Panama: Political and Economic Conditions
and U.S. Relations
Mark P. Sullivan
Specialist in Latin American Affairs
May 11, 2011
Congressional Research Service
7-5700
www.crs.gov
RL30981
CRS Report for Congress
P
repared for Members and Committees of Congress
Panama: Political and Economic Conditions and U.S. Relations
Summary
With five successive elected civilian governments, the Central American nation of Panama has
made notable political and economic progress since the 1989 U.S. military intervention that
ousted the regime of General Manuel Noriega from power. Current President Ricardo Martinelli
of the center-right Democratic Change (CD) party was elected in May 2009, defeating the ruling
center-left Democratic Revolutionary Party (PRD) in a landslide. Martinelli was inaugurated to a
five-year term on July 1, 2009. Martinelli’s Alliance for Change coalition also captured a majority
of seats in Panama’s National Assembly. Panama’s service-based economy has been booming in
recent years, largely because of the ongoing Panama Canal expansion project (slated for
completion in 2014), but economic growth slowed in 2009 because of the global financial crisis
and U.S. economic recession. Nevertheless, the economy rebounded in 2010, with a growth rate
approaching 7%, and strong growth is continuing in 2011.
President Martinelli retains high approval ratings, but he has been criticized by some civil society
groups for taking a heavy-handed approach toward governing and for not being more
consultative. The country experienced labor unrest in July 2010 after the government approved
legislation that would have weakened labor laws in several respects, but the government
ultimately agreed to repeal the provisions. In February 2011, the government amended the
country’s mining code to facilitate foreign investment. Indigenous groups protested the law even
though President Martinelli vowed that his administration would not approve any mining
concessions in indigenous areas. Ultimately, in early March 2011, President Martinelli called for
the repeal of the law.
The United States has close relations with Panama, stemming in large part from the extensive
linkages developed when the Canal was under U.S. control and Panama hosted major U.S.
military installations. The current relationship is characterized by extensive counternarcotics
cooperation; support to promote Panama’s economic, political, and social development; and a
proposed bilateral free trade agreement (FTA). U.S. bilateral assistance amounted to $7.3 million
in FY2010 while the FY2011 request is for $10.6 million and the FY2012 request for $2.6
million. This funding does not include assistance in FY2008 and FY2009 under the Mérida
Initiative to assist Central American countries in their efforts to combat drug trafficking, gangs,
and organized crime; beginning in FY2010, Panama has been receiving assistance under the
successor Central America Regional Security Initiative.
The United States and Panama signed a bilateral FTA in June 2007, and Panama’s National
Assembly approved the agreement in July 2007. Neither the 110th nor the 111th Congress
considered the agreement, but the 112th Congress could consider the agreement this session.
Issues that have raised congressional concern relate to worker rights and to Panama’s tax
transparency. In the 112th Congress, several measures have been introduced that would express
support for the FTA with Panama: S.Res. 20 (Johanns) and S. 98 (Portman), both introduced
January 25, 2011; and H.Res. 86 (Frelinghuysen), introduced February 11, 2011. For additional
information, see CRS Report RL32540, The Proposed U.S.-Panama Free Trade Agreement; CRS
Report R40622, Agriculture in Pending U.S. Free Trade Agreements with Colombia, Panama,
and South Korea; CRS Report RL34112, Gangs in Central America; and CRS Report R41731,
Central America Regional Security Initiative: Background and Policy Issues for Congress.
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Panama: Political and Economic Conditions and U.S. Relations
Contents
Recent Developments.................................................................................................................. 1
Political and Economic Conditions.............................................................................................. 3
From the Endara to the Torrijos Administration ..................................................................... 3
Endara Government (1989-1994) .................................................................................... 3
Pérez Balladares Government (1994-1999) ..................................................................... 3
Moscoso Government (1999-2004) ................................................................................. 4
Torrijos Government (2004-2009) ................................................................................... 5
Martinelli Government (2009-2014)...................................................................................... 7
May 2009 Elections ........................................................................................................ 7
Challenges for the Martinelli Government ....................................................................... 7
Human Rights Issues........................................................................................................... 11
U.S.-Panama Relations.............................................................................................................. 14
U.S. Foreign Aid and Other Support.................................................................................... 15
Port Security and Other Counterterrorism Efforts ................................................................ 16
Drug Trafficking and Money Laundering ............................................................................ 17
Tax Haven Status ................................................................................................................ 18
U.S. Trade Relations ........................................................................................................... 20
Potential Free Trade Agreement .................................................................................... 21
Operation and Security of the Panama Canal ....................................................................... 24
Historical Background and the Panama Canal Treaties .................................................. 24
Canal Transition and Current Status .............................................................................. 25
Canal Expansion Project ............................................................................................... 25
Background on the 1989 U.S. Military Intervention............................................................. 27
Status of Manuel Noriega .............................................................................................. 27
Figures
Figure 1. Map of Panama ............................................................................................................ 2
Appendixes
Appendix A. Links to U.S. Government Reports ....................................................................... 29
Contacts
Author Contact Information ...................................................................................................... 30
Acknowledgments .................................................................................................................... 30
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Panama: Political and Economic Conditions and U.S. Relations
Recent Developments
On April 28, 2011, President Obama met with President Ricardo Martinelli in Washington, DC, to
discuss progress in moving forward with the U.S.-Panama free trade agreement, including
Panama’s reform efforts in banking and taxation, and security issues focused on contending with
the problem of drug trafficking in the region. (White House, “Remarks by President Obama and
President Martinelli After Bilateral Meeting,” April 28, 2011, available at
http://www.whitehouse.gov/the-press-office/2011/04/28/remarks-president-obama-and-president-
martinelli-panama-after-bilateral-.)
On April 18, 2011, a Tax Information Exchange Agreement (TIEA) between Panama and the
United States entered into force. United States Trade Representative Ron Kirk maintained that
completion of action on labor and tax transparency issues cleared the way for technical
discussions with Members of Congress on the draft implementing bill for the Panama FTA. (See
“Tax Haven Status” and “FTA Labor and Tax Issues” below.)
On April 8, 2011, the Department of State issued its 2010 human rights report. The Panamanian
government generally respects human rights, although the State Department report noted
continued problems in several areas. (The Panama section of the report is available at
http://www.state.gov/g/drl/rls/hrrpt/2010/wha/154514.htm. Also see “Human Rights Issues,”
below.)
On April 5, 2011, President Martinelli signed into law two pieces of labor legislation. One
eliminated the prohibition against the right to strike in companies less than two years old and
restrictions on collective bargaining in export processing zones. The second repealed restrictions
on collective bargaining rights in the special economic zone of Barú. (See “FTA Labor and Tax
Issues” below.)
On March 30, 2011, the Office of the United States Trade Representative issued the National
Trade Estimate Report on Foreign Trade Barriers. (See full text of the report, available at
http://www.ustr.gov/webfm_send/2751, with the Panama section on pp. 290-295 of the pdf.)
On March 30, 2011, the House Committee on Ways and Means, Subcommittee on Trade, held a
hearing on the Panama free trade agreement, featuring Deputy United States Trade Representative
Miriam Sapiro and outside witnesses. (See “FTA Labor and Tax Issues” below. Also see the
testimony at http://waysandmeans.house.gov/Calendar/EventSingle.aspx?EventID=230458.)
On March 17, 2011, the House Committee on Foreign Affairs Subcommittee on the Western
Hemisphere, held a hearing on the Colombia and Panama free trade agreements.
On March 3, 2011, the Department of State issued its 2011 International Narcotics Control
Strategy Report, which maintained that the Martinelli government “continued Panama’s history of
close cooperation with the United States on counternarcotics operations.” (See “Drug Trafficking
and Money Laundering,” below. Also see the full text of Volume 1 of the report, available at
http://www.state.gov/p/inl/rls/nrcrpt/2011/vol1/156362.htm#panama, and Volume 2, available at
http://www.state.gov/p/inl/rls/nrcrpt/2011/vol2/156376.htm#panama.)
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Figure 1. Map of Panama
Source: Map Resources. Adapted by CRS.
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Political and Economic Conditions
Panama has made notable political and economic progress since the December 1989 U.S. military
intervention that ousted the military regime of General Manuel Antonio Noriega from power. The
intervention was the culmination of two and a half years of strong U.S. pressure against the de
facto political rule of Noriega, commander of the Panama Defense Forces. Since that time, the
country has had five successive civilian governments, with the current government of President
Ricardo Martinelli of the center-right Democratic Change (CD) party elected in May 2009 to a
five-year term. Inaugurated on July 1, 2009, Martinelli is a businessman and former government
minister. His electoral alliance, known as the Alliance for Change, also won a majority of seats in
the unicameral National Assembly. Panama’s largely service-based economy has been booming in
recent years, spurred on by the Panama Canal expansion project that begun in 2007 that is
expected to be completed in 2014.
From the Endara to the Torrijos Administration
Endara Government (1989-1994)
Before the U.S. intervention, Panama had held national elections in May 1989, and in the
presence of a large number of international observers, the anti-Noriega coalition, headed by
Guillermo Endara, prevailed by a three-to-one margin. The Noriega regime annulled the election,
however, and held on to power. By the fall, the military regime was losing political power and
relied increasingly on irregular paramilitary units, making the country unsafe for U.S. forces and
U.S. citizens. On December 20, 1989, President George H. W. Bush ordered the U.S. military into
Panama “to safeguard the lives of Americans, to defend democracy in Panama, to combat drug
trafficking, and to protect the integrity of the Panama Canal Treaty.” Noriega was arrested on
January 3, 1990, and brought to the United States to stand trial on drug trafficking charges. (Also
see “Status of Manuel Noriega,” below.)
As a result of the intervention, the opposition coalition headed by Guillermo Endara that had won
the May 1989 election was sworn into office. During his term, President Endara made great
progress in restoring functioning political institutions after 21 years of military-controlled
government, and under his administration, a new civilian Public Force replaced Noriega’s
Panama Defense Forces. But Endara had difficulties in meeting high public expectations, and the
demilitarization process was difficult, with some police and former military members at times
plotting to destabilize, if not overthrow, the government.
Pérez Balladares Government (1994-1999)
In May 1994, Panamanians went to the polls to vote in presidential and legislative elections that
observers called the freest in almost three decades. Ernesto Pérez Balladares, candidate of the
former pro-Noriega Democratic Revolutionary Party (PRD), who led a coalition known as
“United People,” won with 33% of the vote. Placing a surprisingly strong second, with 29% of
the vote, was the Arnulfista Party (PA) candidate, Mireya Moscoso de Gruber, heading a coalition
known as the “Democratic Alliance.”
In the electoral race, Pérez Balladares campaigned as a populist and advocated greater social
spending and attention to the poor. He stressed the need for addressing unemployment, which he
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termed Panama’s fundamental problem. Pérez Balladares severely criticized the Endara
government for corruption, and he was able to overcome attempts to portray him as someone
closely associated with General Noriega. (Pérez Balladares served as campaign manager during
the 1989 elections for candidate Carlos Duque, who the Noriega regime had tried to impose on
the electorate through fraud.) Instead, Pérez Balladares focused on the PRD’s ties to the populist
policies of General Omar Torrijos, whose 12-year (1969-1981) military rule of Panama ended
when he died in a plane crash in 1981.
