Author: Marcela Virzi
Investing in Panama
1-What are the factors that seem to influence the identities of Panama’s largest export
markets?
Panama’s major export markets are United States (17%), Venezuela (19%) and Colombia (14%). To
better understand the forces that influence these trades, I will contrast these countries’
similarities/differences to those of Panama using the CAGE model.
Culture: Colombia, Venezuela and Panama share the same language (Spanish), religion (mainly
Catholic), and all three were colonized by the Spanish; thus overall sharing similar values and norms.
Panama shares history with Colombia, Venezuela and the US that traces back to 1821 when Panama got
its independence from Spain and voluntarily joined the “Great Colombia” (Venezuela was also part). In
1903, thanks to the help of the US, Panama got its independence from Colombia.
In recent years due to the increased insecurity existing in Colombia and Venezuela, there has been
immigration of these countries to Panama. In 2010, out of the 3.3M inhabitants of Panama, 17,423 were
Colombians and 5,632 were Venezuelansi. Thus, their shared history, similar culture and even
geographic proximity between these three countries have promoted an increase in the Colombian and
Venezuelan diaspora in Panama.
Even though Panama and the US have different languages and norms, they share the 95-year history of
the construction and management of the Panama Canal that has influenced Panamanian’s culture. It is
common to find Panamanians with dual citizenship living in both countries; furthermore, in 2008 the
US had a Panamanian Diaspora of 146Kii, while Panama had an American Diaspora of 7,776 people. Over
the years the governments have given special importance to promoting the English language in schools.
Also, each year more students go to American Universities to get their degrees, and for the ones that do
not leave there are some American Universities like FSU and Louisville University that have branches in
Panama.
Administrative:
Venezuela, Colombia and Panama have administrative similarities that US and Panama do not share. The
first three countries mentioned were colonized by the Spanish and thus share similar Civil Code; also,
over their history they have had some political instability and corruption is very common among firms
and governments. Panama’s 2.04 transparency index, Venezuela’s 1.14 and Colombia’s X iii show how
they share similar levels of corruption and the way of “getting things done” in these countries. In
contrast, the US and Panama have different legal codes and the US’ 4.5 ivtransparency index show that
they also have different levels of corruption.
Even though Panama does not share trading blocs with its trade partners there are some trading
agreements with the US that promote trade. Panama belongs to CAIS, Colombia and Venezuela to
Unasur/Unasul and the US to NAFTA. Panama is dollarized and has an agreement with the US, stated in
the Torrijos-Carter Treaty of 1977v were the US will guarantee the Canal’s permanent neutrality, which
protect US vessels passing through the Canal, but also promotes Panamanian exports to the U.S. These
lasts are primarily agricultural products that have had a duty-free policy for many years, due to the
Caribbean Basin Initiative and reinforced through last year’s Free Trade Agreementvi.
Geography:
Panama is adjacent to Colombia, but besides that it also shares other geographical similarities with this
country and also with Venezuela. The three countries have tropical climate which constraint the trade
between agricultural products produced (cheaper) in Venezuela and Colombia. However its physical
proximity (one flight away) and the benefits offered by businesses located in Colon’s Free Trade Zone
(variety of products, cheap prices, payment facilities) stimulates exports from Panama to Colombia and
Venezuela.
In contrast to Colombia and Venezuela, Panama and the US have different climate and have a significant
geographical distance between each other. However, Panama takes advantage of these differences and
exports tropical products like sugar, coffee and bananas to the USvii. Furthermore, even though these
countries are very distant, the Panama Canal’s strategic position is very important for the US, since it
shortens the distance that a ship has to go through to get from the East to the West Coast (NY-SF -10K
km vs. NY-Southern Tip-SF - 22.5K km); in 2012, 8% of all the long tons that passed through the Canal
had the US as country of originviii. Even if the tolls paid by US vessels that pass the canal are not
Panamanian goods travelling to the US, they can be seen as trade generating a significant source of
income for the country.
