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Panama, United States

No, Bernie wasn’t right about Panama — and offshore havens have little to do with trade

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Even before a bilateral free trade deal with the United States, Panama City was thriving as a center of commerce, banking and shipping in the Caribbean. (Kevin Lees)
Even before a bilateral free trade deal with the United States, Panama City was thriving as a center of commerce, banking and shipping in the Caribbean. (Kevin Lees)

During Barack Obama’s presidential administration, the United States entered into bilateral free trade agreements with not only Panama, but Colombia and South Korea as well.USflagPanama Flag Icon

It might surprise Vermont senator Bernie Sanders, but that didn’t transform Colombia and South Korea offshore tax havens.

Panama, like the British Virgin Islands or a handful of well-known jurisdictions (including Delaware), was known as a top offshore destination for foreign assets well before 2012, when the U.S.-Panama Trade Promotion Agreement took effect. Today, in the aftermath of the jaw-dropping leak of the ‘Panama Papers,’ a 2011 video clip of Sanders, the insurgent candidate for the Democratic presidential nomination, is now going viral.

But it’s far from evidence that Sanders was somehow prescient, and the suggestion that the U.S.-Panama free trade agreement somehow led to Panama’s reputation as a tax haven is disingenuous.

The truth is that offshore jurisdictions have been under siege for years, and the United States has been at the forefront of that fight. It began in earnest in the 1990s, a result of efforts to stymie money laundering related to drug trafficking. But it accelerated to warp speed after the 2001 terrorist attacks in response to concerns about the intricate networks that financed terrorism. Both before and after the aftermath of the global financial crisis in 2008-2009, the Organization for Economic Co-operation and Development took steps to force many of the worst global offenders, named and shamed on its ‘blacklist’ and ‘graylist’ of violators, to weaken their bank secrecy regimes.

That included, perhaps most notably, Switzerland, once the gold standard of secret bank accounts, which agreed to relent its famous standards of bank secrecy in 2009 and 2010. For the record, neither Panama nor the United States signed a more recent effort from 2014 to introduce greater tax transparency. Yet, under the Obama administration, the Foreign Account Tax Compliance Act (FATCA) has put unprecedented burdens on foreign financial institutions in the effort to root out American tax cheats.

Despite the easy meme about Sanders, the U.S.-Panama free trade agreement was always about free trade.

Continue reading No, Bernie wasn’t right about Panama — and offshore havens have little to do with trade →

Panama

Meet Juan Carlos Varela, Panama’s new president

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veep

Polls showed Juan Carlos Varela trailing in third place going into Sunday’s presidential vote, but the outgoing vice president shocked the country, and he will become Panama’s next president after leapfrogging both the candidate of the outgoing, term-limited president and the candidate of the Panamanian center-left.Panama Flag Icon

With 82.12% of the votes counted, Varela (pictured above), the candidate of the conservative Partido Panameñista (Panameñista Party), one of the country’s oldest parties, led with 39.00% of the vote.

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Trailing in second place was José Domingo Arias, the candidate of term-limited, outgoing president Ricardo Martinelli and the center-right Cambio Democrático (CD, Democratic Change), with 31.87%. In a surpassingly weak third place was environmentalist and former decade-long mayor of Panama City Juan Carlos Navarro, the candidate of the center-left Partido Revolucionario Democrático (PRD, Democratic Revolutionary Party), who was winning just 27.79% of the vote. 

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RELATED: Panamanian presidential race is all about Martinelli

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Until the votes were actually counted, the race seemed like it was set become a photo finish between Arias and Navarro. 

So what happened?  Continue reading Meet Juan Carlos Varela, Panama’s new president →

Panama

Panamanian presidential race is all about Martinelli

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Ricardo-Martinelli

If he could run for reelection, it seems certain that Ricardo Martinelli, the grocery chain tycoon-turned-politician, would almost certainly win a second term in office — he’ll leave the Panamanian presidency this year with approval ratings in excess of 60%.Panama Flag Icon

But with Panama’s law prohibiting consecutive terms, the closest Martinelli can come to a second term is by supporting the ticket of his own center-right Cambio Democrático (CD, Democratic Change), whose vice-presidential candidate is Panama’s first lady, Marta Linares de Martinelli.

