STRAYER UNIVERSITY

A STUDY OF THE ECONOMIC IMPACT OF THE UNITED STATES’

RELATIONSHIP WITH THE REPUBLIC OF PANAMA

A DIRECTED RESEARCH PROJECT SUBMITTED TO THE FACULTY OF

THE

GRADUATE SCHOOL OF BUSINESS, STRAYER UNIVERSITY

IN CANDIDACY FOR THE DEGREE OF MASTER OF BUSINESS

ADMINISTRATION

To

Dr. Joel O. Nwagbaraocha

By

Darell R. Scott

August 2004

2

ACKNOWLEDGEMENTS

I’d like to thank the Lord, my mother, and father for the gift of life and the privilege to

come from such a cultured, prideful background and families. To my grandparents for

always being there for me and instilling in me life’s values. My brothers and sister, my

cousins, aunts, and uncles. To my daughter Imani, you are the center of my life and I

hope that these writings will give you some perspective of your heritage. To my

girlfriend for just being there through the trials and tribulation of this endeavor. To my

friends that was always supportive. To my professors from Howard University to Strayer

University and all the friends and associates I’ve met along the way.

3

ABSTRACT

For over 100 years, the United States and The Republic of Panama has had a

working relationship. Over the years, treaties have been signed, agreements made, and

battles fought, on the behalf of Panama. The United States has continuously played a

significant role in the Panamanian economy and politics. Moving into the 21st century,

Panama now has acquired the Panama Canal and is positioned to be a more prominent

country in Latin America. With the United States transference of the Panama Canal to

Panama and a significantly less U.S. presence, Panama must now find a way to do

without the direct influences of the United States.

My main research question focuses on the economic impact of the United State’s

relationship with the Republic of Panama. Also discussed are sub-questions to better

understand the economic and political significance of the relationship between the United

States and Panama. Questions such as the influences the United States still have on the

Panamanian economy and what influences do other nations have on the Panamanian

economy, the economic effect that the transference of control of the Panama Canal has

had on the United States and what is the economic effect on Panama with the loss of

revenue generated by Americans stationed in the country. The future economic

relationship between the United States and Panama is also another question that is

addressed.

Primary and secondary sources have been utilized for this study. Primary sources

will include interviews with Panamanian nationals and employees of the Embassy of

Panama (Washington D.C.). Amongst the interviewees are scholars in the relationship of

the Untied States and Panama.

Secondary sources include articles from professional academic journals, weekly

publications such as CNN, Reuters, The Washington Times, and various newspaper

publications, Internet articles, as well as books on the specific and broad subjects-areas.

Professional academic journals allow for the various viewpoints and discussions on the

historical and current state of the relationship between the United States and Panama to

be compared and contrasted.

Many interesting revelations were revealed to me in writing this directed research

project. The ―creation‖ of Panama comes off as more of a political opportunity for the

United States, than the ―spreading of democracy for the good of people‖. Panama existed

before the settlement of Jamestown in 1607 and centuries before the United States

intervened in November 1903 to help Panama gain independence from Colombia.

Panamanian nationalists had sought independence from Colombia in the nineteenth

century and unsuccessfully fought for Panamanian freedom in the Colombian civil war of

1899-1903. A French company began building a canal in 1882 to connect the Atlantic

and the Pacific Oceans across Central America. Many men building the canal died of

diseases such as yellow fever, so the project stopped.

In 1890 the Americans tried to cut a canal through Nicaragua and failed. President

Roosevelt talked with Colombia in 1901 about building the canal. A treaty was signed.

The United States requested to buy a six-mile wide and 10 mile long strip of land with

4

connected the Atlantic and Pacific for a down payment of $10 millions and $250,000

each year. In 1903 the Colombian senate turned down the offer.

Some people from the French company and some Americans meet with some

Panamanian nationalist to break away from Colombia. A revolution took place. The U. S.

warship Nashville backed up the revolution with its big guns. Three days after the

revolution began; the United States officially recognized the new nation. Less than two

weeks later a treaty for building the canal was signed. Many years later the U. S. paid

Colombia $25 million for their losses.

To many Panamanian nationalists at the time, the U.S. intervention in 1903

complicated the formation of a Panamanian national state. Thus, to Panamanians, the

United States, at best, was a midwife and never the parent of Panamanian nationality.

The economic impact that the U.S. has dad on Panama for much of the last

century was and still is significant. For canal rights in perpetuity, the U.S. paid Panama

$10 million and agreed to pay $250,000 each year, which was increased to $430,000 in

1933. It was increased again in 1955. In exchange, the U.S. got the Canal Zone and

considerable influence in Panama's affairs. The unit of currency used in Panama is the

Balboa (PAB), which is pegged at parity to the dollar. There is no Panamanian paper

currency and the US dollar is the de facto official currency for all but minor transactions.

The United States military forces in Panama numbered slightly under 10,000 troops, at

full strength in Panama. The United States military also employed approximately 8,000

civilians, 70 percent of whom were Panamanian nationals. The U.S. withdrawal has

significantly affected the Panamanian economy through the loss of civilian jobs and the

significant lack of US dollars from military and civilian personnel (upwards of $250

million every year), but the Panamanian government has made significant strides in

improving the economy. Through social reforms, aid from foreign countries, and the

United State’s on going interest in the Panama Canal, the country is trying to lay the

foundation for a prosperous economic future. But still, almost half the population lives in

poverty and unemployment is at 13 percent.

Economically, the current state of Panama is stable and the most advanced in all

of Central and South America, but continue to struggle with poverty, and the lack of

employment. The United States will always have a significant interest in the Panama,

specifically for the Panama Canal. Since the earliest days of Panama, the United States

has placed its ―hand print‖ on the shaping of the country. The Untied States’ presence in

the country provided a substantial ―cash cow‖ for the country, until the transference of

the Canal to Panama in December 1999. Panama is now in the process of creating new

and innovative ways to market itself. Not only is the government upgrading the Canal

and entering into affiliations with countries once thought unlikely (China), but the

government of Panama is pushing the tourism aspect of Panama throughout the world.

Although a lot of Panama’s notoriety revolves around the Panama Canal, and is infamous

for such headline grabbers as Manuel Noriega and Operation Just Cause, the country is

still one of the most economically sound Latin American countries.

5

A STUDY OF THE ECONOMIC IMPACT OF THE UNITED STATES’

RELATIONSHIP WITH THE REPUBLIC OF PANAMA

TABLE OF CONTENTS

Acknowledgements

Abstract

Chapter 1: INTRODUCTION 7

Context of the Problem 7

Statement of the Problem 10

Specific Research Questions and Sub-Research Questions 12

Specific Research Question 13

Research Sub-Questions 13

Significance of the Study 13

Research Design and Methodology 15

Organization of the Study 16

Chapter 2: REVIEW OF LITERATURE 20

Chapter 3: HISTORICAL PERSPECTIVE - EXPLORING THE

RELATIONSHIP BETWEEN THE UNITED STATES AND

PANAMA 44

The Role of Treaties 54

Chapter 4: THE INFLUENCES THAT THE UNITED STATES STILL HAVE

ON THE PANAMANIAN ECONOMY AND WHAT INFLUENCES

OTHER NATIONS HAVE ON THE PANAMANIAN ECONOMY 61

The Other Countries 66

Chapter 5: THE ECONOMIC EFFECTS THE TRANSFERENCE OF CONTROL

OF THE PANAMA CANAL HAS HAD ON THE UNITED STATES

AND PANAMA AND WHAT THE EFFECT ON PANAMA IS AND

WILL BE TO THE COUNTRY 73

Military Presence 78

Commercial Use 79

Traveling the Canal 80

6

TABLE OF CONTENTS

Chapter 6: THE FUTURE ECONOMIC RELATIONSHIP BETWEEN THE

UNITED STATES AND PANAMA 85

Capitalism Reigns 85

The Panamanian Economy 89

The U.S. Presence – Is the U.S. Really Gone? 94

Chapter 7: SUMMARY, CONCLUSION, AND RECOMMENDATIONS 98

BIBLIOGRAPHY 102

7

CHAPTER ONE

INTRODUCTION

Context of the Problem

The United States has had a direct influence on Panama since before the turn of

the century. Even the Panamanian Balboa has been fixed to the U.S. dollar since 1903.

Generations of Panamanians have become intertwined with the United States. Whether it

is through the military or the Panama Canal, United States foreign policy has not only

affected Panama politically, but also economically.

The Western Hemisphere is the United States sphere of influence, as established

by the Monroe Doctrine, a warning to European nations to keep their influence away

from territory not directly under sovereignty. After the Latin American nations declared

their independence from Spain, they looked to other countries to help them develop

economically and politically. The United States aided these countries economically, as

well s politically, by helping certain factions gain power in the respective countries, but

only if the leaders helped look out for the United States’ best interest.1 Panama is a

classic case of Untied States influence.

Despite its small population and area (3.06 million and 30,193 square miles

respectively), Panama is an important center for international trade in the Western

Hemisphere, as both a major shipping thoroughfare and a regional economic power.

Since 1992, an average of 185 million long tons of cargo has passed annually through the

Panama Canal. Panama is also a financial and communications hub that sits at the

crossroads of five international fiber-optic networks and hosts 110 international banks.

1 Calderon, Rodolfo Vera ―The United States Invasion of Panama: A Tri-dimensional Analysis‖

Georgetown University · School of Foreign Service

8

Although the country has consistently maintained one of Central America's

highest per capita gross domestic products, approximately 37.3% of its population lives

in poverty, including nearly 18.8% in extreme conditions, according to government

statistics. 2

In the 1960s, Panama experienced buoyant growth in virtually all areas of the

economy as a result of the boom in canal-related activities and the growth in private

investment. GDP expanded at an average of 8 percent per year. Employment grew at 3.5

percent per year, well above the population growth of about 3 percent a year. Most of the

new jobs were generated by the private sector.

In the 1970s, Panama's average annual growth rate of GDP fell to 3.4 percent.

Many factors contributed to the decline. In the international arena, reduced canal use

(especially after the Vietnam War), rising oil prices, international inflation, and recession

in the major industrial countries had a negative impact on Panama's economy.

Domestically, investment fell in response to government policies of agrarian reform,

expropriation of private power companies, creation of state industries, protection of labor,

controls on housing, subsidies, and high support prices. In addition, the prolonged

negotiations between the United States and Panama over the canal adversely affected

investor confidence. The government sought to regain private investment by investing in

large infrastructure projects and by expanding or acquiring productive enterprises. Two-

thirds of the new jobs created in the 1970s were in the public sector. The public-sector

deficit expanded, and the government was forced to borrow money from abroad. By 1980

the external debt had reached 80 percent of GDP.

2 Energy Information Administration, Country Analysis Briefs, Panama Country Analysis Brief

9

In 1982 Panama, like most of Latin America, felt the impact of the world

recession. Once again, the government sought to remedy the declining private-sector

investment through increased public expenditures. In the same year, the public-sector

deficit reached 11 percent of GDP. In 1983 and 1984, the government imposed a severe

austerity program, which had the imprimatur of the IMF. Public investment was reduced

by 20 percent in 1983 and by a further 8 percent in 1984. The public deficit was also cut,

to about 6 percent of GDP in both years. In addition, the government undertook structural

adjustment measures in the areas of industry and agriculture and instituted changes to

streamline the public sector. The simultaneous recession and reduction in public

expenditures caused GDP to fall in 1984, the first decline in more than twenty years. In

the following years, however, Panama, avoiding the economic slump that plagued most

Latin American countries, experienced moderate growth.3

Panama has had a steady higher standard of living than most of its neighbors, due

primarily to the Canal and the American presence. Its annual per capita income in 1995

($2400) was among the highest in the developing world. By all major social indicators --

income, literacy, education, live births, life expectancy, birth rate, etc. -- Panama was

closer to upper-class Latin American nations such as Argentina and Uruguay, than to its

immediate neighbors.

This is not to deny social and economic inequities and the obvious differences

between Americans who lived in the Canal Zone and the general Panamanian population.

But for many years the United States has been pumping and annual $300 million into the

local economy.

3 Referenced April 2004: http://reference.allrefer.com/country-guide-study/panama/panama58.html

10

"Integrity is the best national defense" is a social abstraction, devoid of serious

content and satisfying only the soul. Panama has been used to American dollars for most

of this century. Now they are not going to get them, and this simple fact alone may spell

great trouble for the years ahead.

For well over a century, the United States has had direct ties to Panama. From the

building of the Panama Canal to various treaties to the military presence, the United

States has significantly played a role in the Panamanian economy and history, whether

good or bad. Major objectives of this study will focus on the impact that the United

States military withdrawal from Panama has had on the economy. Also, to be analyzed is

the effects that the transference of control of the Panama Canal will have on not only the

Panamanian economy, but also on the country’s relationship with the United States.

Panama and the United States have had a history of mutual dependency.

Statement of the Problem

This study seeks to examine the economic impact that the United States has had

on Panama. The economic state of Panama has been affected on two levels by the United

States. The first being the impact of the withdrawal of the United States military. The

United States military forces in Panama numbered slightly under 10,000 troops. The

United States military also employed approximately 8,000 civilians, 70 percent of whom

were Panamanian nationals. The U.S. withdrawal has significantly affected the

Panamanian economy through the loss of civilian jobs and the significant lack of US

dollars from military and civilian personnel (upwards of $250 million every year).

11

The United State’s transference of the canal to the Panamanian people has also

had a profound economic effect on Panama. The immediate cost to Panamanians through

the loss of U.S. dollars and the wide potential costs of managing and maintaining the

Panama Canal under Panamanian rather than U.S. control are substantial.

Panama has a substantial number of key problems being faced. As previously

stated, one being the economic impact that the withdrawal of U.S. troops will have on the

economy. This can be measured in some hundreds of millions of dollars lost annually

and includes both annual U.S. government payments to Panama and business for

Panamanians generated by Americans stationed there. That is a significant amount

because Panama's national earnings are only about $2.5 billion annually. The land and

assorted facilities the U.S. handed over, and the training the U.S. provided for those who

will now manage the canal, were a substantial bonus.5

Another key problem is the control of the Panama Canal. The question is whether

Panamanians on their own can govern themselves and/or manage the canal according to

their own needs and international expectations. Of course they are capable of running the

canal, the question is whether the national culture will allow trained professionals, now

and in the future, to work honestly and independently to keep the canal functioning as it

has in the past. So far there are positive indicators, including the will of many

Panamanians to prove they can do it, and negative indicators, mainly the record of

Panamanian history. If Panama fails, the people of Panama and the world will pay a

heavy price, directly and indirectly. Gen. Wilhelm warns that the most likely threats to

the canal are not external but "internal and non-lethal," ranging from corruption to

5 Online NewsHour, ―Controlling the Canal‖, William Ratliff and John J. Tierney

12

watershed mismanagement.5 Since the completion of the Canal in 1914, the United

States has operated and defended the Canal, investing somewhere in the neighborhood of

$32 billion in the process. The strategic value of this waterway far exceeds the monetary

investment that the United States has made in it.6 But as long as the U.S. has a navy and

international interest, the canal will be militarily useful and sometimes important, though

if military forces are kept at optimum levels it will not be critical.

Panama also faces many economic challenges, outside of its relationship with the

United States. Although the country has consistently maintained one of Central America's

highest per capita gross domestic products, approximately 37.3% of its population lives

in poverty, including nearly 18.8% in extreme conditions, according to government

statistics.2 Half the population of Panama is centered around the Canal and cities such as

Colon and Panama City. The Canal is a premiere source of revenue for the country. A

major challenge facing the current government is turning to productive use the 70,000

acres of former U.S. military land and the more than 5,000 buildings that reverted to

Panama at the end of 1999. The Panamanian government has to find new ways to attract

other countries to Panama. Panama has been far too dependent on the U.S. dollar.

Specific Research Questions and Sub-Research Questions

In answering the following research question, an attempt will be made to conduct

an in-depth analysis of the economic influence the United States has traditionally had on

the Republic of Panama.

6 Bradley, Scott ―The Panama Canal Give-away‖, Utah Eagle Forum

2 Energy Information Administration, Country Analysis Briefs, Panama Country Analysis Brief

13

Specific Research Question

What is the economic impact of the United State’s relationship with the Republic

of Panama?

Research Sub-Questions

Also discussed are the following sub-questions to better understand the economic

and political significance of the relationship between the United States and Panama.

What is the historical perspective of the United State’s relation with the Republic

of Panama?

What influences does the United States still have on the Panamanian economy

and what influences do other nations have on the Panamanian economy?

What economic effects does the transference of control of the Panama Canal

have on the United States and what is the economic effect on Panama with the

loss of revenue generated by Americans stationed in the country?

What is the future economic relationship between the United States and

Panama?

