Getting to know the General's son

In October 1998, Martín Torrijos, just 35, was unexpectedly thrust into the race for the presidency of Panama when Ernesto Pérez Balladares, the incumbent and leader of his Partido Revolucionario Democrático, was unable to run for reelection. Torrijos's résumé was patchy. In his teens he fought briefly with the Sandinistas in Nicaragua, but his government experience was limited to four years as a deputy minister in Panama's department of the Interior and Justice. During college breaks and after graduation from Texas A&M, he worked for a family friend who owned a chain of McDonald's franchises in the U.S., before returning to Panama in 1990 to become an investment consultant specializing in emerging markets.

What he lacked in credentials he more than made up for in name: Martín is the son of General Omar Torrijos, the charismatic leader of Panama from 1968 until his death in a plane crash in 1981. The general ran a self-described "dictatorship with heart" and most famously negotiated the 1977 treaty with then­U.S. president Jimmy Carter that turned sovereignty of the canal over to Panama.

Name recognition proved insufficient. In the May 1999 election, Torrijos fils lost to Mireya Moscoso, who boasted an impressive legacy of her own. The widow of former president Arnulfo Arias, the populist right-wing leader who had served as Panama's president on three occasions -- the last an 11-day period in 1968 that was cut short by Omar Torrijos's military coup -- Moscoso won by 7 percentage points.

The defeat hardly dampened Martín Torrijos's ambition. The day after the May 2 election, he made a speech announcing a new campaign: He would seek to become secretary general of the PRD, the party founded by his father.

Martín, as he is known in Panama, quickly went to work. He stumped the country, building support among the PRD rank and file, and won the leadership post in 2000 with 92 percent of the party delegates' votes. Torrijos then shook the party to its core, overhauling its operations. He democratized the PRD by instituting primary races for all its offices, strengthened the party structure in all 600 counties, and plumped up membership into an organization 500,000 strong, including a powerful youth constituency -- no small force in a country of 3 million people.

As head of the leading opposition party, Torrijos lobbied for extensive reform to the social security system and blasted Moscoso for government abuses. In short order the young politician skillfully carved out an identity for himself as a determined leader bent on modernization.

Not that he turned his back on the past. When he ran again for the presidency last year, his campaign was long on the family legacy: His father's portrait -- in nostalgic sepia tones -- appeared on Martín's posters all over the country. But with the unemployment rate in Panama running in the low to mid-teens and the crime rate increasing, Torrijos's slogan, "More Jobs, More Security and Zero Corruption," had an equally strong appeal. His promise to tackle abuses of government power resonated with voters weary of the excesses of Moscoso, who grew the government payroll by more than 25 percent -- lifting the number of civil servants to 180,000 from 140,000. All the while she allegedly spent millions from discretionary funds on fancy clothes and jewels, attempting to justify the purchases by declaring that she couldn't represent her country looking like "a homeless person."

Torrijos won soundly, taking 47.4 percent of the popular vote, nearly 20 points more than the nearest contender, former president Guillermo Endara. His party, in an alliance with the smaller Popular Party, secured a majority in the unicameral legislature, with 42 of 78 seats. (Although the PRD has traditionally held a dominant position in the legislative assembly, this was the first time it had outright control.) Taking office in September 2004, Torrijos vowed to deliver on the coalition's campaign platform to create a Patria Nueva -- a new homeland. As he told Institutional Investor in an interview in his office at the Palacio de las Garzas, or palace of the herons, in the old part of Panama City, his goal is "to put in place the basis for a modern Panama, a country of opportunities that gives instruments to the people so they can take advantage of economic growth and achieve full realization as citizens."

That's a lofty vision. But whether Torrijos can reform and revitalize his country as he did his party remains an open question. His support in the business community, which is crucial to the success of his administration's plans, remains shaky, for example.

Certainly, Panama could use some help. Thanks to its strategic location and the wealth generated by the canal, Panama boasts a highly developed, competitive services sector in finance, transportation and telecommunications. But despite the progress it has made in the past 15 years, the country continues to suffer a hangover from the troubles of the 1980s, when it was ruled by corrupt, drug-trafficking strongman General Manuel Noriega. It boasts the second-highest GDP per capita in the Central American region, about $6,300, but its income distribution ranks among the worst in the hemisphere, with 40 percent of the population below the poverty line. The country's economy is sharply divided between a modern, competitive international services center that includes the canal, ports and banking activity, and a backward agricultural sector. A tax system dubbed "unfair" by the new president has only exacerbated the disparity, by heavily taxing salaried workers in the nascent middle class. The 10 percent of the population found at the bottom of the income scale carries four times the tax burden of the top decile.

