Panama was inhabited by several indigenous tribes prior to settlement by the Spanish in the 16th century. Panama broke away from Spain in 1821 and joined a union of Nueva Granada, Ecuador, and Venezuela named the Republic of Gran Colombia.
When Gran Colombia dissolved in 1831, Panama and Nueva Granada remained joined, eventually becoming the Republic of Colombia. With the backing of the United States, Panama seceded from Colombia in 1903.
The Panama Canal was built by the U.S. Army Corps of Engineers between 1904 and 1914. In 1977, an agreement was signed for the total transfer of the Canal from the United States to Panama by the end of the 20th century, which culminated on 31 December 1999.
Revenue from canal tolls continues to represent a significant portion of Panama’s GDP, although commerce, banking, and tourism are major and growing sectors. Panama has the second largest economy in Central America and is also the fastest growing economy and largest per capita consumer in Central America. In 2013,
Panama ranked 5th among Latin American countries in terms of the Human Development Index, and 59th in the world. Since 2010, Panama remains the second most competitive economy in Latin America, according to the World Economic Forum’s Global Competitiveness Index.
According to the CIA World Factbook, as of 2012 Panama had an unemployment rate of 2.7%. A food surplus was registered in August 2008. On the Human Development Index, Panama ranked 58th in 2012. In recent years, Panama’s economy has experienced a boom, with growth in real gross domestic product (GDP) averaging over 10.4% from 2006–2008.
Panama’s economy has been among the fastest growing and best managed in Latin America. Latin Business Chronicle had predicted that Panama would be the fastest growing economy in Latin America during the five years 2010–14, matching Brazil’s 10% rate.
The expansion project of the Panama Canal, combined with the conclusion of a free trade agreement with the United States, are expected to boost and extend economic expansion for some time. Despite Panama’s upper-middle per capita GDP, it remains a country of stark contrasts.
Perpetuated by dramatic educational disparities, over 25% of Panama’s population lived in national poverty in 2013 and 3% of the population lives in extreme poverty, according to latest reports by the World Bank.
Panama’s economy, because of its key geographic location, is mainly based on a well developed service sector especially commerce, tourism, and trading. The handover of the Canal and military installations by the United States has given rise to large construction projects.
A project to build of a third set of locks for the Panama Canal A was overwhelmingly approved in referendum (with low voter turnout, however) on October 22, 2006. The official estimated cost of the project is US$5.25 billion.
The canal is of major economic importance because it pumps millions of dollars from toll revenue to the national economy and provides massive employment. Transfer of control of the Canal to the Panamanian government began in 1999, according to the Torrijos–Carter Treaties of 1977, after being controlled by the US for 85 years.
The Panamanian currency is officially the balboa, fixed at a rate of 1:1 with the United States dollar since independence in 1903. In practice Panama is dollarized: US dollars are legal tender and used for all paper currency, while Panama has its own coinage.
Because of the tie to US dollars, Panama has traditionally had low inflation. According to the Economic Commission for Latin American and the Caribbean, Panama’s inflation in 2006 was 2.0% as measured by weight Consumer Price Index (CPI).
The balboa replaced the Colombian peso in 1904 after Panama’s independence. Balboa banknotes were printed in 1941 by President Arnulfo Arias. They were recalled several days later, giving them the name “The Seven Day Dollar”.
The notes were burned after the seven days but occasionally balboa notes can be found with collectors. These were the only banknotes issued by Panama and U.S. notes have circulated both before and since.
The high levels of Panamanian trade are in large part from the Colón Free Trade Zone, the largest free trade zone in the Western Hemisphere. Last year the zone accounted for 92% of Panama’s exports and 64% of its imports, according to an analysis of figures from the Colon zone management and estimates of Panama’s trade by the United Nations Economic Commission for Latin America and the Caribbean. Panama’s economy is also very much supported by the trade and export of coffee and other agricultural products.
The Bilateral Investment Treaty (BIT) between the governments of the United States and Panama was signed on October 27, 1982. The treaty protects US investment and assists Panama in its efforts to develop its economy by creating conditions more favorable for US private investment and thereby strengthening the development of its private sector. The BIT was the first such treaty signed by the US in the Western Hemisphere. A Panama – United States Trade Promotion Agreement (TPA) was signed in 2007, approved by Panama on July 11, 2007 and by US President Obama on October 21, 2011, and the agreement entered into force on October 31, 2012.