Introduction
History clearly shows that a population properly governed is an immense natural resource and an incomparable source of accomplishment. On the other hand, people so poor that they lack the basic necessities–or the hope of attaining them honestly and peacefully–turn upon themselves and others with distressing results. Under such conditions, people can easily be converted into pawns on the global chessboard.
-Max G. Manwaring
Max Manwaring’s statement above holds true when applied to the question regarding the political and economic stability of Panama and the future of the Panama Canal. Panama’s legitimacy and capabilities in respect to the transfer of U.S. Canal facilities, land, and military bases to Panama on December 31, 1999, as the Panama Canal Treaty stipulates, is something that causes apprehension within the global community. According to William L. Furlong, "This is a situation where the toughest problems also provide the nation with the greatest opportunities." Furlong goes on to point out that "Panama could utilize those facilities to its great benefit and for the economic and social development of the country" ("Panama: The Difficult . . .," pg. 55). Unfortunately, the nation could also destroy this great opportunity and thus welcome economic and political disaster. Struggles for power dominate national life in many countries today, and Panama is no exception. In this environment of "unstable peace," the destabilizing forces associated with multipolarity, interdependence, governability, and the nature of conflict make it only a matter of time before a political actor is threatened (Manwaring, "The Security . . ., pg. 165-66). Panama, as a country with such a resource as the Canal, by all rights, has a chance to finance an economic growth large enough to improve its citizens’ ways of life, thus giving hope to other third world countries. The mismanagement and uneven distribution of wealth must be dealt with so that they may take advantage of the huge earning potential that the Canal holds. This will, in turn, prevent Panamanians from being "converted into pawns on the global chessboard."
The three parts of this paper will deal with the past, present, and future of Panama in the anticipation of its takeover of the Canal. A successful transition depends on both international and domestic policies that will provide for political stability, economic progress, and social justice. The strategic interest of the Panama Canal makes for uncertainty in Panama’s security and the future of the Canal for the Panamanians. Chapter one of this paper will give a background into the history of the Canal and the current demographics of Panama and its social conditions. This will provide a vital understanding of Panama before the following two chapters, respectively, discuss a more in-depth economic report on the Canal and the country as a whole and give predictions of the future for the Panamanians as they prepare for the transition of control over the Canal and plan in accordance for its future viability.
Chapter 1
The history of the Republic of Panama and a look at Panamanian social life and conditions
The Panama Canal will officially pass to the ownership of the people of the Republic of Panama at the close of the Twentieth Century, and the world is unsure of what exactly will happen when possession of the Canal is given to them. Although a specific problem of a small country, its effects raise international concern among even the strongest nations. The success of international trade for many nations is dependent upon an operational canal. Speculation therefore, over Panama’s ability to effectively operate it, is an issue of global concern. To set the stage for a more in-depth analysis of these issues in later chapters, it is important to first understand Panama’s historical past in order to better understand their present situation, and to offer solutions and predictions for a positive transition. What one should realize is that the history of the Republic of Panama and the history of the Panama Canal go hand-in-hand. Mark Falcoff, in his book Panama’s Canal: What Happens When the United States Gives a Small Country What it Wants, explains that
Panama was created by the United States to serve as host to the interoceanic route that it proposed to build; the country’s sense of self has been almost entirely dependent on its relationship with the United States, both cooperative and adversarial; the exigencies of canal construction, on one hand, led to the importation of immigration of people of other countries and cultures. In some ways, this latter turn of events has created a formidable obstacle to the evolution of a coherent national identity (pg. 2).
Thus, it should be expected that a nation created specifically to hold a canal under the direction of another would have stability problems. Panama’s independence revolution was greatly influenced by the United States after the Hay-Herran Treaty, which would have granted the United States concessions to build a canal through the Colombian province of Panama. Therefore, to understand the Republic of Panama’s current political and economic difficulties as we come closer to the transition date of the Canal, it is also necessary to take a deeper look into their history, demographic make-up, and social conditions.
The history of the Republic of Panama and the Panama Canal
The history of the Republic of Panama and its canal is one of great international interest. As early as the beginning of the 16th century, the Spanish recognized the importance of the Central American isthmus when Vasco Nunez de Balboa crossed it in 1513 and discovered the Pacific. "This discovery-the short distance from sea to sea-has dominated Panama’s history ever since" (Encyclopedia.com). Soon the isthmus became the route by which gold from Peru reached the Atlantic in colonial times. By 1698, the British too became interested in the possibility of a transcontinental waterway and saw the opportunity of converting the isthmus into the commercial center of the world. But, it was not until early in the 19th Century that activities and explorations in search of the waterway became important (Aleman, "The Panama Canal Treaty," pg. 2).
In 1814, the Spanish Parliament passed a law allowing for the construction of the Panama Canal. At the same time, the Spanish American colonies were waging their wars for independence, and the power of Spain was in decline. Thus in 1819, Columbia gained its independence, and in 1821, Panama too broke away from Spanish rule and became a province of Colombia. With Spain’s decline, both the United States and England, "faced with the necessity of opening new markets for their fast expanding economies, became more and more interested in the construction of an artificial link to join the vast oceans" (Aleman, "The Panama Canal Treaty," pg. 2). The first move by the United States to secure the right of transit through the isthmus was the Mallarino-Bidlack Treaty of 1846. This treaty granted the U.S. free right of transit in exchange for a guarantee to Colombia of the neutrality of the isthmus and the rights of sovereignty and property. This treaty also gave the U.S. a powerful arm with which to intervene in the developments that would soon take place in Central America and Panama which would result in the ultimate construction of the canal by the U.S. Also, in 1948, the British placed themselves in a favorable position to build an alternate canal through Nicaragua and thus caused the U.S. to concern themselves with limiting England’s position of power. By 1850, the U.S. and England, by way of the Clayton-Bulwer Treaty, came to an agreement that checked British expansion in Central America but also prevented the U.S. from building and politically controlling a canal (Encyclopedia.com). The Clayton-Bulwer Treaty was to stand in the way as a legal obstacle to the realization of the Panama Canal project (Aleman, pp. 3-4).
