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Panama: Poverty Assessment: Priorities and Strategies for Poverty Reduction

Panama FY99 PA

Main Report (4.4Mb PDF)

Annexes (23.5Mb PDF)

The Problems of Poverty, Malnutrition and Inequality...

Despite Panama's relatively high-income per capita (US$3,080 in 1997), poverty remains pervasive. Over one million people (37 percent of the population) live below the poverty line. Of these, over half a million (19 percent) live in extreme poverty. One-half of all Panamanian children are poor. The distribution and magnitude of poverty in Panama varies significantly by geographic area:
  • Rural poverty bias. Poverty and extreme poverty are concentrated in the countryside. Rural poverty is higher in both relative terms (with 65 percent of the rural population living in poverty and 39 percent living in extreme poverty) and absolute terms, with over 788,000 rural residents living in poverty (close to three-quarters of the nation's poor population).
  • Destitution among the indigenous. Poverty in indigenous areas can only be described as abysmal. Over 95 percent of residents of indigenous areas (197,003 people) fall below the poverty line and 86 percent live in extreme poverty. Although indigenous residents represent only 8 percent of the total population, they account for 19 percent of the poor and 35 percent of the extreme poor. With higher rates of fertility, indigenous areas are the most rapidly growing segments of the population. As such, Panama's poverty rate will increase in the absence of an aggressive poverty reduction strategy. Poverty and extreme poverty are highest among the Ngobe-Buglé, Panama's largest ethnic indigenous group, followed by the Embera-Wounan. Poverty is lower among the Kuna overall, although it is still quite high among those living in indigenous areas. Geography appears to be a more powerful determinant of poverty than ethnicity, with a higher incidence among ethnic indigenous people living within indigenous areas than those living outside these areas.
  • Urban vulnerability. Although poverty is not as widespread or as deep in urban areas (15 percent of the urban population), Panama's cities account for an important share of the poor (23 percent or over 232,000 poor urban residents). Close to 40 percent of the urban poor (over 90,000 people) live in the Panama City - San Miguelito area. Moreover, a significant share of city-dwellers live just above the poverty line and could be considered vulnerable.

Poverty is a national problem, with several key regional pressure points. Panama's poor are spread across the country. Although poverty rates are significantly higher further away from the capital area, some 315,000 poor residents are concentrated in the Provinces of Panama and Colón. The new Poverty Map recently constructed by MIPPE/MEF using data from the LSMS and the Population Census confirms this tendency: poverty rates are highest in San Blas, Darién, Bocas del Toro, Coclé, and Chiriqui, and lowest in the Provinces of Panama and Colón. Nonetheless, these latter two provinces account for roughly one-third of Panama's poor. Within each region, poverty rates are highest in the rural, indigenous, and remote areas and lowest in the central urban districts.

There is a strong correlation between poverty and child malnutrition in Panama. Over 16 percent of all children under five (close to 50,000) suffer from some form of malnutrition. About 85 percent of these are poor. Close to one quarter of poor children and one-third of the extreme poor under five are malnourished, compared with 4 percent among the non-poor. The incidence of malnutrition mirrors the geographic and ethnic patterns of poverty, with one-half of all children in indigenous areas suffering from malnutrition and the highest incidence among the Ngobe-Buglé.

Panama is one of the more unequal countries in the world. With a consumption Gini of 49 and an income Gini of 60, Panama's inequality ranks among the highest — on par with Brazil and just below South Africa, two of the most unequal countries in the world. Panama's poorest are very poor and the richest are very rich. Although inequality is higher in rural areas, it is more obvious in urban areas, such as the city of Colón, where the close physical juxtaposition of the modern, dynamic, wealthy sector with poor city slums accentuates the perceived gap between rich and poor.

... Reflect Underlying Disparities in Assets.

The problems of poverty, malnutrition, and inequality in Panama largely reflect disparities in opportunity. The distribution of key productive assets — labor, human capital, physical assets, financial assets, and social capital — is highly unequal. These disparities are most prevalent between the poor and non-poor, but also manifest themselves differently by geographic area.

