Chapter 2. Boosting productivity and value-added in Panama to keep up with growth

This chapter focuses on the current drivers of economic performance in Panama and the challenges the country faces to consolidate sustainable growth. It analyses the macroeconomic conditions underlying the rise in income per capita and the shifts in productivity over the past decade, as well as the uneven growth of labour productivity across economic sectors and regions. The analysis further looks at Panama’s export profile, which concentrates on services exports, and assesses the exports’ value-added and the contribution of services to other exports. The chapter also presents the impact of foreign direct investment on specific economic sectors and its important contribution to total investment. After describing two major actors in the economy, the Canal and the Special Economic Zones, this chapter evaluates sectorial policies, such as infrastructures, logistics and innovation.


Panama’s successful economic growth in the past decade has contributed to reducing the GDP-per-capita gap with OECD economies. Construction, real estate and commerce (wholesale and retail) drove most of the economic performance. Challenges remain to carrying forward the past decade’s economic performance into the future. To achieve this, boosting labour productivity across sectors and increasing value added in exports will be essential.

The Canal and, to a lesser extent, the Special Economic Zones have played a considerable role in the economy. Both present unexploited opportunities to foster development and to address the challenges of Panama’s dual economy, in which a few sectors with high wages and links to global trade contrast with the rest of the economy. In particular, export capacity and productivity levels remain low in the industrial and agriculture sectors. Specific areas including infrastructure, logistics, innovation, inclusiveness in education and skills (see Chapter 3), and business regulation (Chapter 5) should contribute to this purpose.

This chapter examines the evolution of economic growth in Panama, and the challenges to boosting sustainable growth and improving productivity and competitiveness. First, it summarises macroeconomic conditions and economic performance in the past decades. It also highlights the recent trends in productivity among economic sectors and regions. Second, it studies the trade profile in Panama, focusing mainly on the value-added of its exports. Third, it summarises the components and challenges of foreign direct investment to Panama. Fourth, it describes two major actors – the Canal and the Special Economic Zones – and their potential for the economy. Fifth, it focuses on the sectorial areas of infrastructure, logistics and innovation that should contribute to economic development in Panama. The conclusion of the chapter presents the main messages of this assessment.

Boosting productivity is a condition to maintain high and sustainable growth

Impressive macroeconomic performance in the past decade compared to other countries in the region has contributed to closing the income-per-capita gap with OECD economies. The stable macroeconomic framework combined with the boom of some economic sectors including construction, real estate and commerce (retail and wholesale) have played a key role in recent economic performance. Service sectors made a remarkable contribution to that. Most of the labour productivity performance was driven by increases in physical capital. A key challenge to sustaining economic development is therefore to extend the high productivity to other sectors and other regions of Panama.

Strong economic growth has contributed to improving GDP per capita

Gross domestic product (GDP) per capita has grown at a faster rate since the 1990s. The social and political unrest of the late 1980s affected development in Panama and GDP per capita decreased by 1.7% between 1985 and 1990. In 1988 alone, GDP per capita decreased by more than 15%. Since this period, income per capita growth has accelerated. Between 1991 and 2004 the average annual growth rate was 2.7%. In the period 2005-15 it increased considerably, to 5.8% year-to-year on average. This good performance in the past decade contrasts with the sluggish annual average growth in benchmark economies (2.6%), Latin American economies (1.9%), and high-income countries (0.9%). Even compared to upper-middle income (4.9%) and middle-income (4.5%) countries, increases in the GDP per capita have been remarkable over the past decade, recovering from pre-1990s sluggish rates (Figure 2.1).

Figure 2.1. GDP per capita in Panama, 1980-2015
Constant 2011 USD, base 100 = 1980

Note: LAC refers to the average of Latin American and the Caribbean countries.

Source: World Bank (2017), World Development Indicators (database), Washington, DC, (accessed 10 May 2017).

GDP per capita growth over the past decade has been associated with consistent macroeconomic performance. Among Latin American economies, Panama exhibited the highest GDP growth with an average 7.3% over the period 2007-16, competing with emerging Asian countries and above all the benchmark economies (2.9% on year-to-year average during the same period). In particular, while benchmark economies were in recession in the global financial crisis (-0.9% on average in 2009), Panama exhibited resilience; its economy grew by 1.6% in 2009 and more than 5% yearly in the post-crisis period. For example, in 2016 Panama exhibited the second highest performance compared to Latin American and benchmark economies (Figure 2.2).

Figure 2.2. Economic growth in Panama versus benchmark economies

Note: 2007-10 and 2011-15 are the annual GDP growth averages.

Source: IMF (2017a), World Economic Outlook, April 2017 edition (database), International Monetary Fund, (accessed 1 June 2017).

The stable monetary framework, achieved through dollarisation of the economy, and lower volatility of fiscal expenditures have contributed to sustainable economic growth. Lower business cycle volatility improves welfare in two ways. First, it reduces economic uncertainty, thereby fostering investment and boosting economic growth (Hnatkovska and Loayza, 2004). Second, it reduces income volatility, which can have a strong impact on households’ well-being. Welfare improvements from lower business cycle volatility can amount to up to 10% of consumption in Latin America (Loayza et al., 2007). In Panama, inflation rates over the past ten years (2007-16) have remained relatively low compared to emerging and developing countries; on average the annual inflation rate was below 3.8% in that period. In addition, since the beginning of the 2000s the volatility of public expenditures decreased considerably and it remained one of the lowest when compared to benchmark economies (Figure 2.3, Panel A).1 These monetary and fiscal conditions contributed to guaranteeing high but stable economic growth compared to the benchmark economies (Figure 2.3, Panel B). An improved macroeconomic framework is perhaps the government’s most important asset for conducting economic policy. Continuing to strengthen this should be the cornerstone of future policy making and the foundation on which to build a competitive economy and social equity.

Figure 2.3. Macroeconomic performance and volatility in Panama versus benchmark economies (2007-16)

Note: Latin America includes Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay and Venezuela.

Source: OECD calculations based on IMF (2017a), World Economic Outlook, April 2017 edition (database), International Monetary Fund, (accessed 1 June 2017).

The Panamanian economy depends mainly on four sectors: commerce, construction, transport and real estate. In the period 2011-16, 60% of total GDP was represented by commerce (retail and wholesale); construction (both private and public investment in residential and non-residential infrastructure); real estate; and transport, communications and storage.2 This pattern reoccurs in 2016 as well, where each of these sectors represented at least 14% of Panama’s total GDP (Figure 2.4, Panel A). In contrast, manufacturing and agriculture and fishing only represented 5.1% and 2.2% of total production in 2016, respectively. This highlights the concentration of the Panamanian economy in services.

Figure 2.4. Share and contribution of economic activities in GDP

Note: Panel B, the contribution to GDP growth of each economic sector is the change in constant prices of that sector as a share of constant increase in total GDP between 2011 and 2016. *Other social services include other community, social and personal services activities. **Public services include public administration, social security and defence. ***Transport and communications include storage as well.

Source: OECD calculations based on data from CGRP, webpage, (accessed 5 January 2017).

Similarly, services and construction, rather than manufacturing and agriculture, drove most of the macroeconomic performance in past years. The four sectors mentioned above, combined with financial services, accounted for close to 78% of the economic growth between 2011 and 2016 with construction alone representing 34% of GDP growth. Manufacturing, agriculture and fishing combined only represented less than 2% of the total economic growth in that period (Figure 2.4, Panel B).

The Canal plays an immense role in Panama’s economic development and growth

The importance of the Canal in the economy, estimated at around 40% of total activity, renders Panama highly dependent on world trade, and more precisely on maritime transportation. In 2014, the Canal generated fiscal revenues of about USD 2.6 billion (5.4% of GDP). It also represents 16% of Panama’s services exports (travel, tourism, commercial and financial services), and plays an important role in economic development.

Starting in 2013, Panama’s economic growth has slowed to around 6%, and has decreased to 4.9% more recently, mainly reflecting the winding down of the Canal expansion and a normalisation of public investment. While most sectors in the service-driven economy remain buoyant, activities in the Colón Free Trade Zone continue to decline, in part owing to difficulties in trade relations with Venezuela and Colombia and lower demand from the region.

In the medium term, growth is expected to be in the 5-7% range, according to the authorities and International Monetary Fund (IMF) projections (IMF, 2017b). This projected growth is based in part on the benefits expected from the extension of the Canal and the development of a logistics hub in Panama. The Medium-Term Fiscal Framework 2018-2022 projects an average annual rate of 6.2% of GDP growth during this period. Stable and credible fiscal and monetary frameworks support this scenario (MEF, 2017). The inflation rate is projected to remain low in that period, at 1.8% in 2018 and 3.3% in 2022. Public debt is expected to be reduced by close to 4 percentage points of GDP, reaching 33% of GDP in 2022 and the primary balance should remain positive at 0.4% of GDP in 2022 from 0.7% of GDP in 2018. The planned annual contribution of the Panama Canal Authority (ACP) to the state for this five-year period is higher than 2.0% of GDP on average, at 2.6% of GDP in 2018 and 2.2% of GDP in 2022 (MEF, 2017).

