,693 - - EMP ESTATAL CEMENTO BAYANO 36,208 5,033 41,241 - - EMP. ESTATAL CONTADORA PANAMA 1,547 - 1,547 - - GOBIERNO PANAMA 366 1,626,847 259,559 1,886,406 - - HIPODROMO PRES. REMON 1,304 - 1,304 - - INST ACUEDUCTOS ALCANTAR NAC 366 49.123 7.218 56,341 - - INST PANAMENO DE TURISMO 366 4,257 - 4,257 - - INST RECURSOS HIDRAULICOS ELECTRIF 156.755 76,830 233,585 - - INST VIVIENDA Y URBANISMO 29,694 10 29,704 - - INSTITUTO DE MERCADEO 1.625 - 1,625 - - INSTITUTO NACIONAL DE DEPORTES 1,000 - 1.000 - - INTEL 45,493 16,269 61,762 - - UNIVERSIDAD PANAMA 228 - 228 - - ZONA LIBRE DE COLON 366 14.468 13,000 27,468 1,500 -

TOTAL EXTERNAL PUBLIC DEBT 2.276,891 450,454 2,727,345 1,500

NOTES: ONLY DEBTS WITH AN ORIGINAL OR EXTENDED MATURITY OF OVER ONE YEAR ARE INCLUDED IN THIS TABLE. DEBT OUTSTANDING INCLUDES PRINCIPAL IN ARREARS BUT EXCLUDES INTEREST IN ARREARS.

Source: IBRD Debt Reporting Service Table 4.3: SERVICE PAYMENTS, COMMITMENTS, DISBURSEMENTS AND OUTSTANDING AMOUNTS OF EXTERNAL PUBLIC DEBT

PROJECTIONS BASED ON DEBT OUTSTANDING AS OF DECEMBER 31, 1980

(In Thousands of U.S. Dollars)

TOTAL YEAR DEBT OUTSTANDING AT T R A N S A C T I 0 N S D U R I N G P E R I 0 D OTHER CHANGES : BEGINNING OF PERIOD

DISBURSED INCLUDING COMMIT- DISBURSE- S E R V I C E P A Y M E N T S CANCEL- ADJUST- : ONLY UNDISBURSED MENTS MENTS ------:------:------LATIONS MENT * PRINCIPAL INTEREST TOTAL : (1) : (2) (3) (4) (5) (6) (7) (8) (9)

1970 150,125 203,082 111,238 67,446 23,613 6,868 30,481 285 2 1971 193,889 290,424 137,808 78,885 28,068 12,282 40,350 177 -2 1972 244,645 399,985 105,873 135,485 34,716 17,300 52,016 4,044 3 1973 345,418 467,101 282,049 163,281 63,415 23,609 87,024 112 12,172 1974 457,468 697.795 150,847 194,936 91,438 44,119 135,557 1,339 3,849 1975 564,836 759,714 384,182 225,673 31,186 41,184 72,370 8,573 23,373 1976 774,191 1,127,510 346.712 357,586 44,666 56,261 100,927 1,838 16,141 1977 1.101,414 1,443,859 483,813 324,347 88,571 73,809 162,380 5,718 15,308 1978 1,344,601 1,848,691 944,154 974,747 444,299 124,202 568,501 1,320 23,590 1979 1,898,297 2,370,816 394,955 397,643 191,587 196,436 388,023 1,368 -6,903 1980 2,089,742 2,565.913 398,489 387,894 210,355 252,743 463,098 37,628 10,926 1981 2,276,891 2,727,345

