The wager of Panama

Mark Joyce
30 May 2006

Of the many foreign-policy decisions for which former United States president Jimmy Carter has been vilified over the years, one of the most heinous in the eyes of his critics is the 1977 treaty under which the US surrendered sovereignty over the Panama Canal. Even as the protracted transfer was concluded at midnight on 31 December 1999 – nineteen years after Carter left office – there were dark mutterings that a terrible mistake was being committed.

Much of this concern reflected little more than a chauvinistic belief that a bunch of corrupt, work-shy Latinos were not up to the task of running one of the great monuments of American engineering genius. Even among supporters of the transfer, however, there was widespread acknowledgment that Panama still had much to prove. A fledgling democracy, with no armed forces of its own, a history of dependence on the United States and a GDP smaller than that of Kenya was now assuming full administrative responsibility for one of the world's most important trade routes. Success was far from assured.

Six and a half years later the canal is booming. Proposals have been released for a major expansion project, aimed at increasing both the size and number of ships able to transit the canal. The proposals will be put to a national referendum on 21 November 2006. The Panamanian press daily carries fierce debates on expansion-related issues, ranging from the arcane details of dam construction to possible uses for the excavated soil. Nobody any longer questions whether the Panamanians are capable of managing such a project without American supervision. Panama seems at last to have convinced itself, as well as its former guardians in Washington, that it is worthy of its inheritance.

But the canal transfer is not an unqualified cause for Panamanian celebration. Its smooth administration since January 2000 has been primarily a commercial achievement, owing more to the autonomous Panama Canal Authority (PCA) than to the Panamanian government. The majority of the Panamanian people have accrued few benefits. Yet the planned expansion will burden them with a disproportionately high level of financial risk.

Mark Joyce is an Americas fellow with the Royal United Services Institute, London, and a former head of its transatlantic programme. He is currently undertaking research in central America.

Also on central America and the Caribbean in openDemocracy:

Bella Thomas, "Paradox regained: a conversation with an old comandante in Cuba"
(20 August 2003)

Sergio Ramírez, "Nicaragua's hijacked democracy"
(18 November 2005)

Victor Valle, "El Salvador's long walk to democracy"
(26 May 2006)

The burden of history

Arriving for work at the PCA's Panama City headquarters, canal administrators must file past a statue of Ferdinand de Lesseps (1805-94), builder of the Suez Canal and leader of the first, ultimately disastrous attempt to construct a sea-level canal across Panama in the 1880s. It was de Lesseps's hopelessly optimistic assessments of costs, geography and environmental conditions which led to the bankruptcy of the original Compagnie Universelle du Canal Interoceanique and the deaths of tens of thousands of labourers from malaria and yellow fever in the Panamanian jungle.

It is with this formidable historical baggage that the PCA has spent the last five years devising a "masterplan" to prevent the modern canal declining into irrelevance. A new generation of oil tankers and container vessels is too wide to fit through the existing, nearly 100-year-old lock system. Of the container ships currently on the international order books, 60% are of "post-Panamax" dimensions. The canal is currently able to handle around 14,000 transits a year and is operating at 93% of its capacity. Even discounting the larger, post-Panamax vessels, the canal will reach full capacity by 2012 at the latest.

From the moment de Lesseps's motley crew of French engineers and Jamaican labourers began excavating the first, doomed attempt at an isthmian canal, discussion of this "eighth wonder of the world" has been steeped in romantic hyberbole. Against this background, the PCA's masterplan makes for a rather underwhelming read. In resolutely sober language, it recommends the construction of a new set of locks and navigation channels, in addition to an overhaul of the existing locks at Miraflores on the Pacific side of the canal and Gatun on the Caribbean.

The total cost of the project is estimated at $5.25 billion, towards the conservative end of the speculative figures bandied around in recent years. The PCA is desperately keen to assure potential investors that this is not a grand public works adventure on the Victorian scale:

"The risk is very low", says Francisco Miguez, coordinator of the PCA masterplan. "What we are proposing here is not a 'mega-project'. In engineering terms it is very simple and we have years of experience of operating all the relevant technology."