Nevertheless, low global trade could have a negative impact on that medium-term scenario Linkages between GDP growth and trade have increased since Panama joined the World Trade Organization (WTO) at the end of 1997 (Figure 2.5).3 Anaemic world trade growth is one of the main drivers of the recent poor world growth performances. The number of trade restrictive measures in G20 countries has increased to 1 196 in mid-2016 from 324 at the end of 2010, and container demand growth lags global GDP growth (Boston Consulting Group, 2016; WTO, 2016). Furthermore, world trade growth is expected to remain muted in the medium term (OECD, 2016a). Under such an uncertain and downside global risk scenario in terms of trade and shipping, economic activities linked to the Canal should affect inclusive development in Panama.

Figure 2.5. Global trade and GDP in Panama (annual growth rates)

Source: IMF (2017a), World Economic Outlook, April 2017 edition (database), International Monetary Fund, (accessed 1 June 2017).

However, some resilience could reduce the external shock referred above. Indeed, while total cargo has declined, Canal revenues have increased in recent years. Looking forward, the Canal has already started to recover some of its pre-expansion market share and it is therefore expected that the growth in Canal traffic could be somewhat higher than world trade growth. Additionally, the gains from further integration with other countries in the region could be even greater in a scenario of global trade frictions (IDB, 2017). In this context a more comprehensive integration with other countries in the region, beyond the Central American Common Market (CACM) is welcome.

Other risks are linked to the stability of Panama’s financial system and Panama’s reputation in international markets. Panama should improve the assessment of underlying risks, such as in the construction sector and in the sustainability of special zones, to anticipate any shock to the stability of financial intermediaries (see Chapter 4). In addition, to increase the credibility of financial markets and to avoid reputational costs, the implementation of international transparency standards and the exchange of information mechanisms are required (see Chapter 5).

Labour productivity improvements are key to overcoming the Middle Income Trap

Despite this favourable performance in terms of GDP per capita and GDP growth, Panama has since 1998 remained an upper-middle-income country. The majority of countries in the region attained upper-middle status during the 2000s. But Panama, like Mexico (1990) and Venezuela (1997), has retained this status since the 1990s.4 This highlights the need to overcome the so-called Middle Income Trap (MIT). This phenomenon occurs when a country can no longer rely on its traditional drivers of growth (e.g. low labour costs or the accumulation of labour as a major source of growth) to make further progress (OECD/CAF/ECLAC, 2016; OECD, 2014). Panama’s recent period of high GDP growth helped it to consolidate its position as an upper-middle-income country, but this success is not without its challenges.

Overcoming the MIT will require a set of public policies that should improve labour productivity in Panama. While high levels of investments have contributed to closing the gap, Panama should improve several areas that contribute to boosting labour productivity. The experiences of other countries that tackled the Middle Income Trap show that improvements in the quality of education, governance, the rule of law, the taxation system and the liquidity in the equity market are the main domains that should be prioritised (Melguizo et al., 2017). If Panama were to sustain the strong macroeconomic performance of recent years, which saw 4.5% average per capita GDP growth rate over the past ten years, it would become a high-income country in 2021. This would mean Panama’s trajectory from middle-income to high-income country took 67 years, and 24 years from upper middle-income to high-income country. Compared to neighbouring Latin American economies, Panama is not an isolated case (OECD/CAF/ECLAC, 2016). Globally, however, there are examples of countries that transitioned more rapidly. For instance, it took Korea 27 years, Portugal 46 years and Chile 55 years.

Indeed, labour productivity remains low compared to OECD economies, and it is the source of most differences in income per capita from OECD economies. These differences can be broken down into gaps in labour productivity and gaps in labour utilisation, measured as employment as a share of population. Panama, like most emerging economies, features relatively high labour utilisation; the main culprit stifling GDP per capita is labour productivity. Panama’s labour productivity shortfall compared to the richest 17 OECD countries was close to 53 percentage points in 2014. In this, it outperformed Latin America and the Caribbean (LAC) overall, where the average labour productivity is 70% lower than that of the top OECD economies. Despite recent progress, Panama’s labour productivity represents less than 60% of the average for OECD member countries. While labour productivity in OECD countries is more than 1.75 times greater than in Panama, labour utilisation in OECD economies is barely 5% higher than in Panama (Figure 2.6).

Figure 2.6. Sources of income per capita differences with the upper half of OECD economies, 2014
Percentage of GDP per capita, labour resource utilisation and labour productivity differences


1. LAC 8 includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Uruguay and Venezuela. Compared to the simple average of the 17 OECD countries with the highest GDP per capita in 2014 based on PPPs (2011 USD). The sum of the percentage difference in labour resource utilisation and labour productivity does not add up exactly to the GDP per capita difference since the decomposition is multiplicative. Labour productivity is measured as GDP per employee. Labour resource utilisation is measured as employment as a share of population.

Source: OECD calculations based on Feenstra, Inklaar and Timmer (2015), “The Next Generation of the Penn World Table”, American Economic Review, 105(10), 3150-3182, available for download at

While its labour productivity remains low in comparison to OECD economies, Panama has made significant gains in the past decade. In the 1990s, and like other Latin American economies, its labour productivity performance was low compared to other middle-income countries and in particular to high-income economies. But in the past decade, Panama pulled away from Latin America. Labour productivity improved remarkably, tracking the path to other middle-income economies (Figure 2.7). Compared to benchmark economies, Panama also exhibited good performance in terms of labour productivity, measured as GDP per person employed in constant purchasing power parity (PPP), since the beginning of the 1990s. Only a few emerging economies performed better than Panama: the Dominican Republic; Hong Kong, China; Korea; and Singapore.5

Figure 2.7. GDP per person employed
Constant USD 2011 PPP, base 100 = 1991

Source: World Bank (2017), World Development Indicators (database), (accessed 10 May 2017).

Most of the labour productivity gap is explained by the low performance in human capital and total factor productivity (TFP). Labour productivity in Panama has experienced relatively high rates of growth, on average 4% since 2000 and mainly driven by total physical capital per worker accumulation. On the other hand, human capital and TFP have contributed very little to increases in labour productivity, although their contribution increased compared to the end of the 2000s (Figure 2.8). Nevertheless, these high labour productivity growth rates have not been enough to close the gap with more developed economies.

Figure 2.8. Labour productivity growth and its components in Panama

Note: Total factor productivity and the sources of GDP per worker growth are estimated by using the standard Cobb-Douglas function. Human capital is adjusted for the years of schooling. The capital-share production function parameter is set equal to 0.433 (Klenow and Rodríguez-Clare, 2005). All input variables are filtered using HP filter, lambda 7.

Source: OECD calculations based on Feenstra, R., R. Inklaar and M. Timmer (2015), “The next generation of the Penn World Table”, American Economic Review, 105(10), 3150-3182, available for download at, and Barro and Lee (2013).

Labour productivity growth has been particularly high in economic sectors where the concentration of jobs remains relatively high. In absolute numbers, labour productivity was driven mainly by the services sector, most notably within the construction sector, and the industry in the period 2003-12 (Figure 2.9, Panel A).6 Adjusted for the labour intensity in each of the economic sectors, total productivity improvement in that period (46.9%) occurred mostly in the service sector (accounting for 32.3 percentage points) and the industry sector (accounting for 14 percentage points), while the agriculture sector’s productivity remained low (0.6 percentage points) (Figure 2.9, Panels A and B).7 Close to 65% of the jobs are in the service sector, and 18.3% and 16.7% of the jobs are in the industry and agriculture sectors, respectively. The divergence in labour productivity grew more accentuated in the last decade, mainly owing to the slow reallocation of labour among sectors. The changes in productivity can be broken down into a “within-sector” effect (driven by technical change and capital accumulation), a “between-sector” effect (driven by reallocation of labour resources between sectors) and a “cross-sector effect” (driven by the interaction between productivity changes and employment shares). In the period 2003-12, both the effect of reallocations of labour and the cross-sector effect accounted only for 2.8% of the change, while the within-sector effect explained the remaining 97.2% of the labour productivity growth (Figure 2.9, Panel B). The within-sector effect, pushed by capital accumulation per worker, occurred primarily in the service sector, where retail and wholesale, and transport and communications led the advance. Despite progress in productivity, the slow effect of labour reallocation is worrying since it reinforces the productivity and income gap between fast-growing and slow-growing sectors.

Figure 2.9. Sectorial changes in labour productivity in Panama

Note: Panels A and B: Industry (ISIC divisions 10-45) includes manufacturing, mining and quarrying, construction, electricity, water and gas.

Source: Panels A and B: OECD calculations based on World Bank (2017) for value-added and employment share data, and on CGRP for employment data. Panel C: CGRP (2015), website, (Comptroller General of the Republic of Panama), for non-enterprises surveys.

Similar results are observed from surveys of enterprises in Panama for a more recent period, although not all sub-sectors are covered (e.g. construction, and livestock and crop production). In particular, for the period 2012-14, commerce (retail and wholesale) grew more than 18.6%, explaining most of the total labour productivity growth (21.9%). Among the three effects described above, the within-sector effect grew at 17.7%. This corroborates that most of the changes in productivity were due to technical and capital accumulation changes rather than labour reallocation across sectors (Figure 2.9, Panel C).

