Latin America is that eternal promise that never ends. A region with great natural resources, no war conflicts in sight and with great potential, but that has not yet found the path to prosperity. However, there are always exceptions. Within this region there is a country 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 variation rate that exceeds 4%. What is more surprising, 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 has the highest GDP per capita in purchasing power parity or PPP (eliminates price distortions in different economies) in all of Latin America. But, according to World Bank data, this indicator is growing at a rate of 4.4% per year, a true miracle for a country whose PPP per capita income is close to 43,000 dollars (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 get closer to the US in terms of wealth per inhabitant.

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 a convergence of income with respect to the standards of the United States much faster than most other Latin American countries in the last 25 years and is now the richest country in Latin America,” the report states. Although its miracle has been notable, experts say that it has fallen a little short of that achieved by South Korea, for example.

In 1994, Panama’s GDP per capita rose from 33% of the US GDP to 50% today, making it one of the fastest growing economies in terms of per capita over that period worldwide. Panama is currently 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 US$42,7000 in 2023, ranking it among the 35 countries with the highest GDP in the Penn World Table sample of 114 countries.

Not only the IMF, the World Bank is also amazed by Panama’s success story: “Over the past thirty years, economic growth has generated employment and significantly reduced poverty, which has fallen 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.

Panama has experienced a boom unparalleled in the region (well, yes, in 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, since they have significantly increased toll revenues and consolidated the country as a global logistics center. 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 points out.

Investment is everything in Panama

Therefore, in the economy of Panama, investment has an extremely high weight. As in small countries that have a lot of oil (crude oil revenues generate a good part of the GDP), in the case of Panama this position is occupied by bricks and mortar. 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 the recent dissociation of Panama from the rest of Latin America and the Caribbean in terms of per capita production is the growth of investment, in particular due to a boom in construction (most of which is commercial real estate), which cannot exceed the growth of the rest of the economy indefinitely,” they explain.

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 favorable 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.

It is true that 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. 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 surpassed pre-crisis levels in 2022,” explains the IMF. 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 could 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 remodeling, 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, which is no easy task.