Glitter and graft

The Americas
Panama
Jul 19th 2007 | PANAMA CITFrom The Economist print edition

A country revamped as a service hub grows at Chinese rates

COMMUTER traffic crawls along Avenida Balboa, the coastal road that is the spine of Panama City, slowed by thousands of new cars. In the city's wealthier districts restaurants are packed, and it is hard to find a street without a skyscraper under construction. While some of its neighbours in Central America struggle with commodity-based economies, Panama is busy reinventing itself as a regional logistics and services hub.

That was a position it enjoyed in the 1970s, when an offshore financial industry briefly flourished. Then came the dark years of Manuel Noriega, a thuggish strongman toppled by an American invasion in 1989. Several undistinguished governments followed.

Several things have now come together to produce an extraordinary boom in Panama. The economy will expand by 11% this year and by over 9% in both 2008 and 2009, according to a forecast by LatinSource, a consultancy. That is faster than anywhere else in Latin America.

The first was the transfer of sovereignty over the Panama Canal in 1999. Since then, the canal has been run as a Panamanian business, rather than a branch of the United States' federal bureaucracy. President Martín Torrijos, who took office in 2004 (and whose father, a military ruler, negotiated the canal handover in the 1970s), pushed through a referendum last year which approved a $5.2 billion plan to expand the canal, doubling its capacity and enabling it to take much bigger ships. Work is due to start in August.

Other big projects are planned in the wake of the canal expansion. Occidental Petroleum, in partnership with Qatar Petroleum, plans an oil refinery, costing $7 billion, at Puerto Armuelles. A consortium led by Hutchison Whampoa, a Hong Kong company, plans to turn Balboa into the largest port in Latin America. China's government-owned shipping operator, COSCO, is competing to build a second mega-port on the Pacific coast—even though Panama recognises Taiwan. Copa, a local airline, aspires to turn Panama into an alternative regional hub for travellers deterred by the security hassles of Miami airport.

The second factor is that Mr Torrijos's government has been rather more effective than its predecessors. He has cleaned up the public finances, pushing through an unpopular reform of social security. He actively courts foreign investors. He has negotiated a free-trade agreement with the United States, which Panama hopes will soon be ratified by the American Congress. But he also has close ties to other regional leaders, including Cuba's Raúl Castro.

This week Spain's prime minister, José Luis Rodríguez Zapatero, was the latest foreign leader to drop by, with a coterie of businessmen in tow. New foreign direct investment more than doubled in 2006 compared with the previous year, accounting for 16% of GDP—a share that is twice as big as in any other country in the region, according to the UN Economic Commission for Latin America and the Caribbean.

The government has finally got around to developing the prime land once occupied by American military bases in the former Canal Zone. The UN is moving its regional headquarters into one; another will become a technology park. Last week the government signed a contract with London & Regional, a British property company, which plans to build housing and industrial units at the former Howard Air Force base. Some of the new housing is aimed at American retirees, who are flocking to Panama. Donald Trump, an American property developer, is planning a 68-storey hotel and resort.

But as the developers pile in, not everyone is cheering. Some worry that the property bubble will soon burst. Others note that a weak education system does not produce enough engineers or skilled workers. Contractors are likely to import skilled labour from abroad. But with 40% of Panamanians still living in poverty, and unemployment at 8.6% last year (though falling), that will not be popular.

A handful of families continue to control much of the country's wealth and benefit from cosy ties to government while most Panamanians struggle to make ends meet. Mr Torrijos proposes to increase the minimum wage of $300 a month. American diplomats worry that if the benefits of growth don't filter down, the resulting sense of injustice could fuel political radicalisation.

A bigger, related, worry is corruption. Foreign firms are beginning to complain that they are hampered by the informal links between government and local business oligarchs. Sam Taliaferro, an American who runs a property business catering to foreign retirees in Boquete, a hill resort, says that corruption threatens to choke off foreign investment. With three-dozen other investors, he has formed a group to campaign against what he sees as the gouging of foreign firms.

Though Mr Torrijos's government has a cleaner record than its predecessors, it has not been scandal-free. An uncle of the president controversially acquired vacant land, and went on to destroy protected mangrove swamp without the necessary permit. It is hard to judge how deep corruption goes, or how much of an impact it may have on foreign investment. But if Panama's boom is to propel it swiftly to developed-country status over the next decade or so, it would help if it rested on a stronger institutional foundation.