If Panama's construction union is a monster (and it is), the industry lobby is Dr. Frankenstein
or "How the Panamanian Economy Works, Part 4"
Versión original aquí.
The original version of this essay was published February 11, 2024 under the title “El Suntracs secuestró al país buen rato, pero ¿qué nos ha hecho la Capac?”
In late 2023, Panama was on full lockdown. But this was no government-mandated, pandemic-related “shelter in place” order — at least during those, we had time to go grocery shopping or step outside to breathe. Actually, until Panama’s Supreme Court of Justice (CSJ) finally showed mercy on the country and ruled against a highly controversial, if not outright fraudulent mining contract, almost every Panamanian lived under a state of siege for several weeks that November.
Beyond outrage at the perverse cynicism of the former administration, which let a handful of thugs hold the entire country hostage, I won’t theorize here as to why it decided to let anarchy reign while most Panamanians anxiously awaited our High Court’s decision on the country’s future. If our democracy endures, I hope history judges them for this, as well as a great many other crimes against the national interest.
The fact that Panama is at the mercy of a tiny minority of extremists is nothing new, however, nor is it unique to unions. Panamanians, in fact, have spent generations living under the control of a small group of corporations that have managed to capture the State in order to extract value from it, mostly through billions in direct subsidies and all sorts of tax breaks. In exchange, these “private companies” provide local consumers with a product that is both wasteful and detrimental to healthy urban growth. As if that weren’t enough, they generate enormous socioeconomic costs, most of which are borne by Panama’s salaried workers, entrepreneurs, and SMEs.
The most painful of these, without a doubt, is the Sole Union of Construction and Similar Workers (SUNTRACS) — yup, as Maoist as it sounds — an organization that, for all practical purposes, operates outside the law. But even if it’s grown to become one Panama’s most powerful and harmful political forces, SUNTRACS is just one of the many hidden taxes that Panama’s middle class must pay thanks to the Panamanian Chamber of Construction (CAPAC).
As I’ve said previously, state capture by special interests, whether corporations or unions, is not unique to Panama. It happens everywhere, but especially in our region, where the world’s highest levels of economic inequality have created weak and easily corruptible states. In Panama, for example, the construction industry accounts for around of 15% of GDP, the highest in Latin America and — despite having fewer than five million inhabitants — twice the regional average. This is the result of a complex interplay of historical and contemporary factors, some of which we share with other Latin American countries, while others are uniquely Panamanian.
But as we’ll see, a truly unbelievable amount of “foreign investment” has been funneled into real estate projects of highly questionable social value, such as the luxury residential skyscrapers blocking the view for everyone else on Avenida Balboa, many of which remain half empty to this day. Panama, therefore, has a supposed “housing shortage” when so many apartments (and much office space) in prime Panama City locations sit idle, like monuments to waste baking in the noonday sun, their interiors covered in mold and mildew from air heavy with moisture.
Them crazy years
It’s hard to argue against nearly 20 years of the region’s most explosive growth. Even though much of it existed only in government figures as inflation ate away nearly half, the reality is that for the first couple of decades of our post-invasion “democracy,” many Panamanians experienced rising prosperity. Especially in the ’90s and ‘00s, ours felt like a very advanced country. Having been to Bogotá, Colombia and Mexico City several times to visit relatives, for example, and with Miami and New York as my “American” references, I was convinced Panama’s capital was wayyy ahead of most Latin American cities.
First of all, there were no McDonald’s, Burger King or KFC in most of those cities until well into the ’90s (as a kid, that was huge). Their buildings weren’t as tall, nor their highways stretch as far and wide as ours. I still remember driving for the first time to my high school in Costa del Este — as the neighborhood was juuust starting to get built — on the marine bridge of the then brand-new Corredor Sur. It was my senior year, and I felt as if both the country and I were about to blast off from the face of the Earth.
(Years later, however, we would learn just how much Panama would have to pay for this and so many other “mega-projects”, actually, boondoggles that created generational wealth for a small group of insiders).
