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SOVEREIGN MAN

What emerging markets have in common with puberty

April 8, 2010
Panama City, Panama

Do you remember that really awkward phase we all went through as adolescents?

Growth spurts, voice changes, menstruation, and yes, pimples– in the end, while we all came out of it more mature and grown up, there was a difficult and sometimes painful transition period in which we had to learn how to deal with new realities.

Developing countries go through the same sort of transition, and it can be just as awkward and painful.

Typically, they try to transition from fledgling banana republics with corrupt governments and byzantine regulatory systems to stable democracies with a growing middle class and reformed tax code.

Most countries have a very difficult time with this.

For example, I expect China to undergo significant pain as their economy continues to inflate. One day the Chinese will find that their rising currency and wages are no longer cheap, and they’ll have to seek competitive advantage in something other than manufacturing knick-knacks.

In other words, a country of a billion people cannot go from making socks to being the world’s investment bankers overnight, or without any fuss.

These sorts of transitions are very difficult because they affect the entire social landscape– employees are laid off and have to retrain to new skills, businesses go bust and reinvent themselves, etc.  Of course, politicians always get in the way by passing laws which only prolong the pain.

Overall, the transition cycle is not easy, and few countries pull it off well.  In my assessment, Panama is one of the countries succeeding.

20-years ago, with its puppet dictator, open drug trade, and banana exports, Panama was nothing but a bad punch line.  Over the last decade, though, the country has been able to successfully develop a service-oriented economy with robust tourism, banking, and transportation sectors.

Today, while the country is definitely no Shangri-La, Panama is thriving and on a very clear upward trend.

Remember, this is ultimately the most critical point to consider when planting a flag overseas– is the country or jurisdiction on an upward trend? Will it be a better place 10-years from now?

When you survey the political landscape in developed countries, the headlines generally tend to get worse and worse.  Certainly, not all news is bad, but the subversion of civil liberties, erosion of financial privacy, and rapid growth of big government seem to be at least weekly occurrences.

Meanwhile, in developing Latin economies like Panama, Chile, and Peru, things are consistently improving– they are going through the awkward growth phase as smoothly as possible.

As an example, the Martinelli administration in Panama recently passed comprehensive tax code reform.  While increasing the sales (consumption) tax by 2%, it cuts corporate and some personal tax rates, reduces some property tax rates by half, and completely eliminates over 30 types of tax.

This new, simplified tax code is a major step in the right direction, and it will be excellent for business.

The government here clearly understands that successful businesses hire employees and generate wealth in the economy.  This model has done wonders for Singapore and Hong Kong, and Panama is following suit.

Yes, there are still elements of poverty, corruption, drug trafficking, etc. in Panama.  The trend, however, is undeniably one of consistent improvement and greater economic freedom.  Ultimately, this is exactly what helps countries successfully transition through those difficult growth phases.

As I’ve said before, until these economies become large or popular enough, local capital markets tend to be off-limits for armchair investors.  I don’t see TD Ameritrade offering access to the Peruvian stock market anytime soon.

It is possible, however, for intrepid active investors to open local brokerage accounts and capitalize on the rising tide… though the most passive investment opportunities generally tend to be foreign bank accounts (which provide liquidity and exposure to the currency) or property (which is non-reportable and an excellent inflation hedge).

More on these topics in future letters.

About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

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Comments on this entry are closed.

  • Aaron

    Simon, Would you mind emailing me or posting the articles from Feb 24th and 25th regarding Second Passports for those of us who are recent additions to your email group? I very much appreciate your informative writing. Thanks!

  • Alan

    Simon
    Thank you for the great service you provide to us.
    Please advise whether Panama has signed tax exchange agreements with other countries as requested by the OECD. I was looking to set up an alternative residence in Costa Rica, but after further investigation and your very informative letters I have decided to switch to Panama. Can I still order your Black book of contacts in Panama.
    Kind Regards Alan

    • Alan

      Simon
      I recently visited Panama and was impressed with the progress since I was there in 2005. Is it still possible to purchase your black book of contacts for Panama?
      Kind Regards
      Alan
      p.s. I am very happy that your operation was sucessful.

  • Jeff

    Ditto!
    I subscribed with my real email, but never received the Second Passports newsletter either.

  • http://www.targettendonitis.com Alex

    Simon, you’ve mentioned some orts and bits about establishing a foreign bank account in a different country without actually having to go there. How about a brokerage account? Any advice on that?

  • Rexx

    Ditto! Ditto! I only got one of the two Second Passports newsletter also. In addition, I listened to the audio interview with the real estate company you interviewed in Panama and talked about the Chiriqui Province and I filled out the contact info page for them to contact me about purchasing property in Panama but I never got a response from them!!! Unfortuneately I do not have an extra $1,000.00 for the panama black paper but would like atleast to get that real estate company to atleast contact me.

    In closing, Simon thank you for all you do. I know I have thanked you before but just want to let you know how much we ALL appreciate these letters from the field and all the hard work that you do. Rexx

  • Jeff

    Simon, you have often mentioned foreign real estate ownership as being non-reportable. Can you double check my understanding of this? It seems that the only way this would really be possible would be if you paid for the property in cash, and never rented it out. Otherwise, you would have a loan and probably a bank account in the foreign country that you would have to report. If you rent out the property to help defray costs, then you would have to report the rental income. Even though it is possible to purchase property for much less than say the U.S., if you were looking for a nicer property in a country that was not super cheap, then it ends up being out of reach for most people to pay cash for the property. Am I missing something? Thanks.

  • Gioia P. Ambrette

    What do you think of Nicaragua?

  • Dave

    I agree with Alex – would you give some pointers on opening brokerage accounts in foreign countries. I’m particularly interested in investing in Latin American countries but can’t find a broker in my own country who offers this facility.

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