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Panama Manufacturing
In 1984 the value added in manufacturing totaled US$344
million, distributed approximately as follows: food and
agriculture, 42 percent; textiles and clothing, 11 percent;
chemicals, 8 percent; machinery and transport equipment, 1 percent;
and other manufacturing, 37 percent. Manufacturing was almost
completely oriented toward the domestic market; manufactured goods
accounted for a mere 2.5 percent of the value of exports of goods
and nonfactor services. Production was concentrated in Panama City
(over 60 percent of establishments), with smaller industrial
centers at David (10 percent) and Colón (5 percent).
Industrial development has faced the serious constraints of the
small size of the domestic market, lack of economies of scale, high
labor and unit costs, and government policies of high protection
against imports. The greatest growth in manufacturing occurred in
response to import- substitution industrialization in the 1960s and
1970s. By the 1980s, however, the "easy phase" of importsubstitution industrialization was over; a second phase, that of
industrial deepening, was more difficult to carry out in such a
small economy. The economy's obvious limitations in manufacturing
have been partially offset by an educated labor force, highly
developed internal and external transport and communication links,
extensive financial facilities, the country's centralized location,
and relatively few restrictions to foreign investment. The Panama
Canal treaties provided additional space for expanding the CFZ, an
ideal location for light industry and assembly plants.
During the 1970s, the public sector took the lead in
manufacturing by building a cement plant, sugar mills, and iron and
steel works. The structural adjustment program of the mid-1980s
sought to reduce the state's role in the economy and to make the
private sector the engine of manufacturing growth. The industrial
incentives legislation of March 1986 encouraged manufacturers to be
export-oriented by removing tax exemptions for those firms that
produced for the domestic market. The legislation also provided for
maintaining tax exemptions on imported inputs, income, sales, and
capital assets for those firms that produced exports. The
legislation also lowered import barriers over a period of five
years in an effort to increase the productivity and competitiveness
of local manufacturing. In addition, new companies were given
tariff reductions of up to 60 percent for the first 7 years, and 40
percent thereafter.
Since the early 1970s, industrial expansion and job creation
have lagged behind the growth of the labor force. In the 1960s, an
average of 2,400 jobs was created each year in manufacturing. The
rigidities of the industrial incentives law in 1970 and the labor
code in 1972 contributed to a decline in manufacturing employment;
an average of only 530 new jobs were created each year in
manufacturing during the 1970s. The changes introduced in the labor
code in March 1986 sought to reverse the antiemployment bias in
manufacturing. The slight reduction in the overall unemployment
rate in 1986 may be partially attributed to the labor code
revisions.
Despite government measures to stimulate manufacturing,
Panama's becoming a major industrial center seemed unlikely. Under
the CBI, some potential arose for the development of twin-plant
operations, especially in association with firms in Puerto Rico,
where labor costs were higher than in Panama. In general, however,
Panama was unable to compete effectively with Mexico, given the
latter country's low labor costs and proximity to the United States
market. Also, the possibility existed that industries from East
Asia, especially clothing manufacturers, might increasingly
relocate to Panama, in an attempt to circumvent United States
quotas. This possibility was limited by uncertainty over the United
States response. The United States Department of Commerce had
called for the reduction of United States imports from Panama,
precisely in those products manufactured by Asian investors.
Data as of December 1987
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