The Torrijos era (1968-81) stands as a dividing point in Panama's economic history. Under Torrijos, the state took a more active role in the economy and initiated ambitious social projects. The public sector expanded to an unprecedented degree, as did the fiscal deficit and the external debt. In the 1980s, Panama was forced to address some of the excesses of the 1970s, and to adjust its policies, often under the aegis of the International Monetary Fund (IMF--see Glossary) and the World Bank (see Glossary).

In the 1960s, Panama experienced buoyant growth in virtually all areas of the economy as a result of the boom in canal-related activities and the growth in private investment. GDP expanded at an average of 8 percent per year. Employment grew at 3.5 percent per year, well above the population growth of about 3 percent a year. Most of the new jobs were generated by the private sector.

In the 1970s, Panama's average annual growth rate of GDP fell to 3.4 percent. Many factors contributed to the decline. In the international arena, reduced canal use (especially after the Vietnam war), rising oil prices, international inflation, and recession in the major industrial countries had a negative impact on Panama's economy. Domestically, investment fell in response to government policies of agrarian reform, expropriation of private power companies, creation of state industries, protection of labor, controls on housing, subsidies, and high support prices. In addition, the prolonged negotiations between the United States and Panama over the canal adversely affected investor confidence. The government sought to regain private investment by investing in large infrastructure projects and by expanding or acquiring productive enterprises. Two-thirds of the new jobs created in the 1970s were in the public sector. The public-sector deficit expanded, and the government was forced to borrow money from abroad. By 1980 the external debt had reached 80 percent of GDP.

In 1982 Panama, like most of Latin America, felt the impact of the world recession. Once again, the government sought to remedy the declining private-sector investment through increased public expenditures. In the same year, the public-sector deficit reached 11 percent of GDP. In 1983 and 1984, the government imposed a severe austerity program, which had the imprimatur of the IMF. Public investment was reduced by 20 percent in 1983 and by a further 8 percent in 1984. The public deficit was also cut, to about 6 percent of GDP in both years. In addition, the government undertook structural adjustment measures in the areas of industry and agriculture and instituted changes to streamline the public sector. The simultaneous recession and reduction in public expenditures caused GDP to fall in 1984, the first decline in more than twenty years. In the following years, however, Panama, avoiding the economic slump that plagued most Latin American countries, experienced moderate growth.

Data as of December 1987