F ILE' CO -- Y

DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

Not For Public Use

Report No. 275-PAN

REPORT ON THE ECONOMY

OF

PANAMA

(in four volumes)

Volume II

Technical Notes on Public Finance

November 13, 1973

Regional OfficeLatin America and the CaribbeanCountry Programs Department I

This report was prepared for official use only by the Bank Group. It may not be published, quotedor cited without Bank Group authorization. The Bank Group does not accept responsibility for theaccuracy or completeness of the report.

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CURRENCY EQUIVALENTS

1.00 Balboa = 1.00 US$

1.00 US$ = 1.00 Balboa

Fiscal Year: January 1 to December 31

REP )RT ON THE ECONOMY OF PANAMA

VOLUME II: TECHNICAL NOTES ON PUBLIC FINANCE

Table of Contents

Page No,

1. INTRODUCTION ....................................... 1

II. GOVERNNENT TAXES ................................... 2

A. Introduction ..................... 2B. Central Government Taxes, 1936-1968 .... ....... 2C. Central Government Taxes, 1968-1973 .... ....... 8D. New Taxes ............ e .. 16E. Future Revenue Projections .22

III. THE GOVERNMENT MANAGEMENT SYSTEM . .23

A. The Budgetary Systei. .23B. The Internal Borrowing System .25

IV. THE PUBLIC AGENCIES' FUTURE TNVESTMENT PROGRAMand FINANCING .28

V. TECHNICAL ANNEX ON PUBLIC EXPENDITURE INCIDENCE ANDINCOME DISTRIBUTION ................................ 32

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I. INTRODUCTION

In Volume I of this report - The Ma4n Volume - there are some keyfiscal conclusions and projections that require further description, Justifi-cation, and anLalysis for those readers who wish to pursue the public sectorLn detail. This volume provides those details. It i's not a comprehensive

retview of the nublic sector or public finances, rather it is a review of thekey issues in public finance.

The first issue stems from the Government's tax system. Panama hashad a relatively buoyanrt tax system, especially in recent years. However,buoyancy is not the same as elasticity. The Government's extraordinaryefforts to increase taXes have been successful. lhis success, however, doesnot mean that iL left unchanged the tax system will continually brirg inirncreasing revenues as a proportion of GDP. The key revenue findin-g of th.enission is that the tax system has been and still is not elastic wnen comparedto income growth. Unless the system is changed, the Government can only con-tinue to receive buoyant revenue growth if it continues to introduce newtaxes. The mission, therefore, has analyzed the tax system to evaluatepossible new taxes.

The second issue is the need for a change in the Government'smanagement systenms. The "Ordinary Budget" no longer meets Panama's needs.hle syste-m of internal borro-ing needs major changes. There is no reason why

a Governrsent w-th over $1 billion in foreign deposits in its own bankingsvstem should borrow in foreign markets at high rates and relatively poorterms. These are major issues. Without better debt and accounting systems,Panantanian planners will be hampered in improving fiscal programs.

The final fiscal issue is the method of financing the public invest-ment program. In the past,Panamanian planners were not in a position toconsolidate the public sector, trace the transfers within it, calculate thereal resources available to each public agency, and estimate the total sublicneeds for the future. The mission's consolidations for 1960 and 1965-1973provide a picture for the past. The Governinent has completed its w.n con-s.olidation for 1973 based on the budgets of all public avencies. Rather thancontinue to estimate the resource -needs based soiely on the executiox ofprojects, so9e of them requiring outlays from two or more agenciea, the yris-sion recommends that the Government pl.an specific prograns for each publicagency. W4hen the prospective resources available to each agency are compiledua decision can th-en be taken to determi.ne which program shou'd be acceleratedoy receiving further resources from thjie Government's own general revenues.The mission's suggestions and assumptions of the revenue needs of maor publicagencies is included in this volume. Official lending agencies could assistin a better fiscal program by requi-ring revenue producing agencies to atter. ttos meet counterpart needs by better management, higher tariffs, or independentbuit orudent borrowing, before requiring that the Government guarantee thecounterpart f-or their own project.

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A technical a-nnex that explains the mission's analysis of the effecton income distributiorn of public outlays completes this volume.

II. GOVERNMENT TAXES

A. Introduction

The Covernament of Panama has traditionally been restricted in thetaxes it could successfully implement. Sone of this limitation came fromthe proximlIty of the free trade area in the Panama Caa.al Zone and from treatyrequiretments. Many of these deterrents have now been removed, but they haveinfluenced the structure of the tax system. Further limitations were iMposedby Panama's traditional and growing impxortance as a hemispheric shopping center.

Until 1936 the scope for goaernment revenues was limited by the in-

fluence of the Panama Canal Lone. Forty percent of the urban labor force wasemployed in the Zone, import tariffs on most consuner durables and clothingwere negligible, since a substantial Žart of the population had access to thePanama Canal Zone commissaries - which imnported goods duty free - eitherthrough family or social ties. Although an income tax had been, enacted in1934, the wages paid 'by the Zone authorities to Panaeians were exempted by theTreaty of 1904. Lonseauently, the burdeen of taxation fell on the rest of bhe_employed population in the Republic, usually at loter wages. Over 530 ercentof tax revenues stemed from imDort d' ties on essential mass consumpotion goalsand another 30 percent from excise tares on gasoline and domestically prodtuicedliquor.

A treaty revision in 1936 be-an the process of change In the roleof the Government. 7This c.ang;e was subsequently accelerated by WorIld War rI,and taee Retmion-Eisenhower Treaty of 1955 The treaties of 1936 and 195i res-tricted t-srehlases in the Comnr.-assaries and rermitted taxation of wages Daid

by the Panama Canal Zone authorities, thus providing a much wA.der tax Dasefor the Central Governmlenlt. W1 orld War 11_ accentuated the benefits to Paraafrom the 1936 revisions since the movement of troops through the Canac lit:the large U.S. de-ense expendtltures in the Zone anod Panama stimulated doyaesticproduction, income, and government revenues.

C Gentral Gave ament Taxes 1936-68

A princi3al characteristec of Central Governmient revenues since1936 has been their cyclical behav,rior in relation to GDP. The ratio usuallyvaried between 12^ and 4 percent. The neric5s of substantial increases inabsolute govern-menrit revenues occured bet-.r ecn 1940 ano 1945, as thre full effectsof the 1936 treaty rev-isions and World T->;r TI reflected on domestic economicactivity: betwy,ee-n 1950u and 19,55 as zl re economy recovered from the post-warrecession; and betw,.-een 1960 and 1965 when the domestic economy grew rapidly.

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Nevertheless, there are indications that revenue growth was not buoyantcompared to GDP. During periods of rapid economic growth, tax revenues in-creased at a substantially lower rate than nominal GDP. At times of slowereconomic growth, governmnent revenues rose more rapidly than GDP. This resultstemmed from the use of specific taxes on imports so import duty collectionsdid not respond rapidly to higher 'Levels of economic activity and imports.Consequently, while total revenues showed little growth relative to CDP, thestructure of government revenues changed notably. Income taxes, wsich res-ponaded positively to ircotne growth, became ar. increasingly important sourceof revenue while Indirect taxes, mainly import duties, become less important.Also, because nontax revenues-including those from the National Lottery,race track, and casinos; - also responded to changes in income, their ownimportance increased.

INCOE TAX COLLECTIONS, 1950-1968

B/mil lion Percent of CDPCorporate Persona' Total Cor1orate Personal Total

1950 - 3.4 - - 1.3

1955 - 10.8 - - 3.3

1960 -- i0.8 - - 2.6

1965 14.4 7.7 22.2 2.2 1.1 3.3

1968 :24.1 13.2 37.3 2.8 1.5 4.3

Source: Tables 2.3, 5.16, and reports of the Controller General.

The share of Central Government revenues from taxation of incolmegrew ten-fold between 1936 and 196g. Since when they were intro&Lced in 1934,Panama Canal Zone wages - the most important wage income in the country - wereexempt, taxation of income in Panama was directed towards corporate %profits.Alth,ough this exemptioan was later re.noved, receipts fror personal iinco-e taxcontinued to be tw in relation to taxation of the corporate secor Aftersome changes in the early 1940's an incoma tax system emerged wnhii appliedthe same progressive scehedule to both corporations aind individuals. As aresult, many companies became legaLly split into smaller ent•ties to takeadvantage of the lower ratio for snall firms. One characteristic of incometaxation in Panama which had sign- ficant implications on the economic struc-ture was that only income earned ln Panana was deciared taxable. Ths servedas an incentive to activities such as commerce, banking and shi?ping, whereprofits could be attributed to foreigrn operations.

Throughout the 1950t's the average elasticizy to GDP of collected incometaxes was 1.98, i.e. a. one percent increase in GDP resulted in a -wo percentinacrease in income tax: revenues of the Government. Emphasis in the early

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i960's was again placed on income taxes. In 1961 income tax rates wereincreased 15 to 20 percent, and in 1962 another 10 percent. Also, startingin 1962 a 40 percent surcharge was imposed on business profits and a 10 per-cent surcharge on personal incomes above B/1,800.

A major reform of the income tax system was made in 1964 after astudy by an OAS/IDB tax mission. The orinciDal change was the adoption ofdifferent tax schedules for corporations and individuals. Rate increaseswere highest on corporate profits. ThIe tax schedule for corporations wasdivided into seven brackets with rates ranging from 5 percent on taxableincome of B/5,000 to 45 percent on taxable income in excess of B/200,000. Aslightly more progressive schedule with rates rising from. 2.5 percent forincomes at 2,500 to 26 percent on incomes of B/100,000 was adopted for taxa-tion of personal incomes. A tax on dividends was also introduced. However,since it assumed an automatic profit distribution of 40 percent, it was morea surtax on corporate profits than a tax on private income from dividends.These measures, combined with an administrative effort, reflected by a tri-pling in the number of tax payers audited between 1965 and 1968, resulted inthe income tax reDlacing import duties as the principal source of tax revenues.

AVERAGE INCOME TAX RATES FOR SELECTED INCOMES(Percent)

Taxable Income Before 1964 After 1964Corporate Personal

2,500 - - 2.5

5,000 3.5 8.2 4.5

10,000 6.0 10.7 6.7

50,000 14.0 20.2 17.7

100,000 20.0 26.2 25.9

500,000 35.5 40.0

Source: Ministry of Treasury and Finance.

During the 1950's and 1960's other direct taxes failed to show thesame buovancy as did income taxes. The administration of property taxes washar,?ered by the absence of an adequate method of valuation. Rural properties,for examiple, were arbitrarily valued at 30 Balboas per hectare and taxedaccording to a progressive sche(lule. As a result many of the large propertieswere partitioned so that the effective tax rate on rural land was very low.Moreover, thie property registry used for tax valuations was generally in-adequate as a basis for urban or rural property taxation, since it was diffi-cult to keep urn to date.

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Import duties, which were the largest source of tax revenue asrecently as 1963, declined steadily as a proportion of total tax revenues ofthe Central Government. Import taxation consisted of two components; a seriescf specific duties and an ad valorum surcharge. The specific duties weretnresponsive to GDP for three reasons:

(a) Legislation was required to change existing duties or addnew ones. This took time.

(b) The revenue orientation of import taxation was gradually supple-mented by Bome specific protective exemptions, duties, and quotas.

(c) Since the specific duties related to quantity, and not tovalue, they did not increase with the rise in import value.

Thus, between 1950 and 1960 a one percent increase in GDP only yielded a 0.89percent increase in additional receipts from import duties when increased ratesare excluded, although imports remained a constant share of GDP. On2y the importsurcharge, which applied a fixed percentage tax on the value of imports indepen-dently of type or quantity,showed a positive reaction to increases in the level ofGDP. This surcharge, howqever, was changed frequently. By 1957 the surchargewas 5 percent on those goods for which there was a specific duty and 8 per-cent on duty-free goods. The surcharge was abolished in 1957, but reintro-duced at one percent in 1959 and raised gradually to 3.5 percent in 1968.During the 1950's, then, import duties grew slightly as a percentage ofmerchandise imports only because of rate increases. When rate increasesbecame less frequent in t6he 1960's, import duties proportionately declined.

REVENUES FROM IMPORT DUTIES AND SURCHARGE IMPORTS, 1950-1968(Percent- of value of merchandise imports)

1950 1955 1960 1965 1968

Import Duties 14.0 15.7 17.9 10.1 9.0

Import Surcharge 4.9 4.9 1.0 1.5 1.9

Total 18.8 20.6 18.9 11.6 10.9

Source: Tables 3.5 and 5.16.

Policy makers in Panama were rightfully cautious when consideringa raise in import duties. The scope for very high taxation of some importsis linited in Panama, where international commerce is such a predominatingactivity. A prime example of this limitation is the duty on imported liquor.When purchases in the Panama Canal Zone commissaries were open,these werenecessarily low. After restrictions were imposed on liquor purchases fromttie Zone, the duties on imported liquor were increased for revenue purposes

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so that by 192 they were more than double their 1947 level. The attempt toraise thetm again in 1962 by 40 percent led to increased smuggling and lowerconsumption so that receipts actually declined. Receipts rose slowly there-after, but the 1972 attempt to double licuor taxes had the same negativeeffect, although this time the smuggling was from the Colon Free Zone, sincethe Panama Canal Zone's liquor taxes already parallelled Panama's.

Thne inTdustrial incentive laws of 1950 and 1957 also had a substantialnegative impact on the growth of receipts from import duties. The 1950 law*grante( imoort dut-y exemptions for capital and raw material imports on returnfor investmients in Panama. The 1957 law restricted the time of exemption to15 years. A total of 44 contracts wYere granted under the 1950 Law and 238contracts under the 1957 Law. Import duties foregone because of these exemp-tions rose to 3/3.6 million in 1962 and B/6.3 by 1968, or respectively 17 and20 percent of actual receipts from import duties. Other fiscal incentivessuch as exermtions from. export taxes, freezing of income taxes (under the 1950Law only) and tariff protection through quotas did not have such a substantialeffect on tax revenues. Income taxes foregone, for example, only amounted toB/1.3 million, in 1968 or 5.7 percent of corporate income tax receipts.

