Citation
Country development strategy statement, FY 1981, Panama

Material Information

Title:
Country development strategy statement, FY 1981, Panama
Portion of title:
Panama
Alternate title:
Panama Country development strategy statement 1981-1985 (with a 1986-99 preview)
Creator:
United States -- Agency for International Development
Place of Publication:
Washington D.C
Publisher:
Agency for International Development
Publication Date:
Language:
English
Physical Description:
57 p. : ; 28 cm.

Subjects

Subjects / Keywords:
Economic assistance, American -- Panama ( lcsh )
Economic conditions -- Panama ( lcsh )
Social conditions -- Panama ( lcsh )
Genre:
federal government publication ( marcgt )
non-fiction ( marcgt )
Spatial Coverage:
Panama

Notes

General Note:
Cover title.
General Note:
"January 1979."
General Note:
Photocopy.

Record Information

Source Institution:
University of Florida
Holding Location:
University of Florida
Rights Management:
This item is a work of the U.S. federal government and not subject to copyright pursuant to 17 U.S.C. §105.
Resource Identifier:
76903139 ( OCLC )

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This item has the following downloads:


Full Text
AGENCY FOR
INTERNATIONAL
DEVELOPMENT MINUS $TAMl of A4CKA
COUNTRY DEVELOPMENT
... ...'STRATEGY STATEMENT ;'. < -,..
PA1981
PAN..- MA
17A.A
. .. .. . 'A A.

'A''. A

A ', l : T

. January 1979
DEPARTMENT
OF
STATE

UNCLASSIFIED

UNCLASSIFIED 'A,




PA
Country
Strategy

NA

M

A

Development
Statement

1981 1985

(with

U.S. Embassy
USAID Panama

a 1986 99 preview)

-a - -

Jan. 31, 1979




PANAMA
COUNTRY DEVELOPMENT STRATEGY STATEMENT
TABLE OF CONTENTS
Page
Introduction and Summary 1
Part I Analysis
Analytical Description of the Poor 5
Identification of the Causes of Poverty 22
Host Country Plans, Commitment and Progress 26
Human Rights 31
Other Donors 32
Outlook 33
Part II Strategy
Long Range Goals and Intermediate Targets 37
AID Assistance Strategy 38
Part III Assistance Planning Level
Indicative Planning Allocation 51
Proposed Assistance Planning Level 54
Annex I District Poverty Indicators
* Annex II- Methodological Annex

*Annexes are available at LAC/CEN




PANAMA
COUNTRY DEVELOPMENT STRATEGY STATEMENT
1981-1985
1986-1999
Introduction and Summary
Panama's dominant role in the history of the Americas is common
knowledge. Especially recognized is its function as the crucial artery
of communications between North and South America and between the eastern
and western halves of the hemisphere. When one spends a few hours at the
Miraflores or Gatun locks, however, one learns of a lesser known but per-
haps still more important fact. Panama and the Canal provide also a
vital link between the Atlantic basin and Eastern Asia. With the re-
opening of China, this fact assumes tremendous new importance. A quarter
of all the world's population is being suddenly brought newly into world
commerce, and the Panama Canal is among international trade's most vital
organs.
Panama has done well in providing a healthful environment for its
heavily travelled path between the seas. From the mid 1950's until 1974,=
the country achieved an economic growth rate of 8% and during the past
decade the benefits of this growth have been remarkably well distributed.
Especially noteworthy are Panama's progress in alleviating rural poverty
and in reducing the population growth rate.
Since 1974,however, alarming developments have brought heavy clouds
down around the earlier achievements which, if not dispersed soon, could
put the country into a serious crisis situation. In a word, Panama has
for the past four years been the victim of a disease characteristic of
semi-developed countries: --growth arrest. The most crucial current fact




-2-

about the Panamanian economy and society today is not rural poverty but
its negative economic growth rate, which is itself the single most im-
portant cause of poverty. The rapid growth with equity enjoyed earlier
slowed to a halt in the early 1970's and per capita growth went negative
in 1974, where it remains today. Urban unemployment and underemployment
are high (35%). New private investment is at a standstill. The rural
economy, both subsistance and market, is stagnant, and rural families are
continuing to migrate to the cities. Meanwhile, the expansion of social
services, begun more than ten years ago, has continued at the same pace,
largely financed by external borrowing, mostly commercial. The result is
a crushing and sti0l growing debt servicing burden, roughly half the
national budget.
If government investment in new social services were to continue at
present rates, financed by still further external commercial borrowing
while new private investment remains inert, financial crisis would
threaten.
The statement of the problem reveals the basic strategy essential to
its solution: a public sector austerity program on the one hand and the
promotion of massive new private investment and employment on the other.
Fortunately, the GOP has adopted such a strategy. It is important that we
all join in the difficult task of helping to make it work. Austerity is
fraught with problems, frustrations, and the risk of failure to progress
in meeting basic human needs. Promoting new investment is delicate and
difficult, with nolguarantee of success. Unhappily, no panaceas, like
oil, are known to exist. Panama simply has to reverse the downward spiral
by spending less, earning more, retiring or stretching out debt,




-3-

and getting back into a rapid economic growth posture, made possible by
new investment. Then the completion of the task of eliminating poverty
in Panama may be resumed. This is not to say that poverty alleviation
has to be abandoned until after growth has been revived, but the pace and
the costs must be reduced.
In the pages that follow we describe poverty, delineate its causes
and seek to outline a strategy of assistance that looks to the elimi-
nation of poverty from Panama by the year 2000. This strategy is essen-
tially one in support of Panama's own strategy whose aims and structure
we propose to support. We outline immediate, intermediate and long-term
goals and programs. There is poverty to be dealt with on both an im-
mediate and a long term basis. Then there is the opportunity for the
consummation of poverty's permanent eradication through the stabilization,
enhancement, and appropriate exploitation of Panama's natural and human
resource bases.
Under this strategy, USAID Panama will concentrate its resources as
follows:
I. On a short term, highly focused, terminal rural development
program to end in 1985.
II. On the further development of rural growth centers, to integrate
the countryside with its near-by urban hubs and to create jobs
that will serve to divert some of the rural migration now going
direct to Panama City and Colon. This program, already underway,
would terminate between 1985 and 1990.
III. On a series of long term programs aimed at solving the problems
of urban unemployment, underemployment, low incomes, and low




-4-

living standards in general. This program, focussed on appro-
priate technologies and skills, would begin as soon as possible
and remain in effect throughout the rest of the century.
IV. On the problems of preserving and enhancing Panama's natural
resourcesibase: forests, soils, water and energy. This program,
already begun, would continue into the 21st century.
V. On a program to increase the capabilities of both the public
and private sectors better to plan, organize and manage the
nation's rograms aimed at the elimination of poverty, the
establishment and maintenance of full employment and the en-
hancement of the environment.




-5-

PART I: ANALYSIS
A. Analytical Description of the Poor
1. Summary Description of the Poor
Of Panama's 1.8 million people, approximately 715,000 (39%) live
in poverty, as will be defined below. Some 385,000 (21%) live in an ex-
treme state of poverty, so extreme that their lives are in a deteriorat-
ing condition, similar to the most disadvantaged in the poorest countries
in the world. While the poor, and the extremely poor, are found in all
areas of the country, they are concentrated in two major areas the pri-
marily agricultural communities of the country's central and western
provinces and the major cities of the Metropolitan region (Panama, Colon,
Arraijan, and La Chorrera).
All of the key indicators provide ample evidence of the abject
poverty of the rural poor. Illiteracy rates are high; most houses lack
electricity, potable water, and sanitary facilities; and access to basic
health services is almost non-existent. The incidence of extreme mal-
nutrition among young children is high, and infant mortality, while some-
what lower than that in other nearby countries, remains well above the
national average.
While the urban poor have access to some of the basic services
that their isolated rural neighbors lack, their housing conditions, too,
are highly inadequate. They live in conditions of extreme crowding, with
access only to communal water sources and unsanitary waste disposal fa-
cilities. Of even more concern is the absolute lack of employment oppor-
tunities,compoundedbyanabsence of basic skills needed to compete in the
job market. Unlike their rural counterparts, who at least have their




-6-

limited land to fall back upon in order to feed their families, the
urban poor are entirely dependent on a monetary economy with a cost of
living index among the highest in the Western Hemisphere. Seen in the
context of growing migration a n d t h e natural growth that are
rapidly making the Metropolitan region the major locus of Panama's
population, urban poverty, currently a source of concern, becomes a cause
for serious alarm in the coming years and decades. This switch from
predominantly rural to predominantly urban poverty appears increasingly
to be characteristic of countries in the intermediate stages of develop-
ment. And it is increasingly alarming that in Panama, as elsewhere, what
to do about urban poverty and unemployment is proving to be a tougher
problem than was what to do about rural poverty.
2. Income of the Poor
Poverty line analysis
Two levels of income have been calculated for the country
based on estimated minimum family consumption costs for 1978 for the
cities of Panama and Colon. These levels have been adjusted (1) for the
country's other urban centers and (2) for the rural areas to reflect the
lower living costs there.
The first level is the income barely,adequate to provide for
a family's basic needs. This income has been calculated at $517 per
capita annually for the cities of Panama and Colon, $402 for other urban
centers, and $304 for rural areas. These figures are based on a basket
of goods and services which permits a family of 5 persons to barely
satisfy its basic minimal needs. The basket includes a bare minimum diet
and clothing, very modest housing, minimal costs for primary education,




- 7 -

medical services, transport and miscellaneous. Incomes below these three
levels for the three geographic areas cannot meet basic human needs.
The second level of income is descriptive of the more than
1/5 of Panama's population living in extreme poverty, or in conditions
of serious vital deterioration. This income level has been calculated
at $270 annual per capita for the cities of Panama and Colon, $210 for
other urban areas, and $160 for the rural areas. The "extreme poverty
level" is roughly 48% below the poverty level. It includes the same
items in the basket of goods and services but at greatly reduced cost
levels. At and below this level, a family of 5 is in no way able to
provide for food, clothing or housing at adequate levels.l/
Population living in poverty
Application of the "poverty" and"extreme poverty" lines to
the estimated population distribution for 1978 yieldsthe following
population living in poverty:
Pop. Below Extreme Pop. Below Pop. Above Total
Poverty Level Poverty Level Poverty Level Population
Total 384,284 (21%) 714,453 (39%) 1,111,047 (61%) 1,825,500 (100%)
Rural 290,067 (16%) 512,485 (28%) 392,755 (22%) 905,240 (50%)
Urban 94,217 ( 5%) 201,968 (11%) 718,292 (39%) 920,260 (50%)
In absolute terms, the poor are most numerous in the provinces
of Veraguas, Panama, Chiriqui and Colon (531,169 or 74%) with the heaviest
concentration in the rural areas of Veraguas and Chiriqui and the urban
areas of Panama (345,147 or 48%):
1/ A detailed description of the methodology used to both develop these
lines and match them up with family income data in order to arrive at
estimates of the Panamanian population living in poverty may be found in
Annex II.




- 8-

Pop. Below Extreme Population Below
Poverty Level Poverty Level
Provinces Total Rural Urban Total Rural Urban
Total 384,284 290,067 94,217 714,453 512,485 201,968
Veraguas 106,298 103,719 2,579 141,090 133,353 7,737
Panama 98,702 34,367 64,335 197,406 68,736 128,670
Chiriqui 49,495 41,562 7,933 106,923 83,124 23,799
Colon 42,873 35,098 7,775 85,750 70,200 15,550
Cocle 25,653 22,361 3,292 62,486 55,900 6,586
Herrera 19,295 16,419 2,876 46,939 38,311 8,628
Bocas del Toro 24,818 20,442 4,376 39,395 30,663 8,732
Darien 9,751 9,588 163 19,666 19,176 490
Los Santos 7.399 6,511 888 14,798 13,022 1,776
The province with the highest incidence of extreme poverty
is Veraguas with 61% of its population below the extreme poverty level,
almost all in the rural areas (94%).
3. Rural Poverty
In order to move from the more general description of poverty
provided by the income distribution and poverty line data to more loca-
tion specific and qualitative information, the Mission has analyzed social
indicators and access to services at the district level.-/ For the rural
areas, three key indicators infant mortality, birth rate and illiteracy -
were examined for each district in the country. These indicators were
then compared to national averages. Those districts where all three
indicators are above national norms are considered areas of extreme pov-
erty of a large part of the population. These districts are all located
in the provinces which show the largest populations below the poverty
line, as described above. Districts where two of the three indicators
are above national norms have a lesser prevalence of poverty, although
the degree of poverty is similar to that found in the poorest districts.
1/ The country is divided into 9 provinces and 65 districts. In addition
- there is one special district set aside for the Cuna Indian tribe.




>~
~-~- ,
V

II.!




-9-

The results of the district by district analysis are shown on
Map 1. Fourteen districts (shown by cross-hatching) have the "least"
level of satisfaction of basic needs i.e. they are below national
averages on all three key indicators. All are in the Central and Western
regions. Sixteen additional districts (shown by vertical stripes) fall
below the national averages on two of the three indicators and thus have
serious deficiencies in the satisfaction of basic needs. Most of these
districts also lie in the Central and Western Regions. Tables 1 and 2,
Annex 1 summarize the district level data for all 30 districts. The major
concentrations of poverty are in Veraguas province and neighboring dis-
tricts in eastern Chiriqui, Cocle and Colon, Herrera and Los Santos.
Seventeen districts stand out. They have a number of factors in
common, including poor soils, mountainous terrain, highly dispersed popu-
lation and a lack of access roads. The widespread poverty in these dis-
tricts is further confirmed by a review of other indicators as well, such
as housing conditions, water, sanitation and access to health services.
These seventeen districts we now believe to be the proper focus for a
final rural development effort in Panama. They are illustrated on Map
2 and described in greater detail in the following sections.
Key Population Characteristics
As indicated by 1970 Census data, this area, with a population of
178,821, is primarily rural. The population density is low (an average
of 12.3 people per square kilometer) and the inhabitants are highly dis-
persed. Annual population growth rates are low, due in large part to a
tendency of the population to migrate out, especially to Panama City.!/
1/ Between 1960 and 1970,16 of the 17 districts had annual growth rates
of less than 2% (the national average for this period was 3.1%). Veraguas
and Chiriqui were the provinces with the highest level of outmigration.




METROPOLITAN
REC.GION

IM MAP 1
INCIDENCE OF RURAL POVERTY

REGION

CENTRAL REGION

EAST E RN




6E S TER Nt

CEN.TRRL

0 IH
MAP 2
FOCUS FOR RURAL DEVELOPMENT

2-aN




- 12 -

The majority of the population in the eastern districts of Veraguas
as well as those of Colon and Cocle is Hispanic. The western districts
of Veraguas and the eastern districts of Chiriqui also have the nation's
major concentration of the country's 50,000 Guaymi Indians. /
Economic Activity of the Population
The vast majority (87%) of the farm population in this predominantly
agricultural area are dedicated to subsistence farming. Most subsistence
farm families occupy land that is inadequate for cultivation. / Very few
(less than 10%) have legal title to their land. Most farmers use slash
and burn techniques to clear land for cultivation. Seeds are sown by
hand without tilling, and no chemical products are utilized. In 1970,
only 16% of the farmers in this area received credit and 3% received
technical assistance. Virtually none use mechanical power of any kind.
While some families change the location of their homestead every few years
as they slash and burn further into the frontier area, most stay in the
same general vicinity and alternate production on various dispersed plots.
During the off-season male heads of household often obtain off-farm
wages for short, intermittent periods on neighbors'cattle ranches. Some
also migrate to western Chiriqui, where they obtain seasonal work for
several weeks to several months a year on sugar and coffee plantations.
1/ Given their extremely limited access to services, the Guaymi are a
group that merits study and possibly special attention. A FY 1979 Mission
grant project will finance studies of the Guaymi and pilot development
activities which should produce considerable new information on the
development needs of the Guaymi.
2/ Most of the terrain is mountainous and the majority (80%) of the soils
are unsuitable for cultivation (e.g. types VI, VII, and VIII).




- 13 -

Opportunities for off-farm employment for women are minimal, a factor that
contributes to the high incidence of out-migration among younger women,
mainly to Panama City. /
Future prospects for productive use of the natural resource basein this
area are limited. Poor soils and steeply sloping terrain make this area
suitable primarily for natural forest and tree crops, with some areas
suitable for cattle grazing. However, increasing amounts of land are
being converted to unappropriate uses. Forests are being cut and burned
by subsistence farmers to make way for small agricultural plots. Once
the soils on these 'lands are exhausted the farmers move on to other areas,
often leaving the land open to exploitation by cattle ranchers. Outside
of the copper deposits in Tole, there are no other known mineral deposits
with marketable potential.
Selected Indicators
The majority of the houses in this area have dirt floors and they
still lack electricity, potable water, and sanitary facilities (see
Graph 1). Access to health services in this area is also minimal. In
1970 these districts had an average of 0.6 doctors for every 10,000
inhabitants. By 1977 this figure had risen only to 0.8 (the national
average for 1977 was 6.0). Most births (67.6%) are still unattended by
either a physician or a nurse.
1/ Migration data from the 1970 Census reveal that in the province of
Veraguas women made up over half (53%) of the migrant population. Over
two thirds (65%) of these women were young (ages 15 to 24) and nearly
half (48%) either had never been to school or had an incomplete primary
education. The majority took extremely low paying jobs in the service
sector (as domestics). All or part of the salary earnings were sent
back home to help supplement family income.




