The big news out of Latin America today is the approval of a concession for a $40 billion canal by the Nicaraguan parliament. If all goes to plan, it will be the second transcontinental canal in the Americas, and will allow for the largest of cargo ships to pass its entire length; a capacity the Panama Canal will still lack even once its current expansion is completed in 2015. Moreover, the project will be completely privately funded, with a Chinese company footing the bill and managing the canal for at least fifty years.
While the bill passed easily through the Nicaraguan parliament, it is not uncontroversial. Environmentalists are concerned about the impact of supertankers and other large container ships on the ecosystem of Lake Nicaragua, while others worry that the project is being rushed—a feasibility study has only just begun and the specific route has not been chosen out of four possibilities. Additionally, while the government pitches the canal as the fulfillment of Nicaragua’s 200 year national dream and its path to prosperity, there are significant doubts that it will be the sort of windfall that they hope.
Daniel Ortega and Sandinista legislators have claimed that, simply as a result of construction, GDP growth could surpass 15% in just two years, with the completed canal generating consistent high growth thereafter. While the process of construction of such a massive project will certainly lead to a temporary boom, it is easy to envision how the canal could still prove to be a boondoggle on an unprecedented scale. The most obvious way this could happen is if something disrupts construction midway, resulting in a massive investment in a useless piece of infrastructure. Less obvious, but perhaps more salient is the possibility that the canal is successfully completed but fails to be as profitable as predicted.
As it currently stands, the Nicaraguan government projects that a canal in Nicaragua would be equally or more profitable than the Panama Canal. That is certainly possible, but it is also possible that while one canal is hugely profitable and an engine of growth, that two canals are both minimally profitable or even unprofitable. Essentially, this would be a similar situation to the paradox of cable TV infrastructure, where the process of installing the infrastructure is extremely expensive, but the first one to make the investment gets to charge monopoly prices while the second to invest has to charge a competitive rate and is therefore unable to recoup its investment. Nicaragua is obviously counting on the demand for a passage for extremely large ships being so large that it is only in indirect competition with the Panama Canal and therefore able to charge monopoly prices.
However, as it stands now, the canal will be entirely financed by private money, leaving the Nicaraguan government less exposed than it might be otherwise. That does no allay the other worries about the project, particularly the environmental concerns, but it explains why the government is so cavalier about pushing the project through; it has little to lose relative to what it stands to gain.