Under a concession granted by Colombia in 1878, the first attempt to build the canal across Panama was undertaken by the private French company, Compagnie Universelle du Canal Interoceanique. Ferdinand de Lesseps formed this company in 1881 to cut a sea-level channel through the isthmus. The endeavor failed in 1898, however, "the victim of poor planning, terrible losses from disease among the workers, and bankruptcy . . . its sole hope lay in holding together an enterprise that could be offered for sale" (Britannica Online). The wide range of interests of the United States made it imperative that the construction of the Canal be no longer delayed. Through a series of diplomatic maneuvers, negotiations with the British culminated in the Hay-Pauncefote Treaty in 1901. It provided the U.S. with the right to construct the Canal with the idea that it would retain the principle of neutrality, but with U.S. fortification (Aleman, pg. 5). The Spooner Act of 1902, passed by the U.S. Congress, authorized the purchase of the French company’s holdings in Panama and the building of the Canal provided that arrangements were made with Colombia. The U.S. Congress ratified the Hay-Herran Treaty of 1903, which would have allowed the purchase of the Canal properties by the U.S. from the Colombians. The Colombian Senate rejected it though, and thus sparked the movement for independence by Panamanian patriots. "Between 1850 and 1900 Panama had 40 administrations, 50 riots, 5 attempted secessions, and 13 U.S. interventions…and, when, the Colombian Senate put off ratifying a canal treaty, the U.S. lent its support to a Panamanian separatist movement" (Britannica Online). Panama was the most interested in the Canal project for obvious reasons, and thus was provoked by this incident with the implicit backing of the United States, who was impatient to build the Canal. Panama declared independence from Colombia on November 3, 1903 and was recognized by the U.S. on November 6, 1903. Fifteen days later, the Hay-Bunau-Varilla Treaty was signed granting the U.S. "in perpetuity the use, occupation, and control of a zone of land," and thus creating the Panama Canal Zone (Aleman, pg. 6). The U.S. sent ships and troops to protect the new government against an overthrow by Colombia and began building the canal that was completed on August 15, 1914.
Post World War II was a troubled time in Panama. Political rivalries made for an unstable government as groups waged for control of the country. In addition, many Panamanians opposed U.S. control of the Panama Canal and Canal Zone and demanded Panamanian authority. The 1950s and 1960s were filled with frequent riots and demonstrations concerning this matter. In 1968, military leader Omar Torrijos Herrera and the National Guard staged a successful coup, and took control of Panama’s government. Herrera then began to rule as dictator. He strengthened the movement to end U.S. control of the Panama Canal and Canal Zone. His efforts, after many years of negotiations, led to the signing of the Panama Canal Treaty of 1977 (World Book Encyclopedia, pg.101). The new treaty provided for gradual transfer of the operations of the Canal to Panamanians with the gradual phasing out of U.S. military bases and the return of lands and waters used in the management of the Canal. The transfer is to be completed by December 31, 1999. The Panama Canal Commission was created by the Panama Canal Act of 1979. It took control of what the formally U.S. owned Panama Canal Company possessed, along with the Canal Zone that ceased to exist after the 1977 treaty was enacted. The commission controlled the physical plant directly related to operations, and transferred everything else over to Panama. The 1977 treaty was supplemented by the Neutrality Treaty of 1979 that has no termination date. The Neutrality Treaty stipulated that the U.S. and Panama guarantee the neutrality of the Panama Canal while U.S. and Panamanian warships, however, were given passing rights. The treaty also said that after the termination of the Panama Canal Treaty in 1999, no nation other than Panama could operate the Canal or have military installations within Panama. However, the U.S. still reserved the right to use military force, to keep the Canal open (Manfredo, "The Future of the Panama Canal," pp. 109-124). "This was, in part, the rationale behind the U.S. military intervention in Panama in 1989-90, which, nonetheless, did not prevent the Canal from being closed down for about a day in December 1989" (Britannica Online).
Conclusions from the History
As was stated earlier, Panama was created by the U.S. to serve as a host to an interoceanic canal. Because of this, "Panama was deprived, at a crucial moment of its history from establishing the proper conditions for exploiting what it did then, as it does now, constitute its main wealth: a unique and privileged geographical position" (Aleman, pg.7). In 1903, due to the threat of Colombian invasion, Panama had to concede to U.S. desires. To refuse would mean the withdrawal of U.S. protection. In more ways than one, Panama lost out on its chance to truly benefit from the Canal. Its chance to naturally evolve into a country with strong national identity has been interrupted by such things as immigration and U.S. policies that have not allowed many of Panama’s own institutions and leaders to properly perform and be recognized internationally.
