WHEN A U.S. COURT FROZE $60 MILLION IN
VYthe National Bank of Panama’s accounts in the
United States last March, a $5 billion economy
screeched to a halt. What made the Administration’s
economic warfare so devastating was the extreme de-
pendence of Panama’s economy on the services it pro-
vides foreign banks and corporations. Once Washing-
ton made destabilization the objective of its policy, they
took their business elsewhere.
Service to foreigners has been Panama’s specialty
for decades. At independence in 1903 the country
adopted as its motto ‘Pro Mundi Beneficio”-for the
benefit of the world-and some would argue it has lived
up to that motto only too well. The benefits Panama
provides are closely related to its geographic location as
a transit route for goods, money, people and informa-
tion. Besides the canal, today Panama offers the world
the Col6n duty-free zone, an international banking cen-
ter, Panamanian ship registry (previously known as flag
of convenience), loose laws of incorporation, and the
transisthmian oil pipeline. This combination of facili-
ties for international business, known as the transna-
tional services platform, accounts for much of the coun-
try’s gross domestic product.
Relative to its neighbors, Panama’s service economy
has served Panama well. At $2,100, Panama’s income
per capita last year was one of the highest in Latin
America, and its inflation rate (3%) one of the lowest.
Yet its national debt per capita, around $2,000, was one
of the highest, and income distribution one of the most
unequal. While average life expectancy is a respectable
69 years for men and 72 for women, government figures
Panama City’s financial district
JU.I VIflU’JU I 170 Ju. I/a.UUJI L00 IPANAMA
show that one-third of the population was unable to
satisfy minimal needs for food and shelter, even before
the Reagan Administration’s sanctions wrought eco-
nomic disaster.
The major users of the transnational services plat-
form are U.S. and Japanese corporations, although this
“crossroads of the world” has become a useful place
for Latin American, European and other Asian countries
to do business as well. Two factors made Panama par-
ticularly attractive: the free circulation of U.S. dollars
throughout the country (according to a 1904 conven-
tion, Panama reserves the right to mint balboa coins
only), and the “stabilizing” presence of 2,000 U.S.
troops at the Southern Command.
N 1987, 140 MILLION LONG TONS OF CARGO
passed through the Panama Canal, 5% by volume
of all world trade. Seventy percent of these goods were
involved in direct trade with the United States, the larg-
est volume travelling from the U.S. East Coast to Asia.
In terms of value, however, the transport of vehicles and
other manufactured goods from Asia to eastern United
States is probably most important. Though Latin
American traffic through the canal is of less volume, it
is vital for those countries on the Pacific coast, carrying
more than 40% of their external trade. The direct contri-
bution of the canal to Panama’s GDP is around 8%, and
some 7,000 Panamanians are employed by the Canal
Commission.
The Col6n Free Zone, established at the Atlantic end
of the canal after World War II, is now the second
largest in the world after Hong Kong. This tax-free
warehousing enclave does $4 billion of business in im-
port and re-export of predominantly high- value, low
volume luxury items and electronic goods from the Far
East, the United States and Europe, for sale throughout
Central and South America. In comparison, the Miami
duty-free zone’s 1987 business was worth only $600
million. Panama’s Zone employs 5,000 people in over
600 companies in the depressed city of Col6n and it
contributes around 3% of GDP.
The oil pipeline, which carries 600,000 barrels of
Alaskan North Slope oil per day, is another story. Pipe-
lines in the United States can be delayed for years while
environmental impact statements are prepared and
evaluated. This 80-kilometer tube stretching from the
Pacific to the Atlantic coasts of Panama was erected
just a few months after the contract was signed in 1981.
At the time it was called the first “throwaway” pipeline
on the grounds that it would soon be superceded by a
more direct alternative on the North American main-
land. Investors got their money back in a record 18
months. In fact, one third of the whole Alaska North
Slope output still flows bountifully through it. No state-
side pipeline yet built could handle this additional vol-
ume, and there are still restrictions on the export of
Alaskan oil. Though it directly employs only 400
people, its contribution to GDP is around 3% in current
prices, greater than that of the Col6n Free Zone.
Panama’s ship registry now covers 10% of the world
merchant fleet, some 12,500 ships, making it the second
largest in the world. Neither the management nor the
real ownership of the fleet, however, is in Panamanian
hands. The main beneficiaries are Japan, the United
States, West Germany and the United Kingdom, al-
though Panama’s consular officials do earn sizeable
commissions and ship registry brings up to $30 million
in foreign exchange to the treasury each year.
