Panama Takes a Firm Step Toward Reinventing Its Economy with the EMMA Law

Over the past two decades, the Republic of Panama has experienced and enjoyed unprecedented economic growth. Some will proudly defend this growth, while others will loudly point out its less positive aspects and consequences. Indeed, its pros and cons can certainly be listed and discussed in depth, but what no one can deny is that during this period, Panama has led economic growth levels in Latin America, with indicators far above those of other countries in the region. For those of us who have lived in Panama during all or part of this time, the growth has been evident and tangible. Today (despite the fact that these same levels of economic growth show a downward trend), we can still affirm that, compared to other Latin American and Caribbean nations, Panama remains a country with a high quality of life, a place where one can raise a family, and where countless opportunities for prosperity and development still exist.

The foundation of Panama’s wave of economic growth has been its service-based economy (notably financial, legal, and maritime services, as well as all direct and indirect services derived from the existence and operation of the Panama Canal), along with strong public infrastructure investments in recent years (such as the metro system, the Canal expansion, and others). However, due to various external and internal factors (for example, the global economic situation, the Panama Papers, corruption, and poor administration, among others), the growth levels of recent years have begun to show a downward trend. This makes it evident that if fundamental changes are not introduced into Panama’s service-driven economy, it will be unable to maintain sustained economic growth. Consequently, the call from various professional associations and national economic leaders—who have anticipated this scenario—has grown louder, urging and advocating for a reinvention of the Panamanian economy. This shift in economic direction seeks to develop other industries that, although currently dormant, possess significant yet underestimated potential as engines of long-term economic development. One key industry, which we will discuss today, is the manufacturing industry (closely tied to the logistics sector).

I am of the opinion that, at this moment—amid an unprecedented international health crisis—and with the recent approval by the National Assembly of Law 159 of August 31, 2020, which creates the Special Regime for the Establishment and Operation of Multinational Enterprises for the Provision of Services Related to Manufacturing (“EMMA Law”), the Government of Panama has put forth a positive option in response to the country’s medium- and long-term needs. It has undoubtedly taken a firm step toward the economic reinvention that Panama greatly needs.

Esta nueva Ley EMMA busca atraer y promover la inversión extranjera directa de empresas multinacionales. Dicha ley tiene la intención de que estas empresas monten operaciones relacionadas con la prestación de servicios de manufactura y de procesos productivos y que sean motores generadores de empleos y de transferencia de tecnología y conocimiento (para los trabajadores locales), haciéndonos más competitivos en la economía global .

Why do I see opportunities for development and growth for Panama with the new EMMA Law?

Well, there are many angles and positive factors to analyze, discuss, and debate (which we will certainly explore in future articles), but today I want to share with the reader a story of economic transformation and development that I witnessed over a period of approximately fifteen years— a transformation and development that remain active and relevant to this day. As a proud naturalized Panamanian, with a Panamanian family, I want the very best for this nation. Now, let me tell you that I am originally from the State of Baja California, Mexico, where I lived during the formative years of my life. Baja California is a geographical region with a strategic (and for many, enviable) location, situated in the northwest of Mexico and bordering the great State of California, United States, to the north. Mexico has a strong manufacturing industry (known in that region as the “maquiladora” industry), which today is one of the most important engines driving the Mexican economy. This Mexican manufacturing industry is anchored in manufacturing legislation (maquila) with characteristics very similar to Panama’s newly enacted EMMA Law.

I remember the economic and infrastructure underdevelopment that the State of Baja California, Mexico, experienced in the late 1980s. I also remember even more clearly how, at the beginning of the 1990s, the North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico was signed with great fanfare. This free trade agreement—which opened the doors to the free movement of goods, services, and merchandise throughout North America—combined with Mexican manufacturing laws and the already existing free-trade zone in northern Mexico (a geographical area extending along the entire northern border of the country and up to 26 km southward), propelled the development of Baja California in an extraordinary way.

