In past writings I have compared the running of a business to that of the running of a country. I know there is a big difference in the two entities, but it seems to me that the same disciplines that drive a successful enterprise would hold true to the running of a country as well, especially one that is rather small and more manageable such as Panama. So the question I pose in the title of this post, whether a country can borrow its way into prosperity, is based on an article that appears in La Prensa today about the governments plan to bring growth and prosperity to Panama over the next 10 years by making huge investments into infrastructure projects and increasing the debt. Panama already has a significant debt burden of over $11 billion so any and all new spending will add to that.
I come from the old school, having been raised by my grandfather, who believed if you don't have the money don't buy it. He had lived through the great depression and it was ingrained in him to spend only what he had and could afford to pay for at the time. He would not borrow money to build his businesses or buy a home. He waited until he saved enough and then expanded or bought a nicer house for his family. Most people have not experienced a world where such economic strife took place that a whole generation was impoverished and forced to live hand to mouth, so they don't really understand that concept of not borrowing. The world today is built on debt and both individuals and businesses depend on borrowing to acquire the things they want and/or increase growth.
Our generation has grown up in a world where debt and prosperity go hand in hand. I have seen great fortunes made by using borrowed money, so it is not to say that this is the wrong way to go. The point is it is viable as long as the profit on income is there to pay both the principal and interest on the debt and that depends on a lot of unknown factors. Many Americans have found out the hard way that borrowing against their homes as if it were an ATM machine has turned out to be a debt trap and now many are forced into paying more for a house than it is worth or declaring bankruptcy. Many companies are going through a similar scenario as they borrowed too much just and then the economy turned south. Not only does it depend on making more income than outgo during good times, but it depends a great deal on macro economics that are beyond the control of individuals and businesses or even countries. The worlds economy is far from stable right now so everyone and every business is at risk if they borrow too much at this time.
So how does all of this apply to Panama and the huge amount of infrastructure construction they are embarking on? Well, in order to build the billions of dollars of infrastructure projects, they have to borrow the money either from large collective government banks such as the World bank or IMF or they have to sell government bonds to private individuals and institutions. In any case the government is putting up everything that the state owns as collateral for the loans. It is not that a default would force the sale of the canal, bridges and roads, but those looking to get their loans repaid will be looking at the people of the country to pay them back and the only way that can happen is through higher tax burdens.
Governments propose these grand plans based on a bright future and they rarely paint a picture of possible lower incomes or a world credit crunch that could make a mess of their grandiose projections. From a bureaucratic standpoint the future is always bright and growth is as inevitable as the rising of the sun each morning. I am torn between two positions when it comes to Panama. I want to see it grow and prosper, yet I am concerned about the ever expanding debt that is being accumulated.
I am happy to see the new private projects being developed such as the mining industry where significant private resources are invested and the government shares in the income, but I am cautious when the government borrows to build because it is all based on a belief in an ever growing local and world economy.
On the other hand, knowing governments as I do, they all operate the same in that respect. If money is available, they will borrow and spend it. And seeing how that is the reality with Panama's new credit ratings, then we can only be thankful that the money is being spent on hard assets that will benefit the people. For those foreigners who are making Panama their home this may only affect them in the future as they buy goods and services at an increased ITBM or the mil rate on their real estate property. For those doing business or working here they will have significantly higher burden in taxes on labor and/or profits in the future. You can count on it.
Most of the article below deals with concerns about transparency and the bidding process of the projects rather than the viability of the spending. Only a brief mention of the potential of it being inflationary is brought to light and the concern that the benefits may be temporary.
From La Prensa
The Government has based its business plan on an intensive program of Infrastructure to Drive Growth in this five year period.
According to a compilation made by the consulting firm Indesa, with information Provided by the Ministry of Economy and Finance (MEF), Investments in large scale projects for the 2010/2013 Period Exceed $ 6 billion, including the construction of the Metro works, ports within the country and airports for nearly $ $1billion.
A port to be built near the canal would cost $ 600 million, But was the MEF did not elaborate on plans for the terminal, or its administration and date of operation.
The aforemention Investment is necessary to add the extension and construction of a third bridge over the canal. The president, Ricardo Martinelli has particular expressed particular Interest in the development of this project.
Although this Economic model is primarily based on construction, it has-been devoid of debate by analysts and professional associations and the question of whether it will generate only temporary growth and will not produces a permanent change in the economic and employment structure. This benefit is only during the time of the investment.
Bonanza "temporary?
According To The Economist Adolfo Quintero, this administration has CHOSEN to a model based on service and exports and attracting Foreign Investment and that this requires the development of infrastructure.
However, they acknowledge the scheme in question may Improve Productivity in the long term, but It could be inflationary.
In addition, representative of the Panamanian Society of Engineers and Architects (SPIA) consider the investment-planned by the Government for the next three years to respond to a National Development Plan That Involves all Sectors.
The SPIA Commission recommended the Development of a study to Ensure Adequate planning and programming that meets the needs of the country.
"The Lack of proper planning and economic policy have not taken advantage of Professional and Technical resources available to us," they said.
An important element of being aware that such groups as the SPIA, the rating agencies, and international agencies, in the ability to run the government.
The current bidding process, according To the SPIA, is not being utilized.
Any contracting entity, they claim, must have a database of unit costs in order to get a bid price of better reference.
"The Methodology of Combining Into procurement studies, design and construction of the maintenance works with Its Own, have not yielded the expected results. It also requires an inspection by appropriate professionals for best results. "
In ink and paper
Under an aggressive, disciplined execution, as highlighted in the Government Strategic Plan 2010/2014, The development of specific sectors could lead to an annual Increase of $ 8 billion in gross domestic product (GDP) and create 860 000 new jobs up to 2020.
To achieve these ambitious goals, the Government has planned in long term
Infrastructure Investments of over $9.6 billion.
This amount Represents 70% of total planned Investments ($ 13.6 billion) from 2010-2020.
The figure includes about $ 3.8 billion in Infrastructure and Social Programs to another $ 5.8 billion in Economic Programs such as irrigation systems, cold chain, tourism plan, a series of road Infrastructure, construction of ports and airports.
The analyst at Standard & Poor's Roberto Arevalo Siphon recently said in a visit to Panama that the agency would be following up on these investments and how to execute this plan and conduct of the bidding process.
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