The copper mine wasn't the only state asset being exploited without due compensation
or “How the Panamanian economy works, Part 1”
Versión original en español aquí.
The original version of this essay was published on January 19, 2024, under the title “La mina no es la única que explota/ba el recurso nacional sin pagarle al Estado”.
Turns out the mining contracts signed by the previous administration (Nito & Co.), which Panamanians became unwilling experts on, were steeped in all kinds of corruption and illegality. While the protests against them had multiple causes, it’s clear to me that most of us who oppose them — unless driven by political ambition or purely environmental concerns — do so primarily because we see Panama’s resources being literally extracted from our soil without the State (or, if you prefer, “the people”) receiving fair compensation. In this case, the issue boils down to how much of the international market value (or sales price) of these metals will actually remain in Panama.
However, in this first edition of Versión Criolla, I’d like to argue mining is not the only sector in Panama that operates this way. In fact, it’s not just multinational corporations like First Quantum Minerals (FQM) and Hutchison[1] that exploit state resources without paying either fair or adequate compensation for the privilege.
On the contrary, the vast majority of Panama’s major business groups are profitable precisely because they enjoy extraordinary access to the State and its resources — not because the products or services they sell are inherently superior to their competitors’, as might be the case with companies like Apple or Amazon (at least before they grew large enough to act in anti-competitive ways).
In other words, what many Panamanian companies sell — and thus their revenues — depend heavily on the value they extract from national resources, for which the Panamanian State receives little to nothing in return.
Latin America’s Original Sin
Before I begin, I want to emphasize none of this is unique to Panama. Across the entire region — from colonial-era plantations to today’s large conglomerates — the Latin American “elite”, by which I simply mean the minority of the population that controls the majority of state resources, has generally exercised said control for its own benefit rather than the country’s.
I suspect that most of us, given the chance, might have done the same at some point.
This doesn’t mean Panama — at least parts of its population — hasn’t benefited, perhaps even significantly, from the exploitation of State resources by private interests. It does mean, however, that any “national” benefit has mostly been incidental, and in some cases, counterproductive in the long run (we’ll discuss this more in later issues).
In his book “The Costs of Inequality in Latin America: Lessons and Warnings for the Rest of the World”, Diego Sánchez-Ancochea (Professor of Development Economics and Director of the International Development Centre at the University of Oxford) argues that over a century of inequality in Latin America has created many vicious cycles. These cycles — marked by poor economic performance, weak political institutions, and social problems — have led to low growth, exclusionary public policies, violence, and social distrust, all of which, in turn, have reinforced income concentration. For instance:
[S]tarting with the economy, a small elite, which has always controlled a large share of land and financial resources, has faced limited incentives to increase productivity and invest in more advanced economic sectors. To be sure, the business elite has diversified into new activities at different times, but they have generally been low-risk, not particularly sophisticated, and/or dependent on the government.
This is still evident, for example, when considering the list of the ten wealthiest Latin Americans, a group made up of nine men and one woman coming from just four countries (Brazil, Chile, Colombia, and Mexico). Their revenue comes from highly regulated telecommunications services, (Carlos Slim), finance, (Jorge Pablo Lemann, Joseph Saphra, Luis Carlos Sarmiento Angulo), food and drinks processing (Marcel Hermann Téllez, Iris Fontabona, Carlos Alberto Zipicura), and mining (Iris Fontabona, Germán Larrea Mota Velasco, Alberto Baillères González). Why would they move into new high-tech sectors when they can secure huge returns in low-risk activities?
Panama’s story isn’t much different. While our business elite may bask in the glory of the unprecedented fortunes accumulated by some of its members, the reality is that the bulk of the country’s economic output has long depended, in one way or another, on the exploitation of state resources.
In “Toward a New Economic and Social Vision for Panama” (essential reading for anyone seeking to understand our country) economist and former Finance Minister Guillermo Chapman lists the three “productive” industries that most grew in Panama in the last decade — excluding mining, the top one, which grew by 16.5% (comments are mine, not Chapman’s).
Construction (13.8%) — Highly regulated, with significant public subsidies.
Utilities (electricity, gas, and water) (9.7%) — Dominated by legal monopolies and duopolies that extract millions from markets with no competition, without compensating the State for such a right.
Financial intermediation (5.8%), including legal and financial services provided by Panama’s “international business platform.” This sector, besides being highly regulated, depends almost entirely on Panama’s legal code — a social resource provided by the State.
Conglomerates that so profit in Panama, whether via monopolistic exploitation or lack of competition, have generated billions of dollars for their owners and executives, otherwise impossible without access to the Panamanian State. As explained in “The Costs of Inequality”, these rents — income derived above and beyond the value added by a company — are “generally not reinvested in innovation or increased productivity.” Why would they be? Private companies with exclusive access to national resources already have a huge built-in competitive advantage.