Significance of the Study

As a natural born Panamanian-American, this author feels that it is necessary for

future generations of Panamanian-Americans be made aware of the importance of the

United State’s influence on our mother country, politically, through the military, and

most important economically. Although Panama has consistently maintained one of

14

Central America’s highest per capita gross domestic products, approximately 37.3% of its

population lives in poverty, including nearly 18.8% in extreme conditions, according to

government statistics. 4

Panama has historically been a major strategic location for U.S. With the

transition of the Panama Canal from U.S. control to Panamanian control, the U.S. may

have ―lost‖ a strategic ―foot hold‖ on Central America. The United States has let go of

the 14 military bases that lined the canal’s bank. The United State’s civilian presence,

mostly through the military, has also been significantly impacted, thus leading to a loss of

significant revenue into the country.

This study will assist in revealing the in-depth relationship that the United States

has had with the Republic of Panama and the profound economic effects of the

relationship on not only Panama, but the United States, as well. Panama's economy is

based primarily on a well-developed services sector that accounts for nearly 80% of

GDP. Services include the Panama Canal, banking, the Colon Free Zone, insurance,

container ports, flagship registry, medical and health, and other business.

A major challenge facing the current government under President Mireya

Moscoso is turning to productive use the 70,000 acres of former U.S. military land and

the more than 5,000 buildings that reverted to Panama at the end of 1999.

Administratively, this job falls to the Panamanian Inter-Oceanic Regional Authority.

GDP growth for 2002 was about 0.8% compared to 0.3% in 2001. Though

Panama has the highest GDP per capita in Central America, about 40% of its population

2 Energy Information Administration, Country Analysis Briefs, Panama Country Analysis Brief

15

lives in poverty. The unemployment rate surpassed 14% in 2002. The United States

cooperates with the Panamanian Government in promoting economic, political, security,

and social development through U.S. and international agencies. Cultural ties between the

two countries are strong, and many Panamanians come to the United States for higher

education and advanced training. About 19,000 American citizens reside in Panama,

many retirees from the Panama Canal Commission and individuals who hold dual

nationality. There also is a rapidly growing enclave of American retirees in Chiriqui

Province in western Panama.5

This study will assist future generations of Panamanian /Americans, Panamanian

citizens, and Americans in understanding the effects that the United States has had on the

Republic of Panama and how changes can be implemented to improve the economic

stature of Panama and the on-going relationship between the United States and Panama.

Research Design and Methodology

Primary and secondary sources have been utilized for this study. Primary sources

will include interviews with Panamanian nationals and employees of the Embassy of

Panama (Washington D.C.). Amongst the interviewees are scholars in the relationship of

the Untied States and Panama.

Secondary sources include articles from professional academic journals, weekly

publications such as CNN, Reuters, The Washington Times, and various newspaper

publications, Internet articles, as well as books on the specific and broad subjects-areas.

5 U.S. Department of State, Bureau of Western Hemisphere Affairs, September 2003, Background Note:

Panama

16

Professional academic journals allow for the various viewpoints and discussions on the

historical and current state of the relationship between the United States and Panama to

be compared and contrasted.

Organization of the Study

The first chapter of this study has been devoted to describing the context of the

problem, statement of the problem as well as the significance, objectives, and

methodology of the study.

Chapter 2, Review of Literature, is devoted to an extensive literature review of

economic reports, political reports, business reports, government reports, media

perspectives, editorials, and interviews. The Internet served as a major secondary source

to access most of the aforementioned literature. Interviews were conducted as a primary

source of first hand accounts and opinions of the past, current, and future environment of

Panama.

Chapter 3, Historical Perspective – Exploring the Relationship between the

United States and Panama, looks at the history between the United States and the

Republic of Panama. The United States cooperates with the Panamanian Government in

promoting economic, political, security, and social development through U.S. and

international agencies. Cultural ties between the two countries are strong, and many

Panamanians come to the United States for higher education and advanced training.4

The United States has cast a long shadow over Panamanian life since the country's birth,

occasionally intervening in its internal affairs -- as in 1989, when U.S. troops deposed

4 U.S. Department of State, Bureau of Western Hemisphere Affairs, September 2003, Background Note:

Panama

17

Panamanian strongman Manuel Noriega. American control of the economic -- and literal

-- heart of Panama was a source nearly constant and sometimes violent resentment by

Panamanians. 8

Chapter 4 focuses on the Influences that the United States still have on the

Panamanian Economy and what Influences other Nations have on the Panamanian

Economy. About 19,000 American citizens reside in Panama, many retirees from the

Panama Canal Commission and individuals who hold dual nationality. There also is a

rapidly growing enclave of American retirees in Chiriqui Province in western Panama.

Twenty-nine opinion polls over this decade have revealed a steady 70 to 75 percent of

Panamanians in favor of a continued U.S. presence, with most of this due to the economic

benefits.5 With virtually no serious debate, Congress committed $6 billion to pay for

U.S. intervention in Bosnia, where no perceptible U.S. vital interest is at risk. Closer to

home, Congress had proven unwilling to spend a fraction of that amount (less than $100

million per year) to maintain an essential U.S. military presence at the isthmus at Panama

and to block eventual control of the isthmus by interests allied with Communist China.

Key port facilities on the Atlantic and Pacific sides of the Canal (Cristobal and Balboa)

have been leased by Hutchison Whampoa, 10% of which is owned by China Resources

Enterprises (100% of which is controlled by the Red Chinese government). Red Chinese

influence in Panama is growing in many ways. Recently, the Bank of China extended a

15-year $120 million loan to Panama at 3% interest to finance the government's

8 Referenced May 2004, CNN.com: http://www.cnn.com/1999/US/12/14/panama.canal.01/

5 Online News Hour, ―Controlling the Canal‖, William Ratliff and John J. Tierney

18

investment program and to purchase and sell assets. Taiwan has considerable investments

in the Republic of Panama.20

Chapter 5 analyzes The Economic Effects the Transference of Control of the

Panama Canal has had on the United States and Panama and what the effect on Panama is

and will be to the Country. For many years the United States has been pumping and

annual $300 million into the local economy. Panama has had a steady higher standard of

living than most of its neighbors, due primarily to the Canal and the American presence.

Its annual per capita income in 1995 ($2400) was among the highest in the developing

world. By all major social indicators -- income, literacy, education, live births, life

expectancy, birth rate, etc. -- Panama was closer to upper-class Latin American nations

such as Argentina and Uruguay, than to its immediate neighbors. The U.S. ran the canal

as a public utility for the global community, pumping profits and sometime much more

into maintaining the facility, Panama intends to run it as a business for profit. Panama's

intention could be dangerous if it expects to make much from the canal itself since doing

so would require either a significant hike in tolls or cutting corners in maintenance, or

both. The former would drive users to seek more cost-effective alternatives while the

danger of the latter, even in the medium term, is self-evident. Canal administrator Alberto

Aleman Zubleta has acknowledged that canal profits come mainly from businesses made

possible by the efficient operation of the waterway itself.

Chapter 6 discusses the Future Economic Relationship between the United States

and Panama. Despite its small population and area (3.06 million and 30,193 square miles

respectively), Panama is an important center for international trade in the Western

20

Lt. Gen. Gordon Sumner, Jr. (USA-Ret) Howard Phillips “Who Will Control the Path Between the

Seas?‖ The Washington Times Commentary Section Monday August 18, 1997

19

Hemisphere, as both a major shipping thoroughfare and a regional economic power. The

Untied States understand the strategic importance of Panama. Panama is vital to the U.S.

shipping industry and was an opportune military location to train not only U.S. troops,

but also Latin American forces. The unit of currency used in Panama is the Balboa

(PAB), which is pegged at parity to the dollar. There is no Panamanian paper currency

and the US dollar is the de facto official currency for all but minor transactions.

Not only is the Panama Canal important to Panama for income and jobs, but it is

also considered to be vitally important to the United States economy. Many U.S. exports

and imports travel through the Canal daily (over 10% of all U.S. shipping goes through

the Canal). Exports represent jobs for U.S. citizens because U.S. workers made the

products. Imports enable U.S. consumers to receive needed products.

Since the United States is the only superpower in the world, the United States is

interested in keeping the global economy running smoothly. If world trade is disrupted, it

can lead to worldwide economic problems. Therefore, any disruption in the flow of goods

through the Panama Canal could directly hurt the U.S. and global economies.

The final section, Chapter 7, concludes with a Summary, Conclusions, and

Recommendations for the further development of the Panamanian economic system.

Panama faces many challenges. Some of these challenges are made more difficult with

the loss of a significant U.S. presence. With proper economic development initiatives,

the ―weeding out‖ of government corruption and the business opportunities that are

available to such a unique country, Panama can prosper in the new millennia.

20

CHAPTER TWO

REVIEW OF LITERATURE

* Calderon, Rodolfo Vera ―The United States Invasion of Panama: A Tri-dimensional

Analysis‖ Georgetown University · School of Foreign Service

The author speaks on the various reasons of the United States’ intervention in

Panama. The reasoning was to protect the United State’s interests, both economically

and politically. The author notes how the United States has a tradition of funding rebel

forces in Latin America. The author notes the U.S. policies towards governments that

fall out of favor and how Panama (especially during the Noriega regime) was affected by

U.S. policies, thus leading to Operation Just Cause. The author also questions the

integrity of that U.S. operation.

From the texts, the real reason behind the United States intervention in Panama

was to protect United States’ interests, both politically and economically. The United

States has a tradition to fund rebel forces in Latin America when the present government

falls out of favor, such as the Bay of Pigs Invasion in Cuba and the Contras in Nicaragua.

However, while the governments of Latin America are in agreement with the United

States goals, then any type of illegal activity is neglected, as was the case with Noriega.

When Noriega started becoming more independent of United States influence, his

connections with insurgent groups across the world, but more specifically in Latin

America, were no longer ignored. These ties to groups under United States scrutiny then

became public attention and were used to justify the intervention of the United States in

the South. Considering how Latin American countries are dependent on the North for

their economic relationships, it could also be argued that the United States wants to

21

maintain this dependency of the South on the North. This was also seen through the

United States economic sanction on Panama before the invasion, which then promised

financial aid once Noriega was taken out of power.

Taking the three levels of analysis into account, the systemic level best proves

why the United States intervened in Panama. If it were not for the global issue of drug

trafficking and the United States’ War on Drugs, the U.S. would not have had a

legitimate reason for their intervention and military presence in Latin America. The

United States desire to keep the Latin American governments in check also resulted in the

invasion of Panama, mainly because Panama was becoming increasingly rebellious and

the United States could not allow for that type of rebelliousness to spread to other Latin

American countries, especially with the fight against Communism, which indeed was

coming down in the other side of the world with the fall of the Berlin Wall. In addition,

the criticism received by the United States was at the international level, with Latin

American countries demanding the decrease of American troops and influence in Latin

America. Followed closely is the individual level of analysis because if it were not for

Noriega’s personal agenda and his decision to play both sides of the card, he would not

have fallen out of favor with the United States.

22

* Energy Information Administration, Country Analysis Briefs, Panama Country

Analysis Brief, Author Unknown

Panama is important to world energy markets because the Panama Canal is a

major transit center for oil shipments and a potential choke point. Panama is also key to

plans to connect the electricity grids of North and South America.

The author gives a strong background on the Republic of Panama. Despite its

small population and area (3.06 million and 30,193 square miles respectively), Panama is

an important center for international trade in the Western Hemisphere, as both a major

shipping thoroughfare and a regional economic power. Since 1992, an average of 185

million long tons of cargo has passed annually through the Panama Canal. Panama is also

a financial and communications hub that sits at the crossroads of five international fiber-

optic networks and hosts 110 international banks. The Panamanian economy is one of

Latin America's most stable, with the Panamanian Balboa being fixed to the dollar since

1903. Panama's Colon Free Trade Zone (CFZ), established in 1953, is the largest in the

Western Hemisphere and contributes substantially to the country’s economy. The CFZ

allows all goods, except firearms and petroleum products, to be imported, stored,

modified, repacked, and re-exported without being subject to any customs regulations.

The strategic importance of the Panama Canal, shipping and port services not

only makes Panama's economy highly dependent on world trade trends, but also

vulnerable to fluctuations in the global economy. On May 2, 1999, Mrs. Mireya Moscoso

was elected to a five-year term as president. Since entering office, the Moscoso

administration has been trying to reduce the country’s public debt while alleviating

poverty by funding social projects. However, fiscal restraints, namely the Fiscal

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Responsibility Law that stipulates that the public-sector debt cannot exceed 2% of GDP

in a given year, may make it difficult for the government to implement these programs in

their entirety. The author covers such areas as Energy in Panama, Treaties, The Panama

Canal, Canal Traffic, Trans-Panama Pipeline, and Canal Expansion and Modernization.

The Information contained in this report is the best available as of October 2003 and can

change.

* The Library of Congress - Country Studies - Panama

This particular site gives the readers an expanded background on Panama. This

site, with the information courtesy of The Library of Congress, focuses on the

Panamanian economy, foreign economic relations, agriculture, and industry, amongst

other subjects.

Although a dated site, a good perspective of Panama under the Torrijos era is

give. Information is given up until December1987. This site focuses more on the state of

the Panamanian economy and how it is affected by various factors through the mid

1980’s.

The Torrijos era (1968-81) stands as a dividing point in Panama's economic

history. Under Torrijos, the state took a more active role in the economy and initiated

ambitious social projects. The public sector expanded to an unprecedented degree, as did

the fiscal deficit and the external debt. In the 1980s, Panama was forced to address some

of the excesses of the 1970s, and to adjust its policies, often under the aegis of the

International Monetary Fund and the World Bank.

24

* U.S. Department of State, Bureau of Western Hemisphere Affairs, September 2003,

Background Note: Panama

The U.S. Department of State offered general information and history on Panama.

A basic country profile is provided including information on Panama’s geography,

history, people, government, and economy. Also provided is contact information for both

the Panamanian and United States Embassies in Panama and the U.S.

The United States cooperates with the Panamanian Government in promoting

economic, political, security, and social development through U.S. and international

agencies. Cultural ties between the two countries are strong, and many Panamanians

come to the United States for higher education and advanced training. About 19,000

American citizens reside in Panama, many retirees from the Panama Canal Commission

and individuals who hold dual nationality. There also is a rapidly growing enclave of

American retirees in Chiriqui Province in western Panama.

Panama continues to fight against the illegal narcotics and arms trade. The

country's proximity to major cocaine-producing nations and its role as a commercial and

financial crossroads make it a country of special importance in this regard. Although

money laundering remains a problem, Panama passed significant reforms in 2000

intended to strengthen its cooperation against international financial crimes, and the

conclusion of the Speed Joyeros case in April 2002 marked the dismantling of a major

money-laundering network with scores of arrests in several countries.

25

Panama's history has been shaped by the evolution of the world economy and the

ambitions of great powers. Rodrigo de Bastidas, sailing westward from Venezuela in

1501 in search of gold, was the first European to explore the Isthmus of Panama. A year

later, Christopher Columbus visited the isthmus and established a short-lived settlement

in the Darien. Vasco Nunez de Balboa's tortuous trek from the Atlantic to the Pacific in

1513 demonstrated that the isthmus was, indeed, the path between the seas, and Panama

quickly became the crossroads and marketplace of Spain's empire in the New World.

Gold and silver were brought by ship from South America, hauled across the isthmus,

and loaded aboard ships for Spain. The route became known as the Camino Real, or

Royal Road, although was more commonly known as Camino de Cruces (Road of the

Crosses) because of the frequency of gravesites along the way.

Panama was part of the Spanish empire for 300 years (1538-1821). From the

outset, Panamanian identity was based on a sense of "geographic destiny," and

Panamanian fortunes fluctuated with the geopolitical importance of the isthmus. The

colonial experience also spawned Panamanian nationalism as well as a racially complex

and highly stratified society, the source of internal conflicts that ran counter to the

unifying force of nationalism.

* Online NewsHour – ―Changing of the Guard”

Does handing over the Panama Canal pose national security dangers to the United

States? William Ratliff of the Hoover Institution at Stanford University and John J.

Tierney of The Institute of World Politics in Washington, D.C., respond to your

26

questions. These excerpts from a forum on the ―Changing of the Guard‖, speaks to the

transference of power of the Panama Canal from the United States to Panama. Other

issues such as the maintenance of the Canal, the economic impact that the transference

has on Panama, and the relationship between the U.S. and Panama run prominent through

the forum.

The construction of the Panama Canal came with tremendous human and

financial cost. Nearly 20,000 people died during its creation as the U.S., following French

attempts, struggled to carve the 51-mile passage. In addition, the final bill rose to more

than $387 million -- following a $40 million investment for the land and 10 years of

digging. But when the canal opened in 1914, it was immediately heralded one of the

world's great engineering achievements. More importantly, it formally opened a transit

way to the western United States and the Pacific Ocean. The average traffic until World

War I was about 2,000 ships per year.