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RELATED: The internal politics of the widening of the Panama Canal 

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Martinelli has a strong record. Panama’s economy has grown by an average of between 8% and 9% through his five-year term (significantly boosted by the revenues garnered from the country’s eponymous canal.). He’s also introduced supplementary pensions for Panamanians over 70, built Panama City’s metro system, and spent around $20 billion on infrastructure projects. That includes the $5.25 billion Panama Canal expansion initiated by his predecessor, though the expansion has faced cost overruns and worker strikes that have postponed the expected completion date from 2015 to 2016.

He’s faced accusations, however, that he’s undermined Panamanian democracy, bullied opponents and presided over such a culture of corruption that Martinelli himself may face bribery charges in Italy after leaving office.

ariasyamigos

Critics argue that the CD’s presidential candidate, José Domingo Arias, another former businessman who served two years as minister for foreign trade and three years as minister for housing and land development under Martinelli, is merely a figurehead. They worry that if Martinelli’s wife (pictured above with Martinelli and Arias) is vice president, the incumbent will continue to control too much power in Panama. Despite a constitutional provision that appears to limit family members of the incumbent from running for president or vice president, Martinelli’s allies on the Panamanian supreme court have not blocked Linares’s vice presidential candidacy. But there’s also a sense that most Panamanians realize this going into the weekend’s vote.

In a fierce column for the Wall Street Journal last month, Mary O’Grady chastised Martinelli for trampling Panamanian democracy. She was shocked (shocked!) that a Central American president may have promised greater spending in exchange for a parliamentary majority over the past five years, and she ultimately compared Martinelli (unconvincingly) to Nicaraguan strongman Daniel Ortega:

In 2012, Mr. Martinelli tried to pack the Supreme Court by adding three new seats to guarantee his influence and raise the odds that he might overcome the prohibition on re-election the way Daniel Ortega did in Nicaragua. When Panamanians went to the streets to resist, he withdrew the proposal. The lust for power remains.

It’s worth noting that even in Costa Rica, which has the best governance standards in all of Central America, two recent former presidents have been convicted of corruption. It’s also a pretty rich argument for a columnist in a country where the frontrunners for the 2016 presidential election are the wife of a former president (Hillary Clinton) and the son and brother of two former presidents (Jeb Bush). Martinelli himself took to Twitter to attack her in a fairly petty retort, which wasn’t perhaps the most convincing step.

All pearl-clutching aside, and without getting into the theoretical question of ‘good corruption’ and ‘bad corruption,’ Martinelli certainly isn’t the first Latin American president on the right or the left to chafe at term limits. Though initially instituted to prevent the kind of personality-based caudillos that had a tendency to co-opt presidential systems throughout Latin America in the 19th and 20th centuries, strict one-term limits make presidents from Mexico to Chile lame ducks from the first day of their administrations. It’s not surprising that politicians like Martinelli (and like former Honduran president Manuel Zelaya) are looking for ways to escape the yoke of single term limits.

The two main challengers to Arias come from Panama’s two traditional parties. Continue reading Panamanian presidential race is all about Martinelli →

Nicaragua

Don’t take the concept of the Nicaraguan Canal seriously until the Chinese government does

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(11) View from Parque Historica

Over the past month, Nicaragua has been working to push forward with a plan to build a canal linking the Pacific Ocean to the Caribbean Sea — a dream that predated the actual construction of the Panamá Canal in 1914.Nicaragua

The original push in the United States for a canal through Central America started as the dream of U.S. senator John Tyler Morgan of Alabama, a former Confederate colonel during the U.S. civil war, who hoped that a canal through Nicaragua would restore the U.S. south to economic prominence, and he pushed throughout the 1880s for a Nicaraguan canal, in particular, long before Panamá, then itself the northernmost province of the Republic of Colombia, was a serious option, despite the fact that the engineer of the Suez Canal, Ferdinand de Lesseps, had failed in French-led efforts to build a canal through the isthmus of Panamá.

