When quality education and high living standards are NOT part of your growth model
or “How the Panamanian economy works, Part 5”
Versión original aquí.
The original version of this essay was published February 18, 2024 under the title “Cuando la educación de calidad, y la calidad de vida, no encajan en tu modelo socioeconómico”
As we discussed last week, most of the “investment” in Panama is directed toward land and real estate thanks to public policies that encourage construction — primarily of apartments or office buildings — to be used for financial speculation and/or “wealth protection,” rather than for living or working. This additional demand for real estate relentlessly drives up the cost of living for all Panamanians, especially in three key areas:
Housing and office space, particularly in the city center.
Any type of general construction, as both labor and material costs are pushed higher.
All unskilled labor, which severely impacts the profitability of almost all small and medium-sized businesses (SMEs) that rely on Panamanian workers.
This “extra” demand is extraordinarily lucrative, unfortunately, both for our political leaders and for the Capac-Suntracs mafia, Panama’s construction cartel, the unholy matrimony of the national builders’ association (business lobby) and the construction workers’ union. As a result, neither of them spares any effort to ensure the government continues pouring billions of dollars into the industry, even after all that has happened in Panama since the COVID-19 pandemic.
It’s been a bumpy ride, to say the least.
The vast majority of this money goes to beefing up operating margins for local construction companies, many of which are often spoiled and inefficient — just like the labor they employ, which they have no incentive to make more productive, since laying brick, tough job that it is, doesn’t require much training. The end result, for those who don’t fully understand the model, might seem paradoxical.
Panama is quite expensive — both for consumers and entrepreneurs — yet it has one of the least trained, least productive workforces in the region. On the other hand, the Panamanian government “invests” an average of 4.9% of GDP on public education, placing the country in the mid-to-upper range within the region. However, Panamanian students continue to rank at or near the bottom of international academic performance tables. For this, most Panamanians (rightly) blame the dozens of teachers’ unions, which, like all public-sector unions, have an inherent conflict of interest and should therefore be illegal.
But using the Ministry of Education as a warehouse for botellas (politically appointed check-collectors) is just one of the many ways local politicians “collect their dues”, in exchange for writing the rules of the game that allow the same players to always win. These rules define, for example, how housing may be used in Panama, who can privately profit from public infrastructure, which markets will “remain” free and which will become monopolies, duopolies, or oligopolies, and so forth.
Therefore, both our high-cost, low-quality middle-class life, as well as the public education system on which most Panamanians depend — so bad as to harm its students — are features of the model, not bugs. So far, our lack of vision and profoundly wasteful spending has had no serious consequences for the country. Not yet, at least, but I wouldn’t be so sure Panama won’t end up very much like Venezuela in the not-so-distant future.
Indeed, the price for all these unproductive “investments”, along their extremely high social costs, will soon include the loss of our democracy at the hands of some populist — whether from the right or the left, believe me, they’re equally rotten — just like it’s happening across the world. Panama has simply become too unequal to have any sort of social harmony, let alone the political stability that became our calling card after the U.S. invasion in 1989. We really must change our so-called growth model, then, if we are to have a durable, vibrant, and robust democracy.
Shitty Incentives
Before continuing, I want to clarify: I am not accusing Panama’s construction lobby, or any of its members, of consciously conspiring with every government we’ve ever had — democratic or dictatorial — to ensure that the Panamanian population is among the least trained, least productive in Latin America. The same goes for the construction workers’ union. This is not about conspiracies or “deep states”, villains or superheroes. The world doesn’t work that way. It’s simply the result of people who, in most cases, are both well-intentioned and patriotic (as they define it, of course) yet have huge incentives to prioritize X over Y, say, real estate development over education.
However, Panama’s core problem is that these incentives run counter to the multi-billion, multi-generational investments the state should be making in its people and critical infrastructure; investments that would require an unprecedented increase in revenues (though not necessarily higher taxes) to ensure that most Panamanians gain access to a 21st-century educational/vocational system.
