For the past decade, Panama’s economy has been roaring. With GDP growth averaging 8.24 percent from 2003 to 2013, Panama’s economy looked more like that of the so-called East Asian Tigers than many of its neighbors, particularly to the north, and the comparison to Asia does not end there. As the government moves to widen the Panama Canal to accommodate wider shiploads and makes massive investments in infrastructure, including ports and the first-ever subway in the capital city, Panamanian authorities have proclaimed that they want to be the Singapore of the Western Hemisphere—the region’s main logistical hub.
While in terms of investment outlays, growth of the financial sector and overall GDP growth, that ambitious goal certainly seems possible, the question is whether politics—and in particular corruption—will ultimately drag down a country that on the surface, at least, seemed to be doing all the right things.
President Juan Carlos Varela, elected on May 4, seems intent to try to turn the page on the corruption, cronyism and autocracy that marked the term of his predecessor, Ricardo Martinelli, as it has much of Panama’s history since its U.S.-sparked independence from Colombia in 1903. Indeed, the election that unexpectedly gave Varela the presidency became a referendum on the nepotism of the Martinelli administration. Martinelli’s handpicked successor, Jose Domingo Arias, ran with then-First Lady Marta Linares de Martinelli as his running mate under the governing Democratic Change (CD) party, opposed by Varela and the minor Panamenista Party (PPA) in coalition with a number of small parties grouped together under the banner The People First (EPP).
Even just a month before the May election, Varela—who had been vice president under Martinelli, but was effectively pushed out as the president jockeyed to run for a second time—was a long shot. But Martinelli’s ham-handed attempts to retain power, along with the mounting examples of collusion between the state and the private sector—the latter including many members of Martinelli’s family—in the awarding of lucrative construction contracts, fueled a rejection of the Martinelli cronies’ attempt to cling to power. At the same time, Panama’s largest party, the Revolutionary Democratic Party (PRD), was in disarray after losing in 2009 to Martinelli. While running second in the months before election day, the PRD eventually fell to third with 28 percent of the vote.
A clever social media campaign—featuring, among other things, YouTube videos of merengue and salsa songs mocking Arias and the tactics of the Martinelli inner circle—stoked popular indignation and contributed to an unprecedented turnout of over 75 percent of registered voters that pushed Varela past Arias to an eventual eight-point win. Along with Varela’s unexpected victory, the PPA also won the mayoralty of Panama City over the PRD and the CD incumbent.
During the campaign, Varela promised to launch independent investigations into allegations of corruption under the government. Those promises, while inspiring fear among Martinelli’s inner circle, also inspired voters.
Since being elected, Varela has made good on his promises. He has revoked 355 presidential pardons issued under the Martinelli administration; prodded the electoral tribune to investigate charges of campaign abuse by dozens of state agencies in favor of the incumbent party; and appointed anti-corruption prosecutor Lorena Lozano Coronel. Only months after her appointment, Lonzano launched an investigation into alleged abuses in the government’s National Assistance Program (PAN); sent a case in September to the Supreme Court over former Labor Minister Alma Cortes’ irregular expenses on a trip to Geneva; and opened an investigation into alleged bribes that may have passed from Italian contractors for the Panama Canal expansion to members of Martinelli’s government, including Martinelli himself.
But as experience has shown in other countries, truly rooting out and ending a legacy of corruption beyond just one discredited administration is a difficult task. In the case of Panama, the current government must address not only the big-ticket perfidy and personalism of its predecessor, but a history of public rent-seeking and weak institutions. As Varela rides the wave of rejection of the past government, it is relatively easy to target and prosecute high-level violators. The question is whether the government can tackle the broader permissive environment in the public and private sectors that has allowed corruption to flourish, and whether Panama can build strong, independent institutions, especially the judiciary. Those are long-term efforts and policies that must extend beyond political vendettas and the term of one administration.
The Good Years
Given the years of economic expansion preceding and during the Martinelli administration, Panamanian voters’ anti-incumbent reaction may come as a surprise. Panama’s torrid economic growth began shortly after the U.S. invasion removed Manuel Noriega in 1989, jumping from -13.4 percent under Noriega to 1.6 percent in 1989 to 8.1 percent in 1990. The Panama Canal, which this year celebrates its centennial, has always been a keystone of the country’s economy and tied it closely to the United States, to the point that the U.S. dollar is the de facto currency over the official national currency, the balbao.
