When Your Greatest Competitive Advantage is the State

(or "How the Panamanian Economy Works, Part 3")

Versión original aquí.

The original version of this essay was published February 5, 2024 under the title “Cuando tu ventaja competitiva más rentable es el Estado”

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The greatest trick the devil ever pulled was convincing the world he didn’t exist.
— Verbal Kint  

According to the World Bank, Panama is a high-income country. Not only did it boast the fastest-growing economy in Latin America during the early 21st century (2000–2020) — even if this growth, as we’ll see, was of very poor quality — but events entirely beyond our control, such as the implosion of the Venezuelan economy and globalization (i.e., skyrocketing international trade as an engine of economic growth) benefited the country immensely.

However, today Panama is also one of the most unequal places on Earth, which means the vast majority of the wealth that has poured into this small strip of Central American isthmus during “good times” has historically remained at the very top of our socioeconomic pyramid, specifically, within the handful of ultra-profitable companies / local families.

This has had serious repercussions for most Panamanians, while our democracy currently faces its most severe threat since it was reinstated in 1990. As political power too has accumulated in the hands of a tiny few, for example, our current President was literally handpicked by billionaire supermarket tycoon and former President Ricardo Martinelli, who’s been indicted by both Panama and the U.S., and is currently in hiding in the Nicaraguan embassy in Panama City, under the auspices of fellow authoritarian, Daniel Ortega.

More significantly, though, our society has frayed in the last decade, a process accelerated and brought to the forefront by the pandemic. Riots in late 2023 resulting from the wholesale repudiation of yet another boondoggle for the citizenry at large — this time, in the form of a shameful (and unconstitutional) mining concession — were a major shock to those who have long touted Panama as a haven of stability in a volatile region.

Yet, as a people, Panamanians are intensely divided, never more so than today. To make matters worse, our workforce is one of the least productive in the region, itself, tragically unproductive, making any attempt at a real recovery infinitely more difficult. This rather murky outlook for the country, therefore, demands a closer examination of Panama’s economic “miracle” — and how it’s left the middle class in such a deep morass.

Crucially, this issue permeates the entire economy. It’s no coincidence that Panama’s four most “productive” industries — mining, construction, utilities, and the international services platform — are all closely tied to the State. This happens through legally restricted markets (such as energy, including electricity, natural gas, and fuel), extraordinary rights or benefits (like the exclusive use of state infrastructure, as we’ll see below), or the uncompensated exploitation of our legal and fiscal codes (social resources) for private gain.

Copa Airlines, while not unique, serves as a useful illustration of this rather comfy arrangement (for those who can afford it). At first glance, the company seems to be performing splendidly, contributing to the economy and enhancing the country’s global reputation. Unfortunately, things are not always as government figures suggest. Like many so-called Panamanian companies, Copa appears to be creating value — while generating staggering fortunes — when, in reality, much of the value is being extracted from the country without paying the State its fair share.

Source of Pride?

As mentioned last week, aside from the Panama Canal Authority (ACP) and the State’s 49% stake in Cable & Wireless Panama (CWP), “Panamanian” corporations don’t belong to Panama, but to their shareholders. Copa, however, is currently the company most associated with our country (excluding Mossack-Fonseca, of course, which is linked to us for entirely different reasons). For many years, even a natural cynic like myself would feel a sense of pride when flying Copa.

Nonetheless, Copa enjoys an effective monopoly on connecting passengers via Panama’s Tocumen International Airport (PTY). Using it as an air bridge between most places throughout North and South America and the Caribbean, this grants Copa a competitive advantage the State provides no other airline. Other carriers are legally restricted to either bring passengers to Panama and/or take them abroad. But beyond mere value extraction, the exclusive use by a private airline of a state asset (as its hub) also entails gigantic costs for Panama’s middle class.

For one, every passenger that Copa “brings” to the country to connect (before heading elsewhere) decreases the supply of seats, and thus raises the price of tickets, for travelers who actually want to stay in Panama.

How come?