Labor, the poor's most abundant asset, accounts for 77 percent of their total income (69 percent for the non-poor). Nonetheless, the poor are constrained in their use of this key asset in a number of ways:

  • High rates of unemployment for the urban poor. Though poverty and unemployment are not correlated for the nation as a whole, the poor are twice as likely to be unemployed as the non-poor in Panama's cities. The difference is even higher when taking into account seasonal and discouraged job seekers. Unemployment is particularly high for poor urban women and youths.
  • Potential underemployment among the poor in all areas. The poor work fewer total hours than the non-poor in all areas — likely, a sign of underemployment and low productivity.
  • A strong correlation between informal sector employment and poverty. Close to three-quarters of the poor work in the informal sector (40 percent of the non-poor). Low levels of household consumption are significantly correlated with informal sector employment even after other factors (such as human capital) are taken into account. Earnings in the informal sector are significantly lower than those in the formal sector: informal workers earn 60 percent and 43 percent of what those in the private and public formal sectors earn, respectively. These differences are not explained by differences in human capital, area of residence, or job characteristics.
  • Indigenous workers face probable wage discrimination. The LSMS1 shows that differences in salaries received by indigenous and non-indigenous workers cannot be explained by factors such as education, experience, type of work, etc. In addition, indigenous workers have few opportunities for employment in the formal sector.

Human capital — education and health — is an important complement to labor, boosting its productivity and potential for income generation. The LSMS reveals that schooling pays off in terms of higher incomes: each year of schooling yields about a 5 percent increase in hourly earnings. These returns vary significantly by education level, with primary school (which has fairly equitable coverage) generating much lower returns than secondary or higher education (to which the poor have much less access). Access to health care also generates productivity gains and contributes directly to well-being. The distribution of human capital assets, however, is highly unequal.

Disparities in education are key causes of poverty, malnutrition, and inequality in Panama. Education is a crucial elevator for the poor to lift themselves out of poverty. Higher educational attainment for a household head or his/her companion significantly reduces the probability of being poor. Mothers' education significantly affects child nutritional status. Disparities in education constitute the single most important determinant of inequality, accounting for about 40 percent of Panama's consumption inequality. Inequities are apparent for achievement, coverage, internal efficiency and the quality of education:

  • Although progress has been made in expanding literacy and increasing educational attainment over time, gaps remain for the poor and the indigenous (particularly indigenous women).
  • The main gaps in access include the indigenous at all levels, and the rural and urban poor at the pre-primary and secondary levels. Moreover, very few students of higher education are poor (5 percent). Key obstacles to higher enrollment for the poor include: (i) the direct costs of schooling (fees, books, etc.) at the primary and secondary levels; (ii) a lack of "interest" among some poor children (particularly poor urban boys) at the secondary level, which could reflect social pressures as well as quality issues in the educational system; and (iii) a lack of programs at the pre-primary level.
  • Internal efficiency is also lower among the poor and indigenous, who tend to repeat grades and drop out more frequently than the non-poor.
  • Lower quality education for the poor is evident from the higher share of poor students without textbooks, a lack of bilingual materials and instruction for indigenous primary students, the high share of the poor in communities reporting insufficient teachers, and dilapidated school facilities in communities with higher concentrations of the poor.

Inequities in health status and health care also abound. Relatively strong health indicators for the nation as a whole mask large disparities and poor health status among those living in poorer areas. The poor (particularly the indigenous) have a lower life expectancy, higher rates of infant mortality and malnutrition, and continue to die from infectious and communicable diseases despite Panama's epidemiological transitioning. The poor and indigenous have less access to health care, and are less likely to seek medical treatment in case of illness than the non-poor. Low access to health services bears a significant link to child malnutrition in Panama.

Physical assets such as housing and land also contribute to income-generating potential and help households avert risk. The poor commonly use housing and land as a base for productive activities and enterprises. Property also generates rent through earnings charged to renters or via the savings from "imputed" rent. Households can also use property as collateral for leveraging credit. Emergency income can likewise be generated through sales of property or borrowing against it (equity loans). Finally, housing can be used as a tool for extending personal relationships, building trust, and generating social capital.

The ability of households to use property as an asset largely depends on the security of tenure and the flexibility of land and housing markets. In Panama, the distribution of housing and land is highly unequal, as is access to the titling of available property.

