97719 Panama Locking in Success Systematic Country Diagnostic Friederike (Fritzi) Koehler-Geib Kinnon Scott Ayat Soliman J. Humberto Lopez Panama Locking in Success Friederike (Fritzi) Koehler-Geib, Kinnon Scott, Ayat Soliman, J. Humberto Lopez © 2015 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 18 17 16 15 This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Contents Foreword. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi About the Authors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Abbreviations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 The Nature of Growth in Panama. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Inclusion and Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Sustainability: Economic, Social, and Environmental. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Priority Areas and Complementarities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Knowledge Gaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1. Poverty and Shared Prosperity in Panama . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 The Nature of Panama’s Economic Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 2.  The Canal and Trends in World Trade. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 The Impact of the Canal on Growth in Specific Sectors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 The Increasing Role of Public Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 FDI and Private Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Panama’s Stable Macroeconomic Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Outlook. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Filling Knowledge Gaps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 3. Prioritization Linked to Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Benchmarking the Determinants of Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Priority Areas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Identified Opportunities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Filling Knowledge Gaps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 4. Inclusiveness of Panama’s Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Positive Trends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Limitations of Growth’s Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 iii Drivers of Poverty Reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 5. Prioritization Linked to Inclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Benchmarking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Priority Area. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Identified Opportunities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Filling Knowledge Gaps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 6. Sustainability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 Economic Sustainability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 Social Sustainability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Environmental Sustainability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 7. Prioritization Linked to Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 Benchmarking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 Priority Area. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 Identified Opportunities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 Filling Knowledge Gaps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 8. Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 Note. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 Appendix A: Definition of Peer Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 Structural Peers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 Aspirational Peers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 Other Peers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 Note. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 Appendix B: Matrixes of Identified Opportunities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 Appendix C:  Comparison Between ACP and ANAM Water Resources Management Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 iv Contents Boxes 1.1 Indigenous Peoples Demographics and Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.1 Regional Integration in Central America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 3.1 Institutional Challenges of the Energy Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 4.1 How Institutional Challenges Affect Service Delivery in the WSS Sector . . . . . . . . . . . . 72 5.1 Main Areas of Action for the DIPORP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 7.1 La Purisima. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 Figures 1.1 Panama’s Poverty Rates, 2007–2012 (Percent, National Poverty Line). . . . . . . . . . . . . . . . 9 1.2 Poverty in LAC and Panama, 2007–2012 (Percent, International Poverty Line). . . . . . . . 9 1.3 Middle Class in Panama and LAC, 2007–2012 (Percent, International Poverty Line). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1.4 Urban and Rural Extreme Poverty in Panama, 2007–2012 (Percent, National Poverty Line). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 B1.1 Population by Province and Comarca . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1.5 Shared Prosperity in LAC, 2007–2012 (Annualized Growth Rate of Income for the Poorest 40% and the Overall Population). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1.6 Shared Prosperity Across the Country (Mean Income Growth, Percent). . . . . . . . . . . . . 13 1.7 Panama’s GDP Per Capita as a Share of U.S. Versus Latin America (Percent, Constant 2005 US$). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 1.8 Real GDP Growth in Panama and Its Peer Countries 2001–2013 (Percent Change). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 1.9 Gini Coefficient in Panama and LAC, 2007–2012 (Index). . . . . . . . . . . . . . . . . . . . . . . . . 16 1.10 Datt-Ravallion Decomposition of Poverty (Percent). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 1.11 Movements Out of Poverty (Percent). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 1.12 Changes in Poverty Status by Original Characteristic (Percent) . . . . . . . . . . . . . . . . . . . . 17 1.13 Employment Creation in Panama Between 2001 and 2013 Versus Its Peers (Percent Change). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 1.14 Job Creation by Education Level (Total Number of Jobs). . . . . . . . . . . . . . . . . . . . . . . . . . 19 1.15 Panama’s Social Spending by Sector (Percent of GDP). . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 1.16 Growth Versus Volatility in Panama and Its Peer Countries, 2001–2013 (Average Percent Change). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 2.1 Panama’s Trade Openness Compared to Its Peer Countries, as Measured by the Share of Exports and Imports of Goods and Services in GDP (Percent of GDP). . . . . . 23 2.2 Contribution of Aggregate Demand Factors to Economic Growth from 1947 to 2013 (Percentage Points). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 2.3 Transport and Communication Share of GDP and GDP Growth (Percent, Growth Index 1950=100). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 2.4 Panama-U.S. Growth Differential (Percentage Points, Panama GDP pc Growth Minus U.S. pc growth p.p.) and Inflation Differential. . . . . . . . . . . . . . . . . . . . . . 26 Contents v 2.5 Panama Canal Revenues, Commodity Index, and World Trade, 2000–2013 (Nominal Index, 2000=10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 2.6 Transport Infrastructure in the Canal Zone. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 2.7 Logistic Performance Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 2.8 Logistic Performance Index by Components. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 2.9 Line Shipping Connectivity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 2.10 Sectoral Contributions to GDP Growth from 1947 to 2013 (Percentage Points) . . . . . . 32 2.11 Employment by Sector and Education Level, 2012 (Total Number). . . . . . . . . . . . . . . . . 34 2.12 Current Account Deficit and FDI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 2.13 Real GDP Growth and FDI, 1980–2012 (Percent Change). . . . . . . . . . . . . . . . . . . . . . . . . 36 2.14 Savings versus Investment, 1980–2013 (Percent of GDP). . . . . . . . . . . . . . . . . . . . . . . . . . 37 2.15 FDI by Economic Activity, 2010–2012 (Share of Total FDI). . . . . . . . . . . . . . . . . . . . . . . . 37 2.16 Imports of Goods and Services, 1996–2003 (Share of GDP). . . . . . . . . . . . . . . . . . . . . . . 38 2.17 Exports of Goods and Services, 1996–2013 (Share of GDP) . . . . . . . . . . . . . . . . . . . . . . . 38 2.18 Factors Contribution to GDP Growth, 1971–2012 (Percentage Points). . . . . . . . . . . . . . 39 2.19 Labor Productivity by Economic Activity (Dollars of 1996) . . . . . . . . . . . . . . . . . . . . . . . 39 3.1 Stabilization and Structural Policies Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 3.2 Enrollment Rates by Level, 1990–2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 3.3 Top Ten Business Environment Complaints. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 3.4 Educational Attainment Among Immigrants in the Labor Force, 2010 (By Country of Birth). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 3.5 PISA 2009 Mathematics Mean Score (By Country for 15-Year-Old Students and GDP Per Capita) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 3.6 Panama’s Institutional Quality in International Comparison. . . . . . . . . . . . . . . . . . . . . . . 53 3.7 Panama’s Efficiency of Legal Framework in International Comparison. . . . . . . . . . . . . . 54 B3.1 Institutional Challenges of the Energy Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 4.1 Annualized Growth Incidence Curve, 2007–2012 (Constant Prices of 2002). . . . . . . . . 61 4.2 Night Lights in Panama, 1997 and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 4.3 The Rise of the Middle Class. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 4.4 Gini Coefficient by Area, 2007–2012 (Index). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 4.5 Percent of the Population with Access to Basic Services, 1990–2012 . . . . . . . . . . . . . . . . 64 4.6 Changes in Overall Poverty Rates by Geographic Area, 2007–2012. . . . . . . . . . . . . . . . . 64 4.7 Poverty Rates by Province and Comarca, 2012 (Percent). . . . . . . . . . . . . . . . . . . . . . . . . . 65 4.8 Changes in Geographic Concentration of the Extreme Poor. . . . . . . . . . . . . . . . . . . . . . . 65 4.9 Destination of Internal Migrants Between 2000 and 2010 (Percent). . . . . . . . . . . . . . . . . 66 4.10 Educational Attainment of Internal Migrants, 2010 (By Ethnicity, Percent). . . . . . . . . . 67 4.11 Unemployment Rates (Open and Broad), by Migration Status and Ethnicity, 2010 (Percent). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 4.12 Characteristics of the Poor, by Geographic Area. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 4.13 Characteristics of the Extremely Poor, by Geographic Area. . . . . . . . . . . . . . . . . . . . . . . . 69 4.14 Change in Access to Piped Water in the Dwelling, 2000–2010 . . . . . . . . . . . . . . . . . . . . . 71 4.15 Change in Access to Sewage Connection in the Dwelling, 2000–2010. . . . . . . . . . . . . . . 71 vi Contents B4.1 WSS Sector Institutional Framework Diagram. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 4.16 Access to Running Water in the Dwelling by Concentrations of Indigenous Peoples. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 4.17 Contribution of Different Income Sources to Changes in Overall Poverty, 2007–2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 4.18 Contribution of Different Income Sources to Changes in Extreme Poverty, 2007–2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 4.19 Net Number of Jobs Created by Geographic Area, 2000–2010 . . . . . . . . . . . . . . . . . . . . . 76 4.20 Net Number of New Jobs by Education Level and Geographic Area, 2000–2010. . . . . . 77 4.21 Sector of Employment in 2010, Migrants by Ethnicity and Destination (Percent). . . . . 77 4.22 Contributory and Non-Contributory Pension Coverage, 2007 and 2012. . . . . . . . . . . . . 80 4.23 Distribution of Benefits (Leakage), 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 5.1 Panama’s Poverty Rate Compared to Peers (US$4 Per Day Poverty Line). . . . . . . . . . . . 84 5.2 Share of Population and Extremely Poor by Area, 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . 84 5.3 Access to Basic Services by Ethnicity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 6.1 Homicide Rates (per 100,000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 6.2 Critical Problems Facing Panama (In Order of Importance). . . . . . . . . . . . . . . . . . . . . . . 97 Tables ES.1 Priority Areas and Opportunities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.1 Panama Canal Traffic by Type of Cargo. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 3.1 Top Obstacles to Growth (As Reported by Firms). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 3.2 Synthesis on Process to Benchmark Priority Areas for Growth. . . . . . . . . . . . . . . . . . . . . 49 4.1 Health Indicators. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 4.2 Basic Characteristics of the Population by Ethnicity, 2010. . . . . . . . . . . . . . . . . . . . . . . . . 70 A.1 Panama’s Structural Peers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 A.2 Panama’s Aspirational Peers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 Contents vii Foreword Panama’s economic performance has infrastructure, as a complement to private been stellar over the past decade, and the investment. And this operating in a stable country has achieved remarkable progress and sustainable macroeconomic framework. in reducing poverty and increasing shared Of these public projects, probably the best prosperity. Panama’s growth since 2001 was known is the expansion of the Panama more than double the average of the Latin Canal, expected to start operating in 2016. American and Caribbean region and its rate It is intended to double the capacity of the of poverty reduction was greater than the re- Canal accommodating post-Panamax ships. gional average. Only Bolivia saw greater im- This in turn is expected to act as a catalyst of provement in shared prosperity, as measured new activities exploiting the opportunities of by the growth of the income of the bottom the country as a logistic hub. forty percent of the population, than Panama. The second message is that even countries The rise of the middle class, seen in many as successful as Panama, have areas that re- countries in the region, was particularly quire careful thought and where the World marked in Panama and there has been an Bank can be a partner. In Panama, for exam- overall decline in inequality. ple, growth has not been enough to elimi- This outstanding success, is the focus of nate existing inequities in the country. For the World Bank’s latest report on Panama, example, the Indigenous Peoples living in Panama: Locking in Success—A Systematic semi-autonomous provinces (comarcas) and Country Diagnostic. Building on the exper- groups living in remote rural areas suffer tise of World Bank staff on economic, social, from higher poverty levels than the rest of and environmental topics this reports pro- the country. Significant gaps in access to vides an in-depth look at the nature of the basic services remain despite improvements country’s growth, the extent to which this across the country. Ensuring that all popula- growth benefited all members of the society, tion groups in the country benefit from and the sustainability of the development growth and have equal opportunities is a model. As such, Panama: Locking in Success highly relevant agenda going forward. Based has served as the analytic underpinning of on a large array of analytical approaches, and the first of the World Bank’s new County consultations with country stakeholders and Partnership Frameworks. experts, Panama: Locking in Success identi- There are two main messages that I take fies five priority areas for policy attention from this report. The first one is that there needed to sustain Panama’s development are many lessons that can be learnt from successes which include education and skills Panama, for example, regarding the way mismatches, an inefficient energy sector, successive administrations have stressed ­ public sector institutions, Indigenous the role of public investment, particularly Peoples, and water management. ix The goal of this report is to contribute foster further investigation and promote a to the public debate around Panama’s chal- deeper policy debate. I am sure that the pres- lenges and opportunities. By having synthe- ent report can contribute to Panama’s bright sized a substantial amount of the existing future. research on Panama and generating new analyses, the report brings this knowledge to Jorge Familiar a broader public. At the same time, the sys- Vice President for Latin America tematic and comprehensive effort to identify and the Caribbean priority areas for the future can serve to The World Bank x Foreword Acknowledgments We would like to thank the members of (Environment and Natural Resources); Ana the World Bank Group Panama Country Fiorella Carvajal and Rekha Reddy (Finance Team from all Global Practices and the and Markets); Ashruf Mohammad Megahed International Finance Corporation (IFC), as (Global Partnerships); Diego R. Dorado well as all the partners and stakeholders in Hernandez, Francisco Lazzaro, and Svetlana Panama, who have contributed to the prepa- I. Proskurovska (Governance); Carmen ration of this document in a collaborative Carpio and Christine Lao Pena (Health, process. We are very grateful for their gener- Nutrition, and Population); Angela M. osity in providing us with substantive inputs, Fonseca Arango, Eduardo Wallentin, Gabriel knowledge, and advice, particularly given B. Goldschmidt, Irene Arias, Luv Jhangimal the time limitations. Khemchand, and Sofia Stefanelli (IFC); The following people provided substantive Jaime R. de Pinies Bianchi and Daniel inputs and guidance: Frank Sader, Louise J. Lederman (Latin America and the Cord, Auguste Tano Kouame, Maryanne Caribbean [LAC] Chief Economist’s Office); Sharp, Oscar Calvo-Gonzalez, and Kathy A. Jennifer Keller, Diana M. Lachy Castillo, Lindert. The authors received invaluable Edgardo Favaro, Miguel Angel Saldarriaga comments from the peer reviewers Pablo Noel, Rong Qian, Silvia Gulino, and Susana Fajnzylber, David Gould, and Jennifer J. M. Sanchez (Macroeconomics and Fiscal Sara. Management); Mateo Salazar Rodriguez, The following people—from various Liliana Sousa, and Bernarda Erazo (Poverty); Country Management Units (CMUs), Global Edmundo Murrugarra, Emma M. Monsalve Practice Areas, Cross-Cutting Solution Montiel, and Pablo Ariel Acosta (Social Areas, and the IFC—contributed their time, Protection and Labor); Alejandro Espinosa- effort, and expertise: Irina I. Klytchnikova Wang and Jose Eduardo Gutierrez Ossio and Norman Bentley Piccioni (Agriculture); (Trade and Competitiveness); Lincoln Flor, Francisco Galrao Carneiro (Caribbean Shomik Mehndiratta, and Doyle Galegos CMU); Jovana Stojanovic, Kathy A. Lindert, (Transport and ICT); Concepcion Aisa Otin Mary Rose Parrish, Maria del Camino and Hector Ibarra Pando (Treasury); Hurtado, Oscar Calvo-Gonzalez, Anabela Armando Guzman Escobar, Agustin Maria, Abreu, Sara Paredes Ponce, Meilyn Gem, Carmen Bernardo Garcia, Catalina Michelle Mccue, Sonia Molina, and Desiree Marulanda, Dianna M. Pizarro, Kimberly Gonzales (Central America CMU); Luiz T. Vilar, Yoonhee Kim, Luis-Felipe Dulchicela, A. Maurer (Climate Change); Rita Almeida and Ramon Anria (Urban, Rural, and Social (Education); Fernando Javier Anaya Development); and Antonio M. Rodriguez Amenabar, Javier Aguilar, Mark Lambrides, Serrano, Carmen Rosa Yee-Batista, Charles and Susana Moreira (Energy and Delfieux, Elvira Cusiqoyllor Broeks Motta, Extractives); Carter J. Brandon, Karen I. Laura Maratou-Kolias, and Miguel Vargas Martinez Ona, and Klas Sander Ramirez (Water). xi During preliminary consultations, a broad Técnica Internacional, and Dirección de range of stakeholders provided feedback and Gestión Administrativa de Proyectos of the inputs that assisted in particular with the po- Ministry of Economy and Finance (MEF). litical economy context discussions of identi- From civil society, we thank the following fied opportunities under the focus themes. organizations: Plan de Desarrollo de Pueblos We are grateful for the participation of many Indígenas de Panama Technical and Legal organizations from Panama’s government, Experts and Mesa Indígena, representing civil society, and private sector. From the Indigenous Peoples; Alianza para el government, we thank the following: Desarrollo e Innovación de los Dirección del Sub-Sector de Agua Potable y Afropanameños y Fundación Arnold Walters Alcantarillado Sanitario (DISAPAS) and (ADINA/FAW), Sociedad de Amigos del Dirección de Planificación (DIPLAN) of the Museo Afroantillano (SAMMAP), Consejo Ministerio de Salud (MINSA); Instituto Nacional de la Etnia Negra (CONEN), and Nacional de Acueductos y Alcantarillados Comisión Nacional Contra la Discriminación Nacionales (IDAAN); Secretaría Nacional de (CNCD), representing Afro-descendants Energía (SNE); Autoridad Nacional de los groups; Asociación Nacional para la Servicios Públicos (ASEP); Ministerio de Conservación de la Naturaleza (ANCON); Comercio e Industrias (MICI); Ministerio de Centro de Estudios y Acción Social Panameño Educación (MEDUCA); Programa Red de (CEASPA); and Fundación Natura. From the Oportundidades, Programa 120 a los 65, private sector, we thank the following: Programa Ángel Guardián, and Secretaría Cámara Minera de Panama, Consejo Técnica del Gabinete Social of the Ministerio Nacional de la Empresa Privada (CONEP), de Desarrollo Social (MIDES); Dirección de Convivienda, Costa Verde, Ingeniería Carpen, Crédito Público (DdCP), Dirección de Fundación Panama Viejo, Fundación Programación de Inversiones (DPI), Dirección Amador, La Hiptecaria, Multibank, de Inversiones, Concesiones y Riesgos del Inversiones Bahía, Superintendencia de Estado (DICRE), Dirección de Análisis Bancos, Zona Libre de Colón, Manzanillo Económico y Social, Dirección de Políticas International Terminal, and Cámara Públicas (DPP), Dirección de Cooperación Marítima de Panama. xii Acknowledgments About the Authors Friederike (Fritzi) Koehler-Geib, is a Senior measurement.  Her recent work has focused Economist in the Macroeconomics and on developing the means to measure finan- Fiscal Management global practice group in cial capability in developing countries, the the Latin America Department of the World links between migration and labor outcomes Bank in Washington, DC. Her prior work in Mexico and inequality aversion among experience includes the Economic Policy the middle class in El Salvador and how this and Debt department of the PREM network might affect subsidy reform. She holds a of the World Bank, the Monetary and Ph.D from the University of Pittsburgh. Capital Markets Department (MCM) and the Research Department of the Ayat Soliman is the outgoing Program International Monetary Fund. Leader for the areas of transport, urban so- Her research interests fall in the area of cial and rural development, agriculture, international finance and international mac- ­ water and environment in the Central roeconomics. She has written articles on fi- America Department of the Latin America nancial crises, their contagion, volatility of and Carribean region. Her responsibility economic growth, fiscal policy, and asset spanned strategy and program development management and is editor of a book on the and implementation for these thematic areas Central America-Dominican Republic free- in the six countries of Central America, in trade agreement with the US. addition to coordinating multisectoral solu- She holds a PhD in Economics from tions on climate change and public private Ludwig Maximilians University (Munich) partnerships. Prior to that she led large infra- with extended research stays at Universitat structure and sustainable development pro- Pompeu Fabra (Barcelona) and two master’s grams and analytical work in Latin America, degrees from the University of St. Gallen, the Middle East and North Africa and the HEC Paris, and University of Michigan. African Nile riparian countries of the World Bank. She previously worked for the United Kinnon Scott is a Senior Economist in the Nations Development Programme, and the Poverty Global Practice in the World Bank private sector on environmental and water working in Central America and Mexico on resources management. She will be ­ assuming issues of poverty reduction, migration and her responsibilities as Practice Manager for inclusive growth.  Previously she worked Urban, Rural and Social Development and in the Research Group in the Development Resilience Global Practice for the MENA Economics Department of the World Bank. region as of July 1st, 2015. Ayat holds a BSc ­ Her research interests are broad, ranging in Mechanical Engineering and MSc in from behavioral economics, to methodologi- Environmental Engineering from the cal issues around poverty and inequality American University in Cairo. xiii J. Humberto Lopez is the Director of the publication record in diverse areas such as Central America Department of the World fiscal policy, optimal currency areas and real Bank’s Latin American Region with respon- exchange rate misalignment, armed conflict sibility for the Bank’s portfolio, lending, and development, and pro-poor growth. strategy, and dialogue for Guatemala, El He has also been the editor of three books Salvador, Honduras, Nicaragua, Costa Rica, on Free Trade Agreements, Remittances and Panama. During his years in the World and Development, and the Latin American Bank, he has occupied positions of signifi- Investment Climate, and was the lead author cant responsibility including Director for of the World Bank 2006 Latin American Economic Policy and Poverty Reduction of Flagship on growth and poverty reduction. the Latin American region; Deputy Chief of Before joining the Bank permanently, staff of the World Bank Group during the Humberto was a Professor of Economics at first year of President Jim Kim, and Manager the University of Salamanca (Spain) and a for Economic Policy and Poverty Reduction Visiting Professor at Louisiana State East Africa. Humberto has an extensive University, Baton Rouge (US). xiv About the Authors Abbreviations ACP Panama Canal Authority (Autoridad del Canal de Panama) Alianza para el Desarrollo e Innovación de los Afropanameños y Fundación ADINA/FAW  Arnold Walters ANAM National Environmental Authority ANCON Asociación Nacional para la Conservación de la Naturaleza ASEP National Authority of Public Services (Autoridad Nacional de Servicios Públicos) CBI Panamanian Centro Bancario Internacional CEASPA Centro de Estudios y Acción Social Panameño CEDLAS Center for Distributive and Social Studies CGE Computable General Equilibrium CMU Country Management Unit CNCD Comisión Nacional Contra la Discriminación CND National Dispatch Center CONEN Consejo Nacional de la Etnia Negra CONEP Consejo Nacional de la Empresa Privada DdCP Dirección de Crédito Público DICRE Dirección de Inversiones, Concesiones y Riesgos del Estado DIPLAN Dirección de Planificación DIPORP National Integrated Development Plan of the Indigenous Peoples of Panama DISAPAS  Directorate of Water and Sanitation of the Ministry of Health (Dirección del Sub-Sector de Agua Potable y Alcantarillado Sanitario) DPI Dirección de Programación de Inversiones DPP Dirección de Análisis Económico y Social, Dirección de Políticas Públicas ECLAC Economic Commission for LAC EML Encuesta de Mercado Laboral ENASSER Encuesta Nacional de Salud Sexual y Reproductiva ETESA National Electricity Transmission Company FARC Revolutionary Armed Forces of Colombia FDI Foreign Direct Investment GDP Gross Domestic Product GMM General Method of Moments IBC International Banking Center IDB Inter-American Development Bank IDAAN  National Water Supply and Sanitation Administration (Instituto Nacional de Acueductos y Alcantarillados Nacionales) IFC International Finance Corporation ILO International Labour Organization IMF International Monetary Fund xv INEC National Institute of Statistics and Census IPCC International Panel on Climate Change IRHE Institute of Water and Electrification LAC Latin America and the Caribbean LAPOP Latin American Public Opinion Project LSCI Liner Shipping Connectivity Index MAPAS Monitoring Country Progress in Water Supply and Sanitation MDG Millennium Development Goal MEDUCA Ministerio de Educación MEF Ministry of Economy and Finance MICI Ministry of Commerce and Energy (Ministerio de Comercio e Industrias) MIDES Ministerio de Desarrollo Social MINSA Ministry of Health (Ministerio de Salud) OECD Organisation for Economic Co-operation and Development PAHO Pan American Health Organization PCW Panama Canal Watershed PISA Program for International Student Assessment SAMMAP Sociedad de Amigos del Museo Afroantillano SCD Systematic Country Diagnostic SEDLAC Socio-Economic Database for Latin America and the Caribbean SEM Sedes de Empresas Multinacionales SIEPAC Sistema de Interconexión Eléctrica de los Países de América Central SNE Secretaría Nacional de Energía SSEIR Social Sector Expenditure and Institutional Review UNCTAD United Nations Conference on Trade and Development UNDP United Nations Development Program UNHR United Nations Human Rights UNODC United Nations Office on Drugs and Crime WDI World Development Indicators WBES World Bank Enterprise Surveys WEO World Economic Outlook WSS Water and Sanitation Services xvi Abbreviations Executive Summary Panama has made significant prog- sustainable is the growth and, more generally, ress in reducing poverty in recent years. Be- the development model of Panama? tween 2007 and 2012, a period including the In doing so, the report identifies a select Great Recession years, Panama managed to list of policy priorities for poverty reduction reduce poverty (using the national poverty and shared prosperity in Panama. The analy- line) from 39.9 percent to 26.2 percent, and sis of the development challenges in any extreme poverty from 15.6 percent to 11.3 country, including Panama, will likely find percent. Thus, in a population of about 3.6 that there is space for improvement on most million people, the number of Panamanians areas underlying development. However, a living below the national extreme poverty long list of recommendations is likely to be line declined by slightly more than 150,000 of limited use. Policy makers face budgetary people and those living below the overall and political economy constraints that limit poverty line declined by close to half a mil- their scope for action. Thus, an effort that lion people. prioritizes among competing policy inter- Panama’s progress in reducing poverty ventions will add significant value to any di- and increasing shared prosperity compares agnostic of country development challenges. positively with the Latin American region. Exploiting a diverse set of analytic tools, a Poverty reduction in the country was greater benchmarking exercise and country knowl- than the Latin American and Caribbean (LAC) edge, this report also contributes to Panama’s average. Only Bolivia saw greater improve- policy debate by identifying a select list of ment in shared prosperity, as measured by priorities and opportunities. the growth of the income of the bottom 40 percent of the population, than Panama. The rise in the middle class, seen in many coun- The Nature of Growth tries in the region, was particularly marked in Panama and there has been an overall de- in Panama cline in inequality. Over the past decade, Panama has been This report takes stock of this progress, one of the fastest growing economies world- and reflects on the constraints and opportu- wide. Average annual growth was 7.2 percent nities that Panama faces in continuing on its between 2001 and 2013 and Panama was an path of shared prosperity and poverty reduc- outlier in terms of postcrisis recovery, having tion. Following a detailed analysis of poverty— had higher growth after the crisis than before. recent trends, drivers of poverty reduction, Even though the growth rate is expected to and demographic factors—the report provides moderate to between six and seven percent elements to answer three main questions. First, in 2014, this is one of the highest rates for what has driven growth in Panama in recent that year. In addition, not only has growth years? Second, to what extent has this growth been high but it has also been accompanied been, or not been, inclusive? And, finally, how by progressive distributional change. Executive Summary 1 Panama’s exceptional growth perfor- and recent moves by the government to en- mance over the past decade stems from a sure that the banking sector meets interna- number of factors. The transfer of the Canal tional standards will also continue to make to Panama in 2000 allowed Panama not only Panama an attractive country for FDI. The to benefit from the growth of world trade but prospects of sustained high growth in the also to leverage its geographical position to coming years are also supported by emerging transform itself into a well-connected logis- opportunities in key sectors such as trans- tics and trade hub and a financial center. port and logistics, mining, financial services, Complementing this strength, Panama has and tourism. undertaken important public investment Nonetheless, certain structural areas re- projects, such as the expansion of the Canal quire attention to ensure that Panama meets and the construction of the Metro in Panama these high growth expectations: infrastruc- City. In the process, it has managed to attract ture, particularly energy; education and skills; increasing foreign direct investment (FDI) and public sector institutions. For example, flows and private investment. As a result of the energy sector has not been able to keep these factors, and the underlying stable pace with the growing demand of a high per- macroeconomic environment, Panama’s real ­ forming economy, and this issue will likely growth since 2001 has been more than dou- become even more binding as the economy ble the average for LAC. The country has continues to grow at healthy levels. Likewise, been one of the few that have been able to while the country has made large gains in catch up with the United States in terms of education in recent years, the transformation per capita gross domestic product (GDP) in and modernization of the economy has ex- recent years and its growth rate displayed posed weaknesses in both the coverage and low volatility in international comparison. quality of secondary and tertiary education. As a result, it has consolidated its position as Finally, there is an obvious mismatch be- the most competitive economy in Central tween the increasing sophistication of Pan- America and is second only to Chile in LAC. ama’s economy and the effectiveness of its There are good reasons to expect that public institutions. Challenges are most growth will continue to be strong in Panama marked in transparency, efficiency, and the (around six percent) in the near future. The adequacy of the regulatory framework. completion of major infrastructure projects (Canal expansion and the first Metro line) will lower public investment in the coming Inclusion and Economic years; however, this will be offset by the planned construction of the second Metro Growth line, and the additional traffic generated by Panama’s growth has been inclu- the expanded Canal. In addition, there is no sive along many dimensions. Over the past indication of a downturn in private invest- years, growth has been accompanied by de- ment according to residential and non-­ clines in income inequality, and vulnerable residential construction leading indicators groups in society (poor, women, unskilled) (such as construction permits). The contin- have significantly benefited from growth. For ued stable macroeconomic environment example, the average income growth of the 2 Executive Summary bottom 40 percent (8.2 percent per year be- assistance are the indigenous population liv- tween 2007 and 2012) was significantly higher ing in the comarcas. than income growth for the average Panama- Benchmarking across indigenous groups nian (6.6 percent per year). Similarly, the in the region shows Panama to be lagging percentage of female-headed households that in economic and social development. In ab- escaped poverty between 2007 and 2012 (14 solute and relative terms, Panama’s indige- percent) was higher than the percentage of nous populations fare poorly compared to male-headed households escaping poverty other Indigenous Peoples in Latin America. (12.3 percent) and today, the difference in The differences in terms of access to services the poverty rates between female- and male- are striking. Among 12 Latin American headed households is less than one percent countries, Panama has both the lowest level (2.6 percent in 2007). The economy has also of electricity coverage among the indigenous managed to generate a large number of jobs population and the largest gap between in- for the unskilled: an increase of almost 12 digenous and non-indigenous populations percent. The positive effects of economic (52 percentage points compared to the next growth on poverty came through a combina- largest gap of 38 percentage points in Col- tion of increased labor income and a strong ombia). The gap in sanitation is also the larg- program of public transfers. Labor income est, and only Nicaragua has lower absolute was the key driver of both poverty and ex- levels. The situation is similar for piped water treme poverty reduction in urban areas, but and Internet access. government transfers were the main force While reducing poverty in Panama will behind poverty and extreme poverty reduc- require attention to all deprived groups, tion in rural areas. the concentration of the poor in comarcas The degree of inclusion has varied across suggests that this would be a priority area. the country and across population groups. The Indigenous Peoples of Panama have sig- Despite the strong pro-poor growth, sharp nificant social capital, and their lands rep- regional disparities remain. Take the case resent significant wealth and biodiversity. of Ngäbe Buglé comarca, Panama’s poorest At the same time they suffer from multiple area, where 93 percent of the population is deprivations: extremely low incomes, low poor—compared to 26 percent for the coun- access to basic services and infrastructure, ­ try as a whole, and only 15 percent in the lower human capital, poorer health outcomes, richest province. The rate of change of pov- fewer labor options, and de facto land tenure erty also varied. While urban extreme pov- insecurity. Investments in basic infrastruc- erty fell 40 percent between 2007 and 2012, ture in roads, electrification, and sewage sys- in rural areas the decline was 15 percent, and tems would benefit both rural indigenous in the indigenous territories, or comarcas, and non-indigenous groups. However, im- only four percent. This has resulted in an in- proving social service for the indigenous will creasing concentration of the extremely poor require special attention to accommodate in the indigenous territories. Finally, among their cultural norms. In short, while Panama’s the poor and extremely poor in Panama, the agenda on eradicating extreme poverty is groups with the least human capital, lowest much broader than just the comarcas, the incomes, and greatest dependence on social levels and severity of poverty in these areas Executive Summary 3 and the slowness of positive change suggest Lack of services, particularly access to water that focusing on the comarcas is a priority. and sanitation, continues to be a constraint At the same time, it is important to un- in the comarcas. Low population density and derstand the complexities of addressing the dispersed populations are often blamed for development challenges of the comarcas and lack of service provision in these areas. This the need to pay attention to issues of (i) cul- is a challenge that needs to be acknowledged; turally appropriate economic opportunities, but the fact that Los Santos, one of the three (ii) social assistance, and (iii) infrastructure provinces with the highest rate of poverty re- provision. The lack of culturally appropriate duction in the past six years, has a population models for development for the comarcas has density below that of the poorest comarca reduced the positive impact of government suggests that additional barriers to service programs and policies. Differences in com- provision are at play. munity organization and communal property, among others, need to be taken into account. Furthermore, a good understanding of the Sustainability: Economic, tradeoffs that Indigenous Peoples are, and are not, willing to make among different goals Social, and Environmental will be key to finding sustainable solutions. Can Panama sustain this progress and In this regard, the National Integrated Devel- improve on it? Whether Panama can sustain opment Plan of the Indigenous Peoples of the progress observed in previous years de- Panama (DIPORP), completed by the National pends on the extent to which attention Indigenous Working Group after a two-­ year is paid to critical economic, social and envi- effort, provides an opportunity to tackle pov- ronmental issues. erty in the comarcas. The Plan presents the con- Panama’s continued high reliance on for- sensual vision of the goals and priorities of the eign financing for its investment program 12 indigenous congresses on economic devel- will depend on continued progress on com- opment, social development, and legal rights. pliance with international finance standards. The challenges faced by the social protec- The Panamanian government is working on tion system in the comarcas also merit fur- reforms to address these concerns but is still ther attention given that outcomes are muted under a peer review process. The first phase despite good spending levels. Indeed, the of this review involves an assessment of legal benefits of Red de Oportunidades, the condi- and regulatory frameworks; the second phase tional cash transfer program for the most consists of an assessment of how well the vulnerable, in the comarcas, appear to have country is doing on tax transparency in line been limited by a lack of differential ethnic with international standards. Based on