Then I left for college in the United States. Each time I returned on break, there were more shiny skyscrapers, more shopping malls, and more luxury cars, but there were also more of what I consider to be a country’s best possible calling card: foreigners choosing to live here — never as many, however, as those who just came to exploit Panamanian sovereignty to hide their wealth from prying eyes.
At the same time, there was a lot more debt than before, not just sovereign debt but also corporate and personal debt. Many Panamanians nonetheless felt like they were riding an unstoppable money train, with the noise of cranes and cement trucks drowning out critics of a “real estate bubble”. In the meantime, the Ministry of Housing and Land Use (MIVIOT) became a cesspool of corruption rivaling the Ministry of Public Works (MOP) and, naturally, the Presidential Palace.
At the very least, this allowed Panama to avoid much of the economic and political instability that had plagued our sister republics after the “democratic wave” swept through Latin America at the end of the 20th Century — except for Cuba, of course, which remains a dictatorship to this day, lest you forget some places may be cursed forever.
Some benefited more than others, obviously, but enough Panamanians saw their standard of living improve that, for example, a critical mass of voters today still associates the corruption-filled spending of Ricardo Martinelli’s term (2009-2014) — peak money on the streets — with sound economic stewardship. Although we know that presidents have far less control over the economy than we give them credit for, in good times and bad, anyone with half a brain could see Panama was being flooded with foreign capital.
As Venezuela collapsed — it was mostly money fleeing Chávez that “built” Costa del Este — and the world economy struggled mightily after the GFC, we also issued sovereign debt left and right to expand the Canal. For a critical mass of Panamanians, no doubt, things seemed to be getting better. For a few, they were definitely getting much better.
Economic Growth: Quality over Quantity
Yet, as anyone who knows anything about economics can tell you, and as Panamanians are now experiencing firsthand, the type of growth incentivized since our military dictatorship (1968-1989) — despite looking pretty first-world when landing in Panama City’s Tocumen International Airport (PTY) — hasn’t delivered long-term prosperity for most.
Since Venezuela’s slow and steady collapse, and our gargantuan investment in expanding the Canal, official figures published by our Ministry of Economy and Finance (MEF) have looked phenomenal. Especially the most misleading for being so broad, such as GDP and Foreign Direct Investment (FDI), are still cited ad nauseam by our business and political leaders when they are out “selling Panama” to the world.
These figures, however, belie the fact that no country has or will ever develop sustainably using the construction industry as its primary engine of growth. As we see in China’s ongoing economic slowdown, there are two uncomfortable truths to this model:
Over time, the accumulation of more physical capital stops driving economic growth — especially when most of that “capital” is low-quality, unproductive housing.
It is possible to build so much physical capital that you impoverish your own people.
This happens, in a nutshell, because all capital depreciates (looses value) over time, especially if it’s built of cheap materials that can’t withstand life in a tropical rainforest. As a result, investment in physical capital — if we can even consider Dubai-style, man-made islands “capital” — generates diminishing returns, meaning that each additional dollar invested in it yields ever lower value.
For example, China’s over-investment in real estate has led to “ghost cities” filled with empty buildings and all kinds of unused infrastructure, like roads, bridges, parks, etc. This is just terrible allocation of a country’s limited capital, not to mention the fact it requires regular maintenance, i.e. costs money. Regardless of whether it’s borne by private owners or the State, which in China amounts to the same thing, this is a complete waste of resources that could be better invested elsewhere — like education.
As lucrative as the business is for developers, the construction union, and the landowners whose lots are developed, “real estate” represents one of the least efficient uses of a country’s resources, as it starts depreciating as quickly as a brand-new car leaving the lot. Not surprisingly, “low-income housing” has been one of Panama’s largest government expenditures throughout most of my lifetime. Honestly, it wouldn’t surprise me if every dollar we now spend on building homes is subtracting value from the economy.
The dangers of real estate
For a comparative example, let’s look at Greece after the 2008 Global Financial Crisis (GFC). By the way, during this time, Panama was soaking up Venezuelan bolívares like a sponge — back when they were still worth something — as well as expanding the Canal, all of which fueled yet another construction boom. Many Panamanians, therefore, are oblivious to the ravages brought upon the rest of the world by the GFC.
