Panama has been one of the fastest growing economies in the world over the previous decade. In that short but vibrant time span, the country managed to double its income per capita. Growth has been spearheaded by the development of a modern service sector on the activities surrounding the Canal, and non-residential construction. Large public infrastructure projects and the private provision for infrastructure demanded by the service sector, have fueled growth and expanded job opportunities for non-skilled workers. Two warning signals hover over Panama’s stellar performance. The construction sector has been growing at a rate equivalent to doubling its stock of structures every four years. The demand for non-residential construction cannot grow indefinitely at a higher rate than the rest of the economy. Once the stock of infrastructure required by the service sector is set and large infrastructure projects are completed, the rate of growth will recede and other sectors shall take the leading role. The deceleration of construction, characterized by a lower demand of non-skilled labor, will feed into the second warning signal: Income inequality. In spite of the minor improvements registered over the accelerated-growth spell, Panama remains amongst the world's top five most unequal countries. Both warning signals point to the need of further diversifying the Panamanian economy, and promoting economic activity in the provinces so as to deconcentrate growth and make it more inclusive.

1. Center for International Development
at Harvard University
Shifting gears in Panama:
Policy recommendations for sustainable and
inclusive growth
Miguel Angel Santos
@miguelsantos12
www.miguelangelsantos.net

2. 2

3. Panama: One of the top-ten fastest growing economies 2005-2015
3
Income per capita
Transfer of
sovereignty over
the Canal

4. Growth has been accompanied by a significant reduction
in poverty and inequality
4
52545658
IndiceGini
05101520
Tasadepobreza(%)
1990 1995 2000 2005 2010 2015
Year
Tasa de Pobreza (US$1.9 al dia) Indice Gini
Fuente: World Development Indicators, Banco Mundial
Evolución de la pobreza y desigualdad

5. In spite of that, Panama remains among the most unequal
countries in the world
5
PAN
2030405060
GINIIndex,year2010
6 8 10 12
GDP per capita (logs)
Source: own calculations based on WDI (World Bank)
Gini coefficient (2013)

6. Growth has been spurred by the development of a service sector
that demanded non-residential construction
6
Weighted Contribution to Growth (CAGR * Ave Weight in GDP)
-0.3% 0.3% 0.8% 1.3% 1.8% 2.3% 2.8%
Construction
Wholesale, Retail, Vehicle Repair
Transport and communications
Housing
Financial intermediation
Public utilities
Mining
Manufacturing
Restaurants and hotels
Other social services
Social services and private health
Private education
Agriculture
Fishing
2005-2015 2010-2015
Wholesale, Retail and Repair
Transport and communications
Financial intermediation
Non-residential construction has
been growing at a CAGR of 20.25%
for a decade, that is equivalent to
duplicating the stock of structures
every four years

7. In terms of exports, the real driver behind Panama’s astonishing
success is the development of an exportable service sector
7
Export of services per capita (US$ million)

8. The bulk of the growth in services was registered by Transport-
Logistics, Travel, and - more recently - business services
8
-2,000
0
2,000
4,000
6,000
8,000
10,000
2008 2009 2010 2011 2012 2013 2014 2015 2016 (1H)
Panama: Export of Services, net
(2008-2015)
Transport Travel Communication
Construction Insurance Financial Services
Information Technology Royalties and licenses Business and entrepreneurial services
Cultural and recreational Government services

9. The service sector has attracted significant amounts of foreign direct
investment and has spurred demand for non-residential construction
9
-2,000.0
-1,000.0
0.0
1,000.0
2,000.0
3,000.0
4,000.0
5,000.0
6,000.0
2008 2009 2010 2011 2012 2013 2014 2015 2016 (1H)
Panama: Balance of payments
(US$ million)
Current Account Deficit Foreign Direct Investment Portfolio Investment Other, net

10. The steady inflow of FDI is mostly coming from foreign entities
reinvesting their earnings in Panama
10
65%
20%
49%
67%
35%
70%
96%
85% 84%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
500
1000
1500
2000
2500
3000
3500
4000
2008 2009 2010 2011 2012 2013 2014 2015 2016 (1H)
Reinvestment Ratio: Rent payments to FDI and Reinvestment of Earnings
(US$ million)
Rent payments to FDI
Reinvested earnings
Reinvestment Ratio (%)

11. By 2015 construction accounted for 25.6% of GDP, although most of
the 2005-2015 growth occurred in the non-residential sector
11
21.0% 20.2%
6.6%
17.0%
18.3%
16.4%
8.6%
8.6%9.1%
6.8%5.5%
6.3%9.7%
6.2%
3.7%
4.4%3.3%
3.1%5.0%
2.6%
2005 2015
Hogares con personas empleadas
Pesca
Educación privada
Servicios sociales y salud privada
Minería
Otros servicios sociales
Agricultura
Restaurantes y hoteles
Servicios públicos
Manufactura
Intermediación financiera
Bienes raíces
Construcción residencial
Transporte y comunicaciones
Construcción NR
Comercio al mayor y detal
Composición del PIB
Source: INEC, IMF. Excludes “Oher non-marketable production”.

