Panama builds on decades of reforms and expansion

Though one of Latin America’s fastest growing economies, Panama’s political situation stands in contrast to its economic performance. The past decade has seen sustained economic growth, driven by the transport, services and banking sectors. More recently, expansion of the canal and other large public spending infrastructure projects have set the pace of economic development.

By contrast, institutional development has struggled to keep pace. Though more than two decades of peaceful democratic transfers of power have facilitated economic development, Panama is now faced with the challenge of maintaining strong growth while overcoming challenges such as a lagging education system and marked social inequality. The government of Juan Carlos Varela has placed particular emphasis on social programmes and the fight against corruption, a move expected to lead the country to improved governance and less social inequality.

Political Transition

Military dictatorship marked Panama’s political scene from 1968 to 1989. The 1980s were a particularly challenging decade. Slow economic growth and political instability accompanied by high public debt and fiscal deficits beset the country. The authoritarian style of leadership of General Manuel Noriega resulted in opposition in Panama and abroad, which eventually led to national civil disobedience. In response, the US government froze economic and military aid and imposed economic sanctions on Panama. In 1989 the US government used military force to secure the Panama Canal Zone and re-establish democracy in the country, deposing Noriega, a former ally, over his repressive rule. Democracy was restored in 1989 following more than two decades of military dictatorship. Since the political instability of the 1980s and the return to democracy that followed, Panama has established itself as a relatively stable democracy, though not without deficiencies. In the post-Noriega period a succession of presidents have maintained business-friendly economic policies, achieving strong economic growth rates, though institutional development has not been as successful.

Building Democracy

Guillermo Endara was the first to be sworn in as president under the reinstated civilian government in 1989 and served until 1994 when Ernesto Pérez Balladares took office under the restructured Democratic Revolutionary Party (Partido Revolucionario Democrático, PRD). Panama underwent significant structural reforms in the 1990s including trade and market liberalisation and privatisation of state-owned enterprises.

Under the leadership of Martín Torrijos, son of former military ruler Omar Torrijos, the PRD lost the 1999 election to Mireya Moscoso, leader of the country’s oldest political party, the Panameñista Party (Partido Panameñista, PP). Moscoso’s achievements included overseeing the transfer and nationalisation of the Panama Canal, and the implementation of many social programmes. In 2004 Torrijos led the PRD to an election victory. The Torrijos administration saw economic benefits from the Panama Canal and simultaneously began to address political corruption and transparency.

Economic Gains

In the election of 2009, Ricardo Martinelli led his Democratic Change (Cambio Democrático, CD) party to a sweeping victory. Martinelli led Panama through the greatest period of economic expansion in the country’s history, invested in social programmes for the poor and increasing economic expansion through spending on a multitude of infrastructure projects.

Despite these advances, Martinelli has been the subject of some criticism, most notably led by his own former vice-president, Juan Carlos Varela of the PP, with whom Martinelli allied in the 2009 elections until the partnership ruptured in 2011. Martinelli has since become a polarising figure in Panama. While supporters point to his significant contribution to the economic growth Panama experienced under his leadership, allegations of corruption and misuse of public funds have also surfaced. Though transparency and corruption remain a political challenge in Panama, the current administration has pledged to combat these issues and has taken steps to follow through on these promises (see analysis).

Political Parties

Panama has a multi-party political system. The dominant parties have historically been the PRD and the PP. The PRD, a centre-left political party, was founded by Omar Torrijos in 1979 and had strong connections with the military regime that overtook the country in the military coup of 1968. Since the return to democracy, the party has been restructured and holds primaries to elect representatives for government positions. Originally founded in 1932 by Harmodio Arias Madrid as the National Revolutionary Party, the PP is the oldest party in Panama and currently holds the presidency. A third party, the CD, a centre-right political party, was founded by Martinelli in 1998 and was in power until the most recent election in 2014 when its candidate Jose Domingo Arias lost to the PP under Varela.

2014 Elections

General elections were held in May 2014. The main contenders for this election included the incumbent vice-president Varela of the PP, former mayor of Panama City Juan Carlos Navarro of the PRD, and Jose Domingo Arias representing the CD, and running with Martinelli’s wife, Marta Linares, as his vice-presidential candidate. As Panama’s constitution does not allow for presidents to run for consecutive terms, Martinelli was ineligible for a further term. Following a close race, Varela emerged as the winner, leading the country through another peaceful and democratic transition of power.