TAX EXEMPTIONS FOR FIRMS WITH INEDUSTRIAL INCENTIVES, 1966-1969/1(Thousand Balboas and percent)

As Per As Per 0Cent of Cent of As Per

Income Corporate Import Total Total Cent ofTax Incom Duties Import Taxes Total tax

Exempted Tax- ExtEpted Duties Exemt Revenue

1966 :,392 7.3 5A102 24.1 6,794 8.81967 1,372 6.2 5,918 25.4 74290 8.41968 1,382 5.7 6,318 28.7 7,699 8.41969 1,375 5.2 7,100 28.1 8,475 8.1

/1 The incomne tax exemnptions for 26 "cor.tract" firms - the beneficiariesof the 1950 Law - were ended by the 1970 tax reform.

Source: Mv!inistry of Treasury and Finance.

Taxes on dom.estic production or transactions also did not respondelastically to GDP growth. During the 1950's these revenues were not usedto their full potential because of administrative problems. For example,although domestic production was initiated in 1953, cigarettes were not taxeduntil 1958. In the latter hatlf of the 1950's taxes on domestic production

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bec ame increasingly concentrated on a few commodities; beer, liquors, ciga-rettes, and gasoline. 1/ By 1960 these commodities accounted for 91 percentof receipts from taxes on domestic production; by 1968 they accounted for 95percent.

TAXES ON DOM4ESTIC GOODS AND TRANSACTIONS

Year B/mil % of GDP

1950 8.5 3.3

1955 9.7 2.9

1960 7.4 1.8

1965 11.9/1 1.8

196R 14.8/1 1.7

/1 Receipts from gasoline tax of B/3.9 andB/5.5 million which were classified asimport duties pri or to 1962 excluded forcoimparative purposes.

Source: Tables 2.3 and 5.16

in sum, in spite of the successful reform of the income tax in '964,PanamaTs tax revenues did not perform particularly well in the 1960-68 periodfrom the point of view of generating additional revenue concurrent w7ith econo-mic growth. Tax revenues rose by 9,4 percent annually compared with a GDP growthrate of 9.5 percent. Thus buoyancy (revenue growth including tax changes) wasabout unity in spite of major reforn efforts. This result was due in part tothe poor perfornance of taxes on foreign trade, vffiich rose by only 3.8 pereentannually during the period, and nontax revenue, wVhioh rose by 7.t) *eercentannually. One elemnent in the poor performance of import duties vWCsS rhe nega-tive effect of- raising the i=,ort duty on liquor in late `962. Mcre fundamen-tally, the slow growth of irmort duties was attributable to the continuingexemptions under industrial incentive l aws and the fact that imDort dutieswere of a specific rather than en a1d valorem nature. This combination of fac-tors meant that although the value o7 reigstered irmports rose by 10.5 percentannually between 1960 and ,968 immort duity receipts rose by only .. 2 percertannually. Therefore, tle tax syster i nherited by the Government wT.iich caneto power in 1968, while relatively progressive because of the high proportion

1/ Gasoline production began in 1962. Previously it was taxed by importduties.

of income taxes, was not approPriate for the expansion of the Central Govern-ment's role in the economy. Since 1950 tax revenues had remained a constantshare of CDTP, about 10 percent, despite several rate increases. Nontaxrevenues remained at about 4 percent of GDP throughout 1960-1968, so allgovernment current revenues were about 14 percent of GDP in both 1960 and1968.

C. Central Government Taxes, 1968-1973

1968- .973 was a period of more rapid revenue growth, as governmentrevenues - including nontax revenues - rose annua7ly on the average by about13.6 percent. in part the revenue growth was associated with booming economicconditions, but an increased collection effort and tax changes were the keysto the rise in the ratio of governmrent revenues to GDP from 13.9 percent in1968 to 15.1 percent in 1972. The first year impact of each change accountedfor about 30 percent of the total revenue growth during 1969 and 1972, or,put another way, revenue would have grown at less than 10.7 percent yearly inthe absence of changes in tax rates and admninistration. I/ Another elementin the strong revenue performance was the growth of nontax revenues, partic-ularly the National Lottery, the race track and casinos and the registry offoreign shipping. Profits of the National Lottery apparently respanded tothe growth in urban workers' incomes, while the casinos' revenue expandedwith the growth of tourism.

in contrast to the 1950's, and even to 1960-68, the 1968-73 periodwas one of urgent demand for government revenues, stemming from large increasein expenditure by the new Government and the decision to expand public sectoractivity. The impact of the Government on the revenue system was reflectedin a number of significant tax changes including:

(1) An increase in both personal and corporate income tax ratesin 1970, and a reduction in the number of brackets used inthe latter.

(2) An intensive effort in administration of the income tax, withthe main revenue impact in 1970.

(3) An increase in the tax on dividends (i.e., corporate incometax surcharge) in 1970.

(4) An increase in cadastral valuation for the urban propertytax, with its primary,if limited, revenue impact in 1971.

(5) An increase in rates for the business net worth tax in 1970.

I. Itf non tax revenues are excluded, the first year impact probablyaccounted for about 35 percent i9 the tax revenue rise during1969-1972.

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(6) A near doubling of the ad valorem import surcharge rate (from3.5 to 6.0 percent), taking effect in 1970.

(7) Steep increases in 1972 in excise duties on beer and domesticliquor, domestic cigarettes, and gasoline; and on import dutieson liquor. In addition a tax on houses of assignation was in-troduced. These tax increases took effect in January and April1972, but the increases on liquor and beer were rescinded inDecember 1972 after disappointing revenue results.

The most successful tax rate and administrative changes were thoserelating to the income tax. Because of the reforms of 1964 and 1970 theincorae tax emerged as the single most important revenue source and the primaryelement in revenue growth. Nevertheless, income tax receipts have shown littlerelation to annual changes in economic growth, as illustrated below, and in-st:ead vary primarily with the externt of a&dinistrative effort.

YEARLY CHANGES IN GDP AND INCOME TAX COLLECTIONS, 1965-1972

Per Cent Change in Per Cent Change in GDPIncome Tax Receints in Current Prices

0 1965 30.5 9.8

1966 33.5 9.0

1967 15.2 11.4

1968 9.2 7.6

1969 9.8 9.8

1970 32.9 10.6

1971 10.1 10.6

1972 0.0 13.4

Source: Tables 2.3 and 5.16.

Of total income tax receipts in 1972, more than half came from thecorporate income tax and surcharge (the dividend tax). The personal incometax filed by taxpayers accounted for only 15 percent of the total, while with-hol.iing on wages and salaries, including those from the Panama Canal Zone,accounted for over 25 percent of the total. Thus the corporate income taxand withholding on government employees and large private firms account for

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the great bullz. of 1nco;ae tax collections. Tne effective taxation of thecornorate sector is shown orn an aggregate level by comparing corporate taxpay-ents to corporate profits as estimated in the national income accounts.The resulting rate of taxation rises sharply from a rate of 21 percent in 1965to an average of 33 percent for 1969-71. Because of the high margin of errorin such aggregate calculations, the seemingly high effective rate was cross-checKed bov anaiyzing data for the 46 largest corporate taxpayers over theyears 1972-1973. Although somze of these finrs have income tax incentives, 45of them show an overall declared eftfective rate on taxable income of 35.8percent in ̀ $972 and an estimated 36.5 nercent in 1973. (The totals excludethe Chiripui Land Company). Another measure of the effectiveness of thecorpoirate income tax is that the taxable income of the 46 largest companiesaccounted for only 186 percent of total reported corporate taxable incore.In stmi, the corporate income tax appears broadly based with apparently littleevasion and a high effective rate.

iLn contrast to the taxation of the corporate sector, however, indi-vidual tax paymnents as a percent of total- wages, salaries, and professionalearnings show a very low effective tax rate, rising from 1.8 percent ofestimated wages salaries, and professional earnings in 1965 to 3.3 percentin 1971.

iNCOM TAX PAYMENTS AS PROPORTON OF CORPORATE PROFITSAND PERSONAL INC0ONE

(Percent)

1965 196^ 1967 1968 1969 1970 1971

Corporate income tax

paymeets comparedto gross corporateproaf .u;) 20,7 25.9 26.7 30.7 36.9 34.1 28,3

Personal incomfe taxpayments cosmaredito personal incoime 1.8 2.2 2.3 2.3 2.3 2.8 133

Source: Tables 2.6 and 5.e6.

The effective corporate taxatio-i has been based on signi: icant rateincreases in recent years. The effective tax rate for a company earning msorethan B/50l,000 rose from 35.5 percent befcre 1965 to 45.1 percent after 1970.Companies with earnings of B/50,000 and B/1OO,0 also had increases from 14percent to 25 percernt and 20 percent to 29.5 percent, respectively. On theadministrative sLde. indicators of tax adyministration effort show an increasein taxpayers aud^ied, especially corporat-iLons, from 497 in 1965 to 3,293 in1970 and i'n delinquent account collections fror 379 in 1964 to 1,718 in 1970.

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After 1970 this effort lessened; there was a distinct drop in both audits anddeliquent account collections. Personal tax collections showed continuedadministrative effort in 1971, when withholding of wages and salaries increas-ed 40 percent. This wjithholding effort fell slightly in 1972, a year in whLichsalaries increased relatively rapidly.

In addition l:o the decline im administrative effort i-n 13727 corporate tax payments were adversely affected by the "thirteenth-month" bonuspayment which had to be made in December 1971. According to corporate taxdeductions, corporate t:axable income increased by only 1.5 percent in 1971,reflecting the fact that the bonus had to be absorDed out of profits in thatyear. Because 1972 cormorate income taxes were generally based on the previousyears' actual earned income, payments in 1972 were correspondingly low. Theoutlook for 1973 was brighter, since actual corporate taxable income rose byat: least 10 percent in 1972. A more important factor behind the renewedgrowth in income tax receipts Jn 1973 is the apparent determination of thenew Minister of Treasury and Finance to renew administrative efforts in theform of field audits, cross-checking of income tax returns with Social Securityand other relevant data, and hirina more auditors and enforcement officers.This action is probably more effective than any other short-term reven.ue effortthe Government could make.

Some major taxes on personal and corporate earnings do not accrue tothe Government. These are Social Security contributions, mostly useo for hos-pital services, and pavroll taxes earmarked for education. These taxes arenot small, and although they divert reEources from the Central Government,they reflect favorablv on Panama's efforts to expand public social services.Panama's Social Security rates are quite siih relative to other Latin Americancountries, with basic charges of 5 percent on the employee and 7-i/2 percenton the employer. In addition an educational insurance plan was establishedin July 1971, financed by a payroll tax of 1.25 percent of salaries r romemployers and 0.75 percent from emr;loyees. L-lke the personal and corporateincom.e tax, tnese taxes fall initially on corDorations, although t2nere isstrong evidence thaey are passed on to the consumer in the form of higherprices ratner than absorbed out of orofits. In 1972 the employeras con.-ibu-tion to Social Security and to the new payroll education tax toget ner wasestimated at about B/16.8 million, or nearly one-half as much as corDorateincome tax nayments for that year and 1.3 percent of GD?, The 1972 dollect ionsfrom employees and employers for both Social Security obligations And theeducational insurance represented about 40 percent of gross corporate profitsfor the previous year. 1/

The oroperty tax is coliected almost entireay in the uzrb.n areas ofPanama City and Colon. A major cadastral survey assessing reaL propertyvalues for these areas was cumpleted in ,970. Compared uo an orig nal valua-tion of B/249 million i.n 1969, property in the two cities is now revalued at

1/ 1972 gross corporate profits are not vet available.

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B/875 million, or a rise of 250 percent. A rural cadaster, completed in 1971and published in 1972, has revalued most rural properties. The revenue payofffrom the urban cadastral survev has so far been low. The new valuationsresulted in an increase in nroDertv tax collections from B/6.9 million in 1970to Bt8.6 million in 1971, a 25 percent increase, ten times less than increasein valuation. The failure to implement the cadastral values effectively andthe continued reliance on the troperty registry system of assessment haveblunted the effect of reform for the urban areas. In rural areas the propertytax has virtually no impact because of the decision to continue applyihg anautoomatic assessment of B/30 per acre to all rural land.

The 1972 tax package; marked a distinct departure from previousconcentration on the income tax. The 1972 package was also more directlyrevenue as opposed to equity oriented than previous tax measures. Unfortunate-ly, it failed to provide the needed revenue. The failure of the 1972 taxpackage was in part based on unrealistic expectations, and in part on aninadequate conceptual framework. The most disappointing of the 1972 taxchanges was the doubling of the import duty on liquor from B/3.50 per literto B/7.00 per liter. Revenue actually fell after the measure was taken inApril 1972 (apparently oxwing to smuggling from the Colon Free Zone), so theduty was drop-ed to B11.50 per liter in December (with a B/1.00 per bottleincrease in the stamp tax to take affect in 1973), This was a reminder thatin Panama the price differential on easily smuggled goods must be kept quitenarrow. The history of import duties on hard liquor attests to this fact.The duty was raised to B/1.90 per liter in 1947 and B/2.50 per liter in 1958with continuing increases in revenue. However, in 1962 an increase in theduty to B/3.50 per liter resulted in a drastic decline in taxable imports andrevenue, which only gradually recovered before the further tax increase in1972.

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THE 1972 TAX PACKAGE

Fates (In Balboas) Additional Revenues for 1972Apr. Dec. (In Millions of Balboas)

Tax 1971 1972 1972 Expected. Estimated

'rotal 18.4 5.6

Beer, domestic(in litres) 0.10 0.20 0.10 3.1 0.3

Liquor, domestic(in alcohol) 0.03 0.05 0.03 4.2 1.3

Liquor, imported(in litres) 3,50 7.00 1.50/1 3.1 -0.6

Cigarettes 0.04- 0.06-(in packs) 0,10 0.14 - 1.2 0.3

Gnsol nef2 0.125 0.222 - 6.0 4.3tgallon--.-

Rouses of assigna-tion/2 8.0-(per month). n.a. 12.0 - 0.8

/1 To accompany the sharp reduction in the tax on imported liquor therewas an increase in stamps from B/1.00 per bottle in 1972 to B/2.00per bottle effective in 1973.

