From Annex to Autonomy: A Centennial Exploration of Panama’s National Development Path

Abstract

With its strategic position and convenience for trade and commerce, Panama connects two oceans by a Canal and links the Americas via the isthmus. The construction of Panama Canal led to the independence of Panama. In the early days, with its territory divided into two parts and its politics and economy totally dependent on the United States, Panama was more like an annex of the Canal Zone which was under the jurisdiction of the United States. Throughout the twentieth century, in addition to the strenuous efforts for the sovereignty over the Canal Zone, Panama has also been exploring its own model of development. A long-term plan, rooted back to the Torrijos era in the 1970s and implemented after the return of the Canal, is the main line of Panama's development. Based on its own characteristics, Panama focuses on the service sector and gradually forms its four pillars on Canal, duty-free zone, finance and tourism. In the new century, the vision of “Hub of the Americas” was proposed to integrate all Canal, maritime and logistics-related industries and make Panama the “Singapore of the America”. While these achievements have been widely recognized by the international community, Panama still faces challenges such as the enormous gap between the rich and the poor. Whether these challenges can be overcome will determine the prospects of Panama.

1 Introduction

1.1 The Background of the Founding of Panama

Located at the intersection of the isthmus between North and South America, Panama enjoys a superior geographical location. Colón on the Caribbean coast is only 80 km away from Panama City by the Pacific Ocean. Therefore, Panama is geographically inseparable from business activities. Back to the colonial times, Panama was once the only route for the Spanish Empire to transport Peruvian silver. After more than a century of hiatus, the completion of the Panama Canal Railway in 1855 made Panama once again a dream route for American gold prospectors from the East Coast to California.¹ With the rapid rise of American national power at the end of the nineteenth century, it became a pressing need to effectively coordinate the shipping routes between the east and west coasts. Soon Americans turned their attention to the French Panama Canal project which was abandoned halfway in the 1880s.

Colombia, then sovereign over Panama, was plunged into chaos by the Thousand Days’ War that began in 1899. The Americans, with their overwhelmingly superior national power after the victory of the Spanish-American War, instigated the independence of Panama in 1903 when the negotiation with Colombia failed, and forced the newly born Panama to accept the completely unequal “Hay-Bunau-Varilla Treaty”.² The treaty stipulates that the United States has the right to permanently build, operate and manage the Panama Canal, and sets aside an area of 1432 km² on both sides of the Canal as the Canal zone that is fully governed by the United States.³ The Canal Zone was a de facto American colony in Panama. Panama was divided into two disconnected areas and the second largest city, Colón, had actually become an enclave.

1.2 The Canal and Panama’s Development

Historically, Panama lacked a strong traditional agricultural sector. The slave owners, churches, large landowners, and caudillos who exerted a great influence in other Latin American countries were weak. The politics was dominated by weak urban business elites.⁴ The early Panama government, also called as a puppet regime of commercial oligarchy by the left, could only maintain its governance relying on the support from the United States.⁵ Until the 1960s, Panama depended on the service sector in an entrepot economy. Susceptible to the fluctuations in the international economy, the Canal, which was under the full jurisdiction of the United States, had not invigorated the country.⁶

The entire history of Panama in the twentieth century revolves around struggle and development of the Canal. The Panamanian people and government have gone through multiple stages of being a protectorate, awakening, continuous struggle and gaming, treaty signing, war and cooperation, until they finally fully recovered the sovereignty over the Canal on December 31, 1999. During this century-long process, the Panamanians have gradually cultivated a sense of national identity and clarified the direction of national development, i.e., to focus on the development of the service sector by utilizing their own geographical advantages and to strive to build the “center port”⁷ of the America with Canals, free trade zones, finance and tourism as the four pillars. Among them, a series of measures during the Torrijos military regime in the 1970s had laid a foundation for the future development of Panama: on one hand, the previously marginalized working class and ethnic minorities were incorporated in the national development⁸; on the other hand, the influence of the long-term strategic development plan formulated during this period has sustained until today.⁹

After recovery of the full sovereignty over the Canal Zone, Panama continues to develop along the established path with its economic growth rate twice as the average level of Latin America during the same period in the twenty-first century. In 2019, Panama’s GDP per capita reached US$ 15,731, ranking among the highest in Latin America.¹⁰ As for the lifeblood of the national economy, i.e., the Canal and maritime businesses, Panama established professional institutions such as the Panama Canal Authority (ACP) and the Panama Maritime Authority (AMP), and adopted corporate management model to avoid the influence from political volatility. This model works very well. Instead of the anticipated problems, the revenue of the Canal operated by the Panamanians has increased significantly through reforming the tolling model. This further strengthens the consensus of whole Panama on separating enterprises of ACP and AMP from the government, and boosts the confidence of all business sectors in the national development model.¹¹ Although every general election since the 1990s has undergone political party rotation, all the successive governments have effectively sustained the strategic policy of national development, which integrates the Canal and the maritime industry into an all-in-one “hub of the Americas” covering multiple aspects of economy, trade, logistics, finance and HQ economy to create a “Singapore of the Americas” in the western hemisphere.¹²

This article will focus on the main line of “the hub of the America” and review Panama’s exploration into its own development model in the past 100 years so as to explore the successful experiences, risks and challenges of Panama's development model.