Varela won the election with 39% of the votes while Arias garnered 31% and Navarro 28%. Alongside Varela, Isabel de Saint Malo became vice-president. Varela assumed office in July 2014 and begin serving his five-year term. However, Varela’s party, the PP, did not win a majority in Panama’s unicameral legislature, the National Assembly, winning only 17 of the 71 seats available. The CD currently holds 25 seats and the PRD has 26, with the remaining 20 seats divided among smaller parties and independent candidates. Though Varela was inaugurated with a legislative minority, an agreement reached between the PP under Varela’s leadership and the opposition PRD, its traditional rival, gave Varela a marginal majority as the leader of The People First (El Pueblo Primero, EPP) coalition government with a combined total of 43 seats. Varela had previously made a similar arrangement with his predecessor, Martinelli, which collapsed two years into the former president’s term. This then led in 2011 to Varela’s dismissal from his role as foreign minister.

Of the 71-member legislature, 34 members underwent investigation for alleged irregular use of state funds during the electoral campaign. The allegations affected 20 deputies from the CD and eight from the PRD. These concerns led to the annulment of 11 legislative results and new contests being held. As part of Varela’s mission to clean up politics, efforts are under way to increase transparency with regards to the financing of electoral campaigns with the National Electoral Reform Commission tasked with drafting reforms to the electoral code before the next elections in 2019. The 2014 elections saw a voter turnout of around 75%, up from 70% in the previous elections of 2009. All Panamanian citizens are legally required to vote, though in practice there are no penalties for not doing so.

Varela’s victory is in keeping with a pattern of defeat for the incumbent presidential party; since the US invasion no incumbent party has been immediately re-elected in Panama. This shift in leadership marks a return to power for the PP, which last held the presidency more than a decade ago under the leadership of Moscoso (1999-2004).

During his presidential campaign and into his presidency, Varela vowed to root out corruption within the political system, promising a more transparent government. Since assuming office, Varela has affirmed his commitment to restoring the credibility of democracy and the country’s institutions. In the face of growing allegations of corruption against Martinelli and several government officials under his leadership, the current administration is challenged with following through on its promise to address the issue (see analysis). Though corruption has been cited as one of the most significant barriers to conducting business in the country, Panama continues to lead Central American economies on the World Bank’s 2014 “Doing Business” survey, up from 61st in 2012 to 52nd out of 189 countries.

Structure

Panama is a constitutional democracy. The president is elected to a five-year term, and executive power is vested in the president, who serves as both head of government and head of state, and may serve more than one term provided they are non-consecutive. The vice-president is elected alongside the president as a running mate in the general election. The legislature consists of a unicameral body made up of 71 representatives, known as the Asamblea Nacional, or National Assembly. These representatives are also elected to five-year terms alongside the general presidential election.

The judiciary includes 14 superior tribunal courts as well as a network of circuit and municipal courts. At the top of the judicial branch is the Supreme Court. Judges are appointed to 10-year terms by the Council of Ministers, with approval by the National Assembly. An independent electoral tribunal oversees the election process.

Judicial independence in Panama continues to be low by international standards, as evidenced by its rank of 116th out of 144 in the World Economic Forum’s (WEF) “Global Competitiveness Index 2014-15”. Other political indicators also received low scores, including public trust in politicians at 102nd (down from 94th in the previous year) and favouritism in government officials’ decisions, at 89th.

Competitive Economy

Panamanian economic policy is seen as favourable to economic growth and foreign investment. The government has promoted economic growth over the past decade largely by supporting free trade and maintaining business-friendly policies. Panama was ranked 48th in the WEF’s “Global Competitiveness Index 2014-15”, placing it second in Latin America behind Chile. Compared to the Latin American average, Panama scored strongly for its infrastructure, financial market and technological adoption. According to a survey of local businesses, the most problematic areas included corruption (mentioned by 16.8% of respondents), an inadequately educated workforce (15.2%) and an inefficient government bureaucracy (14.3%).

Social Inequality

Varela’s government faces the challenge of maintaining Panama’s strong growth while managing economic inequality. A central component of his campaign platform was the introduction of price controls on staple foods to alleviate the pressure of inflation on Panama’s poor. The price of the “basic food basket” (one month of food for a family of four) increased 25% since 2010. The current administration took action to control the price of food by issuing a decree to stabilise the price of pantry staples. The announcement of the temporary price controls on 22 items in the basic food basket was among Varela’s first actions upon taking office. High food prices were a major concern for voters in the 2014 election after a surge in inflation in 2009-11 as a result of the rise in international energy and food prices. However, inflation has since decreased to historically low levels, recorded at 2.6% for 2014, down from 3.7% in 2013.

Despite a strong and growing economy, income inequality continues to be a challenge in Panama. According to the World Bank, the country’s Gini coefficient was 51.9 in 2012, trailing behind most countries in Latin America with the exception of Brazil and Colombia, at 52.7 and 53.5, respectively.