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Panama has to rise above its internal conflicts and understand that the benefits that we may draw from [the Canal], which is what ultimately counts, lie in the seriousness and restraint with which we handle that entity step by step" (Falcoff, Panama’s Canal, pg.32). Internal problems such as unemployed and unskilled workers go on to promote an argument that the true earning potential of the canal, along with the nation’s other resources, is not being realized. To better understand Panama’s current situation, is to not only study its past, but to also study its current demographics and social situation in order to assess its ability to not only properly manage the Canal, and to provide a stable political and economic environment for its citizens. In sum, "the ubiquitous obstacles of change–lack of awareness, absence of preparedness, inadequacy of commitment, retention of privilege for a few, and corruption–are all very much a part of the cultures of a majority of countries . . . [and] Panama’s culture and history . . . all testify to this reality" (Manwaring, "The Security of Panama . . .," pg. 162). It is vital for the future of the Canal and the future of the Republic of Panama that the Canal be efficient and maintain an effective management of finances, as well as the confidence of its customers (Manfredo, "The Future . . .," pg.107). To offer solutions and predictions of the future viability of the Canal, it is also important to understand Panama’s current make-up and capabilities.The Republic of Panama’s Demographics and Social Conditions
I. The People and Social Conditions
Its society is extraordinarily diverse, culturally, racially, and linguistically . . . during the colonial period, most of the population was of mixed Spanish-Indian descent (mestizos), though significant complements of Indians and even small numbers of African blacks rounded out the picture. Chinese indentured laborers were introduced during the building of the Panama railroad . . . followed by large numbers of West Indian blacks, Protestant and English speaking, during construction of the canal (Falcoff, Panama’s Canal, pg. 24).
Spanish colonization along with the construction of the Canal has led to the settlement of a diverse ethnic and linguistic group that calls themselves Panamanians. The creation of such a commercially oriented area attracted immigrants from everywhere. Mestizos make up the largest population group, comprising about 64% of the estimated 2, 719,000 habitants of Panama. The rest of the ethnic composition includes 14% black and mulatto, 10% white, 8% Amerindian, and 4% Asian. Panamanian demography has shown a high rate of population increase due to immigration, but this rate has declined since the Post World War II era as the levels of immigration have decreased. Spanish is the official language of Panama, while English and Indian languages are spoken by select groups. Most Panamanians are Roman Catholics, but freedom of religion is provided for in the constitution. Panama is a civilian republic with a unicameral Legislative Assembly and a popularly voted president. Its military was abolished in 1991 and was replaced by a national police force (Britannica Online).
Near the canal is the center of urban activity, while the rest of the country is comprised of farms, villages, and small towns. The Panamanian population is now predominantly urban. Panama has experienced demographic trends such as the movement of rural people within the country in search of land. This is due to the fact that their methods of production have led to the destruction of land such as slash-and-burn techniques of clearing forestland. Also a trend has been developed in the movement of young people to urban areas, as they search for better economic conditions. Much of this urbanization has come from the increased industrialization in the cities that has generated employment and better services (Heckadon, "Impact of the development . . ., " pg.143). Panama’s white population lives in close proximity to the Canal. Most are wealthy large landowners and political leaders. A few families control much of Panama’s economic and political systems. There is a large middle class, mostly mestizo, which live near the Canal and make a living as merchants and office workers. The lower classes, both Indian and Hispanic, are mixtures of skilled and unskilled workers. The Panamanians that do not live near the canal are mostly farmers. The Indian population lives predominantly in rural areas and farm and fish for a living. Women in Panama have little job opportunity outside of the home (World Book Encyclopedia, pp. 98-99).
Social indicators such as per capita income, proportion of the population engaged in nonagricultural careers, life expectancy, and birth rate make for the argument that Panama is significantly higher developed that other Central American nations yet, "the numbers, however impressive in themselves, mask sharp inequalities between urban and rural areas and within social classes and groups" (Falcoff, pg. 24). Although over 90% of the population of Panama are literate, only about 29% attain a secondary education and only 7% complete their undergraduate degree. There are two schools of higher learning in Panama–the University of Panama and the University of Santa Maria la Antigua. Health conditions are adequate in most areas with the exception of urban slums where tuberculosis is still quite common. Most Panamanians have access to medical care, however Panama’s birth rate ranks among the lowest in Latin America (Britannica Online).
II. The Economy
Economic activity in Panama depends on geographic location. Those who live near the Panama Canal engage in business related to the waterway including commerce, trade, manufacturing, and transportation. In other areas of Panama, most people are involved in agriculture. Panama has a free market economy based primarily on services connected with the Canal. The service sector of Panama accounts for three-fourths of the GDP and employs over half the economically active population. The effects of the Canal along with the absence of exchange controls in the Colon Free Zone have helped Panama in becoming an international trade and finance center. As one of the world’s largest trading centers, the Canal provides storage, assembly, and transshipment services. Panama imports mostly supply fuels, capital goods, and food products, while it exports bananas and other food products. Its main trading partners are the United States, Germany, Japan, and other Latin American nations. Imports amount to about 2 billion more Balboas than exports. Canal services, international banking, and tourism traditionally offset this trade imbalance (Britannica Online).
Despite the Panama Canal being single most important factor in Panama’s economy, agriculture actually employs more people than any other economic activity. It accounts for only one-tenth of the GDP, but employs one-third of the economically active population. Seminomadic and subsistence farming exist while large commercial plantations use modern equipment. Land distribution is a problem in Panama as less than one-third of all farms are owned by the people working on them (Britannica Online). Most of the cash crop production is done by wealthy landowners that hire agricultural workers. Agriculture production includes the production of sugarcane, bananas, coffee, and rice on the commercial and individual level. The raising of livestock, including cattle, pigs, and poultry, is also an important economic activity. This is due to the high price of hides and the growing urban market. Fishing has also developed on the commercial level, adding to the list of Panama’s exports, while forestry, mainly mahogany, is their forest export (Britannica Online).
Even with Panama’s geographical location, the industrial movement there did not begin mainly until after WWII.
