PANAMA: THE NEW VIRTUAL NATION

by

Marc M. Harris

In the same way that the virtual corporation has become the new model for global commercial enterprises, the virtual nation will become the model for emerging nations like Panama.

Less developed countries that focus on production derived from land (e.g. Iraq) may still desire territory; however, in the new global economic order, economic inputs have become mobile.

The new virtual nation would rather conquer the world market than acquire territory. The virtual state that has downsized its territorially-based production capability is the logical consequence of this freedom.

The economic equivalent of the virtual state, the virtual corporation, has discovered the advantages of locating its production facilities wherever it is most profitable. Increasingly, this is not in the same location as corporate headquarters. Parts of a virtual corporation are dispersed globally according to their specialties. The virtual state is the political counterpart of the virtual corporation.

For example, a company can have its headquarters in Santiago, Chile, its banking operations in El Centro Financerio de Panama, its manufacturing facility in Costa Rica, its distribution from Zona Libre de Panama; its Panamanian flagged shipping operations out of Aruba; and its customers in North America, Europe, and Asia.

The predecessor to the virtual nation was the trading state. After World War II, Japan shifted its efforts from acquiring territory to increasing its share of world trade. At that time, exports became a priority. In much the same way, Panama has never focused on acquiring territory militarily, but focused its efforts on importing and re-exporting its way to wealth.

As capital has become increasingly mobile, more advanced nations have come to recognize that exporting is no longer the only means to economic success. Alternatively, nations can produce goods overseas for other foreign markets. For example, a Panamanian headquartered company can produce its goods in Colombia and re-distribute those goods via the Zona Libre de Panama to Spain.

As more production by domestic industries takes place abroad and land becomes less valuable than technology, knowledge, and direct investment, the function of government will be redefined. In the case of Panama, the government will negotiate with foreign and domestic capital and labor to motivate potential investors to base their operations in Panama for international trade in products and services. Panama's offices of trade promotion and foreign investment combined with a current administration that has the foresight to see Panama as a virtual nation have gone the distance in creating an environment where international business is welcome.

For virtual nations, a national economic strategy is probably more important than a military one. Panama has taken a major lead in this trend by converting its ambassadors into foreign trade and investment representatives with a specific mission to promote conducting business in Panama.

The old methods of increasing national power and wealth are no longer effective. Like the headquarters of a virtual corporation, the virtual state determines overall strategy and invests in its people rather than amassing expensive production capacity. Panama's recent focus on the quality of both its elementary and higher level education systems has been a major step in creating the proper base for the virtual nation of the future. The continued development of an internationally recognized university system will only add to the foundation necessary to create such a state.

The new virtual nations will also contract out other functions to states that specialize in or need them. For example, previously state owned sectors in Costa Rica have been privatized, maintaining their production facilities there while transferring part of their international distribution operations to Panama.

Britain may have been the model for the 19th century, but Hong Kong and Panama could be the model for the 21st.

The virtual state is a country whose economy is reliant on mobile factors of production. The new virtual nation houses virtual corporations and presides over foreign direct investment by its enterprises. But more than this, it encourages, stimulates, and to a degree even coordinates such activities. In formulating economic strategy, the virtual state recognizes that its own production does not have to take place at home; equally, it may play host to the capital and labor of other nations.

The new virtual state does not seek to confine or excel in all economic functions, from mining and agriculture to production and distribution. The virtual state specializes in modern technical and research services and derives its income not just from high-value manufacturing, but from product design, marketing, and financing. The rationale for its economy is efficiency attained through productive downsizing. Size no longer determines economic potential. Virtual nations hold the competitive key to greater wealth in the 21st century. They will likely supersede the continent-sized and self-sufficient units that prevailed in the past. Productive specialization will dominate internationally.

Panama could become the ultimate virtual state via the following processes:

• Panama imports raw materials and conducts light assembly activities for re-export of these goods via Zona Libre de Colon.

• ARI (Inter-Oceanic Regional Authority, i.e. the successor to the former Canal Zone) will become the largest real estate company in the world. Size will not be the determinant of its value, but its use in international commerce.