Economics:
Key Indicatorsix:
GDP/Capita: Panama $7,175, Colombia $5,167, Venezuela $11,383 and USA $45,934
GDP growth: Panama 8%, Colombia 4%, Venezuela 5% and USA 1%
Internet Penetration: PTY - 28, Colombia - 28, Venezuela - 27, USA - 75
Panama, Colombia and the US have a free market economy whereas Venezuela’s economy is somewhat
manipulated by the government; however, all four economies are very different. Panama’s economy is
based mainly on the services industry that accounts for nearly 80% of its GDPx. Services include the
Panama Canal, the Free Trade Zone, ports, flagship of vessels, banking, among others. Colombia has a
strong primary sector, and Venezuela has an economy driven the exploitation of oil (accounting for 95%
of total exports and 18% of GDP)xi. Moreover, Panama found in the US, the world largest economy, a
buyer of its agricultural goods and a frequent user of the Panama Canal’s facilities.
Even though cultural and administrative similarities and geographical proximity facilitates trade among
Colombia (Cage Distance 208), Venezuela (1,063) xiiand Panama, the economic differences between
these countries (and political difficulties in the case of Venezuela) open export markets in these
countries.
On the other hand, even though USA and Panama on the surface have many differences in terms of
culture, administrative, geographical and economic factors (Cage Distance 4,104) xiii, sharing a common
history of cooperation, and the strategic position of the Canal for the US econony has promoted trade
between these two countries.
2-Do you see any untapped export opportunities for the focal country?
Panama has the highest minimum wage of Central America $432.00/month, compared to other Central
American countries ex. El Salvador’s $144, or Colombia’s $328; these high wage makes labor more
expensive and makes Panama less competitive in labor-intensive industries. Thus, Panama cannot
export agricultural products to countries with shorter CAGE Distance to Panama (Central America,
Ecuador, Belize and Jamaica) since is very likely that are already producing those same products
cheaper. This same reason makes Panama’s agricultural products less competitive when exporting to
the US; thus, sometimes firms that have committed to participate in the US quota have to sell below the
local market price. For that reason, I believe that in the long run agricultural exports to the US will
decrease, and will shift to countries with cheaper wages and closer to the US border.
Since the Canal influences Panama’s economy, it should focus in its core competences and make the most
out of the logistics and businesses related to the Canal. Already a significant part of Panama’s exports
(35%) are goods brought from East Asia (2.85% longtons from Chinaxiv) to Panama’s Free Trade
Zonexv, those products are later exported to countries like Venezuela and Colombia. Thus, Panama
should continue exploiting these opportunities, and sell more to other countries in the region.
Furthermore, the 5.25B expansion of the Canal scheduled to be finished in 2014 will expand the capacity
of the canal, allowing more and bigger vessels to go through the canal. The Panamax vessels that can
carry up to 4,500 containers vs the Postpanamax that can carry 12,000 containers will increase
efficiency and reduce shipping costs. Thus, Panama should focus on becoming the hub of the Americas.
Panama Census 2010, http://www.censos2010.gob.pa/acercad.html
Pankaj Ghemawat, http://www.ghemawat.com iii Pankaj Ghemawat,
http://www.ghemawat.com iv Pankaj Ghemawat,
http://www.ghemawat.com v Panama Canal,
https://micanaldepanama.com
vi
Office of the United States Trade Representative
http://www.ustr.gov/tradeagreements/free-trade-agreements/panama-tpa
vii
Office of the United States Trade Representative
http://www.ustr.gov/tradeagreements/free-trade-agreements/panama-tpa viii
Panama Canal, https://micanaldepanama.com ix Pankaj Ghemawat,
http://www.ghemawat.com
x Panama’s Ministerio Economia y Finanzas, http://www.mef.gob.pa/es/Paginas/home.aspx
xi Office of the United States Trade Representative
http://www.ustr.gov/countriesregions/americas/venezuela xii Pankaj Ghemawat,
http://www.ghemawat.com xiii Pankaj Ghemawat, http://www.ghemawat.com xiv Panama
Canal, https://micanaldepanama.com xv Pankaj Ghemawat, http://www.ghemawat.com
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