President Pérez Balladares implemented an economic reform program that included liberalization
of the trade regime, privatization of state-owned enterprises, the institution of fiscal reform, and
labor code reform. Tariffs were reduced to an average of 8%.
Pérez Balladares also worked closely with the United States as the date of the Panama Canal
turnover approached. Under his government, Panama and the United States held talks on the
potential continuation of a U.S. military presence in Panama beyond the end of 1999 (the date
Panama was to assume responsibility for defending the Canal). Ultimately negotiations ended
without such an agreement.
Although Panama’s constitution does not allow for presidential reelection, President Pérez
Balladares actively sought a second term in 1999. In 1997, the PRD had begun studying the
possibility of amending the constitution to allow a second bid for the presidency in the May 1999
elections. Ultimately, a referendum was held on the issue in August 1998 but failed by a large
margin.
Late in his administration, Pérez Balladares became embroiled in a scandal involving the illegal
sale of visas to Chinese immigrants attempting to enter the United States via Panama. As a result,
U.S. officials cancelled the former president’s U.S. tourist visa in November 1999.1
Moscoso Government (1999-2004)
In her second bid for the presidency, Arnulfista Party (PA) candidate Mireya Moscoso was
victorious in the May 1999 elections. Moscoso, who was inaugurated September 1, 1999, for a
five-year term, captured almost 45% of the vote and soundly defeated the ruling PRD’s candidate
Martin Torrijos (son of former populist leader Omar Torrijos), who received almost 38% of the
vote. Until March 1999, Torrijos had been leading in opinion polls, but as the election neared, the
two candidates were in a dead heat. A third candidate, Alberto Vallarino, heading a coalition
known as Opposition Action, received about 17% of the vote.
President Moscoso, a coffee plantation owner and Panama’s first female president, ran as a
populist during the campaign, promising to end government corruption, slow the privatization of
state enterprises, and reduce poverty. She also promised to ensure that politics and corruption did
not interfere with the administration of the Canal. The memory of her husband Arnulfo Arias, a
nationalist who was elected three times as president, but overthrown each time, was a factor in the
campaign, particularly since Arias was last overthrown in 1968 by General Omar Torrijos, the
father of the PRD’s 1999 and 2004 presidential candidate.
1 “Ex-Leader of Panama Linked to Visa Sales,” Washington Post, November 27, 1999; Pablo Bachelet, “U.S. Uses
Visas to Combat Corruption,” Miami Herald, February 21, 2006.
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Although Moscoso took the presidency, the PRD-led New Nation coalition won a majority of 41
seats in the 71-member unicameral Legislative Assembly. Just days before her inauguration,
however, Moscoso was able to build a coalition, with the support of the Solidarity Party, the
Christian Democratic Party (which later became the Popular Party), and the National Liberal
Party, that gave her government a one-seat majority in the Assembly. In August 2000, the
Christian Democrats deserted the coalition and formed an alliance with the principal opposition,
the PRD. However, corruption scandals in 2002 led to five PRD legislators defecting to support
the Moscoso government, once again giving the president majority support in the Legislative
Assembly.
The Moscoso government partially reversed the trade liberalization process of the Pérez
Balladares by raising tariffs on some agricultural products, some of which reached the maximum
rate allowed under Panama’s World Trade Organization obligations.2
As noted above, Moscoso was elected as a populist, with pledges to end government corruption
and reduce poverty, but her campaign pledges proved difficult to fulfill amid high-profile
corruption scandals and poor economic performance. As a result, the president’s popularity
declined significantly from a 70% approval rating when she first took office in 1999 to only 15%
in 2004.3
Torrijos Government (2004-2009)
In the May 2004 presidential race, Martín Torrijos of the PRD won a decisive victory with 47.5%
of the vote, defeating former President Guillermo Endara, who received 30.6% of the vote, and
former Foreign Minister José Miguel Alemán, who received 16.4% of the vote. Torrijos’ electoral
alliance also won a majority of seats in the unicameral National Assembly (formerly known as the
Legislative Assembly), 43 out of 78 seats, which should provide him with enough legislative
support to enact his agenda. Elected at 40 years of age, Torrijos—the son of former populist
leader General Omar Torrijos (1968-1981)—spent many years in the United States and studied
political science and economics at Texas A&M University. He served four years under the Pérez
Balladares government as deputy minister of interior and justice, and as noted above, became the
PRD’s presidential candidate in the 1999 elections.
Leading up to the election, Torrijos had been topping public opinion polls, with 42%-49%
support. In the campaign, he emphasized anti-corruption measures as well as a national strategy
to deal with poverty, unemployment, and underdevelopment. He was popular among younger
voters and had a base of support in rural areas. Torrijos maintained that his first priority would be
job creation.4 He called for the widening of the Canal, a project that would cost several billion
dollars, and would seek a referendum on the issue. During the campaign, all three major
candidates supported negotiation of a free trade agreement with the United States, maintaining
that it would be advantageous for Panama. Endara and Alemán appeared to emphasize the
protection of some sensitive Panamanian sectors such as agriculture, while Torrijos stressed that
such an agreement would make Panama’s economy more competitive and productive.5
2 United States Trade Representative, 2006 National Trade Estimate Report on Foreign Trade Barriers, p. 501.
3 “Toss Up Between Torrijos and Endara,” Caribbean and Central America Report, February 17, 2004.
4 Frances Robles, “Ex-leader’s Son Wins Presidency in Panama,” Miami Herald, May 3, 2004.
5 “Panama: Presidential Candidates Remark on FTA with US,” La Prensa (Panama), January 24, 2004, translated by
(continued...)
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During his five years in office, President Torrijos faced such major challenges as dealing with the
deficits of the country’s social security fund (Caja de Seguro Social, CSS); developing plans for
the expansion of the Panama Canal; combating unemployment, poverty, and increasing crime;
and contending with the effects of the global financial crisis and U.S. recession on the
Panamanian economy.
After protests and a protracted strike by construction workers, doctors, and teachers in June 2005,
the Torrijos government was forced to modify its plans for reforming the social security fund.
After a national dialogue on the issue, Panama’s National Assembly approved a watered-down
version of the original plan in December 2005. The enacted reform did not raise the retirement
age but will gradually increase required monthly payments into the system and introduces a dual
pension system that combines aspects of privatization with the current system.6 In mid-December
2007, an almost six-week strike by doctors in the public healthcare system was resolved, with the
government offering a 26.7% increase in salaries equivalent and a commitment not to privatize
the system.7
In April 2006, the government unveiled its ambitious plans to build a third set of locks that would
double the Canal’s capacity, and allow larger post-Panamax ships to transit the Canal. Panama’s
Cabinet approved the expansion plan in June, and the National Assembly approved it in July
2006. A referendum on the expansion project took place on October 22, 2006, with 78%
supporting the project. The referendum was viewed as a victory for the Torrijos government,
which advanced the project as integral to Panama’s future economic development and one that
helped restore the president’s popularity.8
The Torrijos government’s agenda also included judicial, penal and anti-corruption reforms, as
well as an economic development strategy to target poverty and unemployment. The government
implemented a new penal code in May 2008 that took a tougher stance on crime by increasing
sentences on serious crimes and other measures. In early July 2008, Panama’s National Assembly
gave President Torrijos powers to carry out security sector reforms over the next two months. In
August 2008, President Torrijos enacted five decree laws reorganizing Panama’s law enforcement
and security services, including the establishment of a National Border Service and a National
Intelligence and Security Service (SENIS). Some critics fear that the actions will lead to
Panama’s re-militarization, while Torrijos maintains that the new agencies are needed to combat
growing drug crimes.9 In mid-December 2008, the Torrijos government approved additional
changes to the penal code that increased penalties for the illegal possession of firearms and
introduced sentences for attacking a police official.10
(...continued)
Foreign Broadcast Information Service.
6 Marion Barbel, “Panamanian Congress Approves Modified Social Security Reform,” World Markets Research,
December 22, 2005.
7 “Panama: Country Report,” Economist Intelligence Unit, January 2008, p. 2.
8 Richard Lapper, “Good Luck, Good Timing,” Financial Times, July 24, 2007.
9 “Panama: Torrijos to Undertake Security Reform by Decree,” Latin American Weekly Report, July 3, 2008; “Torrijos
Forges Ahead with Security Decrees,” Latin American Regional Report, Caribbean and Central America, September
2008.
10 "Panama: Torrijos Pushes Through Changes to Penal Code," Latin American Weekly Report, December 18, 2008.
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In order to deal with the effects of the global financial crisis, President Torrijos announced the
establishment of a $1.1 billion fund in January 2009 to allow for eased credit access and loans to
financial institutions in Panama. The fund—financed with support from the Inter-American
Development Bank, the Andean Development Corporation, and the National Bank of Panama—
was established in order to counter the tightening of credit because of the global financial crisis.11
Martinelli Government (2009-2014)
May 2009 Elections
Because Panama’s Constitution does not allow for immediate reelection, Torrijos was ineligible to
run in the May 3, 2009, presidential election, which supermarket mogul and former government
minister Ricardo Martinelli of the small center-right Democratic Change (CD) party won in a
landslide. Despite strong economic growth and reductions in poverty, support for the Torrijos
government in its last year in office eroded because of concerns about rising crime, the effects of
the global financial crisis, and problems in improving infrastructure and public services. This
contributed to the PRD’s poor showing in the 2009 presidential and legislative elections.
While initially in 2008 it appeared that the candidate of the ruling PRD, former housing minister
Balbina Herrera, was favored to win, opinion surveys late in the year reflected a significant shift
in favor of Ricardo Martinelli. Polls in January 2009 showed Martinelli with 43% support
compared to 25% for Herrera and almost 15% for Juan Carlos Varela of the center-right
Panameñista Party (PP).12 In late January 2009, Martinelli and Varela struck a deal to run together
in a four-party coalition dubbed the Alliance for Change, with Martinelli leading the ticket and
Varela as his running mate. The new alliance further widened Martinelli’s lead in opinion polls.
Ultimately, Martinelli captured 60% of the vote compared to almost 38% of the vote for
Herrera.13
Martinelli’s Alliance for Change also won a majority of seats in the unicameral National
Assembly that will increase the chances that the president will be able to secure enough votes to
enact his legislative agenda. The Alliance for Change parties captured 42 out of 71 seats in the
legislature, with Martinelli’s CD winning 15 and the PP winning 21 seats. The opposition PRD,
however, still remains the largest single party in the legislature, with 26 seats although internal
divisions could weaken its power.14 The Alliance for Change coalition faces some internal
divisions that could jeopardize its cohesion, especially if President Martinelli’s popularity begins
to falter.
Challenges for the Martinelli Government
President Martinelli still retains high approval ratings, measured at over 70% in December
2010,15 although this strong popularity masks some of the difficulties that the president has faced
11 Marion Barbel, "President Unveils U.S. $1.1 billion Anti-Crisis Fund in Panama," Global Insight, January 23, 2009.
12 “Panama: Martinelli’s Presidential Prospects Strengthen,” Latin American Weekly Report, January 15, 2009,
“Panama Mogul Extends Lead in Election Race – Poll,” Reuters, January 11, 2009.