the services for the various ethnic groups. In this outcome of the first phase, Panama is cur- regard, the adaptation of service provision to rently undertaking reform measures to allow the environment is critical, including, for ex- it to move on to phase two of the process. ample, offering multicultural bilingual edu- Sustainability will also depend on Pan- cation in indigenous areas or ensuring that ama’s successfully assessing and mitigating health workers are equipped to work in dif- the various sources of competition to the ferent cultural contexts. Panama Canal, given its crucial role for the 4 Executive Summary country’s economy. To the east, the recent overcome potential opposition from the in- project by Egypt to widen parts of the Suez digenous populations living in the areas where Canal will enlarge transit capacity and de- the mining deposits are. crease waiting time from 18 to 11 hours for While the risks to social cohesion exist, most ships. Closer to home, Panama’s north- various factors may play a mitigating role. ern neighbor Nicaragua has recently an- The recent success the government has had nounced the initiation of a project to build a in reining in homicide rates suggests that Nicaragua Canal passing through Lake Ma- Panama may be able to avoid the escalation nagua. Once completed, this canal could of crime and violence seen in neighboring have significant impact on the share of trade countries. The youth gang movement is na- going to Panama. Finally, in the medium to scent and appears amenable to intervention. long term, the Northern Passage may open Ratification of the International Labor Orga- up as global warming melts the Arctic ice nization Convention 169 could help promote cap, substantially reducing the distance be- land and other rights because ratification tween Asia, Europe, and North America. would trigger international supervision of Competition to the Canal requires constant the Convention’s implementation, thus pro- adjustment of its pricing policy to maintain viding more visibility to land rights issues. market edge and competitiveness within the The planned creation of a Ministry of Indig- global market. enous Affairs to help promote economic and On the social front, the country’s cohe- social welfare of the Indigenous Peoples in sion is threatened by existing inequalities, the country and support the National Inte- the crime and violence linked to Panama’s grated Development Plan of the Indigenous strategic position as a drug corridor, and Peoples of Panama provides further oppor- weak protection of land rights. The stark tunities for improvements in the protection economic inequalities and relative depriva- of land and resources rights of the Indige- tions, coupled with more precarious forms of nous Peoples in Panama. urban employment and perceptions, along Environmental sustainability depends on with evidence of corruption have been creat- safeguarding Panama’s water and natural re- ing strains on society. Relative deprivation sources and on putting in place adequate has led some groups to further organize and regulation to mitigate the effects of large in- assert political voice (such as through the frastructure and extractive projects, rapid Mesa Indigena) but has also led to increases urbanization, and risk from to natural disas- in violence in urban areas when combined ters. Safeguarding Panama’s water and natu- with the illegal drug trade. However, the risks ral resource base is critical to the current from crime and violence affect not only urban growth model linked to the Canal and other youth but also rural and indigenous popula- economic activities. In terms of long-term tions. Struggles around infringements of in- climate change, the recent International Panel digenous land rights also pose serious threats on Climate Change (IPCC) Fifth Assessment to social sustainability. This is particularly (IPCC 2014) cites a trend of increasing pre- the case when one considers mining, which cipitation over most of Panama. This is gen- has the potential to be a key source of growth erally good news for the Canal. However, in the coming years but which will need to greater variability, with more frequent floods Executive Summary 5 and droughts, is also predicted and poses a sustainability. The analysis has been framed real risk. The country’s infrastructure-based to answer three key questions: What is the growth model requires strong environmental nature of growth? How inclusive is it? and regulation and enforcement to avoid long- How sustainable is it? The analysis identified term irreversible negative impacts. In partic- five priority areas: (i) infrastructure with a focus ular, the growth of the mining sector raises on energy, (ii) education and skills, (iii) pub- significant potential environmental risks due lic sector institutions, (iv) Indigenous Peoples, to the lack of an adequate regulatory frame- and (v) water resources management. But work that regulates safe and sustainable min- beyond the relevance of each of these areas ing permits. The challenge of improving the for growth, inclusion, and sustainability, it is urban environment is amplified by the ongo- important to also highlight the complemen- ing process of decentralization that has not tarities that exist across them. Some simple been coupled with adequate municipal ca- examples illustrate this point. Education and pacity building. Finally, the increasing risks skills have been identified as a priority for of natural disasters require an integrated economic growth: a well-­ educated workforce mitigation strategy. with relevant skills is fundamental to sustain Water resources management under vary- economic growth. In parallel, closing the ed- ing climate conditions emerges as a priority ucation gap between the poor and non-poor area linked to sustainability. Benchmarking is also highly relevant for inclusion by pro- across time highlights the greater incidence viding opportunities to rural and indigenous of extreme weather events in the last decades. Panamanians. Institutional capacity clearly Climate models predict this to be the new affects growth, inclusion and sustainability. norm. The effects on the economy are multi- In terms of opportunities within these ple, including, most critically, the effect on areas, those identified to improve public in- the Canal operations as greater variability in stitutions provide a clear example of the syn- rainfall and extreme weather can lead to ergies. Performance-based budgeting or temporary closures (this has happened four enhanced fiscal management along with other times to date). Changes in rainfall in other opportunities will free resources that could areas of the country can affect hydro-electri- be spent on other areas, including education cal power generation, a key energy source for or Indigenous Peoples. Moreover, enforcing the country. And, of course, extreme weather consistent social and environmental safeguards, can affect agriculture, the main source of in- regulations, and standards across sectors will come for many of the poor in the country. have an important positive impact on water resources management. Priority Areas and Knowledge Gaps Complementarities In the process of reviewing, analyzing Valuable synergies emerge from look- and synthesizing the existing data and re- ing at priorities and opportunities across search on Panama, a series of knowledge the themes of growth, inclusion and gaps were discovered. By discovering and 6 Executive Summary describing these gaps, this report outlines a In other cases there is a need for more ana- roadmap for further research on Panama that lytical work (qualitative and quantitative will benefit the design of specific policies in work on the causes of dropout rates in Pan- the priority areas identified in this report and ama or the creation of simulation tools on generate information that can lead to the growth or climate, for example). Focus on identification of new priority areas. Knowl- filling these knowledge gaps will ensure the edge gaps are, in some cases, data related best possible analytic base for future work on (poverty by all ethnic groups, for example). prioritization in the country. Table ES.1  Priority Areas and Opportunities Diagnostic Area Priority Area Opportunities Complementarities GROWTH Energy Managing (reducing) national energy demand Contributing to a more -  efficient public sector Increasing power generation via renewables/ Reducing demands on water -  clean energy resources Increasing domestic and cross border Freeing up resources for -  transmission priority social programs, such Modernizing the institutional framework in as education and indigenous energy Improving rural energy services Education Strengthening targeted public/private technical - Reducing dropout rates and education to meet labor market demands proving opportunities for indigenous, inter alia Strengthening M&E of education to improve - Contributing to growth, quality potentially increasing demand Differentiating social assistance benefits to for energy and water lower the dropout rate from secondary - Contributing to a more education efficient public sector Public Sector Meeting Global Forum standards on tax/ - Freeing up resources for Institutions financial information sharing (OECD grey list) priority social programs, such as education and indigenous Improve public procurement practices - Creating conditions for Introducing performance informed budgeting sound indigenous people (PIB) along with better coordination development framework Developing effective subnational institutions and engagement needed for decentralization - Supporting sustainable energy and water Improving fiscal management, incl. modernizing management financial planning, debt management, and fiscal risk from disasters Modernizing mining regulatory framework to promote oversight, benefit sharing, and environmental/ social sustainability Strengthening financial sector regulation Enforcing consistent social and environmental safeguards, regulations, and standards table continues next page Executive Summary 7 Table ES.1  continued Diagnostic Area Priority Area Opportunities Complementarities INCLUSION Indigenous Increasing the quality, access, and cultural -  Reducing drop-out rates Peoples pertinence of health and education services in - Ensuring sustainable water indigenous communities and energy use - Strengthening institutional Supporting “economic development with framework for inclusion identity,” for example traditional agriculture, payments for environmental services, benefit sharing, sustainable tourism Strengthening and formalizing Indigenous Peoples’ participation in relevant government decisions and processes SUSTAINABILITY Water Implementing integrated water resources - Creating economic management plans in selected priority basins opportunities for rural and outside Canal watershed indigenous - Contributing to a more Scaling up integrated disaster risk planning efficient public sector coupled with climate adaptation measures - Ensuring supply for Reducing pollution by improving sewerage hydropower generation treatment capacity and access to sanitation Streamline regulatory and institutional functions across Water sector agencies Reference IPCC 2014. Climate Change 2014: Synthesis Report. Fifth Assessment Report of the Intergovernmental Contribution of Working Groups I, II, and III to the Panel on Climate Change. Geneva: IPCC. 8 Executive Summary 1. Poverty and Shared Prosperity in Panama Panama has made significant progress ​ percent in 2012. This compares with a pov- on the poverty reduction front over the past erty decline in the Latin American and Ca- five years.1 Between 2007 and 2012, a period ribbean (LAC) region from 32.2 percent to including the years of the Great Recession, 25 percent over the same period. Likewise, Panama managed to reduce poverty (using extreme poverty (using a US$2.5 poverty the national poverty line) from 39.9 percent line) declined from 19.2 percent to 11.8 to 26.2 percent, and extreme poverty from percent, compared to a decline in the region 15.6 percent to 11.3 percent (figure 1.1). from 17 percent to 12 percent (­figure 1.2). Thus, in a population of about 3.6 million Extreme poverty, as measured by the inter- people, the number of Panamanians living national US$1.25 poverty line (used by the below the national extreme poverty line de- World Bank to measure progress toward the clined by slightly more than 150,000 people, twin goals) would be four percent, which is and those living below the moderate poverty close to the World Bank’s global extreme line declined by close to half a million ­ people. poverty target of three percent for 2030. Panama’s progress in reducing poverty The observed declines in poverty rates compares positively with the Latin American have been accompanied by a significant in- region. Indeed, using a US$4 a day poverty crease in the middle class. When measured line, moderate poverty declined from 33.5 as the share of the population with incomes percent of the population in 2007 to 20.9 between US$10 and US$50 a day (as done in Figure 1.1  Panama’s Poverty Figure 1.2  Poverty in LAC and Rates, 2007–2012 (Percent, Panama, 2007–2012 (Percent, National Poverty Line) International Poverty Line) 45 35 40 30 35 30 25 Percent Percent 25 20 20 15 15 10 10 5 0 0 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 Poverty Panama $4 LAC $4 Extreme poverty Panama $2.5 LAC $2.5 Source: Nati­ onal Institute of Statistics of Panama (INEC), http:// Source: World Bank data. www.contraloria.gob.pa/inec/. Note: LAC=Latin America and the Caribbean. Poverty and Shared Prosperity in Panama 9 the Economic Mobility and the Rise of the despite the evolution of the middle class, the Middle Class report, Ferreira et al. 2015), the vulnerable group continues to be the largest. Panamanian middle class increased by about As in most Latin American countries, 10 percentage points from 29.7 percent in there are important differences between pov- 2007 to 39.7 in 2012. This is consistent erty levels in rural and urban areas. Despite with—although more marked than—the the fact that 75 percent of Panamanians live evolution of the middle class in the Latin in urban areas and two-thirds of those in American region, which also increased from Panama City, the urban-rural discrepancies 27.4 percent to 34.2 percent (figure 1.3). are still important. For example, while in As a result, the middle class has been the urban areas extreme poverty is below largest group in Panama since 2011. The four percent, in rural areas extreme poverty typical transition from poverty to middle is about 27 percent. Moreover, in contrast to class is through the vulnerable class (that is, urban areas, where poverty has fallen every a group of the population that, while not year since 2007, extreme poverty levels have poor, has a significant chance of falling into fluctuated in rural areas and indeed in- poverty in the coming years). In Panama in creased in 2010 and 2012 (figure 1.4). But 2007, the middle class was as large as the perhaps more worrisome, as discussed in population living in poverty but began in- Chapter 4 of this document, poverty rates creasing between 2007 and 2010 as poverty vary dramatically across the country. In the declined. Starting in 2011, the vulnerable Indigenous Peoples’ territories (figures 4.7 class was smaller than the middle class.2 This and 4.8), poverty is almost universal and is unlike in Latin America as a whole where, persistent (declining at a rate below the Figure 1.3  Middle Class in Panama Figure 1.4  Urban and Rural Extreme and LAC, 2007–2012 (Percent, Poverty in Panama, 2007–2012 International Poverty Line) (Percent, National Poverty Line) 41 35 39 30 37 35 25 33 20 Percent Percent 31 29 15 27 10 25 5 0 0 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 Panama LAC Rural National Urban Source: World Bank data. Source: World Bank data. Note: LAC=Latin America and the Caribbean. 10 Poverty and Shared Prosperity in Panama Box 1.1  Indigenous Peoples Demographics and Data Panama has a population of around four million people living in 10 provinces, 75 districts or municipalities, five collective and semi-autonomous Indigenous territories organized by ethnic groups (comarcas), and 620 corregimientos. The tenth province was created when the original Province of Panama was divided into two—Panama and Panama Oueste—in January of 2014. Due to the recent split, the analysis here looks at the original Province of Panama. Figure B1.1  Population by Province and Comarca Colón Guna Yala Bocas del Toro 258.201 39.344 141.364 Panama 1.917.752 Ngäbe Buglé Chiriquí 183.059 Coclé 435.165 245.763 Darién Emberá Veraguas 51.014 11.087 Herrera 239.792 116.306 Los Santos 93.477 Source: INEC 2010. Panama is home to eight Indigenous ethnic groups or “peoples,” namely the Ngäbe or Ngöbe (260,058), Kuna or Guna (80,526), Emberá (31,284), Buglé (24,912), Wounaan (7,279), Teribe/Naso (4,046), Bokota (1,959), and Bribri (1,068). The 2010 census shows that 196,059 indigenous persons live in comarcas, while 221,500 live in other areas. The comarcas and other indigenous territories enjoy significant autonomy and self-­ government through 10 Congresses and two Councils. The comarcas make up 22.2 percent of the country’s area, or 16,634 square kilometers, and comprise some of Panama’s richest natural resources and cultural diversity. Panama is also home to a population of Afro-descendants representing 9.2 percent of the national population in 2010. The majority live in Colón (29 percent), Darién (17 percent), and Panama City (11 percent). box continues next page Poverty and Shared Prosperity in Panama 11 Box 1.1  continued Data on the full population of the Indigenous Peoples and Afro-descendants is limited. The annual household survey used to measure welfare does not include an ethnicity variable. In most of the analysis here, the geographic variable comarca is used as a proxy for per- sons of indigenous origin. This has three problems: (i) this captures only the three largest comarcas; (ii) there are small numbers of non-indigenous people who live in the comarcas; and (iii) using the comarca variable excludes the half of the indigenous population that lives in other parts of the country from the analysis. There is also no way to identify Afro-descendants from the household survey because they are included in the urban or rural areas in which they live. The only data source that allows a comparison to be made of these two groups is the National Population and Housing Census carried out every ten years: these data are used as much as possible. Thus, the discussion of welfare of these groups is constrained. These knowledge gaps merit further attention in Panama. Source: INEC 2010. national average). For example, the Ngäbe However, like the poverty reduction story, Buglé comarca has a poverty rate of not everyone in the bottom 40 percent has 93 percent and an extreme poverty rate of shared equally in Panama’s prosperity. The 80 percent. These poverty rates surpass pov- bottom 40 percent of the population has erty among indigenous peoples in other seen its income rise in all provinces (those countries including Bolivia, Ecuador, Guate- that existed before January 2014) and the mala, and Peru.3 three comarcas (figure 1.6). Those among the Beyond the progress made on poverty re- bottom 40 percent of the national population duction, Panama has also made significant who lived in Coclé, Veraguas, and Los Santos progress on shared prosperity. Average per saw the highest average income growth— capita income, as measured by household which in the case of Coclé was close to surveys, grew by 6.6 percent between 2007 10 percent. However, in the comarcas cap- and 2012 whereas the average incomes of the tured by the data, growth was much lower at bottom 40 percent of the population rose 8.2 only 2.4 percent. And only in the comarcas percent (figure 1.5).4 These statistics indicate was the overall average income growth (five not only that growth has been pro-poor—​ percent) greater than that of the bottom 40 having a clear bias toward the poor—but also percent. Compared with national data, the that the increase in their incomes has been per capita income growth in the comarcas significant: at this rate, the incomes of the was 1.6 percentage points lower than the na- poor would double every nine years. It is also tional growth rate; and the income of the worth noting that in Latin America only Bo- bottom 40 percent was 3.7 times lower than livia saw greater income growth among the the income of the bottom 40 percent at the bottom 40 percent of the population. national level. Indeed, as discussed later, 12 Poverty and Shared Prosperity in Panama Figure 1.5  Shared Prosperity in LAC, 2007–2012 (Annualized Growth Rate of Income for the Poorest 40% and the Overall Population) 15.0 Annualized Growth Rate (%) 10.0 5.0 0 –5.0 9 08 2 2 05 12 2 2 07 2 2 08 2 00 012 07 2 00 12 Pe 007 2 12 12 11 1 06 1 01 Re e, 2 200 1 01 01 1 01 01 01 01 01 01 20 20 20 0 0 20 20 –2 –2 –2 –2 –2 –2 –2 2 –2 –2 –2 –2 9– 7– 0– 8– 8– 8– – 07 07 07 8 08 00 00 0 01 00 20 0 20 20 20 20 - u , 20 20 20 20 20 ,2 ,2 ,2 ,2 ,2 ,2 2 , C, r, a, a, a, r, ca o, Co zil, ay as Co blic ia a, an ru an do do m il al LA bi c liv gu ur Ri gu Ch a i rb rb em ex na m lva pu a Br Bo nd ra ra u a -u lo M Pa st Ec Sa at ca Pa Ho a y Gu Ni n El ua in ica nt ug in ge Ur m Ar Do Mean income bottom 40% Overall population Source: Latin America and the Caribbean Equity Lab tabulations of the Socio-Economic Database for Latin America and the Caribbean (SEDLAC) produced by the Center for Distributive and Social Studies (CEDLAS and the World Bank); World Development Indicators (database), World Bank, Washington, DC, http://data.worldbank.org/products/wdi. Figure 1.6  Shared Prosperity Across the Country (Mean Income Growth, Percent) 12 10 8 6 P rc nt 4 2 0 –2 –4 os lé s o a ui n s n or m r rié c ló riq nt u rc Co lT rr Co i n Ch D m S H r d P Co s V s Lo c Bo M n incom rowth (Bottom 40%) M n incom rowth Source: Authors’ calculations based on Panama household survey, Encuesta de Mercado Laboral (EML), rounds 2007 and 2011 (INEC 2007 and 2011). Poverty and Shared Prosperity in Panama 13 even though the number of extremely poor that Afro-descendants have also been ex- has declined significantly in the country, the cluded from the country’s economic growth comarcas historically have been, and are now and face difficult challenges, including lack even more so, the places where extreme pov- of access to basic services, such as water, erty is most prevalent in Panama. electricity, sanitation, education, employ- The extremely poor are highly concentrated ment, health services, and political participa- in remote geographic areas where Indigenous tion. While the limited data available do not Peoples live. The indigenous populations liv- completely support this perception, qualita- ing in the three largest comarcas represent tive studies indicate that Afro-descendants 42 percent of the extremely poor, but at the rank among the poorest and most vulnerable same time represent less than seven percent groups in the country.7 of the country’s population (although Indige- This raises a question about the factors nous Peoples represent 12.2 percent of the driving poverty reduction in Panama. Over total population). Many of the Indigenous the past decade, Panama has been one of Peoples in Panama live outside but in close the fastest growing economies worldwide. proximity to the comarcas with collective title, With an average annual growth rate of as is the case of the Naso territory, two Wou- 7.2 percent between 2001 and 2013, Pan- naan communities in Darién, and the Dagar- ama has outpaced most of its peer countries gunyala collective territory. Many others are and grown significantly faster than the av- awaiting territorial recognition and titling, as erage country in any of the analyzed peer is the case of the Bri-Bri and many communi- groups.8 The country has been one of the ties in Darién. The communities without land few that have been able to catch up with the tenure security are at the greatest risk because United States in terms of per capita gross of land invasions by non-indigenous farmers, domestic product (GDP) in recent years the Revolutionary Armed Forces of Colombia (figure 1.7) and Panama has been an outlier (in the case of Darién), and parties interested in terms of postcrisis recovery (figure 1.8); in resource extraction. while most countries were not able to catch At the same time, lack of opportunities up to their pre-crisis dynamism, Panama within these areas has forced many indige- had higher growth after the crisis than be- nous people to migrate to cities. According to fore. Even though the growth rate is ex- the 2010 census, only 40 percent of the Guna pected to moderate to around seven percent population now lives in the three Guna co- in 2014, this is one of the highest rates for marcas; 52.3 percent of Ngäbe and Buglé peo- that year. In addition, not only has growth ple live within their comarca; and in the case been high, but it has also been accompa- of the Emberá and Wounaan, only 24 per­ cent nied by progressive distributional change. of the population is living within the comarca.5 Growth accounted for about 80 percent Internal migration among the indigenous of poverty reduction and the reduction in population in Panama is higher than in most inequality accounted for the remaining other Latin American ­ countries.6 20 percent between 2007 and 2012. The re- Nonetheless, inequality has not been an cent high GDP growth rates experienced by issue exclusive to the Indigenous Peoples. Panama would suggest that growth has There is a universal perception in Panama played a predominant role in explaining 14 Poverty and Shared Prosperity in Panama Figure 1.7  Panama’s GDP Per a la Dang et al. (2011), shows that the 2007– Capita as a Share of U.S. Versus 2012 period saw people moving out of, but Latin America (Percent, Constant also into, poverty. The synthetic panel results 2005 US$) in terms of poverty numbers do not com- pletely align with the national figures, but the 18 analysis does highlight several important movements of households (figure 1.11 and 16 figure 1.12).10 First, households with low edu- 14 cational levels (primary or below) and those engaged in agriculture were the most likely to 12 have been poor in 2007 and remained poor 10 in 2012. Second, households in the agricul- tural sector and in the bottom income quin- 8 tile were the least likely to move out of poverty and most likely to fall into poverty. 0 1960 1970 1980 1990 2000 2010 Finally, urban areas overall showed the great- Panama Latin America & Caribbean est movements out of poverty. Source: World Development Indicators (database), World Bank, But what sources of income have helped Washington, DC, http://data.worldbank.org/products/wdi. people move out of poverty? To understand the different factors that have contributed to poverty reduction; inequality has fallen poverty reduction, it is important to explore only slowly (figure 1.9). We test this hy- developments in labor markets (which typi- pothesis by performing a Datt-Ravallion cally generate the main income of the poor) decomposition,9 which attempts to identify as well as the role of public spending, includ- the relative contributions of growth and ing transfers (both cash and in kind) to the changes in inequality for any given poverty poor. The rest of this section explores these change. The results of this decomposition issues. are displayed in figure 1.10 confirming the Panama has been a top performer in terms hypothesis that growth accounted for about of creating jobs, and the poor have benefited 80 percent of the poverty gains and in- from it. In 2013, the employed labor force in equality for about 20 percent. This is in Panama was 66 percent higher than in 2001, contrast to the Latin American region, an increase that far exceeds those of peer where growth has been admittedly lower countries.11 For example, the corresponding and the gains on the inequality front more, increase among the structural peer countries where over the same period of time, growth was 17 percent, and in Central America as a would have accounted for 57 percent of whole it was 44 percent (figure 1.13). The poverty reduction and inequality for bottom 40 percent have benefitted from this 43 percent. job creation. While the bulk of net new jobs The positive changes in poverty measured required completed secondary education or by cross-sectional household data hide some higher, 11.5 percent of new jobs were for un- of the movements of the population in and skilled labor with primary or incomplete sec- out of poverty. A synthetic panel, constructed ondary education. In 2012, the average years Poverty and Shared Prosperity in Panama 15 Figure 1.8  Real GDP Growth in Panama and Its Peer Countries 2001–2013 (Percent Change) 14 12 12.1 10.9 10 8 7.2 8.5 3.9 6 4 2 0.6 0 –2 –4 –6 08 09 10 12 02 11 13 03 04 06 07 01 05 20 20 20 20 20 20 20 20 20 20 20 20 20 Panama World Middle income Central America Structural peers Aspirational peers LAC Source: World Economic Outlook (WEO) indicators, https://www.imf.org/external/pubs/ft/weo/2014/01/weodata/index.aspx. Note: LAC=Latin America and the Caribbean. Figure 1.9  Gini Coefficient in Figure 1.10  Datt-Ravallion Panama and LAC, 2007–2012 Decomposition of Poverty (Percent) (Index) 90 54 80 53.5 70 60 53 50 52.5 40 52 30 20 51.5 10 51 0 Panama LAC 0 2007 2008 2009 2010 2011 2012 Growth Inequality Panama LAC Source: Authors’ calculations based on Panama household survey, Encuesta de Mercado Laboral (EML), rounds 2007 and 2011 (INEC Source: World Bank. 2007 and 2011). 16 Poverty and Shared Prosperity in Panama of schooling of the bottom 40 percent of the households in Panama have only 5.1 years population was 7.6 years compared to 11.7 of education—4.5 years fewer than the na- for the rest of the population (figure 1.14). tional average. They are also concentrated There is a large gap between the ex- in the agricultural sector and work mainly tremely poor and the rest of the popula- as self-employed or unpaid family workers. tion. The heads of extremely poor The households of the extreme poor have much higher dependency ratios, driven by a much greater share of young children, Figure 1.11  Movements Out of and lower life expectancy. For every worker Poverty (Percent) in an extremely poor household, there are 2.2 dependents, while the national average 100 is 1.3. The dependency ratio for working 80 age people (15 to 64 years) is 1.25 for ex- tremely poor households, while the na- Percent 60 40 tional average is 0.5. 20 Social spending has increased in real 0 terms also benefitting the poor. Between Total Urban Rural 2007 and 2012, education and health spend­ Never poor Not poor-Poor ing have stayed relatively flat at around Poor-Non poor Always poor four percent of GDP (in a context of very Source: Authors’ calculations based on Panama household survey, rapid GDP growth), while social protection Encuesta de Mercado Laboral (EML), rounds 2007 and 2011 (INEC 2007 and 2011) and Dang et al. (2011) methodology. has decreased by half a percentage point of Figure 1.12  Changes in Poverty Status by Original Characteristic (Percent) 100 80 60 Percent 40 20 0 Educ: Pri Educ: Sec Educ: Ter Agric Construct Retail Services Other Head Female Head Male Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 Manuf Never poor Not poor-Poor Poor-Non poor Always poor Source: Authors’ calculations based on Panama household survey (EML) rounds 2007 and 2011 (INEC 2007 and 2011) and Dang et al. (2011) methodology. Poverty and Shared Prosperity in Panama 17 Figure 1.13  Employment Creation in Panama Between 2001 and 2013 Versus Its Peers (Percent Change) 70 66 60 50 44 40 38 30 25 20 19 20 17 10 0 Panama Structural Central LAC World Upper Aspirational peers America middle peers income Source: Author’s estimations based on World Economic Outlook (WEO) indicators, https://www.imf.org/external/pubs/ft/weo/2014/01/ weodata/index.aspx. GDP (figure 1.15).With 13.3 percent of cash transfer program, was introduced to GDP in 2013, Panamanian social expendi- support families in poverty; in 2009, 100 a ture was in the middle range for Central los 70 followed to support elderly in need; in America. In that year, Costa Rica dedicated 2010, Beca Universal was put in place to almost 21 percent of GDP to social expen- ­ provide a cash transfer to children for school diture, and Guatemala spent only eight achievements; and in 2012, Angel Guardian percent. In real terms, social spending has was established to provide social assistance grown three percent annually over the ana- to people with severe disabilities in poverty lyzed period.12 Although access to health or vulnerable conditions. Although the qual- and education services has improved for all ity of the targeting of these programs differs Panamanians, significant inequalities per- and can be further improved, a large share sist with less access in rural and indigenous of their benefits reaches the lowest income areas where a large percentage of the poor percentiles. Chapter 4 provides further de- and extremely poor live. Chapter 4 of this tail on social protection, its incidence, and report provides more detail on the inci- targeting. dence of social spending. Progress toward the twin goals has been The country has continuously expanded achieved not only because of the pace of the coverage of its social protection system. growth but also because of its low volatility. In 2006, Red de Oportunidades, a conditional Panama has stood out not only in terms of 18 Poverty and Shared Prosperity in Panama Figure 1.14  Job Creation by This report (i) explores the elements be- Education Level (Total Number hind the observed growth, poverty, and in- of Jobs) equality trends; (ii) identifies the factors that may affect the sustainability of Panama’s re- 1200000 cent performance and thus the priority areas for action or policy; and (iii) highlights spe- 1000000 cific opportunities for the country to con- tinue as one of the best performers in the Latin American region on growth and pov- 800000 erty reduction. The rest of the report is structured as follows. Chapter 2 looks in 600000 more depth at the evolution and features of economic growth and what may affect it going forward. Chapter 3 compares Pan- 400000 ama’s progress to other countries to identify priority areas linked to maintaining growth 200000 and opportunities of which the country might well take advantage. The chapter con- tains a brief discussion of the prioritization 0 process. Chapter 4 focuses on issues of in- 2000 2010 clusiveness, laying out the evidence of prog- Secondary incomplete Secondary complete ress as well as the limits on this progress. Primary complete or less Any tertiary Chapter 5 attempts to benchmark Panama’s Source: Authors’ calculations based on the Panama Population and Housing Census (INEC 2000 and 2010). progress on inclusion to that of other Latin American countries, identifying ethnicity as a priority area and drawing out opportuni- its fast economic growth but also in terms of ties for action. Chapter 6 addresses the issue the low volatility of that growth (­figure 1.16). of sustainability from different lenses: eco- In the sample of peer ­ countries, only a few, nomic, social, and environmental. Chapter such as Bolivia and Guatemala, had lower 7, using an over-time benchmarking ap- coefficients of variation of GDP growth, proach, lays out the case for water to be the however at significantly lower average GDP final priority area and identifies opportuni- growth rates. As mentioned before, the low ties for action. The final chapter covers volatility of economic growth is highly rele- knowledge gaps that arose during the pro- vant for achieving the twin goals. This is due cess of preparing this report, gaps that to the impact of overall output volatility on would ideally be the focus of any subsequent consumption as well as the negative link be- analysis for Panama’s ability to ensure inclu- tween macroeconomic volatility and sive and sustainable growth and make in- ­equality.13 roads on the twin goals. Poverty and Shared Prosperity in Panama 19 Figure 1.15  Panama’s Social Spending by Sector (Percent of GDP) 25 20 14.9 15.5 14.4 14.7 14.4 15 13.3 4.0 4.2 4.2 4.0 3.9 3.7 10 4.0 3.9 4.0 3.7 3.9 3.7 1.0 1.2 1.0 1.3 1.5 5 0.9 5.5 5.4 5.8 6.0 5.3 5.0 0 2007 2008 2009 2010 2011 2012 Health Education Social Assistance and Labor Social Security Source: World Bank (forthcoming). Figure 1.16  Growth Versus Volatility in Panama and Its Peer Countries, 2001–2013 (Average Percent Change) 1.6 MEX 1.4 ARG URU PAR 1.2 Volatilty of Growth Structural Aspirational 1.0 SAL peers peers 0.8 BRZ BEL Middle NIC DOR 0.6 CRI income LAC HON Central CHL PER PANAMA 0.4 America GUA ECU World COL 0.2 BOL 0 2 4 6 8 Growth Source: World Economic Outlook (WEO) indicators, https://www.imf.org/external/pubs/ft/weo/2014/01/weodata/index.aspx. 20 Poverty and Shared Prosperity in Panama Notes 1. Unless otherwise stated, the analysis uses na- 7. Generating quantitative data on Afro- tional definitions of poverty and shared pros- descendants will be necessary to create an ac- perity (both poverty lines and the income curate picture of absolute and relative poverty aggregate). The analysis focuses on the 2007– levels of this ethnic group. 2012 period for reasons of data comparability 8. Appendix A contains the types of peer coun- that limit the use of longer time trends. While tries (regional, aspirational, structural) and every effort has been made to replicate the wel- the countries included in each peer group. fare measure used in Panama, there are some 9. See Datt and Ravallion (1992). slight discrepancies (see Cadena et al. 2013) 10. The synthetic panel uses a different poverty line that are not expected to change the story in (US$4 per day) and, by construction, can only any way. The value of the national poverty line include a subset of households, i.e., those that was US$7.9/day urban and US$5.8/day rural. have the potential to be in both periods. Thus 2. Ferreira et al. (2015). households with very young heads in 2012 will 3. Using an international poverty line of be excluded from this analysis. Both of these US$4  per  person per day. This is based on characteristics of the synthetic panel analysis the harmonized dataset SEDLAC (CEDLAS mean that the estimated levels of poverty will dif- and World  Bank) 2015 and, Economic fer between this analysis and the national figures. Commission for Latin America and the 11. Appendix A provides detailed definitions Caribbean, 2014. of  the different peer groups. Based on IMF 4. The process of data harmonization for WEO data on changes in the labor force cor- cross-country comparisons means that the rected for unemployment. comparable results differ from those for 12. This growth rate is based on 2007 constant Panama alone as the construction of measures US$ and taking into account purchasing for one country are quite different from what power parity. When spending in constant has to be done in a multi-country context. US$ is used, the increase appears larger. 5. Based on Population and Housing Census of 13. See for example Breen and Garcia-Penalosa Panama. (2004); Garcia-Penalosa and Turnovsky 6. Economic Commission for Latin America and (2004); Huang, Fang, and Miller (2012); and the Caribbean (ECLAC) (2014). Loayza et al. (2007). References Breen, R., and C. García-Peñalosa. 2005. “Income Poverty Measures: A Decomposition with Inequality and Macroeconomic Volatility: An Applications to Brazil and India in the 1980s.” Empirical Investigation.” Review of Journal of Development Economics 38: 275–295. Development Economics 9 (3): 380–398. Economic Commission for Latin America and Cadena, K., C. Cardoza, L. Lucchetti, and the Caribbean (ECLAC), 2014. “Informe K. Scott. 2013. “Central America en el Nuevo Los Pueblos Indígenas en América Latina”, Milenio: Seis Historias Diferentes de Pobreza Santiago de Chile. y Desigualdad.” World Bank. Ferreira, F., J. Messina, J. Rigolini, L. Lopez- Dang, Hai-Anh, Peter Lanjouw, Jill Luoto, and Calva, M. Lugo, and R. Vakis. 2015. Economic David McKenzie. 2011. “Using Repeated Mobility and the Rise of the Latin American Cross-Sections to Explore Movements in and Middle Class. Washington, DC: World Bank. Out of Poverty.” Policy Research Working Garcia-Penalosa, C., and S. Turnovsky. 2004. Paper No 550, World Bank, Washington, DC “Macroeconomic Volatility and Income Datt G., and M. Ravallion. 1992. “Growth and Inequality in a Stochastically Growing Redistribution Components of Changes in Economy.” Conference volume of conference Poverty and Shared Prosperity in Panama 21 on “Economic Growth and Income INEC (Instituto Nacional de Estadística y Distribution: On the Nature and Causes of the Censo). 2000 and 2010. Censo Nacional Wealth of Nations,” Lucca, Italy, June 16–18. de Población y Vivienda. Contraloria, Huang, H., W. Fang, and S. Miller S. 2012. “The Panama. Effect of Growth Volatility on Income Inequality.” Loayza, N., R. Ranciere, L. Serven, and J. Ventura. Working Paper, University of Nevada. 2007. “Macroeconomic Volatility and Welfare INEC (Instituto Nacional de Estadísticas y in Developing Countries: An Introduction.” Censo). 2007–2013. Encuesta del Mercado The World Bank Economic Review 21 (3): Laboral. Contraloria, Panama. 343–357. 22 Poverty and Shared Prosperity in Panama The Nature of Panama’s Economic 2.  