Due to its strategic location at the mouth of two oceans,
Panama, from the time of the conquistadors, has served as the crossroad
of trade for the Americas. Today the country is an international trading,
banking, and services center. Trade liberalization and privatization
over the last several years, while flawed, have added some substance to
these assertions. Panama’s dollar-based economy offers low inflation and
zero foreign exchange risk. Panama’s Government actively seeks foreign
investment. The downturn of Panama’s economy, which started in 1999,
modestly reversed itself at the start of 2003. Panama still struggles
to overcome the departure of the US military, low prices for its primary
exports, higher prices for petroleum imports, reduced trade and investment
due to the regional and worldwide economic slowdown, and contraction
of domestic demand, however, growth in tourism, telecommunications, and
maritime sectors along with recent growth in construction portends that
first quarter 2003 gains in the Panamanian economy might continue. The
sectors of Panama’s economy that have suffered in 2002 were manufacturing
and construction, traditional agriculture, retail sales, fishing, and
the exports sector (the Colon Free Zone in particular). According to
the Government of Panama (GOP), the economy grew 0.8% in real terms in
2002, compared to 0.3% real growth in 2001. Although Panama’s 2002 per
capita GDP is among the highest in the region at US$3,699, this figure
is unreliable as an indicator of prosperity overall, because of Panama’s
highly skewed income distribution. Panama’s income distribution is second
only to Brazil in the hemisphere in terms of inequality. The Survey
of Living Standards, produced by the World Bank and the Government of
Panama in 2000, estimated that 37% of all Panamanians live in poverty,
including over 50% of children under age 10, and 95% of the indigenous population. GDP
grew 2.0% during the first quarter of 2003. The GOP predicts GDP growth
of 2-2.5% for 2003. Due to the evolution and composition of Panama’s
largely services based economy, the extent and nature of local competition
is limited in most non-service sectors. Although the United States is
Panama’s most important trading partner, with about 40% of the import
market, and U.S. products enjoy a high degree of acceptance in Panama,
competition is strong in several sectors including: telecommunications
equipment, automobiles, heavy construction equipment, consumer
electronics, computers, apparel, gifts, and novelty products. Panama’s
merchandise imports increased in 2002 by 3.5 percent over 2001 to a total
of US$3.1 billion. The value of Panama’s total merchandise exports in
2002 reached US$756 million, a decrease of 6.5 percent over the previous
year. The Colon Free Zone alone represents a larger market than Panama’s
entire internal market. Free Zone imports totaled US$4.45 billion in 2002,
with exports of US$ 4.8 billion. These figures mark a decrease of 6.5%
and 10% respectively in comparison to 2001, when imports decreased 0.6%
and exports increased 0.4%. The total net contribution of the CFZ to the
Panamanian trade balance (Exports-Imports) was US$369.3 million, down
slightly from 2001. In 1999, the CFZ experienced one of its worse years
ever, a disastrous 23% decline. Zone imports are mostly luxury goods,
electronic products, clothing, and other consumer products. Because of
this product mix, U.S. market share is somewhat lower in the Zone than
in Panama. Hong Kong is the Free Zone’s biggest supplier, while Colombia
and Ecuador are the two largest destinations for Zone re exports. As a
direct effect of economic slow down of the economy, Panama’s agriculture
sector continued to reduce its contribution to the GDP in 2002, which
stands now at 6.9%. Falling prices for export commodities such as coffee
and sugar continued affecting those sectors, reducing their exports on
an average of 2%. Banana exports decreased 13% due to access problems
to EU markets and to local labor unrest. Traditional commodities such
as rice, corn and beans suffered setbacks due to bad weather conditions
(drought caused by El Nińo), forcing an increase in imports. The sectors
that experienced the highest growth rates were fruits (mainly melons,
watermelons and pineapples) with 7% average increase, and beef with 3%
increase. Some agricultural imports are still subject to high duties
while non-tariff barriers have proven to be a persistent obstacle to
agricultural market opening. The Fisheries sector suffered a setback
with exports decreasing 12% due to recurring problems with shrimp virus
(the White Spot Virus). Panama paved the way for tuna exports by signing
the International Dolphin Conservation Program Agreement in 1998. 2002
witnessed advanced growth in the sector with tuna exports increasing to
USD 14 million (a 49% increase), mainly to U.S. markets.