13 Tribunal Electoral de Panama, “Elecciones Generales del 3 de mayo de 2009.”
14 Asamblea Nacional de Panama, listing of deputies, available at http://www.asamblea.gob.pa/diputados/index.html
15 “Re-Election Motion Chucked Out in Panama,” LatinNews Daily, January 6, 2011.
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since taking office. Moreover, the president has been criticized by civil society groups for taking
a heavy-handed approach toward governing and not being consultative with civic groups.16 In
early January 2011, a bill initiated by a deputy from President Martinelli’s CD that would have
amended the constitution to allow for consecutive presidential re-election was rejected by a
congressional committee. Panama’s next presidential election is scheduled for May 2014. During
the 2009 presidential race, Martinelli reportedly agreed that the Panameñista Party would head
the coalition in 2014, although some reports indicate that there are concerns that President
Martinelli will not adhere to this and might support another candidate.17
In 2009, a significant economic challenge facing the Martinelli government was dealing with the
fallout stemming from the global financial crisis, but the economy weathered the storm and
avoided the contraction experienced by many Latin American economies. Panama’s service-based
economy had been booming in recent years, largely because of the Panama Canal expansion
project, but the global financial crisis and the related decline in U.S. import demand stemming
from the U.S. recession slowed Panama’s economic growth. The economy grew 12.1% in 2007
and 10.1% in 2008. Initially, some economists were predicting that the economy would contract
in 2009, but the economy ended up growing an estimated 3.2%. This made Panama’s economy
one of the few in the region registering positive economic growth in 2009. In 2010, the economy
grew even faster, with an estimated growth rate approaching 7%, and the forecast for 2011 is for
growth over 6%.18
Although Panama is categorized by the World Bank as having an upper-middle-income economy
because of its relatively high per capita income level of $6,180 (2008), one of the country’s major
challenges is highly skewed income distribution with large disparities between the rich and
poor.19 In order to tackle poverty, the previous Torrijos government initiated a social support
program of conditional cash transfers to poor families (Red de Oportunidades) and in mid-2008,
the government extended the program to include the elderly living in extreme poverty. Poverty
rates have been reduced from almost 37% in 2002 to almost 26.4% in 2009. Extreme poverty or
indigence in Panama declined from 18.6% in 2002 to 11.1% in 2009.20 Since taking office,
President Martinelli has fulfilled his campaign pledge to provide $100 a month to poor seniors. In
early May 2011, the World Bank approved a $100 million policy loan for Panama to help it
strengthen fiscal management, improve tax collection, and expand key social programs.21
During the 2009 presidential campaign, Martinelli pledged to simplify the tax system by the
introduction of a flat tax for individuals and for corporations in order to discourage tax evasion.
Instead, however, the government enacted two tax reform measures, the first in September 2009
and the second in March 2010, that increased reliance on indirect taxes, reduced income tax rates,
and broadened the tax base. These measures are expected to increase government revenue by
more than 2%, according to the International Monetary Fund.22 The tax reform in March 2010
16 "Country Report: Panama," Economist Intelligence Unit (EIU), January 2011, p. 11.
17 Ibid, p. 10; and “Re-Election Motion Chucked Out in Panama,” LatinNews Daily, January 6, 2011.
18 "Country Report: Panama," EIU, March 2011, p. 14.
19 World Bank, World Development Report 2010.
20 U.N. Economic Commission for Latin America and the Caribbean, Social Panorama of Latin America 2010.
21 World Bank, “Panama/World Bank: Nearly 20 Percent Increase in Tax Revenue to Boost Social Programs,” Press
Release, May 4, 2011.
22 International Monetary Fund, “Panama: 2010 Article IV Consultation—Staff Report,” October 2010, IMF Country
Report No. 10/314.
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reduced corporate and personal income tax rates, and offset the loss of revenue by raising the
sales tax from 5% to 7% (not including food) and raising other taxes on banks, casinos, airlines,
and the free-trade zone, with a projected net increase in revenue. The government maintains that
additional revenue from the reform will be used to augment social expenditures (such as
scholarships and cash transfers to the elderly), but critics of the measure maintain that the poor
will be hit by an increase in the cost of living. The tax measure in 2010 prompted protests against
the government in March, with violent clashes between police and demonstrators, and some 200
people were detained.23 The tax measure, however, also led to an upgrading of Panama’s
investment-grade credit rating that could improve the country’s financing costs and its
attractiveness for foreign investment.24
During the 2009 campaign, Martinelli also called for a number of large public infrastructure
projects, including a subway system for Panama City, a light rail system on the outskirts of
Panama City, regional airports and roads, and a third bridge over the Canal. The government has
already begun to move ahead on some projects. It has set up a body to oversee a plan to construct
a subway system in Panama City, and in October 2010 awarded the $1.4 billion project to a
Brazilian and Spanish construction consortium.
Another challenge for the Martinelli government has been dealing with Panama’s rising crime,
which increased significantly in 2008 and 2009, but declined in 2010. From 2000-2006, the
annual homicide rate averaged between 10 and 11 homicides per 100,000 inhabitants.25 The rate
subsequently increased from 13 per 100,000 in 2007 to 19 in 2008 and 24 in 2009. Panama had
806 murders in 2009, up 23% from 2008, with drug trafficking the driving force behind the
increase.26 During the 2009 electoral campaign, Martinelli proposed a safe streets program that
included increasing the number of police and raising police pay. In February 2010, President
Martinelli announced an expansion of the national police force with an additional 4,000 officers
that would raise the total force to over 15,000.27 In late 2010, Panama’s minister of public security
said that the number of murders in 2010 had declined about 15% to 692.28
The Martinelli government initiated a number of anti-corruption investigations against officials
from the PRD who served in government, including former President Ernest Pérez Balladares
(1994-1999), but the PRD maintains that Martinelli is using an anti-corruption crusade to
prosecute its political opposition. In late January 2010, Panama’s Supreme Court voted to
suspend Attorney General Ana Matilde Gomez on allegations of abuse of authority. Gomez had
been appointed by the Torrijos government in 2005 to a 10-year post, but the Martinelli
government had criticized her for failing to act in cases involving former high-ranking PRD
government officials. Gomez’s interim successor, Giuseppe Bonissi (reportedly a close associate
23 Inti Landauro, “Panama Approves Tax Bill to Boost Revenue, Cut Deficit,” Dow Jones Newswires, March 16, 2010;
Sean Mattson, “Panama: President Ricardo Martinelli Moves His Agenda Forward,” Noticen: Central American &
Caribbean Affairs, March 18, 2010; “Panama Unions Show New Signs of Life,” Latin American Regional Report:
Caribbean & Central America, April 2010.
24 “Panama: Credit Update,” EIU – Business Latin America, March 29, 2010.
25 U.N. Development Program, Informe Sobre Desarrollo Humano Para América Central 2009-2010: Abrir Espacios a
la Seguridad Ciudadana y el Desarrollo Humano, October 2009.
26 “Panama: Drug-Fueled Violence on the Increase,” Noticen, Central American & Caribbean Affairs, January 28,
2010.
27 “Panama Politics: President’s Popularity Slips,” EIU ViewsWire, March 23, 2010.
28 “Panama, Colombia Build Police Stations on Border to Control Crime,” BBC Monitoring Americas, December 28,
2010.
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of Martinelli), resigned in December 2010 after accusations that some government prosecutors
had given preferential treatment to suspected drug-traffickers. President Martinelli then appointed
career official José Ayú Prado to finish out the rest of Gómez’s term until 2015. The appointment
reportedly was lauded by civic groups who had feared that President Martinelli would again
designate a close ally.29
Some observers have criticized President Martinelli for undermining the independence of the
judiciary because of his nomination of two political allies to the Supreme Court in December
2009. The National Assembly quickly approved the nominations, and the two justices took office
in January 2010. A complaint on this and the broader issue of problems with Panama’s judicial
system was heard by the Inter-American Commission on Human Rights in March 2010, with
representatives of the Citizens Alliance for Justice (Alianza Ciudadana Pro Justicia). The alliance
represents 20 Panamanian civil society organizations dedicated to implementing judicial reform
and improving the administration of justice.30 In January 2011, Panama’s Supreme Court revived
legislation approved in 1999 under the Pérez Balladares government that expanded the court from
9 to 12 judges and established a “court of constitutional guarantees” within the Supreme Court.
President Moscoso’s government subsequently repealed the legislation expanding the court and
the membership of the court returned to 9 members. But in January 2011, the Supreme Court
declared the Moscoso government’s action unconstitutional so that the court will return to 12
members. Critics maintain that it will give President Martinelli more influence over the court.31 In
mid-April 2011, Supreme Court Justice José Abel Almengor resigned after accusations emerged
that he had conspired to unseat former Attorney General Ana Matilde Gomez.32
In July 2010, Panama experienced labor unrest in response to controversial legislation that would
have allowed companies to suspend contracts of striking workers, allowed companies to hire
replacement workers during strikes, and ended the obligatory payment of union dues. Two
striking workers in the banana sector were killed in clashes with police in Bocas del Toro and
hundreds were injured. The strike was suspended after the Martinelli government agreed to
suspend some of the controversial aspects of the law. In October 2010, the government agreed to
repeal the controversial labor provisions as well as provisions that would have relaxed
environmental standards. The law had included provisions that would have allowed the
government to eliminate environmental-impact studies for public works deemed of “social
interest.”33
On February 10, 2011, Panama’s National Assembly approved legislation initiated by the
Martinelli government that amended the country’s mining law to facilitate foreign government
investment in the sector. Changes to the law were reportedly motivated by plans of Canada’s
Inmet Mining company to secure financing from Singapore and South Korea for a mining project
29 "Country Report: Panama," EIU, January 2011, p. 9; “People Profile, José Eduardo Ayú Canals, Panama,” Latin
NewsDaily, January 25, 2011
30 See the website of the Citizens Alliance for Justice at http://www.alianzaprojusticia.org.pa/ ; The Washington, D.C.-
based Due Process of Law Foundation has also done work on the issue of Panama’s judicial system. For more
information, see: http://www.dplf.org/index.php?c_ID=395&catID=1
31 "Country Report: Panama," EIU, February 2011, p. 10.
32 "Country Report: Panama," EIU, April 2011, p. 10.
33 Sean Mattson, “Panamanian President Ricardo Martinelli Reverses Course on Controversial Legislation,” Noticen,
Central & Caribbean Affairs, November 11, 2010; “Panama: Martinelli Performs Major U-Turn,” Latin American
Regional Report, Caribbean & Central America, October 2010.
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known as Cobre Panama.34 Indigenous and environmental groups protested the amendment of the
mining law and called for its repeal. President Martinelli vowed that his administration would not
approve any mining concession in indigenous areas, including in the Cerro Colorado, believed to
hold the country’s largest copper reserves, which lies in the indigenous Ngöbe-Buglé comarca
(semi-autonomous region) in Chiriquí province. Despite Martinelli’s action, indigenous and
environmental groups vowed more protests, with some calling for a referendum to settle the
dispute.35 Ultimately, on March 3, 2011, in response to indigenous protests and concerns over the
mining law, the president relented and called for its repeal, which was completed on March 18.
