The Big Ditch: How America Took, Ran, and Ultimately Gave Away the Panama Canal

Published by EH.NET (June 2011)

Noel Maurer and Carlos Yu, The Big Ditch: How America Took, Ran, and Ultimately Gave Away the Panama Canal. Princeton: Princeton University Press, 2010.? xv + 420 pp. $35 (hardcover), ISBN: 978-0-691-14738-3.

Reviewed for EH.Net by Leticia Arroyo Abad, Department of Economics, Middlebury College.

In The Big Ditch, Maurer and Yu offer an exciting analysis of the creation and development of one of the masterpieces of engineering: the Big Ditch, i.e. Panama Canal. Until now, the literature fell into two dominant views: the Canal as a great waterway or as a reminder of American imperialism. By reconciling both perspectives, the authors successfully show that this imperialistic act was indeed profitable while exploring the crucial factors to the abandonment of this imperial operation. Integrating thorough quantitative evidence with engaging historical narrative, this work is a crucial contribution to the new political economy of Latin America and to the economics of colonialism.

The dimensions of the Panama Canal project are hard to grasp. Fortunately, the authors successfully portray the immensity of this enterprise. This undertaking effectively took eighteen years to complete, employed at its peak over 45,000 employees in a tiered system, displaced around 12,000 inhabitants of the Chagres basin, and dug out millions of metric tons of dirt. All for a tag price of 9 billion dollars (2009 prices).

From a methodological view, the authors cleverly combine analytical narratives using rational choice assumptions together with social savings calculations ? la Fogel. To estimate the social savings, Maurer and Yu use counterfactual analysis or ?economics by strategic bombing force? (p. 48). By comparing the costs under the non-existence of the Canal to the actual cash flow generated by it, they conclude that while during the first year of operation the project merely yielded 2.9% of return, the following year it exceeded 10%. The bulk of these savings were due to the dramatic decline of intercoastal freight rates leading to a ?transportation revolution? (p. 145). As such, the authors claim that the rents from this imperial initiative had a broad base: American consumers. Yet, the benefits to Panamanians were limited.

The book also takes into account the impact of the Canal on Panama. Before the Canal?s inauguration, Panamanians? optimism was palpable. This impressive engineering marvel was supposed to be Panama?s ticket to growth and development. This promise failed to materialize as the U.S. devised explicit policies to restrict Panamanian access to the Canal project. These measures ranged from the import of cheap foreign labor to the establishment of the Commissary. This institution was initially in charge of feeding and housing the workforce, but then extended its activities to the sale of general goods and supplies to passing ships. Numerous complaints from the Panamanian government and merchants proved unsuccessful. The local economy had little chance to compete with imported goods, exempted from tariffs or taxes, which enjoyed preferential shipping costs. An unintended benefit arose from this institution as imported goods trickled down through the black market to the domestic economy at convenient prices.

While the Canal did not contribute to the development of the domestic economy, the authors ask whether favorable influence may be found elsewhere. Panama under the tutelage of the American empire could have benefited from improvement in institutions. Had the U.S. made property rights more secure and increased the stability of the country, Panama could have achieved a higher rate of investment at lower interest rates. As a consequence we would expect a significant reduction in the cost of capital due to the consistent and deep U.S. intervention in Panamanian domestic affairs.? However, the evidence suggests that the ?empire effect? was virtually nonexistent in this case. In the end, the benefits to Panama were reduced to health improvements due to the eradication of malaria and yellow fever.

While the end of World War II substantially changed the net benefits of the Canal project, the authors argue that even during the war the Canal?s relevance has been overstated. By exploring potential American costs in the absence of this alternative waterway, the evidence indicates the Canal was not too valuable from an economic or military point of view. In addition, the enlargement of military vessels and the expansion of the U.S. strategic needs from two to five oceans further diminished the Big Ditch?s value. The social savings further declined with the sharp drop in the domestic freight costs. The consolidation of trucking-based transportation rooted in the development of the highway system and containerization outstripped the initial comparative advantage of the Canal.

From an economic standpoint, Maurer and Yu show that the Canal made little sense after World War II; however, politically it proved to be difficult to ditch the Ditch. It was not until 1977, under President Carter, that the Panama Canal Treaty was signed leading to the handover of the Canal in 1999 with U.S. participation in a special regulatory commission. The Panamanians were widely in favor of the Treaty manifested in two-thirds support in a national plebiscite.

From a key asset in economic and national security to a liability, the history of the Panama Canal supplies a long-run example of the ever-changing costs and benefits associated with imperial endeavors. We learn how economic and institutional constraints changed over time affecting the net benefit of this imperial endeavor. Judged by social savings, America?s engineering marvel was good business, yielding a 6.4% return for the first two decades. The Big Ditch shows us that this project was not as revolutionary as other public enterprises but still quite useful to the U.S. For Panama, the imperial legacy is restricted to health improvements with no clear favorable institutional development. Overall, this book teaches us important lessons on the global consequences of imperial ventures with particular insights on institutional development, economic and political constraints and power.

Leticia Arroyo Abad is an assistant professor in Economics at Middlebury College. She works on inequality and standards of living in Latin America since colonial times.

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