Facultad de Economia y NegociosEscuela de Ingenieria Comercial | Economic development in Panama between 1995-2010 | Taller de Economía Empresarial | | José Venegas Rojas | |

Professor: John Cobin

Santiago, Chile 2013

I. - Introduction.
The controlling purpose of this paper is to review the academic literature about the economic development of Panama between 1995-2010 in Panama City. Panama is among the twenty economies which have grown the most in the past ten years, according to the World Bank, which curiously matches giving ones the administration of the Panama Canal by the United States to Panama in 1999. Most of the buildings in Panama City were built around 2000 and in order to observe this change, the financial statements of the country when it still belonged to the United States, will be analyzed so that it can be possible to consider a factor in the economic development in this country. On December 31, 1999, at midday the Panama Republic took administrative control of the Panama Canal after a long process of negotiation which started in 1977 with the signing of the Treaty between the President Jimmy Carter from the United States and the Panama president Omar Torrijos. This Treaty stated that it was an important issue that Panama guaranteed the neutrality of the Canal. This step of command happened after almost eighty-five years of diplomatic negotiations between the US and Panama. Many Panamanians considered the administration of the Panama Canal as its Third Independence after Independence of Spain and its separation from Colombia.
In 2006, during the presidency of Martin Torrijos, (son of Omar Torrijos), the Canal expansion project was approved in a referendumin order to build other set of locks on the Pacific and Atlantic oceans. The work involves the removal of about 150 Mm3 of material, the elevation of Lake Gatun, dredging waterways and entries in the Pacific and Atlantic oceans. The total cost of the project is nearly 5 MM. USD.

II. - Review of the Academic Literature.
Theory 1: The climate of the country affects its economic development.
The climate theory says that colder areas or countries tend to be more developed than the tropical, food is easier to obtain. Mazrui has addressed the importance of climate at an interview on BBC. He stated: “Food abundance in tropical and equatorial regions of the planet, unnecessary shelter or refuge from the cold and the ease of building new shacks in a short time, are holding to develop the talent in an environment where it is not really necessary” (Mazrui 1986, p. 1). He believes that the food of the streets is really easier to get and also contributes to the construction of homes with materials basic and fast, it is not necessary to take care of the cold and therefore do not need to work too hard.
Another version or complement for this theory comes from Cobin. He talks about people who live in tropical areas and the exceptions that we can find in the entire world about this theory. He described in his paper The Andean antiplano:
People in warm tropical regions do not face the same dire circumstances, being able to live with far less shelter and clothing, and having an abundant year-round food supply. Thus they tend to advance and produce less than other societies. Of course, there are some notable exceptions to this thesis, namely tropical cities Hong Kong, Singapore, Taipei, Honolulu, and, perhaps, Sao Paulo and Papeete. One might also point to thriving subtropical places like Bahrain, Brisbane, Johannesburg, and Miami as counterexamples (Cobin 2000, p. 5).

Mazrui also declared a weakness of the society in tropical Africa for their wealth of food resources and the lack of planning. Contrary to other places where people suffered from famine in catastrophic eras, in tropical areas it was not necessary a social organization for the distribution of tasks because most of the African population was not organized into states or nations.
High also comments this theory, citing Wiley, a chemist at Purdue University, Wiley believed that US farmers would starve if they failed to produce and comparing to Cobin and Mazrui agree to the tropical zones are favored with their climate and do not have the need to care for the cold and food because they can find easily on the street:
Wiley favored a tariff to protect the industry from the cheap sugar produced in tropical areas. He believed that sugar production would be a great boon to U.S. farmers, who were in constant danger of failure. People in tropics, according to Wiley, could lie on the beaches and eat coconut and bananas and still survive, but the U.S farmer would freeze and starve if he failed (High 1991, p. 100).

Theory 2: Failed government interventions cause underdevelopment.
Interventionism causes failure in the system. This theory says that the middle class is affected and the interventionism discourages effort, as well as penalizes merit and savings, by not under capitalizing that class. As Mises detailed in his book Human Action when the government fails, taxpayer wealth or income is required to bail it out:
If the government itself owns and operates plants, farms, forests, and mines, it might consider covering a part or the whole of its financial needs from interest and profit earned. But government operation of business enterprises as a rule is so inefficient that it results in losses rather than in profits. Governments must resort to taxation, i.e., they must raise revenues by forcing the subjects to surrender a part of their wealth or income (Mises 1960, p. 737).

