Panama has a long history as a trading area. In 1501, the Spanish began exploring the area that is now Panama in search of gold and silver. Panama soon became one of the main crossroads for the trade between Spain and its colonies in Central and South America, including Mexico, Peru, and Cost Rica. Gold and silver were transported to Panama and then shipped to Spain abroad ships. This route became known as the Camino Real or Royal Road.
The modern economic history of Panama has been dominated by efforts to construct a canal across the isthmus. The Panama Canal currently forms the backbone of the Panamanian economy. In addition to revenues from the tolls, maintenance work, and general operations of the canal, a variety of businesses and industries have emerged to support the trade goods going through the canal, including storage warehouses, refueling stations, and repair facilities. In order to capitalize on the importance of the canal, the government has long supported the establishment of free trade areas where goods can be transshipped without tariffs or taxes. The U.S.-built 80-kilometer (50-mile) canal opened in 1914. The United States paid Panama US$10 million for the rights to construct the canal and then a base of US$250,000, plus inflation , annually for the right to operate the canal. In 1999, the United States turned control of the canal over to the Panamanians. Ships going to Japan from the east coast of the United States save 3,000 miles by using the canal, and ships sailing from Europe save 5,000 miles traveling to Asia.
Because of the Panama Canal, the nation's small geographic size, and small population, Panama's economy is centered on services. The main elements of this sector include services related to the transshipment of goods across the canal: banking, insurance, and international trade. The Colón Free Zone is the world's second largest free trade area after Hong Kong. The agricultural sector is small, but it accounts for the majority of the country's exports. The main Panamanian industries are construction, petroleum refining, brewing, paper and paper products, clothing, furniture, the production of cement and other construction materials, and sugar milling. While the Panamian economy is structured around the services in the Canal Zone, the nation does have a variety of economically-advantageous natural resources including timber, precious minerals, and seafood.
Since 1991, the Panamanian economy has been increasing by 5 to 8 percent annual growth (as measured by the GDP). However, growth slowed toward the end of the decade. In 1997, the GDP grew at a rate of 4.5 percent. The rate slowed to 3.2 percent in 1999 and to 2.6 percent in 2000. Economic growth was greatly affected by the economic and political reforms which followed the restoration of democracy in 1991. The nation's per capita GDP has increased from US$3,198 in 1997 to US$3,513 in 2000 to give Panama the highest GDP per capita in Central America. Panama's prosperity is directly attributable to the canal.
In 1999, the United States withdrew from the 50-mile wide Canal Zone that it had maintained since 1914. This withdrawal provided the Panamanian government with 364,000 acres of land and 5,000 buildings. In 2000, the canal provided the government with $569 million in tolls. However, the U.S. withdrawal also meant the loss of numerous jobs and $175-350 million in funds that were spent by U.S. military forces in the region. Most of the lost jobs were service sector jobs that had provided for the U.S. forces. Examples include domestic help, restaurant workers, and retail employees. After the withdrawal of the United States from the canal, many Panamanians found that their own government paid less than the Americans had. Unemployment and underemployment continue to cause problems for the economy. In 2000, unemployment in Panama was 11.6 percent, down from 13.6 percent in 1998. Underemployment affects approximately 25 to 30 percent of the working population.
There is also a large informal or black market economy. Estimates are that the informal economy may be worth as much as US$2 billion annually. Among the main components of this sector of the economy are the illegal drug trade and various types of personal services including maintenance work, household help, and transportation.
Panama is dependent on foreign trade. In 1996, the nation joined the World Trade Organization (WTO). Membership allowed Panama to export goods to other members of the WTO with substantially reduced tariffs and import duties . During the 1990s, there were broad efforts to privatize government-owned companies and firms; however, the current administration has slowed or halted these programs in order to prevent further increases in unemployment. In addition, to the withdrawal of U.S. forces, which created an increase in unemployment, the slowdown in the U.S. economy has also caused an economic slowdown in Panama since the United States is one of the nation's largest trading partners.
Panama is a net recipient of foreign aid. Each year the country receives approximately US$200 million in aid. Panama has a substantial foreign debt which in 2000 was US$7 billion. When the nation joined the WTO, it renegotiated some of its debt and reduced interest rates. However, payments on the debt continue to be a drain on the government's revenues. Currently, about 15 percent of the budget to devoted to debt management.