II. Financial and Trade Center

...In 1970, U.S...

...and other foreign banks are flocking into Panama...

...The corporations got around this by trading through flags of convenience, thereby maintaining markets and trade even with boycotted countries...

...The service sector has been the most dynamic part of the economy because of the Canal Zone...

...They have also undertaken a land reform program which has distributed 1000's of acres to peasants...

...government labor standards (they are not required to hire U.S...

...It has become the ideal corporate headquarters for a multinational corporation because all offshore earnings (money earned outside of Panama) are non-taxable, During the present period, 500 new companies are incorporated and registered in Panama every month, with little regulatory control over them...

...The threat was never carried out because Panama finally reached an agreement with the company...

...banks in Panama and are among the five banks with the largest assets in the country...

...A serious consequence is that Panama is forced to import more and more foodstuffs which further exacerbates its balance of trade problem...

...trade and military operations...

...About all that is known about most loans arranged through private banks and investment houses is the date, amount, the name of the principal lending banks, due date and sometimes the interest rate...

...flag ships could not transport goods to or from enemy countries...

...Panama's economy has traditionally been based on serving the canal and on exporting bananas, the latter controlled by the infamous United Fruit Company, now known as United Brands...

...The U.S...

...8 This type of operation is more commonly known as the runaway shop, where manufacturers set up assembly plants in other locations to take advantage of cheaper labor, and then bring the finished goods back to the United States for sale at standard rates...

...The government's laws are aimed at attracting private investors particularly in agri-business, fishing, mining and manufacturing...

...The government is attempting to do this by constructing roads, electrification projects and sugar mills...

...Ten percent of the deposits in Panama are in numbered accounts...

...Panama has no Central Bank and is forbidden by law to print its own paper currency...

...21 It can also be seen as an attempt to compensate for the abysmally low rent the United States pays for the Canal, and as a form of blackmail to influence the Canal negotiations--if Panama becomes too intransigent, this source of dollars could be stopped immediately...

...proposed a rate hike to offset current and projected deficits...

...Panama also offers another service to multinational firms who want to avoid paying taxes: chartering ships...

...Originally $250,000, it was raised to $1.93 million in 1955, while the United States collects more than $100 million annually...

...In an effort to energize the economy, the government has embarked upon a program to attract foreign investment and capital...

...Established in 1953 as an agency of the Panamanian government, the CFZ now conducts annual transactions worth more than $750 million for more than 600 firms...

...In monetary agreements signed by Panama and the United States in 1904, Panama essentially gave up its right to print its own money...

...2 Toll rates have not been increased since they were originally set in 1914...

...The ECLA report concludes that "the Canal Co.'s rate policy amounts to an implied and substantial subsidy of international traffic, a sizeable proportion of which accrues to the United States economy, since it is the major user of its services...

...duty would be levied only on the "labor added"--and the difference in labor costs more than makes up for the tariff...

...Instead of remitting overseas profits back to the United States where they would have to pay income taxes, corporations can deposit these profits in Panama and reinvest them later in another country without having to pay any taxes...

...1 1 As a result of the lack of regulatory control over new corporations, Panama is also a center for "illegal" money hidden in paper corporations set up just for that purpose...

...Merchandise entering, stored, processed or leaving the Colon Free Zone (CFZ) is exempt from taxes and duties...

...Frequently a ship can save as much as ten times the amount of the toll by using the Canal instead of other routes...

...1 5 Agricultural products, principally bananas, are Panama's leading exports...

...Travel from New York to Los Angeles saves 22 days by using the Canal...

...More than twothirds are foreign banks, including U.S., Latin American, European and Asian subsidiaries...

...H. Sousa, a Brazilian sociologistl Regaining sovereignty over the Canal Zone is an essential part of Panama's efforts to reorient its development according to its own best interests, but it is only one side of the problem...

...In fact, because of the Torrijos government's enticements to foreign bankers, Panama is becoming one of the most important banking centers in the world...

...and 4) the proximity of the Colon Free Zone...

...In 1972, when Panama nationalized the Power and Light Company, a subsidiary of Boise Cascade of Idaho, members of the U.S...

...Ninety-six percent of U.S...

...Panama has become a more attractive financial center recently, because monetary and capital controls are increasing in Europe, and the traditional havens in the Caribbean are growing hostile to foreign banks and corporations...

...and maintain the U.S...

...Transactions can be made in any currency...