- 14 -

Houses with Dirt Floors

Houses without Electricity

NATIONAL
AVERAGE
O

Houses Lacking an Approved
Water Source

NATIONAL
AVERAGE

Houses Lacking Approved
Sanitary Facilities

NATIONAL
AVERAGE

W 4
H U

GRAPH 1

HOUSING CONDITIONS IN FOUR OF THE SEVENTEEN TARGET DISTRICTS, 1970
POPULATION CENSUS

NATIONAL
AVERAGE




- 15 -

Results of a recent survey of malnutrition in the province of Vera-
guas indicate that a large proportion of the population (79% of the 1
through 4 year olds and 70% of the 5 through 17 year olds) were malnour-
ished. Malnutrition was particularly severe among the 1 to 4 old group -
29% were found to be in second degree malnutrition and 5% in third degree.
These figures were much higher than corresponding national level figures
obtained in 1967 (10.8% of the I to 4 year old group in second degree
malnutrition and 1.1% in third degree) and suggest that malnutrition,
rather than decreasing,actually may be increasing.
According to district level projections for 1975, over 45% of the
adult population ages 15-39 in this area was illiterate. Of the remain-
ing 55%, most had no more than two or three years of schooling. 1/
While it may be assumed that the major portion of this latter group can
read and write and do basic calculations, their low level of education
hardly prepares them adequately for employment in sectors that require a
minimum of certain basic skills.
Although the GOP has made strides in recent years in attending to the
educational needs of the primary school age population throughout rural
Panama (1977 enrollment data indicate that in this region most primary
school age children are in school), GOP activities oriented toward re-
ducing literacy among adults and increasing their skills remain very
limited.
1/ Opinion of Ministry of Education officials in the absence of
statistical data.




- 16 -

4. Urban Poverty
In addition to the poverty line data presented in Section 2,
above, three key sets of indicators unemployment, underemployment, and
housing conditions are used to describe poverty in urban Panama and
Colon. Unemployment and underemployment have been chosen as they have a
direct bearing on the welfare of the urban poor who depend on cash income
to fulfill the majority of their basic needs. General indicators of hous-
ing conditions (type of housing, crowding, existence of non-approved or
shared water and sanitary facilities) as well as access to housing and
employment services help shed further light on the extent to which the
urban poor are receiving the assistance they need in order to incorporate
themselves into the modern sector.
As is illustrated in the discussion below, urban Panama's number one
current problem is unemployment. Faced with a stagnation in the job
market plus a rapidly increasing population, Panama City and Colon are
confronted with a poverty problem that, if not checked, could reach
crisis proportions by the year 2000.
Unemployment and Underemployment
An estimated 790,000 people (43% of Panama's population) currently
live in the urban areas of Panama and Colon. Panama's Department of
Statistics and Census estimates that by the year 2000 approximately
1,600,000 people, or nearly 57% of the country's estimated population of
2,823,000 will be living in this area. 1-
1/ This rapid rate of population growth in urban Panama and Colon is due
both to the forces of natural growth and migration. During the 1960's and
earlier migrants accounted for the major part of this growth. Attracted
by both the jobs and services available in Panama City, migrants flooded




- 17 -

Population Projections for Urban Panama & Colon
Percentage of
Year Population Total Population
1960 383,000 34.9
1970 597,000 40.8
1980 864,000 45.6
1990 1,203,000 51.2
2000 1,600,000 56.7
In an economy with a rapid rate of economic growth such as Panama
enjoyed in the late 1960's and early 1970's, providing jobs for this
steadily increasing population is within the realm of the possible. How-
ever, since 1974 the number of jobs has actually declined and unemploy-
ment has soared. Moreover, equivalent unemployment (unemployment plus
estimated underemployment) in the Metropolitan areas is now over
35%. Equally as significant, the non-economically active population has
steadily increased.
Labor Force Trends for the Metropolitan Region
1974-1977
1974 1975 1976 1977
Total population 15 years & over 455,800 478,630 501,060 534,260
Economically Active Population 280,300 284,100 279,760 289,680
Percentage total 61.5 59.4 55.8 54.2
Employed 260,400 259,030 254,920 256,000
Unemployed 19,900 25,070 24,840 33,680
Percentage EAP 7.1 8.8 8.9 11.6
Non Economically Active Population 175,500 194,530 221,300 244,580
PercentaF- total 38.5 40.6 44.2 45.8
the job market with unskilled labor (in 1970 40% of migrants 15 and over
had either no education whatsoever or an incomplete primary education; the
comparable figure for Panama district was 33%). While migrants continue
to account for a sizable proportion of the population growth, it is
estimated that by the end of the next decade, the forces of natural growth
alone will be responsible for over 60% of urban Panama's population increase.




- 18 -

Underemployment, a chronic problem among the agricultural labor force
in rural areas, has also increased in the Metropolitan area in recent
years. In 1975 it was estimated that approximately 70,000 workers (28%)
in the Metropolitan labor force were underemployed. A high proportion
was concentrated in the service sector which, as is indicated below, is
the only major sector where the number of jobs has increased appreciably
over the last eight years.

Employment in the Metropolitan Area by Sector
1970 1978

Services
Industry
Commerce
Construction

Number
70,300
27,100
42,800
14,900

%
31.7
12.2
19.3
6.7

Number
96,720
32,460
48,460
18,690

%
34.7
11.6
17.4
6.7

This concentration of employment in services has important ramifica-
tions for the poor, as wages in this sector are not only low, they are
also not subject to much increase. 1/ Areas of the service sector such
as domestic services also have the major concentration of unskilled
workers. In 1975,70% of those employed in this area had a sixth grade
education or less.
Unemployment and underemployment are particularly high among women
and among the young. In 1977 14% of the female labor force was unemployed
and approximately 44% was underemployed. (the comparable figures for men
were 10% and 18%, respectively). Female employment in urban Panama is
1/ Between 1974 and 1976 average weekly wages in the non-government
services declined by 1%. Wages in commerce and industry, on the other
hand, increased 5% and 16%, respectively.




- 19 -

concentrated overwhelmingly in the service sector, and wages paid to women
are both lower than those for males and increase at a much slower rate.
Unemployment rates among individuals 15 to 19 and 20 to 24 (1975 figures
including both men and women) were 20.9% and 14.7%, respectively. While
the data base necessary to calculate underemployment among those 25 and
younger is unavailable, it may be assumed that there is a high incidence
of underemployment in this group as well.
Both women and the young in the Metropolitan area are relatively low
participants in the labor force and their participation seems to fluctuate
strongly as the job market alternatively expands and contracts. 11 Given
the opportunity, however, both groups would join the labor force in far
greater numbers. Experience with the GOP's Emergency Employment Program 2/
provides a case in point with regard to women: 42% of the 16,700 women
hired under the Program were not actively seeking employment at the time.
Housing Conditions
According to the 1970 Census, a significant portion of the inhabit-
ants of both cities lived in crowded conditions in shacks or tenements,
and over half either had no access to an approved water source or shared
1/ The percentage of economically active women in the Metropolitan area
rose from 35.1% in 1970 to 40.8% in 1974 and declined to 37.9% in 1978
as a result of Panama's economic recession. The percentage of economi-
cally active 15 19 year olds in the Metropolitan region declined from
44.8% in 1970 to 25.8% in 1975. (Some of the latter decline is a reflec-
tion of increased secondary and post-secondary education opportunities
over this period.)
2/ The Emergency Employment Plan was initiated in 1977 to serve as a
temporary stop gap measure to deal with the unemployment problem.
Public service jobs at monthly salaries of $100 were given to 24,000
individuals. Thelcompetition for these jobs was very high.




A
k A




- 20 -

a communal facility. Significant proportions of both cities' populations
lacked sanitary facilities or shared sanitary facilities with their
neighbors.
Housing Conditions in Panama & Colon, 1970 Census
PANAMA COLON
Number % Number %
Total population 444,338 100 67,874 100
Inhabitants living in
substandard housing!i/ 143,352 32 41,980 61
Inhabitants with non-
approved or communal
water source 235,499 53 44,660 64
Inhabitants with non-
approved or communal
sanitary facilities 173,291 39 44,660 65
Summarized in the following table are a number of individual studies
carried out by the Ministry of Housing in 1974-75 of typical slum commu-
nities of Panama City and Colon, characterized by inadequate housing,
water supply and sanitary facilities. The majority of the 8,800 families
(36,900 people) living in these barriadas had family incomes below $200
per month,i.e. below the poverty line. Only about two thirds of the
heads of household reported they had full time employment. Informed
sources suggest that rather than decreasing the number of people living
in these types of communities has actually increased over recent years.

1/ Shacks or tenements with a ratio of 3 or more inhabitants per room.




SURVEYS OF LOW INCOME NEIGHBORHOODS IN PANAMA AND COLON

NEIGHBORHOOD DATE OF INHABITANTS FAMILIES PERCENT FAMILIES PERCENT HOUSEHOLD
STUDY WITH INCOME LESS HEADS EMPLOYED
THAN $200 A MONTH FULL TIME
PANAMA
Viejo Veranillo 1974 2262 459 59 69
Santa Cruz 1975 4439 1169 55 77
Boca la Caja 1975 939 182 52 --
Brooklyncito 1975 683 139 64 70
Chorrillo 1 1973 6043 1474 55 72
Chorrillo 2 1973 3635 869 58 --
CurundG 1970 7818 1525 72 52
COLON
Barrio Norte 1975 6557 1663 56 62
Barrio Sur 1975 635 239 65 --
Pueblo Nuevo 1975 1846 504 62 54
La Playita 1974 635 222 61 55
Manzana 44 1974 529 142 61 --
Bamboo Lane 1975 858 239 65 65

Source: Department of Social Affairs, Ministry of Housing




- 22 -

B. Identification of the causes of poverty
The discussion in Section A highlights, for the two target areas
selected for special attention, a number of characteristics of the poor
which while themselves descriptive of poverty are also factors con-
tributing to its existence. Three general causative factors stand out:
(1) An extremely limited natural resource base.
(2) Extreme isolation of a large proportion of the rural population.
(3) Very limited education and skill levels in both rural and urban
areas.
The consequences of the above for the poor are obvious:
(1) Low quality soils which are rapidly becoming depleted of what
little nutrients they have, in combination with a lack of alternative
employment, severely limit the productive potential both present and
future of the majority of small farmers.
(2) Isolation makes access to vital education and health services
difficult. It also inhibits access to support services (e.g. inputs,
technical assistance, credit) needed to increase farm productivity.
(3) Low education and skill levels hold down productivity of both
the rural and urban Poor by limiting opportunities for the rural poor to
utilize better technologies and expand into new activities, while locking
the urban poor into a limited array of employment opportunities, all in
areas where wages and opportunities for advancement are low.
These three factors limited natural resources, isolation, and low
skill levels are all keys to understanding the causes of poverty in
Panama. In order to further unravel the causal chain, it is necessary
also to consider a series of factors that are closely linked to Panama's




- 23 -

recent, severe, and continuing economic recession. This recession, which
began in 1974, has manifested itself in near zero economic growth since
1974, a trade deficit that climbed to $500 million in 1974 where it has
remained, a 7 percent drop in per capita GDP, and as already pointed
out in Section A a stagnant job market.
1. Concentration of Panama's economy in the tertiary sector.
Panama's strategic location and the presence of the Canal make it
a natural center for commerce and other service activities. Since the
turn of the century, Panama has exploited its location, promoting an open,
dynamic service sector clustered in the Metropolitan corridor along the
Canal. Of Panama's 1977 GDP of $2254 million, 53% was derived from
service activities. Manufacturing accounted for only 20%, agriculture
1/
16%, construction 5%, and the Canal Zone 6%.- Both commercial and other
services activities have benefited from the GOP's liberal banking policies
which have made Panama a major regional financial center.2/
Panama's increased reliance on tertiary sector activities in place
of the primary and secondary sectors has had three negative consequences
1/ The Canal Zone 6% covers only wages of Panamanian employees; the $261
million direct balance of payments flow from the Canal Zone to Panama in
1977 was 11 percent of GDP. Applying an export multiplier plus inclusion
of other indirect benefits result in an overall contribution of the Canal
Zone to Panama's economy which is much greater than indicated by the
direct benefits.
2/ Panama has no central bank. A government owned commercial bank the
National Bank of Panama performs many of the normal functions of a central
bank; however, it does not issue Panama's currency,the "balboa". Instead
the main medium the U.S. dollar circulates freely. While this provides
Panama with the monetary stability it needs both to attract outside private
investment (esp. private commercial banks of which there are now some 81 in
operation) and to finance many of its large scale development projects, it
has the marked disadvantage of restricting Panama's ability to use monetary
policy as an effective instrument of economic management.




- 24 -

for the poor: (a) That once represented a plentiful source of low-skilled
jobs, and thus a drawing card for rural migrants, has dried up. Neverthe-'
less thousands of migrants continue streaming into the Metropolitan
corridor in hopes of getting jobs in these areas. (b) Unlike agriculture
and industry, which as a rule tend to generate additional jobs in related
activities, new activities in the services sector do not result in the
spontaneous generation of secondary employment. (c) As already illustrated
in Section A, a significant proportion of services sector jobs pay very low
wages, thus further contributing to the underemployment problem.
2. Excessive dependence on imports and limited exports.
In keeping with its tradition of serving as a funnel for world
commerce, Panama h's allowed goods to move in and out of the country quite
freely, keeping import quotas for many articles at a minimum. While this
has obviously benefited the commercial sector and permitted it (at least
until recently) to thrive, it has served as a deterrent to small, locally
oriented industry, and thus limited opportunities for creating additional
jobs. Dependence on imports, from basic commodities to finished consumer
products, has also had a negative impact on the disposable income of the
poor. In 1974, when world oil prices skyrocketed, the consumer price
index in Panama leaped upwards correspondingly. Between 1973-1977,
consumer prices rose at an annual rate of over 8%. .As described in..
Section A, wage increases in sectors employing a large proportion of the
urban poor during this latter period ranged from 0 to only 2.7% per year.
Panama's dependence on a limited array of exports has also in
recent years had a negative impact on its balance of payments. Panama's
only recourse to date for redressing trade imbalances has been attempts




- 25 -

to increase exports of traditional, largely primary, products such as
bananas, petroleum products, shrimp, and sugar. However, the drastic
drop in the world price of sugar and declining demand for Panama's
petroleum products have made this difficult. Panama is currently making
a concerted effort further to expand its export base to include non-
traditional (both primary and secondary) products, but identifying
appropriate non-traditional exports, markets for these exports, and
attracting needed private investment remain a difficult challenge, due
in large part to Panama's increasing high wage structure which makes it
less competitive with nearby countries. Meanwhile the urban and rural
poor are losing out both on past job opportunities that actually crumbled
and on future job opportunities that have yet to materialize.
3. Decline in Private Investment
Private investment in Panama has declined steadily over the past
five years, to a 1977 level that in real terms was only one third of the
peak reached in 1973. This resulted in a stagnation of the economy and
a steadily shrinking job market, since the expansion of public sector
investment was not sufficient to prevent a drop in overall investment.
Private investor interest waned as promising commercial and industrial
investment prospects played out. Government policies further discouraged
investors.
The Labor Code was made highly pro-labor and more expensive to
employers in 1971, further raising Panama's already high cost labor
structure. The government took over ownership and operation of all
public utilities in recent years and made a few incursions into the
normal private sector arena (e.g. sugar, cement), causing private investor




- 26 -

apprehension over possible future public sector takeover in their areas
of investment interest. Uncertainty over Canal treaty negotiations, and
now treaty implementation concerns have also been unsettling factors.
Panama's new government, however, has made resumption of economic
growth a priority concern, clearly recognizing the predominant role of
private sector investment in generating that growth. In an attempt to
attract private investment, revisions of current economic and labor
policies are being designed and the GOP is looking at the semi-autonomous
government enterprises, with a view to possibly reducing their role in
the economy. The government's fledgling industrial development financing
institution, COFINA, is steadily expanding its efforts to offer finan-
cial support to a Widening range of profitable new private investment
opportunities in Panama.
Rekindling private investment is, however, a challenging task
and one in which the GOP needs outside help. Profitable investment areas
and markets need to be researched and credit mechanisms expanded. In
addition, the Canal transition will offer some investment opportunities,
and if handled smoothly and efficiently it can contribute to restoring
private sector cov idence.
C. Host Country Plans, Commitment and Progress
Development Plan
Despite Panama's economic stagnation, the GOP over the past ten years
has made a major, essentially successful effort to improve the lot of the
poor and disadvantaged. The "Revolutionary Government"which has been in
power since 1968 set as its general objectives a more complete integration
of the country, improved social and economic conditions of the poor through
income redistribution, and strengthened bases of economic growth.




- 27 -

In striving to accomplish these objectives, the government sub-
stantially increased its involvement in both the social and economic
life of the nation during that time. For example, education and health
programs were greatly expanded and extended into the provinces, and an
agrarian reform program was initiated. Major investments in economic
infrastructure were made, primarily in transportation, power, and
communications. A new labor code was instituted which was decidedly
pro-labor.
The GOP's overall development strategy was formalized in its National
Development Plan for 1976-1980. This plan defines development policies
with respect to six major objectives and identifies the means to be em-
ployed for their achievement. These policies cover (1) increased
popular participation and improved distribution of economic benefits;
(2) accelerated, diversified, sustained economic growth; (3) greater
regional integration; (4) more effective utilization of public finances;
(5) strengthened public sector institutions; (6) more autonomous and in-
dependent development.
With strong commitment backed by significantly increased public invest-
ment, the Government has made great strides towards achieving many of its
objectives. In general, the GOP's social programs have had considerable
success, whereas its production programs have produced mixed results.
Performance
With regard to social objectives, progress on the national level as
measured by key indicators has been impressive and is especially note-
worthy for rural areas. The following table presents data on important
health indicators, pointing up some results of the GOP's efforts to re-
duce rural/urban inequalities.




