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Panama’s economic success story over the last decade has been well documented, after an unprecedented spurt of growth that has seen the country develop as the economic capital of the region. Panama’s per capita gross domestic product has doubled in the last 10 years, a feat that has caught the attention of the world.

As noted in the most recent economic report, the growth has been powered by the strength of the construction, mining and financial industries, in addition to public projects.  But economic analysts like to dive deeper, and they often ask, why? Why has Panama succeeded while so many other economies have struggled?

Richard W. Rahn, a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth, asked that question and he came away with a specific answer: the link to the U.S. dollar. Panama does not have a central bank, Rahn notes in a recent column in the Washington Times.

“The standard answer, from both government officials and business leaders I spoke with, is that Panama does not have a central bank. That is, Panama uses the U.S. dollar as it currency. As a result, it cannot “inflate” its way out of any temptation to spend far more than tax revenue. Using the dollar without a lender of last resort serves as a natural debt break and causes some spending and taxing restraint — even though both are above the growth maximizing rate.”

Using the U.S. currency provides Panama with a wide variety of advantages, Rahn argues. Those advantages have given Panama a “competitive advantage” over the rest of the region. Another excerpt from the column:

“Panama does not have currency controls, and so the use of the U.S. dollar is as free as using the same U.S. dollar in each of the U.S. states. Having the dollar as its currency gives Panama’s banking system a competitive advantage over other countries in the region, because there is no exchange-rate risk or costs of currency conversion to U.S. dollars.”

Read the full article here.