Serving Foreigners

September 25, 2007

WHEN A U.S. COURT FROZE $60 MILLION IN VYthe National Bank of Panama's accounts in the United States last March, a $5 billion economy screeched to a halt. What made the Administration's economic warfare so devastating was the extreme de- pendence of Panama's economy on the services it pro- vides foreign banks and corporations. Once Washing- ton made destabilization the objective of its policy, they took their business elsewhere. Service to foreigners has been Panama's specialty for decades. At independence in 1903 the country adopted as its motto 'Pro Mundi Beneficio"-for the benefit of the world-and some would argue it has lived up to that motto only too well. The benefits Panama provides are closely related to its geographic location as a transit route for goods, money, people and informa- tion. Besides the canal, today Panama offers the world the Col6n duty-free zone, an international banking cen- ter, Panamanian ship registry (previously known as flag of convenience), loose laws of incorporation, and the transisthmian oil pipeline. This combination of facili- ties for international business, known as the transna- tional services platform, accounts for much of the coun- try's gross domestic product. Relative to its neighbors, Panama's service economy has served Panama well. At $2,100, Panama's income per capita last year was one of the highest in Latin America, and its inflation rate (3%) one of the lowest. Yet its national debt per capita, around $2,000, was one of the highest, and income distribution one of the most unequal. While average life expectancy is a respectable 69 years for men and 72 for women, government figures Panama City's financial district JU.I VIflU'JU I 170 Ju. I/a.UUJI L00 IPANAMA show that one-third of the population was unable to satisfy minimal needs for food and shelter, even before the Reagan Administration's sanctions wrought eco- nomic disaster. The major users of the transnational services plat- form are U.S. and Japanese corporations, although this "crossroads of the world" has become a useful place for Latin American, European and other Asian countries to do business as well. Two factors made Panama par- ticularly attractive: the free circulation of U.S. dollars throughout the country (according to a 1904 conven- tion, Panama reserves the right to mint balboa coins only), and the "stabilizing" presence of 2,000 U.S. troops at the Southern Command. N 1987, 140 MILLION LONG TONS OF CARGO passed through the Panama Canal, 5% by volume of all world trade. Seventy percent of these goods were involved in direct trade with the United States, the larg- est volume travelling from the U.S. East Coast to Asia. In terms of value, however, the transport of vehicles and other manufactured goods from Asia to eastern United States is probably most important. Though Latin American traffic through the canal is of less volume, it is vital for those countries on the Pacific coast, carrying more than 40% of their external trade. The direct contri- bution of the canal to Panama's GDP is around 8%, and some 7,000 Panamanians are employed by the Canal Commission. The Col6n Free Zone, established at the Atlantic end of the canal after World War II, is now the second largest in the world after Hong Kong. This tax-free warehousing enclave does $4 billion of business in im- port and re-export of predominantly high- value, low volume luxury items and electronic goods from the Far East, the United States and Europe, for sale throughout Central and South America. In comparison, the Miami duty-free zone's 1987 business was worth only $600 million. Panama's Zone employs 5,000 people in over 600 companies in the depressed city of Col6n and it contributes around 3% of GDP. The oil pipeline, which carries 600,000 barrels of Alaskan North Slope oil per day, is another story. Pipe- lines in the United States can be delayed for years while environmental impact statements are prepared and evaluated. This 80-kilometer tube stretching from the Pacific to the Atlantic coasts of Panama was erected just a few months after the contract was signed in 1981. At the time it was called the first "throwaway" pipeline on the grounds that it would soon be superceded by a more direct alternative on the North American main- land. Investors got their money back in a record 18 months. In fact, one third of the whole Alaska North Slope output still flows bountifully through it. No state- side pipeline yet built could handle this additional vol- ume, and there are still restrictions on the export of Alaskan oil. Though it directly employs only 400 people, its contribution to GDP is around 3% in current prices, greater than that of the Col6n Free Zone. Panama's ship registry now covers 10% of the world merchant fleet, some 12,500 ships, making it the second largest in the world. Neither the management nor the real ownership of the fleet, however, is in Panamanian hands. The main beneficiaries are Japan, the United States, West Germany and the United Kingdom, al- though Panama's consular officials do earn sizeable commissions and ship registry brings up to $30 million in foreign exchange to the treasury each year. The success of the ship registry is tied to the conven- ient flexibility of Panama's 1927 incorporation law, based on that of the state