- 28 -

1967 1977
Nat ional Rural Nat ional Rural
1. Death rate 6.8 7.7 4.4 4.5
2. Infant mortality 42.7 49.7 28.1 29.3
3. % Population with
potable water 64.5 34.7 82.5 63.8
4. % Population with
sanitary facilities 73.2 62.2 88.3 78.9
Progress on other indicators for the national level over a similar
time frame show illiteracy decreasing from 26.7% to 13.8%, the birth
rate declining from 38.9 per thousand to 28.4, and population growth
rate from 3.3% to 2.6% per year.
Commitment to improved access by low income agricultural producers
has been strong, but progress has been slow. The GOP has established
a system of price supports and controlled marketing margins, and a gov-
ernment agency purchases several basic commodities from producers to
support the market for their crops. The government has supported some
200 asentamientos with over 7,000 families participating in a program
which provides lnid title, credit, technical assistance and other ser-
vices to these organized groups. To date, few asentamientos have
achieved financi1. viability, and the GOP absorbs their losses. The GOP
also assists the cooperative movement and other group arrangements.
The political system has been designed to increase the participation
of the less advantaged segments of the population in the decision-making
process. The elected representatives of the smallest political sub-
division (the corregimiento) both serve their local area and comprise the




- 29 -

National Assembly. This political/administrative system is intentionally
biased towards the rural areas, where the bulk of the poor have tradi-
tionally been located.
The data on the key indicators show that most Panamanians are con-
siderably better off as a result of the development which has taken place
over the past ten years. There is no indication that development has
adversely affected any given group, although the recent economic stagna-
tion has obviously struck hardest at the poor, particularly the urban
poor. Further detail on these topics may be found in the Mission's 102(d)
report in TOAID A-71 of October 23, 1978.
Development Budget
The GOP's consolidated national budget for 1979 calls for expenditures
of $854 million, comprising about one third of estimated GDP. Central
Government current revenues of $453 million are expected to cover only
current expenditures, leaving the investment program to be financed
principally by foreign borrowing, as has been the pattern in recent years.
Over one third of the current expenditure budget will be taken up by
interest and transfer payments. Among the ministries, the largest
allocation goes to education -- 18.5%. The health ministry receives
8.3% and agriculture 2.6%. An estimated 7% goes for defense spending,
which as usual will come to less than 1% of GDP. The largest allocations
in the public sector investment budget are for physical infrastructure --
18% for electricity (hydropower development) and 17% for transportation
(roads, ports, airports). Agriculture receives 15% and commerce and
industry 8%.
One of the most noteworthy characteristics of the development plan was
the continuing high level of public sector investment. In an attempt to




- 30 -

offset the effects of the severe decline in private investment which
began in 1975, the GOP stepped up public sector investment. from $75
million per year in 1970-1975 (5% of GDP) to $400 million per year
during 1976-1978 (18% of GDP). This increased investment program re-
quired huge increases in public borrowing, mostly from abroad, since the
government felt constrained on both political and economic grounds to
attempt to self-finance much of the program through increased taxes
during a time of recession, although a 5% sales tax was instituted in
1977.
The high level of public investment and external financing has in-
creased the demands placed upon the public institutions which in turn
has required that they be made more effective and efficient. Moreover, the
burden on them will increase as Panama assumes its new responsibilities
for the Zone and the Canal. The government's planning and project devel-
opment capabilities are qite impressive even as measured by strict uni-
versal standards. There are, however, still some weaknesses in project
management and administration when measured by absolute standards. By
relative standards the Panama Civil Service is already among the better,
though still not good enough for the high pressure and quality tasks
ahead. The major causes are inadequate coordination and cooperation among
the different public institutions, and the overburdening of the relatively
small group of qualified personnel. This cadre of competent professionals
are simply too few in number and inadequately backstopped at the middle
levels of service.
The GOP is aware of the challenge and has already taken positive steps.
The public enterprises (e.g. utilities, sugar) are to be self-financing,




- 31 -

reorganizations have produced new institutions (e.g., planning and
housing ministries) and government training programs are being coordi-
nated. Moreover, the GOP is now developing a major program which will
combine administrative reform with stepped up training of middle level
public officials.
D. Human Rights
Panama has a record of sustained human rights progress in the last
decade. The GOP has responded vigorously to the need to improve the
standard of living of the poor including free education, health care at
minimal cost, rural credit, price controls on essential foods, and
subsidized housing.
As to respect for integrity of person, reports of degrading treatment
and arbitrary arrest or imprisonment do occur, but such cases are not
common. The inviolability of the home is respected. Respect for civil
and political liberties has increased in the last two years, as witnessed
by a series of political reforms. In ordinary criminal cases, Panamanians
have the benefit of a fair and public trial. In politically sensitive
cases, the judiciary appears to have been susceptible to the influence
of the Executive Branch. Labor unions are free to organize and operate,
and the government frequently solicits labor's views before making domestic
policy decisions. While political participation has been limited, political
parties are now able to function again, greater freedom of expression is
allowed, and there is a genuine give-and-take at the local level. Locally
elected representatives comprise the National Assembly which funnels local
concerns to the national level and, in the recent past, elected the
President and Vice President of the country. Future presidential elec-
tions will be by direct popular vote.




- 32 -

E. Other Donors
Over the past few years, other donor activity in Panama has been
substantial. IFI lending reached a peak in 1977 when the IDB provided
$122 million for hydroelectric power and tourism development and the
IBRD provided $57.7 million for hydroelectric power, livestock develop-
ment and improvements in the fishing fleet. Assistance from the IDB and
IBRD was more limited in 1978, totalling $31 million for a pre-investment
fund, agricultural credit and highway maintenance. While both banks
generally finance capital intensive projects, with a concentration on
physical infrastructure, increasing attention is being given to social
projects, particularly by the IDB. Projects under development continue
this mix, including support of university education, tree crops, industrial
credit, urban development, and power distribution. Current plans for 1979
indicate a total lending level of about $50 million.
The UN system provided in 1977 about $1.6 million in technical
assistance, about evenly divided between the UNDP and the specialized
agencies. This assistance went to a number of sectors, with a concentra-
tion in the fields of health, agriculture, transportation and communications,
and social and economic planning. New UN projects emphasize agriculture,
industrial development, and regional planning. UNDP assistance increased
to over $1.3 million in 1978 and is programmed to remain over $1.0 million
through 1981.
Bilateral programs of the DAC countries consist primarily of procure-
ment credits and scholarships, with most programs being under $100,000
per year, accorinting for about $1.6 million in 1977. OAS and IICA activ-
ities consist mainly of advisors and scholarships and represent about
$500,000 per year.




- 33 -

Donor activities are effectively coordinated in two ways. A strong
Ministry of Planning and Economic Policy is the major counterpart agency
for all donors at the policy level and coordinates all technical cooper-
ation activities. There are also formal and informal coordinating
mechanisms among the donors which are more than satisfactory.
All major donors pursue similar objectives, employing differing but
complementary means. The IDB and IBRD tend to concentrate their assis-
tance on infrastructure projects. The UNDP, OAS and other bilateral
donors focus on relatively small technical assistance activities. The
A.I.D. program fills a gap helping to assure that both the GOP and the
other donors do not ignore the interests of the poor in their consider-
ation of overall economic development needs.
F. Outlook
A newly elected government took office in October, 1978, and work on
a new five year development plan has already been initiated. The devel-
opment strategy revealed so far by the new government does not differ
significantly fromthatof the past ten years. The new President has
listed the high cost of living, unemployment and integrated national de-
velopment as primary concerns and defined the following medium term devel-
opment objectives: resumption of economic growth with better social and
regional distribution; expansion of employment and increased housing
construction; more political democratization; a more efficient public
sector; better quality of education; greater respect for human rights;
improved foreign relations, especially with the U.S.; and better utili-
zation and protection of natural resources. A basic policy of fiscal
austerity will be followed, in recognition of the government's continuing




- 34 -

financial problems. Social services, however, are to be further extend-
ed. The key role of private investment is emphasized. Greater efficiency
in public enterprises will be sought and additional resources will be
directed to Panama's agricultural development. Industrial, transportation,
and energy projects will continue to be developed, with emphasis on the
impact they will have on export promotion.
It is recognized that economic growth is pre-requisite to the attain-
ment of Panama's development goals. From the standpoint of poverty and
human suffering'. the core problem for Panama has become the demise of
the growth of ibs economy. This economy can no longer support the non-
productive poor and jobless at levels recently achieved through the
government's redistribution efforts. In its own words: "Before we can
contemplate thelideological choices for the distribution of our wealth,
we must first reate that wealth. One cannot distribute imaginary
wealth".
The government recognizes that resumption of growth is a first step
if the problem of Panama's poverty is not to worsen. It also recognizes
the predominant role of the private sector in generating economic growth.
Accordingly, the government is making a major effort to assure the private
sector of its cooperation, and to enlist their support in a joint effort
to set the economy on a long term expansion path. One vehicle for an
improved government/business dialogue is a newly formed Economic Advisory
Council, composed of representatives of business, labor, and agriculture
whichis to study and make recommendations on economic policy.
In addition, the GOP is banking heavily on the resources it will
receive under the Canal treaties. Plans call for expansion of the rail-
road, construction of a modern container port, and expansion of the Free




- 35 -

Zone. These and other projects are expected to generate ancillary in-
vestment by the private sector. Also, the increased revenue the COP will
receive from the Canal operation should help relieve the financial pres-
sure currently facing the government. It should reduce the high level
of commercial financing which the Government has required to continue
the current level of public sector investment with the assistance of
additional concessional financing.
A new wave of private investment activity could, therefore, take
place in the near future if the GOP succeeds in gaining the confidence
and support of the business community, and if it does not stumble in
taking on its new responsibilities under the treaties. An increased in-
vestment level, however, is not likely to be sustained by these means
alone, since most of the same constraints on growth that have led to the
current economic stagnation will continue to exist. Nonetheless, ex-
pectations of increased employment opportunities will likely attract still
more workers from the provinces to the Metropolitan area seeking jobs
which are likely to prove temporary, adding to the already unmanageable
problems of urban housing, sanitation, and social services.
One of Panama's most serious obstacles to the achievement of sustained
economic growth has been high labor costs, which have limited export
expansion. High wages and benefits for Panamanian employees of the Canal
Zone will continue to exert upward pressures on wage levels throughout
Panama beyond what would normally develop from international or other
domestic causes. This will tend to further inhibit private investment,
particularly in labor intensive activities, and have the familiar negative
impact on employment and the balance of payments.




- 36 -

Under these circumstances, which are certain to be a permanent part
of the economic scene in Panama, it would appear to be futile policy for
Panama to strive to increase permanent employment opportunities for poor,
unskilled workers. Rather, GOP strategy for the longer run should aim
at an across-the-board upgrading of the skill level of the entire labor
force, including 'the minimum skill level of the mass of Panamanian work-
ers, both urban And rural. Only through higher productive capabilities
of Panamanian labor, in general, can the private sector justify the high
labor costs it muist pay, i.e., achieve lower real wage costs and thereby
improve its international competitiveness. This in turn means that GOP
development strategy should encourage primarily the development of those
industries or activities whose output requires relatively high skill
labor inputs. For maximum effectiveness, it will also require a more
flexible GOP labor/wage policy, in which the productivity issue should
be factored in as a major element.
This approach should steadily open up additional profitable investment
opportunities in Panama, create jobs, establish the economy on a firm
expansion path, And develop the bases for permanent, sustained growth.
The number of hard core unemployable, unskilled workers would be reduced
rapidly to levels constituting a lesser drag on the economy and on the
public sector in providing for the welfare needs of the poor. Ultimately,
the inhibiting 6load on both the economy and the public budget of poverty
and unemployment would be reduced to the lowest practicable limit.
In Part II which follows, we identify and describe five specific courses
of action by which AID can help Panama achieve these goals.




- 37 -

PART II STRATEGY
A. Long range goals and intermediate targets
Panama is destined either to remain poor with a more urban
than rural complexion or to flourish as a hub of international
financial, communications and trade services, and as a producer of high
technology products for export, with a healthy balance and complemen-
tarity of roles among the two main cities, a dozen small cities, and
the rural areas.
The immediate goal is to bring all remaining rural poor into
the economy. The rural population is now almost evenly divided among
those who have crossed over the poverty line and those who have not.
There is momentum, however, so that the goal already half-won seems
progressively more attainable. The combination of a geographically
focused rural development program with an intermediate city-market
town program is intended both to complete the integration of all
families into the economy and to secure a permanently healthy economic
growth posture in the Panamanian countryside. Small, medium and
large scale farming on the one hand will interact profitably with
flourishing agro-industries and services and with a growing national
market on the other.
The long range goals are to return the Panamanian economy to
a condition of rapid, sustained growth and, on this basis, to share
the benefits of such growth among all Panamanians. Stated another way,
the aim is to attain and sustain full employment with the labor force
gaining its fair share of the proceeds of production.




- 38 -

Given Panama's size, location and natural and human resources
bases, we see no other way for the country to go than to aim to be a
high technology economy, strong in international financial trade
services, in a diversified program of exports of agricultural and agro-
industrial products and in manufactures competitive in world trade.
The Hong Kong,Singapore, and Taiwan models come to mind, as each has
been highly successful with strategies tailored to its own unique
circumstances. Panama and these island economies have much in common,
including an intrinsically talented human resource base. While its
maturation is yet incomplete,the human potential is there. So is the
superb geograpbc location -- the world's Broadway and 42nd Street.,
B. AID Assistance Strategy
1. Areas and Sectors of Development
The Introduction and Summary made clear, and the data on
poverty demonstrated that development in Panama will be coursing along
5 main streams over the next 20 years. Two are of short and intermediate
term. Three are the long range development efforts necessary to establish
and make permanent a good quality of life for all Panamanians. As
planned by the GOP and supported by AID and other donors, some have
been initiated and all five will be operative during this current
CDSS period, 1981-85. How much longer the GOP and other donors may
find it necessary to continue with each such program is not now pre-
dictable. As for AID, we propose to conclude our participation in
Rural Area Development at the end of 1985, and in Rural Growth Centers
by the end of 1989. Employment Creation, Environmental Enhancement,
and Human Resources Development we see as needing also to be launched




- 39 -

in force now. They are as urgent as the others. But they are more
difficult, less is known about how to deal with them, and results
will be harder to achieve and slower in coming. By their nature they
are complex, conglomerates of problems and opportunities where the
best that the sciences have to offer needs to be woven into the de-
signs for their solutions. We see these three assuming growing
importance in AID's support activities during the decade of the 1980's
and as the principal foci of AID's efforts in the 1990's.
2. Role of Other Donors
We expect bi-lateral aid from other developed countries
to be of an ad hoc, targets of opportunity nature. The World Bank
and the IDB will continue to be the principal external sources of the
capital needed to complete the financing of high cost programs,
particularly infrastructure. In both rural development and in
employment creation, we would expect these I.F.I.'s to continue to
supply substantial external capital for highways, power, water,
industries, and transportation. UNDP, both because its funds are
limited, like ours, and because it is also similarly interested
in experimenting with new projects will be AID's closest collaborator.
While we expect the whole external aid complex to be complementary,
UNDP-AID collaboration will be from close to intimate, including
joint projects.
3. Intended Areas of AID Assistance and the Problems They
Address
I. Rural Development




- 40 -

The analytical description of the poor reveals a
number of interesting things about Panama's poverty and the country's
efforts to defeat it. There is less rural poverty than 10 years ago
or than in many other countries. Some 55% of rural families still live
below the poverty line, as described in IA, and the heaviest concen-
tration of these live in 17 districts of 5 Provinces which are
contiguous geographically and the people have 5 basic common character-
istics: (1) they live in the mountains beyond the roads; (2) they live
dispersed, not in villages, (3) they till poor soils; (4) they have low
education and skill levels; and (5) they have limited access to medical
care.
Lack of access is the key to their substandard
condition. They do not have access to the services readily available
to the other half of the rural population, and the government has not
gained access to them, despite the desire to do so. Lack of roads,
dispersion and poor soils have thus kept 55% of the country's rural
population outside a system of economic opportunities and services
that, by developing country standards, is otherwise impressive. The
AID-GOP joint view of this problem is: let's finish the job; let's
face this toughest last portion of the task, identify the complex
issues (e.g. poor soils) and the less complex tasks requiring mainly
muscle and money (e.g. access roads, education and health services),
and bring to.these 17 districts the same standard of life the other
"half' of the country's rural families already enjoy. If the job
can be done in these 17 districts with the help of AID and others,
the GOP can do it in the remaining areas of rural poverty on its own.




