Development Centre

Investing more in skills and promoting regional development are fundamental in making Panama´s economic growth more inclusive and sustainable

 

Panama City, 6 July 2018 - Panama’s economic growth over the last decade has helped reduce poverty but it did not benefit equally all groups in society, nor all regions of the country, according to a new report by the OECD Development Centre launched today in Panama City.

According to the Multi-dimensional Review (MDCR) of Panama, the country is considered one of the most dynamic economies in Latin America. Panama´s GDP per capita has grown at an average rate of 5.5% annually, faster than the region´s average of 1.5%, mainly attributed to the country´s stable economic growth. As a result, poverty levels have been declining over the last decade. Yet, inequality remains a challenge, as the benefit has not reached equally to all groups in society as experienced by many Latin American countries.


“Panama is on the verge of becoming a high-income economy. Though economic growth has helped reduce poverty, it has done too little to cut inequality. We hope that the evidence-based recommendations of the report will help foster more inclusive development", said Federico Bonaglia, Deputy Director of the OECD Development Centre, while launching the report today in Panama City.


The most affected groups are the people in rural areas, especially in the comarcas (indigenous areas), as they remain much more likely to live in poverty. Moreover, many of those who escaped poverty in recent years remain vulnerable and could slip back in the event of an economic slowdown. Therefore, it is essential for Panama to ensure a sustainable and inclusive development agenda.


To improve the lives of those remaining in poverty and to consolidate the middle class, the government stands to benefit from focusing on creating more formal jobs, improving the skills of the workforce and fostering the development of all regions. This requires promoting private sector involvement through sound regulatory and institutional frameworks for public-private partnerships as well as a more efficient and effective tax system to provide the necessary resources and increase redistribution. Indeed, similar to Latin American average, taxes and transfer only reduce market income Gini coefficient by 0.02 Gini points, while in OECD economies it decreases by 0.16 points.


Panama’s dual economy has resulted in a dual employment market, which in turn largely explains the vulnerability of the middle-class and income inequality in the country. On one hand, Panama has a strong and productive modern tradeable service sector, which has steered the country’s recent economic growth. This sector is mainly composed of skill-intensive activities that create relatively little employment. On the other hand, the less-productive service sector, agriculture and in some measure the manufacturing sector, in which own-account workers and micro-productive units have proliferated, offers subsistence and informal jobs to most workers.


Furthering socio-economic progress and inclusion requires tackling the economy’s dependence on few formal sectors, such as construction, the financial sector and the activities of the Canal. Outside of those sectors, about 40% of non-agricultural workers work informally, with low job quality, productivity and wages. To facilitate their transition to the formal economy, a better balance needs to be found between enforcing labour regulation and reducing red tape and administrative costs that discourage independent, micro, small and medium enterprises (MSMEs) from operating formally.


Another key obstacle to better jobs is the absence of an adequately skilled workforce. Almost 50% of Panamanian formal firms report difficulties finding the skilled workers they need, compared with about 38% in OECD countries. The economy needs to provide students with a wider range of skills; better secondary education as well as technician and vocational training; and new mechanisms to match the labour market’s demand and supply of skills.

Likewise, Panama stands to benefit from pursuing more active regional development policies to stimulate investment across all regions, especially in the lower-performing ones. This means devising new regional development plans, with adequate capacity – including at the municipal level – funding mechanisms and performance measurement systems.


Finally, fiscal revenues should play a more significant role in shaping income distribution and financing development in Panama. In 2015, total tax revenue and social security contributions amounted to 16.2% of GDP, far less than in OECD (34.3%) and Latin American (22.8%) economies. A more effective and efficient tax system would improve income redistribution and provide stable, long-term resources to finance social and productive policies. Finally, Panama should adopt and implement new norms for public-private partnerships with sound regulatory and institutional frameworks.

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For more information on the OECD Multi-dimensional Country Reviews (MDCR), visit: http://www.oecd.org/development/mdcr/.

 

To request an interview or a copy of the report, journalists are invited to contact Sebastian Nieto Parra (email: Sebastian.Nietoparra@oecd.org; Telephone: + 33 (0)646450900) at the OECD Development Centre.

 

Background information about the MDCR Panama:  The Multi-dimensional Review of Panama is composed of three distinct phases: initial assessment (Volume 1), in-depth analysis and recommendations (Volume 2), and implementation of reforms in the identified key areas (Volume 3). This second Volume delivers an assessment and makes recommendations to overcome constraints on social and economic development. The report contains detailed policy recommendations and, above all, the OECD's expertise in promoting social inclusion at the regional level, building better skills and increasing formal jobs, and improving the taxation system, as well as, enhancing private´s sector involvement to support financing for development.

 

The MDCR of Panama is the third OECD review in Latin America, following Peru and Uruguay. The MDCR process supports Panama’s own development agenda towards achieving a brighter future for its citizens.

 

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