of Delaware. Estimates of the total number of Panamanian "paper companies," as they are sometimes called, range up to 100,000. New companies were being registered at the rate of 114 a day before the political crisis broke out in June 1987. Panama's international banking center took off in 1970, when the government set the ground rules for tax- free, unrestricted, anonymous accounts. It peaked in 1982 with $49 billion in assets, held by a total of 124 banks with international or general license. In 1984, when total assets were $39 billion, 24% were in 11 U.S. banks, and 16% in eight Japanese banks. When sanc- tions were imposed this year, Panama was host to 120 banks with assets of just over $20 billion, down primar- ily due to the political crisis. Panamanian deposits and loans to local residents have never been more than a quarter of the total activities carried out at the banking center. Secret banking naturally attracts illicit money, in- cluding profits from drug and weapons transactions, and the take of crooked politicians from around the globe. Related international financial services, such as insurance and reinsurance, and the ease with which cor- porations are created and dissolved-Oliver North had three-turned Panama into a beehive for commerce, for- eign exchange transactions, countertrade and rediscount activities. At its peak the financial services sector em- ployed around 8,000 people and generated demand for upmarket condominiums and modern office buildings alongside antiquated shacks. This lucrative network of no-questions-asked banks and dummy corporations employs an army of highly trained lawyers, accountants and their bilingual secre- taries. They all rose in a chorus of outrage in 1986 when the United States pressed for a change in the bank secrecy laws, ostensibly to prevent illicit money laun- dering. This move was seen as "the thin end of a penetrate Panamanian sovereignty," as one critic put it, which could allow U.S. tax authorities access to other company information. Though an alternative system of controlling drug money was finally adopted, Gen. Noriega did cooper- ate with U.S. Attorney General Edwin Meese in "Op- eration Pisces" in March 1987, further incensing the REPORT ON THE AMERICASentire banking community. Panama's government froze 18 accounts in ten banks, employing such heavy- handed tactics as cutting off the banks' communications with the outside world while each manager was obliged to comply. N 1986, U.S. DIRECT INVESTMENT IN PAN- ama totalled $4.5 billion, the third largest in Latin America; Japanese direct investment was over $8 bil- lion, the largest in the world after its investment in the United States. As one might suspect, the Japanese have not one single manufacturing subsidiary in Panama. Much of their investment is tied up in Panama-regis- tered ships, while the rest is largely in financial serv- ices. Japanese corporations use Panama as a marketing and service center for their business activities through- out Latin America. U.S. investment is also largely in the financial (non- banking) sector, but many U.S. companies do have manufacturing facilities in the country, some of them producing for the regional market. While it has been estimated that two-thirds of U.S. private investment is offshore-that is, non-productive-a good estimate for Japan's would put it over three-fourths. However, the spokesman for the American Chamber of Commerce in Panama reckons that fully one-half of all private sector business in Panama is U.S.-related. Panama's motto: "For the benefit of the world" Add to this the bazaar atmosphere of downtown Pan- ama City with its business tourism and casinos, and it is not surprising to find that half the economic activity of the country is devoted to private services. Industry accounts for a scant 9% of GDP and agriculture only 10%, a third of which is taken up by bananas for export. Yes, Panama is also a banana republic. The fruit is the largest single export commodity, earning 20% of Pan- ama's foreign exchange from the export of goods in 1986. A look at employment figures gives an idea of why the top 5% of the population receives 17.8% of the national income, while the bottom 20% receives only 2.1%. Thirty percent of the economically active popu- lation works in agriculture, most of them subsistence farmers who complement their meager income with oc- casional day labor. Another 28% of those working are employed in unspecified social and personal services- the other pole of low productivity-primarily in urban areas. P ANAMA SHARES WITH THE REST OF LATIN America the weighty problem of public indebted- ness. At the end of 1987, the external public debt amounted to $3,968 million, equivalent to 75% of GDP. Internal debt was another billion dollars, and the 1987 government budget assigned 51% of outflows to debt v-amos hacia ;PANAMA service and capital repayments. In view of the political crisis and ensuing fiscal crisis, Panama suspended debt servicing payments in June 1987. In November the World Bank suspended disbursements and in March the Inter-American Development Bank followed suit. That same month Panama became the first developing coun- try to effectively default on yen bonds issued in the Tokyo capital market, a situation of which Japanese bankers took an extremely dim view. Since 1983 