FILECOPY ReportNo. 2306-PAN Panama'sDevelopment in the 1980's: A SpecialEconomic Report 97p
Public Disclosure Authorized (InTwo Volumes) t4 1 /J Volume1: The Report July20, 1979 LatinAmerica and Caribbean Region RET1UNTOLs G& Country ProgramsDepartment I INFORMATIONCENTER FOR OFFICIAL USE ONLY
Public Disclosure Authorized U Public Disclosure Authorized
Public Disclosure Authorized Documentof the World Bank
Thisdocument has a restricteddistribution and maybe used by recipients oniy in the performanceof theirofficial duties. Its contentsmay not otherwisebe disclosedwithout Wo!IdBank authorization. Exchange Rate
1.00 Balboa = 1.00 U.S. Dollar
Fiscal Year
January 1 - December 31
Abbreviations
AID = Agency for International Development APN = Auteridad Portuaria Nacional (National Port Authority) BDA = Banco de Desarrollo Agropecuario (Agricultural Development Bank) VNH = Banco Nacional Hipotecario (National Mortage Bank) CODEMIN = Corporacion de Desarrollo Minero (Cerro Colorado Mine Cerro Colorado Development Corporation) COFINA = Corporacion Financiera Nacional (National Finance Corporation) CZ = Canal Zone EDC = Export Development Corporation IDAAN = Instituto de Acueductos y (National Water and Sewerage Alcantarillados Nacional Institute) IDB = Inter-American Development Bank IDIAP = Instituto de Investigacion Agropecuaria (Agricultural Research Institute) IMA = Instituto de Mercadeo Agropecuario (Agricultural Marketing Institute) IPAT = Instituto Panameno de Turismo (Panamanian Tourism Institute) IRHE = Instituto de Recursos Hidraulicos (Hydraulic Resources and y de Electricidad Electricity Institute) INTEL = Instituto Nacional de (National Telecommunication Telecommunicaciones Institute) MICI = Ministerio de Industria y Comercio (Ministry of Industry and Commerce) MIDA = Ministerio de Desarrollo (Ministry of Agriculture) Agropecuario MIVI = Ministerio de Vivienda (Ministry of Housing) MPPE = Ministerio de Planificacion y (Ministry of Planning and Politica Economica Economic Policy) ZLC = Zona Libre de Colon (Colon Free Zone) FOR OFFICIALUSE ONLY
TABLE OF CONTENTS
Page No.
DATA SHEET
SUMMARY AND CONCLUSIONS
MAP
I. INTRODUCTION ...... I
II. THE PAST PATTERN OF PANAMANIAN DEVELOPMENT ...... 1
A. Before 1968 ...... I B. 1968 to 1978 ...... 9
III. THE NEW CANAL TREATY ...... 31
A. The Treaty ...... 31 B. Implementation of the Treaty ...... 32 C. Short and Medium Term Impact of the Treaty ...... 37
IV. DEVELOPMENT ISSUES IN THE 1980'S ...... 50
A. Spatial Growth Policies ...... 53 B. Rural/Agricultural Development Issues ...... 56 C. Urban Issues ...... 64 D. Copper ...... 72 E. Public Finances ...... 77
This report is the product of an economic mission that visited Panama in June 1978. The members of the mission were Paul M. Meo (Chief), Herminia Martinez (Public Investment Program), Yoshine Uchimura (Young Professional), Luis Liberman (Spatial/Agricultural Analysis), Carlo Castelli (Canal), David Goodman (Urban Specialist), and Nancy Rodriguez (Secretary). The draft report was discussed with the Government in February 1979.
This document hasa restricteddistribution and may be used by recipientsonly in the performance of their officialduties. Its contents may not otherwise be disclosed without World Bank authorization.
Page 1 of 2
PANAMA - COUNTRY DATA
GROSS NATIONAL PRODUCT IN 1978 (Prel.) ANNUAL RATE OF GROWTH (%, constant prices)
US$ Mmn. % 1963-68 1968-73 1974-77
GNP at Market Prices 2,231.4 100.0 7.0 7.2 1.3 Gross Domestic Investment 601.1 26.9 10.5 11.1 -7.0 Gross National Saving 350.9 15.7 14.3 7.1 0 Current Account Balance -250.2 -11.2 Exports of Goods, NFS 927.1 41.5 8.2 4.5 -2.7 Imports of Goods, NFS 1,093.7 49.0 6.5 7.5 -5.4
OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1976
Value Added Labor Force/ V. A. Per Worker US$ Mln. % Thou. % US 5 %
Agriculture 330.4 17.1 158.7 31.0 2082.0 55.1 Industry 474.0 24.5 83.5 16.3 5677.0 150.3 Services 1129.8 58.4 261.1 51.0 4327.0 114.5 Unallocated 8.7 1.7 - - Total/Average a 1934.2 100.0 512.0 100.0 3778.0 100.0 GOVERNMEN3TFINANCE 2/3/ General Government 2/ Central Government - (B/. Mln.) % of GDP (8/. Min.) % of GDP 1978 1978 1976-77 T978 1978 1976-77
Current Receipts - - - 417.5 i8.0 16.4 Current Expenditures - - - 4 j.4i9.8 16.5 Current Surplus -19.7 -0.9 0.1 -41.9 -.1.8 -0.1 Capital Expenditures 4/ 3395 14.7 16.5 141.7 6.1 6.1 External Assistance (net) - 456.1 19.7 14.5 277.6 ;2.0 4.9
MONEY, CREDIT AND PRICES 1972 1973 1974 1975 1976 1977 (Million B/. outstanding end period) Money and Quasi Money 5/ 440.4 506.4 596.4 622.1 732.3 791.0 Bank Credit to Public Sector 16.3 6.1 71.4 219.0 313.0 315.0 Bank Credit to Private Sector 703.5 965.1 1229.3 1279.2 1301.8 1369.7
(Percentages or Index Numbers) Money and Quasi Money as % of GDP 33.9 34.4 32.5 32.2 36.5 37,1 General Price Index (1963 = 100) 128.1 141.6 1 4.4 210.3 226.7 243.0 Annual percentage changes in: General Price Index (wholesale) 8.5 10.5 30.2 14.0 7.8 7.2 Bank Credit to Public Sector -4.0 -63.0 1070.0 207.0 42.9 0.6 Bank Credit to Private Sector 33.1 37.2 27.4 4.1 1.8 5.2
Note: In early 1979, the Government revised downwards slightly its estimates of GDP in current prices. While the ratios on this page reflect the new GDP estimates, the real increases used stem from the old services, which has not yet been revised. 1/ Total labor force; unemployed are allocated to sector of their normal occupation. "Unallocated" consists mainly of unemployed workers seeking their first job. Excludes collective settlements and indigenous population. 2/ Excludes financial intermediaries. Includes Government owned enterprises. 3/ Cash basis. 4/ The net external borrowing for 1978 is about B/lO million higher than that used for deficit financing in 1978; it will be used during 1979. The pulilicsector deficit was 15.4 percent of GDP in 1978. 5/ Demand, time and savings deposits only. The amount of US dollars in circulation is unknown. Balboa issues are limited to coins. Page 2 of 2
PANAMA- COUNTRYDATA
BALANCEOF PAYMENTS MERCHANDISEEXPORTS (AVERAGE 1975-77)
1974 1975 1976 1977 US $ Mln. / (Million US$) Bananas 61.3 24.4 Exports of Goods, NFS - 751.5 851.5 804.2 844.5 Refined petroleum - 58.6 23.3 Imports of Goods, NFS -918.4 -992.1 -961.0 -998.2 Shrimp 27.2 10.8 Resource Gap (Deficit = -) -166.9 -140.6 -156.8 -153.7 Sugar 31.9 12.7 Coffee 3.5 1.4 Interest Payments (net) -55.0 -20.8 -33.3 - 39.0 All other commodities 68.7 27.3 Workers' Remittances - - - - Other Factor Payments (net) - - - - Net Transfers -4.2 -5.0 -4.5 -6.6 Balance on Current Account -226.1 -166.4 -194.6 -199.3 Total 2-25.2 100.0 Balance Direct Foreign Investment 35.4 10.2 7.3 8.0 EXTERNAL DEBT, DECEMBER 31, 1978 Net MLT Borrowing Disbursements 196.7 206.9 309.7 358.4 US 5 Mln. Amortization -93.1 -31.1 -74.2 -89.7 Subtotal 103.6 175.8 235.5 268.7 Public Debt, incl. guaranteed 1,894.9 Capital Grants 9.9 6.0 6.5 5.0 Non-Guaranteed Private Debt Other Capital (net) 2/ -194.8 -155.5 -101.0 -104.9 Total outstanding & Disbursed 1,894.9 Increase in Reserves (-)- 272.0 129.9 46.3 22.4 DEBT SERVICE RATIO FOR 1977
Fuel and Related Materials Imports 277.4 330.7 265.0 254.2 Public Debt, incl. guaranteed 19.9 of which: Petroleum 271.1 324.2 258.4 247.6 Non-Guaranteed Private Debt Exports 227.5 263.1 187.3 178.5 Total outstanding & Disbursed 19.9 of which: Petroleum 227.5 263.1 187.3 178.5
IBRD/IDA LENDING, (12/31/1977) (Million US$) RATE OF EXCIIANGE IBRD Through - 1978 Outstanding & Disbursed 99.1 US $ 1.00 = B/. 1.00 Undisbursed 92.9 B/. 1.00 = US$ 1.00 Outstanding incl. Undisbursed 192.0
1/ Ratio of Debt Service to Exports of Goods Non-Factor Services plus workers' remittances. 2/ Net foreign transactions of the banking system. 3/ Excludes sale of bunker oil. 4/ Includes earnings of Panamanians who work in the Canal Zone.
not available
not applicalbe
Country Programs I Latin America and the Caribbean Regional Office SUMMARY AND CONCLUSIONS
Even before its independence Panama's urban economy was closely linked to traffic passing across Panama between the Pacific and Atlantic Oceans. Shortly after its independence Panama became the site of one of the world's two most important canals. The new canal treaties ratified by Panama and the United States in 1978 mean that Panama will own and operate this canal at the end of this century. In less than a year substantial land, infrastructure, revenues, and responsibilities regarding the canal will revert to Panama. These treaties again focus attention on the means by which Panama can more fully reap the benefits of it strategic location. In the past ten years the Government of Panama has undertaken a substantial development effort. This effort, the resulting changes in the economy, and the burden it placed on public finances have been documented in prior World Bank reports. This report sums up Panama's experience over the last ten years, the responsibilities and opportunities of the new treaties, and a revised devel- opment strategy consistent with both past and future perspectives.
Between 1955 and and 1968 Panama's GDP grew at over 7 percent annually. Secondary activities located in the Metropolitan Area adjoining the Panama Canal grew at over 10 percent; urban services expanded at only a slightly lower rate. Although an expanding network of roads linked most populated territory, the rapid expansion of incomes in the Metropolitan Area was matched in rural areas only in the banana zones, where United Brands rapidly expanded plantations after conquering the "Panama Disease". Govern- ment programs and outlays were oriented towards the Metropolitan Area; little emphasis or investment was made in the central provinces. In this region, where almost a third of the population lived, a pattern of slash-and-burn subsistence farming followed by land-extensive cattle grazing on mountain slopes led to soil degradation and continued impoverishment of many rural residents.
The Government which took power in 1968 wished to increase national control over the economy. It was also convinced that future growth would not be as buoyant nor would the past growth pattern ameliorate the rural poverty problem. It correctly believed the future incremental benefits from the Panama Canal, import-substitution opportunities in manufacturing, and banana output would be less expansionary. The growth strategy of the Government was therefore to increase the urban surplus by infrastructure support and export expansion, and invest this surplus in rural Panama to reduce poverty, expand output, and integrate the economy more closely.
The Government has succeeded in expanding national control over the economy. Not only were the Canal negotiations successfully concluded, foreign-owned utility companies were nationalized and the banana lands purchased. The public sector was expanded rapidly. To stimulate private investment and new export activities, the Government undertook a greatly expanded public investment program. New airports, dams, roads, ports and other infrastructure were built. New institutions were established, and existing institutions such as agricultural and housing banks, the vocational institute, and the Social Security Institute were also expanded rapidly. And the Government, particularly during 1972-74, entered into directly - ii - productive activities, investing in projects to produce sugar, cement, citrus products, bananas, and other agricultural commodities. Finally, the Government ,mV,pec to transform the rural sector of Panama. A major agrarian reform was implemented along with an expansion of outlays and institutions in agri- cul-ture. Credit, technical assistance, research, marketing, and direct investment were channeled towards 200 agrarian reform asentamientos. Social programs were improved and expanded for all rural residents.
Some results are now apparent. The Government's social programs have had a noticeable effect, although they were costly; by 1977 current public outlays on education and health equalled 10 percent of GDP. Neverthe- less, rural mortality rates have declined significantly as the proportion of rural residents with access to safe water rose almost 50 percent between 1970 and 1976. Expanded rural sewerage facilities, health clinics and staff and community health programs have reduced mortality rates noticeably. Rural education programs, adapted to each community's needs, complemented a major expansion in educational facilities. Not only are rural Panamanians now more healthy and better educated, they can expect to be more mobile and productive in the future. The improved equality of access to education and other services may have a beneficial impact on future income distribution. One partial result of these programs may have been the rapid drop in fertility rates between 1971 and 1975; a drop that -- in spite of reduced mortality rates -- means that Panama's population is now growing at a rate heretofore expected in the 1990's.
Unfortunately, during 1974-77 Panama underwent one of its worst recessions in the past 30 years. By 1977, real per capita output was over 5 percent below the 1973 level. Private investment fell from 19 percent of GDP in 1974 to 8 percent in 1977; real private investment in manufacturing fell by a quarter between 1974 and 1976; a private construction boom, much of it based on speculative condominium and office buildings, collapsed in 1974. Unemployment in the Metropolitan Area is probably now about 16 percent. The rise in oil prices, slowdown in OECD growth and world trade, and the great uncertainty caused by the Canal negotiations all had an adverse effect. Nevertheless, some Government policies contributed to the recent decline of output growth and employment.
During 1972-74 the Government undertook major changes in the employer/employee relationship, private/public economic responsibilities, and a series of price control actions to dampen the effect of world-wide inflation. One goal was an increase in urban real wages. At the same time, it increased taxes on wages; three quarters of the increase in general government taxes between 1970-77 came from this source. This shift in labor costs, combined with increased, occasionally abrupt, government intervention, deterred private investors. Government agricultural price policies also deterred investment and production increases.
The cost of Government emphasis on agrarian reform groups -- 5 per- cent of farm families -- was less attention to the others. The considerable attention and resources spent by the Government on the asentamientos have - iii - had limited production and income results; the average yearly income per worker generated from asentamiento production was only US$250 after machine, credit, and other costs were paid. Part of the reason was poor land, but poor organization and overly capital-intensive production techniques also had their cost. State-owned agroindustries in sugar, rice, and citrus were able to increase production (or, in the case of citrus, continue it) but they operated at a loss; and these losses were financed by external, commercial borrowing.
Since 1975, the Government has reexamined, and in some cases, reversed these policies. An intense and open dialogue with businessmen has been undertaken by high government officials. Incentives for increased investment, exports, and employment were offered private firms; a new invest- ment bank, COFINA, was established by the Government to promote new industries. During 1977 and 1978, the Government froze all collective bargaining and wage contracts, and banned strikes. The price of grains was raised in 1974; milk prices were raised substantially in 1977 and that of beef in 1978; production expanded rapidly in rice, corn, and milk shortly thereafter. The Government has recently emphasized production results from the organized farm sector, and has taken action to reduce the large default rates of some asentamientos; the future of the organized farm sector is also being reexamined. A policy decision was made to undertake no new state enterprises, with the single exception of copper.
Panama's public finances have reflected the problems the economy has encountered. The collapse of the private housing industry and greatly increased petroleum prices in 1974 were followed by the OECD recession the following year. Soon thereafter the Canal Treaty negotiations and ratifica- tion process created further uncertainty. In spite of these setbacks the Government continued its simultaneous push for rapid social development and developing new sources of economic growth --particularly from exports-- the latter emphasis was also joined by major outlays for high risk public enter- prises. As unemployment rose, the Government increasingly turned to even more expansionary fiscal policies to reflate the economy. At the same time some of its more important infrastructure projects and investments in new state enter- prises were peaking in cost if not employment. While crucial to encouraging a more diversified economy, the infrastructure projects will produce their highest economic returns and employment only when private investment picks up. The state enterprises quickly led to losses which greatly increased the public sector deficit.
In 1976 public capital outlays peaked at over 19 percent of GDP. In the same year public savings fell to virtually nil, and the public sector deficit rose to over 18 percent of GDP, virtually all of it filled by external borrowing, mostly from Eurocurrency loans. In 1977, a major new value added tax, restraint on government workers' wages, increased public utility rates, and reduced public capital outlays dropped the public deficit to 13 percent of GDP. Public finances deteriorated in 1978. Increased interest rates, a US$28.4 million emergency work program for 20,000 people, and increased capital outlays led to a deficit of over 15 percent of GDP; US$350 million compared to a programmed US$235 million. These large recent deficits followed growing gaps since 1969. The result has been that Panama now has a public external debt about 80 percent of GDP; among the highest of all developing countries. - iv
The new canal treaty provides the stimulus for Panama to review the emphasis of its development efforts. Partly because prior treaties discouraged commercial development of the canal zone, partly because a probable reduced US presence and expenditures will only be partially compensated for by increased Panamanian activities, and partly because the present Canal Zone economy is already partially integrated into the Panamanian economy, the net economic benefits of the treaty may be at best only 3 percent of GDP in five years, when most economic clauses take effect. Two thirds of this increment would come from the US$60 million in increased net fiscal receipts received by the Government.
But this is a static view; the treaty in fact presents Panama with many challenges and opportunities. The challenges are two-fold. The first, and most immediate, is the issue of wages. The new treaty requires the Government of Panama to ensure that workers transferred with those activities that revert to the Government be paid in effect, U.S. salaries; two to three times more than present domestic Panamanian wages. This legal obligation could well lead to upward pressures on real Panamanian wages in the Metro- politan Area (and perhaps more difficulty in attracting private investment) unless the Government can successfully freeze these high salaries in nominal terms and resist substantial wage increases in the rest of the economy. The second challenge will come from the need to turn what was, in effect, a totally state-run area into a dynamic source of productive jobs and exports. While decisions are now being taken by the Government on infrastructure integration, new infrastructure, and the operation of the newly-formed Panama Canal Authority, there still remain decisions as to the role the private sector can assume in the reverted area.
Not all the opportunities presented by the new treaty are known, but some are already clear. These depend on a further exploitation of Panama's locational advantage, superb transport links, and dollar currency. Panama has used these advantages well. During 1970-77 it became a regional Euro-banking center and its free zone in Colon became the most successful in Latin America. By 1978, more than 85 banks had located in Panama 1/ and the free zone's trade was over US$1.5 billion. Panama now has the opportunity to develop comple- mentary commerce, other services, and some industry in the reverted Canal Zone area. The Colon Free Zone is expanding as fast as it can construct warehouses; a container port will be established; and the Government has already begun considering how to develop the two ports of Cristobal and Balboa, using their surrounding area for development of light export industry and even more commercial activity. One other opportunity is presented by the potential for more rational urban development. Both Panama City and Colon, but most especially the latter, have been spatially constrained by the old Canal Zone boundaries. The new treaty will provide both cities with adjoining areas that can be used for development of housing, offices and other economic activity. Substantial infrastructure is already in place in some of this area; this land, close to city centers, should be very valuable to private developers.
1/ Unlike some other offshore banking centers, Panama requires the physical presence of offshore bankers, thus leading to investments in buildings and substantial linkages in hotels, apartments, restaurants, etc. -v -
The other opportunity stems from both the urban potential of Panama and the limited success of government rural, productive programs. Panama can now expect that rapid urban development could attract all of the incremental rural population growth to the Metropolitan Area. Because of the high propor- tion of urban service industries, many of them employment-intensive and export oriented, it is possible to expect that over the longer term this migration (which would be at lower rates than in the past) could be absorbed in pro- ductive employment. Moreover, Panama's major public investments in transport, power, water, tourism, and telephones have provided the basis for this growth. The chief need for urban, social investments would be housing for the poor.
A more urban-oriented development strategy, however, would require Panama to concentrate more of its public investment on the tradi- tional utilities and the development of the reverted Canal Zone area. If government investment in directly productive activities were reduced, private, export-oriented activities could -- on the margin -- be the chief source of income and employment generation. Reduced public outlays for agriculture would require changing from a heavy emphasis on some traditional crops (e.g. rice, corn, beans, and sugar) to land extensive cattle raising, reforestation in the more hilly areas and the development of the few areas of fertile land in labor intensive, but high value crops. Some areas such as the province of Bocas Del Toro and parts of Darien region show promise for agricultural development if they can be developed in a cheaper manner than other recent agricultural projects.
The key to such a new emphasis would be the response of domestic and foreign private investors to the new opportunities. So far foreign investors have proven eager to invest while domestic entrepreneurs remain cautious. Nevertheless, the existing tax incentives seem to have played little part in investment decisions. Given the pressing need for fiscal resources, it may be prudent to reexamine the utility of these incentives. The attraction Panama has to investors today has been obtained at a sacrifice both by its citizens and their Treasury; there may be little need to provide some of these subsidies if the rules of the game are clearer and more stable than in the past. On the other hand, a major promotional effort to attract private investors would be a good complement to this climate. COFINA, a new state-owned DFC has begun well in undertaking this task; the Government may wish, however, to make promotion an independent activity.
The recent recession may have worsened Panama's income distribution. Nevertheless, with the exception of jobs in the existing Canal Zone, there seems to be little inefficiency in the existing labor market. Moreover, the more equal access to education and health services may even the distribution of income that would be generated in the future. If Panama can avoid a rise to US wage levels because of the treaty, it may find that urban job generation could be the best medium term tool of Government to both improve incomes and reduce the cost of its costly social program now increasingly spread out in rural areas. While neither the Government nor the mission expects an immediate recovery of the economy, it is possible for Panama to expect an annual real output growth of about 6.5 percent after a few years. It will be difficult, however, to attain this growth if the present smooth transfer of the Canal Zone and the present government efforts to establish clearer rules of the game are not continued. - vi -
One important issue which confronts Panama is the decision as to whether or not to proceed with the US$1.5 billion Cerro Colorado copper nrnlect. As presently proposed, this project would require borrowing equal to ?anama's outstanding public external debt at the end of 1977, and 80 percent would be owned by the state. Because the cost of the project to Panama may
L.d- Deen understated the feasibility study for this project may have been optimistic in estimating a 10 percent economic rate of return. Not only would including all costs to the economy produce lower returns, even a 10 percent return would be low given the high risk of the project. Because of the volatility of copper prices and the proposed 70:30 high leverage of the project it appears an extremely risky one; unless much higher than expected copper prices occur in the 198 0's the financial return to the Government would be well below the debt service obligations it will incur for its equity contribution, a contribution which will be from borrowed funds. A period of lower than expected copper prices might force the majority owner -- the Government -- to pay the debt service of the project itself. To reduce this risk, the Government is seeking new equity partners, obtaining cash deficit financing from a potential copper purchaser, and trying to obtain contingency overrun financing for the project.
Over the past 10 years Panama's public sector has accumulated large deficits. In spite of major tax collection efforts which have raised Panama's General Government taxes to over 20 percent of GDP, public savings have remained small while public capital outlays have grown. It is now clear that Panama's weak public finances stem from structural problems. Panama's nongovernmental public sector is unlikely to generate more than 2 percent of GDP in public savings unless the losses of important state enterprises (e.g. the sugar company, Bayano Development Corporation, some agroindustries) can be reduced. Moreover, the ongoing and large responsibilities of the Central Government in education, health and the defense of the Canal make it unlikely that the Central Government will have significant savings.
The Government agrees with this analysis. While attempting to restrict its current outlays as much as possible, it has decided to reduce its public capital outlays. Not only have these been reduced in the 1979 budget, further reductions will be made in later years as large projects now underway are completed. Seriously concerned over the short-term, more- over, it has established a public finance program for 1979 designed to reduce the public sector deficit to B/ 260 million, 10 percent of GDP. Because of surplus borrowings in late 1978, its net external borrowing will be restricted to US$130 million, excluding an additional US$30 million expected from an IMF second-tranche standby. The key to this program will not only be a drastic reduction in the emergency work program but a 15 percent reduction in public capital outlays.