Through the decades, however, many experts in the United States began arguing

that the canal, also expensive to maintain, had become a much less important waterway in

America's strategic interests. Others, in contrast, maintained the canal was an American

possession and vital to national security. Plus, they added, the two countries originally

negotiated a "perpetual" sovereignty agreement after the United States bought the

holdings in 1902. But in 1977, under mounting pressure by the Panamanians, President

Jimmy Carter negotiated a formal hand-over of the canal to Panama's government under

an agreement called the Carter-Torrijos Treaties. The treaties established a twenty-two

year framework to systematically grant full control of the canal to Panama, set to end at

noon on December 31, 1999. The agreement was ratified in the Senate by a single vote

27

and was approved by Panamanian voters in a nationwide plebiscite. Therefore, after

noon December 31, the U.S. gave control to Panama, which had already negotiated a

contract with Panama Ports, a subsidiary of Hong Kong Corporation Hutchinson

Whampoa, to manage the canal. In times of military need, United States warships,

according to Carter-Torrijos, have right-of-way on the canal. But opponents to the treaties

are afraid the canal could still become a choke-point, instead of a passage, when the

United States needs it most.

The forum is very informative and offers interesting perspectives on the

relationships between the U.S. and Panama from two prominent spokesmen. One very

interesting interview focuses on the United State’s continued interests in the Canal. The

article talks about the ―threat‖ posed by China and other countries in controlling the

Canal.

* Bradley, Scott ―The Panama Canal Give-away‖ Utah Eagle Forum

The author gives an unabashed view on the Panama Canal. Although they are

general, the author does provide incite on a broad range of subject. These include ―The

Treaties‖, ―U.S. Dependence Upon the Canal‖, and the ―China Connection‖. The

author’s review offers valuable information on the U.S. – Panama relationship such as

―The Senate ratified a treaty which differs from the treaty agreement the Panamanians

ratified and, in addition, the U.S. House of Representatives has not given their consent to

dispose of this territory or property which belongs to the United States. The United States

Constitution does not give the power to the Senate, through the treaty ratification process,

to dispose of U.S. property without the approval of the House.‖

28

―In 1903, during the administration of President Theodore Roosevelt, the United

States concluded the Hay-Bunau-Varilla Treaty with the new Republic of Panama,

conveying to the United States "in perpetuity" a ten-mile-wide strip across the isthmus

for construction of a canal. The United States paid Panama $10,000,000.00 in gold. In

1914 the United States completed the tremendous engineering feat of constructing the 51

mile long canal, overcoming the disease infested jungles and the seemingly

insurmountable physical challenges. Since then the United States has continued to

operate and defend the Canal, investing somewhere in the neighborhood of $32 billion in

the process. The strategic value of this waterway far exceeds the monetary investment

this Nation has made in it.

Since 1903 the Canal territory has been considered United States

territory in every sense of the word. It was always understood that this was not "occupied

territory" which was held by an imperialistic United States. This is truly part of the

United States. During the Truman administration, men like Alger Hiss, and other

fomenters of international intrigue and discontent, started a movement to build the belief

that the United States was imperialistic if it did not return the Canal to its "rightful

owners," the people of Panama. This perspective was fostered through successive

Presidential Administrations, and those who held this position were ultimately in a

position to carry out this lie.‖

The author focuses on many issues that where not fully discussed in the general

public, before the transference of the Canal. One issue being the perception of a

heightened military threat by ―unfriendly‖ countries – particularly China.

29

* Mabry, Donald J. ―Panama's Policy Toward the U.S.: Living With Big Brother‖ The

Historical Text Archive

Author Donald J. Mabry gives an in-depth historical perspective on Panama and

the Panama Canal. The author focuses on the United States ―being a liberator, the United

States treated Panama as a conquered province. Washington established a military

dictatorship in the Canal Zone; the Canal Zone Commissioner was always an active-duty

U.S. military officer and Zonians, regardless of nationality, had no political power. They

did what the Commissioner wanted or were expelled. The Zone was a military socialist

society; the U.S. government owned virtually all but Zonians' personal possessions.

Outside the Zone, the United States controlled most of the public services in Panama City

and Colón.‖

Also, looked at is the racism that was prevalent in the United States – Panama

relationship. ―Americans viewed Panamanians, even those of the elite class, as lesser

people. Moreover, these Spanish-speakers resented the importation of English-speaking

black workers from the Caribbean because of their language and their ethnicity, a

complaint compounded by the subsequent U.S. refusal to repatriate them once the Canal

was completed.‖

This author gives a very realistic view on the United States NOT being a so-called

―savior‖ to the country of Panama, but more of a ―bully‖. From the way the U.S. initially

took control of the Canal, to the treaties signed to Operation Just Cause, a not so positive

light is reflected on the relationship between the two countries.

30

* CNN.com ―U.S. Prepares to Hand Over Panama Canal After 85 years‖

This dated article focused on the United States ―ceremonially hand over the

Panama Canal to Panama‖ and the politics surrounding the transference. President

Clinton was in office during the time of this article. The article speaks to his absence at

the ceremony (but President Carter was in attendance). The article covers the

engineering feet needed to build the Canal and the U.S.’s concern over the Chinese

influence on the Canal.

The canal was a symbol of the American emergence as a world power at the turn

of the century. The United States backed the revolt that separated Panama from Colombia

in 1903; built the canal, which was completed in 1914; and assumed control of the strip

of land surrounding it from the Caribbean to the Pacific.

The United States has cast a long shadow over Panamanian life since the country's

birth, occasionally intervening in its internal affairs -- as in 1989, when U.S. troops

deposed Panamanian strongman Manuel Noriega. American control of the economic --

and literal -- heart of Panama was a source nearly constant and sometimes violent

resentment by Panamanians.

The 1977 treaties ceded the 50-mile long canal and the surrounding Canal Zone to

Panama. Leaving closed U.S. military bases, which cost Panamanians 18,000 jobs.

When opened, the passage cut the sailing time from New York to San Francisco

in half. About 14,000 ships pass through the canal every year, steered by Panamanian or

U.S. pilots. Shipping companies pay $540 million in tolls annually -- and that concerns

31

some observers, who fear Panamanian leaders may not be able to resist the temptation to

turn the waterway into a cash cow and a source of patronage.

* Lindsay-Poland, John ―U.S.-Panama Policy: Canal, Bases, and Dollars‖ Volume 1,

Number 14 November 1996, Fellowship of Reconciliation.

This is a very well written article, providing a resourceful background on the

relationship between the U.S. and Panama. A history of mutual dependence underlies

U.S.-Panama foreign policy and accounts for the patterns of dominance and dependence

in bilateral relations. The two nations have convergent interests in safe, efficient

commerce across the isthmus. For the U.S., this resulted from its status as the main user

of the Panama Canal; for Panama, it is because half its population lived on the canal’s

banks, and the canal generates economic benefits. The U.S. also depended on Panama as

a base for hemispheric military operations. Although the canal was the initial reason for

the special U.S. attention to Panama, the selection in 1941 of the Canal Zone as

headquarters for the U.S. Southern Command (SouthCom, previously the Caribbean

Command) sharpened U.S. interest in Panamanian affairs. The U.S. has since moved

SouthCom.

Due to the power differential between the U.S. military and economic empire and

the small nation of Panama, colonialist attitudes have often characterized policy

discussions and obstructed rational decision-making. The enduring impact of the 1989

U.S. invasion of Panama should not be underestimated in considering future U.S.-

Panama policy. The invasion was the twentieth U.S. military intervention in this nation of

2.5 million people and easily the most violent event in Panama’s history.

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Despite the increasing importance of air transport and the rise of other major

trading nations, the U.S. remains the canal’s primary user. One-eighth of all U.S.

seaborne traffic passes through the locks. Its economic utility for the U.S. is in making

inter-oceanic trade cheaper for U.S. shippers and traders—in effect subsidizing the U.S.

shipping industry and its exports.

Although the canal is not owned or operated by the U.S. military, the Pentagon

has always had a role in canal policy. The U.S. army supervised the construction of the

seaway from 1904 to 1914, and the Panama Canal Commission’s Board of Directors is,

by law, chaired by the Assistant Secretary of the U.S. Army, who retains the right to

dictate the votes of the board’s U.S. majority. Except for an interlude during the Carter

administration, when the White House and the State Department assumed a more

prominent role, the Pentagon has been the main powerbroker in U.S.-Panama policy.

The military’s willingness to close the Panamanian bases has been reinforced by

the closure of military bases at home, increasing the reluctance of the Pentagon to pay for

a post-1999 military presence in Panama—at an estimated cost of $200 million a year.

* Infoplease.com - Panama

This web site offers general information on Panama. Information at this site

focuses on giving a general synopsis on the history of Panama. Information of note

focuses on ―between 1850 and 1900 Panama had 40 administrations, 50 riots, 5 attempted

secessions, and 13 U.S. interventions. After a U.S. proposal for canal rights over the

narrow isthmus was rejected by Colombia, Panama proclaimed its independence with

U.S. backing in 1903.‖

33

The southernmost of the Central American nations, Panama is south of Costa Rica

and north of Colombia. The Panama Canal bisects the isthmus at its narrowest and lowest

point, allowing passage from the Caribbean Sea to the Pacific Ocean. Panama is slightly

smaller than South Carolina. It is marked by a chain of mountains in the west, moderate

hills in the interior, and a low range on the east coast. There are extensive forests in the

fertile Caribbean area.

For canal rights in perpetuity, the U.S. paid Panama $10 million and agreed to pay

$250,000 each year, which was increased to $430,000 in 1933. It was increased again in

1955. In exchange, the U.S. got the Canal Zone—a 10-mile-wide strip across the

isthmus—and considerable influence in Panama's affairs. On Sept. 7, 1977, Gen. Omar

Torrijos Herrera and President Jimmy Carter signed treaties giving Panama gradual

control of the canal, phasing out U.S. military bases, and guaranteeing the canal's

neutrality.

* The Columbia Electronic Encyclopedia, 6th ed. 2003, Columbia University Press -

Panama

The Columbia Electronic Encyclopedia offers background on the United States

interest in Panama. This reference material gives valuable perspective on the United

States’ active negotiations that led, in 1846, to a treaty by which the republic of New

Granada (consisting of present-day Panama and Colombia) granted the United States

transit rights across the Isthmus of Panama in return for a guarantee of the neutrality and

sovereignty of New Granada.

34

Building an inter-oceanic canal was suggested early in Spanish colonial times.

The United States, interested since the late 18th century in trading voyages to the coast of

the Pacific Northwest, became greatly concerned with plans for a canal after settlers had

begun to pour into Oregon and California. Active negotiations led in 1846 to a treaty, by

which the republic of New Granada (consisting of present-day Panama and Colombia)

granted the United States transit rights across the Isthmus of Panama in return for a

guarantee of the neutrality and sovereignty of New Granada.

The isthmus gained more importance after the United States acquired (1848)

California and the gold rush began, and the trans-Panama RR was built (1848–55) with

U.S. capital. At the same time, interest in an alternate route, the Nicaragua Canal, was

strong in both Great Britain and the United States. Rivalry between the two countries was

ended by the Clayton-Bulwer Treaty (1850), which guaranteed that neither power should

have exclusive rights or threaten the neutrality of an inter-oceanic route. In the 1870s and

80s the United States tried unsuccessfully to induce Great Britain to abrogate or amend

the Clayton-Bulwer Treaty.

After the United States acquired territory in the Caribbean and in the Pacific as a

result of the Spanish-American War (1899), U.S. control over an isthmian canal seemed

imperative. Following protracted negotiations, a U.S.-British agreement (see Hay-

Pauncefote Treaties) was made in 1901, giving the United States the right to build, and

by implication fortify, an isthmian canal. It was then necessary for Congress to choose

between Nicaragua and Panama as the route for the canal.

35

* Stieber, Halley, ―The Future of the Panama Canal‖ Illumin, Volume 5: Issue 2 March

1st, 2002

This article explores the future of the Panama Canal as part of the global

transportation system. Beginning with a brief overview of how vessels pass through the

canal this article outlines the canal's importance to the global economy. It identifies three

problems the canal is faced with regarding efficient traffic flow: the transfer of authority,

the increasing shipping industry and the environmental impact. The article concludes

with an explanation of the canal's renovations. Current and future renovations will be

able to accommodate for traffic flow well into the future.

On December 31, 1999, the United States handed the Republic of Panama control

of the Panama Canal. While much controversy surrounded Panama's ability to provide

efficient service, business on the canal has been flowing smoothly. However, the switch

in power was only the first of many hurdles the canal has faced and will be facing in

years to come. The amount of traffic through the canal is increasing by 5% to 8% every

year (Murphy 1996); traffic increase is occurring in volume as well as in size. How long

can this almost century-old engineering marvel serve the needs of the shipping world?

With physical and technological improvements, the Panama Canal can expand to provide

for the shipping community in the future.

36

* Gillespie, Jr., Charles A., Brandon Grove, Thomas E. McNamara, and C. Richard

Nelson ―The United States and Panama: End of the “Special Relationship‖

The final implementation of the Panama Canal Treaty brought to an end the

―special relationship‖ between the United States and Panama because the elements that

characterized that ―special relationship‖ for almost a century are gone. The canal is no

longer the strategic ―chokepoint‖ that it was; U.S. Southern Command Headquarters

moved to Miami; U.S. forces have been redeployed; and the canal is now entirely under

Panamanian control. As a result, the United States has downgraded Panama as a national

security and foreign policy priority. Meanwhile, Panama faces difficult economic and

political problems, which will require closer cooperation among the political elite. The

authors focus on the true relationship between the two countries.

The authors tempered their positive preliminary assessment of the transition and

prospects for the short term with several concerns that challenge both sides. Although

Panama occupies a lower priority in U.S. foreign policy, the relationship nevertheless

remains important and bears close monitoring. It is still not the time to raise the issue of

stationing U.S. troops in Panama. The needs of both countries are better served by a

visiting forces agreement to handle routine visits and transits.

The authors conclude that the canal is in the hands of competent managers and

faces no serious threats, at least in the short term. Over the longer term, however,

Panama’s economic problems could spill over and adversely impact the canal.

37

* Referenced May 2004: Lowtax.net – Panama

The Lowtax.net site provides valuable incite into the Panamanian Geography,

Culture, Government, Economy, Business Environment, Import of Foreign Capital, and

Colon Free Zone.

This site speaks to Panama’s territorial taxation. There are no 'offshore' regimes as

such other than the Colon Free Zone and the export processing zones. There are more

than 120,000 companies in Panama, most of which trade or hold assets externally. It is

reasonably easy to form corporations, and privacy is assured. There are no tax treaties.

Banking and shipping are Panama's two main 'offshore' industries. There are 140 or more

banks, specializing obviously in South and Central American business, and Panama is the

world's largest shipping registry. Once, it would have been fair to say that drug running

and money-laundering were well-rooted in Panama, but with lots of US pushing and

shoving, the country seems to have moved in a better direction lately. There is a small but

growing stock exchange, and there is 'captives' legislation, which is little used.

* Referenced May 2004: BusinessPanama.com

Launched in 1997 by the Council for Investment & Development of Panama,

www.BusinessPanama.com became Panama’s leading Business, Trade & Investment

website. At the end of 2001, the Council for Investment & Development of Panama

ceased operations and the BusinessPanama Group acquired all of its rights and assets

including www.BusinessPanama.com

38

Since Panama was well on its way to becoming a destination of choice for

Tourism, www.BusinessPanama.com expanded its content to Tourism in Panama as well

as other additional areas of business, trade and investment.

The Business Panama Group (―BusinessPanama‖) is a well-established group of

companies, professionals and alliance partners promoting and facilitating business,

foreign investments, trade and tourism in Panama by providing information, business

development and support services to individual and corporate investors. This site gives

an up-to date financial assessment of Panama and current and future business

opportunities that are available in the country.

* Moreno, Elida Reuters “U.S., Panama Open Free-Trade Talks Amid Protests‖

April 26, 2004

In this particular article, the author focuses on the U.S.-Central American Free

Trade Agreement, dubbed CAFTA. Panamanian labor unionists and farm workers oppose

a free-trade treaty between the U.S. and Panama. They feared it would hurt Panama's

economy. Farmers want the agricultural sector to be excluded from any agreement on the

grounds it will not be able to compete against the subsidized U.S. farm sector. President

Mireya Moscoso agreed Panama "cannot compete against subsidized countries," but said

the imbalances would be taken into account in the negotiations. Trade between Panama's

service-led economy and the United States totaled about $2 billion last year.

39

* Referenced May 2004: Global Perspectives – Central America – Panama Canal

1999-2002 by Wheeling Jesuit University/Center for Educational Technologies

This article focuses on the economic importance of Panama to the United States.

Not only is the Panama Canal important to Panama for income and jobs, but it is also

considered to be vitally important to the United States economy. Many U.S. exports and

imports travel through the Canal daily (over 10% of all U.S. shipping goes through the

Canal). Exports represent jobs for U.S. citizens because U.S. workers made the products.

Imports enable U.S. consumers to receive needed products.

Since the United States is the only superpower in the world, the United States is

interested in keeping the global economy running smoothly. If world trade is disrupted, it

can lead to worldwide economic problems. Therefore, any disruption in the flow of goods

through the Panama Canal could directly hurt the U.S. and global economies.

