Panama Table of Contents

The Panama Canal continued to play a central role in world trade and Panama's economy in the mid-1980s. Some 5 percent of the world's trade in goods passed through the canal, contributing 9 percent of Panamanian GDP in 1983. This canal's location at one of the crossroads of international trade has spawned a plethora of other service-oriented activities, such as storage, ship repair, break bulk (the unloading of a portion or all of a ship's cargo), transshipment, bunkering, and distribution and services to ship travelers. The dynamism of the canal also was instrumental in the development of the CFZ, the trans-isthmian pipeline, and offshore financing. Evidence suggests, however, that the canal's relative importance to world trade is likely to continue to experience a small relative decline in the future, which has led Panama, together with the United States and Japan, to study alternatives for improving or replacing the canal.

Role of the Canal From 1903 to 1977

In 1903 the United States secured the right, by treaty, to build a canal across Panama. The United States rejected plans to build a sea-level canal similar to that attempted by the French and opted instead for a system based on locks. Construction began in 1907 and was facilitated by medical work that largely eradicated yellow fever and reduced the incidence of malaria.

Construction of the canal involved damming the Río Chagres to create the huge Gatun Lake in the middle of the isthmus. Channels were dug from each coast, and locks were built to raise and lower ships between sea level and Gatun Lake. Three sets of locks were constructed: Gatun Locks on the Atlantic side, and the Pedro Miguel and Miraflores Locks on the Pacific side. The lock chambers were 303 meters long by 33 meters wide, which limited vessel size to approximately 287 meters in length and 32 meters in width. Distance through the canal is eighty-two kilometers, and in 1987 transit took about fifteen hours, nearly half of which was spent in waiting. The canal began commercial operations in 1914.

The United States operated the canal and set tolls from the beginning of operation. Tolls covered operation costs but were kept low to encourage canal use. Direct benefits to Panama were minimal, consisting of annual annuity payments that increased infrequently, usually in response to Panamanian demands. In the 1975 to 1977 period, the annuity payments reached US$2.3 million a year. Indirect benefits to Panama's economy were substantial, however, and included the jobs of its citizens working in the Canal Zone, value of goods and services sold to the Canal Zone and to passing ships, and expenditures by visitors.

Economic Implications of the 1977 Treaties

The 1977 treaties and the related documents, which became effective October 1, 1979, signaled important changes for the Panamanian economy. The most obvious benefit was in receipts from operation of the canal. Under the terms of the treaties, the government of Panama receives from the Panama Canal Commission: a fixed annuity of US$10 million; an annual payment of US$10 million for public services such as police and fire protection, garbage collection, and street maintenance, which Panama provides in the canal operating areas and housing areas covered by the treaties; a variable payment of US$0.30 per Panama Canal net ton for each vessel transiting the canal (in 1986 this amounted to US$57.6 million); and an additional annuity, not to exceed US$10 million, to be paid only when canal operations produce a profit. In 1986, for example, US$1.1 million was paid; in 1984, on the other hand, canal operations registered a US$4.1-million loss, and no payment was made.

The United States controls the tolls because of its majority (five members) on the nine-member Panama Canal Commission, which will operate the canal until December 31, 1999. In order to encourage use of the canal, tolls have remained relatively low, although high enough to cover costs. (Under the United States law that implemented the canal treaties, the canal must be operated on a self-sustaining basis.) Maximum use of the canal is in Panama's interest, because its annuity depends on transit tonnage. Tolls were raised by nearly 30 percent in October 1979 and by an additional 9.8 percent in March 1983.

Under treaty provisions, the canal administrator is an American and his deputy is a Panamanian. In 1989, a Panamanian will become administrator and the deputy an American. In order to prepare Panama to assume operation of the canal in the year 2000, the Panama Canal Commission has encouraged the hiring and training of Panamanians for all types of canal-related work. The commission's work force was approximately 82 percent Panamanian in 1987.