Thirty year ago, there was only one plant–a cement factory–located within the basin area. Today, there are many factories, turning out plastic products, glass, paper, lubricants, soaps, pesticides, pharmaceuticals, foundries, sawmills, and the like (Heckadon, "Impact of Development . . ., pg. 141).
These are bound to increase as transportation services improve to bring together the nation’s markets to ports and airports, not to mention the Canal. The main center of manufacturing is in Panama City and other cites along the Canal.
Conclusions on the Panamanian Demographics and Social Conditions
Despite Panama’s improved economic performance over the years, serious problems still wait to be solved. Questions over the future viability of the Canal after it is turned over to Panama on December 31, 1999, still persist. Steps still have to be taken to restore the confidence of the Panama Canal’s users in their ability to maintain it in the long run (Manfredo, "The Future of . . .," pg. 107).
One of the main problems of Panama is its high unemployment rate (about 14%). The first step to solving Panama’s problems may be the "full restoration of democracy and political stability in Panama" (Manfredo, pg. 107). Here, the majority low-income members of the population would have the majority voice in a democratic society. Changes could then be made to reduce the unemployment rate and their way of life. One potential demand might be land reform. Panama must find a way to share ownership and production of land while incorporating better wages for agricultural workers. Better wages to the lower income workers will help Panamanian industry, as more people will have more money to invest. Another demand might be to broaden the industrial base and depend less on a service economy. This was mentioned by Stanley Heckadon Moreno in his "Impact of Development on the Panama Canal Environment" (pg. 142). Thus, more jobs could be created for the urban community.
The Panama Canal has a huge earning potential that if managed correctly will be a great resource to the Panamanian population. Yet problems of poverty and unemployment still persist. These economic circumstances seem out of place in a nation of such potential. For the future, the Panamanians must look to the Canal and use it as a moneymaking facility. It has the capacity to finance the economic growth of a nation along, with Panama’s agricultural and manufacturing industries. By all rights, Panama should be a rich and prosperous nation and the following chapters will make the predictions as to whether their "place in the sun" is possible and will be realized.
Chapter 2
The Economics of Panama and its Canal
Since 1914, the Panama Canal has played a very important role throughout the country and in transcontinental trade. In 1996, the Canal’s revenues were $486 million. The net income was $105 million. (Shipshape: the Panama Canal) Every year almost 14,000 ships, each weighed with some 200 million tons of cargo, pass through the Canal. According to the Europa World Year Book, the total revenues of the country totaled $2,263,577,000 in 1996, making the percentage of the Canal’s revenues to this total be roughly 21%. In Mark Falcoff’s Panama’s Canal, he notes that the "Canal tolls account for some 9 percent to Panama’s gross domestic product, though its contributions to the republic’s welfare go far beyond this." (Falcoff, 49) The economy is primarily service-based, emphasizing banking, commerce and tourism.
Not only is the Canal very important within the country, but around the world as well. During the Colonization of the America’s, Panama’s coast was used by the Spaniards to send home their bullion. Late in the 19th century, Spain’s neighbor to the north, France, was weakened in its unsuccessful attempts to construct the Canal. The French invested years of time and millions of dollars, only to render much of their investment exhausted, leaving many citizens bankrupt and countless others poor. Perhaps the most obvious example of a country that has been considerably impacted economically by the Canal is the United States. They were the actual creators of the Canal, and as successful creators often do, they reaped the benefits of the project they completed in 1914. In 1977, the United States, through a series of Treatise, handed over control of the Canal to Panama, a gradual process that would end by the year 2000. Many questions and doubts are raised regarding Panama’s ability to continue the job the United States has performed in their maintenance of the Canal. Given the unstable and corrupt political past that Panama holds, such apprehensions are understandable. In looking at the economic structure of Panama, we will pay particular attention to the turnover, viewing it principally as an economic movement, and look to see what may come of Panama’s newfound responsibility.
Economic Background
Until the mid 1970’s, Panama was a competitive player in international trade. Only until recently, with the restoration of a democracy, has Panama been able to bring itself back on its feet. The current president, Pérez Balladares, modeled his economic policies off those of Asia. The key to growth was exports, which would rise by lowering tariff barriers and decreasing the already low domestic wages. (Panama: Tailoring a new image) "Panama continues to suffer from one of the most unequal patterns of wealth distribution in all of Latin America, and half the population lives in dire poverty." (Ibid) Balladares’ reforms have not worked; the unemployment rate is still very high, around 13% to 15%, and the growth rate is moving slowly along at a measly 2%.
With the removal of the United States presence, much of Panama is worried that the strong relations between the countries may be strained. Panama is both politically and economically dependent on the United States. 40% of Panama’s foreign trade is with the United States. In 1997, the United States exports to Panama totaled $1.2 billion, with Panamanian exports to the United States at $231 million. (U.S. Dept. of State) Panama is one of two Latin American countries that matches its currency with the United States. Both the Panamanian balboa and the Argentinean peso have fixed their exchange rate to be exactly equal to the U.S. Dollar. In more ways than one, the United States has served as a paradigm for Panama. In assuming control of the Canal, Panama now has the freedom to remove itself from the American shadow.
There is discussion of the $105 million net income from the Canal and its significance. Such amounts of money can be incorrectly distributed if placed in the wrong hands. To prevent problems, and to take one of many important steps towards managerial sovereignty of the Canal, a commission called the Panama Canal Authority (PCA), a constitutionally recognized body consisting of only Panamanians, that will have significant power in decisions affecting the Canal, has been established.
