Panama Plays its Economic Cards Right, But Will Human Capital Become a Major Roadblock?

The sizzling and sustained economic growth being seen in Panama is causing some to step back and say: Why now and why Panama? The answer seems to partly lie in the fact that Panama has played its US-supplied economic cards right, luring big name IT firms to the country and establishing a firm foundation for legally-oriented business services.

Panama is a dynamic country. The middle class is expanding rapidly, and not surprisingly citizens are quickly becoming tech savvy. Nearly two million Panamanians are active on the Web today, and more than 50 percent of businesses in the country have websites of their own.

Tech is Beckoned

Global technology companies like LG, Dell, AT&T, Sprint and Nextel have subsidiaries here. And a large number of law firms in the United States are outsourcing their data-entry works to Panama as that helps them save an estimated 50% on cost.

“The majority of IT firms are based in Ciudad del Saber (City of Knowledge). Here there are a variety of tax benefits that are advantageous for technology companies,” said Brendan Wolters, co-founder of Solace Group in Panama.

Panama offers a verity of incentives and tax-breaks to foreign investors, particularly to technology companies. Here is a Venture Club , driven by the City of Knowledge Business Accelerator (AEP), which connects foreign investors with Panamanian entrepreneurs. More importantly, the Venture Club has successfully fostered a start-up culture in the region offering to infuse capital into intelligent technology ventures.

There is no precise data to measure the actual growth in Panamanian IT and BPO industry. However, a conservative estimation says Panama’s outsourcing sector has registered 25 percent growth in the past three years.

Workforce Woes

But for a country with just 3.6 million people, the lack of a knowledge-based workforce is  a major hurdle. In an Enterprise Survey 2010, nearly 19 percent of firms cited lack of educated workforce as a barrier to expanding operation in Panama.

“I don’t think Panama is running short of skilled workforce. But it may be true that the number of educated workforce the country is generating will not be enough to sustain the growth in the days ahead,” Wolters, said.

Meeting the need for human resources is indeed a huge challenge Panama is facing today. Given the most recent survey by Manpower, the number of firms planning to hire people in Panama far outweighs the number of firms planning to lay off personnel. That means Panama has to focus on inviting foreign laborers rather than foreign investors.

The Government here is aware of the shortage in labor force, so it has loosened laws related to issuing visas to foreign workers. And the administration has set up technology institutions in Panama Pacifico with an objective of training Panamanians in technical and professional occupations.

In Panama, companies can have their own training facilities or hire a training institute for supplying them with trained workers. American PC giant Dell runs a huge training center in Panama to meet the needs of its cluster of call centers.

In addition, Panama has significantly liberalized its labor laws, and under the existing laws companies can remain open on Sundays and holidays.

Panama’s Changing face

With the economy growing at more than 10 percent annually, Panama has undergone a lot of change over the past years.

“It seems almost overnight Panama City has changed from a Casablanca-on-the-Pacific to a Singapore of the West,” says CN Kumar, a Bangalore-based BPO consultant, who had recently visited the South American country.

“Somebody forgot to tell Panama about the eurozone crisis,” he jokes.

Panama’s growth is hard to replicate and hard to compare with others. While a majority of countries in Latin America are seeing their citizens migrating to the United States for better life, Panamanians are cutting short their foreign stay and returning home. While its neighbors are receiving huge sum of money in remittances, Panamanian workers are sending remittances to their relatives in US and Europe.

For panama, the main engine of economic growth is, however, the Canal that connects the Atlantic Ocean with the Pacific Ocean. And Panama has, no doubt, made most of its geographic placement, and that’s why this has kept on growing regardless of global slowdown.

More than 4 per cent of world trade passes through its canal. And this figure is likely to be doubled once the country expands canal further. It is estimated that Panama handles some 40 per cent of the traffic between East Asia and the America’s eastern coasts.

These days the Panamanian government is investing billions of dollars in infrastructure, including a $5.2bn expansion of the Panama Canal scheduled for completion in 2014.

What the modern Panama has failed to mitigate is corruption. Panamanian press is full of stories about corruption allegations made against politicians and bureaucrats. Transparency International gave Panama a score of only 3.3 out of 10 on the perception of corruption (with a 10 being considered clean).

Don’t be surprised if Panama stamps out corruption in the near future, because Panama has already shaken off its reputation as a major transit point for US-bound drugs and illegal immigrants. And this country is no longer a tax haven.