Panama's present-day economic success is intricately tied to its strategic location and forward-thinking economic policies, with free zones as key players in stimulating sustained growth. Beyond the iconic Panama Canal, these designated areas offer an array of incentives and benefits, attracting foreign direct investment (FDI), promoting exports, creating jobs, and fostering overall economic development.
A free zone, essentially a designated area within a country, allows for the import, export, storage, processing, and re-export of goods without the burden of customs duties or taxes. The advantages extend beyond tax-related benefits. Inter alia, they include simplified administrative procedures, access to infrastructure and services, legal security, and preferential treatment for foreign trade. The overarching goal of free zones in general and in Panama in particular is to promote exports, create employment opportunities, attract foreign direct investment (FDI), and foster overall economic development.
Panama's economic prowess through free zones
Panama boasts several free zones, each tailored to specific characteristics and objectives.
Colon Free Zone: The Colon Free Zone stands out as the largest and oldest, positioned on the Atlantic coast near the canal. Functioning as a distribution and logistics hub, it hosts over 2,500 companies engaged in importing and re-exporting diverse products that contribute significantly to Panama's GDP and employ more than 30,000 people.
Panama Pacifico: On the Pacific coast, Panama Pacifico, a modern and innovative free zone developed on the grounds of a former US military base, covers 1,400 hectares. It offers a mixed-use environment, accommodating distribution centers, light manufacturing, and various service activities, including call centers, software development, and financial services. Notably, eight Fortune 500 companies, with 3M, Dell, and BASF among them, have established operations in Panama Pacifico.
In 2020, the Panamanian government approved five new free zones, strategically located across the country. The goal was to diversify and decentralize economic activities. These zones focus on specific sectors like agro-industry, biomass, urban waste management, and trade with Central America.
Panama East Logistics Park: Located near Tocumen International Airport, the Panama East Logistics Park is a strategic hub for air cargo and logistics. Covering a vast area, this free zone specializes in warehousing, distribution, and value-added logistics services. Its proximity to the airport allows for efficient connectivity, making it an attractive destination for companies dealing with time-sensitive and high-value goods.
Howard Industrial Park: Sitting on the grounds of the former Howard Air Force Base, Howard Industrial Park is another important free zone. With a focus on light manufacturing and logistics, it provides a favorable environment for companies engaged in assembly, packaging, and distribution. The park's strategic location near the Pacific entrance of the Panama Canal enhances its accessibility to global markets.
Panama Pacifico Special Economic Area: Distinct from the previously mentioned Panama Pacifico, the Panama Pacifico Special Economic Area is designed to attract a diverse range of businesses. Offering a mix of industrial, commercial, and residential spaces, it aims to create a self-sustained community with a focus on innovation and technological development. It is an ideal location for companies seeking a comprehensive business environment.
Baru Free Zone: The Baru Free Zone in the Chiriquí province contributes to economic decentralization. Established near the border with Costa Rica, it facilitates trade and commerce between the two nations. The Baru Free Zone focuses on agro-industrial activities, allowing companies to take advantage of the region's agricultural potential.
Aeropuerto Internacional Enrique Malek (AIEM) Free Zone: Located adjacent to the Enrique Malek International Airport in David, the AIEM Free Zone specializes in air cargo and logistics. This zone leverages its proximity to the airport to provide efficient transportation links, which makes it an attractive location for companies engaged in the import, export, and distribution of goods by air.
Panama's free zones as engines of development
The impact of these free zones on Panama's economic growth is multi-faceted. Firstly, they serve as magnets for foreign direct investment by providing attractive incentives and a favorable business environment. This influx of foreign capital brings new technologies, skills, and markets, enhancing competition and productivity. In 2019, Panama received USD 6.6 billion in foreign direct investment, with 40% directed to free zones, according to the World Bank.
Secondly, free zones play a crucial role in boosting exports by reducing trade barriers and associated costs, and facilitating access to international markets. Panama's exports of goods and services reached USD 25.4 billion in 2019, with 23% attributed to free zones, the World Trade Organization reports.
Thirdly, the creation of jobs is a direct outcome of free zone expansion. These zones generate both direct and indirect employment opportunities, particularly benefiting low-skilled workers. The Ministry of Commerce and Industry claims that free zones employed over 60,000 people in 2019, constituting 3.5% of the total labor force.
Lastly, the positive effects of free zones extend beyond their immediate boundaries. They contribute to economic development by increasing the demand for local goods and services. What is more, they improve infrastructure and connectivity, enhance institutional quality and governance, and foster the development of clusters and linkages with other sectors. They are important for the diversification and modernization of Panama's economic structure, contributing to social and environmental sustainability.
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