- 41 -

Having made this basic decision, the composition of
the program needed to meet the goal is all but self-defining --credit,
extension, marketing, access roads, land tenure rationalization, small
farm systems, health, family planning, and nutrition services, role of
women, cooperatives, etc. all applied to the special problems of each
of the 17 districts. Two interrelated issues will stand out: (1) the
need for many to move to land with better soils -- or through applied re-
search, find ways to make better use of the soils they have; and (2) the
need for a more equitable land tenure pattern. There is much so-called
"government" land but little not claimed as the "possessory rights" of
someone. Five hectares of "possessory rights" land today brings the same
price as five hectares of titled land. Not an easy issue to resolve.
II. Rural Growth and Service Centers
This is a proposal to continue the effort tc lay a
sound economic base in the countryside in order to permit rural, small
farm family development to become self-sustaining. Rural development can-
not sustain itself where the country has only a single urban market. The
effort to bring subsistance farmers into the national economy will die on
the vine without the kind of intermediate regional development which the
GOP has already started and which AID is assisting in project No. 047,
Rural Growth and Service Centers (URBE). This project is just now
becoming operational. We propose that a similar project be phased in
during the CDSS period and that the whole process of intermediate city
development be followed closely to make certain that its objectives
are fully met, both those having to do with small farmer




- 42 -

benefits, and those relating to employment generation, including the
development of productive enterprises based on appropriate new techno-
logies aimed at producing goods for internal Panamanian markets, now
too dependent on imports. We are also interested in the interception
at intermediate points of the families who for the foreseeable future
will migrate because they continue to produce more of themselves than
profitable crops.
III. Employment Creation
Not all of Panama's relative success in dealing with
rural poverty is due to virtue and hard work. Many rural families
were not saved, nor re-cycled, nor brought into the market as producers.
They escaped tol Panama City and Colon. They got away, and now Panama
has a serious urban poverty and unemployment problem. The population
balance has becbme over one-half urban, mostly in Panama City and
Colon, and unemployment levels are high. Unofficial figures which
reflect the real situation suggest that unemployment plus underemploy-
ment are at 35% of the Metropolitan area labor force. Part I under-
scores the plight of the unskilled urban poor migrating into the
Metropolitan corridor. It is here that we find many of the poorest of
the poor. While migration continues, the formation of new jobs
stopped 4 years ago when the economy stopped growing and investment
came to a halt.
In Part I.B we have suggested that the only known
solution is to bring about the resumption of economic growth through
the resumption on a massive scale of private investment.
As noted in Part I B, many of the elements for a




- 43 -

resurgence of private investment are already in place. Government
policy favors it, assumption of Zone resources should encourage it,
there are ample tax and profit repatriation incentives, etc. But we
are convinced that all these favorable factors, including the receipt
of Canal revenues and Zone resources, will not suffice to create
enough permanent new jobs to match the present excess labor supply,
nor to keep up with its growth. Why? Because Panamanian industry
and commerce as constituted today and as they might be expanded with-
out redesign have too little to sell at internationally competitive
prices, and Panama is also as yet not utilizing enough intermediate
technology to supply national market needs that are now unnecessarily
met by imports.
What is needed, as the Part I B analysis shows, is
a new orientation of productive investment toward export oriented,
higher technology industries employing large numbers of highly skilled
workers and toward intermediate technology industries supplying many
potential local markets. Not only do we see that the solution for
Panama requires the resumption of a growing GNP, we do see that
happening primarily through the creation of high and intermediate
technology industries, including agro-industries, and in a diversified
export agriculture sector that does not leave out the small farmer.
Yes, it is a long way from here to there. And that
is where AID comes in. First, we justify our concern for the macro as
well as the micro issues under the mandate because economic stagnation
is, and will continue to be the principal creator of poverty in Panama.
If AID is really concerned about the poor majority in this country,




- 44 -
it must address the problem of employment creation, first, in the cities,
secondarily in the secondary cities, in agro-industry, and in a modernized
export agriculture sector.
How can AID address these needs? We propose to do so by
assisting with '3 parallel programs. The first is already underway --
small city-market town development integrated with rural development. The
second is a program to identify high technology investment opportunities
and to promote investment in them. The third is a massive program of
skills training tailored to the needs of the first Mo. The latter would
be carried out, with AID help, jointly by the Ministries of Education and
Labor in cooperation with the organized Private Sector. The MOE is already
actively involved in a massive program designed to provide applied skills
training within the formal education system starting in the primary grades.
The MOL effortsare complementary with a focus on out-of-school adults who
have low skills levels and are unemployed. While the institutions are
in place, the program will require careful planning and coordination.
The identifying and securing of investments in high
technology enterprises, however, is neither simple of conception nor
execution; nor are the necessary institutions in place. We therefore
propose the following:
1) The creation of the capability in an existing, or
possibly new institution to investigate, research, identify and architect
new high-technology investment opportunities -- a Panamanian Institute
for New Investment and Employment Creation (PINIEC). It would be the
joint creation of the Private Sector and the GOP, and it would have AID
technical and capital (R & D) assistance. One feasible pattern would




- 45 -

be to make the Institute a joint venture of the newly announced
Polytechnic University, the new Agricultural University and the Chambers
of Industry, Commerce and Agriculture.
The Institute would be strongly science and technology
oriented and would be the natural focus of collaboration with inter-
national activities, such as AID's proposed program for technology
exchange and cooperation. The Institute's functions would include
basic and applied research and pilot projects. Once feasible technologies
have been proven, the Institute would offer industrial extension services
and would have a promotion program jointly with its Private Sector
collaborators. Since high technology opportunities are in fact a
continuum from the already relatively well-known to the as yet unknown,
the Institute would have a major extension and promotion program as well
as a research program, from the start. Its long term significance,
however, will lie in the integral combination of the three: research,
extension and promotion. A key element in this program would revolve
around the development of profitable import substitution investment
opportunities, including alternative energy sources and food products.
2) The establishment in Panama of the Productive Credit
Guarantee Program. If the PCGP program is not extended by Congress,
USAID Panama will develop a sui generis project with COFINA and the
National Bank, based on a guarantee fund financed by the Panamanian
institutions and an AID development loan, along the lines of existing
AID land sale guarantee programs.
3) The creation, perhaps through a USAID Project
Agreement with the Chambers of Industry and Commerce, of a program of




- 46 -

USAID-Private Sector joint ventures. AID and private investors' funds
would be made available together to provide joint support to a single
project -- notably projects dealing with labor intensive industries and
social services. We would explore the commingling of AIDandprivate sec-
tor funds and the use of AID guarantees. Potential areas for collaboration
include health facilities in poor communities, assistance to small enter-
prises, day care facilities and other services to facilitate greater
participation of women in the labor market, etc.
4) The implementation of a Housing Investment Guarantee
program focused on the Metropolitan Corridor. This program will both
employ large numbers of people in actual construction and create opportu-
nities for small support businesses,e.g.,doors, window frames, furniture.
No strategy for employment creation would be complete
without addressing the need to slow the creation of employment seekers. As
indicated in Part I.A.,the workforce of the Metropolitan Corridor is
expected to double by the year 2000. Any action which can hold down this
growth enhances the chances of success of the program. Panama has lad
notable success in reducing the population growth and birth rates. To
reinforce the downward trend, USAID will continue a family planning
program. A key focus of this program will be on adolescents who have
become the primelcontributors to Panama's population growth. By collabo-
rating in a vigorous campaign to help young women delay pregnancy, while
providing them with opportunities to upgrade their skills, USAID will be
helping to reduce both population growth and unemployment.
IV. Environmental Protection and Enhancement
The USAID's Watershed Management Project is only the




- 47 -

beginning of the Environment Program Panama wants to carry out. Panama's
natural resources are being depleted rapidly. The specter of resources
shrinking to the point of their being inadequate to support the population
is very real. Panama intends to reverse this trend. It has 9 critical
watersheds, of which the 1979 project deals with only 3. And there are
other environmental problems to be attacked, notably water pollution,
urban blight, and unsanitary sewage disposal. AID expects to assist in
these efforts, concerned about their "pilot" qualities as well as what
these projects can do for Panama alone. In this connection, the fact of
the ceding of the Zone to Panama creates an environmental enhancement
opportunity (or hazard) of great importance. The merger of a protected
Zone with an essentially blighted urban corridor needs to be carried out
so as to preserve the environmental quality of the Zone while solving
the blight problems of the corridor. A HIG program already projected
over the CDSS period will be used to deal with the housing and facilities
problems of the Metropolitan Corridor in this light, and we will provide
specialized T.A. to help the GOP with land use planning.
V. Human Resources Development
Panama's development objectives are ambitious. The re-
invigoration of the economy is a herculean task, and there are no easy
outs. Panama must approximate a Taiwan or a Hong Kong type achievement
by adopting a growth/development strategy suited to its special circumstances.
The private sector needs a quality and quantity of human resources far
beyond that contemplated, until recently. A special element here is the
opportunity Panama has to maximize the use of the resources ceded to it
by the Treaties: the ports, the railroad, the 1,000 square kilometers of




- 48 -
land replete with its resources, etc. These are assets for growth that
Panama can exploit -- if it has the skilled leadership and technicians
to do so.
The quality of human resources in the Public Sector is
crucial. Panama already has an excellent layer of top leaders and
technicians. It, however, lacks the depth the Public Sector must have
if it is to carry out all the development programs needed.
Specifically,we propose to work with Panama in the
development of a massive training program for both the Public and Private
Sectors -- focused on increasing the abilities of hundreds of Panamanians
to plan, organize, and implement development programs, particularly those
aimed at eliminating poverty, establishing and maintaining full employ-
ment, identifying and developing high technology enterprises, and reversing
the natural resource depletion process that, if not reversed, threatens
to make of the development effort a cruel mockery.
This Training Program will consist of the following kinds
of projects:
(1) Graduate level training in all the key fields -- the
training to be providedabroad.
(2) Assistance for curriculum improvement, R & D, etc.
(along with IDB & WB assistance for physical facilities) to build to a
level of excellence the teaching and research capabilities of the Poly-
technic and Agricultural Universities through the Masters degree level.
'3) Assistance to strengthen and improve the 5 Regional
University Branches being developed throughout the country in areas related
to development.




- 49 -

This program will form an integral part of the complex of
institutionaland human resources required to strengthen the scientific
and technological capabilities needed to create and apply new solutions
to the causes of Panama's long term poverty problems. We see a natural
linkage of this complex to such AID-supported initiatives as science and
technology transfer collaboration and Title XII.
Proposal to Alter U.S.G. Organization for Implementing U.S.
Bi-lateral Assistance to Panama, After 1985.
As direct AID concerns with poverty projects per se are replaced,
in the next 8-10 years, by programs aimed at sustaining development, at
raising permanently the capability level of Panama to grapple with its
own problems, and at defending the physical environment and resources
base, the less appropriate seems the typical AID Country Mission of the
past 28 years. The number and diversity of technical subjects and
expertise involved could not be covered even by a very large resident
USAID staff. A wide range of pertinent U.S. technical resources would
need to be focused on particular Panamanian problems involving short and
medium term consultants from a variety of university, industrial, and
governmental sources. U. S. technicians needed for extended periods to
take part in programs of long duration might better work within the
Panamanian establishment, under Panamanian direction. What seems to be
needed on the U. S. side is a small unit attached to the U. S. Mission
that, on the one hand,performs a U. S. assistance programming function,
and,on the other,serves as liaison between U. S. technocracy and Panama's
needs for external expertise. It could appropriately be called the Office
of the Counsellor for Development Sciences and Technology. This may also




- 50 -

imply a need for a different role for AID/W in being able to identify
and supply to a much greater extent than at present resources from
outside its regular staff. This proposed change in organization is not
related to levels of U. S. assistancewhich would not necessarily go
down.
One approach would be to create an autonomous Panamanian Develop-
ment Corporation with which the U.S. would enter into an International
(Executive) Agreement to provide technical and capital assistance as
agreed, either on a project basis, or on the basis of an annual program
budget funded jointly by both governments, or both. The P.D.C. could
also receive assistance from other governments and the I.F.I.'s.
While autonomous,it would be affiliated to the Ministry of Planning
and Economic Policy and would be regarded by the GOP as its principal
economic and social development R & D instrument.




- 51 -

PART III. ASSISTANCE PLANNING LEVEL
From the foregoing sections on poverty, its causes, and the proposed
USAID strategy, it is clear that a modest funding level can produce sig-
nificant results. A pattern can be set which will lead to the elimination
of extreme poverty in the foreseeable future, and assure that positive
action is taken to resolve the problems which would otherwise continue
to generate poverty. While the elimination of present poverty is, if
vigorously pursued, within grasp, the efforts to prevent future poverty
are only in their initial stages.
The Indicative Planning Allocation (IPA) proposed by AID/W for
USAID/Panama for 1985 is a paltry $5 million. This compares with a
program of $21 million in FY 1978, a proposed FY 1979 program of $17
million and similar levels in previous years. The proposed IPA in Pana-
ma represents so drastically rapid a reduction of assistance that it
seems explainable only as computer error.
The proposed IPA is totally inadequate to permit the strategy herein
proposed to be implemented. A five-year Proposed Assistance Planning
Level (PAPL) of $122 million for the CDSS period 1981-85 is the minimum
necessary to support the modest program planned to assist this resource-
poor country break out of its economic stagnation and establish the
bases needed to prevent the worsening of its poverty problems. Growing
urban unemployment and poverty and natural resources depletion, are
companion spectres that now threaten to reduce the imminent conquest of
rural poverty to but a pyrrhic victory.
Justification
An annual funding level of $20 million (adjusted for inflation) from
FY 1981 through FY 1985 will be sufficient to carry out our strategy.




- 52 -
After year five, with the changed character of the program and the
proposed new USAID structure, funding levels may be reconsidered.
We believe that the AID/W proposed IPA of $5 million is highly
unreasonable because:
1. The formula employed gives far too much weight to mean per
capita income (PCY). For most developing countries, the data
base for estimating PCY is highly unreliable. Moreover, reliable
or not, the mean is a meaningless measure of poverty. In Latin
America the thin veneer of a growing modern sector masks a fragile,
vulnerable traditional economy in which the reality is that almost
everyone is poor and the poorer half are typically below even the
Asia-Africa poverty line. The distribution of income is the real
indicator of poverty, and PCY relates to this not at all. A country
like China, for example, is in much better shape with a PCY of
$400 and an income distribution of $250-500 than is the typical
Latin American countrywithaPCY of $1000, whose distribution is
from $40 to $400,000, with the lowest 50% earning from $40 to $150
per capita. We are convinced that PCY, as AID is using it, is highl
misleading. If we have to use a formula, in place of analysis, we

y

strongly suggest that it be the median or mode of the poorest 50%
adjusted as to rural and urban differences and as to the cost of
living variations among countries. The PCY measure is especially
inadequate as applied to Panama due to its dollar based monetary
system and the skewing of the income scale by the high (U.S.) level
wages paid to the employees of the Canal Zone.
2. TheJlPA factor of commitment should be given moreweight.AIDshould




- 53 -

take advantage of the opportunity to help those countries, like
Panama, that share our concern for the poor, to move as rapidly as
possible to eliminate poverty, especially where achieving this is
within our grasp. Countries who join us in this effort can serve
as models. Panama's record on commitment and solid, rapid progress
is superior. The GOP has clearly and unequivocally committed itself
to the elimination of poverty. This is a long term task, but for
many components the objective can be reached in a relatively short
period of time. Panama merits our assistance in these efforts.
3. Modest inputs at the level we propose can produce highly
significant results. Panama has the potential for being a model
of how to eliminate rural poverty and for being a laboratory for
discovering the means effectively to combat urban poverty.l/ The
Agency's broader interests will be served by being able to point
to countries like Panama as examples of successful AID programs.
Countries like Panama could then be listed along with Taiwan and
Korea as success stories, with no caveats about cultural heritage.
l/ With regard to the latter, in addition to their vital importance for
Panama's development, the kinds of programs we undertake here are aimed
at resolving development problems which other countries will need to address
in the next three, five, ten or fifteen years. The proposed efforts in such
areas as urban development, environmental management and alternative energy
will offer a chance to test new concepts based on recently developed approaches
These concepts call for, inter alia, promotion of labor intensive activities
as a key to improving income distribution. These programs offer AID and
other countries the benefit of valuable experience in testing these approaches
at a time when such experience will be particularly relevant to their own
development problems. The growing interest in these problems exhibited by
professional societies as well as private interest groups sponsored by
concerned citizens strengthens the case for responding to these problems.




- 54 -

4. Our assistance will be well used by Panama. Absorptive capacity is
high and will increase as our strategy, with its element of development
administration, is carried out. Assistance at the levels proposed here
can be accomodated without pipeline increases. We believe that absorptive
capacity should be a significant, if not the controlling factor in the
determination of the IPA.
5. Finally, we believe no determination of funding levels for a country
as vital to the U. S. as Panama can justifiably ignore U. S. interests. We
strongly believe the factor of U. S. interests belongs in the calculation
of the IPA. The security and economic interests represented by the Canal
need no exposition here. The safe and efficient operation of this vital
artery of world commerce, of immense importance to the U. S., would be
jeopardized by a socially and politically unstable Panama. The proposed
AID program can play an important role in assuring the essential economic
and social stability and well-being of this key crossroads country.
Proposed Assistai.ce Planning Levels
The following table presents the PAPL required to carry out our
strategy. A number of current and proposed FY 1979 and 1980 projects are
directly related to the various categories shown on the table. These in-
clude ongoing projects in Integrated Rural Development and Rural Growth
and Service Centers. FY 1979 projects include Watershed Management and
Applied Agricultral Research loan projects and a pilot grantin Alternative
Energy Sources. FY 1980 proposals include loans for Workforce Development
(skills upgrading) and Development Planning and Management (public sector
training).