The government maintains that the repeal of the law will not affect the development of the Cobre
Panama project.36
Human Rights Issues
The Panamanian government generally respects human rights, but, as noted by the State
Department in its 2010 human rights report (issued in April 2011), human rights problems
continue in a number of areas. Among the problems cited was excessive force used by police
during protests. In July 2010, two protestors were killed during labor protests in clashes with
security forces, and hundreds of people were injured. Other problems cited included harsh prison
conditions; prolonged pretrial detention; corruption, ineffectiveness and alleged political
manipulation of the judicial system; corruption in the executive and legislative branches and
security forces; discrimination and violence against women and other forms of societal
discrimination; trafficking in persons; and violations of some worker rights.
Administration of Justice. As noted above, there has been some criticism in Panama regarding
the administration of justice and the independence of the judicial branch. Some observers have
criticized President Martinelli for undermining the independence of the judiciary because of his
nomination of two political allies to the Supreme Court in December 2009. A complaint on the
issue regarding the justice system was heard by the Inter-American Commission on Human
Rights on March 23, 2010, with representatives of the Citizens Alliance for Justice (Alianza
Ciudadana Pro Justicia). The alliance represents 20 Panamanian civil society organizations
dedicated to implementing judicial reform and improving the administration of justice.37 The
State Department’s human rights report maintained that the judiciary was subject to corruption
and outside influence and reportedly was manipulated by other branches of government.
Freedom of the Press. In past years, Panama had been criticized by the State Department and
international human rights groups for vestiges of “gag laws” used by the government to silence
those criticizing policies or officials, but the legislature repealed these laws in May 2005.
Nevertheless, the legislature approved penal code amendments in May 2007 that allow for the
prosecution of journalists who violate the privacy of public officials or who publish classified
information. The new penal code went into effect in May 2008. Nongovernmental organizations
assert that the new code threatens freedom of speech and press.
34 “Panama: Martinelli Hits Another Nerve,” Latin American Weekly Report, February 24, 2010.
35 “Decree Fails to Resolve Panama Mining Row,” Agence France Presse, February 23, 2011.
36 “Govt Assures Inmet That Repeal of Law 8 Will Not Affect Current Contracts, Concessions,” Business News
Americas, March 24, 2011.
37 See the website of the Citizens Alliance for Justice at http://www.alianzaprojusticia.org.pa/; The Washington, D.C.-
based Due Process of Law Foundation has also done work on the issue of Panama’s judicial system. For more
information, see: http://www.dplf.org/index.php?c_ID=395&catID=1
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As noted in the State Department’s 2010 human rights report, the government has used a variety
of means to impede freedom of expression and attempt to silence criticism of its actions.
International press rights groups such as the Committee to Protect Journalists and Reporters
Without Borders have expressed concern about several cases.
In September 2008, a judge ordered the seizure of a local newspaper, El Periódico, because it
published the tax returns of a prominent businessman. The paper subsequently went out of
business, but the case remains under appeal.
In February 2009, a Panamanian court sentenced Jean Marcel Chéry, the director of the daily El
Siglo, to two years in prison for trespassing in connection with reporting on alleged corruption
involving a Supreme Court Justice. Chéry is still appealing the decision, but he and the other two
journalists have not been imprisoned since the law requires commutation of sentences into fines
in cases where a final ruling has not been made within two years. In May 2010, Chéry filed a
complaint with the Inter-American Commission on Human Rights alleging that the government
had launched a campaign of intimidation after his newspaper ran a story on government failure to
collect garbage in poor neighborhoods of Panama City.
In September 2009, a Panamanian court convicted a journalist from La Prensa of libel against a
former vice president, and the case remains under appeal. In May 2010, the Supreme Court fined
La Prensa for “moral damages” after it reported on the 2005 firing and subsequent reinstatement
of a prosecutor; the case remains under appeal.
In late September 2010, a Panamanian court convicted two television journalists of defamation
and banned them from working as journalists for a year, although President Martinelli
subsequently issued a pardon after their conviction. Press rights groups welcomed Martinelli’s
action, but called for legal reforms to fully decriminalize defamation.38
In early January 2011, a draft law that would have allowed anyone convicted of insulting the
president or an elected official to be sentenced to prison was withdrawn from consideration in the
National Assembly. The bill had been criticized by journalists and press rights groups, and
President Martinelli had warned that he would veto the measure.39
Past Human Rights Abuses Under Military Rule. In an attempt to redress human rights abuses
that occurred under military rule (1968-1989) and to prevent their recurrence, the Moscoso
government established a Truth Commission in 2001 that documented 70 cases of murder and 40
disappearances, but progress has been slow in investigation and prosecution of these cases. In
2008, Panama’s attorney general announced that investigations had either been opened or
reopened in 47 of these cases because of new evidence. According to the State Department’s 2009
human rights report, more than half of these cases have been temporarily dismissed or closed, but
19 were at various stages of the trial process. The 2010 State Department human rights report
maintained that a number of cases remain underway or under consideration.
In 2008, the Panamanian government opened an investigation into the alleged killings of more
than 20 persons who reportedly were thrown from helicopters in the Darién region in 1982-1983.
38 “In Panama, Defamation Conviction Draws Outcry,” Committee to Protect Journalists, October 7, 2010.
39 “Withdrawal of Proposal to Introduce Jail Terms for Insulting the President,” Reporters Without Borders, January
12, 2011.
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The State Department’s 2010 human rights report maintained that there were no known
developments in investigations.
In November 2009, Panama’s attorney general asked a court to call to trial former Minister of
Government and Justice Daniel Delgado for a killing in 1971 when he was a member of Panama’s
National Guard. The Supreme Court acceded to the request, but a court date has not been set.
In July 2006, just as a human rights trial was approaching an end, a former military officer
implicated in the 1970 killing of activist Heliodoro Portugal died from an apparent heart attack. In
September 2008, the Inter-American Commission on Human Rights ordered the Panamanian
government to pay restitution to the family of Portugal. In April 2010, a Panamanian court agreed
to try eight former members of the National Guard, including former Manuel Antonio Noriega,
for alleged involvement in the disappearance and killing of Portugal.
Displaced Persons. Over the years, violence from the civil conflict in neighboring Colombia has
resulted in thousands of displaced persons seeking refuge in the neighboring Darién province of
Panama. Many of the Colombians have lived in Panama for years, have given birth to children in
Panama, and do not want to return to Colombia because of family and cultural ties to local
Panamanian communities. According to the Department of State, the Panamanian government
restricts the movement of some 1,200 Colombians in the Darién region covered under “temporary
humanitarian protection.” While the majority of the displaced are Afro-Colombians, there have
also been indigenous people from Colombia who have fled to Panama because of the violence.
In addition to those under “temporary humanitarian protection,” the State Department’s 2010
human rights report notes that there were 1,213 officially recognized refugees in Panama, while
the Office of the U.N. High Commissioner for Refugees (UNHCR) classifies some 15,000 people
in Panama as “persons of concern” in need of international protection. (Some nongovernmental
organizations maintain that the number could be as high as 75,000.40) UNHCR has a permanent
office in Panama and was generally allowed access to provide services to refugees, internally
displaced persons, and persons under temporary humanitarian protection.
In April 2008, UNHCR lauded Panama for the approval of a new law that allows long-standing
refugees (those residing 10 years or more) the opportunity to apply for permanent residency until
November 2010. According to UNHCR, the new law largely affected refugees from Nicaragua
and El Salvador who arrived in Panama during the Central American conflicts of the 1980s.41
According to the State Department’s 2010 human rights report, 277 out of 300 applications for
permanent residency were approved under the law by the time of its expiration.
Worker Rights. With regard to worker rights in Panama, the State Department’s 2010 human
rights report notes that while Panamanian law recognizes the right of private-sector workers to
form and join unions of their choice, the law requires a minimum of 40 persons to a form a union,
and only one trade union is allowed per business. The International Labor Organization (ILO)
Committee of Experts criticizes both provisions as violations of workers’ rights to organize.
Public servants may not form unions, but they may form associations, which can bargain
collectively, and there is a limited right to strike with the exception of those areas vital for public
40 Refugee Council USA, Living on the Edge: Colombian Refugees in Panama and Ecuador, 2011.
41 “UNHCR Welcomes New Panama Law,” UNHCR Briefing Notes, April 1, 2008; and UNHCR, “Panama,”
September 2010.
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welfare and security. The National Federation of Public Servants (FENASEP), an umbrella
organization of 21 public-sector worker associations, is not permitted to call strikes, and the ILO
has expressed concerns about this. As noted above, Panama experienced labor unrest in July 2010
after the government approved legislation weakening labor laws in several respects, but the
government subsequently repealed those provisions. The State Department report also noted that
child labor was a problem, with violations occurring most frequently in rural areas at harvest time
and in the informal sector, but the report also described efforts by the government to combat the
problem. This has included adoption of a national plan to eliminate the worst forms of child labor
by 2015 and all illegal child labor by 2020. (For additional discussion of labor issues raised in the
context of the proposed free trade agreement, see “FTA Labor and Tax Issues” below.)
Human Trafficking. According to the State Department’s 2010 Trafficking in Persons (TIP)
report, issued in June 2010, Panama is a source, transit, and destination country for women and
children trafficked domestically for commercial sexual exploitation. Non-governmental
organizations report that some Panamanian children are subjected to involuntary domestic
servitude. The report maintained that the government showed little evidence of progress in
combating human trafficking, with weak law enforcement, no penal code prohibition against
forced labor, and failure to provide adequate assistance to trafficking victims and to identify
trafficking victims among vulnerable populations. As a result, Panama was placed on the Tier 2
Watch List.42
Panama previously had been on the State Department’s Tier 2 Watch List in 2008 for failing to
show evidence of increasing efforts to combat human trafficking and for failing to provide
adequate victim assistance. After the 2008 TIP report was issued, the government increased
prevention efforts, enacted a legislative reform package to strengthen its anti-trafficking laws, and
eliminated a special visa category that had been used to facilitate the trafficking of Colombian
women into the sex trade. As a result in Panama was placed on the Tier 2 List in June 2009
because of the government’s anti-trafficking efforts.
U.S.-Panama Relations
Since the 1989 U.S. military intervention that ousted the regime of General Manuel Antonio
Noriega from power (see “Background on the 1989 U.S. Military Intervention”), the United
States has had close relations with Panama, stemming in large part from the extensive history of
linkages developed when the Panama Canal was under U.S. control and Panama hosted major
U.S. military installations. Today, about 27,000 U.S. citizens reside in Panama, many retirees of
the former Panama Canal Commission, and there are growing numbers of other American retirees
in the western part of the country.43
The current U.S. relationship with Panama is characterized by extensive cooperation on
counternarcotics efforts; support to promote Panama’s economic, political, and social
development; and a proposed bilateral free trade agreement (FTA) that was signed in 2007.
Panama is seeking the FTA because it would make trade rules with the United States permanent,
and perhaps more significantly, because it would promote increased foreign investment in the
42 U.S. Department of State, “Trafficking in Persons Report,” June 2010. Also see CRS Report RL33200, Trafficking in
Persons in Latin America and the Caribbean, by Clare Ribando Seelke.
