Iowa State University Capstones, Theses and Retrospective Theses and Dissertations Dissertations 1978 A macroeconometric model for the Panamanian economy 1950-1972 Jarilaos Stavrou Iowa State University Follow this and additional works at: https://lib.dr.iastate.edu/rtd Part of the Economics Commons Recommended Citation Stavrou, Jarilaos, "A macroeconometric model for the Panamanian economy 1950-1972" (1978). Retrospective Theses and Dissertations. 6420. https://lib.dr.iastate.edu/rtd/6420 This Dissertation is brought to you for free and open access by the Iowa State University Capstones, Theses and Dissertations at Iowa State University Digital Repository. It has been accepted for inclusion in Retrospective Theses and Dissertations by an authorized administrator of Iowa State University Digital Repository. For more information, please contact [email protected]. INFORMATION TO USERS This was produced from a copy of a document sent to us for microfilming. 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Universitv Micrdfilms International N /hl-R ROAD, ANN ARBOR, Ml -IHlOf) tH HI UF ÙRD R(,)W, LONDON WCIR 4f:J, 1 NO, LANID 793728 3 STAVROU, JASILAOS A MACR0EC]N]4ETtlC 130EL FO^ THE PA^AMAIIAM EC0N3MY 1953-1972. I3WA STATE JNIVERSITf, P4.D., 1973 Univers^ Micrdilms International 300n ztEBHOAu, annarboh,mi48io6 A macroeconometric model for the Panamanian economy 1950-1972 by Jarilaos Stavrou A Dissertation Submitted to the Graduate Faculty in Partial Fulfillment of The Requirements for the Degree of DOCTOR OF PHILOSOPHY Major: Economics Approved: Signature was redacted for privacy. Signature was redacted for privacy. for we Major Department Signature was redacted for privacy. For the Graduate College Iowa State University Ames, Iowa 1978 ii TABLE OF CONTENTS CHAPTER I. INTRODUCTION CHAPTER II. THE PANAMANIAN ECONOMY The Effect of Geography Small Size of the Economy Openness of the Econoiriy Limited Productive Capacity Special Institutional Arrangements Economic Performance 1950-1972 The Dual Economy: The Two Panamas CHAPTER III. SOME THEORETICAL CONSIDERATIONS Income Determination Models for Developing Economies General Considerations Income Determination Models for Developing Economies Equation Specification Statistical Examination CHAPTER IV. THE MODEL General Comments The Consumption Sector The Investment and Capital Formation Sector The Import and Export Sector The Supply Sector The Government Sector The Income Sector iii Page Closing the Model 127 CHAPTER V. TESTING THE MODEL 131 Model Simulations 134 Multiplier Analysis 149 CHAPTER VI. SUMMARY AND CONCLUSIONS 190 BIBLIOGRAPHY 193 ACKNOWLEDGEMENTS 197 APPENDIX 198 1 CHAPTER I. INTRODUCTION In recent years, there has been increasing interest in the short run problems of the LDC's. There has been a change in the view that growth of GDP is more important than stabilization and other short run problems, and consequently, a large number of Keynesian income determination models have been constructed for less developed economies, among them those of Latin America. This raises the ques­ tion of how does the body of theory on stabilization within the framework of income determination models, which has been developed for the more developed countries, apply to the different features of the LDC's in general. This dissertation is a first attempt to build a medium size macro- econometric model for the Panamanian economy. The model presented here is a smaller version of a model built by Stavrou and Arboleda (1975). A number of its equations have been respecified and its dynamic properties differ from those of the initial model in some important characteristics. As a first attempt, it suffers from the problems commonly encountered in such enterprises. Being first means that there is no previously accumulated body of econometric knowledge to draw upon, so that the results are preliminary, and in various parts of the model, tentative rough approximations. For this reason, the research strategy has been to keep the specification of the equations as simple as possible, in order that the process of testing different formulations of the equations may begin. When this 2 exploratory phase is over, we may undertake to refine the structure of the model. The intention has been to build a forecasting model useful to predict the quantitative value of the main macroeconomic aggregate variables one or two years into the future. The model contains as much detail as the data permitted and was considered useful for users of the forecasts. In its present form, the model is useful to make ex ante forecasts of the future values of GDP and its components under sets of alternative assumptions about the values of the exogenous variables, which include both policy instruments and noncontrolable variables. Chapter II presents a description of the Panamanian economy from 1950 to 1972. Chapter III presents some results from the literature on the question of how well does the economic theory on stabiliza­ tion apply to the different conditions of the LDC's. Chapter IV mwaeanfc fkA + + nf fkA mnXal Chanfc* \/ presents some model simulations and multiplier analyses. And finally, chapter VI presents the conclusions and recommendations of the study. 3 CHAPTER II. THE PANAMANIAN ECONOMY This chapter offers a brief description of the Panamanian economy. It discusses a number of characteristics which are peculiar to Panama, and essential to understand the course of its development. The central theme is the small size of the economy. It interacts with the lack of resources and the influence of geography to shape the economic development of Panama. The topics mentioned are listed below: 1. Small size of the economy. This is discussed in terms of the small area, small population and small GDP (Gross Domestic Product). 2. Very open economy. This is discussed as being due to the small size of the economy. 3. Limited productive capacity. This is discussed as being partially due to the small size of the economy with its more limited natural resource endowment, and also in terms of the poverty of human resources due to history and past policy. Finally, the effect of inter­ national relations is also mentioned. 4. Existence of special institutional arrangements. This is explained as the result of geography and inter­ national politics. 5. Results of economic growth during the sample period. This is analyzed in terms of the structural changes 4 which occurred in the economy as a consequence of the process of economic growth during the 1950 to 1970 period. 6. The dual economy: the two Panamas. This is analyzed as the result of the process of economic growth discussed in five above, which did not change all structural aspects of the Panamanian economy. The Effect of Geography The special geographic location of Panama has exerted consider­ able influence upon its economic structure and development. Since the early sixteenth century, the isthmus has been the crossroads for trade and communication routes linking the Atlantic and Pacific oceans. Panama's geography fostered the development of trade, commerce and services. Also, the lack of population, the poor quality of agricultural land, the unhealthy climate, and the poverty of mineral resources, prevented the development of agriculture and industry. Thus it can be said that Panama's natural resource is its geography. In the fourth decade of the eighteenth century, British and Dutch piracy forced the Spaniards to abandon the Panama route. The impact of this measure on the economy of Panama was disastrous. The exodus of population was so great that the Spanish Government had to forbid emigration in order to prevent the depopulation of the isthmus. 5 The following century was one of decay and stagnation. It lasted until the discovery of gold in California, which created a new demand for transporation across the isthmus. The American-built Panama Railroad across the isthmus was completed in 1855. The boom lasted until 1869, when the American intercontinental railroad was completed, providing an alternative route to the U.S. west coast. There followed another ten years of economic depression, which lasted until the beginning of the French attempt to build a canal through Panama. After the French failure, the U.S. began negotiations with Colombia to obtain the concession to build a canal.