The concentration of an illiterate population in the capital city is one of the common phenomena in developing countries, such as the Republic of Panama. Few studies have tried to examine socio-demographic factors and their effect on regulating the social space of literacy in the urban areas of developing countries. This paper, using 1990 census data at the neighborhood level, tried to identify some factors concerning the spacial differentiation of literacy in Panama City, and attempted to analyze how the extracted factors affect the literacy rate. From observing the spacial differentiation pattern in the literacy rate (Fig. 2), high rate areas, in the central and intermediate zones of Panama City, appear near the central business district and elite residential zone. Apart from the city center, high rate areas expand along the two principal highways, la Carretera Transismica and la Carretera Panamericana. Although, in the area along la Carretera Transismica, the high rate area is interrupted in the north-east part of Betania, in the area along la Carretera Panamericana it extends continuously to the east fringe of Panama City. The low rate areas, in the central zone, correspond to the urban slums, such as Crundu, Baca la Caja, Panama Viejo, and Monte Oscuro, which have grown out of squatter settlements. Moreover in the suburban zone , low rate areas appear in the widespread zone of the San Miguelito District and in the Pedregal's north-east hilly zone. As mentioned above, it is hypothesized that this spatial differentiation of the literacy rate in Panama City may correlate with certain socio-economic indices.