The deluge of papers emanating from the office of Panamanian law firm Mossack Fonseca has caused ructions across Latin America, spurring governments and supra-national bodies into action on shadowy financial practices. On Twitter, the firm has pledged to cooperate fully with multinational anti-corruption investigations that have already raided its Panama City headquarters, along with regional offices in Peru and El Salvador. What these probes will uncover remains to be seen but the resignation of Gonzalo Delaveau, the head of the Chilean branch of Transparency International revealed to have links to 5 offshore companies, does at least prove that irony is still alive and well.

For its part, the Panamanian government was quick to attempt to distance itself from the furore, insisting that an entire nation ought not to be judged on the actions of a private entity such as a law firm. This would be an entirely valid defence were it not for a couple of issues:

• Firstly, successive Panamanian regimes have been instrumental in creating the opaque regulatory framework within which firms like Mossack Fonseca operate.

• Secondly, the links of the present government to Mossack Fonseca itself: Ramón Fonseca Mora – the “Fonseca” in Mossack Fonseca – served as an advisor-minister in the cabinet of current president Juan Carlos Varela until March 2016, when he took a leave of absence due to allegations that his firm helped launder the proceeds of corruption at Brazilian state oil giant Petrobras.

Now, amid mounting pressure from the Organization for Economic Cooperation and Development (OECD) and a diplomatic spat with the French on the topic of economic blacklisting, Panama’s government has adopted a more accommodating stance.

In a speech on Tuesday, President Varela announced the setting-up of an 8-member commission – including Nobel Economics Laureate Joseph Stiglitz – to review the nation’s fiscal legislation and mediate changes with the OECD and other bodies. This statement comes less than a week after Mr Varela had pledged to put forward measures to “strengthen transparency in legal and financial systems” to bring Panama further into line with international standards on corruption and money-laundering.

Whether it is the result of foreign pressure, internal soul-searching or a combination of the two, the president’s reformist zeal marks a significant departure from previous Panamanian financial policy. Since the 1970s, various governments had actively fostered a culture of regulatory isolationism, refusing out-of-hand to sign tax treaties with foreign powers.  Coupled with a laissez faire approach to taxation – no levies are imposed on offshore companies operating outside Panama’s jurisdiction – and strict banking secrecy laws – unauthorised disclosure of account holders still carries fines of up to $100,000 – the country rapidly established itself as a haven for murky commercial ventures.

Deliberately lax financial regulation is just one item on a laundry list of questionable activities centred on the Central American country. As early as 1919, the Standard Oil Company was allowed to register vessels locally to avoid taxes and charges in the United States. More recently in the 1980s, the dictatorship of Manuel Noriega used Panama’s financial institutions to launder the proceeds of the Medellín Cartel’s drug trafficking, reputedly to the tune of billions of dollars.

Against this backdrop, Juan Carlos Varela was elected in May 2014, at least partially on a ticket of combating corruption and promoting openness in government. At a domestic level, progress has been slow but steady: anti-corruption “tsarina” Angélica Justiniani took a scalp in December, issuing an arrest warrant for former president Ricardo Martinelli on charges of bribery, embezzlement and espionage (Believed to be residing in Miami, the long process of securing Mr Martinelli’s extradition from the US is in its opening stages).

On the international stage, in February, mere weeks before the Mossack Fonseca leaks occurred, Panama was removed from the Financial Action Task Force’s “grey list” of nations failing to meet set targets on “money laundering, terrorist financing and other related threats to the integrity of the international financial system”.

But Mr Varela’s desire for greater transparency at Panama Plc must also be tempered by an understanding of what it is that makes his country successful. Since the 1990s, Panama has experienced some of the highest growth rates in Latin America, with GDP increasing at an annual average of 8.4% between 2004 and 2013. Certainly a dollarized currency and relative political stability have helped the country scale these heights, but it would be a mistake to ignore the role the favourable fiscal regime has played in attracting investment and promoting growth.

At present, 370,000 International Business Corporations call Panama home, placing it third behind only the British Virgin Islands and Hong Kong. Taken in combination with the positive impact of the Panama Canal, the net effect is that 77% of Panamanian GDP is derived from services, a significant chunk of this figure coming directly and indirectly from banking and financial intermediation.

These riches have not always been evenly shared; 23% of the population lives in poverty, with extreme poverty still dispiritingly prevalent among Panama’s indigenous population. However, recent years have seen changes, with social programmes like the Red de Oportunidades taking on the tasks of developing social infrastructure and bringing the whole population under the umbrella of state-backed healthcare and education.

It goes without saying that these progressive policies require significant funding commitments, commitments that can only be met with money drawn in large part from Panama’s shady financial sector. Without recourse to this capital, the country would be unable to maintain existing levels of development, much less look forward to a more prosperous future.

In short, in the wake of the Mossack Fonseca scandal, President Varela faces a dilemma: confront his country’s detractors and risk becoming a pariah in the international community or tighten up the loose financial regulations that have brought so much prosperity and jeopardise Panama’s economic future.