The Power and the Money

Criticism of the Trump letter to Panama is missing the point

The Trump Organization recently sent a letter to the president of Panama in regards to a legal dispute over a Trump-branded property. The letter listed some putative irregularities in the legal proceedings and asked the President of Panama to intervene lest his government be held responsible for denying justice to the Trump Organization. The threat, made quite explicit, is that the Trump Organization would then haul Panama up in front of a panel at the International Center for the Settlement of Investment Disputes (ICSID).

Vox wrote the following:  “Even if Varela decides to do nothing about this specific dispute, he could now feel obligated to curry favor with Trump in other ways to make up for the issue and keep US-Panamanian relations stable. That could lead to his government approving specific policies to placate Trump or perhaps covertly acting to ensure that the Trump Organization secures favorable business deals in Panama in the future.”

In other words, Vox and others fear that President Trump’s personal connection to a private venture means that American foreign policy is being perverted to produce private gain. 

So is that what is happening? Is this a case of the Trump Organization using the fact that its principal is also President of the United States to muscle a small country for private gain? Well, to know that you need to answer three questions:

1. Would the Trump Organization have sent the letter if Donald Trump weren’t President of the United States?
2. Will the Panamanian executive react differently to the letter than it would have if Donald Trump weren’t President of the United States?
3. Will the United States government take actions against Panama that it would not have taken had Donald Trump not been President of the United States?

The answer to the first question is “yes.” As a colleague of mine at Brookings wrote:

Details of the case a bit unclear, but foreign investors complaining they've been mistreated in local courts (and that this reflects poorly on investment climate) is pretty common... More generally, aggrieved investors will complain to anyone who will listen

— geoffrey gertz (@geoffreygertz) April 9, 2018

The answer to the second question so far is, “We don’t know yet.” But probably not. President Varela does not have a lot of power to intervene and the Trump Organization does not have a particularly good case to bring to ICSID. 

Which brings us to the third question. Will the Trump administration use the vasty power of the United States to twist Panama’s arms? To which the right answer is: probably, but what else is new? I wrote an entire book about the rather egregious ways American administrations of all ideological stripes twisted the arms of small countries in fights with American investors. The Obama Administration did that to Argentina when its government tried to ignore an ICSID decision. (Obama later went after Argentina on behalf of U.S. creditors.) And Geoffrey Gertz has found that American investors still rely on official U.S. support to get their way with foreign governments. If the administration leans on Panama to aid the Trump Organization it would be following a long-standing American tradition.

To be honest, the Trump Administration is more likely to fail at getting its way than earlier administrations. First, the current President speaks so loudly and is so unpopular that it would be hard for any foreign government to easily acquiesce. Second, the current President is unpopular at home and actions that might have slid under the radar will get much play. 

So stop worrying that Trump corruption will pervert American foreign policy or create some sort of American empire run for the benefit of an investing class. That ship sailed in the 1890s.

What you should worry about is not Trump leaning on foreigners to benefit his private businesses. You should worry about foreigners favoring Trump’s private businesses to benefit their interests. There is evidence that the Philippine government is doing exactly that and we all know about the Russians.

I doubt that President Varela will do much in this particular case (not least because he can’t do much) but others in other countries will. The tail will wag the dog.

Never go with the lowest bidder, but if you do, drink Dos Equis

I’ve recently given a lot of interview on the Panama Canal expansion and forgot to blog about it here. But now there’s a reader request! So I’ll give the short version, since I’m on the road to Alabama.

Four points:

1. This recent New York Times story is spot on, although the tone is much too dire. It needs to be kept in mind that the teething pains are normal on big construction, all the way down to the leaking concrete, with one exception ...
2. The tugboat issue. That is a big deal. Saving money by going with tugboats instead of locomotives was boneheaded stupid. I have been asking around to see if the new locks could be retrofitted with locomotives; so far, I do not know how much that would cost. 
3. The earthquake risk is real, but applies to any project along the West Coast of the Americas. The water issue is also real, but can be solved if it becomes pressing. They are both overblown. (Which is not to say that an earthquake could not happen!) 
4. The expansion is a big deal for the United States ... but only for certain sectors, specifically American agriculture and coal. Those exports will see a big stimulus from lower export costs to Asia. Individual ports will gain, but that’s mostly from cannibalizing West Coast traffic. Details here, third story down, “The Panama Canal authority Panama Canal prepares for bigger vessels.”
5. The problems stem from the Panama Canal Authority’s (ACP, for its Spanish initials) decision to go with the lowest bidder. In theory, the ACP saved between $1.1 billion and $2.9 billion. In reality, they will have saved less. 

The original expansion was budgeted at $6 billion. (Some sources will say $5.25 billion, but that does not include some ancilliary construction.) The Sacyr-led consortium (Grupos Unidos por el Canal, or GUPC) made a bid for $3.1 billion. ($3.118 billion, IIRC.) Bechtel put in a bid for $4.2 billion and Grupo ACS bid at $6.0 billion. The gap was stunning: more so, since Bechtel all as much admitted that they were lowballing at $4.2 billion. 

Right now, the expansion is overbudget by $550 million in delays and $250 million over cement quality problems. (Forgive the lack of footnotes; I’m writing this quickly from memory.) GUPC is claiming that it is owed $3.5 billion in overruns. So far, $930 million of those claims have been adjudicated; the GUPC has won $350 million. If their success rate of 37% holds, they will receive a total of $1.3 billion. That will push the total cost of the project up to $8.1 billion. ($6.0 billion + $550 million + $250 million + $1.3 billion.)

That is a total overrun of 35%, which is in fact awesome for a project of this size, whether public or private. 

One of the reasons for the high success rate is that the ACP is taking a very hard line in arbitration over the cost overruns. And they have a good case ... in fact, GUPC is already facing criminal charges in Panama. I wrote about the ACP’s super tough bargaining position back in 2014.

The NYT article paints the Canal director, Jorge Quijano, in a poor light regarding the tugboat decision. That is probably deserved. But the man has been a hell of a negotiator, the most interesting negotiator in the world of big megaprojects. I bet he drinks a lot of beer. 

Ghost Fleet #1: That’s a really dumb way to attack the Panama Canal

 On page 55-56, the Chinese attack the Panama Canal by smashing a giant container ship into the locks. “Two ships ahead, the Xianghumen, a Chinese-flagged freighter, had turned on its engines. This was craziness. What was Xianghumen’s captain thinking, speeding up inside the transit zone? The canal master was screaming over the radio for the Xianghumen to acknowledge and stop. But there was no reply.”

After the Chinese freighter crashes into the locks, “crushing the doors inward,” a Filipino sailor watching it happen thinks : “[He] wasn’t sure how long it would take the Chinese companies that ran the Panama Canal Zone to fix this mess, but their investment had clearly gone down the tubes.”

This was the second moment where I was yanked out of the book, because the scenario is impossible on multiple levels.

The first problem is that ships are not allowed to enter Panama Canal waters under the control of their captains. A Panamanian pilot takes full control. The Xianghumen would have to start its kamikaze run several miles away from the locks, which would making smashing into them a pretty impressive feat of navigation. Moreover, it would give the game away hours before it crashed. The Canal Authority would mobilize tugboats to push the ship away. 

Now, the story is set in 2024. So maybe the Chinese ship has some sort of ghost computer system that can seize control back from the pilot and start its run close to the locks. Still, there will be plenty of warning; ships do not accelerate quickly. 

But that brings us to the second problem: it is goddamned hard to get to the locks. Look at the above picture. Better still, look at this video, which shows a ship clonking into the side of the canal as it approaches the locks:

How in the name of God is a kamikaze vessel supposed to navigate that entrance? Even now, ships cannot safely transit without being hooked up to those locomotives that you can see in the video. 

Finally, we should point out that the Panama Canal has three separate lock systems. You would need three kamikaze vessels to crash simultaneously. That kills your robot scenario, since the Panama Canal Authority does the scheduling. Be hard to make sure that you have three ships in the right places at the right time. 

The scene is just fantastically silly.

If the Chinese really want to knock the Panama Canal out of action, then they should send a commando team to blow the Gatún dam. (Or just hit the damn thing with cruise missiles, as was pointed out in comments.) 

And it gets worse, because there is no reason to take out the Panama Canal in a hypothetical war. The Canal cuts the transit time from the Atlantic to the Pacific, but presumably the U.S. Navy will have the initiative in any counterattack. As Carlos Yu and I showed in our book, the Panama Canal had no substantive effect on anything in World War 2 other than the the marginal campaigns in the Aleutians and the timing of the Doolittle Raid. If the Canal had no strategic benefit in World War 2, why would it have one in World War 3? 

The final nail in the coffin of my suspended disbelief was at the end, where the Filipino sailor wonders “how long it would take the Chinese companies that ran the Panama Canal Zone to fix this mess.” Chinese companies do not run the Canal. The Panama Canal Authority runs the Canal. Chinese companies do run some of the port facilities on either side the Canal. But those ports are a different thing.

Ghost Fleet admirably has footnotes, so I checked the ones for this passage. They footnoted   “Chinese companies that ran the Panama Canal Zone” to an article in the Economist. Go read the article. Now come back. You will note that the Chinese interest the article cites is about the possibility of financing a fourth set of locks or building a competing canal in Nicaragua. How did they turn that into Chinese management of the existing canal?

It is a minor plot point, but it planted the skepticism that will blossom in this space over the next few days. 

Sure, yes, the Gold Cup does not matter ...

 ... but WTF happened? First the loss to Jamaica, and now this. It was entertaining, in the way that a terrible match can often be entertaining. Consider Game 4 of the 2004 ALCS. Terrible baseball, but sort of weirdly entertaining for that. The U.S.-Panama third place game had that quality. 35 fouls! Ridiculous refereeing! Botched attacks against sleeping defenders! 

OK, this is what happens when two baseball countries play soccer. Only it isn’t! The U.S. is a rising soccer power. In theory, we’re about 15 years away from being a serious prospect to win the men’s World Cup; 11 years if things break right.

But right now 15 years seems impossibly soon. Feels more like 100, or never. Ugh.