* * * * * * THE FOLLOWING FIGURES ARE PROJECTED * * * * * *

1981 2,276,891 2,727.345 253,500 200,300 206,279 290,773 497,052 - -1,491 1982 2,269,420 2,773,075 - 134,734 202,308 281,027 483,335 - 7 1983 2,201,856 2,570,774 - 116,563 285.504 262,658 548,162 - -2 1984 2,032.912 2,285,268 - 100,253 278,119 234,987 513,106 - 12 1985 1,855.059 2,007,161 - 61,386 284,601 200,180 484,781 - 9 1986 1,631,852 1,722,569 - 39,666 269,019 163.259 432,278 - 8 1987 1,402,506 1,453,558 - 28,136 294,699 126,809 421,508 - -4 1988 1,135.941 1,158,855 - 16,259 232,549 86,768 319,317 - 13 1989 919,664 926,319 - 5,581 138,972 59,060 198,032 - 6 1990 786,279 787,353 - 918 123,434 46,193 169,627 - 1 1991 663,764 663,920 - 124 91,531 35,935 127,466 - - 1992 572,357 572,389 - 31 72,977 29,325 102,302 - 4 1993 499,415 499,416 - 1 75,855 24,507 100,362 - 7 1994 423,568 423,568 - - 68,300 19,196 87,496 - 2 1995 355,270 355,270 - - 46,699 15,322 62,021 - -5

t THIS COLUMN SHOWS THE AMOUNT OF ARITHMETIC IMBALANCE IN THE AMOUNT OUTSTANDING INCLUDING UNDISBURSED FROM ONE YEAR TO THE NEXT. THE MOST COMMON CAUSES OF IMBALANCES ARE CHANGES IN EXCHANGE RATES AND TRANSFER OF DEBTS FROM ONE CATEGORY TO ANOTHER IN THE TABLE.

Source: IBRD Debt Reporting Service Table 5.1: CENTRAL GOVERNMENT OPERATIONS, 1977-82

(millions of Balboas)

Actual Prel. Proj. 1977 1978 1979 1980 18 1982

Current revenue 369.0 405.4 477.0 707.8 790.5 912.0 Tax revenue 303.3 338.8 405.1 506.9 581.7 665.0 Income tax (117.7) (120.9) (152.1) (205.0) (256.5) ( Other direct taxes (28.9) (24.0) (31.1) (35.6) (48.3) (.) Taxes on foreign trade (56.4) (70.1) (80.2) (91.0) (99.1) (.) Taxes on domestic transactions (100.3) (123.8) (141.7) (175.3) (177.8) ( Nontax revenue 65.7 66.6 71.9 200.9 208.8 247.5 Panama Canal (2.3) (2.3) (2.3) (83.8) 1/ (75.8) (79.3) Transfers from rest of public sector (7.0) (6.2) (4.3) (18.4) (15.3) (37.0) Other (56.4) (58.1) (65.3) (98.7) (117.7) (131.2)

Current expenditure 353.0 450.4 553.8 680.3 766.2 862.6 Wages and salaries 184.4 196.5 235.2 279.4 295.3 324.6 Goods and services 25.7 30.8 53.0 40.5 54.5 73.7 Pensions and transfers 74.8 107.7 130.6 142.0 175.7 151.8 Of which: to rest of public sector (37.7) (52.0) (58.9) (71.6) (82.2) (90.1) Interest 63.5 85.0 133.2 196.7 236.3 283.7 Internal (19.4) (19.6) (13.5) (16.7) (21.9) (28.2) s External (44.1) (65.4) (119.7) (180.0) (214.4) (255.5) Other current expenditures 4.6 30.4 21.8 21.7 4.4 28.8

Current account surplus or deficit(-) 16.0 -45.0 -76.8 27.5 24.3 49.3

Grants-in-aid 7.7 4.7 5.0 1.8 0.6 __

Capital expenditure 114.8 145.9 229.7 237.6 238.6 242.6

Fixed capital formation 69.3 79.1 107.8 126.0 159.6 150.8 3/ Transfers to rest of consolidated public sector 45.5 66.8 121.9 111.6 79.0 91.8 Of which: to La Victoria 2/ (--) (--) (47.5) (62.6) (17.3) (23.3)