Labour productivity and other dimensions vary across regions

Segmented labour productivity across economic sectors translates to high disparities at the regional level. Panama exhibits high heterogeneity across provinces in terms of GDP per capita, labour productivity and several social dimensions (see Chapter 3 for the social dimensions). Although there are no reliable data covering all sub-national authorities (i.e. some key productive and social variables are not available in data on the comarcas), estimations show that Colón and Panama exhibit a high level of labour productivity compared to other provinces (Figure 2.10). Colón is an important contributor to the economy in terms of logistics and services including the Colón Free Trade Zone (Zona Franca de Colón) as well as tourism and port activities. Modern services such as in logistics and a variety of commercial and trade services have potential for diversification in Colón. Such development could advance existing manufacturing sectors close to Colón, such as the plastics, foodstuffs and paper industries (Hausmann, Morales and Santos, 2016). Panama province exhibits a diversity of economic sectors, including financial services, construction, real estate and activities around public administration.

Figure 2.10. Labour productivity by province, 2014 (in thousand balboas)

Note: Labour productivity measured as the value-added (the value of output less the value of intermediate consumption) over the annual average personnel employed per month.

Source: OECD estimations based on CGRP (2014), website, (Comptroller General of the Republic of Panama),

The rest of provinces present low levels of labour productivity and structural challenges. In particular, provinces such as Los Santos and Darién have the least complex and connected industrial structure in Panama. The most promising sectors still have a long way to go in terms of capabilities. The government is developing policies in the poorest provinces to tackle these inefficiencies. But the urgency to improve key areas, such as education and health, demonstrates the state’s low capacity to achieve effective policies in these provinces. Los Santos, for example, presents an opportunity given its strategic base is agriculture (Hausmann, Morales and Santos, 2016). The high heterogeneity among provinces highlights the need to develop productive strategies at the sub-national level, in particular in highly isolated areas, with respect to the sectors contributing to growth such as logistics and transport services and commerce. For instance, better interconnectedness between the services already located in areas neighbouring the Canal and the poorest provinces is key to developing new sectors such as the agro-industry and creating formal jobs.

Panama’s exports can promote further value-added

Panama’s economy depends on world trade. As a consequence it is more open than other economies in the region. The services sector is the main driver of the trade profile, just as it has been key to productivity growth in recent years. Close to 95% of total exports are based on services, where transport exhibits a high relative comparative advantage. The transport sector directly exports most of its value-added, mainly through the Canal. In contrast, some services translate value-added to other economic sectors. This is particularly the case with distribution and trade, as opposed to finance or other specific business services such as real estate activities, renting of machinery and equipment, and research and development. However, total service exports show low value-added composition compared to benchmark economies.

Although trade openness has decreased in recent years, Panama remains a more open country than the rest of the Central and South American economies and has a similar level of openness as other port economies. The combined value of exports and imports represented 104% of GDP in 2015, divided in equal parts between exports and imports. The ratio reached its peak value in 2011, at 166% of GDP, before declining to its current value. Now it is lower than in 2005, when imports and exports represented 137.5% of GDP. Like other countries where port activities are important, Panama is heavily dependent on trade (Figure 2.11). Panama scores higher than other Central and South American countries in openness to trade, with 73.1% compared to 26.5% of GDP in 2015. Nonetheless, the ratio is well below that of other port economies and financial hubs such as Hong Kong, China; Singapore; Belgium; and Netherlands (UNCTAD, 2017).

Figure 2.11. Trade openness
Sum of imports and exports as percentage of GDP, 2015

Notes: The indicator for Trinidad and Tobago is for 2011. Central America comprises Belize, Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua and Panama. South America comprises Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Guyana, Paraguay, Peru, Suriname, Uruguay and Venezuela. OECD includes all 37 member economies of the Organisation.

Source: UNCTAD (2017), Trade in Goods and Services (database), (accessed 10 May 2017).

Panama imports mostly capital and consumer goods from the rest of the world. Consumer goods accounted for 59% of total imports in 2015, representing the largest share of total goods imports (WITS/UN Comtrade, 2017). These goods notably comprise manufactured goods including automobiles, medicines, electronic goods, processed foods, beverages, textiles and plastics. Capital goods, which account for an additional 21% of total goods imports, include primarily machinery, transport material and industrial chemical products. Other important imports are petroleum oils and mineral products. In 2015, the United States was the main import partner and represented 25.9% of total imports, followed by Panamanian Free Zones (16%), China (9.5%), Mexico (5.1%) and Costa Rica (3.7%) (CGRP, 2016a).

Services, which account for 95% of the total exports, are the main driver of Panamanian exports. Transport, both air and sea, and travel services represent almost 75% of exports, followed by other business services (18%) (Figure 2.12, Panel A). The re-exportation of goods that do not enter the country makes up the majority of other business services; in 2015 this represented 85% of services in this category (CGRP, 2016b).8 However, there are no data to assess the destination of the services exports. Similar to the case of services, exports of goods present a concentrated profile. Primary agricultural products encompass more than half of the gross export of goods (about 2.5% of total exports). Bananas, shrimps, salmonids, pineapples and fish flour are the most exported products, representing one-third of the goods basket in 2015 (Figure 2.12, Panel B; CGRP, 2016c).

Figure 2.12. Exports profile in Panama, 2015

Notes: Transport refers to services “involving the carriage of people and objects from one location to another as well as related supporting and auxiliary services. Also included are postal and courier services” (IMF, 2009). Travel exports “cover goods and services for own use or to give away acquired from an economy by non-residents during visits to that economy” (IMF, 2009). In Panama, the re-exportation of goods that do not enter the country represents the great majority of “other business services” (85% of the heading in 2015) (CGRP, 2016b). The “Other business services” are net of the debit value of “Goods acquired in port by means of transport” to avoid including the value of imports for re-exporting.

Source: OECD calculations based on data from CGRP (2016b; 2016c).

Composition and challenges of the exports on goods

During the past decade, merchandise exports shrank and were restricted to raw materials. Following a long period of growth, goods exports doubled between 1996 and 2007. However, the trend reversed in the following years. By 2015 goods exports declined by nearly one-fourth compared to a decade earlier, and exports per capita values were lower than in 1996 (CGRP, 2016d; CGRP, 2003). Setting aside re-exports, in 2015 the bulk of merchandise exports were raw materials (63% of total goods exports). Capital goods were an insignificant part of total goods exports, 1.7%. Intermediate and consumer goods played a secondary role, at 16.5% and 18.3% respectively (WITS/UN Comtrade, 2017).

Despite the low level of processing, agricultural products contribute considerably to the composition of the domestic value-added of total exports on goods. One US dollar of primary agricultural products exported has 71 cents of total value-added. This value-added content is even higher than that of processed foods (50 cents) and is close to that of financial services (77 cents). Moreover, in 2011, less than 1% of the value-added of the exports of primary agriculture products came from the value-added of other Panamanian sectors (indirect backward linkages). In contrast, 12.4% of the total value-added exported by other sectors came from Panamanian primary agricultural products (indirect forward linkages) (WITS/World Bank, 2014).9

Panama’s exported goods have “low complexity” and share few connections with more sophisticated products. Exports of new products can be considered as the result of recombining capacities already present in the economy. Therefore, some goods that involve highly specialised and diverse capacities will allow development of more potential products than others (Hidalgo and Hausmann, 2009). Such specialisation and diversity of capacities embodied in an exported product are captured by the so-called complexity indexes. Panama’s current goods export basket is mainly composed of low complexity products, which comprise close to 76% of goods. High complexity products amounted only to 5% (Hausmann, Morales and Santos, 2016). Moreover, the proximity of Panama’s current goods export basket to more sophisticated goods is low. The goods basket remains rather isolated, clustered around raw materials and far from capital-intensive activities, where the largest potential to develop new high-value-added products lies (Hausmann, 2012). An export basket that relies on merchandise that is labour-intensive to produce, and uses low levels of technology and processing, creates few linkages with the rest of the economy. In turn, the lack of linkages limits the possibilities for incorporating further value-added into the exports.

The Panamanian government has stressed the low performance of agriculture. The Plan Estratégico de Gobierno 2015-2019 identifies agriculture as one of the four “potential sectors” for boosting growth and job creation (together with logistics, tourism and mining). The Plan envisions improving productivity and competitiveness in the sector by addressing a variety of bottlenecks, ranging from lack of appropriate agricultural inputs and poor infrastructure to a weak institutional framework. For improving agriculture’s performance the Plan allocated 4.5% of total public investment between 2015 and 2019 (GRP, 2014).

The services sector is the outstanding actor in the exports profile

Service exports have blossomed and Panama has a marked comparative advantage in some of these products, thanks to exploitation of opportunities provided by the Canal. Evidence for this is in services exports growth: services constituted 72% of Panamanian exports in 2000; by 2015 their share had grown to 95%. A Balassa index for services illustrates Panama’s strengths in this regard relative to the world. The index measures the ratio between the contribution a product makes to the exports of a country and the same product’s contribution to world trade (Balassa, 1977). A value larger than “1” suggests specialisation of a product by the country. Compared to global shares of exports, Panama has a strong and increasing comparative advantage in exporting travel and transport services and is developing a comparative advantage in governmental services, and personal, cultural and recreational services (Figure 2.13).

Figure 2.13. Relative comparative advantages in Panama’s service exports, 2005-15


1. n.i.e. means “not included elsewhere”. The revealed comparative advantage (RCA) is an index based on Balassa (1977) that measures the ratio between the contribution a product makes to the exports of a country and the same product’s contribution to world trade. Values larger than “1” suggest specialisation of a product by the country. This measure is taken as reference to the rest of the world by excluding Panama’s exports.

