Caribbean & Central America - March 2025

Panama must invest in education and job quality to increase productivity, reduce poverty and inequality, and boost long-term growth, according to a new report from the World Bank (WB).

Published 13 February, the report, entitled “Panama: From Growth to Prosperity”, highlights the fact that Panama has significantly reduced poverty but remains one of the world’s most unequal countries. Inequality and remaining pockets of poverty are linked to differences in ethnic, territorial, employment, human capital, and resilience, according to the report, which says that the country “must focus on the drivers of inequality and poverty, addressing urgent deprivations in the short term while promoting structural changes in the medium and long term”.

Around 25% of the lowest income quintile do not have access to basic services such as water, sanitation, and electricity, with many poorer households also lacking access to roads and the internet, according to the report. This feeds into gaps in access to education that still affect some low-income households, meaning that members of these households find it harder to secure quality jobs. At the same time, only 20% of young people finish tertiary education, and degree programmes are poorly aligned with the evolving demands of the labour market. 

With the poor quality of jobs another issue, Panama also faces systemic challenges in human capital, according to the Human Capital Index (HCI), which forecasts labour productivity for future generations. The country’s HCI has declined in the last 10 years, remaining both low and uneven compared to peer countries with similar income levels. According to the index, future generations could achieve only 50% of their potential labour productivity, meaning that they will lose 50% of future potential earnings. Linked to this, Panama performs poorly in standardised measures of education quality, with just 16% of secondary school students proficient in maths and under 50% able to understand an age-appropriate text. These scores are even lower among rural and indigenous populations, adding to existing inequalities.

• Jobs

The World Bank highlights the poor quality of available jobs as a further issue in Panama. Although labour income has increased in recent decades, the share of formal employment has stagnated and remained at around 55% since 2005. Low income households have suffered higher rates of decline in job quality, with 82% of the bottom two income quintiles working in the informal sector. 

Recent progress in poverty reduction and well-being is threatened by the country’s high exposure to natural hazards and climate change, with shocks more likely to knock vulnerable households back into, or further into, poverty. There are significant gaps in social protection programmes, that do not reach more than a quarter of poor households, which often lack the capacity to withstand climate events such as floods without assistance.

“Panama has experienced rapid economic growth in recent years. However, improving job quality and addressing labour market inequalities are key to expanding opportunities for people to escape poverty,” said Oscar Calvo-Gonzalez, Director for Equitable Growth, Finance, and Institutions for the Latin America and Caribbean Region of the WB, in a statement marking the release of the report. “If it hopes to address these challenges, the country must continue investing in quality education and training aligned with labour market demands and promote policies that will reduce territorial and ethnic gaps to achieve sustained growth that will benefit all Panamanians.”

The report recommends three policy areas for Panama to concentrate on in order to ensure that future economic growth benefits the poorest members of society. The first is to improve access to infrastructure and basic services in rural areas and indigenous regions to close territorial and ethnic gaps. Efforts should also be made to boost economic activity in these areas, such as ecotourism and cultural tourism to sustainably exploit natural capital, according to the report, with improvements in infrastructure key. Improved data collection would also help to strengthen and expand social assistance programmes, it adds.

The second is to better align education, health, and training programmes with labour market demands in order to assist human capital accumulation and productive job creation. Suggested actions include improving programmes to encourage school attendance and reduce dropout rates, as well as promoting IT skills. The WB also recommends that the government study Panama’s labour demands in order to build stronger technical and technological programmes that would increase productivity. Other recommendations include the creation of early childcare programmes to encourage women and young mothers to join the labour force.

Finally the WB calls on Panama to improve social protection policies and critical infrastructure to improve resilience to natural hazards such as flooding. More work needs to be done to identify vulnerable communities, and then to develop social protection policies that can effectively respond to future disasters. In the long-term, the bank suggests that some populations may need to be relocated, while others would benefit from investments in resilient critical infrastructure.

However these measures will require significant investment at a time when Panama’s public budget is under increasing strain. The Panama Canal contributed less to state coffers in fiscal year 2024 than the previous year following a historic water crisis due to drought, falling from US$2.54bn in fiscal year 2023 (October 2022-September 2023) to US$2.47bn in FY2024. And the decision taken under former president Laurentino Cortizo (2019-2024) to shut down the massive Cobre Panamá copper mine has also impacted the public purse, with the comptroller general’s office previously blaming the mine closure for slowing GDP growth, which the United Nations Economic Commission for Latin America and the Caribbean (Eclac) forecast came in at 2.6% in 2024, down from 7.4% in 2023, on its latest (December 2024) projection.

President José Raúl Mulino, who took office in July 2024, inherited these issues, along with serious problems at the social security system (CSS) which has been running significant deficits in recent years and has been flagged as a cause for concern by international credit ratings agencies. Mulino has proposed a number of reforms, but the package has sparked violent protests. Successful reforms could put the CSS on a more sustainable footing and prevent it dragging on public finances, but it is unlikely to free up spare cash to invest in addressing the myriad complex problems identified by the WB. Mulino is also facing tensions with the US and China linked to the Panama Canal, as well as issues around migration, which are taking up much of his time and energy.

Overall, Panama faces a complicated outlook as there is no money with which to address the demands of voters or the WB recommendations. As a result it is likely that the territorial and ethnic discrepancies identified by the report will remain, or widen further as climate change intensifies and vulnerable communities suffer shocks caused by more frequent and more powerful natural hazards.