  • Housing. The poor tend to live in much lower quality housing than the non-poor. Moreover, while the majority of the population lacks proof of ownership (registered or unregistered titles) for their homes, the gap in titling of housing assets is much worse for the poor. Not owning a house increases a household's probability of being poor, as does the lack of a registered title.
  • Land. The distribution of land is highly unequal in Panama. The poor, who account for two-thirds of the rural population, own one-third of land. Among those who own any land, the Gini coefficient for total land owned is 77. Disparities in land ownership account for 11 percent of total consumption inequality in Panama. The poor have even less access to titled land: only one third of all owned agricultural land is fully titled, and the non-poor own 84 percent of it.
  • Titling and Income Generation. The lack of property titles reduces the ability of the poor to obtain credit (since titles are often required as collateral). The lack of guarantees (property titles or other assets) was the main reason poor households were refused credit. Without formal claim, the poor also lack the option of selling or borrowing against these assets for emergency income.

Basic infrastructure services contribute to higher welfare and productivity. Some services, such as potable water and sanitation, contribute directly to overall welfare and health status. Others, such as electricity and telephones, help households use their homes productively for income generation. The LSMS reveals that access to basic services is highly correlated with a lower probability of being poor. Inequities in access to such services abound in Panama, both between the poor and non-poor and by geographic area (especially among disperse populations in rural and indigenous areas). Key gaps in coverage include: the indigenous, for all services, and the rural poor, for energy and sanitation services and, to a lesser extent, potable water. While the urban poor have much greater access to all types of services than their rural counterparts, a lack of sanitation services for an important share of poor city-dwellers raises public health concerns.

Financial assets — savings and credit — allow households to smooth their consumption and invest for future earnings potential. The poor are much less likely to save than the non-poor; when they do, they tend to put their savings in public institutions (whereas the non-poor are more likely to use private banks). The overall volume of lending to the poor is much smaller than their contribution to the economy. Whereas poor households receive 3 percent of total credit, they account for 10 percent of total consumption and income in the economy. Information constraints, physical distance, lack of formal guarantees, and high costs-per-dollar borrowed present obstacles to lending to the poor.

Social capital2 is one of the assets of the poor. The poor and extreme poor account for a disproportionate share of those living in communities with high social capital. The LSMS reveals that the poor tend to associate for "public goods" purposes (e.g., in community associations), whereas the non-poor join associations that yield higher private gains (e.g., cooperatives). These patterns suggest that the poor rely on community action (social capital) to compensate for a lack of other assets created by public services. Social capital also helps communities leverage assistance. Communities with high social capital report a higher frequency of assistance from the government and NGOs. This correlation is observed in all three geographic areas, and is particularly strong in rural and indigenous areas. Interventions should work with communities to build on this important avenue for public action.

Such Disparities Largely Reflect a Legacy of Distortions in Panama's Economy ...

The disparities in the distribution of assets and economic opportunity reflect Panama's uniquely dualistic pattern of development. Panama's privileged geographic location and its monetary regime anchored in the use of the US dollar as legal tender have fostered its comparative advantage in services, which contribute over three quarters of GDP and generate two-thirds of employment in Panama. These strategic factors have also spurred the rapid development of internationally-oriented, modern, dynamic service enclaves, including the Canal Zone, the Colón Free Zone, and the International Banking Center. While these enclaves generate large shares of GDP, they create little employment (3 percent of the labor force) or fiscal revenue. Moreover, they inject negative spillovers into the economy due to the huge differentials between wages paid in the enclaves, particularly the Canal Zone (which is subject to the U.S. labor code) and the rest of the economy.

Indeed, factor markets have been segmented by policies that drive up the cost of labor relative to capital. Panama's labor market is characterized by a multiplicity of policy regimes, with separate regimes for the private sector, the public sector, the Panama Canal Commission, and the Export Processing Zones. These regimes have created large wage differentials between workers in the Panama Canal Commission, public sector employees, and those employed in the rest of the economy.

Labor-market interventions not only hamper growth, but also have a direct link to poverty. By increasing the relative price of labor — thus, reducing demand for the poor's most abundant asset — these distortions have swelled the ranks of the unemployed and encouraged informality. Moreover, while they benefit those who work in formal sector jobs, the resulting segmentation of the labor market can put a heavy toll on informal sector workers by reducing their wages, making it difficult for the working poor to grow out of poverty through their own labor. Indeed, the LSMS reveals that the poor in Panama do not benefit from such distortions, but may be hurt by them: (i) the majority of the working poor receive wages that are below the official minimum wage; (ii) they do not receive the "mandated" fringe benefits; (iii) the majority are employed in the informal sector, where wages are lower and employment terms less favorable; and (iv) the urban poor are hurt by high rates of open unemployment and the rural working poor appear to be underemployed.