Growth Panama’s exceptional growth perfor- trade hub and a financial center. Through mance over the past decade stems from an continuous improvements in infrastructure, open and competitive economy. Panama’s Panama has established a port network that real growth since 2001 has averaged 7.2 is on par with major international logistics percent, more than double the average for hubs and an airport network that allows Latin America and the Caribbean (LAC). the country to function as a major regional The country has been one of the few that passenger hub for connecting passengers be- have been able to catch up with the United tween North, Central, and South America. States in terms of per capita gross domestic Thus, the country has consolidated its posi- product (GDP) in recent years (figure 1.7), tion as the most competitive economy and its growth rate displayed low volatility in Central America and is second after Chile in international comparison (figure 1.16). in LAC, according to the 2014–15 Global The economy is one of the most open in the Competitiveness Report (Schwab and Sala-i- region (figure 2.1) and is well integrated Martin 2014). into the global economy. It has done well in In recent years, five main elements have leveraging its geographical position, includ- explained this growth performance: (i) the ing through the Panama Canal, transforming transfer of the Canal to Panama that has al- itself into a well-connected logistics and lowed Panama to benefit from the growth of Figure 2.1  Panama’s Trade Openness Compared to Its Peer Figure 2.2  Contribution of Countries, as Measured by the Share Aggregate Demand Factors to of Exports and Imports of Goods and Economic Growth from 1947 to Services in GDP (Percent of GDP) 2013 (Percentage Points) 250 20 200.9 15 200 10 147.2 150 5 98.1 97.8 93.4 91.5 100 80.2 0 –5 50 –10 0 –15 a ica e ld C l l m m 71 70 81 80 –2 0 0 01 02 03 20 4 05 06 20 7 08 09 10 11 12 na ra LA or 0 0 91 9 00 er 20 na co 20 tu 20 20 tio 19 –19 20 20 20 20 19 –19 20 20 19 19 W m in Pa c ra – lA ru 47 e pi St dl ra 19 As id nt rm Consumption Private investment Public investment Ce pe Net exports GDP Up Source: World Development Indicators (database), World Bank, Source: Authors’ estimations based on the National Institute of Washington, DC, http://data.worldbank.org/products/wdi. Statistics of Panama (INEC) (accessed November 17, 2014), http:// www.contraloria.gob.pa/inec/. The Nature of Panama’s Economic Growth 23 world trade; (ii) the successful management such as China. The recent catching up with and expansion of the Canal that spilled over United States per capita income seems to to growth in specific sectors; (iii) the increas- have started in 2003 (figure 2.4). Even ing role of public investment; (iv) the parallel though Panama’s convergence towards the increase in foreign direct investment (FDI) United States was faster than that of LAC as and private investment; and (v) a stable mac- a whole, the inflection points coincide. roeconomic environment. The rest of this Therefore, it seems that a set of common fac- section discusses these elements. tors might have driven both Panama’s take off as well as the resurgence of growth in the rest of Latin America, albeit by different The Canal and Trends in magnitudes. A forthcoming World Bank study suggests that these common factors are World Trade associated with the relatively fast growth of The acceleration of growth followed large emerging markets, such as China.2 the transfer of the Canal to Panama and co- However, it is likely that the main channels incided with its successful management. The of transmission from the growth of China to United States built the Panama Canal zone in Panama have been different from those af- the ten-year period from 1904 to 1914 after fecting other fast-growing Latin American receiving a concession for the construction countries, such as Bolivia, Chile, Colombia and operation of the Canal and the areas sur- or Peru: for Panama, it is the Canal, rather rounding it. In 1977, the two countries than commodities. signed the Torrijos-Carter Treaties that laid Transshipment of goods originating in the foundation for the gradual return of the and destined for China has surged, and the Canal to the Panamanian government. On increases in revenues from the Canal be- December 31, 1999, the transfer became ef- tween 2000 and 2013 are significant. During fective.1 Since then, the Canal has been man- these years, the value of world trade almost aged by an autonomous government agency, tripled from US$6,725 billion to US$18,890 the Autoridad del Canal de Panama (Panama billion. At the same time, the value of trade Canal Authority, or ACP), which is widely that passed through the Canal increased by recognized for its institutional capacity and 16 percent, from US$374 billion to US$434 efficient management. Even though there is billion between 2006 and 2013. Overall the no stringent proof of causality, the increased share of total world trade going through the trend of the growth of the transport and Canal slightly decreased from three percent communications sector in particular seems in 2006 to 2.3 percent in 2013. The origins to have followed the return of the Canal to and destinations of goods passing through Panama. After the transfer in 1999, trend the Canal reflect China’s increasing role in growth, both of the transport and communi- world trade. In 2013, the share of goods cations sector, as well as of the economy as a originating in China was 7.6 percent, while whole, have accelerated (figure 2.3). the share of goods destined for China was The Canal has allowed the country to 14.5 percent. Because the size of the largest benefit from the increased world trade due to ships that cruise the Canal has increased the fast growth of large emerging economies, and therefore the same volume of 24 The Nature of Panama’s Economic Growth Figure 2.3  Transport and Communication Share of GDP and GDP Growth (Percent, Growth Index 1950=100) 3000 25 2500 Canal 20 trasnferred to Panama US (2000) 2000 invasion Torrijos (1989) 15 Carter treaty Remon Einsenhower International (1977) 1500 Banking Center treaty (1955) (1970) Colon Free 10 Zone 1000 (1948) 5 500 0 0 1947 1957 1967 1977 1987 1997 2007 Panama growth index (1946 = 100) Transport and communication share (% of real GDP) Source: Authors’ estimations based on the National Institute of Statistics of Panama (INEC) (accessed November 17, 2014), http://www​ .­contraloria.gob.pa/inec/. merchandise could be transported through (table 2.1). Containers mainly carry different the Canal with fewer shipments, overall pas- types of manufactured goods and minerals. sages through the Canal have declined from The ACP constantly adjusts fees in order to 12,198 vessels in 2001 to 12,045 in 2013.3 compete worldwide, and the fees are based The increase in trading volumes and pas- on volume and weight of the cargo (not the sages has led to an increase in collected value). For this purpose, a special measure- tolls from US$580 million to US$1.847 bil- ment has been created, the Panama Canal lion over the same period, and 1.7 and 2.4 tons.4 As a result, Canal revenues have con- percent of GDP in non-tax revenue to the tinuously increased even in years when total government. cargo was declining, as for example in 2009. The resilience of Canal revenues is due to Moreover, the variety of goods as well as the both the variety of goods going through the adjustments in fees has decoupled Canal rev- Canal and a proactive fee policy by the ACP. enues from the price movements of any one The three main types of cargo going through good. Even fluctuations in overall commod- the Canal are containers, grains, and oil ity prices that commoved with the value of The Nature of Panama’s Economic Growth 25 Figure 2.4  Panama-U.S. Growth Differential (Percentage Points, Panama GDP pc Growth Minus U.S. pc growth p.p.) and Inflation Differential 15 Post-transfer Canal to Pre-transfer Canal to Panama Panama 10 5 0 in p.p. –5 –10 –15 –20 80 12 92 82 94 84 96 86 98 10 88 90 02 04 06 08 00 20 20 19 19 19 19 19 19 19 19 19 20 20 19 20 20 Inflation differential 20 GDP per capita growth differential Source: World Bank 2015. Note: pc=per capita; p.p.= percentage points. Table 2.1  Panama Canal Traffic by Type of Cargo Total Cargo Containers Grains Oil Others Vessels Year (Panama Canal tons) (% of total cargo) (number of ships) 2001 193.2 30.7 28.1 17.6 23.7 12198 2002 234.9 28.1 22.5 12.5 36.8 11862 2003 242.7 32.4 20.6 10.6 36.4 11725 2004 266.9 32.4 20.0 12.5 35.1 12518 2005 279.1 35.0 19.7 12.4 32.9 12648 2006 296.3 38.2 19.9 11.1 30.8 12772 2007 312.8 41.1 16.0 12.7 30.3 13234 2008 309.6 40.2 16.4 13.9 29.6 13147 2009 299.1 39.6 19.9 16.1 24.4 12855 2010 300.8 34.8 24.1 15.5 25.6 12591 2011 322.1 35.3 24.8 15.2 24.7 12989 2012 333.7 35.9 25.0 15.5 23.6 12862 2013 320.6 36.7 16.5 22.7 24.1 12045 Source: ACP and World Trade Organization. 26 The Nature of Panama’s Economic Growth Figure 2.5  Panama Canal Revenues, Commodity Index, and World Trade, 2000–2013 (Nominal Index, 2000=10) 350 300 250 200 150 100 50 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Canal revenues World trade Commodity prices Source: ACP and World Trade Organization. world trade have had little impact on reve- construction and the largest infrastructure nues (figure 2.5). project in Panama. The expansion will dou- ble the Canal’s capacity, increasing econo- mies of scale and international maritime The Impact of the Canal trade. The expansion program consists of on Growth in Specific four main components: (i) a third set of new locks, (ii) a Pacific access channel, (iii) Sectors dredging of navigation channels, and (iv) The Canal has affected the Panamanian improvements to water supply. The impact of economy both directly and indirectly. In ad- the Canal expansion will benefit the econ- dition to the direct effects through transport omy through the construction stage and and communication as well as the ongoing through the increase in traffic, which in turn construction to expand the Canal, Canal op- is expected to boost Canal-related activities. erations have positively affected the rest of The government is also expected to have a the economy. The Canal drives the bulk of significant inflow of additional revenues.6 Panamanian service exports.5 In particular, it Taking advantage of its geographic posi- generates revenues for the local economy tion and the Canal, Panama has transformed and creates employment in the logistics sec- itself into a regional logistics hub performing tor. The recent expansion of the Canal is the very well on indicators of connectivity and largest project at the Canal since its logistics. The country has developed a The Nature of Panama’s Economic Growth 27 sophisticated transport infrastructure 37—and even ahead of developed countries around the Canal (figure 2.6). In particular, like Canada, 38).7 Its geographic position Panama has first-world infrastructure assets, and the Panama Canal give it an advantage with the Panama Canal as an axis for struc- when compared to other countries in the re- turing the development of its logistics ser- gion. However, connectivity falls short of vices. Currently, the majority of logistics what other major logistics hubs such as operators of the world have permanent oper- Singapore and Hong Kong SAR, China ational presence in Panama. This has re- achieve (scoring 107 and 117, respectively) sulted in the availability of a wide range of on the LSCI. In the same vein, Panama lags logistics services, mainly devoted to mari- behind these economies in terms of the time cargo. It is one of the most connected 2014 Logistic Performance Index (figures 2.7 countries in the region and has the highest and 2.8). Hence, the potential to attract addi- Liner Shipping Connectivity Index (LSCI) in tional services by developing value-­added the LAC region (Panama has achieved a service infrastructure remains high. In the score of 45, ahead of Mexico, 42, and Brazil, same vein, regional integration offers still Figure 2.6  Transport Infrastructure in the Canal Zone ’ Source: “Implementation of Panama Maritime and Logistics Strategy—Phase II: Air Logistics Strategy for Panama.” World Bank, February 2014. 28 The Nature of Panama’s Economic Growth Figure 2.7  Logistic Performance Figure 2.8  Logistic Performance Index Index by Components 4.5 4.5 4 4 3.5 3.5 3 3 2.5 2.5 2 2 1.5 1.5 1 1 0.5 0.5 0 0 a s e na ile ca a nd or m bi s re s e g s Ch Ri om t es nc in hi m na ap tu en la ac C in te a lo er uc st Pa pm ng st R, el tr Co pe th Cu tr m Co Si SA d hi m Ne as Ti an ls co ng fr na ng In ics Ko io ki st at ac ng gi rn Tr Ho Lo te In Source: World Development Indicators (database), World Bank, Panama Hong Kong SAR, China Singapore Washington, DC, http://data.worldbank.org/products/wdi. Source: World Development Indicators (database), World Bank, Washington, DC, http://data.worldbank.org/products/wdi. untapped opportunities for further efficiency Airport as a major regional passenger hub gains and growth (box 2.1). for connecting passengers between North, In terms of other forms of transportation, Central, and South America. Air passenger railway and air transport are important con- volumes have tripled from 2003–2013 as has tributors to Panama’s logistics success while international passenger traffic, growing from roads are the weakest link. The Canal- 2.1 million to 7.7 million during the same railway corridor plays an important comple- period, of which 50 percent are transit pas- mentary function in the feeder service sengers (the national carrier COPA has the scheme of Panama’s transshipment ports, main market share). Contrary to its excellent linking the Atlantic and Pacific seaports on a position in ports and airports infrastructure 75-kilometer stretch along the Canal. Most (figure 2.9), Panama ranks 48th in quality of of the ships passing through the Canal have road infrastructure.8 Road density (190 miles their dedicated feeder services for either the of roads per one square kilometer of terri- American west or east coast and stop only tory) is, together with that in Nicaragua, the once at either an Atlantic or Pacific trans- lowest in Central America. Due to Panama’s shipment port. Air transport is one of geographic location and the concentration of Panama’s fastest growing sectors, contribut- logistics around the Canal zone, 71 percent ing around US$1 billion to the country’s of all main routes are short-haul. Truck uti- GDP and creating over 10,000 direct and in- lization is quite low, with a high percentage direct jobs. This is the result of having posi- (50 percent) of empty backhauls and one of tioned Panama’s Tocumen International the highest wait times in Central America The Nature of Panama’s Economic Growth 29 Box 2.1  Regional Integration in Central America The integration of markets and infrastructure networks has extraordinary power to stimulate growth through efficiency gains, technology spillovers, and investment. However, despite several notable bright spots in economic cooperation, the promise of greater regional integration among the Central American countries has remained largely unfulfilled. Central America’s efforts at forming greater regional economic ties have been ongoing for decades, most notably on the trade side stretching from the establishment of a Central American Common Market in the 1970s to the Dominican Republic–Central America Free Trade Agreement and the EU–Central America Free Trade Agreement. But there have also been several significant integration successes outside of trade, including in the energy sector with the Sistema de Interconexión Eléctrica de los Países de América Central (SIEPAC), a transmission line project which came into being in June 2013 and connects the electricity grids of Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama. That interconnection could enhance investment opportunities for large-scale renewable energy projects, as well as improve the efficiency and the security of electricity supply in Central America. Financial interconnectedness is also on the rise, with almost all the banks in the region expanding operations into neighboring countries, although differences in legal and regulatory frameworks have limited greater connectedness. But by and large, Central America has not realized the gains expected from integration efforts. Exporters have not experienced appreciable growth in either export lines or markets since the signing of the regional free trade agreements. Bilateral trade in Central America remains an agenda of largely untapped opportunities, as evidenced by the negative elasticity of bilateral trade to different factors including adjacency and time-ad- justed distance. This untapped potential can be attributed to deficiencies in infrastructure, burdensome processes, and congestion at the border crossings limiting trade, even where distances are short. Poor road quality, particularly on secondary and unpaved rural roads, has led to road transport prices averaging 17 cents per ton-kilometer in Central America, one of the highest road transportation costs in the world. Burdensome customs proce- dures, lack of regulatory harmonization (for example in terms of phytosanitary standards for agricultural exports), few established trade links, an atomized shipping industry, sparse information sharing on cargo and backhaul in trucking, and relatively few options and competition for shipping also limit the gains from free trade agreements. Transport and logistics costs can surpass 50 percent of the final price of goods traded, and it has been estimated that intraregional exports in Central America could have doubled if the region achieved the adjacency and time distance factors of a truly integrated region. Source: Gordillo et al. 2010; Osborne, Pachon, and Araya 2014; and Marcelo et al. 2010. 30 The Nature of Panama’s Economic Growth Figure 2.9  Line Shipping Connectivity Source: “Implementation of Panama Maritime and Logistics Strategy—Phase II: Air Logistics Strategy for Panama.” World Bank, February 2014. (0.05h/km). Security costs are above the larger investment (both public and private) Central American average, amounting to in residential and non-residential infrastruc- almost US$600 per vehicle in 2011 (a 27 ­ ture (1.9 percent contribution over the past percent increase compared to 2008). five years). Another emerging growth driver In terms of sectoral composition, has been hotels and restaurants (0.3 percent growth has mainly stemmed from the trans- contribution over the past five years). In con- port and communications, financial services, trast, the contributions of agriculture and commerce and construction sectors (Figure manufacturing have declined (from 0.2 and 2.10). In the past decade, services have ac- 0.3 percent respectively in 2005 to 0.1 and counted for more than 50 percent of GDP 0.1 in 2013). growth, boosted by transport and communi- Panama has continued to develop its po- cation (explaining on average 1.8 percentage sition as an international financial center. points of growth between 2001 and 2013) The country has established itself as a major and financial and business services (explain- offshore banking center, hosting 80 banks ing 1.7 percent). Commerce, a traditional with total assets of approximately US$112 growth contributor, has recently contributed billion, nearly three times the size of the less as a consequence of external conditions country’s GDP. Most of the country’s financ- (1.4 percent on average between 2003 and ing needs are met by the banking sector and 2011 versus 1.2 percent between 2012 and not by equity or bond markets.9 The compet- 13). In addition, construction has become itive and sophisticated banking sector of one of the key drivers of the economy due to Panama has shown that it is agile and The Nature of Panama’s Economic Growth 31 Figure 2.10  Sectoral Contributions to GDP Growth from 1947 to 2013 (Percentage Points) 15 12 9 6 3 0 –3 0 0 0 0 01 02 03 04 05 06 07 08 09 10 11 12 13 97 98 99 00 20 20 20 20 20 20 20 20 20 20 20 20 20 –1 –1 –1 –2 47 81 71 91 19 19 19 19 Financial services and business services Transport and communication Commerce Construction and mining Hotels and restaurants Other GDP Source: Authors’ estimations based on the National Institute of Statistics of Panama (INEC) (accessed November 17, 2014), http://www​ .­contraloria.gob.pa/inec/. capable of adapting to a rapidly changing including Canal-related export activity and environment. The financial sector has a long tourism) and consumer credit (16 percent). tradition in Panama, preceding the Canal Mortgage lending has been growing slightly devolution. Its contribution to economic faster than GDP over the last few years, but growth has been larger than those of tradi- the lack of data on real estate prices and the tional sectors, such as agriculture and man- resulting absence of loan-to-value ratios rep- ufacturing. The banking sector of Panama is resent a significant information gap for effec- widely regarded as healthy and sound. Most tive prudential management and banks in Panama are well capitalized, profit- supervision. Nonetheless, anecdotal evidence able, and liquid, with nonperforming loans suggests that a doubling of urban real estate at very low levels. The sector has been prices over the past five years has been driven by investment in logistics and trans- roughly in line with the rapid pace of GDP port, construction, and commerce, and by growth. an increasing private consumption boosted Although commerce has been one of the by solid domestic demand. As a result, traditional growth drivers, its contribution mortgage lending represents the largest has shrunk recently because of external fac- share of total private credit in Panama at 30 tors affecting the trade of the Colón Free percent, followed by commerce (19 percent Zone. Commerce has been driven by retail 32 The Nature of Panama’s Economic Growth sales as a result of the increase in vigorous growth. Overall, construction has Panamanian incomes and the expansion of grown on average 21 percent per year in malls and commercial stores and by whole- the last five years, contributing two per- sale sales, mainly from the Colón Free centage points of GDP. Meanwhile, the sec- Zone. The Colón Free Zone is a giant bazaar tor contributed 17 percent of total growth cum container port where companies from in employment. It is very likely that in the across the world—many from East Asia last decade there has been a migration of where 65 percent of the merchandise origi- agricultural workers from the provinces to nates—can market their products to buyers Panama City to work in the sector. from the region, saving the latter the incon- Construction is, after agriculture, the sec- venience of traveling to Asia and of stock- tor with the highest share of employees piling parts. This cluster has become a who have completed only secondary educa- significant financial center serving, in par- tion or less (figure 2.11). ticular, clients in Columbia and República The role of agriculture and manufactur- Bolivariana de Venezuela as well as other ing for growth has decreased, although agri- parts of Latin America. In the last two culture remains a key source of income for years, the exports-import activity declined the bottom 40 percent. While still growing in as a consequence of lower sales to the absolute terms, the shares of both agriculture Dominican Repbulic, Puerto Rico, and and manufacturing have declined in total República Bolivariana de Venezuela and the GDP due to the strong growth of other sec- deceleration of sales to Colombia. Sales to tors. The share of agriculture dropped from República Bolivariana de Venezuela de- seven percent of GDP in 2000 to three clined due to the problems of that country percent in 2013, and manufacturing declined in accessing foreign exchange markets, from 10 percent to five percent. While agri- while sales to Colombia remained stagnant culture accounts for only a small share of due to increasing tariffs on textile and shoes GDP, it employs 17 percent of the workforce exports. and has contributed to poverty reduction be- The construction sector has been an im- cause it employs a large share of the bottom portant growth driver in recent years 40 percent (see Figure 1.5). Main products and created most of the new employment include rice and beans for domestic con- between 2007 and 2012, especially for low- sumption and bananas, plantains, shrimp, skill workers. Over the past decade, con- sugar, pineapples, watermelons, and coffee struction exhibited strong growth for exportation. In terms of manufacturing, explained by vigorous private investment the textile industry is declining and the in residential projects and public infra- growth prospects of other industries, such as structure projects, such as the expansion of food processing, construction materials, and the Panama Canal and the construction of chemicals, are dim. line 1 of the Panama City Metro. In addi- Panama is richly endowed with natural tion, in recent years, construction of hotels capital and has used it sustainably; nonethe- and storage has also contributed to the sec- less, the mining sector accounts for a small tor. Related indicators, such as concrete share of GDP so far although it could expand and cement production, have also exhibited further in the future. Between 2008 and The Nature of Panama’s Economic Growth 33 Figure 2.11  Employment by Sector and Education Level, 2012 (Total Number) Community, social and personal services 476140 Wholesale, accommodation and food services 359110 Agriculture, forestry and fishing 203394 Construction 161776 Transportation, storage, and communication 132682 Manufacturing 101140 Financial, insurance and real estate activities 50384 Electricity, gas, and water supply 12425 Mining and quarrying 3528 0 200000 400000 600000 Primary incompleted Primary completed Secondary incompleted Secondary completed Postsecondary incompleted Postsecondary completed Source: Authors’ estimations based on the National Institute of Statistics of Panama (INEC) (accessed November 17, 2014), http://www.contraloria.gob.pa/inec/. 2012, the sector grew 14 percent, averaging The Increasing Role of two percent of the country’s GDP. In 2011 and 2012, gold was the top export of Public Investment Panama, totaling US$117 million and Investment has played a prominent role US$116 million, respectively. By 2013, the in Panama’s growth in recent years, support- mining sector was producing US$553 mil- ing a shift of the country’s growth model to- lion or two percent of Panama’s GDP. wards domestic demand (figure 2.12). Construction materials accounted for most Although private consumption has been an of this production, while gold production important driver of growth (contributing on and exports started declining, down to average 4.2 percentage points since 2001), the US$66 million in 2013 and to only US$38 contribution of net exports has fluctuated million in the first quarter of 2014 (a 97 with external conditions. During the period percent drop vis-à-vis the same period in from 2004 to 2008, net exports contributed 2013), due in large part to a significant de- significantly to overall growth through high cline in gold prices that made production export growth in services (accounting for uneconomical. 2.8 percentage points of overall growth). 34 The Nature of Panama’s Economic Growth During the crisis year 2009, net exports con- FDI and Private tributed positively to growth based on the significant contraction of imports. In the Investment postcrisis years, the contribution of net ex- FDI has financed a large part of this in- ports to growth has been moderate as the ex- frastructure investment and remains the pansion of imports exceeded that of exports. largest source of external finance of the cur- While investment, both public and private, rent account deficit (figure 2.12). Panama contributed only around one percentage has been successful in attracting FDI inflows point to overall growth between 2001 until from a group of diversified economies from 2009, its contribution doubled thereafter, off- all over the world. In general, FDI has gained setting the lower contribution of net exports. in importance in Panama since the late Gross investment reached almost 30 percent 1990s, and in the last decade it reached the of GDP in 2013 (figure 2.14). current high level in excess of 10 percent of The increased contribution of public in- GDP. These buoyant FDI inflows have fi- vestment to growth has been backed by an nanced on average 80 percent of the current ambitious public investment program and account deficit in the last three years. The av- the Panama Canal expansion. The share of erage of the deficit on the current account of public investment in GDP increased from the balance of payment increased from 3.1 percent in 2001 to 13.7 percent in 2013. US$942 million in 2003–2007 to US$3,962 In 2010, the government launched a public million in 2010–2012. The main reason for infrastructure program comprising more the expansion of the deficit is a large increase than 100 projects such as highway upgrades; in investment from an average of US$3,212 roads enlargement and upgrade in Panama million in 2003–2007 to US$8,571million in City; airport infrastructure upgrades in six 2010–2012, although this was partly com- airports (including Tocumen Airport); a cold pensated for by an increase in savings from chain to support agriculture activity and re- US$1,818 million in 2003–2007 to US$4,307 duce losses in the sector; the Panama Canal million in 2010–2012. expansion; Metro line 1 and a Metro bus sys- As a consequence, Panama’s growth rate tem in Panama City; Panama City Bay reme- is highly dependent on FDI (figure 2.13). diation; improvement in the sanitation A one percent increase in the FDI to GDP services, hospitals, and 21 health care cen- share has a short-term impact on real GDP ters; Curundu urban renovation; 10 air naval growth equivalent to 0.63 percentage points stations; and four new prisons, among oth- and a long-term effect equal to 0.79 percent- ers. The total investment of the program is age points; in fact, 56 percent of the variance estimated at US$16.7 billion with an overall in the growth rate is explained by FDI. execution above 80 percent.10 The Panama FDI and private investment more gener- Canal expansion project amounts to US$5.2 ally have increased due to a favorable and billion and is currently planned to be final- improving business environment. FDI ized by the end of 2015. In addition, accord- inflows increased from nine to 11 percent of ­ ing to the government, this program was GDP between 2010 and 2013 and private expected to generate at least 100,000 new investment from 13 to 16 percent. As ­ jobs. mentioned before, Panama is a top ­ The Nature of Panama’s Economic Growth 35 Figure 2.12  Current Account Deficit and FDI 20.0 15.0 10.0 5.0 0 –5.0 –10.0 –15.0 –20.0 1980 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 FDI (% of GDP) Current account deficit (% of GDP) Source: Author’s estimations based on the National Institute of Statistics of Panama (INEC) and United Nations Conference on Trade and Development (UNCTAD). http://www.contraloria.gob.pa/inec http://unctad.org/ Figure 2.13  Real GDP Growth and FDI, 1980–2012 (Percent Change) 20 15 10 5 0 –5 –10 –15 80 82 84 86 88 90 92 94 96 98 0 02 04 06 08 10 12 GGDP FDI Source: Author’s estimations based on the National Institute of Statistics of Panama (INEC) and the World Bank’s World Development Indicators. http://www.contraloria.gob.pa/inec;http://unctad.org/;http://data.worldbank.org/products/wdi. 36 The Nature of Panama’s Economic Growth performer in Latin America in the Global regional headquarters in the country in Competitiveness Report and has managed to 2007. Maersk was followed by Procter & improve its ranking in the Doing Business Gamble (2007); LG, Roche, Caterpillar, Indicators, moving up to 55th (fifth in Latin Western Union, and Halliburton (2008); America in 2014) from 79th overall in 2007. Phillips, Cemex, Pan American Life, and Panama has been successful in attracting Nestle (2009); Sab Miller, Otis, Ericsson, headquarters of foreign companies to and Sanofi (2010); Unilever, Johnson & Panama City. Under the SEM (Sedes de em- Johnson, Baxter, Merck, Van Oord, and presas multinacionales) program (also called Huawei (2011); Belcorp, General Electric, Law 41) established in 2007, Panama created L’Oreal, Diageo, and 3M (2012); and Hino, a new incentive regime (made up mainly of Ace Limited, and Neptune (2013), among fiscal, labor, and migratory benefits) to at- others. As of 2014, there are more than 100 tract foreign companies to Panama, similar companies under this regime, and they have to the regimes implemented in Singapore in turn invested almost US$600 million in and Switzerland. These benefits are comple- Panama and currently employ about 5,000 mented by Panama’s position as a logistics workers. hub, its connectivity and well-developed in- FDI has flowed into a large range of frastructure, its solid banking center, and its sectors, with an emphasis on services. To ­ dollar-based economy. Maersk Cargo, one of date, FDI inflows are concentrated in service the most important cargo shipping compa- sectors, such as commerce, transport, and nies in the world, was the first company to communications, and the financial services take advantage of this law and established its (figure 2.15). The sectoral composition of Figure 2.14  Savings Versus Figure 2.15  FDI by Economic Investment, 1980–2013 Activity, 2010–2012 (Share of (Percent of GDP) Total FDI) 40.0 50 45.7 45 30.0 40 35 20.0 30 10.0 25 21.5 20 0 15 11.6 10 8.3 –10.0 5.1 5 3.6 2.2 1.7 0.4 –20.0 0 1980 1985 1990 1995 2000 2005 2010 ce s g s d vic nd s re g nc tio d ce ice nt rin in na ca n tu er an ser n a ls n st s in Fi uni rt a ra vi tu v re e ul m Gross National Savings (RHS) M er er au o ric ac m m o te ing cti rs m sp Co uf Ag ia Ho ous tru he co an an Ot Gross Investment (RHS) h ns Tr M Co ls External Gap Source: World Development Indicators (database), World Bank, Source: Authors’ estimations based on the National Institute of Washington, DC, http://data.worldbank.org/products/wdi. Statistics of Panama (INEC) (accessed November 17, 2014),http:// www.contraloria.gob.pa/inec/. The Nature of Panama’s Economic Growth 37 FDI in Panama more closely resembles some República Bolivariana de Venezuela, and of the Caribbean countries, rather than other the United States. Panama’s main export Latin American economies. goods are textiles, chemicals, and machin- While the increase in investment led to ery and electric goods, and are sold primar- an expansion of imports, mostly of invest- ily to Colombia, República Bolivariana de ment goods, Panama’s exports have grown Venezuela, and the United States. Panama’s more slowly and were concentrated in ser- export markets are diversified and not con- vices. Public and private construction proj- centrated (in 2011, the Herfindahl index ects generated a need for investment goods, was 0.08). goods that were imported (figure 2.16). At Moreover, the increase in investment in the same time, Panama’s exports are ori- physical capital has been accompanied by ented toward services, unlike those of many an increase in the labor force and in total other upper-middle-income countries. In factor productivity, each explaining around the period from 2001 to 2013, exports of a third of economic growth between 2001 services were on average 62 percent of total and 2012 (figure 2.18). These results have to exports (figure 2.17). These services in- be interpreted with care because the meth- cluded mainly transport and travel, repre- odology used biases the estimate of total senting more than 75 percent of the total factor productivity upward.11 Despite this export of services. Transport is directly upward bias and subsequent uncertainty linked to Canal services, and its share has about the size of the contribution of total remained steady in the recent past. factor productivity, its increase is consistent Meanwhile, travel has increased its share as with the structural change observed in a consequence of the increasing number of Panama. Workers from the agricultural sec- tourist arrivals (which by 2012 exceeded 1.6 tor moved into urban sectors, and the share million), coming mainly from Colombia, of better-paid services expanded, suggesting Figure 2.16  Imports of Goods and Figure 2.17  Exports of Goods and Services, 1996–2003 (Share of GDP) Services, 1996–2013 (Share of GDP) 120 120 100 100 80 80 60 60 40 40 20 20 0 0 96 97 98 20 9 00 20 1 02 20 3 20 4 05 20 6 20 7 08 20 9 10 11 12 13 96 97 98 99 00 20 1 20 2 20 3 20 4 05 20 6 20 7 08 09 10 11 12 13 0 0 0 0 0 9 0 0 0 0 0 0 0 20 20 20 20 20 19 20 20 19 19 20 20 20 19 20 20 19 19 19 19 20 20 20 Import of goods Import of services Export of goods Export of services Source: Author’s estimations based on World Economic Outlook Source: Author’s estimations based on World Economic Outlook (WEO) indicators, https://www.imf.org/external/pubs/ft/ (WEO) indicators, https://www.imf.org/external/pubs/ft/ weo/2014/01/weodata/index.aspx. weo/2014/01/weodata/index.aspx. 38 The Nature of Panama’s Economic Growth Figure 2.18  Factors Contribution Figure 2.19  Labor Productivity by to GDP Growth, 1971–2012 Economic Activity (Dollars of 1996) (Percentage Points) Financial and Transport and housing services communication 15 170000 12 120000 9 70000 6 20000 18000 3 16000 14000 12000 0 10000 8000 –3 6000 4000 –6 2000 0 2007 2008 2009 2010 2011 2012 0 91 90 0 01 02 03 04 05 06 20 7 08 09 10 11 12 0 19 198 00 20 20 20 20 20 20 20 20 20 19 –19 20 20 –2 Agriculture Manufacturing – 81 71 19 Construction Commerce, hotels Capital Labor Productivity GDP and restaurants Total Source: Authors’ estimations based on the National Institute of Source: Authors’ estimations based on the National Institute of Statistics of Panama (INEC) (accessed November 17, 2014), http:// Statistics of Panama (INEC) (accessed November 17, 2014), http:// www.contraloria.gob.pa/inec/. www.contraloria.gob.pa/inec/. that resources were allocated more effi- number is almost five times the construction ciently among sectors. figure.12 Labor productivity has increased as well, Job creation has been concentrated in displaying stark differences across sectors the Province of Panama. Almost two-thirds (figure 2.19). Overall, labor productivity in- of the net job gain in Panama between creased by 27 percent between 2007 and 2000 and 2010 occurred in the Province of 2012. The main services sectors—financial Panama, mainly in the commerce, con- services and transport and communication, struction, and services sectors. Chiriquí which are capital-intensive—are the more and Coclé followed with nine and eight productive activities, with productivity well percent of net job growth, respectively. It is above the overall average. Meanwhile, pro- worth noting that job creation for each of ductivity in construction, a labor-intensive these sectors in the Province of Panama is sector whose contribution to growth and job larger than total job creation in any of the creation has been important, is just under other provinces. Agriculture activity exhib- half of the total productivity of the economy. its a loss of almost 9,000 jobs, the only sec- Differences in productivity are also linked to tor with negative net job creation. Chiriquí skill mismatches and the low level of skills of and the Comarca Ngäbe Buglé showed the people employed in labor-intensive activities. largest losses. It is very likely that the For instance, only nine percent of the total booming construction services sector has workers in the construction sector have at- attracted workers from all over the country, tained a postsecondary education, while in mainly from rural areas, thus contributing personal services this figure is 29 percent, to a reduction in the agricultural labor and in financial and real estate activities this force. The Nature of Panama’s Economic Growth 39 Panama’s Stable from the Canal are a significant non-tax ­ revenue source for the central government, Macroeconomic representing over 10 percent of total govern- ment revenues. While dividends and fees Environment from the Panama Canal and other non-tax Another factor in Panama’s strong revenues added another 4.8 percentage growth performance was the country’s stable points of GDP in 2013 to the central govern- macroeconomic framework. Macroeconomic ment’s current revenues, they are low by in- stability in Panama is based on full dollariza- ternational standards. Nevertheless, fiscal tion, fiscal policy that follows a fiscal rule, deficits remained relatively low amounting to and a healthy banking sector. Dollarization −2.1 percent in 2011, −1.5 in 2012, and −3 dates back to a monetary convention signed percent 2013 (overall fiscal balance exclud- with the United States following Panama’s in- ing the Panama Canal Authority). dependence from Colombia in 1903 and co- In recent years with particularly high inciding with the beginning of the Panama growth rates, inflation rose slightly and has Canal construction. Given the lack of inde- moderated with the reacceleration of pendent monetary policy, fiscal policy plays growth rates leading to a gradual real ex- a crucial role in stabilizing the economy. change rate appreciation. Inflation peaked And Panama has adapted the social and fis- at around six percent in 2011 and has since cal responsibility law in 2002 that mandates come down to levels around three percent. fiscal deficit ceilings to help maintain fiscal As these rates have been higher than the in- prudence. According to the latest flation rate in the United States since the International Monetary Fund (IMF) Article economy took off in 2003, the inflation dif- IV Consultation (“Panama Article IV,” June ferential has led to a gradual real apprecia- 2014), most local banks have a traditional tion with modest consequences for business model with limited wholesale fund- Panama’s competitiveness. ing, and are well capitalized, profitable, and Panama continued the downward trend- liquid. The system showed its resilience dur- ing of its debt-to-GDP ratio. The ratio of ing the 2008 global financial crisis. public debt to GDP (including external debt As a result, fiscal deficits have been kept contracted for the Panama Canal expan- in check despite the high public investment sion) fell from about 66 percent in 2005 to and a low tax revenue collection. As dis- about 41 percent in 2013. To encourage the cussed above, public investment has been development of domestic capital market, stepped up significantly in recent years, and the authorities have also increased local Panama has been characterized by relatively debt issuance. Its efforts have been awarded low tax revenues. Despite the recent tax re- by all credit rating agencies. Panama form program implemented in 2009 and achieved investment grade in the spring of 2010, tax revenue reached 12.0 percent of 2010, and the rating has further improved GDP in 2013. It averaged 11.9 percent of in 2012. In April 2013, all three agencies GDP in the last three years, below the aver- confirmed Panama’s BBB rating, one notch age of 13.4 percent in Central America and above investment grade, on par with Brazil, the world average of 17.3 percent. Revenues Mexico, and Peru. 40 The Nature of Panama’s Economic Growth Outlook warehousing and other services are also being developed. The recently started expan- There are good reasons to expect that sion of other transport and logistics subsec- growth will continue to be strong in Panama tors—for example, air transport, roads, and (six to seven percent) in the near future. The railroads—is expected to continue. Among completion of major infrastructure projects these, Tocumen airport is currently undergo- (Canal expansion and the first Metro line) ing an expansion with a total investment of will lower public investment in the coming about US$700 million, and the road network years; however, this will be offset by the is being modernized. planned construction of the second Metro Although the mining sector could turn line, and the additional traffic generated by into a major driver of growth in the near fu- the expanded Canal. Further, there is no sug- ture, it is subject to uncertainties. The largest gestion of a downturn in private investment, business opportunity is the Cobre Panama according to leading indicators of residential project owned by Minera Panama, which is and non-residential construction. 