(honestly, though, I’d settle for just teaching them basic English and math, and making sure that the most vulnerable students aren’t exploited).
For Panama’s business and political elites: construction companies, real estate developers, law firms, banks, and lawmakers, there’s just no reason to invest in human capital — not if they want to keep the economic rents they’re used to. This is the main reason, far more than government corruption or bureaucracy, why the Panamanian State has never taken education seriously. Beyond functioning as daycare — so that working parents can stop raising their kids to go do whatever “the market” considers productive, usually hours away from where they live — schooling plays no role in our economy.
As I explained previously, why invest in more advanced sectors, especially those that require highly skilled labor, when Panama already gets paid handsomely just for parking foreign investors’ money (don’t ask for their names, though) in any of the thousands of empty apartments in the country? All of them built, of course, by the union, yet almost none of them affordable for the average Panamanian family. More than a housing crisis, what Panama really lacks is the political will (or a pair) to challenge this corrosive alliance between industry and labor.
Hidden Taxes: The Real Costs of the Construction Cartel
Unfortunately, it’s not easy for people to conceive — let alone feel — what economists call opportunity costs: the fact that every dollar invested in X is a dollar that therefore cannot be invested in Y.
First and foremost, high-quality education is expensive and yields results mostly in the long run — too long, actually, for a politician to be able to show voters in a single term. Additionally, Panama’s capital owners, to be perfectly honest, don’t need a highly skilled workforce.
Since land still represents the majority of the country’s physical capital, the incentive for landowners (myself included) is to develop it for short-term profit. Thanks to Panama’s corporate laws, which allow land and housing to be used as an “investment”, the highest and fastest returns come from real estate development. Unfortunately, most of these (upscale) buildings are not for actual use, but for financial purposes, specifically, asset safekeeping and speculation, or betting that property prices will keep rising indefinitely — maybe even forever, why the hell not?
Instead of housing (built by the private sector) being used as a place to live, most of it is used by foreign and local “investors” to store their money, especially if someone is trying to take it away from them, whether it’s the IRS, Vladimir Putin, the DEA, the Maduro regime in Venezuela, etc. To make matters worse, if you can get the government — not just through legal and tax benefits, but through direct subsidies — to cover the other side of your business model, you just can’t loose.
Take, for example, our so-called “social interest housing”, as well as the mortgages that private banks originate for them. One of the greatest rackets in Panama, it’s a classic case of privatized gains and socialized risks — and loses. These mortgages are not just backstopped by the government, they are straight-up subsidized. As I always try to explain to my friends in the industry — whom I love like brothers — it’s easy to go through life without “fearing success” when the state reduces your risks and fattens your margins.
So, beyond badmouthing public school teachers, owners of construction companies — as well as union leadership — have no real interest in seeing the Panamanian government invest in education. Not because they’re bad people, but because they simply don’t benefit from it. Once they extract the laws that enable their racket, they’re not going to make a fuss if these same politicians use the Ministry of Education, and most other government agencies, as a dumping ground for political appointees from their respective parties.
To put it bluntly, our elected leaders will always demand something in return for passing the laws which benefit the construction industry — too often to the detriment of the rest of the economy. Indeed, this is the value they extract as intermediaries between the state and its citizens. That “something” is usually the abuse of their office without repercussions from “business leaders”, mostly clan patriarchs and chieftains of one sort or another. That’s how — as our version of Mussolini liked sayin’ — they enter politics without a pot to piss in, and leave it freakin’ millionaires.
This abuse of power takes many forms. Some legendary figures in our National Assembly have turned it into an art form, but one well-known tactic is diverting state funds — not just the money gifted through “tax benefits” to campaign donors — toward themselves, their friends, and their families by way of the public payroll. For this reason, government officials use the national treasury, including the well-paid jobs it underwrites, as rewards to distribute among loyal allies (patronage), instead of as money to pay the best-qualified people, which would manage the state in the interests of its true owners: its citizens.