The modern services sector is juxtaposed with a traditional sector (primarily agriculture and industry), that has been constrained by policy-induced rigidities and low productivity for decades. Until recently, a highly distorted trade regime (one of the most protectionist in Latin America) combined with a complex web of price controls had the result of protecting inefficient sectors, distorting resource allocation, generating rents for certain groups, and raising the cost of basic staples. Simulations using the LSMS suggest that the net redistributive effects of such protection was regressive, effectively taxing the poor and increasing poverty and inequality.

The government has undertaken a number of fundamental reforms since 1994 in an attempt to stimulate higher and more inclusive growth and reduce poverty and inequality. It has dismantled the labyrinth of trade barriers and price controls, launched a far-reaching privatization program, issued anti-trust legislation, unified fiscal incentives for manufacturing firms, and adopted modest but important reforms in the Labor Code. After several years of little growth, the economy began to respond in 1997, with strong growth and some decline in unemployment for the first time in years. Even more important for the long term, employment has apparently become more responsive to changes in growth. Despite these reforms, an important policy agenda remains, with several key additional reforms needed to reduce poverty.

... And Biases and Inefficiencies in Public Spending.

Disparities in key assets — notably human capital — also reflect a lack of targeting of social policy and public spending. Despite high spending on the social sectors (21 percent of GDP overall, 6 percent for education, and 7 percent for health in 1997), inefficiencies and inequities have prevented improved outcomes for the poor:

  • Total public spending on education is regressive, with the non-poor benefiting more than the poor. This inequity largely reflects the large share of public spending allocated to higher education (close to one-third of the public education budget), virtually all (95 percent) of which benefits the non-poor. It also reflects the gaps in coverage of the poor at the pre-primary and secondary levels. Geographic inequities in public spending on education are also apparent, with biases in favor of urban areas and against rural (indigenous and non-indigenous) areas. Furthermore, the poor quality of public education stems from functional inefficiencies in the delivery of education, including over-centralized decision-making, weak policymaking and planning capacity in the Ministry of Education, lack of management information tools, and a disconnect between teacher salaries and performance.
  • Inequities in public spending on health care also abound. The poorest quintile of the population benefits the least from public spending on health care due to low levels of use and access to these services. Inefficiencies in the health sector including the fragmentation of the sector by three major providers (the Ministry of Health, the Social Security Institute, and the private sector), few incentives for efficiency and performance, and weak policymaking, financing, and regulation capabilities in the Ministry of Health have also prevented improved health outcomes among the poor.
  • Since the early 1990s, the government has attempted to compensate for some of these biases by developing a number of social assistance programs. While several programs appear to be quite effective at reaching the poor, lack of targeting of some of the larger programs, inefficiencies in program delivery, and possible duplication of functions reduces the effectiveness of these transfers.

The Main Principles of the Government's New Poverty Strategy

The government's Poverty Strategy and Action Plan3 is a direct outcome of the joint analysis of the LSMS and several inter-institutional poverty seminars. This strategy complements the government's economic reform program and is designed to strengthen the key assets of the poor, taking into account geographic differences in the poverty situation and priorities. The main underlying principles for this strategy include:

  • Coherence with, and implementation of, the economic reform program for sustained broad-based economic growth;
  • Improved efficiency in social spending;
  • Targeting of resources to the poor;
  • Decentralization of services for improved efficiency and quality of interventions;
  • Increased community participation for improved effectiveness;
  • A multi-dimensional approach with strong intersectoral coordination; and
  • Monitoring of the poverty situation and implementation of the strategy itself.

The strategy also includes an action plan for interventions in key areas, including: education, health, social assistance and nutrition, urban poverty, and rural poverty.