With these developments, almost immediately, this region of Mexico began receiving large inflows of foreign direct investment. Multinational companies in the electronics industry—such as PANASONIC, SAMSUNG, SONY, LG, DAEWOO, SANYO, CASIO, PIONEER, HITACHI, GOLDSTAR, and SHARP—began operations with manufacturing and assembly plants for a wide variety of products. Over time, foreign investment from the medical industry also started to flow in, with multinational companies such as JOHNSON & JOHNSON, 3M, KIMBERLY-CLARK, BOSTON SCIENTIFIC, TYCO, among others, establishing operations. Baja California also became a consolidated reference point for aerospace manufacturing, attracting major multinationals such as HONEYWELL, LOCKHEED MARTIN, GKN AEROSPACE, GULFSTREAM, SAFRAN, and others. The automotive industry also established its presence, with major manufacturers of auto parts and heavy vehicles like KENWORTH, as well as the significant TOYOTA plant that today assembles vehicles which are later sold on both the local and international markets.

The list of multinational corporations that arrived, passed through, and remain in the region is extensive, and their business operations generated countless direct economic benefits for the area, such as the creation of many jobs and the generation and payment of taxes. They also created indirect economic benefits for other companies and professionals in various industries, including construction (warehouses, industrial facilities, and even housing), professional services (logistics, customs, legal, accounting), among others.

These benefits were not only economic in nature; the growth of the manufacturing industry in the region also brought about intellectual, professional, and academic development for a large portion of its population. The reason was simple: as the years went by and the manufacturing and production processes of these companies became more sophisticated, it became increasingly necessary for the local workforce to be better prepared. In the beginning, the transfer of knowledge and technology was facilitated by the multinational companies themselves, which not only exposed their employees to new work experiences but also provided training and upskilling courses according to the requirements of each company’s processes. The regional education sector did not sit idly by. During the second half of the 1990s and especially from the year 2000 onward, several private universities emerged, and together with the already existing public universities, began developing courses, curricula, degree programs, and master’s programs aligned with the direct and indirect needs generated by the manufacturing industry. Today, the region’s universities graduate highly qualified professionals in various fields of knowledge, with special recognition given to graduates in technical and engineering disciplines. English as a second language also became a basic requirement for anyone who wished to advance professionally in the region, and today a significant portion of the population has an adequate command of the English language. This unquestionably led to better job opportunities for locals who, as time passed, increasingly filled the most important and technically demanding positions.

During my teenage years in the 1990s, I witnessed how the region’s public infrastructure improved: better access to basic public services (increasingly available to a larger portion of the population), improved roads and highways, and better service from government institutions to their citizens. I am not saying the region made a dramatic leap from the third world to the first, but I do want to make it clear that, in many aspects, I experienced an improvement in quality of life.

Later on, in the 2000s, at the beginning of my professional career after completing my Law degree, I had the opportunity to work for one of the most prominent law firms in northern Mexico (Bryan, González Vargas y González Baz, S.C.), whose main market niche was providing legal and corporate services to multinational manufacturing companies. It was there—already with a more mature professional perspective—where I was able to witness firsthand the benefits that the manufacturing industry brought to the region. The manufacturing industry does not simply create direct jobs and stop there; its economic impact spreads across many other areas of the economy. As corporate lawyers, we advised multinational companies with diverse needs that generated significant business opportunities for the region across many sectors—job creation, new commercial entrepreneurship opportunities, and social development. We advised them in various aspects of their daily operations, which revealed how their interaction with the rest of society and the different economic sectors produced a substantial economic spillover that contributed to the growth of many other areas. I dare say that during those years, the region experienced one of its periods of greatest and most stable political balance (not a leap into first-world status, but certainly a highly significant positive change).

