US embassy cable - 05PANAMA2260

UNCLAS SECTION 01 OF 03 PANAMA 002260 
 
SIPDIS 
 
FOR EB/TPP 
ALSO FOR WHA/CEN - G. SCHIFFER 
STATE PASS USTR/K. RICHARDSON AND R. SMITH 
 
E.O. 12958: N/A 
TAGS: ETRD, ECON, EFIN, ECONOMIC AFFAIRS 
SUBJECT:  CARIBBEAN BASIN ECONOMIC RECOVERY ACT REPORT 
 
REF: (A) STATE 188288 
     (B) PANAMA 1539 
 
1.  Per ref A, post has emailed the below text to USTR for 
inclusion in the Sixth Report to Congress on the Operation 
of the Caribbean Basin Economic Recovery Act (CBERA).  As 
noted ref B, the CBERA and Caribbean Basin Trade Partnership 
Act have boosted Panama's exports to the U.S., particularly 
non-traditional agricultural products such as pineapple and 
watermelon.  Post's survey of private firms earlier in 2005 
indicated that most new agricultural projects would not have 
been initiated absent the CBERA/CBTPA program. 
 
Begin text of input for CBERA report: 
 
2.  Country Reports: Compliance with Eligibility Criteria 
 
The country reports contained in this section focus 
particular attention on current performance of CBI countries 
with respect to the eligibility criteria reflected in the 
CBTPA, as the most recent expression of U.S. policy 
objectives linked to the extension of CBI benefits.  The pre- 
existing eligibility conditions of the CBERA are also 
reflected in the country reports, where relevant. Population 
statistics are drawn from the Panamanian government's July 
2005 estimate.  Per capita income figures reflect gross 
national income statistics published in the World Bank's 
2004 World Development Report. 
 
 
3.  Economic Review 
 
Approximately 80% of Panama's economy is services-based, led 
by maritime transportation, banking, commerce, financial 
services, and tourism.  Industry and agriculture represent 
about 14% and 6%, respectively, of Panama's economy.  Trade 
and financial ties with the United States are close.  Panama 
attracted major investments in the latter half of the 1990s 
through privatization efforts in the energy, 
telecommunications, and transportation sectors.  Foreign 
direct investment fell dramatically from $1.2 billion in 
1998 to only $99 million in 2002 due largely to the winding 
up of privatization projects, but has since rebounded to 
just over $1 billion in 2004. 
 
Panama's GDP posted its strongest growth in six years in 
2004, growing by 7.6%.  The Ministry of Economy and Finance 
(MEF) expects GDP to grow by about 5% in 2005.   The 
Torrijos Administration inherited a fiscal defict equal to 
about 5% of GDP upon taking office in September 2004, which 
exceeded the 2% limit set by Panama's 2002 fiscal 
responsibility law.  The government of Panama is working 
bring its deficit to about 3.6% of GDP in 2005 through 
increased tax revenues and reduced growth in spending. 
 
Panama's healthy GDP growth has yet to translate into widely 
shared prosperity, as some 40% of Panamanians remain mired 
in poverty (topping 80% in rural indigenous communities). 
The country also has the second-worst income distribution in 
Latin America, as the richest 20% hold about two-thirds of 
Panama's wealth, while the poorest 20% hold only about 1.5% 
of national wealth.  Moreover, unemployment in Panama has 
remained at 12-16% in recent years.  In November 2005, the 
government reported a drop in unemployment from 11.8% to 
9.6%, attributed largely to growth in informal employment. 
Approximately 20-25% of the workforce is underemployed. 
 
Panama's dollarized economy has typically enjoyed low rates 
of inflation (hovering around 1% per year).  However, annual 
inflation reached 3.5% by late 2005 - the highest rate the 
country has seen in some 23 years -- owing to an upward 
spiral of global oil prices.  (As Panama has no domestic oil 
or gas reserves, it is completely dependent upon imports for 
fossil fuels.) 
 
4.  Commitment to WTO and FTAA 
 
Panama completed its accession to the WTO in 1997.  As part 
of the accession process, Panama's government initiated a 
number of significant trade policy reforms, including 
reduced tariffs and non-tariff barriers, elimination of 
production subsidies, greater disciplines in the area of 
competition policy, and strengthened protection of 
intellectual property.  Some of this progress was reversed 
after late 1999, particularly with increased tariffs and non- 
tariff barriers to agricultural and food products.  Frequent 
problems in the GOP's non-science-based use of sanitary and 
phytosanitary restrictions have been of particular concern 
to U.S. exporters, typified by the Ministry of Agriculture's 
freeze on import permits for U.S. beef for much of 2005, 
ostensibly over concerns about a second case of "mad cow" 
disease found in the United States.  Despite these concerns, 
however, Panama is generally more open to imports of goods 
and services than was the case prior to its WTO accession. 
At 8%, Panama's average tariff is one of the lowest in Latin 
America, although it retains high tariffs on some 
agricultural products, e.g., 273% for chicken, 63-159% for 
dairy products, 83% for potatoes and tomatoes, 74% for pork, 
and 55% for rice. 
 
