Panama now boasts the second-most competitive economy in Latin America according to the 2010-2011 Global Competitiveness Index from the World Economic Forum (WEF). A report issued this month says the tiny Central American nation came in second to Chile. Costa Rica fell one spot to take third place in Latin America.

Countries like Uruguay and Peru also made great progress toward sounder fiscal management, increased market efficiency, and other competitive goals, says the Swiss-based WEF, adding that improvement throughout the region reflects “the strong resilience within Latin America and the Caribbean in the face of the recent severe global economic downturn…”

Reforms in the region have helped it weather the global crisis and stimulate its growing economies.

Most Latin American countries improved, while only three (such as Venezuela) saw declines. Bolivia, Panama, and Paraguay posted the largest improvements in the region, says the report, adding that many other economies improved slightly or at least remained stable, including Brazil and Uruguay.

Says the WEF: “In particular, the reduced debt levels (with longer maturity profiles) of most countries in the region, coupled with their increased foreign reserves, have been instrumental in reinforcing their resilience and ability to support their economy with stimulus measures.” Although regional GDP contracted by 1.8% last year, projections for 4% growth in 2010 are more solid than those for so-called advanced economies, which are considerably lower at around 2%.

Panama: The Story of its Success

But the real story of success is Panama, which jumped from 8th place last year to rank second in 2010. The WEF attributes the jump to “a more positive assessment of infrastructure quality,” as well as to technological factors.  Major investments in infrastructure, sound macroeconomic management in times of crisis, and a legacy of well-developed financial markets also helped.

Panama has highly ambitious infrastructure plans for 2011-2014 (the new administration will step down in 2014). The government’s budget for 2011 may well be the biggest ever, with massive infrastructure projects such as the Panama Canal expansion, a new airport, and major roadworks fueling the economy while costing the nation billions.

Panama could improve its educational system, labor market flexibility, and human resource initiatives to further spur long-term growth and become more competitive, says the WEF report.

Though Chile remains the most competitive economy in Latin America, the report shows a slight decline in its score, partly due to flaws in its educational system. Still, an efficient goods and labor market, a sophisticated financial market and the largest pension industry in the region help make Chile’s economy more competitive than those of “first world” countries such as Iceland and Spain.

According to the WEF index, the most competitive economies in the world this year are Switzerland, Sweden and Singapore, respectively (The United States fell two places to fourth position this year).

The Index is based on 12 “pillars” of competitiveness or categories, which include infrastructure, macroeconomic environment, health and primary education, higher education and training, goods and labor market efficiency, technological readiness, market size, and innovation.

The rankings are calculated from both publicly available data and a survey of over 13,500 business leaders in 139 economies. Read more about the index here.

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