/2 Increase as of January 1972.

Source: MAinistry oF Planning and Economic Policy.

A doubling of the excise tax on domestic liquor in April 1972 wasmore successful, in that a net positive revenue effect was acnieved in thebrief period before the tax was reduced to its former level in December 1972.Revenue from this tax, wghich falls mainly on lower income Rroups, increasedby B/1.6 million over 1972, part of which can be attributed to the rateincrease. The failure of the tax increase to vield the budgeted B/4.2 millioncan be attributed to the fact that production and sales dropped sharply buttemporarily in the months following the imposition of the tax in ADril. Theprice elasticity of demand was far greater than had been assumed in the budget.Another element of the tax package, a doubling of the excise on domestic beer,also snowed a small positive revenue impact from the rate increase before itwas rescinded in December 1972. Again, however, production and sales droppedsharply after the imposition of tne tax indicating, at least for the short run,thtt consumers purchased considerably less beer at higher prices. A further

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exaimDle wvas the increase in cigarette taxes, although of a more moderatedegree than the tax hikes on liquor and beer. Again a small net revenue effectwas achieved but production dropped in the months following the tax hike, in-dicating a combination of smuggling and/or consumer resistance to higher.cigarette prices. The tax increase was retained and preliminary data for1973 indicate increased revenue from this source.

A successful component of the tax package was the increase in thegasoline tax, a commodity which cannot easily be smuggled and for which demandis apparentlv relatively inelastic at this price range. The estimated revenueimpact of this change was about B/4.3 million.

The imract of the tax increases on domestic production is shown inthe fol' owing table:

SAPTLF YONTHLY PRODUCTION AND TAX RECEIPTS O.W EXCISETAX INCRF,ASF

Froduction- Tax Receipts-- (thousand units or Balboas)---

BeerJanuary 1972 3,231 B/258April 1972 1,39/i B/238November 1972 2,345 B/422

Domestic liquorJanuary 1972 166 B/372April 1972 10P B/549November 1972 184 B/880March 1973 196 B/586

Cigarettes.January 1972 497 B/332April 197? 232 B/207November 1972 523 B/495March 1973 427 B/407

GasolineJanuary 1972 5,180 B/830April 1972 4,380 B/1,121November 1972 4,047 B/1,308March 1973 3,17r 9/1,206

/1 Beer in liters, domestic liqnuor by amount of high gradealcohol used in production, cigarettes by cartons, gasolinebv gallons of 7'super" subject to tax.

Source:- Ministry of 7Finance.

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The poor results obtained from the 1972 tax package and the stagna-tion of income tax collections in the same year have led to a more carefulannroach to new tax nronosals by the Government. This caution is warranted.Panama's tax base is very unusual. The historical Derformance of the taxsystem indicates the tax svstem will require further tax changes if theGovernment is to increase its revenues nroportionately to GDP. In consider-ing these changes, the following conclusions may be helpful:

(1) Because of the past emphasis on corporate income taxation, thecorporate sector is relatively efficientlv taxed.

(2) The major area of income tax evasion may be personal incomenot subject to withholding. This suggest the collection effortof the CGovernment may be usefully expanded into checking theincome of the mans professionals, merchants, and other self-emploved individuals in the two terminal cities. Until evasionis reduced, raises in the nersonal income tax would onlv affectemployees of the government, of the Panama Canal Zone, and largecorporations.

(3) Taxes on easilv-smuggled goods should be increased with greatcare. Rather than assure a nerfect price elasticitv for thesegoods, fiscal experts should start with the assumDtion that anoticeable increase in prices on these goods could Droduce avery inelastic consumption and revenue resDonse.

(4) Panaama's tax s;'vste.m is verv resTonslve to administrative efforts.Tax collectiorns on both corporate andt nersonal incomes varyquickly Twhen ciuditin2 and other enforcement changes are m.ade.Not only is there an untanped source of nersonal income taxreceIpts not being collectede. b-ut 4it would appear that collec-tion of thin t:ax will require a continued collection effort.

(5) Corporate profits are taxed bv the Social. Securitv Svste,m andfor an educational insurance scheme as Nol'1 as hv the CentralGovernment. 'Since cornorate income tax receipts are a largepronortion of government tax revenies, any change,ps in thesesocial taxes shoulid be carefullv reviewed to assess thelrimpact on Governrent revenues.

(6) Chano(es in the land tax svstem could nowr 'e made for in-creased reve-nues. A revaluation of the fast-growinTtprminal cities has been cormleted,. and rural land vralueshave been assessed. IThile tiis change would be iusti-Li e.for reasons of equity, will bring in only a rnoieraraamount of revanue. Even a rise in landi tax collectionsin 1971 commensurate wit-a the urban revaluction ( -'.eD bV250 percent) would6 nave 'lrought in only B/8.6 million more;5 nercent of the revenuies for th-iat year. Future increaseswotildi be slow,er thereafter unless freniuent revsluattons

* were made.

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(7) The low specific tariffs on most imDorted goods and theneed for Panana to increase taxes on most goods slowly,leads to the concltusion that some form of sales tax orincreased import tariff would he suitable for increasingtax revenues.

m. New Taxes

One broadly based tax measure with a high revenue potential couldcor.e from a restructuring of imnort duties from specific to ad valorem rates,with selective increases in rates. A detailed study nor exists that wouldallow the Government to make this change. However, an examination of thenotential base for a sales tax indicates that the gross value of domesticmanufacturing is now as large as the value of finished imported goods. Unlessthe Covernment vishes to increase protection, an increase in import tariffswould need to be accompanied by a domestic sales tax. Therefore, althougha change to ad valorem import tariff rates is recommended, a tax on goodsshould be designed to affect domestic and foreign goods relatively equally.

There are four major tyDes of sales taxes employed in developingcountries:

(1) A multi-stage turnover tax:

(2) A single stage tax at the retail, wholesale, or manufacturinglevel;

(3) A hybrid retail-wholesale tax similar to that now employed inHonduras, Costa Rica, Nicaragua, and Paraguay;

(4) A value-added tax carried to the retail, wgholesale, or manufac-turing level.

The multi-stage turnover tax has tmdesirable "'cascading" effects,which resuilt in a discrimination against firms or industries with many inter-mediate btuvers and sellers. The single stage retail or wholesale tax createsnot onlv the administrative difficulty of erecting a new tax administrationwhere there exists no sales tax - as in Panama - but also problems in identify-ing all taxpav'rs and administering the law. This leaves three possibilities:

(1) A sin½lv-stage tax imposed on finished imported goods at thectustoms stage and at the manufacturing level on domesticgoods. A licensing system can be devised to identify taxablemanufacturers.

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(2) A hybrid wholesale -retail tax. According to the "Honduras" model,firms with sales above a specified amount (USS30,000 in Honduras) areregistered. The tax is then collected only on sales made by registeredfirm!s to unregistered buyers. 3y this technique sales are taxed either att.?e retail level by the registered seller, or at tlhe wholesale or manufactur-ing level on sales made :'o small, unregistered, retailers. Thne profitmargins of small retailers and artisans therefore remain outside the taxbase. The tax applies to sales of all nonexempt commodities made byregistered firms to unregistered buyers. In addition, certain services sucha inotels, amusements , and restautants are also taxed. In this way liabil-ity for the tax falls on only a limited number of larger taxpayers (1,100in Honduras and 1,900 in Costa Rica) and aministration is simplified.

(3) A form. of value-added tax (VAT). VAT is a tax on the value addedto goods and services at each stage of the production and distributionprocess. The principal ingredients of value added are wages and salariesnaid and profits earned blefore income tax. Although the tax payable byeach enterprise could be measured by the total anount of these separateitems (the so-called additive approach) the "subtractive" technique 1S insteadusuallv employed. The tax is then collected by (1) deducting purcnases ofgoods and services from ret sales and taxing the balance; or (2) the taxcredit device, by which the tax paid on purchases is set off against thetax payable on sales. If a deduction (or tax credit) is given for thefullL value of investment goods at the time of purchase, the VAT reachesoTIly consumption exDenditure. If the tax is carried th1rough to the retaillevel its base is identical to that of a retail sales tax on consum.ner goodsantd services. Variations of the VAT are employed in Ecuador, Uruguay, and

Exemptions from a sales tax of any of the above forms typicallyinclude food products and some other necessities such as medicine. Theseexemptions help to improve the equity and progressivity of the tax. Servicesm.ay or may not le exempted, primarily on the basis of administrative considera-tions. Hotels could probably be included in a sales tax base, for example,hut financial services such as banking have typically been excluded becauseof tne difficulty in calculating value added. Capital goods are usuallyexem pted in developed countries, but in Panama the payroll taxes on laborand import exemptions for capital poods have probably favored capital-intensive production oethods. To reverse this trend a sales tax in Panamacould tax capital as well as consumer goods.

Thie rate of the ihybrid w-lolesale-retail sales tax is 3 percent inhonduras aind 5 percent in Costa ica and Nicaragua. The total rates ofthie VAT in Latin America vary widely, from 4 percent in Ecuador, '80 percentin ruguay and 16-17 percent in the states of irazil. One important factorchat favors botLi the VAT and sales t.axes is that rates are administrativelyeasy to raise gradually.

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.e easiest form of sales tax to administer is probably the hybridwholesale-retail sales tax (Honduras model), since the number of taxpayersa'nd anount of calculations are -minimized. This type of tax discriminatesil favor of small businesses, which are not taxes on their value-added.Because the Government of Panama htas no established sales tax administrationand it wishes to assist small businesses, a tax of this type miay be the, mostefficientv

Data on the gross value of industrial production are not availablebvonc 1970. Thae SITC groupings do not allow a precise judgement on how muchof manufacturing -roduction is in finished products so it was assumed thatill production-, was of finished goods. While this assumption tends to over-

state the base of a sales tax, if the tax were carried beyond the manufactur-ing level to larger retailers, as in the Honduras model sales tax, tniscalculation- would understate the potential base since the margin of retailersWould be addend In order to bring the value of the base approximately toI972, -c 20 percent m.arkup was :-sade on the 1970 value:

Cross Value of TIndustir-al Y4anufacturiing,, 1970(t:housands of balboas)

1970

Food products (exempted) 110,030

.,everages 29,000Tobacco 10,101

Iothing 22,691wood products excent furniture a,902Furaiture 8,942Paper products 14,645Puib lishing (exempted) 12,1117Animal products (cuero y piel) 1,014Ieatlher 724Chemical products 13,714Nocnzmetallix mineral products 22,042Basic r.etal products 7,484ietal pro3ducts, except transport equipment 14777

.a ch.inery, except electric 559I'ectric ofachinery 1,150

Transport machinery 1,156siverse "ianufacturing 79, 990

Total 5 ,529

^inus exemptions -122,147

Total 1970) ',ase 234,382

Plus 20 percent to 1970 value 46,876

Total estimated 1972 base 231,258

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* Ikorts of Finished Goods, 1972(thousands of balboas)

1972

Food products (exempted) 33,777Beverages and tobacco 2,928

hiler.Lical products (one fourth exempted) 40,393Manuf actured roods 89,222Mfachinery and transport materials 112,846Diverse manufactured articles 46,166

Potal 325,332

1'inus exemptions -438-75

lotal 1972 base 281,457

Ankproximate Sales Tax Base, 1972(thousands of balboas)

&pproximate domestic base: 281.,258Approximate mnport base: 2819457

Approxi-mate total base: 562,715

With an approximate base of r'/550 million, a sales tax at a 3percent rate would ideally have yielded B/16.5 million in 1972. Neverthe-less, some slippage fromr evasion and initial administrative difficultuiesshould be expected. For projection purposes tne miassion has estim.ated thisslippage as about equal to tthe pro-bable ri'se in the tax base between ,972and 1975, the year of suggested iLm.plementation. If the Government decideson this tax, it can calibrate the tax by modifying the initial rate, aswell as the scope of exemiptions.

Some other tax changes could be made before 1975 to brin£ in acdded revenueearlier, although their revenue implications are relatively modest.

1. Simplification of corporate income tax

At present tha coroporate income tax consists of five brackets.TLis could be changed to a singLe flat rate of 45 percent for all firmswitch taxable income a7bove 3/30,000 per year, and a rate of 20 percent- forsmnall businesses earning less than 3/30,000 per year. Some posi.ive revenueeffect, perhaps of the order of B/S million coulc be expected from thecaange, since sizab1e a.mounts are collected in the 3/30,000 to 3/* ,000G

- 20 - 20~ ~~

bracket where the average rate would be approximately doubled. In addition,firms in the B/100,000 to B/2001000 range could have a sizable increasein rates. 1/

Present Corporate Rate Schedule

Income Bracket Number of Amount Paid in 1972 Marginal(Ba1boas) laxpayers (In thousands of balboas) Rate

Up to 15,000 3,086 2,971 10

15,000 to 30,000 516 1,961 20

30,000 to 100,000 474 6,272 30

100,000 to 500,000 77 3,702 .45

Over 500,000 56 9,562

Total 4,209 24,469

The data above indicate that the present revenue loss from larger firmssplitting into smaller firms to avoid higher brackets may not be veryimportant in the aggregate, although it could be significant for particularfirms. Although a simplification of the corporate tax might well be inorder, previous analysis hias indicated that the modern corporate sector istaxed quite effectively and more emphasis should be put on a greater collectionof personal income and property taxes.

