Panama and the Middle-Income Trap: Structural Diagnosis, Explanatory Model, and Prospects for Productive Transformation

Carlos Merino Troncoso

MPRA Paper from University Library of Munich, Germany

Abstract: This paper analyzes the structural challenges facing Panama in escaping the middleincome trap (MIT). Despite recording average real GDP growth above 4.7% per annum over the past decade, Panama exhibits unambiguous MIT symptoms: a productive structure concentrated in technologically unsophisticated services, a labor informality rate of 48.2% (2024), persistently high income inequality with a Gini coefficient above 0.50—the second highest in Latin America (CEPAL, 2025)— chronically insufficient investment in research and development, and deteriorating fiscal sustainability with public debt reaching 61.6% of GDP in 2024. We develop a multidimensional analytical model integrating four theoretical frameworks: (i) the MIT concept of Gill and Kharas (2007) and Kharas and Kohli (2011); (ii) the overlapping-generations model of Ag´enor and Canuto (2015), which formalizes multiple steady-state equilibria driven by talent misallocation and infrastructure quality; (iii) the growth diagnostics methodology of Hausmann et al. (2008); and (iv) the economic complexity framework of Hidalgo and Hausmann (2009). We argue that Panama’s “decade of gold” (2004–2014)—during which the country led Latin American growth—was driven by an extensive accumulation boom (Canal expansion, Metro construction, real estate) that generated high output but failed to build the technological capabilities required for sustained convergence. Since 2015, the structural exhaustion of this model has produced a persistent deceleration that COVID-19 recovery has not reversed. We derive a policy agenda centered on advanced infrastructure investment, human capital transformation, innovation financing, and fiscal consolidation.

Keywords: middle-income trap; Panama; growth diagnostics; economic complexity; total factor productivity; Ag´enor–Canuto model; labor informality; productive transformation. (search for similar items in EconPapers)
JEL-codes: H54 J24 O11 O14 O40 O54 (search for similar items in EconPapers)
Date: 2026-05-02
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