SCENESETTER: SECRETARY RICE,S VISIT TO PANAMA FOR

UNCLAS PANAMA 000896

SENSITIVE
SIPDIS

USTR FOR JOHN MELLE; COMMERCE FOR ANNE DRISCOLL, TREASURY
FOR DAS O'NEIL, LABOR FOR CHARLOTTE PONTICELLI

E.O. 12958: N/A
TAGS: ECON ENIV ETRD OVIP PGOV PM PREL
SUBJECT: SCENESETTER: SECRETARY RICE,S VISIT TO PANAMA FOR
THE PATHWAYS TO PROSPERITY MINISTERIAL

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SUMMARY
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1.(SBU) Embassy Panama warmly welcomes your December 9-10
visit for the inaugural Pathways to Prosperity (Pathways)
Ministerial. In many ways, Panama's social and economic
journey since the 1989 restoration of democracy mirrors the
goals of the Pathways initiative: establish and consolidate a
democratic, stable and responsive government; accelerate
economic growth through open markets; and strive to ensure
that the benefits of that growth reach all citizens. While a
hemispheric leader in progress on these fronts, Panama today
stands at a crossroads. Its political establishment is
approaching its fourth presidential election since 1990 in
May 2009, yet cynicism abounds. Panama has leveraged its
superb stewardship of the Canal and central location to
create an economic and logistical architecture that is
yielding stellar economic growth and a substantial reduction
in poverty. However, opportunities created by the growth
remain elusive to the poor and middle class due to continued
income inequality fostered by lack of access to quality
education, inadequate public infrastructure (especially
transportation) and the disproportionate effect of inflation
on lower income citizens.


2. (SBU) If Pathways develops as planned, it will directly
address a theme you have stressed - overcoming the left/right
divide in Latin America to achieve agreement on common
principles for governing wisely and enabling the private
sector and civil society to participate fundamentally in that
process. Throughout its history, Panama has served as a
facilitator between left and right. Marked by its
multi-ethnic population, non-ideological pedigree, and its
comparative advantage as the conduit for goods and funds in
the hemisphere, Panama is an ideal host for the Pathways
ministerial. Your will visit will reinforce key Pathways
themes via your signing of a bilateral education agreement to
provide pre-academic English instruction and your steadfast
support of completion of the free trade agreements for Panama
and Colombia. End Summary.

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PANAMA'S PROGRESS
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3. (SBU). During your visit to Panama, you will find much of
the progress envisioned in the Pathways initiative. Behind
the construction cranes and traffic jams lies an expanding
economic/logistical architecture. Its foundation is the Canal
through which passes roughly 5% of world commerce. The Panama
Canal Authority (ACP) has embarked on a $5.25 billion dollar
expansion, the centerpiece of which is a third set of locks
capable of handling the largest class of container vessels. A
growing network of ports, including Manzanillo International
Terminal in Colon (partially owned by U.S. firm Carrix),
facilitates trans-isthmian logistics along with the
revitalized Kansas City Southern Railway between Panama City
and Colon. Panama Ports (Hutchison Port Holdings, Inc. of
Hong Kong) launched a $240 million expansion of its Pacific
and Caribbean terminals, augmenting the GOP's construction of
the $215 million Panama-Colon Highway. The Colon Free Zone
generated over $16 billion in trade last year. It serves as a
hemispheric "one-stop shop" for sourcing, financing, and
delivering products (mostly from Asia) to Latin American
markets.


4. (SBU) Panama's robust financial center, with 90 banks and
$63 billion in assets fuels the purchase and movement of
cargo and facilitates the absorption of robust foreign direct
investment (FDI) inflows that totaled $1.1 billion for the
first half of 2008. Through generally prudent management, it
has been able to finance construction projects and consumer
spending, key drivers of GDP growth - 11.5% last year and
9.5% in the first half of 2008.



5. (SBU) In recent years, Panama has reached beyond its
traditional maritime and financial networks to build
connectivity of data, knowledge, and people. Panama lies at
the junction of five high bandwidth submarine fiber optic
cables, placing Panama City second only to New York City in
bandwidth availability. This feature was key in the decisions
of Dell and Hewlett-Packard to locate regional headquarters
in at the former Howard Air Base, which is undergoing a $705
million transformation as a regional manufacturing hub. You
will sign a bilateral education agreement at the former U.S.
Army base Fort Clayton, today the home of the City of
Knowledge (Ciudad de Saber - CDS). Ciudad de Saber is
executing its vision to be a center of learning and
innovation by creating a community of academic institutions,
international organizations and NGO's and technology oriented
businesses and organizations. The number of entities
established at the CDS has grown from 43 in 2001 to 120 in
2007, currently employing 2000 people. The Business Incubator
Program alone within the CDS has created more than 300 jobs
and led to the registration of 5 international patents.