When in doubt, a Nicaragua Canal update

 Not terribly much to report. The much ballyhooed access road is indeed under construction, so dirt is flying. But as a project the road is nothing, and as far as we can tell here at TPTM the money so far is coming from Venezuela via the Petrocaribe program. HKND, the company behind the project, says that the environmental impact statements will be coming out at the end of May. Apparently the company ran the statement past a group of academics at Florida International University last month, and those academics had some “doubts.”

The other big news, from yesterday, is that the head of the Panama Canal Authority, Jorge Quijano (pictured here) claimed the following: “I just came from China and builders told me that no state company is interested in financing the project.” But Mr. Quijano is self-interested. I have no doubt that he is telling the truth about what Chinese construction executives told him ... but I have rather more doubt that said executives really know Beijing’s thoughts on the matter. Heck, I doubt that Beijing knows Beijing’s thoughts on the matter. 

Weirdly, when asked about the matter, the spokesperson for Nicaragua’s official canal commission claimed, after some harrumphing, “That is, even this week we got German investors, and in the next few days I will travelling to the United States and the whole world is interested in investing in Nicaragua.”

No word on who these German investors were.

For what it is worth, Quijano thinks that a fourth set of locks big enough to accomodate the newest container ships could be built within 15 years for $17 billion. If that estimate is correct, I can’t see how in the name of God anyone can expect HKND to build the Nicaragua Canal in only five.

In short, our official position remains unchanged: as cool as it would be, this project is not going to happen unless the Chinese government gets involved directly.

The Philippines move right!

 Carlos Yu and I have a long-term plan to write a book on the Philippines under American rule. But it won’t be done until 2018 at the earliest.

One thing that we discovered while writing our book on the Panama Canal was that Panamanians drove on the left until April 15, 1943. The reasons for the changeover are obvious; less so is why Panama started out on the left. The influx from the British West Indies is often cited. (Colombia did not start to regularize its traffic codes until Panama had already seceded but appears to have always driven on the right.) Argentina drove on the left between 1889 and 1945. The first traffic code, from 1872, mandated driving on the right but the country switched to the left in emulation of the British-built railroads. (You can still see this in the Buenos Aires subway.) It moved back to the right on June 10, 1945.

But neither of us had any idea that the Philippines also drove on the left until March 10, 1945! That is more than slightly amazing. The vast majority of cars were imported from the United States. So how did the rule survive so long? Even more amazing, the reason for the shift given in the text of the executive order implies that imported cars had been physically reconfigured to right-hand-drive before the switch:

EXECUTIVE ORDER NO. 34: AMENDING TRAFFIC REGULATIONS FOR VEHICLES

WHEREAS it is deemed advisable to change the existing regulations providing for the driving of vehicles on the left side of the road so that the vehicle traffic in the Philippines shall conform with the practice of driving on the right side of the road obtaining in most countries of the world;

WHEREAS such a change would bring about certain economic advantages to the people of the Philippines in that it would reduce the price of motor vehicles imported into the Philippines from the United States;

WHEREAS during the present emergency the great majority of the motor vehicles of the United States Army used on the roadways in the Philippines are right-hand driven and the drivers thereof are accustomed to driving on the right side of the road; and

WHEREAS the present affords the most propitious opportunity to effect this desired change;

NOW, THEREFORE, by virtue of the powers vested in me by the Constitution and the laws of the Commonwealth of the Philippines, particularly Commonwealth Act No. 671, I, Sergio Osmeña, President of the Commonwealth of the Philippines, do hereby order;

1. That section 60 of the Revised Motor Vehicle Law, Act No. 3992, be amended, as it is hereby amended, to read as follows:

“SEC. 60. Drive on right side of road.—Unless a different course of action is required in the interest of the safety and security of life, person, or property, or because of unreasonable difficulty of operation in compliance herewith, every person operating a motor vehicle or guiding an animal drawn vehicle on a highway shall pass to the right when meeting persons or vehicles coming toward him, and to the left when overtaking persons or vehicles going the same direction, and, when turning to the left, in going from one highway into another, every vehicle shall be conducted to the right of the center of the intersection of the highway.”

2. That all other sections or parts of the said Revised Motor Vehicle Law and amendments thereof shall be considered as amended or modified as they are hereby amended or modified accordingly so as to conform with the provisions of the Executive Order; and all other provisions of law inconsistent with or contrary to the provisions of this Executive Order shall be considered repealed as they are hereby repealed.

Done at the City of Manila, this tenth day of March, in the year of Our Lord, nineteen hundred and forty-five, and of the Commonwealth of the Philippines, the tenth.

SERGIO OSMEÑA
President of the Philippines

Unless most American imports had been reconfigured before sale in the Philippines, then there is no reason why switching the side you drive on would make imports cheaper. Today the Bahamas drives on the left but enforces no such rule; neither does the U.S. Virgin Islands. Was there a mechanics lobby group in the Philippine Islands that insisted on reconfiguring imports before 1945? 

There has got to be a story here.

Heterodox Friday: Panamanian price controls

 This blog has long taken the position that Hugo Chávez was uniquely incompetent. There was a time, back in 2008, where we gave him political props for building an effective machine. That admiration began to fade with the electricity crisis. Then some of this blog’s old readers (where have you gone?) made good arguments that the Chávez boom wasn’t all that it was cracked up to be, although we remained on the positive side of neutral. Sure, there were some shortages caused by price controls. But other than the insanity in the electricity sector, the controls could be justified as a means of income redistribution in a country that lacked the administrative ability to impose punishing income taxes. (This gets to a question from Randy that I will try to get back to.) 

Unfortunately, the Socialists proceeded to run completely off the rails. Their cardinal sin was keeping the bolívar pegged at 6.3 to the dollar. The resulting capital controls have led to massive shortages of imported goods. Had the exchange rate regime been liberalized after the 2013 elections, living standards would have been hit, but the economy would be in better shape now. As importantly, the Maduro administration would have the space to engineer a mini-boom before the midterm elections. As it stands, however, Venezuelan exchange rate policy stands as an incredible example of economic and political incompetence. 

After all, in a another world the people lined up to buy cheap goods at a state-owned supermarket would be grateful to the government which got it for them. But in this world they are quite angry at the government. Here is a good article by David Smilde of Tulane University that argues that it is too late to effectively reform. The Socialists are going to (a) lose the next election; (b) pull some sort of hat-trick involving Chinese money and a short-election season; or (c) actually turn Venezuela into a dictatorship. (The link goes to an earlier post here that argues that the Polity IV score ranking Venezuela as already dictatorial is bullshit. But we were would agree that it is not far-fetched to imagine Maduro abandoning democracy, possibly via unconstitutionally postponing the midterm elections. That Polity IV ranker may have been prescient.) 

Or maybe Trinidad will come to the rescue? On Wednesday, the Trini prime minister, Kamla Persad-Bissessar, offered to swap tissue paper for bitumen. “The government of Trinidad and Tobago will purchase goods identified by the government of Venezuela from T&T’s manufacturers, such as tissue paper, gasoline, and parts for machinery.” It is part of the Trinidadian charm offensive that just enabled a deal for joint exploration for natural gas in the Gulf of Paria.

But as strange as it is to see T&T riding to the of the Bolivarian Republic, I would argue that it is probably too late for (b). The government certainly has started to throw a lot of opposition leaders in jail. That is more (c) than (b), even if they manage to pull off a win without election fraud. (Stealing elections, we have to add, is hard to do in Venezuela. Some things Chávez did right.)

So what does all this have to do with Panama? Well, mainly a demonstration that I am not an orthodox right-wing buzzword-of-the-day. 

When President Juan Carlos Varela took office on July 1st, 2014, Panama faced an inflationary spiral. (See page 4.)To some extent, the idea of inflation in Panama sounds odd: the country uses the U.S. dollar. There has been no sign of inflation in the United States, so why were prices escalating in Panama? Simple: Panama was in the middle of a huge economic boom. (See page 19.) Incomes were rising fast and pulling up prices.

The traditional diagnosis in such a situation is that supply bottlenecks are the cause of the inflation. In that view, the right answers are (a) wait it out; or (b) slow economic growth via austerity. There were two problems with (a). First, the inflation hit the poor hard. In Panama, unlike the United States, overall turnout tops 75% and most people are still relatively poor ... governments cannot safely ignore them the way they do in North America. Second, prices are sticky. Increases in the price of food will translate into wage increases. In a dollarized economy, that means a loss of competitiveness and a serious adjustment problem ahead. (To some extent, that is what happened to Spain during the early years of the euro.) If you can keep inflation from escalating, you should.

The problem with solution (b), of course, is that austerity is painful. And there is a diagnosis in which austerity is unnecessary. What if the bottlenecks aren’t physical? Rather, what if they are caused by an uncompetitive wholesale sector? In that world, rising demand leads to rising prices not because goods are scarce but because wholesalers and retailers are using the opportunity to take profits. If that view is correct, a big if, then the government can use price controls to break the inflationary spiral. Merchants will have lower profits, but there will be no shortages: it will still pay for them to provide goods. 

My esteemed colleague in what remains of the blogosphere, Fausta, confidently predicted that shortages would result if Panama imposed price controls. (She is correct in pointing out that former-president Martinelli was a supermarket magnate!) Economists were more divided (the headline of the article is misleading) although they did universally insist that the controls should be temporary. 

President Varela went ahead with his campaign promise and imposed controls. The decree with the list of the prices can be found here. The ones I recognize are lower but not that different from the price in D.C.: frex, we buy chicken breasts for about 90¢ a pound. 

So what happened? No shortages. Lots of fines. A dramatic fall in inflation. The Varela administration has decided to extend the controls until July 2015. For more details you can find an August 2014 analysis from the Economics and Finance Ministry here. 

In short, a victory for economic heterodoxy, hooray! (FWIW, President Varela is from the conservative party in Panama.)

Of course, with no independent monetary policy, nobody in Panama has any incentive to take advantage of the controls to, say, print money and engineer an electoral boom. But still.

So there. I am against the Chavistas because they are incompetent and authoritarian, not because they are left-wing or heterodox. May there be an election in Venezuela and may the Socialist Party lose.

