Friday, July 22, 2011

Panama's economic experiment: no central bank

Panama has no central bank, attracting it praise from libertarian economists:

For a real-world example of how a system of market-chosen monetary policy would work in the absence of a central bank, one need not look to the past; the example exists in present-day Central America, in the Republic of Panama, a country that has lived without a central bank since its independence, with a very successful and stable macroeconomic environment....

This market-driven system has created an extremely stable macroeconomic environment. Panama is the only country in Latin America that has not experienced a financial collapse or a currency crisis since its independence.

In recent years Panama has experienced an economic boom, but this is reported with caution instead of optimism by the BBC:

Five years of unprecedented economic growth - and a continued projected growth rate of 8%-9% over the coming years - has turned Panama into a regional giant on wobbly legs.

Since 2007, 50 skyscrapers have been built or are being finished within the next year.

The size and scale of Panama's growth goes far beyond the rest of Central America.

But the growth spurt raises serious questions about overdevelopment.... it has grown as haphazardly and unregulated as a 19th Century gold-rush town.

So is Panama's growth unsustainable? Will we see the kind of speculative bubble, followed by a traumatic decline, that the first article says has been absent throughout Panama's history? If Panama really grows and sees real improvements to standards of living then the libertarians may have a helpful example. If it pops the way bubble economies have popped elsewhere, they must eat humble pie.

So the future of Panama has wider implications, and could help us to improve our understanding of economics.

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