6. (SBU) Panama's tourism industry has similarly mushroomed
in the past five years, with tourist arrivals increasing 133%
between 2000 and 2007. Arrivals at Tocumen International
Airport reflect a similar trend, climbing from over 2.1
million in 2000 to an estimated 4.5 million in 2008. Tocumen
recently completed an $85 million expansion of its
international terminal, complimented by the concurrent growth
in its flag carrier, Copa (which codeshares with Continental
Airlines).

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CHALLENGES AHEAD
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7. (SBU) Amidst Panama's partial, yet impressive, realization
of Pathways goals lies an equally impressive set of
challenges. The global economic crisis is beginning to curb
growth across the board in this internationally dependent
economy. Inflation this year has been running just under ten
percent, causing food and fuel needs to curb discretionary
spending in lower income families. A recent United Nations
report highlighted true progress in poverty reduction from
2001 to 2007 - overall poverty fell from 37% to 29% and
extreme poverty fell from 19% to 12%. Yet, the distribution
of Panama's wealth and income remains highly skewed, and
Panama has one of the highest degrees of inequality in the
Americas. This situation creates palpable resentment as BMWs
and Land Rovers zip past hot, crowded, buses that subject
riders to unreliable multi-hour commutes. Most inhabitants of
Panama City have never visited an indigenous area or the
Darien, where poverty predominates and government services
are minimal.


8. (SBU) The fragility of Panama's rural infrastructure was
on full display this week, as the worst floods in 40 years
washed away crops, farm-to-market roads, and thousands of
homes. SOUTHCOM, through Joint Task Force Bravo operating out
of Soto Cano in Honduras, played a leading role in disaster
relief in Chirqui and Bocas del Toro provinces as well as the
Nogbe Bugle indigenous people's autonomous region (comarca).
Over a nine day period, two Blackhawk and two Chinook
helicopters flew more than 97 flights that resulted in 16
rescue MEDEVACS and delivery of more than 200,000 pounds of
cargo, including $250,000 in USAID food, water, and other
supplies.


9. (SBU) Panama's educational system falls well short of what
is needed to prepare its students to take advantage of
opportunities in the global economy to improve their lives.
Subpar training in English, math and science - if allowed to
continue -- will profoundly curtail opportunity for another
generation of Panamanians. Lack of opportunity could heighten
instability, as youth unable to compete in legal activities

could turn instead to illicit pursuits.


10. (SBU) Panama's status as a regional hub carries a darker
side. Illegal activities piggyback on Panama's location and
commercial/financial infrastructure, namely the transshipment
of narcotics and contraband, and money laundering. While
crime currently is low by regional standards, it is
increasing. There is a very real prospect of losing
adolescents who see the benefits of free markets all around
them, but are unable to share in those benefits via
educational attainment. In this context, your visit to the
City of Knowledge to sign a bilateral education agreement
bodes well for our bilateral relationship and as an example
of turning Pathways goals into practice. This agreement more
than doubles the number of Panamanian Fulbright participants
and provides pre-academic English instruction to national
scholarship winners who want to pursue graduate study in the
United States.

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ELECTIONS
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11. (SBU) Panama will hold general elections on May 3, 2009,
to choose a president and to fill every elected seat in
Panama's National Assembly. We fully expect this date to
herald the fourth free and fair election since Operation Just
Cause. However, this contest is particularly personal and
nasty. According to polls, a population focused on the rising
cost of living, wage stagnation, and increasing crime has
grown cynical about its government's ability to deliver
sustained social and economic progress. Until recently,
President Torrijos' PRD party successor, Balbina Herrera,
looked like a strong front runner. Yet, missteps by both have
eroded Herrera's standing, especially President Torrijos'
decision to remain in Spain at an event with the Spanish
royal family while floods were ravaging the Western
provinces. The Panamanian press juxtaposed photos of
Ambassador Stephenson leading USG relief efforts and cartoons
of President Torrijos clinking champagne glasses in Spain.
Independent Ricardo Martinelli has thus far successfully
positioned himself as the candidate for change, bolstered by
financing from his substantial fortune. Meanwhile Juan Carlos
Varela, of the traditional opposition Panamenista party lags
far behind.

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FTA STILL ON HOLD
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12. (SBU) Finally, the uncertain status of the U.S.-Panama
FTA (along with the U.S.-Colombia FTA) is certain to arise
during the Pathways Ministerial. President Torrijos will
express disappointment that his close relationship with
President Bush has not yielded submission of the FTA to
Congress. However, recent positive statements of Democratic
Congressional leaders, endorsement of the pact by prominent
newspapers such as the New York Times, Washington Post, and
Los Angeles Times, and the Brookings Institution's
enthusiastic embrace of the agreement in its November
"Rethinking Latin American Relations" report augur well for
prospects for passage of the Panama FTA in the new Congress.

GILMOUR