Is Ground Connectivity Essential for Economic Integration between Panama and Colombia?

Historically, the economic integration between Panama and Colombia has been limited because there is no ground connectivity. The section of road of the Pan-American Highway that should connect both countries is incomplete. Today, there have been many attempts to construct the aforementioned road. The purpose of my dissertation is assessing if:  Ground Connectivity Essential for Economic Integration between Panama and Colombia?

It is worth pointing out that in this context, economic integration is understood as the integration among developed and developing areas.[1] For this reason the methodology used is mainly based on the World Development Report (2009) "Reshaping Economic Geography" which aims to look at the different factors that influence the economic integration at different geographical scales (international, national and local ones) such as the necessary transformations for integration (decreased divisions, shortened distances and increased densities) as well as the economic forces that interact (specialization, migration and agglomeration). The analysis of those variables together allow for deciding if economic integration is possible.

The resulting conclusions are surprising since my hypothesis was that ground connectivity was essential for economic integration. Nonetheless, real economic integration was in progress due to a free trade agreement that had already been signed.  There were many signs of goods and services specialization between both countries. Distance was not a problem because the majority of ships dock at both Colombian ports as well as Panamanian ones. Even if the highway were constructed between both, the construction would be economically harmful. The main reason for this is that Medellin, one of the main Colombian manufacturer cities, might use the Panama Canal rather than other Colombian ports. Consequently, many ships would not stop in the Colombian ports (Buenaventura and Cartagena), since those ports would not have economies of scale provided by the combination of goods from Medellin and other interior Colombian cities. The construction of the highway would be useful for Medellin because this city could transport their goods to both oceans from just one point. However, according to economic analysis, the construction would not be useful for Colombia as a whole since many cities might not possess economies of scale in the ports, thus making it economically unnecessary for ships to stop at them. Last but not least, the density and agglomeration of Panama is too small to create such a big highway investment when the exchange of goods is already done by ships which are required logistically to pass through both countries. The unique plus point in favour of the construction of the ground connectivity would be the increase on passenger commuting.

And about 80% of its extension is located in Panama and 20% in Colombia. However, in recent times Panama and Colombia have tried to improve their economic relations. As a result, both of them signed a free trade agreement and the bilateral trade will be boosted. Moreover, the Panamanian government is expanding the capacity of the Panama Canal in 100%. 

In terms of reduction of divisions, one of the most important positive effects for both is the reduction of taxes and having similar regulatory frameworks. Since, international transport companies could perceive them as just one country which in turn could boost the bilateral cabotage. Furthermore, the regulatory framework might encourage and facilitate new investments between both nations.

In terms of distances, the WDR (2009) presents as main objective, shorten distances between developing and developed areas with better connectivity. In this context, Panama has better transport infrastructure than any other country in Latin America and it can be considered as more developed in terms of logistic infrastructure. Hence, shorten distances between Colombia and Panama would be reasonable. However, nowadays Colombian and Panama have already partial connectivity through their ports. This is because Colombia has a vibrant cabotage between their ports and stops in Panama (Cartagena, Colon, Balboa and Buenaventura). Just on an average month, there are 62 trips in both ways from Buenaventura to Cartagena and from Cartagena to Buenaventura, making these two ports very important for the Colombian trade. Therefore, it can be concluded that there is already good connectivity which facilitates the cargo transport between both nations. However, in terms of air transport the supply is limited, since just three cities offer flights to Panama City. Additionally, in cases like Cali and Medellin, flights are just one per day, what makes it much very expansive in comparison than if there were ground connectivity. 

In terms of density, the size of the country market represents a small number in Panama in comparison to the Colombian one, 3, 4 million and 45, 2 million respectively. Also, at the local scale, the Panamanian population in cities like Panama City (1, 2 million) and Colon (204,000). Thus, those are very small in comparison to the Colombian ones. Furthermore, if the GDP per capita is multiply by the number of people, let’s say in Panama City and in Bogota, we will see that the size of the market is much more important in Bogota than Panama City, 47,914 million and 8,966 million respectively. Hence, reduction of trade barriers will be more beneficial for Panama in terms of population density.