Additionally, there are three types of fiscal interventionism according to Mises. The first is tax for suppressing or restricting the production of commodities; taxes stop to apply in national product to exclude the commodity import. The second is tax expropriation of a part of the income or assets of the people and the third is tax expropriation of all the income or assets, taking everything from them.
When governments restrict products to the society, countries will not grow due to difficult entry or more custom to enter to the society; therefore, fewer entrepreneurs will impact the country’s economy. As Mises states: “Restriction of production means that the government either forbids or makes more difficult or more expensive the production, transportation, or distribution of definite articles, or the application of definite modes of production, transportation, or distribution” (Mises 1960, p. 743).
Corruption is a wrong use of the power to get an unfair advantage, usually secret and private. Vito Tanzi defines corruption as: “Corruption is the intentional breach of the principle of impartiality in order to derive from this type of behavior personal benefit or to persons linked” (Tanzi 1995, p. 10). And when appear rent reeking could be in a case of corruption because the people will try to obtain economic wealth by manipulating the political environment of a country, instead of creating new wealth.
When people do not get their rent or have restrictions, they will try to complete it to get what they want and this is completely legal; however in other instances, rent seeking takes other forms such as bribery, corruption, smuggling, and black markets. Anne Krueger describes:
When quantitative restrictions are imposed upon and effectively constrain imports, an import license is a valuable commodity. It is well known that under some circumstances, one can estimate the tariff equivalents of a set of quantitative restrictions in the same manner as one would the tariff equivalent. In other circumstances, the resource-allocational effects of import licensing will vary, depending upon who receives the license (Krueger 1974, p. 291).

Theory 3: The protestant ethic and the spirit of capitalism cause economic development.
Authors like Max Weber, postulate that the protestant religions create a faster progress than others. This theory explains that the protestant doctrines show favorable individual enrichment in two ways: Calvinism and Lutheranism. Calvinism explains that the status of this life will be an indicative of the people for the next life. Lutheranism humiliates before God in order to push their productivity so that he can get God’s acceptance. For these reasons the countries and areas that choose these doctrines are more developed than others.
Cobin cited Weber in his paper The Andean Altiplano and he describes the thesis of Weber of capitalism and religious as protestant it shows more benefit than the Roman Catholic in the industry, he states:
Roman Catholics, observed Weber, lagged behind Protestants (Calvinists in particular) in industry. Protestants “both as ruling classes and as ruled, both as majority and as minority, have shown a special tendency to develop economic rationalism which cannot be observed to the same extent among Catholics either in the one situation or in the other. Thus the principal explanation of this difference must be sought in the permanent intrinsic character of their religious beliefs, and not only in their temporary external historico-political situations” (Weber 1958 [online], chapter 1, paragraph 5) (Cobin 2000, p. 3)

César Vidal, Protestant writer, has postulated the difference between the work and conception of this in different occidental countries, focusing on differences between Catholicism and Protestantism. He says: “The fact that the protestant reform in sixteenth century did not triumph in Spain, Italy, Greece, Ireland or Portugal had enormous consequences which transcended the religious phenomena and modeled the society, the economy and politics due to the fact that the reform showed a vision radically different of the work” (Vidal 2011, p. 1).

Theory 4: Structuralism produces underdevelopment and a larger gap between developed and underdeveloped countries.
Raul Prebisch, public accountant and economist from Argentina, states in his thesis with Hans Singer, that structuralism wears the terms of trade, in the long run, to benefit big countries and economies and damaging producing countries of raw material. They did an investigation and show the tendency of commodities producer countries to decline. Singer state as follow:
One indication of this is that the PST [Prebisch-Singer Thesis] is now incorporated, both implicitly and explicitly, in the advice given by the Bretton Woods Institutions to developing countries. They are warned to be prudent even when export prices are temporarily favorable and to guard against currency overvaluation and Dutch Disease, with all the unfavorable impact on the rest of the economy and all the dangers of macroeconomic instability which a sudden boom in a major export sector could imply. They are warned to remember that the outlook for commodity prices is not favorable and that windfalls will tend to be temporary, with the subsequent relapse likely to be greater than the temporary windfall. This is exactly the warning which the PST would give (Singer 1998, p. 3).