Because they are competing for the same seats on Copa’s planes with those who are only passing through. This is one of the main reasons (though not the only or most important one) why Panama is such an uncompetitive tourist destination: getting here is freakin’ expensive! — especially compared to other regional hotspots in the Dominican Republic, Costa Rica, México, etc.

Although Panama, in return, gets an underperforming tourism industry — and thus a less dynamic and thriving economy — the ones who suffer the most from Copa’s extraordinary privileges at our airport are small businesses and entrepreneurs who depend on tourism. Similarly, this setup also penalizes Panamanians who wish to travel abroad.

Many of us get excited whenever Copa announces a new destination: more places we can fly to directly! But the reality is that no Panamanian starting or ending their journey in Panama is Copa’s core customer. For this “Panamanian company”, Panamanians and tourists wanting to visit Panama are incidental. The airline’s industry-leading profitability, i.e. the greatest amount value it can extract, comes from the routes made possible by PTY — not from flying Panamanians anywhere or bringing tourists here.

Meanwhile, this forces us to compete for flights, for example, to Austin, TX not only against other Panamanians wishing to go there, but also against millions of South Americans, Central Americans, and Caribbeans who, because it suits them better to connect through PTY, use exactly the same gates and runways from which Panamanians take off and land — it’s usually cheaper than the alternative (a direct flight), which is, precisely, Copa’s value proposition. This, however, bids up (increases) prices both for locals as well as for tourists looking to visit Panama!

In other words, it’s yet another cost imposed on our middle class, which now finds it even harder to afford traveling abroad. Because of Copa’s business activity, the demand generated by our airport as a hub makes its use as a point of origin / destination wayyy more expensive than it would otherwise be. Panamanians, then, are at a disadvantage in their own country, paying inflated prices for flights that, ironically, would not even be possible without our one and only international airport.

Job Creator?

One of the most egregious misconceptions in all of Panama, parroted ad nauseam by our so-called business and political leaders (i.e. the people who supposedly know), is that Copa “creates jobs”. This demonstrates a fundamental misunderstanding of how an economy works, namely, how supply and demand in markets tend to (disclaimer: in perfect conditions that don’t actually exist) reach an equilibrium, or “clear”, through the price mechanism.

Like virtually all companies worldwide, Copa generates strictly the number of positions necessary to meet demand for its products and services — and not a single job more. This figure is directly tied to how many people throughout the Americas wanna fly/connect via Panama’s infrastructure and airspace, rather than any commitment by Copa to hire locals for some sort of “national” benefit. No company, no matter how patriotic it claims to be, has that responsibility, and thinking otherwise is a huge mistake for the Panamanian middle class.

In short, Copa’s interests and those of the Republic of Panama are not in alignment; they are, indeed, in opposition to each other. From a corporate perspective, Copa’s management must — above all else, by law — “maximize shareholder value”, which translates into a policy of minimizing labor costs. The less the company has to pay in salaries (or fees to the State, for that matter), the more money the owners get to keep. At the end of the day, every dollar spent on salaries is a dollar not reflected in dividends and/or the stock price. Therefore, corporate efficiency will always take precedence over any “social contribution” — as it should be!

Diving deeper, we must understand that jobs are not magically “created” by Copa. Instead, they result from our infrastructure, and the opportunities it creates as a geo-strategic hub. Returning to the Austin, TX example, it’s our airport’s operational capacity, as well as Panamanian airspace, what allows routes to/from ATX across the region to even exist. The demand these routes generate — and, consequently, the jobs — would be impossible without the support and resources provided by Panama, i.e. without the value provided by the State, for which it receives, relatively speaking, mere pocket change in return.

This is a crucial point that reveals the deep interdependence between private airlines and public infrastructure — or, rather, Copa Airlines’ outright dependence on Panamanian state assets.

To be clear, Copa does compete with Avianca and other regional airlines with their own hubs — which, either way, serve domestic markets vastly larger than Panama’s, making comparisons to Copa inadequate. However, the question for someone flying from Guayaquil to Washington, D.C., for example, isn’t whether to choose Copa or Avianca if a direct flight isn’t available (or is too expensive). Instead, it’s whether to connect via Bogotá’s El Dorado or via PTY.

