The government has played a limited role in economic matters throughout most of Panama's history, restricting its activities to infrastructural development and creating a climate conducive to private investment. The government's role expanded dramatically after 1968, when the National Guard, now called the Panama Defense Forces (Fuerzas de Defensa de Panamá--FDP), took control of the government under Torrijos's leadership. Members of the National Guard tended to be provincial, racially mixed, and lower- or middle-class in background and thus provided an outlook different from that of the urban-oriented elite that had dominated Panamanian politics in the twentieth century (see The Government of Torrijos and the National Guard , ch. 1).

The National Guard implemented policies that attempted to reduce the most glaring discrepancies between the urban and rural economies. In 1968 economic activity was heavily concentrated in the two provinces of Panamá and Colón, which accounted for over two-thirds of GDP, and an even larger share of the country's manufacturing, construction, trade, transport, and communications (see fig. 1). Residents of the metropolitan areas had access to relatively well-developed education, health, and other services. Their consumption pattern was closer to that of affluent developed countries they owned most of the country's cars, refrigerators, telephones, and television sets. Their tastes and aspirations were patterned on those of United States citizens in the Canal Zone and the many international visitors. In contrast, rural residents had access to far fewer services, and their living conditions were substantially below those of urbanites (see Rural Society , ch. 2). The majority of the population in the countryside had incomes of less than one-third of those in Panama City and Colón, and many had little more than one-tenth. The economic policies of the military leaders aimed at continued high growth of the urban economy, from which resources could be channeled to the poorer elements of the society to bring about greater economic and social integration.

High growth of service industries in the terminal cities was considered essential because of several constraints: canal-related activities were not expected to provide much of a growth stimulus import substitution opportunities in manufacturing had been largely exhausted and expansion of banana exports appeared limited by international conditions. Panama became a regional financial center after 1970, when the government created the International Financial Center. Tourism was bolstered by construction of additional airports, a convention center, new hotels, and resorts. The CFZ was upgraded, and transportation and warehousing facilities were also improved.

Under Torrijos the government became more active in the goods sectors. In agriculture, land reform was accelerated, and cooperative farming was promoted. In industry, state-owned companiab5 nies expanded, most notably in sugar refining, cement production, and electric power. Torrijos intervened more forcefully in other areas of the economy, such as in the setting of wages and prices a 1972 labor code increased job security and promoted union organization.

These measures created a more equitable society, but often at the expense of efficiency and overall growth. Government expenditure rose sharply, and the public sector became bloated with a proliferation of new government agencies. In the service sector, construction declined in the mid-1970s, in part because of the disincentive created by rent controls. In agriculture, considerable improvements in social conditions were not accompanied by increased incomes. Moreover, greater government participation and prolonged canal negotiations created difficulties and uncertainties for private investors, and private investment declined precipitously.

After 1975 the government became more pragmatic and modified its programs to stimulate economic activity. Incentives to investors were increased. The 1972 labor code was modified in 1976 to meet some of the objections by employers. A freeze on collective bargaining agreements was established that in effect prohibited wage increases. Government-set prices were raised to encourage production.

Under a structural adjustment program in 1983 and 1984, Panama reduced the scope of the public sector in the economy. In March 1986, and as preconditions for two structural adjustment loans from the World Bank, the government passed several major laws that revised its labor code, removed protective tariffs, changed the price structure for agricultural goods, and encouraged foreign investment. In August 1986 the government launched a privatization program and proposed the sale of state assets worth US$13 million.

Data as of December 1987