Kevin Garrahan is a 2018 graduate of the Johns Hopkins School of Advanced International Studies, where he concentrated in Latin American Studies. He is currently a consultant in Chicago.
The small nation of Panama – its society, economy, and people – is characterized by a series of dichotomies: the Panama-Colon axis compared to the exterior regions; within Special Economic Zones or outside; the successful modern services sector vs. traditional subsistence farming; high-income professionals in Panama City vs. extremely impoverished indigenous peoples in the comarcas; and, most broadly, economic growth vs. development. Following 25 years of GDP growth, Panama is at a turning point. It must simultaneously address both sides of these longstanding divides.
In keeping with this line of thinking, the solution also relies on a dual approach. Panama should further its industrial policies both “in the small” to support current comparative advantages and “in the large” to facilitate the creation of new ones. New policies, then, will continue to advance the competitive services sectors where Panama has excelled but also branch out to support economic transformations in the agricultural and industrial sectors. Pushing this dual industrial policy approach forward will create new engines of growth and bring the broader population into the folds of Panama’s success story.
Industrial Policy in Panama
Current Policy Assessment
Industrial policy in Panama to date has effectively focused on investment and the country’s comparative advantages stemming from its geographic location. First, it has utilized three key Special Economic Zones (SEZs) that offer a range of tax, tariff, trade, and, notably, labor incentives. (See Figure 1 for policy details.) While most businesses in Panama cannot have more than 10% of their workforce comprised of foreign workers, firms within the SEZs are exempt from this cap. Hausmann, et. al., explain that this a key feature driving growth and higher productivity in the SEZs. Higher-skilled immigrant workers fill roles that few Panamanians are currently qualified for, a result of domestic “skill-scarcity,” especially in the upper tiers of the modern services sector. This, in turn, helps employ greater numbers of Panamanians in mid- and lower-levels within the firm and, surprisingly, more high-skilled foreign workers actually boost wages for the native workers. Furthermore, when the productive firm is allowed to grow and succeed, it and its employees demand greater goods and services, including construction, that support low-skilled Panamanians. Thus, even though SEZs don’t actually account for the majority of FDI, and their direct employment gains are somewhat limited, SEZs should be considered a successful industrial policy for Panama. One obvious limitation, though, is that SEZs are place-based industrial policies “in the small” whose benefits are specifically constrained to certain areas.
Figure 1: Panama’s Special Economic Zones and SEM Laws
Source: “Appraising the Economic Potential of Panama: Policy Recommendations for Sustainable and Inclusive Growth”
On the other hand, the Multinational Corporation Headquarters SEM law is not technically place-based, but its benefits are expectedly concentrated in the Colon-Panama axis, as well. This 2007 law also includes tax and critical labor law exemptions and incentives, including the removal of the foreign worker cap and visas for executives and their families (at least while they’re employed with the firm). The government has supported 140+ Multinational Companies (MNC) in locating regional offices in Panama, including 20 new ones last year, and boasts high-profile firms from across different industries. The law seems to have notably shifted FDI’s sole focus from shipping and logistics, and expanded it into electronics, cars, airplanes, and retail, for example. These varied, advanced firms are “bringing new collective know-how and upgrading the country’s skills,” important objectives of any industrial policy. That said, the know-how is concentrated within the MNCs and, if not solely there, certainly within the highly-developed regions. The “in the small” SEZ and SEM policies have leveraged Panama’s existing advantages well, but have not fostered opportunity elsewhere in the country. Overall, they “have been instrumental to Panama’s accelerated expansion,” but have simultaneously contributed to the country’s dual trajectories.
In the past ten years, most of the government’s new upgrading efforts have focused on key infrastructure investments. While this includes the massive $5.3 billion Canal expansion, another instance of resources concentrated on the Colon-Panama axis, it also includes work to expand and improve the Tocumen airport. Tocumen airport has become a regional hub for both cargo and passengers, and it has furthered the iterative upgrading of the flag carrying-airline, Copa Airlines. Lufthansa, which recently located in Panama under the SEM law, cited the airline’s “extensive network and high-quality services” as a key reason for its move, along with the country’s increased tourism and MNC activity. Clearly these two large undertakings, and related support in logistics, have improved Panama’s connections with the outside world; the country leads Latin America in overall quality of infrastructure, air transport, port quality, and on the World Bank’s Logistics Performance Index, and it ranks in the top five or ten in the world across them, as well. This is no small feat for a small country with limited resources.