19th century Nicaraguan dreams turn to 20th century Panamanian realities

After the French disaster in Panamá — beset by corruption, disease and ultimately failure — Nicaragua seemed the clear favorite for U.S. interests in the construction of a Central American canal.  The story of how Wilson Nelson Cromwell (who helped found the law firm Sullivan & Cromwell) and Philippe Bunau-Varilla transformed public opinion, first within the administration of former U.S. president William McKinley and, thereafter, Theodore Roosevelt, and then in the U.S. Congress, to favor a Panamanian route as speedier and less costly is one of the most amazing stories in the history of congressional lobbying.  After all, Panamá already featured a French railway to facilitate construction, ports on either side of the isthmus, the remnants of the aborted French canal effort, and it would, after all, be much shorter than any Nicaraguan canal.

As debate in Congress ultimately turned into a battle of the routes, Bunau-Varilla and U.S. senator Mark Hanna, a top Republican powerbroker, had worked to convince skeptical colleagues that Nicaragua’s volcanic activity made it too unstable for a canal.  Incredulously, Hanna delivered a speech on the Senate floor purporting to show all of Nicaragua’s supposed active volcanoes would make the route more difficult.

But the tour de force turned out to be a stamp — as Matthew Parker writes in Panama Fever: The Epic Story of One of the Greatest Human Achievements of All Time:

Over the next few days Bunau-Varilla scoured the philatelists of the capital looking for a certain 1900 one-centavo Nicaraguan stamp, which he had come across the year before.  In the foreground of the stamp is pictured a busy wharf while in the background rises the magnificent bulk of Mount Momotombo.  In an artistic flourish the illustrator had added smoke to the top of the volcano, which was actually more than a hundred miles from the proposed Nicaragua canal.  Just before the vote, every senator was sent this ‘evidence’ of the dangers of the Nicaragua route.

nicaragua mt momotombo 5c blue0001

Ultimately, the vote favored Panamá over Nicaragua by just eight votes.  Roosevelt’s administration thereafter embarked on the self-interested cause of Panamanian independence from Colombia and, having helped deliver such independence in 1903, commenced building the Canal over the next decade, with U.S. doctors and engineers learning how to reduce yellow fever and malaria along the way through the reduction of mosquito populations.  Though the United States controlled the Canal through much of the 20th century, U.S. president Jimmy Carter formally agreed in a 1977 treaty to cede control of the Panamá Canal Zone back to Panamá.  Since that transition in 1999, Panamá has reaped much of the economic benefit of the Canal’s income, which has helped Panamá become one of Central America’s strongest economies, and the country is preparing for the completion of a project in 2014 to widen the Canal, thereby expanding Panamanian economic opportunities.

A Sandinista canal

Fast-forward nearly a century, and Nicaraguan president Daniel Ortega hopes to succeed where over a century’s worth of futile dreams have failed — that is, with a little help from the Chinese.

Ortega came to power for the first time in 1979 when his Sandinista revolutionaries overthrew U.S.-backed dictator Anastasio Somoza, the last of a line of three Somoza family members that had controlled Nicaragua since the mid-1930s.  Somoza was no great loss for Nicaragua, but his overthrow came at a difficult time for the country, which was slowly recovering from an earthquake in 1975 that had essentially leveled Managua, the capital, hastening its long-term decline as the financial capital of Central America to the rising Panamá City.  Ortega came to power as part of a Sandinista junta, and though he slowly emerged as Nicaragua’s top leader as president from 1985 to 1990, his rise to power led to one of the most brutal proxy fights of the Cold War, with Ortega and the Sandinistas turning to the Soviet Union for support and the United States clandestinely arming and supporting the ‘Contras,’ plunging the tiny Central American country into a decade-long civil war.