Source: Based on UNCTAD (2017), Trade in Goods and Services (database), (accessed 5 March 2017).

The potential of services lies in the value-added that they embody as inputs in the exports of other sectors. The importance of service sectors extends beyond the value-added that is directly exported – i.e. the service’s gross exports and the direct value-added exported (Francois, Manchin and Tomberger, 2015). When services are tightly woven into the rest of the economy, they boost the development of higher technology sectors, manufacturing exports performance and the overall economic performance (OECD, 2014; Francois and Woerz, 2008). This is largely driven by the use of services as inputs in exports. The use of services as inputs for export in Netherlands; Singapore; Hong Kong, China; and Belgium – the leading exporting economies of services in gross value among the benchmark economies – represented, on average, 23.6% of their total value-added exported (WITS/World Bank, 2014).10 In Panama, the ratio was 25.6% of the total value-added.

Following the example of the benchmark economies, Panama could increase the value-added exported by services beyond the gross value of its service exports. The importance of services as inputs is all the more striking in the cases of Australia, Argentina, Chile, Korea, Peru and New Zealand. These countries leverage from their high commodities exports (Australia, Chile and Peru) or high-value-added manufactured goods (Korea) by using services as intermediate inputs to contribute to the value-added content of their gross exports. Beyond metal exports, the experience of Peru exporting agro-processed goods illustrates how chaining logistics services can boost the value-added of services (OECD, 2016b).

As mentioned above, services solely used as intermediate inputs accounted for 25.6% of the total value-added in Panama’s exports, of which distribution and trade represented 16 percentage points.11 In 2011 about 43.3% of total value-added in exports was in the form of intermediate inputs. Distribution and trade services contributed the most value-added of all sectors through intermediate inputs to other sectors’ exports (Figure 2.14). In particular, 65.5% of the exports’ value-added in machinery and equipment and on chemical, rubber and plastic products was explained by distribution and trade services.

Figure 2.14. Total contribution of the service sector in exported domestic value-added to other sectors (percentage of total value-added exported, 2011)

Note: The total contribution of the service sector includes the domestic value-added that originates in a service sector and goes into a different service sector’s exports. The specific business services are those covered by the International Standard Industrial Classification of All Economic Activities (ISIC) rev. 3, divisions 70 to 74. These are real estate activities, renting of machinery and equipment without operator and of personal and household goods, computer and related activities, research and development, and other business activities.

Source: Adapted from WITS/World Bank (2014), Export of Value Added (EVA) Database (database), (accessed 5 March 2017).

Financial services and specific business services (e.g. real estate activities, renting of machinery and equipment, and research and development) are the second-largest suppliers of intermediate inputs among services in Panama. However, they remain largely isolated from the rest of the economy. These sectors incorporated through inputs 6 percentage points of the total value-added exported by other sectors in 2011 (WITS/World Bank, 2014). However most value-added created by financial services and especially by business services in Panama remains within the same sector’s exports.

Panamanian financial services are integrated in the exports of the economy to the same extent as other financial centres. Financial services exports accounted for 57% of the domestic value-added generated by finances in 2011. In addition, the share of value-added created by finances and exported through other sectors is only slightly lower in Panama (4.7% of total value-added) than in other benchmark economies with financial centres such as Hong Kong, China (7.37%); New Zealand (5.8%); Uruguay (5.69%); and Singapore (5.08%) (Figure 2.14). The benchmarking comparison suggests a good level of integration of the financial sector with the external sector.

In contrast, the specific business services mentioned above do not contribute to the value-added in other sectors’ exports as much as they do in other benchmark economies. In port-economies the value-added of these specific business services into other sectors’ exports ranged from 25.7% (Netherlands) to 15.9% (Singapore) of the total value-added. In Panama, the level of integration was 8.8% –17 percentage points below the best performing economy. Indeed, in 2011 52% of the value-added of these specific services stayed within the same sector. Panama has established itself as a net exporter of commercial services to the world, yet other sectors have not appropriately taken advantage of those services in their export profile.

Most of the value-added of the transport sector is directly exported by this sector itself. The Canal, which is the main supplier of transport services, is still not well integrated economically to the rest of the economy. Consequently, there remain unexploited opportunities to develop mutual benefits arising from the Torrijos-Carter treaties, signed in 1977 and implemented in 1999. The transport services can be chained to the rest of the economy in two complementary ways. First, they can be used to add value and promote the growth of (good) exporting sectors (transport as a supplier). Second, they can be chained by enhancing transport services through the usage of other services (transport as a user). However, in Panama 99.6% of transport services’ value-added is exported directly by itself. At the same time, the transport services exports contain little value-added from the rest of the economic sectors. Notably, its exports incorporate only value-added originating in construction (mainly due to the infrastructure projects) and from energy extraction. As highlighted below, further linkages between the Canal and the rest of the economy remain a key challenge in Panama.

Foreign direct investment inflows have been volatile in recent years but remained high and focused mostly on services

Apart from a few years, foreign direct investment (FDI) inflows have been buoyant following the political instability of 1989. Privatisation programmes and fiscal benefits of the Colón Free Trade Zone attracted FDI inflows in the 1990s. In 1998, the enactment of the Investment Stability Law established equal treatment under the law for foreign and domestic investors. These new policies leveraged on Panama’s stable macroeconomic framework and close historical ties with the United States. With the exception of economic slowdown in the 1998-2002 and 2007-08 periods, FDI inflows have increased since the 1990s. By 2015, net FDI inflows represented 8.6% of the GDP, almost three times the net FDI inflow shares of LAC countries overall (3.8% of GDP) (CGRP, 2016e; World Bank, 2017). Moreover, since 2010, FDI inflows have directly created an estimated 23 000 jobs (Financial Times, 2017).12 An open investment climate in Panama has contributed to strengthening services exports through the trade-investment-services nexus. Furthermore, the expansion of the service sector was appropriate given Panama’s geographical location. Compared to manufacturing exports, services exports are less determined by distance to current hubs and more by investment policies (OECD/CAF/ECLAC, 2015). FDI in services is further boosted because the segmentation of production processes across countries increases the need to connect production processes among themselves, as well as to connect with end markets, mainly through services.

Wholesale services, transport and warehousing, and finance sectors have consolidated as major recipients of FDI flows since the mid-1990s. Although FDI flows to Panama have been highly volatile year to year, these sectors have received consistently high inflows. Wholesale and retail services are the leading recipients of FDI flows and the FDI contribution has significantly increased in recent years. While the sector captured 10% of the total FDI inflows accumulated between 1994 and 1997, its share grew to 33% of the total FDI received between 2010 and 2015 (Figure 2.15). The fiscal benefits of the Colón Free Trade Zone (CFZ) have attracted investments to wholesale and retail. However, the flows towards the sector have contracted since 2010 as the activities of the CFZ slowed down (see section below on the Special Economic Zones).

Figure 2.15. Foreign direct investment net inflows composition by sector, 2010-15 (percentage of GDP)


1. (P) refers to projection values.

Source: OECD calculations based on data for FDI flows from CGRP (2016e), “Inversión Directa Extranjera en la República, por país de residencia del inversionista y rama de actividad económica, según sector”,

Transport and warehousing activities represented 25% of FDI inflows received between 2010 and 2015. Recently this sector benefitted from the widening of the Canal, which brought large FDI investments into the surrounding areas. However, these investments have been mainly directed to storage and warehousing projects (ECLAC, 2015).

Finally, the financial sector represented 19% of the total FDI received between 2010 and 2015. However, the financial sector showed high volatility in its inflows. Following negative net inflows between 1998 and 2002, the sector received 43% of the incoming FDI between 2003 and 2007. FDI net inflows were negative again in the 2008 economic crisis. These fluctuations highlight the growing exposure of Panama as its economy becomes more deeply ingrained in world trade and international financial systems.

In the past, mining, information and communication, and real estate activities have been added as new receptors of FDI. Since 2006, foreign investment expanded towards construction and real estate activities in response to the demand for retirement houses, as well as to demands for infrastructure to support tourism, wholesale and logistic activities. Mining too has received additional investments (in particular in 2012), as Canadian companies took copper, silver and gold concessions. Among the concessions is Cobre Panamá, acquired in 2013 for USD 6.4 billion and with additional investments for USD 600 million in 2014. The large investments in mining foreshadow the shift in Panama’s goods exports profile towards commodities.

Although FDI inflows decreased slightly over the previous year, they remained high in 2015. Preliminary data point to a decrease of 0.5 percentage points of GDP in FDI compared to 2014 values (CGRP, 2016e). The largest drop – of 3.7 percentage points of GDP – occurred in the transport sector as investment for the Canal widening project declined. This also affected the financial system, which is estimated to have lost 0.9 percentage points of GDP. Inflows to information and communications sector, and the wholesale and retail sector slowed down too in 2014.

The absolute size of FDI inflows, however, does not tell the whole story about their contribution to the Panamanian economy (ECLAC, 2016). First, FDI flows have been directly linked to investment in past decades in Panama (Figure 2.16).13 However, only about 35% of FDI has generally been used for physical capital formation (ECLAC, 2016).14

Figure 2.16. FDI has closely followed the path of fixed capital formation, 1977-2015 (percentage of GDP)

Source: World Bank (2017), World Development Indicators (database), (accessed 10 May 2017).

