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  Number 385 | Agosto 2013
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The canal and the illusion of development

Nicaraguan economists are considering the implications of the canal through Nicaragua. Economist Julio Francisco Báez told La Prensa, “I‘m skeptical about the canal’s ability to end our poverty. I’m with those demanding participation in clarifying this project, which could end up something positive or a reckless adventure. I tend to assume the latter because so far the process has smacked of alarming improvisation. It’ll change the country’s environment, laws, economy and Treasury yet the way they’re going about it seems like a joke.” Here we offer the opinion of yet another alarmed economist.

Adolfo Acevedo

Ongoing dynamic change in the productive and employment structures is crucial to a country’s development. In this process, the productive factors, including the workforce, get reassigned to activities with ever greater productivity, greater value added, increasing returns to scale and more dynamic demand, in other words longer and wider production chains from raw materials to ever more complicated finished and marketed products.

Decades without making that effort

Obviously, the association between productive structure and economic growth has profound economic policy implications. Insofar as a country’s development is closely linked to changes in the productive structures, an essential task of economic policy is to ensure that the economy can achieve a dynamic productive transformation.

Between the mid-20th century and today, the only countries that have successfully made the transition from developing to developed countries in the space of a few decades have done so with deliberate, sustained and persistent effort of structural change, maintained over time, advancing tenaciously from one level of technological intensity of the production apparatus to a higher one. There’s no substitute for that effort.

Nicaragua isn’t even thinking about undertaking a long-term sustained development effort like that. Apparently, it’s thought that it wouldn’t pay off quickly enough, even though the evidence shows that there’s nothing “faster” than the barely thirty years the Asian tigers (Hong Kong, Taiwan, South Korea and Singapore) took.

While decades have elapsed with no deliberate or sustained effort for structural change in our country, the illusion is still being nurtured that development will come with some megaprojects that all by themselves will magically convert Nicaragua from a poor, backward country to a developed, prosperous one, virtually overnight.

The canal will be a private enclave

We’re compelled to clarify whether a megaproject like the interoceanic canal could contribute to the development process. It’s true that building the infrastructure for such a canal would produce an important temporary boom in economic activity, although the machinery and the entire imported component involved in such a major work could exceed 70% of the investment, thus having little or no impact on the local economy.

In no way can this temporary boom from the direct and multiplying effect of the investments be compared to a country’s self-sustaining development over time. And once the infrastructure is built, this boom inevitably ends.

When that happens, the canal will be reduced to a relatively self-sufficient, powerful private enclave able to supply the needs of the staff employed there, as happened in Panama’s Canal Zone. For all intents and purposes, that enclave will be separate from the rest of our country, with few links to the rest of the economy. Furthermore, as an extremely capital-intense operation, the canal won’t need a large workforce to keep it functioning once it’s in operation.

What will remain for us?

There’s another problem. The canal’s construction phase will inevitably be accompanied by the effects of the well-known “Dutch disease,” in which the magnitude of the capital inflows causes a massive revaluation of the real exchange rate. That will make Nicaragua’s tradable activities—such as agriculture and cattle raising, agroindustry and other industry—uncompetitive on the international market. Such a huge revaluation of the exchange rate is diametrically opposed to what is needed to promote positive productive restructuring. It’s also opposed to Nicaragua’s need to transform its current kind of insertion in the international economy.

To achieve the transformation we need, Nicaragua needs to maintain a high and relatively stable real exchange rate that promotes focusing resources to the exportable sectors and those that would replace imports. With a permanent “Dutch disease”—an exchange rate that renders the majority of potentially tradable national economic activities internationally uncompetitive—the economy’s structural change process would stay blocked. What we’d have as a result wouldn’t be the needed process described above: permanent diversification of the productive structure and employment towards increasingly more productive activities, greater value added, more dynamic domestic and foreign demand and denser inter-sectoral production chains. Instead we would have a gigantic high-tech enclave, with very limited job creation, in the middle of a lagging economy, dependent on the crumbs left us by the canal.

Trapped in a vicious circle

But there’s even more. Once the temporary boom is over, the country’s economy—the part not integrated into the private canal enclave—could go into depression and acute stagnation, as has happened in so many other places in the world over history. Who today remembers the Bolivian city of Potosí, which had streets cobbled in silver during its boom in the 16th century?