Contreras shows his position about this topic in his paper about competing. He argues that the raw material in Latin America at twentieth century was very important for the country economy and they should concentrate to expand their exports. He also described the structuralisms is only achievable by the interventionism of government, something that in the Theory 2 is described and their kinds with taxes customs for import. Contreras states “The structuralisms argued that the structural changes needed to bring about economic development could only be achieved by state intervention. For example, government imposed tariffs on imports were designed to stimulate the internal market by protecting new industries within the country. A tariff was viewed as a way to even the playing field between a manufacturer in an industrialized country and one in a developing nation” (Contreras 1999, p. 6).
Theory 5: Rent seeking produces underdevelopment.
Rent seeking was first introduced by Anne Krueger but only as a name. Later, it was investigated and developed in depth by Gordon Tullock. Rent seeking theory helps to focus the atenttion in the fact that public spending is not distributed according to supply and demand criteria, but according to lobby groups which aim to make themselves heard and blackmail with the objective of seek rents that are observed in grants, tariffs, fees, or any other privilege.
Gordon Tullock introduces this concept and mentions two different levels that can be found in rent seeking: individual manner and the organization or firm manner. He describes:
…an individual who invests in something that will not actually improve productivity, or will actually lower it, but that does raise his income because it gives him some special position or monopoly power, is “rent seeking” (Tullock 2005, p. 104).

Mukum explains what employees need to do in order to reach wealth due tobureaucracy and its chain of command within an organization. He introduces the concept of legality of actions that are made by those people. He describes this situation as:
If civil service salaries are relatively low, then more of the returns to bureaucratic positions may be derived from external activities. The nature of a polity’s laws and institutions has a significant impact on the ability of a public employee to seek and secure outside compensation, either legally or illegally.... Kimenyi (1987) has shown that bureaucrats in autocratic political systems are less constrained in their use of public resources to influence legislators with direct responsibility for determining civil service compensation levels. Like competitive interest groups, civil servants attempt to influence the political system in order to maximize their compensation package (Mukum 1998, p.4).

Theory 6: Neo-Marxism causes underdevelopment in poor countries. The neo-Marxists believe that underdeveloped countries cannot grow as developed exploit them. They do this by importing, as these have lower prices on natural resources developed, they process them into finished products and ship them back to very high prices.
First, neo-Marxists broadened the scope of orthodox Marxist doctrine by looking at exploitation among nations… Hence they concluded that industrialized countries historically extracted surplus value from developing countries. (Contreras 1999, p. 10).

This is making a strong dependence in the development economics, natural recourses that are exports by underdevelopment countries are very dependence of grown and sales of development countries.
…the theory was subject to a great deal of criticism, especially the neo-Marxist-based "dependency theory," which held that developing countries’ development was dependent on, and thwarted by, advanced capitalist countries (Contreras 1999, p. 11).

III. -Evidence:
Panama is one of the countries which has more economic stability according to an investigation made by the British consultancy Consensus Economics which believes that the country will growth nearly 8.1% this year. Panama can be seen as a role model within its region; the same happens with Chile and its stable development. Both countries are the most remarkable ones for foreign investors in Central America and South America.
Comparing the growing of the Gross Domestic Product, which is measured in percentage according to the difference of the previous year of both countries along with an average of the countries in Latin America and Central America, and making reference to the years that involve this research (1995-2010), a comparative graph is created which reflects the economic superiority in Chile in an specific period of the studied years. As can be seen in Figure 1, in the 90s, Chile had an important growth in its economy, but it also had many variations among the years; consequently, in the early twenty century, Chile acquired a similarity with Panama and Latin America where we can observe the great growth that was recognized by the British consultancy regarding to Panama economy.
Figure 1

Source: Anonymous (2013a). “World development indicators & global development finance”, World Bank, p. 1