• Given the plans developed by ARI, development of those reverted areas could bring Panama an initial windfall followed by years of sustained economic development.

• By focusing on its comparative advantages as an international trading center, Panama will avoid the costs associated with environmentally unattractive manufacturing industries.

• Through the modernization of its financial services laws and the development of Panaclear, Panama could become an even more important international financial services center.

• Based on the government and the private sector's continued focus on education, Panama's youthful population could become the model of an educated and integrated workforce for the rest of Latin America.

In the past, states were obsessed with land. The international system with its intermittent wars was founded on the assumption that land was the major factor in both production and power.

Land can still be physically captured, but labor, capital, and information resources can easily slip away in the contemporary world of cyber-commerce.

In a setting where the economic functions of the trading state have displaced the territorial functions of the expansionist nation, the newly pruned corporation has led to the merging phenomenon of the virtual state.

Downsizing has become an index of corporate efficiency and productivity gains. Now the national economy is also being downsized. Among the most efficient economies are those that possess limited production capacity.

The best model of this structure will most likely be Panama. Panama's current international trading and financial center will capitalize on its takeover of the reverted areas and the Canal to become the ultimate virtual state. This new virtual nation will allow Panama to be a central hub for distribution, finance, trade, and international management.

One could almost imagine a day where Panama will not only govern its own national territory, but direct businesses internationally. The virtual state is in this sense a negotiating entity. It depends as much or more on economic access abroad as it does on economic control at home.

A reflection of how far these tendencies have gone is the growing proportion of Panama's gross domestic product consisting of high-value-added services. As a proportion of foreign direct investment, service exports will become an increasingly important Panamanian export.

If services productivity increases as much as it has in recent years, it will greatly strengthen Panamanian competitiveness abroad. But it can no longer be assumed that services face no international competition. Efficient high-value services will be as important to a nation as manufacturing was in previous times.

The implications for Panama are exciting. As capital, labor, and knowledge become more important than land in charting economic success, Panama can influence and possibly even reshape its pattern of comparative advantage.

Panamanian educational institutions will play an increasingly important role in positioning Panama as its model virtual state.

Despite productivity studies showing its long-term importance to growth and innovation, numerous nations and business have under-invested in education. For many years, education was undervalued, socially and economically speaking; however, substantial improvements in both elementary and higher education will provide the foundation of Panama's future.

Given that probably more than 60 percent of the world's wealth consists of human capital, nations will increasingly turn to the cultivation of human capital.

Production for one company or country can now take place in many parts of the world. In the process of downsizing, corporations and nation-states will have to get used to reliance on others. Virtual corporations need other corporations' production facilities. Virtual nations need other states' production capabilities. As a result, economic relations between states will come to resemble nerve centers. Naturally, producer nations will be working quickly to become the brains behind emerging industries elsewhere. But in time, few nations will have within their borders all the components of a technically advanced economic existence.

Like Hong Kong, Panama's current trading strategy could be emulated by many other countries. Its lack of territorial ambitions combined with a dependence on world markets for key raw materials supplies have engendered greater economic cooperation between Panama and other countries.

Diminishing their command of real estate and productive assets, they are downsizing, to functional if not in geographic terms. Small states have attained peak efficiency and competitiveness, and even nations have begun to think small.

If durable access to assets elsewhere is assured, the need to physically possess them diminishes. Free movement of capital and goods, substantial international and domestic investment, and high levels of technical education have been the recipe for success in the industrial world of the late twentieth century. Those who depended on others did better than those who depended only on themselves.

Panama must continue to encourage foreign capital to enter its domain. To keep such investment, the local authorities will need to continue to maintain low inflation, rising productivity, a strong currency, and a flexible and trained labor force. Those demands will sometimes conflict with shorter term domestic interests, but over the long term Panama will be a greater nation and its populace much wealthier.

About the author

Marc M. Harris is the President of The Harris Organisation, a financial planning and investment management firm with a staff of 150 people in Panama. He is also the author of The Private Interest Foundation of Panama.

Copyright © 1996 by Marc M. Harris

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