Panama WUDC Matter File - Ryan Lafferty

Disclaimers

  • Disclaimer 1: The document warns that the author is not an expert and that the notes may contain inaccuracies. Readers are advised to conduct their own research and consider other debaters' viewpoints.

  • Disclaimer 2: Some sections, especially those on Trump's presidency and the Russo-Ukrainian War, may become outdated quickly. The notes were primarily written in August 2024, with final edits on December 23, 2024.

  • Disclaimer 3: This matter file differs from the author's previous Vietnam matter file in three ways:

    • It is more fact-focused and less debate-focused.

    • It does not repeat topics from the Vietnam matter file, with minor exceptions regarding post-conflict societies and Chinese politics.

    • It covers fewer topics but in greater depth, with a heavier focus on international security and financial economics.

  • Disclaimer 4: The document does not reflect the author's personal views but is intended for BP debate preparation.

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Table of Contents

  • Latin America

  • New Matter and IR

  • Financial Crisis

Panama Overview

  • Panama is an upper-middle-income emerging market and one of the wealthiest Latin American countries, characterized by:

    • Healthy debt-to-GDP ratio (50%)

    • Stable inflation rate (2%)

    • Reasonable growth rates (4%–7%)

  • Inflation-adjusted per-capita income saw substantial growth, increasing nearly eightfold from 5,000 in 1990 to $38,000 in 2023.

  • Historically, Panama's economy has centered around international trade, dating back to Spanish colonial times (1513–1821) and the California Gold Rush in the mid-19th century.

  • The construction of the Panama Canal by the U.S. in the early 20th century reinforced Panama’s dependence on international trade, though Panamanians initially benefited little due to U.S. control and employment practices.

  • The economy experienced growth under the Torrijos dictatorship in the 1970s, driven by public works and welfare programs, but contracted sharply during the Noriega dictatorship in the 1980s due to U.S. sanctions.

  • Since the U.S. transferred ownership of the Panama Canal to Panama in December 1999 (under the Torrijos–Carter Treaties), the economy has grown rapidly, spurred by economic liberalization, foreign direct investment, and the EMMA regime.

  • The Panama Canal underwent a major expansion (5.25 billion) from 2007 to 2016, doubling its shipping capacity and enabling the passage of larger ships (New Panamax) and LNG tankers.

  • The EMMA regime (Special Regime for the Establishment and Operation of Multinational Companies Providing Manufacturing-Related Services) has attracted foreign investment through tax, immigration, and labor incentives, with nearly 200 foreign companies building infrastructure in Panama.

  • Since 1999, Panama's economy has more than doubled in size.

Benefits of the Panama Canal to Panama

  • Increased Demand for Services: Trade through the Canal boosts demand for transportation, logistics, storage, wholesale, and banking services, leading Panama to become an interoceanic logistics hub with high-quality infrastructure and a dollarized banking system.

  • Dynamic Construction Industry: The Panama Canal fuels the construction industry, representing over 22% of GDP, with significant privately funded projects since 1999, including airport and canal expansions, metro construction, and skyscraper development.