2. Annual excise or motor vehicle license charge on passenger automobiles

At present an annual motor vehicle license charge is levied bythe municipalities. The license fees vary according to the type of vehicle,ranging from B/26 for a five-passenger private car to B/242 for the heaviesttruck. Because the fee for passenger cars is relatively light and anadditional charge would not be a burden on the cost of transport for com-m-ercial goods, anid annual excise tax with revenues to be received by thecentral government rias been suggested. The existing municipal tax couldbe retained and perhaps administered together with the national tax, as themunicipalities cdepend on this source of revenue.

An excise tax on automobiles faces the problem of establishingthe value of a cars or alternatively taxing by weight. A plan that hasseen suggested by Professor Charles YfcLure is the following:

/ The average effective rate under the present schedule is 10 percent forearnirngs of B/5,000, 10 percent for BP10,000, 21 percent for B/50,000,25.5 percent for B/100,000 and 4t.A percent for 3/500,000. These ratescompare with the suggested flat rate of 45 percent over B/30,000.

0

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Passenger Vehicles by Weight in Pounds

(Percent of basic fee to be paid)

qLe in Years Under 2,000 2,000 to 3,000 Over 3,000

0-3 70 85 100

3-6 60 75 90

6-9 0io 65 80

10 and over 40 55 70

A basic fee of B/50 per passenger car, with an exemption for taxisand other commercial vehicles, could yield approximately B/1 to 2 -;.illion.

3, Increase in aut:omobile import tariff duties

An increase in automobile duties would tax consumption goods whichcannot easily be smuggled. At the same time the growth in imports ofautomotive vehicles indicates that this revenue increase would have a highfuture income elasticity.. From an equity point of view the tax increase alsoappears sound, as private automobiles are bought by the relatively affluent.

Present and proposed tariff rates are as follows:

Automobile Tariff Rates

Tariff No. f.o.b. va]ue Import Tariff - Proposed Tariff 1,

7.32-01-01 under B/1,500 22.5 307.32-91-02 1,500 - 2:,200 27.5 407:32-01-03 2,200 - 2,500 30.0 457.32-01-04 2,500 - :3,000 50.0 60732-01-05 3,000 - 3,500 60.0 70732-01-06 over :3,500 75.0 80732-01-07 used avg. 25.0 same

Import data show that raore than half the revenue and an even greater propor-tiorn of units imported come from the three lowest value classes. Thus, togain new revenue, rates in these categories must be increase significantly.b3y the same token, rates in the upper categories are apparently high enoughto have cut off imports, so that proposed increases in the upper categoriesare not as great. Final:Ly, rates for the category of used vehicles arekept the same as an equity consideration. To prevent abuse of the "used"category, rates on used automobiles above a certain value might be giventae same value as new automobiles in the same bracket.

* 1/ Basic import tariff, not including import surcharge.

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E. Future Revenue Projections

During 1960-1972 the buoyancy of the government revenues comparedto GDP growth was 1.16; i.e. for every one percent increase in GDP, therewas a 1.16 percent increase in government revenues. When the tax changesare taken out, however, the true elasticity was 1.07. During 1968-1972 thebuoyancy was 1.20, but the elasticity was only 0.86. For projection purposes,the mission chose an elasticity of 1.05 after 1975, since it was assumedthat policies which led to the poor performance of income, property, andaomestic excise taxes would not be repeated. Tables 5.35a to 5.35c inVol=me IV show the past elasticities and buoyancies.

The projections of government revenues for 1974 and 1975 weremade by individual taxes. The first projection assumes close to the normalelasticities and a 12 percent yearly growth of GDP in nominal terms. Thesecond projection assumes a 10.2 percent nominal GDP growtA in 1974 and9.9 percent growth in 1975, but increasell collection of income taxes amount-ing to B/I nillion yearly because of more effective collection programs.The two projections are given below:

Government Revenue Projections

(million Balboas)

Est. 1973 1974 1975

Current Revenues:

Projectioh 225.2 253.3 285.7Projl ection II 225.2 251.1 278.2

Of which:

income Taxes

Projection I 69.5 73.7 89.1Projection II 69.5 78.3 87.8

Taxes on Foreign Trade

Projection i 47.3 51.2 55.5Projection II 47.3 50.9 54.6

Taxes on Domestic Transactions

Projection 1 33.5 38.2 42.9Projection II 33.5 37.7 41.4

Source: Tables 5.35a to 5.35c

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The difference between the two projections for 1975 is only B/7.5million; less than 3 percent. The mission has obviously chosen the more con--servative estimate for use, since it is expected that real GDP growth may beabout 7 pe:-cent in the future, plus 5 percent inflation. Inflation hasreached a hiigher rate in the recent past,but it may come downi in the future ifmaj,or currencies are not realigned and no major wage increases are putthrough. New taxes producing B/ 3 million in 1974 and a 3 percent salesta> providing B/ 16.5 million in 1975 were added to this. ase projection toarrive at the total revenue potential used in the maiin report.

III. TEE GOVERNMENT MANAGEUN-T SYSTEM

Panama now has a relatively high quality of competence in most keyareas of public service, but the rapid growth of the Panamanian pU-3blic sectorhas strained its management capability. As in many rapidly developing coun-tries, there is a need for more trained middle-level managers in the zoublicsiervice. The rapid expansion of the publec sector has accentuated this problem,but Panama's growing university population and relatively good use oL consul-tants leads to the expectation tihat this shiortage can be overcome gradually.

The wage level freeze since the mid-1960's has created some inequi-ties in government salaries, sirce off 4cials and teachers hiave bee: promotedintno higher level positions, often nmerely as a result of their own office orminiLstry s ability to expaind its budget. The Government is aware of thisproblem and expects to review all governient positions in the near `Zuture,An improvement in persennel and wage equity will be most useful if it can beaccompanied by an equal improvement in some crucial areas of thie Government'smanagerial syster.

A. The Budgetar: System

Budget management by the executive branch, of Government is a rela-tively new process in Panama. lTnti' 1L94 there existed no formal or compreMhensive governritent budget. Each Ministry was allocated sumrs ind-vidua'llyfrom the general revenu:es by the legislAature. Unti'L 1961 th,e "Oreinary BudRet"was prepared by the Controller General s Office, wliichr answered rirectl.y c,the legislature. The same off ice controlled the executior of the oudget andreported the resillts annua&lly to th,e iegislature. Even after 1961, whIen thePresidency drew up the Ordinary Budget, the Controller General remained incharge of its execution and reported the results to the legislature, not thePresidency.

The Panamanian Budget resemoles tihe Dudget systemn used We rcany UnitedStates states. Current: outlays, government debt service, aned nainor capitalexpenditures are included in the bucget but major inves.lment ?ro_ects areconsidered, approved and accounted for separately. All these latter projectsare financed totally by borrowing. By law, budgeted Ordinary Expendituresmust equal the expected Ordinary Revenues (virtualiyv all current revenues),

0

24 -

and while the resulting def icits or surplus of ordinary revenues and expendi-tures are carelully analyzed by the Controller General, capital projects andtile borrowing for them were until recently not given as much fiscal analysis.In any event, until the mid-1960/s these capital projects were a relativelyminor portion of government outlays.

Iuring the 1960's wnen the legislature found it difficult tobalance its Ordinary Budget, it responded by excluding some expenditure items.The most important expendit-ure item was the Social Security obligatiorio owedbv the Central Government for its empl oyees. As a result, the Social Securitybecame a major creditor of the Government. After all-owing these obligationsto accrue up to Bi/ 20 million in non-interest bearing notes, the Governmentrefinanced them with a bond issue. Some capital items were transferred outof the Ordinary Budget when official lending agencies were assoclated withthe investmernt program. After 1968, the Government excluded virtually allcapital outlays from the Ordinary Budget and rapidly increased governmentinvestment.

A Comparison of Ordinary and Total Expenditures in Selected Years(Million balbaos)

1960 1968 1971

Ordinary Total Ordinary Total Ordinary Total

56.1 68.3 118,6 140.1 145.4 240.9

Note: Amortization payments excluded from both expenditures.Source: Controller General's Reports and mission calculations.

The difference between Ordinary and Total Expenditures, which averaged abouttwenty percent of Ordinary outlays until 1968, rose to two-thirds by 1971.

Between 1968 and 1971 the Controller General's office did not attemptto control or review the government's capital outlays. For these years onlythe Planning Office attempted to review the execution of these expenditures.iTlis office was not trained or equipped for fiscal accounting. There was nodetailed fiscal auditing of a large proportion of the Government's capitalexpenditure. Mioreover, even the actual expenditures were not carefully cal-culated, Some capital outlays financed fron grants were excluded from expen-diture amounts; some irports for direct government use financed with suppliers'credits were not included in the capital budget; and amortization obligationsexnected to be refinanced xwere excluded from the Ordinary Budget. In 1972,the Controller General's Office resumed control of accounting and auditing

capital outlays.

~n s_ta of clear Lmoproveurients, ttiere still exists a large infor-ma-ion Cap tc be overcome, The present budgetary system, an inheritance ofthe past has part.ially contributed to some of the following results:

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1. Many officials - except those in the Planning and Finance Ministriesand Controller General's Office - are not aware of the total govern-ment budget and the total resources needed to cover it. An OrdinaryBudget deficit of B/ 10 million is occasionally discussed when theactual total deficit is ten times larger. Until all officials areaware of the total outlays and resources of the Government, itwill be difficult to conduct an austerity program over the longerterm;

2. The budgeting system partially leads to the difficulty in increa-sing government savings. Now that virtually all Ordinary outlaysare current ones, it may be difficult to convince some authoritiesthat rises in Ordinary (current) revenues are needed if the OrdinaryBudget can be balanced;

3. The complexity of the system is now such that the budget isdifficult to comprehend fully unless one is an expert. There islittle knowledge of the level of total capital transfers; theSocial Securit:y's financial position is often misjudged; a d cashand accrual accounting have been mixed together; and

4. The budgeting system tends to a continuation of a policy offinancing counterpart for projects executed by the Government withofficial lendi.ng agencies' assistance out of borrowed counterpart,since all capital projects are excluded from the Ordinarybudget.

The Controller General's Office has recently computerized thebudgetary system. By working more closely with the new Ministry of Planningand Economic Policy - whiich includes the Budget and Planning Offices - theController General's system has been able to include most capital items in:lts computerized review. To complement this effort, it would be most usefulif the Planning Hinistry could continue its efforts to compile an integratedg3overnment budget - split into current and capital portions - which would bereviewed in detail by the Controller General as all outlays were made.

B, The Internal Borrowing System

Because Panama uses the U.S. dollar as currency, there is littledifference between internal and external public debt. With the exception ofsome debt owed to the IBRD, all public debt is denominated in dolIars, Thereis a difference, howeverr, between the government's management of its internaland external debt. The difference explains why, with the exception of forcedborrowing from the National Bank and Social Security System, the Government'srecent net internal borrowing has been negative.

Panama has no Central Bank; hence the Government has no entity whichcan. be used for unlimited domestic borrowing. In partial compensation Pana-manian Governxments have traditionally turned to the National Bank of Panamab

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the Social Security System, and suppliers and contractors to the Government.The National Bank operates similarly to a private commercial bank, but it isgovernment-owned and the sole banking depository and lender to the publicsector. The Government has used overdrafts at the National Bank for finan-cing its Ordinary Budget deficit, and short-term loans for financing somecapital outlays. Both the 'nterest-free overdrafts and shlort-term bills havethen been turned into long-term loans at 6 percent interest, even when theNational Bank was fLorced to borrow funds at 8 percent to finance these loans.The amount of goveriunent bonds and loans held by the National Bank rose fromB! 4.9 million at the end of 1968 to B/ 30.8 million by the end of 1972.

The Government's borrowing from the Social Security System has beendiscussed in the main volume. The short-term bills extended the Social Secu-rity System in lieu of the Government's employer obligations, are periodicallyturned into 20-vear bonds at 6 percent interest. Beginning in the mid-1960'sthe Goovernment began extending notes to the Social Security System for theamount withheld from employees for thieir own quota obligations. By the enidof 1972, for example, B/ 1249 million of Social Security's current assets ofB/ 18.9 million were in these short-term bills. B/ 88.5 million of itsinvestments were in government bonds; all 20 years or more in maturity andnone carrying an interest higher than 6 percent. B/ 9.4 million more were inlow interest bonds owed by other public agencies, mostly IVU. As a result,56 percent of the Social Security System' s assets were in public bonds orbills which could only be sold at a substantial loss.

The third market for government internal borrowing has been domesticsuppLiers or contractors. Capital projects not associated with lending agen-cies have been financed with internal bonds. Rather tharn sell these bondson the open market, however, the Government has issued them directly tocontractors in payment of their bills. These bonds usually have a 20-yearmaturity and pay 6 percent interest. Suppliers of office supplies arnd otherequipment were often not paid regularly. After a delay varying from 6 monthsto a year, they were issued bonds - usually with a 3-year maturity and 6 percentinterest. In early 1973, holders of time deposits in the conmercial bankingsysteml were offered up to 8 percent by the banks, and commercial loans bybanks were made at rates varying between 9 and 10 percent. As a result, evenmedium"terr- government bonds held Dy private suppliers, sold at a varyingdiscount which never was lower than 15 percent and is usually around 30 per-cent,

Reco,nnizing that many bonds were sold wqell below par, the Governmentchanged its amortization system. Rather than pay a coupon when due, or holdan annual lottery of bonds to be redeemed at par, the Government lholds auctionson bonds held by the private sector. Bids are periodically requested frombond holders, The bondholder who will accept the lowest redemption pricehnas his bonds redeem.ed at t'hat pr ce Then the other holders have theirbonds redeem:ed at their offered price until t'ie funds allocated for bondredenptions are exhausted. Occasionally eTSren bondholders of expired bondsmust wait for payment if funds for redemt.i,ion - determined by the budget - areexhaustec before their turn for redemption at par is reached.