Second, FDI can contribute to knowledge spillovers and the formation of so-called “intangible capital”. Long-term benefits stream from the creation of new production linkages, transfers of technology, and improved managerial skills and worker capacities (ECLAC, 2016). Looking ahead, therefore, a large part of future benefits will be contingent on the technology intensity of investments and will be effective only as long as the foreign firms integrate well with the local economy.

Under these conditions, FDI inflows, human capital and international trade reinforce each other. Incoming FDI increases the economy’s international trade, which in turn raises the demand for skilled workers. This growing demand for skilled workers is reflected in rising salaries, which in turn increases the incentives and pressures to supply them. Finally, the productivity improvements from a better-qualified workforce attract additional FDI (Aizenman and Noy, 2005). Firm-level evidence of favourable productivity gains from knowledge spillovers has been found in the context of the SEZs in Panama (Hausmann, Obach and Santos, 2016).

Nonetheless, the lack of skilled workers in Panama is hindering further FDI inflows. Growth diagnostics exercises for Panama have also shown a shortage of skilled labour as a binding constraint (Hausmann, Espinoza and Santos, 2016). Chapter 3 further analyses the issue in terms of education and skills. Based on surveys of local business leaders, Panama ranks as the fifth country where FDI brings more new technology (World Economic Forum, 2016). Nevertheless, only 13% of the FDI projects announced between 2010 and 2016 mentioned the availability of a skilled workforce within their reasons for investing in Panama (Financial Times, 2017).

To increase interconnectedness, Panama has benefitted from two key activities: The Canal and the Special Economic Zones

The canal and to a lower extent the Special Economic Zones have played a considerable role of Panama in the global context but also in the local economy. First, the Canal has permitted the development of competitive service sectors, such as logistics, transportation, financial services, communications and trade. The importance of the Canal in the economy is estimated to 40% of total activity, including direct and induced output. In addition, the government has also actively promoted place-based policies to attract foreign firms and spur innovation, through the creation of an array of Special Economic Zones (Hausmann, Obach and Santos, 2016). The CFZ alone, located in the Atlantic entrance of the Canal, employed close to 25 300 workers and represented nearly 5.8% of GDP in 2016.15 This largely explains why Panama is often characterised as a dual economy. On one hand, it has a formal sector featuring high wages in specific sectors and linked to global trade (Bussolo et al., 2012). On the other, export capacity and productivity levels remain low in the rest of the economy, in particular the industrial and agriculture sectors.

Special Economic Zones: New opportunities to traditional challenges

The Special Economic Zones (SEZs) serve as key platforms to integrate Panama with the rest of the world. This integration is based on the development of outwards-oriented economic activities by establishing tailored migration, labour, customs and tax regimes. Foreign workers and investors benefit from special visas, and firms are exempt from limits on hiring foreign workers. Other incentives include tariff and tax exemptions that vary according to a firm’s activity. The most sought-after activities by SEZs are logistics firms; high-technology firms; and research, education, health and environmental organisations.16 The SEZs provide high-quality logistical and financial services for companies and investors that relocate into these zones.

There are three major SEZs, each one serving distinct purposes. The Colón Free Trade Zone (CFZ), the pioneering SEZ, specialises in re-exporting and manufacturing for exports. The more recent Panamá Pacífico is a residential and industrial zone that seeks to attract multinational headquarters, service companies, and high-value-added manufacturing firms, among others. Finally, the City of Knowledge is orientated towards knowledge-intensive enterprises, privileging innovative enterprises, research institutions and international organisations.

The CFZ has been successful in terms of volume of trade, but tensions with trading partners have slowed down re-exporting operations. The zone serves as a bridge, importing manufactured goods from China, Singapore and the United States (e.g. machinery, chemical and electrical goods, and textiles), and re-exporting them to Venezuela, Colombia, Puerto Rico, other Central American countries and the rest of Panama. Since 2012, operations in the zone have dropped to USD 14.8 billion in 2016 from USD 30.7 billion in 2011.17 The decrease in activity responds to difficulties with its trading partners; Venezuela, for example, imposed controls on foreign exchange payments and Colombia raised tariffs on footwear and textiles (IMF, 2016).

The SEZs have played a positive role in job creation and attracting FDI. Despite its recent decline, the CFZ accounted for 6% of the non-financial jobs in 2015 (IMF, 2016). However, job creation in Panamá Pacífico and CFZ has not evolved above the trend in the rest of Panama, but the SEZ provide more formal jobs and higher wages than outside the SEZs. Regarding capital flows, the SEZs have played a secondary role. CFZ and Panamá Pacífico, the only major SEZs for which there is available information, accounted for 64% of total FDI during its pick year in 2007. Its participation has been declining since to 8% in 2014 (Hausmann, Obach and Santos, 2016). CFZ mainly attracts FDI for wholesale and retail, and logistics and transportation. Panamá Pacífico has received investment in high technology and financial institutions.

The long-term benefits of the SEZs are in labour productivity and wages, driven by upgrades in human capital. The higher inflows of educated immigrants have created agglomeration economies and knowledge spillovers. Estimates show that firms within Colón Free Trade Zone are 90% more productive than other firms in Colón, and firms in Panamá Pacífico are 29% more productive than in Panama City. The advantages are mostly streamed by the adoption of foreign technologies, manufacturing know-how and managerial practices (Hausmann, Obach and Santos, 2016). It is therefore important to continue efforts to improve the expansion of productivity gains in these SEZs to the rest of the economy. The government is aware of the value of the SEZs in the formation of human capital. In that context, the laws regulating the SEZs demand the design of firm policies towards improvements in skills and training of workers.

While SEZs provide benefits, they also carry costs to the economy

Yet more assessments and accountability studies of the relative costs and benefits of the SEZs are needed. The benefits from the SEZs can carry opportunity costs from uneven competition conditions and forfeited tax revenues. On one hand, the legal privileges of the SEZs can concentrate investment needed from the development of other regions and profitable economic activities. On the other hand, the cost of forfeited tax revenues could limit the financing of other development activities and regions (Chapter 4 analyses tax expenditures in Panama). Furthermore, tax breaks can subsidise activities that would be unprofitable otherwise. In light of these trade-offs and empirical assessments in other countries, more information is needed to evaluate the benefits and costs derived from the different incentives that are granted to these SEZs (Engman et al., 2007; Hausmann, Obach and Santos, 2016).

To increase competitiveness in the country, the SEZs do bring new opportunities to address traditional challenges linked to regional disparities in labour productivity, low creation of value-added and poor human capital. The SEZs have promoted migration and connections in trade and investment by establishing fiscal and customs regimes. In particular, re-exporting activities have been developed in these SEZs. Panama can use those connections to reduce regional inequalities in labour productivity and boost value-added in other regions. However, there is a need to evaluate better the benefits of the SEZs to fully exploit their potential. Following Costa Rica’s experience, Panama could grant differential fiscal benefits according to the level of development of the zones where future SEZs are located relative to the rest of the country (Martínez, 2015; OECD, 2016c). The decrease in the activity of the CFZ highlights the risks associated with the volatility of world trade. New Zealand presents an alternative set of policies to boost competitiveness based on indirect public stimulus with low fiscal duties rather than stabilising free zones (Martínez, 2015; OECD, 2015a).

The expansion of the Canal: Towards further operations and relevance to the overall sectorial composition of Panama

Since June 2016, the widened Canal welcomes vessels that nearly triple its previous maximum carrying capacity. The conclusion of the project should increase the volume of operations and fiscal revenues. In turn, the larger volumes could also allow the surrounding cluster to tap into the scale economies of maritime transport. Going beyond the Canal area, the project should ripple into the overall sectorial composition of Panama. GDP is expected to grow faster as the Canal multiplies its transit capacity and labour moves to the new higher productivity jobs (Bussolo et al., 2012).

Direct benefits to the government through the expansion come from raising non-tax revenues. The Canal is managed by an autonomous public entity, the Autoridad del Canal de Panama (ACP). The net profits of the ACP, known as the Panama Canal Authority in English, are transferred to the National Treasury according to the Organic Law of the ACP. The ACP also pays the state a fee per ton transported and for the use of public services. In 2016, these payments amounted to USD 1 013 million, nearly identical to those in 2015 (Ernst and Young Limited Corp., 2016). The Canal is expected to raise non-tax revenues in the following years. The anticipated contributions of the ACP to the state over the next five-year period range from USD 1 360 million in 2017 (2.3% of GDP) to USD 2 130 million in 2021 (2.8% of GDP).18

The expansion of the Canal has a ripple effect beyond the realm of the ACP. A wide variety of firms have clustered around the Canal to satisfy the demands created by maritime transport including aiding ships to transit through the Canal, vessel maintenance and merchandise distribution to ports nearby. This cluster encompasses eight loosely defined sectors including services for the vessels, services for the load, international transport of load, tourism, telecommunications and financial services (Nathan Associates Inc., 2012). Even before work was completed, the Canal widening led to further domestic and foreign investments in warehouses and distribution centres and air transport facilities (ECLAC, 2015). However, despite the positive impact of the increased trade in containerised merchandise, the consequences for the CFZ – a key piece of the cluster – remain uncertain.