What, then, can be concluded from Panama's past effort and new situation? First, the Government's strong concern with improved income dis- tribution has produced significant results when directed through social pro- grams. Not only are education and health services distributed more equitably, they have made all Pananamians better educated and in better health than ever before. While these programs have been costly, they have improved and lengthened the most precious gift of all--that of life--for all Panama. - vii -
Some other measures, undertaken partly on income distribution grounds, have been far less successful. Price controls and Government regulations often led to less production and less employment. State enterprises produced jobs and output, but at such a high cost that the target group benefitted was small, and the losses of these entities is too large to sustain. While rural social programs had a major and broad impact on the rural poor, the Asentamiento program failed to generate very much income for its beneficiaries, and these were less than 10 percent of the rural population. The Government has recog- nized some of these problems; its policy changes since 1975 have begun to ameliorate them.
Panama now confronts--partly for reasons outside of Government control--severe short- and long-term problems. Urban unemployment is high, the economy has been in recession for four years, public resources have been insufficient for the desired expenditures, and its public, external debt is at a record level. The Government's options are now limited. Does this mean that Panama must sacrifice its desire for improved income distribution in favor of the necessary growth and more prudent fiscal policies? The mission believes not.
First because of the present high unemployment rates, growth policies that provide faster labor absorption would improve income distri- bution. Secondly, the heavy social outlays made by the Government in the past have more equitably distributed human capital; the assets so necessary for Panama's future growth--education, mobility, lower dependency--are more equitably shared. This improved distribution and a reasonably efficient labor market would more closely link future growth to equity. Secondly, some large public projects now undergoing completion (airport, ports, power, tourism, housing) have provided the base for rapid growth in those areas where un- employment is highest. Finally, the Canal Treaties, while no immediate bonanza, provide opportunities for a more diversified, export oriented growth. Urban growth, because of its high service component, should generate sufficient jobs over the next two decades not only to employ the urban population, but to provide many rural migrants with higher income urban jobs.
How then, given its desires and constraints can the Government accelerate this growth? Because of the new Treaties, its heretofore strong comparative advantage stemming from its geographical location has been made even stronger. Panama's growth must be export oriented; but private investors, both domestic and foreign, appear best placed--in terms of marketing, technology, and production processes--to use this comparative advantage well for export growth. The Government can assist them by export and investment promotion and clear, stable rules of the game. Now that the Canal will be Pananamian, the Government should also attempt to ensure that wages are kept to Panamanian levels; levels that will generate employment for more Panamanians. If these crucial needs are provided, heavy fiscal subsidies for such investors may not be needed. Public capital outlays will need to be increasingly directed towards urban needs. The integration and development of the reverted areas of the old Canal Zone will require more power, telephones, water, and sewerage, and housing for the poor; all public responsibilities. The key to improved rural growth and incomes will not be more state enterprises or subsidized credit, but price incentives, marketing improvements, and more private invest- ment. - viii -
This strategy is one the Government is consideringcarefully. It believes Panama's present problems can only be overcome by a resurgence of private investment;investments that are both export-orientedand relatively labor intensive. Only if these are forthcomingcan it expect a reduction in already high unemploymentlevels. In late 1978 it establishedcommissions, made up mostly from the private sector, to examine changes needed in specific areas (e.g., agriculture,construction, manufacturing, labor relations) and in early 1979 was seriously consideringthe suggestionsof those commissions that had reported. Senior Governmentofficials were travelingto foreign countries to review Panama's prospectswith potential investors. There is some evidence that private investment,particularly foreign private investment, has responded to these initiatives. Private investmentin industry and commerce in 1978 probably exceeded levels not seen since 1974. Many private projects, heretofore deferred,went forward in late 1978 and 1979; the economy's growth in 1978 and 1979 will lead to per capita increases for the first time since 1974. Since 1977 no new state enterpriseshave been started; except for the possible copper project, the Government has determined to restrict all future investmentsto infrastructureand utilities. The copper project was deferred until further informationon its cost, potential return, and financing structurecan be obtained. There is some expectationthat the Government'sequity can be reduced from 80 to at most 60 percent. Financial investmentsin housing and agriculturewill continue,but both public banks in these fields are being restructured. The spatial plans of the Governmentare also shifting. A powerful new entity, the Panama Canal Authority, has been created to both coordinate and (in some cases) operate the reverted assets in the old Canal Zone. While the Government is reluctant to sell at a loss or close now any of its loss-makingagricultural state enterprises,they will not be expanded. The asentamientoprogram is being reconsidered,and the large subsidies to it are being reduced. A new developmentplan for the 1980's is still under preparation-- and it is hoped that this report will assist in its prepara- tion -- so the Government is unable to determine exactly how it will allocate its limited, future public resources. Nevertheless,the Government is deter- mined to continue to reduce its public deficit in the early 1980's,with a medium-termgoal of 6 percent of GDP. Unless both its 1979 public finance program can be closely followed and its medium term goal is met, Panama's creditworthinesswill be jeopardized. lBRD 13860 T9'o PANAMo"A OCTOOIR 1974 7A7s940' 7o47o iS 4- 09 l~vs PANAMACANAL AREA c-e,4t,ti 2bex 5ea Sit. (,U, Wt~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~T1, f9_7A
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I. Introduction
Historically, the economy of Panama has developed most rapidly around that part of the country--the most narrow--where world commerce has passed between the Atlantic and Pacific Oceans. Since 1914 Panama has been the site of one of the two most important canals in the world. Because of this canal, the economy of Panama boomed during the 1920 's, World War II, and showed a steady, rapid growth (about 7 percent yearly) during the sustained period of world trade expansion that occurred in the 1950's and 1960's. Not only did the Canal and commerce provide an urban expansion catalyst, it led to an increasingly sophisticated population which is now multiracial, mul- tiethnic, and in some urban areas bilingual. The 1903 treaty which led to the construction of the Canal, however, bifurcated a newly independent country. In 1977 the Governments of Panama and the United States signed a new Canal treaty. By mid-1978 both countries had ratified the treaty. By the end of this century the Republic of Panama will own the Canal.
While past World Bank reports on Panama 1/ attempted an in depth analysis of the economy, they touched only lightly on the Panama Canal and its effect on the economy. This report is a different one; it does not pretend to analyze the economy of Panama in great depth. Moreover, it does not--and indeed cannot--project the economic growth of Panama with great precision. It does, however, analyze the effect of past Government policies, the important economic effects of the new treaty, and the new policy issues it presents. Finally, it reviews the new options now available to the Government for a different growth and poverty alleviation strategy.
II. The Past Pattern of Panamanian Development
A. Before 1968
Between independence and the 1950's, the economy of urban Panama was greatly affected by the Panama Canal. This is understandable; even as late as 1950 about one fifth of the total work force of the Metropolitan Area (defined as Panama City and Colon) 2/ was directly employed in the Panama Canal Zone; the gross receipts of the Canal Company were equal to 37 percent of Panama's GDP.
These data, however, are misleading. By the end of World War II Panama had two--or, counting banana areas, three--economies, and the majority of Panama's population was little influenced by the Canal. In 1950, for example, only 35 percent of the population resided in the Metropolitan Area; an additional 6 percent resided in other provincial cities, and the rest was essentially rural.
1/ 275-PAN, November 13, 1973; 1066a-PAN, May 13, 1976.
2/ Or more specifically, the districts of Panama, Arraijan, Chorrera and San Miguelito ("Greater Panama City") and Colon. - 2 -
Except for those in the banana areas, most of the rural population was dedicated to subsistence agriculture; there were few roads to bring their product to market. In addition, the low population density and the wide availability of public lands made possible a culture of semi-nomadic slash-and-burn farmers and extensive cattle ranching. Most of this activity occurred along the western, Pacific side of the country and was concentrated on the mountains north of the Azuero Peninsula. These practices, carried on for over a century, caused a partly irreparable degradation of a portion of the Pacific slope.
Until partly destroyed by disease in the 1930's most of the com- mercial agricultural production was represented by the then United Fruit Company banana and cacao plantations in the Atlantic province of Bocas del Toro. During the 1940's the Company developed a major banana plantation in the Pacific Province of Chiriqui. Both areas declined drastically in banana production in the 195 0's because of the "Panama" banana disease. With the exception of job creation in these areas and some fiscal revenue, these isolated plantations, however, had little impact on the rest of the country.
Because of the Canal, the urban economy was quite different. By 1950, residents of Panama City and Colon had education and health levels equal to Latin American averages today; the workforce was accustomed to modern organizational requirements; and the immigration attracted by the Canal included sophisticated entrepreneurs. Thanks to repeated pressures by Panamanian Governments and unions, more and more Panamanian workers in the Canal Zone received higher wages. Urban aspirations were equally high. Urban residents contrasted their relatively high levels of public services to the even higher, heavily subsidized, services provided in the nearby Canal Zone, not against Panamanian or regional averages.
Thus Panama began the 1950's with a pattern somewhat similar to a dual economy; a high-income export-oriented, urban economy adjoining the Panama Canal contrasted with subsistence-level farming in relatively poor agriculture areas not well linked to either the Metropolitan Area adjoining the Canal or the banana enclaves near the Costa Rican border. -3-
Between 1955 and 1968 Panama's GDP grew at over 7 percent annually.
Table 1: COMPOSITION AND GROWTH OF GDP, 1955-68 (Percent)
Composition Rate of Growth 1955 1968 1955-68
Primary 29.2 23.0 4.6 Agriculture 29.0 22.8 4.6 Mining 0.2 0.2 6.7
Secondary 15.2 23.8 10.9 Manufacturing 9.7 15.9 11.2 Construction 4.2 5.9 9.9 Utilities 1.3 2.0 11.7
Services 55.7 53.2 6.9 Banking 1.9 2.9 10.4 Canal Zone 7.3 8.1 8.1 Transport 4.6 4.6 9.6 Commerce 12.6 13.2 7.8 Others 29.3 24.5 5.2
GDP 100.0 100.0 7.2
Source: Table 2.1
This rapid growth produced an unbalanced economic pattern, both spatially and sectorally, and did little to reduce the duality of the economy. By 1970 economic activity was concentrated heavily in Panama and Colon. Almost 70 percent of GDP was generated in these two provinces which had only half the country's population. Sectorally, these Metropolitan Area provinces accounted for 81 percent of manufacturing, 94 percent of construction, 96 percent of transport, warehousing, and communications, 83 percent of commerce, and 78 percent of other services. Value added in agriculture was also concentrated; the two provinces of Bocas del Toro and Chiriqui, with 17 percent of the population, generated almost two thirds of sector value added as result of heavy banana production. The central provinces (Cocle, Herrera, Los Santos and Veraguas), which accounted for almost 30 percent of the population, produced less than one eighth of total GDP, and only about one quarter of value added in agriculture. - 4 -
Table 2: GEOGRAPHICAL DISTRIBUTION OF GDP AND POPULATION, 1970 (percent)
Population GDP Agriculture Industry
Metropolitan Provinces 49.8 69.7 9.9 81.0 Central Region 29.1 11.2 26.7 9.2 Chiriqui Province 16.5 12.9 38.1 8.5 Rest of Country 4.6 6.2 25.3 /1 1.3
Total 100.0 100.0 100.0 100.0
/1 Of which about 22 percent stems from the banana operations of United Brands in Bocas del Toro province.
Source: From "Informe Tecnico No. 2," Proyecto PAN/71/520, Naciones Unidas, 1973.
Despite an emphasis on urban-related activities, per worker output in the agricultural sector grew at more than twice the rate in non-agricultural activities (6.9 percent versus 3.2 percent) from 1960 to 1968, thus decreasing the gap between the respective products per worker from a ratio of 3.3:1 in 1960 to 2.2:1 in 1968. This improvement in productivity was due to an increase in employment and output in bananas, rice, livestock, and fishing, and the migration of large numbers of low productivity farm workers to the cities.
Banana and livestock production accounted for almost half the value of agricultural production by 1967-69, and grew at rates substantially above those for domestic consumption crops during the 1950-1968 period. Once United Fruit Company developed a "Panama disease" resistant banana plant in the late 1950's, it tripled banana production in the provinces of Chiriqui and Bocas del Toro. Banana plantation employment rose by 70 percent (to 14,400 workers, or about 10 percent of the agriculture work force), encouraging heavy migration of farm workers to the plantation areas. Table 3: COMPOSITION OF AGRICULTURAL OUTPUT AND GROWTH RATES (percent) Average Annual Growth Rates 1950/52 1960/62 1950/52 1960/62 1967/69 1960/62 1967/69
Crops for Domestic Consumption 59 54 46.7 2.8 4.1 Export Crops (banana and cacao) 17 19 22.4 4.7 8.2 Total Crops 76 73 69.1 3.2 5.1
Cattle 9 10 9.3 4.2 5.4 Other Livestock 15 17 15.1 5.5 3.9 Total Livestock 24 27 24.4 5.0 4.4
Total Crops and Livestock 100 100 93.5 3.7 4.9
Forestry - - 0.1 6.1 2.9 Fishing - - 6.4 10.3 5.2
TOTAL AGRICULTURE SECTOR 100 100 100.0 4.1 4.9
- = Below 0.1 percent.
Source: Table 7.1
The second most dynamic important subsector was livestock. Cattle are produced by a large number of various sized ranches (an estimated 35,000 in 1977) owned mostly by Panamanians. Cattle production rose fast enough to enable Panama to start exporting meat in 1966.
Among other crops, rice, sugarcane and tomatoes also showed rapid growth in the 1960's. Rice production and yields rose rapidly until the late 1960's when price problems arose. Sugarcane output more than doubled during the period as acreage increased from 11,000 hectares in the mid-fifties to some 25,000 in the early seventies, owing to a steep increase in domestic demand and an expanded U.S. import quota. Soon after Nestle established a processing plant in the early 1960's, tomato output began increasing rapidly; by 1968 its gross value was equal to that of corn and beans combined. 1/
Compared to the growth of bananas, livestock and some crops, that of beans and corn--the main staples of the Panamanain diet--was slow, leading to growing imports of these products after 1969. The trends in acreage, production, and yields were almost stagnant. The reasons were the virtual ending of the accessible frontier for slash-and-burn agriculture in the Pacific slopes west of Panama City and primitive production techniques, which did not permit yield increases in traditional farming areas.
1/ Nestle established this plant to occupy the personnel of its milk process- ing plant during the dry season when milk deliveries drop substantially. - 6 -
The increase in agricultural production during 1950-60 took place, with few exceptions, by opening unused lands to crops and pasture. The notable exceptions were the conversion of former grazing lands to sugarcane and commer- cial rice production as well as the establishment of small vegetable plots. Land expansion was particularly evident in cattle ranching, where virtually all the increase in meat and milk production can be explained by expanded pasture acreage. There was, therefore, very little improvement in productivity of land in livestock. During 1960-70 pasture acreage continued to expand rapidly, but crop land fell as mechanization in some crops (e.g. rice) proceeded and livestock displaced slash-and-burn farming.
Table 4: CHANGES IN LAND USE (1,000 hectares)
1950 to 1960 1960 to 1970
Temporary crops n.a. +9 Permanent crops n.a. -14
All crops +93 -5
Improved pasture +256 +281
Crops and improved pasture +350 +276
Natural pasture and fallow +20 +36 Forest, woodland and other +278 -20
Total: +647 +292
Source: Censuses of 1950, 1960 and 1970.
The changes in land use pattern in the 1950-70 period increased the land in pasture from 48 percent in 1950 to 54 percent of the land being farmed in 1970, while crop land was only 15 percent compared to 21 percent in 1950.
Between 1955 and 1968 world trade expanded rapidly; as a result tonnage passing through the Panama Canal grew at an annual average rate of 7.4 percent. Moreover, the benefits from the Canal, at least to Panama City, accelerated. As a result of the Remon-Eisenhower Treaty of 1955, most of the commercial activities of the Canal Company were phased out. Many of the dropped commercial activities were assumed by businesses in Panama City, giving an added boost to its growth. During the same period, the paving of the Inter-American Highway more closely linked the major population centers and expanded the domestic market. Finally, modest protection--usually by import quotas--encouraged the development of import-substitution industries.
The result was a sustained urban boom. Manufacturing, utilities, and banking all grew at over 10 percent per annum between 1955 and 1968 and real wages of Panamanians working in the Canal Zone grew at about 8 percent; virtually all of this rapid growth occurred in the Metropolitan Area. - 7 -
The growing scarcity of readily accessible land on the Pacific slopes and the rapid growth of urban-related activities attracted rural residents to the Metropolitan Area. While the country's population grew at an annual average rate of 3.0 percent, its rural component was growing at almost half the rate of urban population (2.2 percent versus 4.2 percent), thus lowering the proportion of people living in rural areas from 63.8 percent in 1950 to 55.5 percent in 1968. During 1960-68 urban employment increased 5.1 percent per annum. Agricultural employment, however, increased from 150,000 in 1960 to 168,000 in 1966, but then began declining absolutely.
Most of the migration to the urban areas went to Panama City, which accounted for three quarters of the 1950-70 increment in urban population and had 36.4 percent of the country's population by 1970. Only the cities of David in prosperous Chiriqui province and Santiago in Veraguas grew faster. With the exception of Panama City, Colon, and David, the other urban areas remained small in relation to the surrounding rural population in their respective provinces.
Table 5: PRINCIPAL URBAN CENTERS (000 inhabitants)
Average Annual Growth Rates 1950 1960 1970 1950-1960 1960-1970
Greater Panama City 216.6 331.8 519.6 4.3 4.8 Colon 67.0 79.5 103.0 1.7 2.8 David 14.8 22.9 40.8 4.3 6.1 Chitre-Los Santos 12.4 15.4 22.9 2.2 4.2 Santiago 5.9 8.7 14.6 4.0 5.4 Aguadulce 6.3 8.4 11.4 2.8 3.2 Puerto Armuelles 5.7 10.7 12.0 6.3 1.2 La Concepcion 3.1 6.5 9.2 7.6 3.7 Penonome 3.5 4.3 5.1 2.8 1.8
Total Population 805.3 1.075.5 1,428.1 2.9 3.0
Source: Fox, Robert W., and Jerrold W. Hugguet, "Population and Urban Trends in Central America and Panama," Inter-American Development Bank, 1977.
It should be noted, however, that migration was not only to urban areas. There were also some important movements between rural areas. Between the census years of 1960 and 1970 the main expulsion area of the agricultural workforce was the overpopulated and resource-poor Azuero peninsula (the provinces of Herrera, Los Santos and part of Veraguas), while the attraction poles were the western provinces and the eastern virgin lands. The move to the west was due to the expansion of banana plantations in both coasts and the intensification of land use in other crops, while the east (Darien and the eastern parts of Panama province) was settled by slash-and-burn farmers. - 8 -
Panamanian Governments during the 1950's and 1960's intervened only lightly in the economy. Import tariff levels were low and most were specific, so they reduced themselves through inflation. While new firms usually received heavy protection from import quotas, the aggregate effect of these quotas was still not large. Most utilities--electricity, telephones, bottled gas--were privately owned. There was only one state-owned economic enterprise (a Free Zone in Colon), two government-owned banks run on commercial principles, and a very small government-owned agricultural bank. There was limited government investment in infrastructure and, with the exception of highways, much of the investment that did occur was in the Metropolitan Area.
During the 1960's Government current receipts averaged only about 14 percent of GDP, and about two thirds of Government current outlays were spent on the traditional areas of education, health, and security. In 1968 Government outlays for agriculture were only 3.5 percent of total expendi- tures, and the agricultural bank was lending only B/I million yearly, net; less than one percent of the non-banana value added in agriculture.
Table 6: KEY GOVERNMENT INDICATORS, 1960 AND 1968
1960 1968 (as percent of GDP)
Central Government Current Revenues 13.9 13.9 Public Capital Outlays 3.9 4.6 Public External Borrowing, net 1.9 2.2
(as percent of Government Current Outlays)
Education 25.2 31.3 Health 26.2 22.8 Security 14.0 14.4
Source: IBRD Report 1066a-PAN, May 1976.
Consolidated public savings were low, but public sector capital outlays averaged only four percent of GDP. External borrowing--most of it from official lenders at soft terms--financed about half of these outlays.
There was little spatial or redistributive emphasis in Government policy; the fast-growing Metropolitan Area demanded more traditional public services and received it. While the educational and health systems were extended to rural areas, their rural coverage was poor and the systems were designed with the Metropolitan Area in mind. The lack of sizeable provincial centers and the wide dispersal of the rural population (15.2 percent of the population lived in 7,427 localities of less than 100 inhabitants and 22.5 percent--320,600--lived in 1,597 localities with 100-500 inhabitants) made the provision of services to them more expensive. -9-
B. 1968 to 1978
The RevolutionaryGovernment that assumed power in 1968 believed that while the past growth of the economy had been rapid, and employment generationwas rapid, it had been unbalanced spatially,sectorally, and also in equity. Too many Panamanianslived in rural poverty, a poverty unaffected by relevant educationand health services and only limited developmentinterest from the Government. Moreover, the Governmentwished to expand national control over the economy. As its first steps, it wished to end the de facto US control over the Panama Canal Zone, expand the control of Government over utilities, and reduce the enclave nature of the banana zones. The new Govern- ment also believed much of the prior stimulus to growth was ending. It believed little marginal export stimulus could be expected from the Panama Canal, that the relatively easy import-substitutionphase in industry was ending, and that new sources of export growth needed to be stimulated. It believed that major public investmentsin power generation,transport infra- structure,and agriculturewould be needed to attract and expand private investment in these areas.
The Government believed that the nation's comparativeadvantage, internationaltrade and services,could be exploitedwell by the Metropolitan Area of Panama--if supportedby increasedpublic investments--toproduce an economic surplus. If this surplus were invested in the rest of the country, it would produce sufficient growth to reduce glaring spatial income dis- parities. 1/ Development of the non-MetropolitanArea of Panama was expected to slow down the expected migration to Panama City, raise rural incomes-- especially those of the rural poor--and integrate the economy more closely by decentralizingindustry and services.
There have been three phases to Government policies,although the main objectiveshave remained the same. The first phase, from 1969 to 1972, emphasized changing the face of rural Panama through the provisionof health and education services,infrastructure (particularly roads), and a major land reform. Concurrently,the existing agricultureand rural institutionswere reorganizedand new ones created, and public utilitieswere purchased from private companies. The Colon Free Zone was expanded, and new banking legisla- tion was designed to improve Panama's attractionsas a Eurocurrencybanking center. Many major public projects which had been long studied (Tocumen airport, Darien Gap of the Pan American Highway, Bayano dam) were also begun with the assistance of official lendingagencies. Beginning in 1972, increased stress was put on agriculturalself-sufficiency without abandoning the heavy social orientationof rural sector policy. Production of traditionalstaples and sugarcanewas emphasized,without much concern about costs or comparative advantage. Price or export controls or taxes were placed on exports such as beef and bananas and items that loomed large as wage goods. At the same time, the Government rapidly increasedthe range of public ownership in directly productive activities,such as sugar, citrus, and banana production;livestock and forestry;and tourism. Major changes in labor and housing legislation were made to expand the role of government and unions in these areas.
1/ This approach,of course, is the reverse of the more traditionaldevelop- ment strategy,which attempts to create and then invest a rural/ agriculturalsurplus in urban/industrialdevelopment. - 10 -
A third phase started in 1976. The Government began a period--still underway--of readjusting some of its past policies. As a result of a continued recession, increased incentives were given to private investment; a freeze on collective bargaining was applied in early 1977; and a closer dialogue was begun between the Government and private businessmen. The lack of output response from those rural areas where Government policy and expenditures had been concentrated led to pricing policy changes and a greater insistence on greater production and productivity in agriculture. A series of integrated rural development projects were begun; as well as a project to improve and strengthen a group of urban areas in the Central and Western Regions of the country.
Growth
During 1969-77, the growth rate of the Panamanian economy gradually dropped; during 1975-77 Panama underwent its worst depression since the late 1940's.
Table 8: SELECTED REAL GROWTH INDICATORS (percent)
1955-68 1968-73 1974 1975 1976 1977
GDP 7.3 7.4 2.7 0.6 0.0 1.6 GDP per Capita 4.2 4.5 0.0 -2.0 -2.5 -1.0 Investment 10.1 13.4 -10.8 10.0 -11.1 -17.7 Public Investment 9.2 25.7 0.3 87.5 6.0 -7.7 Private Investment 10.3 10.4 -26.0 -6.6 -13.1 -42.8
Source: Table 2.4.
Part of this deceleration was due to external events. The real flows to Panama from the Canal Zone dropped after 1968. The rise in oil prices in late 1973 had an immediate deflationary effect on the economy; because of its unique monetary system, the income transfer from Panama to its oil suppliers was both rapid and effective. An urban housing boom collapsed in 1973, leading to a recession in both construction and that part of industry (about one fifth) which produced construction and housing materials. Finally, but most importantly, the Canal treaty negotiations and ratification process created an uncertainty unprecedented in the country's history.
