Within the entirety of Panem there are 12 districts which are ruled by a distant city, known as the "Capitol." Each district serves the capitol with production of a service or good. District 12, for example, is a mining district, and provides the Capitol with coal. District 11 is an agricultural district, farming and raising food for the Capitol. Essentially, the Capitol controls everything.
When I was younger, I scared my mother to death, the things I would blurt out about District 12, about the people who rule our country, Panem, from the far-off city called the Capitol. Eventually I understood this would only lead us to more trouble. So I learned to hold my tongue and to turn my features into an indifferent mask so that no one could ever read my thoughts. (Chapter 1)
There is a time in Panem's history known as the "Dark Days," in which the 13 districts rebelled against the Capitol. They were defeated. (In fact, District 13 was completely destroyed.) As a result, the Capitol, which was always in control, created the Hunger Games, a reminder to citizens of Panem that they hold absolute control, and the districts are ultimately powerless.
Taking the kids from our districts, forcing them to kill one another while we watch – this is the Capitol’s way of reminding us how totally we are at their mercy. How little chance we would stand of surviving another rebellion. Whatever words they use, the real message is clear. "Look how we take your children and sacrifice them and there’s nothing you can do. If you lift a finger, we will destroy every last one of you. Just as we did in District Thirteen." (Chapter 1)
In addition to the annual Hunger Games, the Capitol trains and sends out "Peacekeepers" (mainly from District 2) to act as police-type enforcers within each district. As Katniss learns from Rue, in the arena, each district has a different level of law enforcement, depending on the severity of its Peacekeepers at punishment. District 11, for example, is a very strictly run district, while 12 has been relatively lax in allowing citizens to publicly trade and buy illegally hunted wild game.
As far as commerce or trade goes, the districts have absolutely no contact with one another, and each district provides some sort of product or service that only benefits The Capitol. The Hunger Games are the only window Panem citizens have into what might go on in other districts. Districts 1 and 2, who send the strongest and brightest as tributes every year, are clearly two of the wealthiest (most cared for) districts. Meanwhile, citizens from districts 11 and 12 are mostly starving.
Finally, as a additional method of control, The Capitol inflicts punishment on individual citizens for an endless number of reasons. Many of these people are simply killed. Others are brought to The Capitol as avoxes, who have their tongues removed and spend a lifetime in endentured servitude to political or entertainment figures in The Capitol.
"What’s an Avox?" I ask stupidly."Someone who committed a crime. They cut her tongue so she can’t speak," says Haymitch. "She’s probably a traitor of some sort. Not likely you’d know her." (Chapter 6)