- 55 -

PROPOSED ASSISTANCE PLANNING LEVELS

Fiscal Years ($ Millions)

Categories:
I. Agriculture and
Rural Development
Integrated Rural
Development
Regional Development
Environmental Manage-
ment
II. Education and Human
Resources
Skills Upgrading
Public Sector Train-
ing
III. Selected Development
Activities
Alternative Energy
Investment stimulation/
employment creation
TOTALS

1981 1982 1983 1984 1985 TOTAL

-- 12

-- 10

-- -- -- 12

-- 10 --
-- -- 12

-- 12

-- 14 24
-- -- 12

5 10

In addition to the above amounts, $1.2 million is needed for
tinuing implementation during the FY 81-83 period of the FY 1979
Population II project. PL 480 assistance and Housing Investment
are not included here (see below).

con-
authorized
Guarantees




- 56 -

PL 480
The Mission's current PL-480, Title II activities consist of a Ma-
ternal/Child Health program reaching about 30,000 beneficiaries and a
school feeding program now at the mid-point of a planned phase out.
These activities are implemented through CARE and CRS. The limited re-
cent nutrition data on the USAID target group suggests that malnutrition
is increasing, particularly for children ages 1-4 (see part I. A.). The
Mission has programmed for early 1979 a nutrition study which should
help us better define the nature and size of a continuing Title II
program. It is, as yet, too early to provide planning levels, but we
expect that a MCH program will be needed throughout the period of this
CDSS. Panamanian officials believe that MCH activities are most effec-
tively implemented by relating them to a school feeding program, and this
is one possibility which will be studied.
Housing Investment Guarantees
A HIG program of $75.0 million is programmed over the 1979-1983
period, with its focus on the Metropolitan corridor. Given the size of
the low income housing shortage in the urban areas and the expected
continuation of rapid population growth in the Metropolitan region, we
expect that there will be a demand for HIG programs not only through the
- period of this CDSS, but well beyond.
Considering the expected urban growth and the beneficial effects of
housing construction on primary and secondary employment creation, we
believe that this AID sponsored mechanism for attracting private invest-
ment to social overhead projects will continue to play a major role in
Panama's development. We see the HIG program as not merely complementary




- 57 -

to our strategy of employment creation and economic growth, but absolute-
ly essential. With the ever increasing need for low income housing and
the related employment potential, we propose to continue the HIG activ-
ities after 1983 at an annual rate of about $10.0 million for the fore-
seeable future.
Staffing Implications
During the early years of the period of this CDSS, we view the direct
hire requirements as being essentially what they are now i.e., about
30 USDH and 60 FNDH. As the program emphasis shifts from the more
traditional activities (rural development, growth poles) to those which
are more in the area of the unknown (urban problems, environmental man-
agement, heightened science and technology capability levels, high
technology industrial development), we see less need for regular direct
hire USAID staff and more need for the use of specialized contract
personnel. As discussed in Part II, we particularly see a need for large
numbers of consultants in the fields of science and technology. It is
probable that USDH staff could decline somewhat by 1985, with a propor-
tional reduction of FNDH, while non-USAID personnel needs would be
increasing. When the Panamanian Development Corporation becomes a
reality, direct hire staff could be even less, though with a significant
number of U.S. technicians assigned to the PDC.




Full Text

PAGE 1

A "'A' 41 A 1 0A0 rAE TAE E 4 4.

PAGE 2

P A N AM A Country Development Strategy Statement 1981 -1985 (with a 1986 -99 preview) U. S. Embassy US AID Panama Jan. 3 1, 1 7 9

PAGE 3

P A N A M A COUNTRY DEVELOPMENT STRATEGY STATEMENT TABLE OF CONTENTS Page Introduction and Summary Part I -Analysis Analytical Description of the Poor 5 Identification of the Causes of Poverty 22 Host Country Plans, Commitment and Progress 26 Human Rights 31 Other Donors 32 Outlook 33 Part Il -Strategy Long Range Goals and Intermediate Targets 37 AID Assistance Strategy 38 Part III -Assistance Planning Level Indicative Planning Allocation 51 Proposed Assistance Planning Level 54 Annex I -District Poverty Indicators Annex IIMethodological Annex *Annexes are available at LAC/CEN

PAGE 4

P A N A M A COUNTRY DEVELOPMENT STRATEGY STATEMENT 1981-1985 1986-1999 Introduction and Summary Panama's dominant role in the history of the.Americas is common knowledge. Especially recognized is its function as the crucial artery of communications between North and South America and between the eastern and western halves of the hemisphere. When one spends a few hours at the Miraflores or Gatun locks, however, one learns of a lesser known but perhaps still more important fact. Panama and the Canal provide also a vital link between the Atlantic basin and Eastern Asia. With the reopening of China, this fact assumes tremendous new importance. A quarter of all the world's population is being suddenly brought newly into world commerce, and the Panama Canal is among international trade's most vital organs. Panama has done well in providing a healthful environment for its heavily travelled path between the seas. From the mid 1950's until 1974,the country achieved an economic growth rate of 8% and during the past decade the benefits of this growth have been remarkably well distributed. Especially noteworthy are Panama's progress in alleviating rural poverty and in reducing the population growth rate. Since 1974,however, alarming developments have brought heavy clouds down around the earlier achievements which, if not dispersed soon, could put the country into a serious crisis situation. In a word, Panama has for the past four years been the victim of a disease characteristic of semi-developed countries: --growth arrest. The most crucial current fact

PAGE 5

-2 about the Panamanian economy and society today is not rural poverty but its negative economic growth rate, which is itself the single most important cause of poverty. The rapid growth with equity enjoyed earlier slowed to a halt inithe early 1970's and per capita growth went negative in 1974, where it remains today. Urban unemployment and underemployment are high (35%). New private investment is at a standstill. The rural economy, both subsi'stance and market, is stagnant, and rural families are continuing to migra Ite to the cities. Meanwhile, the expansion of social services, begun mor e than ten years ago, has continued at the same pace, largely financed by external borrowing, mostly commercial. The result is a crushing and still growing debt servicing burden, roughly half the national budget. If government investment in new social services were to continue at present rates, financed by still further external commercial borrowing while new private investment remains inert, financial crisis would threaten. The statement of the problem reveals the basic strategy essential to its solution: a public sector austerity program on the one hand and the promotion of massive new private investment and employment on the other. Fortunately, the G6P has adopted such a strategy. It is important that we all join in the difficult task of helping to make it work. Austerity is fraught with problems, frustrations, and the risk of failure to progress in meeting basic human needs. Promoting new investment is delicate and difficult, with no guarantee of success. Unhappily, no panaceas, like oil, are known to exist. Panama simply has to reverse the downward spiral by spending less, earning more, retiring or stretching out debt,

PAGE 6

-3 and getting back into a rapid economic growth posture, made possible by new investment. Then the completion of the task of eliminating poverty in Panama may be resumed. This is not to say that poverty alleviation has to be abandoned until after growth has been revived, but the pace and the costs must be reduced. In the pages that follow we describe poverty, delineate its causes and seek to outline a strategy of assistance that looks to the elimination of poverty from Panama by the year 2000. This strategy is essentially one in support of Panama's own strategy whose aims and structure we propose to support. We outline immediate, intermediate and long-term goals and programs. There is poverty to be dealt with on both an immediate and a long term basis. Then there is the opportunity for the consummation of poverty's permanent eradication through the stabilization, enhancement, and appropriate exploitation of Panama's natural and human resource bases. Under this strategy, USAID Panama will concentrate its resources as follows: I. On a short term, highly focused, terminal rural development program to end in 1985. II. On the further development of rural growth centers, to integrate the countryside with its near-by urban hubs and to create jobs that will serve to divert some of the rural migration now going direct to Panama City and Colon. This program, already underway, would terminate between 1985 and 1990. III. On a series of long term programs aimed at solving the problems of urban unemployment, underemployment, low incomes, and low

PAGE 7

living standards in general. This program, focused on appropriate technologies and skills, would begin as soon as possible and remain in effect throughout the rest of the century. IV. On the problems of preserving and enhancing Panama's natural resourcesibase: forests, soils, water and energy. This program, already begun, would continue into the 21st century. V. On a progr-am to increase the capabilities of both the public and private sectors better to plan, organize and manage the nation's rograms aimed at thd elimination of poverty, the establishment and maintenance of full employment and the enhancement of the environment.

PAGE 8

-5 PART I: ANALYSIS A. Analytical Description of the Poor 1. Summary Description of the Poor Of Panama's 1.8 million people, approximately 715,000 (39%) live in poverty, as will be defined below. Some 385,000 (21%) live in an extreme state of poverty, so extreme that their lives are in a deteriorating condition, similar to the most disadvantaged in the poorest countries in the world. While the poor, and the extremely poor, are found in all areas of the country, they are concentrated in two major areas -the primarily agricultural communities of the country's central and western provinces and the major cities of the Metropolitan region (Panama, Colon, Arraijan, and La Chorrera). All of the key indicators provide ample evidence of the abject poverty of the rural poor. Illiteracy rates are high; most houses lack electricity, potable water, and sanitary facilities; and access to basic health services is almost non-existent. The incidence of extreme malnutrition among young children is high, and infant mortality, while somewhat lower than that in other nearby countries, remains well above .the national average. While the urban poor have access to some of the basic services that their isolated rural neighbors lack, their housing conditions, too, are highly inadequate. They live in conditions of extreme crowding, with access only to communal water sources and unsanitary waste disposal facilities. Of even more concern is the absolute lack of employment opportunities,compounded by an absence of basic skills needed to compete in the job market. Unlike their rural counterparts, who at least have their

PAGE 9

-6 limited land to fail back upon in order to feed their families, the urban poor are entirely dependent on a monetary economy with a cost of living index amongithe highest in the Western Hemisphere. Seen in the context of growingimigration a n d t h e natural growth that are rapidly making the Metropolitan region the major locus of Panama's population, urbanlpoverty, currently a source of concern, becomes a cause for serious alarm lin the coming years and decades. This switch from predominantly rural to predominantly urban poverty appears increasingly to be characteristic of countries in the intermediate stages of development. And it is increasingly alarming that in Panama, as elsewhere, what to do about urban~poverty and unemployment is proving to be a tougher problem than was what to do about rural poverty. 2. Income of fthe Poor Poverty line analysis Two levels of income have been calculated for the country based on estimated minimum family consumption costs for 1978 for the cities of Panama'and Colon. These levels have been adjusted (1) for the country's other urban centers and (2) for the rural areas to reflect the lower living cost s there. The first level is the income barely. adequate to provide for a family's basicineeds. This income has been calculated at $517 per capita annually for the cities of Panama and Colon,$402 for other urban centers, and $304 for rural areas. These figures are based on a basket of goods and ser-vices which permits a family of 5 persons to barely satisfy its basic minimal needs. The basket includes a bare minimum diet and clothing, ve i y modest housing, minimal costs for primary education,

PAGE 10

medical services, transport and miscellaneous. Incomes below these three levels for the three geographic areas cannot meet basic human needs. The second level of income is descriptive of the more than 1/5 of Panama's population living in extreme poverty, or in conditions of serious vital deterioration. This income level has been calculated at $270 annual per capita for the cities of Panama and Colon, $210 for other urban areas, and $160 for the rural areas. The "extreme poverty level" is roughly 48% below the poverty level. It includes the same items in the basket of goods and services but at greatly reduced cost levels. At and below this level, a family of 5 is in no way able to provide for food, clothing or housing at adequate levels. Population living in poverty Application of the "poverty" and' Iextreme poverty" lines to the estimated population distribution for 1978 yields the following population living in poverty: Pop. Below Extreme Pop. Below Pop. Above Total Poverty Level Poverty Level Poverty Level Population Total -384,284 (21%) 714,453 (39%) 1,111,047 (61%) 1,825,500 (100%) Rural 290,067 (16%) 512,485 (28%) 392,755 (22%) 905,240 ( 50%) Urban 94,217 ( 5%) 201,968 (11%) 718,292 (39%) 920,260 ( 50%) In absolute terms, the poor are most numerous in the provinces of Veraguas, Panama, Chiriqui and Colon (531,169 or 74%) with the heaviest concentration in the rural areas of Veraguas and Chiriqui and the urban areas of Panama (345,147 or 48%): l/ A detailed description of the methodology used to both develop these fines and match them up with family income data in order to arrive at estimates of the Panamanian population living in poverty may be found in Annex II.

PAGE 11

-8-Pop.' Below Extreme Population Below Poverty Level Poverty Level Provinces Total Rural Urban Total Rural Urban Total 384,284 290,067 94,217 714,453 512,485 201,968 Veraguas 106,298 103,719 2,579 141,090 133,353 7,737 Panama 98,702 34,367 64,335 197,406 68,736 128,670 Chiriqui 49,495 41,562 7,933 106,923 83,124 23,799 Colon 42,873 35,098 7,775 85,750 70,200 15,550 Cocle 25,653 22,361 3,292 62,486 55,900 6,586 Herrera 19,295 16,419 2,876 46,939 38,311 8,628 Bocas del Toro 24,818 20,442 4,376 39,395 30,663 8,732 Darien 9,751 9,588 163 19,666 19,176 490 Los Santos 7.e399 6,511 888 14,798 13,022 1,776 The province with the highest incidence of extreme poverty is Veraguas with 61% of its population below the extreme poverty level, almost all in the rural areas (94%). 3. Rural Poverty In order to move from the more general description of poverty provided by the income distribution and poverty line data to more location specific and qual itative information, the Mission has analyzed social indicators and access to services at the district level.-l For the rural areas, three key indicators -infant mortality, birth rate and illiteracywere examined for! each district in the country. These indicators were then compared to national averages. Those districts where all three indicators are above national norms are considered areas of extreme poverty of a large part of the population. These districts are all located in the provinces which show the largest populations below the poverty line, as described above. Districts where two of the three indicators are above national norms have a lesser prevalence of poverty, although the degree of poverty is similar to that found in the poorest districts. l/ The country is divided into 9 provinces and 65 districts. In addition -there is one special district set aside for the Cuna Indian tribe.

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Alayu P1, I,;IL L Li -IA U JII"

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-9 The results of the district by district analysis are shown on Map 1. Fourteen districts (shown by cross-hatching) have the "least" level of satisfaction of basic needs i.e. they are below national averages on all three key indicators. All are in the Central and Western regions. Sixteen additional districts (shown by vertical stripes) fall below the national averages on two of the three indicators and thus have serious deficiencies in the satisfaction of basic needs. Most of these districts also lie in the Central and Western Regions. Tables 1 and 2, Annex I summarize the district level data for all 30 districts. The major concentrations of poverty are in Veraguas province and neighboring districts in eastern Chiriqui, Cocle and Colon, Herrera and Los Santos. Seventeen districts stand out. They have a number of factors in common, including poor soils, mountainous terrain, highly dispersed population and a lack of access roads. The widespread poverty in these districts is further confirmed by a review of other indicators as well, such as housing conditions, water, sanitation and access to health services. These seventeen districts we now believe to be the proper focus for a final rural development effort in Panama. They are illustrated on Map 2 and described in greater detail in the following sections. Key Population Characteristics As indicated by 1970 Census data, this area, with a population of 178,821, is primarily rural. The population density is low (an average of 12.3 people per square kilometer) and the inhabitants are highly dispersed. Annual population growth rates are low, due in large part to a tendency of the population to migrate out, especially to Panama City.L/ 1/ Between 1960 and 1970, 16 of the 17 districts had annual growth rates o f less than 2% (the national average for this period was 3.1%). Veraguas and Chiriqui were the provinces with the highest level of outmigration.

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CEN.iTRAL REGc-IO, METROPOLITAN EASTERN REGION M A 0 I N C I D E N C E 0 F R U R A L P 0VE

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S STEN ES. CEI AL/EGO M A P2 F 0 C U S F 0 R R U R A L D E V E L 0 P M E N T

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22 The majority of the population in the eastern districts of Veraguas as well as those of Colon and Cocle is Hispanic. The western districts of Veraguas and the eastern districts of Chiriqui also have the nation's major concentration of the country's 50,000 Guaymi Indians. Economic Activity of the Population The vast majority (87%) of the farm population in this predominantly agricultural area are dedicated to subsistence farming. Most subsistence farm families occupy land that is inadequate for cultivation. VVery few (less than 10%) have legal title to their land. Most farmers use slash and burn techniques to clear land for cultivation. Seeds are sown by hand without tilling, and no chemical products are utilized. In 1970, only 16% of the farmers in this area received credit and 3% received technical assistance. Virtually none use mechanical power of any kind. While some families change the location of their homestead every few years as they slash and burn further into the frontier area, most stay in the same general vicinity and alternate production on various dispersed plots. During the off-season male heads of household often obtain off-farm wages for short, intermittent periods on neighbors' cattle ranches. Some also migrate to western Chiriqui, where they obtain seasonal work for several weeks to several months a year on sugar and coffee plantations. 1_/ Given their extremely limited access to services, the Guaymi are a group that merits study and possibly special attention. A FY 1979 Mission grant project will finance studies of the Guaymi and pilot development activities which should produce considerable new information on the development needs of the Guaymi. 2/ Most of the terrain is mountainous and the majority (80%) of the soils are unsuitable for cultivation (e.g. types VI, VII, and VIII).