Translating these Principles into Priorities and Action

To translate these principles into action, the Government should:

  • Prioritize among poverty groups. Given the distribution of poverty, first priority should be given to: the rural poor, the indigenous (particularly the Ngobe-Buglé), poor children and youths, undernourished children, and pregnant and lactating women. Second priority should be assigned to combating urban poverty. Third priority should be given to programs that target the elderly poor, poor child laborers, poor informal-sector workers and the unemployed poor.
  • Reallocate public expenditures. The top priority for effective action to reduce poverty should involve reallocating public expenditures. Given the high level of social spending, it is unlikely that a large amount of additional resources will be forthcoming. As such, the government needs to reallocate existing spending toward areas that benefit the poor, boost cost recovery for services used by the non-poor, and improve efficiency in service delivery. A thorough review of public spending should be conducted in 1999 to guide such reallocations. The review should emphasize both the functional aspects of the budget (including the distributional incidence of spending in key sectors) as well as the management of public expenditures. Clear candidates for reallocation of education spending include: (i) enforcing higher cost recovery for higher education and shifting freed resources toward basic education; (ii) focusing spending on demand-side education schemes to reduce economic barriers faced by poor households to increase enrollment by the poor. Although a thorough analysis of the incidence of health spending remains to be done, some candidates for reallocation include: (i) enforcing higher cost recovery for curative and hospital care (disproportionately benefiting the non-poor) and (ii) shifting resources to cost-effective primary interventions in poor areas. Spending on social insurance and assistance should also be streamlined to ensure a comprehensive, efficient, well-targeted safety net. An inventory of service coverage should be overlayed with the new Poverty Map to guide spending allocations on basic services so as to target key gaps among the poor. In broad terms, transportation, electricity, telephones and potable water have been identified by rural communities as priority; potable water is top priority in indigenous communities; and transportation and sanitation are key for urban communities.
  • Decentralize and promote community participation in service delivery to improve the effectiveness and efficiency of poverty interventions. Examples include: (i) decentralizing personnel decisions to regional education boards and expanding innovative participatory pre-school programs; (ii) decentralizing food purchases in remote areas under school feeding programs; (iii) expanding use of NGOs and communities as intermediaries in social programs; and (iv) responding to community preferences for service delivery.
  • Implement key policy reforms to reduce disparities in assets. While maintaining existing reforms is critical, the agenda for the second-generation of economic reforms designed to promote growth is large. Special efforts should be made to ensure that key reforms to reduce disparities in assets and, hence, poverty are undertaken, including: (i) deepening reforms to the labor code; (ii) expanding property titling (both of housing and land), which will also help improve the poor's access to credit; (iii) continuing trade reforms; and (iv) reducing distortions in public and freight transport.
  • Improve targeting mechanisms. The government should apply the new poverty map (combining data from the LSMS and the census) to the allocation of expenditures as soon as possible. It should also seek to develop additional mechanisms for targeting, including means-testing and self-targeting.
  • Allocate sufficient resources to monitor poverty and to implement the strategy. The government is developing a poverty monitoring system to track living conditions and provide data for impact evaluation of interventions. This system includes LSMS-type surveys that will be conducted every three years. The government should also seek to develop a key set of indicators for monitoring the implementation of the poverty strategy in 1999 and subsequent years. Program-specific questions should also be included in the next LSMS for additional impact and implementation analysis.

Some key steps for immediate implementation during the remainder of 1999 should include:

  • Conducting a thorough review of public expenditure allocations and developing proposals for reallocating expenditures so that they better reach the poor starting with the 2000 budget;
  • Developing a set of indicators to monitor implementation of the strategy (including key budget categories) and agreeing on an inter-institutional process for reporting on indicators and implementation. Funds from the on-going IDF grant could be used to contract technical assistance to help MEF staff developing and monitoring such indicators;
  • Applying the new Poverty Map as a tool for targeting and resource allocation; and
  • Disseminating the Poverty Assessment and the government's Poverty Strategy in government circles and public forums.

Areas for further research include: analyzing public expenditure (incidence and management), the links between poverty and the environment, the impact of existing legislation on labor markets including the informal sector, the distributional incidence of social security, impact evaluations of social assistance programs, participatory research on the obstacles to increased school enrollment among indigenous children, and participatory research on poverty, crime and violence.


1 The analysis is based on salary regressions that do not include income from self-employment.

2 Social capital -- defined as norms, trust and reciprocity networks that facilitate mutually beneficial cooperation in a community -- is an important asset that can reduce vulnerability and increase opportunities.

3 Nuevo Enfoque Estratégico Frente a la Pobreza, Cabinet Resolution No. 134, September 17, 1998.

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