2 From a Fledgling Small Country to a Strongman Leadership: Limited Autonomy in a Protectorate

2.1 The Efforts to Gain Autonomy in Early Years

Completed in 1914, the Panama Canal was regarded as the quintessential work embodying the prosperity and mission of the United States.¹³ The United States completely dominated all the affairs including capital, technology, labor, and materials. The large-scale influx of labor from all over the world, especially the Caribbean region, permanently changed the demographic structure of Panama.¹⁴ In the early stages of the construction and completion of the Canal, the Americans regarded Panama as a tropical wilderness and only cared about the Canal. Whenever there was an incident in Panama that the United States considered unfavorable to the Canal, the latter would intervene.¹⁵ In stark contrast, the Republic of Panama was excluded from Canal affairs. Weak in its national power, Panama had only 300,000 people when the state was founded in 1903. The oligarchy, traditionally composed of business elites and “rentistas”, benefited from the so-called “national independence” under the aegis of the United States and limited economic and trade exchanges with the Canal Zone. Whatever actions the United States took, they just followed suit so that people at that time thought “it is ridiculous to discuss Panama as an independent state because it is just an annex to the Canal Zone”.^{16 17}

Panama’s tentative exploration of autonomy began under the regime of President Belisario Porras (1912–1916, 1918–1924). During his tenure, Panama attempted to amend the Canal treaty, invested on infrastructure, funded scholarships to cultivate talents, and fought a failed but glorious border war with Costa Rica in 1925. Hence, the preliminary state system in Panama was established.¹⁸ These series of actions, together with Porras’ ideology, had effectively promoted the national identity within Panama and enhanced Panama's state capability. By the 1930s, the populist wave that swept across Latin America affected Panama. The Arias brothers came to power successively. Born in a small town, they received a systematic education overseas thanks to the Porras Scholarship Program. They themselves were the products of Panama's pursuit of independent development.¹⁹ Arnulfo Arias, the younger brother, implemented a series of nationalist policies and put forward the slogan of “Panama for Panamanians” during his administration.²⁰ Since then, the public and covert struggles over the rights of the Canal dictated US-Panama relations, and consequently Panama gradually recovered some of its economic interests in the Canal.

During World War II, Panama's political and economic situation was relatively stable. The wartime economy and the construction of a series of US military bases brought relatively rich economic benefits to Panama. By the early 1950s, Panama’s population expanded to more than 1 million. The oligarchs still controlled the regime, and the economic structure based on entrepot trade was not much different from the colonial period hundreds of years ago. In agriculture, apart from the poor peasantry across the country, there were only a few plantations in the northwest that served as extensions of American companies in the Central American “Banana Republic”. The Canal was still a strategic passage for Americans, and the Panamanians only got a bit of commercial benefits from the annuity and the Canal area business activities. It is worth mentioning that the Colón Free Zone, established in 1948, could be regarded as a landmark move by Panama in its independent exploration for economic development, though there were only some duty-free warehouses and duty-free goods for sale at the early stage.

On the other hand, Panama was trying to expand maritime service of which notably was the ship registry.²¹ After the WWII, due to the increasingly stringent labor laws in western developed countries, shipowners looking for low costs tried to register their ships in developing countries to avoid supervision and reduce costs. Panama took advantage of its special relationship with the United States and the convenience of the Canal to seize this opportunity together with countries like Liberia. It is noteworthy that the early Panamanian ship registry industry was the product of balancing the domestic interests within the United States. Panama was just interested in making profits from certification while ignoring to fulfill the responsibility of managing the ship affairs as their flag country. This led to long-term criticism. However, the Panama ship registry has gradually become formalized and standardized as time went by, and eventually an important part of Panama maritime sector.

