What Happened
Panama needs to move beyond a services-heavy economy and build stronger links between investment, local suppliers and formal employment, according to a policy argument centered on long-term diversification. The proposal calls for a national plan led by the private sector through CADES-Panamá to tackle structural bottlenecks such as red tape, protectionism and a dependence on services for roughly 80% of GDP.
The central idea is that Panama should not rely on its current economic base alone. Instead, it should develop sectors with higher value added and greater capacity to generate sustainable growth and formal jobs, especially as the services sector has not been absorbing the labor force quickly enough to reduce informality, which affects more than a third of workers.
The Hirschman Framework
The argument draws on economist Albert O. Hirschman’s theory of economic development, which holds that growth depends not just on investment itself, but on the economic links that investment creates. When firms buy from local suppliers, they generate backward linkages. When their output becomes an input for other industries, they create forward linkages. Together, those connections help build the next stage of development.
Mexico is presented as an example of how a country can climb that ladder over time. Its maquila model began with assembly and training, then moved toward stronger domestic content requirements in the automotive sector, and later benefited from trade liberalization under NAFTA. The result, in this view, was a more diversified industrial base and a much larger role in global manufacturing.
Lessons for Colón and Other Regions
In Panama, the Free Zone of Colón is described as an important first step that has reached its limits. The zone has long served as a major commercial hub, but its operations have generated limited local spillovers. The argument notes that transactions fell sharply between 2012 and 2016 and that Colón remains one of the country’s poorest provinces despite hosting one of the world’s largest free zones.
Even so, the model already shows signs of what deeper linkage could look like. Some firms in the zone import medicines in bulk and repackage them locally for distribution across Central America and the Caribbean, creating a possible foundation for a pharmaceutical hub with greater local value added.
Three Proposed Steps
The first proposal is to reform the EMMA regime so that companies manufacturing in the Colón Free Zone or other special economic areas commit to local supply chains and technical training for Panamanian workers. The goal is to shift from enclave investment to investment that strengthens domestic productive capacity.
The second proposal is to create Agro-industrial Zones 4.0 in Chiriquí, Coclé and Panama Este, powered by renewable energy and using artificial intelligence and blockchain for crop optimization, traceability and smart export contracts. The aim is to help producers of coffee, cocoa, pineapple and passion fruit reach premium markets in Europe and North America.
The third proposal is to turn Panama Pacífico into a regional Logistics 4.0 hub, using AI and blockchain to improve supply chains tied to the Canal and the ports. That would increase demand for technical talent in programming, data analysis and AI, while also exporting logistics services across a global network that reaches more than 170 countries.
Why It Matters
The broader message is that Panama already has the foundations for a more diversified economy: trade agreements, world-class ports, the Canal, global connectivity, a competitive tax framework and macroeconomic stability. The challenge now is to ensure that investment does more than pass through the country. The goal is to make it build local capabilities, create suppliers and expand formal employment.
For Panama, the debate is no longer whether the country has a first step. It is whether it will keep climbing.