The neo-liberal State: debt, inequality and poverty

Carlos Marcelo Castillo

The faithful compliance with the economic recipes imposed by international financial bodies has been carried out through the transformation of the State’s role. The result has been more expensive services, weakened agricultural, livestock and industrial productive sectors, the deterioration of living conditions, a widening inequality gap and the acceleration of the debt spiral.

Overthe past fifty years, the economy has closely followed the world economic cycle,since its form of international insertion has been based mostly on transport,trade and services. However, it was at the end of the 1980s and beginning of the1990s that a process of sweeping changes began, in which the State was to be themain actor. Economic performance reflects the strong impulses towardglobalisation and liberalisation on a world level and the adjustment policycontext that accompany them. These pursue three basic objectives: theprivatisation of public companies and services, the elimination of tariffbarriers to open up markets, and the increased flexibility of the labour force.At the time, such policies were defined as the only way to overcome poverty andthe increasing unemployment manifested during that period. Paradoxically,faithful compliance with these economic recipes, imposed by internationalfinancial bodies, has made services more expensive, weakened the agricultural,livestock and industrial sectors, caused a deterioration of living conditions,and significantly widened the gap between those who have more and those who haveless.

TheState’s role in the economic transformation

Infact, six months after the 1989 invasion by the United States and theinstallation of the government of former president Guillermo Endara, a processof transition from an entrepreneurial State to a free market was initiated.Contrary to the opinions that predicted the State would be weakened oreliminated with the progress of globalisation, this process has made the Statemore important and has placed it at the service of major transnational companiesthat need it to maintain the conditions of accumulation and competitiveness, topreserve labour discipline and to increase capital mobility while blockinglabour mobility. The so-called “neo-liberalism” means more than thewithdrawal of the State from social security, that is to say, the elimination ofpublic expenditure on programmes of social interest and the simultaneousprivatisation of social services the State traditionally provided. It is a setof active policies, a new form of state intervention, aimed at increasingprofitability of capital in a global internal market and at guaranteeingpunctual payment of the foreign debt.

Underthis perspective, the plan of the Vice President of the reconstructiongovernment, Guillermo Ford, was implemented, with the objective of transformingthe State’s function and enabling the free play of supply and demand. Theso-called “National Strategy for Development and Modernisation of the Economy:Policies of Restoration, Sustained Growth and Creation of Employment”maintained that the main problem for the Panamanian economy was the excessiveintervention of the State. It added, “Panama’s economic problems were aproduct of economic policies developing a philosophy of an ‘activist state’instead of a free market philosophy. A productive state was developed, showingitself to be inefficient in investment projects as production operations, whileit maintained an antagonistic position towards private enterprise, occupying itsnatural space. Public expenditure was used for various employment problems, toimprove the distribution of income and to promote development through nationalinvestment by external funding, increasing taxes on the private productivesector—an economic policy of inward growth was developed to the detriment ofexports.”

Thedocument continued, “the economic policy proposed here has the central aim ofreactivating the national economy and launching a period of sustained growththat will significantly improve the standard of living of the Panamanian people.Its general objectives are: 1) to increase the levels of employment andproductivity; 2) self-sustainable growth; 3) the creation of a system generatingmore equitable opportunities.” These objectives were to be achieved throughthe application of three fundamental points: privatisation of public companiesand services; opening up markets and labour flexibility.[1]

Theprivatisation programme is considered a “strategic component of the economicpolicy” and it comprises several objectives: a) to reduce the number of stateentities; b) to transfer public sector activities to the private sector; c) tosell some companies or assets. Specific privatization criteria were also setforth: a) unprofitable companies; b) non-strategic activities; c) activitiesthat are not being efficiently developed; d) activities that could be managed astrusts; e) those with possibilities for partial privatisation.

