Panama City’s Success: A Product of Trade and Liberalization

Latin American cities generally grow fast, but many remain impoverished. Then there’s Panama City.

One of the wealthiest cities in the Americas, it’s full of modern skyscrapers and urban revitalization projects. Despite sharing the trait of political turbulence that infects the rest of LatAm, Panama City’s eponymous host country has seen economic success, and with the Panama Canal expansion, is poised for more. The answer to why it’s fared better has to do with higher degrees of economic freedom and trade—aka liberalization. 

Panama’s economic success is clear. According to James Loxton, writing in Foreign Policy, the country has LatAm’s highest per-capita GDP, which grew by 15.3% in 2021 during the COVID recovery. The country’s economy has grown faster than any LatAm nation, at just under 6% on average from 1989 to 2019. This is all the more impressive given Panama is in Central America, a particularly poor LatAm sub-region. 

While far from a perfect environment for economic or personal liberty, for reasons detailed below, it fares better on these fronts than most other LatAm countries, scoring 65.4 on the Heritage Economic Freedom Index (#56 out of 177 countries worldwide). Panama held the highest score in Latin America for ease of starting a business, according to Holland House Panama; further, the average time it takes to incorporate a business is 5 days maximum. 

Currency decisions also play a role in its ease of doing business, reports the World Bank: “Panama’s dollarization has helped keep inflation lower than in regional peers, as expectations are well-anchored.” International Relocation Firm also speaks to a number of internal benefits, namely the stability of Panama’s banks and quality of its infrastructure. 

The country likewise benefits from political stability and lack of autocracy. Neighbors like El Salvador have experienced political upheaval in recent years, and Latin American countries like Cuba and Venezuela have long languished under authoritarian far-left leadership. But Panama has maintained a stable democracy ever since the overthrow of dictator Manuel Noriega in 1990. Noriega’s rule was characterized by corruption and execution of opponents; but following the overthrow, Loxton says, Panama “avoided many of the pitfalls of other Latin American democracies, such as military coups, elected strongmen, and the breakdown of party systems.” While the country still contends with substantial corruption into the modern era, Loxton writes, it has managed to safeguard vital institutions such as the Panama Canal from the worst levels of graft. 

Another factor of this economic success is Panama’s embrace of free trade. This is facilitated most obviously by the geographical good luck of the canal. But trade policies themselves are crucial to its success—the country allows imports and exports with minimal taxes, and has signed several trade agreements. Even countries without formal agreements generally face favorable trading conditions in Panama. A number of free trade zones exist within the country, including the Colon Free Trade Zone, which hosts 2,500 companies and is “the largest free-trade zone in the Western Hemisphere and one of the most effective distribution channels for accessing Latin American and Caribbean markets,” according to the U.S. Department of Commerce. The trade zone has generous tax policies and cheap rents. The recent expansion of the canal, enabling larger and more frequent ships to pass through, will only pay further dividends. 

Low tax rates also factor into Panama’s international attractiveness, notes Live and Invest Overseas. Foreign residents aren’t taxed on income earned outside the country; retired U.S. citizens, for instance, “are not taxed on pensions, Social Security, or similar income earned in the States.” Individuals who invest “at least US $50,000 in tourist infrastructure” are eligible for tax breaks, and the floor for property tax obligations is $30,000. According to International Relocation Firm, “Panama has a low VAT / sales tax on the sale of products or services of just 7% (versus 17-21% sales tax for most other surrounding countries in the region), and a relatively low corporate income tax of just 25% on net income after expenses.”

Panama still has problems though. It has only moderate scores for freedom of expression. It deals with significant poverty, particularly in rural areas and among indigenous populations. The Borgen Project writes that “over one in five Panamanians is living in poverty,” and the infrastructure benefits that urbanized parts of Panama experience are lacking in rural regions. 

However, Panama has been successful in alleviating poverty ever since the Noriega overthrow. From 1989 to 2019, poverty plummeted from just half of the population to just over 12%.  Meanwhile, in Venezuela, over half the country is still in poverty, and the share of households in poverty increased from 29% in 2012 to 96% in 2019, with the share in “extreme poverty” growing from 8% to 79% during that period highlighted by power grabs from Chavez and Maduro. Further, in contrast to Panama’s emphasis on trade, Venezuela focused primarily on one economic activity, energy production, leaving it vulnerable. 

Liberalization does not just apply nationally—Panama City is a monument to how cities can function when liberalization is applied at municipal level. It’s an oasis of towers, sporting the world’s 25th biggest skyline and edging out Miami as the biggest skyline in LatAm. 45 of its 50 tallest towers were built after 2000, speaking to a construction rate that simply doesn’t exist in today’s NIMBY-dominated U.S. cities. It also very much contrasts with other LatAm ones, which are often low-rise and plagued with vacancy. It was startling during my journey to fly from Guatemala and Honduras—two previous stops with thoroughly 3rd-World living standards—into the gleaming metropolis of Panama City. 

Panama still has its challenges like other LatAm countries. Crime rates have increased in recent years, including homicides, along with corruption, poverty, and infrastructure challenges. But compared to elsewhere in LatAm, one could reasonably use the “economic miracle” moniker to describe Panama. It’s a testament to the prosperity that occurs by even slightly removing government control in favor of economic liberty.

All images credited to Scott Beyer and The Market Urbanist.