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… the Inter-Oceanic Canal

Ometepe Island, in Lake Nicaragua

Ometepe Island, in Lake Nicaragua

Today marks the day that Nicaragua and her Chinese backers are breaking ground on the grand inter-oceanic canal that in five years will bisect the Central American isthmus and allow super-tankers too large for the Panama Canal to make the Pacific-Atlantic journey with ease.

Except it is never going to happen.

The history of Nicaragua is basically the history of failed canal attempts, and the foreign manipulation and betrayal, as well as the domestic anguish and languish that this brings. This is no less than the 72nd official proposal for a Nicaraguan canal. This won’t even be the first time that construction has begun. The first plans for a canal across Nicaragua were hatched by the conquistadors way back in the 1500’s, and Cornelius Vanderbilt nearly secured the financing he needed to construct the canal before the Civil War scuttled his attempts. But he did manage to incite a war and build a railroad through Nicaragua in the meantime.

Anyone who looks at a map of Central America may be puzzled by the proposal for a canal through Nicaragua. Costa Rica and Panama are far less wide. Nicaragua is the largest country, by area, in Central America. However, Nicaragua also has the largest lake in the region, Lake Nicaragua. At its closest, it is only 17 km from the Pacific Ocean. And Lake Nicaragua drains all the way to to the Caribbean Sea by way of the Rio San Juan (San Juan, or Saint John River). The vast majority of Nicaragua is an Atlantic, not a Pacific watershed. The Rio San Juan is rocky, shallow, and fraught with rapids at spots, but that has not stopped pirates from sneaking all the way up the river, as well as steam ships from being towed up the river. It is the most logical path for a successful canal through Central America.

As treacherous as the terrain of the river, the geopolitics of the river are far more rocky. The Rio San Juan is the border between Nicaragua and Costa Rica. However, it is the only riparian border in the world that is wholly owned by one country – in this case Nicaragua. And that has created endless problems and disputes with Costa Rica. So many, in fact, that the proposed route of the canal is completely bypassing the river and being cut straight through the interior of Nicaragua (and even so Costa Rica still has watershed issues that they claim Nicaragua is not responding to, in regards to the canal).

I don’t see why this time around should be any different from the 71 other attempts.

The main, insurmountable obstacle this time is the estimated price of the canal. Panama started with a good ‘ole American-made canal. Let’s say a Ford. And they have made a series of upgrades through the years. Let’s say right now they have a nice BMW model. To compete with Panama, Nicaragua is trying to acquire a Buggati. A $50 billion Bugatti, super-wide, super-deep, complete with access roads and highways, two deep-water ports, an airport, electric generation, pipelines, free-trade zones, a railroad, and a number of other necessary supply and infrastructure projects! They estimate it will take 50,000 workers and only take five years to complete.

So how is Nicaragua going to secure investors willing to provide nearly 4.5x its annual GDP ($11.26 billion, 2013 estimate, according to the World Bank)? I’ve put together a small list of possible backers and will go through my thoughts on each:

  • China
  • Nordic Sovereign Wealth Funds
  • Middle Eastern Sovereign Wealth Funds
  • Malaysian Sovereign Wealth Fund
  • Big Banks, the Backers of the Many Engineering Marvels of the Past
  • Venezuela and ALBA

China

If you ask a Nicaraguan where the money is going to come from they always say “China.” I don’t think so. Sure, the main investor at this point is a Chinese telecom mogul. And he is a multi-billionaire. But no one in the world has $50 billion to throw around, and our man in China is quick to point out that he has absolutely no backing from the Chinese government with regards to the canal. No one believes him, but it makes it very unlikely that he can muster $50 billion from his own domestic sources. Besides, between 2010 and 2012 China invested $101 billion, in total, in the entire continent of Africa (source: Business Insider). To think that they would even put half of that into one small country is irrational.

