[Provided for the record, Subcommittee on Separation of Powers, Senate Committee on the Judiciary, hearing held July 22, 1977.] Total payments as a result of the 1903 Treaty1 1. Reflected on company books as title and treaty rights: a. Payment to Republic of Panama-- $10, 000, 000 b. Payment to individual property owners (depopulation of 3,965, 254 c. Payment to French (land rights). d. Madden Dam Area land rights, 1924–1932_ Total b through d__ 2. Further payments to French : a. Inventories, salvage credits, other--- b. Panama Railroad Capital Stock....... c. Channel costs---. Total (Combined with 1c., payments to French total $40,000,000). 3. Payment to Colombia (not reflected on company books): Indem nity to Colombia for loss of Panama_ 4. Payment to Panama for annuity: a. 1913 to 1920 (capitalized as construction costs). c. 1952 to 1976 (dollar value in gold changed, 1973 and 1974; Total 326, 016 437, 619 4,728, 889 1,282, 664 7, 000, 000 31, 391, 320 39, 673, 984 25, 000, 000 2, 000, 000 10, 990, 000 43, 610, 992 56, 600, 992 Total payments to Panama, French, and Colombia------ $136, 003, 865 1 The figures reported in are actual dollars paid at the time of payment and have not been adjusted to reflect the value of payments in terms of 1977 dollars. NOTE.-Does not include unrecovered United States' investment in the Canal and Canal facilities except to the extent of $2 million in annuity payments which were capitalized as construction cost during the period of 1913 through 1920. As of October 1, 1977 unrecovered capital investment of the United States in the Panama Canal Company totals $319 million on which interest payments accrue in the approximate amount of $17 million per annum. (69) DEPARTMENT OF THE ARMY, OFFICE OF THE SECRETARY OF THE ARMY, INFORMATION FOR MEMBERS OF CONGRESS: APPOINTMENTS TO BOARD OF DIRECTORS OF THE PANAMA CANAL COMPANY Secretary of the Army Clifford L. Alexander, Jr., today announced the appointment of members for vacant seats on the Board of Directors of the Panama Canal Company. Under the Chairmanship of the Army Secretary, the Board will oversee the operation of the Panama Canal. As Stockholder of the Panama Canal Company, and the President's direct representative to supervise the administration of the Canal Zone Government, the Secretary of the Army appoints members of the Canal Company's Board of Directors. The Board reviews and sets guidelines affecting the operation and management of the Canal and business operations incidental to the Canal's operation and maintenance. Meetings of the Board are held quarterly, normally in Washington. Under the currently proposed Canal treaty dealing with the operation and administration of the Canal, the Panama Canal Company and the Canal Zone Government would be replaced by a new United States Government agency, the Panama Canal Commission. Six months after the exchange of ratification instruments, a new Board of Directors for the Commission would be appointed by the United States. That Board would consist of five United States citizens and four Panamanians and would replace the current Panama Canal Company Board. The Board will be comprised of individuals from various U.S. Government Executive Agencies plus Canal Zone Governor Harold R. Parfitt who, as President of the Panama Canal Company, is an ex-officio member. The new Board members replace previous Board members whose terms of office ended April 1, 1977. The new Panama Canal Company Board members appointed under provision of the Canal Code are: Hon. Clifford L. Alexander, Jr., Secretary of the Army. Mr. Charles R. Ford, Deputy Assistant Secretary of the Army (Civil Works). Hon. Anthony M. Solomon, Under Secretary of Treasury for Monetary Affairs. Furnished by: Office, Chief of Legislative Liaison. [Sent by United States Embassy in Panama to the State Department on Oct. 26th, 1976] Tags: ECON, EFIN. Subject: Panama's recession is structural-a result of low productivity. 1. This message is part of a continuing series of mission economic studies of the State of the Panamanian economy and projections for its future. 2. Summary: Panama's recession, which deepened during the first half of 1976, is either cyclical nor primarily a product of economic conditions outside Panama. In our view the economy is floundering mainly because its high cost output is not competitive in the world market and few opportunities exist for available private investment. To establish a basis for renewed subtainable growth will require actions that lead to lower costs and improved productivity. These could include easing the labor code, reducing subsidies, boosting domestic savings, and directing resource flows more toward the international service sector where Panama has natural advantages, however, most such actions would cut back social benefits granted to the working classes under the "revolu 99-592-78- -6 tion," and might not be politically acceptable under the present government, inflows of foreign capital have not been getting at the core problem of high costs (low productivity). Lack of access to relevant Canal Zone sites is delaying GOP development of infrastructure which is prerequisite to the growth of various commercial services industries by the Panamanian private sector. End summary. 