Panama's free-enterprise opportunity

May 14 (UPI) -- Renewed international debate over the Panama Canal has revealed something deeper than a mere sovereignty dispute. It has shown how much Panama's prosperity depends on institutional credibility and how urgently the country must strengthen the foundations of its free-enterprise model before external pressures further test it.

Panama has built one of Latin America's most distinctive economic models. Its success rests on full dollarization, trade openness and a geographic position that makes it a bridge between oceans. Those advantages have helped the country maintain a relatively low cost of capital and a level of macroeconomic stability that many of its neighbors have struggled to achieve.

Yet Panama's future as a financial and logistics hub is not guaranteed. The country faces fiscal pressure, lingering reputational concerns after four years on the Financial Action Task Force (FATF) grey list, and institutions that remain weaker than its economic ambitions require. If Panama wants to consolidate its position as a regional leader, it must deepen the strengths of its free-enterprise model while simultaneously correcting the weaknesses that still limit its potential.

The central pillar remains the defense of dollarization. Since 1904, the use of the U.S. dollar as legal tender has eliminated exchange-rate risk and reduced financing costs. For a small, open economy that depends heavily on services and international capital, that monetary framework is a decisive advantage.

Related

• Uruguay: From good student to regional leader
• Brazil and the high price of risk
• Latin America can lower its cost of capital -- but only with reforms

Any proposal to introduce a national currency should be treated with great caution. A domestic currency could expose Panama to the same temptations that have harmed other countries in the region, including political pressure on monetary authorities, inflationary financing and sudden capital flight. Dollarization is not a limitation. It is a discipline that encourages responsible policy and gives investors confidence that their capital will not be eroded by devaluation.

Fiscal discipline is the next priority. Panama cannot rely solely on dollarization to preserve its credibility. Public spending must be controlled, deficits reduced and budget accounts made fully transparent. The country's strong services sector gives it advantages that many Latin American economies lack, but those advantages should not become an excuse for complacency.

Voluntary adherence to high standards of fiscal governance would strengthen global investors' trust. Panama does not need to abandon its flexible model. It needs to make that model more transparent and resistant to political abuse.

Tax simplification should be part of the same effort. Complex tax systems create unnecessary compliance costs and discourage formalization. They also tend to favor those with the resources to navigate exemptions and special regimes. Panama would benefit from lower marginal rates and fewer discretionary privileges, with a broader base driven by stronger growth. The goal should be a system that allows companies to invest and expand without having to navigate a maze of arbitrary rules.

Targeted incentives can still play a useful role if they are clear and rules-based. The Colón Free Zone demonstrates the potential of such arrangements, and a modernized financial free zone could build on that experience. Low taxation and simplified rules would make Panama more attractive to international banks, fintech firms and investment funds.

However, openness must be matched by strong regulatory compliance. Panama cannot afford to be seen as a place where financial activity moves faster than oversight. Its future as a hub depends on being both competitive and credible.

Reducing bureaucracy is equally urgent. Entrepreneurs and investors should not lose weeks or months to approvals that could be handled through digital systems. Panama should set an ambitious goal: creating a company or approving an investment project within 24 to 48 hours through one-stop platforms and the principle of positive administrative silence.

Every day of unnecessary delay weakens Panama's position against Singapore, Hong Kong and Dubai, which have made regulatory agility part of their competitive identity. Panama's geography offers an opening, but speed and reliability will determine whether it becomes a lasting advantage.

Infrastructure is another key priority. The Panama Canal remains the country's greatest strategic asset, not only because of its direct contribution to public revenue but also because of its multiplier effect on logistics and business services. Private concessions and well-designed public-private partnerships can help meet infrastructure needs without putting excessive pressure on the public treasury.

Projects such as the Panama-David railway, improvements at Tocumen International Airport and modernization around Balboa and Colón could benefit from foreign participation if contracts are transparent and risks are properly allocated.

Panama should also continue opening itself to trade. Remaining tariffs and non-tariff barriers should be reviewed to make the country more attractive as a platform for distribution and high-value services. Deepened trade agreements with Asia-Pacific economies, the United States and Europe could reinforce Panama's role in the changing structure of global supply chains, provided that customs procedures and certification requirements do not become hidden barriers to investment.

No free-enterprise model can succeed without strong institutions. Legal certainty is the foundation: contracts must be honored, courts must be predictable, and public tenders transparent. A credible anti-corruption effort is not merely a moral imperative. It is an economic necessity.

Panama's challenge, therefore, is not to abandon its model but to complete it. Dollarization and openness have given the country a structural advantage. Fiscal responsibility, institutional strength, and regulatory agility would make that advantage durable - attracting capital not only because of its location, but because of the confidence its rules inspire.

Panama's geography opened the door. Its institutions will decide whether the country walks through it.

César Addario Soljancic is an economist specializing in public finance, with decades of experience advising governments and institutions across Latin America and the Caribbean. Over his career, he has led 69 capital-market issuances across 13 countries, totaling nearly $49 billion. The views expressed are solely those of the author.