Some of the reasons for the recession, however, stemmed from Govern- ment policies. The growth of agriculture and industry since 1968, has been not only disappointing, it has been partly a reflection of Government policies. Before analyzing these, however, it is useful to review the results of other major Government policies and programs, since these have, to a great extent, transformed the development issues confronting Panama. - 11 -
Social Services
Panama's greatest success has been in the provision of basic public services to its rural citizens at the same time it expanded coverage in urban areas and improved the quality or relevance of the services.
To improve the distributionof medical, water, and sewerage services, the new Government decided on a public health strategy that concentratedthe efforts of the Ministry of Health on preventivemedicine in urban areas while improvingall medical services receivedby rural residents,including water and sewerage in towns of less than 500 inhabitants. IDAAN, the water and sewerage institute, expanded its operations into towns and cities with popula- tions of over 500 residents. The Social Security Fund expanded its medical facilities for urban residents into provincialcities.
Access to health service by the rural populationhas substantially improved as new hospitals, clinics, health centers, and subcenters (manned by paramedicpersonnel) have been opened throughoutthe country. Between 1970 and 1977, 150 new health institutionswere built; 95 percent of them outside the MetropolitanRegion. The largest increase has been in health centers and subcenterswhich provide curative and preventive services at the local level, in most cases concentratingon obstetricsand pediatrics. During the same period the share of hospital beds outside the MetropolitanArea increasedfrom 35 percent to 40 percent; the proportion of doctors residing in the remainder of the country increasedfrom one quarter to over one third; and births with professionalassistance in rural areas increasedfrom 40 percent to 55 percent.
Rural wells drilled by the Ministry of Health increasedfrom an annual average of 166 between 1955 to 1968 to 275 in the 1969-1976period. By the end of 1976, about 210,000 people (one quarter of the rural population)had access to potable water throughwells. Between 1968 and 1976 some 427 piped water systems were built for communitiesof 100 to 500 residents, serving an addi- tional one fifth of Panama's rural population. Although this program was originally designedwithout house connections,all systems built since 1973 include such service. In addition to helping in the constructionof wells and piped water systems, rural communitiesare responsiblefor their operation and maintenance. A rural sewerage programwas also undertaken;over 44,500 latrineswere built. Between 1970 and 1976 the rural populationwith access to potable water increasedby almost one half to 63 percent, and to sewerage disposal facilities from 68 to 78 percent. - 12 -
Table 8: POPULATION COVERAGE OF WATER AND SEWERAGE SERVICES, 1970-76 (percent)
1970 1976 Total Urban Rural Total Urban Rural
I. POTABLE WATER
1. Population with access 70.1 100.0 43.0 82.1 100.0 63.0 to potable water Water Main 53.9 100.0 12.2 70.1 100.0 38.1 Wells 16.2 - 30.8 12.0 - 24.8
2. Population with house 46.6 90.4 6.9 59.0 93.2 22.5 connection
II. EXCRETA DISPOSAL 79.7 92.5 68.2 87.8 97.1 78.0 Sewerage System 32.3 67.6 0.2 36.2 69.6 0.6 Septic Tanks 3.5 7.4 0.2 5.3 6.3 4.1 Latrines 43.9 17.5 67.8 46.4 21.1 73.2
Source: Ministry of Health
The Social Security Fund expanded its coverage rapidly to 45 percent of the workforce, compared to 30 percent in 1968. New hospitals and clinics have been built and older ones expanded in Bocas del Toro, Chitre, Almirante, David, Puerto Armelles, Guabito and other provincial towns.
Education was also expanded rapidly. Since 1969, the Government has increased the number of primary and secondary schools by 30 percent; the number of students increased 57 percent. Equally important, 85 percent of the new schools, half the increase in students, and three fifths of the new teachers were located outside the Metropolitan Area. - 13 -
Table 9: INCREASES IN SCHOOLS, /1 STUDENTS, AND TEACHERS BETWEEN 1969 AND 1976
Average Annual Growth Rate No. % __%
1. New Schools 607 100.0 9.5
Metropolitan Area 89 14.7 2.9 Rest of the Country 518 85.3 5.0
2. Students ('000) 180.1 100.0 7.8
Metropolitan Area 88.4 49.1 8.2 Rest of the Country 91.7 50.9 7.5
3. Teachers 5,879 100.0 7.1
Metropolitan Area 2,250 38.3 5.5 Rest of the Country 3,629 61.7 9.5
/1 Preprimary, basic, and middle schools.
Source: Controller General.
Today, virtually all children in the Republic of Panama attend the first three grades of primary school. Moreover, the proportion of children attending preprimary, primary and secondary school has increased as follows:
Table 10: PROPORTION OF CHILDREN AGED 5-18 YEARS OLD IN PREPRIMARY, PRIMARY, AND MEDIUM SCHOOLS
1969 1976
Metropolitan Area 70% 89% Rest of Country 59% 76%
Source: Table 1.5 and census data.
This expansion has been more than matched by that of tertiary schools. Between 1969 and 1976 university students increased from 7,900 to 30,500. Besides expanding its Panama City campus, the University of Panama established a new, major campus in David, and has opened smaller campuses in other provincial cities. The private university is in the midst of a major expansion program, and the number of normal schools rose from one to three. - 14 -
This quantitative improvement has been matched by a qualitative change in the educational system. Since 1973 the Government has been gradually applying a "basic educational cycle" system, which expands the initial school experience from six to nine grades. School attendance was made obligatory up to age i5. The "basic cycle" system is based on a modified "basic education" concept. Students spend about one tenth of their academic time studying vocational acAivities relevant to their community's economy. An additional one to three afternoons weekly (depending on age) are spent applying these skills. Most important, the total curriculum and textbooks have been revised to a Panamanian context. Rural schools accept boarders, whose costs are borne from scholarships financed through an earmarked tax. "Basic cycle" schools are soon to be complemented by "medium schools" (three year college preparatory) and professional and technical institutes (terminal vocational training). By mid-1978, 115 basic cycle schools had been established, mostly in rural areas. Completely revised textbooks were issued in September. Beginning in 1979 "basic cycle" schools will be increasingly established in urban areas.
The increased emphasis on education and health has been costly. By 1976, Panama was spending 10 percent of its GDP on public current outlays for these two services; adding capital outlays would raise it to over 11 percent.
Table 11: CURRENT PUBLIC OUTLAYS FOR EDUCATION AND HEALTH /1 (percent of GDP)
1968 1976
Health 4.3 5.5 Education 4.1 4.6
Total 8.4 10.1
/1 Including Ministry budgets, health outlays of Social Security Fund, IDAAN, University of Panama, Education Insurance outlays of Governmental ministries and IFARHU, and Government transfers to Chapala school.
Source: Tables 2.3, 5.7, 5.19, 5.20, and Controller General.
Moreover, these outlays are likely to increase in relative terms as the programs expand, since the expectations of Panama's rural citizens have been raised. Panama made a commitment for equal health for all; its success in approaching this goal means that the expectations of its citizens have been substantially raised. The "basic cycle," as it is increasingly applied in urban areas, may make public education more costly. While the vocational emphasis in rural areas has been relatively cheap so far--thanks to dedicated teachers and an emphasis on practical farming techniques that use little machinery--urban "basic cycle" schools will require more expensive tools (typewriters, machine tools, etc.) with higher replacement and maintenance - 15 - costs. Moreover, a later move to polytechnical schools for "basic cycle" graduates will require even greater current outlays.
The results of these programs, however, are now becoming available. They are such that Panama is becoming one of the healthiest and best educated countries in the developing world. Perhaps the most important indicator is the 23 percent drop in rural infant mortality; from 48.8 to 37.6 per thousand births between 1968 and 1976. The increased health services have also con- tributed to the reduction of the incidence of water-borne diseases. A 1975 study of 66 rural communities served by new water systems found important reductions in parasitosis (from 24.5 percent to 8.5 percent of reported diseases), diarrhea (from 29.6 percent to 12.6 percent), infectious diseases (from 10.2 percent to 5.1 percent) and gastroenteritis (from 8.8 percent to 3.7 percent).
One emphasis of most health and some educational programs is family planning. The drop in Panamanian fertility rates between 1971 and 1975 is one of the most rapid in the developing world--from 131.3 per thousand women (aged 10 to 49) to 114.0. Equally important, birth rate drops occurred in all areas of Panama and were matched by sharp drops in death rates.
Table 12: BIRTH AND DEATH RATES, 1971 AND 1975 (per thousand)
Panama City Herrera Los Santos Veraguas Births Deaths Births Deaths Births Deaths Births Deaths
1971 33.6 6.1 37.5 6.8 31.0 6.3 38.8 8.8 1975 26.9 4.7 27.7 5.5 21.8 5.5 35.5 6.6
Note: Herrera, Los Santos, and Veraguas are the poorest provinces in Panama.
Source: "Situacion Demografica, 1975," Panama.
The effects of the education expansion will be more difficult to evaluate until the 1980 census returns are available. Nevertheless, improved rural health indices, reduced births, increased mobility of the work force, and the ability of the Government to undertake many structural changes in the economy owe much to the education expansion.
Panama now ranks high in most social indicators; far above the averages for middle income developing countries--but about the same as Costa Rica--and approaching that of the industrialized countries. - 16 -
Table 13: SELECTED INDICATORS, 1975
Middle-Income Industrialized Panama Countries Countries
Infant Mortality (per thousand) 31 46 15 Populations with Access to Safe Water (percent) 82 52 - /1 Child Mortality (per thousand) 3 5 1
/1 Not known exactly, but probably at least 98 percent.
Source: "Situacion Demografica, 1975," Panama and "World Development Indicators," IBRD.
Agrarian Reform
Although an agrarian reform law was passed in 1962, activities of the Agrarian Reform Commission in the 1963-68 period consisted mainly in distributing some 44,800 hectares of land through issuing 2,864 titles to individual farmers. Land acquisition during the period amounted to 9,700 ha. A census of landless farmers was undertaken in 1963 as well as a National Land and Water Cadaster in 1965-68, covering 46 percent of the country's territory; the balance being mostly unpopulated.
Since 1968 the Government has undertaken a significant land reform. It has acquired 730 farms with 490,700 ha; about 23 percent of the land in farms. During the same period it issued 10,693 property titles for a total of 164,000 ha. Organized farmers were given priority over individual farmers. Since 1974 the process of land acquisition has been slowing down; Government action has expanded into production programs, with emphasis on the consolida- tion of asentamientos and Juntas agrarias. 1/
11 Over half the land acquired since 1974 is accounted for by a purchase of all United Brands' farms in January 1976, the land for the Bayano Project (a watershed protection and state farming project), and a 5,000 ha citrus plantation in Chiriqui. The Government, however, leased back to United Brands all lands in banana plantations (36 percent of its affected land) for a 5-year renewable term. - 17 -
Table 14: LAND ACQUIRED FOR AGRARIAN REFORM
1969 1970 1971 1972 1973 1974 1975 1976 1977 Total
(hectares)
27,770 53,847 / 91 /2 79,371 26,055 44,57G/3 19,6094 8,634 16,361 286,132
(percent)
9.7 18.8 3.5 27.7 9.1 15.6 6.9 3.0 5.7 100.0
/1 Excludes 154,000 ha acquired from Boston-Panama Corporation. /2 Excludes 7,107 ha donated (3,000 ha) and purchased (4,107 ha) from banana companies. /3 Excludes 3,000 ha donated by banana companies. /4 Excludes 39,485 ha purchased from banana companies.
Source: Table 7.4.
Over three fourths of the land was acquired in eastern Panama province and Veraguas. Little acquisition has taken place in the heavily populated Azuero provinces of Herrera and Los Santos. Only 1.1 percent of the land in non-United Brands farms in rich Chiriqui province was touched by the reform process. Most of the tax delinquent land acquired in Darien was unexploited jungle, as was some of the land acquired in eastern Panama province. 1/
With the exception of banana lands, land was acquired where campesinos pressured the Government to do so. Groups of campesinos claimed unused land (sometimes preceded by "invasion" of the property) or land they had been farming for some years and worked to establish security of tenure in addition to receiving public supporting services. In general these were poor lands; over 70 percent is of Class V or worse. Lands acquired in Veraguas are particularly poor.
The Government acquired titled property by purchases, expropriation, tax auctions or donations, usually initiating negotiations with a purchase offer. If negotiation failed, expropriation was used. The Agrarian Code allows for tax auctions with the Government allowed to bid. In all cases of purchase or expropriation, outstanding land taxes were deducted from
1/ See Table 7.5. - 18 -
compensation, and the net compensation was paid in the form of bonds. 1/ Only United Brands received a different type of payment: a deduction from its income taxes amounting to the land value. Since 1969, expropriation was used to acquire 20.5 percent of the affected land; direct purchase, 20.4 percent; tax auction, 53.0 percent; donation and other methods, 6.1 percent.
If the foreign-owned land is excluded, only 13.4 percent of land in farms was affected. On the other hand, over 18,260 families (12 percent of 1970 rural families) gained access to land either in individual plots or through organized groups (9,400 families in 230 asentamientos and 82 juntas agrarias). The titling process, however, has not kept the pace with land acquisition (164,100 ha with title versus 490,724 ha acquired). Obtaining titles is expensive for farmers; title for a 50 ha plot may cost about $1,000. Although emphasis has been placed on organized farmers groups, these have only informal and collective, temporary occupancy rights. The Government has not yet decided on the type of tenure under which titles will be issued to the asentamientos nor on the form of payment for the land and improvement made by the Government.
The concentration of agricultural services almost exclusively on groups, together with a strong, direct promotion by government staff, were strong incentives for farmers to join together. They could pool their land resources into a Junta Agraria de Produccion (Agrarian Production Association) or they could establish an Asentamiento (settlement) by registering a claim to nearby unused or underused land, or to land they were already occupying without title. Where the members of an asentamiento did not have prior indi- vidual family plots, virtually all the cleared crop land is worked collectively. Some municipal village councils have undertaken commercially oriented projects on public land. The net sales of these Juntas Comunales de Produccion (Community Production Associations) are earmarked for community development. In addition, in some cases independent producers have joined in marketing cooperatives (Juntas de Mercadeo). By 1977 there were 274 officially organized farmer groups with some 7,200 families on 88,300 hectares of land, representing only 5 percent of rural households and 18 percent of land distributed under the agrarian reform process. 2/ In the last few years very few new groups have been established, as the Government emphasized consolidation of existing groups.
The asentamientos have organized nationally in the Confederacion de Asentamientos Campesinos (CONAC), and in provincial federations. CONAC wields substantial political power relative to the size of its membership, and has affected government policy. The provincial federation of Chiriqui province (FEDACHI) is the most developed; it owns a rice mill (currently managed by the Agricultural Development Bank), farm machinery and a fleet of trucks.
1/ 40 year, 1 percent bonds are used to pay for expropriated land; 25 year, 4 percent bonds to pay for improvements on the farms; 25 year, 6 percent bonds for farm purchases.
2/ While these are the official numbers of organized groups and families benefited, no recent census has been undertaken. Some groups have dispersed, explaining the discrepancy between 7,200 and 9,400 families. - 19 -
In spite of much Government attention, the agricultural output of organized groups remains almost negligible and the organized farmers' income equally low. In 1976 asentamiento production accounted for only 3.3 percent of crop production, excluding cacao and bananas. Only in rice and corn do the asentamientos account for relatively important shares of production; 21 percent of rice and 8.5 percent of corn production.
Table 15: PRINCIPAL CROPS BY TYPE OF PRODUCER, 1976 (percent of each crop)
Annual Crops Organized Producers State Farms Private Producers
Grains 16.0 1.4 82.6
Rice 20.9 2.1 76.9 Corn 8.4 0 91.6 Sorghum 0 0 100.0 Beans 0 0 100.0
Roots and Tubers 0.1 21.9 78.0
Sugarcane 0.1 30.9 69.0 Banana 0 7.0 93.0 Plantain 0.2 0 99.8 Coffee 0 0 100.0 Oranges 0 56.4 43.6
Source: MIDA
A few asentamientos in Veraguas and in the Azuero peninsula produce beef cattle and milk; some have broiler and pork enterprises (mostly run by women), but these do not represent a significant share of livestock output.
The Government, together with the Inter-American Institute for Agricultural Science (IICA), has recently finished a study which provides detailed information on a sample of 72 asentamientos. Average annual income of member families was estimated at US$248, 1/ equivalent to one month's salary of a Government or banana plantation worker. This disappointing result contrasts sharply with the effectiveness of Government's social programs in improving the lot of the rural poor. Besides the poor land received, this low income is due to three reasons. Heavy mechanization requires only 12 percent
1/ This estimate, while a good indication of the efficiency of the Asentamiento program, underestimates somewhat family income since it does not include the value of production in family plots, the income earned outside the asentamiento, and the improved standards of livings stemming from social programs. - 20 -
of the disposable man-years available. Worker income represents less than 20 percent of production cost, the remaining going for machinery rental, seeds, fertilizers, herbicides, etc. Workers must find jobs outside the asentamientos to improve their incomes. Secondly, very few asentamientos earned profits which could be distributed among their members. The study found that of the 72 groups, 80 percent operated at a loss; 41 groups showed losses of up to US$50,000; and 17 had losses amounting to more than US$50,000 each. Finally, in many cases land available per family is small. On average each organized family has 3.4 ha of cultivated land compared with a rural sector average of 14.0 ha per family.
Besides its labor-saving effects, the heavily mechanized technology has produced yield gains when compared to private producers. While the asentamientos produced an average of 2.47 MT of rice per hectare, private producers had a yield of 1.44 MT. In corn the difference is even larger, 2.90 MT per hectare compared to 0.82 MT. Nevertheless, these yields are less impressive when compared to production costs and to other countries using comparable technology.
The relative failure of the asentamiento program to provide higher incomes for member families comes in spite of a major effort by public sector institutions to assist these groups. Probably about three-fourths of MIDA's staff and efforts are dedicated to the asentamientos. Technical assistance, for example, is provided almost exclusively to these groups. Because of a lack of managerial capacity, MIDA's staff prepares an annual production plan for each asentamiento, determining what to produce and how, almost completely without member participation. In addition, MIDA has appointed managers and accountants that deal with 2 to 3 neighboring groups; many of these groups have become, in fact, state farms. The marketing institute, IMA, concentrated its efforts on organized farmers and suffered losses of about B/ 3 million yearly.
Based on the production plan, BDA provides credit for organized groups. Since 1973 it has made loans totalling US$60.9 million. Until the end of 1976, when much of BDA's asentamiento portfolio was consolidated into longer term loans, refinancing of overdue and delinquent loans was common. In 1977 BDA reduced its lending to organized groups drastically and started new procedures for collecting from them. IMA, the marketing institute, when purchasing grains from an asentamiento, will first cancel the group's obligations with BDA. Nevertheless, at the end of 1977, BDA arrears amounted to US$7.9 million, 14.6 percent of BDA's portfolio, and over two-fifths (US$3.5 million) were in loans past due from asentamientos. - 21 -
Table 16: BDA LENDING TO ORGANIZED GROUPS, 1973-77 (million Balboas)
1973 1974 1975 1976 1977
Loans to Organized Groups 7.1 15.9 13.8 17.7 6.4
Agriculture 5.7 11.8 10.9 15.2 5.1 Livestock 1.4 4.1 2.9 2.5 1.3
Total Lending 20.1 22.6 27.5 26.4 20.9
Ratio of Organized Group to Total Lending (%) 35.3 70.4 50.2 67.0 30.6
Source: BDA and Controller General.
Since 1976 Government policy on collective farming has been changing. MPPE and some high level MIDA officials are stressing efficiency, stating that only those groups with some economic potential should continue to secure public assistance, but MIDA's staff continues to work closely with all asentamientos and stresses the social importance of the scheme rather than production results. Nevertheless, the movement towards increased emphasis on efficiency, training asentamiento managers, and more careful control of credit has been continuous and noticeable.
State Enterprises
The Government increasingly became involved in direct production. In 1972 it purchased the U.S.-owned telephone and power utility which serviced the Metropolitan Region. Shortly thereafter it purchased other, smaller power companies. The power system was turned over to the public power company, IRHE, and the telephone system was consolidated into a new state telephone company, INTEL. The Government purchased the resort island of Contadora in 1975 when the Spanish/Panamanian consortium that was developing it went bankrupt. In 1978 a major state-owned cement plant began operations. Govern- ment financial support has been extended to cooperatives for the development of buslines, small community factories, and other activities. Since few are financially viable, their foundation and continued existence may depend on continued access to Government funds.
The most important state enterprises, however, are agroindustries; the Chiriqui Citrus Company, Bayano Development Corporation, and the Victoria Sugar Corporation. The Government has also recently created two corporations to produce bananas, COBAPA in Chiriqui and COBANA in Bocas del Toro. A small cassava processing plant which operated in 1976/77 was closed down. - 22 -
Chiriqui Citrus Company. In 1975 MIDA took over a 5,000 ha orange plantation and a concentrate plant established in the 1960's, that was being abandoned as unprofitable by the American Ludvig Group, mostly because of labor problems and fungus diseases in the plantation. Plantation size has now been reduced to about 2,000 ha. During the first two years of government operation the company showed large operating losses; $300,000, or 36 percent of sales, in 1975; and in 1976 US$700,000 on sales of $1.6 million. While most of its sales are in Panama, it is now exporting about $250,000 a year in concentrate to Costa Rica.
Bayano Development Corporation (BDC). The BDC was created in 1975 to protect the watershed of the Bayano hydroelectric reservoir (which led to the expropriation of virtually all privately held land and to the exclusion of private settlers) and to start a capital-intensive state farm producing mostly rice, cattle, and timber. In addition to the forest lands in the mountains around the reservoir, it owns 42,500 ha, including some 8,600 ha of flood plains and 5,600 ha of marshland. It has spent close to US$2 million for a drainage system, and estimates that a complete water management system for its lands could cost an additional US$36 million. Total real assets at the end of 1977 were $21.5 million, including US$4.5 million as the estimated value of the reservoir.
In 1977 BDC cultivated 2,000 hectares producing some 3,900 m.t. of rice and 70 m.t. of sugarcane. BDC currently has some additional 8,000 ha of pasture, half of which are highly improved, for 5,100 beef cattle. Less than half its 195 dairy cows are currently in production, while its modern facilities have a daily capacity for milking 400 cows. About half of the revenues of BDC come from forestry operations, mainly the sale of sawn wood. It is currently considering a joint venture with a Canadian firm to establish a wafer board plant, sawing mill and resin plant with a total project cost of US$30-40 million.
BDC's agricultural operations employ some 140 permanent workers including agronomists, machine operators, and field workers, with a fixed capital per job of over $100,000. In 1976, BDC showed an operating profit of US$0.2 million (excluding depreciation charges) on sales of US$2.3 million, but for the 1977/78 period its losses amounted to almost US$0.5 million on sales of US$2.1 million. Its net income in both years, when depreciation is considered, was negative.
La Victoria Sugar Corporation. In the early 1970's the Government entered sugar production with the objective of making sugar one of the leading earners of foreign exchange and expanding employment in poorer rural areas. While the original plans were for one mill, the high sugar prices of 1974/75 and future projections of a continued high price, led to plans for four more. High costs at La Victoria, the first mill, coupled with falling world prices, resulted in cancellation of a mill in Cocle and a decision to hold capacity at the following levels: - 23 -
Table 17: LA VICTORIA SUGAR MILLS
Mill Name Location Daily Capacity (tons)
Victoria Santiago, Veraguas 4,100 Felipillo Pacora, Panama 5,500 Alanje Alanje, Chiriqui 7,300 Corporacion Azucarera Azuero /1 Pese, Herrera 1,800
./ 51 percent owned by La Victoria Corporation, 49 percent by private Panamanians.
Source: La Victoria.
As a result of the new mills, La Victoria sugar production rose 355 percent between 1972/73 and 1977/78. Unfortunately, the drop in the sugar price adversely affected the corporation's profits.
Table 18: LA VICTORIA PRODUCTION AND REVENUE
1972/73 1974/75 1976/77 1977/78
Cane Processed (short tons) 246,199 430,230 988,653 1,263,319 Sugar Produced (short tons) 20,681 39,825 76,652 94,109 Exports (US$ thousand) 3,934 26,240 11,292 n.a. Average Price per lb (US$, cents) 9.0 33.0 9.5 7.2
Source: La Victoria.