* Referenced May 2004: External Relation: EU’s Relations with Panama

The article focuses on the relationship between Panama and the European

community. Political relations between the EU and Panama have been shaped by the San

José Dialogue, which was launched at an EU-Central America Ministerial Meeting in

Costa Rica in 1984. Panama is also a signatory to the EU-Central America Framework

Cooperation Agreement signed in February 1993 in San Salvador, which came into effect

in March 1999 following its ratification by all parties. A new political dialogue and co-

operation agreement has been signed in December 2003. All parties have not yet ratified

this agreement. The United States is Panama’s main trading partner, accounting for 46%

of its exports and 33.5% of its imports in 2002. The EU ranks second, accounting for

40

some 21% of Panamanian exports and 8.5%of its imports. The principal country's exports

to the UE (excluding the Colón Free Zone) are, in decreasing order, fruits (especially

bananas), ships and floating vessels, fish and crustaceans, skin and leather.

Like the other Central American countries, Panama is covered by the EU’s

Generalized System of Preferences adopted on 7 December 1998 and recently extended

until the end of 2005 without graduation system for small countries, which provides for

special treatment for its agricultural and industrial products.

* Gedrich, Fred ―Panama Canal: U.S. Must Keep Watch‖, Freedom Alliance

January 6, 2003

The author, Fred Gedrich is a senior policy analyst at Freedom Alliance. He

focuses on the Panamanian government’s control of the Panama Canal and of the ―threat‖

that foreign insurgence presents to the U.S. with gaining control of the Canal. He states,

―…the Panama Canal is vitally important to U.S. economic and national security

interests. Americans should not lose sight of these interests and happenings in Panama

and our hemisphere. Our adversaries have shown the proclivity to exploit any situation

that helps their cause, and we should not be caught with our guard down. Diplomatic

relations between Panama and the United States are excellent and there is a strong bond

between our citizens. ―

With eyes of the world focused on the Middle East and Korean peninsula, the

United States must not ignore signs of trouble emanating from its strategically important

and friendly neighbor in Central America: Panama. This country houses the famous

41

Panama Canal that, for nearly a century, has served as a prime U.S. economic and

national security interest.

The 50-mile American-made waterway is a spectacular engineering feat. It

separates North and South America and provides merchant ships and military vessels an

8,000-mile shortcut to U.S. ports on the Atlantic and Pacific coasts. In today's dollars, it

cost about $7 billion to construct. The United States uses the Canal more than all the

other nations in the world combined.

The U.S. withdrawal created opportunities for opportunists in the region. A

Columbian-based foreign terrorist organization, FARC, hides in Panama’s southern

jungles because Panamanian security guards are unable to patrol the porous border with

Columbia. In addition, South American drug cartels are flourishing in Panama. U.S.

intelligence reports Panama still serves as a major cocaine transshipment point and a

major drug money-laundering center.

There are other worrisome and potentially explosive conditions in Panama. For

instance, 37 percent of the 2.9 million Panamanians live in poverty, as much as 30

percent of the Panamanian workforce may be unemployed, and tens of thousands of

Panamanians live in squalor in the slums of the Chorillo and San Filepe districts of

Panama City in the shadow of thousands of empty housing units formerly owned by the

U.S. military.

42

* Lt. Gen. Gordon Sumner, Jr. (USA-Ret) Howard Phillips ―Who Will Control the

Path Between the Seas?” The Washington Times Commentary Section Monday

August 18, 1997

This dated article by Lt. Gen. Gordon Sumner, Jr. (USA-Ret) (Former Chairman,

Inter-American Defense Board) and Howard Phillips, Chairman of The Conservative

Caucus, Inc., focuses on the transference of the Panama Canal to Panama and the

supposed threat from foreign countries to U.S. security.

The Panama Canal Neutrality Treaty reads as follows: "Nothing in the Treaty

shall preclude the Republic of Panama and the United States of America from

making...agreements or arrangements for the stationing of any United States military

forces or the maintenance of defense sites after that date in the Republic of Panama that

the Republic of Panama and the United States of America may deem necessary or

appropriate."

A U.S.-Panama accord to carry forward the American presence is not "pie in the

sky". Surveys conducted in Panama over a period of years have indicated repeatedly

that the overwhelming majority of Panama's citizens want America to stay. The margin

of support swells to 80% and beyond if the U.S. agrees to pay a leasing fee to maintain its

presence.

* Referenced July 2004: Panamainfo.com

Panamainfo.com is Panama's premier tourism web portal with more than 1000

pages of information in both English and Spanish and 120 links to Panamanian tourism

and international business related websites.

43

Founded in May 1999, Panamainfo is the most visited web portal about Panama.

On a Google search on "Panama" in English Panamainfo always comes up on the first

page as one of the first three listings. As interest in the attractions of Panama grows, so

does traffic to Panamainfo. Panamainfo current receives an average of 3400 unique

visitors per day who visit at an average of 15, 000 pages per day.

Panama is a sophisticated dollar-based service economy, a financial sector with

106 banks, the second largest free trade zone in the world and incomparable geographical

location, make Panama one of Latin America’s leading business centers.

Modern Maturity, the American Association for Retired Persons magazine, rated

one region as one of the top four places in the world for Americans to live abroad.

International Living, rates Panama as the number one country outside the United

States for a second home- based its outstanding safety, infrastructure, climate and beauty.

Panama is even blessed by nature- it has none of the disastrous hurricanes and

earthquakes that plague its Central American neighbors.

44

CHAPTER 3

HISTORICAL PERSPECTIVE - EXPLORING THE RELATIONSHIP

BETWEEN THE UNITED STATES AND PANAMA

To say that the United States and The Republic of Panama has had a relationship

over the last century would be a major misinterpretation of the word ―relationship‖. The

United States assisted Panama in gaining independence from Colombia. Ever since the

United States’ assistance, the relationship between the U.S. and Panama has been filled

with everything from political manipulation to economic imprisonment to racism.

In 1903, during the administration of President Theodore Roosevelt, the United

States concluded the Hay-Bunau-Varilla Treaty with the new Republic of Panama,

conveying to the United States "in perpetuity" a ten-mile-wide strip across the isthmus

for construction of a canal. The United States paid Panama $10,000,000.00 in gold. In

1914 the United States completed the tremendous engineering feat of constructing the 51

mile long canal, overcoming the disease infested jungles and the seemingly

insurmountable physical challenges. Since then the United States has continued to

operate and defend the Canal, investing somewhere in the neighborhood of $32 billion in

the process. The strategic value of this waterway far exceeds the monetary investment

this Nation has made in it.6

6 Bradley, Scott ―The Panama Canal Give-away‖ Utah Eagle Forum

45

Republic of Panama18

National name: República de Panamá

President: Mireya Moscoso (1999)

Area: 30,193 sq mi (78,200 sq km)

Population (2004 est.): 3,000,463 (growth rate: 1.3%); birth rate: 20.4/1000; infant

mortality rate: 21.0/1000; life expectancy: 72.1; density per sq mi: 99

Capital and largest city (2003 est.): Panama City, 1,053,500 (metro.area), 437,200 (city

proper)

Other large cities: San Miguelito, 309,500; Colón, 44,400

Monetary unit: Balboa; U.S. dollar

Exchange Rate: US$1.00 = B/.1.00 (fixed exchange since1904)

Languages: Spanish (official); many bilingual in English

Ethnicity/race: mestizo (mixed Indian and European ancestry) 70%, West Indian 14%,

white 10%, Indian 6%

Religions: Roman Catholic 85%, Protestant 15%

Literacy rate: 93% (2003 est.)

18

Referenced May 2004: Business Panama

http://www.businesspanama.com/latestnews/article.php?nid=108

46

Economic summary: GDP/PPP (2002 est.): $18.06 billion; per capita $6,200. Real

growth rate: 0.7%. Inflation: 1.1% (2001 est.). Unemployment: 16%. Arable land:

7%. Agriculture: bananas, rice, corn, coffee, sugarcane, vegetables; livestock; shrimp.

Labor force: 1.1 million (2000 est.); note: shortage of skilled labor, but an oversupply of

unskilled labor; agriculture 20.8%, industry 18%, services 61.2% (1995 est.). Industries:

construction, petroleum refining, brewing, cement and other construction materials, sugar

milling. Natural resources: copper, mahogany forests, shrimp, hydropower. Exports:

$5.8 billion (f.o.b., 2002 est.): bananas, shrimp, sugar, coffee, clothing. Imports: $6.7

billion (f.o.b., 2002 est.): capital goods, crude oil, foodstuffs, consumer goods, chemicals.

Major trading partners: U.S., Sweden, Costa Rica, Honduras, Colombia, Japan,

Venezuela.

Communications: Telephones: main lines in use: 396,000 (1997); mobile cellular:

17,000 (1997). Radio broadcast stations: AM 80, FM 44, shortwave 0 (1998). Radios:

815,000 (1997). Television broadcast stations: 38 (including repeaters) (1998).

Televisions: 510,000 (1997). Internet Service Providers (ISPs): 6 (2000). Internet

users: 45,000 (2000).

Transportation: Railways: total: 355 km (2002). Highways: total: 11,400 km; paved:

3,944 km (including 30 km of expressways); unpaved: 7,456 km (1999). Waterways:

882 km navigable by shallow draft vessels; 82 km Panama Canal. Ports and harbors:

Balboa, Cristobal, Coco Solo, Manzanillo (part of Colon area), Vacamonte. Airports:

103 (2002).

International disputes: none.

47

Country Flag10

Map

As previously stated, for canal rights in perpetuity, the U.S. paid Panama $10

million and agreed to pay $250,000 each year, which was increased to $430,000 in 1933.

It was increased again in 1955. In exchange, the U.S. got the Canal Zone—a 10-mile-

10

Referenced May 2004: Infoplease.com

http://www.infoplease.com/ipa/A0107870.html

48

wide strip across the isthmus—and considerable influence in Panama's affairs. On Sept.

7, 1977, Gen. Omar Torrijos Herrera and President Jimmy Carter signed treaties giving

Panama gradual control of the canal, phasing out U.S. military bases, and guaranteeing

the canal's neutrality10

, until December 1999.

Politics and economics reared there ugly horns well before the Hay-Bunau-Varilla

Treaty. Panamanian nationalists eagerly point out that Panama existed before the

settlement of Jamestown in 1607 and centuries before the United States intervened in

November 1903 to help Panama gain independence from Colombia. Panamanian

nationalists had sought independence from Colombia in the nineteenth century and

unsuccessfully fought for Panamanian freedom in the Colombian civil war of 1899-1903.

To them, the U.S. intervention in 1903 complicated the formation of a Panamanian

national state. Thus, to Panamanians, the United States, at best, was a midwife and never

the parent of Panamanian nationality. The temporary Panamanian representative to the

U.S., Phillipe Bunau-Varilla, a Frenchman, violated his instructions from the new

Panamanian government to await the arrival of officials from Panama before negotiating

a treaty. Instead, he wrote a treaty so generous in giving away Panamanian authority that

John Hay, U.S. Secretary of State, quickly signed it before the Panamanian delegation

could force changes. The new Panamanian government reluctantly accepted it, fearing

either Colombian or United States military intervention if it didn't.

Instead of being a liberator, the United States treated Panama as a conquered

province. Washington established a military dictatorship in the Canal Zone; the Canal

10

Referenced May 2004: Infoplease.com http://www.infoplease.com/ipa/A0107870.html

49

Zone Commissioner was always an active-duty U.S. military officer and Zonians,

regardless of nationality, had no political power. They did what the Commissioner

wanted or were expelled. The Zone was a military socialist society; the U.S. government

owned virtually all but Zonians' personal possessions. Outside the Zone, the United

States controlled most of the public services in Panama City and Colón. Americans

viewed Panamanians, even those of the elite class, as lesser people. Moreover, these

Spanish-speakers resented the importation of English-speaking black workers from the

Caribbean because of their language and their ethnicity, a complaint compounded by the

subsequent U.S. refusal to repatriate them once the Canal was completed.

The U.S. actively discouraged Panamanian self-determination, for Washington

saw its interest as the maintenance of a compliant Panamanian government. Foreign

soldiers and foreign laws controlled the Zone; Panamanians could be arrested by foreign

personnel, tried in foreign courts, and punished by foreigners all on Panamanian soil. The

bifurcation of the nation by this foreign enclave prohibited the integral development of

the nation, and, instead, skewed national development towards the cities of Panama and

Colón, each a terminus of the Canal. As these two cities grew, Panamanians wanted

unused Zonian land converted into Panamanian-owned farms to produce food to feed the

urban populations along the canal.

Panamanians also criticized the 1903 treaty for treating Panama unfairly in

economic terms. Panama had no right to tax in the Zone or fix the toll rates on the canal.

The rent on the Zone was fixed by treaty, thus making it extraordinarily difficult to

change, and inflation reduced the value of the rent paid. The United States imported

50

goods directly into the Zone, both escaping Panamanian taxes bypassing Panamanian

merchants. Panamanians or black West Indians were paid at the "silver rate" whereas

U.S. citizens were paid at the higher "gold rate."

Panamanian sovereignty has always been the source of friction between the two

nations. Soon after the Hay-Bunau-Varilla treaty was signed in November, 1903,

Panamanians argued that the treaty's phrase "as if it were sovereign" only gave the United

States "jurisdictional sovereignty" over the Canal Zone and that the Zone was

Panamanian. Washington officials understood the distinction, although they usually

ignored it, but the average U.S. citizen erroneously believed that the Zone was U.S.

territory and that Panama had yielded all rights in the Zone in perpetuity.

Washington regularly intervened in Panamanian politics, usually through

diplomats but too often through soldiers, to support favored local elites, those who

supported U.S. policies because they benefited most directly from them. Throughout the

history of Panamanian-U.S. relations, the United States could always rely on those

Panamanians who prospered from the American presence.7

A history of mutual dependence underlies U.S.-Panama foreign policy and

accounts for the patterns of dominance and dependence in bilateral relations. The two

nations have convergent interests in safe, efficient commerce across the isthmus. For the

U.S., this results from its status as the main user of the Panama Canal; for Panama, it is

because half its population lives on the canal’s banks, and the canal generates economic

benefits. The U.S. has also depended on Panama as a base for hemispheric military

7 Mabry, Donald J. ―Panama's Policy Toward the U.S.: Living With Big Brother‖ The Historical Text

Archive

51

operations. Although the canal was the initial reason for the special U.S. attention to

Panama, the selection in 1941 of the Canal Zone as headquarters for the U.S. Southern

Command (SouthCom, previously the Caribbean Command) sharpened U.S. interest in

Panamanian affairs.

Due to the power differential between the U.S. military and economic empire and

the small nation of Panama, colonialist attitudes have often characterized policy

discussions and obstructed rational decision-making. The enduring impact of the 1989

U.S. invasion of Panama should not be underestimated in considering future U.S.-

Panama policy. The invasion was the twentieth U.S. military intervention in this nation of

2.5 million people and easily the most violent event in Panama’s history.

The Panama Canal was usually at the center of conflicts. Despite the increasing

importance of air transport and the rise of other major trading nations, the U.S. remains

the canal’s primary user. One-eighth of all U.S. seaborne traffic passes through the locks.

Its economic utility for the U.S. is in making interoceanic trade cheaper for U.S. shippers

and traders—in effect subsidizing the U.S. shipping industry and its exports.9

As previously noted, the United States and Panama have butted heads many times

politically. Arguably, the most famous political upheaval between the two countries has

been ―Operation Just Cause‖. Manuel Noriega, a ruthless dictator that at first was held in

good standing with the United States government had continuously overstepped his

boundaries. He was a known purveyor of the Central American drug trade through

Panama and had dismisses democracy, amongst other human rights violations.

9 Lindsay-Poland, John ―U.S.-Panama Policy: Canal, Bases, and Dollars‖ Volume 1, Number 14 November

1996, Fellowship of Reconciliation.

52

Panamanian public opinion definitively turned against Noriega and in favor of U.S.

military intervention when Noriega stole the May, 1989 elections and ordered his

minions to beat the opposition presidential and vice presidential candidates when they led

a massive protest of the electoral fraud. Noriega's newly-constituted Dignity Battalions

had overstepped the bounds of acceptable Panamanian political practice, and done so in

front of the international media. The Panamanian Roman Catholic Church denounced the

regime for the fraud and violence, calling for Panamanians to withdraw their support of

the dictator. The United States recognized the victory of opposition leader Guillermo

Endara. Panamanians openly began suggesting that either a military coup or U.S. military

intervention might be the only way to oust the dictator.

Elements of the Panamanian Defense Force failed to overthrow Noriega in

October 1989. Noriega executed the ringleaders and reorganized the PDF to insure its

loyalty. He also sought to neutralize other dissidents, some of whom fled to the Zone and

U.S. protection. The thug dictator seemed invincible. Elections, Organization of

American States diplomacy, and an attempted military coup had all failed. Noriega was

tightening his grip on the nation, strangling it for his personal ends. In December, 1989,

Noriega, growing bolder by his seeming ability to act with impunity, harassed U.S.

personnel and had the national assembly assert that Panama was in a state of emergency

because of U.S. aggression. For both the average Panamanian and for Washington,

Noriega had gone too far.