That economic, political, financial and personal proximity between the two countries continued after 1999, when the U.S. turned over ownership of the canal to the Panamanian government. Today, the canal, through which $270 billion in goods passes every year, is managed by the independent Panama Canal Authority (ACP).
The treaty passing the canal to Panama was signed in 1977 between then-U.S. President Jimmy Carter and the commander of Panama’s National Guard, Gen. Omar Torrijos. At the time, U.S. conservatives sounded all sorts of alarms, claiming that the eventual turnover would lead to the deterioration of the canal’s infrastructure and to the Chinese gaining control over the all-important maritime link between the Atlantic and Pacific Oceans.
None of those fears came to pass. After the mysterious death of Torrijos in a plane crash, his protege, Gen. Manuel Noriega, took power and served both as an informant for the CIA and as a broker for drug smugglers and money launderers. As evidence mounted that Noriega was in cahoots with narcotics traffickers, his attempt to steal upcoming elections brought the full force of the U.S. Army against him. The U.S. invaded Panama, arrested Noriega and sent him to stand trial in Florida before two federal grand juries. Found guilty of drug trafficking, racketeering and money laundering, Noriega was sentenced in 1992 to 40 years in jail, making him the first foreign leader ever convicted on criminal charges in the U.S. In 2010, he was extradited to France, where he was convicted again for money laundering and sentenced to a seven-year prison term, but served only a year before being extradited, once more, to Panama on murder charges.
After a relatively brief occupation, the U.S. turned the country back to the Panamanian government, while continuing to offer development assistance and helping in the reorganization and strengthening of the electoral council. Since that time, six presidents have been elected from an array of parties, mostly on the left, including the son of Omar Torrijos, Martin Torrijos. There is a ban on consecutive re-election of presidents, and Panamanians have shown a distinct distaste for re-electing an incumbent party for a second term. Thus, while the loss of the Martinelli ticket and Varela’s come-from-behind victory after record years of economic growth may have come as a surprise, the scenario was understandable given Panama’s recent political history.
Political stability in the post-Noriega period, combined with the pro-market orientation by the governments that followed and policy consistency across them—an unfortunate rarity in the region—soon brought economic growth to the isthmus nation. In the 10 years after Noriega was sent packing to a Miami prison, GDP growth averaged 3.2 percent. That was complemented by a host of other reforms intended to boost investment, make the famously opaque financial system more transparent, guarantee property rights, and link the country to the global economy.
Panama’s first female president, Mireya Moscoso, and later Martinelli negotiated and signed a 2009 treaty with Mexico on double taxation and information-sharing—the first step in reversing the Organization for Economic Cooperation and Development’s labeling of the country as a tax haven for its lack of transparency and nominal taxes. To meet the conditions for Panama’s free trade agreement (FTA) with the U.S., the government also adopted a set of other reforms to improve the regulatory environment and the banking sector. At the same time, Panama embarked on free trade discussions with Canada, Taiwan and Singapore. The U.S.-Panama FTA, long delayed thanks to the U.S. Congress, was signed into law in October 2011.
Martinelli’s election in 2009 was seen as a confirmation and consolidation of the country’s pro-business, orthodox economic orientation. A billionaire supermarket magnet of Panama’s grocery store chain Super 99, Martinelli ran as an independent business candidate, in coalition with the Panamenista Party. In contrast to his predecessors, Moscoso of the PPA and Martin Torrijos of the Democratic Revolutionary Party, Martinelli was seen as a political outsider. His campaign was largely self-bankrolled, generating hope that he would be free of “politics as usual,” but also concern that he signaled a new era of purchased politics.
Once elected, Martinelli brought into government a crop of business leaders and close associates and bet big on infrastructure investment as the trampoline for Panama to jump to a new phase in its development and participation in the global economy. The capstone to all of this was the plan to expand the Panama Canal.
A Man, a Plan, a Canal—Panama
Originally discussed under the Torrijos administration, Martinelli’s plan was to widen the Panama Canal to double its capacity, permitting larger ships to pass through. Where the existing arrangement only allowed for ships that were capable of holding 5,000 containers, or 20-foot equivalent units (TEU), the expansion would allow for ships carrying over 12,000 TEU to pass through the country’s three-storied locks between the Pacific and the Atlantic.