Having shared this brief story, you may now be asking yourself… What does the region of Baja California, Mexico, have to do with our Panama? You might be wondering, “Is the writer actually comparing apples to apples?” You might even find the following thought crossing your mind: “But today’s circumstances in Panama are different from those early years in that region, and the economic and geopolitical characteristics of both places are not the same. Why would the economic impact of the EMMA Law in Panama be similar to—or even greater than—the impact the writer claims to have witnessed in Baja California as a result of similar regulations?”

And I respond as follows: comparisons can sometimes be harsh or unfair, and many people may not like them, but let us analyze: What are Panama’s current characteristics that can be leveraged to boost the development of the manufacturing and logistics industry under the new EMMA Law?

1. Panama is certainly not in a state of economic underdevelopment today. We have experienced better moments, but even now, our economy remains the best positioned in the region. The industries that currently operate and produce in Panama must continue to be strengthened; however, with the real opportunity presented by the EMMA Law to add a new and powerful engine to the economy, we must approach this moment with careful attention.

2. Panama may not be located directly on the border of a major consumer market like the United States, or even one of the major economies of Latin America. However, let us consider this: Panama is geographically positioned at the center of Latin America and, one could say, at the center of global trade. We may not share a border with one of the world’s largest economies, but one of the most important commercial routes in the world passes through the heart of our country. Let us remember that a considerable portion of global trade and goods passes through the Panama Canal— via 140 maritime routes that include our canal and connect 1,700 ports in 160 countries. The key phrase here is “goods pass through.” With the new EMMA Law, this phrase can evolve from “goods pass through the Panama Canal” to “a large volume of goods is collected/exported through the Panama Canal.” Our Canal and its surrounding ports have the potential to transform us from merely a facilitator of commercial transit into a key player as an exporter of goods to ports around the world. Yes, this represents a logistical challenge, but today, with the EMMA Law, it is far more attainable.

3. Will it be difficult to attract foreign investment? Of course—anything good and positive is never easy to achieve. But Panama is no stranger to foreign investment. Today, many multinational companies have already chosen to establish themselves in Panama within our existing special trade zones; companies such as DELL, PROCTER & GAMBLE, ESTÉE LAUDER, NESTLÉ, CATERPILLAR, LG, and others. Yes, it is true that the current operations of these multinationals in Panama are not related to manufacturing; but why could they not also become operations covered under the EMMA Law? Why wouldn’t other multinational companies come for the competitive advantages this law offers, for our strategic geographic location, and for the many other reasons that have already led other corporations to choose Panama as an investment destination?

4. Does Panama not have the population needed to strengthen its manufacturing industry? As an interesting fact, according to statistical data from INEGI based on the most recent census conducted in Mexico in 2015, the State of Baja California has a population of 3,315,766 inhabitants—a number very similar to Panama’s population today. We are enough, and we are capable! As a country with a relatively small population, it should be easier for us to reach consensus and organize the best way to guide this new branch of our economy forward.

I could continue with a long list of advantages, opportunities, and benefits that I see for Panama as a potential manufacturing country. But I ask you, the reader: What opportunities do you see? My intention is not to provide all the answers in a brief opinion piece. Instead, I aim to start a conversation—with and among the various sectors that will form part of this new industry. A conversation that must address questions such as: What do we, as a country, seek to achieve with this opportunity? What direction do our authorities intend to take, and is it aligned with the vision of the business sector—the true creators and drivers of the economy? How can we ensure meaningful technology transfer that elevates the knowledge and skill level of our people? What type or category of manufacturing will we develop in Panama? When do we begin coordinating discussions with the logistics sector?

The new EMMA Law has given us a blank canvas, and our authorities have outlined the initial borders of the painting. It is up to us to create a masterpiece. The invitation has been extended… Let us begin the conversation.

Lic. Alejandro Rivera de la Torre
arivera@riveradelatorre.com
The writer is a suitable lawyer, practices the profession in Panama and Mexico, has professional experience and legal and financial academic training in Panama, Mexico and the United States.
www.riveradelatorre.com
He is also part of the education sector as Secretary General of the Hosanna Universitywww.uh.ac.pa).