Friday, July 27, 2007

THE ECONOMY: Excessive wealth fails to filter down to the poor

Tuesday Jul 24 2007 07:10

It is early evening on a Wednesday night but Manolo Caracol is buzzing just the same. A group of more than 20 well-dressed Panamanians fills one side of the spacious, ethno-chic restaurant, and the sangria at their table has been flowing for a while. To the left, against a backdrop of primitive oil paintings and oversized buckets brimming with tropical fruit, a young woman cooks furiously while waiters skip between the tables in an attempt to keep up with demand.

Not so long ago, you could turn up unannounced at this cool, Colombian-owned restaurant in the best part of Panama's historic centre and be confident of getting a table. Doing that today might lead to disappointment: Panama's economy is expanding at the fastest rate in almost a generation, and business is booming virtually everywhere you look. "We're experiencing growth across the board, not just in one particular sector," says Héctor Alexander, Panama's finance minister.

During the first quarter of this year, the country's fully-dollarised economy expanded at an annual rate of 9.4 per cent after growing 8.1 per cent during 2006, and both government and private-sector estimates suggest that the end-of-year figure will surpass 10 per cent.

Exports grew 15.1 per cent last year in nominal terms, and strong growth in government revenue – during the first quarter of this year it was expanding at more than 19 per cent year-on-year – helped notch up a non-financial public sector surplus equivalent to 1 per cent of gross domestic product. In the financial sector, credit is growing apace and levels of capital and reserves are building up fast.

Crucially for Panama's newfound dynamism, prime lending rates are below 9 per cent, the lowest in years.

One clear motor driving growth is the robust world economy – in spite of the US deceleration – and in particular, the heady expansion of the global shipping trade. That has boosted activity for the canal by between 5 and 6 per cent in recent years. It has also spawned the growth of related sectors such as tourism and rapidly expanding re-export trade. According to Samuel Lewis, the vice-president, the movement of shipping containers this year through Panama will reach 3m units, up from just 700,000 at the start of the millennium. He expects that figure to increase to 7m by 2009.

Guillermo Chapman, an economist and a former finance minister, describes the second engine of growth as a sort of "the world has discovered Panama" phenomenon. The country's geographical location, stable political system, the dollarised economy, still relatively low levels of inflation – the rate has fallen slightly since reaching a two-decade high of 3.9 per cent in 2005 largely as a result of high oil prices – and benign interest rates have spawned a wave of foreign direct investment. Mr Chapman says FDI this year is set to hit $2.5bn up about 20 per cent on last year.

The most obvious sign of this is in construction. Look out from the 19th century waterfront buildings of the capital's historic quarter across the bay and the rate at which the skyline is changing suddenly becomes apparent.

Another is the sparkling sports cars and shining SUVs that fill Panama City's already crowded streets. Drive down Balboa Avenue, the road that links old and new Panama City, and you will see the latest Lexuses and Lamborghinis vying for space with fat-tyred Fords and Toyotas.

The trouble is that this ostentatious wealth is not quite everywhere. Look beyond the investment figures, glass skyscrapers and the fancy restaurants and poverty more reminiscent of the seamier side of Haiti comes into view.

In Panama City's old neighbourhood, wizened men eke out a living selling loose cigarettes from roadside stands improvised from cardboard boxes and planks of wood. Families live in dingy, airless rooms that, as often as not, serve as kitchen, sitting room and bedroom all in one. Go out into Panama's lush tropical countryside and it is a similar – and sometimes even more miserable – story.

"The gap between rich and poor here just gets wider," argues Miguel Antonio Bernal, a well-known lawyer and critic of the government. "Sure, there's growth but none of it filters down to the poor." Mr Bernal insists, for example, that unemployment is running at between 20 and 23 per cent of the country's economically active population.

The administration of President Martín Torrijos dismisses such assertions, insisting that the percentage of jobless is more like 6 per cent, a historic low. But it does recognise that many Panamanians continue to live in extreme poverty. The government also says it is working overtime to try to solve the problem. Mr Lewis insists that the Opportunities Network, providing a direct subsidy of $35 a month to families that can show that their children attend school regularly and turn up to doctors' appointments, is making a significant difference for 38,000 of the 78,000 families it claims live in extreme poverty. By 2009, when the administration's term ends, Mr Lewis claims the remaining families will be receiving similar help.

Two further shadows – the fear of a bubble in the vigorous property market and a slowdown in the global economy – could also loom in the coming months and years. Mr Chapman believes that a continuing softening of the US housing market would be likely to produce less demand from US baby boomers who have been snapping up retirement homes and second properties in Panama.

Meanwhile, Mr Chapman points out that a change of fortunes in the global economy is simply a question of time – though exactly when that will happen is clearly guesswork. So what does all that mean for Panama in the medium term?

With no clear sign of an impending slump in world growth and with China's emergence as an economic superpower continuing to underpin shipping activity – China is now the second most important client of the canal after the US – many private economists believe that the country can maintain growth rates of between 6 and 7 per cent. It is a rate that almost any government in the world would be more than pleased with.

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