As a financially and administratively autonomous government agency, the PCA is not able to approach the capital markets armed with a sovereign credit rating. It must therefore make its estimates of costs and construction schedules sufficiently watertight to attract favourable financing, whilst meeting the ambitious target of completing the new locks before the canal reaches full capacity in 2012. If it overspends, the PCA will be forced to introduce steep toll increases in the future, undermining the canal's competitiveness relative to other trade routes and driving away the increased demand on which the expansion was justified in the first place.

A debt to the future

Although the PCA has autonomous day-to-day control over the canal, the national constitution stipulates that any decision to enlarge the waterway must be approved by a popular referendum. This has given the president, Martin Torrijos, an opportunity to inject some of the old romance back into the debate.

When Torrijos campaigned for the presidency in 2004, he sought to capitalise on popular affection for his late father, the former military dictator General Omar Torrijos, who was elevated to the status of national hero after negotiating the canal transfer with President Carter in 1977. Citing his father's achievement, Martin argued that it was historically fitting for a member of the Torrijos family to oversee the canal enlargement. It was a tenuous, but effective, ploy and Torrijos won the May election with a hefty majority.

As a result of this personalisation of the issue, popular support for the canal enlargement has tended to fluctuate with the president's own popularity. In June 2005, Torrijos instigated a series of harsh public-sector pension reforms in an attempt to contain Panama's ballooning balance of payments deficit. The reforms went down well with the International Monetary Fund but considerably less so with Panamanian civil servants, who carried out a series of strikes in the second half of 2005. The president's approval rating plummeted and support for the mooted canal enlargement fell with it.

More recently the president has tried a new approach, arguing that the canal referendum should be judged on its merits and is too important to be turned into a verdict on the government's wider performance. He has emphasised the project's labour implications, pointing out that it could generate up to 10,000 jobs (although this was somewhat undermined by the chief of the PCA, who subsequently let slip that much of this work would go to foreign contractors due to a shortage of appropriately skilled labour in Panama). Polls indicate that the president's new tactics have produced a small upturn in support for the project. With six months still to go until the referendum, however, the vote could still go either way.

After five years of fine-tuning its financial and engineering proposals, the PCA is entitled to be furious with the president's ham-fisted mismanagement of the politics. If the referendum fails, the PCA will see its market share gobbled up by more dynamic competitors, such as the north-American "inter-modal" rail and road network. Too bad for the PCA: but would it, as the president's pre-referendum rhetoric suggests, also represent a historic missed opportunity for the Panamanian people?

The canal's principal contribution to the national coffers is through a transfer to the government of a percentage of the PCA's annual profits. This "dividend", coupled with a "service fee" based on the number of ships transiting the canal, amounts to around 2% of GDP. If the wages paid by the PCA to its 9,000 employees (mostly Panamanian) are factored into the equation, then the canal's direct contribution to GDP stands at just over 5%.

The canal's full contribution to the national economy is, in fact, closer to 17% if one takes into account the country's large maritime servicing, financing and transportation industries, each of which depends heavily on the canal. But with one of the lowest tax-to-GDP ratios in Latin America, and a particularly soft corporate tax regime, little of this wealth filters down to the average Panamanian. While 60% of national income is concentrated in the wealthiest 20% of households, only 2.4% of income makes it down to the poorest 20%.

While accruing few of the direct or indirect benefits of the canal expansion, the Panamanian people are potentially shouldering a very large burden of risk. The IMF's 2005 country report on Panama pointed out that, although the PCA will approach the capital markets as a commercial entity, its credit rating may benefit from the implicit understanding that the Panamanian government would guarantee its debt in extremis:

"One cannot discard the possibility that, in a hypothetical worst case scenario, an implicit government guarantee would be called. This possibility creates a source of potential vulnerability."

The estimated $5.25 billion cost of the expansion is equivalent to around 35% of Panama's GDP. The PCA and the Torrijos administration may enjoy a strained relationship, but they will be united in trying to play down the scale of this vulnerability ahead of November's referendum.

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