Despite economic growth of more than 5 percent for two successive years, the government's fiscal deficit soared to $714 million in 2004, or an uncomfortable 5.2 percent of GDP. Gross public sector debt was 70 percent of GDP, or $9.8 billion, up from $6.9 billion in 2000. The country's generous social security system, the Caja de Seguro Social, saddled with the burdens of a growing population of seniors and a relatively small active workforce, is running out of funds.

Looming in the background, of course, is the future of the Panama Canal, whose revenues make up 6.5 percent of GDP. As more of the so-called post-Panamax class of megaships make their way from the world's shipyards to its oceans, the country faces an urgent need to expand the 91-year-old passageway -- or risk losing tens of millions of dollars in revenues from ships too large to use the canal. Though it would take ten years and perhaps as much as $10 billion to complete -- a huge endeavor for such a small country -- the government sees it as a priority. Says Torrijos: "The canal must be a motor that gives momentum to growth."

AFTER AN UNCERTAIN START -- it took the Torrijos administration three months longer than expected to reveal its fiscal reform program -- the new cabinet has been working hard to get its economic house in order, plugging the leaks in government finances, rebuilding revenues, improving the debt outlook and revisiting commercial relations with its biggest trading partner, the U.S.

In January, Torrijos unveiled a fiscal reform package whose centerpiece was an alternative minimum income tax. This controversial new revenue generator targets corporations, as well as individuals earning more than $60,000 per year, by imposing a tax of 1.4 percent on gross income. This measure, over the next four years, should increase tax revenues -- currently an anemic 8.5 percent of GDP -- to about 12 percent of GDP, the level in the 1980s, according to Economy and Finance Minister Ricuarte Vásquez.

Torrijos also laid out a series of austerity measures. These range from largely symbolic gestures -- government employees traveling on official business must fly economy class -- to significant cutbacks: By 2007 the ranks of the civil service will have been slashed by more than 20 percent -- to the 140,000 who were on the payroll when Moscoso took office in 1999. Taken together the cutbacks and the new tax should reduce the government deficit from the current 5.5 percent of GDP to about 3.5 percent in 2005 and 1 percent in 2007. Torrijos plans to announce his strategy for mending the social security system later this year, after he completes intense negotiations with business leaders and other interested parties.

Torrijos has moved to clean up government as well, creating a National Council of Transparency Against Corruption, passing a law that grants easier access to official information and instituting a code of ethics that, among other things, forbids government officials from receiving gifts. Staff salaries, along with a full accounting of the president's discretionary funds, are now posted on the Internet.

To be sure, not everyone is enamored of Torrijos, beginning with his political opponents. "I feel betrayed by Martín. No corrupt people are in jail, he increases taxes without consulting anyone, and we don't know how he's going to use the money," says Ricardo Martinelli, leader of the pro-business, anticorruption Cambio Democrático party and owner of Panama's largest private company, a supermarket chain and conglomerate employing more than 8,000 people.

Adds Roberto Brenes, general manager of the Panama Stock Exchange: "The philosophical concept of the reform is not developmentalist, it is fiscal; the objective is to collect now. It reflects a short-term philosophy of charging [taxes] and hurts the competitiveness of the country. The reform seems to reveal a Martín who is more a populist than a modernizer."

Torrijos, not surprisingly, takes a different view, portraying his moves as part of a sweeping change that is a necessary first step toward genuine modernization. "Without doubt, I represent a new generation in Panamanian politics -- a generation that is willing to assume the challenge of advancing a series of reforms that will create good prospects for the development of the country," he says.

Early signs are encouraging. His first stabs at fiscal reform and good-government initiatives have won the backing of Wall Street analysts and investors worried about the country's creaky finances. Last month, Standard & Poor's upgraded the outlook on Panama's sovereign credit rating to stable from negative. "A key contributing factor to the outlook revision has been the determination of the president and his economic team and their commitment to improve Panama's overall fiscal situation in order to set a firmer foundation for growth and poverty reduction in the medium term," Lisa Schineller, S&P's director of sovereign ratings for Latin America, tells II.

It's a verdict that would no doubt please Martín's flamboyant father. But the son, argues Guillermo Chapman, president of economic consulting firm Indesa and a former Finance minister, is manifestly his own man. "He didn't get to power on his father's mantle," Chapman says. "He has shown a great deal of political ability without making a great show of it."

AS PRESIDENT THE GENERAL'S SON IS NEVER FAR from his father -- two photos of Omar Torrijos hang prominently in the waiting room just outside Martín's office.