12. What are the most important
restrictions to sustainable and
inclusive growth?
12

13. 1) Non-residential construction cannot grow indefinitely at a faster
pace than the rest of economy and has started to decelerate
13
24.2%
32.4%
6.9% 7.7%
)17.5%
2012 2013 2014 2015 2016-*
Variación(en(Valor(Total(de(Permisos(de(Construcción((%)
15.7%
47.6%
24.7%
21.8%
*9.0%
31.0%
21.8%
*8.1% *8.3%
*27.2%
2012 2013 2014 2015 2016(*
Variación5en5Valor5Total5de5Permisos5de5Construcción5(%)
Residenciales No(Residenciales
77.5%
16.3%
(36.8% (36.1%
(23.8%
2012 2013 2014 2015 2016(*
Variación2en2Producción2de2Concreto2Premezclado2(%)
2.4%
%7.7%
%8.6%
%6.0%
2013 2014 2015 2016(*
Variación1en1Producción1de1Cemento1Gris1(%)
Change in total number of construction permits Variation of construction permits:
Residential vs. non-residential
Variation in production of ready-mixed concrete Variation in production of cement

14. 2) Human capital: Panama embarked on a high-skill growth strategy,
based on the competitiveness of its service tradable sector
14
Economic Complexity by Industry

15. 2) Human capital: Panama embarked on a high-skilled growth
strategy, based on the competitiveness of its service tradable sector
15

16. 2) Human capital: Panama embarked on a high-skilled growth
strategy, based on the competitiveness of its service tradable sector
16
Economic Complexity, qualified labor and share of employment (2010)

17. The Panamanian governments has made significant efforts
to improve the coverage of education …
17
Distribución de trabajadores por nivel de escolaridad
(% de la fuerza de trabajo, año 2012)
Al menos Primaria Al menos Secundaria Al menos Terciaria
*Fuerza de trabajo incluye a empleados y desempleados
Fuente: Cálculos propios basados en World Developmnet Indicators, Banco Mundial

18. … but it terms of quality there is still a significant gap
18
0 2 4 6 8 10 12 14
Colombia (381)
Panama (360)
Peru (365)
Mexico (419)
Brazil (386)
Argentina (388)
Chile (421)
Uruguay (427)
OECD (496)
Top performers in mathematics, PISA 2009
Percentage of students reaching the two
highest levels of proficiency
Level 5 Level 6
0 1 2 3 4 5 6 7 8 9
Colombia (402)
Panama (376)
Peru (369)
Mexico (416)
Brazil (405)
Argentina (401)
Chile (447)
Uruguay (427)
OECD (501)
Top performers in science, PISA 2009
Percentage of students reaching the two
highest levels of proficiency
Level 5 Level 6

19. Panama: Headquarters Law (Law 44)
Has attracted 117 multinational regional headquarters
19

20. Special Economic Zones:
Import-Export, Industrial Park, Technology Park
20
Special Economic Zones
• Special Visa for:
• Investors
• Workers
• Dependents
• Allowed to hire
>10% immigrants
• Labor regime:
• Overtime rate (25%)
• Days-off rate (50%)
• Flexibility to operate
Sundays & holidays
• Special Custom Reg.
• One-stop shop
• Oldest in the world
• Largest in LATAM
• 2nd worldwide
• 2,527 companies
• 29,786 jobs
• Income tax
• Import-Export tax
• Sales tax
Import-Export
Colon Free Zone (1948)
Characteristics Tax exemptions
Immigration
incentives
Other
• Import tax
• Remittances tax
• ITBMS tax
• Income tax
• Dividend tax
• Import-Export tax
• Sales tax
• Remittances tax
• Commercial license
• Patent & ITBMX tax
Ciudad del Saber
Technology Park (2000)
Panama-Pacifico
Industrial Park (2007)
• 75 SMEs
• 1,290 direct jobs
• Focus: innovation
and technology
• 251 companies
(41% multinational)
• 2,305 jobs
• Master plan:
• 1,000,000 sq.mts
• 40,000 jobs
• Special Visa for:
• Workers
• Allowed to hire
>10% immigrants
• Allowed to hire
>10% immigrants

21. Four facts about immigrants in Panama
21
1. There are scarce (they are expensive)
2. Immigrants are over-represented in high-skill occupations
3. Immigrants tend to work in the more complex industries
4. Immigrants tend to raise the salaries of Panamanian workers
within their industry-district

22. 1) A sign of skill scarcity: Wage premiums to foreign workers are very
high on average(50%), and positive for all industries and occupations
22
Wage premiums to foreigners (2010)

