Living on Ometepe Island, in the middle of Lake Nicaragua, it is easy to think that this must be as close to paradise as any place on Earth. However, the Nicaraguan Government cannot seem to leave the place well enough alone and as a result, Ometepe finds itself in the middle of Chinese construction of the world’s most expensive new canal system. Who ultimately benefits from this situation remains a foreign policy puzzle.
Surveying for the construction of the estimated $50 billion “el Gran Canal Interoceánico de Nicaragua” (“the Nicaraguan InterOcean Grand Canal”) has already commenced, with the privately-owned HKND Group of Hong Kong leading the effort. According to the company’s website, “The integrated Nicaragua Grand Canal project will include the following 6 sub-projects: a canal (including locks), 2 ports, a free trade zone, holiday resorts, an international airport and several roads. In addition, there will be construction of a power station, cement factory, steel factory and other related facilities to ensure the successful completion of the canal within 5 years.”
International involvement is being solicited. The Belgian engineering consulting firm SBE, which worked on the Panama Canal, Australia’s MEC Mining and the American consulting firm McKinsey & Company are already participating.
Russian involvement has also begun. In September 2014, Vladimir Kuvshinov, the Secretary General of Russia’s International Civil Defense Organization, announced that Russia will be providing Nicaragua with a ‘high-tech system’ to assist in the canal’s construction. In addition, legislation in the Russian parliament, approving the establishment of a ‘a satellite navigation monitoring system’ in Nicaragua has already been drafted.
Viewed from a near-term perspective, the adverse affects of canal’s construction appear to be manifold. The most damaging include: substantial residential land and house land price inflation in the cities of San Juan del Sur and Rivas, forcing people to relocate to other parts of the country that may not be ready - or willing - to accept them; and, potential total contamination of an important source of fresh water and fish, which would adversely impact the health and well-being of a large segment of Nicaraguan population.
Local opinion, concerning the construction of the canal and its implications, appears to be mixed. Gilbert Antonio Vallejo, a 25-year old fisherman who lives on Ometepe, thinks that, “The fish in Lake Nicaragua will be destroyed and I will lose my job. The lake is going to become contaminated, the animals around here are going to die.” Yet, he does not blame the Chinese, noting that, “The Nicaraguan Government is just enriching itself, at the expense of the Chinese and none of it is going to make our lives better.”
In a similar vein, Gregorio Castillo Vallejo, a 50-year old Ometepe farmer, takes a dim view of the what he knows of the canal project so far. He is convinced that any increase in traffic on Lake Nicaragua “will benefit people who are at a far higher level of society” than himself.
On the other hand, Pablo Catena, a 26-year old coffee plantation manager on Ometepe, is worried about the possible global military effects of the canal’s construction. When questioned about what he thought of potentially having either the Russian or Chinese navies using the canal in the future, he opined, “Independent of where these navies are from, Nicaragua will be seen as related to those navies and this could increase the level of violence in this part of the world.”
Nevertheless, there are a few near-term advantages to the canal’s construction for Nicaragua. Beyond the monthly fees that the Nicaraguan Government is destined to reap from allowing construction to proceed, most of these revolve around the potential creation of construction-related jobs and who will benefit from the development of an oil depot as well as a free trade zone that will be located where the canal will meet the Pacific Ocean. In addition, after the western portion of the canal is open, cruise boat passengers will be able to visit the old colonial capital city of Granada for the first time, providing another source of tourist-related income.
Long-term advantages appear more problematic. For instance, if the oil depot that is planned only stores relatively cheap Venezuelan crude oil destined for China, then China benefits, but Nicaragua is left behind. Similarly, if the management team of the canal authorizes the transit of any kind of military transport, then the countries that own those ships benefit, while the Nicaraguan Government finds itself in the unenviable position of becoming a potential military strike target.
Indeed, from a longer time perspective, the list of things that could go wrong - vis-à-vis the canal’s construction - is lengthy. If the fish in Lake Nicaragua die off, then there will be a segment of the population who will lose their livelihoods and have no skills - or land - for starting and/or maintaining another line of work. As has been seen time and time again, people with no economic hope have little to lose in sowing the seeds of revolution. In addition, by sanctioning such a massive foreign investment, the Government of Nicaragua risks being on the receiving end of any number of domestic socio-political backlashes, should the foreigners involved not comport themselves to the satisfaction of Nicaragua’s voting public.