Three reasons to build the Red Canal

 I do not think the Canal Rojo will be built. It makes no commercial sense. Most independent observers concur. Here, for example, is an article from the South China Morning Post, in which Andy Lane arrives at the same conclusion using different data. Mr. Lane has another good analysis here which doesn’t quite pan the project, but certainly leads towards skepticism.

All that said, I would like it to be built! Simply because it would be cool. But that will only happen if the government of the People’s Republic of China wants it to happen.*

So why might the government of the People’s Republic of China want it to happen?

Well, consider what China might gain from a Nicaragua Canal. Right now, it is nearly a wash between using Panama and using Suez from the East Coast of the U.S. to southern Chinese ports. Using Suez, however, also means going through the South China Sea. Most scenarios in which the South China Sea was closed to shipping would likely also involve fighting around the First Island Chain ... but not all. (An Indonesian collapse? A war with India?) And there are multiple scenarios in which Suez might be closed. A Nicaraguan Canal would provide an insurance route for cargoes to and from the east coasts of North America and Brazil. 

The problem? An expanded Panama Canal would do the same thing at lower cost. Remember: there is no way on God’s green earth that China could use the Nicaragua Canal in a situation in which Panama was closed to it. In addition, there would be political benefits to financing a second Panama Canal expansion over building a Nicaragua Canal. Financing a fourth set of Panamanian locks would set off some huffing among the usual suspects here in America, but serious observers (e.g., most plausible U.S. administrations) would be reassured by the fact that a Panama expansion would fall under the rubric of the Neutrality Treaty. Which means a greatly reduced chance of antagonizing Washington. Moreover, another Panama Canal expansion would be uncontentious in Panama ... the same cannot be said of the Gran Canal project in Nicaragua. In other words, all the security gains at less financial cost and less political risk.

In fact, Chinese companies in August of last year broached the possibility of financing a new Panamanian expansion. 

There is a second possible reason to build a Nicaragua Canal. Note that Lane does not think that the new canal will lead to price competition with Panama. His logic, however, assumes that the Nicaragua Canal is run as a business. Perhaps China does not plan to run the Canal Rojo as a money-making operation at all. Rather, it could  run it as a piece of necessary public infrastructure, operating at cost. In that scenario, a price war with the Panama Canal leading to HKND’s  bankruptcy would be a feature, not a bug. 

The problem with the second reason? Well, for China to want to do that, it would need to believe that the rates charged by the Panama Canal are a significant drag on commerce. There is not a lot of evidence for that proposition. Would reducing canal tariffs really cause Chinese consumers to buy much more raw material from the east coast of South America or prompt Chinese producers to sell many more goods to the east coast of North America? I have my doubts.

Moreover, how would China insure that its commerce captured the lion’s share of the gains from the Nicaragua Canal? As Carlos Yu and I showed in our book, when the United States tried to give preference to its own ships in the Panama Canal in 1912, British pressure forced the country to change tack. The only reason that the benefits of the Panama Canal went overwhelmingly to the United States during its first 25 years was that the Panama Canal overwhelmingly carried domestic traffic. Maybe China will be able to get away with favoring its commerce over other nations, but I doubt that too. Or maybe geography implies that most of the ships using a low-cost Nicaragua Canal will be carrying Chinese commerce. Maybe ... it would be a hell of a $50 billion bet. 

That leaves you with a third possibility: the project would be the 2020s equivalent of the 1960s landing on the Moon. China would be metaphorically planting its flag on the American continent. Sure, the U.S. Navy would remain in complete control of the sea lanes and the People’s Republic would have no sovereignty. But the opening of the Canal Rojo would trumpet the end of America’s informal empire more than anything ...

... other than the actual end of America’s informal empire. Which will not (inasmuch as it survives) be altered in a any substantive way by this project. As stated above, the U.S. Navy will still control the Western Hemisphere. Moreover, I do not see how building this project would win China diplomatic gains in Latin America worth the $50 billion cost. Perhaps I underestimate the power of symbolism?

In short, the Chinese state would obtain at least three advantages from the construction of a money-losing Nicaragua Canal:** 

1. Insurance against disruptions in Suez, the Indian Ocean, the straits of Malacca, or the South China Sea (although this insurance could be obtained more cheaply using Panama);
2. The chance to drive transit rates down to their operating cost;
3. Prestige.

Are those advantages enough for the Chinese government to lend billions of billions of dollars to an entreprise that will likely go bankrupt? 

A way to make the Nicaragua Canal profitable

 I have been tinkering with my mickey-mouse financial model for the Nicaragua Canal. 

There is one way to make the Nicaragua Canal look like a decent investment: assume that it comes in on-time and on-budget (which we did) hits all its transit targets (which we did) and that the ships are all sized at the maximum possible (which we did) but also that the Nicaragua Canal will be able to raise average tolls at the same 6.8% rate that the Panama Canal has managed since the 1999 handover. If you believe that is possible, then you can manage a positive 6.1% return through 2030 and a respectable 12.2% return through 2040; breakeven happens in 2027.

Do I believe that is possible? No. Do I believe that equity investors would accept that return? No. Do I believe that with enough debt equity investors might be persuaded to that they could get an acceptable return? Uh ... maybe.

We come back to that whole government-involvement thing. The Nicaragua Canal will need a lot o low-cost debt to be viable even under the most heroic assumption. The project only flies if Beijing decides that it wants it to and is willing to back that up with government money. A whole lot of government money.

Stephen Kaplan is just down the metaphorical hall. I should ask him if he thinks the Chinese government would want to back this ... and if so, why. One colleague of mine suggested “colonization” as a goal of its own. Me, I don’t think the Chinese government thinks that way, at least not in this hemisphere. So I am back to thinking that this project isn’t going to happen.

I have no special insight into Chinese strategic thought. I have heard that it might be about secure access to Venezuelan oil or Trinidadian natural gas, but if I were in the Chinese leadership I would not think building the Canal Rojo a sensible way to attain that goal. Is there any Chinese strategic question to which the Nicaragua Canal is the answer? 

The Nicaragua Canal still makes no business sense, now with numbers

 The Nicaragua Canal project is a little crazy. I’ve been canoodling around with some numbers and I just can’t make it work.

The project is estimated to cost $50 billion. According to HKND, the Red Canal will have an average bottom width of 280 meters. (Page 5.) That is only enough for one-way traffic. (Page 8.) Given the amount of time that it will take ships to pass through the two three-chambered locks, that means about 14 transits per day. (Page 72.) That is reasonable. 14 transits per day means 103 minutes for a ship to transit one set of locks. (Only one ship can through the locks at once, but there can be a ship in both the Brito and Camilo locks at the same time.) The new Panama Canal lock chambers are designed to take about ten minutes to fill or empty; call it an hour then for each transit, plus 40 minutes to enter and leave.  

OK, then. In 2020, HKND expects 3,576 transits, rising to 4,138 by 2030. (Also page 72.) That’s about a third of the roughly 12,000 recorded by the Panama Canal. So it is certainly a plausible number.

In 2012, the Panama Canal collected approximately $160,000 in tolls per transit, or $5.67 per ton. (Eight dollars for container ships, around five for reefers, and roughly four for tankers and dry bulk.) The new Nicaragua Canal is intended to handle ships of up to 18,000 TEU; ships on the current Panama Canal is limited to around 5,000. (The expansion will take that up to 13,000.)

If you ever wondered what a Panamax container ship looked like going through the Miraflores locks, well there’s one right behind me in the picture up there. That’s a ship, not a warehouse. Yes, the current locks are a tight fit.

Now imagine one three times the size.

So let’s calculate a ridiculous upper bound for the Nicaragua Canal. Assume that all the container vessels are at the maximum size for the new passageway. At the current rates charged by the Panama Canal, that’s $1.4 million per container transit. Then assume that all other vessels (save tankers) are equivalently oversized. That gets you about $500,000 per dry bulk transit and $1.1 million for vehicle carriers. We’ll further assume that all the “other” vessels in the HKND report are vehicle carriers. For crude oil, imagine that everything is a ULCC with almost 7× the capacity of a Panamax tanker. Ditto the LNG ships. Refined products, on the other hand, are currently shipped in Panamax-sized vessels, so even in this silly projection we’ll leave them the same. 

And opex? Well, huh. I’ll take current Panama Canal costs and divide ‘em by the ratio of projected Nicaragua Canal traffic to current Panama Canal traffic. That does not, of course, make sense, but it is a lower bound. (And one that comes to $75,000 for each of the Nicaragua Canal’s projected 3700 permanent employees; a ridiculous number by any standard.)

What do we get? A real internal rate of return through 2030 of negative 1.8%. If you take it out to 2040, then you can eke out 4.1%. A steely investor willing to bet against global war, the Singularity, and the chance that climate change will open the Northwest Passage could get 5.6% through 2050.

If this thing gets built, it will not be to generate profits for shareholders. Rather, it will be because the Chinese government sees some sort of security benefit. But other than, I dunno, access to the natural gas that the United States is not going to export in large amounts I could not tell you what that might be. 

Panama backs down in the face of the Bolivarian revolution

 Many months ago, we discussed the growing confrontation between Panama and Venezuela, which cumulated in a Panamanian threat to expose the Venezuelans who were hiding their money in Panama. As of May, the new Panamanian administration had decided not to follow through. So what happened then?

Short version: the Varela administration normalized relations right after his inauguration on June 1st. No more shouting.

But what about the unpaid Venezuelan debt that started the whole thing? Well, on October 29th, Panamanian trade minister Melitón Arrocha flew to Caracas to try to hammer out a settlement. That succeeded ... in the sense that on November 18th the two countries agreed to appoint two joint working groups to negotiate payment. The markets are not reassured: Copa Airlines (which is owed about $600 million) stock took a beating. 

Meanwhile, Venezuela suffers. The number of international flights has been cut in half. And since the airlines now require payment in dollars, access to flights for Venezuelans has been reduced by even more. Meanwhile the collapse of trade with the  Colon Free Zone has contributed to Venezuela’s shortages. 

Given Venezuela’s woes, I would not expect payment in full.