Panama has been a strong supporter of the FTAA process and 
played a constructive role in trying to advance FTAA 
progress at the November 2005 Summit of the Americas. 
Panama previously hosted the Administrative Secretariat of 
the FTAA and served as the site for FTAA negotiations during 
the March 2001 - February 2003 period. 
Panama has actively pursued bilateral free trade agreements 
in recent years, having signed FTAs with El Salvador (2002), 
Taiwan, (2003), and Singapore (2005).  The U.S. and Panama 
have held eight rounds of FTA negotiations over the past two 
years.  In November 2005, Presidents Bush and Torrijos each 
expressed their desire to conclude an FTA as soon as 
possible.  Panama has also sought an FTA with Chile and is 
in exploratory discussions for FTAs with Mexico, Mercosur, 
the Andean Community, and CARICOM. 
 
5.  Protection of Intellectual Property: 
 
Intellectual property protection has improved greatly since 
the mid-1990s when the country passed several strong new 
laws and began enforcing them vigorously.  By virtue of 
acceding to the WTO as a developed country, Panama was 
obliged to have TRIPs-compliant legislation in force 
immediately upon its accession in 1997.  Industry 
representatives and legal experts are in broad agreement 
that Panama has made progress in setting intellectual 
property rights standards above the minimum afforded under 
TRIPs. 
 
 
 
6.  Provision of Internationally Recognized Worker Rights: 
 
The law protects the right of private sector workers to 
organize and join unions, though unions must be registered 
by the government.  About 13 percent of the workforce is 
organized.  Most civil servants may join unions and bargain 
with their respective agencies.  Workers employed by the 
Panama Canal Authority may join unions and bargain 
collectively but are prohibited from striking. 
 
Collective bargaining is protected by law for private sector 
workers and is widely practiced.  In the public sector, only 
a small proportion of civil servants may bargain 
collectively and strike.  The minimum wage law does apply in 
export processing zones, and the Government issued  Law 3 of 
1997  that might limit  effective union organization in the 
zones, including the restriction of strikes and negotiations 
with workers who are not represented by a union.  Unions 
assert that this latter practice results in negotiations 
with employee groups that are dominated by employers. 
 
The employment of children under age 14 is prohibited by 
law.  Children under age fifteen may work only if they have 
completed primary school.  In 2003, the National Child Labor 
Survey results estimated that 57,524 children ages 5 to 17 
years in Panama were working (7 percent of this age group). 
It is estimated that 11 percent of children between the ages 
of 10 and 17 work.  This is particularly problematic in the 
agricultural sector among indigenous populations.  Education 
is compulsory through the equivalent of the ninth grade, but 
enforcement and compliance are uneven. (It should be noted, 
however, that these figures are from a survey done in 2000 
and published in 2003.  In June 2005, the GOP created a 
committee of 27 government and non-governmental 
organizations that expects to produce updated figures 
through a new survey.) 
 
The Labor Code establishes minimum wages by regions and 
industries.  Most urban workers employed in the formal 
sector are paid the legal minimum or more.  It also 
establishes a standard workweek of forty-eight hours and 
provides for at least one 24-hour rest period weekly.  The 
Ministry of Labor enforces workplace health and safety laws, 
though the emphasis is more on safety rather than long-term 
health.  The Labor Code also prohibits forced or bonded 
labor by adults and children. 
 
7.  Commitments to Eliminate the Worst Forms of Child Labor 
 
On October 31, 2000, Panama ratified ILO Convention 182. 
Panama has signed a Memorandum of Understanding with the ILO 
International Program for the Elimination of Child Labor and 
is working with the ILO on various programs aimed at phasing 
out exploitative child labor.  Panama has developed a strong 
legal framework to combat the worst forms of child labor, 
including a prohibition on employment of minors under the 
age of 18 in hazardous labor.  Panama has also established a 
special office within the Ministry of Labor to oversee child 
labor issues.  However, some concerns exist with respect to 
involvement of children in rural coffee and sugar 
plantations and in the informal sector of the urban economy. 
Institutional mechanisms to investigate child labor and 
provide prevention services are slowly being strengthened. 
 
8.  Counter-Narcotics Cooperation 
 
The United States and Panama have a long and productive 
relationship in the counter-narcotics area.  Panama has 
received unconditional certification as cooperating with the 
United States on counter-narcotics efforts. 
 
9.  Implementation of the Inter-American Convention Against 
Corruption 
 
Panama is a party to the IACAC, but has not yet fully 
implemented or enforced several of the convention's 
provisions.  Allegations of official corruption have been 
featured in local media, often prompting libel actions 
against reporters and publishers, which have a chilling 
effect on media and reporting.  Legal processes are in place 
to allow investigation of citizen complaints about alleged 
corruption, but few investigations have resulted in criminal 
charges.  Documented delays in judicial resolution of high 
profile cases reinforce the belief that while individuals 
who engage in acts of petty corruption are often punished, 
high-ranking public officials act with impunity and have 
little interest in allowing public scrutiny of government 
expenditures. 
 
10.  Transparency in Government Procurement 
 
Procurement practices of government ministries and 
institutions vary widely.  Lack of transparency, excessive 
delays, and bureaucratic machinations have caused problems 
for the United States and other bidders on important 
contracts in the past.  Panama submitted an initial offer to 
accede to the WTO Government Procurement Agreement in 1997 
and made a revised offer in early 1999.  Accession 
negotiations had not been concluded as of late 2005. 
 
EATON