- 27 -

Internal bonds, tlhen, are not willingly accepted by private Pana-iranians at their par valuae. Only the Social Security System and the Naatio-nalBank accept goverrnment bonds willingly. The rapidly-growing banking system.rill accept only a small amount of bonds at par from the Government, and

only as a "public service." The issuance of bonds to private persons a-ndbanks has declined rapidly as interest rates rose and a higher proportLonof the government's inivestment was associated withi of ficial lendingr agencies,which require counterpart payments to contractors to be paid in cash. Prio-rto 1968, the Government wqas usually able to float about B/ 5 to 6 million i,bonds outside of tht2e Social Security System. During 1970-1972, this amouintwqas halved and the net internal borrowing from the private sector was negative.

At the same time that thie Government was not borrowing domesticallyit was borrowing heavily from foreign private sources; rore tnan $45 millionyearly during l969-1973.. While a Panaman4an branch of a multinational bankwas declining purchase of a 20-year bond at 6 percent interest, its horae officewas accepting 5 year bi:Lls carrying an effective interest rate of 1C percentor higher. Since the Panam.anian currerncy is the U.S. dollar, and bank; flowsare unregulated, this was a natural and logical action.

To improve the internal creditworthiness of the Government, thefollowing steps miglit be considered:

1. Dropping the direct link between rrojects or purcnases and bondsor bills. if the Government were to pay cash after the normalcommercial term. i ts purchasing cost would be reduced. Sominecontractors have allegedly offered bids about 30 percent lower forprojects associated with lending agencies (i.e., which would bepaid for in cash) than for similar projects financed solely withdomestic rescurces (i.e., paid in bonds);

2. Offer higher interest and shorter maturities; and

3. Redeem bonds at par when due.

T'nese actions could be complemented by some administrative changes.Since the Treasury 'linfistry has more expertise in estimating approoriate tennsfor bonds and the potential market, the domestic borrowing cou1 L be trans-ferred from the Controller General's OCf fice to that ministry, Once a totalbudget systerm is established and thle borrowing needs knowin, the rmi.nistry couLdthen issue bonds with terns attractive to the market, and place tul- receiptsin a special fund at the disposal of the Ministry and Controller Ceneral'sOffice. As soon as the creditwortainess of publ-ic bonds is esLa,-hlisned,other public agencies - i.e., IRHE, the telephone corporation, t. new publicmortgage bank - could use the same systemi. Moreovert by establishing i tsability to borrow from the Panamanian private sectors thue Governmaent canreduce its borrowing directly from the National Bank or gay it tne establishedmarket rate of interest. The borrowing from the Social Security is not impru-dent as long as it is understood that the Social Security System and itsmesmbership are subsidizing the Government. To understand and plan betterthe magnitude of this borroiing, the obligations owed cou'ld be included inthe government budget and the borrowing recorded as a financing item.

28 -

IV. TrE PUBLIC AGENCIES' FUTURE LNVEST11ENT PROGRMS 4ND FINANCING

This section explains the financial assumptions underlying thefinancing programs of each public agency. The Central Government investmentsand financing are outlined in Volume I and the details given in Tables 5.36to 5.38 in Volume IV. Table 5,39 to 5.47 in Volume IV present the financialforecasts of each agency that accaimpany this description,

Because of the rapid expansion of the autonomous public agencies,it has been difficult for planners to assess the size of their future require-ments. The Ministry of Planning and Economic Policy has been graduallyincreasing its knowledge and control of these agencies'operations. To assistit in considering the future needs of the major public agencies, thiis technicalsection discusses some of the key assumptions made by the mission in itsprojection of the individual public agencies,

The total public investment proJections and financing have beencompiled from the suggested government investment program (table 5.38) andindividual programs for the public agencies based on the following assumptions:

Social SecuritZ stem: The two key assumptions made on the futureof the Social Security System depend on a Government decision to continue tomove the Social Security System into a nat-ional medical scheme and to reduceits private housing mortgage portfolio. The mission assumes the Social Secu-rity System could be turned into tile major provider of curative health facili-ties in the urban areas by assuming financial responsibility in 1975 for allurban general hospitals (i.e., excluding small clinics and the tuberculosissanatorium) now run by the Ministrv of Health. This move would allow theMinistry to concentrate on preventive medicine and rural medical facilities,paying the Social Security System for treatment extended in the latter'shospitals for those few patients not covered by Social Security. The missionestimates that the cost of running these hospitals would be about B! 10 millionin 1975, so a corresponding amount was deducted from the 1975 governmentcurrent outlays and added to the Social Security System's costs. BecauseSocial Security coverage of new workers has expanded rapidly in the recentpast, the coverage ratio may grow slotier in the future. The mission estimatesthat the Social Security System's current revenues would grow at about 9 per-cent yearly; 3 percent yearly from wage raises and 6 percent from the normalwork force expansion as well as a slight increase in coverage (2 percent)yearly. Because outlays on new programs peaked during 1970-1973, and theabsorption of the urban general hospitals should bring some economies, theoperating expenditures were projected at a 10 percent growth rate .- excludingthe additional B! 10 million cost in 1975 - two-thirds the 1968-1972 rate.The capital revenues are consistent witsi the Social Securities' housing port-folio (minus that portion passed to the new public mortgage bank), the publicbonds held in 1972, and new ones from lending to the public sector in thefuture. All future financial investments are assumed to be in 15-year govern-ment bonds, so the private capital revenues decline slowly as mortgages arerepaid.

- 29 -

After the rapid expans-.on in hospital construction during 1970-1973,the fixed investment is expected to decline to B/ 2.5 million in 1974 fromB! 8.5 million in 1973 w:hen the Panama City hospital was virtually completed.Renovation of newly-acquired hospitals should require an average of aboutB/ 5,0 million yearly after 1976, The consolidation of the urban hospitalsystem may allow future major urban hospital construction to be phased withinthese suggested limits. According to these projections, the Social SecuritySystem would have about B! 10 million yearly for gross lending to the Govern-ment; about half the obligations owed it from the Government for its employees.

Civil Aviation Directorate: Since tne IBRI appraisal report mayhave been on the conservative side when projecting air traffic at Tocumen,the. mission increased the traffic and revenue projection by 606 percent toreflect performance for :1972 and the first semester of 1973. Current expen-diture projections were increased by 3.7 percent to reflect the same perfor-mance. The Tocumen airport will probably be completed in 1976; thereafterDAC should have sufficienat funds to spend about B/ 1 million yearly on impro-ving Tocumen and smaller airports and repay a growing amount (from B/ 0.5million in 1977 to B! 1.5 million by 1980) of past no-interest loans to theGuverrnment. The projection is quite sensitive, If DAC spends twice thissm.all investment, it mus-t borrow fdr all of it or its repayment on the pastgovernment loan would be negligible.

Colon Free Zone: The mission's projection is partially based ontAe Livesey, Henderson report on tile Free Zone. 1/ Because it is now clearthat the Colon Free Zone will not be ab'le to undertake a major physicalexpansion iato the Panama Canal Zone area in the near future and is expandinginstead into a smaller area close to the Cristobal docks, the mission acceptedt.Ae second alternative presented by the consultants in their projections -tIe program now being fo:Llowed. The revenue projections of the consultantswere raised by a third to reflect the rent increases of 1972, but the ope-rating expenditure projection was assumed to be the same as the consultants'.Construction costs, however, appear double those estimated earlier, so tlhesewere adjusted accordingly. Borrowing was restricted - as the consultantssuggested - to mortgages on new warehouses. Infrastructure was left to befinanced out of savings, These, however, are insufficient, so a gap averagingB/ 1.5 million yearly remains during 1974-1978 in spite of the conservativeonerational expenditure projection.

The Colon Free one' s rental rates were only raised by about one-tlzird, when the consultanits had implied a doubling of rates would reflect11971 land values. Unless these rates are raised, 4 t will be impossible fortine Zone to declare a dividend to the Government, and it will have insufficientcash by 1978 to assist in fin:ancing a major expansion, supposing the Govern-ment were able to receive access to a larger area in the existing PanamaCana:l Zone for the Colon Free Zone's expansion, By the end of 1972, itscurrent assets minus current liabilities were negative.

l/ Livesey;, lenderson & Partners, "Estudio Para el Deserollo de la ZonaLibre de Colon London, December 1971.

30

Water and Sewerage Institute: IDAAN's financial projections were 6based on , 1973 1DB appraisal report for a provincial water project. Themain changes made by the mission were to assume that the large Panama Citywater project would be finished in 1974, that the IDB project would begin intllat year, and a B/ 20 million provincial city water program would begin in1977, assisted with a $10 million soft loan. Capital outlays after 1974 werephased to rise more slowly (fromr B/ 5 million in 1976 to B/ 10 million in1980) so t0at a yearly government capital transfer of B/ 4 million wouldsuffice for supplementary financing until. 1978, when more will be needed un-less !DAAN7s operating efficiency is im.proved. In spite of nmerous consul-tants and advisers, IDAAN's profits are minimal while its average rates (B!2,00 per month for the average residence) are almost twice those of CentralAmerican countries and Mexico,

Vocational Training _nstitute: The mission assumed that IFARHU.might be again placed in charge of operating the existing vocational schools,IFARIU's portlon of the educational insurance (B/ 5 million in 1974) is assumedto grow at 9 percent yearly. Outlays for scholarship grants are estimatedas about half the revenues from educational insurance, and student loans theother halfe although repayments will slightly reduce the net lending to stu-dents. The Governmeent's annual current transfer, which is reduced from B/2.0 millior. i. 1974 to B! 0,,7 million during 1977/1978 4is treated as aresidual. A capitai expansion of the vocational centers is needed, so a B/5 million soft loan was projected as beginning to disburse in 1976; both fora B! 1.5 million new training center and student loans. If IFAIRU is able tocentralize the vocational and student planning, schLolarship, lendiing, andtraining programs it would be able to not only work more efficienitly, it wouldbe an attractive agency for continual multilateral assistance.

Electrisity and Hydraulic Resources Institute: The financial pro-jections for IREH are based on the 1973 IBPD appraisal report for, a new pow erproject. T- is assumed IRHis telephone and gas responsibilities will beended by 1974, The keys to IRHE's ability to end its need for govenumentcurrent and capital transfers after 1975 are three: (a) a general tariffincrease to take effect in 1975 - which may be needed to ensure that the lega'.minimumi return on capital, 8-3/4 percent, is reached ; (b) no further sig-nificant cost overruns on investment programs; and (c) IRHI's ability to turnto the do aestic bond market to float about B! 7.5 million in domestic bonisyearly during 1976/1977 and B/ 10 million yearly during l978/1980, Thislatter move would be assistea by the Government's efforts to improve thestaniding of its owrn bo-nds.

Tourist Institute: The m.ission assumes the cost of the new co-nven-tion center would be about B/ 7.5 raillion. Wiiile it is being built, theGoverrment is assumed to be able. ,o ensure that IPAT's own minor investmentsare ended and all of its resources applied to tne center, If this can bedone, the government transfers for the center may be hield to B/ 3,7 millionduring 1974-1976. Since Panama is not a final-destiLnation recreationaItourist area, it is assum ed that IPAT's current outlays could be restrictedto a growth of 10 percen.t yearly, ever, with the convention center operations,

- 31

if IPAT concentrated on the convention market and trav'elers arriving inPanamac IPAT now spends '5 times more on its programs than comparable insti-tutions in other Central American countries. If the convention center isoperated at a profit of about BJ100,000 yearly, and the new hotels opening by1976 bring in commensurate revenues to IPAT, then IPAT should be able tospend about B/ 750,000 yearly thereafter on capital projects and end its de-pendence on a current subsidy by the Governnment. Nevertheless, if the twotourist infrastructure projects now pronosed by the Government are implemented.during 1975-1978, about B,/ 9,6 m'llion more in government capital transferswill be needed to complement an additional B/ 12 million of borrowing.These two large projects, however, might be deferred or rephiased, which wouldreduce the transfer requirements correspondinglIv

The Colon Free Zone, DAC, and IPAT are in charge of programs whiche:x31it Panama's best resources - the Canal, the international bankingfaciLitiest and an excellent hemispheric aviatior. network. All three shouldultimately be expected to produce revenues for the Government, rather thanrequ:ire a net subsidy fron the Treasury.

National rtga nk: The budget or program for the new NationalMortgage Bank (BNIO had rot yet been set in early 1973e The financialprojections in Table 5.4c, therefore, depend on the revenue and borrowingestimates from knowm programs. IVU's rents, income from the IFE and SocialSecurity System, the 2/9 of the "thirteenth month" wage increase allotted to

tthe BiH, and a net goverrnment subsidy of B/ 1.2 million a year (mostly fromearmarked taxes not included in government revenues) was added to an estimatedexecution program for the recent $15 million AID loan. It appears that theBELl will have enough resources to expand its net mortgage lending from B/lj million in 1974 to B/ 16 million during 1978-1980, construct some otherbuildings for direct ownership, and guarantee other low-cost mortgages. Itsadministrative capacity will thus be the key factor in its operations. Iftihis can be quicklv improved, the BNlH could probably purchase urban slum landon behalf of the Government, rehabilitate it, and sell it at a profit, eveinif a portion is allocated to low cost housing. For this reason, the BNHmav be an excellent urbana renewal arm of the Governiment. Its success infuture urban renewal will depend more ofh the Government's abilitv to strengthenthe BNH and the new Ministry of Housing than on expanding the financial resourcesfor housing.

University of Panama: The financial projections for the Universityof Panamaa are based on a recent IDB appraisal report, with a 50 percent raisein all student fees added in 1975. The mission also assumes the Government couldamend the law requiring university professors to receive 15 percent yearly-wage increases. The IDE program is assumed to be delayed about one year,eneing in 1976. After that expansion, complemented by the two regional cen-t:ers opening in 1974, ccnstruction outlays are projected to drop until 1980,The Government's current transfer, neverthieless, cannot be held to an 8 per-cent yearly growth. To fill the financing gap after 1976, the transferswould lhave to be raised from B/ 9,9 million in 1976 to B/ 14.9 four years

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later. 1/ This is double the 1973 transfer. The Government, therefore, mightconsider whether it prefers to spend more of its general revenues on sub-sidizing tertiary students assured of later high incomes because of thissubsidy, or on other sectors and adjust student fees accordingly.