The public investment at the time seemed both bold—with an originally estimated price tag of $3.2 billion—and forward-looking, given the rise of China and Asia in the global economy and the increased flow of trade between the Western and Eastern Hemispheres. Already, however, Panama was beginning to lose share of trans-oceanic maritime traffic to the Suez Canal, which, because it has no locks, can take larger ships. The Suez had seen its east-west traffic increase from a 30 percent share to 42 percent in the past four years.
But was the plan sensible? Despite the apparent logic of updating a 100-year-old canal to accommodate modern ships, the truth was that most of the ports to Panama’s east were not ready to accommodate them. Since the announcement, the U.S. ports of Baltimore, Charleston, Miami and Tampa, among others, have scrambled to upgrade for the new big draft ships that could soon pass through the canal.
While it was reasonable—laudable even—that Panama should lead the way for maritime commerce, the economics of the expansion were far from clear. According to an article in Americas Quarterly, after the expansion of the canal, shipping goods by rail or truck across the continental U.S. will remain a faster and more cost-effective means of getting products to markets and consumers. Moreover, shipping goods from coast to coast by rail rather than through the canal is also better in terms of carbon dioxide emissions. According to the Americas Quarterly article, the route from a U.S. West Coast port via rail for inland distribution emits only two-thirds as much carbon as a trip through the Panama Canal to an East Coast port.
Nevertheless, the plan had no shortage of financial backers, in part because of the guarantee of the independent canal authority, the ACP, which investors believed isolated the project from politics and patronage. As a result, when bonds to support the project went on sale, investors snapped them up in record time. The contract for the massive infrastructural overhaul was awarded to the international consortium United Group for the Canal (GUPC), made up of members in Spain, Italy, Belgium, Panama, the U.S. and the Netherlands. A French company was also contracted to build a model of the expanded canal to test its engineering.
The expansion work focused on the construction and excavation of new locks, as well as improving the existing route and its dependability and water supply. At the close of 2010, the canal expansion was running smoothly, with 19 percent of work complete. But by 2011, warning signs had already started to appear. Worries of drought threatened the passing of bigger ships through the canal; a new Nicaraguan inter-oceanic canal posed potential competition; and, worst of all, costs skyrocketed from initial projections.
So far, the projections for the cost of the expansion have swollen to more than $5.2 billion, with some estimates as high as $5.5 billion, against the original $3.2 billion. The opening date has shifted from October 2014 to early 2016. The cost overruns and delays led to a conflict earlier this year between the Panamanian government and the Spanish-based construction company and main contractor, Sacyr, which the government accused of overbilling and failure to meet target delivery dates.
With Sacyr and Italy’s Impregilo demanding that the ACP foot the cost for the production price increase, workers from the consortium threatened to cease construction unless they were paid. Negotiations put 10,000 jobs at risk for nearly a month until an agreement was reached, with the ACP paying a portion of $36.8 million in return for an immediate recommencement of construction. A second workers’ strike on April 23 brought infrastructure production, including the canal expansion, to a halt, persisting for two weeks before an agreement was reached.
Many people believed that these cost overruns and tales of government kickbacks were just the tip of the iceberg: Big-ticket corruption linked to the canal expansion and the investment boost around infrastructure were only a reflection of a larger pattern. Rumors persisted of malfeasance in small projects and personal enrichment or profligate spending of the public budget across the government. What made the swirl of allegations around the canal contracts more shocking was that they were in relation to the ACP, which had historically been respected for its independence and integrity, and around a project that the world was watching closely.
The Whiff of Corruption and the Wikileak of Conspiracy
The revelations around the Panama Canal fit a larger pattern of patronage, lack of transparency and malfeasance that was already raising concerns in Panama. The $20 billion spurt of infrastructure investment during the five years of Martinelli’s term, while visible in the cranes crowding out Panama City’s skyline, appeared increasingly to be going to relatives and business associates. Contracts for public works projects such as parking lots and highways were awarded with little competition.