43 U.S. Department of State, Background Note: Panama, September 16, 2010.
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country. The United States has stressed that an FTA with Panama, in addition to enhancing trade
by giving the United States greater access to Panama’s growing market, would also provide
greater access to Panama’s large services market. According to the U.S. officials, Panama’s
strategic location as a major shipping route (with about 10% of U.S. international trade passing
through the Canal), enhances the significance of the FTA for the United States.44 Panama is
currently in the midst of a $5.25 billion expansion of the Panama Canal, and has identified almost
$10 billion in additional infrastructure projects in coming years that could provide opportunities
for U.S. companies.45
The United States turned over control of the Canal to Panama at the end of 1999, according to the
terms of the 1977 Panama Canal Treaty, at which point Panama assumed responsibility for
operating and defending the Canal. All U.S. troops were withdrawn from Panama at that time and
all U.S. military installations reverted to Panamanian control. However, under the terms of the
Treaty on the Permanent Neutrality and Operation of the Panama Canal, or simply the Neutrality
Treaty, the United States retains the right to use military force if necessary to reopen the Canal or
restore its operations.
U.S. Foreign Aid and Other Support
Because of Panama’s relatively high per capita income level, the United States has not provided
large amounts of foreign aid to Panama in recent years. Nevertheless, aid has included
development assistance to improve business competitiveness and trade-led economic growth;
child, survival, and health assistance to help in the fight against HIV/AIDS; and security
assistance to improve Panama’s counterterrorism capabilities, security programs, and maritime
interdiction. In recent years, U.S. bilateral assistance (not including Peace Corps assistance)
amounted to $3.7 million in FY2008, $7.6 million in FY2009, and $7.3 million in FY2010.
For FY2011, the Obama Administration requested $10.6 million in assistance for Panama,
including $7.5 million in Development Assistance and $2.1 million in Foreign Military Financing
(FMF). According to the State Department’s FY2011 Congressional Budget Justification for
Foreign Operations, the United States will work in partnership with Panama to advance common
interests in improving citizen safety, strengthening democratic institutions, enhancing the health
and education of all citizens, addressing income inequality, and supporting sustainable economic
growth. While Congress completed action on FY2011 foreign operations appropriations in April
2011 (P.L. 112-10), the Administration has not yet determined its foreign aid allocations by
country. For FY2012, the Administration did not request any Development Assistance, but
requested $2.79 million in assistance, with $1.8 million in FMF and $800,000 in International
Military Education and Training (IMET).
These figures for regular bilateral assistance do not reflect additional assistance that Panama has
been receiving since FY2008 under the Mérida Initiative, a program providing assistance to
Mexico and Central American countries in their efforts to combat drug trafficking, gangs, and
organized crime. In March 2009, Panama and the United States signed a letter of agreement for
44 Office of the United States Trade Representative, Statement by Ambassador Miriam Sapiro, Deputy United States
Trade Representatives, Statement before the House Committee on Ways and Means, Subcommittee on Trade, March
30, 2011.
45 Office of the United States Trade Representative, “Benefits of the U.S.-Panama Trade Promotion Agreement,” April
19, 2011.
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$2 million in funding under the initiative; overall, Panama will receive an estimated $11 million
in Mérida Initiative assistance for FY2008/2009. For FY2010, instead of funding under the
Mérida Initiative, Panama is receiving a portion of the $95 million in assistance under the Central
America Regional Security Initiative (CARSI), a successor to the Mérida Initiative for Central
America.46 For each of FY2011 and FY2012, the Obama Administration requested $100 million
in assistance for CARSI. The lack of details for actual and proposed country funding for Panama
under the Mérida Initiative and CARSI makes it difficult to provide an overall picture of U.S.
assistance going to Panama.
A number of U.S. agencies provide support to Panama. The U.S. Agency for International
Development (USAID) has a mission in Panama administering U.S. foreign aid programs.
USAID has plans to close its Panama mission, but the agency will continue support for Panama
through its Central America Regional program. The Peace Corps has over 180 volunteers in the
country working on a range of development projects. The State Department, the Drug
Enforcement Administration, the U.S. Coast Guard, and the Department of Homeland Security
are involved in providing counternarcotics support to Panama. The Department of Health and
Human Services provided support in 2007 to launch a Regional Training Center for health-care
workers in Panama City that trains students from throughout Central America. The U.S. Southern
Command (Southcom) also provides support to Panama through military exercises providing
humanitarian and medical assistance, and at times provides emergency assistance in the case of
natural disasters such as floods or droughts. Southcom also has sponsored annual multinational
training exercises since 2003 focused on the defense of the Panama Canal. Panama also hosts the
Smithsonian Tropical Research Institute dedicated to studying biological diversity.
Port Security and Other Counterterrorism Efforts
Panama also participates in the Container Security Initiative (CSI) operated by the U.S. Customs
and Border Protection of the Department of Homeland Security, and the Megaports Initiative run
by the National Nuclear Security Administration of the Department of Energy. Three Panamanian
ports—Balboa, Colón, and Manzanillo—participate in the CSI, while those three ports plus the
port of Cristobal participate in the Megaports Initiative. The CSI uses a security regime to ensure
that containers that pose a potential risk for terrorism are identified and inspected at foreign ports
before they are placed on vessels destined for the United States. The Megaports Initiative
involves deploying radiation detection equipment in order to detect nuclear or radioactive
materials.
The State Department’s Country Reports on Terrorism, 2009, issued in August 2010, maintained
the main terrorist concerns in Panama remained the presence of the Revolutionary Armed Forces
of Colombia (FARC) in the Darién province bordering Colombia and potential actions against the
Panama Canal. The report noted that Panama continued to work in both areas. A small number of
FARC members from the guerrilla group’s 57th Front were reported to operate in the Darién,
using the area as a safe haven and drug trafficking base. The members also were responsible for
the kidnapping of a U.S.-Cuban citizen near Panama City in April 2008 who was held until
February 2009. Panama turned over several FARC members to the United States for prosecution
in 2009. In January 2010, three FARC members were killed and two were captured in a clash
46 For additional information on CARSI, see CRS Report R41731, Central America Regional Security Initiative:
Background and Policy Issues for Congress, by Peter J. Meyer and Clare Ribando Seelke.
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with Panamanian forces in the Darién. In late 2010, Panama and Colombia agreed to establish
police stations near each side of the border in order.
With regard to the Panama Canal, the United States and Panama have continued to work together
to plan for potential incidents that could close the Canal. Since 2003, Panama has participated in
annual PANAMAX exercises with the United States and a number of other Latin American
countries focused on ensuring the security of the Canal. The most recent exercise was held in
August 2010 involving 16 nations in the region in addition to the United States and Panama.
Drug Trafficking and Money Laundering
An important concern for U.S. policymakers over the years has been securing Panamanian
cooperation to combat drug trafficking and money laundering.
Panama is a major transit country for illicit drugs from South America to the U.S. market because
of its geographic location and its large maritime industry and containerized seaports. The State
Department’s March 2011 International Narcotics Control Strategy Report (INCSR) maintains
that Colombian and Mexican drug trafficking operations (DTOs) located in Panama, along with
Colombia’s FARC operating in the remote Darién region, actively seek to move drugs through
Panamanian territory. Traffickers use Panama’s coastline and its transportation infrastructure,
including four major containerized seaports, the Pan-American highway, and Panama City’s
international airport to facilitate the movement of illicit drugs.
In the March 2011 INCSR, the State Department maintains the Martinelli government is
continuing Panama’s history of close cooperation with the United States on counternarcotics
operations. Panama seized 49.5 metric tons of cocaine in 2010, compared to 54 metric tons in
2009. Since 2009, the Martinelli government has established several air and naval anti-drug bases
on both the Pacific and Caribbean sides of the country in an effort to increase the ability of its
security forces to interdict suspected trafficking vessels.
U.S. counternarcotics support has included programs to improve Panama’s ability to intercept,
investigate, and prosecute illegal drug trafficking; strengthen Panama’s judicial system; improve
Panama’s border security; and promote strict enforcement of existing laws. The United States also
has provided resources to modernize, train, and maintain vessels and facilities of the National Air-
Naval Service (SENAN), the National Border Service (SENAFRONT), the National Police
(PNP), and the newly created Ministry of Public Security; assisted with training and maintenance
for aircraft involved in interdiction efforts; supported and encouraged Panamanian jungle-survival
training by Colombian police; and supported reform efforts for all of Panama’s security services
to combat corruption. Looking ahead, the State Department encourages Panama to devote more
resources to the modernization of its security and justice services and to continue with reform
efforts that improve public sector accountability and transparency.
In addition to being a transit country, Panama’s service-based economy, with a large financial
sector and free trade zone, the Colón Free Zone (CFZ), makes the country vulnerable to money
laundering. According to the State Department (in its 2010 INCSR), the majority of money
laundering in Panama relates to proceeds from drug trafficking (especially the sale in the United
States and Europe of cocaine produced in Colombia) or from the transshipment of smuggled,
pirated, and counterfeit goods through the CFZ.
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Panama has made significant progress in strengthening its anti-money-laundering regime since
June 2000, when it was cited as a non-cooperative country in the fight against money laundering
by the Financial Action Task Force (FATF), a multilateral anti-money-laundering body.
Subsequently, the government undertook a comprehensive effort to improve its anti-money-
laundering regime by enacting two laws and issuing two decrees in 2000. As a result of these
efforts, the FATF removed Panama from its non-cooperative country list in June 2001.
According to the 2011 INCSR, Panama has made progress over the past year on the policy front
in improving the transparency of its financial system. The government is moving to ensure its
removal from the OECD’s gray list. It signed a Tax Information Exchange Agreement (TIEA)
with the United States in November 2010 and has signed a number of double taxation agreements
with other countries. (Also see “Tax Haven Status” and “FTA Labor and Tax Issues” below.) For
a number of years, the State Department has expressed concern in the 2011 INCSR about
Panama’s use of bearer shares, often associated with money laundering, and maintained that the
government should take steps to eliminate or immobilize these financial instruments. Panama
took action on this issue on February 1, 2011, when President Martinelli signed into law bearer
shares or “know your client” legislation.47
Nevertheless, while Panama has made significant progress in improving it anti-money laundering
regime, the State Department maintains in the 2011 INCSR that the government’s lack of
enforcement has undercut this progress. It notes that Panama’s judicial system has not sentenced
anyone under the current money laundering laws. The INCSR encourages Panama to continue
enhancing its efforts to prevent, detect, investigate, and prosecute financial crimes and money
laundering.
Tax Haven Status48
While there is no single accepted definition for a tax haven, the Organization for Economic Co-
Operation and Development (OECD) has stated four criteria can be used to identify tax haven
jurisdictions.49 The criteria are no or nominal taxes and three criteria related to transparency and
the exchange of information.
Whereas the OECD recognized that the determination of appropriate tax policy is a national
concern, the organization has stated that the areas of transparency and information exchange
require a multilateral solution. Following this belief, the OECD has an ongoing project, the
Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global
Forum), working to increase transparency and information exchange.50 In April 2002, Panama
committed itself to meet the OECD principles on transparency and information exchange, thus
averting a designation as a non-cooperative tax haven.
47 Information provided to CRS by the Department of State, February 15, 2011.
48 Prepared by Donald J. Marples, Specialist in Public Finance, ext. 7-3739
49 A full discussion of the criteria can be viewed at
http://www.oecd.org/document/23/0,3343,en_2649_33745_30575447_1_1_1_1,00.html and a broader discussion of tax
havens can be found in CRS Report R40623, Tax Havens: International Tax Avoidance and Evasion, by Jane G.
Gravelle.
