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World economies

August 14, 2017

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PANAMA has a fully dollarised free-market economy, based mainly on the service industry and heavily weighted towards banking, commerce and tourism. The well-developed service sector accounts for nearly 80 per cent of its gross domestic product (GDP).

Being an extremely open economy, it is highly susceptible to external factors. Fluctuations such as a dec­reased demand for exports to the US or a smaller flow of capital into Panamanian banks could have huge implications for the nation’s economy.

However, like any developing nation, Panama continues to face a myriad of economic challenges. It is plagued by high poverty and inequality of income distribution and ranked the second worst in Central America.

According to a survey, some 36.8pc of the population were living in poverty, defined as an income of less than $100 a month, and 16.6pc were living in extreme poverty in 2003.

There had been a slight improvement with poverty falling to 32.7pc and extreme poverty to 14.4pc in 2008. However, it made significant progress in reducing poverty from 26.2pc to 18.7pc and extreme poverty from 14.5pc to 10.2pc between 2008 and 2014.

Despite the gains on poverty reduction, sharp regional disparities remain. Poverty prevails in rural areas. While in urban areas extreme poverty is below 4pc, in rural areas it is about 27pc.

According to the IMF, poverty still affects 22pc of the population — with 10pc of the population hit by extreme poverty — and inequalities are among the highest in Latin America.

So, Panama, which has tremendous need for sustained growth, continues to struggle with the need to strike a balance between investing in more and better improvements besides maintaining good fiscal management and eliminating corruption from the projects it undertakes.

The country has had the highest growth in Latin American economies over the past two decades which caused a significant increase in its per-capita income. Exceptionally strong growth contributed to an improvement in social-economic conditions.

The country resisted the international financial crisis well. Though the country is experiencing slowdown in economic activity since 2013, it has also put an end to the government’s tendency to overspend on large infrastructure projects that had been overheating the economy. Since then, the country has experienced solid growth pushed by domestic demand.

GDP grew by over 10pc in 2007, 2008 and 2009. Despite the global financial crisis, it expanded by 7.7pc in 2010.

Growth rates bounced back to over 11pc in 2011 and 2012. Since 2013, however, Panama’s GDP has been growing at a slower rate with annual growth averaging 7.2pc between 2001 and 2013, more than double the regional average.

Panama is well positioned to continue making progress towards the twin goals, ending extreme poverty and boosting shared prosperity, supported by growth prospects and the government’s renewed attention towards structural reforms, particularly related to infrastructure, education and skills, and the effectiveness of public institutions.

Peru

PERU, now the fifth major economy in South America, is expected to become the fourth South American economy in 2018 by surpassing Venezuela.

The World Bank has classified Peru as upper middle income, mining-dependent economy. With a GDP of $410 billion and a per-capita GDP above $13,000 on a purchasing power parity basis, it is one of the world’s fastest-growing economies.

Although the economy is diversified, commodity exports still make up a significant proportion of economic activity and thus subject the economy to the risks of price volatility in the international markets.

Trade and industry are centralised. Agricultural exports have led to development in all the regions Poverty has decreased dramatically in the past decade, from nearly 60pc in 2004 to 20pc in 2016. Extreme poverty declined from 27.6pc to 10pc over the same period.

The strong growth in employment and income have sharply reduced poverty rates. Peru now aims at reducing poverty rate to 15pc by 2021, down from about 20pc last year.

Though growth has been significant, inequality is growing, and much of Peru’s rain-forests have been damaged in the mining of gold and silver.

A favourable external environment, prudent macroeconomic policies and structural reforms in different areas created a scenario of high growth and low inflation.

Peru is the world’s second-largest producer of silver and third-largest producer of copper. Its main exports are copper, gold, zinc, textiles, chemicals, pharmaceuticals, manufactures, machinery, services and fish meal.

Although exports have provided substantial revenue, self-sustained growth and a more egalitarian distribution of income have proven elusive.

Services account for 43pc of GDP, followed by manufacturing 32.3pc, extractive industries 15pc, and taxes 9.7pc.

Recent economic growth has been fuelled by macroeconomic stability, improved terms of trade, and rising investment and consumption.

Though political uncertainty led to GDP growth of 0.2pc in 2001, Peru has enjoyed some of the strongest growth readings and slowest inflation rates in the region this century.

Peruvian economic performance is tied to exports, which provide hard currency to finance imports and external debt payments.

But according to most economists, the economy will likely slow to 2.8pc this year from 3.9pc in 2016, even with the government’s planned fiscal stimulus.

The Central Reserve Bank of Peru also projects the economy to expand 2.8pc this year and 4.2pc next year. Some forecasters are less optimistic and have revised down their earlier forecasts for 2017 to 2.5pc.

Published in Dawn, The Business and Finance Weekly, August 14th, 2017