Is Panama’s Economic Growth Sustainable?

September 24, 2010

PANAMA CITY – Panama’s apparent economic recovery, marked by a 6.1 percent growth rate for the first half of 2010, might not be as robust or sustainable as it appears, according to independent economists.

The Panamanian government this week reported that the tourism, retail and telecommunications sectors are helping the economy to recover more strongly than expected this year.

The gross domestic product (GDP) reached above $10 billion during the first semester, $581 million over the figure at the same time a year ago.

Economy and Finance Minister Alberto Vallarino said the economy could grow by 7 percent for the year – two percentage points higher than originally calculated. An increase in fourth-quarter public spending on the canal expansion project will provide an additional boost near the end of the year, he said.

Yet not everyone is celebrating. Juan Jované, a professor of economics at the University of Panama, says the country’s economic growth is “detached” from the world economy, and therefore “not sustainable.”

He said the temporary uptick in economic growth is mostly due to Panama’s public spending on infrastructure, which is compensating for the downturn in the private construction sector. But sustained economic growth will depend on a recovery of the world economy, and the rate at which it recovers, Jované said.

“The problem with the Panamanian economic model is that it functions well when two things are happening: construction and exports. If those two things are working well, then the economy is going very well. And right now construction is going well, but it is (based on) public construction projects that will end. The question is, What is going to happen to the world economy?” Jované told The Nica Times this week.

The economist noted that Panama’s public investment projects – a coastal highway project and a $5.2 billion canal expansion – were designed based on projections of growth made during a time of global economic expansion. If the world economy doesn’t live up to its previous expectations, Panama “could have a lot of problems” in the future, he said.

“We are investing in all this infrastructure (to accommodate) the world economy. We are building the new highway so that tourists come and we are expanding the Panama Canal so that more ships come,” Jované said. “But it’s like constructing a new hotel: when you are building, it creates work. But after that new jobs are going to depend on whether or not people arrive to stay in the hotel.”

And there are already some worrisome trends, the economist noted. Shipping trade has decreased for the past three years, Panama’s traditional fruit exports dipped 50 percent last year and the average real-wage salary for the middle class has dropped 10 percent in the last decade, despite record levels of economic growth, Jované notes.

So while the first semester growth numbers look good right now, he said, it might still be too soon to pop the cork on the champagne.

“Panama’s luck could last for a while and keep the country detached from the luck of the world economy,” he said. “But in the end, all will depend on what happens to the U.S. economy.”

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