In the future, the types of services offered should widen and specialise as more and larger ships transit the Canal. The Plan Estratégico de Gobierno 2015-2019 (Government Strategic Plan 2015-2019) anticipates the Canal will diversify activities towards energy including generating electricity, exploiting the trade of liquefied natural gas (LNG) and liquefied petroleum gas, and bunkering (GRP, 2014). The expansion may allow the development of hub-spoke economies (i.e. moving cargo from smaller to larger vessels for the longer hauls). Construction of shipyards in the Atlantic entrance of the Canal for post-Panamax ships is also foreseen, as well as carrying out top-off operations for ships that do not satisfy the draught restrictions.

Some benefits of the expansion are already clear. The expanded Canal, first and foremost, will increase labour demand in the Canal cluster, and in particular demand to fill high-skilled jobs, given the Canal cluster’s intensive use of educated workers. (See Chapter 3 for further analysis on the labour market.) Wages in the Canal and for related services should continue rising well above wages in the economic activities not related to the Canal. In 2016, the average ACP worker was in the top 2% highest salaries in Panama (CGRP, 2017). Estimates suggest that in the coming five years the skill premium will increase 31 percentage points more than had the Canal not been expanded (Bussolo et al., 2012). Estimates also show tourism, merchant marines, land transport, retail and distribution, and air transport will be the biggest winners, while fishing, agriculture, construction and business services will face stagnant growth rates (Nathan Associates Inc., 2012).

To increase competitiveness and equity in Panama, future benefits of the Canal should expand to other sectors and regions. The sectorial shifts and rising wages in the Canal cluster underscore a larger concern about loss of competitiveness and concentration of economic activities. On top of rising labour costs, the rising prices of intermediate goods and labour will make the agricultural, manufacturing and certain services sectors less competitive. While the Canal is a fundamental source of high-quality jobs and high salaries, there is a risk of increasing the concentration of production and exports around it unless the Canal’s direct benefits and spillovers are further expanded in Panama.

Infrastructure, logistics and innovation in Panama: From improvements to challenges

To boost productivity and consolidate sustainable economic development Panama should enhance policies aimed at taking advantage of its comparative advantages. Initiatives contributing to expanding the benefits of the Canal and the Special Economic Zones to other sectors of the economy demand a combination of better infrastructure, logistics, innovation, education and skills (Chapter 3), financing for development (Chapter 4) and entrepreneurship (Chapter 5). Panama has made considerable progress in increasing investments in infrastructure and better soft solutions to increase international connectivity. However, these improvements should be more inclusive with all areas of the country. In addition, policies promoting research and development and higher innovation outcomes are crucial to move from an infrastructure-driven growth to a more diversified and knowledge-driven growth.

Infrastructure investment has been buoyant but more inclusiveness remains a concern

Investment has been considerably high in Panama and represents a key source of growth. Following the political and economic crisis at the end of the 1980s, investment has resurged. In the last decade, levels of investment have been higher than OECD and Latin American averages (Figure 2.17, Panel A). Compared to benchmark economies and at more than 40% of GDP, Panama’s investment ratio is the top performer and is above the average of high-income as well as middle-income countries (Figure 2.17, Panel B). As highlighted above, investment has been a key player of GDP growth and in contrast to total factor productivity (TFP) and human capital, physical capital has been a key source of labour productive growth in the past years.

Figure 2.17. Investment in infrastructure has been considerable

Note: For Panel C Latin America refers to a simple average (depending on data availability) of Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, El Salvador, Guatemala, Honduras, Mexico Nicaragua, Panama, Paraguay, Peru and Dominican Republic.

Sources: Panels A and B: World Bank (2017) World Development Indicators (database), Panel C: ECLAC/IDB/CAF (2016), INFRALATAM Database, (accessed 1 April, 2017).

Regarding investment in infrastructure, Panama has also performed well compared to Latin American economies. In the past years, infrastructure investment has remained high compared to the region, in particular thanks to public investment (Figure 2.17, Panel C). Most of the good performance in infrastructure investment has been explained by transport infrastructure (close to 4.3% of GDP in 2015), which represented more than 85% of the total investment in 2015. This includes energy, telecommunications, and transport and water management infrastructure.

The quality of overall infrastructure has improved in the last decade. While overall quality of infrastructure on average in benchmark economies improved by 6.7% between 2007 and 2016, Panama’s infrastructure quality increased by more than 10.5% in the same period (Figure 2.18). This good performance was greater than that of Latin American economies, which improved 9.2% in that period. Although Panama’s quality of infrastructure remains below that of OECD and Asian benchmark economies, its performance places it better than Latin American benchmark economies. In 2007, Panama’s overall quality of infrastructure was ranked 51st out of 131 countries; in 2016, it improved to 37th out of 138 countries.

Figure 2.18. Perceived quality of overall infrastructure has been improving, 2007-16

Note: This indicator uses a scale from 1 to 7 where a higher score means a better quality of infrastructure. LAC is the average of the following countries: Argentina, Barbados, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay and Venezuela.

Source: World Economic Forum (2016), The Global Competitiveness Report 2016-2017,

Despite some heterogeneity in the access and quality of different infrastructure sectors, Panama exhibits good performance relative to other Latin American economies and to a lesser extent to other benchmark economies by infrastructure sectors. The quality of Panama’s energy, telecommunications and transport infrastructures has improved since 2007. In some specific items, such as the quality of port infrastructure and mobile telephone subscriptions, Panama ranks well above Latin American economies and achieves similar levels to benchmark economies (Figure 2.19).

Figure 2.19. Quality of selected public service infrastructures, 2016

Note: Mobile telephone subscriptions refer to the number of mobile-cellular telephone subscriptions per 100 population. LAC is the average of the following countries: Argentina, Barbados, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay and Venezuela.

Sources: World Economic Forum (2016), The Global Competitiveness Report 2016-2017, and International Telecommunication Union (2016), ITU World Telecommunication/ICT Indicators June 2016 (June 2016 edition),

Regarding the energy sector, access to energy remains unequal and inefficient although Panama produces more than it consumes. Total energy consumption was equivalent to 82% of total generation in the period 1999-2014 (Hausmann, Espinoza and Santos, 2016). Access to electricity remains relatively low compared to benchmark economies. According to latest comparable data, in 2012, 91% of the population had access to electricity, lower than all benchmark economies (99% on average). This is particularly evident at the rural level where more than 20% of the rural population does not have access to electricity (World Bank, 2017). Regarding firms, a high proportion of electricity is provided by generators. Indeed, 90% of electricity among firms owning a generator comes from it (Hausmann, Espinoza and Santos, 2016). As in other Latin American economies, electric power transmission and distribution losses in Panama are relatively high at 13.5% of the output, making it one of the worst compared to benchmark economies (8.2%).19 Panama ranks better than Latin American economies in terms of the quality of electricity supply, but below the rest of benchmark economies (Figure 2.19). Its improvement of 2.4% in the period 2007-16 was lower than Latin American economies and benchmark economies, which improved by 5.4% and 3.7%, respectively.

The government aims to expand energy supply and update the quality to meet the country’s growth requirements. Among its projects is the finalisation in 2017 of the third line going through Veladero, Llano Sánchez, Chorrera and Panamá. This new line will complement the energy now solely supplied by lines 1 and 2, the latter dating from 15 years ago. In addition, public bidding is expected to be opened for a fourth transition line.

Airport and port infrastructure rank well compared to transport infrastructure in benchmark economies. In terms of air transport quality, Panama also ranks well: the World Economic Forum (2016) found that among benchmark economies only Hong Kong, China; Netherlands and Singapore rank higher. Registered carrier departures have been increasing over the past five years and are high relative to those in other Latin American economies and benchmark economies. Registered carrier departures rose in 2015 to nearly 132 000 from nearly 73 000 in 2010 — a figure representing close to 3.4% of the population, a higher proportion than in the average of benchmark economies and Latin American economies (1.7% and 0.45%, respectively).20 Forty percent of Central American cargo passes through Tocumen International Airport, and a new free trade zone has been approved for Tocumen. However, there is a critical need for the airport to start expanding its cargo capacity to accommodate increased activity. Tocumen is also a hub for passenger transport, with half of them transit passengers. Recent investments to expand the airport envision greater services through a connectivity and logistics hub, and passenger transport capacity is expected to triple by 2030.

Port quality improvement has been impressive, increasing by 32% between 2007 and 2016, compared to 9.3% and 7.1% for Latin American and benchmark economies, respectively. Among benchmark economies only Hong Kong, China; Netherlands and Singapore rank better than Panama in regards to port infrastructure (Figure 2.19). Private ports play a considerable role in the activities linked to the Canal. Activities linked to the vessels passing through the Canal such as storage and transhipment, maintenance and cleaning of vessels have largely contributed to the expansion of port activities in Panama. Similar to past years, more than 95% of cargo movement in 2015 was to international trade and through private ports (mainly Panamá Ports Company Balboa; Petroterminal de Panamá, in Chiriquí Grande; Charco Azul; and Manzanillo International Terminal). Nearly 85% of the vessel traffic in activities linked to the Canal was short sea shipping (cabotage), and close to 80% of the 59 981 vessels that circulated Panama in 2015 passed through private ports.21

While infrastructure to international connectivity performs well, further development of domestic connectivity remains a key challenge. Improvements in the quality of secondary and tertiary roads should increase the connectivity in the country and in particular provide provinces with better access to the main road, La Carretera Panamericana. Additionally, close to 400 kilometres of paved roads were built between 2011 and 2015, bringing the total to around 11 300 kilometres. However, the ratio of paved roads to total roads has remained close to 70%. The number of cars in circulation increased by more than 45% in that period to more than 730 000 in 2015, or 19.6 cars per 100 people versus 13.8 cars per 100 in 2011.22 Road quality remains lower than in other benchmark economies, with the exception of Latin American countries (Figure 2.19). The use of other transport modes such as railways is low; increasing this could reduce road congestion, and promote domestic multimodality as well as better economic integration with other members of the Secretaría de Integración Económica Centroamericana (SIECA), or the Central American Economic Integration Secretariat.23 In addition to the railway between Panama City and Colón, and thanks to the Panama Canal Railway Company, additional railways should improve economic development in other areas of the country.