Nordic Sovereign Wealth Funds

I’ll make this one easy. Nordic countries, primarily Norway, have a lot of oil money that they are saving. But they are not going to invest it in Nicaragua. These countries have already pulled back on diplomatic channels and foreign aid to Nicaragua because of transparency concerns. They’re not going to pull a 180 and start pumping billions into a project fraught with questions and uncertainty.

Malaysian Sovereign Wealth Fund

Same story as Norway. They’re saving their oil money, and they’re not going to give it to Nicaragua. Unfortunately, this year, Malaysian Airlines, owned partially by the fund, had a rough one, losing two 777’s in their tragic entirety. The fund had to bail out the airline.  The price of oil is tumbling, which is probably helping to prop up Malaysian Airlines, on the one hand, but it is stunting the funds cash flow, on the other hand. I doubt they will be announcing a non-stop to Managua from KL anytime soon.

Middle East Sovereign Wealth Funds

And that leaves the Arabs. This is where I see the miracle coming from, if it comes from anywhere. Everyone knows that the Arabs have lots of oil wealth. And they’re known for the audacious. For one, Dubai. For seconds, it was the Arabs who bailed out some of the banks and hedge funds in the early days of the Sub-Prime Mortgage Crisis, long before Lehman Brothers became all too well known. So maybe, just maybe, a jet-setting Chinese man and Ortega’s outdated mustache can convince the right mix of petrocrats to throw in a good chunk of the $50 billion and really get the show on the road.

The Big Banks

No way Josue. Big banks in America, Europe, and elsewhere, are under immense pressure to demonstrate the viability of their investments. American regulators would pounce on any bankers working on this less-than transparent project, and European banks are already very bearish on shipping, since Northern European banks with shipping exposure were under extra scrutiny during the recently completed European banking stress tests, since global shipping has been very weak since the global recession.

Venezuela and ALBA

For years Hugo Chávez’s Venezuela was the standard-bearer for Latin-American Leftist opposition to America. When Chavez died last year his followers all started pounding their chest to become his heir. This included Correa in Ecuador, Ortega here in Nicaragua, Evo Morales in Bolivia, and of course Maduro in Venezuela. For years Venezuela, and its leftist sphere of influence, the Bolivarian Alliance of the Americas (ALBA in Spanish), have been financing cheap oil for member states as well as other social development projects. However, this all comes from Venezuelan stability and a steady stream of oil dollars into her state coffers. But with oil prices tumbling and Venezuela simmering in social unrest, it’s another no way Josue.

It is serenely ironic that the same trends, the rise of US oil and gas production, are giving rise to the need for an American super-canal, while at the same time driving the nail into the coffin of possible financing options, by driving down the price of oil.

The Sovereign Wealth Fund Institute has a nice map showing the size of sovereign wealth funds around the world. Click on the map for the link:

Red circles represent oil wealth, and blue circles represent other wealth (often mineral)

Red circles represent oil wealth, and blue circles represent other wealth (often mineral)

So it is never going to happen. But that does not mean I do not want it to happen. No one doubts that Nicaragua is starved for development. It is tied for being the second-poorest country in the Americas. Haiti takes the unfortunate crown, with Bolivia tied for second with Nicaragua.

The largest concern, after the obvious financing issues, is environmental. First and foremost, there is a 20-foot tide differential between the east and west coasts. And plans for the canal have not addressed this engineering obstacle yet. But furthermore, the canal will drive through protected wetlands, productive agricultural communities, and protected indigenous communities on the Caribbean coast. This is all not to mention that the route will go straight through and require the dredging of Lake Nicaragua, which is the largest source of freshwater in Central America. It is already an extremely fragile freshwater ecosystem due to agricultural and other pollutants streaming into the lake. Everyone from locals to parties interested in the fledgling tourism industry are in extreme opposition to the canal.