The Chinese, themselves, may have misjudged the timing and size of the canal’s ultimate economic benefits. If the construction of the canal was supposed to expedite Chinese global trade growth, the fact that the Baltic Dry Index is at an all time low is not comforting. Furthermore, if one of the purposes of creating the canal is to allow for easier and cheaper access to American and European export markets, then continued technological advances being made in western workplace robotics and 3-D manufacturing are alarming. Finally, should the glaciers of Greenland continue to melt and the northern Atlantic Ocean’s thermohaline circulation begin to reverse, then China’s largest trading partner - the European Union - might face significant weather-related disruptions for a significant period of time and the economic value of having a bigger, better waterway to Europe might be quite overrated.
It could also be argued that the Nicaraguan Government’s calculations of the value of any future Russian military presence inside Nicaragua may be misplaced. At the end of the day, no one can pretend that any foreign military installation with equipment capable of triangulating the position of orbiting military-use satellites [through the use of Russia’s proprietary Глобальная Hавигационная Cпутниковая Cистема (Global Navigation Satellite System)] is not a logical target of attack, should global hostilities reach the point of deploying force to settle what diplomacy cannot.
All in all, this situation is brimming with opportunity for creative American diplomatic initiative. Intelligently guided, what looks like the creation of another potential Chinese endgame could turn into an American diplomatic and economic triumph. The key is to positively - and, permanently - change the lives of millions of voting Nicaraguans who may find themselves at the wrong end of the economic totem pole when the construction of the canal is finished.
For instance, right now in Nicaragua, most farmers use tree limbs to demarcate field boundaries. Most of them know that this practice destroys their main source of cooking firewood and helps cause landslides during the rainy season, but the cost of making concrete posts (or buying metal ones) is beyond their reach.
If the US Government were to create a Nicaraguan sovereign debt swap scheme that monetized the Nicaraguan planting of millions of living fence (“Gliricidia sepium“) trees as boundary markers, thousands of digging/planting jobs would be created all over Nicaragua and trees that might otherwise be filled for the making of fences would stay whole, slowing down the destruction of Nicaragua’s forests and preventing further landslides. Since trees are countable objects that can be viewed by a satellite, the potential for fraud should be limited.
Since the early 1970s, various governmental and international agencies (such as United Nations Development Program) have surveyed the geothermal resources of western Nicaragua and have found significant development potential. In 1999, the Nicaraguan Government hired a division of Schlumberger (a leading American oilfield services company) to research and create a geothermal resource development master plan for the entire western half of the country. The result was that these resources are so significant that, with appropriate development, Nicaragua could easily become a regional net energy exporter.
However, at the present time, Nicaragua continues to be a net energy importer (a situation that acts as an added national tax on business development and per capita income). Lack of financial resources to exploit existing natural resources is the major reason.
This bottleneck could be broken by the creation of a Nicaraguan sovereign debt swap scheme funding a series of geothermal power plants capable of powering the national electrical grid as well as part of any number of neighboring countries. Ram Power’s “PENSA” geothermal development project near Leon, which has had the support of the Nicaraguan Government, could serve as a model. Remote utility output monitoring is possible; the potential for corruption should be limited.
Another diplomatic opportunity exists within the Nicaraguan public school system, where most elementary school children get only four hours of schooling during the mornings of Monday through Friday and the majority of junior and senior high school students only receive five hours of education per day - starting after they have eaten lunch at home - Monday through Friday. The primary reason for this situation is the fact that the Nicaraguan Government does not have the financial resources to create and maintain a national school lunch program.
Deploying a sovereign debt swap program based the value of the Nicaraguan Government deputizing a rotating number of mothers of students to provide a specific luncheon item - in return for a receipt that could be cashed in at the end of the month - would allow both primary and secondary students the chance to have another couple of hours of schooling per day. This, in turn, would earn the support of all the parents involved as they realize that the more education their children receive, the higher the chances of them being gainfully employed in the future - a very serious concern in a country that has double digit underemployment and unemployment as well as a patchy national pension system coverage. Since the chances that the mothers of attending students would willfully corrupt a luncheon program designed to give all students a chance at having a school lunch is relatively low, the scope for potential graft should be limited.
In sum, the Chinese are going where they have never been before in Central America – building one of the largest construction projects ever undertaken - based upon questionable socio-economic assumptions. As a result, the US Government can take advantage of this situation. However, only if it begins to move now.