According to the treaty provisions, Panama also received substantial assets in the former Canal Zone, including three large ports (Colón, Cristóbal, and Balboa), the railroad across the isthmus, two airfields, 147,700 hectares of land (including housing, utility systems, and streets), a dry dock, large maintenance and repair shops, and service facilities formerly operated by the Panama Canal Company. Ownership and operation of the canal ports of Balboa and Cristóbal were transferred to Panama in October 1979, but a portion of these port facilities will continue to be used by the Panama Canal Commission for canal operations until the year 2000. Panama also received housing that belonged to the former Panama Canal Company, but will continue to supply housing to the Panama Canal Commission and the United States Department of Defense in decreasing amounts until 2000. Some assets and functions of the government of the former Canal Zone, such as schools and hospitals, are maintained by the United States Department of Defense. The Panama Canal Commission continues to operate utilities in the zone areas that it received under the treaty.

The 1977 treaties had important provisions concerning employment and wages. Panamanians would gradually replace United States citizens in the operation of the canal. Perhaps most important was the provision that former Canal Zone employees who became employees in Panama under the treaties were guaranteed wages and conditions similar to those that their position in the zone had commanded. In 1979 a zone employee received about twice the wages of someone employed in a similar position elsewhere in the economy. The canal areas will therefore continue to exert a pull on other domestic wages, making the country less competitive internationally.

Current Use and Future of the Canal

In both the short and the long term, the impact of the 1977 treaties on the economy will depend to a large extent on canal traffic. Since 1979, when the treaties went into effect, the amount of canal traffic has stagnated. In 1979 the canal was transited by 13,056 ships; by 1984 that number had fallen to 11,230--the lowest number in 2 decades. Cargo tonnage also dropped during the same period, from about 154 million to about 140 million tons. Despite the decline in the number of ships and cargo tonnage, toll revenues expanded over the period from US$208 million to US$298 million, because of the toll increase in March 1983.

The decline in canal traffic was in large measure a result of the opening of the trans-isthmian oil pipeline, which carries Alaskan North Slope oil. In 1983 the pipeline diverted 30 million tons of oil from the canal. In terms of Panama's economy, the diversion of oil from the canal to the pipeline did not cause alarm as it was little more than a transfer of services.

Some observers expressed concern that the canal had seen its best days and that it would decline in importance over the long run. Latin American trade, much of which passes through the canal, has stagnated because of prolonged regional recession and balance of payments constraints resulting from the regional debt crisis. Many supertankers and bulk cargo carriers are too big for the canal. Even some smaller vessels sought to avoid the delays associated with transiting the canal. Increased tolls also lowered the demand for canal usage. Many coal and banana producers shunned the canal and shipped to Europe from the Caribbean Basin and to the Pacific Basin from the west coast of Latin America. In addition, the canal faced competition from Mexican and United States land bridges (roads or railroads linking Atlantic and Pacific ports). Standardized cargo containers have made land bridges an increasingly attractive option, even though the distances involved are much greater (the United States land bridge is over 5,600 kilometers long) than across the canal. The concern over the future of the canal was partially allayed by the increase in total canal traffic between 1984 and 1986. In 1986 11,925 ships transited the canal, carrying 139 million long tons of cargo and generating US$321 million in tolls and revenues. In 1987 canal tolls and revenues totaled US$330. The increase in 1986 was due in large measure to increased automobile trade.

In 1982 Panama joined the United States and Japan, the two principal users of the canal, in an agreement to establish a tripartite commission aimed at studying improvements in or alternatives to the canal. The US$20-million study was expected to be ready in 1991. One modest proposal, at a cost of US$200 million, was that of widening the canal at the Gaillard Cut, its narrowest channel. The Gaillard Cut measured approximately 100 meters when the canal opened in 1914, and in the 1960s it was broadened to about 165 meters. The proposal called for doubling the width of the Gaillard Cut. A more extensive plan, at a cost of US$500 million, proposed widening the entire canal by 16 meters to allow for uninterrupted 2-way traffic along the waterway. The canal's existing capacity was forty-two vessels a day; the less expensive proposal would accommodate fifty ships. The most ambitious plan, however, was that for a second, sea-level canal, which could handle even the largest supertankers without the use of locks. This plan's estimated cost was US$20 billion, considered prohibitive in the light of foreseeable toll revenues. Alternatives to a second canal included an improved railroad system, an express highway for container traffic, and additional pipelines.

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Source: U.S. Library of Congress