...Because of the magnitude of the project and the $13 million already invested by Canadian Javelin in exploratory work, Panama has moved slowly in granting the firm and its subsidiaries the concession to Cerro Colorado...

...Panama's debt is among the highest per capita in Latin America and most of it is owed to the United States...

...4 The Canal has had a tremendous impact on Panama as well...

...Panama is demanding a larger share of the revenues, and the United States is prepared to raise this to $25 million yearly...

...and Panama 29 percent...

...However, the largest single landowner in Panama is still the Chiriqui Land Co., a subsidiary of United Brands, which is embroiled in a conflict with the government over the payment of a tax on bananas (see section on "Banana War...

...crews) and U.S...

...COLON FREE ZONE The Free Zone in the city of Colon strongly appeals to foreign investors...

...The principal trade route, from the east coast of the United States to Asia, accounts for 37 percent of the trade through the Canal, and without the Canal, this voyage would take an additional two weeks...

...Corporations use ships flying the Panamanian flag to avoid the shipping and cargo taxes common to most countries...

...One European banker pointed out that "providing the banks do not try to interfere in the country's politics, the prospects are stupendous...

...Eight percent of the world's seaborne commerce passes through the Canal yearly in more than 15,000 ships...

...the financial center facilitates the expansion generated by the economic activities of foreign capital and the agro-industrial center exploits the natural resources of the country...

...The code, written by government officials and private bankers, reorganized the banking system to provide strong incentives to attract foreign banks and deposits...

...16 The newest area of investment has been in mining...

...Primarily using crude oil from Venezuela, the refinery sells to ships in transit through the Canal...

...Panama's traditional role as a tax haven is flourishing with the growth of its financial activities...

...Interest gained from savings accounts and long term deposits are exempt from taxes as well...

...textile manufacturer can bring in pieces of undergarments to be stitched together and finished in the Zone for re-export to the United States...

...Chiriqui Land Co...

...no outbound consular fees or processing taxes...

...All of these ventures need financing and monetary services, and this is one reason why U.S...

...3 As the United States pays no rent for the land occupied by its military forces, Panama claims that it is subsidizing U.S...

...Panama's susceptibility to international control over its financial affairs is indicated in the words of a Panamanian official: "Lacking an effective monetary system of our own, Panama * In May 1970, President Nixon appointed Daniel Hofgren, one of his assistants, as special representative to the Canal talks...

...Bank11 of America, First National City Bank and Chase Manhattan Bank are the largest U.S...

...13 The fact that most bank deposits in Panama are long-term is an indication of the faith the international business community has in the country's stability...

...aid per capita in the world...

...According to the director of the AID program in Panama, Alex Firfir, who had been in charge of AID in the Dominican Republic during the 1965 U.S...

...Its exports have provided as much as 88 percent of all of Panama's agricultural exports, and almost 50 percent of the total exports...

...At the same time, the U.S...

...Congress threatened to cut off aid to Panama unless proper compensation was made...

...12 In addition, individuals or corporations wanting to avoid income and other taxes can also hide their money in numbered accounts whose secrecy is guaranteed by law...

...These paper corporations can also be used to conceal the ownership of a particular firm so that other companies are unaware of who they are really dealing with...

...These depositors seek monetary havens safe from the taxes and central bank controls in their own countries...

...Public expenditures have gone from $65 million in 1969 to $225 million in 1973...

...Firms operating within the CFZ are exempt from taxes on capital invested, and on dividends and remittances abroad...

...By not controlling the movement of funds in and out of the country, the government cannot plan adequate fiscal programs...

...safety regulations...

...10 Over three billion dollars are foreign deposits, much of it from Latin America...

...AGRICULTURE AND INVESTMENT Panama's agricultural sector has grown slowly over the last few years and today agricultural production represents less than a quarter of the GDP...

...occupation of the Canal Zone, it is at the same time opening itself up to further penetration by the U.S...

...which are double the export of goods...

...5 Panama provides sanitation and water services, warehousing and trucking, tourist, banking and other financial facilities to the Canal Zone...

...A new mining code is being drawn up that will guarantee Panama's rights and set forth conditions beneficial to Panama's economic needs...

...Panama annually receives a token share of the revenue from tolls...

...Although domestic loans increased in 1972, 70 percent were for consumer purposes and only 30 percent went to productive activities...

...In addition to being a site for exporting and storing goods, the CFZ has also become an important manufacturing center for assemblage production in such areas as electronic components, book binding, clothing and pharmaceuticals...