Why Panama did not follow through on its threat to the Bolivarian Republic

 Panama-Venezuela relations remain at an all-time low because of the money that Venezuelans owe Panamanians. Venezuela’s capital controls are the reason the debts have not been paid. Panama responded in three ways. First, various forms of moral suasion, which are continuing but useless against the Maduro administration. Second, a case at the WTO, which is continuing but very slow. And third, a threat to publicize the moneys that corrupt Venezuelan officials have hidden in Panama ... which has sunk like a stone and disappeared.

Via Randy McDonald comes the likely reason: wealthy Venezuelans are continuing to move to Panama. Some of them are assuredly hiding money from the Venezuelan government, ill-gotten or not. Moreover, banking secrecy is the kind of thing that it is hard to half-violate without spooking clients from elsewhere. And, finally, the fact is that if the Maduro administration were going to respond to the Panamanian threat it would have already responded. Since Panama has no other real arrows in its quiver, it loses no credibility from not following through on its threat.

Plus, there is a new administration in Panama, from one of the two opposition parties. It is not bound by statements from the previous presidency. Venezuela is a scary place and an economic wreck, but it is a wreck in a very Venezuelan way. Panamanians rightfully discounted attempts to frighten them into thinking that the (conservative) opposition would create such a mess at home ... although President-elect Varela does intend to impose price controls on food. 

We will continue to bring you more news in the Panama-Venezuela spat as it continues.

Panama’s other recourse against Venezuela

The Panama-Venezuela spat is continuing. (I know, among news from Venezuela this is among the least important, but it is a big deal in Panama.) No revelations yet on the bank account front, but Panama has taken a leaf from the E.U. will sue Venezuela at the WTO. The justification is that Venezuelan capital controls are, in effect, an illegal trade restriction.

This is the same route that the European Union took against Argentina after the YPF nationalization. Brussels could not legally retaliate for the act itself, but it could throw the book at Argentina over its capital controls.

Continuing.

And Panama strikes back!

Randy McDonald asks if Panamanian creditors have any recourse against Venezuela; we answer “yes, but not very much.”

But it looks as if there is something that the Panamanian government can do: publicize secret Venezuelan bank accounts in Panama!

Let’s turn the mike over to President Martinelli’s chief-of-staff, Roberto Henríquez. “How can Maduro talk about corruption, when they have used the [Panamanian] banking center to hide fortunes? They’ve looted their country. Maduro has placed Venezuela at the service of a little group, that supports him, that controls the country through the force of arms, and much of that money is in the banking center.”

Mwa hah! It will be much fun to see what they report if the Panamanians follow through. Man, I hope they do.

For what it’s worth, it also seems that the Colón Free Zone companies have called President Maduro’s bluff: they are willing to open their books to the Venezuelan government. To quote Luis Germán Gómez, head of the CFZ merchants’ association: “We are open to investigating what has to be investigated, reviewing what needs to be reviewed, but we are also open to being paid.”

Don’t mess with the Revolution; or why Latin American governments do not criticize Venezuela

Because the Venezuelan government will hit them as hard as it can at large cost to its citizens.

In Panama’s case, that is pretty hard indeed. Venezuela importers owe exporters in the Colón Free Zone (CFZ) about $1.2 billion. That is to say, CFZ companies have already sold goods to companies in the Bolivarian Republic and are awaiting payment. In retaliation for voting with the U.S. and Canada at the OAS, the Venezuelan foreign minister now says that the Panamanian companies won’t be paid.

To make matters worse, Copa Airlines has $487 million locked up in Venezuela which the government won’t let them take out of the country.

Add it up and you have about 3% of Panama’s GDP. Now, the companies that are being hit will probably be able to finance the losses, so there likely won’t be much spillover to the broader economy. But it is a nasty punch in the nose. Now, it’s also one that hurts Venezuela quite a bit worse, but that’s likely the point. Caracas is demonstrating that it is not to be trifled with.

In that kind of situation, why bother to make noise? Nothing to gain, something to lose.

UPDATE: Yesterday President Maduro spoke out about the dispute. First, he sort of walked back the default, saying “The debt owned to Panamanian businesspeople will be paid without intermediaries.” Except that really makes very little sense. Unless they advanced credit for their goods, this proposal would mean paying twice whomever sold the goods to the CFZ businesses that sold them to Venezuelan customers. It would also be a bit of an investigatory nightmare. Moreover, the Venezuelan government keeps implausibly claiming that 90% of the goods were never delivered, which sort of puts a damper on their credibility.

What it really fun, however, is how Maduro then took a personal stab at President Martinelli. “He will be a fugitive from justice when he leaves the presidency. He’s involved in all the fishiness. He was into some abnormal dealings with the Canal expansion and will certainly go to jail.”

Well, then.

A man, a plan, a canal expansion, and an interesting standoff in Panama

Something interesting is happening in Panama!

Short version: the Panama Canal expansion is running overbudget and behind schedule. That is not interesting. That is par for the course for big infrastructure projects! In fact, the overruns amount to only 30% of the initial projected cost of the project (and 70% of that is due to increased overtime). Compared to similar projects public-and-private, the Canal expansion is doing pretty good.

The prime contractor, Sacyr, is claiming that it was misled about the geology. So it is demanding restitution for the increased costs. Again, not interesting, par for the course.

What is interesting is Jorge Quijano’s reaction. Quijano is the CEO of the Panama Canal Authority, and he is not having any nonsense. He told Sacyr that the contract is the contract. Sacyr said that they would stop work and good luck with that Canal, shame if anything should happen to delay it even more. Today, Quijano called their bluff.

That rarely happens in these sorts of projects, where the sponsor is usually too afraid of further delays to hold their ground.

Go, Mr. Quijano! I am very impressed. This will be fun to watch.

The real meaning of Sky City

A Chinese company wants to build the world’s tallest skyscraper. As a result, there has been a lot of discussion about the “skyscraper index.” Does the groundbreaking on Sky City mean that the Chinese economy is about collapse? Is the world economy at risk?

Maybe. It could. I am on-record as a medium-term China bear. But that is really not what Sky City means. No, the real meaning of Sky City is the same as the meaning of the locks on the Panama Canal expansion: China’s manufacturing model has reached its limits.

What do the Panama Canal expansion locks have to do with Chinese manufacturing. Well, below you can see a video of the Panama locks being loaded onto the ships that will take them to Panama; they should arrive next month.

You got it: the locks are being built in Italy. Not China. In fact, very little of the equipment for the expansion is coming from China. Engineers on the project told me that Chinese work was cheaper, but they judged it too shoddy and unreliable.

And ... the developers of the Sky City project refuse to use Chinese steel because it is not safe. They will get the steel from Luxembourg instead. (I bet few readers knew that Luxembourg is a historic center of steel production.)

Moreover, the building looks to be mightily unpleasant inside. (I cannot help but think of this great movie.) I also cannot help but think of the infamous skyscraper slum of Caracas.

The upshot is that something is broken at the heart of China’s manufacturing model, at least as it concerns high-performance large-scale capital goods. If nothing else, Sky City exemplifies that concern.

The shadiness of the Nicaragua Canal deal is not why I doubt it will happen

Andres Oppenheimer of the Miami Herald (who wrote what was my favorite book on contemporary Mexico, until overtaken by events) is also skeptical that the Nicaragua Canal will be built. His worries come not from the contract, but from the shadiness of the deal, rushed through the National Assembly.

First, he argues, Wang Jing, the owner of HKND, has no construction experience. Second, Ortega’s son, Laureano, has “chaperoned” Wang around the country. Third, there was no public bidding. He could have added that Wang’s telecoms company, Xinwei, recently landed a $300 million contract to build a 4G network in Nicaragua (without propper bidding) and is building (with Great Wall Industries) a communications satellite for a 2015 launch.

It is a little shady ... but I would not doubt the deal because of that. Xinwei is reputable enough to raise the capital and hire the expertise for a commercially-viable project, even if they might not have been the prime contractor under a more open process. Moreover, as Oppenheimer points out, a lot of reputable Western firms and individuals are pinning their names to the project.

So I am not worried that the Canal might be smokescreen because of Xinwei’s odd relationship with the Sandinistas and President Ortega.

Rather, I am worried that the Canal is smokescreen because it makes little economic sense while the contract allows HKND to build all sorts of other lucrative stuff under 19th-century concession terms. An American company that has been trying to build a transcontinental railroad since 1995 shares my worries: it is going to be locked out of the project.

For what it’s worth, Nicaraguan public opinion is very favorable. And the truth is, unless your property happens to be expropriated, it is unlikely that the project will make Nicaragua worse off. Sure, the FTZ’s will bring less benefit than hoped, and the railroad will generate few spillovers and little public revenue, but it is better than nothing. After all, the American dry canal project has gone basically nowhere for almost two decades and President Ortega is popular. So why not? If I were nica, I’d also support rolling the dice on the project, even knowing that it much more likely to end as a big real-estate deal and quasi-charter city rather than a Nicaragua Canal.

Lastly, a brief revisit of the Panama Canal issue. Below is a map from the Panama Canal Authority showing where a fourth set of locks (i.e., the expansion after the current expansion) would go. Here is the design proposal for a new bridge over the Panama Canal, which specifically states (on page 9) that the bridge must be tall enough to handle the bigger ships from an as-yet-unbuilt fourth locks project. In fact, in 2008 the U.S. embassy in Panama reported that Roberto Solange, then the Panama Canal Authority’s VP of marketing, wanted to run a feasibility study on a fourth set even before the third was finished.

In short, the threat of a second Panama Canal expansion is very real ... and should dissuade rational investors from a full-scale Nicaragua Canal. As opposed to a smaller railroad-port project.

My opinion about Nicaragua’s canal project

As quoted in the New York Times: “It’s not going to happen, that was my first reaction.”

Why not? Where to begin? Quoting myself, again: “Even if they did get the $40 billion, the increases in traffic are increasingly speculative.”

Short version: Nicaragua will be competing with the expanded Panama Canal, climate change (opening the Northwest Passage), and the fact that Panama has built its new locks to make expanding again relatively easy. Even if you believe that the Nicaragua Canal is feasible, it makes little sense to go up against that sort of competition.