I highly recommend watching this video in full from “Economics Explained”, but to summarize, the author describes how, after it joined the euro, real estate development in Greece — aside from sowing the seeds of the Eurozone crisis in the 2010s — resulted in economic growth, for most Greeks, only on paper. Much like when Panama regained sovereignty over the Canal Zone in the early 2000s, the Greek real estate sector also experienced massive growth when it swapped its drachmas for euros (and, more crucially, swapped Greek interest rates, some of the highest in the continent, for Germany’s rock-bottom borrowing costs).
To paraphrase the video:
Building a house significantly increases economic output in theory [emphasis mine] because housing is an important asset. It is also beneficial for employment levels, as even constructing a basic house keeps many workers occupied for a long time, not to mention the additional production required for roads, plumbing, and electrical systems to support these new homes.
The problem with economic growth achieved this way is that once a house is built, the person living in it probably won’t need another one for a long time. Moreover, that house produces nothing of value that could be sold to pay off Greece’s ever-growing debt, which was being taken on to fuel this economic bubble. To make matters worse [just like their Panamanian counterparts, Greek developers] weren’t exactly eager to pay taxes.
As the explainer makes clear, foreign investment truly benefits an economy if it is used to develop industries that create value in the future. When the Greek bubble finally burst, but before they were forced to work for normal wages — instead of the inflated salaries driven by the boom — Greek unions triggered massive social unrest. Things got so bad that, for a moment, it looked like Greece might leave the European Union (EU) altogether.
The similarities between Greece then and Panama today are disturbing. In particular, Greek unions refused to accept a lower standard of living when, inevitably, austerity measures were imposed by Germany and other EU members (as a condition for pulling Greece out of the hole its real estate-driven economy had crashed in). This is how Europe, and the rest of the world, avoided the greatly feared Grexit.
Toxic Relationship or Co-dependency? How to tell?!
For decades, the relationship between the construction industry and Panama’s economy has had nothing to do with free markets — in other words, with some “natural equilibrium” between the supply and demand for housing — and everything to do with public policy. Enacted by the President, the National Assembly, and even the Judiciary, these policies have allowed the industry, both capital and labor, to hoard by far the largest piece of Panama’s economic pie, with devastating consequences for the country.
From the notorious (and heavily subsidized) preferential mortgage rate, which, under the guise of “social-interest housing”, promotes the mass production of low-quality, haphazard urban sprawl — not to mention a highly unskilled labor force — to the legal use of real estate as a vehicle for financial speculation, the Panamanian State has guaranteed construction companies, as well as the banks and law firms that finance and legally represent them, respectively, profit margins so obscene they’d make any local entrepreneur weep with envy. Or rage, who knows?
Now, if this were only about billions funneled into the industry via direct subsidies, perhaps Panama wouldn’t be in such bad shape. Many far less corrupt countries subsidize “politically important” industries (though they tend to be among those that create value, not extract it). And even Scandinavian countries have militant unions — yet none as extreme as the monster created by the CAPAC.
The bigger problem for Panama, though, is that this industry has quite literally stunted the healthy growth of the economy in which it operates and, by extension, of its society — like a tumor growing inside a young child. Beyond the direct costs it imposes on the general population, Panama’s traditional reliance on real estate development has crippled most of its other (actually) productive sectors, as well as bifurcated our workforce into a very small minority of highly-skilled intermediaries, on one side, and, on the other, most other Panamanians — who don’t need much training for the few, low-skill jobs our economy creates.
As Felipe Chapman clearly points out in “Hacia Una Nueva Visión Económica y Social en Panamá” — a must-read for anyone wishing to understand the country — the economic boom that began in the early 2000s happened despite (emphasis mine) low total factor productivity (TFP) growth. Chapman attributes this, among other things, to “the poor quality of education and the lack of skilled human resources.”
Certainly, Panama has grown economically, and some people here have made a killing. But the cold, hard reality is that Panamanians remain among the least educated, least skilled, and least productive people in the region. As we’ll see, this isn’t a bug of our economic model, but a feature.