But lastly, I doubt that Nicaraguans will reap the benefits of the canal, which is how Ortega is selling the whole scheme to his people. The Chinese development corporation has a 50-year concession on profits, with another 50-year option to extend. Ortega is promising 250,000 jobs that will be born as a result of the canal, plus the need for 50,000 laborers on the construction. But of course I have my doubts. The canal will drive through some of the most sparsely populated and least developed departments of the country. Hundreds of thousands of people will have to relocate in order to realize those 250,000 jobs, which will lead to a lot of social strains on the country. Plus, given the under-education of the Nicaraguan people, the best-paying of the 50,000 construction jobs will mostly go to foreigners, not Nicaraguans. And I think it also bears mentioning that the highest HIV rates in Nicaragua are often in mobile populations, much like the worker camps will be. Has anyone put any thought into the epidemiological and public health effects of this project?

Nicaragua and the Chinese development company hired McKinsey to conduct a feasibility study. Officials refuse to release the results, but they are quick to point out the stellar economic projections. In 2013 GDP growth paced along at 4.6%. Official projections for the canal show that in the first year of construction GDP growth will skyrocket to above 14% and stay there for the foreseeable future. I just finished reading Confessions of an Economic Hitman. I hated the book. It was poorly written and not believable. But I can’t fail to mention that the author emphasized that the main tool of an economic hitman is inflated growth projections. It is guaranteed that the construction of a canal would attract a ton of foreign direct investment in Nicaragua, but sustained rates above 10% are preposterous and only part of the Chinese boondoggle to attract investment in the first place.

If the project ever truly gets off the drawing board (the groundbreaking today is ceremonial, nothing more) I will be in opposition. I fear that Nicaragua will bear many negative externalities while reaping few benefits.

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… Ebola

I first had the idea for this article about a year ago when MERS was popping up, but I didn’t write it. Then a few months ago, when Ebola was just beginning to rear its head, I resurrected the idea, but I didn’t follow through. I wish I had written this earlier, but nonetheless, I’m taking her home this time.

From a public health point of view, 2014 has seen an alarming number of epidemics spreading around the world. MERS is emanating from Arabia and infecting travelers worldwide. One of the most feared diseases of modern times, Ebola, is experiencing its worst outbreak in history. And the infamous Plague has appeared in Colorado and China, alarming public health workers. That’s not to mention the spread of Chikungunya (chik-en-gun-ye) in the US and Latin America, and terrifying protocol breaches at infectious disease laboratories in the US. In addition to the devastating human impact that the spread of infectious disease has, there are also acute economic impacts that are interesting to explore.

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The last time that there was an epidemic of worldwide proportions was 2003, when SARS ripped across Asia and spread to others regions of the world, including Canada. The epicenter of the epidemic was Hong Kong. Due to fear of the virus spreading, people tended to avoid the public sphere. As a result, consumption plummeted. Certain retail establishment, such as restaurants and movie theaters, saw traffic decline by more than 50% during the spring of 2003. Overall, Hong Kong retail sales were 6.1% down year-over-year in March, and a whopping 15.2% in April, before fully recovering by July. In addition, travel and tourism were severely stunted during the outbreak and for a period following it. In total, Hong Kong saw 63% fewer visitors during the outbreak, and during the height of the scare air traffic fell by 77%. SARS eventually infected 8,422 people, resulting in 916 deaths. This equates to a mortality rate of 10.9%. Most remarkably, due to the public health response to the virus, all victims were identified and isolated, and SARS has been completely eradicated from the human race. There has not been a single reported case since the outbreak in 2003 was contained. It is the only disease in the history of the world that humans have achieved 100% eradication.