At the same time, allegations of nepotism ran high. Revelations in early 2014 that Alvaro Aleman Healy, the minister of the presidency, had contracted his nephew for an undisclosed job provoked the nephew’s resignation. It followed similar stories that had emerged earlier: Milton Henrique, the minister of government, had hired his sister-in-law, Florita Ciniglio, and Jorge Barakat, the director of the Maritime Authority of Panama (AMP), was in violation of civil service laws dating back to 2004. At the same time, Martinelli ran roughshod over the judiciary, leading international organizations to raise concerns about Panama’s institutions. The World Economic Forum’s 2013-2014 Global Competitiveness Report noted that among the challenges Panama faced were “strengthening the functioning of its institutions, fighting corruption and crime. . . and the independence of the judiciary system.”
Accusations that Martinelli and his crew were spying on and targeting political opponents were also common. The persistent rumors about Martinelli’s practices and U.S. concerns—particularly as Panama pushed the U.S. Congress to approve the FTA—came to light in 2012 as a result of information released by the anti-secrecy organization Wikileaks. Among the pages of classified cables was a note from the U.S. embassy expressing concerns over growing evidence that the government was spying on opponents and consolidating power.
One of the targets of Martinelli’s Machiavellian maneuverings was his own vice president. It was no secret that Varela hoped to succeed Martinelli, an ambition that at first seemed possible given the restrictions on re-election and Varela’s stronger political connections. But it soon became clear that Martinelli not only was loath to share the political limelight, but also that he had bigger plans for himself in power. In August of 2011, Varela left office.
Other defections soon followed, beginning with Finance Minister Alberto Vallarino, as well as the ambassador to the U.S., Jaime Aleman; the ambassador to Spain, Alvaro Tomas; the ambassador to the United Kingdom, Gilberto Arias; the director-general of the Foreign Ministry, Manuela Galindo; and Varela’s assistants Raul Sandoval and Rafael Flores.
By the time the 2014 presidential elections came, Martinelli found himself particularly isolated, his plans to stand for re-election having failed and his coalition splintering. To prolong his power and protect himself against growing calls for investigation of allegations of corruption under his rule, the president hand-picked Jose Domingo Arias to run as the CD’s candidate and placed his wife as the vice presidential candidate.
At the time, given the weakness of Panama’s largest party, the PRD—and the country’s economic success, even in the shadow of corruption and nepotism—Martinelli’s puppet ticket seemed like a shoe-in.
The Next Step: Economic Growth and Uncertain Politics
In the five years of Martinelli’s term, the Panamanian economy did well even measured against the growth rates of its larger neighbors to the south, such as Colombia and Brazil. Between 2009 and 2013, the economy grew on average by 6 percent.
The approval of the U.S. bilateral FTA was also seen as a feather in Martinelli’s cap. Negotiations for the agreement started under the Moscoso administration, were signed in June 2007 and approved by the Panamanian National Assembly a month later, but did not receive approval from the U.S. Congress until October 2011 and did not take effect for another year.
As a result of the agreement, Panamanian goods will now be able to enter into the U.S. tariff-free, and Panama’s well-developed—and now much-more-transparent—financial system will be more closely tied to the economic behemoth to the north. The U.S. also will benefit significantly from the agreement, gaining access to the Panamanian services market in addition to geographic advantages, as almost 10 percent of U.S. international trade passes through the canal.
In this light, Varela’s election is all the more surprising and potentially positive. The Panamenista Party—the oldest operating party in the country—had been a relatively minor player in Panama’s electoral landscape until Varela brought in constituencies disaffected with Martinelli’s government and management style.
While Varela’s coalition, El Pueblo Primero, managed to surprise by winning the presidency and the mayoralty of Panama City, it did less well in Panama’s unicameral legislature. His coalition won only 12 seats in the 71-seat chamber, while Martinelli’s alliance scooped up 30. As a result, Varela’s parliamentary faction formed an alliance with the PRD, which had won 25 seats, to help it govern. Nevertheless, internal elections within the PRD—which led to the resignation of its defeated presidential candidate Juan Carlos Navarro—have thrown the future of the pact into doubt. Now the question is how Varela will be able to maintain the alliance to govern in the national congress.
