Executive summary

Executive Summary

I. Introduction

With a population of about 3 million, Panama is one of the fastest growing and best managed economies in Latin America. A per capita Gross National Income of US$ 4,630 in 2005 places the country among the upper-middle income nations in the world, despite the fact that it does not produce oil or other valuable non-renewable resources, and has no major commodity exports. In terms of real GDP per capita, only Chile grew faster than Panama in Latin America between 1975 and 2004 (Figure 1).

But Panama is indeed a country of disparities and puzzles. Its dynamic internationally-oriented service sector coexists with the inefficient and protected agriculture sector. It enjoys sophisticated private financial services, but its public administration system remains largely ineffective. It has more hospital beds, doctors and nurses per inhabitant than most upper middle-income countries, but malnutrition, child and female mortality in indigenous areas match those of poor countries in Sub-Saharan Africa. The country has grown faster than most Latin American economies, but average household consumption has declined and poverty has remained high.

Figure 1 – Per Capita Growth in Panama and LAC

Source: World Bank’s staff calculations based on World Development Indicators 2006

Why growth has not been translated into effective poverty reduction in Panama?

Despite its high overall per capita growth, Panama’s economy has not been capable to generate sufficient employment to meet national goals in poverty reduction and improving standards of living. More than one third of its population still lives in poverty and more than one sixth in extreme poverty. Traditionally, Panama has been characterized by a tripartite economy, a dual economy plus an indigenous economy, which generates growth mainly from its exports and services sectors, but continues to rely on import substitution policies to shelter its manufacturing and agricultural sectors. Since the few growing areas of the economy generate very little employment, it is not surprising that formal employment growth has stagnated. Between 1997 and 2003 the protected agricultural and industrial sectors have further lost competitiveness even though the manufacturing sector was significantly opened up to foreign competition in the 1990s. Consequently, average per capita consumption has declined by approximately 0.7 percent annually.

Should Panama invest more in the social sectors to accelerate poverty reduction?

Our analysis suggests that Panama does not need to invest more in the social sectors, it needs to invest better. Remarkably, the country spends almost 17 percent of its GDP in the social sectors. This is higher than the 14 percent average in Latin America, and equals Costa Rica’s spending, a country known for its high investment in social programs, and for successfully reducing poverty in the past. In fact, if the amount currently spent in the social sectors were to be distributed in cash to the whole population, poverty, as defined by living on less than $2 a day, would disappear. Of course, this is not a long-term solution to poverty, but it illustrates that at the current levels of spending, significant progress could be made in enhancing the effectiveness of spending in the social sectors.

A major challenge for Panama is, therefore, to formulate and implement policies that help translate its solid growth performance into effective and sustainable poverty reduction, without increasing its overall level of social spending. As discussed in more detail below and throughout this report, improving the targeting, efficiency and effectiveness of social spending will be crucial if Panama is to achieve effective poverty reduction.



The main objective of this Poverty Assessment is to provide a tool for the Panamanian government to use when devising its poverty reduction strategy. It is based on extensive consultations and collaboration with the government. Key components of the process around this report include:

1. 
   Analyzing the evolution of poverty, inequality, human development and other social indicators between 1997 and 2003, paying particular attention to the puzzle of persistent poverty and inequality despite real GDP growth;
   
2. 
   Providing analytical and advisory support to the government of Panama, with a focus on refining and implementing its new strategic vision for poverty reduction and growth, and
   
3. 
   Supporting the country in capacity building in poverty diagnostics and policy evaluation.
   

In addition to the objectives above, and through collaborative efforts in writing this report, the Bank assisted the government of Panama in building its capacity for social policy analysis, with particular emphasis on creating local capacity on poverty diagnostics and on techniques for the ex-ante evaluation of government programs. Toward that goal, the work was carried-out in close collaboration with the staff of the Social Policy Directorate at the Ministry of Economy and Finance and the Ministry of Social Development.
The analysis in the report is primarily based on the Living Standards Measurement Surveys (LSMS, Encuesta de Niveles de Vida in Spanish) conducted in Panama in 1997 and 2003, by the Ministry of Economy and Finance (MEF), with funding from the Government of Panama, the World Bank, the Inter-American Development Bank, the Swiss Agency for Development and Cooperation, Japan’s Policy and Human Resource Development Fund, and the United Nations Development Program. With technical support from the World Bank and the Inter-American Development Bank, the Government also updated its national poverty map that now combines data from the 2003 LSMS with the 2000 National Census. The map is already serving as a policy tool for the targeting of the new conditional cash transfers program, the Sistema de Proteccion Social (SPS)