Panama - A dual economy in transition
Johnson, Sonia R.
The Panamanian economy is among the most prosperous and stable in the region. The economy is highly segemented between the internationally-oriented services sector and the domestically-oriented sector, which is beset with policy-induced rigidities and low productivity. Likewise, factor markets are segmented by policies which drive-up the cost of labor and cheapen the cost of capital. The poor performance of the economy has impeded job creation, swelling the ranks of the poor to two-fifths of the population and exacerbating extreme poverty and income inequality. Over the past twenty-five years, the segmentation of the economy by Government policies and inefficient state enterprises has kept output growth far below potential. As public expenditure mounted realtive to Gross Domestic Product and policy interventions proliferated, domestic prices rose faster than international prices despite the monetary regime, most resources were channeled into rubrics in which economy has a comparative disadvantage, productive investment was crowded out, foreign investment dried up, and the competitiveness of international services was eroded. During the 1980s, these distortions, together with the international debt crisis, pushed the economy into recession. This report strongly emphasizes that duality should not be attacked through either public sector involvement in new economic sectors, or through "promotions" policies. Instead, duality problems should be redressed through broad reform that introduces a much more active role for private market forces and eliminates policy-induced market segmentation. Uniform, less distortionary taxation, as well as privatization and regulatory reform also would mitigate the structural tendency to duality in Panamas economy, thereby reinvigorating the growth and employment-creation potential of the economy.
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