The Cuban Revolution in 1959 brought a new upsurge of anti-American campaigns to Panama. Thanks to the development of education, the burgeoning elite and middle class spearheaded the campaigns. Only with the full sovereignty over the Canal, they firmly believed, could Panama become a truly independent state. The 1964 Flag Incidents (Martyrs’ Day by Panama) led by teachers and students raised worldwide concerns and sympathy, which domestically shook the foundation of the oligarchic business class.²²

2.2 National Development Strategy in the Torrijos Era

Panama was under the leadership of General Omar Torrijos Herrera from 1968 to 1981. This period is labeled as “military autocracy” by the American narrative, an original sin that could never be erased. However, in the context of Cold War confrontations at that time, the United States acquiesced and even supported the military regimes in Latin America in the 1960s and 1970s.²³ Regardless of how it was judged, the Torrijos era was usually acknowledged as the starting point for the economic takeoff of contemporary Panama.

After coming to power through a coup and consolidating his authority, Torrijos, who was born into an impoverished family, modeled himself on the style of the Peruvian left-wing Velasco military regime and chanted a slogan called “New Panama”, dedicating to land reform, economic development and the improvement of people’s welfare benefits.²⁴ As a military who was not directly involved in governance of the country, Torrijos appointed a group of technocrats, including Ardito Barletta, the Planning Minister who would later become vice president of the World Bank and president of Panama.

Advocated and led by Barletta, Panama formulated a comprehensive development plan called “National Development Strategy 1970–1980”.²⁵ Ensured by the prospect that Torrijos could stay in power for a long term, the economic measures of the whole government could be carried out with a long-run consideration. Different from the import-substitution model that prevailed in almost all of Latin America in the 1960s and 1970s, Panama evaded the advice of focusing on the industrial, agricultural and mining development.²⁶ The core of Barletta's development strategy was to maximize Panama’s own geographical advantages to build a service-oriented economy fully integrated into the global commerce, manufacturing, labor and financial markets with the Canal as its axis.²⁷

It is far from enough to rely on a Canal alone to become a trade and logistics center. It needs to be upgraded to a hub. Therefore, port and airport expansion, isthmus railway and road construction were included in the plan which embodied the emerging trend of multi-modal transport. In the aspect of port construction, the 1970s witnessed the burgeoning stage of container transportation. Barletta keenly captured this trend and proposed to build container terminals to make Panama a container transshipment hub for the entire Central America and Caribbean region. The Colón Free Zone was expanded during this period. It gradually emerged as the most important global commodity distribution center in the region, and assembly manufacturing in the form of a bonded zone was also developed. Moreover, Panama's offshore financial sector initiated from the 1970s for the sake of facilitating the capitalization of the economy and using the flowing capital to serve Panama’s service economy. Talent introduction is also an important part of the strategic planning. Barletta’s vision was to utilize the Colón Free Zone and the banking industry to attract companies to set up branches in Panama. Therefore, Panama’s visa policy has always been lax among Latin American countries.

This was a comprehensive and forward-looking plan in line with Panama's national conditions and competitive advantages. On one hand, it foresaw the trend of globalization and shipping containerization in the early 1970s; on the other hand, it also resolutely incorporated the Canal zone with an undetermined return date into the planning blueprint. This foresight set the direction and laid the foundation for the smooth development of Panama in the future, reflecting the national consensus of Panama as the “hub of the Americas”. It is most noteworthy that although Panama experienced setbacks and multiple tests of economic crises in the late 1980s, the direction of national development has never deviated from this correct track. In the context of Canal treaty negotiation at the time, this plan also boosted the fighting morale and confidence of the Panamanian government and people for the sovereignty over the Canal.

Torrijos’ greatest contribution to Panama was the signing of the Torrijos-Carter Treaty (the New Panama Canal Treaty) in 1977. Without the return of the Canal Zone, no visionary plan would be possible. The Canal Treaty is a classic case gaming between small and great powers in which Torrijos’ pragmatism played an important role. During the lengthy negotiation, the Panamanian government made full use of the United Nations and other international multilateral arenas. This action extensively mobilized the third world and fellow Latin American countries and it even drove the United States to cast a veto in the UN Security Council meeting.²⁸ The signing of the Canal Treaty and the Panamanian vision of a hub in the Americas promoted each other. It was the most important moment in Panamanian history and remained a cornerstone of the future development of Panama.

The Canal Treaty stipulates that the United States should gradually return to Panama all the land and facilities of the Canal and Canal zone by December 31, 1999, and assist Panama to complete the handover of the Canal management. Since then, Panama's development exploration ushered into a new stage.

3 Out of the Gloom and Draw a Blueprint: Looking for Opportunities Amid Crises and Ready for Actions

3.1 “The Lost Decade” of Panama

Latin America suffered a “lost decade” in the 1980s. Countries were generally in high debt, and the import-substitution policy once effective in the 1960s and 1970s appeared to be unsustainable. For the outward Panama economy, the impact of regional depression was inevitable, and the huge fiscal deficit put the country in a difficult position. After Torrijos died in an air crash in 1981, the de facto leader became Noriega, who used to be a CIA partner and later contributed a lot to the US intervention in Nicaragua's civil war during the Reagan administration.