50 For background, see as CRS Report R40114, The OECD Initiative on Tax Havens, by James K. Jackson.
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As of early May 2011, Panama remained on the OECD’s so-called “gray list” as one of just five
remaining jurisdictions worldwide that have committed to the internationally agreed tax standard
to help prevent tax evasion, but that have not yet substantially implemented the standard.51 To
date, however, Panama has made significant progress in moving toward implementing that tax
standard. Since late 2009, it has negotiated agreements with 11 countries for the exchange of tax
information. These include double taxation agreements with 10 countries,52 and most
significantly, a Tax Information Exchange Agreement (TIEA) with the United States signed in
November 2010. Jurisdictions that have signed at least 12 such agreements for the exchange of
tax information are considered by the OECD to have substantially implemented the tax standard
and are removed from the “gray list.” Panama has additional double taxation agreements in the
works and their conclusion could lead to the country being removed from the “gray list.” It
should be noted, however, that even if Panama is removed from the OECD’s “gray list,” the
country would still be subject to Global Forum peer reviews of its legal and regulatory system for
the exchange of information for tax purposes.53
As noted below (see “FTA Labor and Tax Issues”), Panama’s National Assembly approved “know
your client” legislation in early February 2011 requiring the identification of the owners of bearer
shares, an action set forth in the joint declaration to the U.S.-Panama TIEA. The TIEA entered
into force on April 18, 2011, and covers all civil and criminal tax matters for tax years beginning
after November 30, 2007.54 In addition, Panama does have a Mutual Legal Assistance Treaty
(MLAT) with the United States, which covers the exchange of tax information if the income is
effectively tied to an illegal activity, such as unreported income from drug trafficking.
The extent to which Panama is used as a corporate tax haven is not clear. According to the most
recent IRS data, 159 U.S. corporations have subsidiaries in Panama. This accounts for less than
2% of all U.S. corporations. Focusing on larger corporations, 18 of the 100 largest publicly traded
companies and 14 of the 100 largest federal contractors had subsidiaries in Panama.55 The
revenue cost of these subsidiaries to the United States is unknown.
Panama’s corporate tax is more similar to the United States’ than other possible tax havens. The
Panamanian corporate tax rate of 27.5% is at nearly the level of the top U.S. corporate tax rate of
35%.56 In comparison, other commonly cited tax havens, such as the Cayman Islands, do not levy
51 Organization for Economic Co-operation and Development, “A Progress Report on the Jurisdictions Surveyed by the
OECD Global Forum in Implementing the Internationally Agreed Tax Standard,” May 2, 2011, up-to date list available
at http://www.oecd.org/dataoecd/50/0/43606256.pdf.
52 The 10 countries are Mexico, Barbados, Portugal, Qatar, Luxemburg, Netherlands, Singapore, Spain, South Korea,
and Italy. Three additional double taxation agreements with France, Belgium, and Ireland are reportedly in the works.
See: CRS Report RL32540, The Proposed U.S.-Panama Free Trade Agreement, by J. F. Hornbeck.
53 In September 2010, the OECD published a phase 1 peer review report that highlighted significant problems with
Panama’s legal and regulatory framework for transparency and exchange of information for tax purposes as of May
2010. See: Global Forum on Transparency and Exchange of Information for Tax Purposes, “Peer Review Report, Phase
1, Legal and Regulatory Framework: Panama,” September 2010.
54 U.S. Department of the Treasury, “Treasury: U.S.-Panama Tax Information Exchange Agreement Now in Effect,”
Press Release, April 18, 2011, available at http://www.treasury.gov/press-center/press-releases/Pages/tg1144.aspx
55 U.S. Government Accountability Office, International Taxation: Large U.S. Corporations and Federal Contractors
with Subsidiaries in Jurisdictions Listed as Tax Haven or Financial Privacy Jurisdictions, GAO-09-157, December 18,
2008.
56 In 2012 the Panamanian corporate income tax rates is scheduled to fall to 25%. In addition, companies in the energy,
telecommunication, financial, insurance, banking, and mining industries are currently taxes at a rate of 30%, falling to
27.5% in 2012, and 25% in 2014.
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a tax on corporate income. As a result, the corporate tax rate is unlikely the motivating factor for
the location of U.S. subsidiaries in Panama.
Non-tax factors could provide motivation for U.S. corporations to have subsidiaries in Panama. In
the case of Panama, it, along with Liberia, is commonly used as a flag of convenience. Traditional
reasons for choosing a flag of convenience include protection from income taxes, wage scales,
and regulations. A specific example of the type of advantage flying a flag of convenience offers is
bypassing the 50% duty the United States government charges on repairs performed on
American-flagged ships in foreign ports. Other non-tax factors could also motivate U.S.
corporations to have subsidiaries in Panama.
Over the years, Panama’s lack of tax transparency and information exchange agreements could
have been factors in making the country a destination for tax evasion. In 2007 testimony before
the Senate Committee on Finance, several speakers commented that a lack of transparency and
strong bank secrecy laws were commonly found in tax evasion destinations.57 Other
commentators specifically identified Panama as being an ideal location for tax evasion
activities.58 However, Panama’s recent negotiation of tax sharing agreements with a number of
countries, including a TIEA with the United States that entered into force in April 2011, and its
recent passage of “know your client” legislation could be factors that deter the country from
being used as a destination for tax evasion.
U.S. Trade Relations
Panama has largely a service-based economy, which historically has run a merchandise trade
deficit with the United States. In 2010, the United States ran a $5.7 billion trade surplus with
Panama, exporting almost $6.1 billion in goods and importing $379 million. Panama was the 36th-
largest U.S. export market in 2010. Panama’s major exports to the United States include fish and
seafood, gold, sugar, and fresh fruits. Major imports include oil, machinery and other capital
goods, consumer goods, and foodstuffs.59 The stock of U.S. direct foreign investment in Panama
was estimated at $7.8 billion in 2009, with over 60% concentrated in depository institutions and
holding companies. This almost equaled the combined U.S. foreign investment in the five other
Central American nations.60
With the exception of two years (1988-1989), when the United States was applying economic
sanctions on Panama under General Noriega’s rule, Panama has been a beneficiary of the U.S.
preferential import program known as the Caribbean Basin Initiative (CBI), begun in 1984. The
program was amended several times and made permanent in 1990. CBI benefits were expanded
in 2000 with the enactment of the Caribbean Basin Trade Partnership Act (CBTPA) (Title II, P.L.
106-200), which provided NAFTA-equivalent trade benefits, including tariff preferences for
textile and apparel goods, to certain CBI countries, including Panama. In May 2010, Congress
approved an extension of CBTPA benefits through September 2020 (P.L. 111-171). The program
57 U.S. Congress, Senate Committee on Finance, Offshore Tax Evasion: Stashing Cash Overseas, 110th Cong., 1st
sess., May 3, 2007.
58 Martin A. Sullivan, "Ah, Panama," Tax Notes, June 25, 2007, p. 1246.
59 U.S. Department of Commerce statistics, as presented by Global Trade Atlas.
60 U.S. Department of Commerce, Bureau of Economic Analysis, “U.S. Direct Investment Abroad Tables,” Survey of
Current Business, September 2010, p. 71.
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continues in effect until then, or the date on which a free trade agreement enters into force
between the United States and a CBTPA beneficiary country.
Potential Free Trade Agreement
Panama and the United States began negotiations for a free trade agreement in April 2004. There
had been expectations that the negotiations would be completed in early 2005, but continued
contention over several issues and a lengthy hiatus prolonged the negotiations until December
2006. Issues included market access for agricultural products, considered sensitive by Panama;
procurement provisions for the Panama Canal Authority regarding expansion activities; and
sanitary control systems governing the entry of U.S. products and animals to the Panamanian
market. Negotiations were suspended for some time in 2006 until after Panama held its Canal
expansion referendum in October, but a 10th round led to the conclusion of negotiations on
December 19, 2006. In December 2006, Panama and the United States also signed a bilateral
agreement on sanitary and phytosanitary measures in which Panama will recognize the
equivalence of the U.S. food safety inspection to those of Panama and will no longer require
individual plant inspections.
When the FTA negotiations were concluded, then-U.S. Trade Representative Susan Schwab stated
that the agreement would be subject to additional discussions on labor, and that the
Administration would work with both sides of the aisle in Congress to ensure strong bipartisan
support before submitting it to Congress.61 On May 10, 2007, congressional leaders and the Bush
Administration announced a bipartisan trade deal whereby pending free trade agreements would
include enforceable key labor and environmental standards. This included an obligation to adopt
and maintain in practice five basic internationally recognized labor principles: freedom of
association; recognition of the right to collective bargaining; elimination of forced or compulsory
labor; abolition of child labor; and elimination of discrimination in respect of employment and
occupation.
The United States and Panama ultimately signed the proposed FTA on June 28, 2007, with the
enforceable labor and environmental standards outlined in the bipartisan trade deal. Panama’s
National Assembly ratified the agreement on July 11, 2007, by a vote of 58 to 3, with one
abstention.
The U.S. Congress had been likely to consider implementing legislation for the agreement in the
fall of 2007, but the September 1, 2007, election of Pedro Miguel González of the ruling PRD to
head Panama’s legislature for one year delayed consideration of the FTA. González is wanted in
the United States for his alleged role in the murder of U.S. Army Sergeant Zak Hernández and the
attempted murder of U.S. Army Sergeant Ronald Marshall in June 1992. The State Department
issued a statement expressing deep disappointment about the election of González because of his
October 1992 indictment in the United States for the murder of Sergeant Hernández. Although
González was acquitted in Panama in 1997 for the Hernández murder, observers maintain that the
trial was marred by jury rigging and witness intimidation. González denies his involvement, and
his lawyer asserts that ballistic tests in the murder were inconclusive. While polls in Panama in
2007 showed that Panamanians believed that González should have stepped down, the case also
61 Rosella Brevetti, “Panama, United States Conclude Negotiations on Free Trade Pact,” but Labor Issues Remain,”
International Trade Daily, December 20, 2006.
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energized the populist anti-American wing of the ruling PRD.62 González did not seek a second
term as president of the National Assembly when his term expired on September 1, 2008, and
another PRD official, Raúl Rodríguez, was elected Assembly president. This essentially removed
the issue as an impediment to U.S. congressional consideration of the FTA.
Under the proposed agreement, over 87% of U.S. exports of consumer and industrial goods
would become duty-free immediately, while remaining tariffs would be phased out over 10 years.
Over 50% of U.S. agricultural exports to Panama would become duty-free immediately, while
tariffs on most remaining farm products would be phased out within 15 years. Under the FTA,
U.S. companies would be guaranteed a fair and transparent process to sell goods and services to
Panamanian government entities, including the Panama Canal Authority. In addition to the $5.25
billion Canal expansion project, scheduled for completion in 2014, Panama has identified almost
$10 billion in additional infrastructure projects in coming years that could provide opportunities
for U.S. companies. 63
FTA Labor and Tax Issues
The Obama Administration focused on working out final issues with Panama related to labor
rights and tax transparency, and on April 18, 2011, United States Trade Representative Ron Kirk
maintained that completion of action on these issues cleared the way for technical discussions
with Members of Congress on the draft implementing bill for the Panama FTA.64
The United States raised labor issues related to restrictions on collective bargaining rights in
Panama’s export processing zones (EPZs) and the right to strike in companies less than two years
old. Legislation addressing both issues was approved by Panama’s National Assembly in late
March 2011 and signed into law by President Martinelli on April 5, 2011. The legislation
eliminated restrictions on collective bargaining in EPZs and also eliminated the prohibition
against the right to strike in companies less than two years old.65
Another labor issue raised by the United States relates to labor rights in a special economic zone
in Panama’s Barú region in the western province of Chiriquí. The law that had established the
special zone made collective bargaining discretionary for six years.66 In late March 2011,
Panama’s National Assembly approved legislation that extended full collective bargaining rights
to workers in the special economic zone in Barú, and President Martinelli signed the measure into
law on April 5, 2011.67
62 Marc Lacey, “Fugitive from U.S. Justice Leads Panama’s Assembly,” New York Times, November 28, 2007.
63 Office of the United States Trade Representative, “Benefits of the U.S.-Panama Trade Promotion Agreement,” April
19, 2011.