Panama’s economic growth can be reflected in a recent study that is being made towards the future economic development; however, in Figure 2, a comparison of the GDP per capita in Chile and Panama is presented considering a period of time since 1990 to 2010 and in this case in dollars. Moreover, it is shown that the growth rate in Panama since the early two-thousands increases constantly.
Figure 2

Source: Anonymous (2013b). “World development indicators & global development finance”, World Bank, p. 1
While Chile as a bigger growth in comparison to Panama, as we can see in figure 2, Panama has a more constant growth and it has a smaller variance than Chile, so we can conclude that Panama is on the road to economic development and the superiority is observed compared to other countries in Central America.
Order to analyze the theory of climate respect to temperature of the country, i.e. if the country has low temperatures has higher state of economic development. Temperatures are analyzed from 1990 to 2009 in Figure 3 and observed big gap temperature between Chile and Panama. Considering an average of Chile because in the north you can find a warmer climate but in the south very cold weather, so you can test the theory that most developed country has climates colder since according to the latest graphics of Chile GDP per capita is more development economically than Panama, but Panama can be the exception of the Theory because the growth of
Figure 3

Source: Anonymous (2013c). “World development indicators & global development finance”, World Bank, p. 1
Paved roads or the constant construction of connecting roads among cities is a crucial sign of economic development. A country should be ideally completely connected and with acceptable roads so that trade can cover the whole country. The big difference between Panama and Chile is the national territory and the population of each country because Panama in 2010 reaches 3,6 million habitants in 75.416 Km², while Chile reached 17,2 million the same year in 756.096 km².
In the following figure, the percentage of paved roads in relation to the total amount of roads of the mentioned countries along from 1990 to 2010.
Figure 4

Source: Anonymous (2013d). “World development indicators & global development finance”, World Bank, p. 1
Religion in Central America belongs in a great part to Catholic Church and this is reflected in the studied countries. According to the Theory three, which relates Protestantism with the economic development, it is demonstrated that the difference between Catholicism and Protestantism is a 69% in Panama and a 55% in Chile; data collected between 2004 and 2002.
As it is shown in Figure 6 and 6.1, it is made a comparison with the PIB per capita checked in the Figure 2, and it could be approved the Protestantism Theory due to the fact that Chile has a higher percentage of that religion in the country.
Figure 5

Source: Anonymous (2013e). “Contraloria general de la Republica de Panama”, INE y Censo, p. 1

Figure 5.1

Source: Anonymous (2013f). “Instituto nacional de estadísticas: Censo 2002”, INE, p. 1

Chile is one of the countries with lower corruption rate in Latin America according to Transparency International study agency which gives this country a total score of 72; On the contrary, Panama is located in the number 83 in the world with a total score of 38. Consequently, comparing Panama with its neighbor countries in Central America, it is one of the most corrupted countries.
In all America, Chile is located in the position number four being only overcome by Canada, Barbados, and United States which makes reference to the importance and seriousness of Chilean institutions and its government. When tourist comes to Chile, they are impressed with the institution that we have and I am sure that when someone of Chile travel to a Latin America country, he is concern all the time.
Below, a comparison of Panama and Chile about freedom from corruption in the aforementioned countries is made, measured in percentages and being a hundred per cent free from corruption:
Figure 6

Source: Anonymous (2013g). “Economic Freedom at the World: 2013 annual report”, Fraser Institute, p. 1

Militarism intervention in terms of law, order, and public policies, can be observed in the Figure 8 which has the comparison of Chile, United States, and Panama.
In a scale from 1 to 10, being 10 the highest militarism intervention in the government, United States during the 90s when it has a great economic growth and the stock markets were in their highest point. Later, in the second semester of 2000 a huge slowdown in economic growth was noticed which affected business expectations.
With this Figure we can review the Theory of Interventionism and Military predator, in a scale of 1 to 10, the Military interference in creation and modification of laws and politics.
Figure 7

Source: Anonymous (2013h). “Economic Freedom at the World: 2013 annual report”, Fraser Institute, p. 1.

Order to contribute to Theory of Neo-Marxism and how it affects underdeveloped countries for its foreign trade, is observed in Figure 8 the data of imports of goods and service for Panama and Chile in recent years, and help to conclude if imports or exports and restricting these affect the economy.