80 percent foreign owned by Canada-based Construction permits in the first half of 2014 First Quantum Minerals. This project alone reached 7,268 (equivalent to US$1,155 mil- could involve about US$10 billion in invest- lion of new construction). This represents a ment over the first ten years. Over a pro- similar number of construction permits to jected 30-year life, it could also contribute that in the first half of 2013 (7,254) but an US$7 billion to the Panamanian economy in increase in value of 20 percent. the form of royalties and taxes, create 10,000 The prospects of sustained high growth in new jobs and over 2,000 temporary jobs the coming years are also supported by (from 3,780 in 2013, or 0.2 percent of the emerging opportunities in key sectors such country’s employees), and make US$1.5 bil- as transport and logistics, mining, financial lion in wage payments and US$800 million services, and tourism. The transport and lo- in social security payments. Uncertainties on gistics sector is already one of the most im- the future outlook of the sector relate to the portant and dynamic sectors in the economy uncertain levels of global demand for miner- and is expected to remain a main contributor als with effects on prices and the actual size to growth. The higher volume of cargo pass- of the underground deposits. Moreover, po- ing through the expanded Canal will by itself litical, social, and environmental factors add increase the demand for related transport to the complexities (this issue is further de- and logistics services. In addition, major veloped in Chapter 6). business opportunities in the next few years Panama has the most dynamic banking are related to private transport infrastructure sector in the Central American region, and and the development of value-added logistics the banking sector is expected to continue to services. For example, the private sector is support GDP growth. On the one hand, the lining up investments of around US$600 projected growth in the logistics and trans- million to expand existing port terminals port sector is expected to raise demand for and US$300 million to construct a new con- funds for new investment projects. On the tainer terminal in the Pacific. Special eco- other hand, high growth is raising nomic zones and several logistics parks for Panamanians’ income, increasing the The Nature of Panama’s Economic Growth 41 opportunities for bank intermediation. In pipeline to build new hotels in the next three addition, the diversification of the economy years in Panama City, Chiriquí, Los Santos, into new growth sectors will increase the rel- and Bocas del Toro). evance of alternatives to bank finance. In ad- dition, business opportunities are emerging in the insurance and reinsurance markets. Filling Knowledge Gaps The insurance market’s penetration is low in There are several sectors that are prom- regional comparison, and Panama seeks to ising drivers of growth going forward. A position itself as a reinsurance hub for Latin thorough analysis of different growth scenar- America. ios would support present day decision-­ Tourism is an important sector for making. There are uncertainties about the Panama. The total contribution of the travel sectoral composition of growth and the lack and tourism sector to GDP was about 14 of knowledge about the channels through percent of GDP in 2013 and, according to which poverty reduction and shared prosper- the World Travel and Tourism Council, is ity would be affected. A promising tool to fill expected to increase by seven percent in this knowledge gap would be a computable 2014 and continue to grow by 6.3 percent general equilibrium model. Such a model annually over the next decade. This growth would provide insights into the trade-offs be- will be supported by transport improve- tween investing in different public services. It ments (for example, the expansion of would also provide information on the chan- Tocumen) as well as a series of grants and nels through which different scenarios would incentives to invest in tourism facilities affect growth, employment, and ultimately (more than US$100 million are in the poverty reduction and shared prosperity. Notes 1. For a comprehensive description of the his- 6. Bussolo et al. 2011. tory and role of the Panama Canal for the 7. The index is computed by the United Nations Panamanian economy, see Barletta (2012). Conference on Trade and Development 2. World Bank 2015. (UNCTAD) based on five components of the 3. In 2000, the largest ship could carry around maritime transport sector: number of ships, 3,500 containers, but in 2013 this had in- their container-carrying capacity, maximum creased to 4,500 containers (the maximum vessel size, number of services, and number capacity for Panamax ships) in terms of ships of companies that deploy container ships in a that actually pass through the Canal. The sec- country’s ports. ond line of locks will allow ships with a ca- 8. Schwab and Sala-i-Martin 2014. pacity of 12,500 containers (the standard for 9. In 2013, total internal credit to the private sec- Post Panamax ships) to also pass through the tor of Panama was US$38 billion. In compari- Panama Canal. son, the Panama Stock Exchange traded a total 4. The Canal Authority uses the Sistema Universal volume of only US$5 billion in 2013, less than de Arqueo de Buques del Canal de Panama (CP/ 12 percent of GDP. Of this amount, US$3.7 SUAB), which is based on a formula to estimate billion corresponded to the private sector, the “Panama Canal tons” (a Panama Canal ton mostly corporate bonds, and the remainder equals 100 cubic feet of volume capacity). was domestically issued public debt. Equity 5. Pagano et al. 2012. represented just US$400 million. 42 The Nature of Panama’s Economic Growth 10. The frequent use of turnkey contracts may un- However, the impact of the transfer of the derestimate the total investment. Canal to Panama on the GDP is properly 11. The estimation of total factor productivity accounted for (appearing under transport, was done using a stock of capital that does storage, etc.). As a result of this inconsis- not properly adjust for the recovery of the tency, the estimate of total factor productiv- Canal Zone in 1999. The reason is that the ity is biased upward. capital stock is constructed using the per- Personal Services include a large variety of 12. petual inventory model and there is no ad- occupations ranging from legal services and justment for the handover of the Canal. bookkeeping to housekeeping. References Barletta, N. 2012. Estrategia para el Desarollo the High Price of Road Freight Transport Nacional—Vision, Realizacion, Actualizacion. in Central America?” Policy Research Panama: Universidad Latina. Working Paper 6844, World Bank, Bussolo, M., R. de Hoyos, and D. Medvedev. Washington, DC. http://documents.world- 2011. “Distributional Effects of the Panama bank.org/curated​/­en/2014/04/19432378​ Canal Expansion.” Policy Research Working /­drives-high-price-road​-freight​-transport​ Paper 5848, World Bank, Washington, DC. -central​-america. Gordillo, D., A. Stokenberga, and J. Schwartz. Pagano, A., M. Light, R. Ungos, O. Sanchez, and 2010. “Understanding the Benefits of Regional E. Tapieros. 2012. “Impact of the Canal Integration to Trade: The Application of a Expansion on the Panamanian Economy.” Gravity Model to the Case of Central Maritime Policy and Management 39 (7): America.” Policy Research Working Paper 705–722. 5506, World Bank, Washington, DC. Schwab, Klaus, and Xavier Sala-i-Martin. 2014. Marcelo, D., A. Stokenberga, and J. Schwartz. The Global Competitiveness Report 2014– 2010. “Understanding the Benefits of Regional 2015. World Economic Forum. Integration to Trade: The Application of a UNODC (United Nations Office of Drugs and Gravity Model to the Case of Central Crime) 2013. “Statistics Online.” https://stats​ America.” Policy Research Working Paper .unodc.org. 5506, World Bank, Washington, DC. World Bank. 2015. “The Rise of the South.” Osborne, Theresa, Maria Claudia Pachon, and Flagship Report of the Chief Economist Office Gonzalo Enrique Araya. 2014. “What Drives of the Latin America Region. The Nature of Panama’s Economic Growth 43 3. Prioritization Linked to Growth The goal of the Strategic Country of individual countries in Latin America for Diagnostic (SCD) is to identify the most each of the explanatory variables. In this re- critical factors constraining or driving growth. gard, two sources are particularly useful. The The diagnostic of growth in the previous chap- first one is a study of economic growth in ter presents the first step in identifying priority Latin America and the Caribbean (LAC) by areas and concrete opportunities for actions Loayza et al. (2004). The second one is a that Panama could take to increase the proba- forthcoming LAC regional study by Araujo bility of continued growth and contribution to et al., which updates and builds on the work welfare. In this chapter the next steps in the by Loayza et al. (2004) and increases the prioritization process are presented along with sample in terms of country coverage and their key results. time period. In a first step, these analyses provide an estimate of the impact of the explanatory Benchmarking the variables on economic growth in a large Determinants of Growth panel of countries, taking into account poten- tial sources of biases. The analyzed explana- To identify the constraints to Panama’s tory factors include transitional convergence continued growth, a variety of methods were (initial gross domestic product [GDP]); cycli- used, including cross-country benchmarking, cal reversion (initial output gap); structural perceptions data from enterprise surveys, and policies in areas such as education, financial microanalysis. The purpose of this exercise depth, or public infrastructure; and stability was to understand which determinants of policies, such as lack of price stability or cy- growth are the most binding, and to identify clical volatility. In both cases, the impact of not only the areas that are holding countries these factors on economic growth is analyzed back but also those that could have the high- relying on system General method of mo- est impact on growth. ments (GMM) estimation, an econometric estimation technique that takes into account Cross-country benchmarking unobserved country-specific effects and joint Cross-country regressions have been com- endogeneity of the explanatory variables monly used to identify the determinants of (growth drivers) with the dependent variable growth. Growth regressions are used to iden- (economic growth) in a dynamic model of tify which of a large number of factors are panel data. Loayza et al. (2004) use an unbal- statistically and economically significant de- anced panel of 78 countries with non-over- terminants of growth rates. Cross-country lapping five-year observations that span the growth regressions provide a useful input for period from 1961 to 1999. Araujo et al. the analysis. Of particular interest are studies (forthcoming) expand the sample to 126 that not only estimate the determinants of countries using five-year non-overlapping growth but also benchmark the performance panel data from 1970 to 2010. Prioritization Linked to Growth 45 The estimation results can give a sense of The analysis by Loayza et al. (2004) sug- the relative importance of the factors behind gests that infrastructure, education, and the growth; however, important limitations of the government burden are significant constraints approach have to be taken into account. First, to growth in Panama. In contrast, stabiliza- as for any econometric estimation, the re- tion policies, financial depth and external sults may be biased due to omitted variables; conditions appear insignificant.1 The authors second, instruments used for the GMM esti- also find that increases in trade openness mation may be mis-specified; and third, the would positively impact growth in Panama. proxies for the explanatory factors may not However, this finding likely overstates the adequately capture the actual concept that is possible impact of these policies in the case being analyzed. Given these limitations, the of Panama because the proxy used for trade results from the econometric analysis are openness in the regression analysis refers to cross-­ checked with additional types of analy- trade in goods, while Panama is a country sis and country-specific knowledge to form a that exports services rather than goods. The plausible overall picture. fact that stabilization policies, financial depth, In a second step, a benchmark exercise is and external conditions as measured by terms carried out to explore the growth that a coun­ of trade shocks are insignificant is consistent try could have achieved if it were a top per- with Panama’s having performed very well in former in terms of each of the explanatory these dimensions in the past.2 variables. This type of counterfactual exer- The analysis by Araujo et al. (forthcom- cise highlights the areas with the largest im- ing) suggests that infrastructure and educa- pact on per capita income for a given country. tion are significant constraints to growth in This is the approach followed by both Loayza Panama. The results of the exercise indicate et al. (2004) and Araujo et al. (forthcoming), that Panama’s GDP per capita would have although with slightly different specifications. been higher with more improvements in in- The scenarios studied in Loayza et al. (2004) frastructure and, to a lesser extent, education. correspond to a hypothetical situation in Govern­ ment consumption also appears as an which the determinants of growth in each area where Panama would benefit from im- country would improve to be on par with the proved policies. In particular, current expen- top 25 percent of the countries. In Araujo et ditures appear large compared to the levels al. (forthcoming), one of the scenarios con- observed in the best-performing countries. sidered corresponds to an improvement in The authors do not find a significant impact the determinants of growth to the 90th per- on growth had Panama improved its perfor- centile of LAC. This helps determine the pos- mance in public sector institutions. However, sible effects that a stellar performance (relative this finding likely understates the importance to the rest of LAC) in specific policy-sensi- of improving institutions, since the variable tive areas might have had for a country’s level used in the model to proxy institutions is a of GDP per capita. In addition, Araujo et al. measure of the degree of political competi- (forthcoming) consider the impact on GDP tion and political constraints rather than a per capita if the determinants of growth were measure of the effectiveness or efficiency of to improve to the average levels observed in public institutions. As in the case of Loayza OECD countries. et al. (2004), there is no significant impact on 46 Prioritization Linked to Growth Figure 3.1  Stabilization and Structural Policies Index Panama 1 Bolivia Grenada Guatemala Peru El Salvador Guyana Stabilization policies index (0 lowest, 1 highest) 0.8 Colombia St. Kitts & Nevis Honduras Paraguay Chile 0.6 Nicaragua Costa Rica Haiti Jamaica Brazil Mexico Uruguay 0.4 Dominican Republic Ecuador 0.2 Argentina Venezuela 0 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 Stuctural policies index (0 lowest, 1 highest) Source: Araujo et al. (forthcoming). growth from an improvement in variables re- Table 3.1  Top Obstacles to lated to macroeconomic stabilization, reflect- Growth (As Reported by Firms) ing the fact that Panama has already achieved 2006 2010 a high degree of macroeconomic stability, as Top five •  Electricity •  Corruption shown in figure 3.2. concerns •  Corruption Practices of the •   of firms •  Crime informal sector •  Tax rates Inadequately •   Perception data Macroeconomic •   educated workforce Microeconomic survey data can provide fur- instability •  Crime •  Electricity ther insights into the key constraints to growth. Source: World Bank Enterprise Survey, http://www.enterprise­ Data collected through the World Bank Enter- surveys.org. prise Surveys (WBES) in particular provides a wealth of information about the expe­ rience of suggest a number of areas that are to some firms and what may prevent them from grow- ­ extent aligned with the results of the cross-­ ing.3 The Enterprise Surveys, two of which country benchmarking. This is particularly the were conducted for Panama (2006 and 2010), case for the lack of an adequately educated provide useful data on the perceptions of firms workforce (education in the cross-­ country about what they experience as key constraints benchmarking) and electricity (infrastructure to growth. Perception data from the WBES in the cross-­country benchmarking). Prioritization Linked to Growth 47 Firm-level micro data apply as mentioned for the econometric anal- But Enterprise Surveys provide much more ysis of the benchmarking part of the analysis. than just perception data. A second type of Results from the microeconometric anal- data collected in these surveys is objective in ysis suggest that regulatory compliance, se- nature. This data relates to both firm perfor- curity, and infrastructure quality are the mance (for example, sales, employment, and areas that would have the most impact. productivity) and investment climate con- Fajnzylber et al. (2010) estimate that im- straints (for example, how much a firm pays provements in regulatory compliance would in bribes, as opposed to the perception of a have the most impact on the productivity of given respondent on the extent of corruption). Panamanian firms. Regulatory compliance The availability of these objective measures captures the effect of regulation and institu- helps nuance some of the findings. For ex- tional quality and is proxied by three variables ample, in the case of corruption—one of the that are likely to be a reflection of excessive top two obstacles—the 2010 Enterprise Sur- or arbitrarily enforcement of rules and regu- vey shows that the percentage of firms that lations. Inter­estingly, infrastructure quality is pay bribes is relatively small. Thus, the Graft proxied in this analysis by firms’ losses Index, a composite index of corruption that causes by electricity outages. reflects the proportion of times a firm was asked or expected to pay a bribe when solic- Synthesis iting six different public services, permits, or The different sources of evidence suggest a licenses, is similar to the LAC average. Cor- broadly consistent set of areas that include ruption perception has increased, however, infrastructure, education, and public sector and now Panama ranks 102nd of 175 coun- institutions. The cross-country benchmark- tries, while in 2001 it ranked 52nd. Although ing exercise concluded that improvements this information does not solve the discon- would mainly come from infrastructure and nect between a high perception of corruption education. The analysis of microeconomic and relatively average objective indicators of survey data highlighted regulatory compli- bribing, it suggests that other factors may well ance and security (both of which relate to the be affecting the perception of corruption. effectiveness of public sector institutions) and The econometric analysis of firm-level the quality of infrastructure (see table 3.2 for data helps to shed light on the areas that an overview). would have most impact on growth. Because of the availability of objective measures of Priority Areas firm performance and of the seriousness of in- vestment climate constraints, it is possible to Infrastructure with a focus on estimate econometrically the relationship be- energy tween investment climate characteristics and While the presented cross-country and micro- firm productivity. This is the exercise that economic evidence points to binding con- Fajnzylber et al. (2010) undertake using a straints in the broad area of infrastructure, pooled sample of more than 10,000 firms in recent years Panama has been ranked from across Latin America. Similar caveats highly on infrastructure in international 48 Prioritization Linked to Growth Table 3.2  Synthesis on Process to Benchmark Priority Areas for Growth Cross-country benchmarking Microsurvey data 2006 Micro- Emerging Loayza et al. Araujo et al. 2010 Enterprise priority areas Enterprise econometric (2004) (forthcoming) Survey survey analysis Areas Infrastructure Infrastructure Electricity Corruption Regulatory Infrastructure that Education Education Corruption Practices of the compliance (for example, would Government Government Crime informal sector Security electricity) have the burden burden Tax rates Inadequately Infrastructure Education most Macro- educated quality Public sector impact economic workforce institutions instability Crime Electricity comparisons. Panama is one of the most com- broad-based economic growth. Metropolitan petitive countries in the region on infrastruc­ areas face congestion and connectivity chal- ture developments, such as roads, ports, and lenges, particularly in the lower-income airports, according to the Global Competi- neighborhoods on the outskirts of Panama tiveness Ranking prepared by the World Eco­ City (Choloma and Araihan). Panama’s ca- nomic Forum (Schwab and Sala-i-Martin pacity to invest in and manage urban devel- 2014). Panama has positioned itself in the last opment has not kept pace with the real estate decade as a foreign trade and logistics hub boom that has taken place over the last de- due to the development of infrastructure and cade. Panama City would need to significantly services for the different modes of transport, improve its offering in terms of public spaces, with the Panama Canal at the center. More- walkability, and other amenities to compete over, according to the World Economic Forum’s with other global cities. In the livability rank- Executive Opinion Survey (Schwab and Sala- ing of 140 global cities, Panama’s capital was i-Martin 2014), the quality of Panama’s port listed among ten cities showing the steepest infrastructure performance exceeds that of decline.4 The full impact of the Metro on ac- other countries in the LAC region and is sim­ cess and mobility requires a comprehensive ilar to that of Dubai in the United Arab Emir- and multimodal integration policy. ates and Hong Kong SAR, China. In addition, The energy sector in particular, has not been overall infrastructure has improved in recent able to keep pace with the growing demand. years boosted by the government’s ambitious The lack of the diversification of power gen- public investment program. Of particular eration has not matched the accelerated in- impor­ tance are the Panama City-Colón high­ crease in demand in the last years.5 Total way, the Metro line, and upgrades to airports. in­stalled capacity in Panama is approximately However, certain infrastructure compo- 2,500 MW and is comprised primarily of hy- nents appear to have lagged behind, such as dropower (both reservoir and run of river) urban connectivity and, most strikingly, en- and fossil fuel–based generation. However, ergy. The ability of various segments of society given system-wide inefficiencies (including to access job and market opportunities in a several power plant failures) and recent cost-effective manner is critical for droughts, firm capacity has fallen to as low as Prioritization Linked to Growth 49 1,600 MW, while peak demand reached 1,500 universal and increasing secondary enroll- MW, leaving Panama vulnerable to short­ ages. ments. Preschool enrollment has also been Generation capacity expansion is not the only expanded, boding well for future educational cause of the current power sector crisis. The attainment. However, the sector faces a num- fact that Panama’s transmission grid has also ber of challenges that may undermine growth failed to keep up with growing demand has and productivity going forward. Retention in both limited the delivery of elec­tricity from secondary education is low, and there are con­ existing generation assets to distributors and cerns about the quality and relevance of the prevented new power plant con­ struction. education system for the present job market. With the system unable to meet rapidly grow- The demand for highly educated workers ing demands, the government has been is strong and growing in Panama, yet the sys- forced to put emergency response measures tem faces significant dropout numbers at the in place and the energy shortage experienced secondary level. Between 2000 and 2010, the during dry seasons is putting tremendous number of jobs in the country grew by close pressure on electricity prices. to 40 percent. The bulk of the jobs created, The underlying reason for the current sit- however, required completed secondary or uation is market distortion due to weak stra- tertiary education (see ­figure 1.14 in Chapter tegic planning, along with subsidies and 1 above). Less than eight percent of all jobs inefficiencies in the institutional set up. The were filled by those with primary schooling subsidies reduce incentives to invest in effi- or less. Despite this strong demand, the en- cient power generation, transmission, and rollment rate in Panama for secondary school­ distribution. The government plays a major ing is low. After age 12, enrollments begin to role in the transmission market, and the pri- fall, highlighting the difficulties the system vate sector owns the power generation and has in retaining students. The fact that this distribution assets. The potential expansion of two interconnection lines to Costa Rica and Colombia, the latter being the most ­ difficult Figure 3.2  Enrollment Rates by to execute, are expected to reduce pressures Level, 1990–2010 on the power market. The current subsidies 100 scheme poses risks on fiscal sustainability and 90 has heavily distorted the prices of the market, 80 70 which in turn has increased the political cost 60 of modifying the scheme. Electricity costs in 50 Panama remain among the highest in Central 40 America despite government subsidies (the 30 20 price per KWh for industrial users was 16.95 10 cents/US$, for commercial users 17.33, and 0 Pre primary Primary Secondary Tertiary for residential users 13.83). (gross) (net) (net) (gross) 1990 1995 2000 2005 2010 Education and skills Source: World Development Indicators (database), World Bank, Panama has made large gains in education in Washington, DC, http://data.worldbank.org/products/wdi. Note: No data were available for Primary 1995 and Secondary recent years, with primary enrollment almost 1990 and 1995. 50 Prioritization Linked to Growth pattern has changed very little between 2007 is low in Panama at present (four percent of and 2012 is of further concern. the population immigrated in the last ten Firms highlight secondary and vocational years), the education levels of many of these education as a binding constraint for the busi­ migrants are above those of the national pop­ ness environment. A study of the top busi- ulation (figure 3.4). ness environment constraints (World Bank Dropout rates remain high despite the 2011) found an inadequately educated labor high returns to education. Panama exhibits force to be one of the top three constraints large positive economic returns to education, for developing a business in Panama (figure higher than Costa Rica, El Salvador, and 3.3). The quality of graduates appears low: in Honduras.6 On the one hand, the opportu- 2009, on the international education tests nity costs of schooling have probably risen: (PISA), Panamanian students underperformed the massive job creation in recent years has by international standards, having one of the provided income opportunities for students. lowest scores (figure 3.5). No further data exist On the other hand, there is a lack of physical as the country pulled out of the tests after 2009. infrastructure at the secondary level: for The expected growth in demand for high- many in remote rural areas, access to school- skill workers may not benefit Panama citi- ing is still a binding constraint. zens if those with the required skills are not Educational quality is a key factor that can available. Although international migration affect retention. Panama spends slightly more Figure 3.3  Top Ten Business Figure 3.4  Educational Attainment Environment Complaints Among Immigrants in the Labor Force, 2010 (By Country of Birth) Corruption 32.5 100 Practices of the… 13.7 13.5 80 Inadequately… Crime, theft, and… 8.8 60 Percent Electricity 8.0 40 Courts 5.6 20 Labor regulations 3.7 Access to finance 3.6 0 a a Ni USA a Re B st ic st the a AC ld bi in m ez gu O Ric ,R Co ubl or Business licenses… 3.2 om Ch rL Do en ara ica ela W p a l Co c u e th n Customs and trade… 2.6 of V in Re 0 10 20 30 40 Tertiary Secondary Primary Percent Did not complete Primary Source: World Bank Enterprise Surveys, http://www.enterprise­ surveys.org; People 1st, “Skills 2020: World-Class Skills for Source: Authors’ calculations based on Population Census (INEC Panama’s Hotel and Tourism Sector.” 2010). Prioritization Linked to Growth 51 Figure 3.5  PISA 2009 Mathematics Mean Score (By Country for 15-Year- Old Students and GDP Per Capita) 600 550 PISA mean performance 500 450 LTU 400 URY CRI 350 BRA COL PAN 300 0 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 GDP per capita (constant 2005 US$) Source: Authors’ estimations based on the National Institute of Statistics of Panama (INEC), http://www.contraloria.gob.pa/inec/. than the average for Latin America (4.2 ­ cent per­ of graduates from teacher training schools are of GDP compared to four percent); however, actually working as teachers. On a more posi- based on the PISA math and education scores, tive note, Panama has benefited from smaller Panama’s efficiency of public spending on edu- class size: the pupil-teacher ratio is less than 20 cation is low.7 Panama’s score on the Public to 1, lower than in some high-performing Sector Efficiency Index is only 0.88 compared Organisation for Economic Co-operation and to the LAC score of 1.0.8 More­ over, Bruns and Development (OECD) countries. Lucque (2015) provide evidence of a drop in the quality of Panama’s education between Public sector institutions 2000 and 2010 that in their measures rep- (including transparency, resents a drop of more than 20 percent in the efficiency of the sector. Teachers in Panama efficiency, and regulatory work significantly fewer hours than other em- framework) ployees in the economy, with male teachers There is a mismatch between the sophistica- having the largest gap in hours.9 Teachers also tion of Panama’s economy and the effectiveness earn less than their counterparts in other and efficiency of its public sector institutions. countries, due in part to an excess supply of In terms of institutional quality, Panama sig- teachers. There is also some evidence of excess nificantly lags behind its aspirational peers production of teacher grad­ uates with generally (figure 3.6) according to the World Economic low academic quality. The most recent data for Forum’s Global Competitiveness Ranking. Panama suggest that only 59 percent Panama ranks 71st out of 144 countries, while 52 Prioritization Linked to Growth Figure 3.6  Panama’s Institutional Quality in International Comparison 116 114 112 109 105 99 87 82 71 58 46 31 26 27 8 7 3 Panama Bulgaria Costa Rica Croatia Dominican Republic Uruguay Estonia Hong Kong SAR, China Korea, Rep. Lithuania Singapore Taiwan, China United Arab Emirates El Salvador Guatemala Honduras Nicaragua Structural peers Aspirational peers Other Central American countries Source: Schwab and Sala-i-Martin (2014). Hong Kong SAR, China and Singapore rank population expressed positive levels of trust 8th and 3rd respectively.10 The challenges in the national government and only a third Panama faces regarding its public sector in- for the National Assembly (LAPOP 2010). stitutions can be summarized as relating to Panama has demonstrated high levels of transparency, the regulatory framework, and efficiency in the management of the Canal, efficiency of public sector management. efficiency that is not been replicated across The challenge of the transparency of the full public sector. An overarching prob- Panama’s public institutions is widely recog- lem is the inability to translate a strategic vi- nized. Government practices are perceived sion into implementable policy. Despite sundry as relatively non-transparent and the moni- multiyear sectorial strategy documents, the toring and evaluation function is weak. The lack of linkage between the various plans and issues raised by the Global Forum in the OECD of strategic planning, including at the mu- highlight some of the weaknesses. The Corr­ nicipal levels, reduces government efficiency uption Perception Index prepared by Trans­ and erodes the foundation for efficient fiscal parency International shows that Panama­ nians management.11 In addition, budget credibil- perceive their government as more corrupt ity is one of the key public financial manage- in recent years than in earlier periods. More­ ment weaknesses in Panama, also affecting over, public trust in politicians is low in government transparency. The lack of budget Panama; in 2010, just over half of the predictability and the difficulty of Prioritization Linked to Growth 53 Figure 3.7  Panama’s Efficiency of Legal Framework in International Comparison 138 124 118 113 108 75 69 65 68 61 54 40 28 23 21 15 3 Panama Bulgaria Costa Rica Croatia Dominican Republic Uruguay Estonia Hong Kong SAR, China Korea, Rep. Lithuania Singapore Taiwan, China United Arab Emirates El Salvador Guatemala Honduras Nicaragua Source: Schwab and Sala-i-Martin (2014). realistically defining activities to be executed Identified Opportunities during the following year promote improvi- sation and reduce budget relevance and stra- A series of specific opportunities has tegic value because the budget is no longer a been identified within each of the priority strategic tool of public administration and areas described above, namely energy, edu- planning, but rather becomes a tool for reg- cation and skills, and public sector institu- istering commitments and transfers. tions. Through the application of a series of Panama’s regulatory framework shows im- filter and criteria along with consultation portant weaknesses that are apparent in most with stakeholders in Panama, a set of oppor- sectors of the economy. According to the World tunities for action were identified.12 These Economic Forum’s Global Competitiveness opportunities are briefly described here Ranking, Panama ranks 69th in efficiency of while a detailed description of each opportu- legal framework in challenging regulations nity can be found in Appendix C. The ex- out of 144 countries, while Hong Kong SAR, plicit links between these opportunities and China and Singapore rank 3rd and 21st re- their effect on specific sectors in the econ- spectively. Box 3.1 illustrates some of these omy that could turn into future drivers of weaknesses in the case of energy. growth are outlined as well. 54 Prioritization Linked to Growth Identified opportunities in the context of A highly relevant action in this regard ap- education and skills include both concrete pears to be the comprehensive introduction policy measures and analytical work to un- of English into curricula. A second opportu- derstand the underlying causes of the chal- nity consists of strengthening the monitoring lenges. The first opportunity consists of and evaluation of education with the goal of render­ing secondary education in Panama improving the quality. Low-hanging fruit in more relevant for the labor market. This could this context are participating in the 2015 PISA be achieved through the introduction of a testing and analyzing the causes of dropout vocational training program with participa- from secondary education both by exploiting tion of the private sector and public sector existing administrative data and by holding coordination. This could also be comple­ mented focus group sessions. Finally, a third oppor- by a revision of secondary and tertiary edu- tunity consists of addressing high dropout cation curricula to integrate private sector rates by expanding the Beca Universal program needs into the training of young Panamanians. through targeted offerings for vulnerable Box 3.1  Institutional Challenges of the Energy Sector The governance system in the energy sector has been criticized for its lack of proper planning and weak or limited staffing and institutional capacity. Slow and rarely transparent decision making is a key factor in the slow pace of investments in energy infrastructure expansion and strengthening in recent years. Further, existing policies, legislation, and regulations—the rules of the game—need to be revisited to meet the needs of a modern, expanding, and diversifying power system that is developing in Panama. The sector is also characterized by a multiplicity of agencies that are not coordinated. Four primary institutions constitute the government’s role in the energy sector. (First, the National Energy Secretariat is the lead national agency that coordinates the actions in the energy and power sector across ministries and agencies. Second, the National Electricity Transmission Company (ETESA) is the only participant in the transmission sector. It was created by Law 6 and is the remnant of the Institute of Water and Electrification (IRHE) responsible for manag- ing the state monopoly on the energy sector since 1997. It has the responsibility for expanding and operating the transmission system, as well as operation of the energy market. Third, the National Dispatch Center (CND) coordinates the participants in the distribution market. And, fourth, the National Public Service Authority (ASEP), besides ensuring compliance with regulation in the electricity sector, is responsible for regulation related to telecommunications, water delivery, and sewage. In the distribution sector, three private companies control power distribution: ENSA, Edemet, and Edechi. The Panamanian state owns about 40 percent of the shares of ENSA, while Edemet and Edechi belong to the Spanish group Unión-Fenosa. box continues next page Prioritization Linked to Growth 55 Box 3.1  continued The graphic below illustrates the relationship between the relevant agencies. Figure B3.1  Institutional Challenges of the Energy Sector Polici s SNE R ul tion ASEP R ion l G n r tion EGESA, ACP Priv t comp ni s int rconn ctions Tr nsmission Priv t comp ni s (3) Whol s l m rk t: ETESA-CND Distribution ENSA Ed m t Ed chi Cli nts L r us rs (4) Source: Inter-American Development Bank (IDB) 2013. students, including culturally appropriate of- sector, including improving the coordination ferings in indigenous areas. among institutions that are key players in the For energy, opportunities present them- sector. The third set of opportunities relates selves in the context of short-term demand to the physical infrastructure of energy gen- manage­ ment; the institutional framework; eration, trans­ mission, and distribution: by and power generation, transmission, and adding renewable energy or natural gas distribution. The first opportunity consists of power generation, Panama may mitigate the the management of national energy demand. risks of power shortages through (i) taking This opportunity could be realized in a short advantage of their costs being lower than the time frame. In other countries such as Brazil, existing oil-based generation; (ii) reducing these types of short-term demand response vulner­ ability to droughts associated with measures led to a 20 percent reduction in de- large hydropower plants; and (iii) reducing mand. The impact in Panama is expected to dependence on imported fossil fuels. By ex- amount to a 10 percent reduction. The sec- panding the number of transmission lines, ond opportunity consists of the moderniza- electricity flows from existing and planned tion of the institutional framework of the power projects will not be limited by the 56 Prioritization Linked to Growth capacity for throughput as is currently the sectors, which are promising sectors for the case given the lack of adequate power economy going forward. transmission. The impact of progress on the opportuni- Opportunities on public institutions re- ties identified will vary by sector. Some specific late to transparency and efficiency of public examples of how these policy opportunities insti­tutions as well as the adequacy of the will affect promising sectors of Panama’s econ­ regulatory framework. Two main opportu- omy are mentioned here. These examples nities emerged in the context of transpar- draw on the International Financial Corpora­ ency. The first is related to meeting the tion’s private sector expertise in Panama. standards on tax and financial information Improvements in public sector institu- sharing of the OECD; the second is related tions will help both the mining and financial to improving public procurement practices, sectors of Panama to maintain or increase in particular for large infrastructure proj- their roles as important drivers of growth. To ects. In the context of public institution ensure that the country can take advantage efficiency, three further opportunities pres- ­ of the existing mining potential, the formu- ent themselves. First, a move to perfor- lation and adaption of a modern mining reg- mance-based budgeting, ­ accompanied by ulatory framework is both an opportunity better coordination among gover­ nment and high priority. Overall, the existing min- plans and entities, could have major bene- ing legal and regulatory framework has not fits. Second, developing institutional capac- been updated to incorporate new interna- ity at the municipal level is needed to tional standards on effective oversight of support the move toward decentralization. mining activity by the relevant government Improving fiscal management would be the and municipal institutions, subnational roy- third opportunity under public institution alty sharing schemes, and environmental efficiency. This is particularly relevant in a protection and social responsibility. Even country like Panama that has fully out- though the financial sector is well regulated, sourced its monetary policy to the United transparency could be enhanced by achieving States Fed­ eral Reserve and that has little OECD Global Forum standards that promote room for fiscal maneuvering because of the transparency and information exchanges, deficit ceiling mandated under the Fiscal thus reducing operational costs and amelio- Responsi­ bility Law. These strong constraints rating systemic risk. Transparency and ap- on fiscal policy mean that the only way in propriate regulatory frameworks are also which Panama can create fiscal space is critical for Panama to launch itself as a rein- through efficiency gains. Finally, the third surance hub for Latin America, and im- opportunity is to ­ improve the adequacy of provements in the institutional framework the regulatory framework, including the are required to develop the domestic capital formulation and adaption of a modern min- market and expand the role of the ing regulatory framework, the enforcement Panamanian Stock Exchange. of social and environmental safe­ guards reg- For tourism, and the transport and logis- ulations, and an update of financial sector tics sector, focusing on the priority areas of ed- regulations. These actions are part­ icularly ucation and energy will remove existing relevant for the financial and mining barriers to expansion. The large number of Prioritization Linked to Growth 57 planned activities in the transport and logistics to improve transmission as well as generation sector will generate new demand for a well- of electricity will prevent energy from becom- trained labor force that is English-­ proficient ing a barrier to these sectors. and capable of working in a multicultural en- vironment. Tour­ ism is also expected to con- tinue to be a significant driver of growth in Filling Knowledge Gaps Panama; ­investor con­fidence remains high There is little data available on cover- given the country’s strategic location and sta- age and quality of public service delivery bility. The opportunities identified above of across the country. The role of municipalities updating the curriculum of the International in regulating and providing public services is Baccalaure­ ate and introducing bilingual edu- fundamental in reaching out to the under- cation will be critical to meeting the new labor served. Understanding the correlation be- demand of both sectors and improving pro- tween weak local governments and access to ductivity. The energy sector will need to re- and quality of public services in the poorer spond to new demands as well, not simply by geographic regions is critical to promoting generating more power but by providing better service delivery. The same is true for transmission mechanisms to areas presently linking spatial data on public social services under-served. The present saturation of the to outcomes. A contribution to filling this hotel market in the capital, for example, knowledge gap could consist of compiling means that new investments will more likely detailed information (databases) on the take place in remote areas and provinces out- quality and resources of regions, municipali- side of Panama. The opportunities identified ties, and metropolitan areas in Panama. Notes 1. As is common in the literature, both Loayza 9. Bruns and Luque (2015). et  al. (2004) and Araujo et al. (forthcoming) ­ 10. The Institutions ranking is one of the 12 classify the determinants of growth in d­ ifferent components of the Global Competitiveness ­ categories, including structural factors—such Index prepared by the World Economic as human capital or infrastructure—and those Forum  and updated every year. The ranking determinants of growth that are related to sta- is the average of 21 subcomponents such as bilization policies—such as inflation. property rights, intellectual property protec- 2. Similarly, Swiston and Barrot (2011) find limited tion, diversion of public funds, public trust opportunities to boost growth given Panama’s in politicians, irregular payments and bribes, already relatively high performance in the ex- judicial independence, favoritism in deci- planatory variables used in their model. sions of government officials, wastefulness 3. World Bank Enterprise Surveys, http://www​ of government spending, and burden of gov- .enterprisesurveys.org. ernment regulation, among others. These 4. EIU 2013. subcomponents are built using the data from 5. Espinosa el al. 2013. the Executive Opinion Survey applied in 144 6. World Bank (forthcoming). countries. 