...It has grown from $155 million in 1967 to over $550 million in 1974...

...These arrangements allow corporations to conduct financial transactions in Panama as though they were doing so in one of the'United States, but without any disadvantages such as bank charges, fees for converting money, etc...

...government is promoting this dependence and tightening the strings that bind Panama to the United States by funneling large amounts of aid and loans to the Torrijos government...

...although this summer the Panama Canal Co...

...Large deposits of gold, silver and other minerals have been discovered in the poorest province of Panama, Veraguas, by Pavonia S.A., a wholly owned subsidiary of Canadian Javelin Ltd...

...Panama is the base from which foreign interests can act, and the result is optimal for the United States...

...Mexico, Taiwan and countless other countries of the Third World are chosen as sites for these shops, and workers both in the United States (by losing their jobs) and in these countries (by low wages and poor working conditions) are exploited...

...government and other aid agencies, thus deepening the dependency on these sources of capital and increasing the public debt...

...The Free Zone attracts so many firms, then, because of the tax and investment incentives, transportation and geographic advantages, and cheap labor and production costs...

...On the other side is the economic structure of dependency, and this involves more than the canal...

...In 1972, these services accounted for 59.1 percent of the Gross Domestic Product (GDP...

...14 Essentially, the banking boom has led to the flow of billions of dollars in and out of Panama, but it has not significantly contributed to the economic development of the nation itself...

...Contrary to the views of conservative groups in the United States lobbying against giving up the Canal, Panama is now being considered by multinational executives as a country with a stable and effective government...

...Among the major companies using the facilities of the CFZ are Coca-Cola, Colgate Palmolive, Firestone, ITT, McGraw Hill, Pfizer, Polaroid and Xerox...

...Total deposits in the banking system have grown from $501 million in 1969 to $3.98 billion as of March 1974...

...and often no capital gain assessment, personal taxes or corporate taxes...

...THE CANAL The Panama Canal is a vital enterprise for world trade...

...BANKING AND FINANCE As a result of a new banking code authorized in 1970, Panama has become the sixth largest financial center in the world, ranking with such monetary havens as Switzerland and the Bahamas...

...private investment in Panama totalled $1 billion, out of an estimated $12 billion in all of Latin America...

...Thus, though Panama is struggling to break out of the colonial relationship exemplified by U.S...

...This has contributed to Panama's growth rate of 6-8 percent annually over the past few years, one of the highest in Latin America...

...In addition, other currencies are freely convertible into dollars...

...In the last four years, the economy has rapidly expanded into the banking and financial field...

...In fact, the high rate of growth in the banking sector has been achieved through the capture of foreign deposits and through granting credits to non-residents of Panama...

...There are a number of factors which have contributed to Panama's growth as a financial center: 1) the free circulation of the U.S...

...This has led to the distortion of the nation's economic development process because the orientation of the economy to serving the Zone has subordinated the development10 of national industry, led to the lack of initiative in developing the interior regions of the country, held back the vital process of diversifying agricultural production, and created an economy that is based on the needs of foreign instead of national interests...

...If the terms of the loans are hard to find out, the exact nature of the relationship between the advisory banks and the governments is even more difficult...

...invasion, the high level of aid is a result of the "special relationship that Panama has with the United States, and (the fact) that the United States feels a strong sense of obligation to Panama...

...Thus far, the U.S...

...The underlying assumption is that the Panamanian government, with an economy increasingly dependent on external capital and confidence, will not endanger this confidence...

...Panama's budget for 1973 represented a serious attempt on the part of the government to develop the agricultural sector and to improve rural conditions, but the contradiction in this effort is that two-thirds of public investment funds are supplied by foreign financing from the U.S...

...by August 1974,there were 66, with more than 160 branches throughout the country...

...Bank advisory relationships with foreign governments are usually kept under a blanket of secrecy...

...seaborne commerce goes through the Canal, but for various Latin American nations the percentage is much higher: Nicaragua 77 percent...

...6 However, even though the Canal has determined the thrust of the Panamanian economy, Panama has had no control over it...

...imperialist apparatus--in the belief that this will aid Panama's economic development...

...oil companies but flying foreign flags, particularly Panamanian or Liberian...

...For example a U.S...

...and recent discoveries of Panama's mineral wealth have the potential to revolutionize the economy...

...Finally, the quantity of money in circulation cannot be manipulated since the money supply is determined strictly by the country's balance of payments...

...There are no export levies or customer duties...

...Investors include corporations from Europe, Japan and Latin America, but U.S...

