Fitchburg State University

Economics of Panama
A Brief History

Daniel Landry, Nicole Fontaine
International Business Management
Dr. Noonan
May 7, 2015
The country of Panama is one of the most important regions of the world for the trade industry. Its geographic position has been the lifeline of the Panamanian economy since the discovery of the Isthmus of Panama by Rodrigo de Bastidas (Cite). The Isthmus of Panama is the narrow stretch of land that separates the Pacific and the Atlantic oceans. This was controlled along with the rest of the country by Spain until 1821 when they became a part of Columbia. In the year 1903 Panama became an independent republic and it established its modern governmental system. The executive branch of government is led by a President and Vice-President whom are “democratically elected for a five year term by direct vote”(Cite). There are several key elements that keep Panama afloat economically. The most important factor in Panama’s economy is the Panama Canal. This is one of the largest civil engineering projects completed and allowed an alternative to the ever-sought after Northwest Passage. The country has several exports that help the economy but nothing that drives it significantly. There are also many imports that the country has been made available to because of their massive trade route. In addition, there are areas like the Colón Free Trade Zone where increased trade is encouraged and achieved. This paper will discuss these major factors in Panama’s economy as well as more variables that can affect the country in the future. Panama is located at the connection of Central and South America with many lakes and rivers dividing the center of the country. In the early years of Spanish exploration, the conquistadors would explore new lands looking for easier trade routes to get gold back to Spain. When the Spanish settled in Panama it was not long after that an expedition was led that began at the Atlantic Ocean and ended at the Pacific Ocean. The Spanish used this route to get gold easily from Peru to the Atlantic side of the country. There were land routes established along the Isthmus of Panama and the locals were in favor of this trade. This was vital to starting the Panamanian economy as technology and farming techniques were not as developed as other countries. As other nations brought their goods to be traded for gold and other goods the Spanish introduced the Panamanian people became more globally diverse in a short amount of time than ever. From the early days of the economy the Panamanians relied on the trading routes to thrive their own economy and businesses to those passing through or settling in the country. The economic power of the Isthmus of Panama continued to grow as a global trade route and in the mid-19th century. After a short period of decline in colonial exchange brought the economy of Panama down, but as the California gold rush began in the 1840’s the popularity of the isthmus grew again. Since Panama was a power of Columbia at the time of the gold rush, the U.S. government had to go through the Columbian government to form a treaty that stated the United States could build a railway over the isthmus leading to California. The government agreed and construction of the railway began. This was a major economic boom for Panamanians with increased labor force being brought in to build the railways and the increased traffic brought along with the finished railway. Local business owners and others around the isthmus and port areas prospered greatly in the coming years when people struck it rich in California. The railway was protected by the United States Marine Corps in times of unrest to assure the railway ran without interruption. This railway would be the preferred method for a lot of American travelers that did not want to take the risk of traveling across the country with Native Americans across the land. Most settlers found it safer and easier to take a boat to the port of Panama and take a train the rest of the way to California through Central America. When this was being constructed and the success of the railway was apparent, there was the idea thrown out there to build a transoceanic waterway at the Isthmus of Panama. In the year 1878, France ended up getting the contract to build the waterway across the oceans. This task was set upon the shoulders of French builder Ferdinand-Marie de Lessep who was recently gleaming in the glory of the Suez Canal he recently led in construction. Just as Napoleon found out, the construction of the canal proved to be a much larger project for the government and the construction company. In less than a decade more than 22,000 workers dies due to yellow fever or malaria and the expense as well as risk for continuing the project put the French company into bankruptcy (The World Factbook). Several years after construction on the project took place, the United States saw the failed French project as an opportunity to control the passageway to the west and not pursue the project planned in Nicaragua. It would then be in 1903 that the French sold the project to the U.S. and shortly after the Panamanian government declared their independence from Columbia and accepted the USD as official currency in the country. The official construction of the canal did not begin until 1904 after some relation differences between the United States and Panama. Less than a decade later the largest engineering project in history to date was completed and the first shop sailed through the canal on August 15th, 1914. This was not only a feat of amazement for the future of engineering and global trade, but it was a major advantage that secured Panama on the map in the world trade industry. The area around the canal was controlled by the United States for about five miles surrounding the area in either direction. This was important for the safety of the canal in the future as others attempted to pirate ships and other vessels before and after the entrance to the canal where many shipping routes now flowed. This did not only help the economy of Panama but it also had negative effects on the overall development of the country. Since the 16th century the company has relied on the imports and exports as well as the food and other products explorers and tradesman brought along. The Panamanians got so accustomed to purchasing all of their foods and goods and as a result the production of