Confronted with this intolerable situation, Panamanians welcomed Operation Just

Cause even though U.S. military intervention did not meet the strict guidelines of the

53

neutrality treaty. The only legal ground for U.S. intervention is to prevent closure of the

Canal; the U.S. had specifically signed away all other rights to intervene. Noriega had not

threatened to close the Canal. By closing the Canal during the invasion (the only time it

has ever been closed), the United States gave the Panamanian government the right,

under both Panamanian and U.S. law, to resist by military means.

Regardless of the legality or illegality of Operation Just Cause, Panamanians

initially, at least, supported the invasion and the capture of Noriega, and the installation

of Guillermo Endara as the new president of the republic. By December 20, 1989,

Panamanians had so despaired of ridding themselves of the tyrannical dictator that even

usurpation of their nation's sovereignty seemed preferable to his continuance in power.

Such a euphoric response was unlikely to endure, however, and more thoughtful

Panamanians realized that not much had changed in U.S.-Panamanian relations since

1903. The relationship between the two nations remained as unequal as it had been in

1903. Washington could and did manipulate the Panamanian economy at will even

though doing so caused suffering for innocent Panamanians. Endara was as much a part

of the U.S. colonial system as former presidents had been. In the disputed election of

May 1989, he had benefited from the expenditure of millions of dollars in American

funds. He and his vice president had been sworn into office on an American military base

shortly before the invasion and then had to be protected by the U.S. military for several

days. While the Panamanian business and professional classes, from which Endara and

his vice presidents come, clearly supported the new government, Endara's government

had few ties to the majority of Panamanians--farmers, laborers, and the urban middle

sectors. U.S. military forces were still the key to power in Panama, treaties

54

notwithstanding. Panamanians realized that the longevity of the Endara government

depended upon the U.S. military and U.S. economic aid. In short, Panama was a client

state.7

The Role of Treaties

Treaties have played a significant role in the relationship between the United

States and Panama. From almost the beginning of the U.S. / Panama relationship there

has been some form of animosity over various treaties between the two nations. Two

provisions of the 1903 treaty immediately became a source of conflict between the two

countries: the division of the economic benefits and the sovereignty question. Of the two,

the economic issue has been the easier to solve. In 1909, the United States agreed to end

private trading in the Canal Zone while allowing only the Canal Commission to sell

imported goods to employees of the canal company without paying Panamanian taxes;

thus Panamanian merchants received some of the protection they wanted although not as

much as they had demanded.

In the 1936-treaty revision, the annuity was adjusted upwards to $430,000 to

offset the dollar devaluation but no other major economic concessions were made until

the 1955 revision. In that year, the annuity was increased to $1,930,000 and the United

States gave Panama the right to tax non-US Zone employees and some goods entering the

Zone, altered some boundaries in favor of Panama, and returned some land as well,

relinquished the exclusive right to construct trans-isthmian railroads and highway, and

granted Panamanians a large share in supplying goods to the Zone market. In a separate

agreement, the United States promised to end wage discrimination against the

7 Mabry, Donald J. ―Panama's Policy Toward the U.S.: Living With Big Brother‖ The Historical Text

Archive

55

Panamanians working for the canal company. The United States acted slowly, however,

and anti-US demonstrations marked the late 1950s. In 1960, President Eisenhower took

executive action to implement some of the changes promised in an attempt to reduce

tensions.

The economic issue was linked to the more inflammatory sovereignty question,

which was the more serious threat to US interests in Panama. Since 1904, Panama

contended that it is sovereign over the Zone and that the United States has limited

"jurisdictional sovereignty." US citizens, on the other band, have believed that the Zone

is an integral part of the United States (in ignorance of the 1903 treaty and its subsequent

revisions) or that Panama yielded all Zone rights in perpetuity. As long as Washington

considered the Canal essential to its security, it refused to budge on the issue, for it did

not trust Panama to protect US interests. Panamanian political instability further

discouraged the United States from yielding. The 1936 treaty revision was ratified in

1939 only after Panama agreed to allow the United States to continue military

intervention when the latter thought it necessary. Panama ceased to be a protectorate in

name only. This fundamental disagreement meant that Panamanian demands met fierce

resistance in the United States and the Zone while failure to budge prompted

demonstrations and riots in Panama. Both Panamanian and U.S. politicians found the

sovereignty issue replete with demagogic appeal.

Nevertheless, the United States slowly yielded to Panama's demands albeit

unwillingly. Defense sites acquired in 1942 were abandoned in 1947 after violent

demonstrations encouraged the Panamanian congress to reject the extension agreement.

The 1955 treaty was negotiated after a series of anti-Yankee protests; and was only fully

56

implemented after student demonstrations, attacks on the US embassy, and threatened

mob invasions of the Zone. The US government decided that its interests were best

served by conceding. In response to more nationalist demands, Eisenhower, in 1960,

ordered the Panamanian flag flown in parts of the Zone and President John Kennedy, in

1963, ordered the Panamanian flag be flown jointly with the US flag over civilian

installations and that foreign consuls accredited to Panama are allowed to operate in the

Zone. Such actions temporarily improved relations but did not solve the sovereignty

problem.

Continued Panamanian nationalism, combined with a decline in the importance of

the canal, resulted in the proposed 1967 treaty revision. In 1964, US high school students

raised the US flag in violation of orders and instigated a riot in which 24 were killed and

hundreds injured. Because US troops clashed with Panamanians in the Zone, President

Chiari demanded an Organization of American States and a United Nations investigation

of what he called US aggression and suspended diplomatic relations. Shortly thereafter,

negotiations on a new treaty began. President Lyndon Baines Johnson, however,

determined not to yield the canal, agreed to negotiate three treaties. One would change

the military defense of the canal. The second would recognize Panamanian sovereignty

over the Zone and give it more control over the canal. The third was for the possible

construction of a new canal (since the Panama Canal was antiquated and incapable of

handling the super ships being built) after the best possible site was determined. That the

proposed new canal was not specified and discussions included possible construction in

Nicaragua or Mexico, the United States had tremendous leverage over Panama, The

treaties were not ratified, however, because they faced opposition within the United

57

States and the military government which replaced the 1967 government was not satisfied

with the terms.

By the mid-1970s, the United States was willing to concede to Panama's demands

on the sovereignty issue if both nations could get the necessary ratifications. Since the

development of a two-ocean navy, nuclear submarines and carriers, long-range bombers

and missiles, the Canal's strategic importance and the necessity of the military bases there

have declined. Some experts assert that the Canal has no strategic value. The

development of excellent internal transportation in the United States as well as the use of

super ships (which cannot go through the Canal) has reduced the commercial importance

of the Canal to the United States. About 80% of the traffic through the canal by the 1960s

was Latin American. By December, 1973, the two nations agreed in principle that the

United States would return the Zone to Panama while gradually involving Panama in the

Canal's operation and defense, that Panama would receive a more equitable share of the

benefits, that the United States would retain only three of its fifteen military installations

in the country, and that the new treaty would have a fixed life.

A new treaty was finally ratified in April 1978 under the leadership of President

Jimmy Carter and General Omar Torrijos. The negotiations were often bitter and the

treaty faced strong opposition in the US Senate. The Canal Zone would be returned to

Panama in 1999. The US would leave its military bases in Panama but would have the

right to intervene militarily to protect the canal, a proviso Panamanians did not like.

Operation of the canal became Panamanian.

The Panama Canal Company, the Canal Zone, and its government were

disenfranchised on October 1, 1979, and replaced by the Panama Canal Commission that

58

operated the Canal during the 20-year transition period that began with the Treaty. The

Panama Canal Commission has now been replaced by a new Panamanian entity, the

Panama Canal Authority. The treaty guarantees permanent neutrality of the Canal.

Control over U.S. military facilities in the former Panama Canal Zone has reverted to

Panamanian authority. The U.S. Southern Command and U.S. Army South troops moved

out of Panama at the end of 1999. The Panama Ports Company, a subsidiary of Hong

Kong-based Hutchison-Whampoa, now operates the ports at both entrances, Cristobal

(Atlantic) and Balboa (Pacific) on to the Canal. This has been a cause for security

concerns among some lawmakers in the United States, although the United States was

legally entitled to intervene to maintain the neutrality of the Canal.2

The significance of an inevitable end to the special relationship deserves more

attention in both countries. Friendship and close ties will persist, of course. The United

States, preoccupied with other foreign and domestic matters, including elections, is not

likely to address the issue soon. Panama, however, has had a new administration since

September 1999 and it has not addressed the issue adequately either. The failure to come

to grips with a new set of circumstances in the relationship risks creating difficulties as

the two friendly nations face several important, unsettled issues.

Because this change will have a great impact on Panama, it is very important that

Panama face this challenge immediately. The idea persists in Panama that the U.S. still

sees the canal as a strategic asset, and that this will preserve old ties. In the past, these

close ties have tempted Panamanian officials not to take full responsibility for their

2 Energy Information Administration, Country Analysis Briefs, Panama Country Analysis Brief

59

problems. To the extent that such perceptions continue, Panama will probably continue to

underachieve.

While the United States has downgraded the canal as a national security and

foreign policy priority, Panama remains important as a unique regional transportation

hub. Most of the commerce transiting the canal originates in or is destined for the United

States. Japan, Taiwan, China, and Europe also are prominent users of the canal. The canal

is even more important to countries in the region, especially the Pacific coast states,

Ecuador, Peru, Chile, Nicaragua, and El Salvador. Trade patterns are shifting and North-

South trade within the Western Hemisphere is growing quickly.

Thus the United States shares the interests of many nations in a non-political, efficient

canal that provides safe passage and good service at a reasonable cost.

U.S. Navy and Coast Guard vessels still use the canal about 90 times per year and

make another 160 port calls in Panama for re-supply and refueling. In addition, about 120

U.S. military aircraft continue to over fly or transit Panama each year, using commercial

facilities when they land. These visits are handled through close, interpersonal

cooperation, but they should be institutionalized through a visiting forces agreement so

that they are more transparent and predictable over the longer term.

Another issue that has received undue attention recently is competition between

Beijing and Taipei for Panamanian recognition. Panama recognizes Taiwan, but China

wants it to shift official relations. The United States should not be drawn into this by

wholly unfounded allegations about a security threat to the canal represented by the

commercial activities of a Hong Kong-based company. This is a widely respected

company with a good reputation for managing container port operations around the

60

world. It has a solid record of cooperating with officials on law enforcement and security

issues. Its operation and presence in Panama do not constitute a threat to the canal, much

less to the United States.13

Cultural ties between the two countries are strong, and many Panamanians come

to the United States for higher education and advanced training. The United States has

cast a long shadow over Panamanian life since the country's birth, occasionally

intervening in its internal affairs. Once a major strategic point, Panama – especially the

Panama Canal, still holds major United States interest. Years of distrust and corruption at

both the political and economic levels have soured generations of Panamanians on U.S.

intentions. Although significant in providing Panama with military ―protection‖ and

being a major pipeline for economic stability to Panama, the U.S. has done a good job in

alienating the general Panamanian population.

13

Gillespie, Jr., Charles A., Brandon Grove, Thomas E. McNamara, C. Richard Nelson

The United States and Panama: End of the ―Special Relationship‖

61

CHAPTER FOUR

THE INFLUENCES THAT THE UNITED STATES STILL HAVE ON THE

PANAMANIAN ECONOMY AND WHAT INFLUENCES OTHER NATIONS

HAVE ON THE PANAMANIAN ECONOMY

A history of mutual dependence underlies U.S.-Panama foreign policy and

accounts for the patterns of dominance and dependence in bilateral relations. The two

nations have convergent interests in safe, efficient commerce across the isthmus. For the

U.S., this results from its status as the main user of the Panama Canal; for Panama, it is

because half its population lives on the canal’s banks, and the canal generates economic

benefits. The U.S. has also depended on Panama as a base for hemispheric military

operations. Although the canal was the initial reason for the special U.S. attention to

Panama, the selection in 1941 of the Canal Zone as headquarters for the U.S. Southern

Command (SouthCom, previously the Caribbean Command) sharpened U.S. interest in

Panamanian affairs.

Due to the power differential between the U.S. military and economic empire and

the small nation of Panama, colonialist attitudes have often characterized policy

discussions and obstructed rational decision-making. The enduring impact of the 1989

U.S. invasion of Panama should not be underestimated in considering future U.S.-

Panama policy. The invasion was the twentieth U.S. military intervention in this nation of

2.5 million people and easily the most violent event in Panama’s history.4

4 Lindsay-Poland, John ―U.S.-Panama Policy: Canal, Bases, and Dollars‖ Volume 1, Number 14 November

1996, Fellowship of Reconciliation.

62

Panamanians, especially those that now live in the United States, have varying opinions

on the United States’ influence on Panama and the Panamanian economy. GYSGT

Rafael W. Scott (Retired, USMC), believes that the United States still has a significant

influence on Panama and the Panamanian economy, ―the American dollar is what

circulates through out Panama and not the Panamanian Balboa‖. This is very significant

in that U.S. currency is the prevalent currency in a foreign country. Ms. Angela

Velasquez, Commercial Attaché - Embassy of Panama, also believes the U.S influence is

significant, but more so in the ―United States’ investments in Panama‖. Ms. Ida Myers,

Office of Alumni Relations and Academic Events at NYU School of Medicine, feels that

―the overall economic and political relationship between the United States and Panama is

one of mutual opportunity. Panama enjoys an open economy and is integrated with the

United States. With the establishment of the Free Trade Agreement, Panama and the

United States will create opportunities for the U.S. and Panamanian business, consumers

and workers. Politically, Panama and the U.S. will benefit when both governments see

eye to eye on political issues concerning Panama‖.

One of the first tests of the new U.S.-Panama relationship is the problem of

unexploded ordnance (UXO) in the military training ranges that were turned over to

Panama. The U.S. government believes it complied with the treaty in turning over these

and other properties to Panama. Senior Panamanian officials, however, argue that the

United States is obligated to rid these areas completely of any UXO.

It seems to us that the United States did clean up the ranges to the extent

―practicable‖ as called for in the treaty. The treaty drafters never contemplated that

unexploded ordnance would be entirely removed from the ranges because the ranges

63

were to be turned over for similar use by Panamanian forces. However, Panama no longer

has military forces, and environmental awareness has increased in the twenty years since

the treaty was signed.

Given these changed circumstances, which could not have been foreseen in 1979,

the two governments should consider examining the issue in a cooperative dialogue,

without depending solely on treaty language for a solution. U.S. officials have indicated a

willingness to work with Panama on the problem, provided treaty compliance is not

called into question. If the government of Panama persists in a legalistic approach

focused on treaty compliance, a productive dialogue is less likely. Also, trying to gain

additional financial concessions from the United States risks poisoning the new

relationship and may cost Panama more in the long run. For the United States, it will be

difficult to treat the UXO problem in isolation because of the worldwide implications.

But this should not preclude cooperative efforts to deal with the problem.

The main focus, therefore, should be on cooperation in managing safety and

environmental concerns. A solution will surely provide a powerful impetus to establish

the new relationship. Both sides have more important interests (e.g., counter-narcotics,

canal security, and economic relations) that could be put at risk over an issue that can,

with a cooperative attitude, be resolved.13

Panama is apparently weathering the economic impact of the withdrawal of U.S.

forces reasonably well. The effects were cushioned by the fact that the transition was

slow and expected. Also, the previous government increased spending on public works.

13

Gillespie, Jr., Charles A., Brandon Grove, Thomas E. McNamara, C. Richard Nelson

The United States and Panama: End of the ―Special Relationship‖

64

According to Panamanian government reports, the almost 3,000 jobs that were lost over

the last year have been offset by the same number of jobs created through some 80

projects associated with the properties turned over to Panama. According to these same

reports, within about three years, property transfers may double the nearly 6,000 jobs lost

during the last five years and the $300 million in lost revenue generated from converting

the bases will also be made up. While these figures are surely too optimistic, previous

forecasts about the adverse impact of the U.S. military withdrawal seem exaggerated.

Some business leaders do not share the government’s favorable evaluation and

expectations. They are concerned about the government’s skill in managing and

disposing of reverted properties, in attracting direct foreign investments, and in

implementing fiscal and social reforms–all necessary for sustained economic growth.

Furthermore, the Panamanian public seems increasingly frustrated with the slow start of

the new government. There is a troubling sense of drift.

Despite ambitious public plans, Panama continues to be plagued by the inability

of the political elite to cooperate. In fact, they are aggressively uncooperative. As a result,

there is little continuity in effort. After nearly one year in office, the government has not

made the transition from a political campaign to running the country. The government at

times seems focused on revenge against political opponents rather than governing well.

