The Grand Canal and the “grand” job expectations

HKND says it will employ 25,000 Nicaraguan workers to build the interoceanic canal and calculates that the associated subprojects, once built, could create up to 250,000 jobs. Doing the math, we find this will have very little impact on total employment, won’t improve the low productivity problem and won’t take us out of poverty.

Adolfo Acevedo

The announcement about the construction of the interoceanic canal generated huge expectations about the jobs this megaproject would create. They talked about as many as a million direct and indirect jobs, although later it was amended that there would be 50,000 direct jobs. The Nicaragua Canal Project Description, made public in De¬cember 2014 by the Hong Kong Nicaragua Development (HKND) Group, further whittled down expectations, estimating that only half of those direct jobs will go to Nicaraguan construction workers employed annually over the five-year construction phase while half of the remaining 25,000 would be filled by workers from China and the other half from other countries.

What do 25,000 jobs
on the canal represent?

Twenty five thousand Nicaraguan jobs would barely represent 0.6% of the projected total annual employment for this five-year period, assuming an annual average total employment growth rate of 6%. Some people, looking on the bright side, say that at least these jobs wouldn’t otherwise exist. But that’s tantamount to assuming the Nicaraguan economy couldn’t grow enough on its own in the next five years to create 0.6% more jobs, which is wrong: without the canal, Nicaragua’s economy has been increasing formal employment at an annual average rate of 7%. There’s thus no reason to suppose it couldn’t generate these 25,000 formal jobs without this megaproject, even assuming a rate of less than 6% over the next five years.

Pushed to the extreme, that view also implies that Nicaragua’s 22,000 workers currently working in construction would be unemployed without the canal, i.e. that the housing, building and infrastructure investments that now provide them jobs would dry up over the next five years. In fact, rather than generating new jobs, the canal will probably attract those experienced workers, thus creating short-term bottlenecks in the supply of workers from the building trades for other projects.

And the thousands
of indirect jobs?

The HKND document also shot holes in initial expectations that the canal construction would have a major multiplier effect in creating informal jobs: eateries, shops and lodging for the workers themselves. The document explains that all foreign and most Nicaraguan workers will be housed in “work camps” and provided all their meals in central facilities to be built for that purpose.

According to HKND, informal commerce of any kind at these “closed” camps will be totally prohibited. Workers will only be allowed to leave as part of an organized outing to buy personal items, or for entertainment or sightseeing.

Local workers from nearby communities will be exempted from that regime, allowed to live at home and move freely. But in practice very few workers will be in that category. First of all most construction workers live in Managua or other big cities, not in communities near where the three camps on the Pacific side and six on the longer Caribbean stretch will be situated. Even more to the point, the planned route passes largely through remote rural areas.

Construction work is planned to take place in two 12-hour shifts a day changing at 8 am and 8 pm, seven days a week. Precise roster arrangements are yet to be determined but conceptually the domestic/local workforce will work 2 weeks on, 1 week off.

Every 15 days, during their week off, they’ll presumably be able to take home their two weeks of wages and pay off debts accumulated by their family in neighborhood shops, pay their household utility bills, replace the tank of cooking gas, spend a little time with the family and probably go have a few beers with the boys to share stories of what it’s like working for the “Chinese”… then back for another fortnight of steady 12-hour days of heavy labor. In this underemployed country, this is perhaps at least something, but for the country as a whole it’s extremely little.

How many new jobs?

According to projections by the UN’s Latin American and Caribbean Demographic Center, Nicaragua’s economically active population will grow by 375,000 between 2015 and 2020, a result of the demographic and gender dividends. That period is an exact overlay for the announced canal-building calendar.

As there are only a few thousand more construction jobs than could be filled by the entire current force of building workers, the canal project doesn’t offer many opportunities for those 375,000 new workers. Even assuming that 25,000 of them were rapidly trained to unclog the bottleneck created by the experienced workers who leave to help build the canal, it would still barely absorb 7% of those newly entering the labor market.

Once the canal is completed, supposedly in 2020, the HKND document now estimates that its operational phase will create 2,700 jobs that same year. It forecasts that the job creation could increase to some 12,700 by 2050, depending on the shipping traffic choosing to use this route. The impact of the canal construction and operation on employment is thus far removed from the fantastic dreams and even early official predictions that fired so many people’s imagination.

A way out of poverty?

A country’s per-capita income crucially depends on its economy’s average productivity, which is calculated based on the weighted sum of each economic sector’s productivity. Although the employment generated by the canal would be highly productive, we can now see that the number of jobs produced would relatively small in comparison to the large weight of the informal sector, which employs 70% of the population. It will therefore have little impact on average productivity and won’t take the country out of poverty.

By the same token, as long as increasing employment percentages in general aren’t being generated by activities with increasing productivity, the economy’s average productivity will not grow to boost the per-capita income growth rates needed for the Nicaraguan population to reach the aging stage in better conditions than those currently anticipated. No enclave, generating such low employment percentages as that of the canal and its associated subprojects, can change this.

A lasting or only temporary
economic boom?

Apart from its impact on employment, what will the canal’s economic impact be? One impact would be the massive inflow of capital expected to finance the projects during the construction phase. That capital influx will produce something of an economic boom due exclusively to the direct multiplier effect that domestic investment in construction works have on economic activity and employment.