However,with the political erosion of the so-called “occupation regime” (a resultnot only of political contradictions, but also of the deterioration of theeconomy between 1988 and 1989 caused by economic sanctions), Panama suffered aloss in production reaching USD 2,334 million, and a further USD 1,246 millionin capital flight, which prevented the regime, during its four and a half yearsin office, from fulfilling the privatisation programme. Nevertheless, as from1984, the state economic policy was increasingly adjusted to neo-liberalconceptions and obligations.[2]

TheChapman Plan

Subsequentlyand with the same philosophical conception, the strategy known as “PublicPolicies for Comprehensive Development: Social Development with EconomicEfficiency” was formulated. It was also known under the name of the Ministerof Finance of the Pérez Balladares government, which took power in 1994. TheChapman Plan had the manifest objective of reducing poverty and extreme poverty,in addition to ensuring economic growth through efficiency and productivity. Itwas during this period that privatisation aspirations materialised, andnearly all the adjustments and privatisation plans were accomplished.[3]

Regardingthe policy for restructuring public companies, the Chapman Plan held that “oneof the limitations preventing enhancement and competitiveness of the economy isthe inefficiency, unreliability and high costs of public services. To thesefactors should be added a historical deficiency of public services: expensiveand unreliable electricity, scarce safe drinking water supply, deficienttelephone services, expensive and inefficient ports, and poor publicfacilities.” To solve these problems in providing public services, the planadvocated administrative restructuring, the granting of concessions, servicecontracts with the private sector and outright privatisation.

Asfrom the second half of the 1990s, the government imposed severe structuraladjustment measures, overriding the opposition of the majority of the people. Atax and labour reform was introduced that favoured the highest income groups inthe country. Legislation was passed to make the work force more flexible and theprivatisation of public services was authorised, which immediately resulted inthe near dissolution of the national economy and the progressive growth ofpoverty.

Almostfive years after the publication of the document at the end of 1994, severalimportant privatisations have occurred:

·        Forty-nine percent of the Telecommunications Institute shares were soldto the Cable & Wireless Panama S.A. Company; the workers kept 2% of theshares and the state retained the rest.

·        Law No. 6 of 3 February 1997 was promulgated, in which the institutionalregulatory framework was set out for the provision of the public electricityservice, permitting private generation and marketing of electricity. Thisframework enabled the splitting up of Institute of Hydraulic Resources andElectrification (IRHE) into seven private electric energy generating anddistributing companies.

·        The concession of the ports of Balboa and Cristóbal was granted to theHutchinson company, and the development of new port sites located on theAtlantic, one to the north of the Port of Cristóbal at the exit of the Canal,and the other in the Province of Bocas del Toro, was granted to the Evergreenand Petroterminales de Panama companies.

·        A reform of the Labour Code in force since 1972 was made in 1995. Thiscode, which had been the result of worker struggles, was considered by thebusiness community to be a “very advanced code for the Panamaniansituation”. The reforms were legitimised by a minority sector of organisedworkers, while for most of them it was seen to be damaging to the interests ofthe population as a whole and, on its approval, major demonstrations took place,triggering very violent street disorder.

Proceedsfrom privatisations generated a DevelopmentTrust Fund (FFD), which, bymid-2001 amounted to some USD 1,200 million (16.3% of the GDP and 26.6% of thestate budget for the year 2002), generating USD 56.6 million in interest during2001. The FFD was conceived as a means to struggle against poverty by fundingpolicies and programmes of a social nature. Although by law the principal fundcannot be used, Panamanian society has an important decision pending about itsmost appropriate potential use from the standpoint of national development.