Figure 8

Source: Anonymous (2013j). “Economic Freedom at the World: 2013 annual report”, Fraser Institute, p. 1.

Government interventionism is reflected in taxation on companies. They pay to state and made that the tax payers companies decrease their profit or otherwise this cost will be transferred to citizens. In the follow Figure shows the number of taxes in Chile and Panama, to conclude that in Panama is more interventionist than Chile and that affects the economy, economic development and business activities as entrepreneur’s activities.
Figure 9

Source: Anonymous (2013j). “Economic Freedom at the World: 2013 annual report”, Fraser Institute, p. 1.
IV. –Conclusion
Panama is one of the best countries with economies in Central America. It is a role in issues of urban and commercial development and can be seen in the expansion plans of the Panama Canal and the construction of subway as transportation for the people of Panama City. It's impressive economic growth that took between 2005 and 2009 where it has an average variation of 6% GDP growth.
Since year 2000 Panama's economy has stabilized and steady growth can be attributed to obtaining of the Panama Canal by the United States. According to an analysis by the BBVA Panama, Panama's economy has grown thanks to public investment, but after that growth comes slowing and will be reflected in 2014 and 2015, where it will have to face economic consequence.
Below are accepted or rejected the theories discussed in this research in order to expose the obstacles that Panama has to become a developed country. Theory | Accepted | Rejected | 1- Climate and underdevelopment | X | | 2- Government Interventionism | | X | 3- Protestant ethic | X | | 4- Structuralism | | X | 5- Rent seeking | X | | 6- Neo-Maxism | | |

III. - References.
Cobin, John (2000), “The Andean Altiplano: Lessons for the Misses-Tullock view of Development”, obtained from http://www.policyofliberty.net/AndeanAltiplano.html on September 3, 2013.
Contreras, Ricardo (1999), Competing Theories of Economic Development, obtained from http://heinonline.org/HOL/LandingPage?collection=&handle=hein.journals/tlcp9&div=15&id=&page= on October 17, 2013
High, Jack (1991), Regulation: Economic Theory and History, The University of Michigan Press: Ann Arbor.
Mazrui, Ali A. (1986), Un jardín del Edén en decadencia. Los africanos: una triple herencia. BBC: London.
Mukum, Jhon (1998), Corruption and Rent Seeking, in The Political dimension of economic growth, S. Borner and M. Paldam eds: London.
Pipes, Richard (1999), Property and Freedom, Alfred A. Knopf: New York.
Prebish, Raúl (1949), El desarrollo económico de la America latina y algunos de sus principales problemas, Naciones Unidas CEPAL: Santiago.
Rodríguez, Octavio (1993), La Teoría del Subdesarrollo de la Cepal, Siglo veintinuno de España: Madrid.
Roberts, Paul Craig and Karen Araujo (1997), The Capitalist Revolution in Latin America, Oxford University Press: New York and London.
Singer, Hans (1998), The South Letter (30) "The Terms of Trade Fifty Years Later - Convergence and Divergence, obtained from http://gesi.sozphil.uni-leipzig.de/fileadmin/media/Global_Studies/Download_Content_EMGS/Preparatory_readings/Singer_-_The_Terms_of_Trade_Fifty_Years_Later_-_Convergence_and_Divergence.pdf on October 17, 2013.
Tanzi, Vito (1995), Corruption: Arm’s-lengh Relationships and Markets, en: Fiorentini, G. y Pelzman, S.M (eds.): The Economics of Organised Crime, Cambridge: Cambridge University Press.
Tullock, Gordon (1993), Rent Seeking, The Shaftesbury Papers, Edward Elgar Publishers Co.: Brookfield, Vermont.
Vidal, César (2011), Los paises europeos más atrasados es por su “concepción católica del trabajo” España, Obtained from http://www.protestantedigital.com/ES/Espana/ articulo/13613/Concepto-catolico-del trabajo-favorece-la-crisis on Septiember 26, 2013.
Weber, Max (2004), The Protestant Ethic and the Spirit of Capitalism, Premía editora de libros: México DF.