...dominates all agricultural production...

...Peru 41 percent...

...1 7 THE TIES THAT BIND Since Torrijos took power, the State has grown as an economic agent...

...There is a great need to diversify the agricultural sector and to develop infrastructure projects in the interior that will open up more land for cultivation...

...portion is used to cover the expenses of the Canal Co...

...The Money Flows Out The lack of adequate monetary and credit policy is one of the obstacles to Panama's economic development...

...However, in absolute terms, the United States is the major user of the Canal: some 70 percent of the tonnage through the Canal in recent years has either originated in or been destined for, the United States...

...Panama currently is being advised by mining consultantswho work for the Peruvian government...

...All companies producing solely for export will be exempt from all income taxes for a minimum of 10 years...

...These account for half of Panama's service exports...

...government has refrained from taking a similar hard line in the current battle between Panama and the banana company, United Brands...

...The benefits to Panama are further minimized because the major banks, which are foreign-owned, lend much more money abroad than to the domestic sector...

...This claim is supported by recent studies of the United Nations Economic Commission for Latin America (ECLA) which indicate that the tolls could be tripled without a significant reduction in traffic through the Canal...

...multinationals dominate the scene...

...However, with the opening of an oil refinery in Colon in 1962, refined petroleum has become the second largest export item...

...2) the absence of monetary controls on the import and export of capital...

...19 And for the past few years (at least since 1970), Panama has gone to the New York investment bank of Goldman Sachs...

...This practice began during World War II when U.S...

...They are also able to avoid the problem of having the Panamanian currency devalued, because it is equal to the dollar...

...Panama also currently receives the largest amount of U.S...

...Sixteen percent of U.S...

...According to the New York Times, "Goldman Sachs & Co., perhaps more than most Wall Street investment banking firms has maintained strong ties with Washington...

...One-third of Panama's employment is related to activities in the Canal Zone...

...coins, or balboas, that are minted in Panama are on a par with the dollar...

...oil imports are carried in tankers owned by U.S...

...But even more importantly, Pavonia's exploratory drilling in Cerro Colorado, in the interior of the country, has confirmed the existence of the largest copper deposit yet found in the world-an estimated 2.2 billion tons of ore...

...According to Fernando Manfredo, Minister of Commerce and Industry, "The new laws are intended to encourage the heavy flow of foreign money into Panama and also establish the country as a center for loans and financing to foreign companies...

...In spite of this secrecy, it is clear that these banks can play a significant role in determining the economic development of a country because they are so involved in its financial life...

...12 Eighty percent of direct foreign investment is concentrated in the provinces surrounding the Canal Zone...

...Furthermore, only half of the loans for productive activities went to agriculture and industry, which are the neediest areas...

...An international investment journal stated that "a cosmopolitan entreprenurial population and stable government have given Panama a booming economy...

...In October of that same year, Hofgren resigned to become a Vice President for corporate finance at Goldman Sachs.13 has alwa s applied for expert international advice...

...One of the largest distribution centers in the world, the Free Zone offers numerous incentives to multinational corporations...

...dollar...

...Chile 34 percent...

...9 In 1969 there were only 19 banks operating in Panama...

...20 This powerful investment bank negotiates large loans and conducts other financial transactions for the Panamanian government...

...According to the report, the revenue in the years 1960-1970 was $757 million, while the savings by not using other routes amounted to $5.4 billion...

...This confidence is expressed in spite of the conflict between Panama and the United States over the Canal...

...In order to mine this discovery, massive capital development projects will be required, including roads, an electric power plant with a capacity greater than Panama's present total power production, a smelter and possibly a copper refinery...

...3) the development of Panama as a tax haven with secret accounts...

...One banker explained that there was no real reason to worry about potential instability because "with a few TELEX messages most of themoney could be out of the country in minutes...

...Many companies maintain warehouses in the CFZ to use stored goods as collateral to borrow money: warehouse receipts and shipping bills are used in the credit and payment transactions...

...By building up the Colon Free Zone, introducing additional tax incentives and reorganizing the banking structure, the economy has taken a new direction and Panama has become an important trading and financial center...

...These ships are also exempt from U.S...

...It is the third largest employer in the country, with 12,000 workers, and owns 36,000 acres of land...

...More than 40 percent of Panama's foreign exchange earnings is directly or indirectly attributable to the presence of the Canal, and Panama sold more than $170 million worth of goods and services to the Canal Zone during fiscal year 1972...