Yet infrastructure is another example of Panama’s dichotomous development. Internally, investments have largely gone towards the Metro expansion in Panama City and new transmission lines in Colon, while the outer regions severely lag in transportation, energy, and, importantly, information and communication technology (ICT) infrastructure. Future infrastructure investment, which has been led by public spending buoyed by an investment grade rating for the government, should seek to leverage greater private financing, and it will have to include a twin focus on furthering Panama’s connections both without and within.
Overall, Panama’s targeted industrial policies have notably played to the country’s relative strengths. Plenty of countries fail to get this right, ignoring their current opportunities for upgrading and growth. That said, Panama’s more intrinsic advantages won’t likely produce the new economic drivers the country needs in the medium to long-term. In order to build and further those new drivers, Panama needs to develop and implement industrial policies “in the large.”
New potential policies in Panama should, in keeping with the approach, proceed along a dual track – one supporting the further development of the services sector and another seeking productive upgrading in the provinces. (See Figure 2 for a map of the provinces.) The first track will mostly be industrial policy “in the small” focused on existing strengths, and it will include updates and expansions to the policies discussed above. The second will be newer ground for Panama, utilizing its public-private partnerships (PPPs) and implementing agencies to spur new comparative advantages – what’s known as industrial policy “in the large.” They will work together to “light up” paths to agricultural and industrial upgrades, emphasizing productivity, diversification, and especially focusing outside of the high-growth areas. While this should occur through a tailored, on-the-ground process with those organizations, a few sectors have been highlighted for places like Chiriqui, Darien, and the broader Colon province to advance.
Figure 2: Panama’s Provinces
The services sector is the key engine of the Panamanian economy, accounting for some 70% of GDP growth since 2000. Service sector growth must be continued and advanced, especially in modern sectors like logistics and business services. To do so, the government should build on its current industrial policies and seek to expand their positive impact. This first means further reforming the foreign labor rules for the entire country, not just the SEZs and MNCs. This is the key recommendation by Hausmann, et. al., as it would remove barriers for the services firms, and therefore amplify the growth chain discussed above. Again, immigrant workers don’t compete with Panamanians; they complement them, boost their wages, and create positive spillovers for the broader economy. While increased education and training efforts for Panamanians are notable and should be expanded, Panamanians themselves simply won’t be able to meet the demanded supply of high-skilled workers in the coming years. What’s more, Panama has shown that it is capable of leveraging foreign know-how for domestic upgrading, as exemplified by the Panama Canal Authority and the financial services industry. Specifically, this entails removing or adjusting the foreign worker cap and scrapping the restricted occupations list. Foreigners are banned from working in dozens of fields, which prevents learning and development. Those with degrees in agricultural sciences, for instance, have been prohibited in Panama since 1961, even though other countries (including in the region, i.e. Brazil) have made remarkable advances in productivity in the sector since then. These reforms should be broad, national-based changes, as both the services-dominated areas and the outer provinces could benefit from the infusion of high-skilled labor.
There are other limited industrial policies Panama should pursue to support its strong services sector. These include further infrastructure improvements, as noted, and especially the continued effort to develop a public-private partnership framework for investment in the sector. It also means new efforts at cutting red tape and corruption everywhere. One of the most important features of the “One Stop Shop” in the Panama-Pacifico SEZ is that it is designed to mitigate these issues, as they can be very burdensome to businesses operating outside of the zone. Perhaps even more important, though, are the drastically improved innovation and technological development efforts. Changes entail adjusting the City of Knowledge SEZ requirements and incentives around R&D and commercialization, and the improved implementation by SENACYT, the science and technology agency, of various R&D, start-up and modernization funding. As the OECD notes, Panama needs to boost domestic value-added across the board – in services exports, as well as in agriculture and industry – and new, expanded innovation efforts are the key to success.
