$Unique_ID{COW02776} $Pretitle{246} $Title{Panama Chapter 3C. Agriculture} $Subtitle{} $Author{Dennis M. Hanratty, Sandra W. Meditz} $Affiliation{HQ, Department of the Army} $Subject{percent land production million panama government manufacturing united increased 1970s} $Date{1987} $Log{Harvesting Bananas*0277601.scf } Country: Panama Book: Panama, A Country Study Author: Dennis M. Hanratty, Sandra W. Meditz Affiliation: HQ, Department of the Army Date: 1987 Chapter 3C. Agriculture For centuries, agriculture was the dominant economic activity for most of Panama's population. After construction of the canal, agriculture declined; its share of GDP fell from 29 percent in 1950 to just over 9 percent in 1985. Agriculture has always employed a disproportionate share of the population because of its labor-intensive nature. Nevertheless, the percentage of the labor force in agriculture has also dropped, from 46 percent in 1965 to 26 percent in 1984. In 1985 crops accounted for 63.3 percent of value added in agriculture, followed by livestock (29.5 percent), fishing (4.3 percent), and forestry (2.9 percent). Despite its relative decline, agriculture was the main supplier of commodities for export, accounting for over 54 percent of total export earnings in 1985. The agricultural sector satisfied most of the domestic demand. The principal food imports were wheat and wheat products, because climatic conditions precluded wheat cultivation. In 1985 the value of food imports was US$108.7 million (8.8 percent of total imports), only half that of food exports. Between 1969 and 1977, the government undertook agrarian reform and attempted to redistribute land. The expanded role of the state in agriculture improved social conditions in rural areas, but long-term economic effects of the agrarian reform were modest. In the early and mid-1980s, the government sought to reverse the decline of agriculture by diversifying agricultural production, lowering protection barriers, and reducing the state's role in agriculture. In March 1986, the government instituted major changes in the agricultural incentives law and removed price controls, trade restrictions, farm subsidies, and other supports. Land Use Panama's land area totals approximately 7.7 million hectares, of which forests account for 4.1 million hectares, followed by pasture land (1.2 million hectares), and permanently cultivated fields (582,000 hectares). About 2 percent of the land was used for roads and urban areas. Nearly all of the cultivated and pasture land was originally forested. A large amount of virgin land has been opened up for cultivation by the Pan- American Highway. Panama's climate and geology impose major constraints on the development of agriculture. Heavy rainfall throughout the year prevents cultivation of most crops on the Atlantic side of the continental divide (see Regions of Settlement, ch. 2). The Pacific side has a dry season (December to April) and accounts for most of the cultivated land (see fig. 9). The mountainous terrain also restricts cropping. In addition, the country does not have high-quality soils. Most of the areas classified as cultivable are so considered on the assumption that farmers will practice conservation measures, but many do not. The topsoil is thin in most areas, and erosion is a serious problem. Most of the nearly level areas conducive to cultivation are in the provinces of Los Santos, Cocle, Veraguas, and Chiriqui. A further constraint on production is the practice of slash-and-burn cultivation, in which trees, brush, and weeds are cut and then burned on the patch of ground selected for cultivation. Indians utilized the slash- and-burn method for centuries, and the Spanish made few changes in techniques. In the 1980s, most farmers practiced a slash-and-burn type of shifting cultivation. The thin and poor-quality topsoil yielded an initially good harvest, followed by a smaller harvest the second year. Typically, the land was cultivated for only two years, and then the farmer repeated the process on another plot, allowing the first plot to rest ten years before refarming. Much of the farming was of a subsistence nature and accomplished with a minimum of equipment. Plowing was generally not practiced on subsistence farms; the seeds were placed in holes made by a stick. Tree cutting, land clearing, weeding, and harvesting were accomplished with a few kinds of knives, principally the machete and the axe, which comprised the major farm implements. Land Tenure and Agrarian Reform Before the 1950s, land was readily available to anyone who was willing to clear and plant a plot. The cutting and clearing of forests greatly accelerated as the population increased. By the 1960s, subsistence farmers sometimes reduced the rest