V. TECHRICAL INTEX 0-N P.UBLIC EXPENDITURE INCIDENCE ANDINCO IE DISTRIBUTION

There are no reliable estimates of the distribution of incomes inPanama. For this reason, no estimates for income distribution by the usualquintile brackets have been givern in the main report, although one estimate(The McLure "'A" estimate, since it was biased against the mission s ownthesis) was used to test the progressivity of the government tax collections.Instead, regional income disparities were emphasized. This Annex describesthe mission's methodology in allocatirng regional incomes and public revenuesand expenditures. Because there exist three recent estimates on income dis-tribution by national quinti1es, a review of the existing studies is presentedto indicate why they are inapplicable for policy guidance,

For the purpose of the mission 's regional analysis of public expen-diture incidence, tne country was divided into two segments: the "TerminalCities," comprising the Census Districts of Colon, Panama and San Miguelito, 2/and the "Rest," comprising all other districts. The year of the latest popu-lation census, 1970, was chosen for the analysis since statistical informationon various aspects of the country was more readily available than for any _other year of the recent decade and the Government had begun many programs bythat year,

"Public expenditure" refers to the expenditures of the followingagencies: the Central Govermnent (Gobierno Nacional), Social Security System(Caia de Seguro Social), University of Painama, Tourism Institute (InstitutoPanamena de Turismo, TPAT), ,7Hsnan Resources Inst-tute (Instituto para la For-macion y Aprovechamiento de los Recursos HurTanos, IFAEIIU), Water and SewageInstitute (Instituto de Acueductos y Alcantarillados Nacionales, IDAN),Hydraulic Resources and Electricity Institute (Instituto de Recursos hidrau-licos y Electrificacion, IRHE), Colon Free Zone (Zona Libre de Colon), Housingand Urban Institute (Instituto de Vivienda y Urbanisno, IVU), and Civil Avia-tion Directorate (Direccion de Aeronautica Civil, DAC). This set of publicagencies is similar to the "General government" as defined in the new Systemof National Accounts., but there are some deviations, The national accountsof Panama classify only the first foutr of the listed establishments as the

1/ Including the capital transfer, treated as a residual after 1976 intable 5.47.

2/ Out of the total 1970 population of 1 428,000,about 550,000 (38.5 percent)resided in thiese three districts.

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general government." 1! Others are classified as public corporations.However, most of those regarded as public corporations seem to representborderline cases. The exceptions are IDAAN, DAC and IRHE, which are clearlyprofit-making enterprises. The inclusion of these three agencies is the majorfactor causing the deviation of "public expendittre" usea in this report

"2,from the SNA "general government expenditure." -

Other minor decentralized agencies classified as "general goverrumein2tin the Panamanian national accounts and local governments are included onlyto tihe extent the transfers from the Central Goverriment cover. However, thledeviation from the "general government" expenditure due to their exclusionis negligible. These minor agencies and municipalities largely depend on tieCentral Government in financing their expenditures. No provincial Governmentsexist in Panama. The only local governments are municipalities, which arelargely dependent finarncially on the Central Government.

The government expenditure figures were obtained from the followingsources:

(a) Central Government: Controller General, Informrie del ContralorGeneral de la Republica, October 1971;

(b) Social Security System: Caja de Seguro Social, InformeS1970-71; and

(c) Other decentralized agencies: IBRD 1973 economic mission tablesin Volume IV of this report.

1!' Estadistica Panamena, Serie "0", Ingreso Nacionai, Anos 196)6 a 1970.2/' In terms of expendciture, the deviation caused by the inclusien of

IDAAIN and IlPiE is about B! 10 mi1llion.

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The mission made a simple expenditure incidence analysis. Noattempt was made to estimate the incidence of thne benefits of public expen-ditures, which probably differ from the expenditure incidence. ./

After allocating the public expenditures between current and capitalitems,each class of expenditure was allocated to the two regions according tothe location of the direct recipients of the expenditure. For a number ofitems, information on the regional distribution was available in the Con-troller General's Informe. The distribution of other expenditure items wasestimated using various statistical information given in Estadistica Panamena,Panaaa en Cifras, and tables given by decentralized agencies to the 1973IBRD economic mission. The distribution of the remaining expenditures wasestimated on the basis of the mission's observations.

That part of the public expenditure incurred for government overhead(e.g., expenses incurred in connection iith the administration of officesupplies), to foreigners, or to foreign countries, was excluded from the anal-ysis. Some government expenditures are incurred for services to the entirepopulation (e.g., the salary of the President, allowances for members of theNational Assembly). Since there is no way to estimate the regional distri-

I/ The reason is that attempts to estimate benefit incidence are moreimprecise. The benefit of certain types of government expenditurescannot be determined exactly. For example, expenditures for freepublic education can be regarded either as a subsidy to students (ortheir families) for the consumption of education services or as asubsidy for investment in human resources (cf. J. Jallade, "PublicExpenditures on Education and ,ncome Distribution in Colombia", April1973, Draft). From the first viewpoint, the benefit would be equalto the amount of money the students (or their families) are willingto pay for exactly the same education services - the consumers'surplus. From thie second viewpoint, the benefit would be equal tothe increment of the lifetime incomes of the students brought aboutby the free public education. The two interpretations do not lead tothe same size of benefits. Nloreover, neither the consumers' surplusnor the increment in students' lifetime incomes is observable.

There are also problems in quantifying tile benefits of many types ofgovernment expenditures. Ar examn-ple is the expenditure for policepatrol service which prevents a loss of human life. For these reasons,any attempt to estimate the benefit incidence of government expenditurestends to rely on numerous arbitrary assumptions. The conclusionsderived on the basis of those assumptions are not only useless, butoften misleading.

- 35 -

bution of these services, expenditures of this type are also excluded. 2]The expenditure for debt transactions, consisting mostly of interest on publicdebt, was also excluded. Interest payments or commissions to financial inter-mediaries are not incurred to provide public services. 2/

The resulting estimates of expenditure incidence are given inTable 1 of this Annex. The expenditures are classi£ied according to thetype of public service, 3 but expenditures not included in the regionalincidence estimates are also recorded in this table under the "Other" columnheading.

The "income" chosen for allocation between regions was t'le inconeof households (including private non-corporate,non-financial enterDrises andpr:ivate non-profit institutions) less current transfers from the generalgovernment, 4/ Because there is no recent survey of housenold incomes, incomeswere estinated by returns to factors, although - as explained later - this metho-dology suffers from imprecision for more detailed income brackets. 5/

I/ Researchers who wish to allocate these expenditures often adopt one ofthe two alternative assumptions: ri) the services are equally distributedamong all citizens; and (ii) the services are distributed among citizensin proportion to their incomes or wealth. Unless the chosen assumptionis valid, this procedure distorts the pattern of expenditure distribution.In Panama, no evidence has been found to support eithler of these assump-tions,

2/ The purpose of past borrowing was to provide public services to thecitizens in excess of what past governments could finance with itsrevenue. Only the public services rendered in 1970 are accounted forhere; the services rendered in other years do not enter the scope oft'ne analysis.

3/ The classification system was adopted from the GFS Draft Manual (Inter-national Mlonetary Fund, "Draft 'Hanual on Government Finance Statistics",First Draft, January 4, 1973), but with some modifications. In particular,Item 7 "Other Community and Social Services" was eliminated. Tile boundarybetxween Item 7 and Item 3.2.5. "Adult Education, Libraries and Huseumslo,is not clear. In Panama, the Ministry of Education takes care of mostservices falling into Item 7.

4/ The Sahota study (G.S. Sahota "PPublic Expenditure and Income Distributionin Panama". August. 1970: 'Mimeographed) used national income, instead othousehold income, National income includes the incomes of corporationsand government, which do not affect the welfare of individuals d'rectly.For analyzing income distribution, it seems more appropriate to use anincome concept directly related to personal welfare.

5/ Estimates were obt:ained from the following publications: Censos Nacionelesde 1970; Estadistiica Panamena, Serie "C", Ingreso 'Nacionalk ;nos 1969y 1970; Estadistica Paramena, Serie "F. 1", No, 1, Industrias, Ano 1970;Estadistica Panamena, Serie "0", Estadisticas del Trabajo (Encuestas del4ano de Obra), Anco 1970.

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The total national household income was derived from the householdaccounts of national income.

HOUSEHOLD INCOITE, 1970(Millions of balboas)

Remuneration for labor ) 677.4

Income from non-corporate enterprise )Property income 36.4Current transfers fronm abroad 7.8

Income 721.6

Property income and current transfers from abroad were assumedto accrue totally to the Terminal Cities. The residents of "The Rest" havelittle contact with the rest of the world. Few agricultural lands are rentedin Panama, and almost all non-corporate agricultural income accrues to thefarmers themselves. The main source of property income would be urban landsand financial assets, which seem to be concentrated in the hands of the resi-dents of the Terminal Cities.

For allocating income from labor and non-corporate enterprises,separate estimates wTere made for the Terminal Cities' incomes originating inthe 11 output sectors, and the "Rest' s" income was derived as a residual.Salaries received from the Canal Zone were assumed to accrue totally to theTerminal Cities. The income of the Terminal Cities from agriculture, forestryand fishing was estimated using three assumptions: (i) capital consumptionallowance in this sector is negligible; (ii) average net value added perworker is the same in the Terminal Cities and in the "Rest"; and (ii) cor-porate income in this sector is negligible in the Terminal Cities. - Theproportion of workers in this sector was multiplied by the gross value addedat factor cost in the agricultural sector to establish the agricultural incomein the Terminal Cities.

Household income from public administration and public servicesconsists of wages and salaries. The regional distribution of public employeeswas used for allocation, but a one percent mark-uip was added to the TerminalCities' income as an adjustment for the greater concentration of high-rankofficials in Panama City. Almost all enterprises in mining, public utilities

L/ The total- registered capital of Sociedad Anonimas in this sector isB/125 million. Of this, fishery accounts for B14 million, and most ofthis is in Panama District. 7however, the labor share in fishery cannotbe estimated due to the absence of information.

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and finance are in corporate form; .!/ hence almost all household incomes fromthis sector are wages or salaries. 2/ The wage bill for the terminal cities'workers in each sector was calculated from labor figures.

In the remaiaing sectors, income from non-corporate enterprisescannot be ignored. However, data are not available on this type of income.To estimate the labor income plus non-corporate enterprise income from eachsector, it was assumed that average income per worker (including the self-employed and family workers) in the Terminal Cities was equal to the sector'savrerage wage; hence

Sector j income = Sector j wage bill (times) Total Sector j workersSector j employees

1/ In mining, 99 percent of registered capital is in either SociedadesAnonimas or Sociedades Collectivas Limitadas; in public utilitiespractically all registered capital is in Sociedades Anonimas; and infinance, 97 percent is in Sociedades of various types, but SociedadesAnonimas have the largest share.

2/ Except for t'ne distributed corporate profit, which is included inproperty income.

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The resulting income estimates are as follows (in millions of Bal-

boas):

Center Rest Total

Remuneration for labor income 442.6 234.8 677.4from Non-Corporate Enterprises ) - - 6

Sector 1: Agriculture, etc. (10.0) (n.a.) (n.a.)Sector 2: Mining and Quarrying (0.2) (0.3) (0.5)Sector 3: 1-4anufacturing (53.8) (n.a.) (n.a.)Sector 4: Construction (23.8) (n.a.) (n.a.)Sector 5: Public IJtilities (6.3) (1.5) (7.8)Sector 6: Transport and Comm. (116.4) (n.a.) (n.a.)Sector 7: Commerce (55.2) (n.a.) (n.a.)Sector 8: Finance (13.4) (1.7) (15.1)Sector 9: Public Services (53.4) (29.2) (82.6)Sector 10: Other Services (30.9) (n.a.) (n.a.)Sector 11: Canal Zone (79.3) ( - ) (79.3)

Property Income 36.4 - 36.4Current Transfers from Abroad 7.8 - 7.8

Total 486.8 234.8 721.6

Population (thousands) 550.4 877.6 1,428.0Per Capita Income (Balboas) 884.4 267.5 505.3

Because household income was used, the mission's per capita income is about16.5 percent below thte per capita national income in 1970.

* -39-

The table below summarizes the regional distribution of publicexpenditure incidence:

REGIONAL DISTRIBUTION OF PUBLIC EXPENDITURES, 1970

TerminalCities Rest

Population (1J000 550.4 877a6Income (B/Million) 486.8 234.8

C,urrent Expenditure (B/million) 91.4 71.6Per Capita (Balboas) 166.0 82.0Ratio to Income (X3 18,8 30.5

C,apital Expenditure (B/million) 26,0 35.0Per Capita (Balboas) 47.0 40.0Ratio to Income (%0 5.3 14.9

Total Expenditure (B/million) 117.3 106.7Per Capita (Balboas) 213.0 122.0IZatio to Income (%) 24.1 45.4

Both current Cnd capital expenditures are more concentrated in thel'enninal Cities, but capital expenditure is relativelv much less concentrated.

The next table shows the effect of public expenditures on incomedisparity. It assumrnes that income is distributed independently of the inci-dence of public expenditures 1/ and regards public expenditures as the purchaseof goods and services made on behalf of private citizens. That individualsmay not have spent the same amount of money for the same goods and serviceshaad they been given cash transfers, equal in size to the government expendi-zures, is ignored.

I/ This assumption is ofter. adopted in similar situations, but it may notbe strictly valid, "Income" includes government payments for factorservlces to households and private non-profit institutions. Since ageographical concentration of government expenditure incidence tends tolead to a geographical concentration of government employees in the samearea, "Income" in that area would tend to be favorably affected by theexpenditure incidenlce. However, government employees do not necessarilyhave to live in the area where they render government services. There-fore, it would be also incorrect to assume that "Income" is affectedproportionally to expenditure incidence.

