Nicaragua
Questions about the canal’s economic “viability”
Environmental aspects predominate in the debate about
the proposed interoceanic canal with which civil society
has filled the vacuum left by the government’s silence.
But what about this megaproject’s economic viability?
So far, this fundamental aspect is scarcely visible.
Here are some basic questions Nicaraguans should be asking.
Adolfo Acevedo
I’m increasingly surprised by the tremendous ease with which concepts about the interoceanic canal’s economic impact are being bandied about in a debate which, if truth be told, hasn’t even started. Some people, without offering even minimum elements of an economic analysis, refer to the canal’s potential benefits for contributing to development, “if it’s done well.” Others take its impact on development for granted and only wonder about the canal’s environmental and economic “viability.”
In the midst of such confusion, the only feature really emphasized so far has to do with the dreams aroused by building a canal in a country with millions of underemployed people in precarious, informal jobs and with the ambitions stirred by the possibility that the canal might help those who manage to form a strong connection with the project accumulate more wealth.
Is it a private project? The issue of the canal’s economic viability refers to the possibility of the colossal capital investment represented by the construction of it and its related megaprojects being repaid by income generated in operating them, i.e. that they’ll be able to generate a sufficient internal rate of return.
The first question that comes to mind is whether these works are backed by the strict rationality of private investors or obey, even partially, the logic of a State that has huge reserves at its disposal and has developed huge investment projects that are never used, such as the notorious “ghost cities” currently abounding in China.
Does maritime trade need it?Next, it would be necessary to determine the international maritime trade growth projections on which this project’s financial forecasts are based, given that global trade appears to steadily be marching to a slower drummer than in past decades. This question of course presupposes that Nicaragua’s canal intends to compete with the Panama Canal, taking from it some of the shipping flow that uses that route. As yet there has been no identification of the means to be used in this competition, unless it is projected that Nicaragua’s Canal will have a monopoly on China’s maritime trade, if indeed that country decides it needs this interoceanic route.
An interoceanic canal creates the possibility of a differential income if its transport costs are lower than other alternative routes. In this case, to compete with Panama, the toll charges could be set at less than the charges of the competing routes, but would obviously have to be higher than the marginal costs of the canal itself. Nonetheless, the possibility of competing via prices could be limited by the need to recover such a big investment, assuming that doing so is a priority, as it would be in a strict private investment rationality.
What about the additional social costs? One important issue is who would take on the additional costs represented by covering a series of big externalities during construction of the Nicaragua Canal. One foreseeable effect, as experience with the Panama Canal shows, is the excessive, uncontrollable population increase that would occur in the construction areas around the megaproject.
We have to ask ourselves if the investment budget has included the costs needed to satisfy the enormous urban infrastructure services (housing, energy, drinking water and hygiene, social services and others) required to accommodate the huge population that would flood into the areas where the canal is being built, drawn by the immeasurable employment expectations it will create, and to deal with foreseeable social and epidemiological problems that would arise from an uncontrolled (and probably uncontrollable) population concentration if it is disproportionate to the labor needs.
And the costs related to
earthquakes and hurricanes? The route chosen for Nicaragua’s canal crosses areas of high seismic and hurricane risk and it is not being made clear how resistant the works will be to the magnitude of any event that might occur, the cost of works that could resist these events and the additional costs for insuring them.
Will it create as many jobs as is being claimed? Another aspect worth examining is the employment projections that have been publicized for the canal’s operational phase. Both the canal itself and the two ports that are planned are highly capital intensive works whose operation is increasingly automated these days. The figure of 250,000 jobs that the canal’s operational phase would create is so out of proportion that it lacks credibility. The Panama Canal is operated by only 10,000 people. With any luck, the projections being made include jobs to be created by the subprojects (free trade zones, mega tourism centers, airports and others).
Is’t this unfair competition? It’s worthy of note that the subprojects associated with the canal will enjoy the same tax and other privileges to be enjoyed by the canal itself for 100 years. This privilege isn’t only about competing with the Panama Canal, but is also unfair competition with similar operations already underway in Nicaragua and possibly in neighboring countries that don’t enjoy these privileges.
It was recently mentioned that the economic conditions of access to the “canal zone” for anyone interested in operating there would be negotiated, and those who pass muster, whatever that might imply, would enjoy the same privileges and benefits. This means that activities being conducted elsewhere in the country would disappear if they succeed in gaining access to “the zone,” set up under a truly extra-territorial jurisdiction.
This system, similar to Honduras’ famous “model cities,” would consist of a huge enclave of free trade zones of all types, making no tax contributions to the public coffers and having limited links to the rest of the economy, which would attract an even greater population concentration.
Will it help the population emerge from poverty? Even if all this does actually create 250,000 jobs and they are permanent, this figure would only represent 5% of the country’s total employment by then. Most of those jobs would evidently be very low productivity activities, mainly in trade and services in the crowded new population zones. In this case, one wonders who will continue creating the most jobs in Nicaragua.
The national economy’s average productivity is weighted and is basically determined by the activities that create the most employment. While the bulk of today’s jobs are created by very low productivity activities, no project that would only create between 3% and 5% of total employment would lift Nicaragua out of poverty.
This is the reason why, despite the fact that a high-income urban nucleus was created in the Metropolitan Areas of Panama City and Colon based on salaries paid in the Canal zone that were linked to the US economy, Panama’s development level was similar to Nicaragua’s until the 1970s, sixty years after its canal commenced operations, all of them with the canal still in foreign (in that case US) hands. It is also why, even in the 1990s and first five years of the new century, Panama still showed population percentages going hungry because their buying power was still less than $1.25 a day, figures similar to Nicaragua’s today.
We also need to remember that unlike what happens today in Panama, where the Canal transfers some billion dollars a year to the country’s budget, the canal that will cut Nicaragua in two won’t be Nicaraguan property and will transfer neither tax revenue nor any other type of resources to the Nicaraguan State.
Here more than ever it is worth differentiating between the Gross Domestic Product, measured as income generated in the country’s territory, and the Gross National Product, measured as the income that remains in Nicaraguan hands.
Adolfo Acevedo is an independent economist.
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