EspañolOn Tuesday, July 1, Juan Carlos Varela begins his term as president of Panama. During his campaign, Varela promised to move politics away from corruption and cronyism and continue opening up the economy.
One of his first policy decisions as president, however, seemingly contradicts his campaign proposals and has caused investors to worry.
Varela said his administration will introduce “emergency price controls” and regulate the price of 22 basic food products, since food prices have increased by 28.4 percent in the last 5 years.
This announcement clashes with the sense of economic freedom and progress that permeates through Panama. Because of its positive business climate, the country occupies the 55th spot on the list of 189 countries studied in the World Bank’s 2014 Doing Business report. In Latin America, it ranks fifth, after Chile, Puerto Rico, Colombia, and Mexico.
Varela is a friend and ally of Nicolás Maduro, president of Venezuela, whose currency and price control policies are widely recognized as the root cause of Venezuela’s widespread scarcity problems and economic crisis. His relationship with Maduro, coupled with his own price control proposals, call into question the new president’s true intentions. Varela won the presidency despite polling third prior to the election.
A Contradictory Government Plan
According to Varela’s plan for government, his administration will continue to reduce tariffs, import taxes, and red tape, in order to make the country friendlier to business. This enthusiastic free-market stance contrasts sharply with the promise of emergency price controls. The limited amount of information available regarding the plan also contributes to the uncertainty among market players.
José Pablo Gutiérrez, a member of the Institute for an Open Society (IOS), explained in a blog post for PanAm Post’s The Canal that “not having a strategy suggests that there is a good deal of improvisation, thus creating political uncertainty, which also is detrimental to the business environment.”
Given the uncertainty regarding the policy and the role that producers will play in the price-control scheme, Meliton Arrocha, who will head the Ministry for Commerce and Industry, told La Estrella last month that they are carrying out an “extensive consultation process with the private sector.”
An official close to the administration provided La Estrella with a list of products that will be subject to regulation. It includes items such as rice, macaroni, certain cuts of beef, chicken, pork chops, sausage, beans, domestic tomatoes, yams, cassavas, and onions.
However, Law 45, enacted in 2007, stipulates that price controls may only be applied to products for which import tariffs exceed 40 percent of their market value, and only for 6-month intervals. The goods listed in the proposed price-control scheme do not meet this criteria.
The analyst Juan Jovanés wrote in Panamá América that these basic goods are outside the legal scope for price regulation. To illustrate, he includes the tariffs for many of the goods featured on the list of price-controlled items: lentils, 0 percent; red beans, 0 percent; milk, 20 percent; eggs, 5 percent; and pasta, between 5 and 10 percent.
According to Pablo Gutiérrez, if the government were to raise tariffs on these products as a way to legally regulate their price, they “would be going against one of their own campaign proposals [liberalizing trade] … as well as further damaging economic freedom.”
Janovés notes that, according to Law 45, the way regulating prices works is by “calculating a maximum price, taking into account the international price or the domestic price, plus the tariff; whichever of the two is lower.” However, the analyst believes that calculating regulated prices following these guidelines will be ineffective. Instead, he proposes the creation of a stronger regulatory agency that is able to exert a tighter, more direct control over the price of these products.
Gutiérrez, however, argues that the key for achieving economic development in Panama is the free market. He believes it continues being obstructed by the demagogic promises of politicians. “If Varela wants to fulfill his promise to ‘put the people first,’ he should favor economic freedom instead of populist proposals that can only go against the people’s welfare,” wrote Gutiérrez in his blog post.
The proposed regulation must now also go through Panama’s Consumer Authority, which can review its content without making any binding decisions.