Overall surplus or deficit (-) -9.1 -1.2 - 208 3 -213.7 -193.3 External financing 127.4 286.6 185.2 236.1 77.3 ... National bank -37.1 -96.4 120.7 -23.5 142.5 ... Other 4/ 0.8 -4.0 -4.4 -4.3 -6.1 ... 1/ Includes B 12.5 million that was scheduled for payment in 1979 but received in 1980. 2/ Includes amortization payments made by the Government on behalf of the sugar corporation, La Victoria. 3/ Excludes investment of B 34.6 million to be undertaken by the Ministry of Housing which is treated as investment by the National Mortgage Bank. 4/ Includes bonds placed locally. Sources: Office o the Controller General; Ministry of Planning and Economic Policy; and IMF. - 78 -

Table 5.2: OPERATIONS OF THE SOCIAL SECURITY AGENCY, 1979-82

(millions of Balboas)

Actual Prel. Proj. 1977 1978 1979 1980 1981 1982

Current revenue 138.9 151.7 181.9 219.1 269.5 321.8 Contributions 104.9 114.0 139.0 165.8 203.3 240.7 From workers (48.0) (52.4) (65.4) (78.5) (95.6) From employers (51.1) (55.4) (66.9) (80.3) (99.5) Other quotas (5.8) (6.2) (6.7) (7.0) (8.2) Professional risk premium 7.9 8.5 10.4 12.9 15.7 17.2 Thirteenth month contribution 11.1 13.0 15.8 19.2 22.9 31.9 Contributions to public employees' compensation pension fund 5.1 5.6 6.6 8.3 9.7 12.0 Income from investments 6.7 6.4 4.2 6.8 11.4 13.0 Other 3.2 4.2 5.9 6.1 6.5 7.0

Current expenditures 133.6 155.6 170.3 197.0 238.6 271.4 Administration 9.0 10.9 9.8 11.4 12.3 14.6

Payments of benefits and other 124.6 144.7 160.5 185.6 226.3 256.8

Current operating surplus or deficit (-) 5.3 -3.9 11.6 22.1 30.9 50.4 Current transfers (net) 9.9 15.4 20.0 16.6 35.1 40.1 Current transfer from Central Government (13.8) (17.5) (22.5) (16.6) (41.2) (42.7) Transfers to Central Government (-3.9) (-2.1) (-2.5) () (-6.1) (-2.6)

Current account surplus or deficit (-) 15.2 11.5 31.6 38.7 66.0 90.5

Capital expenditures 17.6 18.6 9.0 23.7 63.1 62.2 Fixed investment 3.6 4.7 6.0 6.8 41.9 38.0 Of which: housing program (--) () () (2.3) (35.7) (29.5) Financial investment 2.0 1.8 3.0 6.0 7.0 8.2 Net lending to National Mortgage Bank 12.0 12.1 -- 10.9 14.2 16.0

Overall surplus or deficit (-) -2.4 -7.1 22.6 15.0 2.9 28.3 External financing (net) *-- ... -2.5 -1.3 ... National Bank financing (net) ...... -20.1 -16.0 -24.7 Other ...... -- 2.3 21.8 ...

Sources: Social Security Agency; Controller General; Ministry of Planning and Economic Policy; National Bank; and IMF. - 79 -

Table 5.3:: OPERATIONS OF THE DECENTRALIZED AGENCIES, 1977-82L1

(millions of Balboas)

Actual Prel. Proj. 1977 1978 1979 1980 1981 1982

Operating revenue 17.8 34.7 43.2 54.5 61.8 76.3

Operating expenditures 43.7 58.8 76.1 83.9 93.4 110.9 Interest payments 9.5 11.0 19.5 14.3 12.6 22.0 Other current expenditure 34.2 47.8 56.6 69.6 80.8 88.9

Operating surplus or deficit (-) -25.9 -24.1 -32.9 -29.4 -31.6 -34.6

Current transfers (net) 21.0 26.8 27.1 26.3 27.7 25.0 Transfers from Central Government (21.0) (26.8) (27.1) (30.7) (32.7) (33.8) Transfers to Central Government (--) (--) (--) (-4.4) (-5.0) (-8.8)