Policy

Despite the change in leadership resulting from the 2014 presidential election, the main lines of economic policy are, thus far, a continuation of established procedure with a commitment to maintaining economic growth, decreasing public debt, and reducing poverty and social inequality. The completion of the Panama Canal expansion remains a top priority for the new administration.

Infrastructure investment is central to current policy, with a series of projects on the agenda including an expansion of the Panama City Metro and the Puente de las Americas-Arraijan highway development. The 2015 budget increased 7% from the previous year as the government plans to increase spending on social welfare and public works projects. Nevertheless, the current administration has made public its goal of reducing the budget deficit to 0.5% of GDP by 2019, from 4.1% of GDP in 2014, as well as a reduction of public debt from around 40% of GDP in 2014 to 33.8% by 2019. Despite these reductions in spending, plans are in place for an investment of around $19.5bn from 2014 to 2019, with over half earmarked for social programmes.

Community Concerns

The current administration has taken a less confrontational approach than its predecessor in dealing with community concerns over development. The government suspended the Barro Blanco hydroelectric dam project because it did not meet the requirements of its environmental impact assessment. Though the project was nearly complete, it had been a contentious development for Martinelli who had insisted on pursuing this and other mining and hydroelectric projects despite opposition from local indigenous groups.

The new administration’s ability to navigate community concerns related to such developments will be increasingly important due to the country’s significant dependence on hydroelectric energy sources. Furthermore, mining has become one of the fastest growing sectors of the Panamanian economy after recording growth of 25% in 2013 and ambitious growth targets set for the future. Large-scale protests over the perceived impact of mining projects on the local environment and indigenous communities highlight the importance of minimising confrontation with local populations to allow for more peaceful expansion of these developments.

Security Issues

Like many Latin American countries, Panama has suffered relatively high crime rates, and security issues were a concern for voters in the 2014 elections. While there have been increases in homicide rates in Central America, according to data from the UN Office on Drugs and Crime, the rate in Panama has decreased since its peak in 2009 at 22.6 murders per 100,000 members of the population to a rate of 17.2 in 2012. That same year Panama had the third-lowest homicide rate in Central America, following Nicaragua (with a homicide rate of 11.3 per 100,000) and Costa Rica (8.5), well below Honduras (90.4) and Belize (44.7). The UN considers any rate above 10 to be at epidemic levels.

Of the homicides recorded in 2012 in Panama, 52.1% of victims were reportedly killed by gangs or organised criminal groups. According to a UN Development report, there were more than 350 gangs operating in Panama in 2013, up from 200 in 2008. In his inauguration speech, Varela promised to eradicate organised crime, the main driver of violence in the country. His government has since taken steps to reduce violence by way of proposing an amnesty for gang members to surrender their weapons and participate in a programme that offers technical courses geared towards reintegration in the workforce. By the end of the first month, 1100 gang members had reportedly given up their weapons to participate in the programme, representing an estimated 13% of gang members in the country.

Foreign Policy

The strengthening of foreign relations has also been a priority for government administrations during past years. Developing external relationships geared towards economic integration and trade continues to be a focal point of Panama’s foreign policy. The new administration is maintaining a strategy of openness. Though investment levels in several sectors are capped, Varela’s government is retaining the nation’s tradition of welcoming foreign investment.

Panama signed a free trade agreement with Mexico in 2014, bringing the country ever closer to its objective of joining the Pacific Alliance, a regional trade pact that includes Mexico, Colombia, Chile and Peru. Panama is eager to enter the Pacific Alliance, which covers more than 210m people and eliminates over 90% of tariffs on goods and services traded between members. The alliance would also strengthen Panama’s trade flows with Asia.

Outlook

While the continuation of successful transfers of power represents a major step forward in solidifying Panama’s democratic practices, there is still a significant amount of work to be done to improve governance. The current administration has made the fight against corruption a priority, and though some progress has been made on this front, the new government is still early in its term. With the majority of a five-year term remaining before the next presidential elections in May 2019, Varela has some time to deliver on his campaign promises and initial inauguration pledges.

While it is still too soon to judge the overall effectiveness of the current administration in creating a more transparent government, the historic frustration of Panamanian society towards the traditional impunity for government officials has been allayed amid what is starting out to be a government quick to deliver on its promises. As current administrative policy has displayed an ongoing focus on economic growth and a determination to curb corruption, Panama will likely continue to advance economically and politically. Although the Central American republic continues to grapple with a variety of issues, in particular social inequality, by and large, its encouraging trajectory looks set to continue in the future.