At first, Noriega stayed behind the scenes, promising to restore and respect democratic elections. He invited Barletta to run in the 1984 election as a candidate of the military-backed Democratic Revolutionary Party (PRD).²⁹ After a narrow victory over Arnulfo Arias, Barletta continued his national development strategy from the Torrijos era, and further proposed a plan to make Panama a global hub for services and trade, following the role model of Singapore. However, as a brilliant technocrat Barletta lacked political savvy and only focused on the economy. He was eventually forced to resign in late 1985 due to unpopular austerity policies and a conflict with Noriega over a political assassination.³⁰

After that, the political and economic situation in Panama plunged into a downturn, and lack of checks and balances under the military regime became fatal. Unlike Torrijos, Noriega was a willful leader without strategic vision. The government of Panama became tantamount to corruption.³¹ It was even worse that the United States has changed its strategy since the mid-1980s and became increasingly hostile to the military regimes in Latin America. What cannot be ignored was the powerful propaganda apparatus of the United States. The United States attacked and sanctioned Panama in politics, economy, and public opinion in order to overthrow the Noriega regime. Noriega was labeled a villain and dictator engaging in drug trafficking, money laundering, human trafficking and arms smuggling.³² Under the dual reasons of the widespread hatred toward the Noriega by the United States and a series of decision-making mistakes by the Noriega regime, the flagrant invasion to Panama by the United States in late 1989, the so-called “Operation Just Cause”, finally occurred.

The war not only devastated the Panama economy, but also resulted in the loss of a large number of lives and indelible scars on the hearts of Panamanians.³³ In contrast to the adequate military preparations, the Americans attached little importance to post-war reconstruction. Panama was consequently plunged into chaos. Guillermo Endara, the new US-backed president, was little more than a puppet and a lame duck. He himself even complained that all of his decisions must be dictated by the US military.³⁴ For a time, Panama seemed to have returned to the early days of its founding. The US government promised to provide post-war assistance to Panama but ended up in lip service due to the obstruction of Congress. The prospect of the Canal treaty was also highly volatile.

Panama’s vulnerability as a tiny commercial state was manifested in the dark history of this period. Foreign relation, especially dealing with the United States, is a permanent issue that Panama must face. Torrijos’ and Noriega's responses are a stark contrast.

3.2 Transformation and Layout of the Canal Before its Return

Panama gradually regained stability in the early 1990s as relation with the United States restored, and the economy rebounded quickly with the recovery of foreign investments and trade after sanctions were lifted. Despite his low personal reputation, Endara laid many important foundations for Panama institutionally during his tenure³⁵: Firstly, the establishment of an electoral court guaranteed that all the subsequent elections were held smoothly under its supervision. Secondly, the Panamanian Defense Forces (PDF) established by Noriega was abolished and replaced by the Panamanian Public Forces, a paramilitary organization. Thirdly, Gilberto Guardia, a Panamanian, was appointed as the administrator of the Panama Canal Commission (PCC) which was jointly managed by the United States and Panama during the transitional period. Ranked as the de facto second highest position in Panama, Guardia’s work determined whether the Canal could be successfully handed over or not.³⁶ Fourthly, a special Inter-oceanic Regional Authority (ARI) was established to take over the newly recovered properties and lands from the Canal Zone. ARI became the department in charge of the commercial development of the Canal Zone in the late 1990s.

The Americans had largely designed and ratified the aforementioned decisions by the Panamanian government. The United States on one hand endeavored to create a positive image of “helping” reconstruct Panama through media. On the other hand, it built Panama's institutional system based on its own preferences, especially the political system must comply with the standards of the United States.

