preliminary findings on the economic potential of panama and the impacts of immigration

Center for International Development at Harvard University

Analyzing the Economic Potential of Panama

November 4, 2016

Panama has been growing at a fast pace, doubling its income per capita over the previous decade

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Income per capita

-‐0.3% 0.3% 0.8% 1.3% 1.8% 2.3% 2.8%

Construction

Wholesale, retail, trade services

Transport and communications

Housing

Financial intermediation

Public utilities

Mining

Manufacturing

Restaurants and hotels

Other social services

Social services and private health

Private education

Agriculture

Fishing

2005-‐2015 2010-‐2015

Growth has been spearhead by construction, and the development of a competitive modern service sector on activities surrounding the Canal

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Sector Contribution to Growth(CAGR * Average sector share on GDP)

Non-‐residential construction growing at 10-‐year CAGR (20.25%) equivalent to doubling the stock of structures every 4 years

Transport and communications

Financial intermediation

Wholesale, retail, trade services

In spite of some improvements over the previous decade, Panama remains among the most unequal countries in the world

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PAN

2030

4050

60

GINI Index, year 2010

6 8 10 12GDP per capita (logs)

Source: own calculations based on WDI (World Bank)

Gini coefficient (2013)

Panama embarked on a high-‐skilled growth strategy, based on the competitiveness of its service tradable sector

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Economic Complexity by Industry

As construction recedes, the challenge will be on finding enough skill labor required to foster growth on the modern service sector

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Economic Complexity, qualified labor and share of employment (2010)

The government has made significant efforts to upgrade their skill-‐base via education, and so far has achieved some quantitative results…

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Distribution by schooling (% of total labor force), 2012

… but from a qualitative standpoint the results are very different

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Program for International Student Assessment (PISA, 2009)

# rankShanghai-‐China 575 1OECD average 501 24Chile 447 45Uruguay 427 49Mexico 416 51Brazil 405 54Colombia 402 55Argentina 401 58Panama 376 63Peru 369 65

sciencecountry/economy

Science

# rankShanghai-‐China 600 1OECD average 496 24Uruguay 427 48Chile 421 50Mexico 419 51Argentina 388 56Brazil 386 58Colombia 381 59Peru 365 64Panama 360 65

mathematicscountry/economy

Mathematics

# rankShanghai-‐China 556 1OECD average 493 27Chile 449 45Uruguay 426 48Mexico 425 49Colombia 413 53Brazil 412 54Argentina 398 59Panama 371 63Peru 370 64

readingcountry/economy

Science

Panama: Headquarters Law (Law 44)Has attracted 117 multinational regional headquarters

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Special Economic Zones:Import-‐Export, Industrial Park, Technology Park

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Special Econo

mic Zon

es

• Special Visa for:• Investors • Workers• Dependents

• Allowed to hire >10% immigrants

• Labor regime:• Overtime rate (25%)• Days-off rate (50%)• Flexibility to operate Sundays & holidays

• Special Custom Reg.• One-stop shop

• Oldest in the world• Largest in LATAM• 2nd worldwide• 2,527 companies• 29,786 jobs

• Income tax• Import-Export tax• Sales tax

Import-‐ExportColon Free Zone (1948)

Characteristics Tax exemptions Immigration incentives Other

• Import tax• Remittances tax• ITBMS tax

• Income tax• Dividend tax• Import-Export tax• Sales tax• Remittances tax• Commercial license• Patent & ITBMX tax

Ciudad del SaberTechnology Park (2000)

Panama-‐PacificoIndustrial Park (2007)

• 75 SMEs• 1,290 direct jobs• Focus: innovation and technology

• 251 companies (41% multinational)

• 2,305 jobs• Master plan:• 1,000,000 sq.mts• 40,000 jobs

• Special Visa for:• Workers



The strategy of attracting multinationals has raised the skill bar and allowed Panama to develop a modern service sector, but many restrictions remain

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• There is a list of 27 occupations that are legally restricted to immigrants, including all type of engineers, dentists, agriculture scientists, architects, doctors, economists, lawyers, chemists, and educators in the areas of history and geography

• Significant restrictions to foreigners within the SEZs to free flow across firms, or move into the local economy and create their own firms:

• Hefty fees for visa renewals

• Years spent on SZEs do not count for residence purposes

• Visas are revoked if foreigners leave the company originally sponsoring them

• Firms can be expelled from City of Knowledge if they move from innovation to commercialization and sales, falling into a sort of legal limbo

• Restricted citizenships (India, China) for “national security reasons”

• All these restrictions are preventing know-‐how and productive capacities accumulated in the SEZ from spilling over to the rest of the economy

A sign of skill scarcity: Wage premiums to foreign workers are very high on average(50%), and positive for all industries and occupations

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Wage premiums to foreigners (2010)

Restricting the free flow of highly skilled immigrants is a policy that is not helping the Panamanians (neither low-‐skill nor high-‐skill)

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Restricting the free flow of highly skilled immigrants is a policy that is not helping the Panamanians (neither low-‐skill nor high-‐skill)

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Immigrants are also 5 times more likely to be entrepreneurs

Final thoughts

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• In Panama we have explored how and where skills and know-‐how developed in competitive services can be redeployed

• Our work in Panama debunks the myth of immigrants having negative impacts on natives: The most benefited are low-‐skilled Panamanians

• Structural change from low-‐productivity agriculture and construction to modern competitive service sector will demand a skill upgrade

• Massive restrictions to migration are hindering spillovers and maintaining know-‐how locked into the gates of Special Economic Zones

• Further research:

• Data on business travelers (to Panama) would allow us to address causality between flow of immigrants and the appearance of new economic activities

• Social Security data would allow us to track foreigners that flow in and out of the Special Economic Zones or multinational headquarters, and assess their impact in the domestic economy

preliminary findings on the economic potential of panama and the impacts of immigration

Economy & Finance