UNN-26 Public Disclosure Authorized SOME ASPECTS OF THE ECONOMY OF PANAMA Prepared by Romeo Dalla Chiesa Public Disclosure Authorized for the GOVERNMENT OF THE REPUBLIC OF PANAMA Public Disclosure Authorized INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Washington, D. C. Public Disclosure Authorized May 1957 SOME ASPECTS OF THE ECONOMY CF PANA 1/ Table of Contents Page Economic History 1 International Trade and Payments 2 The Size, Age, and Skill of the Population 4 Capital and Capital Formation 8 National Income and Output 10 Agriculture, Forestry and Fishing 12 Industry and Commerce 14 1 This study was prepared in December 1956. The Economic History of Panama 1. The history of Panama has been influenced by trade across the Isthmus from the discovery of the Pacific by Balboa in 1513 to the present day. The first commercial route was the gold road from Panama City to Portobello which carried the wealth of the colonies to the Atlantic seaboard for shipment to Spain. Panama was a center of American trade for almost two centuries and came to ba amongst the wealthiest of the Snanish colonies. This prosperity was generated almost exclusively by commerce. There was some development of light manufacturing, which was, however, frustrated by Spanish taxes. Apart from this, productive acti-vity in Panama was confined to subsistence farming by indians and escaped slaves. Panamals importance as a trading center declined Twith the decline of Spain, and came to an abrupt end when Henry Morgan destroyed Panama City. 2. In the middle of the nineteenth century, the California gold fever spread through the South Sea. Thousands crossed the Isthmus following the "Darien route," and -old from California was shipped to the Eastern ports by way of Panama. Under this stimulus, a railroad was built from Palnama City to Colon. Panama--then part of the Renublic of Colombia--experienced a short revival which came to an end with the decline of the railroad traffic. 3. After a long struggle Panama became an independent nation in 1903. TsTith independence came some awareness of the opportunities offered by the geographic position and natural resources of the country, wh'ich for centuries had suffered the greed and neglect of foreign administrators. It was not, however, until recent yrears that attempts have been made to develop the country. 4. In 1914 came the opening of the Canal which had a profound influence on the economic position, and on the economic attitude of Panamanians. The attitude is called "Canal mentality," i.euf, the prevailing belief that the Republic exists by and for the Canal. Since 1914 Panama's economic pursuits have been related in a very high degree to demand arising from the Canal, and from the strip of territory leased to the United States which is called "Canal Zone." The Canal and its related activities have absorbed a large proDortion of Panama's labor sunr^ly at comparatively high wage rates. In 1940, for instance, when activities on the Isthmus had not reached the peak level of the war years, about 14 percent of Panama's gainfulla, employed population and 30 percent of its salary and wage earners were employed in the Canal Zone. mSnoloyees of the Zone comprised the second largest occupa- tional group in the nation. Imnortant elements in the Panamanian community have been engaged in catering to the Canal's needs. Bars, restaurants, and stores selling liquor, clothinu, jewelry, gifts and novelties flourish on account of the patronage of soldiers, sailors, American employees, tourists and transients from the Canal and the Zone. VTholesale merchants and commercial farmaers have been largely dependent upon bulk purchases made by U.-. Government agencies, especially of agricultural products grown in the Republic. liJhole- sale and export trade hardly existed at all before the opening of the Canal - 2- but developed during the past few decades, together with supporting industrial and servicing activities. Panama also receives financial and transfer pay- ments originating in the Canal., such as payments to contractors, capital transfers particularly in the form of portfolio investment, and direct pay- ments to the Panamanian Government. 5. The importance of the Canal to Panama may be expressed in quanti- tative terms. In the early 19LOts, for instance, it was estimated that about 4O percent of the national income of Panama originated in the Canal Zone. Of the income coming from the Zone, 83 percent was in the form of wages arnd salaries, plus the earnings of self-employed personis; the reirmaining 17 percent was in the form of net profit to business, and returns on property* The net contributions of the Canal Zone to the economy of Panama ranged from ",20 million in 1939 to $85 million at the Deak, in 1942. They averaged around A40o million in 1946-195O, and finally levelled off at about 835 million during more recent years. These receipts have enabled Panama to offset, to a large extent, her deficit on current account vis-a-vis the rest of the world. 