Let me explain with some pictures. Behind me you can see the new Panama Canal channel under construction. The photo is looking north.

This is a view from the other direction. The berm will be knocked down and the entire area opened to water. Note the width. It is wide. Much wider than you need for one new set of locks.

The below picture looks north at the new locks under construction from what will be the approach channel. To the right of the concrete construction will be the water-saving basins. To the left is a lot of empty space.

The reason for the empty space is allow for a fourth set of even-larger locks to be constructed as a mirror image of the third. (For completeness, the below picture shows what the view looked like in the opposite direction from the above picture. Where I am standing will be underwater next year.)

Moreover, Panama decided not to build the third locks bigger. They could have. But the Canal Authority decided that building something that could handle most Suezmax ships would be good enough. In addition, most U.S. ports need work to handle the new size (called NPX or post-Panamax) ... and many analysts think that cargo ships have already gone past their optimal size.

And while we do not yet have the plans for the new canal, we do have the plans that a Nicaraguan commission published in 2006. Those plans called for locks with dimensions of (in feet) 1,529 × 210 ×112. That is deeper but not that much larger than the new Panama locks, which come in at 1,400 × 180 × 60.

The builders of a Nicaraguan Canal therefore would be taking three bets: first, that the increased size would attract a lot more traffic; second, that the Panamanians would not match them with a fourth set of larger locks; and third, that if either of the previous bets went wrong there would still be enough traffic for both canals.

Given all that, I would not invest $40 billion in such a venture.

I have other reasons to doubt the project, but they are political. The above captures my skepticism about the business case. Thoughts?

Colombia is not joining NATO, but it is an American ally

OK, I got some emails about Colombian membership in NATO. The rumors are true: President Santos did float a trial balloon about joining the organization. NATO, unsurprisingly, said no. NATO would have said no regardless, but it was useful that the North Atlantic Treaty states that new parties to the organization have to be in Europe. Article 10:

The Parties may, by unanimous agreement, invite any other European State in a position to further the principles of this Treaty and to contribute to the security of the North Atlantic area to accede to this Treaty. Any State so invited may become a Party to the Treaty by depositing its instrument of accession with the Government of the United States of America.

The country will sign a cooperation agreement with NATO, but it is still not clear what that means. NATO says, however, that all cooperation agreements are the same, and you can find out what the organization says about said cooperation here.

NATO member or not, Colombia and the U.S. are close allies. We have a free trade agreement. Small numbers of U.S. troops operate in-country. The Colombian supreme court overturned an agreement giving the U.S. access to Colombian bases (see page 39 of this CRS report) but the U.S. still builds facilities there. (The text of the agreement can be found here.)

And the U.S. is surprisingly popular. Here is Latinobarómetro’s 2009 results on the question, “Does the U.S. treat your country with respect?”

SIDE OBSERVATION #1: It is interesting that Venezuelans place themselves in a category with Uruguay and Brazil, and not with their Bolivarian comrades in Bolivia, Ecuador and Argentina. My hypothesis is that it reflects Venezuelan polarization: all Venezuelans know that relations between the U.S. and Venezuela are bad, but many more Venezuelans take the American side than do their compatriots in the other big Bolivarian countries.

Here are the results to a general question on the state of bilateral relations:

Colombians do not see their relationship with the U.S. to be as good as do members of America’s near-abroad (like the D.R. and Panama) but they do see it as very good.

SIDE OBSERVATION #2: The Venezuelan results are consistent with my hypothesis: everyone knows that relations with the U.S. are terrible, but many of them blame their own government. 

SIDE OBSERVATION #3: A large subset of Mexicans are uniquely suspiscious of the United States, and uniquely prickly about national sovereignty. In fact, the U.S. treats Mexico with at least as much respect as Colombia (likely more) and relations are at least as good as with Colombia (likely better). But for understandable historical reasons, Mexicans don’t see it that way.

Finally, the Colombian results appear to hold over time. It is not just a phenomenon of the Obama-Santos relationship.

In short, even though Colombia will not be joining NATO, it has a uniquely close relationship with the United States. Moreover, that special relationship is supported by Colombian public opinion, and thus likely to endure.

None of this is to say that the U.S.-Colombian relationship is necessarily good for Colombia. The jury is out on that one, although if there is demand I will present some evidence that it just might be bad.

Martinelli must be really bummed about the Yankees

There are few rational explanations for this. (Hat tip: Will Baird.) The story at the link is that President Martinelli of Panama told Chancellor Merkel that he would like to have the euro circulate alongside the dollar in Panama as legal tender. Seriously, he wants to be only country in the world with two currencies in legal circulation.

The proposal makes no economic sense. (As in, why would you want to force everyone in Panama to post prices in two currencies and start accepting euros as tax payments?)

But it was a very nice thing to say to Ms. Merkel. The video is below: Martinelli makes his proposal around 3:30 ... twenty seconds later, the Chancellor nods sagely. He goes on to say he has “complete faith in the euro.” I suspect that he was just trying to reinforce that point. Either that, or as Carlos Yu suggested, he is seriously pissed off about the Yankees.

The friendly society

 Governor Carter refused to limit emigration because the remittances sent back to Barbados from the Panama workers had markedly improved the economy, especially for poorer tenant farmers.  In a country that had recently been on the brink of collapse, he was not going to tinker with that.

 
The direct impact of the remittances was not that large.  In 1906, when Carter declared their importance, they came to 73¢ (U.S.) per inhabitant per year; call it three days wages.  That is not nothing, but it is also not an economic revolution.  Over time remittances grew, peaking at $2.39 per person in 1913 — a bit more than a week’s labor for a male worker at 1910 wage rates.  Not nothing, but not the millenium, either.

But the indirect impact was huge.  First, it bolstered the growth of smallholders.  In 1897, an estimated 8,500 small proprietors held a bit less than 10,000 acres.  By 1912, 13,152 smallholders owned plots.   Assuming that the average size of holding remained constant, this represented an increase in smallholder ownership of 5500 acres, or over 22 square kilometers, five percent of the land area of Barbados.  By 1929, the number of smallholding households had further increased to 17,731.  Land ownership on the island remained astoundingly concentrated, but the percentage of Barbadians who owned property rose from 18% in 1897 to 40% by 1929.* 

Second, it supercharged the Barbadian banking system.  Barbadians opened 16,094 new accounts in government savings banks between 1906 and 1913, and deposits increased 88%.  In 1920, deposits per person surpassed $11.  That was a level of financial penetration about half of contemporary Spain and two-thirds of Italy; very high for a country as poor as Barbados.  It prefigured the island’s emergence as a regional banking center a half-century later. 

Third, it prompted the emergence of a Barbadian social insurance state.  The “friendly society” served as a form of insurance pool.  For a weekly fee of 10 to 12 pence, the societies provided their members with sickness insurance, unemployment insurance, death benefits, free scholarships to household members, and an annual “bonus.”  In 1901, there were 101 societies; between 1907 and 1910 a further 110 were founded, peaking at 260 in 1920.  Their membership grew from 13,933 in 1904 to 46,207 in 1920.  The 1921 census found that 156,312 people lived in households belonging to a friendly society.  That was 94 percent of the population.  Alongside the friendlies were the “landships,” which provided similar services along with ceremonial drills and uniforms modeled on the Royal Navy. Infant mortality continued to lag the rest of the Caribbean until the 1950s, but the societies aided a huge increase in literacy, to 93 percent by 1946. 

In the Zone

  The Panama Canal Agency took charge of picking the workers and getting them to from Barbados to the Canal Zone. Recruiting took place in Trafalgar Square, in Bridgetown, conveniently near the main police station.  Today the place is called National Heroes Square (although a lot of people use the old name) right outside the Parliament building. 

 
Agents went out into the crowd to interview and select potential workers. A doctor then checked the potential workers, selecting those who would receive a contract.  In 1907, Arthur Bullard described the scene as follows:

Several policemen kept the crowd in order and sent them up into the recruiting station in batches of 100 at a time.  As the men came up, they were formed in a line around the wall.  First, all those who looked too old, or too young, or too weakly, were picked out and sent away.  Then they were told that no man who had previously worked on the canal would be taken again.  Then the doctor told them all to roll up their left sleeves and began a mysterious examination of their forearms.  He saw that a few men had been vaccinated by him already, and these were sent away.  One protested that a dog had bitten him there.  Then, he went over the whole line gain for trachoma, rolling back their eyelids and looking for inflammation.  Seven or eight fell at this test.  Then he made them strip, and went over them round after round for tuberculosis, heart trouble, and rupture. About 20 of 100 were left at the end.

The selected migrants reported back to the docks a few days later.  After a second medical examination and a check to insure that every emigrant had a number that matched the one on their contract, they boarded the steamers, where they had to find deck space and food for themselves during the 12 day voyage to Colón.  According to a report presented to the Barbados Legislative Council, the atmosphere on the docks was fairly hostile towards the ruling class.  The crowds would “abuse whites and aggressively denounce them” before boarding. 

 
The anger was understandable, given the situation the emigrants were leaving.  Ironically, the departure of so many angry young men gave plenty of leverage to those who stayed behind.  One prospective emigrant was heard telling his co-workers, “Why you don’t hit the manager in the head and come along with we?”  His co-workers refrained from assaulting the manager, but there was a wave of plantation labor disputes, and the following song became fairly common:

We want more wages, we want it now
And if we don’t get it, we’re going to Panama
Yankees say they want we down there
We want more wages, we want it now

And what do you know?  Wages went up.  By 1910, the American consul in Bridgetown reported that agricultural workers received 30¢ per day, a 25% rise in nominal wages over the 1900 level.   More importantly, unpaid labor — remember the located labor laws? — basically disappeared.  Planters reacted to the new environment.  First, they started to employ tenant women in the fields.  Second, they modernized production.  In 1910 there were no modern sugar centrals on the island — intead, windmill-powered presses wasted upwards of 30% of the raw material.   By 1921, in contrast, 19 modern sugar centrals had entered operation.  Third, they mobilized politically to halt emigration.