The Canal manages a vast array of international trade. "The Canal handles 4% of the world’s seaborne international trade — about 14,000 ships carrying 200 millions tons of cargo. That’s five times as many ships and twice as much freight as handled by Long Beach, California, the largest U.S. seaport." (Panama Canal Toll Boost is Announced, Effective on Oct. 1.) Goods such as machinery and perfume are shipped from France to Chile, for example. In return the Chileans send large vessels filled with salmon and grapes back to the French. Two-thirds of Ecuador’s main export, bananas, pass through the Canal. Countries as far east as China are made closer to the U.S. via the Canal when sending corn from the Midwest farming states. (Whatever Floats Our Boats)
Positive side of U.S. Takeoff: New Challenges and Opportunities
The turnover of the Canal presents many new opportunities to entrepreneurs abroad. After well over 80 years there, the United States will leave behind some five thousand buildings, among them post offices, movie theaters, bowling alleys and other recreational centers. The U.S. government annually spends $80 million in keeping these structures up. These buildings, along with 10 U.S. military bases, not to forget the Canal itself, cover some 500 miles, and comprise what is known as the Panama Canal Zone. The estimated worth of all the assets in this zone are said to range anywhere from $30 billion to $40 billion. (The Rush to Redevelop) It is clear that such an amount of capital should be quite attractive to investors. Either for companies that as of yet have no establishment in Central or South America, or simply to market new products or ideas, this is a great opportunity.
The InterAmerican bank will be reviewing business proposals for companies to occupy the new space that the U.S. will leave behind. The cost of these redevelopment studies will be from $8 to $12 million. In selecting the developers, the InterAmerican Development Bank has to be very careful with their choices. "According to Jorge Nelson Avila, the IBD team leader on the Panama redevelopment effort, the bank’s primary interest is preserving the country’s ecologically sensitive watershed area while at the same time promoting economic growth." (Ibid) Some developers feel that they can be additionally helpful to Panama, possibly being even more resourceful with the land than the U.S. has been. Particularly important criteria for the potential developers is their willingness to work with the departing U.S. military, and more importantly the Panamanian government.
Price Increases bring thoughts of Alternatives to Canal
In light of recent toll increases, it is doubtful that Panama will be able to maintain tariffs at a steady level. Early in 1996, the Panama Canal Commission (a U.S. government agency run by a board made up of both United States citizens and Panamanians - the predecessor to the Panama Canal Authority) announced that they would be increasing the rates for passage by 16%. (Panama Canal Toll Boost) Although the maintenance to upkeep the area is funded almost entirely by tolls, hikes in pricing can be dangerous. Many countries will be negatively affected by toll increases. For example, much of the Asian trade to the United States passes through the Canal. "In particular, the increase is likely to hurt chemical, oil and commodity companies that ship cargo in large bulk and have had 82 years of relatively moderate pricing policies." (Ibid) Although the toll increase would jump Canal revenues by about $100 million, such increases spark discussions of an alternative to the Panamanian Canal.
Two American companies, Kansas City Southern Industries, Inc. and Mi-Jack Products, Inc. have started work in an effort to relieve the congestion of the Canal, and to accommodate expanding technology. The project is a railroad, costing $60 million to build, connecting the Pacific side of Panama City to the Atlantic side in Colon. (Kansas City Southern Industries to Operate Rail Line Along Panama Canal) Cargo can be transported securely in one and one half hours time. It is helpful for many new ships who’s increasing size makes it either difficult or now impossible to traverse the narrow Canal.
Another alternative is a new transcontinental route through the Isthmus of Tehuantepec in Mexico, proposed by engineering consultants Ochoa and Associates. The project would tunnel through the states of Veracruz and Oaxaca. Currently the outlook looks dim. Many concerned citizens are rejecting the idea, claiming that the construction could harm the forest and the indigenous communities on the isthmus. (Corridor of destruction)
Japan has recently been investigating the possibility of using Nicaragua to create a new "transisthmanian Canal". (What the Panamanians Face) Japan stands as the Canal’s second biggest user, and has therefore much reason to worry over toll increases. Along with the Nicaraguan route, discussion has also sparked about going through Costa Rica. Instead of a Canal though, a railroad linking the Atlantic and Pacific Ocean ports would be built. There is also talk of creating a special cargo railroad running from Texas to California. Although these plans are viable, railroads present some problems. Many popularly traded goods are not packed in containers, such as grain, steel and heavy machinery, and thus cannot be transported by train. (Drought Leaves Panama Canal in Dire Straights)
Although some of these options may seem feasible, they will take a lot of time and improvements to be successful. Will the costs of building an alternative route offset the toll increase in the Panama Canal? Currently some could say that Panama holds a form of a monopoly in the Western Hemisphere. Nonetheless, any monopolistic notions will be quickly eliminated with the construction of an alternative route. Based on the limited viability of an alternate project, experts say that the Canal’s continuous flow will persist. Up through the year 2010, the volume of cargo is expected to grow on average by 1.7% annually. (The Future of the Panama Canal)
The United States recently closed the first of five Air Force Stations, turning over the real estate to the Panamanian government. Apparently, the real estate in the former Albrook Air Force Station was improperly distributed. (Ruling Party in Panama is Profiting From Canal) Instead of being available for public bidding, many of the more prominent homes were removed from the bidding. Certain government leaders had granted themselves the power to have an exclusive opportunity in bidding, along with being able to purchase the homes at near half the market price. Robert Eisenmann, chairman of the Panamanian chapter of the anticorruption group Transparency International, noted that "The Panamanian populace has always felt that the Canal should be above the political fray, but the fact that these homes were assigned to Cabinet ministers said to us that finagling is going on that we never expected." (Ibid)
Government corruption loses people’s faith. Such discontent with the government has led the people to block such measures as a constitutional amendment that would allow the president to run for a second term in office. This first turnover in real estate is a major test. Throughout the next year, some 2,500 more homes are to be turned over, totaling in value some $3.4 billion. If the transition is not done fairly, this lack of faith could increase, and the massive instability that once surrounded Panama could quickly return.
