Executive summary

Panama has experienced considerable socio-economic progress and improved well-being in the past decades. GDP per capita has grown considerably since 2006 at a 4.5% annual average, faster than the average of 2.8% in Latin America and Caribbean and narrowing the gap with developed countries in terms of GDP per capita. If Panama sustains this growth rate, it would become a high-income country by 2021. In addition, Panama cut its level of poverty, defined as the share of people living on less than USD 3.10 purchasing power parity (PPP) per day, in half to 8% between 2004 and 2014. Over the same decade, extreme poverty, or those living on less than USD 1.90 PPP per day, decreased by two-thirds, encompassing 3% of the population. Furthermore, Panama performs relatively well in most OECD well-being dimensions compared to countries at the same level of development.

Yet, these improvements have not benefited all groups in society equally. Significant discrepancies continue to exist between groups and regions. While economic growth has been able to lift the income of important shares of the population, Panama remains an unequal country, with income inequality levels, measured by the Gini coefficient at 0.48, significantly above the OECD average (0.32 for the Gini coefficient). Beyond incomes, access to housing, public infrastructure and services differ significantly between regions, contributing to discrepancies in the well-being of the population across the country.

A great divergence exists between urban and rural areas, and especially with comarcas indígenas or indigenous territories. People living in the comarcas are much more likely to live in poverty and to report lower levels of satisfaction about their living conditions. They are also at greater risk of having an informal job or not having access to drinkable water in their dwelling. The lowest level of electricity coverage in Panama is amongst the indigenous population. However, low outcomes regarding material and living conditions do not stop at the borders of the comarcas. Bocas del Toro, where 63% of the population is of indigenous origin according to the 2010 census, reports comparable outcomes, as does Darién, where indigenous people account for 30% of the population.

Panama needs to unlock new drivers for growth and overcome vulnerability to meet evolving demands from citizens. The country’s drivers of growth, which rely strongly on Canal activity as well as the construction and financial sectors, seem insufficient to sustain further socio-economic progress and inclusion. In addition, many of those who escaped poverty in recent years remain vulnerable and could slip back into poverty with an economic slowdown. At the same time, the emerging middle class has new and evolving demands, regarding notably public services such as education, health, housing and transportation.

Informality continues to hold back job quality. Informality, at close to 40% of non-agricultural workers, is one of the highest among Latin American countries with similar levels of income per capita. Informality is associated to high socio-economic and territorial inequalities. Young people with low education, especially those from the comarcas, are the worst affected, while higher education significantly reduces the likelihood of working informally. Poor controls and weak enforcement in the labour market coupled with deficiencies in education and active labour market policies are some of the factors behind these low outcomes.

Better jobs require further competitiveness and productivity gains across economic sectors. In the period 2004-14, labour productivity has been driven mainly by the accumulation of physical capital, while human capital and total factor productivity have contributed less than 15% of labour productivity growth. Furthermore, large productivity disparities exist between economic sectors. Low industrial and agriculture productivity growth translate into high inequalities at the regional level. Characterised as a conventional investment driven growth, Panama has the challenge to shift to a knowledge driven growth and a more diversified economic structure that expands the benefits of the Canal to other sectors and regions.

Innovation and infrastructure gaps, particularly at sub-national level, remain important. Low investment in research and development and the ineffective diffusion of knowledge affect innovation outcomes. Although Panama has made considerable progress in increasing infrastructure investment and implementing better soft solutions to improve international connectivity, more equal access to infrastructure is needed at the local level.

Panama has significant weaknesses in the area of education and skills that directly affect productivity and inclusiveness. As is the case in other countries in Latin America, the poor quality of education and high drop-out rates from secondary schools stand as key challenges since they thwart students’ path towards higher education, exacerbate inequalities and narrow the skill base of the future labour force. Additionally, the pertinence of education is low. Almost half of Panamanian formal firms report difficulties finding workers with the skills they need, compared to close to 38% in OECD countries. This highlights the importance of focusing on a wider range of skills in the curriculum. It also means improving vocational education, training and mechanisms to better match the demand and supply of skills.

Further fiscal revenues should play a more significant role in shaping income distribution in Panama. In 2015, total tax revenue and social security contributions at 16.2% of GDP are low compared to both OECD (34.3%) and Latin American (22.8%) economies. Improvements in the effectiveness and efficiency of the tax-and-transfer system should promote income redistribution and further resources are needed to finance the investment in key social areas, including education and skills.

Finally, Panama needs to strengthen its institutional capacity to adopt and implement its challenging development agenda. Confidence in institutions remains low and greater transparency is needed to build public trust in government. Panama needs to strengthen institutions’ capacity to improve evidence-based decision making and increase its capacity for long-term strategic foresight to move forward on these reforms. Although the country has a comprehensive National Development Plan (Plan Estratégico de Gobierno, 2015-19) and is currently working on a strategic plan with a 2030 horizon, planning and evaluation processes should be improved by strengthening technical capabilities within most ministries. In that context, an improvement in the institutional framework to promote green growth is fundamental. At the global level, Panama should continue implementing international standards recently approved to increase transparency and improve the exchange of tax information with other countries.

This first volume of the Multi-Dimensional Country Review of Panama identifies the main constraints for inclusive and sustainable development and the second volume of this Review will go into more details about the policy recommendations to achieve it. In particular, first, it will analyse the policies to promote social inclusiveness at the provincial level; second, it will focus on policies to boosting formal jobs, and finally, it will provide recommendations to better public and private financing policies for development. The subsequent, third volume, will focus on how to move from analysis to action, concentrating on implementation and making reform happen.