Barbados had seen the emigration movie in the 1870s, when Guyanese and Trinidadian labor brokers began recruiting on the island.  That time around, it ended with the Emigration Act of 1873, which effectively prevented labor recruiters from operating in Barbados.  (My wife’s grandfather is from Barbados, but he left for Trinidad in the early 20th century.)  Emigration fell from 2,676 in 1873 to only 613 by 1876. 

This time the movie ended differently.  In 1906, the Barbadian parliament passed a bill giving Governor Gilbert Carter the power to halt emigration.  Two angry public demonstrations convinced the Governor to take the then-extraordinary measure of publicly proclaiming that he had no intention of using his new powers.   The parliament then demanded that he appoint a commission of inquiry into emigration; he refused.  Five years later, in 1911, Carter retired and returned to Britain.  The new Governor, Leslie Probyn, appeared to bow to planter pressure by declaring a ban on labor recruiting for Panama ... but he took no action to enforce it.  Barbadians continued to leave for Panama. 

Emigration, then, had palpable economic effects on Barbados.  It raised wages (albeit to still-low levels) and prompted the renewal of the sugar industry.  That is not nothing.  But there was another effect.  In fact, that other effect was why Governor Carter refused to appoint a commission of inquiry ...

Teddy Roosevelt and Spanish labor unions save Barbados, hate Barbadians!

  I don’t have a whole lot of emotional attachment to the madre patria, not where it counts.  After all, the parliament has passed a law giving the descendents of Civil War refugees the option to apply for a passport.  Yet I have zero desire to do it.  No, I have a negative reaction to doing it.  In other words, at the level where it counts, my people are the people of the United States of America.

But sometimes I can’t resist borrowing a phrase from my good friend (and great American) Carlos Yu:  “Oh, my peoples.” The story of the labor troubles on the Panama Canal is one of those times.

 
In 1904, the United States began construction of the Panama Canal in earnest.  Problem was, it needed laborers.  Lots of laborers.  Preferably cheap laborers, which ruled out hiring Panamanians.  (The Canal labor force would peak at more than a quarter of Panama’s economically active population.  Wage rates would have skyrocketed, even had that many people been interested in killing themselves to dig a big ditch ... which they were not.)  So the U.S. turned to the same place from which the earlier French canal effort had got its workers:  Jamaica.  Problem was, the Jamaican government remembered the disaster that was the repatriation of Jamaican workers after the French canal effort collapsed in 1889.  The Crown Colony government insisted that the Americans guarantee repatriation costs for any and all workers.  That ended the idea of using Jamaican labor; ultimately, only 47 worked on the Canal.

At this point the Barbadians, and later the Spanish, enter the story.

With Jamaica out, the Isthmian Canal Commission began recruiting in Barbados.  The first groups of Barbadians to arrive, however, proved too malnourished to accomplish their assigned tasks. “Not only do they seem to be disqualified by lack of actual vitality, but their disposition to labor seems to be as frail as their bodily strength.”   Governor Stevens himself wrote, “I have no hesitancy in saying that the West Indian Negro is about the poorest excuse for a laborer I have ever been up against in thirty-five years of experience.”  This should not have been surprising to anyone who knew about conditions on the island at the time, but we’re talking about Americans.  (Insert the first “oh, my people.”)  After bringing in almost 10,000 Barbadians, the Canal Zone management was disappointed with the results.

The Isthmian Canal Commission now decided to turn to, in the words of a Commission official, the “semi-white foreigner (Dago).”  Between 1906 and 1908, the Isthmian Canal Commission hired 8,000 Spanish workers.  It paid them twice what it paid Barbadians.  Now, it would be entirely reasonable to conclude that this was due to racism, but the Americans running the show weren’t particularly enamored of “dagoes.”  Rather, the higher salary was what they needed to offer to get people to leave the madre patria for Panama, and the Americans were willing to pay it because the Spanish were physically stronger and more robust than the half-starved Barbadians. 

The Spanish, however, were also the heirs to Spain’s militant labor tradition.  (Here is where the second “oh, my people” comes in.)  Spanish workers started the first major strike on the Canal in 1907.  The United States tried to use Italians to break the strike, but it didn’t work; they could only attract a total of 1,941 in 1906-07, after which they received no more.  So the American managers used the Barbadians to restrain the Spanish.  As one foreman wrote, “I could keep them both on their metal by rivalry between the two.”  The result, unsurprisingly, was an all-out riot between Spanish and Barbadian workers in 1909.  

Spanish militancy led the Canal Zone to replace Spanish workers by any means necessary.  The Americans pretty quickly figured out that Barbadian productivity rapidly rose to Spanish levels with access to enough calories.  The head of the Canal effort, a racist Brooklynite named George Goethals, reduced the work day from ten hours to nine in 1907, which lowered exhaustion, and required all workers to purchase three full meal tickets every day.  Previously, many Barbadian workers had chosen to subsist on sugar cane in order to save more money to send home — understandable, considering that meal tickets cost 9¢ ($1.98 in today’s money) and they earned only 68¢ for a nine-hour day, but terrible for their health and energy levels.  Add to that the fact that American foremen (with some head-banging from higher management, regardless of their own retrograde racial attitudes) learned to treat the Barbadians with some modicum of respect, and you can predict the result:  by 1909, the Americans were able to get the same work for less cash from the Barbadians, and stopped hiring Spaniards. 

The Spanish did not go quietly.  A violent wave of strikes rocked the Canal Zone in 1911 and 1912.  But the result was predictable.  (Oh, my peoples.)  The strikes ended with the complete replacement of Spanish labor by West Indians, mostly from Barbados.   By 1913, the Isthmian Canal Commission had brought in 19,900 Barbadians, not including the many women who followed their husbands and a continuing (if less well-recorded) migration as construction work continued after the Panama Canal’s offical opening in 1914.  In fact, the Canal would not be fully open to commercial traffic until 1920.

The ultimate migration turned out to be much bigger than 19,900.  In 1901, Barbados had a population of 195,558.  In 1921, it had a population of only 156,744.  Extrapolating from existing birth and death rates, the population of the island should have been 220,412 in 1921, implying a net outmigration of 64,000 people.  This obviously had massive effects on Panama (which had a population of only 450,000 in 1921, not including the Canal Zone) ... but what did it do to Barbados? 

Truth be told, I do not know for sure, but I have a strong guess, which will have to wait for a later post.  While we’re waiting, what do you think?

A real anti-imperial triumph

  It seems as though the Argentine ambassador in France will no longer need to pay embassy expenses out of his own pocket.  A French judge lifted the freeze imposed on April 3rd.  More importantly, a German judge released the funds that German companies owed Argentine tax authorities.  Interestingly, Judge Wölber did not base his decision on sovereign immunity.  Rather, he ruled that since the tax payments were owed by the companies’ Argentine operations, German courts had no authority.  It remains to be seen if this precedent will be followed by other European courts, but the Argentine government is optimistic.

Interestingly, U.S. courts have taken the same position.  In 1999, the New York-based Leucadia National Corporation sued Nicaragua over $26 million in defaulted debt that it had purchased for $1.14 million.  A New York court granted the company $87 million.  (No, I don’t know why.)  It tried to collect by attaching Nicaragua’s share of the ticket and landing fees paid by U.S.-based airlines that flew to that country.  U.S. courts, however, refused to uphold the judgment.  But don’t cry for Leucadia.  Eventually the World Bank paid off the debt at 4.5¢ on the dollar, including accrued interest.  By my calculations, Leucadia received about $7.8 million, for a nice return of 584%. 

I am increasingly unsympathetic to Argentina.  But I am also relatively unsympathetic to the vulture funds that try to use the judicial system to impose sanctions on defaulting governments.  I may change that position if we start seeing more ploys like President Correa’s brilliant gamble, but that’s still a hypothetical fear, not a real one. 

P.S.  It seems like I was wrong about Ecuador.  I’ll discuss why, but only if there’s interest.  No reason to admit error if nobody cares ...

Really unbecoming American sensitivity

 Most of the (few) readers of this blog are certainly aware that in 1978 the United States agreed to transfer full control the Panama Canal back to Panama in 1999.  (I'll discuss the reasons benind that agreement that in another post, if anyone's interested.)  The resulting treaties were controversial.  Most Americans forgot about it right quick, but the Texas Republican party continued to rant about it until 2003.  From their old platform: 

“The Party urges Congress to support HJR 77, the Panama and America Security Act, which declare the Carter-Torrijos Treaty null and void. We support re-establishing United States control over the Canal in order to retain our military bases in Panama, to preserve our right to transit through the Canal, and to prevent the establishment of Chinese missile bases in Panama.”

That's a whole lotta crazy.  But it represented a defensive nationalism that seemed pretty much to be over.  After all, the United States is not a country that harkens back to a grand imperial past.  We are not a country bothered by our military defeats.  We are not a country afraid to recognize past wrongs, we move past ours, we ask others to move past theirs.  Nor does relative decline bother Americans; if we become more prosperous and more secure, there is no worry that others have overtaken us.

Oh, wait!  That's some other country I'm talking about.  Maybe Finland.  We get things like this:

My oh my.  But thank God for Geraldo.  America owes a lot to half-Jewish half-Latin guys from the New York metropolitan area, that's what I always say. 

When lawyers declare war!

  You know, the more I learn, the more I think that President Correa of Ecuador is really playing with fire in defaulting on his debts.  Brazil is mad at him, and you don't want to get the new imperial rulers of South America mad at you.  But more importantly, he's got his American creditors mad at you ... and it seems as though those creditors may have a rather powerful legal recourse.  It'll all depend on the definition of a “central bank.”

But let's start at the beginning. What happens when lawyers declare war on a country? Well, remember this post, on the U.S. sanctions against Manuel “La Piña” Noriega ?  Turns out that the sanctions weren't really Elliot Abrams' idea. Rather, the credit goes to a lawyer, William Rogers, acting on behalf of his client, former President Eric Delvalle of Panama. 