23. 2) Immigrants are over-represented in high-skill occupations
23
0.2
0.3
0.5
0.7
0.8
1.1
1.1
1.6
2.6
0.0 0.5 1.0 1.5 2.0 2.5 3.0
Agricultores y trabajadores agropecuari
Operadores de instalaciones fijas y maquinas
Empleados de oficina
Trabajadores no calificados
Artesanos y trabajadores de la mineria
Profesionales, cientificos e intelectuales
Tecnicos y profesionales de nivel medio
Trabajadores de los servicios y vendedores de comercios y
mercados
Directores y gerentes de los sectores publico/privado
(% of immigrants in occupation / % of immigrants in workers)
Over-representation
of immigrants
Under-representation
of immigrants
Fuente: Cálculos propios basados en Censo Poblacional, 2010
Immigrants by type of occupation

24. 3) Immigrants tend to work in the more complex industries
24
0123
IndicedecomplejidadeconomicaIndustria
0 2 4 6 8 10
Porcentaje de inmigrantes con al menos titulo universitario, %
Complejidad industrial vs. Inmigrantes universitariosComplexity at industry level and immigrants with college degree
Share of immigrants with college degrees (%)
Economic Complexity at the industry level

25. 4) Immigrants tend to raise the salaries of Panamanian workers
within their industry-district
25
Immigrants flows and Panamanian wages
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Fuerza laboral panameños Panameños de baja
calificación
Panameños de alta
calificación
Change in wages of Panamanian workers associated
to an increase of 10 pp in the stock of immigrants
Total Panamanian labor
force
Low-skilled
Panamanian workers
High-skilled
Panamanian workers

26. 26
Panama wants to be Singapore or Hong Kong: they need to attract
and retain a large number of foreigners demanded by their high-skill
specialization strategy

27. The strategy of attracting multinationals raised the skill bar and allowed
Panama to develop a modern service sector, but many restrictions prevent
knowhow and productivity to spillover to the rest of the economy
27
• Hefty fees for visa renewals (US$2.000-3.000 per year)
• Years spent on SZEs do not count for residence purposes
• Special work visas granted to foreigners in MNCs and SEZ cease as they stop working in the
company that sponsored them
• Dependents of expatriates and other foreigners (“friendly countries”) not allowed to work
• Firms threatened to be expulsed from City of Knowledge and visas of their workers ceased
if they stop innovating and move on to the commercial phase of the business
• There is a list of 27 occupations that are legally restricted to immigrants, including all type
of engineers, dentists, agriculture scientists, architects, doctors, economists, lawyers,
chemists, and educators in the areas of history and geography
• There is a list of restrcited citizenships comprising 50 countries from Asia and Africa, that
need a special bureaucxratic process “authopriozed visa” to enter Panama
• Albania, Bangladesh, China (exception made via SEM Law), India, Indonesia, Lebanon,
Pakistan, Sri Lanka
RESTRICTIONS TO FOREIGNERS ALREADY LIVING IN PANAMA
RESTRICTIONS TO POTENTIAL IMMIGRANTS

28. Policy recommendations for keeping growth momentum in Panama
and make growth more inclusive
28
National Development Plan Guidelines
Reduce transaction costs to qualified immigrants
• Revises and gradually phase out list of restricted professions
• Revise relevance of restricted citizenships subject to “authorized visas”
• Grant working visas to highly qualified dependents
Make growth inclusive
• Create a public-private investment agency responsible for evaluating
industry potential in the provinces, contacting the right partners, solve
the most binding constraints and monitor progress
• Leverage existing knowledge within Panamanian provinces and look at
expanding to higher-value added industries that use similar knowledge
Attract and retain high-
skill human capital and
know-how
Maximize spillovers
and knowledge
diffusion
Promote growth
diversification in the
Panamanian province
Prevent knowledge from being locked into MNCs and SEZ
• Ease residence requirements for expatriates in MNCs and SEZs
• Create a minimum training requirements in MNCs receiving tax benefits
• Extend length of visas across the board

29. 29
• Fabricación de partes y
piezas carpintería
• Fabricación de vidrio
• Forja, prensado y
laminado de metal
• Terminación y
acondicionamiento
edificios
Blue nodes: Current comparative advantages | Red nodes: Opportunities for diversification
El espacio de industrias de Panamá: Una representación grafica de las
oportunidades de diversificación a nivel provincial (Chiriquí)

30. 30
• Comunicaciones y
transporte vía aérea
• Elaboración aceites,
grasas, jabones,
bebidas y lácteos
El espacio de industrias de Panamá: Una representación grafica de las
oportunidades de diversificación a nivel provincial (Colón)
Blue nodes: Current comparative advantages | Red nodes: Opportunities for diversification

31. 31
• Venta al por mayor de
alimentos, bebidas y tabaco.
• Productos lácteos
• Elaboración de bebidas
malteadas y malta
El espacio de industrias de Panamá: Una representación grafica de las
oportunidades de diversificación a nivel provincial (Darién)
Blue nodes: Current comparative advantages | Red nodes: Opportunities for diversification

32. THANKS!
32