At the same time, Varela has sought to make his Cabinet inclusive. Members include Dr. Julio Santamaria, who served under Martinelli and now serves as the minister of health; experienced PPA technocrat Dulcidio de la Guardia as economy and finance minister; as well as other prominent members of the party, including the minister of trade and industry, Meliton Arrocha, who had served in previous governments.
During his campaign and after his July 1 inauguration, Varela has emphasized fighting inflation, and improving citizen security—with the promise of an “iron fist”—and social inclusion as priorities for his administration. At the same, time, he has to balance these against the legitimate gains of his political rival and predecessor, Martinelli. To that end, Varela has stated that he will continue spending $3 billion a year on public investment and sustain the country’s 7 percent GDP growth rate.
One of his most pressing issues, given how he came to power, is rooting out and prosecuting corruption, not just from the past government but also within the state generally. According to Transparency International’s annual corruption survey, in 2013 Panama ranked 102 among 177 countries in terms of perceptions of corruption, having dropped 19 places in just one year. Certainly, the efforts to establish an independent commission to investigate and prosecute corruption from the past government are a step in the right direction. However, there remains the question of whether a politically weak party will have the wherewithal to pursue officials identified as corrupt, especially when that may implicate allies of the Panamenista party or elements of the political system—including its congressional PRD allies—that it will need to govern. There was no greater evidence of the overlapping, competing loyalties than the revelation that the man named by Varela to manage the notoriously corrupt National Assistance Program (PAN), Rafael Stanziola, would have to audit his sister Julissa, who had been a high-level official in the PAN under a past director.
There is also the matter of the completion of the canal. The benefits of the maritime upgrade will depend on both the ongoing flows of east-west commerce as well as structural reforms and the continued flow of investments by the government, which are meant to establish Panama as the logistical hub that Martinelli aspired it to be. Certainly, the decline in China’s once seemingly unstoppable growth rates from 14.2 percent in 2007, just after the plans for canal expansion were announced, to the expected 7.6 percent today, doesn’t bode well for the traffic the government hinged its big plans on.
Similarly, there are pending reforms and investments required to place Panama front and center as the Singapore of Latin America. Among those are streamlining customs practices, maintaining affordable passage rates for the new post-Panamax ships passing through the canal, and attracting private sector logistical giants.
At the same time, Panama faces competition from within the region. Its northern neighbor two countries over, Nicaragua, recently inked a deal to build a canal across the country with the help of a Chinese company. The plan resurrects Nicaragua’s failed, pre-Panama Canal attempt, and quite frankly—given questions about the credibility of the Chinese backer, the competence and integrity of Nicaragua’s Sandinista government and the serious environmental and property-rights concerns—it will likely meet the same fate as previous attempts. There is also the Colombian government’s plan to build a transcontinental railroad across the country from the Caribbean port in Cartagena to the Pacific port in Buenaventura.
In all these cases, Panama’s investments clearly have the upper hand and the support of international investors. Colombia’s proposal, in particular, appeared to be more an effort to prod the U.S. to approve the then-pending Colombia-U.S. and Panama-U.S. FTAs. That said, there still remains the question of how prepared U.S. ports are to receive the larger ships that will be able to pass through the new canal. While eastern seaboard ports have scrambled to keep up, the recent investment by Odebrecht in Cuba’s Port of Mariel have clearly upped the stakes. Should it come to full fruition, the Odebrecht Mariel upgrade may convert Cuba into a hub for the hemisphere through which goods could be shipped to U.S. ports in the Gulf of Mexico and on the East Coast, as well as Europe.
Unlike other governments that come to power on a wave of popular disgust against the previous administration, and thus with a limited protest mandate rather than broad support for a specific policy agenda, Varela has an advantage: the canal. For all the challenges—including the dubious potential rivals, China’s economic slowdown and the difficulties in upgrading and building cost-effective port facilities in the U.S. to accommodate larger ships—the region’s diversified economy and global trade will continue to make Panama a global hub.