7. Afonso, Romero, and Monsalve 2013. 11. IDB (Inter-American Development Bank) and 8. The index takes into account the achievements World Bank. 2012. in education, related to public spending on the education sector. 58 Prioritization Linked to Growth References Afonso, António, Alma Romero, and Emma IDB (Inter-American Development Bank). 2013. Monsalve. 2013. “Public Sector Efficiency: Energy Dossier: Panama. Washington, DC: IDB. Evidence for Latin America.” Discussion Paper IDB (Inter-American Development Bank) and IDB-DP-279, Inter-American Development World Bank. 2012. Public Expenditure and Bank, Washington, DC. Financial Accountability (PEFA). Washington, Araujo, J., M. Clavijo, E. Vostroknutova, and DC: IDB. Washington, DC: World Bank. K. Wacker, eds. Forthcoming. Understanding LAPOP (Latin America Public Opinion Project). the Income and Efficiency Gap in Latin America 2004, 2006, 2008, 2010, and 2012. Constructed and the Caribbean. Directions in Development Panel downloaded from http://www. vander- Series. Washington, DC: World Bank. bilt.edu/lapop, November 2013. Bruns, B., and J. Luque. 2015. Great Teachers: Loayza, N., P. Fajnzylber, and C. Calderon. 2004. How to Raise Student Learning in Latin “Economic Growth in Latin America and the America and the Caribbean. Washington, DC: Caribbean: Stylized Facts, Explanations, and World Bank. Forecasts.” Central Bank of Chile Working EIU (Economist Intelligence Unit Limited). 2013. Paper 265. “A Summary of the Liveability Ranking and Schwab, K., and X. Sala-i-Martin. 2014. The Overview: August 2013.” EIU. Global Competitiveness Report 2014–2015. Espinosa, R., L. Balza, C. Hinestrosa, C. Sucre, World Economic Forum. and S. Guerra. 2013. Dossier Energético Swiston, A., and L. Barrot. 2011. “The Role of Panama. Inter-American Development Bank. Structural Reforms in Raising Economic Fajnzylber P., L. Guasch, and H. Lopez, 2010. Growth in Central America.” IMF Working “Does the Investment Climate Matter? Paper 11/248. Microeconomic Foundations of Growth in World Bank. 2011. Panama Poverty Assessment: Latin America.” Washington, DC: World Bank Translating Growth into Opportunities and and Palgrave Macmillan. Poverty Reduction. Washington, DC: World Bank. Prioritization Linked to Growth 59 4. Inclusiveness of Panama’s Growth Panama’s growth has been inclusive poorest areas, the indigenous territories or along many dimensions, but the geo- comarcas, continue to lag behind. graphic and ethnic distribution of growth The change in the view of night lights in has not been homogenous. Growth has been Panama between 1997 and 2010 underscores strong, averaging 7.2 percent between 2001 the overall growth performance along with and 2013, and above eight percent for five the remaining geographic inequality, inequal- of the past seven years despite the crises of ity linked to ethnicity (figure 4.2). On the 2008–09. The bottom forty percent of the one hand, economic growth around the Canal population has benefited from growth more is clearly visible as is the expansion of growth than has the average Panamanian. Average into the interior in the provinces of Coclé, income growth among the bottom forty Los Santos, and Chiriquí through the spread percent of the population was seven percent of night lights. On the other hand, the con- compared to 6.3 percent overall (figure 4.1), tinued darkness over substantial sections of with the resulting fall in overall poverty from the country reflects regions that have either 40 to 26 percent of the population and benefited only slightly from economic growth, extreme poverty from 16 to 11 percent (see or were so far behind the others that recent Chapter 1). Yet the geographic distribution growth has not been enough for them to catch of growth has not been homogenous: the up, or regions where there are dispersed pop- ulations to whom it is hard to provide ser- vices (including but not limited to electricity). In particular, the indigenous territories are in Figure 4.1  Annualized Growth areas of the map that have remained without Incidence Curve, 2007–2012 access to electricity. (Constant Prices of 2002) 10.0 7% 6.3 % Positive Trends 8.0 Recent economic growth has led to a Annual growth rate (%) substantial increase in the size of the middle 6.0 class. In 2007, the middle class spanned the 69th to 84th centiles of the population; in 4.0 2012 it had expanded to encompass the 57th to 96th centiles of the distribution (figure 4.3). 2.0 The share of income going to the middle class rose from 52.4 to 55.8 percent during the 0 0 10 20 30 40 50 60 70 80 90 100 period (using the definition of middle class Source: Authors’ calculations based on the Encuesta de Mercado as having per capita income of US$10–50 per Laboral (EML) (INEC 2007–2012). day). The top earners doubled their popula- Note: Numbers in blue boxes represent the average annual growth rate of the full population and the bottom 40 percent. tion share, from one to two percent and saw Inclusiveness of Panama’s Growth 61 Figure 4.2  Night Lights in Panama, 1997 and 2010 1997 2010 Source: Night Lights Data (database), World Bank, Washington, DC (accessed November 2014), https://geowb.worldbank.org. their share of total income rise from 10 to 16 Changes in inequality at the national level, percent. The ratio of the share of income of and within urban areas, have been minimal: the top 10 percent of the population over the a one percentage point change over five years remainder of the population has remained at (figure 4.4). In contrast, rural inequality has 2.2 percent from 2007 to 2012. fallen substantially—four percentage points 62 Inclusiveness of Panama’s Growth Figure 4.3  The Rise of the Middle Class a. 2007 b. 2012 20 100 20 100 83.7 89.4 Share of the total income (%) Share of the total income (%) 80 80 15 15 60 60 10 10 37.0 40 40 27.9 5 5 20 20 9.2 4.8 0 0 0 0 0 20 40 60 80 100 0 20 40 60 80 100 Centiles Centiles Poor Vulnerable Middle class Rich Cumulative Poor Vulnerable Middle class Rich Cumulative Source: Authors’ calculations based on EML (INEC 2007 and 2012). Note: Poor is defined as having income below the national poverty line, middle class as having incomes of US$10–50 a day per capita, and rich as having incomes of more than US$50 per day. In this analysis, the vulnerable are those whose incomes are above the poverty line but below the middle class and thus face a danger of falling back into poverty. Figure 4.4  Gini Coefficient by Table 4.1  Health Indicators Area, 2007–2012 (Index) 1990 2000 2010 Life expectancy (years) 73 75 77 56 Child (under 5) mortality 32 24 19 54 Maternal mortality (per 100 110 92 52 100,000 births) 50 Births attended by trained 86 93 89 48 health personnel (%) Malnutrition (weight for n.a. 5.1 3.9 46 age, 0-5 year olds) (%) 0 Source: World Development Indicators (database), World Bank, 2007 2008 2009 2010 2011 2012 Washington, DC, http://data.worldbank.org/products/wdi. World Bank (forthcoming). Total Rural Urban Note: n.a. = not available. Source: Authors’ calculations based on EML (INEC 2007–2012). steadily, and the country has met the Millen- in five years—although it is still slightly higher nium Development Goal (MDG) in terms than in urban areas. The decline in rural in- of child mortality (table 4.1). Although not equality appears to be driven by increased expected to reach the MDG goal on mater- public spending in rural areas that reached nal mortality, Panama has nonetheless seen the poorest groups along with internal mi- some progress over the last ten years on re- gration: self-selection in migrants lowers the ducing maternal mortality in the country. inequalities in their communities of origin (see Malnutrition rates have also declined. Prog- below for a discussion of internal migration). ress has been made in measures of welfare There has also been substantial progress related to service access as well. Enrollment on nonmonetary indicators of welfare and in education has increased at all levels since access to services. Life expectancy has risen 1990, with the biggest gains seen at the Inclusiveness of Panama’s Growth 63 preschool and tertiary levels. The average percentage points (a smaller number given years of schooling of the population have in- the higher starting point); and access to san- creased by 1.6 years since 1990 and 0.1 years itation, while still limited, rose from 60 to 72 since 2005. Access to running water in a dwell­ percent between 2005 and 2010 (figure 4.5). ing increased from 84 percent in 2000 to 94 percent in 2010; electricity access rose seven Limitations of Growth’s Figure 4.5  Percent of the Effects Population with Access to Basic Services, 1990–2012 Despite strong and fairly inclusive growth, differing rates of poverty reduction 100 have led to the poor becoming ever more con­ 90 centrated in specific geographic locations. 80 Poverty rates vary tremendously across the 70 country. In 2012, poverty in the poorest pro­ 60 vince or comarca was 93 percent, with 82 50 percent of the population living in extreme 40 poverty (Ngäbe Buglé comarca) (figure 4.7). 30 In contrast, the province of Veraguas had only 20 15 percent poverty and only 2 percent of the 10 population in Herrerra lived in extreme poverty. 0 These differences are both a result of very Water Sanitation Electricity 1990 2000 2010 different starting points in terms of poverty rates and quite different rates of change (fig- Source: World Development Indicators (database), World Bank, Washington, DC, http://data.worldbank.org/products/wdi. ure 4.6). The poorest areas (the comarcas) Figure 4.6  Changes in Overall Poverty Rates by Geographic Area, 2007–2012 Colón Kuna Yala Bocas del Toro Panamá Ngobe Buglé Chiriquí Coclé Darién Emberá Veraguas Herrera (−7.09,−4.20) (−13.23,−7.09) Los Santos (−17.56,−13.23) (−23.94,−17.56) Source: Encuesta de Mercado Laboral (INEC 2007 and 2012); Shape file from gadm.org. 64 Inclusiveness of Panama’s Growth Figure 4.7  Poverty Rates by Figure 4.8  Changes in Geographic Province and Comarca, 2012 (Percent) Concentration of the Extreme Poor 100 16 90 80 14 70 60 12 10 50 40 Percent 10 30 6 20 8 10 0 6 Overall poverty Extreme poverty 20 15 Comarca Ngäbe Buglé Comarca Kuna Yala 4 Comarca Emberá Bocas del Toro 42 2 24 Panama Los Santos Darién Chiriquí 0 Coclé Colón 2007 2012 Herrera Veraguas Comarcas Bocas del Toro Panama Los Santos Darién Chiriquí Source: Encuesta de Mercado Laboral (INEC 2007 and 2012). Note: Panama Province has been divided into two separate Coclé Colón Herrera provinces since 2013. However, the data sources are Veraguas representative only for the full Panama province level. saw poverty fall 4.2 percent between 2007 and having migrated), the indigenous are slightly 2012. In contrast, Coclé, which began with a more likely (22.6 percent), and the migration substantially lower poverty rate of 56 percent, rate for all other groups was 21.6 percent. saw the greatest fall in poverty (24 percent). Due to data limitations, it is not possible to The net effect of these differential changes in look at either the total number of migrants poverty is that, while overall the number of (many persons may have migrated and then extremely poor people in the country fell, the returned to their previous location in the comarcas became home to an ever increasing ten-year reference period) or trace the full share of them: in 2007, 24 percent of all ex­ migration patterns.1 However, the overall tremely poor people in Panama lived in the picture is one of movement with a tremen- comarcas, a figure which rose to 42 percent dous bias toward the Province of Panama: 67 by 2012 (figure 4.8). percent of all migrants moved to there. Among Internal migration may also play a role in indigenous migrants, 48 percent moved to the concentration of poverty both because it this province compared to 79 percent of is large and because there is evidence of self-­ Afro-descendants (figure 4.9). selection among migrants. There has been sub­ Internal migrants to the Province of Pan- stantial internal migration in recent years: in ama show evidence of being positively self-­ 2010, one-fifth of individuals over age 15 lived selected: education levels of those migrants in a district that was not the same as where are higher than those of non-migrants (figure they had lived ten years previously. The rates 4.10). The difference in education between vary little by ethnicity: Afro-descendants are migrants and non-migrants is especially pro- slightly less prone to migrate (20 percent nounced among the indigenous population: Inclusiveness of Panama’s Growth 65 Figure 4.9  Destination of Internal range of employment offerings for low- Migrants Between 2000 and 2010 er-skilled workers. Further evidence of (Percent) self-selection comes from the fact that mi- grants are less likely to be unemployed than 100 non-migrants (figure 4.11). However, this is 90 probably also driven by return migration, unsuccessful migrants being more likely to 80 return to their place of origin. 70 There remain wide disparities among var- ious groups and areas in the country (figure 60 4.12). Geographic differences are large, with 50 the poor under-represented in urban areas relative to the population of cities and over-­ 40 79 represented in rural areas and the comarcas. 67 30 In absolute terms, however, urban and rural 20 48 areas have similar numbers of poor people at around 40 percent of the total. The remain- 10 ing 21 percent of the poor live in the three 0 largest comarcas. Although there are greater Share of all Share of IP Share of AD numbers of poor people in urban areas than migrants migrants migrants Comarca Ngäbe Buglé Comarca Kuna Yala, in the comarcas, the urban poor are better off Comarca Emberá than their poor counterparts in the comarcas. Bocas del Toro Panama Among the urban poor, monthly incomes Darién, Herrera, Chiriquí are twice as high, the years of schooling of Los Santos Coclé Colón the head of household are more than double, Veraguas a greater share of household members are of Source: Authors’ calculations based on 2010 Population and working age, and their school-age children Housing Census (INEC 2010). Note: For population ages 15 and older. are more likely to be enrolled in school than those in the poor households in the comar- while 47 percent of the non-migrant indige- cas. And the discrepancies are greater among nous adult population had not finished pri- the extremely poor: the population living in mary school, only 22 percent of the the comarcas is worse off than other extremely indigenous migrants to the Province of Pan- poor persons in the rest of the country (fig- ama fell into this category. Among the Afro-de- ure 4.13). Forty-two percent of the extremely scendants and other Panamanian poor live in comarcas, despite that fact that populations, migrants are more likely to have only six percent of the total population lives completed secondary or tertiary school than there. The extremely poor in rural areas are non-migrants, while those who did not fin- somewhere in between the comarcas and ish secondary school are less likely to have the urban extremely poor on most indicators migrated. This pattern of positive self-selec- but actually have the highest income per ca- tion does not hold for migrants to other parts pita per day (at US$1.7 compared to US$1.3 of the country, perhaps reflecting the greater in the comarcas and US$1.5 in urban areas). 66 Inclusiveness of Panama’s Growth Figure 4.10  Educational Attainment of Internal Migrants, 2010 (By Ethnicity, Percent) 60 50 40 30 20 10 0 Primary incomplete Primary complete Secondary complete Tertiary Primary incomplete Primary complete Secondary complete Tertiary Primary incomplete Primary complete Secondary complete Tertiary Other IP AD Non-Migrant Migrant - province of Panama Migrant - other Source: Authors’ calculations based on 2010 Population and Housing Census (INEC 2010). Note: For population ages 15 and older. Figure 4.11  Unemployment Rates (Open and Broad), by Migration Status and Ethnicity, 2010 (Percent) 12 10 8 6 4 2 0 Province of Elsewhere Province of Elsewhere Province of Elsewhere Panama Panama Panama Other IP AD Migrants unemployment (Broad) Migrants unemployment (open) Non-Migrants unemployment (broad) Non-Migrants unemployment (open) Source: Authors’ calculations based on 2010 Population and Housing Census (INEC 2010). Note: For population ages 15 and older; IP=Indigenous Peoples, AD=Afro-descendants, Other=All other ethnic groups; Unemployment (open) refers to those who report being unemployed and actively searching for work; Unemployed (Broad) includes those actively searching as well as “discouraged workers,” those who would like to work but have given up searching. Inclusiveness of Panama’s Growth 67 Figure 4.12  Characteristics of the Poor, by Geographic Area 100 91.7 84.3 80 70.0 60.3 60 47.6 50.0 44.3 41.9 40.5 40 38.9 32.7 21.2 20 15.1 13.9 8.5 6.6 1.6 3.5 3.3 4.4 2.5 3.4 0 or ad y* ad ) ze e ) %) %) %) (% (% al 8( 0( +( Po da Si he He 12 M 8 70 –1 –7 e/ –1 ld 0– of ad of uc 13 Hh 19 m ll.6 es He % e Ed e co es Ag Ag Ag es ro In HH s Ag Ag En Yr Comarca Rural Urban Source: Authors’ calculations based on Panama household survey, Encuesta de Mercado Laboral (EML) (INEC 2007–2012). Note: * = per capita income. Differences by ethnicity are also marked. The indigenous population living outside Ideally, the data should allow a comparison of the five comarcas appears to be better off among the indigenous population living in than their counterparts living in comarcas the comarcas, the indigenous population liv- (table 4.2).2 Those living outside the comarcas ing outside the comarcas, the Afro-descendant have much greater access to services, and population, and the rest of the population. their incomes are more than three times as However, as discussed in box 1.1, the data high. They are also more educated even though limitations preclude the calculations of com- their children have the same enrollment rate parable poverty rates of the full indigenous as those in the comarcas. Households tend to population or that of the Afro-descendants. be smaller, with more working age members The only data source that allows a compari- and more male-headed households—further son between these two groups, indigenous evidence of selectivity in migration. Despite outside of comarcas and Afro-descendants, the fact that indigenous people living outside is the decennial National Population and the comarcas appear to be doing better in Housing Census. The Census provides data terms of basic indicators, they still lag be- on several indicators that can serve as prox- hind their nonindigenous counterparts on ies for welfare. all indicators. 68 Inclusiveness of Panama’s Growth Figure 4.13  Characteristics of the Extremely Poor, by Geographic Area 100 89.8 84.2 80 71.2 60 51.7 46.3 48.6 43.9 41.7 43.5 39.4 40 33.8 24.5 19.9 20 15.1 15.2 8.2 7.0 3.2 4.6 1.3 1.5 2.1 2.4 3.0 0 or ad y* ad ) ze e ) %) %) %) % (% (% al er 8( 0( +( Po da Si he He 12 M 8 70 sf –1 –7 e/ –1 ld 0– of ad of uc an 13 Hh 19 m ll.6 es He % e Ed es Tr co es Ag Ag es ro Ag In HH b. s Ag Ag En Yr Pu Comarca Rural Urban Source: Authors’ calculations based on Panama household survey, Encuesta de Mercado Laboral (EML) (INEC 2007–2012). Note: * = per capita income. In contrast, Afro-descendants, on the in- However, with the available quantitative data, dicators for which data exist, appear to be the Afro-descendant population does not ap- slightly better off than the population at large pear to be at a particular disadvantage.4 (table 4.2). On average, their access to ser- Economic growth has translated into im- vices is higher, reflecting in part that many proved access to services, but despite evidence live in the urban areas of Colón and Panama of convergence, sharp differences remain; City. Income levels are also higher as are ed- growth has not been enough to fill the gaps. ucation levels and school enrollment. How- Between 2000 and 2010, education levels ever, none of the indicators related to services (enrollment rates) have risen fastest in the reflects the quality of these and there are legit- provinces or comarcas with the lowest initial imate concerns about service quality in Colón levels and in the areas with the biggest gap and parts of Panama City. Moreover, there is between males and females; notably, female a concern that, for reasons of stigma, only enrollments have climbed more quickly than the better off and more empowered members those of men. The convergence appears simi- of the group will self-identify as Afro-de- lar in terms of access to water with rates of scendant, which would lead to an over-esti- change higher in the areas that started with mation of welfare among Afro-descendants.3 lowest coverage (figure 4.14). Colón is an Inclusiveness of Panama’s Growth 69 Table 4.2  Basic Characteristics of the Population by Ethnicity, 2010 Indigenous in Indigenous Afro-   All others Comarcas outside Comarcas descendants Share of national population (%) 5.7 6.3 8.8 79.2 Income levels           Income Per Capita Per Day (2010 USD) 1.3 4.8 13.2 11.9 Dwelling characteristics           Access to electricity (%) 5.9 60.5 96.7 89.6   Access to water (%) 44.8 80.1 96.8 95.4   Flushing Toilet (%) 0.9 34.5 81.4 64.6 Household Demographics           Age of head 45.3 41.4 47.7 48.0   Proportion age 0-12(%) 39.3 30.2 17.0 17.7   Proportion age 13-18(%) 12.8 12.3 8.0 8.4   Proportion age 19-70(%) 44.3 55.1 68.6 66.8   Proportion age 70+(%) 3.7 2.4 6.4 7.2 Household Characteristics           Education of head (years) 3.5 5.9 10.9 9.5   Enrollment 6-18 yr olds (%) 82.8 82.9 93.0 91.5   Household size 6.0 5.4 3.4 3.5   Male-headed HH 68.4 80.8 66.9 71.2 Source: Population and Housing Census, (INEC 2010). Note: Less than two percent of the Afro-descendants also self-identify as indigenous. For purposes of this analysis these people were considered Afro-descendants. outlier here, showing a high rate of change. a comarca had a 35 percent probability of In terms of sanitation (sewer connections), having access to electricity compared to an the story is similar for all of the country except 81 percent probability of an average rural the three comarcas: these areas are almost child having electricity, while for sewerage completely excluded from access to sanita- connections, the numbers were 10 percent tion (figure 4.15). Institutional factors affect and 35 percent, respectively.5 In short, the the provision of public services in water and low coverage–comarca link is strong. Inter- sanitation (see box 4.1). estingly, the other ethnic minority in the coun­ There is a striking correlation between liv- try, the Afro-descendants, do not appear to ing in a comarca and having little or no access be as constrained in terms of services, proba- to water, sanitation or even electricity. Figure bly as they are more likely to live in urban 4.16 shows this for running water in the dwell­ areas. ing, with the only exception being Guna Yala. The disparities in access to services are re- In part, this reflects the rural nature of the flected in the very different social outcomes comarcas and the relatively dispersed popu- observed across the population. In 2013, life lations that live there. However, other rural expectancy in the comarcas was estimated to areas have better services: in 2008, a child in be between seven and nine years lower than 70 Inclusiveness of Panama’s Growth Figure 4.14  Change in Access to Piped Water in the Dwelling, 2000–2010 100 Percent of Individuals 80 60 40 20 0 os a a é s n o la n é á í qu ua cl gl am er r or ló rié Ya be nt Co Bu Co iri rr lT ag Da n Em Sa na He Ch Pa de r e Ve äb Ku s C. Lo s Ng ca C. Bo C. Water 2000 Water 2010 Source: Authors’ calculations based on 2000 and 2010 Population and Housing Census (INEC 2000 and 2010). Figure 4.15  Change in Access to Sewage Connection in the Dwelling, 2000–2010 100 Percent of Individuals 80 60 40 20 0 a é o a os n as n la rá í é qu cl m er or ló rié gl Ya be gu nt Co Co iri na rr lT Bu Da Em Sa ra na He Ch Pa de e Ve Ku s äb C. Lo s ca Ng C. Bo C. Sanitation 2000 Sanitation 2010 in the rest of the country: 66.2 years in the rates in the Emberá comarca are almost three comarca of Emberá in 2007 (66.9 years in times the national average of 15 percent and 2009), and 68 and 68.6 respectively in those are similar to those of Ethiopia.7 Bocas del two years in the comarca of Ngäbe Buglé. In Toro also shows poor health indicators and 2008, the last year when national data were high dropout rates. The burden of related di- available, malnutrition in the Ngäbe Buglé arrheal illness in children falls disproportion- comarca was almost six times higher than ately on rural and, especially, indigenous in urban areas and under five mortality was households and is estimated to cause 130 pre- almost twice the national average in 2012.6 mature deaths and one million cases of diar- At just under 45 percent, teenage pregnancy rhea in children under age five each year. Inclusiveness of Panama’s Growth 71 Box 4.1  How Institutional Challenges Affect Service Delivery in the WSS Sector Three main actors are responsible for policy setting, service provision and regulation: (i) the Ministry of Health through the Directorate of Water and Sanitation (DISAPAS), responsible for sector policy, coordination, and long-term planning, as well as smaller towns and rural areas; (ii) the National Water and Sewerage Institute (IDAAN), responsi- ble for urban areas and rural communities with over 1,500 inhabitants; and (iii) the National Authority for Public Services (ASEP), which supervises and regulates service provision in urban areas. Multiple other actors play a role in the sector, including the National Environmental Authority (ANAM) for water quality standards, Autoridad del Canal de Panama (ACP) for selling bulk water to IDAAN, and the Ministry of the Presidency for high priority Water Supply and Sanitation (WSS) service infrastructure. On the organizational side, unclear roles of the different agencies hamper effective regulation, and having multiple implementing agencies for infrastructure provision Figure B4.1  WSS Sector Institutional Framework Diagram Urban Rural Hygiene School Urban water Rural water sanitation sanitation promotion sanitation ORGANO EJECUTIVO Sector Policy MINSA ASEP Regulation ANAM MINSA Service IDAAN MEDUCA Provision Other operators JAARS MINSA IDAAN MINSA Planning and CONADES Implementation PAN PRONADEL Source: Adapted World Bank 2014b. box continues next page 72 Inclusiveness of Panama’s Growth Box 4.1  continued impedes coordination. Specialized rural water boards do not receive appropriate technical support to allow them to run their small systems with adequate cost recovery to ensure sustainability. Sector policy setting remains disjointed, with DISAPSAS unable to exercise its full mandate in strategic planning and oversight. This is due to other agencies executing infrastructure investments in parallel, with no single investment plan for the sector, leading to overlaps and the lack of a coherent vision. Finally, the regulatory function of the sector is clearly lacking, compared to other sectors in Panama, such as electricity and telecommunications. Water tariffs applied by IDAAN are very low and have not been revised since 1982, which means that if adjusted for inflations tariffs have actually decreased by about 50 percent since then. With a flat rate for high minimum consump- tion, even in metered areas, the tariff structure does not encourage water conservation, resulting in a significant gap in both operations and maintenance as well as investment needs, making IDAAN highly dependent on budget transfers. This state is further exacer- bated by high levels of nonrevenue water (54 percent in the City of Colón) and high staffing levels (5.3 per thousand water connections) that often lack the technical capacity for effective service provision and management. Note: With regard to the regulatory function, in 2014 ASEP drafted only 371 resolutions for the WSS sector, compared to 5578 and 7834 for the electricity and telecommunications sectors respectively. Http://www.asep.gob.pa/. In addition, fuel wood burning in rural indig- 4.17and figure 4.18). Sources of income that enous households is the primary culprit for mattered for poverty reduction varied across acute respiratory illnesses, with an estimated the country and by type of poverty. Labor in- economic cost of 0.2 percent of GDP. Finally, come was the key driver of overall poverty children in comarcas are more likely to drop reduction in urban areas and the comarcas. out of school than either their rural or urban In contrast, government transfers played the counterparts: at age 18, only 39 percent of chil- biggest role in poverty reduction in rural dren in the comarcas are in school compared areas. For extreme poverty reduction, labor to 47 percent in rural areas and 69 percent in income was important only in urban areas: urban ones. in rural areas and the comarcas, labor in- come changes would have increased poverty Drivers of Poverty in the absence of government transfers. Reduction Labor income The positive effects of economic The differential effect of labor income on pov- growth on poverty reduction came through erty reduction is due both to the geographic a combination of increased labor income and distribution of job growth and the quality of a strong program of public transfers (figure those jobs. The patterns of economic growth Inclusiveness of Panama’s Growth 73 Figure 4.16  Access to Running Water in the Dwelling by Concentrations of Indigenous Peoples Legend % of indigenous population 0.61 - 1.00 % of people with access to water 0.00 - 0.46 0.47 - 0.81 0.82 - 1.00 Source: Authors’ calculations based on Population and Housing Census (INEC 2010). are seen in both the number and the types of areas with the lowest poverty reduction, the jobs that have been created in the past ten comarcas, were largely those with low net job years. As described in Chapter 2 above, job growth. In the comarca Emberá, where job growth in Panama has been substantial in re- growth was strikingly high, the majority of cent years. However, this has benefited dif- these jobs were in agriculture, typically a low-­ ferent regions disproportionately. Census data productivity sector in Panama. In fact, almost from 2000 and 2010 show that the bulk of half of the new jobs generated in the comarca these new jobs have been in the Province of Emberá required only a primary education Panama (figure 4.19).8 Nonetheless, the co- or less. In contrast, for Coclé, Herrera, and marca Emberá has seen the sharpest job Los Santos, the provinces with the greatest growth, up 58 percent compared to 43 percent poverty reduction between 2007 and 2012, in Panama (and 49 percent in next fastest job growth was much higher (ranging from growth province, Darién). In contrast to the 26 to 41 percent), and most jobs created in growth in jobs in the comarca Emberá, the these provinces were those that required ei- comarca Ngäbe Buglé saw a net loss of jobs ther completed secondary schooling or terti- while Guna Yala saw an increase of only 17 ary studies: 84 percent in Herrarra, 93 percent percent. in Los Santos, and 73 percent in Coclé. The quality of the jobs created also differs The net result is continued low levels of by region of the country (figure 4.20). The income diversification among the indigenous 74 Inclusiveness of Panama’s Growth Figure 4.17  Contribution of Different Income Sources to Changes in Overall Poverty, 2007–2012 10 8 6 Percentage points change in overall 4 2 0 poverty –2 –4 –6 –8 –10 –12 –14 –16 National Urban Rural Comarca Capital Goverment transfers Labor Other Pension Private transfers Source: Authors’ calculations based on EML (INEC 2007–2012). Note: Other incomes include imputed rent, private scholarships, and other sources not included in existing categories. Figure 4.18  Contribution of Different Income Sources to Changes in Extreme Poverty, 2007–2012 10 8 Percentage point change in extreme 6 4 2 0 poverty –2 –4 –6 –8 –10 –12 –14 –16 National Urban Rural Comarca Capital Goverment transfers Labor Other Pension Private transfers Inclusiveness of Panama’s Growth 75 Figure 4.19  Net Number of Jobs Internal migration is linked to the uneven Created by Geographic Area, growth of jobs in Panama and migration leads 2000–2010 to greater income diversification.10 The sec- tor of employment among migrants is largely 2000000 determined by destination, not ethnicity 1800000 (figure 4.21). Between 18 and 25 percent of 1600000 migrants who migrated to the Province of 1400000 Panama worked in commerce, regardless of 1200000 their ethnicity. However, working in hotels, 1000000 restaurants, and private households was more 800000 common among indigenous migrants, who 600000 have lower educational attainment than the 400000 other two groups. Construction work is also 200000 under-represented among indigenous mi- 0 grants, raising questions about barriers to 2000 2010 entry. Those among the indigenous who mi- Comarca Ngäbe Buglé Comarca Kuna Yala grate outside of the Province of Panama are Comarca Emberá Bocas del Toro more likely to work in agriculture: the sector Panama Los Santos Darién Chiriquí accounts for more than half of migrant em- Coclé Colón ployment outside of the comarcas and the Herrera Veraguas Province of Panama. Source: Authors’ calculations based on Population and Housing Overall, women have benefited from the Census (INEC 2000 and 2010). growing job market.11 The rate of growth of jobs for women has outpaced that for men— populations in the comarcas. Despite a de- 25.6 percent compared to 15.4 percent re- cline, agriculture still provides two-thirds of spectively between 2007 and 2012. Female labor income in the comarcas compared to labor force participation rose five percentage only 44 percent in other rural areas, a depen- points between 2000 and 2012 to reach 53 dence that affects welfare gains. Agriculture percent. Unemployment rates for women fell is a sector that is shedding jobs and represents dramatically as well—from 18 to five percent a small share of GDP; moreover, agriculture in five years between 2007 and 2012, with productivity is neither growing nor is it even the 2012 rate just one percentage point higher as high as Latin American averages.9 Why than that of men. The quality of jobs for women agriculture has lagged behind is unclear. Given also improved; in 2000 59 percent of all jobs that returns to other sectors in Panama are held by women required complete secondary higher, there is probably underinvestment in education or higher, and by 2010 this had agriculture. This reliance on agriculture also risen to 69 percent. The share of male jobs results from the fact that the populations in requiring these levels of education was just the comarcas are physically distant from the 45 percent in 2010.12 Female employment in growth corridors of the country and lack other the informal sector remained lower than that skills, which may act as a further barrier to for men (27 percent compared to 31 percent, obtaining jobs in other sectors. respectively) although the figure for men is 76 Inclusiveness of Panama’s Growth Figure 4.20  Net Number of New Jobs by Education Level and Geographic Area, 2000–2010 30,000 25,000 20,000 15,000 10,000 5,000 0 –5,000 o é la rá a os as í é n n qu cl gl er or ló rié Ya be gu nt Co Bu iri rr lT Co Da Em Sa ra na He Ch de e Ve äb Ku s ca Lo s Ng ca ar de Bo m ca ca Co ar ar m m Co Co Prim or less Inc. Sec. Comp. Sec. Any Tertiary Source: Authors’ calculations based on Population and Housing Census (INEC 2000 and 2010). Note: The Province of Panama is omitted because of scale issues. Figure 4.21  Sector of Employment in 2010, Migrants by Ethnicity and Destination (Percent) 100 80 60 Percent 40 20 0 Other IP AD Elsewhere Comarca High IP Elsewhere High AD Elsewhere Panama Other IP AD Other sectors Private households Education Public Admin/Defense Real Estate Transportation Hotels and restaurants Commerce Construction Primary Source: Authors’ calculations based on Population and Housing Census (INEC 2010). Note: For population ages 15 and older. Inclusiveness of Panama’s Growth 77 starting to reach that of women on this indi- number of days and maintaining a minimum cator. The gender income gap in Panama was grade level. The program started as an effort the lowest in Latin America in 2010 at 0.90. to lower secondary school dropout rates but However, of concern are the continued occu- has since been expanded to primary school pational segregation of jobs and relatively as well. low labor force participation rates of women; The impact of the Red de Oportunidades the Latin American and Caribbean (LAC) has been positive. A quantitative analysis of average is five percentage points higher than the program found important effects.13 For that of Panama. rural children ages 12 to 15, the program led to a 10.2 percentage point increase in school Public transfers enrollment and a similar (10.1) decrease in Government spending has played a signifi- child labor. In the comarcas, the increase in cant role in reducing extreme poverty and school enrollment was a bit lower at 7.9 per- overall poverty in rural areas. Overall spend- centage points, but the decrease in child labor ing in the social sectors is similar to that of greater (15.8 percentage points). The health Panama’s neighbors: 13.3 percent in Panama benefits were not as large across the board compared to 13.7 percent in Central Amer- but improved in some areas: incidence of Pa- ica. A series of programs and benefits have panicolau test rose almost 12 and 15 points been introduced in the past few years. Red de among rural and indigenous women respec- Oportunidades, the conditional cash transfer tively. A qualitative analysis of the program program begun in 2003, is the largest. The pro­ highlighted the overall positive perceptions gram consists of four components: (i) condi- of the program and identified some areas for tional cash transfers to beneficiaries contingent improvement. Beneficiaries noted not just on enrollment of children in school and the the economic benefit and access to services use of preventive health care services; (ii) pro­ but also an increased sense of social inclu- vision of the health and education services sion and female empowerment. Children’s required by beneficiaries; (iii) support to fam­ access to schooling has improved. In terms ilies in accessing such services; and (iv) in- of health, awareness regarding preventive re- frastructure improvement. The cash transfer productive health increased. The report found is designed to mitigate poverty today and, by that the program has had the unexpected pos­ increasing human capital, poverty in the fu- itive results of strengthening social capital ture. The 100 a los 70 non-contributory pen- and spawning initiatives for group savings sion program provides a pension to all elderly and microenterprises. Highlighting this, persons with no other pension. In 2014, this beneficiaries suggested the introduction into was modified to provide US$120 to all per- the program of stages, with productive entre- sons 65 and older. Finally, the Beca Univer- preneurship as a final stage. sal, or universal education benefit, provides The benefits of Red de Oportunidades cash transfers to family to encourage school have been limited by a lack of differential attendance. The benefit is given contingent services for the various ethnic groups in on a student attending school for a given the country. The qualitative 78 Inclusiveness of Panama’s Growth study emphasizes the need for adaptation take-up will need to be understood and of service provision to the environment. addressed. There continue to be issues in access and The effects of the universal scholarship, educational quality, as well as the need for Beca Universal, also have not been evaluated. multicultural bilingual education in indige- The expansion of the program from second- nous areas. Program beneficiaries also ex- ary to all students has made it more progres- pressed the need for culturally appropriate sive. It is likely that the program has helped health services and health workers with lower poverty in addition to increasing en- specific skills to work in different cultural rollment and retention rates. Simulations of contexts. The program has had less success its effects on poverty using data from before in affecting malnutrition as well. There the program show a strong effect in indige- have also been concerns raised about im- nous areas. More recent anecdotal evidence plementation, with cultural sensitivities not from the Ministry of Education suggests being addressed and inappropriate condi- that for the Ngäbe Buglé, the benefit has re- tions being applied. duced the seasonal migration around the The non-contributory pension program coffee harvest, allowing children to remain has the potential to lower poverty among the in school. elderly although it has not yet completely de- Despite the significant impact of public livered on its promise. While no formal eval- transfers on extreme poverty, there are still uation of the program exists, simulations of challenges related to both targeting and the first order effects using preprogram data (2009) take-up of programs. As noted previously, less show that a universal assignment of 100 bal- than half of those eligible for the non-con- boas to all people 70 and older could reduce tributory pension actually received it in 2012, poverty among the older population by almost and lack of cultural adaptation may be affect- half and nearly eradicate extreme poverty. ing the take-up of Red de Oportunidades. Ad- The differences in overall poverty reduction ditionally, 18 percent of the population in the for men and women are fairly similar, although bottom quintile receives no social assistance for extreme poverty the benefit would lower of any sort. Nor does all spending benefit the poverty among men less, suggesting that el- poor (figure 4.23). There are costly leakages, derly men suffer from more severe poverty with 31 percent of spending of the top seven than do women. By 2013, however, only 30 social programs going to the top 60 percent percent of all elderly were enrolled in the pro­ of the population. This leakage of benefits to gram, thus reducing its impact on poverty. the richer end of the distribution is also mir- Nonetheless, it is clear that the program is rored in some of the government’s subsidy benefiting the poor elderly (figure 4.22). The programs. Cooking gas subsidies, for exam- expansion of the program to 65 and older and ple, represented US$82 million in 2010 dol- the increase in the benefit will also have an lars and increased government spending by important poverty reduction effect among 2.1 percent, yet the subsidy barely reaches the the older population. If the program is to have poorest: three in four extremely poor cook this effect, however, issues affecting program with wood. Inclusiveness of Panama’s Growth 79 Figure 4.22  Contributory and Non-Contributory Pension Coverage, 2007 and 2012 90 80 76.5 72.4 68.8 67.7 70 66.1 60 Percent elderly 50 45.1 42.7 40 30 20 10 0 2007 2007 2007 2007 2007 2007 2012 2012 2012 2012 2012 2012 Q1 Q2 Q3 Q4 Q5 Total Pension, jubilacion y 100–70 Solo 100–70 Solo Jubilado o Pensionado Source: World Bank (forthcoming). Figure 4.23  Distribution of Notes Benefits (Leakage), 2012 1. As intermediate moves cannot be seen in the data, it is unknown if rural migrants move 100 directly to large urban areas or make a series 90 of intermediate moves, moving first to small 80 towns or cities and then to larger ones. Percent of benefits 70 2. Using the census data allows for an analysis 60 50 of all five comarcas, not just the three largest 40 represented in the household survey (EML). 