While La Victoria was able to operate profitably through 1975, both covering its own debt service and transferring B/2.7 million and B/7.0 million to the Government in 1974 and 1975, the rapid fall in sugar prices thereafter quickly threw it into a deficit position. For crop year 1978/79 the corporation expects to lose B/24 million if its sales price of sugar is 7.5#/lb. Prorating molasses cost by revenue share, La Victoria's operating costs for sugar for 1978/79 could be 12.02/lb. An extra 4.62/lb for financial costs (mostly interest) mean that La Victoria must receive an average 16.62/lb on its sales to break even. Moreover, because of future losses and borrowings costs, its average total cost could rise each year in spite of expected operating economies. - 24 -
The La Victoria mills and field operations now provide permanent employment for 1,720 and temporary employment for an additional 7,720; the equivalent of full time employment for 4,700. The Corporation calculates it may require B/15 million yearly (mostly to pay interest charges) through 1983 just to continue operations at its existing levels even if sugar yields increase significantly and the sugar price rises to 11 over the next 5 years. This would increase its debt from approximately $100 million at the end of 1977 to over $212 million at the end of 1983. The Government is concerned over this situation. For the short term, it believes it can reduce operating costs to 11 Cents/lb., its expected price of sugar for 1979/80. If it can reduce Victoria's operating losses to nil, it will continue operations at present levels, since it is concerned over the unemployment the closure of one or more mills would cause. For the future the Government would consider the sale of either the mills or shares in La Victoria Corporation, but would prefer not to accept a loss on such an action.
COBAPA and COBANA
In the mid-1970's the Government established two state-owned banana companies, COBAPA and COBANA. 1/ By 1977, however, United Brands still accounted for 71 percent and the independent producers for 21 percent of the cultivated area. While exports of bananas dropped in 1974 during a dispute between the Government and United Brands over the level of export taxes, they have shown a secular stagnation since 1970. The main reason is the lack of increase in the area planted to bananas. While United Brands has held its area steady because of uncertainty over Government intentions, the two state- owned entities have increased their share of exports.
Table 19: BANANA PRODUCTION, EXPORTS AND YIELDS, 1970-77
Area ExportsLi Yields ------…('°02 ha)------(millions of boxes)------Boxes per ha---- Ind. U.B.- COBAPA Total Ind. U.B. COBAPA Total Ind. U.B. COBAPA
1970 4.4 9.5 - 13.9 8.4 23.7 - 32.1 1,891 2,505 - 1971 4.1 11.1 - 15.2 7.7 25.5 - 33.2 1,879 2,298 - 1972 3.9 10.8 - 14.7 7.0 25.2 - 32.2 1,875 2,326 - 1973 3.4 10.6 - 14.0 5.8 23.7 - 29.5 1,726 2,239 - 1974 3.2 10.4 - 13.6 4.9 18.1 - 23.0 1,552 1,239 - 1975 3.2 10.0 0.1 13.3 5.0 22.6 0.2 27.8 1,545 2,261 1,280 1976 3.1 10.2 0.6 13.9 5.0 23.0 0.9 28.9 1,597 2,248 1,425 1977 3.1 10.2 1.1 14.4 5.8 21.7 1.4 28.9 1,858 2,126 1,273
/1 In millions of 40 lb boxes. /2 United Brands.
Source: UPEB.
1/ COBAPA is in the Pacific and COBANA in the Atlantic. Although they are - 25 -
COBAPA is currently exporting its production to Yugoslavia, with some of its receipts paid in merchandise. COBAPA's most important effect so far, however, has been to encourage United Brands to increase the price it pays independent producers from $0.90 per box in 1975 to US$1.30 in 1976, and to $1.45 in 1977 while banana export prices were relatively stable.
Agricultural Growth
Since 1968 agricultural growth has not only been affected by a combination of government policies (prices, land reform, export taxes and quotas), but by two severe droughts (1972/73 and 1975/76). During 1968-1977 sector output grew at an average annual rate of only 2.2 percent, compared with 4.9 percent for the period 1960-62 to 1967-69. Real value added grew at only 1.5 percent; thus lowering agriculture's share of GDP from 19 to 16 percent. In addition, employment in the sector decreased in absolute terms from its peak of 168,000 in 1966 to 148,000 in 1976; in ten years the propor- tion of economically active population in agriculture dropped from 43 to 30 percent. In spite of this drop, considerable government attention, and an urban recession, the ratio of value added per nonagricultural worker to those in agriculture rose from 2.2 in 1968 to 2.3 in 1975.
Table 20: COMPOSITION OF AGRICULTURAL OUTPUT AND GROWTH RATES (Percent)
Average Annual Growth Rates Share 1960/62 1967/69 1967/69 1975/77 1967/69 1975/77
Crops for Domestic Consumption 46.7 52.1 4.1 3.6 Export Crops (Banana and Cacao) 22.4 17.9 8.2 -0.6
Total Crops 69.1 70.0 5.1 2.5
Cattle 9.3 8.9 5.4 1.5 Other Livestock 15.1 14.5 3.9 1.8
Total Livestock 24.4 23.4 4.4 1.7
Forestry 0.1 0.1 2.9 0.0 Fishing 6.4 6.5 5.2 2.3
Total Agriculture Sector 100.0 100.0 4.9 2.2
Source: Table 7.1 - 26 -
In 1973 the Government started a drive towards self-sufficiency in grain production, particularly rice, corn and beans. The main instruments were credit and price supports. The rice support price was increased by 75 percent between 1973 and 1977, the corn price by 90 percent and that of beans three-fold. In addition, IMA's (the marketing agency) efforts were concentrated on these crops.
Table 21: MAIN STAPLE SUPPORT PRICES 1972/73-1977/78 (US$ per m. ton)
Rice /1 Corn Beans
1972/73 132 99 220 1973/74 154 110 330 1974/75 220 187 660 1975/76 231 187 660 1976/77 231 187 660 1977/78 231 187 660
/1 Unshelled.
Source: MIDA.
The area planted with rice (122,350 ha in 1976/77) now exceeds the total for corn and beans combined. While it increased by 11 percent per year from 1972/73 to 1975/76, rice production increased at an average annual rate of 14 percent. Although rice is produced throughout the country, most of the expansion took place in the provinces of Cocle and Chiriqui, which accounted for 58 percent of the production in the 1976/77 crop year. In those two provinces, rice is generally grown in large farms (more than 20 ha), and with the use of machinery (86.2 percent of cultivated area in Chiriqui), selected seeds and fertilizers. Yields in these farms average 2.4 m ton/ha (in 1976/77) compared with the national average of 1.6 m ton/ha, and an average of 0.95 m ton/ha for small farms.
Following the 1975/76 record crop (185,000 m tons), Panama had a rice surplus. In order to maintain the support price, IMA had to more than double its share of market purchases to 11 percent of the 1977/78 crop. 1/ For the 1976/77 crop the cultivated area increased by 7,000 ha (of which two- thirds was in Herrera), but production fell by 22 percent as almost one-third of the first crop was lost because of lack of rainfall. 2/ At the beginning
1/ With the assistance of an AID loan (US$6.2 million) and financing by private banks (US$2.3 million) IMA is now increasing its storage and grain handling capacity sixfold.
2/ In Los Santos province, 43 percent of the 1976/77 potential crop was lost. - 27 - of 1978 IMA exported 14,000 m tons of rice, but it lost about $1.4 million on the sale due to the large domestic-international price differential. In order to avoid large stockpiles and to discourage the more inefficient farmers, the rice support price was lowered from US$231 to US$214.5 per m ton for the 1978/79 crop year.
Beans and corn are produced mostly (90 percent) by small farmers using traditional methods. 1/ In 1976/77 corn was cultivated on 83,000 ha, half of which was in the Azuero peninsula. Average yields of 0.7 to 0.8 m ton/ha, which had remained unchanged since the 1950's, improved to about 1 ton/ha during 1975/77. There has been a significant improvement in varieties, and a production growth rate of 6 percent yearly in the past five years. Despite a good crop in 1975/76 (63,500 m ton), Panama had to import an addi- tional 16,100 m ton of corn at a cost of over US$2.1 million. While the doubling of the support price did produce a sizeable increase in corn produc- tion, given comparable producing conditions, the gross income from fertilized rice is now about twice that of corn, thus making corn unattractive to commer- cial farmers. Bean yields have been stagnant, and the area under cultivation has declined from 20,000 (1960-64) to 15,500 ha (1976/77). About two-thirds of total production comes from Chiriqui and Veraguas provinces. Bean produc- tion was 3,300 m tons in 1976/77, less than half the production record (7,500 m tons) set ten years earlier.
Panama cultivates about 4,000 ha of vegetables, of which 1,200 ha are accounted by tomato production for industrial use. As a result of the establishment of Nestle's processing plant in Nata (Cocle province) about 18 years ago, tomato production has become an important cash crop for some 600 families (average 2 ha in tomatoes per farm); the estimated profit per hectare is US$500. With Nestle's technical assistance, yields have increased in 10 years from 18,000 lb/ha to 40,000 lb/ha; about 45 million pounds were produced in 1977.
In the 1970-77 period livestock growth slowed down to about 1.5 percent p.a., compared to an annual average rate of 4.2 percent during the 1960's. While other livestock production increased at 2.4 percent, as a result of some important increases in poultry and pork production, cattle production grew very slowly. During the 1960's, cattle numbers expanded at an annual rate of 5.5 percent, but during the 1970-77 period the annual rate dropped to 2.1 percent; the growth rate during the 1973-77 period was only 1.2 percent.
There are several reasons to explain the slower growth of the cattle industry. First, the drought of 1972/73 cut heavily into herd numbers, espe- cially breeding cows. Secondly, in order to supply the domestic market at low prices, the Government imposed partial embargoes of beef exports and the beef price was held fixed at the same level for the last 5 years, when con- sumer prices rose 50 percent. Finally, the agrarian reform created some uncertainty regarding land tenure which affected investment in the sector.
1/ In 1976/77, only 8.6 percent of the corn area was cultivated using machinery, and in only 9.8 percent was fertilizer used. - 28 -
In May 1978, the Government allowed cattle prices to increase from $0.25 to $0.30 per pound on the hoof. Cattlemen seem satisfied that the increase will make the industry profitable again if the price is maintained in real terms.
Milk production,which was historicallyconcentrated around Panama City, has relocatedin specializedareas, especially the highlands of Chiriqui, the best producing area in the country. The Azuero peninsula has also become very important,since small farmers undertakebeef and milk production as joint enterprises. Because of the relative dryness of the Azuero area, production tends to be highly seasonal.
During the 1969-77 period milk output averaged only an annual average 1.5 percent growth. Commercialmilk productionhas been both erratic and res- ponsive to real price changes. While the price remained at 8i per liter between 1961 and 1968 (when inflationwas minimal), output expanded by almost two thirds. In 1968, however, it decreased two percent. Partly as a result of an increase in the 1969 price to 9.1l per liter, production increasedby 11 percent in that year. As its nominal price remained constant from 1969 to 1974 and inflation increased,output dropped to 62.7 million liters compared to 76.5 million in 1969. Milk prices were finally increasedin 1974 and again in 1977, and production again rose rapidly; in 1977, for example, it rose almost 20 percent.
IndustrialGrowth
Perhaps the sector most adverselyaffected by the recessionhas been manufacturing. Its real value added in 1977 was about the same as five years earlier. Employment in private manufacturing has grown at an average yearly rate of only 2.3 percent since 1968, far below the growth of the workforce. Investment in private manufacturingfacilities dropped almost a quarter between 1972 and 1976.
Table 22: MANUFACTURINGINDICES (1968 = 100)
1970 1972 1976
Real Value Added 117 134 137 /2 Total Employment 94 98 106 Man Hours of Workers /1 112 132 133 New Capital FormationLI /3 163 202 155
/1 For manufacturingfirms employing 5 or more employees. /2 For 1977. /3 Deflated by the import price index.
Source: Controller General. - 29 -
Between 1968 and 1972, however, manufacturing output growth was already declining slowly from the 11.5 percent 1960-68 annual average. The reasons stem from the end of easy import substitution in the small market and lack of export orientation.
With the exception of agroindustries such as sugar, meat packing, and shrimp freezing, Panama's industrial structure is not export-oriented. Panama exports few manufactured products. 1/ In 1976 they averaged only 4 percent of merchandise exports and less than 1 percent of current account receipts. While Panama's industry developed for import substitution, it was not irrational. Indeed, the proximity of the Colon Free Zone and Panama Canal Zone--where consumer goods are untaxed and easily smuggled--to the major urban markets ensured that Panama's consumer goods industry was relatively efficient. As a result, the earlier employment generation in manufacturing was consider- able. While output in manufacturing grew at 10.8 percent between 1960 and 1970, employment in the sector grew at 7.2 percent; Panama was thus one of the few countries in the developing world where manufacturing employment grew almost twice as fast as the urban work force.
Since 1969 the Government has followed an "industrial" strategy of improved infrastructure provision. Convinced that Panama's comparative advantages includes banking, regional conventions, international commerce, and other export-oriented service "industries", it has spent considerable sums to enhance the public infrastructure support for such activities. A new international airport at Tocumen, which opened in mid-1978, improved the country's attraction as a regional aviation center and is providing improved facilities for free zone operations. A major convention center, which should be completed in 1979, should enhance the attractions of Panama City for regional meetings. The airport and convention center have led to the initiation of two new hotels as complements. A new fishing port, also to be completed in 1979, not only will provide a new home for Panama's shrimp fleet, it will ensure that offshore tuna boats use Panama as an operational base. It already has attracted strong interest in firms interested in establishing plants and operations (ship repair, net production, tuna canning) required by this fleet. Many other major investments, such as the expansion of the Colon Free Zone, utility expansion and improvement, urban renewal, and some tourist projects were pushed forward to improve the attractiveness of Panama City for export oriented private investments.
The limited success of this strategy so far stems partly from external events -- the reduction in national income that resulted from oil price rises, the OECD recession in 1974-76, and the uncertainty of the Canal negotiations -- and partly from delays in implementing the infra- structure projects. In retrospect, the delays seem understandable, since the airport, fishing port, convention center, and many other projects were all new to a government which had never before assumed responsibility for so many important, large projects at once. Finally, domestic policies
1/ Using the World Bank's definition of SITC Categories 6-8, minus 68. - 30 -
during 1972-74 also had an effect. Not only did the entrance of government into such activities as cement and sugar production in competition with the private sector create uncertainty as to government policy, but important changes in labor and housing legislation which adversely affected businessmen were combined with antibusiness actions and statements; the result was a disincentive to private investment. Many of these actions were gradually reversed beginning in 1976, and the Government began a much more intense dialogue with private businessmen to ease their fears. It also resorted to a series of financial incentives to encourage private investors.
At present any industrial investor is promised no income taxes for five years (up to ten years if he locates outside of the Metropolitan Area). He is relieved of all but nominal import tariffs on his imported capital and intermediate goods; he is often granted substantial quota protection comple- mented by tariff protection; relieved of dividend taxes on reinvested profits; and granted a modest wage subsidy if he operates a double shift. Most exporters of manufactures receive the above benefits plus a negotiable tax certificate equal to 15 percent of the domestic value added of their exports, are relieved of all income, sales, and capital taxes on export profits, are granted a 10 percent depreciation allowance annually on buildings, and receive the modest wage subsidy for personnel involved in export operations. Hotel investments are granted the same incentives plus exemption from land taxes and a government guarantee on their borrowings.
For new manufacturing investment, the most powerful (i.e., valuable) fiscal incentives are the exemptions from duties and taxes on the import of machinery, equipment, spare parts and raw materials. After the initial years of operation, tax holidays and other tax exemptions assume greater importance as manufacturing operations become profitable.
Although the manufacturing sector now enjoys considerable benefits from the system of import quota and tariff protection, import duty exemptions, tax holidays and other tax exemptions, the incentive system has not led to increased private investment. While investment, output, and employment were falling or growing only slowly, a large amount of taxes were foregone from this legislation. In 1976, for example, the foregone import taxes alone were equal to 1.3 percent of GDP and 60 percent of import duties.
Table 23: EXEMPTION FROM IMPORT TAXES UNDER INDUSTRIAL INCENTIVE LEGISLATION, 1960-76 (millions of Balboas)
Value of Exempted Value of Taxes Year Imports to Firms Import Exempted
1960 15.0 2.3 1965 32.9 4.5 1970 62.2 11.0 1972 74.1 18.3 1974 132.2 28.0 1976 129.9 26.4
Source: MICI. - 31 -
Moreover, while the Government strategy achieved little in expanding private industrial investment, it has had limited success so far in decentral- izing private industrial investment. Rost of the provincial industrial investment since 1970 has been either state-owned (e.g., sugar mills, cement plant, citrus plant) or through community organizations dependent on state finance (e.g., cracker plants, rice mills, shirt factories).
III. The New Canal Treaty
A. The Treaty
After 13 years of discussion and negotiation, the Governments of Panama and the United States signed a new Canal Treaty on September 7, 1977. 1/ After both Governments ratified the treaty, the instruments of ratification were exchanged on June 16, 1978. Unless there is legislation to speed up the process (which is unlikely), the new treaty will begin to be formally imple- mented on October 1, 1979. It will expire on December 31, 1999, at which time the Canal and all ancillary activities will totally revert to Panama.
The new treaty abrogates most prior treaties affecting the Canal. Panama has undisputed sovereignty and ownership over the Canal and existing Canal Zone. The United States, however, retains the right to operate the Panama Canal as well as set the tolls charged through a newly formed Panama Canal Commission. The old Canal Zone boundaries, of course, will be ended, but the United States will still be able to use a strip of land, one to two miles wide, for Canal operations as well as defense sites and military coordination (mostly housing) areas (see map).
Panama will receive a fixed annuity of $10 million as compensation for the provision of public services to those areas used by the Canal Commission. 2/ Panama also receives another fixed annuity of $10 million and a variable annuity equal to 30 cents per "Panama canal net ton ... for each vessel transitting the canal." 3/ The treaty also ensures a variable annuity, not exceeding $10 mil- lion, would be paid to Panama if the Canal produces a surplus.
The United States Government has also agreed to provide credits to Panama, and these will carry the usual terms of each specific supplier. Up to $200 million may be borrowed from the U.S. Export-Import Bank for U.S.
1/ Actually, there are two treaties. One guarantees the neutrality of the Canal; another governs the operations of the Canal and the administration of surrounding territory. Only the second is analyzed in this report.
2/ This sum will be reviewed every three years.
3/ This rate will be adjusted after the first five years and every two years thereafter to reflect changes in the US wholesale price index for manu- factured goods. - 32 -
purchases; these funds must be committed before October 1, 1982. Another $75 million in housing investment guarantees by AID may be used, but there is no specific time limit on these funds. The state-owned DFC, COFINA, will be able to use $20 million in OPIC guarantees, and Panama is assured of up to $50 million in military sales credits over a period of 10 years.
Perhaps more important are the assets in the present Canal Zone that revert to Panama for its immediate use and/or development. These include three ports, a transisthmanian railroad, two unused airports, and substantial housing. Besides these important facilities, Panama receives a substantial amount of land, the most valuable being that near the cities of Panama and Colon. Included with this land are all ancillary facilities (streets, utility distribution systems, etc.) and the Bridge of the Americas over the Canal. While their physical assets are worth much less, all of the service outlets of the Canal Company's present Supply Division will also revert to Panama.
The treaty has some very important provisions affecting employment and wages. The U.S. Government is to make every effort to place all employees completely displaced by the treaty provisions in other employment; Panamanian employees will be placed in U.S. activities in Panama. Panama has undertaken to retain all employees--both Panamanian and Americans--whose activities revert to Panama, to the "maximum extent feasible." Most important, those employees retained in activities that revert to Panama are guaranteed terms and conditions of employment at least equal to that prior to the treaty. Panamanians are expected to gradually replace Americans in the Panama Canal Commission; by 1984 the number of Americans in the Commission will be reduced at least 20 percent.
All American employees of the Canal Commission will be subject to Panamanian import and sales taxes by October 1, 1984. Military personnel are treated differently, and their dependents will have access to U.S. PX's until 1999. The hospitals and schools now run by the Canal Zone Government will be operated by the U.S. Department of Defense. While U.S. Military dependents will use these facilities free, children of U.S. employees of the Canal Commission will also be eligible, at a fee, to use these schools.
B. Implementation of the Treaty
The Canal Zone is presently administered by two United States Government Agencies; the Panama Canal Company and the Canal Zone Government. Under the new treaty, the Canal Zone will be abolished and the functions of these two agencies will be divided between the United States and Panama.
The present functions of the Canal Company may be divided into three major categories: canal operations, supporting operations and administration. In FY1976 canal operations and supporting operations each accounted for roughly 40 percent of net operating expenses, excluding the net cost of the Canal Zone Government and the interest payment to the U.S. Treasury. Admin- istration expenses accounted for the remaining 20 percent. - 33 -
The supporting operations can be broken down further into five categories; ports, retailing and housing, transport, public utilities and others. Some of these operations are commercial in nature. At the ports of Balboa and Cristobal, the Canal Company carries out the handling, transferring and stevedoring of ships' cargoes and marine bunkering operations. Approxi- mately 36 percent of the cargo handled in FY1976 was destined for the Republic of Panama. These operations have proved profitable, generating a profit of $4.3 million in FY1976 and $3.8 million in FY1977.
Table 24: REVENUES AND EXPENSES OF THE PORTS AND RAILROAD, FY1976 (millions of dollars)
Ports Marine Cargo Bunkering Railroad
Revenues /a 16.9 5.1 3.1
Operating Expenses 13.1 4.0 3.2 Personnel (9.7) (2.3) (2.2) Supplies and Materials (0.4) (0.5) (0.6) Other (3.0) (1.1) (0.4)
Depreciation 0.4 0.2 0.1
Profit (or Loss) 3.4 0.9 -0.3
/a Revenues include interdivisional sales of services.
Source: Panama Canal Company.
These figures, however, must be viewed with caution, since many of the costs are intradepartmental, and reflect prices for goods and services that have been unchanged for 10 years or more.
As part of its transport operations, the Canal Company operates the Panama Railroad, a main line, single track 47 miles long, which carries cargo and passengers for both the Canal Zone and the Republic of Panama. The railroad has been experiencing a decrease in passengers and freight in recent years. As a result of this drop in traffic and an increase in labor costs, the railroad, which had marked up a modest profit until FY1976, generated a loss of $278,000 in FY1976 and $469,000 in FY1977. The Canal Company also operates and maintains various vehicles required in the operation of the Canal Company and Canal Zone Government. Automobile repair services are offered to employees. The S.S. Cristobal, owned by the Canal Company, provides necessary cargo transportation between the United States and Panama. - 34 -
The Canal Company also maintains and rents housing at very low prices 1/ to the employees of the Canal Company and Canal Zone Government, and provides them food and other consumer goods through a complex of retail stores, cafeterias, and food production and processing plants. Since 1955, eligibility to buy on Company stores has been limited by treaty to residents of the Canal Zone and U.S. employees residing in the Republic of Panama. Also by treaty, all merchandise sold must be obtained either from the United States or Panama.
Electricity, water and telephone services are provided by the Canal Company to the residents of the Canal Zone. The Canal Company operates hydro- electric and thermal generating stations, and maintains transmission lines, substations and distribution systems in the Canal Zone. Power is purchased from Panama to augment the system's generating capacity whenever necessary. The Canal Company also operates water purification and distribution systems which provide potable water for the Canal Zone, Panama City and Colon.
The Canal Zone Government provides various functions of civil govern- ment for the benefit of the Canal Zone residents (see Table 10.13). The most important of these services are education for children of residents, from kindergarten to junior college, and two hospitals and several clinics. While fees and taxes are collected by the Government, its deficit ($22.3 million in FY1976) is financed by the Canal Company.
The Transfer of Functions of the Panama Canal Company and Canal Zone Government
Upon entry into force of the Treaty, the Panama Canal Company and the Canal Zone Government will cease to operate. The functions performed by these agencies will be divided between the Republic of Panama, the Panama Canal Commission and the U.S. Department of Defense. 2/ The facilities transferred and the timing of the transfer of the various functions are summarized in Tables 10.16 and 10.17.
Under the new treaty, the newly formed Panama Canal Commission will be responsible for the operation of the Canal. The Canal Commission will be operated as a United States Government agency, and will be supervised by a Board composed of nine members: five Americans and four Panamanians. The United States will thus control the Canal Commission and its operation, but after 1989 the Canal Comission must be headed by a Panamanian. 3/ The Canal Commission will be granted diplomatic immunity, and top U.S. officials of the Canal Commission will enjoy the same privileges given diplomats.
1/ In 1977, a maximum comfort house with three bedrooms was rented for $196 a month.
2/ The United States will also assume responsibility for the defense of the Canal until the year 2000. This report deals only with economic matters.
3/ The first Administrator of the Canal Commission will be an American with a Panamanian Deputy, but beginning January 1, 1990, a Panamanian will be employed as the Administrator and an American will occupy the position of Deputy. - 35 -
The Canal Commission will retain those activities of the present Canal Company necessary for the operation of the Canal. All commercial activities will be transferred to Panama. Thus, while the Canal Commission will continue to use the maintenance facilities and conduct repairs to its own vessels and equipment, it will discontinue repairs to vessels transitting the Canal. The operation of the ports of Cristobal and Balboa will be transferred to the Panamanian Autoridad Portuaria Nacional (APN), but the Canal Commission will retain use of some piers, cranes and other facilities necessary for the operation of the Canal. A new Panamanian agency may be formed to run the Panama Railroad, but it will be required to operate it so that "the railroad will continue to provide the levels and frequency of service necessary for efficient management, operation, and maintenance, and effective protection and defense of the Canal."