period of cleared plots from ten years of fallow to as few as five years because of the inavailablity of farm land. The reduced fallow period diminished soil fertility and harvests. Consequently, cropped acreage peaked during the 1960s. The hard life and low income farmers accelerated the exodus of workers from the countryside to the cities (see Rural Society and Migration, ch. 2). The long period when new land was easily obtainable contributed to a casual attitude toward land titles. In 1980, only 32.9 percent of the 151,283 farms had such titles. The decline in available agricultural land has made land titling more necessary. Moreover, insecure tenure has been a particularly severe constraint to improved techniques and to commercial crop production. The cost of titling a piece of land, however, has been too high for most subsistence farmers. Between 1969 and 1977, the government attempted to redistribute land. In the late 1980s, however, the distribution of land and farm incomes remained very unequal. In 1980, 58.9 percent of farms had an annual income below US$200. The issue of unequal land distribution, however, has not been as explosive in Panama as in many other Latin American countries. This was because of the service-oriented nature of the economy and because about half of the population lived in or near Panama City. Also, about 95 percent of all farm land was owner-operated, and virtually all rural families owned or occupied a plot. In an effort to redistribute land, the government acquired 500,000 hectares of land and expropriated an additional 20 percent of the land. About three-quarters of the land acquired was in the provinces of Veraguas and Panama. By 1978 over 18,000 families (about 12 percent of rural families in the 1970 census) had access to either individual plots or collectively held land as a result of the redistribution. The land acquisition created uncertainty, however, and adversely affected private investment in agriculture, slowing production in the 1970s. As part of its agrarian reform, the government placed heavy emphasis on organizing farmers into collectives for agricultural development. Several organizational forms were available, the two most important being asentamientos (settlements) and juntas agrarias de produccion (agrarian production associations). The distinctions between the two were minor and became even more blurred with time. Both encouraged pooling of land and cooperative activity. In some instances, land was worked collectively. Other organizational forms included marketing cooperatives, state farms, and specialized producers' cooperatives for milk, chickens, or pigs. Growth of these agricultural organizations slowed by the mid-1970s, and some disbanded, as emphasis shifted to consolidation. The cost of agrarian reform was high. The government channeled large amounts of economic aid to organized farmers. Rural credit was greatly increased; farm machinery was made available; improved seeds and other inputs were supplied; and technical assistance was provided. Cooperative farm yields increased, but these higher yields were not impressive, considering the level of investment. Despite the high costs of the government programs, incomes of cooperative farmers remained low. After the mid-1970s, the government changed its policy toward cooperatives and stressed efficiency and productivity instead of equity. Although the economic results of agrarian reform were disappointing, the social conditions of most farmers improved. The number of rural residents with access to safe water increased by 50 percent between 1970 and 1978. Improved sewerage facilities, community health programs, and rural clinics reduced mortality rates considerably. Major expansion of educational facilities, including education programs for rural residents, helped rural Panamanians become better educated and more mobile. Crops [See Harvesting Bananas: Courtesy Organization of American States.] The crops category is the largest within agriculture, but its share has fallen slightly, from 66.1 percent in 1980 to 63.3 percent in 1985. During that period, crop production was erratic, and annual growth averaged a mere 1.7 percent. The major crops and foreign exchange earners were bananas and sugar. In the 1980s, however, crop production became increasingly diversified. The production of corn, coffee, beans, and tobacco has increased, as has that of such nontraditional products as melons and flowers. Fruits (especially citrus), cacao (the bean from which cocoa is derived), plantains, vegetables, and potatoes were produced on a minor scale; nevertheless, they were important cash crops for small farms. Bananas were the leading export item, and in 1985 accounted for 23 percent (US$78 million) of total