6. But the Canal has not been an unmixed blessing. It has turned the attention of Panamanians away from the development of the resources of their country. It has created a sharp distinction between the capital and the rest of the country, by causing a concentration of business and political power in Panama City. The influence of business in politics has also given a disproportionate share of government services to Panama City. 7. Unless the Canal Zone can be exploited more intensively as a market for Panamanian goods and services, its contribution to Panama's national income is bound to decrease su:bstantially over the next ten years. On a per capita basis, the countrJy's net receipts from the Zone are already far below the 1940 level. Even when expressed in current prices, they declined frorn $163 in 1940 to about ASO in 1955. A reasonable estimate of the position in 1965 is that receipts fromn the Canal would fall to 530 per head. This is based on the assumptions that population will continue to grow at the compound annual rate of about 3.0 percent and that total net receipts will not be lower than at the presenit (i.e., ,A3 million), a slight decline in the employment of Panananians in the Zone being possibly offset by larger exports of goods. to the Zone. International Trade and Payments Panama's balance of payments is unfavorable but less so than the figures would suggest. The statistics of exports omit firstly the amount of imports that is reexported, and which has been estimated at a fi-fth of total imports. Secondly, the declared value of produce exported by the foreign owned plantation companies is below their commercial value, which has been estimated at 85 percent above the declared value. Part of the difference, however, returns to Panama bv way of invisible receipts. The following table shows the pattern of Panama's imports: -3- Panama's Imports by Categories, 1950-1954 (% of value of total imports) A. Consumption Goods 51.l B. Raw ancd Semimanufactured Mlaterials 22.5 1. Foodstuffs of which: 14.5 C. Fuels, Lubricants and - Prime necessities (-) 6D7 Related Products 8.5 - All others (*r) 7.8 D. Capital Goods1 of which: 2. Beverages and tobacco, mfg. 5.0 - Construction mate- 3. Finished cloths and shoes 5.7 rials ancl equip- 4. Other nondurable 8.8 ment 4.8 5. Durable consumnption goods 17.1 - Agricultural machi- of which: nery and implementsO.5 - Cars and other vehicles - Transnort equipment 5.l for personal use )X.1 - Industrial efluipment 0.9 - Cooking, heating,radios - Other capital goods 5.6 and other electric F. Unclassified Imnorts 1.0 household goods 1.7 - All other durable 11.3 Total Imoorts 100.0 ( Classification based on family's budget sample study. It is on account of the entreaot trade that consumer goods make up so large a proportion--over 50 percent--of total imports. Durable consumer goods, for example, represent over 17 percent of total imports, and consist principally of luxury items which Panamanian customers could not afford to ourchase on such a scale. Similarly, more than half of food imports is represented by items which, according to studies of family budgets, are not generally included in the diet of the average Panamanian. Except for certain items, especially durable goods, imports of consumer goods have increased less rapidly than imports of raw materials and capital goods. The increase in domestic agricultural production is responsible for a decline in imports of live animals, food and drink from 22 percent of total imrorts in 1904.-47 to 19 percent in 1950-1951•. A growth of industrial investment has accounted for an increase in the pro- portion of imports of raw materials and capital goods, from 25 percent of total imports directly after the war, to hlO nercent in 1950-5). The pattern of Panama's export trade is shown in the following table: Panama's E-rports by Prindf,.! cmmodities (percent of value of total exports) Period Total Bananas Cacao Abaca Shrimps All others 1946-50 100.0 69.2 7.4 12.4 - 11.0 1950-54 100.0 70.6 6.4 6.6 5.2 11.2 Note: Based on recorded exnort data with due adjustment for valuation. Bananas, cacao and abaca--produced and sold chiefly by the Chiriqui Land Co., a subsidiary of the United Fruit Comnany--account for more than three-fourths of total exports. During recent years, however, a new product, shrimps, has become important. Sxports of shrimnps t-thich were nil or insigniificant up to 1950, now represent a source of B/ 31 million of net earnings for the country, or some five percent of total exp,o.,rts.