I call dibs on everything
To understand how such a basic industry became so powerful — after all, the Ancient Egyptians were already building massive structures between 1000 and 1500 years before J.C. — it’s worth starting with a little history of the Americas.
If there’s one thing that distinguished Iberian (Spanish and Portuguese) colonization of Latin America from British colonization of what is now Canada and the United States, it was land ownership. For many reasons, including geographic and climatic factors, land in North America was appropriated (read: stolen from the natives) in a much more “equal” way than land colonized by the Iberian kingdoms.
Of course, the Southern United States also had vast plantations very similar to those in Latin America. In fact, this was the main reason the so-called “Confederacy” tried to secede. A short-lived slave republic, it saw its natural expansion southward, where an economy much like its own already existed — starting with Yucatán, where henequen was to the Mexican peninsula’s landowners what cotton was to their counterparts in the “Deep South”.
However, and this is key, both Canada and the U.S. actively incentivized individual land ownership and development through public policies. For example, the U.S. Homestead Act of 1862 offered “state-owned” land to anyone willing to settle and cultivate it for a certain period of time — just don’t tell any Panamanian “squatters” who’ve been living on the same land for years, before anyone even bothered to “develop” it.
This somewhat equal distribution of land — the most important resource at the time and, for many, still today — not only created a relatively more equal economy and society in “Anglo-America”, but laid the foundations for a relatively stable political system going forward (at least compared to Latin America’s, and at least until 2008).
In Latam, however, colonization imposed a strictly hierarchical system of land ownership in the shape of an inverted pyramid, since conquistadors were “granted” control by their respective monarchs over all the territory they managed to conquer in the Crown’s name. As Diego Sánchez-Ancochea describes in “The Costs of Inequality in Latin America: Lessons and Warnings for the Rest of the World”:
When the Spaniards arrived in the Americas, they tried to replicate the social, economic, and legal systems they had left behind in the Iberian Peninsula. Their hope was to get rich quickly, while working as little as possible. To achieve this, the conquerors first established “encomiendas”, which gave them ownership over large tracts of land as well as the right to tax indigenous people living there.
A small elite of newcomers received an enormous share of resources from the Crown. For example, Hernán Cortés alone “controlled” over 100,000 [natives]. Indigenous people were forced to work for the encomendero and pay taxes in the form of corn, wheat, textiles, chickens, and many other goods, all to sustain the Spaniards’ lavish standards of living.
This system not only concentrated most of the land (capital), but also centralized economic and political power in the hands of local elites throughout the entire region. These elites, by which I simply mean a minority of the population that controls the majority of a country’s resources, quickly figured out how to turn their young republics’ natural and human resources into enterprises for personal enrichment. First, exploit land for primary production, namely 1) agriculture and 2) mineral/hydrocarbon extraction. Then, sell these “commodities” to developed countries.
This dependence on industries requiring low investment and low-skilled labor has proven to be the congenital birth defect of all Latin America’s economies, with the majority of a country’s national income going straight into the pockets of its respective elites. Since the very beginning, then, the region’s “private sector” has been characterized more by politically-powerful business groups seeking to limit competition and/or exert market control, than by true entrepreneurs whose ideas and hard work have created real value. To this day, these groups have practically zero incentives to invest in, or push their governments to invest in, the development of a highly-skilled workforce.
So why would they?
Spring of the Oligarchy
By the late 19th Century, as the first wave of globalization reached Latin America, U.S. and European demand for commodities skyrocketed, further increasing the power of the region’s elites. New technologies like the steamship, railroads, and telecommunications allowed the big Latin American landowners — on whose plantations and mines toiled most of the region’s “citizens”, usually, under inhumane conditions — to dominate international markets and hoard even more wealth.
In most cases, this happened with direct state support. For example, in Argentina, the 1826 Land Lease Law (Ley de Enfiteusis) allowed “investors” to acquire massive state-owned lands for agriculture in exchange for a fixed rent. This further intensified the concentration of land into massive estates (latifundios), allowing a handful of families to exploit the country’s legendary farmland for their own benefit, while millions of Argentinians, and newly arrived European immigrants, were crammed into the slums of Buenos Aires, working long hours for paltry wages.