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EFFECT OF GOVERMIMENT EXPERDITURE ONINCOME DISPARITY, 1970

Terminal DisparityCities Rest Mi3 / (ii)

Per Capita Income (balboas) 884 268 3.3Per Capita Government Expenditure (balboas) 213 122 1.8Per Capita Income plus Per CapitaGovernment Expenditure (balboas) 1,098 389 2.8

The effect of public expenditure is clearly an element in reducingregional income disparities. The disparity index, defined as the ratio ofthe Terminal Cities level to the "Rest" level, is 3.3 if calculated with percapita income alone. It declines to 2.8 when calculated with per capitaincome augmented by government expenditure.

Income Distribution by Income Brackets

Tnere are two recent studies on income distribution in Panama. Thefirst, by Professor Clharies E. 'HcLure, Jr., was published in 1972, but used1969 data. -! Because there was no recent household income survey, either inPanama City or the country as a whole, Professor McLure used factor sharesfor his income estimates. As a result; the estimates reflected the problemsthat usually develop from using this type of statistical base. Worker earnings,taken from labor information, were added to corporate earnings (distributedas well as undistributed); rental income - imputed and actual - was allocatedentirely to self-employed workers; and the allocation among 11 income bracketshad to be relatively arbitrary. Professor McLure was fully aware of these pro-blems. He made a second estimate of the agricultural income distribution byassuming twice the net reported income for self-employed operators of smallfarms (McLure B), since he found it unrealistic to credit the 1,000 largestfarms with two-thirds of all farm income. The chief problem with both McLureestimates is that it is difficult to mix inter-worker distribution with inter-family distributions; and since there exists no recent household incomesurvey, any true incorme distribution estimate must heroically attempt thlismix. The mission attempted to revise and update the McLure "B" estimate from1969 to 1970. Nwevertheless, it remains an unsatisfactory estimate. No attemptwas made to allocate income between the upper five incone brackets (B/ 3,600or more) since any allocation would be very arbitrary. The information tomake this allocation even relatively accurate just does not exist. 2/

1/ Charles F. 21cLure, Jr. "The Distribution of Income and Tax Incidence inPanama, 1969", Winter 1969; Paper No. 36, Program of Development Studies,Iice University, ILouston, Texas.

2/ Even when undistributed corporate profits are correctly dropped fromthe household income estimate.

* - 41-

The second stucly, published in mim.eograph form in 1972 by ProfessorG.S. Sahota, suffers from the same handicaps. 1/ Professor Sahota's pioneeringeffort not only attempted to estimate the national distribution of householdinacomles but t,he distribul:ion of incomes ir. each of the 9 provinces, the urban-rual income distribution 9 and the incidence of public expenditures by pro-vince as well as income bracket. Because public capital expenditure infor-r.ation for 1970 was unavaiilable from the Controller General's Office, Profes-sor Sahota used Planning Office data; which are not only unreliable, butinclude part of the credit expansion bv public commercial and savings banksand exclude some investments of public corporations.

Before any further estimate of income distribution is attempted inPanama, a careful family household income survey is needed. Only w11en thissurvey is undertaken will be Government be able to analyze in a detailed waythe present income distribution and the effect of government policies andexpenditures-

1J C.S. Sahota, "Public Expenditure and Income Distribution in Panama",August 1972., mimeograph; Vanderbilt University, Tennessee.

0

0

0

, 0~~~

Taj,le~ lz GOVUTIPENTV FiXFF1VDI1URt INCIDENCE, 1970 /j1 aq - 1o

(thousands of 8a1bosss)

Current Raoital Total _____ urent ~2tal- ~~~~Ceniter Aet Othe CMLter Ra-st Othe-r

I Cetra Publilc Serlvices -331.04 k i~. 2 ~ 12 a?3 ~Lr .

1.1. Geacral Adm~inistration 17 838 1.~4 19,381 9_12~

1.1.1 P'olicy Adinistration 387 2 109 3 8 50 103 3,7201 3 10-5

N4ational Assemsbly 112 2 114 - - 112 -2

Comptroller-Genera3 465 15 480 -465 - 15

Presidency 1,336 53 1,389 - - 1,336 -- 53

Govermeant and &ustice 1,326 26 1,352 50 ~ 103 1,173 1 3 21

Pubtlc works 206 13 219 - - 206 - - 13

Law Coma,ission (Judiciary) 28 - 28- - 28 ---

Other 400 400 - -400-

1.1.2 Fiscal Admainistration 6~0 176 65,.68 ... P 504 L~1214

Accounting, Auditing -Coisptrol.er-Gefleral. 1,143 25 1,168 - - 1,143 - 25

Rzvcuue -- ~~~Sasu-- 4.375 139. 4.514 - - 4,375 -139

Rural Cadastry - Treasury *-- 12 12 - - - .. 12 -

Suibscriptions to 1T1RD ,nd 10B 986 - 986 - - 986 - -

1,1.3 Other Admsinistrative Works 4~4 227 4,7 873 24728 26 173

Representation of the National Interest to Law Courta

- Public 915 23 938 483 432 ... 12 11

Election Administration- Electoral Tribune 526 16 543 207 296 23 6 91

.Civll RagisicatiunGoQvernment and Justice '154 10 164 21 ~ 5~1)

Electoral Tribuine 208 6 213 -I57-1

Census; and Statistics - Ccaptroller-reners-1 1,577 13 1,590 -- 157--1

National Planningplanning Office (I'residency) 867 9 876 -- 867 - 9

Feasibility Study - P.sdnY- 150 150 - -- -- in

1.1.4 Services for Govermeant Offices 3,216 1,031 14,247 - 3,21.6 - -1,031

1.2 External Affairs ~- 203 p.5.6 1 4 ~ .358 ---- O20

1.2.1 Administration - ExIteroal Relations 441 3 444 -- 441 -- 3

1,2,2 Diplomacy and Foreign Policy - External E.eltiOns 2,739 191 2,930 -2.739 -191

2.2.3 Migration and Naturalization - Govermesnt and Justice 179 9 187 -- 179 -9

1.3 Public Order anid Safety 18.535 1.957 20,492 10 _464 8.02 8 81 133

1.3.2 Laow Courts 1601711771. 107 50O

Suvpreme Court, District rourts. Circuit Courts,and H,snicipa.l Courts - Judiciary 1,460 106 1,566 771 689 .. 56 50..

Temporary building, Panama Municipal Court-Governmsent and &xstice* - 51 51 - - -51 --

133Police - Government and Justice 15 620 21 174.IL367 ta6m 6 .920 41 08 1.036 3

133Security, Public Order, lnvestigatioR, etc. 15,620 1,277 16,897 8.659 6,920 41 .708 5663

National Cuard Quarters Construction .- 470 470 . . - 470-

1.3.4 Prisons and Other Places of Detention -

Government and jusstice 684 3 687 379 303 2 2 2

1,3.6 Fire Protection - Govervmnect and Juistice 771 50821 656 11-6 - O

Fire Prevention and Extinction 77 -0 771 65 11 5

Fire Brigade's Qutarters, Santiago -5 0--5

2. Defense -- -

Table 1: (Continued)

Current Copital Current ______ CaCenter Rest Other Celter Rest Other

3. EducAtion and Related Services 31 53 24 7 21,868 ______ _____ 5 3 2___ _397__ 2 -11 I,346

3.1 General Administration - Education 3,327 342 3 6 105 6 1 1S5 1Planning .268 11 2769 SIC 1)_0Othar services 3,059 331 3,390 1,505 .155

3.2 School Education 34.708 5.022 39.730 15808 18810 90 3041 1981

3.2.1 Primary Education 19,670 1.585 21.254 6.370 13.300 - 766 819Administration - Education 351 246 597 114 237 - 80 166Teaching - Education 19,319 54 19,373 6,256 13,063 - 18 37School buildings, etc. - Education* - 1,285 1,285 - - - 668 616

3.2.2 Intermediate Education 9.566 2 017 ,11583 5.633 3.933 _ 856 1161Administration - Education 382 252 634 ) ) ) ) .Teaching - Education )5,633 3 Secondary schools 74737,8563 3,693 3206 )135Normual schools 123 ... 123 3 ) )Technical and vocational schools 1,415 16 1,431

Transfer to Chapels Vocational Sch9.1 240 - 240 - 240 -School buildings, etc. - Education - 1,676 1,676 - - - 650 1,026

3.2.3 College antd University Education - University of Pankama 5 207 42 6,707 3,733 1 464 90412 0Adrninistration, teaching, etc. o f 5,23 - 5,287 3,733 1 90 1X4-Building construction - 1,420 1,420 - - 1,420

3.2.5 Adult Education - Education 185 1 186 71 114 - ... .. -

3.3 Scbolarships, Education Subsidies, etc. 612 - 168. 928- -Scholarships from Central Government ministries 162 - 162 122 41Subsidies from, E&icatlon Ministry 198 - 198 149 50IFARIWU Fjtpenditure fot Education /4 1,196 1,196 684 512Scholarahips . 326 ,1-6-84-51Other Services 1,055 1,055 729 326

3.4 Cultural and Sport Affairs 06 7.520 5,089 625 _ 1.596 210

3.4.1 Cultural Affairs 489 370 859 387 102 - 309 61Diffusion of culture - Education 417 55 472 355 63 - 47 8Art workshops - Education - 65 65 - - - 65 -National Museum Educatio* - 119 119 - - - 119National Theater - Education* - 78 78 - - - 78Local scholars - Education* - 45 45 - - - - 45Social integration of Indians - Government and Justice 34 2 35 - 34 - - 2Colonial Park, Los Santos - Public Works* - 6 6 - - - - 6Transfers to Carnival Junta 39 - 39 33 6 - - -

3.4.2 Sport Affairs 5.225 3.46 6661 4.702 22 1287 149Spert promotion - Education 51 1 52 ) ) ) iTransfers to INGUOE ) ) 3 )

General purpose 1,762 - 1,762 )4702 522 -1257 140Central American and Caribbean Olympic ) )Games Committee 3,385 1,395* 4,781

Bolivarian Games Committee 26 - 26 )Colon Municipal Swimming Pool* _ 30 30 - - - 30Swimming Pool of Chitre - Public Works* _ 10 10 - _ _ 10

m * 0

* 0

Page 3 of 11

Table 1: (Continued)

Current CapitaI Total Current Cpt ____________Center Rest Other Center Rest Other

4. Health 39. 122 JQ ___74 8 33 _

4 1 General Administration - Health 1,313 55 1,368 828 _ _ _Q -

4.2 Medical and Heath Services 37.810 2,665 40.474 25118 I692 _22 66

4.2.1 Hospitals 8,890 406 9_296 7,655 1 167 -Santo Tomes - Health 5,315 152 5,467 5,049 - 144 8Hospital del Nino - Transfers from Health 1,360 1,360 1,292 68 - -National Mental Hospital - Health 1,519 19 1,538 1,139 380 - 14 5Mental. Hospital of Los Sentos, Construction - Health* - 59 59 - - - - 59Nicolas A. Solano

Administration and services - Health 696 34 730 174 5Z2 - 9 26 _Annex conrstruction - Health* - 45 45 - - - -45

Hospital of David, surgery rooms - Health* - 97 97 - - - 97 -

4.2.2 Social Security Medical Expenditure 21.792 iL37 23,169 15.684 6.108_ 1.,377 _Hospitalization assistance 10,503 - 10,503 7,554 2,949 - - - -Medical and dental consultation 11,289 - 11,289 8,130 3,159 -Construction of hospitals and clinics - 1,377 1,377 - - - - 1,377 -

4.2.3 Other 6,159 284 6.444 1.586 4574 - 45 239 -General technical services - Health 1,438 18 1,456 367 1,071 - 5 13 -Medical center improvement and construction - Health* - 165 165 - - 29 136 -Health Ministry's regional services

Oriental region 1,646 18 1,664 1,219 427 - 11 7 -Central region 1,697 63 1,760 - 1,697 - - 63 -Occidental region 1,379 20 1,399 - 1,379 _ - 20 -

4.2.4 Public Health Services 969 598 1.566 194 775 _ 187 411 _Malaria control - Health 969 308 1,277 194 775 - 62 247 _Slaughterhouse - 289 289 - - - 125 164 _

PRe 4of 11

Table 1: (Continued)

Current Cap ital Total Current CapitalCenter Rest Other Center Rest Othe-r

5, Social Security and Welfare Services ,92 3 5 _29427 16 785 12 22 32 1

5.1 Social Security and Asaistance 28,327 - 28,327 15 12.281 - _ _ _

5.1.1 Social Security AdmiiListrationn 3,189 - 3,189 2,060 1,129 -

5.1.3 Pensions for Old Age, Disability, rnd Survivors _ 847 - k8_7 12, 061 86 -

Central Goverrment pensions 6,874 - 6,874Social Senurity long-term plan pensions 14,874 14,874 )11,989 ,9759 ) ) )

Social Security professional ris'; plan pensions 98 - 98 71 27

5.1.4 Other Social Secturity Benefits - 3.292 1.366Temporary disability benefits 971 - 971 655 316

Maternity benefits 2,259 - 2,259 1,228 1,03.1 - -Funeral subsidy 62 - 62 42 20

5.2 Welfare Services 1S064 Q 738 304 22 3__

5.2.1 Child Care 318 34 352 195 123 .. 2 32 Care of delinquenit minors and preventive detention -

Government and Justice 221 4 225 123 98 ... 2 2

Transfer to I^E.9 97 97* 72 25 -

Hogar de Nuestra Senora - Education* - 30 30 - - - _ 30

5.2.2 Other - Labor and Welfare 746 2 748 543 181 21 1 .

Labor and Welfare Administration 21 1 22 - - 21 -

Social assistance 724 1 725 543 181 - 1 ...

