2009 Index of Economic Freedom

Quick Facts

Population:

• 3.3 million

GDP (PPP):

• $30.4 billion
• 8.7% growth
• 5.9% 5-year compound annual growth
• $9255 per capita

Unemployment:

• 6.4%

Inflation (CPI):

• 4.2%

FDI Inflow:

• $2.6 billion

Panama's economic freedom score is 64.7, making its economy the 55th freest in the 2009 Index. Its score is essentially unchanged from last year, reflecting a decrease in monetary freedom that offset slight improvements in business freedom and freedom from corruption. Panama is ranked 10th out of 29 countries in the South and Central America/Caribbean region, and its overall score is above the world and regional averages.

Panama scores relatively well in business freedom, trade freedom, fiscal freedom, government size, investment freedom, and financial freedom, and the economy has achieved steady growth of about 6 percent over the past five years. Government expenditures are low, but public debt remains large. Inflation is relatively low, but price controls distort economic incentives. Foreign investment receives national treatment in most sectors, but there are some remaining limits on foreign ownership. Panama is a regional financial hub and uses the U.S. dollar as its currency.

Challenges include the need to strengthen property rights, make labor markets more flexible, and deal with widespread corruption. The judicial system is backlogged with cases, subject to political interference, and lax in the enforcement of contracts.

Background Back to the top

Since 1999, Panama has been solely responsible for operating the Panama Canal and has converted U.S. bases in the former Canal Zone to commercial and tourism uses. Martin Torrijos, son of the late dictator Omar Torrijos, was elected president in 2004 and has won voter approval to modernize the canal with construction of a third set of locks by 2014. Negotiations for the U.S.–Panama Trade Promotion Agreement were concluded in December 2006; if ratified by both governments, this agreement, along with canal improvements, could promote economic growth and development. Banking and services are booming, but government-run education is not preparing Panama's youth for jobs in the services sector, which accounts for 80 percent of the economy.

Business Freedom 74.5 Back to the top

The overall freedom to start, operate, and close a business is relatively well protected under Panama's regulatory environment. Starting a business takes an average of 19 days, compared to the world average of 38 days. Obtaining a business license takes less than the world average of 225 days. Closing a business can be lengthy and costly.

Trade Freedom 76.2 Back to the top

Panama's weighted average tariff rate was 6.9 percent in 2006. Some high tariffs on agriculture products, import taxes, import licensing, some burdensome sanitary and phytosanitary regulations, export subsidies, weak enforcement of intellectual property rights, and corruption add to the cost of trade. Ten points were deducted from Panama's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 82.6 Back to the top

Panama has moderate income and corporate tax rates. The top income tax rate is 27 percent, and the corporate tax rate is 30 percent. Other taxes include a value-added tax (VAT) and a transfer tax. In the most recent year, overall tax revenue as a percentage of GDP was 10.6 percent.

Government Size 89.8 Back to the top

Total government expenditures, including consumption and transfer payments, are low. In the most recent year, government spending equaled 18.4 percent of GDP. A fiscal reform package enacted in January 2006 targeted the bloated public payroll and tax collection problems. The next target is the large public debt.

Monetary Freedom77.9 Back to the top

Panama has used the U.S. dollar as its legal tender since its founding in 1904. Inflation is relatively low, averaging 3.6 percent between 2005 and 2007. The government controls pharmaceutical and fuel prices, sets prices for a list of basic consumption items, and influences prices through state-owned enterprises and utilities, including electricity and water. Ten points were deducted from Panama's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom70.0 Back to the top

Foreign investment receives national treatment in most sectors. The government limits some foreign ownership—in non-franchise retail and media, for example, where ownership must be Panamanian, and in some 55 professions, such as medicine, law, and custom brokering. There is no government approval process, but investments must be registered. Some investment-related regulations are burdensome and non-transparent, and judicial processes can be cumbersome and arbitrary. Residents and non-residents may hold foreign exchange accounts. There are no restrictions or controls on payments, transactions, transfers, repatriation of profits, or capital transactions. Foreign investors may not purchase land within 10 kilometers of a national border or on an island. Domestic and foreign investors may lease but not own beaches or the shores of rivers or lakes.

Financial Freedom70.0 Back to the top

Panama's financial sector is relatively well developed and stable. The country is a regional financial hub and home to many international companies and financial institutions. Because the U.S. dollar is legal tender, there is no central bank. An independent Banking Superintendency oversees the financial sector. Regulations were largely brought into compliance with international standards in 1998; Panama has since been removed from the OECD's tax haven and money-laundering blacklist. There are few restrictions on opening banks, and the government exercises little control over the allocation of credit. Foreign and domestic banks are treated equally, and one-third of the banking sector consists of foreign institutions. Capital markets are relatively sophisticated, although the stock market trades primarily in government debt.

Property Rights30.0 Back to the top

Panama's judiciary is constitutionally independent but influenced by the executive. Businesses do not trust the system as an objective, independent arbiter in legal or commercial disputes. Backlogs and corruption are severe. The enforcement of copyrights and trademarks, though still inadequate, is improving. Special intellectual property courts hear commercial cases alleging infringement, but redress remains slow.

Freedom From Corruption32.0 Back to the top

Corruption is perceived as widespread. Panama ranks 94th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Panama is a major drug-transit country and is particularly vulnerable to money laundering because of its proximity to Colombia and other drug-producing countries. Corruption is viewed as prevalent in political parties, the National Assembly, the police, and the judiciary.

Labor Freedom44.1 Back to the top

Panama's inflexible labor regulations hinder overall productivity and employment growth. The non-salary cost of employing a worker is high, and the rigidity of hiring and firing a worker creates a disincentive for additional hiring. Regulations on the number of work hours are rigid.