Current account surplus or deficit (-) -4.9 2.7 -5.8 -3.1 -3.9 -9.6

Capital transfers from Central Government 10.1 10.0 23.4 27.3 36.3 51.2

Transfers from Social Security Fund 12.0 12.1 -- 10.9 14.2 16.0

Capital expenditure 62.1 67.0 44.2 50.6 62.6 103.4 Fixed investment /2 49.2 45.6 19.9 17.4 30.8 51.5 Other 13.0 21.4 24.3 33.2 31.8 51.9

Overall surplus or deficit (-) -45.0 -42.2 -26.6 -15.5 -16.0 -45.8 External financing (net) ...... 0.6 18.6 7.0 ... National Bank financing (net) ...... 26.0 -2.3 9.4 ... Other ...... -- -0.8 -0.4 ...

/1 Includes the operations of University of Panama, Human Development Institute (IFARHU), Agricultural Marketing Institute (IMA), National Financial Company (COFINA), and National Mortgage Bank (BHN). /2 Includes investment expenditures of the Housing Ministry.

Sources: Controller General; Ministry of Planning and Economic Policy; National Bank of Panama; and IMF. - 80

Table 5.4: OPERATIONS OF THE STATE ENTERPRISES, 1977-1982L±

(millions of Balboas)

Actual Prel. Proj. 1977 1978 1979 1980 1981 1982

Operating revenue 159.1 183.7 234.9 361.9 424.2 473.4

Operating expenditure 151.3 186.7 238.9 318.4 354.6 399.6 Interest payments 34.6 50.9 61.2 68.8 66.7 79.1 Other current expenditure 116.7 135.8 177.7 249.6 287.9 320.5

Operating surplus or deficit (-) 7.8 -3.0 -3.9 43.5 69.6 73.8

Transfers net of taxes -0.2 3.6 7.5 10.3 4.1 -12.0 Current transfers from Central Government (2.9) (7.7) (9.3) (24.3) (8.3) (13.6) Transfers to Central Government (-3.1) (-4.1) (-1.8) (-14.0) (-4.2) (-25.6)

Current account surplus or deficit (-) 7.6 0.6 3.6 53.8 73.7 61.8

Capital transfers 35.4 56.8 98.5 84.3 42.7 40.6

Capital expenditure 175.1 187.6 142.6 111.8 124.3 146.6 Fixed investment 175.1 187.6 142.6 111.8 124.3 146.6 Other ------

Overall surplus or deficit (-) -132.1 -130.2 -40.5 26.3 -7.9 -44.2 External financing (net) ...... 10.6 -31.5 -9.9 ... National Bank financing (net) ... * -- 30.2 5.3 17.9 ... Other ...... -0.3 -0.1 -0.1

/1 Includes the operations of Hydraulic Resources and Electricity Institute (IHRE), National Telecommunications Institute (INTEL), National Water and Sewerage Institute (IDAAN), La Victoria Sugar Corporation, Colon Free Zone, Civil Aviation Authority, Tourism Institute, Bayano Cement Plant and Port Authority.

Sources: Controller General; Ministry of Planning and Economic Policy; National Bank' and IMF. - 81 -

Table 5.5: SUMMARY ACCOUNTS OF THE NONFINANCIAL PUBLIC SECTOR, 1977-82

(millions of Balboas)

Actual Prel. Proj. 1977 1978 1979 1980 1981 1982

Revenue of consolidated public sector 537.1 595.0 708.2 1,032.6 1,185.0 1,360.5 General Government revenue 521.8 589.7 699.6 977.0 1,110.7 1,298.7 Central Government /1 (365.1) (403.3) (474.5) (703.4) (779.4) (900.6) Social Security Fund (138.9) (151.7) (181.9) (219.1) (269.5) (321.8) Rest of General Government (17.8) (34.7) (43.2) (54.5) (61.8) (76.3) Grants 7.7 4.7 5.0 1.8 0.6 -- Public enterprises current account surplus or deficit (-) 7.6 0.6 3.6 53.8 73.7 61.8 Of which: interest payments (34.6) (50.9) (61.2) (68.8) (66.7) (79.1)