The general left quite a legacy for Martín to live up to. A striking figure who most often wore a crisp military uniform in public, he was a man of grand gestures and easy intimacies. Omar Torrijos would give interviews to foreign journalists in his home, then dash off in a helicopter to drop into villages unannounced to mingle with the crowds he drew wherever he went. "The general used to come without guards and walk here, and 150 people would come out to follow him," recalls Dorothy Knight, 81, a resident of Chorrillos, the neighborhood bombed in the 1989 U.S. invasion that led to the ouster of General Manuel Noriega.

Torrijos senior came to power in a 1968 coup against the democratically elected Arias, who had begun to dismantle the National Guard, shedding senior officers at Torrijos's level. As the country's leader, the General adopted authoritarian tactics, dissolving the legislature and political parties. But he is remembered for his loyalty to Panama's lower and middle classes, for redistributing farmlands and expanding education programs.

General Torrijos loved to play Robin Hood -- he once expropriated a private golf club in central Panama and turned it into a public park -- later renamed, of course, Parque Omar. (The wealthy owners were compensated, and they built a new golf club elsewhere.)

His larger-than-life personality attracted an eclectic mix of friends and admirers, among them English novelist Graham Greene. Their friendship began when Torrijos -- aware of the writer's interest in Latin America -- sent Greene a personal invitation to visit Panama. Soon the two were traveling together and sharing meals at the general's home, where Torrijos would --over lunch or while lounging in his hammock-- describe his vision for a socially democratic Panama. In his 1984 memoir, Getting To Know the General, Greene wrote of Torrijos: "I've never known him to talk down to anyone -- even to a child of five."

To be sure, the Omar Torrijos history is not without its dark side. Last year a truth commission set up under president Moscoso documented the disappearance of dozens of political opponents under the military regimes of Torrijos and Noriega. The cases are now being discussed before the Inter-American Commission on Human Rights in Washington, D.C., which will decide whether to advance them to the Inter-American Human Rights Court.

There are traces of the general in Martín Torrijos's features, although the son has a rounder face and unusually large and wide-set eyes. He is slow and deliberate in speech, even hesitant. He normally wears the kind of tailored business suit appropriate for Panama City, a fast-growing international trade and banking center where a new glass high-rise appears every few weeks.

If Martín Torrijos projects the image of a modern, worldly statesman, his desire to put government finances in order to fight poverty and improve the quality of life of all Panamanians calls to mind the man-of-the-people populism of his father. "I recognize in him his perseverance, his sacrifice," Martín says of the general. "He really was a man who acted on his principles, and that is an example always present with me."

During last year's campaign, Torrijos's political skill was put to the test when he had to publicly address the delicate fact that he is Omar Torrijos's illegitimate son. Martín did not live with the general as a child; he spent his early years with his grandparents in Chitré, a rural town about 200 kilometers southwest of Panama City, where his mother lived and worked.

Martín turned the situation to his favor. At a closing campaign rally, close to 100,000 followers were brought to a hush when he acknowledged his past, saying, "Yes, it's true. I was not born in a perfect home . . . but I will never be ashamed of my grandparents, or of my mother, Xenia Espino, or of loving [General] Torrijos Herrera! On the contrary, every day I feel more proud of them, and those memories of my infancy act as a stimulus for struggling so that the children of this country don't have to suffer what I suffered."

Of course, being the son of a powerful caudillo brought plenty of benefits, too. In his early teens, Torrijos was taken under his father's wing for an up-close glimpse of international politics. He attended the single most important event in Panama's history since the Atlantic and Pacific oceans were first linked: the signing of the Panama Canal Treaty in Washington, D.C., in September 1977. The general took a special interest in Martín's education, seeing to it that he was educated at St. John's Military Academy near Chicago and finding him a surrogate parent and counselor in a friend named Cirilo McSween, a Panamanian living in the Chicago area who owned 11 McDonald's franchises and was vice president of Indecorp bank, then the largest minority-owned bank in the U.S. "We were able to counsel and guide him during his stay," says McSween. "After his father's death we continued the relationship, like a family."

Torrijos worked for McSween at McDonald's, learning not only how to sell burgers and fries, but also how to deal with employees, vendors and financial negotiations. "He developed things that would make you successful in life -- mental attitude, judgment, honesty, dealing with banks, budgets," says McSween. "I gave him room to know everything important: running a budget, inventory, managing people. To be the president of a country, you have to know your budget, live within the resources of a country."

