Envío Digital
Central American University - UCA  
  Number 169 | Agosto 1995



The Honeymoon's Over

The arrival of “people power” gave hope to Panamanians. Now all has changed. Many already see that the economic policies not only do not favor them but are aimed at removing them from the picture.

Ricardo G. Montenegro

After over six months of a "truce" with the government of President Ernesto Pérez Balladares, various sectors in Panama are now beginning to speak out with increasing strength against the economic policies pushed by the executive branch and rubber stamped by Pérez's Democratic Revolutionary Party (PRD) "steamroller" in the legislature.

A Complicated and Weighty Inheritance

When "The Bull" Balladares took office on September 1 of last year, his government found a somber economic situation. Although Panama held one of the top places among Latin American countries for its economic growth over 9% annually in the early 1990s, this growth was far from sustained. By 1995 it was estimated at under 4%. Furthermore, the growth was not equitable. Unemployment today affects 13% of the economically active population without taking underemployment into account and poverty beats down 50% of Panamanians.

Another somber element is that the country's main export activities are in crisis. The Panama Canal has an average growth rate of only 2%. The oil pipeline has decreased 60% in the past four years. Banana production growth is at 0% due to the trade conflicts with the European Union. The Free Zone is the only activity whose growth is acceptable: 21%.

With respect to domestic production, the construction sector, which injects the most vitality into the Panamanian economy, is virtually depleted. This recession in construction is sharply affecting the industries linked to it, even though they are the most flourishing within the whole industrial sector.

The government is trying to fill the vacuum left by the shrinking of housing construction by building a Panama Colón highway and north south corridors, but both projects are months behind.

Agricultural production, historically the most abandoned activity in Panama, is going through a period of uncertainty as a result of the policies pushed in recent years to liberalize the prices of rural products.

And then there is the "tequila effect." The Mexican crisis is sparking a rerouting not only of foreign investment but also of investments by nationals toward Mexico. The high incentives Mexico is offering to revitalize its battered economy are endangering Panama.

This is the complex inheritance Pérez Balladares found upon settling into the presidential chair.

Why the Model Has Run out of Steam

The government is aware that the economic model operative in Panama in recent years is winding down. But its interpretation of the causes is erroneous. According to the official version, the main cause is the macroeconomic distortions created by the state's own protectionist policies, which hinder the market's ability to function freely. State protectionism has two basic manifestations:
* Excessive incentives to capital through subsidies, high tariffs and taxes, which have not permitted free competition.

* Labor legislation that offers excessive guarantees and privileges to workers, generating an exaggerated increase in production costs and a rise in unemployment levels.

New Game Rules

As a formula to remedy these problems, the government has decided on a series of actions to create "the necessary free market conditions to stimulate effective investment of private capital and open new export spaces." The goal is to generate hard currency and revitalize the economy. With this logic, it is implementing a series of actions, among which the following stand out:
* Liberalize the domestic market rapidly (shock) and universally (favoring no special sector).

* Liberalize competition, taking the state out of the game and strengthening private business.

* Privatize public goods.

The Panamanian government makes an implicit distinction between "business administrators" and "business capitalists." The protectionist policies of previous governments had encouraged the predominance of the former: people who have not managed to develop their innovative capacity to adapt and successfully deal with the market's real expectations because they never felt the need to compete. This appears to have created a pseudo capitalist culture that has been partly responsible for the country's economic stagnation.

Given this, the government has opted to provide incentives to national and transnational modernizing capital (the finance, banking, mining and tourist sectors) to the clear detriment of traditional (industrial and agricultural) capital, which has always been subsidized and thus has had few possibilities to successfully face the assault from an open and competitive market. According to this logic, small rural and urban producers are not even being taken into consideration and are relegated to the "excluded" category.

The new rules of the game seek to spur activities by innovative and risk taking "business capitalists," in the hope that they will become the pillars of a strong and competitive Panamanian economy in the medium run.

Changing the Laws

Implementing the majority of these changes requires modifying Panama's existing legal framework. The government has promoted two kinds of actions:
* Creating the "Law to Universalize Tax Incentives," with the argument that the state should create conditions of free competition in which no sector is either favored or harmed.