The operation of the public utilities will be continued by the Canal Commission, but distribution in those parts of the Canal Zone that will revert immediately to Panama will be a responsibility of Panama. The Panamanian Government and the U.S. Department of Defense will take over the various functions being performed by the Canal Zone Government. The operation of hospitals, clinics and schools will be transferred to the U.S. Department of Defense; these will be open only to the U.S. employees of the Canal Commission and the Department of Defense. However, the health facilities will remain open to the non-U.S. employees of the Canal Commission for the first three years. Other activities carried out by the Canal Zone Government will be transferred to Panama. However, the Panamanian Government will operate jointly with the Canal Commission to phase in the police, courts and prison system for a transitional period of thirty months from October 1, 1979, before being completely transferred to Panama.
The ownership of the Canal Company's housing will be transferred to Panama. Panama will in turn provide the Canal Commission and the U.S. Department of Defense with the necessary housing for its employees. The transfer of the housing will be phased to correspond with the decrease in U.S. personnel.
Table 25: PHASING OF THE TRANSFER OF HOUSING UNITS
Years from Entry into Force of Treaty Minimum Amount Transferred (Years) (Percent) (Units)
5 20 860 10 30 1,290 15 45 1,935 20 60 2,580
Source: Panama Canal Company and mission estimates. - 36 -
The reverted port of Balboa includes an industrial complex containing railroad, wood, metal and marine repair shops, a dry dock 1,044 feet long and 110 feet wide, and petroleum distribution plants and tank farms. The unused Albrook airfield adjoining the port will make the expansion of port and/or other activities possible. Although the majority of housing on the Pacific side will be retained for the use of U.S. employees, 1/ considerable land will be made available to Panama for urban expansion. On the Atlantic side, the commercial port of Cristobal, the old U.S. Navy Port of Coco Solo, and the old, disused airfield at France Field will be turned over to Panama. The housing units of Rainbow City, adjoining Colon, will also be made available to Panama. Ample land reverting to Panama in the Colon area will mean that for the first time the City of Colon can expand spatially.
The extent of these changes in the operation of U.S. agencies can be gauged by comparing the expenditures of the Canal Company and Canal Zone Government with the estimates for the new Canal Commission. Table 10.14 presents the budget of the present Canal Company and Canal Zone Government for FY1979 and the estimated expenses of the Canal Commission for FY1979 and FY1984 with adjustments made for the transfer of functions. The treaty will result in only a decrease of 6 percent in the expense of Canal operations, but expenses of the supporting services and government activities are expected to drop by 67 percent and 76 percent respectively.
According to the Treaty, the Governments of Panama and the United States will jointly set up several coordinating bodies to ensure a smooth implementation of the Treaty. A Panama Canal Consultative Committee and a military Combined Board will be formed to deal with general Canal and defense policy matters. The Consultative Committee, composed of an equal number of high level representatives from both countries, will advise the two governments on matters of policy affecting the Canal's operation; e.g., general tolls policy, employment and training policies to increase the participation of Panamanians in the operation of the Canal, and international policies on matters concerning the Canal.
The actual transfer of functions and facilities will be coordinated by a Coordinating Committee, a military Joint Committee and the Joint Commission on the Environment. The Coordinating Committee will deal specifically with the transfer and the implementation of the functions now being carried out by the Canal Company and Canal Zone Government. Subcommittees will be organized to deal with specific matters such as land and water, the ports and railroad, public services, streets and highways, health, housing, judicial matters, employee and labor matters, etc. The Ports and Railroad Subcommittee, which will be composed of an equal number of representatives from both countries, will coordinate the activities of the Canal Commission and the APN concerning the operation of the ports of Balboa and Cristobal and the Panama Railroad.
Panama has established a new government agency, called the Panama Canal Authority. During the transition period, the Canal Authority will be in charge of coordinating all negotiations between the various Panamanian
1/ Curundu Heights Housing Area, adjoining Panama City, will revert to Panama three years from entry into force of the Treaty. - 37 - ministries and autonomous agencies and the U.S. authorities. While the Government's plans are not yet final, its present position is that the new Authority will also assume initial ownership of all reverted assets, turning over only their management to appropriate public agencies. Ultimately, it will be responsible for the operation of the canal, taking over the operation of the Canal Commission in the year 2000, when the new treaty expires.
C. Short and Medium Term Impact of the Treaty
While the Canal has played an important role in the economy of Panama, since World War II many activities in the Canal Zone have been phased out and substituted by those provided by Panama. In the 1950's nonland-related income of the Canal Zone dropped substantially in real terms. While in FY1952, revenues from tolls, pilotage and other activities directly related to Canal transits accounted for only 41 percent of total revenues, by FY1976 revenues from Canal transit operations had increased to 63 percent. On the other hand, retailing, which accounted for 32 percent in FY1952 decreased to 15 percent in FY1976.
Table 26: DISTRIBUTION OF REVENUES OF PANAMACANAL COMPANY BY MODE OF OPERATION (percent)
FY1952 FY1962 FY1972 FY1976
Canal Operations 46.2 66.0 64.3 65.3
(a) Tolls, Harbor, Pilotage, Tug and Other Services 41.1 63.1 63.5 62.8
(b) General Repair, Engineering Storehouse and Other Canal Related Services 5.1 2.9 0.8 2.5
Supporting Operations 53.9 33.9 35.7 34.7
(a) Ports 5.2 6.2 8.1 8.3 (b) Retailing 31.6 18.6 16.6 14.7 (c) Housing 2.7 2.8 2.4 2.0 (d) Transport 6.8 1.7 2.0 2.0 (e) Public Utilities 2.9 3.5 6.1 7.3 (f) Others 4.7 1.1 0.5 0.4
TOTAL 100.0 100.0 100.0 100.0
Source: Panama Canal Company. - 38 -
The Remon-Eisenhower Treaty of 1955 did much to foster the integra- tion of the Panamanian economy and the Canal Zone. The Treaty increased the annuity payment slightly and gave Panama the right to levy income tax on the Panamanian employees of Canal Zone agencies. Panamanian employees who resided in Panama lost purchasing privileges at Canal Zone commissaries. Goods sold in the comissaries had to be purchased either in Panama or the United States. The United States withdrew from the business of selling supplies, except fuels and lubricants, to non-U.S. Government owned or operated ships. The Canal Company terminated the manufacture of consumption goods available in Panama. 1/ The Treaty also established a single wage base for all employees regardless of nationality, but U.S. citizens continued to receive overseas differential payment and other privileges. While Panamanians were granted equal opportuni- ties for employment in qualified positions and participation in various training programs, the ratio of Panamanians to the total labor force of the Canal Company and Canal Zone Government remained constant during the post war period.
Table 27: NUMBEROF EMPLOYEES, PANAMACANAL COMPANYAND CANAL ZONE GOVERNMENT
Share of Number of Employees Non-U.S. Employees U.S. Non-U.S. /a Total (percent)
1952 4,358 /b 13,881 /c 18,239 76.1 1962 3,688 9,975 13,663 73.0 1972 3,845 10,551 14,396 73.3 1976 3,504 9,635 13,139 73.3
/a Mostly Panamanians, but includes a few employees of non-U.S. and non- Panamanian nationality. /b U.S. wage base employees, includes a few Panamanians. /c Local wage base employees, includes a few U.S. citizens.
Source: Panama Canal Company
While the integration of the Canal Zone and the economy of Panama had proceeded gradually during the post-war period, the Canal Zone declined in relative importance. It still remains a major factor in the economy of Panama, but the lack of growth in its operations since 1970 had ended its contribution to Panama's growth since that time.
1/ Among the operations closed down by the Canal Company after 1955 were a bottling plant, abbatoir and sausage plant, an industrial laboratory and a dairy farm. - 39 -
Table 28: SELECTED INDICATORS OF THE CONTRIBUTION OF THE CANAL ZONE (percent)
1950 1960 1970 1975 1977
Panamanian Salaries/GDP 8.6 7.3 7.9 6.3 6.1 Merchandise Exports to C.Z./ Total Merchandise Exports 18.4 22.9 17.0 12.0 14.7 Service Exports to C.Z./ Total Service Exports 76.4 58.2 46.2 17.7 16.3 C.Z. Employment/Total Employment 7.5 6.0 5.1 4.1 n.a. C.Z. Wage Earners/Total Wage Earners 18.4 12.1 8.4 6.3 n.a.
Source: Appendix tables.
The future economic impact of the treaty can be divided into the static impact and the dynamic impact. The static impact is basically the change that would result in the Panamanian economy from the integration of the Canal Zone, assuming that Panama will continue the present activities and not begin new operations in the Canal Zone. The dynamic impact assumes that Panama will make full use of the lands and facilities that would revert under the treaty and expand productive operations in the Canal Zone.
One way to view the impact is its effect on Panama's flows with the Canal Zone. Panama has traditionally had a large net surplus in these flows. The wages earned by Panamanians working in the Canal Zone accounted for 43 percent of receipts, and exports and re-exports to the Canal Zone were another 21 percent; half of the latter was from sales of petroleum products. Annuity payments from the United States accounted for only one percent of the revenues from the Canal Zone. - 40 -
Table 29: EXPORTS AND IMPORTS OF PANAMA TO THE CANAL ZONE (million Balboas)
1973 1975 1977 /a
Exports 175.2 238.5 235.5 Sales of merchandise 24.9 63.7 49.6 Sales of services /b 22.5 29.1 29.3 Purchase of C.Z. residents in Panama 39.0 39.6 39.9 Wages in the Canal Zone 76.9 89.4 100.5 Private transfers 9.8 14.4 13.9 Annuity 2.1 2.3 2.3
Imports 6.9 7.9 8.7 Purchase of merchandise 4.2 4.8 5.7 Purchase of services 1.6 2.1 2.0 Illegal purchases in the C.Z. 1.0 1.0 1.0
Balance 168.4 230.6 226.8
/a Estimates. /b Includes sales of government services and sales of services to contrac- tors and other private organizations in the Canal Zone. This figure differs from that in the Statistical Appendix due to differences in definition of services.
Source: Controller General.
This relationship will be changed under the new treaty. The clearest change will be the increase in gross annuity payments which are expected to increase from $2.3 million to around $68 million. The other changes and their impacts are not so clear-cut. The termination by the Canal Company of commercial activities in the Canal Zone will mean an expansion in markets and job opportunities for Panama. However, these will be offset by the decrease in markets and job opportunities by the decreased American presence in Panama. In order to ascertain the static impact of the treaty, the net effect of these transfers must be calculated.
Under the new treaty, Panama will receive a fixed annuity of $10 million and a further $10 million for the cost of public services rendered in the Canal Commission operating areas. However, the bulk of the payments made to Panama will depend on Canal traffic, since the major part of Panama's receipts will come from the 30 cents per net ton transitting the Canal. - 41 -
The amount of cargo transitting the Canal reached a peak in FY1974, when approximately 150 million tons of cargo passed through the Canal. With the world-wide recession, the amount of traffic has dropped. The nadir of traffic and tonnage was reached in 1976. During the period from 1960 until 1974, the rate of growth of cargo measured in tons grew at a higher rate than the number of ship transits, reflecting the trend towards bigger ships. During the recession period from 1974 to 1977 toll revenues increased, in spite of the decreased traffic, because of toll increases in 1974.
Table 30: PANAMA CANAL TRAFFIC
Growth Rates FY1960 FY1970 FY1974 FY1977 60-70 70-74 74-76 (percent)
Number of transits (thousands) 12.1 15.5 15.3 13.1 2.5 -0.3 -5.0 Long tons of cargo (millions) 60.4 118.9 149.7 123.2 7.0 5.9 -6.3 Panama Canal net tonnage (millions) 59.6 115.6 137.9 134.0 6.8 4.5 -1.0 Tolls ($ million) 51.8 100.9 121.3 164.7 6.9 4.7 10.7
Source: Panama Canal Company.
Once the Canal was constructed at the beginning of this century, the fundamental limits to its capacity were set. Within these physical constraints, the growth of the world economy and trade and geographical relationship to raw materials and markets are some of the major economic factors which affect the transits of the Canal. Other important factors are the level of technology in shipping and political factors (such as the Korean and Vietnam wars and the closing of the Suez Canal) also have a profound effect. One major factor, of course, is the toll rate. An increase in toll rates is anticipated when the new treaty goes into effect. 1/ While it is clear that an expansion in Canal traffic similar to that of the 1960's and early 1970's is not likely to occur again in the future, any exact estimate of the future Canal traffic growth and the ensuing annuity payments to Panama would require a report in itself. Therefore, the figures estimated by the Panama Canal Company for a 20 percent increase in tolls have been used to calculate Panama's fiscal receipts from the treaty. They indicate that Panama would receive about $48 million yearly from the tonnage fee.
1/ If the increase in revenues from tolls more than offsets the decrease from loss of traffic, an increase in tolls may lead to an overall increase in toll revenues despite a decrease in transits. Therefore it is possible for the Canal Commission to increase its revenues through higher toll rates, but any resulting decrease in traffic will mean a loss of revenue for Panama, since its royalty of 30 cents per Panama net ton is fixed irrespective of the toll rate. - 42 -
Table 31: ESTIMATED NET PAYMENTS TO PANAMA (millions of dollars)
FY1980 FY1981 FY1982 FY1983
Annuity 10.0 10.0 10.0 10.0 Profit Sharing Payment /a 10.0 10.0 10.0 10.0 Annuity Based on PCC Net Tons /b 47.3 47.6 48.0 48.4
Total 67.3 67.6 68.0 68.4
/a There remains some uncertainty about this payment, and it has been omitted from later fiscal projections only for the sake of fiscal prudence. The position of Panama is that this payment should be placed in the budget of the Canal Commission when calculating rates; the US has so far declined to accept this position, in essence indicating it would be paid only if an unplanned profit were achieved.
/b Estimated with 20 percent increase in tolls.
Source: Panama Canal Company.
The population of the Canal Zone is estimated to be around 38,000. Of these, approximately 34,000 are U.S. citizens and their families. Approx- imately 24,000, or 70 percent of the U.S. residents, are connected with U.S. military forces in the Canal Zone. It is now likely that the U.S. will reduce its military forces in the area.
The civilian labor force in the Canal Zone was 20,607 in FY1977. About three quarters of the civilian labor force, however, are Panamanians, most of whom reside in Panama and go to work in the Canal Zone. The Canal Company and the Canal Zone Government were the chief employers, employing 74 percent of the U.S. civilian workers and 67 percent of the non-U.S. citizens. - 43 -
Table 32: DISTRIBUTION OF EMPLOYEES IN THE CANAL COMPANYAND CANAL ZONE GOVERNMENTBY CITIZENSHIP AND RESIDENCE, FY1977
Residence Citizenship U.S. Non-U.S.
Canal Zone 3,289 1,310 Panama 466 9,126
Total 3,755 /a 10,436
Source: Panama Canal Company.
Of the 10,436 non-U.S. employees of the Canal Company and Canal Zone Government, 9,616, or 92 percent, were Panamanians. About 87 percent of these non-U.S. employees reside outside the present Canal Zone, while the remaining 23 percent live in the Canal Zone. The non-U.S. employees engage primarily in blue collar jobs. Many Panamanians were employed in the ports, commissionaries and other commercial activities.
Under the new treaty, the U.S. nonmilitary agencies will reduce their activities and employment in Panama. The commercial activities are especially important employers of Panamanians. If Panama maintains the present level of operations of the ports and railroad, and provides government services equivalent to that being provided by the Americans, the majority of Panamanians losing their jobs with the Canal Company and Canal Zone Government will be employed by the Republic of Panama. However, it is very unlikely that the Panamanian authorities or businessmen will continue the operation of the retail stores and other marginal services (e.g., grounds maintenance) in their present form. On the other hand, the integration of the Canal Zone into the Panamanian economy will open up new markets and present new opportunities to existing industry and commerce in Panama.
The U.S. has estimated that the total cash flow in the Canal Zone for 1976 was $593 million, of which $257 million went to Panama. 1/ Using $1976, the Embassy expects that personal spending by the U.S. employees would increase slightly after five years, although the number of employees will decrease. The transfer and phasing out of many of the activities in the Canal Zone will result in a reduction in the amount of wages paid to Panamanians and purchase of goods and services from Panama. This will be offset by the increase in Panamanian activity, estimated to be $117 million. When the
1/ These estimates are close to those used in Table 33, but some slight differences can be observed in Panamanian wage flows and the flow from Panama to the Canal Zone. - 44 - increase in annuity payments is taken into account, the net benefit to the Panamanian economy is expected to be around $102 million; two thirds of this will stem from the increasedfiscal receipts.
Table 33: CASH FLOW FROM CANAL ZONE TO PANAMA (million 1976 dollars)
Treaty Estimated 1976 Effect 1984
U.S. Personal Spending 44 +2 46 PanamanianPayroll 121 -43 78 Purchases 90 -56 34 Payment to Panama 2 +68 70
Gross Flow 257 -29 228
Less Panamanian Purchases in Canal Zone -22 +14 -8
Net Flow 235 -15 220
Activities Transferred into Panamanian Economy - +117 117
Net Direct Benefit to Panama 235 +102 337
Source: U.S. Embassy, 'Direct Impact of New Treaties on Panamanian Economy," Unpublished,May 1978.
The reductionof the U.S. agencies is expected to result in a decrease of 3,300 U.S. employees and 5,500 Panamanian employees. Although the expansion of correspondingactivities in Panama would mean an increase in Panamanian employment, a net loss of 800 jobs could occur. Some of the activities transferredto Panama are likely to be discontinued,and Panama is not expected to maintain the same level of employment. 1/
1/ For example, the closing down of the commissarieswill not imply an opening of new shops in Panama. The present shops will be able to cater to the new demand without a major increase in personnel. - 45 -
Table 34: EMPLOYMENT CHANGE FROM TREATY
Treaty Estimated 1976 Effect 1984
U.S. Agencies American Employees 14,600 -3,300 11,300 Panamanian Employees 14,500 -5,500 9,000
Activities Transferred into Panamanian Economy - +4,700 4,700
Total Panamanian Employees 14,500 -800 13_700
Source: U.S. Embassy, "Direct Impact of New Treaties on Panamanian Economy," Unpublished, May 1978.
But this analysis is both a static and direct one. If indirect effects are added, the total net benefit to Panama might be calculated at $150 million. Nevertheless, this could be less than 4 percent of 1984 GDP, and when Panama's delicate fiscal situation is remembered, the increased fiscal receipts may not necessarily be spent in the economy but used--on the margin--for external debt repayment. When combined with the negative direct employment estimate, this indicates that in a static sense, Panama will receive very little economic or employment stimulus from the new treaty beyond increased fiscal receipts. The treaty's impact on the economy of Panama will thus depend on how Panama develops the area and facilities it receives, as well as how it spends the increased fiscal receipts.
Dynamic Impact of the Treaty
The Government is planning to make full use of the reverted assets, exploiting its strategic advantage to expand into productive operations in the Canal Zone. These operations are expected to complement the Canal opera- tions and take advantage of the vast amount of traffic and goods transitting the Canal.
In order to adapt to the containerization of world trade, the Govern- ment is planning to build a new container port on the Atlantic side, and expand the Pacific port of Balboa to provide modern container handling facilities. 1/
1/ The exact placement of the Atlantic container port is still under study. One alternative is to spend about $38 million to use Coco Solo port; another, cheaper one, is to create more modest facilities at Cristobal. - 46 -
By 1988, the total amount of containers cargo is estimated to be 1.3 million m.t. at the Atlantic port. On the Pacific side, the Government is considering investing B/15 million for new container facilities in an area adjacent to Albrook Field. This expansion is expected to create 100 new jobs.
In order to adapt to the age of supertankers, the Government ulti- mately hopes to build an oil pipeline across the isthmus between Panama and Colon. The oil could be transferred through this pipeline from ships on the Pacific side to ships on the Atlantic side. The need for this pipeline, however, may be less acute, since a transhipment storage tank "farm" is being completed in Chiriqui. This would permit the use of super tankers in the Pacific and smaller tankers that would fit in the Canal and US East Coast ports in the Atlantic.
In FY1977, 12,000 ships transitted the Canal, an average of 33 a day. The Government of Panama will obtain dry dock facilities at Balboa and petroleum tanks on both the Atlantic and Pacific sides. Many ships could use simple ship repair, marine bunkering, cabotage and other marine-related services. Marine bunkering and cabotage services are presently being provided by private firms. The bunkering tanks which Panama will receive are in poor condition; the Government estimates B/20 million may be necessary for renova- tion. The drydock in Balboa could require an investment of B/7 million, but when in operation could employ around 200 people.
Location has been a major factor in the past growth of the Colon Free Zone, but lack of land has been a major constraint to its further expan- sion. With the new treaty, the Free Zone is expanding into the Old France Field area, next to Coco Solo. The activities in the Free Zone might be expanded to include the manufacture of light industrial products such as precision instruments, electrical appliances, toys, cosmetics, etc. The Government has calculated B/38 million for this expansion may be needed; B/8 million for storage facilities and B/30 million for industrial facilities. The contribution from the Free Zone to the Panamanian economy is expected to grow from an estimated B/77 million in 1977 to B/107 in 1982, a real growth of 6.8 percent per annum, generating 2,500 new jobs.
The Government believes its industrial strategy should emphasize export-oriented industrial and service activities. This would concentrate on light industrial products, presently being shipped in their final form through the Canal, enhanced tourist facilities, and commercial operations, particularly in the Colon area. Beside the Colon Free Zone, the Government would establish industrial estates at Albrook Field for some of these activities.
Although these are still only possibilities, an iron and steel industry and petroleum refining industry is being considered for the Atlantic side. An iron and steel industry would use the coal being shipped from the U.S. east coast to Japan and the iron ore being shipped from Brazil and Venezuela to Japan. The refining of the crude oil passing through the isthmus is thought of as another possible industry. - 47 -
The industrial-commercial complex which Panama expects to create on both sides of the Canal will be linked with each other and the rest of the country by a system of highways and the Panama Railroad. The Government is considering a B/14 million investment to expand the present trans-isthmian highway linking Panama City and Colon. A highway between Penonome and Colon, when built, would reduce the distance by 110 km, and save traffic from passing through congested parts of Panama City. A new highway between Arraijan and Panama City with an elevated four-lane bridge at Miraflores and a coastal highway linking Panama City with Veracruz and Vacamonte are also being con- sidered for the longer-term future. The Panama Railroad would be modernized to handle more container traffic.
The creation of new Canal-related industries would bring about an overall increase in economic activity in the Metropolitan Area. The expansion on the Atlantic side around Colon will have a relatively greater impact because of the ample availability of unused land and smaller city size. The Government intends to spend up to B/50 million on an integrated urban project in the Colon area. The Government is also planning to use some of the unused land to attract tourists by building parks and other recreational facilities.
The ultimate overall dynamic effect of the treaty on the economy of Panama is dificult to project; it depends on the policies and programs the Government adopts. The provision of expanded services to transit shipping, the feasibility study for an Atlantic container port, and the expansion of the Colon Free Zone are all underway. Other projects require further study. Nevertheless, when housing construction is taken into account, at least 5,000 new jobs will be directly created. Indirect job creation, especially in services, could double this estimate; but this would be equal to less than 4 percent of the present employment in the Metropolitan Area. - 48 -
Table 35: PROPOSED PROJECTS IN THE REVERTED AREAS /a
Estimated Employment Project InvestmentCost Generated (millionBalboas) (number of persons)
ContainerPort Atlantic Side 38 600 Balboa Expansion 15 100
TransisthmanianPipeline 80-100
Colon Free Zone Expansion 38 2,500
Drydock (Balboa) 7 200
Oil Tank Replacement (Balboa) 20 -
Highways TransisthmanianHighway Expansion 14 - Penonome-Colon 20 - Arraijan-PanamaHighway 60 -
Housing Construction(Colon) 19-22 2,500
/a Investmentin an iron and steel industry amounting to B/200 million has been excluded.
Source: Republic of Panama, Ministry of Planning El Desarrollo Nacional y la Recuperacionde la Zona del Canal de Panama, June 1978.