No country has ever developed itself based on high-tech enclaves. Precisely because of their high capital density, they generate a very limited number of jobs. Any increase in productivity is offset by the pressure the enclave exerts to keep the majority of its workforce in activities with very low productivity.

These enclaves can’t dynamically pull the rest of the economy up after them because the connections between the two are limited. As most employment in the rest of the economy will continue to be in low productivity activities, the economy as a whole will still be trapped in a vicious circle that stifles development.

They should explain why

Under the conditions our government agreed to, Nicaragua won’t even be able to appropriate the differential international income resulting from use of the canal route. An interoceanic canal certainly lowers the international costs of shipping. Owning such a resource, which reduces the cost of transport below what it would be if there was no canal, could generate extraordinary profits for the country offering the natural conditions for such a work. Whoever monopolizes the geography that allows for the canal to be opened can appropriate this benefit as income. The country possessing these natural conditions could theoretically capitalize on these benefits. If the demand for a new interoceanic canal is as deep-felt as is claimed, the country with the geographical resources to open it could put the concession for its construction up for bid, negotiating a deal with investors who would participate in the work on the best terms for the country.

But the government of Nicaragua hurriedly and without tenders handed the exclusive right to own, possess, exploit and use the canal route to third parties, thus granting conditions in advance that are extremely onerous for the country’s sovereignty, renouncing without real justification the country’s appropriate participation in the income from a natural resource that is the nation’s capital wealth. There must be a very convincing explanation for why our government has so easily renounced taking maximum advantage of benefits from the exploitation of a resource that could provide a crucial source of income to finance the country’s development.

Surrendering sovereignty

In the agreement signed by the government of Nicaragua the concessionaire has been granted the right to all benefits of the operation and been exempted from paying any taxes for a century. Nicaragua will not share the income from its patrimony because the agreement establishes that this income will be entirely appropriated by the concessionaires, absolutely tax free. The only shared benefits established in the framework agreement Nicaragua signed are that the concessionaire “will endeavor” to give 1% of the shares annually to the Canal Authority, which isn’t the same as being expressly obliged to do so.

There’s also no guarantee that this will happen because in the written agreement the concessionaire gives Nicaragua absolutely no kind of warranty for damages or any environmental, social or other kind of costs it could inflict on our country. Nor does the concessionaire assume any economic, civil or penal responsibility, but does receive all kinds of guarantees from the Nicaraguan government. The government even irrevocably waives sovereign immunity.

Giving exclusive and totally discretional rights over Nicaragua’s main bodies of water to private investors to exploit, divert, reduce or whatever they deem necessary should be one of our main concerns with what has happened. It’s clear that doing this seriously compromises our future sources of drinking water. And we already know that in the future, drinking water will be a much more valuable and scarce resource than any canal infrastructure. The availability of water is a right inextricably linked in the most essential and fundamental way to life itself, because without water there is no life.

It’s also noteworthy that, even before defining the geographical area the concession and its swath of land will encompass and before doing the feasibility and environmental impact studies, exclusive rights have been granted to the private concessionaire to be exercised completely at his discretion over not only bodies of water but also the rest of the natural resources: air, land and sea space as well as public and private property and assets. It’s notable that in the agreement the Nicaraguan government even renounces the Army’s exclusive role to defend and protect the country’s territory as set forth in the Constitution, ceding this role to whomever the concessionaire deems appropriate and at his sole discretion. It’s significant that the Nicaraguan government commits itself to amending the very Constitution in whatever way the concessionaire considers appropriate to his interests.

It’s also extremely noteworthy that the concessionaire has been conceded rights equivalent to total sovereignty, even though there are no precedents to show that his company has international renown and experience in constructing and operating similar works.

We should concern ourselves

A project of this magnitude can’t be exclusively assessed from the perspective of limited private interests and the opportunities for private wealth that go along with it. A project of such a size and scope has major implications, present and future, that far exceed any private interests. Therefore, it’s up to all of us citizens to seriously concern ourselves with the implications the canal agreement already has for society as a whole. And very particularly, it’s up to us to concern ourselves with the consequences it will have for our future as a country and a society.

Adolfo Acevedo is an independent economist.

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