Starting a Business in Panama: A Masochist’s Game
The lack of high-quality education doesn’t really hurt Panama’s major economic groups. Actually, the ones who most suffer are small and medium-sized businesses and local entrepreneurs. If you’ve ever tried to start your own business in Panama (without access to your own capital), you know that entrepreneurs are probably the group that is most hurt by our low living standards. Not only are they forced to hire low-productivity workers — which they must then spend additional resources training in even basic job skills — but they must also pay our corrupt and inefficient state all kinds of permits and fees, not to mention a good chunk of their employees’ social security!
This is yet another hidden tax imposed on the middle class by Panama’s construction cartel. For entrepreneurs who start with mostly nothing — and therefore must rely on state bureaucracy to be as efficient as possible — trying to build a business is a daily struggle against the affordability, or lack thereof, of high-quality everything in Panama, including public services. For those with resources, however, the Panamanian State works wonderfully — or at least removes red tape at “reasonable prices,” making corruption a mere operating cost for the country’s largest companies.
On top of the scarcity they create, Panama’s few skilled workers are hoarded by the largest companies in the real estate industry (or related fields, like legal and financial intermediation). Again, thanks to public policies that make them extraordinarily profitable, these are the only businesses in the country that can afford to pay decent wages. And here I’m speaking in relative terms, because even wages for skilled labor are suppressed by the market power of just a few business groups that wield disproportionate influence over our labor market, too.
This is a devastating opportunity cost. The lack of real investment in human capital development, including using the Ministry of Education to fill the public payroll with political allies, leads to two key problems:
A very low-productivity workforce in general.
Scarcity of highly-skilled labor, and therefore of jobs that require it.
Even multinational corporations, lured here with generous tax benefits, only set up shop in Panama because the government let them bring their own workforce. They never expected to find skilled labor locally — though there are plenty of construction workers to build the luxury apartments these expats are now renting in Costa del Este and Punta Pacífica.
Such costs, though, are indirect, making them hard for us to perceive. Since we don’t pay for them immediately, they’re not at the forefront of most people’s minds. In the meantime, a great many Panamanians are working themselves to the bone just to avoid ever having to depend on their State for pretty much anything, let alone education, healthcare, and social security.
If my child goes to private school, then, I mostly just complain about the teachers’ union at private events and on social media. And if I have the misfortune of relying on a corrupt and inefficient state to ensure that my children can compete in the 21st-century labor market (although, again, I’d settle for them just being taught basic English), I too complain — but I have a thousand more pressing concerns. For example, how am I going to pay my mortgage, convince the bank not to repossess my car, or deal with rising interest rates. At the very least, public schools take care of my kids while I spend my time at work or, most likely, commuting to and from.
The Perfect Racket
This “growth” model also imposes direct costs on the vast majority of Panamanians, making everyday life far more difficult and expensive than it should be. That said, enough people have their interests tied to the survival — or unrestrained expansion — of our construction cartel, that seeing it as the drag on the economy it truly is, comes neither easy nor naturally. We must pay close attention.
First and foremost, the use of real estate as an instrument of financial speculation — all those half-empty buildings you see in the city’s most “desirable” areas (and the way some of us, myself included, have seen our net worth grow) — not only represents the least productive investment possible for the country, but also dramatically increases the cost of living for the majority of Panamanian families.
The more we “invest” in skyscrapers and artificial islands in the capital, the more Panamanians are forced to live far from the urban centers where they work — and where the most lucrative markets are! — because absolutely everything in the city center is beyond their reach.
However, once a country decides to use housing for anything other than living, it artificially increases demand for it and, consequently, its price. For example, a newlywed Panamanian couple looks for a home to move out of their parents’ house and start their own family. In addition to competing with thousands of other Panamanians who want the same thing (the natural demand for housing), they also have to compete with hundreds of multimillionaires looking for (USD-denominated) “asset safekeeping”, or another type of demand for the same supply.