exports. In that year, the Chiriqui Land Company, a subsidiary of United Brands (formerly United Fruit Company), produced 70 percent of all bananas, followed by private Panamanian producers (25 percent) and the state-owned Corporacion Bananera del Atlantico (5 percent). The volume of bananas produced in Panama peaked in 1978 and slowly declined in the 1980s. Observers doubted that United Brands would expand its production in Panama because bananas could be produced more cheaply in Costa Rica and Ecuador. The history of banana production in Panama virtually coincides with that of United Brands, which has been in Panama since 1899. The company built railroads, port facilities, and storage areas for the processing and export of bananas. In the 1930s, a disease seriously curtailed banana production. In the 1950s disease-resistant plants were developed, and production increased rapidly. In the early 1970s, a "banana war" erupted when banana-producing countries disagreed among themselves and with United Brands about an export tax on bananas. Panama threatened to take over United Brands' plantations. An agreement was reached in 1976 to tax banana exports. In that year, the tax provided the government with US$10 million, nearly 4 percent of all revenues. In addition, United Brands sold all 43,000 hectares of land that it owned in Panama to the government; payment was in tax credits. The government leased back to United Brands over 15,000 hectares for banana production and export operations. Part of the excess land went to the government's newly established banana companies. Sugar has traditionally been Panama's second largest crop in terms of production and export value. Panama consumed about half its sugar output and exported most of the rest to the United States. The production of sugar in Panama increased during the 1970s, peaked in 1982 at 260,000 tons, and fell to 165,000 tons in 1986. The dramatic decline after 1982 was because of low world prices and the rapid reduction in the United States quota from 81,200 tons in 1983 to 26,390 tons in 1987. Annual sugar exports earned an average US$40 million from 1975 through 1981 but fell steadily from US$41.3 million in 1983 to US$33 million in 1984, US$27.3 million in 1985, and US$22 million in 1986. The state has been heavily involved in Panama's sugar production. Under the 1983-84 structural adjustment program, however, the state has privatized, closed, and tried to sell numerous sugar mills. Nonetheless, of the six major sugar mills in Panama, four were still under state control in 1987. The largest was the Corporacion Azucarera La Victoria, which in 1985 accounted for 64 percent of total sugar production. Several small mills operated throughout the country, but their output was for domestic consumption only. The production of coffee has steadily expanded, from 7,000 tons in 1981 to 11,000 tons in 1985. Coffee was Panama's third-largest crop export earner. In 1985 it earned US$15.6 million, which was 4.6 percent of total export earnings. Rice and corn production also increased in the early 1980s. Panama imported rice in the 1970s but by the mid-1980s experienced a surplus, as a result of the expansion of production in the early 1980s, from 178,000 tons in 1982 to 200,000 tons in 1985. Panama produced 75,000 tons of corn in 1985, but in the same year it imported about 40 percent of the corn it consumed, some of which was used for poultry feed. The government granted incentives to increase corn production. Livestock Panama was virtually self-sufficient in livestock production, which included cattle, pigs, chickens, eggs, and milk. Beef was by far the most important product and output was growing slowly in the 1980s. Between 1981 and 1985, the number of cattle slaughtered rose from 239,000 to 295,000; during the same period, the total stock of cattle increased only slightly, from 1.43 million head to 1.44 million head. Milk production remained steady between 1981 and 1985, averaging 89,140,400 liters a year. Cattle raising for both meat and milk was common on land on the Pacific watershed and was concentrated in the provinces of Chiriqui, Los Santos, and Veraguas. Most ranches produced both meat and milk, although some specialized in dairy farming. The majority of ranches had fewer than 100 hectares. Cattle were almost entirely grass fed. The grasslands were not particularly productive, lacking added nutrients and other improvements; on average, more than one hectare is required for each head of cattle. Low government credits, competition from regional cattle producers (especially Colombia), and United States market restrictions have hindered the growth of Panama's cattle production. From 1982 to 1985, poultry production grew rapidly, from 4.5 million