Tourism and a Favorable Outlook
Conclusion
In spite of some economic turbulence, Panama stands tall with $2420 as its per capita income, the highest in Central America. (Enciclopedia) In spite of all the criticism, clearly they are doing something right. Along with transition comes newfound responsibility; Panama will soon be sovereign, and the time will come for it to prove its economic strength. Chapter 3 will give us more insight into what lies ahead for Panama and its Canal.
Chapter 3
The Future of the Panama Canal
As discussed in the first chapter of this essay, the United States’ 84-year reign over the Panama Canal will come to a close when authority of the Canal is transferred to Panama. When the clock strikes midnight on December 31, 1999, Panama will finally gain complete sovereignty over its most vital resource, as well as its greatest trademark. While Panama basks in the glow of its new found national pride, the rest of the world will hold its collective breath as the Panamanian government begins managing the future of the world’s largest shipping shortcut. Few events in history have warranted as much caution and pessimism directed towards a government as has the pending transfer of the Panama Canal to Panamanian control. The international shipping community, for example, views Panama’s pending management of the Canal with great caution. Their fears rest largely on the prospect of increased toll fees arising from mismanagement of the Canal. Criticism directed at the Panamanian government does not rest solely on the shoulders of industry, however. Environmentalists, foreign statesmen, and the Panamanian people themselves have all taken shots at a government that has yet to assume control of the Canal. While the concerns of the shipping industry et al regarding the transfer of the Canal into Panamanian control do warrant some consideration, this chapter will argue that Panamanian government has made strides in successfully addressing most, but not all, of its critic’s concerns.
Panamanian Politics
First, a glance at the political structure of Panama and the concerns surrounding it is necessary, for it is this very government that will be responsible for the future of the Canal. Although Panama’s political system is not regarded as a long-standing pillar of democracy, its efforts towards democratization must be applauded. After two decades of military rule from 1968-1989 (Furlong 19), Panama’s political structure is still in the process of cementing democracy as the norm as opposed to the exception. Instead of a dictatorship, the political structure now places executive power in a president. Two vice presidents assist the president, and all three posts are popularly elected to five-year terms. The president is also responsible for appointing Cabinet ministers and other high-ranking government officials such as the members of the Panama Canal Authority (the PCA is discussed in greater detail in the next section). As for the legislative branch, authority is vested in the unicameral Asamblea Legislativa (Legislative Assembly), which is composed of 72 representatives directly elected to five-year terms. The importance of a publicly elected president and legislature to the future success of the Canal is obvious: the government in office must be responsive to the people. For if Panama’s elected officials choose policies which in any way might jeopardize the future of the Canal, they will be held directly responsible by the people, and at the polls.
While more recent developments have shed a brighter light on the integrity of the current administration, the decade long recasting of a democratic government in Panama has not come without critics pointing to certain events in order to further their arguments that the Panamanian government is riddled with incompetent and corrupt members. For example, in 1992 several eyewitnesses saw a U.S. Army Sergeant gunned down and killed by member of the ruling party’s family. After years of frustrating delays and ample evidence for a conviction, the Panamanian judicial system acquitted the well-connected suspect of murder and set him free. This atrocity of justice enraged U.S. officials, thus increasing the level of mistrust between the U.S. and Panama during the pivotal transitional stage of the Canal (Serrill). On the international front, the decision to invite Taiwan to the Panama Canal Conference in 1997 proved politically unwise. Infuriated by Taiwan’s invitation and sponsorship (Taiwan paid $800,000 to help fund the conference), China boycotted the conference -- a conference intended to prove to the world that Panama was indeed ready and able to assume complete control of Canal (CNN). Panama’s refusal to rescind Taiwan’s invitation to the conference prompted China (the Canal’s fifth largest customer) and the United Nations to boycott the conference. When all was said and done only four presidents (Panama, Taiwan, Nicaragua, and Honduras) out of an expected 200 attended the conference (Journal of Commerce). In political terms, the conference was a dismal failure.
The pessimism surrounding Panamanian politics also comes from Panamanians themselves. One of the most telling illustrations of Panamanian’s skeptical attitude towards their government is that 55% of Panamanians believe the Canal should be operated in conjunction with the United States (Furlong 56). It is interesting that an event that would seemingly promote nationalism, over half the people in Panama believe the United States should remain involved in the affairs of their nation. To further forge the argument that Panamanians are extremely cautious of their politicians’ abilities and intentions, only 9% of those polled wanted Panama to administer the Canal without international assistance (Furlong 56).
With charges of nepotism, corruption, and inefficiency coming from all directions -- U.S, international community, Panamanians -- the Panamanian government needed to act decisively to stem the wave of criticism directed at them. They accomplished this objective by instituting a constitutional amendment empowering the management of the Panama Canal to an autonomous corporation -- the Panama Canal Authority. The main thrust behind this measure was to insulate the Canal from Panamanian politics. Although a viable and workable solution to calm the fears of Panama’s many critics, the initial appointments from President Balladares to the PCA’s 11-member board nearly destroyed the credibility of the newly created authority. Critics were incensed when President Balladares named relatives and political cronies to the PCA’s board. The list included his former son-in-law, his cousin, two of his wife’s cousins and his campaign finance chairman (Serrill). Again, in response to growing criticism, President Balladares silenced many of his critics by appointing Alberto Aleman Zubieta, a well respected former member of the Panama Canal Commission (a U.S. controlled commission) to head the PCA (Transportation & Distribution). The creation of the PCA and the subsequent naming of a reputable administrator were a clear, and much needed, statement that Panamanian politics would not meddle in the affairs of the Canal.
