A Panorama of Panama City

Panama City is an intersection. It lies between the Atlantic and Pacific Oceans; between jungles and man-made waterways; between colorful colonial Spanish architecture and towering skyscrapers; and between history and modernity. The city is defined by its contrasts but known for its growth. Just over one hundred years since the construction of the Panama Canal put the nation on the map, the Central American state boasts a population of 3.3 million and an average yearly growth in GDP of 7.2 percent. A newly urbanized Panama City is on the radar of global relevance, and it is here to stay.

The nomenclature of Panama City, Panama might sound familiar. Mexico City, Mexico. Tunis, Tunisia. Brasilia, Brazil. Developing nations want their cities to define them, and their names reflect that. Around the world, the perception of urbanization as a prerequisite for global significance is pervasive. Nations have rushed to create contrived “crown jewel” cities, but failed to produce industrialization or development. Bangkok, Karachi, Lima, and Lagos, despite ostensible progress, have left poverty, corruption and inequality in their wakes. These nations championed urbanization without pushing for holistic growth. But in Panama, where the GDP per capita is a startling $21,800 (more than double the world average), no such problem exists. Panama is the exception.

Panama has maintained consistent economic growth since 2001, surviving even the global financial crisis. Somehow, as Western banks went bankrupt and Western economies collapsed, Panama City was still growing. This is no small feat, particularly given that Panama’s economy is dominated (over 75 percent) by its financial services sector, and also suffered a $14 billion hit to its imports due to the crisis. Not only did it endure, but it thrived. Panama’s success so far can be attributed to the political, fiscal, and physical environments of the state.

Panama’s statehood has always revolved around the Panama Canal and has always been linked to the United States. In a century, the political environment has wavered from a democracy to a dictatorship to a “narco-kleptocracy” and back to a democracy. Juan Carlos Valera, who has been president since 2014, was elected on a platform of anticorruption and pro-transparency. He is also open to “foreign direct investment,” but committed to mitigating “criminal activity.”

The fiscal environment in Panama is so laissez-faire and so conducive to foreign direct investment that over 350,000 international businesses have been registered – trailing only Hong Kong and the British Virgin Islands. This set-up is not new; Panama has been a tax haven since 1919, and offshore accounts boomed in the 1970s when Panama enacted protective confidentiality laws. Then, in 1998 the government guaranteed the same rights to international companies as domestic firms, solidifying Panama’s identity as the embodiment of free trade. A tidal wave of foreign investment came through the Canal in 1914, and the current has not ceased.

Corporations and countries alike have stakes in Panama City — but the presence of so many influences arguably threatens Panamanian economic sovereignty. Still, an urbanizing nation needs at least one ally to facilitate its growth. For Panama, the advocate has been the United States. The bond between the two nations has historically been one-sided, beginning with the US providing for Panamanian independence from Colombia in return for exclusive rights over the Canal. Following the American usurpation of dictator Manuel Noriega in 1989, the relationship has evolved to be more bilateral. The Canal is now neutral territory and the 2012 US-Panama trade Promotion Agreement essentially granted US companies the same rights to bid on Panama procurements as Panamanian enterprises. But the US takes Panamanian gold, bananas, and sugar with a grain of salt: the financial city is ridden with corruption.

Somehow, as Western banks went bankrupt and Western economies collapsed, Panama City was still growing.

One might read the press surrounding the Panama Papers and conclude that Panama City is just like any other urbanizing metropolis: corrupt and unstable. Indeed, the government did not regulate firms like Mossack Fonesca when they registered ominous and anonymous offshore accounts, free from significant tax rates. However, while this apparent corruption would likely threaten the very stability of other developing cities, Panama held its ground. GDP growth in Panama actually expanded from 4.6 percent in Q1 to 5.2 percent in Q2 of 2016, painting the short-term impact of the leak as inconsequential.

Panama’s Deputy Finance Minister Eyda Varela de Chinchilla told the LatinFinance panel in London that “The impact [on Panama] was zero and I think the impact is going to be continuous zero.” Only 20 percent of the offshore companies implicated in the papers were from Central America, and the internal political impact is difficult to detect. The government seemingly plugged the leak. Foreign investment continues, and the World Bank approved a $300 million loan in September to facilitate more fiscal transparency and help mitigate poverty. Instead of ruining all the progress in Panama City, the leak of the Panama Papers moved the government towards reform and regulation.

Amidst this reform, the Canal remains Panama City’s greatest constant, even more consistent than its economic growth. Panama began an expansion project for the Canal in 2007. It was completed in June 2016, and cost over $5.3 billion, 10 to 15 percent of national GDP. The project widened the canal locks, made the channels deeper, and increased the capacity of the canal to allow for bigger freighters and more toll profits. The Canal project is part of a larger $15 billion infrastructure endeavor that includes a Panama Metro Line, road projects, a Financial Tower, and clean water and sanitation. These initiatives are solely the work of the government. Private investment has also fueled 20 hotel projects, expansions of the copper mines and growth of the Colon Free Trade Zone.

All of this infrastructure investment has allowed Panama to capitalize on migration to the city and profit from global usage of the Canal. The nation is currently running a $23 billion deficit, but the infrastructure project is not a sunk cost; it is a long-term investment based on the canal’s past successes. When many developing cities focus on building up the skyline, they forget to build on the ground. Now, cities like Lagos, Nigeria, are plagued with incomplete infrastructure, traffic, and sanitation issues, trapped in an unsustainable formula. Once again, Panama is the exception to the rule.

The inequality in Panama continues to be an asterisk on its national growth. Indigenous peoples living in distinct camarcas suffer from extreme poverty as high as 85 percent. In places like Guna Yala and Ailigandi, they can barely afford food, let alone a share in a Panamanian company. The contrast in the tiny nation is striking; the divide is gaping even within the boundaries of Panama City. Poverty is pervasive in many developing countries, but they differ in their efficacy in closing the income chasm. In Lagos, for example, urbanization increased absolute poverty six percent from 2004 to 2010. That is where Panama separates itself. From 2008-2014, Panama reduced its poverty from 26.2 to 18.7 percent, and extreme poverty from 14.5 to 10.2 percent. How?

Short-term solutions to poverty across the country have included monthly pensions and children’s education, but Panama’s long term cure is, counterintuitively, more urbanization. Panama City’s growth has not exacerbated the nation’s problems; it has helped to assuage them. Return on investments (like the Canal), foreign direct investment, and support from the World Bank have enabled the government to launch conditional cash transfer programs and pilot Red de Oportunidades, which gives young people greater access to health services and education. As of 2010, “Network of Opportunities” had increased rural and indigenous enrollment in schools by approximately 8 percent and effectively reduced child labor. The Ministry of Social Development estimated the number impacted households to be 70,000 for May/June 2016. The prospect of shared prosperity remains on Panama’s horizon.

Urbanization is like a medication. Ailing nations take it to cure a suffering economy, and removed nations use it to restore their relevance on the global stage. It does not always work. It sometimes even exacerbates a nation’s struggles. Its side effects include corruption, environment degradation, and most conspicuously — inequality. The cities that withstand the symptoms and benefit from urbanization are those with the strongest immune systems and the most robust infrastructure. Panama City is a model of successful urbanization. The development of the city has helped to reduce poverty rates, and it will continue to do so as more returns on investment are funneled into mobile health units, Red de Oportunidades education, and social transfer programs in carmarcas. The city has suffered from corruption in its financial services sector, but has kept its financial framework and initiated efforts to enhance transparency. Panama City expanded and strengthened its infrastructural foundation, while managing to stay true to its cultural and historic roots. Panama shows no signs of stopping at an intersection. The city has a green light.