Expenditure of consolidated public sector 807.7 960.7 1,054.2 1,215.1 1,419.7 1,615.5 General Government current expenditure 495.5 620.5 750.6 913.9 1,024.3 1,168.5 Central Government /1 (318.2) (406.1) (504.2) (633.0) (692.3) (786.3) Social Security Fund (133.6) (155.6) (170.3) (197.0) (238.6) (271.4) Rest of General Government (43.7) (58.8) (76.1) (83.9) (93.4) (110.8) Capital expenditure 312.2 340.2 303.6 301.2 395.4 447.0 Fixed investment (297.2) (317.0) (276.3) (262.0) (356.6) (383.1) Net lending to private sector -(15.0) (23.2) (27.3) (39.2) (38.8) (60.1)

Consolidated public sector savings /2 41.6 -25.5 -42.4 118.7 160.7 192.0

Overall deficit of consolidated public sector -270.6 -365.7 -346.0 -182.5 -234.7 -255.0

Overall surplus or deficit (-) of nonconsolidated public sector -1.3 0.7 20.2 -1.6 18.3 --

Overall deficit of public sector -269.3 -365.0 -325.8 -184.1 -216.4 -255.0 External financing 293.7 467.3 191.3 227.6 70.2 ... National Bank -32.5 100.7 139.9 -40.5 131.1 ... Other /3 8.1 -1.6 -5.4 -3.0 15.1 ...

/1 Excludes transfers to and from the rest of General Government /2 Includes grants. /3 Includes bonds placed locally.

Sources: Controller General; Ministry of Planning and Economic Policy; and IMF. Table 6.1: SUMMARY ACCOUNTS OF THE PRIVATE COMMERCIAL BANKS, 1977-81

(millions of Balboas)

December 31 1977 1978 1979 1980 1981

Net foreign reserves 3,346.2 4,567.5 8,197.5 5,034.2 5,517.4 Assets 3,631.4 4,775.2 8,706.5 5,818.0 6,608.2 Foreign currencies (20.7) (25.4) (41.1) (42.2) (44.4) Deposits abroad (3,318.1) (4,438.8) (8,103.7) (5,060.6) (5,343.3) Other unclassified (292.6) (311.0) (561.7) (715.2) (1,220.5) Liabilities -285.2 -207.7 -509.0 -783.8 -1,090.8

Overseas operations (net) -3,940.1 -5,031.0 -8,666.9 -5,397.5 -5,952.5 Credit to nonresidents 6,408.5 8,607.0 11,139.1 13,327.1 18,121.3 Deposits from nonresidents -10,278.6 -13,601.0 -19,727.5 -18,611.3 -23,840.0 X Foreign banks (-8,856.4) (-11,981.2) (-17,478.4) (-16,095.3) (-20,253.8) Private nonresidents (-1,422.2) (-1,619.8) (-2,249.1) (-2,516.0) (-3,586.2) Other foreign liabilities -70.0 -37.0 -78.5 -113.3 -233.8

Net domestic reserves 57.9 52.0 153.4 144.4 193.2 Domestic currency 2.0 1.3 2.1 3.2 3.3 Interbank deposits (net) 55.9 50.7 151.3 141.2 189.9

Net domestic credit 1,392.1 1,453.7 1,657.4 2,026.7 2,358.1 Central Government (net) 130.1 99.4 ) ) Rest of public sector (net) 132.4 116.0 ) 165.9 ) 213.8 207.7 Private sector 1,148.7 1,250.0 1,496.3 1,803.2 2,182.8 Unclassified assets (net) -19.1 -11.7 -4.8 9.7 -32.4