While these upgrades and broader reforms will give the highly-developed services sector the support it needs to further grow, direct state intervention – classic industrial policy “in the large” – is required to advance Panama’s backward agriculture and nascent industry. These interventions will be carried out at the direction of the National Center for Competitiveness (CNC), as the “brain” of industrial policy, and with a reinvigorated investment promotion agency, Proinvex, and SENACYT as implementing mechanisms. Each particular region has its own set of capabilities and opportunities. Chiriqui has a small industrial base to work from, meaning policy could remedy coordination failures and provide public goods. The CNC, in fact, has recommended steps along these lines. The Harvard analysis highlights aquiculture processing and construction materials manufacturing as two potentials fields, which is supported by CAF research, as well. For Darien, one of the least developed provinces in the country, policy will have to support “jump[ing] into new activities that lie relatively far from the current ones in place.” Further, according to the Hausman, et. al. work, “foodstuffs processing, dairy, and ice cream stand out as products with an attractive combination of complexity, strength in Panama, and global market opportunities.” Public funding for skills and facilities development, as well as the expanded investment and export promotion of Proinvex, will be critical to realizing these new opportunities. The precise barriers to sector development and policy solutions should, again, be specifically developed by the CNC and others. As has been evidenced in practice and theory, even industrial policy “in the large” is not about picking winners ex-ante and hoping for the best. On a national scale, new industrial policies will have to “pump up” agriculture and industry in Panama in order to expand beyond its static comparative advantages.
Panama is at a turning point. It has been an economic success story in the LAC region, with leading growth rates, high investment and FDI, a modern services sector, and quality infrastructure. Its “in the small” policies have expanded upon the country’s existing strengths to achieve these gains, but they alone will not create sustainable growth and development in the next phase of the country’s trajectory. For that, Panama needs to initiate a wave of transformative “in the large” interventions. These expanded efforts will promote the current economic star, services, and kick start new growth sectors across the country. From the Canal to the comarcas, industrial policies will bring all of Panama along the path towards convergence in the coming years.
 Devlin, Robert and Graciela Moguillansky, Breeding Latin American Tigers, ECLAC and World Bank, 2011, 11.
 Hausman, Ricardo, Miguel Angel Santos, and Juan Obach, “Appraising the Economic Potential of Panama: Policy Recommendations for Sustainable and Inclusive Growth,” Center for International Development at Harvard University, 21, https://growthlab.cid.harvard.edu/files/growthlab/files/panama_policy_wp_334.pdf?m=1500670319.
 “Economic Potential of Panama,” 21.
 “Economic Potential of Panama,” 17-18.
 Fabrega Molino, “Multinational Corporation Headquarters (“SEM”),” http://fmm.com.pa/multinational-corporation-headquarters-sem-2/?utm_source=Mondaq&utm_medium=syndication&utm_campaign=View-Original.
 “Economic Potential of Panama,” 29.
 Felipe Bonifatti, Lufthansa, “Why Panama?” Panama 2017, The Business Year, https://www.thebusinessyear.com/panama-2017/why-panama/forum.
 “Proinvex Panama: The Great Connection,” http://proinvex.mici.gob.pa/downloads# .
 “Economic Potential of Panama,” 5.
 Latin American Tigers, 111.
 Consejo de la Concertaction Nacional para el Desarrollo, “Panama 2030,” 40, translated by the author, http://www.concertacion.org.pa/tmp/file/333/PEN2030_ES_Web.pdf.
 Hausman, Ricardo, Luis Espinonza, and Miguel Angel Santos, “Shifting Gears: A Growth Diagnostic of Panama,” Center for International Development at Harvard University, 52, https://growthlab.cid.harvard.edu/files/growthlab/files/panama_growth_diagnostics_wp_325.pdf?m=1485393593
 “Economic Potential of Panama,” 24.
 “Shifting Gears,” 52.
 “Economic Potential of Panama,” 25.
 “Multi-dimensional Review of Panama: Volume 1. Initial Assessment,” OECD, 2017, 79, https://www.oecd-ilibrary.org/docserver/9789264278547-en.pdf?expires=1526504672&id=id&accname=ocid53025068&checksum=488F8B45AFD76FB647A7679B005DA4E6.
 “Agenda de Acción: 2017-2018,” El Centro Nacional de Competitividad, 2017, http://www.cncpanama.org/cnc/index.php/2014-09-04-17-08-52/category/177-agenda-de-accion-2017-2018.
 “Economic Potential of Panama,” 36.
 “Economic Potential of Panama,” 38.
 “Economic Potential of Panama,” 38.
 Latin American Tigers, 236.