Three of the major issues to be faced in formulatinga policy for the developmentof the Canal Zone are the phasing of the new activities,the mode of their management,and wages. The transformationinto an industrial- commercial complex will have to be done in several phases. Given the present stagnation of the Panamanianeconomy, it will be more efficient to concentrate on such activities that make full use of the facilities transferredfrom the U.S. authorities. Activities such as the provision of services to transits of the Canal and the expansion of the Colon Free Zone will facilitate a rela- tively cheap expansion of the economy. Those activitieswhich are relatively labor intensiveshould be given priority. Ambitious large scale, capital intensiveactivities could be deferred until their need and feasibilities become clearer. - 49 -
The second major issue of policy is that of the management of the various activities. There is a choice between operating the Canal Zone as a semi-state operation as is being presently done by the Canal Company, or to allow the majority of the commercial operations to be run by private interests, with the Government limiting itself to providing only necessary services. The Government will have to expand its present operations to cover the activities of the present Canal Zone Government, and may lack the necessary manpower to begin many activities, especially those of a commercial nature. Therefore, the private sector, both domestic and foreign, will have to play an active role in the development of the reverted areas. In order to foster private investment the Government will have to formulate a coherent policy for devel- opment and clarify the roles of the public and private sectors.
One other uncertainty is wages. Whether Panama will be able to have a comparative advantage in the production of industrial goods and the provi- sion of services will depend on the quality of the labor force and wages.
The labor force in Panama is generally of a higher quality than that of most neighboring countries. The Metropolitan Area's non-agricultural labor force is well educated; 60 percent have received secondary and/or university education. Nevertheless, wages in Panama are generally higher than those of other Latin American countries. The new treaty may have an effect on the wages in Panama, especially in the Metropolitan Area. At present, Panamanian employees of the U.S. agencies in the Canal Zone are receiving wages about 2 to 2.5 times higher than that obtainable in Panama, since they are, in essence, on U.S. wage scales. Moreover, this disparity has increased in recent years.
Table 36: RATIO OF CANAL ZONE WAGES TO PANAMANIAN WAGES
Ratio of Average Panamanian Canal Zone Worker's Wage to 1970 1975
National average wage 2.0 2.2 Private companies' wages 2.2 2.4 National government wages 2.3 2.5 Public autonomous agencies wages 2.0 2.2
Panama province average wage n.a. 2.2 Colon province average wage n.a. 2.2
Source: Table 9.3 and Controller General.
The integration of the Canal Zone into Panama could push up Panamanian wages, since Panama is under a treaty obligation "to the maximum extent feasible, ensure that the terms and conditions of employment applicable to personnel employed in the activities for which Panama assumes responsibility are no less - 50 - favorable than those in effect immediately prior to the entry into force of this treaty." This implies, for example, that the Panamanians working in the ports and railroad who will probably be absorbed into APN will continue to be paid U.S. wages. The same can be said of the Panamanians in the Canal Zone government who will be transferred to the Panamanian Government. Given the present gap between Panamanian and Canal Zone wages, the transfer of highly paid Canal Zone employees into the Government agencies of Panama could exert a strong upward pressure on wages. A further complication is the wage policy that the new Canal commission may follow. Panama now has full sovereignty over the old Canal Zone, and its economy will be more closely linked to this Zone. It will be difficult for those who work side-by-side with Canal Commission or other workers covered by the new treaty to resist demanding equal wages, and equally difficult for any Government as concerned with equity as is Panama's to resist such a demand.
The freeze on collective bargaining expired in January 1979. There was much dissatisfaction, especially in the Metropolitan Area, with the freeze. The new treaty has raised high expectations among the people of Panama. In August 1978, the Government raised government wages by about 10 percent. During 1979 about 250 collective wage agreements expire. Under these circums- tances, the problem of wage increases and labor disputes may surface before October 1979. A drastic rise in wages, however, may cancel many advantages to Panama from the treaty. Recognizing this, the Government is considering freezing nominal wages of ex-U.S. employees until they equal Panamanian wages. If inflation and wages rise by 6 or 7 percent a year, such a strategy would require 12 to 15 years before parity were reached.
IV. Development Issues in the 1980's
There is evidence that the economy grew about 2 to 3 percent in 1978. The construction industry seems at the point of recovery. A recent study by the Planning Ministry found that the backlog of unoccupied offices and condominiums has now been reduced to frictional levels. For the first five months of 1978, the value of housing permits approved in the Metropolitan Area was 30 percent higher than the corresponding 1977 period. Foreign visitors and hotel guests increased in the first quarter of 1978, and occupancy ratios rose from 69 to 75 percent. Some important private investments - hotels, a glass plant, Colon Free Zone Warehouses, a canning plant - are now underway and more are under serious consideration. Nevertheless, the future recovery will be slow. Besides the caution shown by domestic investors, other evidence of a slow recovery is a slight drop in gross manufacturing production in early 1978, a slight drop in Metropolitan Area electricity production, and a drop in the Colon Free Zone's trade.
The Planning Ministry estimates an overall growth of only 3 percent in 1978; but expects about 5 percent in 1979, and a return to 7 percent secular growth in 1980. While this expectation may be optimistic, it means that the prospects of decreasing unemployment significantly in the short term are not good. The stock of unemployed created since 1974 will keep the unemployment rate high until the early 1980's. For the short-term there are two obvious urban concerns; the integration of the reverted Canal Zone with the rest of the economy--discussed earlier--and policies which would expand employment generation. - 51 -
Because of the exclusion of discouraged job seekers, official statis- tics understate the true unemployment situation in the Metropolitan Area.
Table 37: UNEMPLOYMENT RATES IN THE METROPOLITAN AREA, 1970-77 (Percent)
Official Labor Official Assumed Possible Force Participation Unemployment Participation Unemployment Rate Rate Rate Rate
1970 63.6 9.8 63.6 9.8 1971 63.0 9.7 63.0 9.7 1972 62.4 8.5 62.4 8.5 1973 61.9 8.9 61.9 8.9 1974 61.5 7.1 61.5 7.1 1975 60.1 8.2 61.0 9.6 1976 58.4 9.6 60.5 12.8 1977 54.2 7.8 59.5 16.0
Source: Controller General and Mission Estimates.
If it is assumed that the participation rate dropped more slowly, then the 1977 Metropolitan Area unemployment rate was about 16 percent. This unemployment is distributed differently by age and city. In 1975 almost 21 percent of youths aged 15-19 were unemployed. On the other hand, only 8 percent of those aged 25-29 were unemployed, and only 5 percent for older age groups.
While unemployment in Panama City rose rapidly during the recession, it can be expected to be reduced as the economy recovers. Colon, however, has had secularly high unemployment since the 1950's. The 1970 census found 18 percent unemployment in inner Colon City and even higher rates in the satellite towns. Today it is probably at least 25 percent. So many in the Colon workforce have been out of work so long; so many youths have never worked, that economic expansion in Colon may not provide them jobs. They may be excluded since they lack basic job skills. This high unemployment has already contributed to a Colon crime rate heretofore unknown, thus reducing the area's attractiveness for industry, commerce, and middle-class housing. The Government hopes to address these problems as part of a new urban project in Colon, once the Treaty enters force.
At the end of 1977 the Government began a program to provide B/100 monthly to over 20,000 unemployed individuals. The emergency nature of the program led it to be more of an income supplement than job-generation plan, although an increasing amount of beneficiaries are being transferred to jobs in public agencies. There is now little the Government can do to employ - 52 - more directly. Most public agencies cannot increase their staff without increased Government transfers. Its present austerity program will prohibit a significant expansion of the Government work force. Government-owned businesses are attempting to decrease staff because of operating losses. The Canal Treaty will provide little immediate, additional official employment. Unless the asset ownership of the country is changed, the only way to generate urban employment is through a rapid expansion of the private sector.
The Government has attempted to encourage this since 1976. It has provided exporters with increased tax deductions. It has begun a small program of wage subsidies to private firms. It has had an intense dialogue with domestic and foreign investors on their problems and needs. Partly as an anti-inflationary move, but also to reassure employers, it froze all collective bargaining for two years in January 1977 and banned all strikes. Finally, it has invested public funds in a new state-owned DFC (COFINA), which is promoting and assisting in the financing of private industrial projects.
Panama's medium-term prospects are more complex. Because of the Canal Treaty and some of the successful policies and programs of the Government, Panama will face in the 1980's far different development problems than it faced in the late 1960's. In only a generation the Canal will be totally Panamanian; in five years Panama must not only absorb the reverted area of the Canal Zone, it must begin preparing to run and defend the Canal itself while developing the many opportunities now presented by the treaties. At the same time, Panamanians--be they rural or urban--are now a long way towards having their basic needs fulfilled; given present trends the new generation of Panamanians will be as well educated and as in good health as most residents of developed countries. Moreover, major public investments in all transport modes (ports, airports, and roads), power, tourism, telephones, and urban development have laid the base for a rapid private sector expansion. However, it is now clear that some of the policies and programs applied by the Government in the 1970's have been less than fully successful in stimulating output expansion.
Many of the issues Panama will confront in the 1980's will require choices of the Government. Until quite recently the Government has found that when its social and economic goals were inconsistent, it undertook to satisfy both, subsidizing the tradeoff from foreign savings. The resulting expansion in foreign debt has now limited the Government's alternatives. While the situation the Government faces could--in a sense--be defined as a choice between growth or equity, the situation is not that simple. The Government must choose, for example, between a rural or urban emphasis. But the keys to combining growth with equity, within the fiscal constraints now facing Govern- ment, may be the choice emphasized in each area, how programs are undertaken, and the price and wage policies followed.
In the 1970's Panama tried to develop those agricultural products the poorer farmers could grow, develop the land where the poor lived, and (during 1972-74) depress the prices of consumer foodstuffs not produced by the poorer farmers. The result was a temporary drop in cattle and milk production and the creation of 200 organized agricultural settlements that--after major inputs of subsidized credit, Government attention, and agrarian reform--produced - 53 - yearly average family incomes of only $250. Partly to reduce the influence of oligopolies, partly to ensure that failing enterprises did not expand unemploy- ment, the Government created or purchased a series of state economic enter- prises. Some of these state enterprises have not fully fulfilled the expec- tations for which they were created. Public housing construction and financing was accelerated as private housing collapsed. While the public housing had effect in taking the slack out of the housing market, it pushed new housing institutions to their financial limits. Some price policies may have deterred private investment. Urban policies during 1972-74 were designed to raise real wages. The Government's growing need for fiscal resources was financed, on the margin, by taxes on wages. Between 1970 and 1977, almost 90 percent of the increased general government taxes (including the Social Security System) came from wage taxes, thus increasing the cost of labor.
All of these points are well known to the Government. In some cases major policy reversals have been made; in others changes are being considered. The prices of grains, beef and milk and have been raised. The productive goals in agriculture are being divorced from distributive techniques. The tradeoff between higher urban wages and employment generation is accepted; especially in a period of recession. Except for copper, no new state enter- prises have been initiated since 1976. Nevertheless, it is difficult for any Government to change policies, and when they are changed to obtain a rapid response. Moreover, the adjustment now underway must be undertaken with a more prudent public expenditure program, since Panama's recent ambitious public investment programs have left the country with one of the highest external debts of the Third World in relative terms. A future program of the same magnitude would jeopardize the nation's creditworthiness. The following sections illustrate the future challenges facing Panama.
A. Spatial Growth Policies
A new development strategy for the 1980's is just beginning to be formed. The key to any development strategy will be resolution of an issue that has been debated in Panama for years: should Panama develop the Metro- politan Area rapidly, attracting migrants to the area from the rest of the country, or should it try to develop all of Panama simultaneously? The mission has concluded that Panamanian incomes can only be raised rapidly if urban activities are emphasized. Panama's agricultural resources are limited in quantity and quality, but its comparative advantage is strong in inter- nationally oriented service activities. It will be, therefore, difficult to raise rural incomes faster than urban ones unless either rural incomes are subsidized or urban incomes are reduced significantly in relative terms. Panama's major employment intensive agricultural products (bananas, sugar) face demand constraints; they will not grow very rapidly in the future. Agriculture is likely to grow at 3.5 to 4.0 percent at best. This would provide no new jobs at all if rural incomes are to rise. Most of the new jobs must therefore be in urban activities. Yet, if urban incomes do not rise, then social problems could occur. It is difficult for any Government to repress significantly the growth of urban incomes, but in Panama the Govern- ment faces the additional problem of restraining the growth of urban wages - 54 -
from rising to US levels because of treaty obligations. Subsidization of rural residents from external savings is financially impossible, given Panama's present debt. Panama must, therefore, both generate new jobs and raise incomes at 3 to 4 percent rates in its urban areas. Because of the importance of urban services, urban growth will be relatively employment intensive. Future job creation will thus be urban, and most of it will be in the Metro- politan Area. For these reasons, Panama should design a development strategy around rapid growth in the Metropolitan Region.
Nevertheless, it is obvious not only that the Metropolitan Area cannot absorb all the population of the remainder of the country, but that Panama has some agricultural potential remaining to be developed. Unfortu- nately, much of this potential (cattle, timber) will require land and labor extensive production, or the use of Panama's best agricultural land, where few of Panama's poor rural residents live. Agricultural development in this context will mean accelerating the flow of migrants from resource poor areas to richer areas, putting much of the poorer land into livestock and forestry, and concentrating on very specific, high value crops in the pockets of good land.
Such a strategy, however, leaves many unanswered questions. Some of them can be answered, at least tentatively, now. Others will require further study to be usable in a plan for the 1980's.
One question is the possible demographic growth of the various areas of Panama. Because of the absolute reduction in the agricultural work force since 1966 and the past migration to the Metropolitan Area, Government popula- tion projections made before the Canal Treaty assumed the Metropolitan Area would continue to grow much faster in population. The development of the reverted areas in the old Canal Zone could accelerate this expectation.
One possible projection of population would expect the population of Panama City to grow at a 3.8 percent rate during the 1980's and decline to 3.5 percent during the 1990's. This, and the growth of other urban centers, could lead to a population growth rate of only about 1 percent in rural Panama, with the rural population of the Azuero Peninsula ultimately being reduced in absolute size. - 55 -
Table 38: POSSIBLE POPULATION PROJECTIONS, 1970-90 (thousands and percent)
Annual Annual Annual Growth Growth Growth 1970 Rate 1980 Rate 1990 Rate 2000
Urban Areas 738.6 4.0 1,089.9 3.6 1,550.3 3.4 2,167.1
Greater Panama City 519.6 4.2 794.3 3.8 1,153.3 3.5 1,626.8 Colon 103.0 2.3 130.8 2.5 167.4 2.4 233.9 David 40.8 4.0 61.8 3.6 89.0 3.1 121.5 Chitre/Los Santos 22.9 2.5 29.5 3.2 40.5 2.9 54.1 Others 52.3 3.5 73.5 3.1 100.1 2.7 130.8
Rural Areas 689.5 2.0 840.9 1.1 982.5 1.1 1,063.1
Bocas del Toro 43.5 3.3 60.6 3.4 84.7 3.0 114.2 Darien 22.7 2.0 27.7 8.3 61.2 5.4 102.8 Panama Province 57.0 2.8 75.9 2.7 99.3 2.4 126.2 Chiriqui 174.1 2.1 215.7 2.0 236.9 1.6 308.6 Cocle 101.6 2.4 129.9 2.2 161.5 1.9 196.1 Central Provinces /1 290.6 1.3 331.1 0.2 338.9 -3.0 215.2
/1 Including rural Colon Province and San Blas; both of negligible size.
Source: Mission estimates.
Such an expectation would mean that by the turn of the century the Metropolitan Area would have almost 58 percent of the nation's population; another 9 percent would be in other urban areas; and of the one third who were rural only 20 percent would be in the land-poor Central Province area.
Yet Panama City now has about 13 percent unemployment and Colon 25-30 percent. Can sufficient jobs be generated in the Metropolitan Region to absorb this migration? Any answer to this question can only be tentative; employment expansion will depend on many factors that are still unknown until the treaty and its implications as well as new development policies are set by the Government. Nevertheless, a tentative projection based on traditional participation rates and lower elasticities of employment than in the past reveals two points: first, that the high proportion of services in Panama's urban GDP means that incremental urban growth is quite employment-intensive, and, secondly, that the lower birth rates since 1971 will have a significant effect on reducing the demand for new jobs by the 1990's. The prospects for full urban employment in spite of a significant rural/urban migration depend greatly on a drop in the population growth from almost 3 percent in the 1960's to 2.5 percent in the 1990's. 1/
1/ In fact, the total population projection of the Controller General--the projection used--may understate the drop in population growth; in 1976/77 population growth was already 2.5 percent. - 56 -
Table 39: PROJECTED METROPOLITAN AREA URBAN EMPLOYMENT, 1980, 1990, 2000 (thousands and percent)
Annual Annual Growth Growth 1980 Rate 1990 Rate 2000
Total Labor Force 323.8 3.6 462.3 3.4 651.3
Panama City 278.0 3.8 403.7 3.5 569.4 Colon 45.8 2.5 58.6 2.4 81.9
Employment 284.9 4.3 438.1 3.7 629.3
Agriculture and Mining (mostly Fishing) 24.5 0.4 26.5 0.0 26.5 Manufacturing 32.5 4.8 52.0 4.8 83.0 Construction 23.9 4.8 38.0 4.8 61.0 Utilities 3.4 6.0 6.1 4.0 9.0 Transport 19.7 4.8 31.5 3.6 45.0 Commerce 51.3 5.0 83.5 3.7 120.0 Canal Activities 21.9 1.3 25.0 0.0 25.0 Other Services 107.7 5.0 175.5 4.0 259.8
Unemployed 38.9 24.2 22.0 (Unemployed as percent of labor force) (12%) (5%) (3%)
Source: Mission estimates.
This projection assumes that real value added in the Metropolitan Area expands at about 7 percent during the 1980's and 6 percent in the 1990's. Given future uncertainties such a projection is valueless for detailed analysis; the only conclusion that can be made is that even if its urban GDP expands slower in the next 20 years than in the 1960's, there is a chance that the Metropolitan Area can absorb in productive employment all those migrants seeking jobs.
B. Rural/Agricultural Development Issues
1. Growth Potential
Some of the past agricultural development strategy followed by the Government was based on reaching self-sufficiency in most agricultural products. This contrasts with the country's possibilities for expanding agricultural exports, and the relatively small scope for import substitution as a source of growth. The import bill for agricultural sector products - 57 -
(excluding forestry) was only 8 percent of total imports over the 1974-76 period, thus providing little scope for relative import savings. Cereal imports, including wheat and wheat products, amounted to $19.5 million out of a total of $68.2 million food imports in 1976. Fruits and vegetables imports were $12.0 million, milk and milk products $10.3 million, imports of vegetable fats and oils and pork products amounted to $7.1 million each.
Some products, such as wheat and temperate climate fruits cannot be produced in Panama. Others, such as pork and pork products, can only be produced at much higher cost. Self-sufficiency in corn and beans is unlikely, as this would require new production techniques and still higher support prices. Panama is already self-sufficient in rice and any further increases in output would require large export subsidies. Given current trends and price policies, Panama should be self-sufficient in milk and most milk products in 1979/80. Vegetable oils and fats provide interesting possibilities for import substitution, and the country's potential for producing oil crops has not yet been tapped. A new oil palm plantation will be started in the District of Baru in Chiriqui province, in addition to some 1,000 ha in Colon province which should initiate commercial production this year.
Given the small size of the domestic market and the limited scope for import substitution, significant growth of the agricultural sector is only possible by diversifying and/or expanding export-oriented activities. As the country's experience in sugar shows, the full development of the country's land resources and relatively expensive labor is only possible through high-value export products for which the country has a comparative advantage. Panama's strategic location and access to superb transportation facilities enhances the feasibility of an outward looking agriculture strategy. Such a strategy will also require changed agricultural institutions and the use of new and better land.
Panama's highest value agricultural export is bananas. Most of the free land with good potential for banana production is on the Atlantic Coast, which, if developed, would improve the country's competitiveness for European markets compared to Ecuador, as it would save about $0.20 per box (about 9 percent of the fob price) in Canal tolls. There are 3,600 ha which could be developed near areas currently under cultivation. United Brands could increase its cultivated area by 2,000 ha within its existing base. In addition, independent producers have 600 ha and COBAPA 1,000 ha apt for banana production which are being developed. Should all these lands be developed, it could mean (at an average yield of 2,000 boxes per ha) an increase of 7.2 million boxes, equivalent to over one quarter of 1977 banana exports. The potential for growth through yield improvement is also substantial. Production could be expanded by 8 percent over the 1977 level by increasing yields to 2,200 boxes (UB's average) per hectare in both independent and COBAPA farms.
About 6,000 ha in the Rio Robalo area in Bocas del Toro province is another area with a probable banana potential. Bananas were produced in this area until the 1920's, but all the infrastructure would have to be built again at a cost of approximately $5,000 per hectare. It could, however, be developed - 58 -
in stages; the first stage could develop 1,000 ha for the minimum production necessary for bimonthly shipments. 1/ The issue remains, however, as to how these new lands could be developed to take advantage of Panama's competitive- ness in the world market. The Government has decided that no new banana development will be undertaken by multinational companies. Given the uncer- tainty created by the Government acquisition of United Brand lands, the five year term of its lease, and the expectation that COBAPA may take over its plantations, it seems unlikely that this company will increase its operations, even on leased lands. COBAPA, however, is a new entity, and could probably well use assistance to undertake a large expansion. If the Government decides not to open this area to private investment, it may be possible for COBAPA to go into a joint venture with any of the multinational marketing companies to develop this land. Part of the development might be made by independent producers under contract with the new company. Such an arrangement is currently being used in Costa Rica.
Panama has a good potential for expansion of its grass-fed beef cattle industry, but Government price and export policies have adversely affected its growth and development. By keeping prices fixed for long periods, the Government has made ranchers unwilling to invest in real pasture improve- ment. 2/ As the agricultural frontier in the traditional farming areas becomes exhausted, growth of the cattle industry can come only through the expansion into new areas (Darien, Bocas del Toro), better cattle management (breeding control and culling low-productivity cows), and improved pasture management in order to be able to increase pasture stocking from less than I animal unit per hectare. Investment in pasture improvement is a long term process which will depend on assurances that the industry will not be faced with periodic cost-price squeezes, the provision of technical assistance and availability of credit, perhaps in that order of importance.
Meat export policy has also adversely affected the sector's expan- sion. Cattlemen do not directly benefit from higher prices abroad because export quotas are given to two USDA approved packing houses, which do not pass any of the benefits to ranchers. This system is not only unfair but it also adds another element of uncertainty to the industry. A system could be developed along the lines of that of Costa Rica or Nicaragua, whereby cattlemen reap some of the benefits of higher prices abroad. Exports, which account for an average 6 percent of domestic production, could expand at a fast rate with the proper price and export policy mixture.
1/ Before embarking in such a large project, market conditions should be carefully considered; United Brands, the Government, and independent producers are preparing a 5,000 ha project in Costa Rica, and Honduran production has not yet reached pre-hurricane levels.
2/ Although census data classify most pastures as "improved," this in essence means they have been seeded. - 59 -
There is also some prospects for fresh fruit and vegetable exports which may profit from Panama's geographic location and transport possibilities, thus presenting the opportunity to develop markets in the US east coast and Europe, particularly for winter produce. Additional processing facilities are also possible. Nestle, which already has a sizeable tomato processing plant, is currently building a new facility in Los Santos to process more tomatoes, pineapple, beans, red pepper, and onions, and it expects these products will be produced at internationally competitive prices in a few years. A sub- sidiary of United Brands is also exporting honeydew melon and other products to the United States with some success.
The land area with vegetable capability is limited; in many cases cultivation in the dry season would require irrigation. Any program to expand fruit and vegetable production requires a greatly strengthened research and extension program. Currently IDIAP has only minor research projects in tomato, onions, and potatoes, while Nestle is experimenting with commercial production of tropical fruits (papaya, maracuya, mango, quezaba, and pineapples) as well as higher yielding varieties of tomato. It is interesting to note that Nestle's impact on fruit and vegetable production through research, technical assistance and by providing a secure market for small farmers' output has had substantially more effect on average income than Government efforts.
Panama exports about 600 m tons of cocoa per year out of a total output of 620 m tons produced in some 2,600 ha by 1,000 farmers. It is pro- duced in the Bocas del Toro province, close to the sea. A new Government program will increase cocoa area by 1,900 ha and renovate 600 ha in existing plantations. This will benefit some 400 additional small farmers at a cost of about B/5,000 per farmer. Further development of cacao in the area may be feasible.
Coffee production and exports have been stagnant for the past seven years. In 1977 Panama exported only 1,360 m. tons, well below its ICO alloca- tion. Coffee is a small farmer crop for about 31,000 farmers; excluding family gardens the average size of plantations is less than 2 ha. Until recently the Government spent little on technical assistance or research, channeled minimal amounts of credit through BDA to the coffee growers, and controlled the domestic price (where the majority of production is sold) below world prices. The Labor Code also made it difficult to mobilize coffee pickers. The Govern- ment is now going forward with a supervised credit project that would renovate 1,300 ha of coffee plantations (6 percent of the area under coffee). Output from this project would still produce exports by the mid-1980's well below the country's allocation. Increased attention for technical assistance and research in coffee could benefit far more small farmers than the asentamiento program and at a far cheaper cost.