3. Economic conditions in Panama worsened steadily during the 1976 first half. There were decreases from a year ago in key indicators-manufacturing, construction, external trade, unemployment, (increase), and sales to the Canal Zone (see reftel), overall growth is likely to be near zero for 1976. 4. Failure of the economy to respond to a variety of stimulants indicates that the recession is more than a cyclical maladjustment. Credit has remained relatively plentiful, with preferential rates available from the government for both agricultural and industrial projects. There are tax subsidies for new exports, and tax benefits for reinvested profits. No basic changes have been made in the "rules of the game" under which business operates, such as the labor code or tax laws, since before the onset of recession, in fact, the GOP in recent months has actively sought by various direct means to improve the business climate. A large boost in 1975 public sector spending had little effect on either private investment or aggregate demand. 5. Also, Panamanian economic problems do not seem to be caused primarily by worldwide economic trends or world trade. In contrast to Panama's continuing decline, other developing countries (LDC's) have been experiencing a quickening economic tempo so far this year in response to rapid recovery by the industrialized countries, plus some correction of structural maladjustments, LDC exports have been generally increasing as a part of the marked improvement in 1976 first half world trade (plus 10 percent) while the value of Panamanian exports remained at its 1975 level (excluding an abnormal decline in petroleum products exports), changes in Panama's economy also differed from the worldwide pattern both during the 1974-75 world recession and the years immediately preceding it. Despite sharp 1974-75 recession among the industrialized countries (zero growth), LDC's, gross domestic product (GDP) increased 5.5 percent in 1974 and 1.7 percent in 1975. Growth had begun tapering off in 1971 whereas during 1971-73 the rest of the world including Latin America experienced unprecedented boom. 6. Private investment in Panama reached a peak in 1971. Growth in manufacturing began to fall off in 1971 with a decline in the number of attractive import substitution possibilities, little increase has subsequently taken place in the volume of manufactured exports, output of both construction materials and intermediate goods stopped expending in 1973. Expansion of construction activity began slowing in 1972 and has actually been declining since 1974. Imposition of rent controls in 1973 brought private investment in low cost housing to a standstill. On the other hand, growth of the important services sector remained near 8 percent annually through 1974 (plus 3 percent in 1975) due in part to the major expansion of the foreign banking sector since 1971, growth in agricultural output has remained sluggish since 1970 at about 3 percent annually, much slower than during the 1960's. 7. Panama's basic economic weakness in our view and the reason behind current stagnation is its non-competitiveness in the world market-a structural problem involving primarily high cost production (coupled with a lack of resources) in both agriculture and industry. The export potential for Panamanian agriculture is extremely limited at present, the main exports, bananas, is in the hands of foreign plantation operators, and has probably reached its peak in an increasingly competitive world market. In general, land is of poor quality and farm labor costs are high-the $3 per day minimum wage is estimated to be at least double the rate anywhere else in Central America. The government encourages high cost production, including rice, the principal crop, by subsidizing producers through support prices typically set above the world market. Thus, Panama cannot profitably export major crops such as rice and corn and is further precluded from developing any profitable export potential for various lesser crops by the small domestic market base in Panama. Accessible forests have been cut over and there is little potential for meat exports while access to the U.S. market is restricted. Panama's sugar industry is likewise non-competitive due to high costs of both cane production and refining operations. 