The existence of a ―kitchen cabinet‖ of advisors around the President undermines the

ministerial cabinet and contributes to the confusion and diffusion of authority and

responsibility. It is difficult to determine who has specific responsibilities. As a result,

nobody seems to be held accountable and the public seems to sense this.

65

Panama faces major challenges. First and foremost is a combination of poverty,

unemployment, and lack of job training. Almost half the population lives in poverty and

unemployment is at 13 percent. President Moscoso calls current levels of unemployment

―alarming,‖ and points to the ―enormous gap between the rich and poor.‖ Indeed, income

inequality is among the highest in Latin America. Poor public health, crime, and

corruption exacerbate these persistent problems. Such conditions could put pressure on

canal managers to provide more jobs and funds at the expense of canal maintenance and

modernization. While the danger is not imminent and provisions exist to protect the

canal, this bears watching over time.

Adequate water supply is another serious problem. Water is critical for both the

operation of the canal and a fast-growing population. About 52 million gallons of fresh

water are used for each of the 13,000 ships that transit the canal each year. In addition,

the bulk of Panama’s nearly three million people live near the canal, and the population

is growing at nearly two percent every year. Abundant rainfall in the past led to wasteful

practices, and the decrease in rainfall in recent years has resulted in water shortages and

forced canal operators to restrict the maximum draft of ships, requiring many to reduce

cargoes. Water also was restricted for much of the population during this period. The

demand for water may increase substantially if Panama moves ahead with construction of

a third set of locks. Water concerns have caught the government’s attention and Panama

is looking into creating additional lakes to supply water for future needs. Plans to

modernize Panama’s inadequate water and sewage system are also being discussed, but

privatization apparently lacks sufficient broad-based political support and no decision has

yet been made on how to proceed.

66

Concerns about the Panama-Colombia border have also been a topic for

discussion. For the last thirty years, guerrilla forces from Colombia have moved freely

into and out of a poorly defined and uncontrolled border area for a re-supply base and

sanctuary. While this violates Panamanian sovereignty, it does not represent an

immediate threat to the government of Panama or the canal. Nevertheless, as the

government of Colombia puts increasing pressure on the guerrillas, more refugees may

flee into Panama, straining Panamanian resources and infrastructure.13

The Other Countries

Political relations between the EU and Panama have been shaped by the San José

Dialogue, which was launched at an EU-Central America Ministerial Meeting in Costa

Rica in 1984. Panama is also a signatory to the EU-Central America Framework

Cooperation Agreement signed in February 1993 in San Salvador, which came into effect

in March 1999 following its ratification by all parties. A new political dialogue and co-

operation agreement has been signed in December 2003. All parties have not yet ratified

this agreement.

Panama elects representatives to the PARLACEN regional parliament and is a

signatory to the 1991 Tegucigalpa Protocol, which creates the Central American System

of Integration (SICA).

13

Gillespie, Jr., Charles A., Brandon Grove, Thomas E. McNamara, C. Richard Nelson

The United States and Panama: End of the ―Special Relationship‖

67

The United States is Panama’s main trading partner, accounting for 46% of its

exports and 33.5% of its imports in 2002. The EU ranks second, accounting for some

21% of Panamanian exports and 8.5%of its imports. The principal country's exports to

the UE (excluding the Colón Free Zone) are, in decreasing order, fruits (especially

bananas), ships and floating vessels, fish and crustaceans, skin and leather.

Like the other Central American countries, Panama is covered by the EU’s

Generalized System of Preferences adopted on 7 December 1998 and recently extended

until the end of 2005 without graduation system for small countries, which provides for

special treatment for its agricultural and industrial products.

Due to its relatively high economic development indicators (GDP per capita of

some $4,000), Panama is not considered a priority country for cooperation by the EU and

its Member States. From 1990-2000, the Commission committed some $39 million for 37

projects in Panama, of which $33 million for financial and technical assistance projects,

$3 million for economic cooperation and a further $3 million for human rights projects. A

key area of support in terms of both impact and visibility has been a series of small

projects providing assistance to the Government of Panama in the context of the handing

over of the Panama Canal. Another area of valuable support has been the assistance in the

transition to democratic government provided in the first half of the 1990s.

In financial terms the main projects include:

Rehabilitation of the Santo Tomas Hospital

($4.8 million – completed in 1995)

68

Support to the Social Emergency Fund

($4.8 million – completed in 1998)

Support to small and medium agricultural producers from the Central

Region

($5 million – completed in 2001)

The promotion of equal opportunities for women

($9.8 million - ongoing);

Modernization of the Prison System

($3.8 million – implementation has started in 2002)

A Framework Agreement on the implementation of financial and technical

assistance and economic cooperation between the EC and Panama was signed on 15 June

1999.

A bilateral Memorandum of Understanding constituting the general framework

for cooperation programs for the period 2000-2006 was signed in March 2001. The

indicative amount allocated for the period is $24.3 million. The Memorandum of

Understanding sets out three focal areas for cooperation: economic development,

democratic institutionalization of the state, and social development. These areas have

been developed in the European Commission Panama Country Strategy Paper 2002-

2006.

Under the first focal area, two projects were approved in December 2001, The

Panama City Historic Centre Rehabilitation (Casco Viejo) support project ($0.95 million)

69

and the Panama International Techno park/City of Knowledge support project ($7.7

million). The first one is almost completed while the second is on going.

Under the second focal area, a project on Institutional strengthening and

Modernization of the Judiciary has been approved at the end of 2003 ($6.7 million). Its

implementation should start early 2004.

Under the third one, a project on « incorporation of new electrification technologies

for education and health in marginal areas » has been approved in 2003 ($8.5 million).18

China is an area of great concern to the U.S. This concern is put on even higher

alert when China attempts to have a significant presence in the Western Hemisphere.

The Chinese penetration of Panama has been effected primarily through an entity known

as the Panama Ports Company, a front corporation for Hutchison-Whampoa Limited, a

Communist Chinese-controlled company owned by Hong Kong billionaire Dr. Li Ka-

shing. Dr. Li's business empire has long been intertwined with enterprises that front for

the Communist military and intelligence arms of the People's Republic of China (PRC).

Ten percent of his Panama Ports Company is owned by China Resources, the commercial

arm of China's Ministry of Trade and Economic Cooperation.

On July 16, 1997, Senator Fred Thompson (R-TN) was quoted in the South China

Morning Post as stating that China Resources was "an agent of espionage – economic,

military, and political – for China." Shen Jueren, the Communist official who heads

China Resources and Li Ka-shing are both partners in the family’s Hong Kong Chinese

18

Referenced May 2004 : External Relation : EU’s Relations with Panama

http://europa.eu.int/comm/external_relations/panama/intro/

70

Bank. Dr. Li is also a principal in the PRC’s huge China Telecom, and the China

International Trust and Investment Corporation (CITIC), a ministry-level conglomerate

with global assets of $21 billion run by Chinese "princeling" Wang Jun. As chairman of

Poly Group, Wang Jun also serves as the PRC’s main arms dealer to Communist regimes,

terrorists, and rogue states. Nevertheless, Shen Jueren and Wang Jun, like many other

notorious Red Chinese agents bearing campaign gifts, were welcome guests at the

Clinton-Gore White House.

Dr. Lie Hutchison-Whampoa is a partner with the China Ocean Shipping

Company (COSCO), the merchant marine arm of the People’s Liberation Army (PLA).

Hutchison-Whampoa also controls countless ports around the world. Because of its

relationship to the PRC and the potential impact this implies for U.S. global interests, this

should be of major concern to the United States. But a specific concern is that Beijing,

operating through this company, has virtually achieved, without a single shot being fired,

a stronghold on the Panama Canal, something which took the United States so many

years and such tremendous effort to accomplish.6

China's interest in Panama is not limited to shipping ports. Panama's Maritime

Handbook for 2002/3 lists China as the third greatest user of the Canal and another

Chinese shipping firm, COSCO, as the largest single client on Panama's ship registry.

The Washington Times reported, "In recent years, Chinese companies have invested $200

million in Panama, with millions more pledged."

Over the years, watchdog groups like the Center for Security Policy, National

Security Center, Eagle Form and Freedom Alliance have warned about Chinese mischief

6 Bradley, Scott ―The Panama Canal Give-away‖ Utah Eagle Forum

71

around the globe. In addition, former U.S. Senator Fred Thompson, past Chairman and

Ranking Member of the Government Affairs Committee and former Select Committee on

Intelligence member wrote, "China has sold nuclear components to Pakistan, missile

parts to Libya, cruise missiles to Iran, and shared a wide variety of sensitive technologies

with North Korea." Panamanian educator and journalist, Dr. Tomas Cabal, in testimony

before the U.S. Congress said, "COSCO is the merchant marine for the Chinese military

and has shipped weapons of mass destruction technology and delivery systems to other

countries." Little wonder why many worry about the contents of cargo on Chinese ships

transiting the Canal and being unloaded by the Chinese gatekeepers.

If this isn't chilling enough, the U.S. withdrawal also created opportunities for

other opportunists in the region. A Columbian-based foreign terrorist organization,

FARC, hides in Panama’s southern jungles because Panamanian security guards are

unable to patrol the porous border with Columbia. In addition, South American drug

cartels are flourishing in Panama. U.S. intelligence reports Panama still serves as a major

cocaine transshipment point and a major drug money-laundering center.

Hutchison's Hong Kong-based Managing Director, John Meredith said, "…

amusement is my reaction to the criticism we've received … Hutchison has 80,000

employees in 35 countries and we've been in business for more than 150 years … we're

putting another $200 million in developing the Panama Port infrastructure further … not

one of the 1,400 workers at the two Panamanian ports are ethnic Chinese …U.S.

warships berth at these ports … the U.S. should be pretty happy we are there – about a

month ago we had a big drug bust and the DEA is very enthusiastic with our work ….‖

72

When asked if Chinese firms pose a security risk to the Canal, Deputy Assistant

Secretary of State for Western Hemisphere Affairs, John Keane said "there is no evidence

whatsoever of any objective other than money … if necessary, the Neutrality Treaty gives

the United States the right to defend the Canal." His boss, Assistant Secretary Otto Reich

along with Charge d'affaires at U.S. Embassy Panama, Chris McMullen echoed his

comments. 19

19

Gedrich, Fred “Panama Canal: U.S. Must Keep Watch‖, Freedom Alliance January 6, 2003

73

CHAPTER FIVE

THE ECONOMIC EFFECTS THE TRANSFERENCE OF CONTROL OF THE

PANAMA CANAL HAS HAD ON THE UNITED STATES AND PANAMA AND

WHAT THE EFFECT ON PANAMA IS AND WILL BE TO THE COUNTRY

Among the great peaceful endeavors of mankind that have contributed

significantly to progress in the world, the construction of the Canal stands as an awe-

inspiring achievement.

The unparalleled engineering triumph was made possible by an international work

force under the leadership of American visionaries that made the centuries-old dream of

uniting the two great oceans a reality.

In 1534, Charles I of Spain ordered the first survey of a proposed canal route

through the Isthmus of Panama. More than three centuries passed before the first

construction was started. The French labored 20 years, beginning in 1880, but disease and

financial problems defeated them.

The United States, interested since the late 18th century in trading voyages to the

coast of the Pacific Northwest, became greatly concerned with plans for a canal after

settlers had begun to pour into Oregon and California. Active negotiations led in 1846 to

a treaty, by which the republic of New Granada (consisting of present-day Panama and

Colombia) granted the United States transit rights across the Isthmus of Panama in return

for a guarantee of the neutrality and sovereignty of New Granada.

74

The isthmus gained more importance after the United States acquired (1848)

California and the gold rush began, and the trans-Panama RR was built (1848–55) with

U.S. capital. At the same time, interest in an alternate route, the Nicaragua Canal, was

strong in both Great Britain and the United States. Rivalry between the two countries

was ended by the Clayton-Bulwer Treaty (1850), which guaranteed that neither power

should have exclusive rights or threaten the neutrality of an interoceanic route. In the

1870s and 80s the United States tried unsuccessfully to induce Great Britain to abrogate

or amend the Clayton-Bulwer Treaty.11

A French company began building a canal in 1882 to connect the Atlantic and the

Pacific Oceans across Central America. Many men building the canal died of diseases

such as yellow fever, so the project stopped.

In 1890 the Americans tried to cut a canal through Nicaragua and failed. President

Roosevelt talked with Colombia in 1901 about building the canal. A treaty was signed.

The United States requested to buy a six-mile wide and 10 mile long strip of land with

connected the Atlantic and Pacific for a down payment of $10 millions and $250,000

each year. In 1903 the Colombian senate turned down the offer.

Some people from the French company and some Americans meet with some

people in Panama to break away from Colombia. A revolution took place. The U. S.

warship Nashville backed up the revolution with its big guns. Three days after the

revolution began; the United States officially recognized the new nation. Less than two

11

The Columbia Electronic Encyclopedia, 6th ed. 2003, Columbia University Press.

75

weeks later a treaty for building the canal was signed. Many years later the U. S. paid

Colombia $25 million for their losses.

The canal was build by the army. Colonel George Goethals was in charge.

William Gorgas was in charge of controlling diseases such as yellow fever and malaria.

Doctor Walter Reed learned about the diseases. He found mosquitoes carried them.

Gorgas followed Reed's rules.

Clear out places where mosquitoes could be found

Cover water supplies with nets

All tents and houses were covered with nets

New sewers were put in

In 1906 eight out of ten workers had malaria. By 1913 only 7 out of 100 had the

disease. The canal went through the jungle, across lakes, and over mountains. Explosives

were used to blast through the rock. In 1914 the canal was opened. Roosevelt died five

years later in 1919.

The Panama Canal extends approximately 50 miles from Panama City on the

Pacific Ocean to Colón on the Caribbean Sea. It is widely considered to be one of the

world's great engineering achievements. The United States is the largest user of the Canal

in terms of cargo tonnage, as either port of origin or destination, although Asian countries

are beginning to close the gap. Ships bound for Japan from the East Coast of the United

76

States save about 3,000 miles by going through the Canal; ships sailing from Ecuador to

Europe save about 5,000 miles.2

When former President Jimmy Carter shook hands with members of the Panama

Canal Authority on December 14, 1999, it marked the ceremonial end to a transition

that's been over 20 years in the making. Though the transfer of Canal power seems to

most a sign of hope, some Americans have voiced second thoughts.

The Canal gradually became a source of bad relations. Anti-U.S. riots in the

1960s sparked negotiations for a new treaty. On Sept. 1, 1977, after a one-vote victory in

the Senate, President Carter signed the Panama Canal Treaties. The legislation called for

the step-by-step transfer of the canal to the government of Panama beginning on Oct. 1,

1979, and officially ending on December 31, 1999.

96 percent of the canal's 9,500-person workforce is Panamanian, and an American

hasn't been in charge of the canal for almost nine years. Gilberto Guardia was installed as

the first Panamanian administrator of the canal in September 1990 and fellow

countryman Alberto Aleman Zubieta succeeded him in 1996.

Since 1979, a U.S. government agency called the Panama Canal Commission,

made up of five Americans and four Panamanians supervised the transition. It gave way

to the new Panama Canal Authority.

The strategic importance of the Panama Canal, shipping and port services not

only makes Panama's economy highly dependent on world trade trends, but also

2 Energy Information Administration, Country Analysis Briefs, Panama Country Analysis Brief

77

vulnerable to fluctuations in the global economy. The recent global downturn brought the

growth rate of Panama's economy, which enjoyed an annual average real domestic

product growth (GDP) of 5.1% through the 1990s, essentially to a halt. In 2002, canal

transits and tonnage, for example, declined 2.3% and 2.8% respectively, over 2001.

Imports and re-exports activity at the Colon Free Trade Zone decreased, along with

export tonnage of some Panama's major export commodities, for example, bananas (-

5.2%) and shrimp (-16.5%). Overall, Panama's real GDP growth fell from 2.5% in 2000

to only 0.3% in 2001 and about 0.8% in 2002. Nonetheless, with the prospects of the

global economy improving, Panama’s economy will most likely recover. The economy is

expected to grow 2.3% in 2003.2 Lt. Colonel Bruce Russell (Retired, U.S. Army), states

―having grown up in the Canal Zone I was somewhat biased about the turning over of

control to Panama. However, I believe Panama to date has demonstrated that it can

sustain and maintain the operations of the Canal. I am skeptical about Panama defending

the Canal in time of crisis and still needs to maintain that relationship with the U.S. for

support whenever needed. Other furthered their skepticism, ―my feelings were one of

sadness and concern about the future of Panama and the Panamanian people. Concern

about the economic, social and political ramifications that would befall the country.‖

stated Ms. Myers. GYSGT Scott offered another perspective, ―My feelings was and still

remain the same, it should have never happened, if you could not keep the city clean how

do you expect to maintain the Canal without intervention of other countries such as

China, Japan, or India?‖

2 Energy Information Administration, Country Analysis Briefs, Panama Country Analysis Brief

78

Military Presence

―(The United States’) military presence was huge. It not only maintained stability

in Panama but also throughout Central and South America.‖ - Lt. Colonel Bruce Russell.

