Democracy in Panama was restored in December, 1989 when Guillermo Endara, who had won the popular elections annulled by Noriega earlier that year, took office in a U.S. military base, along with his two vice-presidents: Ricardo Arias Calderon and Guillermo Ford. The country, however, was bankrupt and war-torn, with an almost non-existent political framework following the abrupt removal of the 21-year-old military dictatorship.

A tight control of government expenditures was one of the main factors that allowed a prompt economic recovery. In a matter of months, most visible signs of the U.S. military action were erased. The strengthening of democratic institutions attracted foreign and local investment, and before the mid-1990s Panama boasted one of the highest economic growth rates in Latin America.

Panama City grew toward the skies as new banks, hotels and office buildings elongated the capital's skyline. Tourism, which had long been ignored by past governments despite the country's strong leisure potential, became fashionable, and new luxury cruise ports and lodging establishments of all sizes appeared throughout the country.

A new government institution, the Inter-oceanic Region Authority (ARI) was created to administrate the lands and U.S. military facilities that gradually returned to Panamanian hands as stated in the 1977 Panama Canal Treaties.

Democracy was consolidated in 1994, the year the most transparent elections in the nation's history were held. Ernesto PÈrez Balladares, of the Democratic Revolutionary Party (founded by Omar Torrijos) became Panama's president, and began an aggressive campaign to steer the country toward globalization by privatizing a number of government entities. Balladares also launched a series of public work projects that included the refurbishment of the Pan-American Highway and the construction of the Corredor Norte and Sur expressways in the capital.

Perhaps the fear of change in regards to Balladares' economic policy can be considered one of the factors that motivated a majority of Panamanians to vote against the PRD in the 1999 elections. Such a decision made more history than immediately meets the eye. On September 1 of that year, Mireya Moscoso, the widow of legendary 20th century-leader Arnulfo Arias, became the first female elected as President of the Republic of Panama. Four months later, on December 31, on the steps of the Panama Canal Administration Building in Balboa, Moscoso led the nation in reaching its most coveted dream: the complete withdrawal of U.S. troops from the Isthmus and the control transfer of the famous waterway from U.S. to Panamanian hands.

Moscoso, who led the country into the 21st century, presented the nation with a package of projects targeted at reducing poverty. She discontinued her predecessor's policy on privatization. This, however, did little to spare the country from the effects of a world-wide economic recession that inflated national unemployment rates to over 14%. Nevertheless, the nation's booming tourist industry, a strong maritime sector and a healthy banking system gave the economy a measure of stability.