Panama’s Challenges
When Panama assumes complete control of the Canal in 2000, it will inherit a host of pressing concerns surrounding the Canal. First, if the current irresponsible environmental practices continue in Panama, the Canal’s water supply from two local lakes -- a crucial ingredient considering the Canal is above sea level -- will continue to diminish. The most serious problem Panamanian officials must address in the area of environmental dangers is deforestation. Deforestation leads to soil erosion, which in turn increases the sediment build-up in the two lakes the Canal relies on for its water supply. Simply stated, an increase in sediment means a decrease in water. It is estimated that one of the two lakes, Lake Alhajuela, will lose up to 23% by the turn of the century (Moreno 132). This continued drain on the Canal’s vital water supply will force the PCA to correct the problem through environmental measures (which is warranted for a number of reasons) or look for alternative water sources. Both of these remedies will not only be extremely challenging, but will also require extensive funding. Unfortunately, the environmental concerns seem to warrant the least amount of attention from the Panamanian government.
Another issue in which the PCA must confront is how to handle the increasing usage of the Canal. A record number of ships passed through the Canal in 1996, generating $486 million in tolls (Falcoff). In an ever-increasing competitive transportation market, the PCA will have to look to improve the efficiency of the Canal for its customers. Issues to be addressed include measures to alleviate traffic congestion; alternative methods to decrease transit time across the isthmus; and expanding the Canal and its locks to accommodate larger ships. Unlike the environmental issues, the Panamanian government has begun to address these concerns in impressive fashion.
First, to reduce the congestion and transit time, the PCA has hired two American companies (Kansas City Southern Industries and Mi-Jack Products of Chicago) to rebuild the dilapidated 50-mile rail line between the Atlantic and Pacific oceans. The railway, handed back to Panama in 1979, is expected to begin operation in 2000. The refurbished railway will offer the 14,000 ships that transit the Canal per year an effective and efficient method to transport their cargoes across the isthmus. Instead of the 8-12 hours necessary to transit the Canal, the rail line will provide a service of moving cargo in only 60-90 minutes time (PR Newswire). The revitalization of the railway illustrates that the Panamanian government views its competition seriously. Indeed, rail lines from Texas to California, or from New York to California, provide the shipping industry with an attractive transit alternative. The importance placed on rebuilding the railway across Panama is a strong indication that the Panamanian government can respond effectively to the many pressing needs facing the future of the Canal.
Second, the increasing number of larger ships that do not fit through the Canal’s locks and the potential for increased congestion together have created a dilemma for Panamanian officials. The question is not whether to expand the Canal and its locks, but rather by how much and at what cost? The Panamanian government will have to decide on whether to spend up to $10 billion to modernize and expand its locks to allow the larger ships passage (Economist). The answer will not be easy given the fact that a recent $1 billion investment in 1996 to increase the Canal’s capacity by 20 percent caused a 16% increase in tolls, thus raising the eyebrows of those in the shipping industry (Economist).
The maintenance, improvement, and management of the Canal will obviously have an impact on the Canal’s toll fees. It is with regards to the toll fees that are of greatest concern to the shipping industry. This concern has been voiced by one of the Canal’s largest customers, Crowley American Transport. Mike Roberts, a Crowley vice president, is troubled by the possibility that maintenance of the Canal could suffer under Panamanian supervision, and that the increased costs of maintenance will be passed on to the shipping industry (Traffic World). Increased toll fees are a legitimate concern and one that the PCA will have to administer with the utmost care. The difficulty of improving an antiquated Canal without excessively raising toll fees to fund the improvements will be one of the first tests facing the PCA. The success of this challenging balancing act is crucial to the credibility of the PCA. For if they improve the efficiency of the Canal without alienating the shipping industry, the PCA will have proven that it can navigate through difficult waters and provide effective solutions. If, on the other hand, the PCA chooses a policy that places the burden of financing the Canal’s improvements on the shipping industry through the increase of toll fees, the critics will have been proven to be correct.
In addition to the potential of increased operational costs being passed on to the users of the Canal, a common concern was echoed by the shipping executives during the Panama Canal Conference in 1997: they feared that the Panamanian government would attempt to use the Canal as a "cash cow" to pay for non-Canal related projects in Panama (Traffic World). This concern, especially given the great importance of the Canal to Panama, seems to be nothing more than a case of paranoia for those critics who rely on Panama’s political history rather than its political future as the basis their fears. What must be understood is that the past is the past. What has already been done cannot be undone, at least in a historical sense. With this said, let the future of Panamanian politics continue to evolve before a label of futility can be applied. As touched on earlier, Panama quieted many of its critics when it created an autonomous authority to protect the Canal from political tampering -- a main target used by the critics. Furthermore, the Panama Canal is certainly more important to the future of Panama than it is to the profitability of shipping companies. While the shipping companies might argue this point, I will stand by my assertion that the well being of a nation is of much greater importance, and therefore the country in question -- Panama -- will take all measures to secure its ability to flourish and prosper as a nation. And finally, in addition to self-interest, the Panamanian government is well aware that it is under extreme scrutiny to manage the Canal with international interests in mind. In sum, it seems extremely unlikely that the Panamanian government would act against the interests of its largest customers, the international community, and its own people.