  • Net Income: Net income from the Panama Canal is approximately 3.5billionannually(33.5 billion annually (3% of GDP).</p></li><li><p><strong>Counterintuitive Drought Revenue:</strong> Reduced shipping due to droughts can increase revenues by raising the price for passage through auctions, where shipping companies bid for scarce spots.</p></li></ul><h3 id="81537354-67b1-4aac-ab66-ee27dd6dabb4" data-toc-id="81537354-67b1-4aac-ab66-ee27dd6dabb4" collapsed="false" seolevelmigrated="true">Problems Facing Panama's Economy</h3><ul><li><p><strong>Economic Inequality:</strong> High levels of economic inequality persist, with Canal-related services concentrated in Panama City and Colón, while indigenous and Afro-Panamanian citizens in rural areas face significant underdevelopment and poverty rates.</p><ul><li><p>The average poverty rate in indigenous-majority comarcas is nearly 80% (per the IMF).</p></li><li><p>High economic development has not translated into commensurate human development, particularly in rural regions.</p></li></ul></li><li><p><strong>Corruption:</strong> Panama faces a major corruption problem, especially in the judicial and legislative systems, ranking low in the World Justice Project’s Rule of Law index and Transparency International’s Corruption index.</p><ul><li><p>Noriega-era desacato laws (disrespect laws) deter journalists from investigating and reporting on corruption by imposing penalties for offending public officials.</p></li></ul></li><li><p><strong>Climate Change:</strong> Climate change threatens the long-term viability of the Panama Canal, which is a lock-based canal requiring vast amounts of water from the Gatun Lake to operate.</p><ul><li><p>Lower water levels in Gatun Lake prevent large “Neo-Panamax” ships from passing through, reduce the number of ships transiting daily, and increase wait times for shipping companies, leading to potential route shifts.</p></li></ul></li><li><p><strong>Potential Solutions for the Panama Canal</strong></p><ul><li><p><strong>Option 1:</strong> Damming the Indio River (estimated cost:1.6 billion, time: five years), though this faces opposition from indigenous communities.

  • Option 2: Building tunnels to connect Bayano Lake to Gatun Lake (estimated cost: 3billion).</p></li></ul></li><li><p><strong>DecliningFixedCapitalInvestment</strong>:Decreasingreturnstoscalearecausingadecelerationoffixedcapitalinvestments,especiallyintheconstructionsector.<br>Grossfixedcapitalformationrepresentedjust53 billion).</p></li></ul></li><li><p><strong>Declining Fixed Capital Investment</strong>: Decreasing returns to scale are causing a deceleration of fixed capital investments, especially in the construction sector.<br>Gross fixed capital formation represented just 5% of GDP in 1989 and 15% of GDP in 2002 but now represents nearly 30% of GDP.</p></li><li><p><strong>Underperforming Education System:</strong> Panama's education system is underperforming, with a high percentage of students not proficient in reading or meeting minimum proficiency levels, and PISA scores significantly below OECD averages.</p><ul><li><p>Panama underspends on education compared to OECD countries (3% of GDP vs. 4.5%).</p></li><li><p>Strong teachers unions block educational reform.</p></li><li><p>67% of Panamanian primary school students are not proficient in reading, and over 60% of Panamanian secondary school students do not meet MPL (minimum proficiency levels).</p></li><li><p>Only 16% of Panamanian high school students attained at least Level 2 proficiency in mathematical literacy—whereas 69% of high school students in the typical OECD demonstrate at least Level 2 mathematical proficiency.</p></li></ul></li><li><p><strong>Restrictive Labor Laws:</strong> Panamanian law reserves high-skill positions for Panamanian citizens, and the Labor Code requires that employers' workforces are composed of at least 85% national citizens.</p></li><li><p><strong>Fiscal Crisis:</strong> Panama faces a fiscal crisis in its social welfare system (CSS), which provides assistance to 52% of residents but is nearing bankruptcy due to low tax revenues, high tax evasion, and extensive tax incentives for foreign firms.</p><ul><li><p>Panama's tax-to-GDP ratio is just 13% whereas the average tax-to-GDP ratio is around 34%.</p></li><li><p>Limited control over monetary policy due to dollarization restricts Panama’s ability to manage crises.</p></li><li><p>Sovereign credit rating downgrades and soaring national debt (28 billion in 2019 to 47billionin2024,projectedtoreach47 billion in 2024, projected to reach60 billion by 2029) further strain the economy as well as a decrease in canal revenues.

