Gwyn Topham in Panama

There's no shortage of girls throwing confetti and boys spraying water, but carnival on Panama City's main strip is a slightly subdued affair. While thousands are gathered in Via Espana, police cordons and the succession of identikit pop singers and merengue bands on the main stage suck the spontaneity from proceedings. A countrywide death toll reaching double figures by the final day points to wilder times elsewhere.

Public offices at least have closed for carnival. Cartoons in the leftwing daily La Prensa depict the political and business elite in full party swing, the thornier issues of corruption, bribes and inquiries tucked away. It is little more than a year since Panama gained sovereignty over the heart of its own territory, the Canal, and with it the possibilities for commercial and other exploitation.

Shipping, banking and big business have always seen the potential in Panama, but tourists have been slower to arrive. At Panama Viejo, the ruins of the Spanish settlement sacked in 1671, the architect behind their part-restoration, Eduardo Tejeira Davis, is surprised to see visitors from Europe. Attracting tourists, he says, was not his motivation. "I always wanted to be proud to be Panamanian - and I was not proud. I felt this country had no sense of its history."

It's a theme echoed throughout the country. A local tour guide, Pedro Garcia, excuses the occasional lack of precision in the available facts, saying: "We're still in the process of discovering our own history." In the old colonial quarter of San Felipe, which was declared a Unesco world heritage site in 1997, a monument chronicles the construction of the canal. Several stone tablets have been amended or replaced as the official version developed.

In a state yet to celebrate its centenary, even the recent past is shrouded. Military bases in the previously US-controlled Canal Zone, once off-limits to the locals, lie abandoned, some gradually being converted to civilian use. Most incongruous is the Sol Melia hotel, a five-star luxury development better known as the former School of the Americas. The School was responsible for training the likes of Argentinian dictator Leopoldo Galtieri and the leader of El Salvador's death squads, Roberto D'Aubuisson, as well as Panama's own CIA-backed former dictator, Manuel Noriega.

A solitary sunbather lies beside the Sol Melia's gigantic pool. In the lobby, a compass and rose mosaic on the floor bears the motto "Peace on Earth". According to Maritza Dolphy, a guest-services manager, there's no effort to conceal the hotel's past. "It's very important for us that everyone receives an explanation of this mosaic and gets the history," she says. But we're not allowed to see Noriega's old room. Dolphy adds: "You know, some people say those things never really happened here."

The US haunts Panama: in the ghost towns of its military infrastructure, in its polarised dollar economy. Panama boasts million-dollar apartments and safe drinking water in its taps; but the cheap new housing blocks in El Chorillo remind one that the city's poorest quarter was singled out for attack by US forces barely 12 years ago.

Ironically, one legacy of the US canal excavations is a swath of pristine rainforest that formed a natural exclusion zone on either side. Hundreds of species of birds flock there; sloths and monkeys are easily spotted in branches overhanging the water. A sole rainforest resort, based in former administrative buildings, currently woos the ecotourist dollar, but other developers are eyeing the land. Tejeira Davis seeks to preserve this heritage, including what he describes as great examples of early American colonial architecture. But some, he says, argue that as "the forest is a symbol of imperialism", it should be dug up.