Surely, Copa’s superb fleet (even the Boeings, fingers crossed), as well as the first-rate service provided by its pilots, crew, and ground staff, do generate some demand. But what passengers pay for when they fly Copa is the value that PTY generates as a hub.

In short, demand for Copa’s product comes from its routes, and Panama provides the routes. The jobs that Copa’s management reluctantly creates — despite its inherent interest in cutting costs — are a function of the demand for the use of Panamanian infrastructure and airspace, and very little else.

Not just quality of life: Will this cost us our democracy, too?

Markets are not immaculate conceptions, as some zealots like to preach. They are human creations, and market rules, what we call “laws”, are written by those in power. In Panama, these laws have allowed certain companies to generate revenues — and accumulate wealth and political power at levels never before seen in our history — that, if you focused solely on GDP per capita, you’d think most Panamanians enjoy a relatively high standard of living.

Unfortunately (for the middle class in particular) these generational riches have not come from value created by these companies — such as better products/services at lower prices — but from value extracted by them.

Who is value being extracted from?

In the case of Cable & Wireless Panama (CWP), from consumers, that is, any Panamanian that used a landline or cellphone. Through the legal monopoly granted to its parent company, Cable & Wireless (C&W), the Panamanian State set up the “telecommunications market”. Copa, on the other hand, extracts value from the exclusive use of PTY — public infrastructure that’s geo-strategically unrivaled in the region — virtually free of charge.

With the exception of the Panama Canal Authority (ACP), it is private companies that extract most of the value from Panama’s resources. However, this is not necessarily a problem. In certain cases, with properly structured incentives — as we have, ourselves, done before — private enterprise can indeed be part of the best way to, as a country, extract value from our resources, just like Alaska does.

Ultimately, the real issue is how the State distributes extracted wealth in the most fair and equitable way possible (or fails to do so). Unfortunately, the Panamanian State has never ensured that companies profiting from the country’s unique and highly lucrative resources pay their fair share for the privilege.

What to do?

It’s not hard to imagine a different economic policy, one in which Panama benefits far more — and more directly, like with CWP — from its own infrastructure. An open-skies policy, for instance, would allow other private companies, both cargo and passenger carriers, to operate not just in PTY, but in other airports across the country.

Or why not auction off these rights to the highest bidder, for example, just as the Panama Canal did to Eneos Group, which paid nearly $4 million last year to jump to the front of the line?

Panamanians, especially salaried workers, entrepreneurs, and small business owners, must start thinking in these terms. For example, what would it mean for Panama to have another CWP-style company, in which the country owns 49% of a hypothetical public-private corporation, say, Amazon PTY, in exchange for granting Amazon, Inc. exclusive rights to use state-owned land, as well as Panamanian ports — aerial and maritime — for its regional operations?

And yet, our reality is more as if the State charged the same tolls (per ton) to all ships entering Panama’s territorial waters, but would allow only Maersk’s vessels to transit the Canal. Other shipping companies may dock to load/unload in Panamanian ports, but Panama grants Maersk exclusive rights on the use of Canal infrastructure.

Unless Maersk paid billions annually to the Panama Canal Authority — and, in theory, to the Panamanian people — such an arrangement would be inconceivable. By the same logic, unless the State has a stake in Copa commensurate with the value PTY generates (which it currently does not), it has no reason to grant Copa, or any other corporation, a monopoly that no one else in the country enjoys.

On the contrary, the State’s obligation is to maximize the profitability of its assets, and invest the revenues long-term for the benefit of the largest number of its citizens. This duty, nevertheless, sacred to many, often conflicts with the interests of many local business groups / family clans, whose massive earnings turn state capture into just another operational cost.

There is no reason whatsoever that Panamanians should grant such extraordinary privilege to a corporation that, in turn, weighs like a huge tax on the middle class. Unless we do something to arrest it, as well as the resulting inequality, it will swallow our entire economy, today, one of the most unequal in the most unequal region in the world — and with it, our democracy, too.