La Piña, you see, had an anger-management problem. He decapitated Hugo Spadafora, one of his political opponents.  When the President of Panama, Nicolás Barletta, made the mistake of thinking that he, you know, ran the country, and decided to investigate the head-chopping, Noriega locked him in his office and threatened his family.  At 3am, President Barletta appeared on national television and offered his resignation, which the National Assemby accepted in a late-night emergency session.  Eric Delvalle, the education minister, then became President. A little while later, Delvalle decided to pass on to La Piña an American offer to let him peacefully resign with all his ill-gotten gains. In response, Pineapple-face ejected Delvalle from the presidency.  Delvalle got word that he was going to be arrested the next day, and managed to make it to an American military base. His ambassador-at-large hired Rogers, and then ...

... Rogers' firm filed suits to freeze Panamanian assets in the United States, beginning with the banks.  On March 3, the courts froze the U.S. accounts of the Banco Nacional de Panama (BNP).  The freeze deliberately cut off the BNP’s liquidity — it could no longer access any of the deposit accounts it held in American banks.  Nor could it clear checks through American institutions. The BNP had to close its doors.  In Rogers' words: 

“It was a conscious plan to tighten the financial noose around the neck of the Noriega regime. The consequences were seen with precision: Starve the banking system of cash, force the banks to close, and thus cause —not to put too fine a point on it — considerable financial, economic distress in Panama. The economy doesn’t function now.” 

Since the BNP was also the Panamanian clearinghouse for cashing domestic checks, the subsequent payday, March 14, became a bit problematic. How could Panamanian firms make payroll? Over 145,000 people, twenty percent of Panama’s labor force, had no access to the $30 million in wages they were owed. A general strike quickly ensued, beginning with the dock workers. By the end of March, Panama’s economy was in disarray, and the country defaulted on its foreign debts.   

Rogers was quietly pleased with himself:

“I don’t know of anyone else who — I mean on the assumption that it works, and Noriega is out — I don’t know of any effort to overturn another government by litigation which really was based on, and derived from, litigation in the United States. Or that worked as fast as this, or that had the consequences this one has.”

Well, it didn't work. But think about it for a moment. Could lawyers declare war on Ecuador for defaulting on its debts the same way that they declared war on Panama for ousting a president? After all Ecuador uses the dollar. And sanctions that didn't work on a dictator might be very effective in swinging public opinion against an elected president. Maybe Felix Salmon was on to something. 

It all depends on whether American courts consider the Banco Central de Ecuador (BCE) to be a real central bank. If it is, then its assets are not attachable, and U.S. courts cannot interfere with its functioning. But if it isn't, well, then some enterprising lawyer could go give it the full Rogers. And wouldn't that be interesting to watch? 

From a big distance, that is. Correa may be worried about this possibility. The BCE is buying a lot of gold ... which is weird, to say the least. But is Ecuador vulnerable?

Lawyers read this blog. So help a brother out with his research. Could somebody do to the BCE what Rogers did to the BNP, or is Ecuador safe? 

Taking the C-levels

  Peter asks, was a sea-level canal possible in Panama?  The answer is yes. 

The French initially planned a sea-level canal.  Of course, they failed.  But the American government also considered a sea-level plan.  They rejected it only when a group of consultants presented a report that killed the idea on something other than cost.

First, they calculated the rate at which dirt could be moved away from the excavation, and figured that a sea-level canal would take at least 15 years to build.  (The actual canal took 11 until the first transit and 17 until full commercial operation, but it was planned to take only 8½.)  Second, because a sea-level canal would be pretty narrow for most of its length, transit times would be longer.  (Narrow is a relative term:  the above and below pictures show one of the narrowest parts of the Canal.)    Third, it would be shallow for long stretches.  (41 feet, in fact.)  Finally, it would require locks anyway:  the Pacific tides are twenty feet higher than the Atlantic tides.  Without locks, there would be a 4.5 knot current ... on average.  In fact, it would vary quite a lot, making navigation much tougher. 

In addition, it would be just as vulnerable to sabotage (lots of talk of dynamite-laden vessels in the 1906 report) and require a 180-foot masonry dam on the Chagres, rather than the 135-foot earthen dam actually constructed.  Which would look cool, but be vulnerable.

Later plans were much more grandiose. 

Expansion!

  In 2006, the Panamanian electorate voted in favor of a plan to expand the Panama Canal.  The reason was not that the Canal had reached full capacity:  in fact, by a back-of-envelop calculation done by myself and a fellow named Andrew Baldwin, the Panama Canal is at roughly half its maximum throughput in terms of the number of ships.  (The ACP, I should add, does not agree with us.)  Rather, the reason is that 35% 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 feet by 110 feet.  They can accomodate ships meausring up to 965 and 106 feet.  An expansion project started by the Americans in 1939 and abandoned in 1942 would have built a third set of locks measuring 1,200 feet by 140 feet, with 45 feet of depth.  The abandonment turns out to have been a great thing for the Panamanian economy:  the new project will build locks measuring 1,400 × 180 × 60, capable of accomodating ships up to 1,200 × 160.  (And to be honest, I suspect that will eventually be pushed up to 1,315 × 176.) 

How large is that?  Pretty f----n’ large.  The new notional Panamax will be 1,200 × 160.  The real new Panamax will be closer to 1,315 × 176.  Well, Malaccamax is 1,543 × 197.  Still not big enough for supertankers, but big enough to capture a lot of the new traffic.  (And Nimitz-class aircraft carriers, should it ever come to that.)  The plan is for the expansion to be finished by 2014.  (Uh huh.) 

The abandonment of the American project also turns out to be a great thing for the Panamanian ecology.  Every time one of the current lock chambers is filled, it drains 26.7 million gallons of fresh water from Lake Gatún.  The problem is that rainfall has been falling in Panama.  The American new locks would have increased that number to 40.8 million gallons for every ship to head through the new passages. 

So the new locks will recycle the water, pumping it out of the locks into reservoirs.  It should allow the Canal to use only 10.7 million gallons per lock crossing, despite the larger size of the locks.  

  

Questions or comments? 

An army in all but name

  So spoke the current U.S. defense secretary about Panama's police forces.  When you see these fellows in action, you can understand why he said that.

But they are not an army in name.  Article 310 of the Panamanian constitution reads as follows:

The Republic of Panama shall not have an army.  All Panamanians are obligated to take up arms in order to defend the independence and territorial integrity of the state.  In order to conserve public order, prevent criminal acts, and protect the lives, honor, and property of those under the jurisdiction of the state, the law shall organize the necessary police services, with separate commands and rank structures.  Under threat of external aggression, temporary special police services may be organized in accordance with the law in order to protect the Republic’s frontiers and the area under its jurisdiction.  The President of the Republic shall be the chief of all services established under this Title; such services, as agents of authority, shall be subject to the civil authorities; therefore they shall obey the orders issued by national, provincial, or municipal authorities in the course of carrying out their legal responsibilities. 

Recently, however, President Torrijos has been accused of violating Article 310 and remilitarizing his country.  Is that true?

Getting around Panama City

  Transportation in this town is a mess.

Now, “mess” is a relative term.  During the time that I lived in Mexico City (1995-2004, with some sizeable interruptions), traffic worsened almost continually.  By the time I left, the situation had become almost unmanageable.  Before that, I lived in the Bay Area towns of Mountain View, Palo Alto, and San Francisco, where I learned that you did not risk driving on Highway 101 anytime between 4pm and 6pm for any reason.  (By 1999, when I briefly returned to NoCal, the no-go-101 time extended from 2:30pm to 7.  I think it’s improved since .  Marcia?  Will?)  In 2002-03, I had to make regular and time-sensitive journeys between Fort Dix, New Jersey, and New Haven, Connecticut, which was no fun at all.  Finally, I regularly drove between Boston and Philly in 2004-06, with stopovers in Manhattan.  So I know from traffic messes.

Panama City is a mess.  One day, it took an hour to get from the Multiplazas mall to the Canal Authority HQ.  Another day, at the same time, it took 20 minutes.  That’s a mess. 

Three additional problems make it worse.  First, the public transit system is confused, privately-run, and highly unpleasant, so that nobody who can possibly avoid it will take it.  Second, although the city is not in fact that large, the crazy lack of planning means that you need the sense of adventure possessed by my wife, but few others, if you are going to walk any distance at all.  Finally, the city government has converted many of the city’s streets to one-way traffic ... without synchronizing the traffic lights to suit.  Add that to the fact that in the last decade the population density of the inner city has soared from a Queens-like 10,000 per square mile to a half-Manhattan of 35,000, and you’ve got a transportation problem from hell.
 
The Panamanian government has a plan to solve (some of) it.

People call it “estilo Miami.”  I didn't have the heart to tell them that Miami is nothing like it.

Improved carrier asset utilization

  If that title didn’t put you to sleep, then you either work in logistics or didn’t bother to read it.

 

In 1998, one year before it took complete control of the Canal operation, the Panama Canal Authority (ACP, for its Spanish initials) granted the rights to rebuild and operate the Panama Railroad to a joint venture of the Kansas City and Southern Railroad and a logistics company with the awful name of Mi-Jack.  When the U.S. controlled the Canal Zone, the Panama Railroad carried mostly Panama-bound freight from the port of Colón to the southern towns in the C.Z. or Panama City.  In the 1950s, the railroad lost much of that business to Panamanian trucking.  (There is a great story there, which I'll tell later.)  By the time the U.S. handed the railroad over to Panama in 1979, it had already gone into decline.  It was never officially abandoned, but some pictures from the late 1990s are enough to make you wonder.

 

Allowing the railroad to decline was the wrong call.  The right call was that a functioning railroad would allow shippers to enjoy “improved carrier asset utilization.”  What that is and why it allows the Panama Canal to charge more is below the fold.   

The Panamanian flag

  Panama's flag flies from myriad vessels around the world.  The crews may be predominantly Filipino, and the owners quite likely to be Greek, but 20 percent of all registered merchant vessels fly a Panamanian flag.

The roots go back to 1916.  In that year, Panama's government allowed foreign-owned Panamanian corporations to register their ships under the Panamanian flag. It also enacted a law requiring the recognition of English language contracts. It took until the 1920s to become popular, by which point Panama had created a global network of consuls who, as part of their duties, could transfer and register ships under the Panamanian flag.  Better still, the U.S. cooperated with Panama:  if no Panamanian consul were available, American consuls would serve. 