But most of the machinery and equipment for the construction stage is expected to be imported from China and most construction materials themselves would also have to be imported because Nicaragua doesn’t have the capacity to supply such a colossal project. In fact this is stated in the strategic cooperation agreements between HKND and the Chinese state companies that would presumably supply these materials.
Although national investment in the canal would be relatively small, it would trigger a significant temporary boom in economic activity during the construction phase because our economy is also very small. Just to offer a point of reference: the construction boom associated with post-Mitch reconstruction in 1999 resulted in a 7% economic growth that year.

The biggest expected impact on our economy would be through the wages paid to the hired workers, but only insofar as they spend them on goods and services produced in the country. The HKND announcement that it will only employ 25,000 Nicaraguans in the construction phase significantly reduces the impact of workers’ wages on the national economy, bearing in mind that the Chinese workers will probably consume products imported from China and the other foreign workers will probably be supplied from HKND’s own commissaries. Moreover, foreign workers typically don’t spend the bulk of their wages in the country where they are temporarily employed. We also mustn’t forget that consumer spending in Nicaragua is increasingly leaning towards imports.

For better and for worse

This temporary employment boom of whatever size wouldn’t be directly associated with the construction projects but rather as an effect of national investment in them (either by local capitalist investors or by workers spending their wages on nationally produced goods and services). And it wouldn’t be associated with the creation of high-quality jobs, but with jobs in non-tradable activities, mainly commerce and services, all of them informal sectors that already produce or sell the goods and services on which Nicaraguan workers usually spend their wages.

Important longer-term effects generated by this temporary job boom would actually reduce the possibilities of job creation and might even actually involve job losses in the tradable sectors. For one thing, our economy’s miniscule size couldn’t absorb a capital inflow of the magnitude expected without causing a massive overvaluation of the real exchange rate, which would markedly deteriorate the relative price of tradable vs. non-tradable goods and services.

Another impact, one explicitly of the opposite sign, would come during the canal’s operating phase, when those inflows would have ceased and the canal would be functioning as an enclave with even fewer links to our economy.

Will we be victims of
the “Dutch disease”?

The multiplier effect of the investment in the canal would generate an increase in the demand for goods and services. As a large part of what Nicaragua consumes is imported from abroad, this would create a strong increase in the demand for imports, which would increase Nicaragua’s trade deficit and the “filtering” of dollars out of the country.

This phenomenon, called the “Dutch disease” (the harmful consequence of a significant increase in a country’s foreign exchange revenue) would block any possible structural change process for an extended period of time and make it extremely difficult for much of the existing tradable activities to survive. Worse yet it could even destroy them.

It would mean that the survival of many tradable—in this case exportable—production lines would be impaired, along with the jobs they generate. Even in the best-case scenario, the growth of these activities would be drastically constrained along with their capacity to create jobs to absorb those 375,000 people entering the labor market.

Even some kind of flexible exchange rate or eventual total dollarization of the economy couldn’t do much to counter these trends. In a context of flexible prices, the trajectory of the real exchange rate becomes independent of the economy’s exchange rate regime.

The economic boom would very probably also result in a temporary increase in the cost of labor, putting in crisis the permanence of an unspecified number of jobs in free trade zone sectors such as textiles, whose viability fundamentally depends on keeping costs very low. The fragility of employment in these zones was revealed in December 2014 when the Tariff Preferential Level (TPL) expired after ten years of privileges from the United States relative to other signatory countries in the Central American Free Trade Agreement. A relatively important temporary increase of real labor costs could easily lead to a loss of jobs that would somewhat offset the equally temporary job increase in the canal’s projects.

Are we facing a
historic depression?

In the end, the canal’s construction phase will conclude and with it the accompanying capital flow. When the construction works are completed and the disproportionate influx of capital ceases, the economic boom could be followed by the greatest recorded economic depression in Central American history. The economic fall can be expected to be of the same magnitude as the “inflation” in economic activity and employment this massive capital inflow was feeding.

It would be a situation similar to the one the Economic Commission for Latin America and the Caribbean (ECLAC) warned about in 1966, in a study done for the Government of Panama evaluating the economic consequences of constructing a new canal: “The problems of the fall in income and employment would reach greater proportions when the work is completed…. The GDP would fall sharply in proportion, estimated at between 17% and 20%.... At the same time, estimated open unemployment of the active population would suddenly rise to levels of over 20%.”

And jobs in the subprojects?

No activity would be able to offset the effect of the abrupt cessation of the massive influx of capital associated with the construction phase and hence no way to avoid economic depression. In the best-case scenario, the 250,000 jobs they claim will be generated by the canal’s subprojects included in the canal concession contract (two ports, an airport, a free trade zone, tourist resorts), would replace the jobs lost by the massive impact of “Dutch disease” on tradable production. Let’s hope it’s so.

By that time, however, those 250,000 jobs would represent only about 5% of total employment. Moreover, the absolute majority of jobs created will continue to be in very low-productivity activities and, as long as that is the case, no employment generating only 5% of total employment can pull the country out of poverty.

Just an enclave
with no turning back?

Moreover, once built, the canal would be reduced to a strictly private, powerful enclave under the total and absolute control of the concessionaire and his partners, for all intents and purposes separated from the rest of the country with very few links to its economy. This enclave would coexist with a low-productivity national economy, inundated by underemployment. By that time, our country’s population will be heading full speed towards its aging phase and there’ll be no turning back.

Adolfo Acevedo is an independent economist.

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