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Investment in Panama real estate and business has done well over the last decade or more. Large scale projects such as the Panama Canal expansion as well as the Panama City building boom promise to support jobs and prosperity for years to come. However, two underlying issues that can help or hurt investment in Panama are poverty and social spending. The United Nations Economic Commission for Latin America and the Caribbean just released a study entitled Social Panorama of Latin America. Thus study looks at a variety of social issues in Latin America from 1990 to 2007. What follows is a brief set of comments and some numbers from Social Panorama of Latin America.

United Nations Economic Commission for Latin America and the Caribbean

UNECLAC or ECLAC using its Spanish acronym was established in 1948. It is one of the United Nations’ five regional commissions. UNECLAC has 44 member states including states outside of Latin America such as Portugal, Spain, Japan, France, the United Kingdom, and the United States.

In general the Social Panorama study shows that poverty is decreasing throughout Latin America. The level of business activity and investment in Latin America (and Panama) certainly would seem to seem to predict this finding.

Figures for Panama based upon household surveys are shown in the table below. The definition of poverty in Panama City is $95 a month income and extreme poverty is half that at $47.50 a month. At minimum wage ($1.50 an hour) one worker working six ten hour days makes $360 over four weeks (one month). If this wage earner is married to a non-working spouse with two dependent children this puts him or her in poverty according to the study.

The study notes that between 1990 and 2007 Panama has had a 77 percent reduction in extreme poverty. One of the factors noted in Panama and throughout Latin America is that when small children in large, poor families grow up they work and help support the family. Thus per person income in the family goes up. The study refers to this as a current demographic bonus and a window of opportunity.

It is of note that Panama has decreased poverty with more jobs and hours of work, not higher pay per hour for the poor.

Investment in Panama and Poverty

Panama is an attractive place to do business and to invest because the wage scale is low and it is relatively easy to find workers willing to work for wages much lower than in the United States, as an example. With a growing economy and more jobs people have more income. The government is subsidizing interest payments on mortgages for first time home buyers for houses and apartments costing less that $80,000 a year.

However, one needs to ask the question. What happens if jobs go away and social discontent is the result? Will a different administration be less business friendly? Will the government be forced to play politics and pass laws unfriendly to foreign investors?

The following table shows public social expenditure as a percent of gross domestic product in Panama. These are rounded to the nearest percentile but they make the point. Panama, even though it is spending more in dollar amounts, is spending less as a percent of its wealth.

What Constitutes Social Spending and whom does it Help?

Think of public social spending as education, health care subsidy, and social assistance programs/social security pensions. When a family receives benefits or uses a public program such as education or low cost, government subsidized health care it effectively increases family income.

The following table looks at the effective increase in income as a function of which fifth of the income scale a family falls in. The first quintile is the lowest income.

One of the worries in Panama is the government’s attempts to privatize health care. This tends to benefit the well to do at the expense of the poor for whom 40% of their social spending benefit is subsidized health care.

Panama Government Investment in Social Benefits and Success of Investment in Panama

The issue gets back to low wages as an attractor for foreign investment versus low wages as a continuing cause of relative poverty and social unrest. If Panama were to substantially increase its minimum wage to reduce poverty it would scare away investment and jobs thus causing more poverty. A Chavez style takeover would much more rapidly drive out foreign investment.

Panama’s public health care system and subsidy of first time mortgages provide a benefit to the poor as well as the middle class. These benefits allow Panama to not demand higher wages and thus continue to attract foreign investment.

Investment in Panama real estate in likely to pay good rewards for years to come. Panama has handled its economics well and will likely continue to attract foreign investment to drive its economic expansion.

If you are interested in our thoughts on Panama’s property investment future, especially regarding possible savings during the current flat period in high end real estate come to see us at ABPanama. We have been managing real estate portfolios for more than 23 years.