IN 1978 THE 16-YEAR-OLD TORRIJOS DID A BRIEF stint as a rebel fighter. He joined more than a thousand Panamanians who chose to fight beside the Sandinistas in Nicaragua in the attempt to overthrow dictator Anastasio Somoza. The battalion was organized by charismatic Costa Rican doctor-fighter Hugo Spadafora, though Torrijos's commander was Edén Pastora, a.k.a. Comandante Zero, famous for leading a Sandinista commando force that seized the National Palace and took Nicaragua's Congress hostage, a spectacular operation that demolished the image of Somoza's national guard. (Pastora later turned against the Sandinistas when they were in power.)

Pastora watched over Torrijos on the southern front, shielding the teenager from serious danger. "He moved with me, he moved with Hugo Spadafora, he moved everywhere, behind the lines, where I was," Pastora told II in a telephone interview. "It was an enormous responsibility to have the son of General Torrijos with us. I could not allow him to go into combat; he was very young, he didn't have military training." Torrijos stayed in Nicaragua for three months his first year, then returned to Nicaragua for two months in 1979, the year the Sandinistas succeeded in toppling Somoza.

Back in the U.S., Torrijos returned to work for McSween to pay for his education at Texas A&M, where he studied political science and economics. In 1994 he became a deputy minister in the Interior and Justice department, working under president Pérez Balladares of the PRD.

By the time he ran for the presidency, Torrijos had already established close alliances with the men who are now members of his inner circle. Torrijos's "new generation" cabinet, or "Team Martín," as it is often called, is a well-trained, predominantly 40-something crew that includes several ex-classmates from Texas A&M, as well as lawyers and former executives and one celebrity.

Rubén Blades, the six-time Grammy Award­winning singer-composer, is now Panama's minister of Tourism. Blades, known as the thinking man's salsa singer, is no stranger to politics. He holds two law degrees, including a postgraduate degree from Harvard Law School, and made his own run for presidency in 1994 under the banner of the progressive party he co-founded, Movimiento Papa Egoró, winning a respectable 17.2 percent of the vote. Now he is delivering on a pledge to give up performing for five years to push Panama as a destination. "I think this work makes me a better person and a better Panamanian," he says.

The Panamanian Institute of Tourism "will exploit the fame and international recognition of the actor and music star," Demetrio Olaciregui, marketing director of the tourism institute, tells II. Last month the ministry launched Panama's biggest-ever tourism promotion campaign, a $9 million advertising and marketing blitz targeting the U.S., the U.K. and Europe. Blades's goal is to increase the number of service jobs in the country and to double tourism revenues from 6 percent of GDP to 12 percent by 2009. Under the slogan "The Path Less Traveled," the campaign aims to draw more visitors, create hundreds of jobs and lure foreign investment to hotels and residential villas.

Torrijos's other cabinet members have more conventional résumés. Chief of staff Ubaldino Real holds three Texas A&M degrees, including an MBA, and was once a financial restructuring consultant with KPMG Peat Marwick. Vice president and Minister of Foreign Relations Samuel Lewis, son of Panama's late ambassador to Washington, Gabriel Lewis, formerly ran various family interests, including agricultural, packing and distribution companies.

Torrijos and Lewis, especially, are emblematic of the new generation of leaders, says Robert Pastor, vice president of international affairs at American University in Washington, D.C. They are, he explains, "educated internationally, know the U.S., know Latin America and the world, are focused on free trade and markets and absolutely committed to democracy."

Linda Watt, the U.S. ambassador to Panama, calls the Torrijos team "technocrats with a social conscience, strategic in their thinking, defining and implementing holistic strategies in foreign, economic and social policy."

TEAM MARTIN HAS SOME HEAVY LIFTING TO DO if it wants to justify S&P's recent vote of confidence and get out from under the cloud left behind by the previous administration's increase in borrowing and spending.

The fiscal reforms announced in January were only the first steps, and even then, they required some serious wrangling. The private sector complained bitterly about the alternative minimum tax, which the government's draft legislation originally set at 2 percent of gross income for corporations and individuals earning more than $60,000. When the cabinet and private sector representatives came out from behind closed doors, the proposed tax had been lowered to 1.4 percent -- a drop that analysts say will not throw the deficit-reduction plans off track.

Now the Torrijos administration must use its political capital to introduce further changes: It must retool the social security system, convince Panamanians to vote yes on a referendum to approve the expansion project for the canal and improve the country's trading relationship with the U.S.

A controversial batch of reforms addressing changes to the social security system, including pensions and health care, is expected to be released by midyear. Social security affects far more people than tax reform -- a total of 900,000 workers. The current retirement component is generous, providing pensions for men beginning at age 62 and women at age 57. But, shortchanged by evasion, underpayment and the growing demographic weight of the elderly and a lowered birthrate, the system is sinking under an actuarial deficit of $4.5 billion.