64 Office of the United States Trade Representative, “Ambassador Ron Kirk Announces Next Step for U.S.-Panama
Trade Promotion Agreement,” April 18, 2011. Also see: White House, Office of the Press Secretary, “Fact Sheets:
U.S.-Panama Trade Promotion Agreement,” April 19, 2011, available at http://www.whitehouse.gov/the-press-
office/2011/04/19/fact-sheets-us-panama-trade-promotion-agreement.
65 Information provided to CRS by the Department of State, April 12, 2011.
66 “U.S. Focused on Labor Laws for New Panama Economic Zone,” Inside U.S. Trade, February 17, 2011. Also see:
U.S. Department of State, “Country Reports on Human Rights Practices: Panama,” April 8, 2011.
67 Office of the United States Trade Representative, Statement by Ambassador Miriam Sapiro, Deputy United States
Trade Representatives, Statement before the House Committee on Ways and Means, Subcommittee on Trade, March
30, 2011; and “Panama Moves Closer to Completing All Steps Necessary for FTA Vote,” Inside U.S. Trade, April 1,
2011.
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In addition, as noted above (see “Human Rights Issues”), certain provisions of Panama’s labor
laws that restrict unions have been criticized by the ILO. These include a requirement that a
minimum of 40 people are needed to form a union. The Martinelli government has not agreed to
make changes to Panama’s labor code to reduce the number of members needed to start a union
from 40 to 20, reportedly because there is no support for such a change, even from Panama’s
labor sector.68 According to the State Department’s 2010 human rights report on Panama, the
Panamanian government, private sector, and unions support keeping the figure at 40 individuals.
With regard to tax transparency issues, some Members of Congress had wanted to delay
consideration of the Panama FTA until the United States and Panama signed a Tax Information
Exchange Agreement (TIEA). This ultimately occurred on November 30, 2010. In a joint
declaration at the signing of the TIEA, both countries agreed that the agreement would take effect
as soon as practicable after Panama approves implementing legislation under its domestic laws to
comply fully with the terms of the agreement. As noted in the declaration, Panama also
maintained that it would enact legislation requiring the identification of the owners of bearer
shares, an issue that U.S. officials have raised with Panama for a number of years.69 Such
legislation on bearer shares, also referred to as “know your client” legislation, was signed into
law by President Martinelli on February 1, 2011. Panama’s National Assembly subsequently
approved the TIEA on April 13, 2011, and the measure was enacted into law and entered into
force on April 18, 2011. According to the Treasury Department, the agreement provides the
United States with access to information it needs to enforce U.S. tax laws, including information
related to bank accounts in Panama. It permits both countries to seek information from each other
on all types of national taxes in both civil and criminal matters for tax years beginning on or after
November 30, 2007.70
Legislative Action
In the 112th Congress, several measures have been introduced in support of the FTA with Panama.
S.Res. 20 (Johanns), introduced January 25, 2011, would express the sense of the Senate that the
United States should immediately approve FTAs with Panama, Colombia, and South Korea. S. 98
(Portman), introduced January 25, 2011, would, among other provisions, express the sense of
Congress that the President should submit the Panama, South Korea, and Colombia FTAs to
Congress and that Congress should approve those agreements. H.Res. 86 (Frelinghuysen),
introduced February 11, 2011, would express the sense of the House that the Panama, Colombia,
and South Korea FTAs should be implemented immediately.
Several hearings have been held in the 112th Congress touching on the proposed FTA with
Panama. On January 25, 2011, the House Ways and Means Committee held a hearing on the
pending FTAs with Colombia, Panama, and South Korea.71 On February 8, 2011, a Senate
Foreign Relations Committee minority staff report urged the Administration to invest the political
68 Information provided to CRS by the Department of State, February 15, 2011.
69 U.S.-Panama Tax Information Exchange Agreement, Joint Declaration, November 30, 2010, available at
http://www.treasury.gov/resource-center/tax-policy/treaties/Documents/PanamaTIEAnote.pdf
70 U.S. Department of the Treasury, Press Release, “U.S., Panama Sign New Tax Information Exchange Agreement,”
December 1, 2010. See the full text of the TIEA, available at http://www.treasury.gov/resource-center/tax-
policy/treaties/Documents/PanamaTIEA10.pdf
71 See the witness testimony from the hearing, available at
http://waysandmeans.house.gov/Calendar/EventSingle.aspx?EventID=220430
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capital needed to secure approval of the Panama and Colombia FTAs.72 The House Committee on
Ways and Means, Subcommittee on Trade, and the Senate Finance Committee held respective
hearings on February 9 and March 9 on the President’s trade agenda featuring United States Trade
Representative Ron Kirk. The House Committee on Foreign Affairs Subcommittee on the
Western Hemisphere, held a hearing on the Colombia and Panama free trade agreements on
March 17. Most recently, on March 30, 2011, the House Committee on Ways and Means,
Subcommittee on Trade, held a hearing on the Panama FTA featuring Deputy United States Trade
Representative Miriam Sapiro and outside witnesses.
For details on the bilateral FTA, see CRS Report RL32540, The Proposed U.S.-Panama Free
Trade Agreement, by J. F. Hornbeck.
Operation and Security of the Panama Canal
Historical Background and the Panama Canal Treaties
When Panama proclaimed its independence from Colombia in 1903, it concluded a treaty with
the United States for U.S. rights to build, administer, and defend a canal cutting across the
country and linking the Pacific and Atlantic oceans. (See Figure 1, “Map of Panama.”) The treaty
gave the United States rights in the so-called Canal Zone (about 10 miles wide and 50 miles long)
“as if it were sovereign” and “in perpetuity.” Construction of the Canal was completed in 1914. In
the 1960s, growing resentment in Panama over the extent of U.S. rights in the country led to
pressure to negotiate a new treaty arrangement for the operation of the Canal. Draft treaties were
completed in 1967 but ultimately rejected by Panama in 1970.
New negotiations ultimately led to the September 1977 signing of the two Panama Canal Treaties
by President Jimmy Carter and Panamanian head of government General Omar Torrijos. Under
the Panama Canal Treaty, the United States was given primary responsibility for operating and
defending the Canal until December 31, 1999. (Subsequent U.S. implementing legislation
established the Panama Canal Commission to operate the Canal until the end of 1999.) Under the
Treaty on the Permanent Neutrality and Operation of the Panama Canal, or simply the Neutrality
Treaty, the two countries agreed to maintain a regime of neutrality, whereby the Canal would be
open to ships of all nations. The U.S. Senate gave its advice and consent to the Neutrality Treaty
on March 16, 1978, and to the Panama Canal Treaty on April 18, 1978, both by a vote of 68-32,
with various amendments, conditions, understandings, and reservations. Panama and the United
States exchanged instruments of ratification for the two treaties on June 16, 1978, and the two
treaties entered into force on October 1, 1979.
Some treaty critics have argued that Panama did not accept the amendments, conditions,
reservations, and understandings of the U.S. Senate, including the DeConcini condition to the
Neutrality Treaty. That condition states: “if the Canal is closed, or its operations are interfered
with, the United States of America and the Republic of Panama shall each independently have the
right to take such steps as each deems necessary, in accordance with its constitutional processes,
including the use of military force in the Republic of Panama, to reopen the Canal or restore the
72 U.S. Congress, Senate Committee on Foreign Relations, Losing Jobs and Alienating Friends: The Consequences of
Falling Behind on Free Trade with Colombia and Panama, committee print, 112th Cong., 1st sess., February 8, 2011,
S. Prt. 112-?? (Washington: GPO, 2011), available at http://lugar.senate.gov/issues/foreign/lac/FTA.pdf
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operations of the Canal, as the case may be.” However, others argued that Panama, in fact, had
accepted all U.S. Senate amendments. The State Department asserted that Panama expressly
accepted all amendments, conditions, and understandings to the two treaties, including the
DeConcini condition. The United States and Panama signed the instruments of ratification for
both treaties, which incorporated all the Senate provisions. The two countries cooperated
throughout the years on matters related to the Canal and established five binational bodies to
handle these issues. Two of the bodies were set up to address defense affairs and conducted at
least 16 joint military exercises between 1979 and 1985 involving Panamanian and U.S. forces.
Canal Transition and Current Status
Over the years, U.S. officials consistently affirmed a commitment to follow through with the
Panama Canal Treaty and turn the Canal over to Panama at the end of 1999. That transition
occurred smoothly on December 31, 1999. The Panama Canal Treaty terminated on that date, and
the Panama Canal Commission (PCC), the U.S. agency operating the Canal, was succeeded by
the Panama Canal Authority (ACP), a Panamanian government agency established in 1997.
Under the terms of the Neutrality Treaty, which has no termination date, Panama has had
responsibility for operating and defending the Canal since the end of 1999. As noted above, both
Panama and the United States, however, in exercising their responsibilities to maintain the regime
of neutrality (keeping the Canal secure and open to all nations on equal terms) independently
have the right to use military force to reopen the Canal or restore its operations. This is delineated
in the first condition of the Neutrality Treaty.
The secure operation of the Panama Canal remains a U.S. interest since the Canal is important for
U.S. ocean-borne trade. The Canal’s largest trade route in FY2010 for ocean-borne cargo was
between the east coast of the United States and Asia, which comprised almost 41% of total
Panama Canal long tons cargo traffic. The Canal’s second-largest trade route in FY2010 was
between the east coast of the United States and the west coast of South America, which
comprised almost 12% of total Panama Canal long tons cargo traffic. The United States provides
assistance to Panama to improve its ability to provide security for the Canal and to enhance port
and maritime security. U.S. officials have consistently expressed satisfaction that Panama is
running the Canal efficiently, and since 2003, the U.S. military has conducted exercises with
Panama and other countries to protect the Canal in case of attack.