chickens to 6.1 million. During the same period, annual egg production also increased, from 28,859 dozen to 31,205 dozen. Pork production has remained steady; the number of pigs in 1985 totalled 210,000. Fishing and Forestry Fishing was more important to Panama's economy than forestry, supplying the domestic market and providing substantial export earnings. The waters of the two oceans afforded a variety of fish and crustaceans. Shrimp provided 84 percent of the total value of fishing, and their share of total export earnings increased from 16 percent in 1983 (US$51.4 million) to 18 percent in 1985 (US$60 million). Fish production increased from 117 million kilograms in 1981 to 127 million kilograms in 1985. The most important fish products were anchovies and herring, which were processed into fish meal and oil. Lobster accounted for a minuscule share of fishing products. Large portions of the country's forests are commercially exploited. Forestry production remained virtually constant in the early 1980s, when the annual forestry output averaged 2,047 cubic meters. The government has implemented a program of reforestation, but the pace of depletion has exceeded that of replanting. Deforestation was most pronounced along the canal, posing a long-term threat to the canal's water level. Industry Industrial development has been uneven in Panama. Between 1965 and 1980, industry grew at an average annual rate of 5.9 percent; between 1980 and 1985, that rate was negative 2.2 percent. In 1985 industry accounted for nearly 18 percent of GDP. Within the industrial sector, manufacturing (based primarily on the processing of agricultural products) and mining contributed 9.1 percent to GDP, followed by construction (4.7 percent) and energy (3.4 percent). Several factors contributed to the rapid expansion of industry between 1950 and 1970. A 1950 law granted liberal incentives and protection from imports to investors, including those in manufacturing. An agreement in 1955 phased out a number of manufacturing activities in the Canal Zone and opened a market for such Panamanian products as bakery goods, soft drinks, meats, and bottled milk. Foreign investment went into relatively large plants for oil refining, food processing, and utilities. The government invested in the infrastructure, especially in roads and the power supply. A building boom increased the demand for construction materials and furniture, further stimulating manufacturing. Management gained experience during the period, and labor productivity increased. The stagnation in industrial growth during the 1970s resulted from external and internal causes that reduced private investment. Externally, the rise of oil prices, recession in the industrialized countries, and uncertainty relating to the future status of the canal clouded the investment climate. Domestically, a recession reduced construction activity and lowered the demand for manufactured goods. The government built cement and sugar mills to compete with privately owned mills; it also implemented an agrarian reform program, instituted a liberal labor code, and enforced rent control laws. These measures created apprehension on the part of investors, and although the government granted tax holidays, export incentives, and protection from imports, private investment declined. A key goal of the structural adjustment program of the mid- 1980s was to increase private investment in industry and to make Panama's industry competitive internationally. Manufacturing In 1984 the value added in manufacturing totaled US$344 million, distributed approximately as follows: food and agriculture, 42 percent; textiles and clothing, 11 percent; chemicals, 8 percent; machinery and transport equipment, 1 percent; and other manufacturing, 37 percent. Manufacturing was almost completely oriented toward the domestic market; manufactured goods accounted for a mere 2.5 percent of the value of exports of goods and nonfactor services. Production was concentrated in Panama City (over 60 percent of establishments), with smaller industrial centers at David (10 percent) and Colon (5 percent). Industrial development has faced the serious constraints of the small size of the domestic market, lack of economies of scale, high labor and unit costs, and government policies of high protection against imports. The greatest growth in manufacturing occurred in response to import- substitution industrialization in the 1960s and 1970s. By the 1980s, however, the "easy phase" of import-substitution industrialization was over; a second phase, that of industrial deepening, was more difficult to carry out in such a small economy. The economy's obvious limitations in manufacturing have been partially offset by an educated labor force, highly