To some extent, the same happened in Brazil and Colombia with coffee; in Mexico with oil (until it was nationalized well into the 20th century); in Central America and the Caribbean with bananas, cacao, and sugar; in Chile with copper and other minerals; and so on, across the region. Panama was no exception, except our main commodity wasn’t bananas, coffee, or hydrocarbons: it was land itself.
Construction in the 19th and 20th Centuries, first of the Trans-Isthmian Railroad, then the Interoceanic Canal, allowed wealthy families and well-connected businessmen to profit enormously from the sale of real estate. But the real gusher for local landowners came with the passage of Law 32 of 1927, regarding incorporation.
Panama’s corporate law — alongside the “international services platform” built by the country’s top law firms and banks — facilitated converting land and property into international investment vehicles. For anyone looking for anonymity, returns, and/or “safekeeping” assets (even from one’s own legitimate tax and legal authorities), Panama offered the perfect product: brick and mortar built by unskilled labor and, of course, a shell company to hide its true owners.
Panamanian landowners had found their cash crop: housing. They would sell it around the world by way of a legal fiction called Sociedad Anónima, which would be “duly incorporated under the laws of the Republic of Panama” and, therefore, have its property rights fully guaranteed by none other than the Panamanian State — without the Panamanian taxpayer receiving any compensation as a result.
The rise of real estate in Panama also brought with it a new professional elite, mainly lawyers, bankers, accountants, and civil engineers. Although most of them came from the same old landowning families, inevitable in a small country like ours, these careers also allowed a few Panamanians from lower classes to climb the socioeconomic ladder, no small feat in Latin America. As fate would have it, this would cement (pun intended) the power of the construction industry as the undisputed ruler of Panama’s economy. CAPAC and SUNTRACS, now two heads of the same fire-breathing dragon, would soon reign supreme.
Something else to learn from the Greeks?
Just like in Greece, most of the “foreign investment” in Panama has ended up fueling the construction of luxury apartment buildings and office towers in prime locations (and some beach areas), rather than being invested in industries or services that require skilled labor.
At least for now, Panama hasn’t yet developed any of China’s “ghost cities”. But careful, because while China’s real estate bubble, as dangerous as it is, was mostly inflated by the historical savings of Chinese households (and the Chinese Communist Party), Panama’s building boom has been financed largely through debt.
As Chapman clearly points out, Panama’s growth has come from massive borrowing, creating an illusion of prosperity that is unsustainable in the long run. This means that, unlike in China, where, at the very least, wasted capital still belongs to the Chinese people, Panama has borrowed to spend so wastefully. This is money we still owe local and foreign creditors, and it’s by far the biggest liability for our middle class.
The construction-driven economic model that has looked impressive on paper — and in photos of the Panama City skyline — has failed to improve quality of life for most Panamanians. Worst of all, it has not diversified the economy in a way that makes it self-sustaining. For years, we’ve been told that construction was the country’s “growth engine”. But the reality is that the industry has become an obstacle for sustained, broad-based economic development, as well as one of the biggest threats to the social mobility of most Panamanians.
Therefore, as a country (or a “people”), we must critically reassess the toxic, codependent relationship between our State and this industry. Public policy should be designed not just to benefit one specific sector, but to promote economic diversification and long-term prosperity for all. This means rethinking subsidies, tax incentives, and regulations that have entrenched a model that makes us more unequal by the day.
The more unequal we become, the more divided and distrustful of one another we’ll get — and the less willing to sacrifice for the common good. Believe it or not, there is such a thing as the “common good”. It usually derives from a shared sense of purpose and, for the most part, societies become prosperous when they are able to figure this out democratically.
Panama has the potential to become a regional leader in sustainable development, but this will require a serious commitment to changing our current model, including via political innovation. We must look beyond short-term gains and invest in a future where all Panamanians benefit from economic growth, not just those tied to a single industry — especially when that industry extracts and, in some cases, destroys value. Only then can we avoid the mistakes of our regional neighbors and build an economy that is resilient, diversified, and fair for future generations.