Week 49: The Eighth Wonder of the World

I was embarrassed to learn this week that the Panama Canal is undergoing a major, $6 Billion renovation that began in 2007. I say embarrassed because the Panama Canal is significant from a geopolitical perspective, a global economic perspective, and from a human achievement perspective. For any of these reasons, it is almost inconceivable to me that I did not know of this not-so-new development. And with my little brother finishing his time in Barcelona and heading to Panama for a spring semester abroad, the topic is all the more timely.

Panama is a very small country of about three million located in the southernmost part of Central America. It connects South and Central America by land and, with the help of the Panama Canal, the Atlantic and Pacific oceans by sea. Since 1904, the United States has had a considerable presence in the country, as Teddy Roosevelt decided that the failed French canal project would be undertaken by the American government. The canal had been conceived of about 400 years ago, but building had not taken place until the 1880s when the French attempted to cut through over 50 miles of dense rock and forest and link the world's two largest oceans. Over 20,000 workers died in the first effort, in large part due to mosquito-borne diseases. When the US Government stepped in to fund the project, it demanded essentially sovereign control over the strip of land on which the canal was to be built and claimed it would protect this area into "perpetuity." So close was the US involvement that US Dollars became (and continue to be) used as currency in Panama (the Panamanian Balboa trades 1:1 with the USD). Upon the project's completion in 1914, it was hailed as the eighth wonder of the world, comparable to the ancient Egyptian pyramids. The amazing feat of engineering used a series of locks that would fill up with water from multiple artificial lakes and then use gravity to lift ships up and down as they traversed Panama.

The new waterway allowed ships to pass through Panama in 10 hours instead of taking an additional one to two weeks to sail around the entire South American continent. This convenience has been leveraged exponentially as global trade has skyrocketed in the last century. But it became clear that an expansion was necessary; the largest ships that can pass through the canals - panamax ships - are limited to fewer than 2,250 containers. Today's largest container ships can carry 6,000 to 8,000 containers. It is estimated that by 2015, without any expansion, 50% of global shipping vessels would be too large to travel the canal. Even the panamax ships have a tough time making it through; these ships are 105 feet wide, and the canal only 110. Navigating the canal has become very tricky business; indeed, it is the only place in the world where the captain of a ship must relinquish his or her control in order to pass through. A team of canal-savvy technicians guide the ships through the canal. In addition to logistical issues, there have been longer lines of ships waiting to pass through the canal as trade volume with China continues to expand.

With the benefits obviously outweighing the costs, the Panama Canal Authority decided to push forward the ambitious renovation, which would essentially involve building a third set of massive locks to allow for larger ships to pass through. It is important to note that the US is not involved in this project. The US ceded direct control of the canal in accordance with the Torrijos-Carter Treaty, in which Jimmy Carter allowed for the Panamanians to take over the canal in 1999. The significance of this development relative to the expansion of the canal cannot be understated: there is a massive difference between a $6B project undertaken by the US Government as opposed to Panama independently overseeing the project. The country's GDP is only $40B per annum, so funding this type of project is a serious undertaking. For comparison, this would be roughly equivalent to the US embarking on a $2.25 Trillion industrial project. If they pull it off, it will be a fantastic achievement for a nation of Panama's size.

However, there are already signs of trouble. Some of the recent wikileaks cables indicate that Panama's Vice President recently called the project and the contractor (Spain-based Sacyr) a "disaster". He apparently claimed that in a few years its failures would become publicly obvious. Further cables revealed suspicions surrounding the winning Spanish bid, which happened to be $1B below all other bidders (including one from American engineering company Bechtel). So it remains to be seen if the project will remain on budget or be complete in time for the Panama Canal's centennial in 2014. Cost overruns would be a formidable problem for Panama, as over 1/3 of the country's population lives in poverty. And not expanding the canal isn't an option, as the canal provides a substantial portion of the country's revenue.

Perhaps 100 years later we will have a repeat of 1904; perhaps a Western European country will fail in its building efforts and the United States will again come in to fix the problem. Or maybe this time it will be the Chinese. Either way, it will get done. The canal is too vital to the global economy, with two many vested interests in its success to not grow in accordance with the world. I look forward to assessing the project firsthand when I visit Panama this spring.