AID assistance to Panama : evaluation of the post-1989 program

military action that year is evaluated. Findings concerning the program's three components are as follows. (1) The private sector reactivation program was initially conceived as a $108 million "safety net" for lending by Panama's banks, which were in a very poor position due to capital flight. However, when depositor confidence and deposits returned much more quickly than expected, the funds were reprogrammed to support a new program, FREN (Fund for National Economic Recovery), to boost the availability of funds for lending to the private sector. FREN has had significant positive effects on GDP and employment, although the overall unemployment rate declined only slightly. Reflows from FREN are expected to be considerable -- $100 million over the next 4 years -- and USAID will likely treat these reflows as additional assistance, attaching policy conditionality to their disbursement. (2) The public sector investment program provided $113.9 million for priority investments in agriculture, health, education, justice, other social sectors, natural resources, and infrastructure; $20 million of this was channeled through an emergency fund to support small, labor-intensive social development programs. While the initial disbursement was conditioned on Panama's planning specific structural adjustment actions, the second and third disbursements were linked to Panama's negotiations with international financial institutions (IFIs) -- the World Bank and the InterAmerican Development Bank -- USAID essentially adopting IFI conditionalities, which coincided substantially with USAID objectives. (3) The U.S. provided $130 million to help Panama settle arrears incurred with the IFIs during the crisis years; conditionality was again appropriately linked to that of the IFIs. Overall, however, the Panama program demonstrates the drawbacks of hurriedly designing a rigid program before circumstances are fully understood. While these rigidities were built in at high policy levels in the U.S. Government, the responsibility rests with USAID to use its influence at the design phase to guard against excessive rigidity. Lessons about program strategies are detailed.