Panama has moved toward more autonomy as Balladares, nicknamed El Toro (“The Bull”), came to power. A member of the Revolutionary Democratic Party (PRD) founded by Torrijos, Balladares was the former finance minister under Torrijos’ regime. Chanting the slogan “PRD is Torrijos’ party, not Noriega's”, he successfully rebuilt the PRD so that the only center-left party in the political spectrum of Panama was able to remain.³⁷ The return to power of the PRD signaled the recognition of Torrijos by the Panamanians. Balladares continued with the national development path that deviated its course in the middle and late 1980s by appointing many technocrats from the Torrijos era, among whom the most representative and decisive was Barletta, who was appointed as the chief executive of ARI. He resumed working for the country and led the planning and development of the Canal Zone under Panama’s sovereignty over the next ten years. A large number of key projects have been completed including the privatization of ports, the expansion of the Colón Free Zone, the establishment of a smart city, the restoration of the isthmus railway operation, the launch of the Panama Pacific project, the sale of 1600 Canal Zone residences, the transformation of Albrook Airport into a domestic airport, the construction of many hotels and tourist facilities in the Canal Zone, and the cooperation with the Panama Canal Authority to protect Canal water resources.³⁸ His principles of exploitation involved job creation, exports, domestic demand and returns to the state and investors. Although Barletta failed to retain his position in ARI due to party affiliation after the return of the Canal in the new century, the political disputes did not affect the continuity of governance. The subsequent development of the Canal Zone was sustained in line with his strategic plan 30 years ago.

The trend of containerization has been fully considered in privatizing the original port and establishing the new one. By unfurling the map of Panama, several large port areas of enormous scale lie in the two wings of Panama City by the Pacific Ocean and beside Colon by the Atlantic Ocean. After several rounds of expansion, the Colón Free Zone has become the second largest free zone in the world after Hong Kong. The smart city has attracted a large number of enterprises and tourism has also become one of the four pillar industries of Panama.

In addition to ARI's achievements in Canal land planning, in 1997 Panama promulgated the Organic Law of the Panama Canal, legally regulating the operation of the Canal after its return. In accordance with the Organic Law, the new Panama Canal Authority (ACP) was established. After a period of parallel transitions, the ACP has eventually replaced the Panama Canal Commission after its return in 2000. ACP adopts a professional and independent corporate mode to systematically avoid the impact of political struggles on the management.³⁹ The next 20 years have witnessed a huge success of the ACP model. Compared with the Canal Zone era, the operation of the Canal did not only keep away from serious problems, but also achieved a breakthrough in revenue. In 1998, the Panama government established the new Panama Maritime Authority (AMP), which integrates all maritime departments in Panama, including port operation, ship registry, maritime law enforcement, training and certification, and the national maritime strategy formulation.⁴⁰

The Balladares administration (1994–1999) coincided with the then prevalent neo-liberalism in the Americas. In addition to the establishment and promulgation of a series of professional institutions and laws, his reforms included accession to the GATT and numerous privatization projects, which prepared Panama for better integration into globalization. If the main achievement of Panama under Endara’s regime was to restore social order and establish a relatively stable political system in accordance with American preference, during the Balladares era Panama got ready for the return of Panama Canal by following the long-term strategy formulated by the country’s elites. Professional bodies represented by the Inter-Oceanic Regional Authority (ARI), the Panama Canal Authority (ACP) and the Panama Maritime Authority (AMP) managed to distance themselves from politics and ensured that political fluctuations would not unduly affect the operation and development of the Canal and maritime sector. The institutional success has promoted Panama’s national integrity and state capacity and brought Panama one step closer to its dream of being a hub of the Americas.

4 The Return of the Canal, Moving Toward the Hub of the Americas

The Panama Canal was officially handed over to the Republic of Panama on December 31, 1999. This handover was universally acknowledged by the United States, Panama and the international community. From the perspective of the Americans, the handover went smoothly. In contrast with the many disasters brought about by the British “withdrawal from its colonies”, the US withdrawal from Panama was highly efficient, constructive and peaceful (except for the Operation Just Cause).⁴¹ For the Panamanians, the actual owners of the Canal, their century-long dream came true. The forced alliance was over and Panama gained its long-desired independence.⁴²

The Constitution of Panama stipulates that the presidential term is five years and cannot be re-elected. Up to now, Panama has gone through 5 presidents after the return of the Canal: Moscoso, Martín Torrijos (son of General Torrijos), Martinelli, Varela and Cortizo. In the re-democratized Panama, every new president came from the opposition party of the previous administration. This pattern lasts until today. The general elections and power transitions in Panama have been relatively smooth and stable. Like other Latin American countries, however, Panama's politics has always been ridden with political chaos such as corruption, nepotism and partisan conflicts. The system of separation of powers looks perfect, however its actual operation is greatly affected by politics. The corruption and redundancy of the judicial system are still rampant even after many reforms. Almost every president is in deep trouble with corruption in his/her later stage of term and is often subject to judicial investigations backed by the next administration. However, when his own party is in power again, the investigation would be halted.

