Distributional Effects of the Panama Canal Expansion

Within the next three years, the output capacity of the Panama Canal will roughly double as a new set of locks is installed, enabling ships larger than the current Panamax standard to transit the canal. Several studies anticipate significant employment creation and growth effects of the canal expansion through increased domestic resource utilization and large multiplier effects.¹ This view, however, is not consistent with the longstanding characterization of Panama as a dual economy, where a dynamic services exports sector has few linkages with the rest of the economy. More important, the methodology of these studies cannot provide insights into the potential distributional consequences of the canal expansion—an aspect of crucial importance in Panama where inequality is a serious concern.

This paper adopts a methodological framework focused on the likely effects of the canal expansion on the distribution of income. The findings of the paper are obtained by linking a dynamic computable general equilibrium (CGE) model of Panama with a microsimulation framework based on a recent Panamanian household survey. The objective of the simulations is to contrast the counterfactual income distribution that would have resulted in the absence of the canal expansion project with the income distribution resulting from the canal expansion during both the construction and operation phases. Compared with earlier studies, this framework is much less suited for comprehensive growth analysis, especially in the near to medium term; on the other hand, it has the advantages of explicitly recognizing the intersectoral linkages in Panama's economy, clearly identifying the income sources of households, and providing a direct mapping of changes in macroeconomic aggregates to household welfare. Thus, this paper does not produce forecasts, but rather provides a consistent set of scenarios for the likely poverty and inequality consequences of the canal expansion.

The paper is organized as follows. The next section discusses the data and presents some background information on Panama and the canal shock. The paper then summarizes the model framework and subsequently discusses the macro- and microeconomic results of our simulations. The final section offers concluding remarks.

Background

Panama is often characterized as a dual economy, consisting of a dynamic, high-wage, export-oriented segment and a rigid, low-earning, domestic-oriented segment.² Service sectors dominate Panama's economy, accounting for 77 percent of total value added and 59 percent of total exports.³ The canal sector is part of the dynamic, export-oriented services sector, accounting for one-fifth of Panama's exports, but only 6 percent of total value added and 0.5 percent of total employment. The sector operates as an enclave with few linkages with the rest of the economy: it exports all of its output, and its purchases of intermediate inputs (many of which are imported) are just 21 percent of its total production. Furthermore, its few workers are highly paid, with average earnings that are ten to twenty times the national average (see table 1).

There are several other elements to the duality of the Panamanian economy. Farm activities account for more than 21 percent of total employment, but just 8 percent of total value added, and the farm labor market is segmented from the market for nonfarm labor. Similarly, informal activities (excluding agriculture) contribute just 6 percent to total value added, yet 30 percent of workers earn their wages in the informal sector. Imports account for less than 10 percent of total purchases of agricultural products and services, while more than half of all demand for manufactured goods is satisfied through imports.

Table 1.

Average Wages by Activity and Skill Level, 2003

The same dichotomous structure is evident in the distribution of income in Panama. At the bottom of the distribution, poverty is concentrated among households earning their incomes from agricultural activities, and practically all indigenous households are poor (see table 2). Despite the nearly 10 percent increase in real GDP per capita between 1997 and 2003, the poverty profile of Panama has hardly changed: the headcount ratio for extreme poverty declined slightly from 18...