The success of the ship registry is tied to the conven-
ient flexibility of Panama’s 1927 incorporation law,
based on that of the state of Delaware. Estimates of the
total number of Panamanian “paper companies,” as
they are sometimes called, range up to 100,000. New
companies were being registered at the rate of 114 a day
before the political crisis broke out in June 1987.
Panama’s international banking center took off in
1970, when the government set the ground rules for tax-
free, unrestricted, anonymous accounts. It peaked in
1982 with $49 billion in assets, held by a total of 124
banks with international or general license. In 1984,
when total assets were $39 billion, 24% were in 11 U.S.
banks, and 16% in eight Japanese banks. When sanc-
tions were imposed this year, Panama was host to 120
banks with assets of just over $20 billion, down primar-
ily due to the political crisis. Panamanian deposits and
loans to local residents have never been more than a
quarter of the total activities carried out at the banking
center.
Secret banking naturally attracts illicit money, in-
cluding profits from drug and weapons transactions,
and the take of crooked politicians from around the
globe. Related international financial services, such as
insurance and reinsurance, and the ease with which cor-
porations are created and dissolved-Oliver North had
three-turned Panama into a beehive for commerce, for-
eign exchange transactions, countertrade and rediscount
activities. At its peak the financial services sector em-
ployed around 8,000 people and generated demand for
upmarket condominiums and modern office buildings
alongside antiquated shacks.
This lucrative network of no-questions-asked banks
and dummy corporations employs an army of highly
trained lawyers, accountants and their bilingual secre-
taries. They all rose in a chorus of outrage in 1986 when
the United States pressed for a change in the bank
secrecy laws, ostensibly to prevent illicit money laun-
dering. This move was seen as “the thin end of a
wedge…to penetrate Panamanian sovereignty,” as one
critic put it, which could allow U.S. tax authorities
access to other company information.
Though an alternative system of controlling drug
money was finally adopted, Gen. Noriega did cooper-
ate with U.S. Attorney General Edwin Meese in “Op-
eration Pisces” in March 1987, further incensing the
REPORT ON THE AMERICASentire banking community. Panama’s government froze
18 accounts in ten banks, employing such heavy-
handed tactics as cutting off the banks’ communications
with the outside world while each manager was obliged
to comply.
N 1986, U.S. DIRECT INVESTMENT IN PAN-
ama totalled $4.5 billion, the third largest in Latin
America; Japanese direct investment was over $8 bil-
lion, the largest in the world after its investment in the
United States. As one might suspect, the Japanese have
not one single manufacturing subsidiary in Panama.
Much of their investment is tied up in Panama-regis-
tered ships, while the rest is largely in financial serv-
ices. Japanese corporations use Panama as a marketing
and service center for their business activities through-
out Latin America.
U.S. investment is also largely in the financial (non-
banking) sector, but many U.S. companies do have
manufacturing facilities in the country, some of them
producing for the regional market. While it has been
estimated that two-thirds of U.S. private investment is
offshore-that is, non-productive-a good estimate for
Japan’s would put it over three-fourths. However, the
spokesman for the American Chamber of Commerce in
Panama reckons that fully one-half of all private sector
business in Panama is U.S.-related.
Panama’s motto: “For the benefit of the world”
Add to this the bazaar atmosphere of downtown Pan-
ama City with its business tourism and casinos, and it is
not surprising to find that half the economic activity of
the country is devoted to private services. Industry
accounts for a scant 9% of GDP and agriculture only
10%, a third of which is taken up by bananas for export.
Yes, Panama is also a banana republic. The fruit is the
largest single export commodity, earning 20% of Pan-
ama’s foreign exchange from the export of goods in
1986.
A look at employment figures gives an idea of why
the top 5% of the population receives 17.8% of the
national income, while the bottom 20% receives only
2.1%. Thirty percent of the economically active popu-
lation works in agriculture, most of them subsistence
farmers who complement their meager income with oc-
casional day labor. Another 28% of those working are
employed in unspecified social and personal services-
the other pole of low productivity-primarily in urban
areas.
P ANAMA SHARES WITH THE REST OF LATIN
America the weighty problem of public indebted-
ness. At the end of 1987, the external public debt
amounted to $3,968 million, equivalent to 75% of GDP.
Internal debt was another billion dollars, and the 1987
government budget assigned 51% of outflows to debt
v-amos hacia ;PANAMA
service and capital repayments. In view of the political
crisis and ensuing fiscal crisis, Panama suspended debt
servicing payments in June 1987. In November the
World Bank suspended disbursements and in March the
Inter-American Development Bank followed suit. That
same month Panama became the first developing coun-
try to effectively default on yen bonds issued in the
Tokyo capital market, a situation of which Japanese
bankers took an extremely dim view.