* * ' ' -~~~~~

Page 5 of 11

Table 3: (Continued)

Current Capital Total - _ Current Ital*.Center Rest Other enter Rest Other

6. Cormnurnity Services 10 148 _12_58 22 737 5 613 4,_ -__r3=_ 12,589 __. _ . __ . r _'

6.1 Housin' 222C 15L5 395 ,214 6 - ¾087 488orpernditures of 1WAdministration 2,189 - 2,189 2,189 -Csnstruction - 180 180 ) ) )260Me.chinery and Fquipmeiot - 255 255 ) ) )

Trarnsfer to llOiAGeneral purpose transfer 31 - 31 25 6 -- -Mortgage financing* - 1,140 1,140 - 912 228

6.2 Ctmniunity Development 891 700 L591___61 830 261 439

6.2.1 Administration - CoTmunity Development Office, Presidenicy 677 56 733 - 677 - 56

6.2.2 Operations - Community Development Office, Presidency 189 317 506 36 153 - 2 315I avestigation and evaluation 41 10 51 - 41- - 10Prov.otion and loans 32 8 40 - 32 - - 8National Volunteer Service 80 32 112 - 80 - 32San Miguelito Plan 36 2 38 36 - 2 -Construction program with coms 1rual assistance - 265 265 - - - - 265

6.2.3 Subsidies 25 327 352 25 - _ 259 68San Miguelito 225 25New area settlement* - 68 68 - - 68Capital transfer to San Isidro, rotation fund - 259 259 - - - 259 -

Page 6 of i1

Table 1: (Continued.)

Curreit 2 Cital . CToetnl Carital.Center Rest Other Center Rest Other

6.3 Sanritary Services 5,545 3, 3 8,854 2,958 2 86 _ Ai2I-. . ~ ~ ~ ~ ~ ~ ~ 0 _ . . . .. _. ... _ __ ___a .

6.3.1, Environment San!ita.tion :t=1 N av16 4 800Sanitary Engineering - Health 522 1.9 0 - -i 19Gernrarl Technical Services Health 62 62 62Health M.nistry7s Regio.n. Survices

Orie,nta1 Region 382 382 344 38Contral Rcgion 137. 137 137Occidental Region 42 42 49

6eJf2, ater Sn?ply and AcyA!uct3 4176 7,576 _614 1.787 B lRudimenta.ry Aquaducts - Xealth - 223 223 - - 223 -

IDAAN Operating Expernses L5 4, 400 _ 4,'io 0o 2,614 J.,786 _ _

IDAAW Investment 2,953 2,953 - 1,877 1,076

,3.3 Other .11 12 $ w5!&n:LicipeJ. Market cof Peaama, Construction 6ealth-Muminipai i. erket of Colon, Construction* - 35 35 - 35

6 4 SIStreets end Furaj. 1k ½ 6 9I2 7,'747 382 373 _ 1,277 5 7lt

Mairitenwace anEd Repair o teet- Public Works 3htw. -l py 79 b I7Maintenance and 2cp.ir o RoeAS c P 8 2,792 3l09 - 306 - 2,792Construction sond Mvnjor Reairs - ?Pblic fWorksi - ; ,755 3,755 _ 898 2,857

6.5 Plblic Lighting, Gs,4 strd Telepirne- lPoblirc Work.s IIi7 11 2Q2 , J 1

* * ' -S

0~~~~~~~~~

Table 1: (Continued)

Current Capijtal Total Current_ CapitalCenterc Rest Other Cetr Rest Other

8. Economic Services 20,917 14 721 10456 __Ji 76

8.1. General Administration and Regulation 1,117 48 1,165 571 265 281 25 13 9

8.1.1. Price Control - Price Regulation Office 281 9 290 - - 281 - - 9

8.1.2. Labor Affairs - Labor and Welfare 8S 39 875 571 265 - 25 13Administration 215 T 223 -Labor ProtectionRegulation and Supervision of Work Condition 278 17 294 ) ) )Administration of Justice in Labor Disputes 224 11 234 ) 345 ) 183 ) _ ) 20 ) 11 )Inter Union Coordination 26 3 30) ) ) )

Full Employment Promotion 94 - 94 80 14 - - - -

8.2. Agriculture and Fishery 6,585 3,102 9,687 169 6,416 18 3,083 _

8.2.1. Agriculture 6,407 3,082 9,490 6 _ 3,407 ,0 C182

8,2,1,1. General Administration - Agriculture and Livestock 12,173 930 2,_102 - 1,173 _ - 930

8.2.1.2. Agrarian Refcrrm - Transfers to Agrarian Reform Commission 1 450 206 1 656 _ 1 450 _ 206General Purpose . - 1,450 1,450For Agriculture Machinery PuLrchase - 206 206 206

8.2,1.3. Co-operative Promotion - Agriculture and Livestock 155 76 231 _ 155 _ 76

8,2.1.4. Financial Assistance 935 - 935 - 935Subsidy from Agriculture and Livestock Ministry - -

Central Governrment Transfer to IFE /6- 850 - 850 - 850 - _ _

8.2,1.5. Other Services for Agricul.ture in General 322 1,379 1 701 - 322 - - 1,379Natural Resource Renovation - Agriculture and Livestock 253 13 2 - 253 - 13Water Control and Supervision - Agriculture and Livestock 59 - 59 - 59 - -

Agriculture De,elopment Program - Agriculture and Livestock _ 590 590 - _ - - 590

Fertilizer Program - Agriculture and Livestock* - 35 35 - - - - 35Irrigation and Artificial Rain - Agriculture and Livestock* - 600 600 - - - _ 600Central Government Transfer to Frontier Development Corp. 10 _ 10 - 10 _ - -_Land Purchase - Agriculture and Livestock* - 141 141 - - - -. 141

__e of 11.

Table 1: (Continued)

Current Capi t al Total Current Canital.Center. Rest Other Center Rest Other

,.2,1.6. Ser-vices for Livestock 2,373 492 2 864 2$73492Research and Extension Services Agr. & LS 1,559 31 9 1,559 - - 3 1Livestock Sanitary Service - Agr. & LS 377 98 476 - 377 - - 98Veterinary Service - Health 95 - 95 - 95Marketing Service - Agr, & LS 183 22 206 - 183 - _ 22Pasture Improvement - Agr. & LS - 10 10 - - _ _ 10Pig Reproduction Prograrn - Agr. & LS* - 20 20 _ - _ _ 20Central Government Transfer to Cattle Institute 158 158 158 -

8.2.2. Fishery - Commerce and Industry 178 19 _1 6 _ _ 18 1Administration 121 1 1.23 . 7 TrInvestigation anLd Exploration 34 15 48 )169 ) 9 )_ ) 18 )1Markcting 16 3 20 ) ) ) ) ) )Inspection of Fishing Boats 7 - 7 ) ) ) )

8.3. LMining, Manufacturing, Commerce and Finance 1,932 3 1187 1 246 _ 809 378

8,3.1. Administration and Research - Commerce and Industry 327 362 68 250 76 _ 278 85

S.3 3.2. Mining - Cormerce & Industry 387 o0 477 329 58 - 76 13Administration 72 . 75 TF ' TFResearch, etc. 315 35 351 ) 329 ) 58 )_ ) 76 )13Mining Project Phase I1* - 51 51 ) ) ) )

8.3.3. Manufacturing - Commerce and Industr;,- 408 305 713 333 76 - 33 272Administration .,9Promotion, Incentive Policy 149 7 156 333 T 76 16 )4Quality Control 7 1 8 ) )Services for Artisans and Small Industries 163 12 175 ) )General Fund, Factory of Veragaas - 265 265 - - - 265 _Small Industry Loans* 20 20 _ _ _ 16 4 -

8.3.4. Commerce 754 427 1,181 720 33 _ 420 8 _Adm-;.nistration, Regulationr and Supervision Cor. & Ind. 223 50 273 3 3 -4 3 -Colon Free Zone Expenditure

Operating Expenditure Z7 443 443. 443 _ _ _ _Commercial Promotion 88 - 88 88 - _ _ _Buildings and Infra-Structure - 354 354 - - 354 - -

Machinery and Equipment 23 23 _ _ _ 23 -.

* * 0

** 9 ~of_I1

Table 1: (Continued)

Curerent Cwt_ Total __ Currentt __

Center Rest Other Center Rest Other

303.5. Finance 56 3 59 53 3 2

Bank Inspection _ Comptroller-General 2 ) 5 3 w 2Regulations of Insurance Business - Cotnerce & Industry 36 3 39 ) 3

3.4- Construction - Public Works 1l996 ., 136 3 131 998 998 568 568

Research, Design, Constructioxi and Inspection of Plblic

Works l,1984 1,135 i 9LL ) 998 998 568 568 -

Regulation of Engineers and Architects 11 1 12)

3.5. Electricity 3 286__&67 6 353 _ 300 2 96 - 2313 554

Central Government Transfer to Electric Energy Coo-mission 85 - b5 05 -

Expenditures of IREEOperating Expenditure /8 2,198 - 2,198 206 1,992 Z2 - -

Adtinistration and Maint.enasce 1,003 _ 1,G03 - 94 909 - -

Fixed Investroent - 2,313 2,313 --

Technical Studies 554 554 - _ _ _ 554

8.6. T Transportation end Counixnication ___298 279 32,T7 2,723 2176 P, 1 21

8.6.1. Transportation _2f 3l2 ,60 1,060 - 12 -4 0 -

86.1.1. Adainistration, Research, etc. Public Works 462 22 48k- 18 444 -

Adtainistration 23 9 )228 8 236) 10~~~~~~~~i 444~ 2I1National Geographic Institute 228 8 236 )) ) )

8.6,1.2, Rosa Transportation 750 2 23-¶94 1595 7718 13<5O6 _Transportation Workshop - Publ-ic Works 15T 9 164 i. - 9

Maintenance and Repair of Inter American Highway - Ph 596 384 980 149 447 96 288

IDB Counterpairt for Road Construction - Public Works ,-, 2,207 2,207 - 2,207

Rosad Construction, Expansion and Improvement -Public Worksx- 5 20,624 20,624 9,622 11,002

8.6,13. Air Transportation - Civil Aviation Directorate _ 12l.3 31264 4 477 887 326 2 io4 1,160 -

Supervision of Airports ,21L3 33' ,57 f7;-1 3

Land Purchase and Construction - 1,190 1,190 - - 754 436 -

Technical Studies - 1,711 1,711 . - - - 1,084 627 -

8.6.1,4 Water Transportation - Public Works* - 715 715 _ - - 701 13 -

Rehabilitation of Harbors - 715 715 _ _ 7_. . . _ .. __ . ,_ _ ,_ t ,, _,_ , , , , _S . _ _ _ , _ . . _ _ _ _ . _~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

570 1

Page 10 o±' f1

Tabie 1: (Continued)

Current CaTotal Current _Caital

Center Rest Other Center Rest Other

3,6i2, Communication - Governoent end Justice 2 473 54 2 527 1 662 810 - 33 21Administration c0 37 m =i5TPostal and Telecor.tr.ication Services £10 1,871 19 1,890 1,258 612 i 10 9

8.7. Tourism - IPAT 1, 103 696 L799 1 48 55 _ _6Regulation and Promotion sf Tourisr 1 1,103,10 1,0 -

Hotel Construction - 696 696 - - 696

9. Other Purposes9.1., Debt Transactions 5-

Central GovernmentSocial Security SystemUniversity of PanamaIPATIFARHUIDAANIRHE Colon Free ZoneIVWJDAC

9.2. Expenditures, n,e.c. 219 701 20 _2 _ _ 557 144

Total 63,233 ,35 71622 25,954 35 036 2,243

- 17 -

Pa gei ofli0

Table 1: (Continued)

/L Consolidated expenditures of the Central Government, Social Security-tysteri, University of Panama, IPAT (Tourism Institute), IFARJ (Hum-anResource Institute), IDAAN (Water and Sewage Institute), TI-, (HydraulicRescurces and Electricity Institute), Colon Free Zone, IVU (Housing andUrban Institute) and DAC (Civil Aviation Directorate). Figures are onan accrual basis, * indicates loan-financed expenditures.

/2 Included in 1.3. No official defense exists in Panama.

/3 kiiversity fees of B1,075 thousands are not netted out.

A Excludes a net lending of B570 thousends, made fcr educational purposes.

/5 Operating revenue of B6,238 thousands is not netted out, but interestpayinent is exclu,ded and shown separately under item. 9.

/6 Instituto de Fomento Economrico.

/7 Rent and storage fee revenues, amounting to B847 thousands ar- notnetted out, but interest payment is excluded and shown separately.

/8 Operating revenue (from electricity sales) of B5,299 thousands is notnetted out, but interest payment is excluded arnd shown separately.

/9 Estimated cost for generating the electricity sold to the Canal Zone(kwh 220 millions) and the electricity wrasted (kwh 12 millions).

/lO The revenues frcm postal and telecommunication services are not nettedout.

/11 Adjusted for the transactions among the agencies listed in /1.

0

7.

0

a

TABLE 2: THE FOUR TNCOME DISTRIBUTION ESTIMATES(percent)

MueA1969) McLu E1&1 Sahota (1970) IBRD Mission (1970)

Income Income Income Income

Families Share Families Share Families Share Families Share

0 - 500 32.0 4.5 23.0 3,7 30.0 3.5 23e9 2e5

500 - 1,000 16.5 6.8 22.5 8.6 16.5 6.5 18.3 8.0

1,000 - 1,500 18.0 12.4 19.3 13.2 16.4 10.9 18.9 14.5

1,500 - 2,000 12.3 12.0 12.9 12.5 12.5 11.8 13.0 14h.2

2,000 - 2,500 6.6 8.3 6.8 8.6 7.5 9.1 8.1 11.0

2,500 - 3,6o0 6.O 10.3 6.4 11.0 8.2 13.5 8.2 15.3

3,600 - 6,000 5.3 14.0 5.4 14.4 5.3 14.2 )6,ooo - 10,000 2.1 9.6 2.2 9.9 2.4 10.6 )1,000 - 20,000 0.9 7.5 0.9 7.5 0.7 6.3 ) 9.7 34.5

20,000 - 50,000 0.3 6e2 0.3 5.4 0.3 5.5 )over 50,000 0.2 8.7 0.2 5.3 0.2 8.1 )

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: McLure and Sahota Studies earlier cited, and Mission estimates.