Liabilities to domestic private sector 606.5 754.9 955.5 1,210.5 1,434.7 Demand deposits 185.0 214.0 262.6 293.3 319.5 Time deposits 301.1 412.1 544.0 772.5 964.4 Savings deposits 120.4 128.8 148.9 144.7 150.8

Private capital and surplus 249.6 287.3 385.9 597.3 681.5

Source: Banking Commission - 83 -

Table 6.2: CONSOLIDATED ACCOUNTS OF THE BANKING SYSTEM, 1977-81

(millions of Balboas)

December 31 1977 1978 1979 1980 1981

Net foreign reserves 3,270.3 4,573.2 8,158.7 4,972.8 5,362.9 Assets 3,698.1 4,927.2 8,830.4 5,490.6 6,730.2 Liabilities -427.8 -354.0 -671.7 -967.8 -1,367.3

Overseas operations (net) -3,936.3 -5,032.2 -8,670.1 -5,401.5 -5,955.2 Credit to nonresidents 6,413.7 8,607.0 11,139.1 13,327.1 18,125.0 Deposits from nonresidents -10,280.0 -13,602.2 -19,730.7 -18,615.3 -23,846.4 Other foreign liabilities -70.0 -37.0 -78.5 -113.3 -233.8

Net domestic credit 1,736.3 1,720.5 2,096.6 2,529.2 3,054.4 Central Government (net) 187.4 60.3 ) ) Rest of public sector (net) 127.7 107.0 ) 257.7 ) 265.1 390.1 Private sector 1,369.5 1,537.3 1,839.4 2,215.8 2,617.9 Official capital and surplus -28.5 -36.8 -37.1 -51.9 -59.7 Unclassified assets (net) /1 34.7 1.6 -12.0 27.5 0.8 Interbank float 45.4 51.2 48.6 72.7 105.3

Long-term foreign liabilities 13.5 13.2 14.4 21.1 31.7

SDR allocation 15.0 16.1 22.5 27.7 30.7

Liabilities to domestic private sector 792.2 944.9 1,162.4 1,454.4 1,718.2 Demand deposits 210.6 242.5 295.9 329.8 354.2 Time deposits 380.2 483.2 620.9 873.1 1,101.5 Savings deposits 195.6 217.2 244.0 248.6 256.7 Other deposits 5.8 2.0 1.6 2.9 5.8

Private capital and surplus 249.6 287.3 385.9 597.3 681.5

Note: Includes National Bank of Panama, Savings Bank (Caja de Ahorros), and General License Commercial Banks (Table 6.1); not included are the various private "financieras," the Housing Bank, and the Agricultural Bank.

/1 Includes valuation adjustments and domestic urrency in vault.

Sources: Banking Commission; National Bank of Panama; and IMF. - 84 -

Table 8.1: ELECTRICITY STATISTICS, 1975-81

1975 1977 - 1978 1979 1980 1981~~~~~~~~~~~~/1 -

(million MWH) Net generation 1.16 1.41 1.43 1.71 1.75 1.85 Hydro 0.10 0.34 0.72 0.80 0.96 1.33 Thermal (petroleum based) 1.06 1.06 0.72 0.91 0.79 0.52

Total consumption 1.02 1.24 1.24 1.45 1.47 1.55 Residential 0.36 0.40 0.41 0.44 0.46 0.48 Commercial 0.35 0.40 0.42 0.44 0.48 0.49 Industrial 0.13 0.13 0.13 0.16 0.18 0.19 Government 0.16 0.22 0.25 0.28 0.30 0.33 Canal 0.02 0.09 0.02 0.13 0.02 0.02 Other ------0.03 0.04

(million bbls.) Petroleum consumption 2.27 2.22 1.58 1.83 1.63 1.09 Savings of petroleum from hydropower generation /2 -- 0.50 1.35 1.41 1.79 2.53

(million US$) Petroleum purchases 25.1 31.0 22.3 29.8 45.3 36.9 Savings of petroleum from hydropower generation /2 -- 7.0 19.0 23.0 49.6 86.1

/1 Preliminary.

