The Grand Nicaragua Canal: Fact or Myth?

Chinese businessman Wang Jing’s canal scheme is just one more added to the pile. After the Panama Canal expansion project was completed this year, the grand Nicaragua Canal was put on hold, and perhaps for the best. After several studies were performed to analyze the socio-economic and environmental impacts of the project, experts started questioning whether it was a good idea or not to build the canal. China’s record on environmental matters is very poor, so there is a reason to concern about the possible negative environmental impacts. In addition, the area targeted for the project is home to a large population of indigenous farmers that don’t have formal titles to the lands they have inhabited and cultivated from generation to generation. Thus, there is also a big concern regarding the people that would have to be evicted from these lands.

According to Coase, the assignments of property rights have no effect in the way economic resources are allocated, in a world with low transaction costs. If transaction costs were low, Wang Jing and the indigenous farmers’ Cacique would bargain to get to a Pareto Optimal allocation. One possible scenario is that all farmers had legal titles to their lands and Wang Jing pays an amount relative to the market value of the acres of land the farmers would give up for the canal construction. If Wang Jing got the rights for the lands instead, according to Coase’s Theorem, the same allocation result will be achieved. However, in reality, the Cacique is not the sole representative of the whole indigenous population that inhabits that area, so the negotiation will not be exclusively between Wang Jing and the Cacique. Due to the large number of parties in the transaction, transaction costs are indeed very high and bargaining is not possible. The lack of ownership (excludability) over the lands gives government authorities the default right to allocate them however they prefer. In a country with weak institutions that doesn’t usually lead to a Pareto optimal allocation that maximizes social benefit. This is a perfect example that shows how incomplete property rights can create conflict, like Coase suggests.