To improve land infrastructure, the Plan Estratégico de Gobierno 2015-2019, aims to strengthen the execution and planning capabilities of the Ministerio de Obras Públicas (Ministry of Public Works). Better institutional organisation will create a harmonised and strategic timetable of infrastructure works. Clear leadership from the government will also facilitate the regulation of public-private partnerships (see Chapter 5). Public works target the maintenance and rehabilitation of existing road infrastructure, including provincial secondary roads; new works should improve accessibility and connectivity to tourism and logistics assets.

Telecommunications infrastructure has improved considerably in recent years, but further inclusiveness and improvements are needed. Mobile telephone subscriptions have increased more in Panama than in the average of benchmark and Latin American economies (World Economic Forum, 2016). It also has a higher number of mobile telephone subscriptions than benchmark and Latin American economies, with the exception of Hong Kong, China (Figure 2.19). However, more than 90% of the cellular devices in use had prepaid subscriptions in 2015.24 Just close to half of the population use the Internet, according to 2015 figures, compared to on average more than 72% who are Internet users in benchmark economies and 54% in Latin America.25 In general, the use of information and communication technology (ICT) in Panama remains well below that in the benchmark economies, including some Latin American economies (Figure 2.20).

Figure 2.20. Use of information and communication technology remains poor, 2016

Note: The ICT use component is calculated based on Internet users, fixed broadband Internet subscriptions, Internet bandwidth and active mobile broadband subscriptions. This indicator uses a scale from 1 to 7, where a higher average score supposes a higher degree of usage. LAC is the average of the following countries: Argentina, Barbados, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay, and Venezuela.

Source: World Economic Forum (2017), The Global Competitiveness Index Historical Dataset 2007-2016,

Increasing the efficiency of logistics should contribute to improved services and other sectors

Along with “hard” components such as transport infrastructure, the “soft” components of a country’s customs and logistics performance can also contribute to boosting domestic and international connectivity. After controlling for other variables affecting economic growth, there is a significant link between improved logistics performance on the one hand, and productivity gains and sophistication of exports on the other (OECD/CAF/ECLAC, 2013).

A way to measure this is through the World Bank’s Logistics Performance Index (LPI), which measures logistics across 160 countries on six dimensions of trade and divided into two groups (Arvis et al., 2014). It considers the regulatory and institutional components that public policy directly affects such as customs, infrastructure and logistics services. It also considers the components that measure the performance of the logistics chain such as timeliness of shipments, cost of international shipments, and tracking and traceability of consignments. The data used in the ranking come from a survey of logistics professionals who are asked questions about the foreign countries in which they operate. Countries that improve their score by 1 in the LPI (which scores countries between 1 and 5) improve their labour productivity by about 35% on average (OECD/CAF/ECLAC, 2013).

Panama performs well in most of the dimensions of the LPI. Between 2007 and 2016, the overall LPI has improved to 3.34 from 2.89. This exceeded the improvement in upper-middle income countries, whose LPI grew to 2.73 from 2.68 in the same period, and in Latin American economies, whose LPI grew to 2.66 from 2.57. Although Panama’s LPI remains lower than that of non-Latin American economies, its overall LPI remains above the region’s (Figure 2.21). Regarding the ease of arranging competitively priced shipments, Panama performs even better than some non-Latin American benchmark economies.

Figure 2.21. Logistics performance gap to the best-performing OECD country is relatively low, 2016
LPI (as percentage of the score of best OECD performing country)

Note: The Logistics Performance Index (LPI) rates on a scale of 1 to 5, where 5 represents the best logistics performance. The gap refers to the difference for each logistics component with the best-performing OECD country, which is Germany for the overall LPI, customs, infrastructure and logistics quality and competence; Luxembourg for international shipments and timeliness; and Sweden for tracking and tracing.

Source: Based on World Bank data in the Logistics Performance Index 2016,

However, challenges remain to improve the ability to track and trace consignments. This component improved the least in the period 2007-16, and performance is well below non-Latin American economies as well as some Latin American countries, such as Argentina and Chile. Effective and available ICT can improve the ability to track and trace consignments by lowering the cost of accessing information and encouraging efficient use of existing infrastructure. There is a positive correlation between access to ICT and logistics performance after controlling for GDP per capita (OECD/CAF/ECLAC, 2013). For instance, port gate management using ICT systems to schedule pick-up and delivery could reduce congestion at port terminals by improving tracking and tracing of consignments.

Trade facilitation – measured as port efficiency, the customs and regulatory environment, and electronic business usage – has a significant impact on trade transaction costs and trade flows. Evidence suggests that customs clearance delays in Latin America increase transport costs by 4% to -12% (Guasch and Schwartz, 2008). OECD Trade Facilitation Indicators provide information to help governments improve their border procedures, reduce trade costs, boost trade flows and reap greater benefits from international trade. These show that Panama matches or exceeds the average performance of upper middle-income countries in the areas of information availability, appeal procedures, fees and charges, the simplification and harmonisation of documents, and governance and impartiality. Panama also performs better in these dimensions than other LAC economies. Yet it ranks below its reference income group in terms of the degree of complexity and automation of border procedures, and involvement with the national and international trade community (OECD, 2015b).

Performance has improved between 2012 and 2015 in the areas of advance rulings and appeal procedures. Also, the recent implementation of a single window to facilitate foreign trade (Ventanilla Única de Comercio Exterior) should improve the procedures as a policy tool to boost trade in Panama. Although Panama has improved in some areas of trade facilitation, challenges remain in several areas, such as automation of formalities, involvement of the trade community and external border agency co-operation. Areas of action to improve involvement of the trade community include further provision of adequate and timely information on regulatory changes and to provide the private sector with the opportunity to comment prior to the introduction or amendment of trade-related regulation. To increase the automation of formalities, Panama needs to promote the availability of full-time automated processing for customs and to improve the quality of telecommunications and information technology supporting the automation of border processes.

Innovation activities remain poor and unarticulated with private businesses

Transitioning from infrastructure-driven growth (i.e. investments in the housing market in Panama City, the Canal and Tocumen airport) to more diversified and knowledge-driven growth requires better and higher investments in innovation. Panama began to promote innovation and to invest in science, technology and research in 2004. Promoting innovation in a small, service-oriented economy such as Panama’s is challenging. The country has managed to increase domestic research capabilities and to introduce incentives to invest in innovation. Panama is still far from achieving the critical stage to improve its innovation capacities and to score well in traditional innovation indicators consistent with its level of development.

Investment in research and development lags well behind most Latin American countries and the gap has widened during the past decade. Panama spent only 0.074% of GDP in 2013 in research and development, while the Latin American average was ten times higher (0.75% of GDP). The gap in investment is all the more striking when compared to OECD economies where such investment was 2.42% of GDP in 2013. Furthermore, this gap increased between 2000 and 2013. While Panama’s expenditure on research and development decreased by 0.31 percentage points, Latin America increased its investment by 0.16 percentage points in the same period. Costa Rica in particular had similar levels of investment as Panama in 2000 but spent 6.33 times more than Panama did in research and development in the 2000-13 period (Figure 2.22, Panel A). The National Strategic Plan for Science, Technology and Innovation (PENCYT) anticipates that Panama will catch up to the regional average expenditure in research and development, or 0.7% of GDP, by 2019 (SENACYT, 2015).

Figure 2.22. Spending on research and development as percentage of GDP is low

Note: Panel B: Data for Costa Rica and Panama are for 2013.

Source: Data available at RICYT (2016), El Estado de la Ciencia: Principales Indicadores de Ciencia y Tecnología Iberoamericanos / Interamericanos 2016. Estimates based on expenditure as share of GDP and expenditure shares by performance sector.

In contrast to other Latin American economies and in particular OECD economies, private participation in research and development remains very low compared to public financial sources. In 2013, while the public sector spent 58% of total research and development expenditure, private participation represented only 1.9% (Figure 2.22, Panel B). This is a low proportion compared to similar-sized Latin American countries where private firms spent significantly more on research and development. In Costa Rica, for example, the private sector accounted for 31.5% of total spending on research and development (RICYT, 2016). In OECD economies, where private companies are the main source of research and development financing, the private sector’s share is between 40% and 70% (OECD, 2015c).

The low levels of business expenditure on research and development and of private sector innovative activities in Panama are focused mainly on the import of capital equipment, suggesting poor creation of domestic value-added. According to a survey carried out in 2010 to monitor private sector firms’ innovative activities, most innovations implemented by Panamanian firms were linked to the import of capital equipment (73%) and to a lesser extent on expenditures for technology transfer (10%). About three-fourths of all innovations implemented within Panamanian firms concerned process, organisational and commercialisation improvements; only about 25% were related to new products. Only about 13% of all firms indicated they had implemented the “new to the world” type of innovation (Suarez, 2010; OECD, 2015c).