8. As with agriculture, Panama's manufacturing industry currently has little export or overall growth potential because of high production costs coupled with a dearth of natural resources (copper deposits have not yet been determined to be economically exploitable). Minimum wages and the general wage and benefit structure in Panama are estimated to be the highest in Central America and among the highest in all Latin America. Higher wages and benefits in the Canal Zone exert upward pressure on wages in the republic as employers compete for the generally better qualified workers attracted by Zone wages. The dominance of the service sector in Panama's central urban areas with its higher skill levels also creates upward pressure on the entire wage and benefit structure. Employee benefits under Panama's labor code add to direct employment costs. The code exerts indirect pressures on costs through subsidies such as firing restrictions imposed on employer and, by strengthening the trade union movement, bolsters the trend toward costlier contract settlements. High labor costs encourage the substitution of capital for labor, thus boosting structural unemployment throughout the economy. Also, relative capital costs-mostly foreign sourced-are likely to rise as Panama's already high debt service burden worsens and the economic outlook for other LDCs improves relative to Panama. 9. Establishing the basis for renewed growth and improved economic well being that can be sustained will require actions that lead to a lower cost structure. One widely discussed possibility is an easing of the labor code, although its real impact on costs remains uncertain (it did not bring on recession although it may have stood in the way of needed private sector adjustments). Changes probably would not induce an immediate surge of private investment, however, the business community has made clear its conviction that changes are essential, giving them an additional psychological importance that bears importantly on the general investment climate. Changes might be a convincing sign of GOP concern over the private sector's economic plight. 10. Appropriate belt tightening also could include lowering subsidies as well as the wage/benefit structure to reduce relative production costs, and increasing personal taxes to curb consumption (particularly imports) and expand domestic savings. These effects are usually achieved indirectly by currency devaluation. Since Panama's currency is the U.S. dollar, such actions must be taken directly, in addition, resources may need to be more heavily concentrated in the internationally-based services sector where Panama has more natural advantages, with proportionately less in agriculture and the non-productive social sectors. 11. Comments: (A) Panama's high wages, subsidies, and consumer imports-together with a moderate tax burden and little public saving-permit a standard of living which no longer appears to be supportable by Panama's inefficient domestic production. (B) Increased external financial flows per se, regardless of concessionality, permit Panama to defer grappling with the core problem of low productivity until a later date when the problem will probably have worsened, unless such financing bears specifically on some aspect of costs. Indeed, much of the capital inflow of the past three years has aggravated Panama's economic malaise by exacerbatng its debt service burden without enhancing overall productivity. Moreover, total inflows greatly exceeded the current account deficit of Panama's balance of payments, resulting in large negative "errors and omissions" (around $100 million annually) most of which probably represented outflows of domestically-owned capital. (C) The types of actions mentioned above for addressing Panama's high cost structure run headlong into the "revolution"-the social and economic benefits granted to the urban and rural working classes over the past eight years which would need to be reversed in party in short, the "evolution" has collided with growth and one or the other must yield, whether or not actions of sufficient scope to be economically meaningful along the above lines are politically possible for the present government is questionable. (D) Panama's best economic prospects lie in the development of its potential as a sub for servicing international commerce, various aspects of cargo handling are an essential part of the picture. Thus, the GOP has a valid case in urging early access to relevant canal zone sites needed to develop the infrastructure on which growth of various transport, storage and other commercial services. Memorandum to: Eng. Demetrio B. Lakas, President of the Republic, Presidency of the Republic. From: Nicolas Ardito Barletta, Planification Minister. The purpose of this Memorandum is to call attention to the financial basis upon which will be defined the budget policy of 1977 thus permitting to show the pertinent limitations that are being detected in this year's budget. (a) The current revenues should increase between B/ 43.6 million and B/ 44.2 million with respect to this year's revised income figures thus reaching totals of |