A new treaty opened markets but entrenched limits.
The new treaty shaped Panama’s growth path.
Panama changed substantially between 1950 and 1970. Output grew fast, investment surged, and the corridor linking Panama City and Colon pulled people, capital, and services into a narrow strip. Yet that same surge hardened the dual economy, with strong growth in the transit corridor and weak inclusion across much of the interior.
The Remon-Eisenhower Treaty of 1955 was key to the changes. The treaty opened parts of the Canal Zone market to Panamanian producers and merchants, and it helped ignite domestic growth. However, it also embedded contradictions in labor markets, sovereignty, and distribution. This blog traces what changed, why it changed, and how the state shaped the result. It then draws out what this means for Latin American and Caribbean policymakers today.
Growth accelerated fast but concentrated spatially.
The rapid rate of change made it highly visible. Panama’s real gross domestic product (GDP) grew at an average annual rate of 6.4 percent between 1950 and 1970. Capital formation rose from 12 percent of GDP in 1950 to 25 percent in 1960 and 27.5 percent in 1970. Services expanded from 57 percent of GDP in 1950 to 63 percent by 1965. Meanwhile, the Colon Free Trade Zone grew from 8 percent of GDP in 1950 to 12 percent in 1970.
The composition of growth also changed. Domestic food supply reached 86.9 percent of total consumption by 1960 and 88.2 percent by 1970. Machinery investment, indexed at 100 in 1960, reached 215 by 1970, and manufacturing value added increased as well. However, there was no broad industrial deepening but protected expansion into a newly accessible market.
Space use changed as much as output. By the end of the 1960s, the trans-isthmian corridor dominated activity. It absorbed 76 percent of manufacturing, 85 percent of construction, 84 percent of communications infrastructure, and 95 percent of transportation services. Local canal employment had already fallen sharply after World War II, from 22,000 local-rate workers in 1946 to about 11,000 in the early 1950s. As a result, the expanding domestic service sector absorbed more than half of the increase in the active population during the 1960s.
Policy choices redirected the canal’s spillovers.
The strongest explanation for the changes is not simple geography or a generic rise in world trade. This blog is about policy. A transit-commercial elite, acting through a thin diplomatic state, used dated instruments to capture spillover rents from a foreign-controlled canal. The key mechanisms were the 1955 treaty, the Colon Free Trade Zone, and the dollar regime established in 1904.
The Remon-Eisenhower Treaty is at the center of that explanation. Before 1955, the Canal Zone functioned as a protected enclave, where duty-free commissaries and post exchanges supplied it directly and blocked domestic producers. The treaty weakened those barriers and opened access for Panamanian merchants and producers. It also allowed Panama to tax the income of Panamanian citizens employed in the Zone and to raise annual canal rents. The later jump in machinery investment between 1960 and 1965 shows that this was a slow institutional shift, not an overnight switch.
The second mechanism was spatial and legal. The Colon Free Trade Zone, established in 1948, created a domestic platform for capturing commercial rents outside the enclave. It gave Panamanian commercial groups a low-tax logistics node tied to canal traffic but outside United States control. The third mechanism was monetary: early dollarization removed exchange-rate risk and lowered barriers to foreign capital, even though it also narrowed policy tools. Together, these mechanisms accelerated growth while reinforcing a model centered on commerce, logistics, and services around the canal.
The state shaped its markets unevenly.
The state negotiated before it provisioned.
The Panamanian state did not begin this period as a strong development machine. Outside actors described the weak coordination, poor technical capacity, administrative instability, and the absence of a coherent economic policy. However, the state was not absent. It could negotiate, borrow, and shape access to key markets. That distinction matters because the diplomatic state came first, and the provisioning state came later.
The Remon-Eisenhower Treaty and the legal architecture around the Colon Free Trade Zone show that role most clearly. Those instruments did not nationalize the canal, but they redirected part of the canal-linked demand into domestic commerce and production. Public investment then tried to connect that corridor economy to the hinterland. A 1955 World Bank loan funded a highway department within the Roads, Airports, and Docks Commission (CAM). The loan also rehabilitated feeder roads to lower transport costs, open land, and stabilize the terminal cities’ food supply.
Provisioning widened, but fiscal reach stayed thin.
The state also expanded direct provision and regulation in utilities. Law 37 of 1961 created the Hydraulic Resources and Electrification Institute (IRHE), an autonomous agency with the exclusive right to develop hydroelectric resources. Cabinet Decree 235 of 1969 strengthened that role. A US$94.4 million program sought to raise generating capacity from 56 megawatts (MW) in 1969 to 287 MW by 1975. This decision was concrete risk-taking: the state moved into expensive, long-horizon infrastructure because private providers could not build what urban growth, light industry, and services required.
Yet the state’s reach remained bounded by the model it had helped shape. The low-tax environment that attracted mobile capital also limited fiscal capacity. Enclave sectors generated large shares of GDP but little employment and minimal revenue. That left the state, with a thin treasury, trying to integrate the periphery. The result was adaptive governance with hard limits, not full strategic control.
Today’s lesson is sequencing under constraint.
The first lesson is about constraints. Panama’s case shows that rapid growth around a strategic asset does not solve the problem of capture. The central question is not whether a country hosts a canal, port, mineral corridor, or digital hub. The question is who controls market access, taxation, and the surrounding legal architecture. In Panama, the 1955 treaty improved access, but it did not erase the deeper structure of a foreign-controlled canal and a domestically narrow capture regime.
The second lesson is about sequencing. Panama did not build broad state capacity first and then diversify. Market access and private investment moved first, and public provision followed later under fiscal strain. That sequence matters for today’s LAC policymakers, because institutions must convert rents into roads, power, services, and productive capability beyond the enclaves. If access to those rents expands first without capacity, growth can widen dualism rather than reduce it.
The third lesson is about trade-offs: the same instruments that attract mobile capital can weaken inclusion. Dollarized stability, tax exemptions, and spatial enclaves attract commerce quickly. However, they also narrow policy space, cut public revenue, and push labor into lower-productivity segments. The Remon-Eisenhower Treaty opened a domestic market and accelerated growth. Yet the broader model still left a wealthy corridor and an excluded periphery on one balance sheet.
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