Panama gets a lot of bad press. Last October, its name was in the news again over the Pandora Papers. Nearly half of the hundreds of politicians and public officials (including three former Panamanian presidents) mentioned in that data leak were clients of one Panamanian law firm.
These revelations come only five years after the so-called Panama Papers, which exposed the shady activities of Mossack Fonseca, the now-defunct Panamanian firm that was once one of the world's largest offshore financial services companies.
The small country has developed an outsized reputation for facilitating the unsavoury financial dealings of the world's rich and powerful. Given these scandals, it may seem tempting to dismiss Panama as nothing more than a hub for corruption and illicit finance.
Yet Panama is one of Latin America's most striking political and economic success stories of the past three decades. Not only has it remained a stable democracy, but it has also been the region's fastest-growing economy and today ranks among its most developed countries.
Its success has defied conventional political science wisdom in startling ways. Four features of its achievements are especially puzzling.
First, Panama is a rare case of democratisation by military invasion. While Operation Just Cause, launched by the United States in December 1989, caused hundreds of deaths and was widely denounced by the international community, an awkward fact remains: it worked.
The toppling of dictator Manuel Noriega allowed Guillermo Endara, the winner of the May 1989 presidential election, to assume office. Democracy soon took root.
Panama has been classified as "free" by Freedom House since 1995. The country has also avoided many of the pitfalls of other Latin American democracies, such as military coups, elected strongmen, and the breakdown of party systems.
These are no small feats, especially since Panama and Grenada are the only two countries to have democratised successfully through military invasion since World War II.
Why the success in Panama? Unlike Iraq and Afghanistan, Panama was a middle-income country without deep religious or linguistic divides when the United States invaded.
Moreover, it had decades of democratic experience before the 1968 military coup that brought Noriega's predecessor—Omar Torrijos—to power. In a very real sense, the 1989 invasion brought about the restoration of democracy, not its creation.
Second, the most successful party since democratisation is none other than Noriega's Democratic Revolutionary Party (PRD). Far from carrying out the equivalent of de-Baathification in Iraq, the United States allowed the PRD to continue to operate—
and even to return to power in the very first post-invasion election.
The PRD has subsequently won two more presidential races (most recently with the election of current President Laurentino Cortizo in 2019) and garnered the most votes in all but one legislative election.
In one sense, the PRD's success is unsurprising. So-called authoritarian successor parties—parties that emerge from authoritarian regimes and continue to operate after a democratic transition—have been present in nearly three-quarters of new democracies since the third wave of democratisation in the late 20th century. These parties have been voted back into office in more than half of third-wave democracies.
What is surprising is that the PRD thrived in the most unfavourable conditions. Few events are thought to be more damaging to an authoritarian regime's reputation than defeat in war. Yet despite Panama's dictatorship ending through a military invasion, the PRD has embraced the legacy of that regime—or more precisely, part of that legacy.
To this day, the party claims to adhere to the principles of its founder, Torrijos, who is still revered by many Panamanians for negotiating the handover of the Panama Canal. At the same time, the PRD threw Noriega under the bus. This strategy of "scapegoating to thrive" gave the PRD the best of both worlds: It could take full advantage of its torrijos inheritance while offloading its baggage onto Noriega.
Third, Panama has managed to achieve rapid economic development despite very high levels of corruption. Between 1990 and 2019, Panama's economy grew at an average rate of 5.9% annually—the fastest in Latin America.
Today, it has the region's highest GDP per capita in purchasing power parity and is considered by the United Nations to be a case of "very high" human development. Yet Panama is a grossly corrupt country: of the 53 countries classified by the World
Bank as "high-income" in 2019 for which data exist, it was by far the most corrupt according to the Corruption Perceptions Index. Corruption is widely understood to be an inhibitor to economic growth, so how does Panama prosper?
Corruption, it turns out, comes in many forms, and some are more economically harmful than others. This may help to clarify the implications of the 2016 Panama Papers scandal. As unethical as they might have been, it is not clear that the tax-avoidance and money laundering activities revealed by the scandal would actually qualify as corruption if by this we mean the abuse of public office for private gain.
Moreover, they do not seem to have harmed the Panamanian economy. Tax havens are, after all, some of the wealthiest places on earth. As such, we might expect the 2021 Pandora Papers to have little negative impact on Panama's economy.
Another factor behind Panama's prosperity lies in the fourth puzzle: The successful management of the Panama Canal following the handover from the United States to Panama in 1999. While the developing world is rife with examples of nationalised industries being run into the ground (such as the oil industry in Venezuela), the Panama Canal—on which the Panamanian economy overwhelmingly depends—is a standout instance of effective resource management.
Canal contributions to the national treasury quadrupled between 2000 and 2008. According to the researchers Noel Maurer and Carlos Yu, Panama "ran the canal much more efficiently and commercially than the United States ever did" after it took control of the transoceanic passage.
To prevent political interference from undermining the efficient management of the canal, successive Panamanian governments led by both of the country's major parties (and backed by strong public support) took rigorous steps to ensure the autonomy of the state-owned Panama Canal Authority, notably through a constitutional amendment.
The agency illustrates the concept of "islands of integrity," in which public institutions maintain high levels of probity despite operating within a context of widespread corruption. The fact that the motor of the Panamanian economy has remained politically insulated almost certainly helps to explain Panama's ability to achieve rapid economic growth despite high levels of corruption elsewhere in the country.
What can be learned from Panama's experience? One lesson that probably should not be learned is about the desirability of promoting democratisation by invasion. Even in Panama—a small country where the United States already had a military presence—the invasion led to significant bloodshed; in larger countries with more formidable militaries, the consequences would likely be even more tragic.
One lesson of Panama relevant to countries such as Cuba and Venezuela, however, is that authoritarian successor parties can thrive under even the most adverse circumstances. These countries' current ruling parties need not fear democracy.
By following the scapegoating strategy used by Panama's PRD, they could remain competitive—and even return to power—in free and fair elections. The United Socialist Party of Venezuela, for example, could campaign on the popular memory of the late Hugo Chávez while offloading its baggage onto the country's much-reviled current dictator, Nicolás Maduro.
Panama's experience also offers another simple but profound lesson. One of the central challenges posed by the rising tide of authoritarianism worldwide is to prove that democracy can deliver. The example of Panama shows that it can: The country's remarkable economic rise has coincided with its time spent as a democracy. That is a story worth telling.
James Loxton, a senior lecturer in the Department of Government and International Relations at the University of Sydney.
Disclaimer: This article first appeared on Foreign Policy, and is edited and published by special syndication arrangement.