Although the canal is not owned or operated by the U.S. military, the Pentagon

has always had a role in canal policy. The U.S. army supervised the construction of the

seaway from 1904 to 1914, and the Panama Canal Commission’s Board of Directors is,

by law, chaired by the Assistant Secretary of the U.S. Army, who retains the right to

dictate the votes of the board’s U.S. majority. Except for an interlude during the Carter

administration, when the White House and the State Department assumed a more

prominent role, the Pentagon has been the main powerbroker in U.S.-Panama policy.9

SouthCom, one of the Pentagon’s regional commands, used its 16 military bases

in Panama to coordinate all U.S. military relations with the countries of the Caribbean

Basin and South America. The Pentagon transferred SouthCom headquarters to Miami in

1997. ―The U.S. military’s presence in Panama was twofold. They were directly

involved in the defense of the canal, were responsible for all U.S. military activities in

Central and South America: activities such as The Jungle Operations Training Center, the

Inter-American Air Forces Academy, which provided training for Latin American air

forces.‖ stated Ms. Myers

Despite the treaties that clearly specify the removal of all U.S. troops and bases,

both U.S. and Panamanian policymakers were discussing the retention of some U.S.

9 Lindsay-Poland, John ―U.S.-Panama Policy: Canal, Bases, and Dollars‖ Volume 1, Number 14 November

1996, Fellowship of Reconciliation.

79

military presence in the Canal area. In the U.S. Senate, a resolution sponsored by

conservative Jesse Helms called for a new agreement that would permit the U.S. to retain

its military presence in Panama. The Pentagon, however, acknowledged that the bases

were not essential to either U.S. military or narcotics control strategy. The military’s

willingness to close the Panamanian bases was reinforced by the closure of military bases

at home, increasing the reluctance of the Pentagon to pay for a post-1999 military

presence in Panama—at an estimated cost of $200 million a year. The last U.S. military

base was closed on December 1, 1999.

―There was plenty of jobs on the military installations, the protection of the Canal

was much more secure than ever by land, air, or sea, no it’s not. They are at high risk of

other countries attempting to make a sort of possession of the Canal, an also using other

types of strategies, privatizing the work arena.‖ – GYSGT. Scott

Commercial Use

Over 13,000 commercial vessels transit the Panama Canal every year with some

190 million long tons of cargo. In the past year, U.S. Naval vessels used the Canal

countless times. This 51-mile waterway cuts 8,000 miles off the trip around the southern

tip of South America, saving as much as two weeks of transport time. In warfare, time

means lives, and that much time can mean the difference between defeat and victory. The

Panama Canal has played a crucial role in World Wars I and II, the Korean War,

Vietnam, Desert Storm, and many other conflicts. It is unfathomable that this tremendous

asset – which was bought at such a cost in gold, lives, sweat, and labor at the beginning

of this century, and that is still so necessary to our nation's safety -- could be surrendered

80

nonchalantly now at the close of this tumultuous century.

More than 15% of American imported and exported goods reach their destination

via the Canal, making the U. S. the number one user of the Canal. Forty percent of the

grain grown by American farmers is exported through the Canal, and each day, nearly

700,000 barrels of oil bound for U.S. ports pass through the Canal. Probably of greatest

importance, the Canal allows the U.S. Navy to transport its combat ships between the

Atlantic and the Pacific Oceans.6

Traveling the Canal

According to the U.S. Marin Transportation 1998 report, "Marine transportation is

an integral component of the U.S. transportation system and essential to the nation's

economy." The United States ships over 1 billion long tons of cargo through the Panama

Canal each year, making the Panama Canal an indispensable aspect of the nation's

economy. Servicing over 50 countries on all 7 continents, the Panama Canal is vital to the

transportation of natural resources and manufactured goods. This can be seen through the

following facts: · 141 trade routes converge at the Panama Canal. · It serviced an average

of 37.8 vessels a day in 2000. · The busiest of the trade routes, the East Coast of the

United States to Asia, is 3,000 miles shorter than the alternative all-water route around

the Southern tip of South America. · Nearly 195 million long tons of cargo were

transported in 2000. · Total revenues for 1999 were nearly $750 million.

6 Bradley, Scott ―The Panama Canal Give-away‖ Utah Eagle Forum

81

The new controlling agency, the Panama Canal Authority (ACP), has successfully

maintained the level of service previously provided by the United States. Up until

December 31, 1999, the United States had complete control of the Panama Canal.

However, the change in authority did not happen abruptly: The Panama Canal Treaty of

1977 outlined a gradual change over to ensure continued customer satisfaction. The

Panama Canal is crucial to global business, and the United States and other world powers

that rely on the canal were concerned that the canal would be more susceptible to a

hostile take-over without the protection of the U.S. military. The ACP was established as

a separate entity of the Panamanian government and has financial sovereignty to avoid

such a problem. It comprises maritime experts and heavyweights from around the world.

Being free from political influence, the ACP operates as a business whose main concern

is efficient service for its customers.

Shipping through the Panama Canal has also increased in the last two decades due

to the decreased service of rail systems in the United States. Before the 1980's, most

cargo from Asia to the Eastern United States did travel through the canal. Improvements

in rail shipping procedure at the time provided service six days faster at only a slightly

higher cost. Now, however, the rails are unable to keep up with the increase in cargo

tonnage. For instance, containers may remain stacked at ports in California weeks before

they make it to the rail lines. Many shipping companies from China have chosen to get

their cargo to the east coast of the Unites States through the Panama Canal to avoid

congested railways in California. The rail service in the United States is no longer the

consistently fastest option. Since the early 1990's, all water shipping routes, as opposed to

water and rail routes, have increased 65%.

82

Vessels are getting larger. While larger vessels are beneficial in that they reduce

the volume of vessels through the canal, they exhaust the canal's resources. The

Panamax, the largest vessel to fit in the canal, has a 106 ft beam and 965 ft length.

Panamax vessels comprised 32% of the some 13,000 vessels that used the canal in 2000.

12

The U.S. East Coast-Asia route is the dominant trade route for the Panama Canal,

and is boosted by increasing U.S.-China trade. Movement between U.S. East Coast and

West Coast South America and between Europe and Asia are also major trade routes.

Recently, North-South trade has been increasing, as Latin America evolves into an

increasingly important trading partner of North America. The Canal is designed to

accommodate about 50 ships per day (the maximum has been 65 transits per day). On

average, it takes one ship 24 hours to pass completely through the canal. Oceangoing

vessel transits totaled 11,862 in fiscal year 2002, or an average of 32 vessels per day, an

almost 3.0% decline from 2001’s total of 12,198 or 33 vessels per day. Overall, there

were 13,185 transits in 2002.

Petroleum is one of the largest commodities (by tonnage) shipped through the

Canal, accounting for about 14% of total canal shipments in 2002. Approximately

599,544 barrels per day of petroleum products and crude oil passed through the Canal in

2002. Around 63% of total oil shipments went from the Atlantic to the Pacific, with

petroleum products dominating (80%) this traffic. Petroleum products also accounted for

the majority of Pacific to Atlantic oil traffic. Overall, petroleum products far outweigh

crude oil, accounting for almost 71% of all petroleum shipments through the Canal. Some

12

Stieber, Halley, ―The Future of the Panama Canal‖ Illumin, Volume 5 : Issue 2 March 1st, 2002

83

coal is shipped through the canal as well, accounting for about 1.6% of total Canal traffic.

About 3.4 million short tons of coal passed through the canal in 2002, with approximately

70% going from the Pacific to the Atlantic.2

Another big challenge that Panama faces is absorbing and converting transferred

property, from the United States. In addition to the canal, the United States turned over

more than 5,000 buildings, facilities, and other infrastructure valued at more than $4

billion, not counting the canal and nearly 350,000 acres of land. The facilities include 13

military bases, 3 airports, nearly 4,000 houses, 35 hotels, 11 schools, and 2 hospitals.

While representing an enormous potential, these facilities must be maintained at

substantial cost until they are leased or sold.

Panama developed a plan for dealing with the transferred property and was

successful in disposing of Albrook Airbase and some other assets quickly. Subsequently,

however, the demand for many properties has been weak, and the change in

administrations has slowed the process while new personnel are involved in reviewing

contracts let under the previous administration. Progress on the development of the

former Howard Air Force Base and Fort Amador will be an indicator of Panama’s ability

to attract investors to Panama. Thus far, the results have been disappointing.13

Outside

of the 14 military bases there are some 5, 000 office and residential buildings left by the

United States.

2 Energy Information Administration, Country Analysis Briefs, Panama Country Analysis Brief

13

Gillespie, Jr., Charles A., Brandon Grove, Thomas E. McNamara, C. Richard Nelson

The United States and Panama: End of the ―Special Relationship‖

84

The economic effects the transference of control of the Panama Canal has had on

the United States and Panama and the effects on Panama are very significant. The

United States, once looked upon like the countries protector, is now ―on the outside

looking in‖ in decisions made on the management of the Panama Canal. Deeper effects

of the transfer, such as the land now available to the Panamanian government (from U.S.

military bases) and the loss of U.S. personnel and their dollars are very significant.

Even though the number of Panamanians employed by the canal has grown to nearly all

the 8,000 employees needed to run the waterway, questions are still plentiful. The true

impact of the transference of the Panama Canal may not be known for some time.

85

CHAPTER SIX

THE FUTURE ECONOMIC RELATIONSHIP BETWEEN THE UNITED

STATES AND PANAMA

Despite its small population and area (3.06 million and 30,193 square miles

respectively), Panama is an important center for international trade in the Western

Hemisphere, as both a major shipping thoroughfare and a regional economic power.

Since 1992, an average of 185 million long tons of cargo has passed annually through the

Panama Canal. Panama is also a financial and communications hub that sits at the

crossroads of five international fiber-optic networks and hosts 110 international banks.

Although the country has consistently maintained one of Central America's highest per

capita gross domestic products, approximately 37.3% of its population lives in poverty,

including nearly 18.8% in extreme conditions, according to government statistics.1 ―The

new Panamanian government is for free trade, globalization, and democracy‖, stated Ms.

Velasquez. ―Privatization is important, as well as bringing in foreign investors‖.

Capitalism at It’s Finest

Capitalism - an economic system characterized by private or corporate ownership

of capital goods, by investments that are determined by private decision, and by prices,

production, and the distribution of goods that are determined mainly by competition in a

free market.22

Residents like to joke that this city of high-rise condos and ocean promenades is a

lot like Miami or Los Angeles except that more English is spoken here. Four years after

1 Calderon, Rodolfo Vera ―The United States Invasion of Panama: A tri-dimensional analysis‖

Georgetown University · School of Foreign Service 22

Referenced July 2004 : Webster Dictionary Online http://www.webster.com/cgi-bin/dictionary

86

the last U.S. troops pulled out and Panamanians gained control of the canal that is their

most important national asset, the Yankee footprint here remains deep and surprisingly

welcome.

Although anti-Americanism is on the rise in much of Latin America, Panamanians

heartily embrace their onetime occupiers' values and symbols, from language to music

and fashion — and the almighty dollar.

"The motto here today is 'Gringo come back,' " said Tomas Cabal, a TV

commentator and English professor. ‖Panamanians would like to see American troops

come back and build a base on the Colombian border."

Panama has had no army of its own for the past dozen years. The Panama Defense

Forces were disbanded three years after a 1989 U.S. invasion ousted the last military

strongman, Gen. Manuel Noriega, in an exercise of regime change for which

Panamanians, by and large, remain gushingly grateful.

"George Bush is a great leader! He got rid of the Pineapple (a Noriega nickname),

and now he's gotten rid of Saddam Hussein," cabdriver Manuel Garcia said, lumping

together the father-and-son presidencies as if they were one.

The U.S. military action in Iraq is a point of political tension between Washington

and many countries in Latin America, from staunch allies such as Mexico and Chile to

historically adversarial Cuba. Panamanians, however, keep their eyes on the bottom line

more than the front lines, Cabal said.

87

The country's best and brightest benefited from generous scholarship programs

that sent thousands of Panamanians to U.S. universities. Most of today's business and

political leaders, including President-elect Martin Torrijos and canal administrator

Alberto Aleman Zubieta, picked up American habits as well as degrees, forging lifelong

affinities for U.S. baseball teams, Fourth of July barbecues and fast food.

A love-hate relationship existed over the decades after the canal opened in 1914,

with Panamanians resentful of U.S. control of the waterway and the 12-mile-wide Canal

Zone that was fenced off from the rest of their country. On the other hand, the U.S.-built

waterway lifted the country from banana republic to global trade and maritime player.

When the canal reverted to Panama on December 31, 1999, the only real thorn in the

relationship fell away.

Much of the persistent good feeling is the result of the high levels of intermarriage

and dual citizenship during the long U.S. occupation of the Canal Zone. More than

10,000 U.S. troops and civilian contractors lived in the zone until the waterway was

handed over to Panama, and even children born to two U.S. citizens retained the right to

Panamanian citizenship after the troops' withdrawal. Hundreds of "Zonians" have stayed

here, strengthening the bonds between the two nations.

"I'm a Panamanian as much as an American. I was born here and spent my whole

life here," said Llori Gibson, a 47-year-old artist whose parents were U.S. canal workers.

Married to another Zonian, she keeps a foot in both countries, visiting family members in

the United States while working in Panama with indigenous groups to preserve their

culture and market their crafts.

88

Because of the untold thousands of dual citizens such as Gibson, official

statistics showing that about 10 percent of the population consists of foreigners probably

fail to fully reflect the proportion of Americans in this cosmopolitan country that is also

home to tens of thousands of people from Asia, Europe and other parts of Latin America.

Underpinning the U.S.-Panama bond is economics. The United States is the

largest user of the canal, Panama's most important trade partner and de facto central

banker and monetary-policy controller.

"Why is our currency the U.S. dollar? Because we were visionaries," said Romel

Adames, vice minister for commerce and industry. Using the greenback saves Panama

the expense of maintaining a national mint and, more important, shields the economy

from inflation and manipulation of the money supply, he noted. "There's no sovereignty

issue here," Adames insisted.

Tourism tracts boast of the strong new presence of U.S. retirees, who have been

drawn to Panama by its low taxes, affordable housing, tropical climate and contemporary,

bilingual entertainment.

"There's a lot of shared history here, a lot of cultural affinity. The long U.S.

presence here affects the way people do business, the way things are viewed," said David

Hunt, the retired Air Force colonel who closed up the U.S. canal shop four years ago,

then jumped at an offer to run the Panamanian-American Chamber of Commerce.

Although he detects among Panamanian movers and shakers a slight increase in

self-confidence and pride for having finally achieved full control over their national

89

affairs, Hunt said he has seen none of the resentment that U.S. citizens encounter almost

everywhere else south of the border. "It's all very subtle and very polite," he said.

"There's self-awareness in the post-U.S. age that I think is a good and natural evolution."

15

The Panamanian Economy

―The economical situation between both countries is merely of power interest in

whom can benefit from the other. Political relationship is not on a good basis, due to

conflict of interest.‖ states GYSGT Scott. But others have a different view, ―Overall I

would believe that the economic and political relationship between both countries is

good. I feel there is a mutual respect for each other.‖ – Lt. Colonel Bruce Russell.

The unit of currency used in Panama is the Balboa (PAB), which is pegged at

parity to the dollar. There is no Panamanian paper currency and the US dollar is the de

facto official currency for all but minor transactions. As a result, the Government cannot

print money, and inflation is low, probably only 1% in 1999.

―Economically, the current state of Panama is stable and the most advanced in all

of Central and South America, but continue to struggle with poverty, and the lack of

employment. Politically, they have had several problems and protests about the

corruption in the government and the management of social security funds.‖ interjects

Ms. Myers.

15

Referenced May 2004: Business Panama http://www.businesspanama.com/latestnews

90

The outgoing administration in 1999, that of Ernesto Balladares, had tried, with

some success, to reverse the fairly dire economic situation of the 1980s which

accompanied and may have been linked to national drug-dependence, culminating in the

US invasion in 1989.

Extremely high external debt, which had led to Panama's exclusion from world

capital markets, was addressed in 1996 with a Brady-bond restructuring. In parallel, the

Government pursued an aggressive policy of trade and economic liberalization, including

privatization of key assets, which has begun to have an effect.

Leaving aside the difficult subject of drugs, the economy in Panama is focused on

banking, mining, commerce and tourism, with the canal and the shipping business

generally playing an important role. The total value of the financial sector's assets (as at

the end of June 2003) was $32.5 billion. The Government has introduced many

investment incentives (see below). Copper mining began to have significance only quite

recently, but Panama is now emerging as one of the world's major producers, with gold

mining also making a contribution.

