The expansion of the 92-year-old Panama Canal system is expected to double its shipping capacity.

Last month, Panamanians voted overwhelmingly to approve a $5.25 billion bond measure to upgrade and expand the capacity of the 92-year-old Panama Canal system. The project enjoyed significant support of governments and corporate entities world-wide, and only token resistance from detractors at home.

The improvements will nearly double the canal system's shipping capacity and permit passage to larger ships, which currently must seek longer alternative routes. Panama estimates that the improvements will yield over $1 billion in annual revenues in its first eleven years of operation.

The canal's capacity is an issue for both daily volume and ship size. Ocean shipping is already considerably slower than air or land alternatives, and wait times at the canal are a growing concern. According to the Canal Authority, single-lane routine maintenance shutdowns have resulted in queues as long as 120 ships - three full days' volume. The canal's capacity to handle larger ships is becoming important as the number of post-Panamax (greater than 110 feet wide by 1050 feet long) ships continues to grow. At this time, some 100 container vessels in active shipping fleets must pursue alternatives, either unloading at US docks for overland transport of goods or taking longer alternative routes such as the Suez Canal.

Implications for Globalization

Both its supporters and detractors agree that the Panama Canal plays a significant role in the march of globalization. The Canal was conceived as both a strategic military asset for the west as well as an economic asset, reducing shipping costs and times for international trade. The upgrade of the canal is driven principally by the necessities of modern trade. Completed in 1913, the canal was built to accommodate ships and shipping volume of another era.

Panama estimates that the improvements to the Panama Canal will yield over $1 billion in annual revenues in its first eleven years of operation.

More important is the effect the canal's upgrade will have on Panama. These improvements maintain Panama's position as a player in the global marketplace, albeit as a niche player in a supportive role. Panama's economy is largely services-based, fueled by the export income ($1.4B annually, about 7% of its gross domestic product) derived from the canal's operations. Panama depends on globalization to survive economically.

The canal also faces competition, particularly as ship sizes increase. The primary competitor is the U.S. overland route, which pulls about a 60% market share of shipping from Northeast Asia to the U.S. East Coast. More costly, more complicated and subject to a larger variety of risks (principally labor issues, weather and deteriorating infrastructure conditions) -- that system's advantages are speed and the ability to deliver more directly to the final intended market. The chief ocean-going alternative is the Suez route. This route pulls only about a 1% market share, but that share is growing due to its ability to accommodate post-Panamax ships.

There are two other potential competitors. One is the so-called "dry canal" route, an overland shipping alternative elsewhere on the isthmus. Like the US overland route, it would be more costly and complex. Goods must be transferred up to six times -- from ship to holding yard, then to truck or train, and back to another ship -- before resuming oceangoing passage. However, this alternative would require much less capital investment and would diversify shipping options for customers.

Panama depends on globalization to survive economically, and the improvements will maintain Panama's position as a player in the global marketplace.

Another option is emerging due to global warming. Scientists now estimate that the Arctic Ocean may become passable for up to nine months of the year as early as 2050. This would cut 4,000-miles off the shipping route from Northeast Asia to the U.S. east coast, with commensurate cost savings. Complex issues of sovereignty, policing of the waters and provision of other support services must still be negotiated among interested parties, but with forty years' lead time, Panama should expect that this alternative could mature into a viable competitor to the canal.

Downsides and Risks

The bond measure faced no serious opposition in Panama, though the plan has its detractors. Opponents worry that an enlarged canal system will exacerbate already widespread corruption. While promises have been made to use additional revenues to fund new and improved social programs, accountability to ensure follow-through is lacking, and past history is not encouraging. In truth, the canal provides few benefits to the average Panamanian other than revenues for the state treasury.

Opposition leaders have also cited the fact that the canal employs only about 4,000 Panamanians out of the canal's 14,000 employees. The Canal Authority did not tout jobs for Panamanians as a primary benefit of the expansion, and the Panamanian labor force is marked by a high percentage of unskilled workers. Therefore it is safe to assume that the trend of employing mostly foreign workers will continue.

Opponents of the reconstruction worry that an enlarged canal system will exacerbate already widespread corruption.

There will also be significant environmental impacts and risks, as there were with the original construction. The design is intended to recycle as much water as possible and minimize impacts on the marine ecosystem. However, increased inter-ocean fish migrations are likely, and it is impossible to fully mitigate the impacts of construction on an undeveloped environment. Issues of deforestation, excavation cleanup, runoff and impacts on wildlife lead the list of environmental concerns. However, the canal's alternatives, particularly overland transport and the "Northwest Passage" option, also carry significant environmental impacts. By comparison, the relative environmental risks of the canal match up favorably.

A more significant risk is the one that plagues nearly every public works construction project world-wide: delays and cost overruns. The first attempt to build a canal was altogether abandoned in 1893 by the French after 13 years of effort. American Canal builders faced numerous unexpected problems with disease (nearly 6,000 deaths), sanitation, excavation and engineering. The current Canal expansion budget includes a contingency of approximately $1 billion, nearly 25% of the total budget, but overruns for projects of this type can extend to 100% or more. Contingency planning for major overruns of this sort are lacking, and it is unclear who would be responsible for paying for them.

These factors put Panama at risk should canal usage decline. The canal is Panama's largest single source of foreign capital in a largely service-based economy. Canal shipping declined steadily through the 1990's and only recently resumed a growth course. Another downturn in canal usage as the bonds are being paid off would dry up the country's principal source of foreign investment capital.

Ocean shipping is cost-competitive so long as energy remains expensive relative to other key resources. But as the world economy continues to become more time-sensitive, customers will be willing to pay more for instantaneous delivery. The canal's cost advantage disappears if people are willing to pay more for faster shipment.

The principal beneficiaries of the project are, first, Panama as a nation-state and as a player in the global economy; and second, shippers.

Another risk is the trend toward "in-sourcing" - moving production facilities to the customer's market. As industrializing countries improve wage and working conditions, labor cost advantages will diminish. As this occurs, producing and buying local becomes more cost competitive, reducing the demand for shipping as well as the income to pay off the capital expansion.

Bottom Line

Debating the pros and cons is somewhat moot, since the plebiscite is over; the advocates won. Assuming no major setbacks, major wars, or catastrophes, Canal expansion is moving forward.

The principal beneficiaries of the project remain, first of all, Panama as a nation-state and as a player in the global economy; and secondarily, shippers. Panama's role in the global economy depends on its strategic geographic location and the rendering of services in support of the global marketplace. Finding and building upon strategic assets may be the principal lesson of the canal expansion proposal for other nations seeking a niche in the global economy.




Sources

Dudley, Steven. "Panama Votes Today on expanding canal." Boston Globe. October 22, 2006

Panama Canal Authority. "Proposal for the Expansion of the Panama Canal: Third Set of Locks Project." Panama Canal Authority, April 24, 2006.

Wikipedia. "Panama Canal."

Weissert, Will. "Panama Canal will grow bigger." The Oregonian. October 23, 2006.

Wood, Patrick M. "Globalization: The Final Demise of National Security." The August Review, Vol 6, No. 3.

www.geographic.org. "Panama Economy."




Contributed by Gary Corbin, freelance writer and consultant in Portland, Oregon.

To read another Global Envision article about trade in Latin America, see Appreciating the Complexity of China's Increased Interest in Latin America.



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