Its position will be dramatically strengthened should the planned Trans-Pacific Partnership (TPP) ever come to fruition. That arrangement will link up the economies of Mexico, Canada, the U.S., Chile, Peru, Malaysia, Australia, New Zealand, Singapore, Brunei, Vietnam and Japan (potentially along with South Korea), together representing 40 percent of world GDP and one-third of global trade. It will represent the largest trans-hemispheric trade agreement in history, and Panama occupies the central passage between the two sides. Recently, unfortunately, the negotiations appear to be moving slowly. Despite U.S. President Barack Obama’s commitment to it, his refusal to renew fast-track authority that would allow him to force a straight up or down vote without amendments in Congress has taken some of the wind out of the sails of the negotiations.
Growth and Inclusion
Varela’s other campaign plank was social inclusion. The theme has become a common one in Latin American politics; in many countries it signals the desire to combine market-friendly policies with targeted government programs to ensure that benefits from the economic gains of recent decades are widely distributed, and that formerly underprivileged constituencies enjoy the political protections needed to demand those benefits.
This promises to be difficult. Currently, Panama ranks sixth in the region in terms of the percentage of GDP spent on social programs, health and education, tied with Brazil and falling short of the U.S., Costa Rica, Honduras, Argentina and Colombia. It also scores within the bottom half of countries in the region in terms of social inclusion, according to the Americas Quarterly Social Inclusion Index, coming in ninth among 17 countries. At the same time, Panama still does not collect internationally recognized valid census or household data on basic measures such as enrollment in secondary school, poverty rates or employment. Such numbers are essential both for gaining a snapshot of the social inclusion needs of the country and for targeting social programs to Panamanians who lack access to basic public and private goods.
While it may seem basic, the first step to securing Varela’s pledge to improve social inclusion will require gathering and reporting on these basic indicators of socio-economic development, particularly as they relate to race and ethnicity in Panama’s famously diverse society. This goes beyond the potential limits of the administration’s political coalition to the technical capacity of the state, as well as inherent biases in the social investment of the government.
At the same time, Varela has also promised to maintain the popular program he started as vice president that provides Panamanians over 70 years of age who do not have access to a pension with a monthly $100 stipend. The “100-for-70” program had become a social assistance policy, targeting a long-overlooked segment of the population.
Nevertheless, increases in social programs, as well as sustained high levels of public investment in infrastructure, will run the risk of inflationary pressures on the Panamanian economy. Already, the president has pledged to ensure that basic foodstuffs will remain affordable for the poor amid rising prices, implementing a system of price controls under a program named “basic food for people.” But price controls are only a short-term and risky palliative.
The question will be if this accidental president, as he’s been described, will have the congressional and popular support to embark on a much-needed program to root out and prosecute corruption while meeting expectations regarding economic growth and the need to contain inflation. As much as Panama may publicly aspire to be Singapore in terms of its regional and infrastructural positioning, massive public corruption and inflation were never part of the Singapore model.
For all the corruption-driven hangover from the early, heady days of the Panama Canal expansion, as well as the political challenges of Varela’s popular mandate and demands for greater social inclusion, Panama maintains a number of advantages. For one, unlike their counterparts in other countries, Panamanian voters have not fallen for the easy charm and pocketbook attraction of fast economic growth and incumbency. The surprise rejection of Martinelli’s CD party demonstrated a unique maturity and pragmatism among Panama’s electorate. That maturity has brought a gentle policy course correction, rejecting the malfeasance and nepotism of one administration but not the pro-market policies that went with them.
Those policies have served Panama’s GDP and global position well. Should global free trade receive a second wind through approval of the TPP or through the sudden—and unexpected—resurrection of World Trade Organization (WTO) talks, Panama will be in a prime position to take advantage. In the meantime, the main question will be whether it can effectively and honestly divert the gains of its economic bonanza to targeted, transparent social programs that can increase social inclusion.
Ultimately, rooting out and addressing corruption will remain a long-term problem that will last beyond Varela’s term and may exceed his limited political mandate and coalition in parliament. How far Panama can go in tackling corruption will depend not just on Varela pursuing and prosecuting those who abused office before him, but on whether he can lay the foundations for a strong, independent judicial system that would offer accountability. Fortunately, Panama’s geographic assets and popular pragmatism may give Varela and his successors the cushion to do that.
Christopher Sabatini is editor-in-chief of Americas Quarterly and senior director of policy at the Americas Society/Council of the Americas.
Rebecca Bintrim is assistant editor of Americas Quarterly and policy associate at the Americas Society/Council of the Americas.