  • Inability to use the Panama Savings Fund: Panama’s sovereign wealth fund assets total a measly 1.4billion.</p></li></ul><h3id="e4714a81−ecd6−41be−9c6c−c17fcd56f0f4"data−toc−id="e4714a81−ecd6−41be−9c6c−c17fcd56f0f4"collapsed="false"seolevelmigrated="true">PotentialDiversificationofEconomy−ManufacturingSector</h3><ul><li><p>Panamahasopportunitiestodiversifyitseconomybydevelopingitsmanufacturingsector,takingadvantageofthetrendofmultinationalcorporationsrelocatingfactoriesfromChinaduetotradetensions,XiJinping′sgovernance,risinglaborcosts,supplychainvulnerabilities,andindustrialpoliciesincentivizingfriendshoring.Manufacturingcontributesjust4.71.4 billion.</p></li></ul><h3 id="e4714a81-ecd6-41be-9c6c-c17fcd56f0f4" data-toc-id="e4714a81-ecd6-41be-9c6c-c17fcd56f0f4" collapsed="false" seolevelmigrated="true">Potential Diversification of Economy - Manufacturing Sector</h3><ul><li><p>Panama has opportunities to diversify its economy by developing its manufacturing sector, taking advantage of the trend of multinational corporations relocating factories from China due to trade tensions, Xi Jinping's governance, rising labor costs, supply chain vulnerabilities, and industrial policies incentivizing friendshoring. Manufacturing contributes just 4.7% of Panama’s national GDP and 16% of Panama’s workforce.</p></li></ul><h3 id="2b3a9df7-27a1-4cfb-b757-cfb4ae5a99a2" data-toc-id="2b3a9df7-27a1-4cfb-b757-cfb4ae5a99a2" collapsed="false" seolevelmigrated="true">Panama During COVID</h3><ul><li><p>The Panamanian economy was greatly affected by the pandemic contracting by 17.9% in 2020, with a quick recovery in 2021 (15.7% growth) and 2022 (10.8% growth).</p></li></ul><h3 id="fcc2cd21-2ab9-4272-ad58-cff81c8c4b8c" data-toc-id="fcc2cd21-2ab9-4272-ad58-cff81c8c4b8c" collapsed="false" seolevelmigrated="true">Panama's Trade Agreements</h3><ul><li><p>Panama is deeply embedded in the international economy with free trade agreements with fourteen countries and bilateral investment treaties with twenty-one countries.</p></li></ul><h3 id="ee408ac2-e662-4bab-8fc6-f7bc81ddb596" data-toc-id="ee408ac2-e662-4bab-8fc6-f7bc81ddb596" collapsed="false" seolevelmigrated="true">Panama's Attractiveness for Investors</h3><ul><li><p>Panama is attractive to foreign investors for its strategic location, developed logistics hub, well-developed infrastructure, pro-business regulatory environment, dollarization, and relative safety.</p></li></ul><h3 id="578b6ee7-be6b-4d82-b77b-f66f56af9663" data-toc-id="578b6ee7-be6b-4d82-b77b-f66f56af9663" collapsed="false" seolevelmigrated="true">Energy</h3><ul><li><p>Panama is one of three carbon-negative countries, with hydropower providing 66% of electricity, but it still relies on oil (60%) and coal (12%) for energy due to carbon-intensive transportation and construction industries.</p></li></ul><h3 id="c5b748c7-64d3-4d1d-a70f-c6129fd69bb8" data-toc-id="c5b748c7-64d3-4d1d-a70f-c6129fd69bb8" collapsed="false" seolevelmigrated="true">Key Economic Indicators</h3><ul><li><p>GDP Growth: 7.3%</p></li><li><p>Inflation: 1.5%</p></li><li><p>Unemployment: 6.7%</p></li><li><p>Debt to GDP Ratio: 52%</p></li><li><p>Urbanization: 70%</p></li><li><p>Per-Capita GDP (PPP):39,000

  • Industries:

    • Services: 67% of GDP, 68% of employment

    • Agriculture: 2% of GDP, 15% of employment

    • Manufacturing: 27% of GDP, 16% of employment

    • Tourism: 10–15% of GDP

  • Exports: China 17%, Japan 12%, South Korea 8%, US 5%, Spain 5%

  • Imports: China 20%, US 20%, Guyana 11%, Colombia 11%, Ecuador 9%

    • Cobre Panamá

    • Panama's copper deposits were discovered in 1968, with exploration and excavation discontinued in the late 1970s due to low copper prices and contractual disputes.

    • Copper's primary use is in electronics due to its excellent thermal and electrical conductivity, explained by its atomic structure and