the government has been struggling to implement a standard "structural adjustment" policy, as recommended by the World Bank and the Interna- tional Monetary Fund. As it includes reducing the benefits of the Social Security system, removing protec- tionist tariffs from agriculture and industry, and cutting back on public sector activities, the policy has met widespread resistance. In a country where barely 19% of GDP is generated by agriculture and industry, the World Bank/IMF has pushed forward on the absurd hope that by growing melons for export Panama could somehow pay off its enormous debt. S NE REASON WHY PANAMA'S ECONOMY shook so violently when dollar accounts in the United States were frozen in March is that U.S. sanc- tions were only the last of several steps taken to destroy business confidence in Panama. Previously the Ad- ministration had cancelled Panama's sugar quota, cut off its military and economic aid, vetoed loans and payments to Panama in international financial organiza- tions, and excluded it from the Caribbean Basin Initia- tive. A few weeks after sanctions were imposed the economy was in shambles, with the public sector living on borrowed time as well as borrowed money, and the private sector operating at half its capacity. Some bank- ers predict that by the end of the year, unless new elements are introduced to shore up the house or to replace it, the only part left standing will be the canal. Open unemployment reached 17% by June, compared with 12% nine months earlier. In many companies, those employees not laid off are working for half, a third, even one-fourth of their former salaries. Some of those who were laid off with redundancy payments to be paid over two years are re-hired on a daily basis and paid according to the day's earnings. So much for the Labor Code, Social Security coverage, retirement bene- fits and job stability. The estimated 35,000 people who work in construction and the 15% of Panama's industry devoted to producing construction materials work en- tirely on credit, and were worst hit. Public works projects, which were reduced last year and further slashed in 1988, cannot possibly compensate for the paralysis of the private sector. On the other hand, the economy has yet to collapse entirely because nearly one-fourth of the working popu- lation, more than 150,000 people, are public employees. When the government succeeded in making its checks negotiable instruments of exchange, that alone allowed for a significant margin of maneuverability. In June, estimates of damage to the economy in 1988 alone ranged from a 12% reduction in GDP, if the eco- nomic sanctions had been lifted then, to over 20% if they were not. At that time, food and fuel sales were 30% below normal and industry was working at 40% of its usual level. Health, nutritional and educational stan- dards will inevitably decline, as there are no resources for preventive action, and few materials in the schools and universities. These damage estimates show the impact of the sanctions on Panama to be extraordinarily high when compared with other cases where sanctions were used to destabilize a government. In an analysis of more than 70 cases since 1900, the Washington-based Institute for International Economics found only three others in which the cost to the target country as a percentage of GNP was greater than 10%: the US/UK against Iran in 1951 (14%), the UK/UN against Rhodesia in 1965 (12%) and in 1982, the Netherlands against Suriname (10%). That same study also showed that where eco- nomic sanctions were successful in helping bring about a change in government or in a particular policy, the sanctions lasted an average of 4.3 years, the failures an average of seven years. Sanctions invite contraband, solidarity from other countries, nationalism and diversification, all of which are cards which the Panamanian government has played with some success. The very openness of the economy and use of the dollar have helped keep some economic circuits moving. One cynic noted that while the Medellin cartel used to pay a commission to launder money in Panama, they now charge one to cash govern- ment checks! In the past decade Panama's strategy has been to diversify the services it offers foreign capital hoping that this would stimulate the domestic economy. Vast increases in public sector investment, funded by bor- rowing in the days of easy money, were spent on im- proving social services and basic infrastructure. A great number of jobs were created in the expanding public sector, but no sustainable productive base capable of satisfying the population's need for jobs, food and hous- ing was achieved. Those days have gone forever, and no easy answers are on the horizon. Alternatives being contemplated range from turning the country into a vast international shopping mall to an Albania-style radical autarky. The government is desperately seeking non-traditional sources of finance. And the opposition is still hoping for a miracle, like the injection of a billion dollars from the United States, to get things moving again. There is one thing on which all sides agree: The longer the cur- rent situation lasts, the worse it will be for everyone.

Tags: Panama, US involvement, political elite, Imperialism, dependency

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