Unlike the political chaos and the periodic fluctuations during the election campaign, Panama's economic development has shown a high degree of continuity under the guidance of the established strategic plan. Each administration has basically been able to continue to deepen and consolidate the economic gain on the basis of the previous one, and make certain adjustments to its policies according to changes in the international situation. Each president formulated relatively ambitious plans early in his term, such as Martinelli’s Strategic Plan of Government 2010–2014.⁴³ Although the late term usually witnesses a decline of executive power, the economic data clearly shows the gradual accumulation by successive administrations. Panama has managed to avoid the common problems of policy swinging between the left and right in other Latin American countries.⁴⁴

4.1 From the Waterways to the Hub—the Sector Integration Based on ACP and AMP

After the transitional period of the US-Panama joint management, the ACP operated smoothly after taking over the Canal, and has established three principles of efficiency, safety and profitability.⁴⁵ While continuing to upgrade the Canal facilities, the ACP and the Panamanian government has not only ensured the continuation of normal operations, but also committed to pursuing improvement by making key decisions on tolls and Canal expansion.

Firstly, Panama has adjusted the mode of tolling based on its own interests. In the early days of the Canal management by the United States, the utilization rate of the Canals was not high, and the Canal charges were oriented to promote the transportation between the two oceans for the United States. With a tolling model to some extent for “public benefits”, the Canal authority formulated the Panama Canal Universal Measurement System (PC/UMS). In the early days when bulk carriers dominated the transportation, the measurement standard was mainly based on the size of the ship under the deck, i.e., the rule of “one price for one ship”.⁴⁶ Obviously, this tolling model is no longer in line with the trend of world shipping industry, which also prevents Panama from maximizing economic benefits. According to the market principle, ACP advocates the “value of the waterway”, and reforms the tolling model based on the size and type of as well as the type of goods. ACP also opens a traffic reservation system with reservation and priority passing mechanism, which facilitates a swift passing for vessels like cruise ships which are highly sensitive to time.⁴⁷ This market-oriented and standardized reform has been recognized and accepted by the shipping industry, and it has increased the revenue of the Panamanian government, as shown in Fig. 1.

Fig. 1

Total annual revenue of the Panama Canal. (Data source Panama Canal Authority (ACP))

Secondly, despite the widening of the Culebra Cut in the 1990s, the rapidly increasing volume of transits still made the Panama Canal less and less capable of satisfying the demand of globalization. After President Martin Torrijos formally proposed the Canal expansion, Panama ratified the project in a referendum in October 2006 to finally materialize the Canal upgrade after decades of planning and discussions. Though two years behind the schedule and additional budget were added, the project was completed in 2016. The expansion project adds a third set of lock systems at both ends of the Panama Canal, with a length of 427 meters, a width of 55 meters and a depth of 18.3 m. The Neo-panamax ship with a width of 49 m and a length of 366 meters can pass through the Canal, and the corresponding container ship can reach a volume up to 12,600 TEU, three times larger than that before the expansion. As shown in Fig. 2, the traffic volume of the Panama Canal increased dramatically upon the completion of the new locks, bringing remarkable economic benefits.

Fig. 2

Traffic Volume growth in the Panama Canal. (Data source Panama Canal Authority (ACP))

Thirdly, Panama attached great importance to safeguard Canal and maritime interests at the organizational level. First of all, the Canal Advisory Board was established in accordance with the Organic Law. Its members include representatives from shipping companies, international maritime agencies and stakeholder countries. Hence, communication channel has been set up between clients and industry insiders. Secondly, Panama actively participates in the operation of the International Maritime Organization (IMO) by taking advantages of its strategic location and status as a major country of ship registry. It plays a positive role in revising shipping and port security regulations to tackle terrorism. Finally, ACP has regularly hosted the Panama Maritime Forum since the early 1990s, which has become one of the major conferences in the industry.

After the return of the Canal Zone to Panama, all successive Panama governments ever since Moscoso administration are dedicated to develop a comprehensive maritime and logistics economy by taking advantage of its transoceanic location to build up a Singapore-like country in the Western Hemisphere. The ACP cooperates with the AMP in businesses involving ship supply, maintenance, repair, fueling, insurance, communication, registry, maritime legal services, container marshaling, multi-modal transportation and other port services. Combined with the fast-growing Panamanian aviation industry, Panama is no longer a transit channel, but a one-stop service hub.

