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Digging With China

Digging With China

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On May 18th, 1903, the United States signed the Hay-Bunau-Varilla Treaty in Panama, winning the rights to build a canal across Panama to connect the Atlantic and Pacific Oceans. Almost exactly 110 years later, on June 15th, 2013, Wang Jing, a Chinese billionaire, and Daniel Ortega, President of Nicaragua, announced their plans to do the same in Nicaragua. That announcement went largely unacknowledged by most major world publications—and indeed, most people could not locate Nicaragua on a map.

Times have changed. Now, Nicaragua is actively working with a major world player, China, to improve its low economic position—it is currently the second poorest country in the Western Hemisphere. Daniel Ortega, the country’s longtime president and former leader of the FSLN (“Frente Sandinista para Liberación Nacional,” or The Sandinistas,) has been accused of manipulating his relationship with world powers in order to gain political leverage and personal wealth. But Ortega’s fortune and Nicaragua’s poverty are not mutually exclusive.

Even if the canal is initially not economically profitable, it is worth building. This canal will benefit the people as for other reasons. This canal will benefit the people as well as the politicians, despite a deep lack of transparency regarding the details of the project. Importantly, the canal’s construction is representative of China’s expanding role in the Western hemisphere.

Nicaragua’s relevance on the world stage, or lack of relevance, stems directly from its poverty. The civil war between the Sandinistas and the Contras and the political corruption that has ensued crippled the country’s economy. Ironically, Daniel Ortega, who came to power on calls for enhanced social mobility and greater equality, has arguably played an instrumental role in this crippling. His brand of corrupt cronyism has benefited few but those in his elite circle.

Yet Ortega’s political flip-flopping is a normal trend after civil wars, according to Columbia University professor of economics Xavier Sala-i-Martin: “It is common for countries to have a group of unsatisfied people rebel against the ruling class in a civil war, and later become similar to the ruling class against which they fought in the first place.” He counts Nicaragua as no exception. While Sala-i-Martin believes that poverty is the result of a “combination of factors, with one main cause: a lack of incentives,” extending to people’s inability to change their situation. Nicaragua, according to Professor Sala-i-Martin’s World Economic Competitive Ratings, is one of the least economically competitive and advantageous countries, ranking 110 out of 140 on the list (comparatively, the United States is 3).

Ortega and the powers-that-be in Nicaragua seem to have reached tacit agreement that something ought to be done. Without outside investment, the country will only fall into worse poverty as the government continues to take from its own people, and after a certain point this hurts the rent-extracting governors and the governed alike. Nicaragua’s most economically competitive “asset” is, in some senses, its geography. It is located in the middle of the Central American isthmus and could provide the latest bridge from East to West. The Chinese seem to agree, and have agreed to partner with Nicaragua in building the new canal. China is already the largest investor in Latin America as a whole. At $40 billion, the proposed canal will be the most expensive and history and certainly not a project that Nicaragua could undertake independently (for some perspective, the GDP of the entire country is estimated to be roughly $20 billion).

farmerspoc.jpgChinese investment in Latin America has been on the rise for some time. In the wake of the 2007-2008 financial crisis, an investment void was left in Latin America. European and US firms that once invested heavily in the region found themselves unable to keep pace, and investment dollars dried up. China has, largely, replaced them. The political implications of this shift are enormous. One has to wonder if the Chinese are involved in the project for profit? Or is there a deeper motivation? The canal has a low chance of being profitable, given the large initial investment required, at least in the short term—accordingly, the Chinese are probably more interested in currying political favor and forging long term partnerships than in making a quick buck.

The critics of Chinese investment in Nicaragua cite lack of transparency as a major problem for the political implication of the project and the actual creation of the canal as well. Leading the investment consortium, Jing’s group has been involved in a number of dubious infrastructure projects in the past. Most suspiciously, the canal agreement did not go out to vote on the Nicaraguan Senate floor before Ortega signed it. In fact, most preliminary meetings were entirely clandestine and involved only Ortega and the Chinese financiers.

While the lack of transparency is unnerving, it has provided a great degree of expediency. The proposed timelines for the canal peg its completion as early as five years from now—a project of comparable import and cost backed by the United States would take years longer to complete. According to the Latin American Research Review, “several US initiatives” in Central America have tried to take flight, only to encounter “several bureaucratic challenges”. The Review states that “competing agencies” in Washington created disputes regarding funding on the projects. The Review also states that there was a “delay in the availability and delivery of funds and programs” for programs in Central America. The Chinese do not have to jump through so many bureaucratic hoops. At the rate at which China is investing in Latin America, the United States’ presence and influence is bound to fall.

Of course, the canal is still risky business. It is unclear when it will turn a profit, if ever, and what the corresponding benefits will be to the Nicaraguan people. If any analogies to Panama can be drawn, however, the canal portends well for Nicaragua’s future. Thousands of semi-permanent construction jobs and permanent facilities positions will be created and, assuming the process runs relatively smoothly, the door for future partnerships with the Chinese would be open. Hopefully, then, the project will benefit the government and people alike.

This is the second time in Nicaragua’s history that it has signed over sovereignty to a country to take the land and build a canal in the country. The first time, in 1914, with the United States after the Panama Canal was completed, Nicaragua made a deal that involved exchanging some of its sovereigntyin order to build a canal for a small payment every year. The second time, in 2013, was with the Chinese. They have the next 100 years to do what they want with a small strip of land in the middle of Nicaragua that stretches through Lake Managua and parts of the natural rainforest. Many posit that this “giving up” of sovereignty will be treacherous to US interest in the future, but there seems to be no imminent threat as of now.

Regardless of the price, Nicaragua has not chained itself to China, but rather created a clever alliance that may be useful to their interests in the future. Even if the canal does not become profitable, or does not come to fruition, an alliance with China is unmistakably good for the Nicaraguan economy as a whole and the political powers and ordinary citizens alike. •

Just Compensation

Just Compensation

An Interview with Joyce Banda

An Interview with Joyce Banda