Since 1983 the government has been struggling to
implement a standard “structural adjustment” policy,
as recommended by the World Bank and the Interna-
tional Monetary Fund. As it includes reducing the
benefits of the Social Security system, removing protec-
tionist tariffs from agriculture and industry, and cutting
back on public sector activities, the policy has met
widespread resistance. In a country where barely 19%
of GDP is generated by agriculture and industry, the
World Bank/IMF has pushed forward on the absurd
hope that by growing melons for export Panama could
somehow pay off its enormous debt.
S NE REASON WHY PANAMA’S ECONOMY
shook so violently when dollar accounts in the
United States were frozen in March is that U.S. sanc-
tions were only the last of several steps taken to destroy
business confidence in Panama. Previously the Ad-
ministration had cancelled Panama’s sugar quota, cut
off its military and economic aid, vetoed loans and
payments to Panama in international financial organiza-
tions, and excluded it from the Caribbean Basin Initia-
tive.
A few weeks after sanctions were imposed the
economy was in shambles, with the public sector living
on borrowed time as well as borrowed money, and the
private sector operating at half its capacity. Some bank-
ers predict that by the end of the year, unless new
elements are introduced to shore up the house or to
replace it, the only part left standing will be the canal.
Open unemployment reached 17% by June, compared
with 12% nine months earlier. In many companies,
those employees not laid off are working for half, a
third, even one-fourth of their former salaries. Some of
those who were laid off with redundancy payments to
be paid over two years are re-hired on a daily basis and
paid according to the day’s earnings. So much for the
Labor Code, Social Security coverage, retirement bene-
fits and job stability. The estimated 35,000 people who
work in construction and the 15% of Panama’s industry
devoted to producing construction materials work en-
tirely on credit, and were worst hit. Public works
projects, which were reduced last year and further
slashed in 1988, cannot possibly compensate for the
paralysis of the private sector.
On the other hand, the economy has yet to collapse
entirely because nearly one-fourth of the working popu-
lation, more than 150,000 people, are public employees.
When the government succeeded in making its checks
negotiable instruments of exchange, that alone allowed
for a significant margin of maneuverability.
In June, estimates of damage to the economy in 1988
alone ranged from a 12% reduction in GDP, if the eco-
nomic sanctions had been lifted then, to over 20% if
they were not. At that time, food and fuel sales were
30% below normal and industry was working at 40% of
its usual level. Health, nutritional and educational stan-
dards will inevitably decline, as there are no resources
for preventive action, and few materials in the schools
and universities.
These damage estimates show the impact of the
sanctions on Panama to be extraordinarily high when
compared with other cases where sanctions were used
to destabilize a government. In an analysis of more than
70 cases since 1900, the Washington-based Institute for
International Economics found only three others in
which the cost to the target country as a percentage of
GNP was greater than 10%: the US/UK against Iran in
1951 (14%), the UK/UN against Rhodesia in 1965
(12%) and in 1982, the Netherlands against Suriname
(10%). That same study also showed that where eco-
nomic sanctions were successful in helping bring about
a change in government or in a particular policy, the
sanctions lasted an average of 4.3 years, the failures an
average of seven years.
Sanctions invite contraband, solidarity from other
countries, nationalism and diversification, all of which
are cards which the Panamanian government has played
with some success. The very openness of the economy
and use of the dollar have helped keep some economic
circuits moving. One cynic noted that while the
Medellin cartel used to pay a commission to launder
money in Panama, they now charge one to cash govern-
ment checks!
In the past decade Panama’s strategy has been to
diversify the services it offers foreign capital hoping
that this would stimulate the domestic economy. Vast
increases in public sector investment, funded by bor-
rowing in the days of easy money, were spent on im-
proving social services and basic infrastructure. A great
number of jobs were created in the expanding public
sector, but no sustainable productive base capable of
satisfying the population’s need for jobs, food and hous-
ing was achieved.
Those days have gone forever, and no easy answers
are on the horizon. Alternatives being contemplated
range from turning the country into a vast international
shopping mall to an Albania-style radical autarky. The
government is desperately seeking non-traditional
sources of finance. And the opposition is still hoping
for a miracle, like the injection of a billion dollars from
the United States, to get things moving again. There is
one thing on which all sides agree: The longer the cur-
rent situation lasts, the worse it will be for everyone.
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