Panama’s slow progress in reducing poverty is not a consequence of a lack of public resources, but is rather due to their inefficient use. Considerable scope under current spending is available for Panama’s public sector to become more effective in the fight against poverty. Our analysis suggests that the following themes are key elements to successful poverty reduction strategies:
Pursuing structural reforms and preserving macroeconomic stability to foster stronger sustained levels of economic growth, which is necessary, though not sufficient, for sustained poverty reduction.
Improving the effectiveness and transparency of public sector spending, especially spending in the social sectors.
Enhancing educational opportunities to reduce the disparity in the rate of human capitalaccumulation between the poor and the non-poor, and particularly between the indigenous and the non-indigenous.
Generating more robust employment opportunities for the youth via better functioning and less restrictive labor markets.
Developing a more effective social protection system that targets more destitute and vulnerable groups, especially the indigenous, and ensures some cost recovery from the non-poor (which has already started with the implementation of the Red de Oportunidades).
Fostering economic growth. Macroeconomic stability, fiscal discipline, and economic growth that is distributed widely to all segments of the population are key ingredients for achieving sustained poverty reduction. This requires widening Panama’s economic base in ways that would permit broader participation of poorer segments of the population and a more concerted effort toward improving social indicators.
Panamanian authorities are aware of the need to improve fiscal balances and strengthen the overall foundations for sustaining broad-based economic growth. To this effect, the Torrijos administration introduced a fiscal reform (“Ley de Equidad Fiscal,” passed in February 2005) that contained revenue-raising and expenditure-cutting elements, and pension reform (passed in June 2005 and revised in December 2005) designed to balance the finances of the social security institute. In seeking to restore fiscal equilibrium, these measures constitute an important effort toward creating a more sustainable basis for growth and could be complemented by the following policy options detailed in the recent Panama Public Expenditure Review (World Bank, 2006):
Strengthening of the government’s tax audit capacity and avoiding the re-emergence of new tax incentive regimes, thereby ensuring that the fiscal gains obtained from the 2005 fiscal reforms are sustained.
Expanding free trade opportunities, such as the proposed free trade agreement with the United States, to help improve investor confidence, and to open up previously protected sectors of the economy, thus diversifying Panama’s sources of growth.
Adoption of fiscal measures to raise the primary surplus and thereby achieve a faster reduction in the public debt would help to reduce public financing costs by reaching investment grade status, especially in light of the proposed investment in canal-widening.
Improving public infrastructure in the ports, urban transport, sewerage and power.
Improving the effectiveness of public sector spending. The maintenance of macroeconomic stability and fiscal discipline could be enhanced through savings and efficiency gains if public spending in the social sectors was more effective in reducing poverty and enhancing human capital accumulation. Better targeted and more effective spending in education, health and social protection ought to put the country on a virtuous cycle in which social spending relative to GDP would persistently decrease, as growth driven by faster human capital accumulation accelerates, and fiscal requirements for poverty alleviation gradually decline. Key options for improving the quality of spending include:
Improving the efficiency of education spending by enhancing budget planning capacity in the sector, implementing cost recovery from the non-poor at the tertiary level, decentralizing key decision making activities to local levels, establishing performance incentives for teachers and school directors, improving human resource management, and adopting systematic testing and performance monitoring.
Improving efficiency of health spending by upgrading the budgeting process and resource allocation, redirecting sector resources from secondary and tertiary care facilities in the major cities to primary care facilities in rural and indigenous areas, eliminating duplication of programs, and establishing appropriate regulation and remuneration in the health referral system.
Reorienting social assistance spending away from costly untargeted subsidies on electricity, water, cooking gas, and gasoline, and towards programs targeted to the poor.
Strengthening monitoring and evaluation systems in all government institutions in charge of social programs, to facilitate a transparent and easy to monitor use of public resources, and to ensure that the benefits of social programs are received by the targeted groups and have the desired impacts.
Introducing more effective targeting tools to all ongoing social programs.
Reducing disparities in the rate of human capital accumulation and improving the employability of the youth. Strengthening human capital accumulation and improving the returns to education, with special emphasis on improving the educational, health and nutritional status of the indigenous, should be a key part of enhancing the effectiveness of Panama’s development strategy. Key policy options include:
Improving access to basic health services in rural areas, with especial attention to enhancing immunization, nutritional monitoring and education in rural and indigenous areas.
Continuing to expand the supply of primary and secondary education in rural and indigenous areas, while insuring relevance and quality of teaching.
Delivering targeted conditional cash transfers in order to alleviate liquidity constraints and provide incentives for the poor to attend school and periodically visit basic health service providers, especially in rural and indigenous areas.
Initiating a national debate on increasing labor market flexibility, including less burdensome labor market legislation and rationalization of minimum wage rules for young workers.
Designing a more effective social protection system. Given current levels and patterns of public social sector spending in Panama, there is considerable scope for improving social protection outcomes for the poor, even within the current budget envelop, this could be achieved through strategic reallocations of resources to areas of high impact, improvements in spending efficiency, and the strengthened use of targeted approaches to ensure access to programs and services by the poorest, most vulnerable Panamanians. A critical function of Panama’s social protection system is to ensure that the country’s poorest are covered against risks that hinder their ability to escape poverty, ill-health, and old age poverty. In this context, several priorities can be identified:
Developing a clear social protection strategy with specific targets, consolidating redundant programs, and replacing ineffective and costly programs with well-designed ones focused on major at-risk groups, including the extreme poor and the indigenous.
Continue to gradually and carefully expand the new CCT program as lessons from the current pilot experience are learned and are applied to refining the design of the program in terms of targeting mechanisms, transfer amounts and conditionality monitoring.
Decentralizing the purchase of foodstuffs in the SIF school lunch program to promote local communities and avoid costly logistical problems in delivering and storing foodstuffs.
Creating non-contributive systems to cover poor elderly citizens that do not have pensions or other source of income, with savings from current social protection budget envelope.
Concentrating the responsibility for the Social Cabinet agenda and results within one ministry to allow for better management of poverty reduction strategy. The Social Cabinet could initiate an in-depth review of existing programs, eliminate ineffective practices, and reorient resources toward established strategic objectives.
