Panama - Economic development

The Panamanian economy is the most stable, and among the most prosperous in the region. But the economy is highly segmented between its dynamic, internationally oriented service sector and the domestically oriented sector, which is beset with policy-induced rigidities and low productivity. Factor markets are also segmented by policies that drive up the cost of labor and lower the cost of capital. About 14% of the labor force is unemployed despite the preponderance of services in the economy, low growth of the economically active population and relatively slow rural-urban migration. The protected poor performance of the economy has impeded job creation, and contributed to high poverty levels and income inequality.

Despite Panama's relatively high per capita income, distribution of the wealth is highly skewed and had become progressively more evident in the 1990s. In 1979, the poorest 20% of the population received 4% of income; in the early 1990s that share had plunged to 2%, leaving Panama with one of the most unequal distributions in the hemisphere. The government's strategy for mitigating poverty and inequality rests primarily on reviving sustainable growth; its economic program emphasizes reforms that will mitigate the bias against employment creation (unemployment surpassed 14% in 2002), increase agricultural productivity, and reduce the high cost of the basic consumption basket.

In 2000, the International Monetary Fund (IMF) approved a 21-month, $85.5-million Stand-By Arrangement with Panama, to support the government's economic reform program. Economic growth slowed in the early 2000s, due in part to the global economic downturn, and weak domestic demand that resulted from the completion of large investment projects and a decline in bank credit to the private sector. The government in 2002 invested in infrastructure projects and strengthened the banking system.

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