The above transformations cannot be completely understood if economic forces that influence on them are not analysed. In the case of the specialization, figures present that there is still scope to improve in terms of exchange of goods. Nevertheless, this specialization is not as important as the specialization in terms investments. Nowadays, Colombia is the second investor in Panama all around the world and invests mainly in tourism and construction sectors. Likewise, Panama invests in Colombia and is the fourth investor in Colombia and invests mainly in financial services, textiles, beverages and others. Therefore, the specialization would be follow the same trends in terms of investments and the most likely is that investments will be boosted by the reduction of divisions.

Those trends are confirmed by the current causes of bilateral migration which in turn can be supported by the new economic theories of labour. Nowadays, international migrants travel from country to country in order to invest and send remittances to their respective places of origin. On the other hand, the migration at the national scale has a slightly different purpose. Both Colombians and Panamanians migrate from rural to urban areas looking for better employments. These trends will be reinforced in Colombia by the TDLA while in the case of Panama by the expansion of the Panama Canal. This situation might increase the supply of labour in urban areas and eventually could improve the quality of life for many people. However, some exceptional cases could be presented like the Darien province in Panama. Since there is no ground connectivity and therefore any control, this province could have serious problems of illegal migration and informal economies.

Finally, in terms of agglomeration economies, the Panamanian and Colombian cities present different agglomeration economies which in turn different externalities and level of hierarchies. The main two cities in terms of hierarchies are Panama City and Medellin. On the one hand, Panama City presents strong industrialization and localization agglomeration economies based on its condition of logistic transport hub and international financial centre. On the other hand, in the case of Medellin, the city has important industrialization and localization economies of agglomeration but mainly based on its industrial clusters. Both are main drivers of their national economies. In the specific Medellin has a strong complementarity ties with Buenaventura and Cartagena. In the hypothetical case that the Darien Gap will be closed in Panama, Medellin would use the Panama Canal because of its proximity and the facility to use just one port. However, Cartagena and Buenaventura could loss competitiveness. These conditions could be much more harmful for Buenaventura in comparison to Cartagena due to is condition of isolation.

In a nutshell, these conclusions lead to answer that there are already conditions to have economic integration without ground connectivity in terms of commerce but not in the terms of migration. Therefore, the importance of ground connectivity is mainly based on cheaper costs for passengers transport. There are several supporting reasons. First, specialization will be reinforced mainly in terms of investment rather than commerce. Also, the size of the Panamanian market is small for Colombia. Moreover, both countries already have a vibrant bilateral trade through their ports which may increase further due to the new bilateral free trade agreement. Finally, if the ground connectivity is constructed, there will be redistribution of the current economic patterns, improving the importance of Medellin but decreasing it for Cartagena and Buenaventura in particular.

Based on the findings above, there needs to be several further research work conducted on some key issues. First, it is essential to determine the very importance of connecting Medellin with Panama City for the two countries as a whole (and not just city to city). This research may be important because the country as a whole may not reap the same benefits – with the loss of competitiveness of other cities especially Buenaventura which is currently the most important port in the Pacific Ocean. The second key area of research would be in relation to the scale of losses of other areas (cities) as a result of the direct link to Medellin. For this, it is essential to calculate the gains of Medellin in terms of cost savings of shorter route and also the loses it may incur to the current port that it uses. The net benefit or loss would give a clearer picture of the importance of this ground connectivity.   Another key research work needs to be conducted in relation to the potential losses for the South American region as a result of the ground connectivity between Medellin and Panama in the event that Buenaventura loses competitiveness - therefore cabotage in South America may also be reduced. All these issues must be carefully analysed before constructing new port like the Interoceanic Canal.

José Alberto Petit Petzoldt
Master in Social Sciences
Urban Economic Development
University College London
Director Gerente- GAMAN CONSULTING

[1] Nowadays, Panama has better transport infrastructure than any other country in Latin America and it can be considered as more developed in terms of logistic infrastructure.