2. Agricultural Institutions
The role of the State. One of the key issues currently being discussed in Panama is what should be the proper role of the state in the development of agriculture. The Government has concentrated its expenditure and institutional efforts on collectivized agrarian reform groups and in direct production. The results, both in terms of production and improvement of rural incomes, have been below expectations. - 60 -
Despite large injections of resources, the Government production enterprises have been less than successful. La Victoria Sugar Corporation was established to increase sugar exports. Panama, however, is a marginal sugar producer. Given the current outlook for sugar prices, Victoria's losses will have to be financed by Government borrowing. The sale or closure of some of these mills may have to be considered if these losses continue. The Bayano Development Corporation (BDC) cannot be expected, under current conditions, to become a financially viable concern. Despite its heavy capitalization (about $100,000 of fixed capital for each of its 140 workers), its yields are somewhat below the national average and improvements would require both additional substantial investments and strengthening of its management. Given the current excess production of rice and low price of sugar, this does not seem to be an attractive alternative. In addition, job creation would be minimal. In spite of its high cost, BDC has not contributed to the country's agricultural diversification; it simply produces traditional crops and livestock, using capital-intensive technology. To provide higher incomes and more employment, it could sell or lease the land and machinery to small farmers, while it concentrates on the development of its forest resources.
The Government's efforts to improve the income of Panama's rural poor through agriculture has at times been concentrated on a small number of people (about 12 percent of the 70,000 rural families in the government's poverty group and 5 percent of all rural families) almost to the total neglect of the rest of the sector. While it was logical to try to organize slash-and- burn and other small farmers in order to be able to provide assistance, the program has not resulted in important production expansion or improvements in these families' incomes. In 1976, the organized groups accounted for only 3.3 percent of crop production, excluding cacao and banana. The only relatively important crops are rice (21 percent of total production) and corn (8.5 percent). Average family income provided by asentamiento income was estimated at $248, about one third of a banana plantation worker's annual income and well below any poverty line.
One of the objectives of the program was to make these primitive farmers into self-reliant organized entrepreneurs, but instead most asenta- mentos have become virtually state farms where MIDA's staff determines what to produce and how, almost without member participation. This has resulted in the widespread idea among organized farmers that the Government "owes them a living." The future direction of this program should take into account the difficulties encountered so far in this program. First, many of the asentamientos have land resources which are not appropriate for cultivation. These could be offered the opportunity to move to better areas such as Darien, Bocas del Toro, and the eastern part of Panama province. Secondly, asenta- miento members could be made responsible for production decisions. The Government has been rethinking its asentamientos program since 1976. High officials of MPPE and MIDA have stated that only those groups with some potential for economic viability will continue to secure public assistance.
The great majority of the rural poor, however, are not affected by collective farm policies. Since the rural poor are concentrated in the central provinces on relatively bad agricultural land, the opening of new - 61 - lands would encourage those with a higher entrepreneurial drive to move there, and enable the Government both to reforest some of the degraded land and also increase the average size of holdings so that cattle ranching can be profitably undertaken by small farmers. Moreover, it is unlikely that even if there is a rapid expansion of export crops, as proposed above, enough employment would be generated in the rural areas to accommodate the growth in the labor force. Thus, the proposed strategy of creating service and manufacturing jobs will enable those who cannot improve their incomes in agriculture to move to the Metropolitan Area to higher paying activities and, for those who choose to remain, better possibilities for increased production and earnings.
There will remain a problem of what to do with those rural poor with low mobility. To address this problem the government plans a series of integrated rural development projects where the poor live. The first project in Tonosi will spend about $20,000 per family to provide additional infrastruc- ture, services, and credit to expand output of 1,000 farm families. This expenditure excludes the Government's prior expenditures in the same area for schools, roads and credit. A cheaper way must be found. Not only are such projects so costly as to be poor guidelines for future action, they ensure that the limited government resources available in agriculture are focussed only on very few farm families.
Pricing policies have had an important effect on sector growth and resource allocation, but they have been used in the past for equity as well as production purposes. The high support prices for rice probably transferred income from the urban sector to some rural poor, but the collec- tives and small farmers produce less than half of the marketed rice. While the beef and coffee prices implied the opposite policy, there are many more small cattlemen and coffee growers. Moreover, in many cases prices were permitted to deteriorate in real terms for prolonged periods of time, bringing cycles in production that adversely affected the development of the sector. It cannot be expected that, for instance, cattle ranchers will embark on major pasture improvement programs without an official commitment to improving, or at least maintaining, real beef prices.
The production response to recent price rises is encouraging, and price policy could be a powerful tool of the government for achieving higher agricultural production and exports. Given its equity concerns, this will require more careful government analysis of price effects. Agricultural prices are set with the participation of MIDA, IMA, and the Office of Price Controls (a semi-autonomous office of the Ministry of Commerce and Industry and in whose policy decisions MPPE also participates) but their capability to undertake detailed studies and formulation of policy alternatives must be strengthened. This would allow the Government to determine both the commodities whose prices should be supported and the level of those prices, taking into account the differential impact of price (and implicit subsidy) measures on subsistence farmers, organized small farmers, and independent small and large commercial farmers. - 62 -
Marketing of agricultural products also requires substantial improve- ment. IMA is a relatively new institution, which has neither the staff nor the financial capability (in spite of substantial government transfers) to carry out its functions. With the exception of grains, farmers are not usually willing to cultivate new crops until there is assurance of a market and storage facilities. With perhaps the exception of rice, IMA lacks the capability and flexibility to provide these assurances, while private markets (milk, vegetables, beef) can. The Government could reconsider the role of IMA. Joint ventures between Panamanian entrepreneurs and international marketing companies might be used for exporting non-traditional agricultural products; marketing cooperatives and private domestic firms could improve the marketing of domestic products.
Diversification of the sector into high value export crops will require a stepped up research program. IDIAP (Instituto de Investigacion Agropecuaria) was established in 1975 as a semi-autonomous institution of MIDA to coordinate and determine policy for all public sector research in agricul- ture. It allocates its limited research services (about US$1 million per year) according to crop priorities determined by MIDA's Prospective Plan of the sector, thus concentrating most of its efforts on traditional crops (grains, sugarcane, cassava) and livestock, where it has produced impressive results in pasture improvement. It is currently changing its approach from nationwide research of a crop to farm management of those crops in specific locations, but stressing cultivating practices for marginal farmers, parti- cularly asentamientos. Although some research should continue in the tradi- tional crops, IDIAP should allocate more resources to high-value, labor intensive crops. IDIAP has requested AID financial assistance for its activities.
Diversification also requires a new emphasis on technical assistance which is currently almost completely monopolized by the asentamientos. Tech- nological packages must be developed to enable field personnel to disseminate them to small and medium farmers, as well as to organized groups. This would also require continuous training of field staff.
3. The Development of New Areas
Most studies on Panama's agriculture have, until recently, argued that the country had just about exhausted the lands with agricultural poten- tial, stating that heavy rainfall in the Atlantic would make agricultural and livestock production unfeasible and that the Darien jungles also had characteristics that made these lands and colonization totally undesirable. Government objectives, however, always have stated the long term goal of "conquering" the Darien and Atlantic Coast. Actually what is possible is their careful colonization, which would substantially expand the country's agricultural frontier and enable the migration of farmers from the poor and degraded lands of the central provinces to better land. It is clear that great care should be used in this colonizatin program in order to avoid the massive deforestation which has resulted in erosion in so much of the land along the western Pacific provinces. In addition to the Darien and Atlantic coast, the eastern part of Panama province, currently being used by BDC, could be transformed into an area of attraction for small farmers. - 63 -
Since 1975 the Government and the OAS have undertaken a series of studies 1/ on the characteristics and potential of Darien province and to prepare an integrated development program for the region. Darien, with a total area of 16,803 km2, accounts for 22 percent of the country's territory. Annual rainfall varies between 1,700 and 2,000 mm, with a marked dry period extending from January to April. In the central part there is a large fertile rolling alluvial plain irrigated by the Chucunaque and Tuira rivers. Almost one third of the province can be used for agricultural production and pastures.
Table 40: DARIEN: LAND CAPABILITIES
Land for: Area % ('000 ha)
1. Intensive crops 106.7 6.4 2. Pastures and permanent crops 441.9 26.3 3. Forest exploitation 575.8 34.3 4. Forest reserves 512.8 30.5 5. Rivers 43.1 2.5
Total 1,680.3 100.0
Source: MPPE.
Although the province is now almost isolated, and air transport as well as sea and river navigation are the only means of communication, the Pan American Highway being constructed through Darien should soon reach Yaviza, some 50 km from the Colombian border. A tentative program elaborated by MPPE and OAS contemplates the orderly colonization of the province and its integration to the rest of the country. The objectives of the program are (i) to expand the agricultural frontier, (ii) to absorb part of the migration of marginal farmers from the rest of the country, (iii) the conservation of a natural resource reserve, and (iv) to consolidate the use and occupation of the border area. The program considers an expansion of agricultural area of 26,000 ha by 1985 and an additional 47,200 ha by 2000 (for a total of 104,000 ha), and a five fold increase in population by the end of the century (to 105,000 inhabitants) in order to reach 3 percent of the country's total population. This means a net immigration of an average 500 families per year.
The main thrust of the development strategy proposed for the region is the rational use of its natural resources, which requires control of sponta- neous colonization and technical assistance to avoid deterioration of the land. In the short run it is proposed to develop the agricultural sector by
1/ The results of these studies are summarized in "Situacion Actual, Prospectiva y Propuesta de Accion para la Region Oriental de Panama (Darien)", MPPE, December, 1977. - 64 - a series of colonization prQjects whose characteristics will depend on the area to be settled. Corn, plantain, palm (to obtain heart of palm) and lemon oil grass (an extraction plant is also planned) are the initial products considered for the lands suited for crops. Nevertheless, if an objective is to improve the income of rural families, new high value crops will have to be cultivated and this requires detailed research, not currently being done, and more detailed soil and climatic studies. There may be possibilities for additional banana, cocoa and oil palm plantations, as well as fruit and vegetables. There is significant potential for livestock expansion and the program esti- mates that in the first 8 years about 5,000 ha of new improved pastures are possible. The most important resource of the region, forests, are to be exploited in those areas where slopes are such that erosion can be minimized.
The Ministry of Planning has already identified 86,000 ha which could be colonized by some 7,800 families (equivalent to all families now in organized farms), an average of 11 ha per family. Social services as well as processing and storage facilities (grain dryers, silos, warehouses, etc.) would be concentrated in small towns.
The main issues in the development of the Darien area are who will carry out the program and its cost. MIDA has not had much success with its asentamiento program. MPPE proposes the creation of a new high level agency for the development of the Darien which would have jurisdiction over the whole province. If this produced another BDC, it might defeat the purpose of the program as well as duplicate many of the activities currently being carried out by other institutions. Moreover, the cost per family could be excessively high, limiting not only the economic benefits of the program, but even more severely restricting the Government's ability to help other Panamanians. In all, it might be best if predetermined areas were opened for colonization in a cheap, "homestead act" fashion, with clear rules for their use, while the responsible sectoral institutions provided modest infrastructure, technical assistance and social services. The Government must make a decision soon, since migrants are literally moving in behind road construction crews and spontaneous colonization is already taking place with the danger that ecolo- gically fragile areas may be damaged and the opportunity lost for making the best use of Darien's land resources.
C. Urban Issues
In spite of Government actions, domestic investors, the key to urban growth, may not respond with the buoyancy of the 1955-68 period. They mentioned many reasons for their caution -- the still uncertain orientation of the Govern- ment elected in October, the many collective bargaining agreements that expire in 1979, and past Government actions which adversely affected business. On the other hand, there is a distinct increase in interest by foreign investors. Projects with some foreign equity either under way or under final consideration are a glass factory, a tuna canning plant, an oil-storage facility, an expan- sion of Nestle's agroindustrial complex, two hotels, a furfural plant, a palm oil plant, a wafer board plant, and a pulp and paper mill which could use bagasse and waste paper as inputs. There has also been interest by Japanese and Scandinavian companies in running the Balboa drydock, and the Colon Free Zone is renting its new warehouses to foreign firms as fast as they can be constructed. - 65 -
While the foreign investor response is encouraging, and lends credence to an expectation of 6-7 percent growth in the 1980's, there appears to be no quick answer to the short term (1978-80) unemployment problem. Moreover, because of the delicate fiscal situation and the need to proceed carefully with Canal Zone integration, the Government should be reluctant to mortgage future policies to short term considerations. Actions which would reduce open unemployment by disguising it through overemployment in public entities, new Canal Zone activities, or private enterprises, or actions which raise real wages significantly would adversely affect Panama's future.
For the longer term there are three issues. What will be required of government to complement and encourage urban growth; what is the urban, productive growth that can be expected and encouraged, and what can be done to reduce urban poverty, much of it transmitted from a rural to urban setting.
Prior portions of the report have mentioned the already good coverage of water, sewerage, education, health, and other public services in urban areas. While these services need to be expanded as population grows and their effectiveness improved, with the exception of public housing, there is a good expectation that this will occur. The impressive investments made by the Government in power, telephones, and transport have also laid the framework for growth. It is because of these past successes and the reasonably efficient labor market that the Government may be able to reduce its direct intervention in productive sectors, concentrating its efforts on housing and the more tradi- tional public services and utilities, without expecting income disparities to increase.
Part of this conclusion stems from the fairly rational operation of the Metropolitan Area labor market. There is no high wage sector in Panama City except for the Canal Zone, and the policies proposed by the Government could reduce this over time. Only in primary activities (mostly fishing) and personal services are earnings low, but if there is any credence to the earlier demographic projections, the flow of rural/urban migrants to the Metropolitan Area (which provides the supply for these service jobs) may be reduced in the 1980's, thus increasing relatively unskilled wages. 1/ Finally, women workers seem to be absorbed readily in the labor market; there are as many women working as office and sales staff as maids, and the number of professional and technical women is almost half the amount of maids. Labor mobility apparently is high between sectors, and workers could flow to the jobs created -- at least in Panama City.
1/ In both sectors important non-wage income (tips, catch sharing) is excluded from the data in Table 41. - 66 -
Table 41: METROPOLITAN AREA LABOR MARKET INDICES
Median Male Weekly Earnings Labor Force, 1977 November. 1975 (No.) (Percent) (Balboas)
Primary Activities 22,650 8.3 26.02 Manufacturing 31,840 11.6 40.98 Public Utilities 4,590 1.7 n.a. Construction 24,700 9.0 46.03 Commerce and Hotels 50,410 18.4 39.81 Transport, Warehousing, Communications 20,490 7.7 n.a. Finance, Insurance, Real Estate 13,320 4.9 59.41 Community, Social and Personal Services 86,500 31.6 20.00 2/ Canal Zone 18,650 6.8 90.24
Totals on Average 273,600 100.0 47.86
1/ Excludes tips and "in kind" payment. 2/ Estimated.
Source: Controller General.
While this picture indicates a probability of substantial labor mobility between sectors, it does not mean that there is no poverty in Panama City. A World Bank study indicated that the Gini coefficient for the Metro- politan Region in 1970 was a high .51, and that the lowest 40 percent of the population received less than 10 percent of the income. About 17.5 percent of the region's population had per capita income below the Government poverty limit of $200, roughly one third of average regional incomes. About 8 percent of households with per capita incomes of below $100 surely lived in absolute poverty. In spite of Government efforts to spread the burden, the stagnation of the economy and the higher unemployment have since probably worsened this situation.
While no cross-tabulations have been done so far, there is evidence that the poor fall into two groups; the old and disabled, and the unemployed. 1/ One third of the income of families with monthly income of less than $100 comes from "self-employment", and more than a third from gifts.
1/ For purposes of an income study, many marginally employed individual appear to be "employed" since they declare income from earnings. This income is so marginal, and its source so tenuous, however, that they are really "unemployed" in the formal economy. - 67 -
Table 42: SOURCE OF PANAMA CITY FAXILY INCOME FOR LOW INCOME GROUPS, 1972
Self-Employed Food, Monthly Family Wages and in Business Lodging Gifts in Retirement Income Salaries 1/or Profession and Rents Lottery Money Pensions
Less than $100 17.9 34.0 - 3.9 35.2 9.0 $100 - 149 58.8 16.7 0.8 4.0 10.5 7.0 $150 - 199 61.5 15.9 1.4 4.5 12.0 3.2 $200 - 249 61.7 18.6 0.8 5.3 10.3 2.3 $250 - 299 64.8 11.4 0.9 5.7 7.7 8.4 All Income Groups 66.1 13.1 0.8 5.4 6.1 5.1
1/ Excluding income tax and social security contributions.
Source: Controller General
A surprisingly high proportion (about half) of urban slum residents seem to hold permanent positions in the formal sector. They have entered the economy, and can be expected to benefit from growth along with the rest. Because of the apparent past labor mobility, expected slower growth of rural/urban migration, already high unemployment, and good public service coverage, the Government may expect that an emphasis on private sector growth would not be expected to lead to increasing income disparities.
It is clear that Panama will remain a relatively high wage economy in the future; little would be gained by attempting the politically unfeasible task of reducing real wages. Panama's strategy must to accept its wage structure and encourage appropriate investments which can thrive on the advantages of the country. The problem is how to do this with least fiscal costs. Panama will soon have the best external transport system of any country in the area, its communication and power system is better than most, and its urban work-force is one of the best educated. Credit is abundant, and its currency is the US dollar. Panama could be so attractive to some industrial- ists that they would be willing to invest even if they were taxed moderately on their profits. Understandably, no domestic or foreign investor has shown alacrity in conceding this point. While world international trade and commerce is not expected to grow as fast in the 1980's as in the 1960's, it has become far more complex, and the developing world, especially Latin America, will have increased importance in this activity. An economy such as Panama's could offer a multitude of industries attractive opportunities.
Because of the present investment incentive system, most private investors producing physical goods and tourist services are assured they will pay no taxes and receive some protection. This means that much of the industrial and hotel expansion in the 1980's will pay little revenues to the Government. Yet, excepting offshore banking, there is no evidence that these incentives have had any effect on expanding investment; while the incentives - 68 - accelerated, private investment dropped. Moreover, Panama's need for more fiscal revenues remains unabated by the Canal Treaty. It appears that the chief requirement for industrial expansion is clear, stable rules of the game. Without this, no amount of incentives will create the expansion required. The reasons are clear:
1. Business based on international communications, transport, warehousing, and processing requires continuous and uninterrupted access to these facilities;
2. Panama's comparative advantages are such that in many areas it would be competing with industrialized countries for investment opportunities. These countries offer stability to counteract their high wage structure;
3. Establishment of a regional center is a long-run proposition for most companies. It is not the same as an assembly industry, which can be phased in or out very quickly.
Yet, if Panama provides such a climate, it may not need the heavy tax incentives it provided during a depressed economic period. Because of this, the Government plans to study in which general areas Panama has a comparative advantage. It might then consider revising the incentive system accordingly, and withdrawing unnecessary incentives over a set period of time. This approach may encourage those presently cautious investors to invest in the near term future, when the need for investment and jobs is more acute. A most useful element of such a strategy would be a stronger promotion effort directed toward foreign investors. An investment promotion center, which could also coordinate all Government requirements for investors, may have high returns.
The big unknown in urban growth prospects is the appropriate indus- trial strategy for the country to follow in the 1980's. While agro-industrial growth has been major in the recent past, it has not been very profitable. Panama's small market limits import substitution possibilities, although there may remain some left in the industrial/service areas because of the high per capita urban incomes. Nevertheless, the Government is convinced that a sub- stantial portion of the incremental industrial growth must come from export- oriented industries, particularly those which suffer relatively high wages with limited capital investment. There is a good prospect that the Govern- ment is correct in its prescription; Panama's small size is an advantage here, since those intersices of the multinational companies that provide opportunities for Panama may be small on a global scale but quite significant for Panama. This, however, is an uncertain area. Until the Government's study is complete, it may be well to defer decisions on urban industrial estates, revision of incentives, and infrastructure required for industrial investment. - 69 -
Some expansion can be expected in financial services. While the banking system is already well developed, there are signs that it will continue to grow. The rise in the banks' foreign deposits (from $0.4 billion in 1970 to $10.3 billion in 1977) and the enhanced political environment stemming from the new treaty indicate some future buoyancy. Some major Japanese banks have expressed an interest in Panama, and Middle Eastern banks, which show an increasing interest in Latin America, could also open offices in Panama. Nevertheless, the major growth and employment stimulus from financial operations in Panama will not come from new commercial banks; it is likely to come from expanded activities of the banks already there and other financial activities. This growth would change Panama from an offshore banking center to a regional financial center.
The Government has attempted to foster this by providing complementary infrastructure (new airport, convention center) and fostering new financial institutions (BLADEX, reinsurance). The linkages of such a continued expan- sion will be many. An expanded, regional financial center would need more computer software companies, more consultants, more housing and offices, and all of these needs would have a high domestic value added. The growth of other export-oriented activities (travel, hotels) with lower domestic value added would also be enhanced.
There is no dearth of ideas in Government of how to do this; indeed the success it has had in establishing BLADEX and a reinsurance industry augur well for continued expansion. Nevertheless, the Government, while considering proposals, has occasionally encountered a lack of cooperation from the banks (who are not eager to assist in creating competitors) and difficulties in obtaining information and competent financial experts. Perhaps both of these problems could be overcome if a joint private-government entity could be established to undertake the studies and initial implementation of new finan- cial institutions, as well as establish a practical training school. Some of the more progressive bankers might be able not only to contribute substantial technical assistance to such an entity, but also reassure their colleagues of Government intentions.
Tourist services are another urban sector with high growth potential. Panama is not an ultimate destination of recreational tourists. Its strategy is, therefore, one of making the Metropolitan Area more attractive to business visitors and passengers in transit, expecting they would stay additional days in Panama. At the same time the Government is attempting to provide even more facilities to attract regional conferences and groups to Panama City. The first element of the strategy has led the Government to purchase a near-bankrupt recreational tourist project on the island of Contadora and assist in its continuing development for high-income tourists (Panama City has no nearby beaches). A convention center will be completed in 1979. The tourist agency, IPAT, is in charge of a program to renovate the old part of Panama City and colonial ruins, mostly with tourism in mind. - 70 -
This strategy seems particularly appropriate for Panama. Inter- national visitors have contributed substantially to Panama's economy. Yet Panama's "tourism" is mainly attracted to Panama by its businesses. The Government, however, may find that its subsidies to tourism (hotel borrowing guarantees, tax concessions, probable losses of the convention center, low fees at Paitilla airport, purchase of failing private projects) may not be needed; a recent discussion of tourist problems with the private industry gave a higher priority to ending some Government regulations than expanding subsidies. Given the present fiscal constraint, it may be appropriate to reexamine the use of concessionary loans for urban renewal with tourist attraction as a goal while the housing bank uses medium-turn Eurocredits for low-cost housing.
The Government, however, will need to expand its urban responsi- bilities in three areas: the presentation of new spatial urban plans and policies, public housing, and the administrative framework to integrate better the implementation of urban activities. Decisions the Government now faces on locational issues will affect the economy for years; even nondecisions in some areas will have crucial impacts. The expansion of free zones at Tocumen Airport might reduce future sales in Colon shops. The development of the port and drydock at Balboa, while ignoring Cristobal, may lead shipping agents and future cabotage activities to be located at Panama City rather than Colon. On the other hand, the continued development of the Colon Free Zone and a container port at France Field may lead to industrial estates in Colon, but not Balboa. While the railroad may need to be extended to the container port if the Colon area becomes a major industrial area, it would not be necessary if Balboa became the future industrial center. In most cases, decisions to do all options at the same time will only create overcapacity.
What is needed soon, perhaps before 1980, is a full urban plan that assesses the growth potential and needs of each area within the Metropolitan Area. Such a plan, of course, should recognize the constraint on public outlays and allocate public infrastructure consistent with locational choices for activities. It should also spell out the role of the private sector.
The future scope and volume of public housing will soon require Government decision. During 1976-77, the newly-established National Mortgage Bank (BHN) borrowed over $80 million in Eurocredits for housing finance. During 1975-77 the Government expanded public housing construction, mostly to pick up some of the slack in the depressed construction industry. In 1977 the Government built 5,750 units, compared to only 1,200 in 1974; 90 percent in the Metropolitan Region. The expansion was a broad one. The Housing Ministry (MIVI) now has four housing programs: single- and multi-family units, ranging in price up to a maximum of $12,000; serviced site developments with core units, with monthly repayments in the $20-40 range; land titling and upgrading programs in areas of squatter settlement; and urban renewal projects in central city areas of Panama and Colon.