30 However, approximately three percent of the 20 indigenous population in Panama lives in 10 territories that have not been given the legal 0 status of comarca. These are considered to live in non-comarca areas for the purpose of the lim AN s s 70 Un ar l s sa io de io present analysis. l co er tic ar P s da lo NE iv cu s en ni e 3. We are indebted to members of the civil society a pe SE n tu 0 cio ro 10 a or a ec consultation group around Afro-descendant ag ta op s B to en os de en im issues for this insight. m d em Al su Re In pl 4. See Chapter 5 below for a discussion of other Su Q5 Q4 Q3 Q2 Q1 issues related to Afro-descendants that these data cannot address. Source: World Bank (forthcoming). 80 Inclusiveness of Panama’s Growth 5. World Bank 2011. a labor pool that can facilitate growth. Given 6. World Development Indicators (WDI), World the data limitations, no attempt is made here Bank, Washington, DC, http://data.world- to determine causality. The self-selection dis- bank.org/products/wdi. cussed above could also be linked to employ- 7. Population and Housing Census (INEC 2010) ment diversification. and WDI (see note 7 above). 11. Unless otherwise mentioned, this section on 8. The Census data are less up to date than the labor markets and women is based on World Encuesta del Mercado Laboral but have the Bank 2014a. advantage of allowing the analysis to be done 12. The data on quality of jobs (education and for a longer time period and to be done for the formality) are from the 2000 and 2010 three comarcas separately. Population and Housing Census (INEC 2000 9. Productivity here is defined as total GDP of the and 2010). sector divided by number of jobs in the sector. 13. Arráiz and Rozo 2011. 10. Growth can create the incentives for migra- tion, but at the same time migration can create References Arraiz, I., and S. Rozo. 2011. “Same Bureaucracy, Poverty Reduction.” Report No. 62955-PA, Different Outcomes in Human Capital? How World Bank, Washington, DC. Indigenous and Rural Non-Indigenous Areas in World Bank. 2014a. “Panama Gender Note.” Panama Responded to the CCT.” Documento Latin American and the Caribbean Poverty, de Trabajo OVE /WP-03/11. Oficina de Gender and Equity Unit (LCSPP). Evaluación y Supervisión (OVE), Inter-American World Bank. 2014b. Panama: Monitoring Country Development Bank, Washington, DC. Progress in Drinking Water and Sanitation INEC (Instituto Nacional de Estadísticas y (MAPAS). Washington, DC: World Bank. Censo). 2007–2013. Encuesta del Mercado http://documents.worldbank.org/curated/ Laboral. Contraloria, Panama. en/2014/04/19647786/panama-monitoring​ INEC (Instituto Nacional de Estadística y Censo). -country-progress-drinking-water-sanita- 2000 and 2010. Censo Nacional de Población y tion-mapas. Vivienda. Contraloria, Panama. World Bank. Forthcoming. Central America World Bank. 2011. “Panama Poverty Assessment: Social Sector Expenditure and Institutional Translating Growth into Opportunities and Review. Inclusiveness of Panama’s Growth 81 5. Prioritization Linked to Inclusion Benchmarking comparisons were made by ethnic groups: indigenous people living in comarcas, indig- The strong economic growth in recent enous people living outside of the comarcas, years has been inclusive, yet it had different Afro-descendants, and all others in the coun- effects across regions and populations—with try. The census does not provide a compara- some benefiting significantly less. On the ble measure of income poverty but does have positive side, incomes of all groups rose, with information on human capital, income, and those at the lower end and the middle of the demographic and household characteristics income distribution increasing the most. linked to welfare. Again the results of the Economic growth also translated into the ex- comparison (see table 4.2 in the previous chap­ pansion of services and access to education ter) show a clear welfare hierarchy: among and health. Poverty fell, and social outcomes the poor and the extremely poor, it is the in- improved. Overall, Panama’s poverty rate digenous living in the comarcas that have the places it ahead of most of its peers (figure lowest levels of income and human capital 5.1). However, the analysis in the previous and show the highest dependency ratios. chapter has shown that even in an environ- High economic growth benefited some ment of strong growth pre-existing income groups less, particularly the indigenous popu- and opportunity gaps in the country have lation. Overall poverty reduction in the past persisted. Moreover, it is unclear that the five years has been on the order of 34 percent present growth model will be adequate to (28 percent for extreme poverty). The comar- eradicate extreme poverty in the near future. cas have also experienced a lower level of pov- erty reduction than the rest of the country. Within Panama Urban areas saw extreme poverty fall 40 per­ Comparing different population groups re- cent between 2007 and 2012. Extreme poverty veals a continuum of states of poverty even in rural areas fell only by 15 percent, less but within the groups of poor and extremely still a respectable reduction. In contrast, the poor Panamanians. Using household survey comarcas experienced only a four percent de- data, comparisons of income poverty, human cline in extreme poverty in the same period. capital, and household characteristics were This means that the share of the extremely made for the populations living in urban and poor by area is even more disproportionate to rural areas and the comarcas. The results of the area’s population share than before. Urban the comparison are clear (see figures 4.12 areas represent 75 percent of the national and 4.13 in the previous chapter). Among population, but only 20 percent of the ex- the poor and extremely poor in Panama, the tremely poor live in urban areas. The comar- groups with the least human capital, lowest cas, however, where only six percent of the incomes, and greatest dependence on social population lives, concentrate 42 percent of the assistance are the indigenous population liv- extreme poor (figure 5.2). This concentration ing in the comarcas. Using the census data, has increased markedly in the 2007–2012 Prioritization Linked to Inclusion 83 Figure 5.1  Panama’s Poverty Rate Figure 5.2  Share of Population Compared to Peers (US$4 Per Day and Extremely Poor by Area, Poverty Line) 2012 45 80 40 70 35 60 30 50 25 40 20 30 15 10 20 5 10 0 0 Panama Structural Central LAC Upper Urban Rural Comarca America middle Population Share of Share of income share extremely poor all poor Source: World Development Indicators (database), World Bank, Source: Authors’ calculations based on EML 2012 (INEC Washington, DC, http://data.worldbank.org/products/wdi. 2007–2013). Note: LAC=Latin America and the Caribbean. period: up from 24 percent to 42 percent (see changes between the indigenous population figure 4.8 in the previous chapter). This pat- and the overall population is smaller than in tern also applies to overall poverty. Panama. The differences between Panama’s Across Latin America Indigenous Peoples’ access to services and In addition to exhibiting the most severe those in other Latin American and Caribbean poverty in Panama, the indigenous peoples (LAC) countries are striking. Among 12 Latin living in comarcas in Panama fare poorly American countries, Panama has both the compared to other indigenous people in lowest level of electricity coverage among the Latin America in both absolute and relative indigenous population (40 percent) and the terms (figure 5.3). The substantial gaps be- largest gap between the indigenous and non- tween indigenous and nonindigenous popu- indigenous populations (52 percentage points lations within Panama in terms of services compared to the next largest gap of 38 per- and human capital are mirrored in the gaps centage points in Colombia).1 The gap in between the Indigenous Peoples of Panama ­ sanitation is also the largest; and only one and other Indigenous Peoples in the region. country, Nicaragua, has lower absolute levels. Additionally, other countries in the region For piped water, again, the gap is largest in with large indigenous populations have seen Panama although the absolute level is higher economic growth more effectively moving than in Colombia, Nicaragua, and Peru. these groups out of poverty. In Bolivia, Access to Internet is also systematically lower Ecuador, and Peru, the gap in poverty rate among the indigenous populations in the 84 Prioritization Linked to Inclusion 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 Ch M ile Ch ex ile ico 20 20 02 20 02 10 M Ve ex ne ico Co st z ue 20 a la 10 Ri 20 ca Source: World Bank 2014. 20 01 Ec u ad 11 or Ch 20 M ile 10 ex 20 ico 02 Co 20 st 10 a Ec Ri ca ua 20 do 11 Bo r2 liv 01 Bo ia 0 liv 20 ia 12 Co 20 st 12 a Ri Ve ca n c. Water Gu ez 20 ue 11 a. Electricity b. Sanitation at la Note: IP=Indigenous Peoples; Non-IP=Nonindigenous Peoples. em 20 al Br a 01 az il 2 Ec 01 Br 0 IP az uad il 2 or 01 20 0 10 Bo liv EI ia Sa 20 lv Non-IP a 12 do Br r2 az il 2 EI 00 01 Sa 7 0 lv Ve a n ez do r2 Figure 5.3  Access to Basic Services by Ethnicity ue EI 00 la Sa 7 20 lv 0 a Co 1 do lo Pa r2 m n 00 bi a am 7 20 a 05 20 10 Pe ru 20 Pe Pe 07 ru ru 20 20 07 07 Pa Co n am Ni ca lo a ra m 20 g bi ua a 10 20 20 05 05 Ni Ni ca ca Pa ra ra na g g ua m ua 20 a 20 20 0 5 05 10 Prioritization Linked to Inclusion 85 region and the indigenous–nonindigenous Priority Area gap in Panama is one of the largest.2 On a slightly more positive note, while Panama’s The increasing concentration of pov- rate of change in terms of access to sanitation erty in indigenous areas suggests that special is one of the slowest, the rate of change for ac- attention is needed for these areas and this cess to water and electricity is faster than in population group. The Indigenous Peoples of many countries. Panama have significant social capital, with Health indicators are also lower among well-developed and functioning community the indigenous population in Panama than and governance structures. Their lands rep- in the rest of Latin America. Infant mortal- resent significant wealth and biodiversity. ity rates among indigenous children are However, many of the Indigenous Peoples in higher only in Bolivia. Panama has the larg- Panama suffer from chronic poverty and est gap between infant mortality rates of in- have multiple deprivations: extremely low digenous and nonindigenous children incomes, low access to basic services and in- (three times greater among the indigenous frastructure, lower human capital, poorer population) and has one of the lower rates health outcomes, fewer labor options, and de of change.3 It is also one of only two Latin facto land tenure insecurity. Many of these American countries where the elderly are problems are long term and have been less more male than female, perhaps a reflection responsive to economic growth and social of the extremely high rates of adolescent program impacts than expected. pregnancy (Panama’s Indigenous Peoples The complexities of addressing the twin have the highest rates of teen pregnancy goals in the comarcas require attention to is- among the indigenous in Latin America sues of culturally appropriate economic op- and the largest gap between indigenous and portunity, social assistance, infrastructure nonindigenous), and low rates of births at- provision, and the enforcement of legal tended by skilled medical practitioners.4 rights. The concentration of economic The indigenous populations in Panama and growth in specific sectors and geographic Brazil are also disproportionately affected areas outside of the comarcas, along with the by HIV/AIDS.5 limited shifts in employment and earnings Only on education indicators do the within the comarcas, highlight the con- Indigenous Peoples of Panama appear to do straints of the present growth model and do- better than other indigenous groups in Latin mestic markets. The challenges faced by the America.6 Levels are higher, and there have social protection system in the comarcas also been many positive changes. Primary enroll- merit further attention. Spending levels are ment among indigenous children is almost at adequate levels, but outcomes are muted. universal; and secondary enrollment, while Education enrollments have increased, in lower, is similar to that of other indigenous part due to social assistance programs, but groups in the region. The country still lags less in the comarcas than in other rural areas. behind, however, in tertiary enrollment. The benefits in health, too, are more limited. Nonetheless, in both rural and urban areas, The impact on poverty reduction, in the the indigenous groups fare less well than short term, is constrained because of limits their nonindigenous counterparts.7 both in coverage and in benefits. The lack of 86 Prioritization Linked to Inclusion services continues to be a constraint, partic- extreme poverty is much broader than just ularly water and sanitation. Low population the comarcas, the levels and severity of pov- density and dispersed populations are often erty there and the slowness of positive blamed for lack of service provision. While change suggest the importance of prioritiz- this may be true in part, the fact that Los ing the comarcas. Santos, one of the three provinces with the highest rate of poverty reduction in the past six years, also has a population density below Identified Opportunities that of the poorest comarca suggests that The national integrated development other barriers to service provision are at play plan of the Indigenous Peoples of Panama and need to be addressed. Additionally, the (DIPORP) provides a new opportunity to lack of culturally appropriate models for de- affect welfare among Indigenous Peoples in velopment has reduced the positive impact Panama. This is because it represents a con- of government programs and policies. sensus, is focused on the broad range of is- Differences in community organization, sues that affect development, and looks to communal property, among others, need to the long term as well as the short and me- be taken into account. Furthermore, under- dium terms.8 The Plan is the result of the standing the tradeoffs the indigenous two-year effort by the National Indigenous peoples are, and are not, willing to make Development Working Group (Mesa nacio- among different goals is needed. nal de desarrollo indígena). The Working Although solving the problems of ex- Group itself was established in the aftermath treme poverty in Panama will not be accom- of a period of conflict between the indige- plished by focusing only on the Indigenous nous communities and the national govern- Peoples living within the comarcas, this ap- ment around land rights, among other pears to be a good starting point. The fact issues, and was charged with creating a na- that the comarcas are home to 42 percent of tional development plan that would become the extremely poor in the country explains national policy and be approved into law.9 the focus on those areas, as does the fact that (See box 5.1 for a summary of the specific poverty is worse in the comarcas than in the areas of the DIPORP) rest of the country. As important, many of The Plan DIPORP represents a consen- the issues that affect livelihoods in the co- sus among the 12 indigenous congresses. marcas also affect those of their rural neigh- For the first time, there is one document bors. Some investments, such as those in that has been agreed upon by all the basic infrastructure in roads, electrification, Indigenous Peoples in the country and rep- and sewage systems would benefit both resents a unified vision of the goals and pri- groups—rural non-indigenous and rural in- orities of these groups. The lengthy process digenous populations. In contrast, investing undertaken by the Working Group to reach in social services such as health and educa- this consensus was carefully designed to re- tion would require special attention to the spect the traditions and customs of each comarcas to adapt services to the social and group. During the first phase of the Plan cultural norms of the Indigenous Peoples. In DIPORP’s development (March–July 2013), short, while Panama’s agenda on eradicating the traditional authorities of each group Prioritization Linked to Inclusion 87 Box 5.1  Main Areas of Action for the DIPORP Governance • Strengthen traditional structures toward a plurinational state and Territories • Strengthen the leadership and capacity of traditional authorities • Strengthen territorial governance and guarantee/strengthen land tenure security • Adopt and implement international legal instruments (ILO 169) and establish safeguards • Implement consultation and participation mechanisms for all projects and decisions that affect IP territories • Empower IP women and youth and their participation and leadership Economics • Develop a “green” and productive culture focused on environmen- tal protection and conservation • Promote entrepreneurial activities and development models owned by the territories • Strengthen traditional production systems and develop new crops and food sovereignty • Improve existing economic activities and structures • Develop sustainable production models for territorial economic development • Promote participation of women and youth in productive activities Education, • Revise and implement Law 88 on Intercultural Bilingual Education Culture, • Improve education quality and efficiency, focus on innovation and and Health competitiveness and technology and communication • Increase and improve higher education for youth and women • Revitalize and promote cultural development • Improve infrastructure and integrated health service, preventive medicine, access to clean water, and sanitation • Increase the number of health personnel and improve coordina- tion with authorities • Strengthen, through the traditional authorities, traditional medi- cine through public resources Housing, • Improve housing and communal spaces using traditional practices Infrastructure, • Establish a program of special attention for urban indigenous and Energy people and their housing • Improve and expand existing road, WSS, energy, and communica- tion infrastructure in territories • Establish renewable energy programs Source: Mesa 2014. 88 Prioritization Linked to Inclusion carried out a total of 94 consultation meet- planning horizon. This longer-term focus ings among the 12 indigenous congresses. provides an explicit opportunity for evalua- The second phase, that of drafting the Plan tion and adjustments to the Plan throughout itself, was carried out by a committee of in- implementation and allows for investment digenous and government representatives in both physical and human capital. Much and facilitated by the United Nations of the Plan DIPORP focuses on training and Development Programme (UNDP) repre- capacity building, aimed at both the indige- sentatives. The proposed Plan was submit- nous communities and public servants in an ted to the Working Group for approval on attempt to build new mechanisms of service October 1, 2013, and then underwent a val- provision and take-up. The Plan DIPORP idation process (phase three) across the also addresses short-term concerns, but it is country and among all the indigenous the longer-term focus that provides the groups. The Plan was approved in greatest opportunity for Panama to affect December 2013. The fourth phase, that of the welfare of the indigenous populations approval by the government and the na- and to learn in the process. tional assembly, was launched prior to the Using the Plan DIPORP as a foundation elections; however, because of the change in will ensure that the cultural identity and the government, this fourth phase has had to be specific characteristics of the Indigenous restarted. A new law that would make the Peoples are taken into account in the deter- Working Group permanent (and validate mination of the best combination of social the DIPORP) is expected to be submitted in assistance and economic development. Local 2016 to the national assembly for discussion knowledge, practices, systems, and experi- and debate. ence are critical components in determining The broadness of the DIPORP is another the best combination of social assistance and factor that enhances its usefulness as a guide economic development that can lead to for improving shared prosperity and eradi- long-term success. The Plan DIPORP high- cating extreme poverty among indigenous lights how many of the barriers to service populations. Unlike many related exercises, access and use result from poor design ­ the Plan is not limited simply to legal issues ­ ments that fail to embrace culturally spe- ele­­ but instead addresses the entire gamut of cific practices and systems, and to include constraints and opportunities facing the the Indigenous Peoples in the design and de- Indigenous Peoples. The Plan is based on the livery of programs—elements critical for three thematic pillars of economic develop- ownership and uptake. Addressing the cul- ment, social development, and legal rights; tural and contextual issues may help to make and its concrete goals and objectives across public investment more effective: in the these areas provide important direction for 2009–2012 period, overall budget execution how the national government, civil society, was just under 70 percent although the ma- and the Indigenous Peoples’ congresses can jority of the sectors saw much smaller per- work together to address poverty eradication centages (housing 26 percent, agriculture 30 and promote shared prosperity. percent, for example).10 It is not clear Finally, the Plan DIPORP has a long- whether the low execution of public invest- term focus. The Plan covers a 15-year ment is due to inappropriate investments, Prioritization Linked to Inclusion 89 low take-up, or low capacity of executing revenues from economic opportunities can agencies. be generated and effectively managed for the The prioritization process for identifying benefit of the indigenous population while opportunities to affect inclusiveness and the the land rights of the Indigenous Peoples welfare of the indigenous populations is are protected. This is of particular impor- based on the DIPORP and consultations tance if the mining sector is to grow in a with the country team and stakeholders in socially and environmentally appropriate ­ Panama. The critical opportunities that have manner. Finally, as described in the Plan been identified reflect the three thematic pil- DIPORP, education is a major concern. To lars of the Plan: economic development, so- the extent that the system can be improved cial development, and legal issues. through modernizing the curriculum and Opportunities have been identified adapting the way in which service is pro- around specific types of economic develop- vided, both dropout and attainment levels ment, governance, and the provision of can be affected with subsequent effects on health and education services with the em- economic outcomes. phasis being on culturally appropriate in- Addressing these issues has a direct effect terventions. In terms of economic activities, on eradicating extreme poverty given that the focus would be on economic develop- such poverty is concentrated in the ment with identity, namely promoting ac- Indigenous Peoples. Evidence for successful tivities that generate income while enhan­ cing interventions in culturally appropriate eco- existing natural resources. Increasing the nomic development comes from Australia, quality and access of health and education Canada, Norway, Peru, and the United States services in indigenous communities re- (Alaska). Costa Rica has implemented a quires that the service content and delivery program of Payments for Environmental ­ mechanisms are culturally pertinent. Finally, Services of US$3 million per year to indige- the focus on governance is to take advan- nous communities for ten years. Both this tage of the opportunity to enhance the and the new anteproyecto de ley to regulate Indigenous Peoples’ participation as Payments for Environmental Services, pre- Panamanian citizens while at the same time sented to the national assembly in August of recognizing their cultural uniqueness and 2014, could serve as a model for Panama. diversity in aspirations and worldview. Evidence of successful improvements in rela- Realizing these economic growth oppor- tionships between governments and the tunities will depend heavily on progress Indigenous Peoples’ governance structures being made on the priority areas identified can be found in Bolivia, Brazil, and Canada, in Chapter 3 above. Focusing on overcom- again examples of how such work could be ing the present inability of the energy sector implemented in Panama. to supply power to the comarcas will con- There is substantial political will around tribute to the development of new industries these opportunities. As discussed above, the and job creation within the comarcas. In Plan DIPORP creates a platform on which parallel, the opportunities identified around the indigenous communities themselves, the institutions (regulations, transparency, and national government, and the private sector effectiveness) will be needed to ensure that can build. Many of the proposed changes in 90 Prioritization Linked to Inclusion service delivery are already covered in law and other Panamanians perceive racial dis- (Resuelto N° 4376 del 25 de agosto de 1999; crimination as a factor that creates obstacles Ministerio de Salud, Medicina Tradicional, to Afro-descendants’ economic, educational, Gaceta Oficial N° 23,880, 7 de septiembre de social, and labor opportunities and limits ac- 1999; Bilingual and Intercultural Education cess to basic services as compared to the rest Law No. 88). And there are agreements in of the Panamanian population. Furthermore, place to legislate around the Plan DIPORP. Afro-Panamanians perceive negative stereo- Finally, the creation of a vice-ministry of typing in the media toward the Afro-descen­ Indigenous Affairs and the plan to transform dant community. Afro-Panamanian women this into a ministry both point to the politi- feel they are particularly discriminated cal feasibility of actions around these identi- against, especially in the labor force. Others fied opportunities. argue that Afro-descendant populations live in areas with poorer infrastructure, have lower access to education, health care, em- Filling Knowledge Gaps ployment, and political participation. An im- The knowledge gap around Afro- portant task going forward will be to address descendants limits what can be concluded both the data gaps in the country as well as to in this report. For those indicators of well-be- pull together what little data exist to attempt ing that exist, Afro-descendants are, on aver- to better understand the constraints and op- age, better off than the Indigenous Peoples. portunities of this group. It is hoped that the However, they also suffer from multiple Consejo de la Etnia Negra (Council of the deprivations. A 2013 qualitative study high- Black Ethnicity) will be a source for further lights the fact that both Afro-Panamanians consultation and data.11 Notes 1. This comparison of the indigenous populations 7. ECLAC 2014. in Panama with those in the rest of Latin America 8. The facts around the DIPORP come from the is based on Los Pueblos Indígenas en América Plan itself (Mesa 2014). Latina: Balance político, económico y social al 9. The Working Group had four areas of work: (i) término del Segundo Decenio Internacional elaborate the Plan DIPORP, (ii) create a perma- de los Pueblos Indígenas en el Mundo (World nent space for consultation between the govern- Bank, 2014c) and compares Panama to Brazil, ment and the Indigenous Peoples, (iii) improve Bolivia, Chile, Colombia, Costa Rica, Ecuador, the capability of the different actors to implement El Salvador, Mexico, Nicaragua, Peru, and the consultation process and uphold interna- República Bolivariana de Venezuela. tional laws and agreements, and (iv) disseminate 2. Economic Commission for Latin America and to all parties the development plans, agreement, the Caribbean (ECLAC) 2014. and results in the appropriate language. 3. IBID. 10. Data from Panama’s Ministry of Economics 4. Economic Commission for Latin America and and Finance website http://mef.gob.pa. the Caribbean (ECLAC) 2014 and World Bank 11. Created in 2007 under the presidential decree 2014c. known as Ley 116, the council, which was to 5. United Nations Permanent Forum 2014. sit within the Ministerio de Gobierno, was 6. Education data from ECLAC 2014. designed to more proactively mainstream the Prioritization Linked to Inclusion 91 needs and aspirations of Afro-Panamanians appropriate educational services, and anti-­ into government programming, culturally discrimination policies. References ECLAC (Economic Commission for Latin Derechos de los Pueblos Indígenas, James America and the Caribbean). 2014. “Informe Anaya. Adición: La Situación de los Derechos Los Pueblos Indígenas en América Latina.” de los Pueblos Indígenas en Panama.” Report Santiago de Chile. A/HRC/27/52/Add.1, United Nations, INEC (Instituto Nacional de Estadísticas y Geneva. Censo). 2007–2013. Encuesta del Mercado United Nations Permanent Forum on Indigenous Laboral. Contraloria, Panama. Issues. 2014. http://undesadspd.org/ Mesa Nacional de Desarrollo Indígena, 2015. IndigenousPeoples.aspx “Plan de desarrollo integral de los Pueblos World Bank. 2014. Los Pueblos Indígenas en Indigenas de Panama.” Panama. América Latina: Balance Político, Económico y OHCHR (Office of the United Nations High Social al Término del Segundo Decenio Commissioner for Human Rights). 2014. Internacional de los Pueblos Indígenas en el “Informe del Relator Especial Sobre los Mundo. Washington, DC: World Bank. 92 Prioritization Linked to Inclusion 6. Sustainability How sustainable is Panama’s progress ​ The sustainability of Panama’s high reli- toward achieving the twin goals of reducing ance on foreign financing for its investment poverty and increasing shared prosperity? program will depend on continued progress The previous sections of this document have on compliance with international transpar- described Panama’s progress toward the twin ency standards. In 2000 the country appeared goals, the country’s outstanding growth per- on the blacklist of the Financial Action Task formance, and the overall inclusive nature of Force on Money Laundering (FATF) as a this growth so far. The current section turns “high-risk and noncooperative jurisdiction” to the future, addressing the question of that did not support international efforts to whether Panama can sustain this progress. fight money laundering.1 In addition, This question will be addressed from an eco- ­ Panama’s practices on tax information shar- nomic, social, and environmental perspective, ing caught the attention of the Organisation followed by a reflection on priority areas from for Economic Co-operation and Develop- a sustainability point of view. ment (OECD) Global Forum, resulting in the initiation in 2009 of a peer-review pro- cess on the full and effective exchange of in- Economic Sustainability formation. Finally, Panama’s maritime In the past, Panama has achieved prog- registry also appeared on the blacklist of the ress mainly through fast economic growth, a Paris Memorandum of Understanding. This strategy that is viable for the short to medium international body, made up of 27 maritime term, albeit with a few qualifications. Given administrations from Europe and North the rapid growth of recent years, it is expected America, seeks to eliminate the operation of to moderate in the future. As pointed out in substandard ships through a harmonized the growth section, however, the identified system of state control of ports. Panama’s priority areas of energy, education, and public open registry allows for easy registration sector institutions are likely to impact growth (often online), employment of cheaper for- negatively in the future if they remain unad- eign labor, and exemption for foreign owners dressed. Moreover, as pointed out in the in- from income taxes. Panama’s registry is con- clusiveness section, growth may continue to sistently beset by allegations of corruption stop short of including the Indigenous Peoples and criticized for hiding the true identity of of Panama, unless specific efforts are made to ship owners and for lax enforcement of rules address their situation and opportunities. In and regulations. addition, compliance with international trans- Panamanian authorities reacted to the parency standards, continued efforts on mac- country’s inclusion on the money laundering roeconomic stabilization policies, and the blacklist in 2000 by adopting legislation that economic role of the Canal for the country moved the country up to the so-called gray need to be carefully taken into account. This list in June 2001. In particular, Panama in- section discusses these three challenges. troduced new legislation to expand criminal Sustainability 93 offenses for money. The so-called gray list of report on observance of standards and codes the Financial Action Task Force names coun- and would help to strengthen Panama’s sta- tries that are in the process of improving tus as an international financial and business compliance with international standards on center. global anti-money laundering and combat- In terms of compliance with international ing the financing of terrorism. In the Latin standards of tax transparency, Panama has American region, Argentina, Cuba, and Nic- taken measures to move to the next phase of aragua also appear in this list. A recent re- the OECD Global Forum’s peer review pro- port on observance of standards and codes cess. Compliance with the Global Forum’s conducted by the International Monetary standards involves demonstrating that na- Fund (IMF) found that Panama’s anti-mon- tional legislation and bilateral or multilateral ey-laundering framework was still not fully agreements on information sharing for tax in line with the Task Force’s recommenda- purposes meets the standards of ten different tions. Panama has ratified the main United technical elements. In September 2009, the Nations Conventions on money laundering Global Forum launched a formal two-phase and has legal provisions in its Penal Code peer review process to monitor and review that are broadly in line with the standards set Panama’s progress toward full and effective by the Task Force. According to the report, exchange of information: (i) Phase 1 (review however, a number of significant deficiencies of the legal and regulatory frameworks of remain.2 each country) and (ii) Phase 2 (assessment of In June 2014, the government made a the practical implementation of the “interna- high-level political commitment to address- tionally agreed standard” on tax transpar- ing these remaining deficiencies. The gov- ency). Panama has made significant progress ernment will work on implementing its in these areas. The Panamanian government action plan to address these deficiencies, in- has successfully negotiated 19 Double Inter- cluding by (i) adequately criminalizing national Taxation Agreements based on the money laundering and terrorist financing, OECD’s Model Tax Convention on Income (ii) establishing and implementing an ade- and on Capital, and 11 of these are already in quate legal framework for freezing terrorist force. As a result of these agreements, the assets, (iii) establishing effective measures government has adjusted its internal legisla- for customer due diligence to enhance trans- tion for effectively applying international tax parency, (iv) establishing a fully operational agreements and for promoting transparency and effectively functioning financial intelli- and effective information exchange for tax gence unit, (v) establishing suspicious trans- purposes. In order to achieve this, the gov- action reporting requirements for all finan­ cial ernment passed (i) Law 33-2010 to introduce institutions and designated nonfinancial transfer pricing rules, permanent establish- businesses or professions, and (vi) ensuring ment, and tax residency into Panama’s Fiscal effective mechanisms for international coop- Code; (ii) Resolution 088-DS/AL 2010 to eration.3 Progress in implementing this ac- create the International Taxation Unit and tion plan and the passage of a new the Tax Information Exchange Unit; (iii) Law anti-money-laundering law would address 2-2011 to identify and apply the “Know your the major deficiencies identified in the clients” procedures; and (iv) Law 47-2013 to 94 Sustainability immobilize bearer shares through a custodial adequate but might be insufficient to provide arrangement system. fiscal resources for prolonged periods of In addition, Panama was able to reform downturn where revenues from both the its maritime registry to advance to the white Canal and tax collection are dropping in the list of compliant countries. Since 2008, context of a shrinking economy. ­ Panama has made enough progress in re- In addition to prudent fiscal policy, the forming its maritime registry to advance to country’s dollarization also calls for a healthy the white list of the Paris Memorandum of banking sector. Lending practices in Panama Understanding. need to be (and indeed have been) more Macro stability remains a continuous conservative than in countries with a lender task and requires a high degree of fiscal of last resort or a deposit insurance scheme prudence in order to be sustainable. Given with greater liquidity