developed internal and external transport and communication links, extensive financial facilities, the country's centralized location, and relatively few restrictions to foreign investment. The Panama Canal treaties provided additional space for expanding the CFZ, an ideal location for light industry and assembly plants. During the 1970s, the public sector took the lead in manufacturing by building a cement plant, sugar mills, and iron and steel works. The structural adjustment program of the mid-1980s sought to reduce the state's role in the economy and to make the private sector the engine of manufacturing growth. The industrial incentives legislation of March 1986 encouraged manufacturers to be export-oriented by removing tax exemptions for those firms that produced for the domestic market. The legislation also provided for maintaining tax exemptions on imported inputs, income, sales, and capital assets for those firms that produced exports. The legislation also lowered import barriers over a period of five years in an effort to increase the productivity and competitiveness of local manufacturing. In addition, new companies were given tariff reductions of up to 60 percent for the first 7 years, and 40 percent thereafter. Since the early 1970s, industrial expansion and job creation have lagged behind the growth of the labor force. In the 1960s, an average of 2,400 jobs was created each year in manufacturing. The rigidities of the industrial incentives law in 1970 and the labor code in 1972 contributed to a decline in manufacturing employment; an average of only 530 new jobs were created each year in manufacturing during the 1970s. The changes introduced in the labor code in March 1986 sought to reverse the antiemployment bias in manufacturing. The slight reduction in the overall unemployment rate in 1986 may be partially attributed to the labor code revisions. Despite government measures to stimulate manufacturing, Panama's becoming a major industrial center seemed unlikely. Under the CBI, some potential arose for the development of twin-plant operations, especially in association with firms in Puerto Rico, where labor costs were higher than in Panama. In general, however, Panama was unable to compete effectively with Mexico, given the latter country's low labor costs and proximity to the United States market. Also, the possibility existed that industries from East Asia, especially clothing manufacturers, might increasingly relocate to Panama, in an attempt to circumvent United States quotas. This possibility was limited by uncertainty over the United States response. The United States Department of Commerce had called for the reduction of United States imports from Panama, precisely in those products manufactured by Asian investors. Mining Despite the variety of mineral deposits and the potential of copper production, the contribution of mining to GDP was negligible, accounting for only US$2.5 million in 1985, down from a 1982 peak of US$4.1 million (both figures at 1970 market prices). The production was restricted to the extraction of limestone, clays, and sea salt. A state company, Cemento Bayano, produced limestone and clay, and operated a cement plant with an annual capacity of 330,000 tons. In the 1970s, several copper deposits were discovered. The largest was Cerro Colorado, in Chiriqui, which if developed would be one of the largest copper mines in the world. Commercial development of the Cerro Colorado project was in the hands of the state-owned Corporacion de Desarrollo Minero Cerro Colorado, which had a 51-percent stake in the operation, and of Rio Tinto-Zinc, with 49 percent. In the 1970s, ore reserves at Cerro Colorado were estimated at nearly 1.4 billion tons (0.78 copper content). In the late 1970s, the cost of developing the mines was estimated at US$l.5 billion, nearly equal to total GDP at that time. Commercial exploitation was postponed because of low copper prices on the world market but could be undertaken if copper prices rose substantially. Construction Construction boomed in the 1970s as a result of government spending on infrastructure and housing. In the early 1980s, with the building of the trans-isthmian oil pipeline and the Edwin Fabrega Dam and associated hydroelectric plant, construction continued to grow, from US$124.3 million in 1980 to US$154.7 million in 1982. Construction fell dramatically in 1983 to US$106.4 million, when the government cut expenditures, and continued to decline in 1984 (US$94.4 million) and 1985 (US$93.4 million). In 1986 the decline was finally reversed, as the sector registered 5 percent growth, generated primarily by private residential building. Thus, the structural adjustment program of 1983 and 1984 achieved its goal of shifting