Reverted Land and Facilities
In addition to the myriad of concerns regarding the Canal, Panama will also be faced with the task of maximizing the utility of land and facilities turned over to them by the United States. Much of the criticism directed at the Panamanian government is in direct response the condition of the facilities that were turned over to Panama after the Neutrality Treaties. Basing his opinion on his governments’ poor record of managing reverted facilities and resources, a Panamanian journalist painted a dire picture of the pending transfer of additional land and facilities to be transferred to Panamanian control: "Now that we are very close to assuming full jurisdiction over our entire territory...we are afraid...Some think that Panama is finished if the Americans leave for good." (Falcoff 102) The most prominent displays of gross negligence of behalf of the Panamanian government can be seen in the conditions of the Panama Railroad (transferred in 1979) and the Coco Solo military base (transferred in 1991). An argument, albeit weak, can be made that the railroad’s dilapidated condition was a result of military rule. This argument, however, cannot be made for the horrible state of the Coco Solo military base that was handed over during the democratic regime of President Endara. As another journalist stated, "it [Coco Solo] began to rot almost as soon as the air conditioning was turned off. Before long, looters had stripped the buildings...today, Coco Solo is an over grown squatter’s camp." (Falcoff 101) The concern for utilizing reverted land and facilities increases exponentially given that 7,000 buildings and facilities, as well as 364,078 acres of land still remain to be transferred back to Panama. As previously mentioned, Panama has quieted some of its critics with the rebuilding of the railroad; however, the enormous task of converting and utilizing the thousand of acres and facilities still pending transfer will take innovative efforts on behalf of the Panamanian government to erase the negative memories of a once dilapidated railroad and military base.
One such innovation is the transformation of a former military base (Fort Clayton, located on the Pacific Ocean entrance of the Canal) into a dynamic, multi-purposed educational and industrial center appropriately named the "City of Knowledge." As the government sponsored pamphlet used to promote this effective use of reverted resources proudly states, Panama stands at a historic juncture with opportunities of unimaginable potential....One of the most far-reaching of these in the City of Knowledge." Indeed, the decision to use newly acquired facilities to promote education, research, innovative technology production, and cultural exchange must be applauded. To improve the chances for this new "city" to succeed, President Balladares, among other high ranking Panamanian political officers, signed into law the "establishment and development of the City of Knowledge." As it stands today, the much criticized Panamanian government has begun the badly needed improvements on the Canal, has begun to rebuild a valuable railway, and is investing heavily in education and technology. If these are the signs of things to come, then the earlier mentioned predictions of an inefficient Panamanian government have been seriously compromised, and gladly so.
Void Left by U.S. Military
In addition to the sobering economic and operational responsibilities borne by the transfer of the Canal and reverted land, Panama must also deal with the loss of U.S. military presence. One area of concern is the defense of the Canal. Though the defense of the Canal is by no means trivial, the threat of an attack is minimal. For what purpose would an attack by another country on the Canal achieve given the Canal’s neutrality status for all countries to utilize its services? Terrorism, on the other hand, is a threat. The presence of the U.S. military could act as a deterrent against an act of terrorism, but how effective of a deterrent has come into question. A member of the U.S. military conceded that "with all the policemen in New York, they [terrorists] were still able to bomb the Trade Center." (Falcoff 71) To summarize, while a U.S. military presence might possibly deter terrorism, its prevention is a difficult task given the fanatic convictions of terrorists. Therefore, the U.S. does not see the need for continued presence if the most prominent threat is one that is difficult to defend in the first place. This is not to imply that the Canal will not be defended, it will. In lieu of the U.S. military, the Panamanian government has converted, with U.S. assistance, the former Panama defense Force into a civilian public force composed of four units: the Panamanian National Police, the National Maritime Service, the National Air Service, and the Institutional Protective Service. As for an official Panamanian military, a constitutional amendment in 1994 eliminated this possibility (U.S. Department of State).
Panama will need to develop a plan to deal will the economic void left by the departure of the U.S. military, currently 10,000 strong. According to the U.S Department of State, the jobs and income earned from U.S. bases contributed $170 - $350 million into Panama’s economy. Panama’s proposed solution to replace the lost jobs created by the departure of the U.S. military has focused on the privatization of government controlled industries. Unfortunately, the hope that industries such as the National Waterworks, the Sewer Systems Institute, and the National Institute of Telecommunications can be privatized to fill the demand for jobs has been met by stiff opposition from the Panamanian people. On average, 76% of Panamanians reject the theory of privatization (Falcoff 108). This sentiment is reflective of Panamanian’s long history of paternalism. Understanding the consequences of a people overly dependent on the government, former Vice President Guillermo emphasized that Panama’s "totally paternalistic state economy needs to be changed." (Falcoff 108) It will be interesting to witness how a government who realizes the importance of industry privatization goes about implementing it while an overwhelming majority of the population opposes the practice.
Conclusion
As this paper has illustrated in each section -- history, economy, and future of the Panama Canal -- the Canal has been of vital importance to the international community, as well as to Panama. The presence of Americans in the affairs of the Canal during the twentieth century has resulted in an efficiently operated Canal. The future of this vital waterway will soon be in the hands of a country that has yet to fully prove it can manage such a valuable resource. That they find the answers to continue and further the history of an efficiently operated Canal is of critical importance to the future of Panama. For many Panamanians, the transfer of the Canal is considered the final phase in a long quest for nationalism. There is a danger with this line of thinking. The transfer of the Canal should be considered the means to nationalism, not an end. The challenges Panama must overcome are well documented, and the decisions they choose will have an impact on the world, and obviously itself. Nationalism, then, is not achieved through written words on a treaty, but rather by actions. Panama has been handed, and rightly so, a golden opportunity to illustrate to the world that it is indeed a country which has earned its nationalism.
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