This group includes all kinds of people: from global superstars like Messi and Shakira looking to dodge taxes, to drug traffickers and international terrorists who, even today, see Panama’s legal framework as one of the many ways to hide their assets. The result is one of our country’s great paradoxes, if not outright injustices: despite an oversupply of housing in the city, the vast majority of the middle class — our newlywed couple, for instance, who most likely work for a living — cannot afford it.
This generates, among other problems, millions of wasted hours, not just of what little productivity Panamanians already have, but of the precious time they barely get to spend with their families, or simply to rest, due to hellish traffic jams whose main victims are, precisely, those who work the hardest. Forced to live outside the city center — where, again, there are plenty of vacant apartments — and subjected to a public transportation system that was, at least until the opening of the Panama City Metro, downright criminal, too many workers spend an unjustifiable portion of their salaries (and their limited time on this Earth, mind you) on transportation, a totally avoidable time-suck of biblical proportions.
Second, for those who say “Oh, Panamanians love their social-interest housing”: it’s not that the middle class prefers to live in Panama Oeste, Panama Norte, or any of the Panamas that aren’t the capital’s nicest neighborhoods; it’s that the only option — if you depend solely on wages to have enough space for yourself and your family — is to move as far as possible from the country’s economic hub.
Why?
Because the best real estate in the city in terms of location has already been taken up by enormous (and often hideous) residential and office towers, most of them underutilized and built for financial speculation rather than actual use.
On top of all this, we must also consider the costs of uncontrolled urban sprawl, our growth model’s congenital disease. Government “solutions” for this very real problem are now costing us a thousand times more than the relatively cheap urban planning that should have been paid by those who benefit most from this racket: the landowners, the construction companies, and the banks. Instead, the kind of “development” we get is deeply counterproductive, mainly because it lowers everyone’s quality of life.
Finally, the racket is juiced even further by the Preferential Interest Rate Law, by which the government heavily subsidizes “social-interest” housing. This corporate giveaway increases inexorably every year. But why? How is it that in a country with so many available homes, so many people still need state assistance to buy one?
Once again: because housing is being used to satisfy another type of demand.
Conveniently for the industry, the Panamanian government has allowed the most desirable land and properties in the country to be used as laundromats, piggy banks, or gambling chips for all kinds of wealthy people. This forces middle-class Panamanians to search for housing far from where they work and spend their free time (or worse, to remain living with their parents) because all the centrally-located apartments are “occupied” despite the city’s high vacancy rate (number of empty apartments) — nothing but a sick joke for those who choose to work honestly.
As if that weren’t enough, this artificial increase in demand for real estate doesn’t just drive up the cost of housing itself; it also inflates the prices of everything needed to build: materials and, of course, labor. And by labor, I mean the absurd wages that the construction workers’ union has managed to negotiate (recently through extralegal tactics), which come directly from the value extracted through its partnership with the industry lobby — just like the latter’s thick profit margins.
With materials and labor artificially expensive, and with an industry accustomed to the rates of return that financial speculation has brought them (at least until the pandemic), the demand for subsidies — whether for low-income housing, gasoline, natural gas, or staple foods — practically generates itself.
So I don’t say the construction industry in Panama is a racket just to be provocative. When the need for all this “social spending” is literally created by public policies — rather than by, say, temporary disruptions like the pandemic — this is textbook racketeering. In economic terms, it is value extraction by an industry whose revenues generate all sorts of costs, in turn, borne mainly by those who aren’t part of the racket. Basically, by allowing housing to be used not just for living but also as an “investment,” the government makes it more expensive, and when housing becomes more expensive, everything else follows. If a baker’s rent or mortgage goes up, he or she must then raise the price of bread — or settle for a worse quality of life.