In summary, the innate inequality that Latin American republics inherited (mostly) from their Spanish colonizers has ensured that certain groups — often the same ones, but not always — still extract immense value from state resources, even well into the 21st century. These resources range from land (and what’s underground) to physical and legal infrastructure.
This type of access — straight-up control in some cases — has shaped the region’s socio-economic development, determining each country’s primary economic activities, and which parts of the population benefit the most from them. As we’ll explore in the future, these activities typically do not require a highly-skilled labor force.
Sadly, on the rare occasions that Panama’s major business groups do reinvest their profits into the local economy, it’s often to maintain or increase their access. This “reinvestment” usually takes the form of donations to political campaigns or outright purchases of legislative votes and executive decrees.
In return, our political leaders write laws — the rules of the game — that ensure these companies and industries, having extracted value from the state for generations, may continue doing so. This process feeds the cycle of inequality, reinforcing it every time.
Every economy is a political economy
In later editions, I’ll analyze each of Panama’s so-called “productive” industries in detail. For now, though, I’d like to illustrate two key concepts: how the State creates a market and what is a monopoly, using the example of Cable & Wireless Panama (CWP).
In 1997, during the wave of privatizations that swept through all of Latin America, the government of Ernesto Pérez Balladares “privatized” Panama’s Instituto Nacional de Telecomunicaciones (INTEL), the state-owned monopoly that provided nationwide telephone service. In doing so, it effectively created the national telecommunications market.
How did this happen?
The Panamanian State, represented by the Pérez Balladares administration, signed an agreement with Cable & Wireless (C&W), the British telecommunications giant. The agreement granted exclusive rights to C&W to provide fixed-line telephone services throughout the country for a specific number of years — in exchange for 49% ownership of a newly formed company. This mixed (public-private) company would also keep all of INTEL’s assets and infrastructure, effectively owning the telecommunications market.
Cable & Wireless Panamá, S.A. (CWP) thus became the country’s new and, for a long time, only telecommunications provider. This process highlights an important economic truth: markets are political constructs because they are human constructs — they’re not natural phenomena, even if some markets are less regulated than others.
Fixed-line telephony in Panama, therefore, went from being a public monopoly to a private one — but, crucially, one in which the State retained nearly half of ownership. To this day, Panama owns almost half of CWP yet, as far as I know, the government has never been directly involved in the company’s daily operations.[2]
The rationale behind this contract was to leverage the British multinational’s experience and investment capacity to improve and expand Panama’s telecommunications infrastructure. At the time — just years after the fall of the Berlin Wall — the prevailing global development narrative championed two ideas:
Governments were inherently inefficient — despite the fact that the independent state agency that runs the Panama Canal (Autoridad del Canal de Panamá, or ACP), for all its criticisms, runs like clockwork.
Only private enterprise can generate enough wealth, security, and prosperity for modern nation-states.
Monopoly Money
Now would be useful to examine the case of Teléfonos de México (Telmex) and compare how the telecommunications markets were created in Mexico and Panama, respectively.
In 1990, Carlos Slim (mentioned earlier) became one of the world’s richest men after “acquiring” Telmex, Mexico’s state-owned telecommunications monopoly. Privatization handed Slim control of the entire telecom market, providing him millions of customers with no alternative providers.
Unsurprisingly — except perhaps to the politicians who promoted the deal — without significant incentives for Telmex, now a private corporation, to deliver better services at lower prices, Mexican consumers experienced the opposite.
By the mid-1990s, phone services were so expensive, Mexicans joked they had “the richest poor people in the world.” High costs and a shitty product — including limited access to broadband internet and other digital technologies as they became available, especially in rural areas — was what Mexican citizens got in exchange for privatizing Telmex.
Meanwhile, the contract signed by then-President Carlos Salinas de Gortari allowed Carlos Slim to extract biblical sums of money from a captive market — without a single peso going back to the Mexican treasury. Slim’s profits were so gigantic that he eventually built himself a private museum, Soumaya, to house the art collection his wealth afforded him.
By the way, at this time it’d helpful to remember that the Medici and Borgia families of Renaissance Florence also funded artists like Michelangelo and Leonardo da Vinci, mainly, to legitimize their wealth — despite being notorious for their greed and brutality. Similarly, today’s huge corporations often sponsor charities and cultural institutions to enhance their public image, as I can attest having visited many a-gallery and museum wing “donated” by the Sackler family.