their own domestic foods took a hit and an evolutionary pause (The World Factbook). While the rest of the world was advancing in agriculture methods and machinery, the Panamanian society was relying on the goods and services brought in by foreigners and did not develop further in the region. Until the late 20th century the majority of the country did not have any farming methods that were above native methods developed several centuries before. In more recent years the people of Panama have become more accustomed to western technologies and economic strategies. Internal production of goods and services has significantly increased since the 1980’s and has led to the exporting of many goods to the United States and Canada. For the years preceding WWII the traffic in the canal began to raise an average of fifteen percent a year for fifteen years. This was strongly seen in the canal cities where major port trading was felt economically but did not last through the depression. In the global depression of the 1930’s canal traffic decreased and the economy of Panama decreased as global trade began to dwindle. The overall economy of Panama was put on hold but the major port cities located near the canal were thriving through the depression. This was due to the heavy presence of American troops in the foreign entity sent there to protect it from attack. The troops spent a lot of money in the local economy which kept it alive during the war years. Many people outside of the port cities lost their jobs and were forced to become agriculture workers. The government noticed this switch in the employment sector and made several government incentives to help farmers and those in the agriculture industry. This included price supports for major crops as well as increased protection for selected agriculture. Panama is currently rated 45th largest trading partner with the United States as of 2013 which totaled $11.2 billion in global two-way trading (Panama Trade). U.S. imports from Panama totaled $449 million which was a 16.9% decrease from 2012 (Panama Trade). There is a large fishing industry in Panama and it accounts for $102 million annually in exports. Most of the product shipped is shrimp and tuna along with other regional seafood. There is also a large mining industry in Panama that has been active since the Spanish expeditions. Most of the exports found in the mines of the country are gold totaling $60 million to the United States alone (Panama Trade). Some agricultural goods are exported as well since the technological advancements have reached the industry in the 1980’s. Most exports for agriculture include sugar cane, raw beet, and unroasted coffee. Panama has heavily relied on trade throughout the country since the Spanish brought shipments from Peru to the Atlantic side. Local villages and farmers would use the trade routes to purchase goods from all over the world. In current trade, Panama imports totaled $10.8 billion which was a 9.6% increase from 2012 and up 483% from 2003 (Panama). The largest imported good is oil which accounted for $5.9 billion leading the import industry with machinery coming in second largest with $711 million. The imports from the United States totaled $640 million with the leading import of soybean mean at $99 million (Panama). The other leading products included corn, dairy products, and wheat. These statistics reflect the heavy reliance Panama has on imports compared to what the country is able to export which is due to the geographical location alone. In addition to the Panama Canal there is the Colon Free Trade Zone which is currently occupied and controlled by the United States. An area on the Atlantic side of Panama covering 600 acres had begun operations in 1948. The area is known as a free port where no taxes or tariffs can be charged on products sold or exchanged within the region. The trade zone is the largest of its kind in the Americas and is the second largest in the world. It currently receives over 250,000 visitors a year where products are brought in and given to over 1,700 companies in the area (Colon Free Trade Zone). These companies are responsible for taking in the imports and products going through the canal and either assembling them, packaging the products, or then re-exporting them to the countries trading through the canal. This is a huge part of the Panamanian economy but it does not come without troubles. The free trade zone has had troubles in recent years with countries not meeting the expectations of exporters and it has resulted in unpaid debts for close countries like Venezuela. Importers from this country owe a total of $535 million at the end of 2014 (Panamá). This could be detrimental to the Panamanian economy in the coming years. Panama has been the epicenter of global trade since the discovery of the Isthmus of Panama and continues to direct the shipping industry on a shorter route than traveling below South America. With several major exports and many major imports to the country it is obvious that the country relies on international trade to keep its economy moving. It has flowed like a roller coaster with the fluctuation in trade throughout its history and it has reflected on the overall economic condition of the country. Issues that lie ahead of the country are related to the canal and the free trade zone. If these areas can remain under the safety and protection of the United States then the country will continue to prosper as debts are being paid back.

Works Cited
"Colon Free Trade Zone." Colon Free Zone, , Panama Free Zone, Panama Trade. Business Panama, n.d. Web. 06 May 2015. <http://www.businesspanama.com/investing/opportunities/cfz.php>.
"Panama | United States Trade Representative." Panama | United States Trade Representative. 2 May 2014. Web. 06 May 2015. <https://ustr.gov/countries- regions/americas/panama>.
"Panamá Espera Pago Del Gobierno Venezolano." Panamá Espera Pago Del Gobierno Venezolano. N.p., n.d. Web. 06 May 2015. <http://www.el- nacional.com/economia/Panama-espera-pago-gobierno-venezolano_0_594540668.html>.
"Panama Trade, Exports and Imports." Panama Trade, Exports and Imports. Economy Watch, Web. 06 May 2015. <http://www.economywatch.com/world_economy/panama/export- import.html>.
"The World Factbook." Central Intelligence Agency. Central Intelligence Agency, 01 May 2015. Web. 06 May 2015. <https://www.cia.gov/library/publications/the-world- factbook/geos/pm.html>.