ortega

Ortega (pictured above) stepped down in 1990 after losing the presidential election, but as Nicaragua slowly recovered from the carnage of the 1980s, and as Nicaraguans suffered through a long line of democratically elected, if massively corrupt and mediocre presidents, Ortega retained a strong following, especially among the country’s poorest residents.  He returned to power in 2006 after winning a highly fragmented election under the old Sandinista banner (FSLN, Frente Sandinista de Liberación Nacional), having remade himself as a democratic socialist along the lines of Venezuelan president Hugo Chávez.  Ortega, who quickly consolidated the instruments of power, eliminated the hurdle of term limits and was overwhelmingly reelected in November 2011 under conditions that were tilted widely in favor of the Sandinistas.

But unlike in the 1980s, when Ortega seemed to be genuinely interested in eliminating corruption and establishing a new more just, socialist era for Nicaragua, Sandinista 2.0 has jettisoned the ideology for a state capitalist model that’s just as corrupt as the Somoza era ever was. Continue reading Don’t take the concept of the Nicaraguan Canal seriously until the Chinese government does →

Panama

The internal politics of the widening of the Panamá Canal

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Joshua Keating at Foreign Policy‘s blog Passport today points to the global ramifications of the widening of the Panamá Canal — a third lane is set to open in 2014, and it will allow much wider ships to pass through the Canal than the “Panamax” vessels currently designed to pass the Canal.

The new lane, which will allow for more efficient ships — economically and environmentally — is expected to affect global trade and energy flows in multiple ways, absolutely.

It’s not quite as rosy as all that — the third lane’s opening date is now all but certain to be later — in 2015 (well after the date of the next Panamanian general election in May 2014).

Although the Canal’s expansion is indisputably an economic boon to the small Central American country, it may not be such a boon for the fortunes of Panamá’s current president, supermarket magnate Ricardo Martinelli, who swept into office in a landslide 2009 promising to restore Panamá’s record GDP growth rates following the worldwide economic slump in 2008.

Since the U.S. handed over sovereignty and control of the Canal to Panamá in 1999 (the result of a controversial agreement — at least in the U.S. — signed by Jimmy Carter in 1977), Panamá’s already solid postwar GDP growth skyrocketed.  Starting in 2000, Panamá saw a rise in GDP growth that peaked at 12% growth in 2007 — it bottomed out at 3% in 2009 before bouncing back up to nearly 11% growth last year.

Much of that growth is of course linked to the Canal and construction and service industries tied to it.

Each successive administration has taken advantage of Panamá’s increased wealth: Mireya Moscoso, who came to power in 1999 and presided over the transfer of the Canal to Panamá, used Panamá’s economic prospects to strengthen social programs, especially for children.  Her successor, Martín Torrijos, initiated the Canal expansion project in 2006, and tried to lessen political corruption in Panamá.

Martinelli has presided over the return to breakneck GDP growth, and he’s also enacted a fair share of legislative reforms, which have merited approving nods from global investors.  As you might expect from a center-right businessman-president, Martinelli has enacted tax reforms to simplify tax collection, he has invested $20 billion into Panama’s infrastructure and he has championed the U.S.-Panamá free trade agreement, which was approved by the U.S. Congress and enacted into law by U.S. president Barack Obama in late 2011.  But Martinelli has also enacted an increase in the minimum wage and instituted pensions for the elderly.

Given his success so far, given the return of the Panamanian economy to double-digit growth rates, and given the lead up to the opening of the Canal’s third lane, you’d think that Martinelli would stand to gain most of the credit for that.  Instead, however, it’s much more unclear — Martinelli’s party is far from certain to make gains in 2014.

Continue reading The internal politics of the widening of the Panamá Canal →