reserves and a strict, that Panama has given up monetary policy efficient supervisory role. The Panamanian as a policy tool and restrained the use of fis- Superintendence of Banks has played a cal policy, the country has little room for strong role in this sense. discretionary fiscal policies. Mindful of this, As an international financial center with Panama is managing its fiscal balance fol- extensive external links, the country is ex- lowing a fiscal rule, the social and fiscal re- posed to external risks and heavy reputa- sponsibility law introduced in 2002 and tional risks. Foreign assets of Panamanian updated several times to adapt to realities banks represent 39 percent of GDP, signifi- such as the 2008 global financial crisis. The cantly more than in the five largest econo- fiscal rule mandates fiscal deficit ceilings mies of Latin America and the Caribbean and has helped Panama to maintain fiscal (LAC), none of which exceed five percent. As prudence. a result, credit risks in foreign country debt- Additional budget flexibility would be ors could have significant impact on the bal- welcome, however, in order to create room ance sheet of Panamanian banks. Similarly, for countercyclical policy. Almost 70 percent foreign liabilities of the Panamanian banking of the total expenditure in Panama is rigid. system represent 95 percent of GDP, more This rigidity is even more binding in the than four times larger than Chile with the context of low tax revenue collection, which highest percentage (21 percent) relative to averaged 10.2 percent of gross domestic GDP among the top five Latin American product (GDP) from 2001 to 2013, com- economies. This implies that the Panama- pared to the already low 12.7 percent of GDP nian banking sector is highly exposed to in- of the Central American region. The require- ternational interest rates. ment of prudent fiscal policy restrains the Finally, the crucial role of the Panama government in terms of public service provi- Canal for the country’s economy warrants a sion to Panamanian citizens. Moreover, 50 close look at the sustainability of Canal oper- percent of nontax revenues come from the ations. In particular, competition to the Canal Panama Canal, making the government requires constant adjustment to maintain highly dependent on these resources. Policy market edge. Alternative shipping routes to measures such as the creation of a sovereign the Panama Canal have been a constant fund (Fondo de Ahorro de Panama) are source of curiosity, and there continue to be Sustainability 95 many attempts to find other options for Social Sustainability global routes. To the east, Egypt’s recent project to widen parts of the Suez Canal The country’s main risks relative to so- seeks to enlarge transit capacity and decrease cial sustainability and social cohesion are waiting time from 18 to 11 hours for most linked to (i) the dynamic growth that has ships. The 72-kilometer works should be lifted many into middle-class status while completed within one year, according to offi- leaving others in extreme poverty, (ii) the cial government statements. crime and violence linked to Panama’s strate- Closer to home, several countries have gic position as a drug corridor, and (iii) weak played with the idea of a dry canal in Central land rights protection. The stark economic America; however, this remains a commer- inequalities and relative deprivations, along cially less competitive option. The recent an- with both perceptions and evidence of cor- nouncement by Panama’s northern neighbor ruption and more precarious forms of urban Nicaragua of the initiation of a project to employment, create strains on society. Rela- build the Nicaragua Canal passing through tive deprivation has led some groups to fur- Lake Managua could, once completed, have ther organize and assert their political voice a significant impact on the share of trade (such as the Mesa Indigena), while others going to Panama. The project, financed by take advantage of the low barriers to entry to the Hong Kong SAR, China–based HKND the illegal drug trade that continues to grow Group, is estimated to cost US$50 billion in the country’s unofficial economy. and will include some of the largest earth- Relative poverty in urban areas, exclu- works in recent times to clear a 278-kilome- sion, and the illegal drug trade are factors in ter passageway through Lake Managua, the increases in violent crime and gen- raising significant environmental and social der-based violence. The country’s homicide concerns. rate places it 39th globally in terms of homi- In the medium to long term, another cides (figure 6.1).5 Cases of reported rape less-cited competition may be created by rose 36 percent between 2009 and 2012— nature as global warming melts the Arctic and in 2009, 19.7 percent of women nation- cap. Its summer ice cover has already ally experienced some kind of physical shrunk by more than 40 percent over the violence after the age of 12, with 9.3 percent last few decades, raising the prospect that it reporting experiencing physical violence may soon be possible to sail along the Arc- within the past year.6 In addition, thefts have tic sea routes with ease. By using the North- risen nine percent.7 The population is very ern Passage along Russia’s northern coast or conscious of the increased crime and vio- the Northwest Passage through the Cana- lence. In 2004, crime and violence ranked dian Arctic archipelago, large bulk carriers third in the perceived top five problems of would substantially reduce the distance be- the country, moving up to first place by 2008 tween Asia, Europe, and North America. and remaining there (figure 6.2).8 This would mean saving more than 4,000 Urban youth, along with rural and indig- nautical miles between German and Japa- enous populations, face particular risks. Sim- nese ports.4 ilar to many of its Central American neighbors, Panama has a large youth cohort, 96 Sustainability Figure 6.1  Homicide Rates (per 100,000) 160 140 120 100 80 60 40 Panama 20 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Panama El Salvador Guatemala Honduras Mexico Canada Source: UNODC 2013. Figure 6.2  Critical Problems Facing Panama (In Order of Importance) 2004 2006 2008 2010 2012 Unemployment/lack Unemployment/lack Crime and Crime and Crime and of jobs of jobs delinquency delinquency delinquency Crime and Inflation, high Corruption delinquency Economy Economy prices Crime and Unemployment/lack Unemployment/lack delinquency Corruption of jobs of jobs Corruption Inflation, high Inflation, high Economy Economy prices prices Lack of water Poverty Lack of water Corruption Corruption Economy Source: LAPOP 2004, 2006, 2008, 2010, and 2012. with 24.9 percent of the population between Darién, a region socially and politically iso- the ages of 15 and 29, 15 percent of whom lated and economically marginalized. Darién neither work nor attend school. Rising gang has been affected by violent conflict between activity, with roughly 240 gangs in Panama Colombian and Mexican cartels for control that operate in and around the major urban over narcotics trafficking routes and the centers, is of some concern. Rural and indig- presence of demobilizing guerillas and dis- enous areas are also vulnerable to crime and placed persons from Colombia. The violence violence. This is particularly the case in and insecurity affects production as families Sustainability 97 move to larger population centers and Illegal logging, large mining interests, and women stop working in community agricul- other encroachment on indigenous lands are tural plots. ongoing problems. Land and resource issues Crime and violence have the potential to have sparked protests and confrontations, stifle growth if not managed. The examples leading to fatalities in recent years, and un- from the neighboring countries are stark. rest may continue if Indigenous Peoples feel An extensive growth analysis of El Salvador threatened. The head of the National Coordi- identified crime and violence as one of the nating Body of Indigenous Peoples in Pan- two major constraints to growth with the ama said in reference to this issue: “We are a huge cost of crime and violence a major fac- peaceful people, but we are at war, and it is tor limiting El Salvador’s ability to compete being fought by women, children, men, caci- on the world markets.9 In Honduras, the ques,” (Barrigón Dogirama as quoted in costs of crime are estimated to represent 10 Berger 2013).12 In 2011, after three weeks of percent of GDP—health costs alone are esti- violent protests and roadblocks by the Ngäbe mated at 1.3 percent of GDP—and the coun- Buglé and environmental groups, the gov- try could increase its GDP by 0.7 percent ernment repealed Law 8, the reforms to the with a 10-percent reduction in crime.10 Al- mining law. The cancellation of this law though estimates of costs are subject to error, leaves a legal vacuum because the clauses of the fact that crime and violence, if un- the mining law that Law 8 had replaced were checked, can hamper growth is a legitimate not reinstated. Both the mining and tourism concern. sectors, although potential sources of much-​ Struggles around infringements of indig- needed growth, also have continued poten- enous land rights also pose serious threats to tial to impinge on indigenous rights and lead social sustainability. The legal establishment to confrontations. of the five comarcas between 1938 and 2000 While the risks to social cohesion exist, formed the base of rights and protections for various factors may play a mitigating role. the indigenous population, a base that is The government’s recent success in reining in widely recognized as a model of indigenous homicide rates suggests that Panama may be rights protection. However, the United Na- able to avoid the escalation seen in neighbor- tions Human Rights Council (UNHR) ar- ing countries. Most youth gangs in ­ Panama gues that the legal framework is fragile and lop­ are in relatively early stages of deve­ ment, that Panama has significant problems in are largely a neighborhood-oriented pheno­ terms of both the implementation and the menon with limited adult invol­ vement, and protection of the rights of the Indigenous lack criminal sophistication or links to orga- Peoples, especially their rights over land and nized crime or corrupt public officials. The natural resources.11 Panama is one of six nascent gang problem, among others, could Latin American countries that have not be dealt with if the country can pull together signed the International Labour Organiza- the well-established but fragmented array of tion (ILO) Convention No. 169, a legally actors—governmental and non-governmen- binding international instrument that deals tal, including the private sector—that work specifically with the rights of indigenous and in the area of youth services and crime pre- tribal peoples. vention to provide “wrap-around” services to 98 Sustainability disenfranchised youth.13 Ratification of ILO are met while maintaining the health of the Convention 169 could help to promote land watershed ecosystem. The risk posed by and other rights because ratification would shifting climate patterns, therefore, becomes trigger international supervision of the Con- critical to the sustainability of the Canal op- vention’s implementation, covering a range eration and hence economic sustainability. of issues from nondiscrimination to cultural The El Nino Southern Oscillation climato- specificities, consultation and participation, logical phenomenon over the Panama Canal and the right to define priorities for develop- watershed is characterized by a reduction of ment in the comarcas. The planned creation total rainfall. In terms of long-term climate of a Ministry of Indigenous Affairs to help change, the recent IPCC 5th Assessment promote economic and social welfare of the (IPCC 2014) cites a trend of increasing pre- Indigenous Peoples in the country and sup- cipitation over most of Panama. This is gen- port the Plan DIPORP provides further op- erally good news for the Canal. However, portunities to improve the protection of land greater variability, with more frequent floods and resources rights of the Indigenous and droughts, poses a real risk. Peoples in Panama. Infrastructure-based growth requires strong environmental institutions and en- forcement to avoid long-term irreversible Environmental negative impacts. As Panama continues on Sustainability its development trajectory—fueled by invest- ments in the construction and logistics sec- Safeguarding Panama’s water and natu- tors—and aspires to expand its image as a ral resource base is critical to the current tourism and service hub, strong regulatory growth model linked to the Canal and other and institutional environmental framework, economic activities. The Panama Canal monitoring, and enforcement are needed to needs close to 2,580 cubic hectometers of guide the design and implementation of in- water per year and depends entirely on Lake frastructure projects. The limitations of the Gatun, and consequently, the health of the national environmental authority, ANAM, in surrounding rainforest. One month of full the areas of priority setting, planning, and operation uses about one-third of the avail- capacity to implement key regulations can able Gatun Lake volume, resulting in a heavy lead to significant negative impacts. Environ- dependence on precipitation, a concern in mental information systems are also an im- the dry season.14 In 2015, once the Canal ex- portant component in facilitating greater pansion is complete, an estimated 3,736 public participation, an issue that has caused cubic hectometers of water will be needed to several social conflicts and outbreak of vio- operate the Canal, a 45 percent increase. En- lence around protected and indigenous areas suring that water resources are adequately in past years. managed is a top priority for the Autoridad In particular, the growth of the mining del Canal de Panama (Panama Canal Au- sector faces environmental risks. As men- thority, or ACP), which has put in place a tioned in previous sections, the mining sec- strong management and monitoring system tor has the potential to contribute to ensure that different demands for water significantly as a driver of growth in the Sustainability 99 coming decades. However, for this to materi- about 400,000 people in urban areas receive alize, the tension between its growth poten- water only seven hours per day, wastewater tial and the significant environmental and collection is very low in low-income urban social challenges needs to be addressed, areas, and 17 percent of the urban popula- given that the mining sector is responsible tion still has inadequate latrines. The chal- for some of the largest releases of heavy met- lenge of improving the urban environment is als into the environment of any industry. It reinforced by the ongoing process of decen- also releases other air pollutants, including tralization. Law 37 of 2009 gives increased sulfur dioxide and nitrogen oxides, and responsibilities to municipal governments leaves behind tons of waste tailings, slag, and for planning and investment in urban infra- acid drainage. Occupational and environ- structure. However, the increased responsi- mental exposure to heavy metals, silica, and bilities have not been coupled with adequate asbestos can occur during mining opera- capacity building to help municipalities un- tions. The lack of an adequate regulatory dertake their enhanced roles in planning, framework to regulate safe and sustainable budgeting, and implementing sound invest- mining permits and of incentives for em- ment choices. Institutional strengthening of ployment promotion and redistribution local governments will be critical to ensure schemes remains a key bottleneck keeping that Panama’s urbanization follows a sustain- the sector from reaching its potential. able trajectory. Increasing urbanization has not been In addition to rural vulnerability to natu- matched by adequate planning and ser- ral disasters, the threat to urban areas from vice-delivery capacity for safe and clean liv- disasters is also increasing. The indigenous ing conditions. A rapidly growing urban comarcas Ngäbe Buglé, Emberá-Wounaan, population (at a rate of 2.4 percent per year, and Guna Yala, and the provinces of Bocas it is the fifth highest in the region after Gua- del Toro and Darién show historically signifi- temala, Haiti, Honduras, and Paraguay), as cant levels of vulnerability to natural disas- was discussed in Chapter 4, increases the ters. Those affected in these rural areas are pressure for adequate urban planning to characterized by low incomes, as shown pre- avoid future problems.15 Total environmental viously, as well as by precarious housing con- health costs are estimated at 1.3 percent of ditions and poor access to basic services GDP per year.16 In particular, urban air pol- (water and sanitation, electricity, etc.). In- lution and associated respiratory illnesses creasingly, however, urban areas are also see- and mortality are a growing concern in Pan- ing more disaster impacts, within a context ama City, San Miguelito, and other urban of a general lack of informed disaster risk centers, with 90 percent of total air pollution management policies and interventions. The resulting from transport emissions from the Metropolitan Area of Panama, home to 43 increasingly large vehicle fleet. The estimated percent of the country’s population and gen- annual costs of mortality and morbidity due erating about 68 percent of the GDP, has to urban air pollution are estimated at 0.7 seen more floods of higher impact in the last percent of GDP. There are marked quality decade. More than ten national emergency differences between fast-developing urban declarations have been issued since 2005, areas and those lagging behind. For instance, with serious landslides and flooding affecting 100 Sustainability Panama and Colón and estimated losses at would be huge: a national loss of US$1,634 over US$135 million. While Panama’s expo- million is estimated if Panama were struck sure to seismic hazard is not as high as that today by an earthquake similar to that of July of neighboring countries, the potential losses 18, 1934 (magnitude 7.4). Notes 1. The Financial Action Task Force on Money noticias/la-encuesta-nacional-de-salud-sexu- Laundering (FATF) is an intergovernmen- al-y-reproductiva-de-panama-llena-dos-dec- tal body established in 1989 by the Ministers adas-de-vacio-de-informacion/35 of its member jurisdictions and currently 7. United States Department of State 2013. includes 36 member countries. The objectives 8. LAPOP 2004, 2006, 2008, 2010, and 2012. of the Task Force are to set standards and pro- 9. USG-GOES 2011. mote effective implementation of legal, regula- 10. World Bank 2011. tory, and operational measures for combating 11. OHCHR 2014. money laundering, terrorist financing, and 12. Berger 2013; Caciques are traditional indige- other related threats to the integrity of the nous leaders. international financial system. 13. Wrap-around services refer to the coordi- 2. See IMF 2014. nation of multiple service providers (that is, 3. See http://www.fatf-gafi.org/topics/fatfgen- health, education, social services, law enforce- eral​/­documents/plenary-outcomes-jun-2014. ment, civil society, etc.) that respond to the html. GAFILAT is a regionally based intergov- changing needs of youth through the various ernmental organization that includes 12 coun- lifecycle stages. In the United States, a case- tries from South America, Central America, worker typically coordinates the provision of and North America whose purpose is to com- such wrap-around services. bat money laundering and terrorist financing 14. ACP 2013. by means of a commitment to continuous 15. Because of pollution from untreated urban improvement of national policies in these areas wastewater from Panama City, Panama Bay and to the enhancement of different coopera- in recent years has reached a critical state of tion mechanisms across its member countries. eutrophication with unpleasant odors and 4. Kerr 2002. bans on consumption of fish from its waters. A 5. UNODC 2013. first phase of wastewater treatment under the 6. Unless otherwise stated, all data of this sec- “Sanitizing the Bay” project has contributed tion are taken from the Encuesta Nacional to the improvement of hygienic conditions in de Salud Sexual y Reproductiva (ENASSER and around the metropolitan area. 2009), http://panama.unfpa.org/novedades/ 16. World Bank 2008. References ACP (Autoridad del Canal de Panama). 2013. and Codes on the FATF Recommendations Informe anual 2013. for Anti-Money Laundering and Combating Berger, E. 2013. “Panama Indigenous Groups Say the Financing of Terrorism.” IMF Country Land under Threat.” Thomson Reuters Report 14/55. Foundation, July 31. IPCC (International Panel on Climate Change). IMF (International Monetary Fund). 2014. 2014. Climate Change 2014: Synthesis Report. “Panama: Report on Observance of Standards Contribution of Working Groups I, II, and III Sustainability 101 to the Fifth Assessment Report of the OSCA. ​https://www.osac.gov/pages/Content​ Intergovernmental Panel on Climate Change. ReportDetails.aspx?cid=14201. Geneva: IPCC. UNODC (United Nations Office of Drugs and Kerr, Richard. 2002. “A Warmer Arctic Means Crime) 2013. “Statistics Online.” https://stats. Changes for All.” Science 297 (5586): 1490–93. unodc.org. OHCHR (Office of the United Nations High USG-GOES. 2011. “Partnership for Growth: El Commissioner for Human Rights). 2014. Salvador Constraints Analysis.” Millenium “Informe del Relator Especial Sobre los Challenge Corporation, Washington, DC. Derechos de los Pueblos Indígenas, James World Bank. 2008. Panama: Country Anaya. Adición: La Situación de los Derechos Environmental Analysis. Washington, DC: de los Pueblos Indígenas en Panama.” Report World Bank. A/HRC/27/52/Add.1, United Nations, World Bank. 2011. Panama Poverty Assessment: Geneva. Translating Growth into Opportunities and United States Department of State. 2013. Poverty Reduction. Washington, DC: “Panama 2013 Crime and Safety Report.” World Bank. 102 Sustainability 7. Prioritization Linked to Sustainability Benchmarking for the most populated areas in Panama lo- cated next to the Canal. However, another Successful Canal operations depend on predicted change is that of higher variability, the availability of an adequate water supply including increased occurrence of extreme all year round. The risk of limited water weather events. Overall, climate change–in- availability in critical months is evident: the duced weather extremes could lead to costly peak of Canal traffic coincides with the low- delays that would actually make the Canal a est rainfall period. Droughts such as the one less efficient shipping route. in 2014 threaten Canal operations by limit- In addition, adequate water management ing the size of ships passing through. At the underlies the country’s ability to generate hy- same time, large storms threaten to flood the dropower for different uses. Hydropower Canal’s infrastructure, as famously occurred generation is the most water-intensive sector in the unprecedented closure in December in Panama, utilizing 50,000 cubic hectome- 2010 (see box 7.1). The urban expansion ters per year to operate.2 During several re- west of the Canal towards Capira puts an cent extended dry seasons causing low water extra burden on the Gatun Lake while devel- levels at hydroelectric dams, the metropoli- opments to the east impact the Madden Dam tan areas suffered from electricity rationing buffer capacity. The data in the past decades and had to import the equivalent of a month demonstrates that the incidence of extreme of energy usage for 100,000 families from the weather events is increasing. Central American Electrical Interconnection Climate change could lead to increased System.3 The growing economy—and related variability in rainfall, thereby affecting Canal rise in demand for hydropower—creates lim- operations. First, climate change may result itations on hydropower investments in spe- in changes in rainfall, which according to the guard cific areas. This increases the need to safe­ recent Intergovernmental Panel on Climate available opportunities, such as in the Bocas Change (IPCC) 5th Assessment Report del Toro region where rainfall patterns are not (IPCC 2014) cites a trend of increasing pre- predicted to increase much, and ensure that cipitation over most of Panama. Fabrega et the upstream watersheds remain healthy. al. (2013) analyzed the projected hydrocli- Sustaining Panama’s forest, biodiversity, matic patterns for Panama, projecting an in- and coastal resources is also critical for crease in precipitation over all four regions tourism and rural livelihoods. Tourism is a of Panama for the 2015–2099 period: Bocas growing industry in Panama, which in 2010 del Toro, Veraguas, Panama Canal, and consumed 1.3 cubic hectometers of water. Darién.1 Future precipitation appears to in- Many of the large tourist resorts on the Pa- crease for all regions by at least five percent, cific coast rely on groundwater resources. with the exception of some areas of the Bocas In 2013, tourists spent approximately del Toro region Fábrega et al. 2013. Incre- US$4.5 billion in Panama, much of it linked ments greater than 15 percent were projected Prioritization Linked to Sustainability 103 Box 7.1  La Purisima In December 2010, Panama experienced the longest rainstorm in the history of the Canal. La Purisima—so named because it took place near the day of the Immaculate Conception, December 8—posted a record 760 millimers of rainfall in 24 hours. The intense rain led to 500 landslides that impacted approximately 9,000 people and caused a surge in turbidity of the water source to 700 NTU, causing the principal potable water plant for Panama City to collapse. As a result, parts of Panama City were left without water for 50 days. Canal operations were stalled for 17 hours; and for the fourth time in its history, the Autoridad del Canal de Panama (ACP) had to open the lock drains to lower water levels. In addition, the company charged with operating the Bayano Dam had to open its gates because the basin nearly reached its maximum capacity. This action resulted in the flooding of the town of El Llano in Chepo. Residents had to be evacuated and lost approximately US$6 million in agricultural production and household structures. The total cost of La Purisima was estimated at US$150 million. Source: Espinosa 2010. to the forest, biodiversity, and coastal re- the main contamination source in Panama sources that attract increasing numbers as the direct discharge of sewage into water every year. The amount of water needed to bodies without prior or sufficient treat- sustain the health of Panama’s ecosystems is ment. The second main contamination yet unknown. The National Environmental source identified is the dumping of solid Autho­ rity (ANAM) has established the nec- waste into water bodies. This is followed by essary amount of water for ecological pro- diffuse contamination from agriculture tection at 10 percent of overall water flow (pesticide and fertilizer runoff) and deter- in basins when granting water resource gent use in cities. Finally, deforestation is concessions, but recognizes that this num- also listed as a source of contamination as ber does not represent the amount of water erosion causes ­ sedimentation and high tur- necessary for conservation.4 Although agri- bidity levels on water bodies. culture consumes much less water and plays a smaller role in the economy (three percent of gross domestic product [GDP]), Priority Area the livelihood of the rural poor depends Given its central role in the economic upon it and subsistence farmers have far engine of Panama, as well as being a key fewer coping mechanisms in the face of ex- component for other growth sectors and the treme weather and climate events. The Na- livelihoods of the poor, adequate water re- tional Plan for the Integrated Management sources management emerges as the key pri- of Water Re­ sources (2010–2030) identifies ority area under sustainability. 104 Prioritization Linked to Sustainability In Panama, there are two worlds of water concrete results, the ACP was able to reforest resources management: the Panama Canal and maintain more than 6,200 hectares in watershed and the rest of the territory. The the PCW, compared to only 300 hectares ACP has a strong monitoring and manage- around the targeted watersheds in the rest of ment program for its water sources, water- the country. In its conservation efforts, the sheds, and forestry resources to ensure the ACP has involved and helped over 3,500 continuity and sustainability of water supply producers and residents to receive land titles, for Canal operations. This includes hydraulic and engaged over 6,000 residents and pro- and water quality monitoring, as well as ducers in training programs related to sus- strict land use planning, community-based tainable management and production forest conservation, and sustainable resource systems. Finally, forecasting and modeling use programs in the Canal’s watershed. In climate change impacts is a central compo- contrast, the remaining 95 percent of the nent of the design of new investments in and country’s watersheds fall under the authority around the Canal. In contrast, only limited of ANAM, where the capacity and resources information and small-scale adaptation and to implement and enforce the National Plan mitigation programs have been undertaken for the Integrated Management of Water Re- by ANAM in selected dry areas. Appendix E sources (2010–2030) are more limited. provides a detailed comparison of the two Comparison of results from water man- management models and associated agement efforts shows stark differences. The ­program results. ACP is fully responsible for the conservation and management of the Panama Canal Wa- tershed (PCW), supported by an interinsti- Identified Opportunities tutional commission. On the other hand, Implementing integrated water re- ANAM’s responsibility for watershed sources management plans in priority management overlaps with several other in- ­ basins can provide a gradual expansion of stitutions, such as the Ministry of Health the successful model outside the Canal wa- (MINSA) and the National Water Supply tershed. Rather than focusing on revising the and Sanitation Administration (IDAAN). legal framework for water resources manage- Over the last two decades, systematic moni- ment (which could prove to be a lengthy toring of the PCW has included vegetation process), the country could embark on a pri- cover, hydrological conditions, water quality, oritized program to improve the manage- and social aspects related to land use and ment plans and implementation capacity in settlement. Water quality in PCW ranks selected priority watersheds. The develop- good to excellent. In contrast, ANAM carries ment of river basin–based plans would bene- out water balances at only ten watersheds fit from the successful experience of the and 95 rivers. Of those monitored, 34 PCW, including through sharing of knowl- percent are classified as contaminated or edge and expertise across the two institu- slightly contaminated. Only four watersheds tions, and would help build ANAM’s have management plans, and only one has institutional capacity to gradually expand its an implementation strategy. In terms of coverage. Prioritization Linked to Sustainability 105 Scaling up integrated disaster-risk plan- indicates that the number of water-use con- ning coupled with long-term climate change cessions have increased from 350 in 2004 to adaptation measures is critical to enhance 952 in 2010, which is only a portion of the Panama’s future resilience capacity. ANAM actual number of users. About 34 percent of is working on small-scale climate change ad- the available water is classified as contami- aptation and mitigation measures, which nated or slightly contaminated. Water use should be scaled up to better prepare vulner- conflicts occur frequently among users of able groups and sectors for higher rainfall the same water source, with limited govern- and longer dry seasons. To achieve this, ment capacity to manage and monitor water there is a need to better integrate national di- use. At the same time, economic incentives saster-risk management into water resource and instruments to adequately value and management planning in priority basins. En- manage water allocations are nonexistent in hanced information and decision support ca- Panama, monitoring capacity is limited, and pacity across key sectors—along with the legal and regulatory framework is out- improved early warning and monitoring sys- dated. ANAM could be supported in devel- tems—is required to forecast and plan for a oping a better understanding of water future in which the occurrence of extreme lability, especially of groundwater. avai­ events could be the new norm. A detailed ANAM estimated that 235,000 people, description of these opportunities in the many of whom live in rural areas, rely on water sector is also included in Appendix C. groundwater for domestic and agricultural uses; but the country currently has limited knowledge on the quantity and quality of Filling Knowledge Gaps groundwater.5 ANAM collects water bal- The hydrogeological situation of the ances at only ten watersheds and does not country is not well known. Investing in a have a full picture of the current water de- better understanding of the water resource mand, making it difficult to establish a fair base is a priority in the short to medium price for the ecological value of water. Fill- term. Panama’s National Plan for Integrated ing this knowledge gap is considered a pri- Water Resources Management (2010-2030) ority over the short to medium term. Notes 1. Fábrega et al. 2013. Using the MRI AGCM3.1 3. See note 2, above. (Atmospheric Global Circulation Model) under the 4. See note 2, above. SRES A1B scenario. 5. See note 2, above. 2. ANAM 2011. References ANAM (Autoridad Nacional del Ambiente). 2011. Plan Espinosa, Jorge A. 2010. “Gestion del Agua en el Canal Nacional de Gestión Integrada de Recursos Hídricos de Panama Durante la Inundacion Extrema en de la República de Panama: 2010–2030. Diciembre de 2010.” Division del Agua, Autoridad 106 Prioritization Linked to Sustainability del Canal de Panama; Paez, Aristides Cajar. “La IPCC (International Panel on Climate Change). Madre de las Lluvias.” La Prensa 141142. 2014. Climate Change 2014: Synthesis Report. Fabrega, J., T. Nakaegawa, R. Pinzon, K. Nakayama, Contribution of Working Groups I, II, and and O. Arakawa. 2013. “Hydroclimate Projections III to the Fifth Assessment Report of the for Panama in the Late 21st century.” Hydrological Intergovernmental Panel on Climate Change. Research Letters 7 (2): 23–29. Geneva: IPCC. Prioritization Linked to Sustainability 107 8. Conclusion The analysis identifies five policy in this document has been framed around priorities that Panama may consider in three questions. What is the nature of order to continue its recent track record growth? How inclusive is that growth? on growth, poverty reduction, and shared And how sustainable is that growth? It is prosperity. Near-term growth prospects for clear that each priority area affects the Panama are good, with projections for others. Some simple examples illustrate 2014–2019 at about six percent based on this point. sustaining high levels of investment. A num- Infrastructure with a focus on energy has ber of potential impediments are emerging, emerged as a priority area for economic however, and could slow growth over the growth and is also highly relevant to inclu- medium to long term if left unaddressed. sion and the sustainability of the develop- First, infrastructure, specifically energy, is ment model. As described in the inclusion creating bottlenecks to growth. Second, chapter, the limited access of the indigenous weaknesses in education—including high population to electricity and basic services dropout rates from secondary education— is a barrier to their economic growth. and a shortage of skilled labor may be Addressing the country’s energy deficit will limiting growth. Third, weak public sector help remove this barrier and facilitate institutions may slow growth, particularly productive activities and human capital if challenges of transparency, pockets of investments. At the same time, appropriately low efficiency, and weaknesses in the regula- addressing energy shortages can improve tory framework remain unaddressed. In fiscal and environmental sustainability. terms of building an inclusive society, the The opportunities identified to improve analysis shows that the indigenous have education and skills will also lead to benefited least from Panama’s excellent advancement on multiple fronts: a more growth performance. Therefore, addressing highly skilled workforce; stronger economic the challenge of their inclusion has been sectors, including energy and water identified as a fourth priority area. Finally, management; and greater social inclusion. ­ water management has emerged as the fifth Strengthening the monitoring and evalua- priority area. Because climate change could tion of education with the goal of improving lead to increased variability in rainfall, the quality could help identify institutional careful water management is necessary weaknesses in the education sector. Knowing to sustain the successful operation of in which parts of the country pupils are the Panama Canal as a major pillar of doing well and crossing administrative data economic activity.1 with outcome data can deliver useful insights These five priority areas are even more in this context. With stronger and targeted relevant when we take into account the technical education, better-prepared gradu- valuable synergies among them. The analysis ates will be available for the labor market. Conclusion 109 This will lead to a skilled workforce available regulations and standards across sectors to work in the water management and obviously will have an important and energy sectors. The Panama Canal Authority positive impact on water management. (ACP) hires highly educated individuals and A final example of complementarities is is one of the most efficient organizations of seen within the Indigenous Peoples priority the country. A stronger workforce in the area. Although the focus on indigenous energy sector could lead to a growth impulse groups arose from the assessment of inclu- in the long run that could generate even sion, facilitating the contribution of these more energy demand and reinforce the need groups to economic activity in line with their for action in this sector. At the same time, cultural values would contribute to national closing the education gap between the poor growth and sustainable development. and non-poor by providing opportunities to Increasing the pertinence of health and rural and indigenous Panamanians is highly education services in indigenous communi- relevant to inclusion. Given the particularly ties could help reduce high dropout rates in high dropout rates in indigenous areas, the there. Supporting economic development increased payments of the conditional cash while respecting cultural identity—especially transfer program Beca Universal could make in relation to payments for environmental a difference. However, in this context, it is services and robust benefit-sharing important to understand the parameters for arrangements—certainly create complemen- ­ the high dropout rates in those areas. tarities with water management and the The opportunities identified under the institutional framework. Sectors like mining institution priority area provide other clear and tourism may be able to generate higher examples of complementarity: institutional growth if Panama becomes a more inclusive capacity clearly affects growth, inclusion, and society. The strengthening and formalizing sustainability. An improvement in public of Indigenous Peoples’ participation in sector management, be it through perfor- government decisions and processes has mance-based budgeting or enhanced fiscal potential positive effects on all the other management, will free resources that could priority areas. be spent on other areas, including education In summary, Panama has been a success or Indigenous Peoples. In addition, greater story in most regards and, by addressing the transparency will also lead to a more efficient identified priority areas, is likely to sustain allocation of public resources. In terms of this success. There are, of course, risks— improving the regulatory framework, including, for example, the global economic adopting a modern mining regulatory environment, rising interest rates, and framework to promote adequate oversight, climate change. There is also the risk that benefit sharing and environmental and social Panamanians could be unable to reach the sustainability is one of the likely necessary consensus to move on the priority areas. The conditions to begin conversations with country has proven, however, to be resilient Indigenous Peoples on developing this during recent crises, and the analysis in this industry in comarcas. Enforcing consistent report suggests that Panama has the building social and environmental safeguards blocks for locking in success. 