Looking back, however, we clearly see what happened: rather than fostering innovation and economic development, the creation of a “market” for telecommunications in Mexico left the country lagging behind its regional peers.
Far from the promises made by “experts” (many of whom directly benefited from these types of deals), Mexican consumers endured decades of overpriced, low-quality services. Meanwhile, Telmex transformed into a multibillion-dollar corporation, enriching its shareholders at the expense of ordinary Mexicans.
This type of wealth, historically accumulated in Latin America by extracting value from the state, is one of the primary reasons the region has remained so economically unequal and, consequently, politically unstable, even centuries after independence. As Telmex legally drained billions from Mexican consumers through a state-created monopoly, telecommunications became an anchor dragging down Mexico’s socioeconomic development.
Households and small businesses, which were already struggling mightily, were hit hardest by monopolistic prices, particularly as telecommunications expanded to include internet services, which became a critical utility of modern life. Before long, Mexican consumers and entrepreneurs would face another blow: a devastating currency devaluation that wiped out their savings and plunged many into bankruptcy, poverty, and despair.
Economic Rents: The Cancer of Capitalism
Returning to Panama, when fixed-line telephone services were privatized, CWP inherited all the extraordinary benefits that come with a national monopoly, especially in such a vital sector. By blocking competition and directly shaping the market, the Panamanian State guaranteed CWP healthy operating margins year after year — a privilege without precedent.
These revenues could have easily been extracted, as in the case of Telmex in Mexico, from Panamanian consumers through inflated prices and/or subpar services. Indeed, C&W, like Telmex, also faced accusations of overcharging customers. However, every time CWP distributed dividends to its shareholders, Panama received 49 cents of every dollar — and this has made all the difference. The rents generated by CWP, earnings above the value it provided, were partially recaptured by the State, thanks to the ownership stake it secured in the privatization process.
Theoretically, Panamanians paid higher-than-necessary rates for phone service thanks to public policies, yet much of the extracted wealth flowed back into State’s coffers — albeit subject to Panama’s corrupt and inefficient redistribution systems, but that’s a topic for another day. Owning almost half the phone company, the government ensured it would retain a significant share of the value extracted from its citizens.
To put things in perspective, in its first 26 years, privatization generated over $9 billion for Panama in dividends and other contributions. In 2022 alone, CWP paid the national treasury nearly $30 million, money that returned to the Panamanian people (at least in theory). Even more remarkable, the remaining 2% of CWP shares — C&W also got 49% — is owned by its employees.
Again, much of this revenue was money extracted from Panamanian consumers. This cannot be ignored, but at least half of it had the potential to be reinvested or redistributed through public policy. And while I can’t say exactly how this money was used — though it clearly wasn’t invested in waste management — what’s certain is that it wasn’t spent on Impressionist art collections from early 20th-century France, ya feel me?
Value Creation vs. Extraction: All Growth Is NOT the same
The contrasting privatizations of Telmex in Mexico and INTEL in Panama (via CWP) illustrate how public policy shapes markets, and can create generational wealth for certain individuals, economic groups, or multinational corporations. The critical difference lies in whether this wealth stems from value creation — as seen in businesses like Amazon, which built a global logistics empire — or value extraction, where profits come from leveraging state resources, including legally restricted markets.
Today, we must examine where Panama’s economic value actually derives from. More importantly, we must determine whether this value is created by entrepreneurs or extracted by insiders — though here the two roles often overlap in the form of “businessmen” inside the government, mostly, bonafide rent-seekers.
While many Panamanians bust their butts to generate wealth — working in offices, running small businesses, raising other people’s kids — too many of the country’s big corporations focus on extracting it, namely, by positioning themselves as intermediaries between the nation’s resources, on one hand, and its general population, on the other.
Whether they’re due to geographic luck or divine intervention, Panama’s resources belong to all Panamanians. These assets — including all kinds of infrastructure that’s as ours as the Canal — should generate returns that benefit everyone, not just a privileged few.
‘Cause let’s be clear: One thing is to do what Jeff Bezos did, which was to create immense value through Amazon, starting with just a computer and an idea — despite criticisms about how his company exploited the U.S. Postal Service, Bezos fundamentally built something new. Carlos Slim, by contrast, extracted value from millions of Mexican consumers, many of whom were already poor, by controlling access to basic services and denying them better, cheaper alternatives.
In the next edition of Versión Criolla, we’ll take a closer look at a “Panamanian” company that profits, much like Telmex, by directly exploiting one of the country’s most important assets without adequately compensating the State. As Panama’s most valuable asset faces growing uncertainty due to changing weather patterns and a shifting geopolitical landscape, we must urgently start maximizing return on investment (ROI) as a country — before it’s too late.