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13 Opportunities for off-farm employment for women are minimal, a factor that contributes to the high incidence of out-migration among younger women, mainly to Panama City. Future prospects for productive use of the natural resource base in this area are limited. !Poor soils and steeply sloping terrain make this area suitable primarily ifor natural forest and tree crops, with some areas suitable for cattle grazing. However, increasing amounts of land are being converted to lunappropriate uses. Forests are being cut and burned by subsistence farmers to make way for small agricultural plots. Once the soils on these 'lands are exhausted the farmers move on to other areas, often leaving the land open to exploitation by cattle ranchers. Outside of the copper deposits in Tole, there are no other known mineral deposits with marketable potential. Selected Indicators The majority of the houses in this area have dirt floors and they still lack electricity, potable water, and sanitary facilities (see Graph 1). Access t-o health services in this area is also minimal. In 1970 these districts had an average of 0.6 doctors for every 10,000 inhabitants. By 1477 this figure had risen only to 0.8 (the national average for 1977 was 6.0). Most births (67.6%) are still unattended by either a physician'or a nurse. I_/ Migration data from the 1970 Census reveal that in the province of Veraguas women made up over half (53%) of the migrant population. Over two thirds (65%) of these women were young (ages 15 to 24) and nearly half (48%) either had never been to school or had an incomplete primary education. The maj ,ority took extremely low paying jobs in the service sector (as domestics). All or part of the salary earnings were sent back home to help supplement family income.

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-14 Houses with Dirt Floors Houses without Electricity 10 100 8060 6 4040 20 2 NATIONAL W r NATIONAL t Z AVRAEAVERAGE C 00 0 0 0 Houses Lacking an Approved Houses Lacking Approved Water Source Sanitary Facilities 10010080 -8060. 60.40 40 20 2NATIONAL NATIONAL AVERAGE AVERAGE W GRAPH 1 HOUSING CONDITIONS IN FOUR OF THE SEVENTEEN TARGET DISTRICTS, 1970 POPULATION CENSUS

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015 Results of a recent survey of malnutrition in the province of Veraguas indicate that a large proportion of the population (79% of the 1 through 4 year olds and 70% of the 5 through 17 year olds) were malnourished. Malnutrition was particularly severe among the to 4 old group 29% were found to be in second degree malnutrition and 5% in third degree. These figures were much higher than corresponding national level figures obtained in 1967 (10.8% of the I to 4 year old group in second degree malnutrition and 1.1% in third degree) and suggest that malnutrition, rather than decreasing,actually may be increasing. According to district level projections for 1975, over 45% of the adult population ages i5-39 in this area was illiterate. Of the remaining 55%, most had no more than two or three years of schooling. / While it may be assumed that the major portion of this latter group can read and write and do basic calculations, their low level of education hardly prepares them adequately for employment in sectors that require a minimum of certain basic skills. Although the GOP has made strides in recent years in attending to the educational needs of the primary school age population throughout rural Panama (1977 enrollment data indicate that in this region most primary school age childreAi are in school), GOP activities oriented toward reducing literacy among adults and increasing their skills remain very limited. 1/ Opinion of Ministry of Education officials in the absence of statistical data. ** :. .-. 5 4 5!

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-16 4. Urban Poverty In addition to the poverty line data presented in Section 2, above, three key sets of indicators -unemployment,*underemployment, and housing conditions -are used to describe poverty in urban Panama and Colon. Unemployment and underemployment have been chosen as they have a direct bearing on the welfare of the urban poor who depend on cash income to fulfill the majority of their basic needs. General indicators of housing conditions (type of housing, crowding, existence of non-approved or shared water and sanitary facilities) as well as access to housing and employment services help shed further light on the extent to which the urban poor are receiving the assistance they need in order to incorporate themselves into the modern sector. As is illustrated in the discussion below, urban Panama's number one current problem is unemployment. Faced with a stagnation in the job market plus a rapidly increasing population, Panama City and Colon are confronted with a poverty problem that, if not checked, could reach crisis proportions by the year 2000. Unemployment and Underemployment An estimated 790,000 people (43% of Panama's population) currently live in the urban areas of Panama and Colon. Panama's Department of Statistics and Census estimates that by the year 2000 approximately 1,600,000 people, or nearly 57% of the country's estimated population of 2,823,000 will be living in this area. -1/ This rapid rate of population growth in urban Panama and Colon is due both to the forces of natural growth and migration. During the 1960's and earlier migrants accounted for the major part of this growth. Attracted by both the jobs and services available in Panama City, migrants flooded *4 -..5

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-17 Population Projections for Urban Panama & Colon Percentage of Year Population Total Population 1960 383,000 34.9 1970 597,000 40.8 1980 864,000 45.6 1990 1,203,000 51.2 2000 1,600,000 56.7 In an economy with a rapid rate of economic growth such as Panama enjoyed in the late 1960's and early 1970's, providing jobs for this steadily increasing population is within the realm of the possible. However, since 19/4 the number of jobs has actually declined and unemployment has soared. Moreover, equivalent unemployment (unemployment plus estimated underemployment) in the Metropolitan areas is now over 35%. Equally as significant, the non-economically active population has steadily increased. Labor Force Trends for the Metropolitan Region 1974-1977 1974 1975 1976 1977 Total population 15 years & over 455,800 478,630 501,060 '534,260 Economically Active Population 280,300 284,100 279,760 289,680 Percentage total 61.5 59.4 155.8 54.2 Employed 260,400 259,030 254,920 256,000 Unemployed 19,900 25,070 24,840 33,680 Percentage EAP 7.1 8.8 8.9 11.6 Non Economically Active Population 175,500 194,530 221,300 244,580 Percentatotal 38.5 40.6 44.2 45.8 the job market with unskilled labor (in 1970 40% of migrants 15 and over had either no education whatsoever or an incomplete primary education; the comparable figure for Panama district was 33%). While migrants continue to account for a sizable proportion of the population growth, it is estimated that by the end of the next decade, the forces of natural growth alone will be responsible for over 60% of urban Panama's population increase.

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-18 Underemployment, a chronic problem among the agricultural labor force in rural areas, has also increased in the Metropolitan area in recent years. In 1975 it was estimated that approximately 70,00 workers (28%) in the Metropolitan labor force were underemployed. A high proportion was concentrated in the service sector which, as is indicated below, is the only major sector where the number of jobs has increased appreciably over the last eight years. Employment in the Metropolitan Area by Sector 1970 1978 Number % Number % Services 70,300 31.7 96,720 34.7 Industry 27,100 12.2 32,460 11.6 Commerce 42,800 19.3 48,460 17.4 Construction 14,900 6.7 18,690 6.7 This concentration of employment in services has important ramifications for the poor, as wages in this sector are not only low, they are also not subject to much increase. Areas of the service sector such as domestic services also have the major concentration of unskilled workers. In 1975,70% of those employed in this area had a sixth grade education or less. Unemployment and underemployment are particularly high among women and among the young. In 1977 14% of the female labor force was unemployed and approximately 44% was underemployed. (the comparable figures for men were 10% and 18%, respectively). Female employment in urban Panama is 1/ Between 1974 and 1976 average weekly wages in the non-government services declined by 1%. Wages in commerce and industry, on the other hand, increased 5% and 16%, respectively.

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* .6 --C -19 concentrated overwhelmingly in the service sector, and wages paid to women are both lower than those for males and increase at a much slower rate. unemployment rateslamong individuals 15 to 19 and 20 to 24 (1975 figures including both men and women) were 20.9% and 14.7%, respectively. While the data base necessary to calculate underemployment among those 25 and younger is unavailable, it may be assumed that there is a high incidence of underemployment in this group as well. Both women and the young in the Metropolitan area are relatively low participants in th e labor force and their participation seems to fluctuate strongly as the job market alternatively expands and contracts. 1 Given the opportunity, however, both groups would join the labor force in far greater numbers. Experience with the GOP's Emergency Employment Progra2/ provides a case in point with regard to women: 42% of the 16,700 women hired under the Program were not actively seeking employment at the time. Housing Conditiions According to the 1970 Census, a significant portion of the inhabitants of both cities lived in crowded conditions in shacks or tenements, and over half either had no access to an approved water source or shared 1/ The percentage'of economically active women in the Metropolitan area rose from 35.1% in' 1970 to 40.8% in 1974 and declined to 37.9% in 1978 as a result of Panama's economic recession. The percentage of economically active 15 -19 year olds in the Metropolitan region declined from 44.8% in 1970 to 25.8% in 1975. (Some of the latter decline is a reflection of increased'secondary and post-secondary education opportunities over this period.) 2/ The Emergency Employment Plan was initiated in 1977 to serve as a temporary stop gap measure to deal with the unemployment problem. Public service jobs at monthly salaries of $100 were given to 24,000 individuals. Thelcompetition for these jobs was very high.

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-o -a --7 ~V -T~x -vt w 7 r1-7i7 4 TiJ~i~ 1 ztt/-

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-20 a communal facility. Significant proportions of both cities' populations lacked sanitary facilities or shared sanitary facilities with their neighbors. Housing Conditions in Panama & Colon, 1970 Census PANAMA COLON Number % Number % Total population 444,338 100 67,874 100 Inhabitants living in substandard housing 143,352 32 41,980 61 Inhabitants with nonapproved or communal water source 235,499 53 44,660 64 Inhabitants with nonapproved or communal sanitary facilities 173,291 39 44,660 65 Summarized in the following table are a number of individual studies carried out by the Ministry of Housing in 1974-75 of typical slum communities of Panama City and Colon, characterized by inadequate housing, water supply and sanitary facilities. The majority of the 8,800 families (36,900 people) living in these barriadas had family incomes below $200 per month,i.e. below the poverty line. Only about two thirds of the heads of household reported they had full time employment. Informed sources suggest that rather than decreasing the number of people living in these types of communities has actually increased over recent years. 1/ Shacks or tenements with a ratio of 3 or more inhabitants per room.

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SURVEYS OF LOW INCOME NEIGHBORHOODS IN PANAMA AND COLON NEIGHBORHOOD DATE OF INHABITANTS FAMILIES PERCENT FAMILIES PERCENT HOUSEHOLD STUDY WITH INCOME LESS HEADS EMPLOYED THAN $200 A MONTH FULL TIME PANAMA Viejo Veranillo 1974 2262 459 59 69 Santa Cruz 1975 4439 1169 55 77 Boca la Caja 1975 939 182 52 -Brooklyncito 1975 683. 139 64 70 Chorrillo 1 1973 6043 1474 55 72 Chorrillo 2 1973 3635 869 58 -Curund 1970 7818 1525 72 52 COLON Barrio Norte 1975 6557 1663 56 62 Barrio Sur 1975 635 239 65 -Pueblo Nuevo 1975 1846 504 62 54 La Playita 1974 635 222 61 55 Manzana 44 1974 529 142 61 -Bamboo Lane 1975 858 239 65 65 Source: Department of Social Affairs, Ministry of Housing

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B. Identification of the causes ofpoverty The discussion in Section A highlights, for the two target areas selected for special~attention, a number of characteristics of the poor which -while themselves descriptive of poverty -are also factors contributing to its existence. Three general causative factors stand out (1) An extremelyllimited natural resource base. (2) Extreme isolation of a large proportion of the rural population. (3) Very limited'education and skill levels in both rural and urban areas. The consequences of the above for the poor are obvious: (1) Low quality soils which are rapidly becoming depleted of what little nutrients they have, in combination with a lack of alternative employment, severely limit the productive potential -both present and future -of the majority of small farmers. (2) Isolation makes access to vital. education and health services difficult. It also inhibits access to support services (e.g. inputs, technical assistance, credit) needed to increase farm productivity. (3) Low educatiori and skill levels hold down productivity of both the rural and urban Poor by limiting opportunities for the rural poor to utilize better technologies and expand into new activities, while locking the urban poor into a limited array of employment opportunities, all in areas where wages and opportunities for advancement are low. These three factors -limited natural resources, isolation, and low skill levels -are all keys to understanding the causes of poverty in Panama. In order to further unravel the causal chain, it is necessary also to consider a series of factors that are closely linked to Panama's

PAGE 28

recent, severe, and continuing economic recession. This recession, which began in 1974, has manifested itself in near zero economic growth since 1974, a trade deficit that climbed to $500 million in 1974 where it has remained, a 7 percent drop in per capita GDP, and -as already pointed out in Section A -a stagnant job market. 1. Concentration of Panama's economy in the tertiary sector. Panama's strategic location and the presence of the Canal make it a natural center for commerce and other service activities. Since the turn of the century, Panama has exploited its location, promoting an open, dynamic service sector clustered in the Metropolitan corridor along the Canal. Of Panama's 1977 GDP of $2254 million, 53% was derived from service activities. Manufacturing accounted for only 20%, agriculture 16%, construction 5%, and the Canal Zone 6%.Both commercial and other services activities have benefited from the GOP's liberal banking policies which have made Panama a major regional financial center. Panama's increased reliance on tertiary sector activities in place of the primary and secondary sectors has had three negative consequences I/ The Canal Zone 6% covers only wages of Panamanian employees; the $261 million direct balance of payments flow from the Canal Zone to Panama in 1977 was 11 percent of GDP. Applying an export multiplier plus inclusion of other indirect benefits result in an overall contribution of the Canal Zone to Panama's economy which is much greater than indicated by the direct benefits. 2/ Panama has no central bank. A government owned commercial bank -the -ational Bank of Panama -performs many of the normal functions of a central bank; however, it does not issue Panama's currency, the "balboa". Instead the main medium -the U.S. dollar -circulates freely. While this provides Panama with the monetary stability it needs both to attract outside private investment (esp. private commercial banks of which there are now some 81 in operation) and to finance many of its large scale development projects, it has the marked disadvantage of restricting Panama's ability to use monetary policy as an effective instrument of economic management.

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-24 for the poor: (a) That once represented a plentiful source of low-skilled jobs, and thus a drawing card for rural migrants, has dried up. Nevertheless thousands of migrants continue streaming into the Metropolitan corridor in hopes of getting jobs in these areas. (b) Unlike agriculture and industry, which as a rule tend to generate additional jobs in related activities, new are~ivities in the services sector do not result in the spontaneous generation of secondary employment. (c) As already illustrated in Section A, a significant proportion of services sector jobs pay very low wages, thus furthe-r contributing to the underemployment problem. 2. Excessive dependence on imports and limited exports. In keeping with its tradition of serving as a funnel for world commerce, Panama 1-s allowed goods to move in and out of the country quite freely, keeping import quotas for many articles at a minimum. While this has obviously benefited the commercial sector and permitted it (at least until recently) to'thrive, it has served as a deterrent to small, locally oriented industry. and thus limited opportunities for creating additional jobs. Dependence on imports, from basic commodities to finished consumer products, has also had'a negative impact on the disposable income of the poor. In 1974, when world oil prices skyrocketed, the consumer price index in Panama leaped upwards correspondingly. Between 1973-1977, consumer prices rose at an annual rate of -over. 8%,., .As described in-Section A, wage increases in sectors employing a large proportion of the urban poor during thislatter period ranged from 0 to only 2.7% per year. Panama's dependence on a limited array of exports has also in recent years had negative impact on its balance of payments. Panama's only recourse to date for redressing trade imbalanc es has been attempts

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-25 to increase exports of traditional, largely primary, products such as bananas, petroleum products, shrimp, and sugar. However, the drastic drop in the world price of sugar and declining demand for Panama's petroleum products have made this difficult. Panama is currently making a concerted effort further to expand its export base to include nontraditional (both primary and secondary) products, but identifying appropriate non-traditional exports, markets for these exports, and attracting needed private investment remain a difficult challenge, due in large part to Panama's increasing high wage structure which makes it less competitive with nearby countries. Meanwhile the urban and rural poor are losing out both on past job opportunities that actually crumbled and on future job opportunities that have yet to materialize. 3. Decline in Private Investment Private investment in Panama has declined steadily over the past five years, to a 1977 level that in real terms was only one third of the peak reached in 1973. This resulted in a stagnation of the economy and_ a steadily shrinking job market, since the expansion of public sector investment was not sufficient to prevent a drop in overall investment. Private investor interest waned as promising commercial and industrial investment prospects played out. Government policies further discouraged investors. The Labor Code was made highly pro-labor and more expensive to employers in 1971, further raising Panama's already high cost labor structure. The government took over ownership and operation of all public utilities in recent years and made a few incursions into the normal private sector arena (e.g. sugar, cement), causing private investor

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-26S apprehension over possible future public sector takeover in their areas of investment interest. Uncertainty over Canal treaty negotiations, and now treaty implementation concerns have also been unsettling factors. Panama's new government, however, has made resumption of economic growth a priority concern, clearly recognizing the predominant role of private sector investment in generating that growth. In an attempt to attract private investment, revisions of current economic and labor policies are beingidesigned and the GOP is looking at the semi-autonomous government enterprises, with a view to possibly reducing their role in the economy. The government's fledgling industrial development financing institution, COFINA, is steadily expanding its efforts to offer financial support to a widening range of profitable new private investmen t opportunities in Panama. Rekindling private investment is, however, a challenging task and one in which the GOP needs outside help. Profitable investment areas and markets need to be researched and credit mechanisms expanded. In addition, the Canal transition will offer some investment opportunities, and if handled smordthly and efficiently it can contribute to restoring private sector confidence. C. Host Country Plans, Commitment and Progress -Development Plan Despite Panama' s economic stagnation, the GOP over the past ten years has made a major, essentially successful effort to improve the lot of the poor and disadvantoaed. The "Revolutionary Government" which has been in power since 1968 set as its general objectives a more complete integration of the country, improved social and e conomic conditions of the poor through income redistribution, and strengthened bases of economic growth.