Debt,inequality and poverty

Allthese measures, together with others over the period indicated, gave rise to astrong transfer of purchasing power towards the richer sectors to the detrimentof the income of the poorer sectors of the population. The structural adjustmentmeasures tended to favour the traditionally strongest economic sector of Panamathat was linked to the financial sector and major international corporations.[4]While 68% of the economy in 1980 was concentrated in the service sector, in 2000the figure had reached 82%. The secondary sector (manufacturing) had droppedfrom 18% to 10% over this 20-year span. The primary sector (agriculture andstock-raising) dropped from 16% to 8% between 1980 and 2000.[5]

Thesemeasures have sharpened inequality. Today Panama is considered one of the mostunequal countries in the world; the poorest are very poor and the richest arevery rich. Thus, while the lowest quintile (20% of the population) isresponsible for 3.6% of the total consumption, the highest quintile consumes53%. The poorest quintile receives 1.5% of the total income, while the richestquintile receives 63%.[6]

Inspite of the relatively high per capita GDP (USD 3,080 in 1997), over onemillion people (37% of the population) live under the poverty line[7] and of these, over half a million (19% of thepopulation) live in conditions of extreme poverty.[8] In general, poverty mirrors the regional average forLatin America and the Caribbean (37%), but extreme poverty is higher in Panama[9](16% in LAC).

Halfof all Panamanian children live in conditions of poverty and it is among thepoor that the highest birth rates are recorded. Fifty-three percent of childrenunder five years of age (over 160,000) and 48% of all minors under 18 years ofage (over 500,000) live under the poverty line. Nearly one third live inconditions of extreme poverty. On the other hand, 27% of senior citizens (over60 years of age) live in conditions of poverty, and 12% in extreme poverty. Thissmaller proportion of poor old people (compared to 37% of the total nationalpopulation), points to a lower life expectancy among the poor than among theaverage population.[10]If we add aging of the population to the increasing pauperisation, the trend istowards an increase in the number of old poor people who lack social securitycoverage and therefore a considerable drop in the life expectancy of thepopulation as a whole.

Furthermore,the debt has represented a very high percentage of the GDP over the last twodecades and amounted to 58.3% in 1999, becoming an extraordinary drain on thestate’s budget (22.1% in 1999). This drain on the country’s finances appearseven clearer on considering absolute figures. At the beginning of the 1990s,foreign debt amounted to USD 3,500 million; near the end of the decade (1999) itwas some USD 5,568 million The country has paid debt service amounting to USD5,536 million between 1990 and 1999; that is to say, over the decade it paid upthe amount of the initial debt plus USD 2,000 million in interest. However, thedebt was not paid nor did it drop. On the contrary, it has grown considerably.



Balance at 1 January

Per capita debt



















Source:General Comptroller of the Republic


Foreigndebt service, 1989-2000 (in thousands of USD)


Debt service

























Source:General Comptroller of the Republic


[1] Flexibility mainly refers to the adaptation of the organisation of production to market conditions.

[2] Enoch Adames Mayorga, “La reforma del Estado en Panamá: procesos y tendencias” in Acción y Reflexión Educativa, No. 23, September 2000, Instituto Centroamericano de Administración y Supervisión de la Educación (ICASE), University of Panama.

[3] So far the exception is Instituto de Acueductos y Alcantarillados Nacionales (IDAAN), which is still under national debate as it has generated increasing opposition in the light of the ill-fated experience in privatisation of electricity and telephony which have become notoriously more expensive, without achieving greater efficiency in the service, as was argued when they were being privatised.

[4] For a more detailed report on this point, see Iván Quinteros and William R. Hughes Who owns Panama, Panama, 2000.
[5] Marco A. Gandásegui. Socioeconomic Profile of Panama, Panama, 2001.
[6] World Bank. Panama: Study on Poverty. Washington, 2000.
[7] The general poverty line is defined as the line of extreme poverty, plus an allocation for non-food items. This allocation is calculated as a proportion of the budget not assigned to food by those individuals having a total consumption near the extreme poverty line.
[8] The extreme poverty line is defined as an annual per capital level of consumption necessary to satisfy the average daily minimum calories requisite of 2,280 (estimated by the Institute of Nutrition of Central America and Panama, INCAP, and the Ministry of Health, this minimum represents a weighted average based on the assumption of moderate activity). The annual cost of this minimum calorie requirement amounts to an extreme poverty line of USD 519.
[9] World Bank, op. cit.
[10] Ibid.