Research Summary

The Panama Canal



The Big Ditch is the first quantitative economic history of the Panama Canal and its effect on Panama, the United States, and the world economy.  It makes three general arguments.  First, that the Panama Canal was very important to American commerce through the 1940s.  Second, American policy unintentionally denied Panama any economic benefits from the Canal until the 1970s.  Finally, since the 1999 handover, the Panamanians have run the Canal far better than the Americans ever did.

The canal provided large cost savings for American commerce before 1940.  Despite very large cost overruns, and a seven-year delay in opening to commercial traffic, the benefits of the canal were more than enough to justify the cost.  The canal redistributed income from the South to the Northwest, spurring the Northwestern lumber industry, and it facilitated the expansion of the Californian oil industry.  (The railroads, perhaps surprisingly, were not much affected.) 

After World War 2, the canal's importance to the United States declined rapidly.  International traffic outstripped intercoastal traffic, which moved to the interstate highways.  Most international cargos were commodities, in which the non-American producers would bear the impact of any rate hikes imposed by a non-American canal management.  Finally, aid to Panama (spent in order to prevent discontent) rapidly outstripped the profits the canal earned the Treasury.  Yet nationalist sentiment inside the United States, and a real fear that Panama might mismanage the canal, made a handover difficult. 

Omar Torrijos, who ruled Panama as a dictator in the 1960s and 1970s, set the stage for the successful handover.  He eliminated patronage networks (for his own reasons, of course) and created the embryo of the banking and trade cluster that would help Panama prosper decades later.  The 1977 Panama Canal treaty set a 22-year transfer period, giving Panamanians time to learn the skills needed to operate the canal.  Finally, the democratic government that followed the American overthrown of Manuel Noriega in 1989 created a number of clever institutional mechanisms to insure that the Panama Canal would be run as a profit-making private enterprise despite 100% state ownership. 

The final result was today's Panama Canal Authority, which since 1999 has greatly improved the canal's productivity and profitability.  The Canal's new management focuses on “shareholder value,” rather than the bureaucratic incentives that defined the American period.  Rather than a source of discontent, the canal has become a source of growth for Panama, and continues to be one of the world's most important trade links.