Offshore Living

Panama: Problems Ahead

I’m in Panama City, Panama, conducting some boots-on-the-ground research and due diligence on this remarkable country’s legal and financial infrastructure.

I finally completed the process of acquiring legal residence in Panama. At the Civil Registry in Panama City, a smiling young lady took my photograph and fingerprints for my Cedula – my official Panamanian identity document.

There’s a new president in Panama. Ricardo Martinelli, the charismatic retail magnate who led Panama for the previous five years, is out. Juan Carlos Varela, a US-trained engineer whose family owns the country’s largest liquor distributorship, is in.

Varela, who heads up the center-right Panameñista Party, hardly received an overwhelming mandate. Only 39% of the votes cast in the May 4 election were in his favor. His five-year term began July 1, just before I arrived in Panama.

It will be an interesting five years, if the first three weeks are any indication. Varela, who served as vice president during the Martinelli administration, had a falling out with his boss midway through his term. Campaigning on a platform against Martinelli’s authoritarian leadership style and growing evidence of corruption, Varela promised a “kinder and gentler” leadership style.

He’ll have his work cut out for him, as numerous Martinelli leftovers bitterly oppose his authority. They include the attorney general and several members of the Supreme Court.

Among Varela’s key pledges was a promise to impose price controls over the soaring cost of food. This was a direct dig at Martinelli, who owns a chain of supermarkets in Panama.

And sure enough, just a few days after he took office, Varela imposed emergency price controls on 22 staple food products. He claims that this move will save more than $600 million for Panamanian consumers and “avoid speculation.” (Click here to view a list – in Spanish – of the price-controlled items.) The government promises that fines up to $10,000 await non-compliant businesses.

Concern over food prices is rampant throughout Panama. I had lunch last week with an expat who moved here with his family seven years ago. He tells me that his grocery bill has more than doubled since coming to Panama, which implies an annual inflation rate of around 11%. That’s more than double the official government statistics, which show food prices have increased 28.4% in the last five years – an annual rate slightly higher than 5%.

Expats gripe about the price increases, but the average Panamanians are the ones who feel the real impact. It’s important to remember that the minimum wage here is only $624 per month.

Why are food prices rising so quickly? Varela blames speculators, but that masks the actual causes:

1. US monetary policy. Panama operates on a “dollarized” economy. There is an official currency – the balboa – but everything is priced in dollars, and the balboa trades at a rate of 1:1 against the dollar.

When the US Federal Reserve creates billions of dollars out of thin air every month through its quantitative easing operations, it causes ripple effects far beyond US borders. The dollars the Fed creates don’t necessarily stay in the US. They flow worldwide, pushing up prices in other countries, especially those with “dollarized” economies like Panama.

2. Growing population. Panama is experiencing an influx of wealthy and successful expats. As countries like Venezuela and Argentina clamp down on professionals and business owners, these individuals are departing for more business-friendly environments like that of Panama. Many of these individuals have higher disposable income than most locals – and put further upward pressure on food prices.

3. Global agricultural trends. As the world’s population has grown, and especially as people living in emerging economies like India and China increase their caloric intake, food prices have increased globally. This trend is likely to continue.

Varela can’t fight these trends, but imposing price controls will only worsen them. Indeed, in the few days since Varela’s price controls came into effect, food shortages have developed in parts of Panama. In one rural area, the owner of the only rice kiosko explained he had to shut down because his distributor had no rice to sell. Unless Varela backs down, this pattern will become increasingly common.

Meanwhile, buyers from Costa Rica are pouring across Panama’s northern border for supplies of price-controlled items. They’re taking home as much as they can carry on their backs or pack into a car. This can hardly be the outcome Varela intended.

I suspect that Varela will quietly withdraw price controls once it becomes apparent to everyone –including their direct beneficiaries – they’re not working. Grocery stores in Panama (and anywhere else) won’t stock their shelves with food if they can’t sell it for more money than it costs them to buy it. And distributors can’t buy price-controlled items if farmers refuse to sell it to them.

The most politically realistic short-term option may be a program of direct subsidies to the poorest Panamanians most affected by rising food costs. In the meantime, Panama should explore the options of decoupling the balboa from the dollar, beefing up educational standards so that its poorest citizens can find better-paying jobs, and increasing food production in the large regions of the country that remain uncultivated.

Price controls didn’t work in ancient Egypt and Babylon, and they’re not working 4,000 years later in today’s Panama. It’s time to end them.

Mark Nestmann

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