Is Panama Taking Off for Good?

Panama-City-SkylinePanama was formed as an independent nation in 1903, by a separation from Colombia. Since then until 2009 Panama had been a typical underdeveloped nation, basically characterized by mediocre government management.

On July 1st of 2009, Ricardo Martinelli was sworn in as Panama’s president; his term expires shortly, next June 30.

The transformations that president Martinelli made to the Panamanian society during the past five years as head of that Central American nation converted it from a sleep economy, into a roaring one.

Taking the Panama Canal’s expansion program as the initial platform, Panama has been able to successfully transit an important part of its economy to banking, services, medical tourism, and rising commerce. Panama has also increasingly become a very attractive country to set-up regional offices of large multinational companies.

Panama has a population of 3.6 million (90th in the world), a total area of 75,420 sq. km. (118th in the world), a total GDP of  US $61.5 billion (90th in the world), and a GDP per capita of US $16,500 (81st in the world).

Panama is an excellent example of a relatively tiny nation that has been recently moving smartly along the lines of its basic competitive advantages.

Irrespective of its tiny size, Panama’s average growth rate during the past three calendar years was a whopping 9.66% (10.8%, 10.7%, and 7.5%, for 2011, 2012 and 2013, respectively).

Within Latin America, Panama’s $16,500 GDP per capita (2013) places it 14% below Chile’s and a notch below Uruguay’s; looking in the opposite direction, Panama’s per capita GDP is a notch above Puerto Rico’s and 6% above Mexico’s. So, the way things stand today, if current trends were extrapolated forward, the first two Latin American nations to achieve full developed status in the years ahead would be Chile and Panama.

During the five years of Martinelli’s administration Panama’s extreme poverty levels were reduced from 38% to 29%. Still very high, albeit a remarkable improvement in such a relatively short period, five years.

In Panama, the demand for workers is so high that even a relatively large dislocation of workers —just a few weeks ago, around 9,000 workers were fired from the Panama Canal’s expansion project—  did not destabilize the economy because they were quickly absorbed and placed in other jobs. The firing of those workers was brought about by a controversy between the subcontractors; currently the case is being disputed in court. Thankfully, the expansion works have already resumed, one month after being suspended.

Hence, time and time again history has proved that although a substantial critical mass can be an advantage for an accelerated pace of development (China’s case), the lack of it is a factor that, with the right government policies and initiatives, can be easily overcome.

It is almost a certainty that, among others, Martinelli was inspired for the design and execution of his strategy by the Four Asian Tigers’ near miraculous turnarounds from rags to riches in less than three decades by the end of last century.

How did Martinelli achieve such a dramatic injection of vitality and growth in Panama?

With the classical recipe, a-la-Singapore: mainly through heavy investment in public infrastructure, opening-up the economy, and removing the major obstacles that hamper growth.

Martinelli lacked previous government experience. He did have though, a good trajectory as a businessman; as a supermarket tycoon, with around 10,0000 employees under his umbrella. In no way am I suggesting that this is a guaranteed recipe for success. It is not. The are innumerable examples of former businessmen and/or corporate officers who have failed miserably when being elected Presidents or Prime Ministers, like president Vicente Fox (2000-2006) in Mexico. Thus, although Martinelli’s experience in business surely was of great help, to be able to achieve such dramatic results in a relatively short time requires many additional attributes which, unfortunately, are in short supply.

Behind major success, as has been Panama’s economic case under Martinelli, there is a state of mind, a different mind frame than the one prevailing for decades (generations, in most cases). It is about leadership, statesmanship, about wise, well implemented profound structural change that unleashes the creative potential and productivity of a lagging society.

A break with the past in many aspects is a must. Martinelli has recently stated “We Panamanians are the Phoenicians, the new Phoenicians of the modern world”.

Martinelli has proved to be a master student of history and of the true foundations of sound economics.

In Panama’s case —like practically everywhere else that this has happened— such a great break with the past is essentially the work, vision, and determination of a single person, the outgoing president Martinelli. Hence, it can be done. Moreover, such a constructive break with a mediocre past should be done everywhere, most particularly starting with the poorest nations on earth.

In the political front, Martinelli has been a vocal, unwavering critic of the many atrocities and extremely poor government policies pursued by Venezuela, Ecuador, and Argentina. That did not gain him many friends, particularly among the abundant populist media in Latin America.

Not all of Martinelli’s efforts were addressed in the right direction. After all, he is only human.

  • Martinelli unsuccessfully tried to change the constitution to extend his stay in office.
  • Likewise, he was also behind his wife’s candidacy for Vice President of Panama, which  surprisingly resulted in a losing ticket.

By itself, the first point did not necessarily entail poor judgement. However, when combined with his wife running for the Vice Presidency —fortunately in a failed ticket—, the mere appearance of nepotism is utterly unacceptable, suggesting Martinelli’s obsessive attachment to power, with all the vicious consequences inherent to it.

In the economic front though, the cause/effect relationship in Panama’s case (like in all other virtuous transformations) is so evident that it can almost be touched.

Life is an open book, an encyclopedia. Thus, we have to learn to learn from it. That’s wisdom. Most fortunately, as Panama’s example proves it, this critical learning process is alive and well, albeit far from running at full steam. Read more on Why are most of the world’s nations socially and economically underdeveloped?.

Aside from Martinelli’s notorious attachment to political power, it is very encouraging and gratifying to witness the work, vision and execution of a government leader like him, injecting such a powerful dynamism into an otherwise rather ordinary country.

There is no substitute for good (preferably great) management.

Juan Carlos Varela, the winning candidate in the recent presidential elections, is programmed to take office next July 1st, for a five-year term. Varela has been part of Martinelli’s administration during most of it. First as the Foreign Secretary, and later on as Vice President. To Varela’s credit, he turned sour on Martinelli when the later intentions to place his wife in his protege’s ticket to the presidency transpired.

Infrastructure investment in Panama has not kept pace with economic growth: electricity and water are rationed in the tallest buildings; the sewage system easily overflows when raining, among other pending tasks. As a result, there is a fair risk the economy can overheat, if it has not already done so.

Assuming the previous aspects are appropriately dealt with, and if Varela sticks to the essence of Martinelli’s economic agenda, in addition to adding his personal touch for improving it (for instance by demonstrating to be an effective fighter against corruption —the backbone of his presidential campaign), Panama could become a bright star in the world.

Panama is not that far from becoming another role model country, a living example of what really works in economics and society.

The key behind this turbocharged growth possibility for decades to come lies in consolidating the good work, and strengthening institutions, transforming it into state policy. Varela has the great opportunity to do so.

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About Martin Marmolejo

Global Investment Manager | Founder & Managing Director at MMA Global Investment Management | Proud husband and father | Follow me @globalmarmolejo.

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