Bidirectional foreign direct investment in Panama

Bi-Directional Foreign Direct Investment in Panama

It is now without any doubt that the Panamanian economy is met with sustainable growth. It is known that the services sector contributes mostly to the growth, which is concomitantly attributed to services offered by the Panama Canal. In this context however, it would be interesting to see what impact have foreign direct investments had on Panama's economy. Otherwise put, did FDIs to Panama play a bi-directional role in the meaning of generating economic growth? The following paragraphs strive to answer this question.

Unlike most global regions, Panama does not possess its own central bank, nor does it control the exchange system. This basically materializes in the lack of command within the financial sector. Given this context, foreign investments are encouraged and welcomed. Nevertheless, an interesting feature is that foreign investors are seldom legally obliged to finish an investment project, and the sums they invested can easily be withdrawn and sent back to the native country.

The Panamanian government convinces wealthy foreigners to invest in the development of the Central American country by presenting them with a wide series of incentives. Some of the most notable enticements are succinctly revealed below:

Companies which manufactured and processed products and commodities and exported all, or the large majority, of their output, were entirely exempt from direct taxes

These companies were also allowed to not pay import taxes on the machineries and equipments they had brought in from other states, and which would be used in their organizational operations

The income generated from export activities would not be subjected to income taxes

The import fares to be paid on imported commodities, capitals or semi-processed components were set in the form of fixed rates

Companies investing in technological advancements, and not already subjected to tax exemptions, would be deducted 25 per cent of their annual taxes

Investments in tourism operations exempt the investor from import fares and real estate taxes for 20 years

Investors in petroleum operations are subjected to fewer restrictions, such as the elimination of the necessity for 50 per cent of the investment to be guaranteed by a financial institution (Low Tax, 2009).

The above list is only a mere depiction of some of the incentives offered to foreign direct investors in Panama. What these efforts have managed to do is to attract numerous wealthy individuals, who, on the one hand, significantly increased their revenues, but on the other hand, also supported the development of the country. These investments were generally efficiently distributed throughout the totality of the Panamanian sectors; and this was achieved through the ability of the local authorities. When these recognized the challenges facing the touristy industry for instance, they developed incentives to attract investors within this field.

Panama has indeed been a phenomenon in terms of foreign direct investments throughout the past recent years. In the first half of 2007, FDIs to Panama registered a 19 per cent increase; the growth was generically associated with the improvement and enlargement projects of the Panama Canal, the sustained growth of the banking sector, as well as the growth of the real estate market (Reuters, 2007). Then, in 2008, the country was ranked the largest FDI recipient, as measured by FDI percentage in gross domestic product, in Latin America. In numerical information, the country's FDIs totaled up to $1.8 billion, accounting for 9.1 per cent in the state's GDP of nearly $20 billion (Woolford, 2008).

The two highlights previously presented are but a few examples, whilst the list could go on for pages. Yet, what is important to accomplish at this stage is the presentation of the direct effects of the foreign direct investments. If these impacts materialize in growths of the Panamanian economy, it will be safe to conclude that the country reveals an efficient bi-direction foreign direct investment system. In this order of ideas, the following lines reveal some of the most notable impacts of FDIs onto Panama's socio-economic status (they are written in bulleted form to increase readability and clarity):

The first and foremost important impact was given by the massive investments made in the enlargement of the Panama Canal; the effects of such an endeavor were tremendous. On the one hand, the enlarged canal offered greater opportunities for traffic, which in turn materialized in greater revenues from offering services in the canal. Then, this enlargement translated into an increased demand for workforce, which in turn created new jobs, reduced unemployment rates and improved the living standards of the population.

But the socio-economic effect of job creation and unemployment rate reduction was felt in virtually all domains which received foreign direct investments, not just the enlargement of the Panama Canal

The foreign investors who exported the products made in Panama also traded in Balboa, increasing as such the stability of the national currency

The foreign investors brought in new technologies and as such supported the country's alignment to it developments

The FDIs set the context for the training of national employees, who benefited from advantages of professional formation

All the above point out extensive levels of economic and social development. In a nutshell then, nothing is safer to say than that Panama enjoys the benefits of an efficient and effective bi-directional system of foreign direct investments, through which the alien investors have made significant contributions to the growth and development of the Panamanian economy and society. "Foreign direct investment is one of the principal drivers of Panama's booming economy, which according to the U.N. Economic Commission for Latin America and the Caribbean (ECLAC) will have the highest growth rate in the region this year" (Reuters, 2007).

Despite all the incentives and benefits of the bi-directional foreign direct investment, fact remains that the stability of the system could be disrupted by the impediments to FDI in Panama. These basically refer to the following: