The Panama Canal Expansion: are clustering forces in action?
By Szabolcs Görög
The expansion project of the Panama Canal, started in 2007, will almost double the commerce through the Canal. It will also raise employment and increase revenues. However the main improvements it can bring to the region comes from the beneficent impact of clustering forces.
The Panama Canal was finished in 1914 and it immediately became one of the most important canals of the world maritime transportation. Unfortunately, many vessels exceed the maximum size which can safely sail through due to the development of the cargo ships. Panama Canal Authority (ACP) in order to retain their competitiveness and market power, started to deepen and broaden the existing canal. They also begun to dredge out a new one with larger locks. In this brief blogpost, I attempt to summarize the most important effects of this investment for Panama.
The expansion of the Canal began in 2007. According to the ACP’s calculation, the project should be finished in 2014 at a cost of $5.25 billion. $3 billion of the total investment come from retained earnings, the rest is financed by bilateral and multilateral lenders, for instance by the Japan Bank for International Cooperation, the European Investment Bank and the Inter-American Development Bank. The list of these lenders indicates the high expectations about the benefits of the expansion.
According to Alberto Alemán Zubieta, the ACP's chief executive, the total cargo per year will grow from 250 million tons to 510 million tons between 2005 and 2025, and the container traffic will also triple to 300 million tons during this period. Moreover, the ACP expect a 1.2 additional percentage points in the annual growth rate of Panama after the completion of the expansion, supporting Panama to attain a GDP of $31.700 million by 2025 (in 2005 dollars), which is almost a 2.5-fold increase. Furthermore, the ACP hopes that on account of the expansion 100.000 inhabitants will emerge from the poverty. Some probably would say that these numbers are too optimistic, especially in the context of the growth of the GDP. Nevertheless, if we put on the glasses of Economic Geography we wouldn’t be one of them.
First of all, the Canal and its close area, primarily Panama City and Colón, is already a notable transportation and logistics hub in the region and actually in Central America as well. Thanks to the expansion, additional clustering forces are in action. In anticipation two computer-maker giants (HP and Dell) and a leading manufacturer of constructing machinery (Caterpillar) already moved to Panama, and operate distribution centres in Panama City. In addition, the City is home to numerous banks, providing saving services in the region, especially to Venezuelans, Columbians and Central Americans, moreover several companies enjoying the favourable tax system for offshore business. Mr. Alemán rightly expects that numerous new arrivals will settle in the region. In particular, such firms will provide fuel sales, tourist operations, airport and merchant marine activities, legal and financial services, vessel repairs and maintenance, telecommunications, shipping services, land and intermodal transportation etc. He also hopes that new railroads, ports, roads and some research institutions will be established.
These economic activities complement each other, some of them directly attached to the Canal, others are in connection with the primary activities, in response to those demands. Therefore, there is an international clustering force of activities that generates local demand for further complementary activities this trigger other important services. Additionally, because of this agglomeration, circular causation will also get in motion. Countless new jobs will appear many of these jobs will demand skilled workers in a relatively short period of time. However Panama do not dispose such number of skilled workers yet, as a consequence, immigrants will show up. Certainly, many unskilled Panamanians will get a job as well. According to the ACP estimates, this number will be between 35.000 and 40.000 in line with the construction, and a total of 150.000 to 250.000 new jobs will be created in the long run, thanks to the considerable cluster effects. Last, but not least, at thing worth mentioning: the ACP is a state owned company which operate independently from the government, but a considerable proportion of its profit goes to the treasury directly.
All things considered, the expansion of the Panama Canal will directly help the life of Panama thanks to the lots of new jobs and the increasing commerce. Furthermore, its indirect effects through clustering will provide an even greater benefit for the whole country, especially in the close region of the Canal.