The throughput of container terminals at both ends of the Canal continued to grow. In the 1990s, the annual container throughput was about 200,000 TEUs. By 2004, it reached 2 million TEUs, and nowadays it is 7 million as shown in Fig. 3. According to the World Bank's Logistics Performance Index, Panama had the best logistics sector in Latin America in 2018. Its port scale ranked first in Latin America.⁴⁸

Fig. 3

The total annual container throughput of all ports in Panama. (Data source Panama Maritime Authority (AMP))

Since 1960s, the Panamanian ship registry sector registered a quarter of the world’s ocean vessels in early 2000. Most of these ships, however, adopt Panama's “flag of convenience” in order to save costs and evade supervision.⁴⁹ Ships registered in Panama have a poor reputation worldwide, and are frequently gray-listed or blacklisted by ship classification society and insurance companies. Furthermore, although the ship registry sector is profitable, it contributes little to domestic employment. Since Martin Torrijos, Panama has continued to make efforts in shipping regulations, training and safety. Panama cooperates with IMO and the International Labor Organization (ILO) to change the image of the Panama ship registry step by step, which greatly strengthens Panama’s discourse power in IMO.

The Canal-maritime-logistics integration strategy formulated by Panama on the platform of AMP has achieved fruitful results by opening up various sub-sectors. The share of maritime industry in GDP only grew from 6 to 10% between 1950 and 1999, but in just 15 years from 2000 to 2015, this proportion has surged to nearly one-third.⁵⁰

4.2 Free Trade Zone, Offshore Financial Center and Regional Headquarter

As the world’s second largest free trade zone, the Colón Free Zone continues to expand in size and integrates with the surrounding port areas. Meanwhile, around the former US Army Howard Air Force Base opposite to the Panama City over the Canal, ARI planned the Panama Pacifico and handed it over to private companies in order to create a multi-modal industrial-commercial-logistic park echoing the Colón Free Zone. The current president Laurentino Cortizo keeps the consistency of economic policies and actively promotes the expansion of warehousing and distribution in the two free zones. He also encourages companies to invest in light assembly, customized services, repairs and renovations to boost the growth of Panama economy and employment.

Similar to ship registry sector, Panama had a background in serving the offshore financial needs from the United States when it established an international banking center in the 1970s.⁵¹ Based on the Colón Free Zone, Panama has implemented an open and free port policy. The use of US dollar as its currency facilitated the flow of funds, goods and people. But shortly after that, the Panamanian financial industry under the Noriega regime became synonymous with money laundering and tax evasion. With the rapid growth of economy, Panama’s national image and investment environment in the twenty-first century is negatively impacted by money laundering and tax evasion even though they generate some benefits. Panama was listed on and off the grey and black lists of the OECD and the US Foreign Account Tax Compliance Act (FATCA) a few times.⁵² In the past 20 years, Panama government has been committed to the standardization and transparency of its financial sector, but the real operators of offshore companies can still manage to take advantage of Panama’s lax financial system to evade taxes and launder money. The “Panama Papers” scandal revealed in 2016 is a typical case. Many businesses have almost nothing to do with local companies in Panama and they are totally out of the reach of the Panamanian government, but the scandal is named Panama.⁵³ The status of a financial center is a double-edged sword bringing both prosperity and constant challenges to Panama.

Thanks to a relax and increasingly regulated business environment and good living conditions, Panama has attracted a group of international organizations, technology companies and shipping companies to establish their regional headquarters in its land since 2002. The most notable ones are the United Nations Development Programme (UNDP) in 2006 and Maersk, the world's largest shipping company, in 2007. The United Nations also declared Panama its regional hub in 2007. By the end of 2019, nearly 160 large multinational companies had established regional headquarters in Panama.⁵⁴ The entry of multinational companies and international institutions has brought a large number of high-quality talents to Panama. Panama's immigration policy also encourages foreigners to come to live and invest. Compared with other countries in the region, Panama has increasingly obvious advantages.

4.3 Diplomacy for Development Strategy

Besides a big role in the maritime sector, Panama is also very active in the field of climate change in the new century. It has a great influence in the 52-member Tropical Forest Alliance. Moreover, in international and regional organizations, Panama plays an active role in the United Nations, the WTO, the World Bank, the IMF, the Organization of American States, the Community of Latin American and Caribbean States, and the Organization of Central American Integration.

Relation with the United States has always been the cornerstone of Panama’s diplomacy, and a considerable number of officials in the Panamanian government have overseas experiences in the United States. The successive governments of Panama since the 1990s have adopted a Torrijos-style, pragmatic diplomatic strategy. On one hand they maintained a good cooperation with the United States by cracking down hard on some security issues such as anti-drug and counter-terrorism. On the other hand, Panama stood for its own strategic interests and increased its influence through the international multilateral arena.