Settling for a worse quality of life, by the way, is something even the upper middle class has had to do in Panama. Desperate to maintain the lifestyle they took for granted just a few years ago, many have racked up massive debt. Household debt, in case you don’t know, is the least productive and most dangerous type of debt, for any country. As if that weren’t bad enough, it incentivizes banks to focus their lending portfolios on (rather unproductive) consumer credit.
As we discussed in the previous edition, this kind of credit is “investment” only on paper. Yet its profitability for Panamanian banks is far greater than that of financing what any dynamic and diversified economy truly needs: seed capital to start new businesses. Once again, this is just another example of the economic and social stagnation created by our public policies.
Who gets stuck with the bill?
In short, every dollar spent on subsidies for people to buy overpriced, low-quality houses is a dollar not invested in education, workforce training, or any other form of human development. But by far the biggest problem is that the same people who look you in the eye and claim that Panama’s main issue is the “lack of good education” — our so-called business leaders — are the ones negotiating with political powerbrokers (from all parties, they’re equally putrid) over how much they can extract from the state, including from the infamous preferential interest rate scheme.
In the latest round of negotiations, btw, our new President, Martinelli’s hand-picked henchman, left it untouched. Despite finally speaking the truth on this unsustainable corporate welfare — and I guess he should get credit for that — his government quickly realized, especially with the financially precarious position the country is in, it couldn’t cut off our addiction to cement and low-skill labor without causing some real pain across the entire economy.
And that’s how it works. Once the construction cartel secures what they consider enough “support”, they let politicians do whatever the hell they want. Again, not because they’re bad people — I have friends and family in this industry and can tell you, straight up, they’re first-rate human beings — it’s just that their business model simply does not require a skilled workforce. In the interests of the largest and most powerful sector of the Panamanian economy — and this is key to understanding our situation — there simply is no need for significant, long-term investments in our people, particularly as productive, highly-skilled workers.
And yet for some strange reason, we see this as if it were some unexplainable tragedy. What we most talk about are public school students, who grow up on one of the worst educational systems in the region, with practically no marketable skills and, therefore, no hope for a better life.
But what are we actually doing about it?
To me, there is no doubt that Panama’s bottom-of-the-barrel PISA test scores, for example, are the truest reflection of our national priorities, and this is no glitch in the matrix. It’s the result of our “industrial policy”. If politicians are going to give all kinds of goodies to the construction sector, they’re obviously going to expect return favors. That’s what they (mostly) got into politics for in the first place!
(Ironically, politics has become one of the few “legitimate” ways left to build wealth in Panama, outside of drug trafficking / money laundering or being born Mariano Rivera).
Public “education”, which most landowners, construction companies, and banks neither use nor need, has tended to be the first thing Panama’s leaders have historically sacrificed in the name of “economic growth”. But it’s no coincidence that at the end of 2023, when several unions held the general population hostage through violence and intimidation, these included the construction workers’ and teachers’ unions.
It is also no coincidence that these two sectors — construction and education — are among the least productive yet, at the same time, wield enormous influence over Panamanian society. This has given their respective unions undue political power, which they exercise at the country’s expense whenever they please. As always, the middle class — particularly consumers and small businesses — ends up paying for a workforce that can’t do much beyond laying bricks, sitting children (barely), and shutting down Panama’s economy.
How exactly are hardworking people supposed to get ahead? With such costs imposed by a tacit arrangement that is simply too lucrative for the business and political elites that exploit it (myself included), what can ordinary citizens — “the people” — do to fight for change?
Especially after the irreparable damage caused by school closures during the COVID lockdowns — closures that continued well past the emergency, a crime future generations will never forgive us for — without a serious shift in how we view, experience, and incentivize quality education, we will continue producing people with very few skills and even fewer hopes for a better future than their parents.
The status quo, which has been so profitable for a select few, is putting Panama’s future at risk, not just as a Land of Opportunity, which it should be given its incredible inherent wealth, but as a relatively free and prosperous country — something we seemed to have managed for over a generation, though troubled waters lay ahead.