110 Conclusion Note 1. The priority areas of infrastructure with a focus Chapter  3. The priority area of indigenous pop- on energy; education and skills; and institu- ulations is ­ discussed in detail in Chapter 5. The tions, including transparency, efficiency, and the priority area of water management is discussed in regulatory framework are discussed in detail in detail in Chapter 7. Conclusion 111 Appendix A: Definition of Peer Countries In order to compare Panama’s perfor- This classification delivers the following mance and structural features, the team group of countries (table A.1). selected six comparable groups of peers: (i) Central American countries, (ii) Latin American peers, (iii) upper-middle-income Aspirational Peers countries, (iv) the world, (v) structural peers, This classification includes countries ​ and (vi) aspirational peers. Structural and that provide good examples of development aspirational peers were identified using for Panama. These countries were aggregated the “Find my friends” tool, which is using the following criteria for the period based mainly on the World Economic 2001–2013: Outlook database.1 • GDP per capita higher than US$8,000 • GDP growth higher than 3.5 percent Structural Peers • Inflation below 4.5 percent Under this classification, countries • Investment to GDP higher than with similar characteristics to Panama were 20 percent aggregated, using the following criteria • Noncommodity exporter for the period 2001–2013: • Not landlocked • Population between one million and This classification delivers the following 12 million group of countries (table A.2). • Not landlocked • Not a fragile state • Gross domestic product (GDP) per Other Peers capita between US$4,000 and US$13,000 The other four comparable groups— • Foreign Direct investment as a share of Central America, LAC, upper middle GDP higher than 3.5 percent income, and the world—were obtained • Credit rating higher than BBB- directly through the “Find my friends” tool. Table A.1  Panama’s Structural Peers Structural peers Population (million) GDP per capita Direct investment Credit rating Bulgaria 7.20 4975 10.3 BBB Costa Rica 4.86 6438 4.6 BB Croatia 4.28 11542 3.9 BB+ Dominican Republic 10.60 4228 4.0 B+ Panama 3.79 6407 7.8 BBB Uruguay 3.40 8566 4.6 BBB- Note: GDP per capita (in US$) and foreign direct investment (percentage points of GDP). Appendix A: Definition of Peer Countries 113 Table A.2  Panama’s Aspirational Peers Aspirational peers GDP per capita GDP growth Inflation Investment to GDP Hong Kong SAR, China 29,810 3.9 1.4 22.4 Estonia 12,702 4.0 4.3 28.2 Korea 18,145 3.9 3.0 28.4 Lithuania 10,089 4.6 3.0 21.0 Panama 6,407 7.2 3.2 21.5 Singapore 36,840 5.4 2.2 24.3 Taiwan, China 16,796 3.6 1.0 20.8 United Arab Emirates 38,693 4.1 4.4 21.9 Note: GDP per capita (in US$), GDP growth (percent change), inflation (percent change, CPI), and investment (percentage points of GDP). Note 1. World Economic Outlook (WEO) indicators (database), https://www.imf.org/external/pubs​ /ft/weo/2014/01/weodata/index.aspx. 114 Appendix A: Definition of Peer Countries Appendix B: Matrixes of Identified Opportunities Appendix B: Matrixes of Identified Opportunities 115 116 ENERGY Modernizing Increasing power Increasing domestic (coordinating/ Managing (reducing) generation via transmission and Improving rural energy OPPORTUNITY NAME streamlining) the national energy demand renewables and other cross-border services institutional framework clean energy options transmission in energy IMPACT ON TWIN Reduces the need for new Contributes to greater Lowers costs to Enables increased access Provides services to GOALS production and sustainability of the government and frees up to lower-cost generation, communities with no transmission lines, freeing energy sector, and resources for social therefore reducing electricity; affects health up resources for social therefore increased spending; increases government expenditures care services delivery; spending; reduces competitiveness; could private sector investment; and freeing up resources improves respiratory environmental and social improve energy efficiency, reduces local and global for social spending; health as people move implications, reduces reducing costs to environmental emissions; increases reliability in away from reliance on brownouts and rolling government; improves improves reliability of the energy delivery; increases wood for cooking; blackouts, favoring quality of service delivery power system private sector investment improves delivery of business and protecting and expands access to educational services; jobs and labor earnings electricity among the poor creates opportunities for rural business development and investment through providing a supply of energy, insuring communications Appendix B: Matrixes of Identified Opportunities TIME HORIZON Short term Short to medium term Medium to long term Medium term Medium to long term COMPLEMENTARTIES Reducing government Provides opportunity to Reducing government Reducing government Increased access to basic subsidies could free up address framework for subsidies could free up subsidies could free up infrastructure in rural resources for improving dealing with resources for improving resources for improving communities contributes basic and social services environmental and social basic/social services basic and social services to rural commerce and issues (serving other agricultural opportunities similar sectors) that can help limit impacts associated with urbanization EVIDENCE-BASED A strict national demand Effective governance— High confidence as Moderately confident. Evidence regarding lack of reduction program in institutions, policies, and evidenced by increased Relationship between electricity coverage in Brazil (2001–2002) regulations—creating the expenditures of the improved transmission rural areas and comarcas successfully led to 20 conditions for markets, government through and interconnection is strong and shows the percent reduction in including attracting subsidies brought on by reduces dependence on lack of economic demand, avoiding investments and increased reliance on high-cost emergency development. Global brownouts and blackouts. transparent competition, high-cost emergency power stations. In Brazil, evidence suggests social Appendix B: Matrixes of Identified Opportunities 117 Modernizing Increasing power Increasing domestic (coordinating/ Managing (reducing) generation via transmission and Improving rural energy OPPORTUNITY NAME streamlining) the national energy demand renewables and other cross-border services institutional framework clean energy options transmission in energy Also, UK BIT studies have contributes to economic power stations. expanded transmission and economic benefits of shown impact using growth and access. Renewable energy systems enabled rapid electrification including in behavioral economics; (World Development systems, including development of Brazil, China, India, Davis, Fuchs, and Gertler Report 2002: Building utility-scale wind and alternative power Mexico, and South Africa. 2014 showed that Institutions for Markets, solar photovoltaics and generation sources (http://www.iea.org/ energy-inefficient https://openknowledge. natural gas power, have including wind, solar, and publications/ appliance buybacks in worldbank.org/ lower levelized costs than biomass; resulting in freepublications/ Mexico were an expensive handle/10986/5984) oil fired power generation diversified energy publication/rural_elect. way to do this; energy (European Commission portfolio with greater pdf) crises in Brazil and other report, http://ec.europa. energy security and lower countries have been eu/energy/studies/ long-term levelized costs. effectively mitigated doc/20141013_subsidies_ through a reduction in costs_eu_energy.pdf) consumption, thereby avoiding excess dependence on expensive emergency power generation POLITICAL Reduces wasteful energy Transparent and effective Affects the budget and Affects the budget and Contributes to FEASIBILTY consumption resulting coordination among thus puts this activity in thus puts this activity in strengthened from a shared community energy institutions conflict with other conflict with other relationships with rural response leads to lower contributes to greater sectoral priorities; sectoral priorities; and indigenous energy related confidence among environmental and social environmental and social communities expenditures, thereby consumers and investors issues as new generation issues as new freeing resources for other could cause pollution and transmission lines will spending or use lands that are in cross national parks, indigenous areas or of biodiversity areas, and importance for lands of Indigenous biodiversity Peoples ESSENTIAL Yes. Offers least cost option Yes. Key factor enabling Yes. Reliable cost- Yes. Reliable cost- Yes. Access to modern PRECONDITIONS to reduce energy prices investments in other effective electricity is effective electricity is energy services is an thereby enabling increased aspects, including essential to power essential to power essential precondition for access and supporting generation, transmission, industry and commerce, industry and commerce, basic services including business and industrial efficiency, and access which enable economic which enable economic lighting, refrigeration, growth and ultimately development development cooking, and health care economic development 118 EDUCATION/SKILLS Increasing payments of the CCT program Strengthening targeted public and private Strengthening monitoring and evaluation Beca Universal differentiated by student OPPORTUNITY NAME technical education to better respond to of education with goal of improving grade level (three cycles) to address high labor market demands quality dropout rates in secondary education IMPACT ON TWIN Increases employment opportunities for youth Improves indirectly the quality of the Increases job opportunities for youth; GOALS and increases income generation education system and labor skills reduces poverty TIME HORIZON Short to medium: introduction of vocational Short term: participation in 2015 PISA Short to medium term training and bilingual education; revision of testing; analysis of high school dropouts high school certificates with existing administrative data Medium to long: impact on labor market Long term: establishment and application outcomes of monitoring and evaluation framework COMPLEMENTARTIES Increases investment attractiveness and Attracts investment in education Enhances social assistance for poor virtuous cycle of jobs creation; enhances competitiveness productivity EVIDENCE-BASED Good results in other countries such as France Countries that participate in PISA have School Subsidies for the Poor: Evaluating and Germany; failure of traditional education evidence of the quality of their education the Mexican Progresa Program (Schultz Appendix B: Matrixes of Identified Opportunities system to prepare youth; Mejores Empleos en system 2004); The Impact of the Bolsa Escolar/ Panama: El Rol del Capital Humano (World Familia CCT Program on Enrollment, Bank 2012), Technical Vocational Education Dropout Rates and Grade Promotion in and Training—Mapping Institutions and Brazil (Glewwe and Kassouf 2012) Policies (World Bank 2014) POLITICAL FEASIBILTY Market open for private services provision The country didn’t participate in the last Government has taken first steps round ESSENTIAL Included in government’s priority programs Link CCT beneficiaries to productive Included in government’s priority programs PRECONDITIONS training Appendix B: Matrixes of Identified Opportunities 119 PUBLIC SECTOR INSTITUTIONS: TRANSPARENCY Meeting Global Forum standards on tax and financial OPPORTUNITY NAME Improving public procurement practices information sharing (OECD gray list) IMPACT ON TWIN Mitigates reputational risks to avoid potential declines in foreign Increases accountability and transparency and reduces transaction GOALS deposits, insurance premiums, and activities related to legal and costs; improving the public procurement practices will improve the accounting services; improving transparency and meeting monitoring and evaluation of public investment and spending, international standards will help Panama ensure the continued improving the efficiency of public spending, thereby freeing up high levels of FDI it depends on (in the absence of a developed resources for strengthening social assistance programs that help stock market); continued poverty reduction and shared prosperity move people out of poverty in both the present and the future (in depends critically strong levels of FDI, especially in the short term. the latter by breaking the cycle of poverty: Red de Oportunidades) TIME HORIZON Short: changes in regulations and procedures Medium to long: improvements of existing regulations to better Medium: a more complete revamping of the information sharing accommodate public investment projects system COMPLEMENTARITIES Improving Panama’s standings in the international community Improving the public procurement system can increase the quality can have spillover effects on major infrastructure projects due of services delivery, enhancing the inputs to the services, affecting to the link to the continued presence of high levels of FDI in the the timeliness of the procurement process itself, and lowering costs. country (of particular importance is for the energy sector where resolving transmission line and generation shortages will require strong investments) EVIDENCE-BASED There is evidence from OECD countries, but the potential impacts Evidence from other countries including Peru and Argentina; for Panama need to be assessed Panama: Enhanced Public Sector Efficiency Technical Assistance Project, Report No. 59159-PA POLITICAL FEASIBILTY Some movement on this front but it is unclear that the political Substantial work done to date by the government; country has will needed to push this agenda forward is in place. moved to the use of framework agreements, thereby complying with Law 22 of 2006 (although the complex infrastructure projects of the recent years have highlighted weaknesses in these agreements) and generating savings in time, price and transaction costs; an e-procurement platform, PanamaCompra, has been integrated with other systems (DGI and Ministry of Industry and Commerce); substantial agenda needed to shift more purchases to the PanamaCompra system ESSSENTIAL Yes Commitment of the Minister of Finance and Secretaría de PRECONDITIONS Presidencia; Technical cooperation across government entities 120 PUBLIC SECTOR INSTITUTIONS: EFFICIENCY OF PUBLIC SECTOR MANAGEMENT Introducing performance-informed budgeting Developing effective municipal (and Improving fiscal management, including (PIB) accompanied by better coordination metropolitan) institutions needed for the modernization of financial planning, OPPORTUNITY NAME between different government plans and decentralization and transfer of debt management, and fiscal risk from entities governmental functions disasters IMPACT ON TWIN Allows for strategic allocation of resources to Enhances efficiency of spending toward Frees up fiscal resources for priority GOALS policy priorities, thus facilitating focus on high-priority economic and poverty service delivery and social protection achievement of results on better services to reduction programs; supports service programs with direct impact on the poor citizens’ special programs for disadvantaged, etc.; provision to and economic planning for allows for defining priorities among competing marginalized communities and rural and policies and taking into account impact of remote areas, and competitiveness of programs on each other urban economic agglomerations TIME HORIZON Medium: developing and implementing a PIB Short: implementation of Law 37 of 2009 Short: introduction of financial planning approach in the MEF and line ministries Medium: capacity building under new information technology tool, measures to Long: better alignment of government framework and design of metropolitan increase liquidity in the domestic debt expenditure (both operational and investment) coordination structures market, and formulation of a strategic with policy goals plan for fiscal risk management of disasters Appendix B: Matrixes of Identified Opportunities Medium: full-fledged modernization of financial planning and implementation of improved fiscal management practices COMPLEMENTARITIES Better management of government programs Rural and local services in water supply Improved transparency, increased and stronger accountability of public and sanitation, education, and economic resilience, and improved public administration for results; better coordination opportunities for Indigenous Peoples procurement; more resources available for helps reduce inefficiency in resource allocation, priority social programs and services and avoid duplication of functions and activities across the government; effective coordination facilitates coherence and transparency within the government EVIDENCE-BASED Performance-informed budgeting has been Successful local municipal development IMF Article IV (IMF 2014) implemented in the majority of OECD countries programs implemented in countries such Panama—Disaster Risk Management through program budgeting approach; advanced as Chile, Colombia, Indonesia, or Tunisia Development Policy Loan with a OECD countries provide multiple examples of demonstrate the improvement in planning, Catastrophe Deferred Drawdown Option central coordination systems for design, investment financing, service delivery, No. 60719 (WB 2011); Non Lending Appendix B: Matrixes of Identified Opportunities 121 Introducing performance-informed budgeting Developing effective municipal (and Improving fiscal management, including (PIB) accompanied by better coordination metropolitan) institutions needed for the modernization of financial planning, OPPORTUNITY NAME between different government plans and decentralization and transfer of debt management, and fiscal risk from entities governmental functions disasters implementation and monitoring, implementation citizen engagement, and central Technical Assistance on Debt of important government policies (Canada and government oversight Management (WB NLTA 2010); United Kingdom); emerging economies have Public Debt Markets in Central America, improved performance through better Panama and the Dominican Republic coordination (Brazil, Chile, Colombia, Costa Rica, (IMF 2007) Lithuania, etc.) POLITICAL FEASIBILTY Strong commitment to better management of High High government programs on the part of MEF (Dirección de Políticas Públicas, Dirección de Programación de Inversiones); DIPRENA declared its commitment to the objective but requires substantial capacity building ESSSENTIAL Yes Yes Yes PRECONDITIONS 122 PUBLIC SECTOR INSTITUTIONS: Adequacy of Regulatory Framework Adopting modern mining regulatory Enforcing consistent social and framework to promote adequate oversight, OPPORTUNITY NAME environmental safeguards, regulation, Strengthening financial sector regulation benefit sharing, and environmental and and standards across sectors social sustainability IMPACT ON TWIN Contributes a potential share of GDP up to Ensures sustainability of present Ensures resilience of financial sector to GOALS 10 percent; contributes to budget through investments and adequacy of natural a range of potential shocks; supports royalties and concessions; adequate benefit resource base for future growth; safeguards sustainable expansion of financial services sharing toward bottom 40 percent the rights of marginalized groups and to excluded populations reduces social conflict TIME HORIZON Short: investment opportunities Short to Medium Medium Medium: coherent framework and institutional structure COMPLEMENTARITIES FDI, fiscal, growth, export, environment, Direct link to infrastructure, territorial Links to fiscal, growth, infrastructure social inclusion. particularly of Indigenous planning, and extractive sectors; resilience finance, and social inclusion Peoples to natural disasters; support for FDI EVIDENCE-BASED Stanley, M., and E Mikhaylova. “Mineral EPA/ OECD/ WB models for environmental- Sound financial systems bolster sustainable Appendix B: Matrixes of Identified Opportunities Resource Tenders and Mining Infrastructure impact assessment and social safeguard growth Projects Guiding Principles,” Extractive policies in large transport, hydropower, Industries for Development Series #22, mining industry, and coastal developments September 2011 demonstrate mitigation of risk POLITICAL FEASIBILTY Ongoing dialogue with civil society (mesa Medium. ACP model for Canal related Medium: Political will uncertain rotonda) brought 54 agreements, but infrastructure can serve as model concerns need to be addressed under strong political championship ESSSENTIAL Yes Yes Yes PRECONDITIONS Appendix B: Matrixes of Identified Opportunities 123 INDIGENOUS PEOPLES Supporting economic development with respect for cultural identity especially Strengthening and formalizing Increasing the quality, access, and cultural pertinence in relation to traditional agriculture; Indigenous Peoples’ participation OPPORTUNITY NAME of health and education services in indigenous payments for environmental services; in government decisions and communities (within and outside comarcas) robust benefit sharing arrangements; processes that concern them and sustainable tourism IMPACT ON TWIN Increases access and health service delivery: (i) food and Increases potential for income Improves effectiveness and cultural GOALS nutrition and (ii) maternal and child health with high generation for both extreme poor and pertinence of investments with quality and cultural pertinence; increases multicultural poor, especially if specific focus on Indigenous Peoples while improving education; revitalizes Indigenous Peoples’ cultures; women is included indigenous women’s agency; should reduces catastrophic health expenditures contribute to reducing poverty and increasing shared prosperity TIME HORIZON Short: access Medium to long Short: laws Medium: quality Medium: capacity Long: cultural pertinence COMPLEMENTARITIES Social protection (conditional cash transfers, school •   Empower Indigenous Peoples resources National energy and resource needs: scholarship program) owners as partners in national create a platform to build trust and •  Water & sanitation development and competitiveness work strategically with Indigenous •  Infrastructure (access to) Peoples on projects of national •  Youth leadership importance by officially recognizing •  Crime prevention their territorial authorities and Performance-based budget for health: catastrophic •   providing an opportunity for their insurance and social protection (conditional for the direct engagement in the planning Indigenous Peoples) and implementation of policies, •  Monitoring water and epidemiology programs, and projects that affect/ •  Gender-specific interventions benefit their communities; better management of NRM; youth leadership; reduce social conflict; increase social cohesion EVIDENCE-BASED Health: The IP Development Plan cites an 2010 IDB study, Australia, Canada, Norway, Peru, and the Government to IP breaking down the factors that have affected indigenous United States (Alaska) Results internationally peoples access to health: 11.3% did not demand health Programa para el Desarrollo Bolivia, Brazil, and Canada services due to their cost; 64.2% due to the long distances Empresarial Indígena: While there has Present indicators of poverty in IP to a health center; 44% due to lack of transportation, as not been a comprehensive evaluation of areas demonstrate lack of well as having felt mistreated by the health staff and low outcomes, the program supported effectiveness in investments participation in program design. Moreover, cultural several indigenous cooperatives and Baseline investment data in IP differences and language limitations limit health education. companies to develop, improve, and territories. table continues next page 124 Supporting economic development with respect for cultural identity especially Strengthening and formalizing Increasing the quality, access, and cultural pertinence in relation to traditional agriculture; Indigenous Peoples’ participation OPPORTUNITY NAME of health and education services in indigenous payments for environmental services; in government decisions and communities (within and outside comarcas) robust benefit sharing arrangements; processes that concern them and sustainable tourism Only 20 percent of the population has health insurance, commercialize their products (coffee, Recommend review of results from compared to 50 percent of the nonindigenous population. forestry, cacao, honey, handcrafts, etc.). the multisectoral program financed Generally the study concludes that the IP population Video available online. by IDB in Panama in Darién generally does not use health services when they are sick Costa Rica, PES = US$3 million per year or injured.” Reference: Plan Nacional de Desarrollo Integral de to IP communities for 10 years + new los Pueblos Indígenas en Panama citing, BID. Inclusión Social anteproyecto de ley to regulate en Panama: La población indígena. Julio 2010. P. 21 Payments for Environmental Services Education: The Plan cites a Save the Children study on (appears to currently be in the Assembly) school dropout rates by age group. Only 65 percent of presented in Aug. 2014 Ngäbe and Buglé children between six and 12 years old Appendix B: Matrixes of Identified Opportunities attend school, regardless of where they live; 43 percent for children between ages 13 and 19 and 7.5 percent for youth between ages 20 and 24. POLITICAL FEASIBILTY Health: Politically feasible to start with Yes. IP intersectoral plan, proposed Resuelto N° 4376 del 25 de agosto de 1999, Ministerio de entrepreneurial, tourism, and PES by IP authorities to government Salud, Medicina Tradicional, Gaceta Oficial N° 23,880, 7 de activities. Government and IP after two-year internal septiembre de 1999 championing through IP national consultations with government The Ministry of Health has created a unit dedicated to development plan. participation. designing culturally pertinent indigenous health public High levels of mistrust (Martinelli IP mesa 12 congresses united policy. environmental law reform), internal Education: conflict (Naso King), and historical lack Passage of 2010 Bilingual and Intercultural education of sharing in benefits of hydro and other Law No. 88 extractive industries (Bayano), would The Ministry of Education’s “Muevate por Panama” make extractives and benefit sharing a literacy program has provided literacy training to over more difficult long-term goal. 20,000 people in the comarcas between 2007 and 2012. Appendix B: Matrixes of Identified Opportunities 125 Supporting economic development with respect for cultural identity especially Strengthening and formalizing Increasing the quality, access, and cultural pertinence in relation to traditional agriculture; Indigenous Peoples’ participation OPPORTUNITY NAME of health and education services in indigenous payments for environmental services; in government decisions and communities (within and outside comarcas) robust benefit sharing arrangements; processes that concern them and sustainable tourism ESSENTIAL Health: Baseline mapping of overlap of IPs and •   •  Law projects approved PRECONDITIONS • investment in health infrastructure key national watersheds or protected •   New institutions have clear • supply of needed medicines areas (to make argument of mandate and budget, and support • bilingual medical staff environmental services being provided) to build capacity • support for the practice traditional medicine (practiced •   Close infrastructure and access to IP National Development Plan •   by traditional healers and midwives) financing gaps (especially in transport, moving towards implementation • Education: WSS, electricity, and productive •   Implementation of Law 72 to • implementation of Law 88 by investing state funds, infrastructure) finalize pending collective land instead of exclusively international grant money • Environment of trust titling through IP Land Titling • staffing schools in indigenous areas (incl. comarcas) with •  Governance framework effective Directorate (part of ANATI ) teachers who are fluent in the pertinent language and •  Land tenure security formed in 2010 who will allow and encourage speaking the native Carried out as part of National •   language Development Plan for IPs with • specialized curricula significant participation of IP • textbooks in indigenous languages authorities in design and • continuous teacher attendance in schools implementation • increased teacher commitment to teach in indigenous schools • increased accountability of teachers towards parents and students (currently teachers register high absenteeism) • principals who foster interculturality instead of prohibiting it 126 WATER Implementing integrated water Reducing pollution by Scaling up integrated disaster Streamlining regulatory and resources management plans improving sewerage treatment OPPORTUNITY NAME risk planning coupled with institutional functions across in selected priority basins capacity and access to quality climate adaptation measures water sector agencies outside Canal watershed sanitation services IMPACT ON TWIN Contributes to economic Reduces income losses from Sanitation: increases welfare Enhances efficiency of resource GOALS growth (hydro production, natural disasters; enhances and health allocation and implementation tourism, agriculture) the coping mechanisms and Waste (bottom 40%) capacity for high-priority diversifies the economic base Drainage Water Sustainability programs and disadvantaged for the most vulnerable groups (floods) groups Treatment Draws in investment TIME HORIZON Short: planning Medium to long Short: quality for those with Medium Medium to Long: access implementation: Medium: new access, community management Long: quality of life COMPLEMENTARTIES Energy: sustainability of clean •   •  Hydropower generation Marginalized groups (rural IP, •   Institutional capacity for energy sources Indigenous People economic •   Colón) environmental and social Indigenous Peoples: ensuring •   opportunities and livelihoods Indigenous population living in •   management sustainable use of natural urban areas resource base •  Crime Violence Appendix B: Matrixes of Identified Opportunities EVIDENCE-BASED Canal watershed management Climate projections forecast Integrated urban water In 2014 ASEP (Regulatory •   model has demonstrated that increased rainfall as well as management in Medellin agency) drafted only 371 efforts lead to reduced increased occurrence of extreme (Colombia), Monterrey (Mexico), resolutions for the WSS deforestation and efficiency weather events and Sao Paolo (Brazil) have sector, compared to 5578 and of water consumption by shown significant improvements 7834 in the electricity and different users telecommunications sector respectively. Tariffs have not been revised •   since 1982 (decrease by 50 percent, adjusted for inflation) POLITICAL FEASIBILTY High High Colón, Panama Bay, and basic Medium sanitation are national priorities for the current government ESSENTIAL Yes No Yes PRECONDITIONS Appendix C: Comparison Between ACP and ANAM Water Resources Management Models Appendix C: Comparison Between ACP and ANAM Water Resources Management Models 127 National Environmental Authority (ANAM) Panama Canal Authority (ACP) Legal Law 35 (1966)—“The water law” supported water resource management Title XIV of the Panamanian Constitution establishes the ACP and gives it 128 Framework on a sector-by-sector basis (this law is pending revision) “exclusive charge of the operation, administration, management, for Water Law 41 (1998)—Created ANAM to manage environmental issues, to preservation, maintenance, and modernization of the Canal, as well as its Resources protect, conserve, and recover the environment, and to promote a activities and related services, pursuant to legal and constitutional Management sustainable use of natural resources regulations in force, so that the Canal may operate in a safe, continuous, (WRM) efficient, and profitable manner.”1 When ANAM was created, other institutions such as MINSA, IDAAN, •   MOP, and MIDA among others were already involved in water resource •  The Canal is financially autonomous. management creating conflicting overlap in responsibilities. An Administrator and a Deputy Administrator head the ACP under the •   Appendix C: Comparison Between ACP and ANAM Water Resources Management Models supervision of an 11-member Board of Directors; members have Law 44 (2002)—Establishes an administrative regime for the overlapping terms to ensure their independence from the country’s management, protection, and conservation of watersheds; proposes the administrations. creation of watershed committees and integrative management plans Law 19 (1997)—Establishes the ACP to assume the responsibilities of the Treats water as one of many natural resources that is to be protected United States–Panama Canal Commission (US PCC) as well as the •   and conserved in the context of watershed conservation and management of the PCW (which was not included in the *A law that reflects modern water management concepts (water use US PCC’s mission) regulations, water pollution controls, water related conflicts) has yet to Agreement 16—Establishes the Inter-Institutional Commission for the PCW.2 be fully developed in Panama Institutional Within ANAM, the Department for Water Resource Management sits in The ACP heads the Inter-Institutional Commission for the Panama Canal Set Up for the Management Unit on Integrated Watershed Management (see Watershed (CICH), which includes the Ministry of Housing, the Ministry of WRM appendix A). Agriculture, the Ministry of Justice and Governance, the Authority for the The UNESCO-supported Inter-Institutional Water Resources Council Inter-Oceanic Region, as well as non-profit organizations. The CICH is (CONAPHI) includes 13 institutions and Panama aims to coordinate and responsible for coordinating all initiatives in the PCW.3 The ACP, through lead water resource management. the CICH, is carrying out its Plan for Sustainable Development and Integrated Water Resource Management. The ACP also has an Executive ANAM’s 2010–2030 Plan for Integrated Water Resource Management Vice Presidency for Environment, Water, and Energy. includes a diagnostic of water resources management and recommends key activities in the short and medium terms based upon the identified gaps and areas of weakness. ANAM has made limited progress on implementing targeted aspects of the Plan. Monitoring ANAM carries out water balances at ten watersheds and assesses The ACP and its predecessor, the Canal Commission, have conducted Capacity water quality in 95 rivers. ANAM currently does not have the financial or extensive monitoring activities associated with Canal operations over the technical capacity to monitor water balances or water quality across last two decades. Monitoring activities have been associated mainly with key the country and is reliant on government funding to extend its water environmental and social conditions central to the management of Canal resource management activities.4 operations and the quantity and quality of hydrologic resources. As such ETESA is responsible for operating and maintaining the national many of the traditional monitoring activities have focused on the Canal area network of meteorological and hydrological stations. In 2011, ETESA watershed and have included monitoring of such environmental aspects as had 95 active stations to measure rainfall, temperature and relative vegetation cover, hydrological conditions, and water quality as well as social humidity among other factors.5 aspects related to land use and settlements. Most of these long-term environmental monitoring programs are key components of ACP responsibilities established in the Organic Law for the adequate management use, and conservation of the Canal Watershed water resources. Appendix C: Comparison Between ACP and ANAM Water Resources Management Models 129 National Environmental Authority (ANAM) Panama Canal Authority (ACP) Quality of In the 95 rivers that ANAM monitors, 34 percent are classified as In 2013, the quality of the water in the PCW received a ranking of 87 on Water contaminated or slightly contaminated.6 The main source of the Global Water Quality Index, positioning the quality of the water contamination is domestic sewage. between good and excellent. Sustainability Measures Watershed Watershed management plans for four watersheds Plan for Sustainable Development and Integrated Water Resource Management Implementation strategy for one of the watersheds7 (2010 data) Management “to promote watershed management in order to raise the Plans standard of living of the PCW’s inhabitants without compromising the Canal’s future needs and constant water production in the amount and quality necessary for running the waterway and human consumption.”8 Reforestation Reforested 300 hectares around targeted watersheds9 Reforested and maintaining more than 6,200 hectares in the PCW10 Community Capacity building exercises for 200 community groups and The ACP through the CICH supports a range of community-based social Involvement cooperatives and environmental development projects to protect the PCW. For example, Developed management plans for thirty farms along the Pacora River11 in conjunction with the National Lands Administration Authority, the ACP has helped over 3,500 producers and residents in the PCW receive land titles. This activity has facilitated land-use planning in the PCW. The ACP has also played an active role in building the capacity of residents to protect the PCW. For instance, in collaboration with the Institute for Professional Formation and Human Resources Development and the Ministry of Education, the ACP carried out conservation and job-training programs for more than 5,666 residents. In regard to agriculture, the ACP has worked with the Ministry of Agriculture Development of Panama (MIDA) to train more than 1,100 producers on sustainable agricultural and livestock practices. The ACP has also worked with MIDA to introduce green agroforestry models for shade-grown coffee and cacao production in the PCW. The ACP receives international and national support for these programs, but also allocates a portion of its annual budget toward community initiatives. In addition to annual financial commitments, USAID assisted in the establishment of a Fund for the Conservation and Recuperation of the Canal Watershed to ensure long-term conservation. This fund supports projects in the following areas: reforestation, agro-forestry, natural habitat management, reduction of sources of pollution, basic community sanitations, liquid and solid waste control, soil conservation, ecotourism, land titling and unified cadastre, and development of sustainable agricultural techniques.12 130 National Environmental Authority (ANAM) Panama Canal Authority (ACP) Climate With the support of National and international funds, ANAM has From the IFC’s August 2008 Environmental and Social Review of the Change undertaken several small-scale adaptation and mitigation programs, Panama Canal: including: As part of the expansion project design process, the ACP conducted A program to capture rainwater in areas without ample water •   extensive statistical modeling to evaluate the potential availability of resources (Guna Yala and Ngäbe Buglé among other areas) water for navigation and potable use during droughts that might Climate change vulnerability studies and installing equipment to •   occur due to climate change influences within the next 17 years. The monitor the impact of climate change in two watershed data analysis included historical rainfall and stream flow patterns, Appendix C: Comparison Between ACP and ANAM Water Resources Management Models including three very significant ENSO events (that is, extreme droughts), which occurred over the last 30 years of operation. Using a 99 percent confidence interval, the evaluation concluded that sufficient water will be available for both Canal operation and potable use for growth in population through the year 2025.13 The ACP is working with the National Civil Defense System and local communities to build risk management capacity. Knowledge In 2010, ANAM highlighted the following knowledge gaps and areas for In addition to a continued commitment to on-going activities, areas for Gaps and development: further development include: Areas for •  Limited knowledge on underground water Mitigating contamination of connecting rivers, especially in urban and •   Development Lack of hydraulic infrastructure for extended dry periods •   peri-urban areas Lack of up-to-date knowledge on water-stressed areas •   Preparing for floods and extended dry seasons •   •  Unreliable information on water uses •  Unknown number of illegal users Lack of guidelines on water use in watershed management plans •   Lack of capacity to monitor compliance with environmental norms on •   water resource management Need to ensure that institutions use hydrogeological information •   before accessing underground water No national campaign on the importance of conserving and •   protecting water; no evidence of optimization of water •  Unknown ecological cost of water Lack of a functioning information system to connect the knowledge •   of the various institutions involved in water resource management Notes 1. ACP, http://www.pancanal.com/eng/acp/acp​ 10. ACP 2013. -overview.html. 11. ANAM 2011. 2. USAID 2005. 12. Data in this section are from the Projects 3. IDB 2008. Database of the International Finance 4. ANAM 2011. Corporation (IFC), World Bank, Washington, 5. GWP et al. 2011. DC, http://ifcext.ifc.org/ifcext/spiwebsite1.nsf​ 6. ANAM 2011. /78e3b305216fcdba85257a8b0075079d​/3fc41​ 7. See note 6, above. e f c 2 4 a 9 9 0 9 7 8 5 2 5 7 6 b a 0 0 0 e 2 c 7 b ? ​ op e n​ 8. WBCSD 2005. document 9. ANAM 2011. 13. See note 12, above. References ACP (Autoridad del Canal de Panama). 2013. IDB (Inter-American Development Bank). Informe anual 2013. 2008. “Panama Canal Expansion Program ANAM (Autoridad Nacional del Ambiente). (PN-L1032) Environmental and Social 2011. Plan Nacional de Gestión Integrada de Management Report (ESMR).” IDB, Recursos Hídricos de la República de Panama: Washington, DC. http://idbdocs.iadb.org​ 2010–2030. /­wsdocs​/getdocument​.aspx?docnum=1650393. GWP (Global Water Partnership), EU (European USAID (United States Agency for International Union), ZONAF (Programa de Desarrollo de Development). 2005. Evaluation of USAID’s Zonas Fronterizas en América Central), and Strategic Objective for the Panama Canal BCIE (Banco Centroamericano de Integración Watershed 2000 to 2005: Final Report. USAID. Económica). 2011. Situación de los Recursos WBSCD (World Business Council for Sustainable Hídricos en Centro América: Hacia una Development). 2005. “Panama Canal: Watershed Gestión Integrada. Sustainable Development Program.” Case Study. Appendix C: Comparison Between ACP and ANAM Water Resources Management Models 131 Panama has made significant progress in reducing poverty in recent years, progress that compares positively to that of the rest of the Latin America and Caribbean region. This report takes stock of this progress and reflects on the constraints and opportunities that Panama faces in continuing on its path of shared prosperity and poverty reduction. The education and skills agenda, energy, public sector reform, the inclusion of indigenous peoples, and water management are identified as areas that will require attention to ensure the sustainability of Panama’s success story. factors— Following a detailed analysis of poverty—recent trends, drivers of poverty reduction, and demographic ­ the report provides foundations to answer three main questions: • What has driven growth in Panama in recent years? • To what extent has this growth been, or not been, inclusive? • How sustainable is the growth and more generally, the development model of Panama? SKU K8332