What mostly embodies the flexibility and pragmatism of Panama diplomacy is its establishment of diplomatic relations with China in 2017. Before that, the ACP and the Panamanian business community had urged the government to adapt to the trend. People of visions in the Panamanian government also took a positive attitude toward the cooperation between the two countries. With the cooperation of Chinese Foreign Ministry, President Juan Carlos Varela and his diplomatic team managed to overcome the obstructions from the United States and completed the negotiation for the establishment of diplomatic relations. The Sino-Panamanian economic and trade cooperation has rapidly advanced since the establishment of diplomacy. The two countries have signed a number of bilateral cooperation documents. So far, the leading Chinese enterprises such as Huawei, ZTE, COSCO, CSCEC, CREC, China Railway Construction, CCCC and Baosteel have set up their regional headquarters in Panama. The diplomatic relation with China helped Panama seize the historical opportunity and the new momentum of economic development, and Panama is going to become a bridgehead for China to expand the markets in Latin America. The ACP Council and its advisory committee held a joint meeting in Shanghai in March 2017, right before the establishment of diplomatic relation, and the first Panama-China Maritime Forum was also held in Shanghai on April 16, 2018.⁵⁵

4.4 Accomplishments and Challenges

Compared with other countries in Latin America, Panama has achieved extraordinary economic achievements over the decades. Before the outbreak of the COVID-19, Panama economy has kept an unprecedentedly fast and steady growth in Latin American history since 2004. The global economic crises did not have too much impact on Panama. Panama’s GDP per capita ranks in the first tier in Latin America, and the country is expected to become one of the very few developing countries that will genuinely evolve into a developed country in the world. In addition, Panama has managed to improve life expectancy, education level and political stability (Fig. 4).

Fig. 4

Panama’s GDP per capita 1991–2019. (Data source World Development Indicators from the World Bank)

The economic inequality is always a hard problem plaguing Panama. In polls conducted by Vanderbilt University in Panama, economic issues such as the wealth gap and unemployment are always the focus of public dissatisfaction.⁵⁶ Economic development only makes life much better for the rich, whereas average people are disappointed that the economic growth doesn’t benefit their lives enough. Each Panama administration has tried to make up the dual economy and close the wealth gap. As shown in Fig. 5, Panama has made great achievements in eradicating absolute poverty, but it still has a long way to go to narrow the gap between the rich and the poor. The COVID-19 pandemic caused Panama’s GDP to plummet by 17.95% in 2020, and a large number of people in informal sectors were among the first to be impacted before they plunge into poverty again.

Fig. 5

The wealth gap and poverty in Panama. (Data source World Development Indicators from the World Bank)

In addition, political corruption is another major problem that people detest. In a 2004 opinion poll, 80% of the public believed that the government was corrupt.⁵⁷ The wealth gap and political corruption are common problems that beleaguer almost every Latin American country. Whether Panama can really stand out to become the Singapore of the Americas depends on how it addresses these two chronic problems.

5 Conclusion

As the historian Michael L. Conniff once said, Panama has grown from being a protectorate and forced to ally with the United States to a global maritime leader and a US security partner.⁵⁸ Panamanians nowadays can confidently discuss their national character and take pride in peace, maritime, democratic tradition, and the embrace of multiculturalism. They cherish the Canal and maritime industry as a national treasure. This confidence reflects that the country has already developed to a certain level. Before 1977, Panamanians were barely involved in any Canal affairs. Today, they can take the country’s fate into their own hands.

The development of contemporary Panama stems from the struggles and negotiations with the United States in the 1960s and 1970s. During the administration of General Torrijos, the national development strategy brought by economists like Barletta was visionary. The secret to Panama's success lies in its firm, long-term and flexible implementation of this development model, which is to gradually integrate the Panama Canal with the national economy in terms of maritime, logistics, aviation, trade, finance, tourism and many other aspects to create more values. Compared with Singapore, Panama has institutional disadvantages, and the potential risk of chaos from political struggles persists. After realizing the basic ARI strategic plan, the future development of Panama is full of uncertainties. Whether Panama can retain its merit of policy continuity remains unsure against the background of intensively polarized world and its domestic political disputes.

Furthermore, as a service-oriented economy, which is highly sensitive to external conditions, Panama has to face many challenges out of its control. These challenges include the COVID-19 pandemic, the drastic global geopolitical change after Donald Trump’s presidency, and the Canal plans of Mexico, Nicaragua and Colombia, and the free port projects launched by many Caribbean countries are all Panama’s immediate competitors.

Looking back on the century-long development path from a protectorate to an autonomous nation state, Panama has been successful in its development model. Taking advantage of its privileged geographical location, Panama has kept on promoting investment, and managed to integrate multiple elements such as Canal, port, airport, and free trade zone. Panama dedicates in consolidating its status as a transport hub, multi-modal logistics center and Latin American headquarters of multinational company. Is Panama really able to develop into the hub of the Americas—the Singapore of the Americas—so that the fruit of economic development can benefit all its people? Let’s wait and see.