Besides housing, MIVI also designs and implements a substantial amount of urban infrastructure itself. For the future, it is obvious that BNH, which finances MIVI housing projects, will require all of earmarked - 71 - receipts of $12-14 million yearly 1/ it receives to pay the debt service on its commercial borrowings. Its rent income was insufficient for payment of BNH's own administrative expenditures, so that in 1977 MIVI will be financed directly from the Government budget, not BNH "profits". This means that virtually all future BNH lending will need to come from concessionary credits. AID will be issuing housing guarantees of about $15 million yearly over the next five years; further funds from IDB and IBRD may lead to yearly disburse- ments of only $5-$10 million more. This resource availability contrasts with a MIVI desire to lend $50 million yearly by 1980; twice the available resources. Given this situation, it is clear that the Government must focus more carefully its public housing target group.
Panama will be receiving some housing stock in the reverted area of the Canal Zone. Some barracks and other buildings may also make appropriate low income housing with modest renovation. At the same time, downtown urban renewal areas may be more appropriate for private development of office and commercial buildings. In Colon, however, it is probable that major government housing efforts would be needed before private capital could be attracted. If the economy responds as expected, the Government may be able to focus its public housing effort towards only low income housing (say, households with below $200 monthly income), leaving expanded private sources to finance the rest.
A more focused urban strategy will require more centralized authority and better urban institutions. MIVI, established in 1973, is endowed with wide powers in the formulation and execution of urban development programs and public housing schemes. While the Ministry's role in urban development planning is national in scope, the Metropolitan Area is its main focus of attention. Although concerned with wider spatial development issues, such as rural-urban and regional balance and industrial location policy, the Planning Ministry also engages in some urban planning activities. This overlap inevitably creates interministerial problems.
The Planning Ministry, which coordinates the projects of all Ministries and public agencies, seems to have a limited authority over MIVI. Moreover, the coordination and initial management of most of the reverted Canal area will be the responsibility of the new Panama Canal Authority. Finally, coordinating agencies such as the Planning Ministry and MIVI have lost some of their decision-making powers as rapidly growing agencies like IRHE, the Port Authority, the Colon Free Zone and IDAAN have increased their responsibilities. An added problem is that BHN is in poor shape for an agency with such large financial responsibility. It claims to have no detailed income statements, and the accounts it has have not been audited for two years. Its coordination with MIVI, for which it is supposed to be the financing entity, has been difficult, and its financial management is equally deficient. This decentralization of decision-making has ocurred at the time that central- ized decision-making is becoming an urban imperative. The public finance situation of Panama makes better coordination all the more important.
1/ These receipts stem from a forced savings scheme that allocates one third of workers' annual bonuses to BHN indirectly. If the economy recovers, they should equal $15-17 million yearly in a few years. - 72 -
D. Copper
One of the most important issues facing the Government is whether or not to proceed immediately with the development of what would be one of the largest copper mines in the world. The project, compared to the Panamanian economy, is substantial and will certainly have a major impact.
Table 43: SIZE INDICES OF CERRO COLORADO PROJECT
US$ Million
Panamanian GDP, 1977 2,254 Cerro Colorado, estimated project cost a/ 1,530 Cerro Colorado, estimated external borrowing 1,380 Panamanian outstanding public external debt, 1977 1,378 a/ According to feasibility study.
If successful, the project feasibility study claims it would contri- bute substantially to Government revenues, employment and manpower training. However, the initially proposed project borrowing (which includes loans for equity) would equal the outstanding public external debt of Panama in 1977. Any significant cost overrun or other unforeseen expenditures would increase the required borrowing even further. The major issues confronting the Govern- ment are therefore the viability of the project, its timing, and its financing.
Copper was first discovered in 1957 at Cerro Colorado, in the mountains of Chiriqui Province. In 1973, development negotiations with Canadian Javelin Company, which had explored that area since 1970, failed, and the Government reimbursed Canadian Javelin $23.6 million for its expen- ditures. In 1975 the Government transferred its concession rights to the state-owned Corporacion de Desarrollo Minero Cerro Colorado (CODEMIN). Texasgulf and CODEMIN then jointly established the Empresa de Cobre Cerro Colorado for the development of the project in February 1976. CODEMIN holds 80 percent and Texasgulf 20 percent of the shares. Texasgulf, Inc. is a US corporation 1/ engaged in international mining and processing of phosphate rock, sulphur, potash, hydrocarbons, and base metals.
Two agreements were signed by CODEMIN and Texasgulf. One for a feasibility study, now completed, and a second which appoints Texasgulf as administrator of Empresa de Cobre Cerro Colorado for 15 years after the start of commercial production to manage evaluation, design, construction, operation, and most marketing activities. During construction, its fee will be 1-1/4 percent of total construction value (including infrastructure), and during production it will receive 1-1/2 percent of gross sales plus full reimburse- ment of incurred costs and 2.5 percent of operating profits during the first five years, gradually declining to 0.75 percent for both in years 10 and 11, respectively.
1/ In which the Canadian Government holds approximately 30 percent interest and private Canadian stockholders own another 20 percent. - 73 -
The feasibilitystudy recommends the developmentof an open pit mine to extract annually 27 million metric tons of ore containing0.78 percent copper. A concentratorwould be located close to the mine for crushing, grinding, flotationand thickeningcircuits. About 760,000 mt of concentrate would be produced annually,and transportedby pipeline to a smelter located on the Pacific Coast. The smelter would include a flash furnace, converters and a sulphuricacid plant, producing 187,000mt of blister copper and approxi- mately 800,000mt of sulphuricacid per year.
The orebody can be consideredsufficiently defined to permit reliable ore reserve calculations.
Table 44: CERRO COLORADO COPPER RESERVES
Cut-off Grade Ore Reserve Average Grade Copper Contained % Copper Million mt % Copper in Ore, Million mt
0.20 2,590 0.55 14.3 0.30 1,890 0.66 12.5 0.40 1,380 0.78 10.8
Source: Cerro Colorado FeasibilityStudy
The copper seems to be evenly distributedin the ore body, and no relatively high-grade area has been outlined to be mined during the early years.
Infrastructurerequirements of the project are substantial. A deep-water port, able to accommodatetwo 20,000 ton vessels on two piers, complete with warehouses,fuel tank farms, navigationalaids and other ancilliarieswill be needed. Also needed is a 70 km highway to connect the various facilities to the Panamericanhighway, and a 66 km-long, 7 inch concentratepipeline. The feasibilitystudy assumes that power would be available from the national grid and includes only provision for the distri- bution system for the project. Anticipateddemand and consumptionis 175 MW and 1,450 GWh annually, respectively. The consumptionequals all of Panama's 1977 electricityproduction. A study by IRHE estimates that if the copper project goes forward, it will require investmentsin power of over B/250 million (1978 prices) by 1988 that would not otherwise have been necessary. Water requirements,4,500 m3/hr, will require the erection of dams for storage reservoirsin addition to pump-stationsand pipelines. Other items included are communications,headquarters, industrial buildings and lime and silica quarries required to provide the concentratorand smelter. A townsite to house approximately2,300 employees would be attached to an - 74 - existing townsite, but the cost was excluded from the project. The Government now considers private developers would likely be interested in developing the housing required for the townsite, and that this could be financed from private mortgages.
About 72,000 MT per day of tailings would be discharged into the San Felix river system without prior treatment or impoundment. The proposed tailings and overburden disposal system could lead to ecological problems. Large amounts of fine waste materials containing heavy metals and chemical residues could have a negative impact on the river basin, the coastal agricul- tural lands, and the marine life in the Gulf of Chiriqui, which is exten- sively used for shrimp fishing. If these disposal methods prove to be un- acceptable, and the Government is now studying them intensively, the capital costs would be increased.
The project will require a major training program and the study proposes a comprehensive training exercise during construction, start-up and operations. Plans have also been made to replace all managerial and professional expatriates with Panamanians during the first 15 years.
The proposed implementation schedule calls for the completion time of 60 months. A peak labor force of 7,200 would be required for construction. The smelter and all other facilities are expected to reach virtually full capacity by month 59. This learning curve may be optimistic. The project is large and the processes involved are complex. Texasgulf, the operator, has no previous experience in mining low-grade copper ore in large-scale open pits, nor has it ever operated a copper smelter.
All of the output would be sold in Europe. CODEMIN is now discussing with a major purchaser a guarantee (up to a point) for its cash flow solvency, the purchaser receiving a price discount for this limited liability. The project's viability will obviously depend on the copper price. The price projected for the mid-1980's in the the most recent economic analyses of the project is close to that projected by the World Bank, but the economic returns are only about 8 percent, not the 10 percent of the feasibility study. The reason is cost variations. - 75 -
The total project cost was calculated by the sponsors as follows:
Table 45: Cerro Colorado Cost
(in million US$)
Mine 210.0 Concentrator 199.2 Smelter 181.7 Port 30.6 Roads 50.0 Water Supply 56.2 Ancillaries 65.0
Total Unadjusted Capital Cost 792.7
Price Escalation 240.0 15% Contingencies 154.9 Contractor and Administrator's fee 45.5 Start-up 80.2
Total Capital Cost 1,313.3
Interest during construction 144.3 Working capital 73.0
Total financing required 1,530.6
Source: Feasibility Study
The foreign currency portion is estimated at approximately 65 percent of the total. Capital investment per mt of annual blister copper is high at $8,200. 1/
The feasibility study's proposed project cost may have been underesti- mated by allowing the tailings to be discharged into a river system without treatment or impoundment; eliminating a phosphoric acid plant; relying on the (insufficient) power generating capacity of the national grid by excluding captive power facilities from the project scope; and excluding housing devel- opment costs. The combined cost of tailing impoundments and the housing development could increase the base estimate by $200 million. Because of the increase in interest rates since the study was done, interest costs during construction may be underestimated.
1/ The $5,000 given in the feasibility study excludes contingencies, escalation and interest during construction. - 76 -
Cash operating costs were estimated at $0.51 per pound of refined copper, excluding costs for operating non-processing infrastructure facili- ties. No marketing discounts were included in the revenue calculations. Furthermore, the cost of electric power was estimated at $0.028 per kWh (in $1977); a recent study by IRHE revealed a long-run marginal cost of about $0.033 to $0.038 per kWh, about 20 percent higher. The cost of power presently represents about 19 percent of the cash operating costs of Cerro Colorado's production, but could approach 23 percent. Because of the power tariff question alone, cash operating costs were underestimated by at least 4 percent. According to World Bank information, 1976 cash operating costs amounted to approximately $0.59 in Zambia and $0.55 in Zaire, while Chile and Peru are well below $0.50.
The financial structure of the project is another issue. Both sponsors intend to contribute as little equity as possible, and a debt- equity ratio of 70:30 is envisaged. In late July 1978 the Canadian Export Development Corporation (EDC) indicated its interest in taking a lead role in arranging financing; and it wrote that it would contemplate a loan of approxi- mately $1.12 billion with terms of at least 15 years, part at a fixed interest rate and the remainder on a floating rate basis. The loan would be made on the basis of an assignment of the proceeds of long-term sales contracts and a completion guarantee.
The financing plan originally envisaged by the sponsors included the EDC loan and $480 million in equity. CODEMIN would provide equity of $384 million; Texasgulf $96 million. Texasgulf's equity would probably come from private loans and internally generated cash. CODEMIN, however, tentatively planned to finance its share with loans from the Government, which -- in turn -- would borrow $280 million from official lending agencies and $104 million from commercial sources. Borrowings for CODEMIN's equity would be equivalent to 28 percent of Panama's total outstanding public external debt at the end of 1977. Because of depreciation allowances and the high leverage of the project, it would require a very high copper price indeed before the dividends received by Government equalled the debt service on its equity borrowing, and the interest on this debt would exceed the wage taxes and management fee tax received from the project. Moreover, any sharp secular drop in copper prices might force the Government to pay the debt service for the project itself from general revenues. Consequently the Government is now considering the addition of a third partner who would provide 20 percent or more of the stock. Its efforts to assure a cash flow solvency guarantee from possible purchasers and further discussions with EDC with regard to cost overrun finance are all designed to reduce this heavy risk. - 77 -
While the earlier financing proposal ensured that the Government would acquire majority control over the copper project, it assumed most of the risk. And the risk--given the uncertainties mentioned in this report and the known volatility of copper prices--is considerable. Moreover, Cobre Panama, S.A., a subsidiary of Mitsui Mining Company of Japan, has recently finished exploration work at the Petaquilla deposit, which may have 200 million mt of 0.7 percent copper, and is now negotiating an exploitation contract with the Government. If this same pattern of financing were used for the other project, Panama would be accepting financial responsibility for two major mineral projects in a period of a few years when its borrowing capacity and managerial talent is strained. The Government is now considering these risks very seriously, and has deferred a decision on the project until further informa- tion is available.
E. Public Finances
Because of two major uncertainties--the effects of the Canal Treaty and the Cerro Colorado copper project--projecting Panama's public finances is a very speculative exercise. Even in situations of lesser uncertainty, past Bank projections of Panama's public finances have been less than accurate. A 1973 Bank report estimated public savings would be about 4 percent of GDP during 1974-77. In the event, it averaged one third that ratio. A 1976 report estimated 1976-77 savings would be 6.4 percent of GDP; in fact, they were virtually nil. All Bank reports since 1969 significantly underestimated the rise in the public debt. The Government is now in the midst of revising its public investment program; a program that will set the stage for its priorities in the early 1980's and take account of the opportunities presented by the new treaty. Rather than make detailed projections, this report will concentrate on secular public finance issues the authorities may consider as they determine the level and financing of their future program.
Because Panama uses the US dollar as currency, there is no "transfer problem" with its balance of payments. Panama has no foreign reserves and no short-term foreign exchange constraint. The movement of banking flows in and out of the country is both unimpeded and at least partially sets the level of domestic activity and import demand. While over the long term Panama must-- like any country--avoid a proportionately growing dependence on foreign savings since it would ultimately require growing repayments and reduce the share of national income, in the short- and medium-term Panama's creditworthi- ness and financial stability depends on its public finances.
The secular trend of Panama's public deficits is now of concern. Panama's public finances in the 1970's showed a significant change since the 1960's. While public expenditures expanded rapidly, public savings deter- iorated in spite of major new tax packages about every third year and a series of IMF programs in effect since 1969. - 78 -
Table 46: PUBLIC FINANCE INDICATORS,1970-79 (percent of GDP)
Est. Proj. 1970 1972 1974 1976 1977 1978 1979
Public Savings 2.2 1.4 3.8 0.1 0.0 -0.9 1.0 (of which: Central Government) (2.6) (1.4) (1.4) (-1.0) (0.7) (-1.8) (-0.8)
Capital Receipts, net -0.3 -0.2 0.2 0.7 0.4 0.2 0.2
Capital Outlays 6.6 7.5 10.5 19.3 13.8 14.7 11.3
Deficit 4.6 6.2 6.5 18.5 13.4 15.4 10.1
Net External Financing 3.7 7.3 5.8 15.1 13.0 19.7 1/ 6.2
Net Domestic Financing,and error 0.9 -1.1 0.3 3.4 0.4 -4.3 3.9
1/ During late 1978 there was a surplus borrowing of about $100 million which remained in BNP at year-end, it will be drawn down in 1979.
Source: Table 5.1, MPPE, and IMF
Note: During the discussionof this repport in draft form, the Government noted that its 1976-78GDP estimates had been revised downwards. While a full breakdown is not yet available,and the appendix tables have not, therefore,been revised, the new nominal GDP series was used for this table: 1976 = B/2.00 billion, 1977 = B/2.13 billion, 1978 = B/2.315 billion, and 1979 projected at B/2.59 billion.
The public sector deficit peaked in 1976 at B/370 million, or over 18 percent of GDP, before dropping in 1977. Central Governmentsavings rose considerably in 1977 with a freeze on government workers' salaries and a new value added tax (VAT), which collected almost 1.4 percent of GDP. Public capital outlays dropped. The following year, 1978, was more'difficult. As interest costs rose with LIBOR, the emergencywork program peaked, and capital outlays rose 15 percent, public savings became negative, and the deficit rose to an estimated B/355 million, over 15 percent of GDP. Because of the high liquidityin the Eurocredit market, the Government borrowed US$100 million more than it needed for 1978, and will use these sums for financing the 1979 deficit. Panama's public external debt, disbursed and outstanding,rose from about 65 percent of GDP in 1977 to an estimated80 percent of GDP in 1978; in 1979 interest on this debt will absorb over 5 percent of GDP.
Much of the incrementaldebt came from commercialborrowing; most has been undertakenby the Central Government,which faced a formidabledebt amortizationschedule. Its future repaymentobligations, however, were smoothed out by $460 million of Eurocreditscontracted in 1978 and used for refinancing;the drop in the level of repayments is considerable. - 79 -
Table 47: PUBLIC EXTERNAL DEBT REPAYMENT PROJECTIONS,1979-85 ($ million)
1979 1980 1981 1982 1983 1984 1985
Total Repayments 156 170 154 187 197 171 138 (before rescheduling) (233) (220) (175) (182) (138) (69) ('49)
Likely to be Repaid by Central Government 38 58 80 101 122 128 108 (before rescheduling) (114) (107) (99) (95) (61) (25) (18)
Source: IBRD.
Table 47, however, is based on borrowingsonly through August 1978, and it illustratesthe effect of the refinancingoperations. The 1979-81amortization payments of the total public sector were reduced by a quarter. The Central Government and those agencies directly dependenton it, with a far higher proportion of commercialdebt, had its repaymentobligations reduced by 45 percent during the same period. While refinancingoperation gave breathing space for the Government,the further borrowing after August and raises in LIBOR in late 1978 raised the debt service payments rapidly. They are now estimatedat US$385million for 1980, risingto US$419 million in 1983 before falling rapidly. Some short term trends reveal the difficultiesthe Governmentcon- fronts. The 1976/77 restrainton increasesin civil service salaries was finally breached in August 1978, and the Governmentwas forced to raise 1979 salaries significantly;those of teachers even more than the average. The freeze on collectivebargaining ended in 1979; during this year about 250 labor agreementsmust be negotiated. The emergencywork program which had originallybeen scheduledfor terminationin August 1978 was continued through the year at a cost of B/28.4 million. Finally, the increase in LIBOR that occurred in October 1978 will increase the Government'sinterest payments substantiallyin 1979.
Certain secular trends in Panama's public financesare also known, and should be considered in any future program. First, for the medium-term future, Panama is likely to continue to have proportionatelylow public savings. Panama's large and growing requirementsfor educationand health; the poor financialposition of some major state enterprises;and the major capital expenditureprograms of those utilitieswhich do have savings all imply that it will be difficult to generate an increasedshare of public savings available for new capital outlays. It is not yet a declared policy of the Government to change this structuralproblem. Such a change would require closing or sellingat a loss some losing state enterprises,and raising taxes. Complementarymeasures would be to drasticallyreduce the growth of education and health programs or phase down other social programs supportedby govern- ment transfers. If taxes on gambling are included, the General Government tax burden on GDP rose from 17 to over 20 percent between 1970 and 1977. All of this buoyancy was owed to new taxes. - 80 -
Table 48: RELATIVE TAX BURDEN, 1970 AND 1977 (percent of GDP)
1970 1977
Direct Taxes 8.7 11.3 (Wage Taxes) (2.5) (5.0) (Other) (6.2) (6.3) Indirect Taxes 6.8 7.7 Gambling Taxes 1.6 1.7
Total Taxes 17.1 20.7
Source: Table 5.9.
While the new VAT, passed in 1977, may lend more elasticity to the tax system, it would be imprudent to depend on major new taxes in the near future, given the depressed economic situation, already high tax burden, and expectation of increased fiscal receipts from the Canal in 1979/80.
Increasing Government savings substantially will be difficult. If it is assumed that government revenues and current outlays show the same buoyancy to GDP growth since 1968, then government savings will be minimal by 1983.
Table 49: PROJECTED CENTRAL GOVERNMENT SAVINGS, 1983
Past Buoyancies Projected (Elasticities to GDP)/a Ratios to GDP (percent)
1968-73 1968-77 1983
Current Revenues 1.04 1.22 18.1 Current Expenditures 1.15 1.27 17.0 Savings not applicable 1.0
/a Using least squares projection.
The above projection assumes a 1979-83 revenue buoyancy of 1.1, receipt of $59 million additional in 1983 from Canal revenues (a smaller sum than used by present official projections since it is the mission's judgement that the $10 million annuity received for provision of public services to the Panama Canal Commission may require about that amount in actual additional outlays, and these corresponding outlays have also been excluded) and a current expenditure elasticity of only 1.15. It excludes a possible increase in current outlays for the National Guard, which may expand in the early 1980's as it prepares to ultimately fulfill a role in defending the Canal. - 81 -
The needs of some major public agencies are also known. IRHE, La Victoria, IDAAN, and Cerro Colorado will have relatively large borrowing requirements if certain programs are undertaken. If the Cerro Colorado project were to begin in 1979, and the Government were to be indirectly responsible for 80 percent of the borrowing required, it would require net external borrowings of about $275 million yearly over the next five years. If no change is made in the present sugar program, La Victoria would also need to borrow at least $15 million yearly. The power and water programs are ambitious, and will require substantial net borrowing.
Table 50: NET BORROWING POSSIBLE BY KEY PUBLIC AGENCIES, 1979-82 ($ million)
1979 1980 1981 1982
Net Borrowings for:
Cerro Colorado /a - 192 297 453 IRHE 21 26 13 - /b Sugar Mills 14 15 15 15 IDAAN 10 15 19 17
Subtotal 45 248 344 485
/a 80 percent of project borrowings; project delayed one year. /b This projection of IRHE assumes no rephasing of its hydroprojects. If the Cerro Colorado project proceeded in 1979, IRHE would be a net borrower in 1982.
If between 1978 and 1982 these four agencies and the Central Government were to add to the public debt $1.5 billion; it would be a sum higher than the expected increment in GDP over the same period. Panama's external public debt would thus be equal to 90 percent of its GDP by 1982.
The Government believes this would be an untenable situation. To both reduce the public sector deficit and the nation's indebtedness it has taken action along the following lines. First, it negotiated a new second tranche standby with the IMF in early 1979 that will provide it with about $30 million in IMF funds during the fiscal year. Its 1979 public sector program includes a drastic reduction in the emergency work program and a drop in public capital expenditures (from about B/340 million in 1978 to B/290 million in 1979), and a goal of reducing the public sector deficit to B/260 million; about 10 percent of GDP. Because of surplus borrowings in late 1978, it plans to limit net, non-IMF external borrowings to US$130 million.
Secondly, future public projects will be limited. The new Tocumen airport was completed in 1978. A major power project, a new fishing port, and a convention center will be completed in 1979. No new state enterprises - 82 - have been started since 1977, and the Government plans no new ones with the possible exceptionof the Cerro Colorado project now under discussion. With that exception,all future public fixed investmentwill be limited to infrastructureand utilities. The net financialoutlays of the public sector will also be reduced; the agriculturalbank is being restructuredand the finances of the housing bank are also being examined carefully.
Obviously, one of the greatest future public resource claimants could be the Cerro Colorado project. The projectwas initiallyproposed to begin in early 1979; it has been deferred until further informationis available. The Governmentis fully aware of the risks such a large project, so dependent on nonequity capital and volatile copper prices, will entail. The Government hopes, before a decision is made, that its equity in the project can be reduced by 20 percent or more.
Finally, the Government is determinedto reduce public capital outlays. This, however, would be easier to accomplish if private investmentwere more buoyant. To encourage this, in late 1978 the Government formed commissions to examine many areas of conflict (e.g. construction,agriculture, manufac- turing, labor relations). Each commissionhas a majority representationfrom the private sector. In early 1979 the Government was receiving and considering very seriously each commission'ssuggestions for policy, legal, and implementa- tion changes. Senior Governmentofficials are also visiting foreign investors personally to encourage them to invest. It has some hope that these efforts should improve the private investment climate, and that by 1980 - when the new Canal Treaty has taken effect -- there will be a resurgenceof private investment. While the Government is at present reluctantto sell loss-making enterprises,it is prepared to sell some, or at least shares in them once the employment situation improves, thus reducing its future losses. An improved economic climatewill also permit new taxes. The reduced capital outlays will make more important the Government'sefforts to link private investment more closely to recently completedpublic projects (e.g., fishing port, airport) to ensure their full,usage.
The Government believes that Panama's present public finance diffi- culties are both acute and chronic. Not only must it adhere closely to its 1979 public finance program, it must reduce its public sector deficit even further during 1980-82. It has a medium-termgoal of reducing its deficit to 6 percent of GDP, thus slowly reducing the ratio of this public debt to GDP. Unless it succeeds in both its short and longer term efforts, Panama's creditworthinesswill be jeopardized.