Panama and Central American economic integration

Abstract

This article looks at the benefits that Panama could derive from its possible integration with the countries of the Central American Common Market (CACM);. First of all, Panama's production structure is analysed in terms of the phenomenon known as the "Dutch disease": this reveals the de-industrializing effect that the booms in the services sector have had on the economy. An examination is then made of the advantages that Panama could derive from gradual integration with the CACM countries in terms of intra-industry exports, promotion of investments, competition and modernization of production, and it is asserted that these benefits do not exist, on a reciprocal basis, in a scheme based on unilateral trade openness. An examination is also made of the ways in which subregional integration could further a process of modernization of production which could offset the adverse effects of the Dutch disease. Finally, some econometric equations based on a gravity model are presented and a quantitative assessment is made of the appreciable improvement that Panama could secure in its trade balance with the CACM if it became a full member of that integration scheme.