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Panama must clean up its act to become Americas’ Singapore

The following editorial appears on Bloomberg View:

With the world’s second-largest free-trade zone, Latin America’s fourth-busiest airport, four container-vessel seaports, the Pan-American Highway and numerous free-trade agreements, Panama is on its way to becoming the Singapore of the Americas. And as Eric Sabo reports in the March issue of Bloomberg Markets magazine, the expansion of the Panama Canal now under way “is only part of the massive infrastructure spending that is propelling the Panamanian economy.”

Yet to reap the full benefits of such investment, and to address one of the hemisphere’s worst cases of economic inequality, Panama needs to follow Singapore’s lead in fighting corruption. Singapore ranked fifth out of 177 countries in last year’s Corruption Perceptions Index compiled by Transparency International (the higher the rating, the less corruption); Panama was 102nd — a drop of almost 20 places from the previous year’s index. Executives surveyed by the World Economic Forum have pegged corruption as Panama’s biggest problem for business.

Many of the qualities that have made Panama a hub for global trade and finance also attract malefactors. Drug cartels from Mexico and Colombia take advantage of its location, dollarized economy and free-trade zones to move their products and launder their proceeds. Panama’s low tax rates (including no wealth or foreign income taxes) make it a haven for those seeking to shelter or hide assets. Revenues from the canal and huge investments in infrastructure – a five-year public investment program of as much as $15 billion amounted to more than 50 percent of Panama’s 2010 gross domestic product – feed temptations for misappropriation, bid-rigging and bribery.

And notwithstanding five successive elected civilian governments since the 1989 U.S. intervention that toppled General Manuel Antonio Noriega, Panama’s civil institutions and democratic culture remain weak. Its judiciary is seen as lacking political independence: In 2012, the World Economic Forum placed it 132nd out of 144 countries in that regard. The news media faces intimidation and harassment. And President Ricardo Martinelli’s administration has been marked by scandals and efforts to amass executive power. As one U.S. diplomatic cable put it, the president “may be willing to set aside the rule of law in order to achieve his political and developmental goals.”

This May’s presidential elections offer Panamanians a chance to bring in a new administration that would attack corruption with greater urgency. It could start with transparency – for example, by posting online more details on corporate ownership and taking other steps recommended by the Organization for Economic Cooperation and Development. Panama also has yet to sign on to the World Trade Organization’s government procurement agreement, which would ease concerns about underhanded dealings on billions of dollars in contracts.

Strengthening Panama’s judiciary and building up anti- corruption institutions will take time; in the interim, a few aggressive prosecutions of cases involving corruption and abuses of authority would be a good down payment on reforms to follow. What has made tiny Singapore such a success is not just its freedom of commerce, after all, but also its outsized commitment to following the rules.

© 2013, Bloomberg News

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