/2 Compared with hydropower generation in 1975.

Sources: IRHE; IMF; and Bank staff. -85-

Table9.1: COST OF LIVINGINDEX, CITY OF PANANA,1975-1981

(1975 - 100)

Year Total Beverage Housing Clothing Other

1975 100.0 100.0 100.0 100.0 100.0 1976 104.0 101.4 105.5 103.3 105.5 1977 108.7 104.4 113.7 108.5 109.7 1978 113.3 110.9 121.2 112.0 110.7 1979 122.3 122.2 125.0 118.2 121.8 1980 139.2 137.6 135.4 130.5 145.6 1981 149.3 150.2 141.7 137.5 156.7

Source: ControllerGeneral - 86 - Table 9.2: SELECTED PRICE INDICES, 1970-81

(1961 = 100)

Wholesale Agricultural Industry Imports Internal Terms

1970 112.0 119.2 106.9 115.3 111.5 1971 118.1 124.5 112.9 121.6 110.3 1972 128.1 129.5 126.3 129.8 102.5 1973 141.6 141.3 139.0 144.9 101.7 1974 184.4 174.9 185.8 186.6 94.1 1975 210.3 210.4 210.5 210.0 100.0 1976 226.7 223.8 231.4 222.2 96.7 1977 243.0 235.1 245.7 243.0 95.7 1978 256.1 254.8 256.3 256.3 99.4 1979 292.0 291.9 305.5 275.4 95.5 1980 336.8 328.1 360.3 311.5 91.1 1981 370.5 350.5 390.9 353.9 89.7

1/ Ratio between agriculturaland industrialwholesale price indices.

Source: Controller General - 87 -

Table 10.1: PANAMA CANAL TRAFFIC, 1915-1980

Long Tons Panama Canal Fiscal Year Transits Tolls of Cargo Net Tonnage ('000) (Millions of US$) (Millions of US$) (Millions of US$)

1915 1.1 4.4 4.9 n.a. 1922 3.1 11.2 11.1 n.a. 1932 5.1 20.7 19.9 n.a. 1942 4.6 9.8 14.2 n.a. 1950 7.7 24.5 30.4 n.a. 1951 7.8 23.9 31.3 n.a. 1952 9.1 30.4 36.9 n.a. 1953 10.2 37.5 41.2 n.a. 1954 10.2 37.2 41.9 n.a. 1955 9.8 35.1 41.5 n.a. 1956 9.7 37.4 46.3 42.6 1957 10.2 39.6 50.6 44.8 1958 10.6 42.8 49.0 49.1 1959 11.9 46.5 52.3 53.4 1960 12.1 51.8 60.4 59.6 1961 12.0 55.1 65.2 63.4 1962 12.1 58.3 69.1 66.9 1963 12.0 57.8 63.9 66.4 1964 12.9 62.5 72.2 71.5 1965 12.9 67.1 78.9 77.0 1966 13.3 72.6 85.3 83.1 1967 14.1 82.3 93.0 95.1 1968 15.5 93.1 105.5 107.5 1969 15.3 95.9 108.8 110.4 1970 15.5 100.9 118.9 115.6 1971 15.3 100.6 121.0 114.7 1972 15.2 101.5 111.1 116.0 1973 15.1 113.4 127.6 128.8 1974 15.3 121.3 149.7 137.9 1975 14.7 143.3 140.6 136.4 1976 13.2 135.0 117.4 128.5 TQ /1 3.3 35.5 30.9 33.8 1977 13.1 164.7 123.2 134.0 1978 12.8 195.7 157.8 157.5 1979 /2 13.1 210.2 156.9 155.7 1980 /3 13.4 286.4 162.8 163.2

/1 In 1976 the fiscal year for all U.S. Government agencies was changed from July 1 through June 30, to October 1 through September 30. For continuity purposes, July, August, and September 1976 were designated the Transition Quarter. /2 Estimation. /3 Projection. Source: Panama Canal Company/Canal Zone Government.

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