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In its recent special on Latin America, The Economist notes that “Panama, which has embarked on a $5.25 billion scheme to expand its canal, has a chance of becoming a Singapore-style entrepot for Latin America.”  Back in May, after Panama’s sovereign debt received a coveted investment grade rating by both Fitch and S&P, a Reuters piece observed that the country, with a population of roughly 3.4 million, was drawing an increasing amount of attention from multinational companies attracted to its low taxes, easy immigration and flexible labor laws, and plethora of available land.  “While foreign investors put only about $500 million a year into Panama in the 1990s, the country attracted $8.6 billion between 2006 and 2009, according to government and U.N. data,” the article reported.  And while tourism, construction and a growing financial services sector have all benefited, the canal (currently a transit point to 4 percent of global trade) remains central to the state’s dream of transforming itself into a high-margin goods and services exporter.  The expansion of the canal will be complete in 2014, per officials, after which time the state will spend another $13.6 billion on infrastructure and social programs over the ensuing four years.

That said, structural economic and social problems remain not only in Panama, but across Latin America in general that should cause investors to at least pause.  For instance, while capital stock accumulation is one of the central pillars (along with total factor productivity) to the long run success of growth in GDP/capita and productivity, the World Bank’s Jordan Schwartz points out that as a whole, “counting both private and public sources, investment in infrastructure [in the region] totals only around 2-3% of GDP, of which a third is in energy and much of the rest in transport.”  Latin American countries, Mr Schwartz concludes, “need to invest twice as much if poor infrastructure is not to hold back growth.”  Furthermore, The Economist wrote, per the Gini coefficient (a measure of inequality), income distribution in Latin America has continued to fall since the 1990s but “remains the most unequal in any continent.”  In Panama, for example, “while the economy has been growing at breakneck speed, the poverty rate only dropped from 36.8 percent to 32.7 percent between 2003 and 2008.”  And while the government is creating “ad hoc feeder programs” for foreign companies who value not just cheap labor but cheap and at least somewhat skilled labor, its easy to see that if Singapore is the stated goal, then Panama still has a ways to go.  But given where the country was just two decades ago immediately post-Noriega, and given the region’s potential going forward, such a lofty goal deserves both praise and attention.

JGW

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