Headed by Alberto Alemán Zubieta, the Panama Canal Authority has run the Canal for more than
10 years and has been lauded for increasing Canal safety and efficiency. In January 2006, the
Martín Torrijos government established a social investment fund backed by Panama Canal
revenues that invests in schools, hospitals, bridges, roads, and other social projects. The initiative,
according to the government, was designed to show Panamanians that the Canal is contributing to
economic development and improving the quality of life for Panamanians.73
Canal Expansion Project
In April 2006, the Panama Canal Authority presented to President Torrijos its recommendation to
build a third channel and new set of locks (one on the Atlantic and one on the Pacific) that would
73 Rainbow Nelson, “Canal Cash to Pay for Social Development,” Lloyd’s List, January 18, 2006.
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double the capacity of the Canal and allow it to accommodate giant container cargo ships known
as post-Panamax ships. The project would also widen and deepen existing channels and elevate
Gatun Lake’s maximum operating level. The estimated cost of the seven-year project is $5.25
billion, to be self-financed by the ACP through graduated toll increases and external bridge
financing of about $2.3 billion that would be paid off in about 10 years. According to the ACP,
the overall objectives of the expansion project are to (1) achieve long-term sustainability and
growth for the Canal’s financial contributions to the Panamanian national treasury; (2) maintain
the Canal’s competitiveness; (3) increase the Canal’s capacity to capture the growing world
tonnage demand; and (4) make the Canal more productive, safe, and efficient.74
President Torrijos and his Cabinet approved the expansion project in June 2006, and the
Legislative Assembly overwhelmingly approved it in July 2006, with 72 out of 78 deputies voting
for the project. Pursuant to Panama’s Constitution (Article 319), the project had to be submitted
to a national referendum. The Torrijos government chose to hold the referendum on October 22,
2006, close to the anniversary of October 23, 1977, the date when Panamanians approved the two
Panama Canal treaties in a national plebiscite by a two-to-one margin. The expansion project was
approved by 78% of the vote.
There had been some vocal opposition to the Canal expansion project. The organization known as
the Peasant Coordinator Against the Dams (CCCE, Coordinadora Campesina Contra los
Embalses), consisting of agricultural, civil, and environmental organizations, asserted that the
expansion project would lead to flooding and would drive people from their homes. An umbrella
protest group known as the National Front for the Defense of Economic and Social Rights
(Frenadeso), which was formed in 2005 during protests against social security reforms, called for
a “no” vote.75 Former Presidents Jorge Illueca and Guillermo Endara, as well as former Panama
Canal administrator Fernando Manfredo, also opposed the expansion project, maintaining that the
price was too high and too much of a gamble. Critics feared that the total price tag could rise
considerably and expressed concern that toll increases could make alternative routes more
economically attractive.76
The ACP is moving ahead with the Canal expansion project. The Panamanian government
officially launched the project on September 3, 2007, with a ceremony led by former President
Jimmy Carter, whose Administration negotiated the Panama Canal Treaties. The project is
expected to be completed by 2014. In March 2009, three multinational consortiums placed bids
for the multi-billion dollar contract to build the new set of locks.77 The ACP announced in July
2009 that the consortium Grupo Unidos por el Canal (United for the Canal) led by Spanish
construction company Sacyr Vallehermoso was the winner of the contract after posting a bid of
$3.12 billion. The consortium also includes Italian, Belgian, and Panamanian companies, as well
as two U.S. companies—Montgomery Watson Harza and Tetra Tech—involved as design
subcontractors.78 In January 2010, the ACP awarded the fourth and final dry excavation contract
74 Autoridad del Canal de Panama (ACP), “Proposal for the Expansion of the Panama Canal, Third Set of Locks
Project,” April 24, 2006.
75 “Torrijos Appeals for Approval of Canal Expansion,” Latinnews Daily, September 1, 2006.
76 “Panama: Torrijos Reveals Plans to Expand Canal,” Latinnews Daily, April 25, 2006; Chris Kraul and Ronald
D.White, “Panama is Preparing to Beef up the Canal,” Los Angeles Times, April 24, 2006; John Lyons, “Panama Takes
Step Toward Expanding the Canal,” Wall Street Journal, April 24, 2006.
77 "Panama: Groups Bid on Canal Expansion," Economist Intelligence Unit, Business Latin America, March 9, 2009.
78 “Unidos por El Canal Virtual winner of ACP contract,” Business News Americas, July 8, 2009; and “Panama Canal
Announces ‘Best Value’ Proposal for New Set of Locks Expansion Contract,” States News Service, July 9, 2009.
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to a consortium made up of Spanish, Mexican, and Costa Rican companies. The excavation work
will create an access channel linking the new Pacific locks with the Gaillard Cut, which is the
narrowest stretch of the Canal.
Background on the 1989 U.S. Military Intervention
The December 20, 1989, U.S. military intervention in Panama, known as Operation Just Cause,
was the culmination of almost two and a half years of strong U.S. pressure, including economic
sanctions, against the de facto political rule of General Noriega, Panama’s military commander.
Political unrest had erupted in mid-1987 when a high-ranking Panamanian military official
alleged that Noriega was involved in murder, electoral fraud, and corruption, which prompted the
formation of an opposition coalition that challenged his rule. The regime nullified the results of
May 1989 national elections, which international observers maintain were won by the opposition
by a 3-1 margin. It also harassed U.S. citizens in Panama, including the killing of a U.S. Marine
lieutenant. President George H. W. Bush ultimately ordered U.S. forces into combat to safeguard
the lives of Americans in Panama, to defend democracy, to combat drug trafficking, and to protect
the operation of the Panama Canal.
In early January 1990, with the restoration of democracy and Noriega’s arrest to face trial in the
United States on drug charges, President Bush announced that the objectives of the U.S.
intervention had been achieved. In terms of casualties, 23 U.S. soldiers and three U.S. civilians
were killed, while on the Panamanian side, some 200 civilians and 300 Panamanian military were
killed. While Congress was not in session during the intervention, in general, Members were
strongly supportive of the action. In February 1990, the House overwhelmingly approved a
resolution, H.Con.Res. 262, stating the President acted appropriately to intervene in Panama after
substantial efforts to resolve the crisis by political, economic, and diplomatic means.
Status of Manuel Noriega
In the aftermath of the 1989 U.S. military intervention, General Manuel Noriega was arrested in
January 1990 and brought to the United States to stand trial on drug charges. After a seven-month
trial, Noriega was convicted on 8 out of 10 drug trafficking charges in U.S. federal court in
Miami in 1992, and sentenced to 40 years in prison. That sentence was subsequently reduced to
30 years, and then to 20 years. With time off for “good behavior,” Noriega was scheduled to be
released from jail on September 9, 2007, but remained in U.S. custody pending appeals of his
extradition to France. Noriega’s defense filed a final appeal with the Supreme Court in July 2009
on the grounds that Noriega was granted “prisoner of war” status under the Geneva Convention in
a 1992 U.S. court ruling and therefore was entitled to return to Panama. Noriega lost that appeal,
and was extradited to France on April 26, 2010. In France, Noriega faced a 10-year prison
sentence for his conviction in absentia in 1999 on money laundering charges. He was eligible for
a new trial upon his extradition to France and in July 2010 was again convicted of drug money
laundering and sentenced to seven years in prison.
When he was released from the United States, Noriega wanted to return to Panama in order to
appeal his convictions in absentia, including for two murders: the brutal killing of vocal critic
Hugo Spadafora in 1985; and the killing of Major Moisés Giroldi, the leader of a failed 1989
coup attempt. Panamanian courts sentenced Noriega to at least 60 years in prison, but the law
only allows him to serve a maximum sentence of 20 years, and according to some reports, 18
years of Noriega’s imprisonment in the United States could be subtracted from his sentence in
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Panama.79 Nevertheless, there are additional outstanding cases against Noriega, including alleged
responsibility for the deaths of several members of the Panamanian Defense Forces involved in
the failed 1989 coup.80
Noriega’s attorneys argued that since Noriega had been recognized as a prisoner of war in the
U.S. courts, the United States should have repatriated him to his native Panama, insisting that this
complies with the Geneva Conventions. U.S. officials argued that France’s extradition should be
honored because Panama by law does not extradite its nationals.81 Panama had filed an
extradition request for Noriega in 1991.
While Panamanian officials called for Noriega’s extradition to Panama, they did not oppose the
possibility of Noriega being extradited to France and stated that the government would respect the
decision of the U.S. courts on this matter. Some observers maintained that Panamanian officials
were reluctant to have Noriega return because of changes to Panama’s penal code that could
allow Noriega to serve little, if any, of his sentence.82 In response to Noriega’s extradition to
France, Panama’s Foreign Minister Juan Carlos Varela maintained that the Panamanian
government respected the United States’ sovereign decision, but that it would pursue legal and
diplomatic means to return Noriega to Panama to serve sentences handed down by Panamanian
courts.83
On January 12, 2011, Panama requested Noriega’s extradition from France for the 1989 killing of
Major Moisés Giroldi, the leader of a failed coup. According to Panama’s Ministry of Foreign
Affairs, Panama previously had requested Noriega’s extradition from France for the 1985 killing
of vocal critic Hugo Spadafora and is awaiting a response.84
79 Kathia Martinez, “A Homecoming for Noriega after Miami Release? Many Hope Not,” Associated Press Newswires,
August 12, 2007.
80 “Torrijos on Edge over Noriega Release,” Latin American Regional Report, Caribbean and Central America, August
2007.
81 Carmen Gentile, “Noriega Court Bid Called a Charade; Aims to Avoid Extradition,” Washington Times, August 14,
2007.
82 Marc Lacey, “An Ambivalent Panama Weights Noriega’s Debt and Threat,” New York Times, July 29, 2007.
83 “Panama’s Noriega Extradited to France,” LatinNews Daily, April 27, 2010.
84 República de Panamá, Ministerio de Relaciones Exteriores, Comunicado de Prensa, “Extradición de Manuel Antonio
Noriega por el caso Giroldi,” January 12, 2011.
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Appendix A. Links to U.S. Government Reports
Background Note, Panama
Date: September 16, 2010
Full Text: http://www.state.gov/r/pa/ei/bgn/2030.htm
Congressional Budget Justification for Foreign Operations FY2012, Annex: Regional
Perspectives (p. 813-815 of pdf)
Date: March 2011
Full Text: http://www.state.gov/documents/organization/158268.pdf
Country Reports on Human Rights Practices 2010, Panama
Date: April 8, 2011
Full Text: http://www.state.gov/g/drl/rls/hrrpt/2010/wha/154514.htm
Country Reports on Terrorism 2009 (Western Hemisphere Overview)
Date: August 5, 2010
Full Text: http://www.state.gov/s/ct/rls/crt/2009/140888.htm
International Religious Freedom Report 2010, Panama
Date: November 17, 2010
Full Text: http://www.state.gov/g/drl/rls/irf/2010/148770.htm
International Narcotics Control Strategy Report 2011, Vol. I (Panama, pp. 445-448 of pdf)
Date: March 2011
Full Text: http://www.state.gov/documents/organization/156575.pdf
International Narcotics Control Strategy Report 2011, Vol. II (Panama, pp. 155-158 of pdf)
Date: March 2011
Full Text: http://www.state.gov/documents/organization/156589.pdf
National Trade Estimate Report on Foreign Trade Barriers 2011 (Panama, pp. 290-294 of
pdf)
Date: March 2011
Full Text: http://www.ustr.gov/webfm_send/2751
Trafficking in Persons Report 2010 (Panama, pp. 265-266 of pdf )
Date: June 14, 2010
Full Text: http://www.state.gov/documents/organization/142979.pdf
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Author Contact Information
Mark P. Sullivan
Specialist in Latin American Affairs
msullivan@crs.loc.gov, 7-7689
Acknowledgments
Donald J. Marples, Specialist in Public Finance (ext. 7-3739), authored the section on Panama’s “Tax
Haven Status.”
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