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27 In striving to accomplish these objectives, the government substantially increased its involvement in both the social and economic life of the nation during that time. For example, education and health programs were greatly expanded and extended into the provinces, and an agrarian reform program was initiated. Major investments in economic infrastructure were made, primarily in transportation, power, and communications. A new labor code was instituted which was decidedly pro-labor. The GOP's overall development strategy was formalized in its National Development Plan for 1976-1980. This plan defines development policies with respect to six major objectives and identifies the means to be employed for their achievement. These policies cover (1) increased popular participation and improved distribution of economic benefits; (2) accelerated, diversified, sustained economic growth; (3) greater regional integration; (4) more effective utilization of public finances; (5) strengthened public sector institutions; (6) more autonomous and independent development. With strong commitment backed by significantly increased public investment, the Government has made great strides towards achieving many of its objectives. In general, the GOP's social programs have had considerable success, whereas its production programs have produced mixed results. Performance With regard to social objectives, progress on the national level as measured by key indicators has been impressive and is especially noteworthy for rural areas. The following table presents data on important health indicators, pointing up some results of the GOP's efforts to reduce rural/urban inequalities.

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-28 1967 1977 N;t'i oilalI Rura I Nat ionial Rural 1. Death rate 6.8 7.7 4.4 4.5 2. Infan t mortality 42.7 49.7 28.1 29.3 3. % Population with potable wate : 64.5 34.7 82.5 63.8 4. % Population with sanitary facilities 73.2 62.2 88.3 78.9 Progress on other indicators for the national level over a similar time frame show illiteracy decreasing from 26.7% to 13.8%, the birth rate declining from 38.9 per thousand to 28.4, and population growth rate from 3.3% to:2.6% per year. Commitment to improved access by low income agricultural producers has been strong, but progress has been slow. The GOP has established a system of price supports and controlled marketing margins, and a government agency purchases several basic commodities from producers to support the market for their crops. The government has supported some 200 asentamientos with over 7,000 families participating in a program which provides lnid title, credit, technical assistance and other services to these or ganized groups. To date, few asentamientos have achieved financial viability, and the GOP absorbs their losses. The GOP also assists the cooperative movement and other group arrangements. The political system has been designed to increase the participation of the less advarntaged segments of the population in the decision-making process. The elected representatives of the smallest political subdivision (the corregimiento) both serve their local area and comprise the

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-29 National Assembly. This political/administrative system is intentionally biased towards the rural areas, where the bulk of the poor have traditionally been located. The data on the key indicators show that most Panamanians are considerably better off as a result of the development which has taken place over the past ten years. There is no indication that development has adversely affected any given group, although the recent economic stagnation has obviously struck hardest at the poor, particularly the urban -poor. Further detail on these topics may be found in the Mission's 102(d) report in TOAID A-71 of October 23, 1978. Development Budget The GOP's -consolidated national budget for 1979 calls for expenditures of $854 million, comprising about one third of estimated GDP. Central Government current revenues of $453 million are expected to cover only current expenditures, leaving the investment program to be-financed principally by foreign borrowing, as has been the pattern in recent years. Over one third of the current expenditure budget will be taken up by interest and transfer payments. Among the ministries, the largest allocation goes to education -18.5%. The health ministry receives8.3% and agriculture 2.6%. An estimated 7% goes for defense spending, which as usual will come to less than 1% of GDP. The largest allocations in the public sector investment budget are for physical infrastructure 18% for electricity (hydropower development) and 17% for transportation (roads, ports, airports). Agriculture receives 15% and commerce and industry 8%. One of the most noteworthy characteristics of the development plan was the continuing high level of public sector investment. In an attempt to

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-30 offset the effects of the severe decline in private investment which began in 1975, the GOP stepped up public sector investment. from $75 million per year in 1970-1975 (5% of GDP) to $400 million per year during 1976-19 (18% of GDP). This increased investment program required huge increases in public borrowing, mostly from abroad, since the government felt constrained on both political and economic grounds to attempt to self-finance much of the program through increased taxes during a time ofirecession, although a 5% sales tax was instituted in 1977. The high lellel of public investment and external financing has increased the demands placed upon the public institutionswhich in turn has required that they be made more effective and efficient. Moreover, the burden on them will increase as Panama assumes its new responsibilities for the Zone and the Canal. The government's planning and project development capabilities areqAite impressive even as measured by strict universal standards. There are, however,.still some weaknesses in project management and administration when measured by absolute standards. By relative standards the Panama Civil Service is already among the better, though still nor good enough for the high pressure and quality tasks. ahead. The major causes are inadequate coordination and cooperation among different public institutions, and the overburdening of the relatively small group of qualified personnel. This cadre of competent professionals are simply too few in number and inadequately backstopped at the middle levels of service. The GOP is aware of the challenge and has already taken positive steps. The public enterprises (e.g. utilities, sugar) are to be self-financing,

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-310reorganizations have produced new institutions (e.g., planning and housing ministries) and government training programs are being coordinated. Moreover, the GOP is now developing a major program which will combine administrative reform with stepped up training of middle level public officials. D. Human Rights Panama has a record of sustained human rights progress in the last decade. The GOP has responded vigorously to the need to improve the standard of living of the poor including free education, health care at minimal cost, rural credit, price controls on essential foods, and subsidized housing. As to respect for integrity of person, reports of degrading treatment and arbitrary arrest or imprisonment do occur, but such cases are not common. The inviolability of the home is respected. Respect for civil and political liberties has increased in the last two years, as witnessed by a series of political reforms. In ordinary criminal cases, Panamanians have the benefit of a fair and public trial. In politically sensitive cases, the judiciary appears to have been susceptible to the influence of the Executive Branch. Labor unions are free to organize and operate, and the government frequently solicits labor's views before making domestic policy decisions.-While political participation has been limited, political parties are now able to function again, greater freedom of expression is allowed, and there is a genuine give-and-take at the local level. Locally elected representatives comprise the National Assembly which funnels local concerns to the national level and, in the recent past, elected the President and Vice President of the country. Future presidential elections will be by direct popular vote.

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-2 E. Other Donors Over the past few years, other donor activity in Panama has been substantial. IFI lending reached a peak in 1977 when the IDB provided $122 million for hydroelectric power and tourism development and the IBRD provided $57.7 million for hydroelectric power, livestock development and improvements in the fishing fleet. Assistance from the IDB and IBRD was more limited in 1978, totalling $31 million for a pre-investment fund, agricultural credit and highway maintenance. While both banks generally finance capital intensive projects, with a concentration on physical infrastructure, increasing attention is being given to social projects, particularly by the IDB. Projects under development continue this mix, including support of university education, tree crops, industrial credit, urban development, and power distribution. Current plans for 1979 indicate a total lending level of about $50 million. The UN system provided in 1977 about $1.6 million in technical assistance, about evenly divided between the UNDP and the specialized agencies. This assistance went to a number of sectors, with a concentration in the fiel ds of health, agriculture, transportation and communications, and social andleconomic planning. New UN projects emphasize agriculture, industrial development, and regional planning. UNDP assistance increased to over $1.3 million in 1978 and is programmed to remain over $1.0 million through 1981. Bilateral programs of the DAC countries consist primarily of procurement credits and scholarships, with most programs being under $100,000 per year, accounting for about $1.6 million in 1977. OAS and IICA activities consist msainly of advisors and scholarships and represent about $500,000 per year.

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-Donor activities are effectively coordinated in two ways. A strong Ministry of Planning and Economic Policy is the major counterpart agency for all donors at the policy level and coordinates all technical cooperation activities. There are also formal and informal coordinating mechanisms among the donors which are more than satisfactory. All major donors pursue similar objectives, employing differing but complementary means. The IDB and IBRD tend to concentrate their assistance on infrastructure projects. The UNDP, OAS and other bilateral donors focus on relatively small technical assistance activities. The A.I.D. program fills a gap helping to assure that both the GOP and the other donors do not ignore the interests of the poor in their consideration of overall economic development needs. F. Outlook A newly elected government took office in October, 1978, and work on a new five year development plan has already been initiated. The development strategy revealed so far by the new government does not differ significantly from that of the past ten years. The new President has listed the high cost of living, unemployment and integrated national development as primary concerns and defined the following medium term development objectives: resumption of economic growth with better social and regional distribution; expansion of employment and increased housing construction; more political democratization; a more efficient public sector; better quality of education; greater respect for human rights; improved foreign relations, especially with the U.S.; and better utilization and protection of natural resources. A basic policy of fiscal austerity will be followed, in recognition of the government's continuing

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-34 financial problems. Social services, however, are to be further extended. The key role of private investment is emphasized. Greater efficiency in public enterprises will be sought and additional resources will be directed to Panama's agricultural development. Industrial, transportation, and energy projects will continue to be developed, with emphasis on the impact they will have on export promotion. It is recognized that economic growth is pre-requisite to the attainment of Panama's development goals. From the standpoint of poverty and human suffering'. the core problem for Panama has become the demise of, the growth of its economy. This economy can no longer support the nonproductive poor and jobless at levels recently achieved through the government's redistribution efforts. In its own words: "Before we can contemplate thel ideological choices for the distribution of our wealth, we must first rteate that wealth. One cannot distribute imaginary wealth". The governm ient recognizes that resumption of growth is a first step if the problem of Panama's poverty is not to worsen. It also recognizes the predominant role of the private sector in generating economic gro wth. Accordingly, the government is making a major effort to assure the private sector of its cooperation, and to enlist their support in a joint effort to set the economy on a long term expansion path. One vehicle for an improved government/business dialogue is a newly formed Economic Advisory Council, composed of representatives of business, labor, and agriculture whichis to study and make recommendations on economic policy. In addition, the GOP is banking heavily on the resources it will receive under the Canal treaties. Plans call for expansion of the railroad, construction of a modern container port, and expansion of the Free

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5Zone. These and other projects are expected to generate ancillary investment by the private sector. Also, the increased revenue the C-0' will receive from the Canal operation should help relieve the financial pressure currently facing the government. It should reduce the high level of commercial financing which the Government has required to continue the current level of public sector investment with the assistance of additional concessional financing. A new wave of private investment activity could, therefore, take place in the near future if the GOP succeeds in gaining the confidence and support of the business community, and if it does not stumble in taking on its new responsibilities under the treaties. An increased investment level, however, is not likely to be sustained by these means alone, since most of the same constraints on growth that have led to the current economic stagnation will continue to exist. Nonetheless, expectations of increased employment opportunities will likely attract still more workers from the provinces to the Metropolitan area seeking jobs which are likely to prove temporary, adding to the already unmanageable problems of urban housing, sanitation, and social services.I one of Panama's most serious obstacles to the achievement of sustained economic growth has been high labor costs, which have limited export expansion. High wages and benefits for Panamanian employees of the Canal Zone will continue to exert upward pressures on wage levels throughout Panama beyond what would normally develop from international or other domestic causes. This will tend to further inhibit private investment, particularly in labor intensive activities, and have the familiar negative impact on employment and the balance of payments.

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-36.Under these circumstances, which are certain to be a permanent part of the economic scene in Panama, it would appear to be futile policy for Panama to strivel(to increase permanent employment opportunities for poor, unskilled workers. Rather, GOP strategy for the longer run should aim at an across-the-board upgrading of the skill level of the entire labor force, including 'the minimum skill level of the mass of Panamanian workers, both urban And rural. Only through higher productive capabilities of Panamanian lador, in general, can the private sector justify the high labor costs it mist pay, i.e., achieve lower real wage costs and thereby improve its international competitiveness. This in turn means that GOP development strategy should encourage primarily the development of those industries or activities whose output requires relatively high skill labor inputs. For maximum effectiveness, it Vill also require a more flexible GOP labor/wage policy, in which the productivity issue should be factored in as a major element.I This approach should steadily open up additional profitable investment opportunities in iPanama, create jobs, establish the economy on a firm expansion path, and develop the bases for permanent, sustained growth. The number of hard core unemployable, unskilled workers would be reduced rapidly to level constituting a lesser drag on the economy and on the public sector in providing for the welfare needs of the poor. Ultimately, the inhibiting l6ad on both the economy and the public budget of poverty and unemployment 'would be reduced to the lowest practicable limit. In Part II which follows, we identify and describe five specific courses of action by which AID can help Panama achieve these goals.

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-37 PART II -STRATEGY A. Long range goals and intermediate targets Panama is destined either to remain poor with a more urban than rural complexion or to flourish as a hub of international financial, communications and trade services, and as a producer of high technology products for export, with a healthy balance and complementarity of roles among the two main cities, a dozen small cities, And the rural areas. The immediate goal is to bring all remaining rural poor into the economy. The rural population is now almost evenly divided among, those who have crossed over the poverty line and those who have not. There is momentum, however, so that the goal already half-Won seems progressively more attainable. The combination of a geographically focused rural development program with an intermediate city-market town program is intended both to complete the integration of all families into the economy and to secure a permanently healthy economic growth posture in the Panamanian countryside. Small, medium and large scale farming on the one hand will interact profitably with flourishing agro-industries and services and with a growing national market on the other. The long range goals are to return the Panamanian economy to a condition of rapid, sustained growth and, on this basis, to share the benefits of such growth among all Panamanians. Stated another way, the aim is to attain and sustain full employment with the labor force gaining its fair share of the proceeds of production.

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-38 Given Panama*s size, location and natural and human resources bases, we see no other way for the country to go than to aim to be a high technology economy, strong in international fi nancial trade services, in a diversified program of exports of agricultural and agroindustrial prodi its and in manufactures competitive in world trade. The Hong Kong, Singapore, and Taiwan models come to mind, as each has been highly successful with strategies tailored to its own unique circumstances. Panama and these island economies have much in common, including aninrinsically talented human resource base. While its maturation is yet incomplete,the human potential is there. So is the superb geograpbac location -the world's Broadway and 42nd Street. B. AID Assistance Strategy 1. Areas and Sectors of Development The Introduction and Summary made clear, and the data on poverty demonstrated that development in Panama will be coursing along 5 main streams over the next 20 years. Two are of short and intermediate term. Three are the long range development efforts necessary to establish and make permapnt a good quality of life for all Panamanians. As planned by the G0P and supported by AID and other donors, some have been initiated and all five will be operative during this current CDSS period, 198i-85. How much longer the GOP and other donors may find it necessary to continue with each such program is not now predictable. As for AID, we propose to conclude our participation in Rural Area Deveiopment at the end of 1985, and in Rural Growth Centers by the end of 1989. Employment Creation, Environmental Enhancement, and Human Resources Development we see as needing also to be launched

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39 in force now. They are as urgent as the others. But they are more difficult, less is known about how to deal with them, and results will be harder to achieve and slower in coming. By their nature they are complex, conglomerates of problems and opportunities where the best that the sciences have to offer needs to be woven into the designs for their solutions. We see these three assuming growing importance in AID's support activities during the decade of the 1980's and as the principal foci of AID's efforts in the 1990's. 2. Role of Other Donors We expect bi-lateral aid from other developed countries to be of an ad hoc, targets of q-portunity nature. The World Bank and the IDB will continue to be the principal external sources of the capital needed to complete the financing ofhigh cost programs, particularly infrastructure. In both rural development and in employment creation, we would expect these I.F.I.'s to continue to supply substantial external capital for highways, powe r, water, industries, and transportation. UNDP, both because its funds are limited, like ours, and because it is also similarly interested in experimenting with new projects will be AID's closest collaborator. While we expect the whole external aid complex to be complementary, UNDP-AID collaboration will be from close to intimate, including joint projects. 3. Intended Areas of AID Assistance and the Problems They Address I. Rural Develo ment 3g -05 ----II

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4o The analytical description of the poor reveals a number of interesting things about Panama's poverty and the country's efforts to defeat it. There is less rural poverty than 10 years ago or than in many other countries. Some 55% of rural families still live below the poverty line, as described in IA, and the heaviest concentration of thee live in 17 districts of 5 Provinces which are contiguous geographically and the people have 5 basic common characteristics: (1) they live in the mountains beyond the roads; (2) they live dispersed, not in villages, (3) they till poor soils; (4) they have low education and skill levels; and (5) they have limited access to medical care. Lack of access is the key to their substandard condition. They do not have access to the services readily available to the other-.half of the rural population, and the government has not gained access to them, despite the desire to do so. Lack of roads, dispersion and poor soils have thus kept 55% of the country's rural population outside a system of economic opportunities and services that, by developing country standards, is otherwise impressive. The AID-GOP joint view of this problem is: -let's finish the job; -let's face this toughest last portion of the task, identify the complex issues (e.g. poor soils) and the less complex tasks requiring mainly muscle and money (e.g. access roads, education and health services), and bring to ,these 17 districts the same standard of life the other "half" of the country's rural families already enjoy. If the job can be done in these 17 districts with the help of AID and others, the GOP can do it in the remaining areas of rural poverty on its own.