The government has not revealed its reform plan, but local press reports say that proposed reforms will likely raise the retirement age, increase pay-in quotas for workers and employers and privatize some services. Opponents -- principally unions -- are gathering force and launching alternative proposals that call for a cap on the increase in quotas while suggesting other ways to raise government revenues.

Moving its agenda forward will be a delicate public issue, with high stakes for the Torrijos administration. The danger is that the reforms could trigger a popular backlash that will spell trouble for Torrijos and his cabinet next fall when they put forth a referendum on the expansion of the Panama Canal. Voters, dissatisfied with Torrijos's economic policies, could vote against the referendum and put the project in jeopardy.

At present nearly three quarters of the world's container fleet fits within the Panamax limit, the maximum size of a vessel able to pass through the canal. But 332 post-Panamax ships are already circling the globe, all forced to chart a course around the southern tips of South America or Africa. Some industry watchers believe that, given their efficiencies, these megaships may be the next wave of preferred shipping vessels. To accommodate them the canal authority would have to build a set of deeper and wider locks west of the existing ones. "What we need to do now is guarantee that the country takes advantage of the full potential of this important waterway of world trade," says Torrijos. "It must be an important part of the development strategy, and the presence of the canal and all the opportunities that it signifies must be put at the service of the country."

Informed observers estimate that the project will cost anywhere from $3 billion to $10 billion, although the government cagily refuses to talk about the price of expansion. "I have no cost range right now. It's important that once we come up with the range, it stays there," says Alberto Alemán Zubieta, CEO of the Panama Canal Authority.

Financial markets and canal users are paying close attention to the project. Analysts speculate that new bonds will have to be issued to pay for the expansion, but the PCA insists that the expansion, if approved, will be financed with user fees. The problem, says Fernando Manfredo, a former administrator of the canal, is that a user-fee plan is theoretical. "What happens if usage is not that high?" he asks.

Commerce and Industry Minister Alejandro Ferrer says that all construction contracts will be subject to international bidding. Not surprisingly, China, now the canal's No. 2 user (after the U.S.), appears to be gearing up to become a key player. In October it sent a high-level mission including representatives of China Overseas Shipping Corp. and the China Yangtze Three Gorges Dam Project Development Corp. to meet with Zubieta. China "manifested its interest in participating in construction and financing," says Yu Furong, deputy representative of the China-Panama Trade Development Office in Panama City. But China is not alone -- also looking on are companies from the U.S., Europe, Japan and Brazil.

In the meantime, Panama is working to strengthen its trade position with the U.S. through bilateral talks led by Ferrer and assistant U.S. trade representative for the Americas Regina Vargo. "One of the objectives of our negotiating strategy is to improve the situation that totally favors the U.S.," says Ferrer. Panama hopes to reduce its trade deficit of $2 billion with its largest trading partner. Talks began last April and are progressing slowly. In early January negotiations bogged down over Panama's request to bump up its agricultural export quotas, including limits on chicken, rice and pork. At the last round of talks last month, trade teams reached an impasse again, this time over sensitive agricultural items, including sugar. A date to resume the meetings has not been set.

Panama is also driving to deepen and diversify trade ties with South America. Torrijos has built strong relationships with presidents Luiz Inácio Lula da Silva of Brazil and Ricardo Lagos of Chile and recently attended a meeting of Mercosur, the growing South American trade association. In early January, Chile's foreign minister, Ignacio Walker, met Torrijos in Panama City to renew long-stalled free-trade negotiations.

Formalizing trade relations will be essential to Panama's participation in the global economy, says Ferrer. "Once we straighten out the country to make it more competitive, there is no going back," he adds.

THE SENSE OF FORWARD MOMENTUM IN PANAMA is already winning fans abroad. The change in "government is very welcomed by Wall Street," says Geoff Gottlieb of the emerging-markets economic research group at Goldman, Sachs & Co. "There had been such poor transparency around [public] accounting, and the president appears first-rate in terms of policy outlook." Daniel Hewitt, a senior international economist and Panama specialist with Alliance Fixed Income in New York, concurs: "It is not all that common that you get this positive a shift in reform attitude. It is painful to make reforms like this, but they have a chance to put Panama in a different economic position."

Tourism Minister Blades praises Torrijos as a president who "seeks sustainable, long-term changes. He has a clear and statesmanlike vision, [and] when there is a long-term plan, improvisation is left on the sidelines."

Withal, it appears that Martín may yet fulfill the general's vision for his son, as once described to his friend Cirilo McSween: "Omar said, 'I want for Martín to work with me. He has the ability to take the country to another point.'"