construction activity from the public to the private sector. Nonetheless, the state continued to play a significant role in construction. The government planned to build 2,500 houses and service facilities for low-income families in Panama City. The construction sector benefited from liberal tax incentives, which included preferential interest rates on mortgages and exemption from capital gains tax on sales of urban real estate through 1988. In the immediate aftermath of the political turmoil of mid-1987, the rate of construction lowered dramatically as credit available to the private sector declined. Energy Energy is generally considered a part of industry, to the extent that it is an intermediate input in the production process. In Panama, however, the largest shares of energy are sold to the consumer and to commerce. Therefore, a significant portion of energy used in Panama should be considered a part of the services sector; for the sake of this analysis, however, energy is placed under industry, following conventional practice. Panama's energy production has increased substantially, from an average annual growth rate of 6.9 percent between 1965 and 1980 to 11.1 percent between 1980 and 1985. The expansion of hydroelectric generating capability has been responsible for most of the growth. Per capita energy consumption has increased, from 576 kilograms of oil equivalent in 1965 to 634 kilograms in 1985. This figure is higher than that of Nicaragua (259 kilograms) and Costa Rica (534 kilograms) but lower than that of Colombia (755 kilograms) and Mexico (1,290 kilograms). Panama depended on petroleum for 80 percent of its domestic energy needs in the late 1980s. Petroleum exploration has been underway since 1920, but without success; as a result, the country is dependent on imported petroleum. Saudi Arabia and Venezuela were the primary suppliers until 1981, when Mexico replaced Saudi Arabia and joined Venezuela in the San Jose Agreement of 1980, under which the two countries supply oil to Caribbean Basin countries on concessionary terms. Panama nearly halved its imports of oil between 1977 (20.5 million barrels) and 1983 (11.8 million) in response to rising oil prices. Oil imports have declined as a share of the total value of imports, from 33 percent in 1977 to 19 percent in 1985; in the latter year, the value of oil imports was US$19.2 million. The country's only oil refinery, near Colon, has a capacity of 100,000 barrels per day. Since 1976 it has been operating far below capacity, because greater use has been made of hydroelectricity. Refinery products supplied the domestic fuel for thermal power plants, most of the transportation system, and other minor uses. In 1977 about 64 percent of the imported crude was reexported after refining, mostly to ships' bunkers; by 1983 that figure had fallen to 35 percent. The government has approved the construction of a second refinery, also near Colon, with a capacity of 75,000 barrels per day. Hydroelectricity accounted for 10 percent of energy consumption and was the country's main domestic energy resource in the late 1980s. Panama has been substituting hydroelectric power generation for petroleum-based thermal generation since the late 1970s. By 1980, some 30 sites had been identified on the country's numerous rivers, which, if developed, could generate 1,900 megawatts of power. The capacity for generating electricity was 300 megawatts in 1979; in 1984 it had increased to 980 megawatts, of which 650 megawatts was hydroelectric and 330 was thermal. The increase was due in large measure to the Edwin Fabrega Dam, on the Rio Chiriqui, which began operation in 1984 with a generating capacity of 300 megawatts. In 1985 the Institute of Hydraulic Resources and Electrification, responsible for power generation and distribution, initiated a five-year program to expand Panama's electrical generating capacity. At the time, there were 275,429 electricity consumers. A major goal of the program was to increase the distribution of electricity to an additional 12,000 people in rural areas. Other energy sources, such as bagasse, charcoal, and wood, accounted for the remainder of energy demand. Firewood supplied half of the country's energy requirements as late as the 1950s but declined rapidly thereafter, partly because of the deforestation it engendered. Bagasse was used as fuel at sugar mills. Coal reserves were discovered in the Bocas del Toro region in the 1970s, near the border with Costa Rica. If commercially exploitable, the coal in the region could be used for generating electricity. In August 1985, the government announced plans to explore the reserves, with funding from the United States Agency for International Development and the United States Geological Survey.