* Promoting the "Labor Code Reform," laying out the need to modernize Panama's labor legislation so it is in harmony with the world economy's new requirements.

The "1991 Tax Reform Law," although pushed through by the previous government, fits hand in glove with current governmental goals: it gradually "universalized" tax rates on business profit. The law broke with the old norm of "who earns more, pays more," and clearly favors the large corporations and hits small and medium businesses hard, as the table shows.

The intent is clear. "Universalization" opens the doors to a world of "free and healthy competition," but that world requires a membership certificate whose price not everyone can pay.

"Colón's Free Zone is kaput" was the pronouncement of the Association of Free Zone Users in reaction to the new tax imposed by the government. The Law to Universalize Incentives establishes that Free Zone users should pay a 15% tax on earnings. Previously, they only paid 8%.

The government and the Free Zoners engaged in a pitched media battle for several months, putting forward their respective reasons. The latter sustained that such a tax would put them at a disadvantage with Latin America's other free zones and that, if approved, a massive capital flight to other areas would result, causing the country's unemployment rate to grow.

Obviously, the law was approved. Now we must wait for the results of its implementation, which do not seem easy to forecast in the short term. A first sign is that Samsung, a company that distributes household appliances, announced its decision to move to Miami because that city was more profitable. Was it a coincidence or a consequence?
The objective of the tax reform and incentive universalization policies is to offer better conditions for capital investment. This may happen, but at a very high cost. By allowing businesses to pay less taxes, the government's income has shrunk so much that the current fiscal deficit is over $10 million. The government hopes to cover this deficit with the increased tax on the Free Zone, which is experiencing a boom.

Cellular Phones: The Last Straw

In the midst of all these debates about the new legislation, the attitude of most legislators immensely irritated public opinion. They not only passed laws that go against grassroots interests, but also used their position to gain personal advantages. Not satisfied with salaries of over $10,000 a month or with the right to import vehicles tax free, they used the framework of a law establishing use rights for the cellular telephone frequency to include in one article each legislator's right to freely acquire two cellular phones. With what possible argument? That it will allow them to "be in continual communication with their bases," of course. It would be hard to stoop lower.

On June 4, the result of polls carried out by Dichter and Neira and by the Editorial Council, Investigative Unit and Board of the daily La Prensa were made public. Some of their conclusions were the following:
* 49% of those polled agree with the Labor Code reform, while 37.4% are opposed.

* 74.2% agree that the labor unions should participate in the negotiations to reform the code.

* 51.3% state that the national economy has remained the same since the new government arrived, while 28.5% said it had improved and 20.2% said it had worsened.

* With respect to government popularity, 58.9% said they had a good impression, against 27.9% who spoke of a bad impression.

The polls also revealed that Panamanians consider unemployment to be their major problem and view the policies to combat it as ineffective; that distrust of Panamanian justice is growing; that the Assembly is viewed as going from bad to worse; that this reduces governmental efficiency against corruption; and that the economic plan is still not widely known.

And the Gringos?

Are the US military bases going or will they stay? Plans are afoot to hold something more than a poll in November: a national plebiscite to determine if they should remain in Panama beyond 2000, the year the canal treaty becomes a reality.

The curious thing is that neither the government, nor the opposition, nor any sector of civil society is promoting this consultation. Its main backer is a Panamanian turned US citizen, who came from Miami on instructions from Senator Jesse Helms. The Jurassic senator is convinced that this plebiscite will clear up once and for all the doubts of both the Panamanian and US governments about whether the majority wants to continue being protected by the Pentagon umbrella.

In the end, there is no doubt that the current government fed a sea of expectations in a population tired of putting up with an incompetent and corrupt government for four years. The arrival of the "people to power" offered the new government a long grace period, or honeymoon, to implement the integral development plan for everyone which was so touted in the PRD's electoral campaign.

Today things are already changed. After ten months of PRD government, the unmet promises have frustrated the hopes of many sectors. The economic policies not only do not favor them, but it is already easy to see that these policies have been planned with the intention of excluding them from national development.


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