The Colon Free Trade Zone has enjoyed major success, and now accounts for

10% of GNP. Other free trade areas are being created. In the 1990s, growth had been

running at 4% with low inflation; however it fell from 2.5% in 2000 to only 0.3% in 2001

and about 0.8% in 2002. Nonetheless, with the prospects of the global economy

improving, Panama’s economy will most likely recover. The economy is expected to

grow 2.3% in 2003. GDP per head of $4,000 is only average for the region and

91

unemployment remains stubbornly high at 13%. As of June, 2003, Panama's GDP was

valued at $12.6 billion.

In October, 2003, it was reported that financial and trading services already

contribute 80% of Panama's GDP, and the government would like to establish the country

as Latin America's regional financial services hub.

Panama is a well-located, well-endowed and well-educated country which has

been held back by corrupt and ineffective leadership. If the Government manages to

continue with business-friendly and liberal policies, the country will be successful.14

Panama is a sophisticated dollar-based service economy, a financial sector with

106 banks, the second largest free trade zone in the world and incomparable geographical

location, make Panama one of Latin America’s leading business centers.21

Panama's economy is based primarily on a well-developed services sector that

accounts for nearly 80% of GDP. Services include the Panama Canal, banking, the Colon

Free Zone, insurance, container ports, flagship registry, medical and health, and other

business.

―I believe Panama is in a great position to grow economically and politically

without a big brother, the United States, dictating and influencing its every move.‖ states

Lt. Colonel Russell.

14

Referenced May 2004: Lowtax.net http://www.lowtax.net/lowtax/html/jpacfir.html 21

Referenced July 2004: Panama Information http://panamainfo.com

92

A major challenge facing the current government under President Mireya

Moscoso is turning to productive use the 70,000 acres of former U.S. military land and

the more than 5,000 buildings that reverted to Panama at the end of 1999.

Administratively, this job falls to the Panamanian Inter-Oceanic Regional Authority.

GDP growth for 2002 was about 0.8% compared to 0.3% in 2001. Though

Panama has the highest GDP per capita in Central America, about 40% of its population

lives in poverty. The unemployment rate surpassed 14% in 2002.

From March 2001 to February 2003, Panama served as host for the Free Trade

Area of the Americas negotiations. Panama’s first free trade agreement, with El Salvador,

entered into force in early 2003, and in August 2003 Panama concluded negotiations on

an FTA with Taiwan. Panama also is negotiating FTA’s with its Central American

neighbors. 4

If the trend continues, gross domestic product growth for 2004 should reach 6.7

percent, Finance Minister Norberto Delgado told reporters. Growth is also being

bolstered by construction activity and increased traffic through the government-

controlled Panama Canal as world trade picks up, Delgado said. Panama's recovery

started last year with economic growth of 4.1 percent, following two years of little

change, reflecting weak U.S. demand.15

The Bush Administration has announced it will

begin trade negotiations with Panama in the hopes of completing a bilateral "free trade

agreement" (FTA). The negotiations represent the latest attempt to expand NAFTA

4 U.S. Department of State, Bureau of Western Hemisphere Affairs, September 2003, Background Note:

Panama 15

Referenced May 2004: Business Panama http://www.businesspanama.com/latestnews

93

further into Latin America. A Panama FTA would complement the Central America Free

Trade Agreement (CAFTA) with Guatemala, El Salvador, Honduras, Nicaragua, Costa

Rica, and the Dominican Republic that the Administration finished negotiating last year.

"Like CAFTA, the Panama FTA is just a Trojan horse for the stalled FTAA" said Larry

Weiss, Executive Director of Citizens Trade Campaign. "Many Latin American countries

reject the NAFTA model and refuse to go along with the Bush Administration's plans to

extend that model throughout the hemisphere. The administration is employing a

backdoor FTAA strategy by twisting the arms of the small and weak governments in the

region."

"The Administration will likely offer a raw deal to Panama with any trade

agreement they negotiate," said Bill Klinefelter, Political and Legislative Director of the

United Steelworkers of America. "The U.S. Trade Representative showed that labor

rights are simply not a concern with the CAFTA negotiations. We have no reason to think

they will have any more regard for Panamanian workers."15

Trade between Panama's

service-led economy and the United States totaled about $2 billion last year.16

―The overall economic and political relationship between the United States and

Panama is one of mutual opportunity. Panama enjoys an open economy and is integrated

with the United States. With the establishment of the Free Trade Agreement, Panama

and the United States will create opportunities for the U.S. and Panamanian business,

consumers and workers. Politically, Panama and the U.S. will benefit when both

governments see eye to eye on political issues concerning Panama.‖ states Ms. Myers.

15

Referenced May 2004: Business Panamhttp://www.businesspanama.com/latestnews/article.php?nid=108 16

Moreno, Elida Reuters “U.S., Panama open free-trade talks amid protests‖ April 26, 2004

94

Also, a major problem that remains is how Panama can absorb into its economy

the 5,000 buildings and over 90,000 acres vacated by the U.S. forces. Most of these assets

are now open for private investment. Until investors arrive, however, Panama has

calculated the annual maintenance bill at over $40 million.

The U.S. Presence – Is the U.S. Really Gone?

U.S. economic aid programs in Panama, reduced drastically from their post-

invasion peak in 1991, are focused on protecting the canal watershed in order to prevent

deforestation from silting the canal and making it less efficient. U.S. concern about

protecting the canal watershed is laudable, but by leaving decision-making to

SouthCom’s discretion, Washington has essentially ignored the problem of toxic and

dangerous substances left by decades of military activity in Panama. For example,

unexploded ordnance left on firing ranges has exploded, injuring and even killing

Panamanian children and farmers. The Canal Treaties require the U.S. to make an effort

to remove hazards to human health and safety from its military sites. Relations between

the two countries will be recklessly undermined if future generations of Panamanians find

their health and safety compromised by the dangerous materials that the U.S. military left

behind.9

Twenty-nine opinion polls over the decade have revealed a steady 70 to 75

percent of Panamanians in favor of a continued U.S. presence, with most of this due to

the economic benefits.

9 Lindsay-Poland, John ―U.S.-Panama Policy: Canal, Bases, and Dollars‖ Volume 1, Number 14 November

1996, Fellowship of Reconciliation.

95

Panama has had a steady higher standard of living than most of its neighbors, due

primarily to the Canal and the American presence. Its annual per capita income in 1995

($2400) was among the highest in the developing world. By all major social indicators --

income, literacy, education, live births, life expectancy, birth rate, etc. -- Panama was

closer to upper-class Latin American nations such as Argentina and Uruguay, than to its

immediate neighbors.

This is not to deny social and economic inequities and the obvious differences

between Americans who lived in the Canal Zone and the general Panamanian population.

But for many years the United States has been pumping and annual $300 million into the

local economy.

"Integrity is the best national defense" is a social abstraction, devoid of serious

content and satisfying only the soul. Panama has been used to American dollars for most

of this century. Now they are not going to get them, and this simple fact alone may spell

great trouble for the years ahead.5

The Panama Canal is important to Panama for income and jobs, but it is also

considered to be vitally important to the United States economy. Many U.S. exports and

imports travel through the Canal daily (over 10% of all U.S. shipping goes through the

Canal). Exports represent jobs for U.S. citizens because the products were made by U.S.

workers. Imports enable U.S. consumers to receive needed products.

Since the United States is the only superpower in the world, the United States is

interested in keeping the global economy running smoothly. If world trade is disrupted, it

5 Online NewsHour, ―Controlling the Canal‖, William Ratliff and John J. Tierney

96

can lead to worldwide economic problems. Therefore, any disruption in the flow of goods

through the Panama Canal could directly hurt the U.S. and global economies. For

instance, if England were selling products to Peru, England's economy would suffer if the

Canal were not operating. Without access to the Canal, the cost of exports from England

to Peru would significantly increase because England would have to regain the added

expenses involved in sailing around South America. Because of increased prices, Peru

could not afford to purchase as many products from England, which in turn would

decrease England's revenues gained from exports. Decreased revenue means that England

would have less money available to purchase products from the United States and other

countries. A "domino effect" would be set in motion as the United States and other

countries experienced similar problems with their exports and imports. This example

illustrates the economic importance the Panama Canal has to the U.S. and global

economies.

If one considers the thousands of ships full of goods that pass through the Canal

every year and the impact that closing the Canal would have on the world economy, one

can understand the economic importance of the Canal. Therefore, keeping the Canal open

is directly and indirectly important to the United States and to the global economy.17

The future economic relationship between the United States and Panama can be

called unsteady, at best. Although efforts have been made on both sides to build a

stronger economic relationship, politics seem to be at the root of stalled negotiations. For

future generations of Panamanians too thrive, a stronger economy must be maintained,

17

Referenced May 2004: Global Perspectives

http://www.cet.edu/earthinfo/camerica/panama/PCtopic4.html

97

and even with the transference of the Panama Canal, and the absence of the U.S. military,

the United States seems primed to be a major force in shaping the Panamanian economy.

Much work remains to make Panama a first world nation. The judicial system is

badly in need of reform and de-politicization. The level of government corruption is still

way too high, a common problem in Latin America. Decentralization- giving more

authority and services to cities and provinces is vital. While private education is good,

public education needs continued improvement to prepare young Panamanians for the

many jobs that will be created in the sophisticated service sector. Panama recognizes this

and is now spends 20% of its public spending on education, the highest figure in the

Americas.

The nascent prosperity is not reaching the whole populace: the wealth distribution

curve is one of the most skewed in the world. One third of the population lives in

poverty. Sustained determination and creative planning will continue to be needed to

create the conditions so that all Panamanians can participate in the country's growing

prosperity.21

21

Referenced July 2004: Panama Information http://panamainfo.com

98

CHAPTER SEVEN

SUMMARY, CONCLUSION, AND RECOMMENDATIONS

Summary

This Directed Research Project (DRP) has provided an opportunity to examine the

true relationship between the United States and Panama. This focus here has been to

examine the economic impact that the United States has had on Panama, on various

levels. The impact of the withdrawal of the United States military has had lasting

economic effects outside of protecting the canal. The United States military forces in

Panama numbered slightly under 10,000 troops, at full strength in Panama. The United

States military also employed approximately 8,000 civilians, 70 percent of whom were

Panamanian nationals. The U.S. withdrawal has significantly affected the Panamanian

economy through the loss of civilian jobs and the significant lack of US dollars from

military and civilian personnel (upwards of $250 million every year), but the Panamanian

government has made significant strides in improving the economy. Through social

reforms, aid from foreign countries, and the United State’s on going interest in the

Panama Canal, the country is trying to lay the foundation for a prosperous economic

future.

The United State’s transference of the canal to the Panamanian people has also

had a profound economic effect on Panama. The immediate cost to Panamanians through

the loss of U.S. dollars and the wide potential costs of managing and maintaining the

Panama Canal under Panamanian rather than U.S. control is substantial, but foreign

influences are starting to play a significant role in the future of the Panama Canal.

Various business ventures and upgrades to the Canal are providing the Panamanian

government with an on-going resource of revenue to the country. The United States still

remains the preeminent user of the Canal, though.

99

Conclusion

The United States will always have a significant interest in the Panama,

specifically for the Panama Canal. Since the earliest days of Panama, the United States

has placed its ―hand print‖ on the shaping of the country. The Untied States’ presence in

the country provided a substantial ―cash cow‖ for the country, until the transference of

the Canal to Panama in December 1999. Panama is now in the process of creating new

and innovative ways to market itself. Not only is the government upgrading the Canal

and entering into affiliations with countries once thought unlikely (China), but the

government of Panama is pushing the tourism aspect of Panama throughout the world.

Although a lot of Panama’s notoriety revolves around the Panama Canal, and is infamous

for such headline grabbers as Manuel Noriega and Operation Just Cause, the country is

still one of the most economically sound Latin American countries.

Economically, the current state of Panama is stable and the most advanced in all

of Central and South America, but continue to struggle with poverty, and the lack of

employment. Politically, they have had several problems and protests about the

corruption in the government and the management of social security funds.

The U.S. military’s presence in Panama was significant. They were directly

involved in the defense of the canal, were responsible for all U.S. military activities in

Central and South America: activities such as The Jungle Operations Training Center, the

Inter-American Air Forces Academy, which provided training for Latin American air

forces.

100

The overall economic and political relationship between the United States and

Panama is one of mutual opportunity. Panama enjoys an open economy and is integrated

with the United States. With the establishment of the Free Trade Agreement, Panama

and the United States will create opportunities for the U.S. and Panamanian business,

consumers and workers. Politically, Panama and the U.S. will benefit when both

governments see eye to eye on political issues concerning Panama.

This study of the United States’ economic impact on the Republic of Panama is

not intended to incite a feeling of resentment from Panamanians to the United States.

This study highlights key events in the relationship between the two nations, and how the

relationship has affected the Panama politically and economically. Working together, in

the generations to follow, an improved relationship between the two countries can be had

in learning from past obstacles.

Recommendations

Some recommendations for economic growth in Panama are as follows:

Maintain the U.S. dollar – this encourages foreign investment. A dollar based

economy simplifies the transaction process between Panama and the U.S. and

foreign investors.

Promote foreign investment into the country.

USA, Germany, and Costa Rica are Panama’s major trading partners. Find ways

to encourage more trading with these countries, and promote trading with other

major countries, in order to establish a footprint in the global economy.

101

Use the resources left by the United States (i.e. building, land, technology) to

further develop the country’s economic base.

Establish and maintain a strong relationship with the United States. Not only does

the Panamanian government have ties to the U.S., but many Panamanian citizens

have ties to the United States, especially through family.

Some marketing recommendations for economic growth in Panama are as follows:

Panamanians value products of high quality, excellent customer service, brand-

name recognition and attractive packaging.

Effective tools for trade promotion in Panama include trade shows and

exhibitions.

Most foreign consumer product manufacturers advertise via billboards, newspaper

advertising, and commercials. This is a very resourceful avenue for exposure of a

product in Panama.

Economic development opportunities in the interior should be expanded, but with

environmental considerations at the forefront of development.

Panama offers a diverse culture. The climate in Panama is ideal for outdoor

activities. Panama’s outdoor diversity should be further pushed to foreign

tourists. For those wishing to venture beyond traditional city limits, Panama

offers whitewater rafting in the mountainous region of Chiriqui Province,

snorkeling in Bocas del Toro on the Caribbean, and bird watching in the Canal

areas.

102

BIBLIOGRAPHY

1. Calderon, Rodolfo Vera ―The United States Invasion of Panama: A Tri-dimensional

Analysis‖ Georgetown University · School of Foreign Service

2. Energy Information Administration, Country Analysis Briefs, Panama Country

Analysis Brief

3. The Library of Congress - Country Studies - Panama

4. U.S. Department of State, Bureau of Western Hemisphere Affairs, September 2003,

Background Note: Panama

http://www.state.gov/r/pa/ei/bgn/2030.htm

5. Editorial piece - Online NewsHour – Changing of the Guard

http://www.pbs.org/newshour/forum/december99/panama_canal4.html

6. Bradley, Scott ―The Panama Canal Give-away‖ Utah Eagle Forum

7. Mabry, Donald J. ―Panama's Policy Toward the U.S.: Living With Big Brother‖ The

Historical Text Archive

8. CNN.com ―U.S. Prepares to Hand Over Panama Canal after 85 years‖

www.cnn.com/1999/US/12/14/panama.canal.01

9. Lindsay-Poland, John ―U.S.-Panama Policy: Canal, Bases, and Dollars‖ Volume 1,

Number 14 November 1996, Fellowship of Reconciliation.

10. Referenced May 2004: Infoplease.com

http://www.infoplease.com/ipa/A0107870.html

11. The Columbia Electronic Encyclopedia, 6th ed. 2003, Columbia University Press.

Panama

http://www.infoplease.com/ce6/world/A0860214.html

12. Stieber, Halley, ―The Future of the Panama Canal‖ Illumin, Volume 5 : Issue 2 March 1st,

2002

13. Gillespie, Jr., Charles A., Brandon Grove, Thomas E. McNamara, C. Richard Nelson

The United States and Panama: End of the ―Special Relationship‖

103

14. Referenced May 2004: Lowtax.net

http://www.lowtax.net/lowtax/html/jpacfir.html

15. Referenced May 2004: Business Panama

http://www.businesspanama.com/latestnews/article.php?nid=108

16. Moreno, Elida Reuters “U.S., Panama open free-trade talks amid protests‖

April 26, 2004

17. Referenced May 2004: Global Perspectives

http://www.cet.edu/earthinfo/camerica/panama/PCtopic4.html

18. Referenced May 2004 : External Relation : EU’s Relations with Panama

http://europa.eu.int/comm/external_relations/panama/intro/

19. Gedrich, Fred ―Panama Canal: U.S. Must Keep Watch‖, Freedom Alliance

January 6, 2003

20. Lt. Gen. Gordon Sumner, Jr. (USA-Ret) Howard Phillips “Who Will Control the Path

Between the Seas?‖ The Washington Times Commentary Section Monday August 18,

1997

21. Referenced July 2004: Panama Information

http://panamainfo.com

22. Referenced July 2004 : Webster Dictionary Online

http://www.webster.com/cgi-bin/dictionary