Why did shippers like to use the Panamanian flag?  I'll turn the floor over to W. Leslie Comyn, a corporate officer of Pacific Freighters:

¡Panamá!

  I could say something about Teddy Roosevelt, or “A man, a plan, yadda yadda,” but what I really think of when I hear “Panama” is:

 Jump back, what's that sound?
 Here she comes, burnin' down now
 Hot shoe, burnin' down the avenue
 Model citizen, zero discipline

 

Which fairly well describes the first impression you have of the capital city.  The road from the airport arrows into the city from the east, passing a bunch of bland tightly-packed housing developments that could be in California and a dramatic group of new towers sprouting by the beach.  The road then angles out onto a causeway over the water with the ruins of Panamá Viejo on your right and burns down the avenue right into … a giant mess.

A very cool giant mess, but a giant mess nonetheless. 

A ditch not dug

In 1911, U.S.-Latin American relations almost took a dramatic turn for the different.

In October of that year, the head of the Panama Canal Zone's civil administration, Maurice Thatcher, told a U.S. Senate committee, “We must have courts ...  I would like to see an American civil population here ... These Americans would come here to live, make their homes here, and they would prefer to live under the dominion of the American government, under American laws.” 

George Goethals, the rather un-Brooklyn-like Brooklynite in charge of construction thought differently.  “Introduce the franchise, and we’d go to pieces.”  The Taft administration agreed with Goethals.  The Canal Zone was not to receive elected government, civil courts, or even private property.  The Zonians remained a population of transients.  (Vocal, obnoxious, and slightly-crazy transients, but transients.)

But what if Thatcher had won the argument?  The Zonians would have owned farms and businesses.  They would set their own tax rates.  They would elect their governor.  The strange monopoly that the federal government held over ancilliary businesses would not last.  The Zonians would not all work for the federal government.  They would be a settled population, certainly larger than the actual Canal Zone population, which bounced around 50,000 in the 1950s and '60s.  And it is hard to imagine them lacking a non-voting representative in Congress.

Under such circumstances, could Congress have agreed to give the Canal Zone back to Panama?   

Imperialism can pay

There's a debate out there about imperialism.  Did it pay?  The consensus answer is:  no, it did not.  The British spent far more in defense than they earned from imperial investments; in fact, by the 1880s, the profitability of imperial investments had fallen below domestic and non-imperial ones.  The French believed that their empire after WW2 helped them maintain their balance-of-payments; the numbers don't support that idea either.  The big counterexamples involve the Nazi conquest of France, and the Soviet occupation of Eastern Europe after 1945 ... but after 1970 or so the balance on the Soviet empire hinges on how much you believe control of the Warsaw Pact armies was worth to Moscow.

But there is a case of imperialism paying, and paying quite well:  Panama in 1903. 

Here's the simple story.  A French company, see, had tried and failed to build a canal across Panama.  In 1904, as per the terms of its concession, the assets of that French company would revert to the government of Colombia, which could then sell them to (say) the United States, which wanted to build a canal.  Those assets included a whole lot of big ditches, and a working railroad, and were worth around $40 million — $21.3 billion as an equivalent share of national income today.  So when the U.S. comes sniffing around to strike up a canal agreement, the Colombians rather intelligently decide to stall. 

The shareholders in that French company, though, want a deal quickly.  So does the United States, run by, you know, Teddy Roosevelt.  (Any resemblance to a current postulant for the Oval Office is entirely coincidental.)  Of course, the U.S. isn't a dictatorship, Congress matters, so it kinda helped that the shareholders of that French company had made rather large donations to the GOP and hired all the best lobbyists of the time, including a Brooklynite named William Cromwell.   

So one of the shareholders of the French company cuts a guy named Manuel Amador a personal check for $100,000 in a New York City hotel room ($53 million) to make sure that a revolt gets organized on schedule.  It does, and coincidentally enough American ships are right offshore to make sure that Colombia can't intervene.  The new government then appoints the French dude who cut the personal check to be its foreign minister, and he negotiates a canal treaty with the United States.  When the people in Panama City see the agreement they balk, but their foreign minister (and, uh, the U.S. secretary of state) warn them that if they don't sign then the half-life of their new republic is going to be significantly less than its two-month history, and poof, Panama signs.  Without a Spanish translation.

So far, so sordid, but honestly, that tells you nothing.  After all, there was competition between the Panama and Nicaragua routes.  I don't care that there was skullduggery in the dealings, and I don't care that Colombia got screwed.  What I want to know is whether the U.S. got a better deal because it used military force than it would have gotten in the absence of force.

Fortunately, we have indeed got six existing deals struck with either Colombia or Nicaragua which did not involve force or the threat of force.  (Well, one of them involved the implicit threat of force.)  All of them incorporated the fear of competition from another route.  And all of them gave the owner of the Isthmus a hella lot more squeeze than the deal Panama actually received.

Here's a table showing the net present value of how much less the U.S. would have received under various other agreements compared to the one it foisted on Panama in 1903:

	% of U.S. GDP	2007 dollar equivalent	% of Canal cost	% of Panama GDP
Hay-Herrán treaty	0.07%	$10.1 bn	4.3%	117%
Concha memorandum	0.10%	$13.4 bn	5.7%	155%
MCC-Nicargua contract	0.10%	$13.6 bn	5.8%	157%
French-Colombia concession	0.10%	$13.8 bn	5.8%	159%
Senate counteroffer	0.17%	$22.9 bn	9.7%	265%
Nicaragua-U.S. treaty	0.23%	$31.7 bn	13.4%	366%

So, yes, sometimes imperialism does pay. 

North of south, or the economic consequences of Elliott Abrams

  Okay, here's the set-up. In 1903, the U.S. sponsored the independence of a mercantile breakaway region of Colombia in a strategically very intriguing location. The constitution of this new country permanently linked its new currency, the balboa, one to one with the dollar. In 1914, the Panama Canal was opened. Canal Zone policy did not allow sales to ships on credit. Banks in Panama filled the gap.

Jump-cut bone to space station here. Seventy years after, in a region whose major products were coffee, bananas, and death squads, Panama managed to seize this tiny bit of comparative advantage and leverage it into a national economy centered around financial services. Swiss-style bank accounts, generous corporate tax policies, and a major re-exporting hub, combined with the use of the U.S. dollar and the low inflation caused by the Balassa-Samuelson effect: all these things made Panama an attractive site for many types of business activity.

Small problem: Manuel Noriega. A scary guy, and I'm not talking about the acne. He was the chief of secret police for the charismatic leftist populist Chicago-influenced leader of Panama, General Omar Torrijos, and the guy who (in theory) was going to disable the Panama Canal if the 1977 treaty didn't go through; and after Torrijos's plane mysteriously crashed in 1981, Noriega quickly moved to consolidate power behind the scenes. Money laundering, drug smuggling, dogs and cats living together, mass kleptocracy. One of the cuter scams was that Noriega's associates ran the company responsible for security in the re-export zone. Guess how that worked.

Now, somehow Noriega had got on the bad side of Uncle Sugar. It's rather difficult to pin down the proximate cause, since the fellow had been messing with drugs and money since the 1970s, when he was heavy petting with the CIA, but whatever. Suffice it to say that by the late 1980s, Noriega had turned from “our bastard” to “liability” in the eyes of the Powers That Be. The change might even have been made in good faith. Manuel Noriega was indicted in a Miami court on February 4, 1988. On March 3, 1988, all the U.S. accounts of the Banco Nacional de Panama were frozen. The Assistant Secretary of State for Inter-American Affairs, Elliott Abrams, gloated to the press about this neat idea, quipping like only an apparatchik can: “Noriega is hanging on by his fingertips. He'll be out of power in a week. Now we'll see who stole the strawberries.” But it was a neat idea, if not very well thought through.

Here's the thing: because Panama has no independent currency, it relies on dollar flows from the U.S. to maintain financial liquidity. Panama has no central bank. Balboa notes have only been issued once, in a bizarre episode in the early 1940s, and they were all cancelled. So the mechanism to maintain Panama's financial liquidity was deliberately cut off. When this happens on a widespread scale, it's called a depression. After all, as the history of the twentieth century tells us, nothing causes dictators to lose power more quickly than a depression. The BNP had to close its doors, and other Panamanian banks followed. It gets better. The BNP, while not a central bank, is the Panamanian clearinghouse for cashing checks. Since Panama had a modern, service-based economy, this made the next payday (March 14) problematic. A general strike quickly ensued. Noriega had an ingenious scheme: pay the workers in commemorative coins! This was nixed by the money mavens on hand. So, all in all, a lot of calamity, a lot of hardship.

Why didn't it work? It took Operation Just 'Cause (originally named Operation Blue Spoon, which I think is much cooler) to oust Noriega. The sanctions did manage to reduce the Panamanian economy by a third, maybe a half, for over a year, precipitating a decade-long jump in unemployment. But that doesn't mean much to a dictator. It's almost the definition: a dictator is a leader who is unresponsive to the popular will. But a major reason it didn't work was that the Panamanian financial system was remarkably resilient.

The Panamanian bankers weren't unsophisticated rubes fresh off the coffee finca. Some of them went to the University of Chicago. They had long practice finding loopholes and workarounds against Uncle Sugar's more anti-Panamanian rulings; they had a decades-long institutional history of doing this. So the government issued fractional pay checks which could circulate like bills of exchange, increasing the effective money supply. Noriega himself set up Eurodollar accounts using laundered drug money -- sweet of him, and part of the reason he's getting a French vacation -- so that the BNP could finally clear checks and credit card bills. Some banks issued CDs based on savings accounts, which were used for big ticket items.

In short, just as the Great Depression sparked a wave of industrial innovation in the U.S., the U.S.-engineered depression sparked a wave of financial innovation in Panama. The other reason is, private companies sent Panama a lot of dollars so their Panamanian enterprises could stay afloat. Texaco, United Fruit Brands, Eastern Airlines. Not a whole lot in absolute figures, but it helped at the margin. After all, politics is politics, but business is forever. (PS: Doug, I know the exact word that's tickling the back of your head -- Komarr.)

This is sweet

This might be the nicest result I've ever got, in any of the fields I've worked in.