Panama Canal: Troubled History, Astounding Turnaround

I came across this interview of Noel Maurer, a HBS professor  who has co-written this book with Carlos Yu, an economic historian – The Big Ditch: How America Took, Built, Ran, and Ultimately Gave Away the Panama Can.

In the interview, Maurer gives an excellent account of how Panama Canal was built, American Imperialism and the canal’s role in international trade.

Sarah Jane Gilbert: What led you to write the book?

Noel Maurer: The idea of the book grew out of two conundrums. First, why wasn’t Panama richer in 1999, after [nearly] 100 years of the Panama Canal? After all, the United States and Panama were joined at the hip for decades, in what looks a lot like the kind of close relationship that many scholars have claimed could greatly improve governance in many third world nations: the United States ran the currency, provided aid, posted an official inside the Panamanian government, and operated one of the great commercial arteries of our time. Yet as late as 1999, the place appeared to be run little better than and little richer than most of Latin America.

Second, why was the canal so much better run after the handoff to Panama than it had been before? The turnaround has been astounding. The answer to these two questions seemed to be related-and vital to understanding the limits of attempts by outside governments to improve business and political conditions in other countries. Answering them, however, required a long and detailed romp through the history of US involvement with what Secretary of War Henry Stimson described as “the one spot external to our shores which nature has decreed to be most vital to our national safety, not to mention our prosperity.”

On American Imperialism:

Q: You describe the US involvement in the construction and administration of the Panama Canal as a “successful American venture into imperialism.” Can you discuss our role as imperialists?

A: Americans never like to use that word in describing our actions! I certainly don’t. But it fits our behavior in Panama. The “successful” part happened under Teddy Roosevelt: the United States used military force and the threat of military force against Colombia (to detach Panama from Colombia) and against the new Panamanian government (to get a better deal for the Panama Canal).

The Colombians wanted to hold out until 1904 to make a deal with the United States to build a canal. The reason was that the properties of the failed French canal company (worth about $22 billion in 2010 terms, as a share of national income) were scheduled to revert to Colombian ownership in that year. The money to buy them for the new canal effort, then, would have gone to Bogotá instead of the shareholders in the moribund French company. Those shareholders, however, contributed large sums of money to Senator Mark Hanna [R-OH] and the leaders of a Panamanian independence movement. Hanna, in turn, convinced President Roosevelt to support the independentistas.

American warships prevented Colombia from responding to Panama’s declaration of independence. The new government then appointed the head counsel of the French company as their foreign minister. (He was not Panamanian and in fact lived in New York.) The lawyer drafted a treaty that gave Panama a far lower share of the canal revenues than the United States could have received in a fair negotiation. When the new government balked at the treaty, Secretary of State John Hay warned of “grave consequences” and threatened to send the Marines. The Panamanians soon capitulated.

The whole thing was quite sordid, although the cynic in me can’t help but admire the way self-interest was couched as high principle.

Hmmm. A typical US tactic…

Then the author tells us about how the overall development costs of the canal were overshot, the decline of importance of canal to US etc. In 1999, the canal was handed to Panama Govt. but ran into the hands of dictators who corrupted the place:

Q: What role did the corrupt governments of dictators Torrijos and Noriega play in the handover of the canal back to the Panamanians in 1999?

A: Ironically, the two dictators set the stage for Panama’s ability to run the canal as astoundingly well as it has. Omar Torrijos started the destruction of the patronage networks through which the old oligarchy controlled Panamanian politics, and Manuel Noriega completed it. Torrijos launched the attack as part of an attempt to create a broad-based populist movement to sustain his regime and transform Panamanian society; Noriega continued it in order to destroy anyone who threatened his control over the profits from corruption and cocaine. Once the United States removed Noriega through the brute application of military force, a large bloc of Panamanian swing voters emerged—and for those voters, the inviolability of the Panama Canal became one of their key issues. Panama’s new government passed a constitutional amendment to make the Panama Canal Authority as independent as humanly possible, and credible accusations of interference in the management of the canal soon became the electoral kiss of death for Panamanian politicians.

Hmm. just like independent central banks (and competition authorities) we see independence working for canal management as well. Since then, it has become profitable and is now being widened to handle wider bodied ships:

Q: What role does the canal play in the global marketplace currently and in the future?

A: The Panama Canal will never again be as important to the United States as it was before World War II, but its importance to the world economy is set to grow. The continuing growth of the Chinese economy is stimulating a wave of new eastbound exports through the canal coming from the growing links between Brazil and China and to a lesser extent between China and Europe.

If the Panama Canal declines in the future, it will be because of shifts in the global economy or, more likely, shifts in global geography: for example, the opening of the Northwest Passage as a result of climate change.

In 2006, the Panamanian electorate voted in favor of a plan to expand the Panama Canal. The reason is not that the canal had reached full capacity: in fact, a back-of-envelope calculation shows that the Panama Canal is at roughly half its maximum throughput in terms of the number of ships. Rather, the reason is that 35 percent of the planet’s commercial shipping consists of ships too large to fit through the current locks, and Panama wants a piece of that business. The current locks measure 1,050′ x 110′ x 85′, accommodating ships measuring up to 965′ x 106′. The new locks will measure 1,400′ × 180′ × 60′ and be capable of accommodating ships up to 1,315′ × 176′. This is big enough to accommodate Nimitz-class aircraft carriers and most cargo ships short of a supertanker

Read the whole thing. Superb insights into various aspects of economics.