Tuesday, October 24, 2006

Panama Approves Canal Expansion

Sources: Financial Times: Expanded Canal Vital to Panama’s Prospects, Panama Seeks to Expand Canal Capacity, A Bigger Canal Can Bring East and West Closer; Associated Press; Panama Goes to the Polls for Upgrade on Canal; Business Week, Voters Approve Expansion.

Panama’s citizens voted overwhelmingly on October 22 to approve the expansion of the aging Panama Canal. Seventy-eight percent of the votes cast were in favor of the expansion, and the canal is now set to undergo the most comprehensive renovation since it was first constructed in 1914. Presently, the canal is unable to accommodate most ships built after 1990, and Panama anticipated losing some of the 5% of world trade that passes through its locks if the referendum failed. Now with the voters’ approval, engineers will start to work on doubling the canal’s capacity by adding a third set of locks and generally deepening and widening the canal.

Overall, the project is expected to cost $5.25 billion, or 1/3 of the country’s gross domestic product (GDP). The work will begin in 2007 and last approximately seven years. The state-run company responsible for operating the canal since the United States relinquished control in 2000, the Panama Canal Authority (PCA), will be responsible for financing much of the expansion. The PCA is expected to contribute 60% of the funding for the project and thereby limit the debt that the country must shoulder in order to pay for the project to no more than $2.3 billion. The PCA anticipates that the project will largely be paid for by increasing tolls; it expects to generate over $6 billion by 2025.

Despite its passage, not everyone voted in favor of the plan. In opposition, critics cited the likelihood that the project will run over budget and overburden the already debt-ridden country. Additionally, environmental activists are troubled by the likelihood that construction will further damage marine ecosystems and that another set of locks could cause salt-water-contamination of the fresh-water reserves inland.

These concerns were generally drowned out, however, as the government frequently touted the link between the canal’s expansion and its efforts to alleviate the country’s poverty. At one point, Vice President Lewis called the expansion of the canal an “essential” element in the reduction of poverty. This proved to be a persuasive argument at the polls in a country where poverty levels reach 40% and the unemployment rate is consistently above 9%.


Panama’s government often highlights the fact that a portion of the proceeds from the canal go to education and social programs. Critics, however, point to a history of corruption and believe that Panamanians will never see most of the money the expansion generates. As one citizen stated, “With that kind of money, there’s a lot to steal.” What types of safeguards should be put in place to ensure that the economic benefit of the expansion is not undone by corruption?

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