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-41 Having made this basic decision, the composition of the program needed to meet the goal is all but self-defining --credit, extension, marketing, access roads, land tenure rationalization, small farm systems, health, family p lanning, and nutrition services, role of women, cooperatives, etc. all applied to the special problems of each of the 17 districts. Two interrelated issues will stand out: (1) the need for many to move to land with better soils -or through applied research, find ways to make better use of the soils they have; and (2) the need for a more equitable land tenure pattern. There is much so-called governmentn" land but little not claimed as the "possessory rights" of someone. Five hectares of "possessory rights" land today brings the same price as five hectares of titled land. Not an easy issue to resolve. II. Rural Growth and Service Centers This is a proposal to continue the effort te lay a sound economic base in the countryside in order to permit rural, small farm family development to become self-sustaining. Rural development cannot sustain itself where the country has only a single urban market. The effort to bring subsistance farmers into the national economy will die on the vine without the kind of intermediate regional development which the GOP has already started and which AID is assisting in project No. 047, RuralGrowt~h and Service Centers (URBE). This project is just now becoming operational. We propose that a similar project be phased in during the CDSS period and that the whole process of intermediate city development be followed closely to make certain that its objectives are fully met, both those having to do with small farmer

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-42benefits, and th ose relating to employment generation, including the development of productive enterprises based on appropriate new technologies aimed atiproducing goods for internal Panamanian markets, now too dependent on imports. We are also interested in the interception at intermediate points o f the families who for the foreseeable future will migrate because they continue to produce more of themselves than profitable crops. III. Employment Creation Not all of Panama's relativ e success in dealing with rural poverty is due to virtue and hard work. Many rural families were not saved, nor re-cycled, nor brought into the market as producers. They escaped tolPanama City and Colon. They got away, and now Panama has a serious urban poverty and unemployment problem. The population balance has become overone-half urban, mostly in Panama City and Colon, and unemployment levels are high. Unofficial figures which reflect the real situation suggest that unemployment plus underemployment are at 35% of the Metropolitan area labor force. Part I underscores the plight of the unskilled urban poor migrating into the 1 Metropolitan coiridor. It is here that we find many of the poorest of the poor. Whil e migration continues, the formation of new jobs I stopped 4 years ago when the economy stopped growing and investment came to a halt.4 In Part I.B we have suggested that the only known solution is to bring about the resumption of economic growth through the resumption on a massive scale of private investment. As noted in Part I B, many of the elements for a

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-43 resurgence of private investment are already in place. Government policy favors it, assumption of Zone resources should encourage it, there are ample tax and profit repatriation incentives, etc. But we are convinced that all these favorable factors, including the receipt of Canal revenues and Zone resources, will not suffice to create enough permanent new jobs to match the present excess labor supply, nor to keep up with its growth. Why? Because Panamanian industry and commerce as constituted today and as they might be expanded without redesign have too little to sell at internationally competitive prices, and Panama is also as yet not utilizing enough intermediate technology to supply national market needs that are now unnecessarily met by imports. What is needed, as the Part I B analysis shows, is a new orientation of productive investment toward export oriented, higher technology industries employing large numbers of highly skilled workers and toward intermediate technology industries supplying many potential local markets. Not only do we see that the solution for Panama requires the resumption of a growing GNP, we do see that happening primarily through the creation of high and intermediate technology industries, including agro-industries, and in a diversified export agriculture sector that does not leave out the small farmer. Yes, it is a long way from here to there. And that is where AID comes in. First, we justify our concern for the macro as well as the micro issues under the mandate because economic stagnation is, and will continue to be the principal creator of poverty in Panama. If AID is really concerned about the poor majority in this country,

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it must address the problem of employment creation, first, in the cities, secondarily in the secondary cities, in agro-industry, and in a modernized export agriculture sector. How can AID address these needs? We propose to do so by assisting with '3 parallel programs. The first is already underwaysmall city-market town development integrated with rural development. The second is a program to identify high technology investment opportunities and to promote investment in them. The third is a massive program of skills training tailored to the needs of the first two. The latter would be carried out, Iwith AID help, jointly by the Ministries of Education and Labor in cooperation with the organized Private Sector. The MOE is already actively involved in a massive program designed to provide applied skills training within the formal education system starting in the primary grades. The MOL efforts are complementary with a focus on out-of-school adults who have low skillsilevels and are unemployed. While the institutions are in place, the program will require careful planning and coordination. The identifying and securing of investments in high technology enterprises, however, is neither simple of conception nor execution; nor are the necessary institutions in place. We therefore propose the following: 1) The creation of the capability in an existi ng, or possibly new institution to investigate, research, identify and architect new high-technology investment opportunities --a Panamanian Institute for New Investme Int and EmployMent Creation (PINIEC). It would be the joint creation of the Private Sector and the GOP, and it would have AID technical and capital (R & D) assistance. One feasible pattern would

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-*45.be to make the Institute a joint venture of the newly announced Polytechnic University, the new Agricultural University and the Chambers of Industry, Commerce and Agriculture. The Institute would be strongly science and technology oriented and would be the natural focus of collaboration with international activities, such as AID's proposed program for technology exchange and cooperation. The Institute's fu nctions would include basic and applied research and pilot projects. Once feasible technologies have been proven, the Institute would offer industrial extension services and would have a promotion program jointly with its Private Sector collaborators. Since hig h technology opportunities are in fact a continuum from the already relatively well-known to the as yet unknown, the Institute would have a major extension and promotion program as well as a research program, from the start. Its long term significance, however, will lie in the integral combination of the three: research, extension and promotion. A key element in this program would revolve around the development of profitable import substitution investment opportunities, including alternative-energy sources and food products. 2) The establishment in Panama of the Productive Credit Guarantee Program. If the PCGP program is not extended by Congress, USAID Panama will develop a sui generis project with COFINA and the National Bank, based on a guarantee fund financed by the Panamanian institutions and an AIP development loan, along the lines of existing AID land sale guarantee programs. 3) The creation, perhaps through a USAID Project Agreement with the Chambers of Industry and Commerce, of a program of

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46 USAID-Private Sector joint ventures. AID and private investors' funds would be made available together to provide joint support to a single project -notably projects dealing with labor intensive ind ustries and social services. We would explore the commingling of AIDand private sector funds and the use'of AID guarantees. Potential areas for collaboration include health facilities in poor communities, assistance to small enterprises, day care facilities and other ser vices to facilitate greater participation of women in the labor market, etc. 4) The implementation of a Housing Investment Guarantee program focused on the Metropolitan Corridor. This program will both employ large numbers of people in actual construction and create opportunities for small support businesses, e.g., doors, window frames, furniture. No strategy for employment creation would be complete without addressing the need to slow the creation of employment seekers. As indicated in Part I.A., the workforce of the Metropolitan Corridor is: expected to double by the year 2000. Any action which can hold down this growth enhances the chances of success of the program. Panama has lud notable success in reducing the population growth and birth rates. To reinforce the downward trend, USAID will continue a family planning program. A key focus of this program will be on adolescents who have become the primelcontributors to Panama's population growth. By collaborating in a vigorous campaign to help young women delay pregnancy, while providing them with opportunities to upgrade their skills, USAID will be helping to reduce both population growth and unemployment. IV. Environmental Protection and Enhancement The USAID's Watershed Management Project is only the

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beginning of the Environment Program Panama wants to carry out. Panama's natural resources are being depleted rapidly. The specter of resources shrinking to the point of their being inadequate to support the population is very real. Panama intends to reverse this trend. It has 9 critical watersheds, of which the 1979 project deals with only 3. And there are other environmental problems to be attacked, notably water pollution, urban blight, and unsanitary sewage disposal. AID expects to assist in these efforts, concerned about their "pilot" qualities as well as what these projects can do for Panama alone. In this connection, the fact of the ceding of the Zone to Panama creates an environmental enhancement opportunity (or hazard) of great importance. The merger of a protected Zone with an essentially blighted urban corridor needs to be carried out so as to preserve the environmental quality of the Zone while solving the blight problems of the corridor. A HIG program already projected over the CDSS period will be used to deal with the housing and facilities problems of the Metropolitan Corridor in this light, and we will provide specialized T.A. to help the GOP with land use planning. V. Human Resources Development Panama's development objectives are ambitious. The reinvigoration of the economy is a herculean task, and there are no easy outs. Panama must approximate a Taiwan or a Hong Kong type achievement by adopting a growth/development strategy suited to its special circumstances. The private sector needs a quality and quantity of human resources far beyond that contemplated, until recently. A special element here is the opportunity Panama has to maximize the use of the resources ceded'to it by the Treaties: the ports, the railroad, the 1,000 square kilometers of

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-land replete With its resources, etc. These are assets for growth that Panama can exploit --if it has the skilled leadership and technicians to do so. The quality of human resources in the Public Sector is crucial. Panama already has an excellent layer of top leaders and technicians, 'It, however, lacks the depth the Public Sector must have if it is to carry out all the development programs needed. Specifically, we propose to work with Panama in the development of a massive training program for both the Public and Private Sectors -focused on increasing the abilities of hundreds of Panamanians to plan, organize, and implement development programs, particularly those aimed at eliminating poverty, establishing and maintaining full employment, identifying and developing high technology enterprises, and reversing the natural resource depletion process that, if not reversed, threatens to make of th6 development effort a cruel mockery. This Training Program will consist of the following kinds of projects: (1) Graduate level training in all the key fields -the training to be providedabroad. (2) Assistance for curriculum improvement, R & D, etc. (along with IDB & WB assistance for physical facilities) to build to a level of excellence the teaching and research capabilities of the Polytechnic and Agricultural Universities through the Masters degree level. '3)' Assistance to strengthen and improve the 5 Regional University Branches being developed throughout the country in areas related to development.

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-9 This program will form an integral part of the complex of institutional and human resources required to strengthen the scientific and technological capabilities needed to create and apply new solutions to the causes of Panama's long term poverty problems. We see a natural linkage of this complex to such AID-supported initiatives as science and technology transfer collaboration and Title XII. Proosa toAltr US.G Oraniation orImplementing U.S. Bi-lterl Asistnceto anaa, Af ter 1985. As direct AID concerns with poverty projects per se are replaced, in the next 8-10 years, by programs aimed at sustaining development, at raising permanently the capability level of Panama to grapple with its own problems, and at defending the physical environment and resources base, the less appropriate seems the typical AID Country Mission of the past 28 years. The number and diversity of technical subjects and expertise involved could not be covered even by a very large resident USAID staff. A wide range of pertinent U.S. technical resources would need to be focused on particular Panamanian problems involving short and medium term consultants from a variety of university, industrial, and governmental sources. U. S. technicians needed for extended periods to take part in programs of long duration might better work within the Panamanian establishment, under Panamanian direction. What seems to be needed on the U. S. side is a small unit attached to the U. S. Mission that, on the one hand, performs a U. S. assistance programming function, and,on the other, serves as liaison between U. S. technocracy and Panama's needs for external expertise. It could appropriately be called the Office of the Counsellor for Development Sciences and Technology. This may also

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-50 0 imply a need for a different role for AID/W in being able to identify and supply to a much greater extent than at present resources from outside its regular staff. This proposed change in organization is not related to levels of U. S. assistancewhich would not necessarily go down. One approach would be to create an autonomous Panamanian Development Corporation with which the U.S. would enter into an International (Executive) Agreement to provide technical and capital assistance as agreed, either on a project basis, or on the basis of an annual program budget funded jointly by both governments, or both. The P.D.C. could a lso receive Iassistance from other governments and the I.F.I.'s. While autonomous, it would be affiliated to the Ministry of Planning and Economic Policy and would be regarded by the GOP as its principal economic and 'Social development R & D instrument.

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-51 PART III. ASSISTANCE PLANNING LEVEL From the foregoing sections on poverty, its causes, and the proposed USAID strategy, it is clear that a modest funding level can produce significant results. A pattern can be set which will lead to the elimination of extreme poverty in the foreseeable future, and assure that positive action is taken to resolve the problems which would otherwise continue to generate poverty. While the elimination of present poverty is, if vigorously pursued, within grasp, the efforts to prevent future poverty are only in their initial stages. The Indicative Planning Allocation (IPA) proposed by AID/W for USAID/Panama for 1985 is a paltry $5 million. This compares with a program of $21 million in FY 1978, a proposed FY 1979 program of $17 million and similar levels in previous years. The proposed IPA in Panama represents so drastically rapid a reduction of assistance that it seems explainable only as computer error. The proposed IPA is totally inadequate to permit the strategy herein proposed to be implemented. A five-year Proposed Assistance Planning Level (PAPL) of $122 million for the CDSS period 1981-85 is the minimum necessary to support the modest program planned to assist this resourcepoor country break out of its economic stagnation and establish the bases needed to prevent the worsening of its poverty problems. Growing urban unemployment and poverty and natural resources depletion, are companion spectres that now threaten to reduce the imminent conquest of rural poverty to but a pyrrhic victory. Justification An annual funding level of $20 million (adjusted for inflation) from FY 1981 through FY 1985 will be sufficient to carry out our strategy.

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After year fiv6, with the changed character of the program and the proposed new USAID structure, funding levels may be reconsidered. We believe that the AID/W proposed IPA of $5 million is highly unreasonable because: 1. The lformula employed gives far too much weight to mean per capita income (PCY). For most developing countries, the data base for estimating PCY is highly unreliable. Moreover, reliable or not, Ithe mean is a meaningless measure of poverty. In Lat in America lthe thin veneer of a growing modern sector masks a fragile, vulnerable traditional economy in which the reality is that almost everyone is poor and the poorer half are typically below even the Asia-Afiica poverty line. The distribution of income is the real indicator of poverty, and PCY relates to this not at all. A country like China, for example, is in much better shape with a PCY of $400 and an income distribution of $250-500 than is the typical Latin American countrywithaPCY of $1000, whose distribution is from $40 to $400,000, with the lowest 50% earning from $40 to $150 per capita. We are convinced that PCY, as AID is using it, is highly misleading. If we have to use a formula, in place of analysis, we strongly suggest that it be the median or mode of the poorest 50% adjusted as to rural and urban differences and as to the cost of living variations among countries. The PCY measure is especially inadequate as applied to Panama due to its dollar based monetary system and the skewing of the income scale by the high (U.S.) level wages paid to the employees of the Canal Zone. 2. The IPA factor of commitment should be given moreueight.AIDshould

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-054 4. Our assistance will be well used by Panama. Absorptive capacity is high and will increase as our strategy, with its element of development administration, i carried out. Assistance at the levels proposed here can be accommodate without pipeline increases. We believe that absorptive capacity should be a significant, if not the controlling factor in the determination of the IPA. 5. Finally,y.e believe no determination of funding levels for a country as vital to the U. S. as Panama can justifiably ignore U. S. interests. We strongly believe the factor of U. S. interests belongs in the calculation of the IPA. The security and economic interests represented by the Canal need no exposition here. The safe and efficient operation of this vital artery of world commerce, of immense importance to the U. S., would be jeopardized by a socially and politically unstable Panama. The proposed AID program can pitay an important role in assuring the essential economic and social stability and well-being of this key crossroads country. Proposed Assistaince Planning Levels The following table presents the PAPL required to carry out our strategy. A number of current and proposed FY 1979 and 1980 projects are directly related to the various categories shown on the table. These include ongoing projects in Integrated Rural Development and Rural Growth and Service Centers. FY 1979 projects include Watershed Management and Applied Agricultilral Research loan projects and a pilot grantin Alternative Energy Sources. FY 1980 proposals include loans for Workforce Development (skills upgrading,) and Development Planning and Management (public sector training).

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-55 PROPOSED ASSISTANCE PLANNING LEVELS Fiscal Years ($ Millions) Categories: 1981 1982 1983 1984 1985 TOTAL I. Agriculture and Rural Development Integrated Rural Development 12 10 22 Regional Development 12 12 Environmental Management -12 --12 II. Education and Human Resources Skills Upgrading 10 14 24 Public Sector Training 12 12 III. Selected Development Activities Alternative Energy 5 5 10 Investment stimulation/employment creation 15 15 --30 TOTALS 20 22 24 27 29 122 In addition to the above amounts, $1.2 million is needed for continuing implementation during the FY 81-83 period of the FY 1979 authorized Population II project. PL 480 assistance and Housing Investment Guarantees are not included here (see below).

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-56 PL 480 The Mission's current PL-480, Title II activities consist of a Maternal/Child Health program reaching about 30,000 beneficiaries and a school feeding program now at the mid-point of a planned phase out. These activitie s are implemented through CARE and CRS. The limited recent nutrition 'ata on the USAID target group suggests that malnutrition is increasing, particularly for children ages 1-4 (see part 1. A.). The Mission has programmed for early 1979 a nutrition study which should help us better define the nature and size of a continuing Title II program. It is', as yet, too early to provide planning levels, but we expect that a MCH program will be needed throughout the period of this CDSS, Panamanian officials believe that MCH activities are most effectively implemented by relating them to a school feeding program, and this is one possibility which will be studied. Housing Investment Guarantees A HIG program of $75.0 million is programmed over the 1979-1983 period, with its focus on the Metropolitan corridor. Given the size of the low income housing shortage in the urban areas and the expected continuation ofirapid population growth in the Metropolitan region, we expect that there will be a demand for HIG programs not only through the -period of this CDSS. but well beyond. Considering the expected urban growth and the beneficial effects of housing construction on primary and secondary employment creation, we believe that this AID sponsored mechanism for attracting private investment to social overhead projects will continue to play a major role in Panama's development. We see the BIG program as not merely complementary

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-57 to our strategy of employme nt creation and economic growth, but absolutely essential. With the ever increasing need for low income housing and the related employment potential, we propose to continue the HIG activities after 1983 at an annual rate of about $10.0 million for the foreseeable future. Staffing Implications During the early years of the period of this CDSS, we view the direct hire requirements as being essentially what they are now -i.e., about 30 USDH and 60 FNDH. As the program emphasis shifts from the more traditional activities (rural development, growth poles) to those which are more in the area of the unknown (urban problems, environmental management, heightened science and technology capability levels, high technology industrial development), we see less need for regular direct hire USAID staff and more need for the use of specialized contract personnel. As discussed in Part II, we particularly see a need for large numbers of consultants in the fields of science and technology. It is probable that USDH staff could decline somewhat by 1985, with a proportional reduction of FNDH, while non-USAID personnel needs would be increasing. When the Panamanian Development Corporation becomes a reality, direct hire staff could be even less, though with a significant number of U.S. technicians assigned to the PDC.