Panama also lags behind most benchmark economies in the levels of production of original knowledge, as measured by patent applications, but it is improving. Although the number of patent applications via the Patent Co-operation Treaty (PCT) has grown since the 1980s, Panama shows very low levels of patents (Figure 2.23, Panel A). Between 2000 and 2009, about 3 000 patents were filed through the Panamanian office for direct and PCT national phase entries. This is three times higher than the applications filed in the decade 1980-89, and more than four times higher than those filed in 1990-99 (OECD, 2015c). Panama’s rates of patent applications (1.3 per million habitants) continue to be far below those of benchmark economies such as Hong Kong, China (64.8) or Singapore (145.8), but they are close to those of Latin American economies such as Uruguay (2.1) and Colombia (1.8).

Figure 2.23. Performance indicators in innovation (per million people)

Note: In the OECD Indicators on Patents, “Patent applications” refers to total patent applications filed under the PCT, using as reference country the investor’s country of residence.

Source: Population and trademark data comes from the World Bank ( and, accessed on June 2017. Patent data comes from the OECD (

Rates of trademark applications fare better than patents when compared to benchmark economies and other Latin American economies (Figure 2.23, Panel B). Trademarks are used to claim the specific properties of a product or service in the market to distinguish it from others. They often signal novelty or a specific brand value and are widely used as indicators to compare companies’ attitudes towards commercial innovation and intangibles. The numbers of trademark applications have increased recently in Panama (OECD, 2015c). In 2011, trademark applications filed amounted to about 11 000, up from 7 000 in 2004. By 2014, trademark applications dropped below those 2010 numbers. Nevertheless, trademark applications per million population, at 2 749, are significant compared to 1 222 per million on average in Latin American benchmark countries (OECD, 2015c; World Bank, 2017).

More promotion of existing institutions to attract private investment in research and development is needed. Panama’s experience in science, technology and innovation policy is quite recent and dates back to the end of the 1990s with the creation of the National Secretariat Science, Technology and Innovation (SENACYT) as an autonomous agency to elaborate and implement science and innovation policies. SENACYT is in charge of defining the strategy as set by the five-year National Strategic Plan for Science, Technology and Innovation (PENCYT) and implementing these policies (OECD, 2015c). The plan calls for innovation activities to be directed towards advancing sustainable development, social inclusion, entrepreneurship and business innovation. It also includes developing science and scientific capacities in Panama and empowering the institutional framework necessary to design, implement and evaluate science and innovation policies. Each of the objectives identifies specific actions and indicators to measure progress, stating both baseline values of 2014 and expected results in 2019 (SENACYT, 2015).


Over the past decade, Panama exhibited high and sustainable economic growth driven mainly by construction, real estate, commerce (retail and wholesale) and finance, and thanks as well to a stable macroeconomic framework. This has contributed to reducing the income per capita gap with developed countries.

Challenges remain to guarantee and consolidate the economic performance of the past decade. The main driver of labour productivity performance has been physical capital, and among economic sectors within-sector effect in the services sector has played a considerable role in that performance. Panama needs to boost labour productivity in other sectors (i.e. agriculture and industry) and regions, beyond Panama City and Colón. The logistics hub platforms settled in some areas of the country should promote further development in other regions and economic sectors, including the agro-industry.

Similarly there is a need to increase value-added in exports, and in particular the exports of services, which remain the most important component in the export profile. While exports on services represent close to 95% of total exports, the services’ value-added generated for these exports remains low compared to benchmark economies.

The Canal and to a lesser extent the Special Economic Zones could contribute further to inclusive development in Panama. The Canal is estimated to represent 40% of total activity in Panama’s economy including direct and induced output. Regarding the Special Economic Zones, the government has promoted place-based policies to attract foreign firms and spur innovation. The Colón Free Trade Zone alone, located in the Atlantic entrance of the Canal, employed nearly 25 300 workers and represented close to 5.8% of GDP in 2016. Panama is often characterised as a dual economy, with a few specific sectors linked to global trade featuring high wages. In the rest of the economy, in particular the industrial and agricultural sectors, export capacity and productivity levels remain low. Unexploited opportunities remain in these two sectors for domestic local development. Greater connection and linkages with other economic activities and among regions remain a challenge.

Panama has made considerable progress in increasing investment in infrastructure and better soft solutions to improve international connectivity, but further inclusiveness is needed. These improvements should be more inclusive with all areas of the country. For instance, good performance indicators on transport infrastructure relate to those infrastructures serving to connect Panama with the rest of the world (e.g. Tocumen airport and ports) rather than to connect provinces (e.g. railways and secondary and tertiary roads). Despite the expansion of infrastructure in some areas including energy and telecommunications, access to such infrastructure remains unequal. In addition, better use of information and communications technology should improve tracing and tracking of merchandise, and consequently would contribute to boosting further logistics performance.

Finally, expenditures in research and development remain very low and mostly concentrated in public spending. As a result, innovation outcomes remain poor in Panama. Policies promoting research and development and higher innovation outcomes are crucial to move from an infrastructure-driven growth to more diversified and knowledge-driven growth.


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← 1. The volatility of public expenditures as a share of GDP, measured as its standard deviation in the previous five years, was close to four times higher at the end of the 1990s compared to the 2000s.

← 2. These leading sectors are followed by financial intermediation, which accounted for nearly 8% of the total production in the period 2011-16.

← 3. The correlation coefficient between Panama’s GDP growth and global trade growth increased from -0.52 in the period 1990-97 to 0.39 in the period 1998-2016 (0.25 for the total period 1990-2016).

← 4. The Latin American countries that entered upper-middle-income status after Panama, and the year each did so, are: Brazil (2006), Colombia (2008), Costa Rica (2000), Cuba (2007), Dominican Republic (2007), Ecuador (2010), Paraguay (2014) and Peru (2008). For further information on the evolution of these economies in terms of GDP per capita, see

← 5. Data are from the World Bank’s World Development Indicators (2017), as Panama is not included in the 2016 Conference Board Total Economy Database (in contrast to 17 other Latin American economies).

← 6. The industry and construction sector includes: mining and quarrying, manufacturing, electricity, gas and water supply and construction. The service sector includes: wholesale and retail trade; repair of motor vehicles, motorcycles and personal and household goods, hotels and restaurants, transport, storage and communications, financial intermediation, real estate, renting and business activities and public services (e.g. education and health).

← 7. This productivity performance across economic sectors follows a similar pattern as other service-based economies, such as Uruguay. See OECD (2016d),

← 8. Transport refers to services “involving the carriage of people and objects from one location to another as well as related supporting and auxiliary services. Also included are postal and courier services” Travel exports “cover goods and services for own use or to give away acquired from an economy by non-residents during visits to that economy”. Other business services encompass three subcategories: research and development services; professional and management consulting services; and trade-related, technical and other business services. According to Hausmann, Espinoza and Santos (2016), the reported value of service exports by the CGRP is subtracted from the imports of “goods acquired in ports by means of transports” in the balance of goods to account only for the margin left by re-exports of goods that do not enter Panama. For full definitions, see

← 9. The sources of domestic value-added can be divided into indirect backward linkages and indirect forward linkages. The former is the value-added that went into a single sector’s exports coming from all other sectors. The latter refers to the value-added of a single sector that goes as input into all other sectors’ exports. This analysis explores the composition of only exported domestic value-added, in contrast to global value-added chains analyses that focus on the origin of value-added (foreign or domestic).

← 10. This figure includes the domestic value-added that originates in a service sector and goes into a different services sector’s exports.

← 11. That is the share of indirect value-added forward of the sector. Services sectors considered are distribution and trade, specific business services, finance, water supply, construction, other services, communications, other consumer services, insurance, and transport. The specific business services are those cover by the International Standard Industrial Classification of All Economic Activities (ISIC) rev. 3, divisions 70 to 74. They are real estate activities; renting of machinery and equipment without operator and of personal and household goods; computer and related activities, research and development; and other business activities.

← 12. Financial Times fDi Markets estimations on job creation are based on worldwide announcements of FDI projects and estimations. See

← 13. The comparison between FDI flows and the current account balance is discussed in Chapter 4.

← 14. The methodology explained in the 2016 ECLAC might underestimate the share of FDI destined to physical capital formation, as Panama has historically had a higher ratio of formation of physical capital to FDI.

← 15. Information provided by the Economics Office of the Colón Free Trade Zone.

← 16. The main regulation on these aspects is the Law No 32 of April 2011.

← 17. Information provided by the Economics Office of the Colón Free Trade Zone.

← 18. See for further information on fiscal projections in Panama.

← 19. Based on OECD/IEA 2014 data, the latest available, at

← 20. Based on estimates in the International Civil Aviation Organization’s Civil Aviation Statistics of the World

← 21. Based on data provided by the Autoridad Marítima de Panamá (Maritime Authority of Panama),

← 22. Based on data provided by the Panama Ministry of Public Works,

← 23. SIECA member countries are Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama. See

← 24. Based on data from Autoridad Nacional de los Servicios Públicos – ASEP – (National Authority for Public Services),ón%209.pdf.

← 25. Based on International Telecommunication Union, World Telecommunication/ICT Development Report and database, and World Bank estimates,