The Economic Miracle of Panama

Introduction

Panama is the richest country in Latin America, an economic miracle without the help of oil reserves and its exploitation.
The GDP per capita of the country continues to grow at an annual rate of 4.4%, gaining ground in the US.
The International Monetary Fund (IMF) stated that:
"It has been one of the economies that has grown the fastest in 25 years, in just a few years it has become the richest country in the entire region."

Latin America is that eternal promise that never ends. A region with great natural resources, without war conflicts in sight and with great potential, but that has not yet found the path to prosperity. However, there are always exceptions.

Panama: A Wealthy Nation Without Oil

Within the Latin America region, there is a country, Panama, whose per capita income has reached levels worthy of a developed economy.
In addition, its economic growth remains relatively high in terms of GDP per capita, with a rate of variation that exceeds 4%.
What is even more surprising is that this country does not have oil, although it has something that resembles it and that is really what has made it the most prosperous nation in Latin America: a canal that has revolutionized international trade.

Panama's Economic Growth and Global Standing

Panama has the highest GDP per capita in purchasing power parity or PPP (eliminates price distortions in different economies) in all of Latin America.
But what is more, according to data from the World Bank, this indicator is growing at a rate of 4.4% annually, a true miracle for a country whose PPP per capita income is close to $43,000 (the more developed an economy is, the more difficult it is to present high GDP per capita growth rates).
All of this is allowing Panama to see itself increasingly closer to the United States in terms of wealth per inhabitant.

IMF Analysis of Panama's Success

Such is the miracle that the International Monetary Fund (IMF) has carried out a dense work in which it analyzes the factors that explain the success of this small economy.
The conclusions are clear:
"Panama has achieved income convergence to US standards much faster than most other Latin American countries over the past 25 years and is now the richest country in Latin America," the report says.
Although its miracle has been remarkable, experts say it is still a bit short of that achieved by South Korea, for example.

Historical Perspective on Panama's Economic Progress

In 1994, Panama's GDP per capita went from representing 33% of the GDP of the United States, while today it is already close to 50%, making it one of the fastest-growing economies in terms of per capita during that period in the world.
Today, Panama is classified as an upper-middle-income emerging market economy (although the World Bank already includes it among developed economies).
Its GDP per capita adjusted for purchasing power parity (PPP) stood at around $42,000 in 2023, ranking among the 35 countries with the highest GDP in the Penn World Table sample of 114 countries.
The standard Gross Domestic Product is around $19,000 in 2024.

Not only the IMF, but the World Bank also shows its amazement at Panama's success story:
"Over the past thirty years, economic growth has generated employment and significantly reduced poverty, which has decreased from 48.2% in 1991 to 12.9% in 2023."
However, the weak point remains inequality between people and territories, especially in rural areas.

Since the 2000s, Panama has become decoupled from the rest of the region.
In 1970, Panama's GDP per capita was roughly equal to that of the Latin American and Caribbean region as a whole and lower than that of Chile, Costa Rica, Uruguay, Mexico, Ecuador, Jamaica, Nicaragua, and Barbados. However, since 1990, Panama's growth performance has been very strong and, in 2023, Panama had a higher per capita product than any other country in the region, the IMF report highlights.

Drivers of Panama's Economic Growth

Panama has experienced a boom unparalleled in the region (well, yes, the case of Guyana, but this is distorted by the large oil discoveries), often referred to as the "Panamanian economic miracle."

This growth has been supported by several key factors, but above all by investment and the income generated by the Panama Canal thanks to globalization.
The expansion and modernization of the Panama Canal have been fundamental, as they have significantly increased toll revenues and consolidated the country as a global logistics centre.
In addition, the Colon Free Zone has played a crucial role in international trade, facilitating the transit of goods and attracting foreign investment.
"In terms of demand factors, much of Panama's strong growth was the result of a marked increase in the investment/GDP ratio," the IMF highlights.

Investment is everything in Panama. Therefore, investment has an extremely high weight in the Panamanian economy. The Panama Canal and its privileged geographical location mean that investment in infrastructure and real estate is one of the drivers of GDP.

This is how the IMF explains it: "The most important factor in Panama's recent dissociation from the rest of Latin America and the Caribbean in terms of per capita production is the growth of investment, particularly due to a boom in construction (most of which is commercial real estate), which cannot outpace the growth of the rest of the economy indefinitely," they explain.

Economic Policies and Stability

Another determining factor has been the adoption of market-oriented economic policies and trade liberalization.
Panama's accession to the World Trade Organization in 1997 and the signing of multiple free trade agreements have opened new markets and encouraged foreign direct investment.
These policies have diversified the Panamanian economy, reducing its dependence on traditional sectors and promoting the development of financial services, tourism, and construction.

On the other hand, political and macroeconomic stability have also been essential for Panama's sustained growth.
The dollarization of the economy has helped maintain low and stable inflation, while fiscal reforms have strengthened public finances (the country is rapidly reducing its deficit).

These conditions have created a favourable environment for business, attracting investment and stimulating economic growth. As a result, the Panamanian economy has grown at a faster rate than most countries in the region, consolidating itself as one of the most dynamic in Latin America.

Indeed, Covid hit harder than elsewhere, which led many analysts to believe that the Panamanian miracle had come to an end. But the truth is that the recovery has been spectacular.

After a recovery on par with the miracle of the previous 20 years, in 2023 Panama's economy grew by 4.4% in terms of GDP per capita: "For the third consecutive year, real GDP growth surprised on the upside, reaching 7.3% in 2023. Rapid growth was driven by a rebound in construction, retail and wholesale trade, transport and logistics. On the expenditure side, growth was driven by very strong information on fixed capital, while private consumption growth lagged behind GDP growth” supports the IMF.

“GDP is now well above pre-Covid levels and unemployment is close to pre-crisis levels. GDP has grown by 39% since 2020 and 14% since 2019 and exceeded pre-crisis levels in 2022," explains the IMF.

Future Outlook

However, rapid growth was driven by an unprecedented construction and investment boom that included major projects such as the expansion of the Panama Canal and Tocumen Airport, and the expansion of the service and logistics sectors that benefited from these engineering works," the IMF notes.

This may be a problem in the medium term. In recent years and over the past two decades, growth has come from investment and construction.
Now that the Panama Canal, its remodelling and indirect works have been completed, future growth will have to come from other sectors.

The income generated by this engineering work on a recurring basis gives the country time, but if it wants to maintain the very high growth rates it has shown in recent years, it will need to find alternative sectors with potential, a task that is not easy.

Sources & Footnotes

[1] IMF: Panama Economic Data
[2] IMF Official Website
[3] World Bank: Panama Overview