Panamanian Economics - Corruption Versus Capitalism

I went to Panama last March on a fact-finding mission. A buddy and I had been hearing for months that there were real estate opportunities aplenty in cool areas like Bocas del Toro, Panama's Caribbean archipelago. So we flew into Panama City (not the one with Spinnaker's and wet t-shirt contests) and then made our way to the islands the next day.

One of the things I pay close attention to when I travel is the gap between the rich and poor. I look to see if there's a significant middle class because I think it says a lot about the economy and the rule of law. I can say that it appeared to me that Panama City was mostly middle class, although I'll concede that I did not see all of it. There were certainly some nice homes (well guarded, I might add), but the majority of what I saw was what you'd think of as everyday housing - not too big or nice, but not dilapidated. More importantly, the city was bustling with people tending to their "para hacer" lists. Things changed dramatically as we made our way to the coast.

Bocas del Toro is a collection of islands just south of the Costa Rican border, on the Carribean side of Panama. It is an interesting place because the main town, Bocas Town, is sheltered from the ocean by the backside of two sizeable islands - it's own and one other. There are some smaller islands in the mix, as well. The result is a place where much of the transportation is by boat, on water that is as smooth as glass. Houses and hotels are built on stilts. It's actually one of the neatest places I've ever been. Alas, economically, the place is a train-wreck.

As I said, my friend and I were investigating rumors that property was dirt cheap, but on the rise as international tourism was taking off. We concluded that it was probably true. We also concluded that we'd be idiots to try and find out for sure. This is where the rule of law comes into play. You see, Panama is very friendly to foreign investment, mainly because the US is the biggest user (and therefore customer) of the Panama Canal. As a foreigner investing in Panama, you can set things up so that you don't have to pay any taxes - not on property, not on income - for a period of ten years. If you invest in some sort of re-forestation project, ten years can become twenty. The Panamanian government has latched onto the idea, which has been well proven, that foreign capital creates local jobs. It's the rising tide lifts all boats principle. However, the adherence to the rule of law is really the arbiter of long-term success.

In Panama City, you can see the wonders of a free market with an influx of capital - Panama City is the financial center of Central and some of South America. Though I am quite certain that corruption is present there, I am also certain that enough of the folks in power have realized that gains from malfeasance are easily dwarfed by gains from saying what you mean and meaning what you say. Essentially, the leaders in Panama City have officially become westernized. Not so in Bocas del Toro.

One of the big draws to Bocas is teak wood. Just run a google search on "bocas del toro teak wood" and see how much comes up. The offers vary, but the general theme is the same - you can pay a ludicrously low price for 10-20 acre increments of waterfront land with beaches that transition into teak forests . The teak is meant to be your nest egg - they (a crew of workers comes with the deal) harvest them every ten years or so - yielding a reportedly whopping return on investment. On top of that, these visionary developers have dedicated some of the land to harvesting the Noni plant, which, as near as I can tell, is something like Aloe but with a "it'll cure what ails you" kind of mystique. This is harvested yearly, offering investors reliable and consistent income. So, to summarize, here's what you get: land for cheap that is right on the water (high appreciation potential), the full rights to build whatever you like on it (vacation home or business), a farm of teak trees that will provide a windfall of cash every ten years (built-in revenue stream), and a crop of Noni plants that will pay the light bills (icing on the cake). Too good to be true? You bet.

It didn't take much digging to conclude that the areas away from Panama City are not even remotely westernized, at least not the economic sense. They're in a strange place, between the past "he who has the cash makes the rules" system and the future "follow the rules and create the cash" system. Corruption still holds sway over Bocas del Toro. The concept of quid pro quo has not yet really taken hold there, at least not where foreigners are concerned. To some (too many) of the locals, we are nothing more than walking money bags. Their job is to extract as much as possible from us, and there is no ethical or practical issue with saying or doing whatever it takes to make that happen. From my perspective, whether you're renting a taxi, hiring a tourguide, or buying a teak farm, you are well served if you do not count on honesty or integrity from the locals.

We met another American who had been in Panama for much longer than we had. He had the occasion to befriend an attorney who spends half her time in Panama City and half her time in Miami. She explained to him that a very large portion of the time she spends in Panama deals with helping foreigners who've been scammed in real estate deals, many of which take place in Bocas Del Toro. Apparently, they have quite a slick operation set up there.

Buyers are courted and shown real, working tree farms. They're provided access to reference customers who sing the praises of their investments. When these marks decide to pull the trigger, they are treated to a credible closing, complete with piles of legal paperwork. The thing is that the paper is worthless. The check clears and the crime is discovered only when the "new owner" tries to exercise his rights of ownership - either by building something or simply by hanging out. The Bocas authorities are called in and the person gets that sickening feeling that you get when you know you've been had. The police, who most likely are in on the con, rave about how this is causing all sorts of problems and how they are hot to nail these ladrones (criminals). From there, the story is just like any con movie - the victims return to the scene of the closing, only to find an empty building with no one around. The company they dealt with is gone, vanished from paradise. And the point of all this?

The situation in Panama, if we can extrapolate the Bocas situation, highlights something important about how societies handle the transition to capitalism. The thing about going from a closed market to a free market that invites foreign participation is that there is a queue for the receipt of benefits. The haves are the first in line, which means they will have more before the money trickles down to those who have nothing. This can be very disconcerting when seeing far into the future must always give way to daily necessities. So, for many rural Panamanians, the benefits of honoring contracts with foreigners have simply not yet availed themselves. In an area where there is no middle class, corruption, for most folks, is still a better business than truth. The problem is that this can only go on for so long before the whole project withers away.

Capitalism is a vacuum for money, but only if the profit motive can be realized. When money goes in and then disappears because the main rule of the game is that there are no rules, the vacuum dissipates...and fast. This is what is happening in Bocas right now. A friend visited there a couple of months ago and says that Bocas del Toro is already played out. How can that be? As recently as March, you could smell the opportunity there. There were major resorts planned on one of the biggest islands and more and more tourists were visiting and staying longer and longer. It seems, however, that one too many investors got burned by the short-sighted (although understandably pragmatic, from their point of view) actions of latino grifters on the long con. The resorts are on hold. The money well has dried up before it ever really got going. It's sad, really...but maybe not.

Like I said, Bocas del Toro is beautiful. Though I liked the idea of buying low and selling high while the international tourist boom made landfall there, I now like the idea of being able to go back to a place that'll be largely unchanged and still every bit as charming (don't get me wrong, I had fun) in 10 years. And now that I know what I'm dealing with, I'll conduct business as I do in Jamaica - product first...then the money, mon. And if I'm in a real good mood, I might just finish off the transaction with my favorite Spanish phrase: "Donde tu frijole playa?" (That one, you'll have to look up.)