Ebola, on the other hand, has a much higher mortality rate. In some previous outbreaks it has reached 90%. So far in 2014 it has not infected as many people as the SARS outbreak, probably because the West African countries it is spreading through are less densely populated and have fewer interconnected socio-economic communities than East Asia. However, it is taking serious tolls on the under-developed economies. Consumption, like in Hong Kong, China, Singapore, Taiwan, and Canada, during SARS, has plummeted. Even though the virus is not spread through the air, no one wants to risk catching the disease from an infected person at the market. Plus mines, which are one of the economic engines of growth in Africa, are shuttering to prevent the spread of the disease through workers. And globally, prices for agricultural commodities such as cocoa and palm oil are increasing in anticipation of an under-productive harvest in West Africa. Lastly, foreign airlines are cancelling flights to the three infected countries – Sierra Leone, Guinea, and Liberia. And the latest news from West Africa now has the disease spreading into Senegal as well, although it seems to be contained in Nigeria.

These short-term impacts fail to mention the more dire impact on human capital. With the loss of life there is an immense loss of economic productivity for years to come. In addition, this Ebola outbreak is acutely affecting health care workers who are caring for patients. Health care workers, especially doctors, are extremely productive members of economic communities, and the affected countries will have to reinvest millions in medical education for years to come to recuperate the losses they are experiencing as their best doctors and nurses succumb. In addition, with attention being placed on Ebola, other virulent diseases are being neglected, so mortality rates are rising generally across West Africa, further sapping human capital.

The last time there was a widespread, nearly uncontrollable worldwide pandemic was 1918, when Spanish Influenza spread across the entire world and killed 40 million people worldwide, including 0.8% of the population of the United States of America. Evidence from the pandemic is hard to come by, but the main effect, similar to SARS, was a vast reduction in retail sales – the face to face interactions that often drive economic activity. However, globalization had not swept the world by 1918. Commercial air travel did not exist, and World War I was still being fought, severely limiting international travel and economic cooperation. If another global pandemic were to arise, the economic effects could be far more severe.

Although there has never been an international pandemic during the era of globalization of international air travel, we can use the experience of the 2010 eruption of Eyjafjallajökull (EH-ya-fi-AHT-la-yo-coot) on Iceland. Due to the emission of ash particles into the atmosphere, air travel across Europe was all but shut down for a week in 2010, stranding millions, stunting professional services-based economic activity, and shuttering the tourism industry for a short time. In the UK alone, 456.5 GBP was shaved off of GDP, an equivalent of 0.02% of annual GDP. This translates to more than 10,000 jobs. The impact was much larger on the airline and hospitality industries (British losses exceeded 700 million GBP), but domestic consumption, in the form of retail sales, was not affected. In fact, the stranded customers likely boosted retail sales by having to eat and sleep for an extra week.e25_23048757

If an infectious epidemic were to spread globally, forcing governments to close borders and ground air travel, the British and European volcanic experience could be magnified hundreds-fold. Tourism and business travel would evaporate. Plus, most forms of human economic interaction, mainly shopping and entertainment would dry up before our eyes. Shops would close, lay-offs would be massive, and most effected economies would dive head-first into recession, if not depression. Interestingly, cyber commerce may experience a boon, with consumers preferring to shop from the safety of their home computers. That is, as long as telecommunications were still properly functioning and not suffering from the loss of workers, and delivery services, such as FedEx, UPS, and the US Postal Service, were still carrying out package deliveries.

I truly hope that the current Ebola outbreak in West Africa is contained and eradicated, because the pain that victims and their families are suffering must be awful and the fear that the populations are living in absolutely stifling. And I also hope that societies around the world take this as an opportunity to optimize their public health initiatives, if only to prevent undue harm to economies, developing and developed, from epidemics and pandemics.

Sources:

http://www.hiebs.hku.hk/working_paper_updates/pdf/wp1084.pdf

http://www.bloomberg.com/news/2014-08-21/ebola-sickens-economies-of-west-africa.html

http://www.stlouisfed.org/community_development/assets/pdf/pandemic_flu_report.pdf

http://www.visitbritain.org/Images/Volcano%20Economic%20Impact%20Study%20-%20Oxford%20Economics_tcm29-15226.pdf

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