Panama Canal: work begins on a $5bn project to widen the canal that revolutionised the transport of goods

A few hundred years ago, Panama was a malaria-infested tropical swamp of no particular interest to anyone. But then the Spanish conquered the New World, global trade was born, and suddenly it became very significant indeed.

For the past century, the country that has the thinnest strip of land separating the Pacific and the Atlantic oceans has of course been identified with the eponymous canal that revolutionised the transport of goods from one side of the world to the other.

The construction of the Panama Canal in the first years of the 20th century marked the historical moment when the United States came of age as a global power and, at least until a decade ago when the Canal Zone reverted to local control, was perhaps the most potent symbol of US hegemony over the entire American continent.

Now its symbolism, and its role in international container shipping, looks set to take on new weight, as the trading systems of the past century give way to the unbridled globalisation of our own century. The Panama Canal, in short, is in severe danger of going out of date and the local government has decided to do something about it.

Starting today, Panama will embark on an ambitious seven-year project, at an estimated cost of well over $5bn (£2.5bn), to expand the canal so it can accommodate the very largest classes of transport ships, the so-called "post-Panamax" generation which is expected to dominate shipping within the next decade or so. The plan is to double the width of the two sets of locks that bring the shipping traffic up above sea-level and thence across the 48-mile waterway separating the two oceans.

The projections are very clear. Without the expansion, the Panama Canal will be forced to turn away an anticipated 37 per cent of the world's container ships by 2011 because they will be too big to pass through. That, in turn, is bound to cause a severe downturn in business as companies consider other routes, up to and including circumnavigating the world in the other direction and taking advantage of the much larger Suez Canal instead.

Panama's president, Martin Torrijos, has been on to the issue ever since he took office in 2004. This time last year, he lobbied for a public referendum to approve the canal expansion, and the referendum passed easily. Panama's argument – to its people, and also to the international investors and political leaders who have a vested interest in the country's stability and prosperity – is that the canal represents a myriad business development opportunities, not just in global trade.

President Torrijos – the son of the former Panamanian leader Omar Torrijos, who negotiated with the Americans for local sovereignty over the canal back in the 1970s – has a vision of Panama as an international trading and financial hub a bit like Dubai. Construction is booming in Panama City in anticipation of an influx of Americans, Canadians and Spaniards seeking second homes at cheap prices and to enjoy the benefits of a highly relaxed tax regime. Oil companies from Qatar and the United States, meanwhile, are looking into expanding the country's energy sector, starting with a projected big new oil refinery near the Costa Rican border.

The world has changed considerably over the past century, however, and the new Panama Canal project can no longer count on the supremacy that it enjoyed for so long. Rather than being the gleaming prize of a burgeoning international superpower – the United States – it is now the best hope of a small country fighting furiously for survival against a myriad competitors in the modern globalised environment.

The brutal truth is that, even after the expansion, the Canal will continue to grapple with a problem that has beset it ever more markedly over the past decade or so – overcrowding. And it is almost certain to become just one sea passage among many as international shipping companies cast around for alternatives and lobby competing governments to embark on their own ambitious infrastructure projects.

One such project is already being floated in Nicaragua, where the distance between the Pacific and the Atlantic is 173 miles rather than 48 but where a brand new canal could be fully equipped for the most modern ships from the get-go. Last year, the Nicaraguan government proposed construction of a Grand Inter-Oceanic Canal, at a cost of $18bn, and said it could be ready by 2020. That's far from a sure bet, not least because of last winter's re-election as president of Daniel Ortega, the father of the Sandinista revolution, which has caused an outbreak of the jitters among would-be international investors.

One way or the other, though, the hunt for alternatives is bound to go on, including the pre-20th century solution of carrying goods across the American continent by land. There has even been talk of the effects of global warming on the Arctic ice pack and the possibility of one day using the North-west Passage, assuming, somewhat unnervingly, that its icebergs melt into harmlessness.

The reasons for such talk aren't hard to fathom. The Panama Canal is, in a word, overwhelmed. The volume of container shipping has tripled over the past 12 years, and increased more than 50 per cent over the past six.

It's not uncommon now to see queues of up to 100 vessels on either side of the canal, enduring a long wait to make the nine-hour passage through the waterway. Waiting is an expensive business – it can cost a large container ship up to $50,000 a day to sit idle – and that, in turn, has spawned a complex bidding system whereby ships can jump the queue for the right price. Last year, a British oil tanker paid a record $220,300 – not including the hefty transit fees – to jump ahead of 83 other ships.

What the next few years will bring is some kind of measure of the effects of the new globalised economy, in much the same way that the canal's construction did in the latter part of the 19th Century and the early years of the 20th Century.

The canal wasn't initially intended to be an American project at all, but fell rather into the hands of a more conventional imperial power of the time, France. Ferdinand de Lesseps, who had built the Suez Canal, started work on a sea-level canal in 1880, a project that was soon to become a byword for imperial hubris. Lesseps hadn't considered the swampy geography, and he certainly hadn't considered the risk of disease. Over the next 13 years, a staggering 22,000 employees died of malaria or yellow fever, eventually forcing the French to abandon the project.

The Americans, meanwhile, had been pondering whether it might be better to build the passage through Panama or Nicaragua. This was the Gilded Age, a period of unparalleled growth in prosperity, but also the first flourishing of US government corruption, and the Panama Canal project was as fine an example as any of both of these tendencies. Panama won the contest with Nicaragua primarily thanks to the efforts of US lobbyists in the employ of French landowners in Panama.

On the eve of a crucial congressional vote authorising construction of the canal, the lobbyists distributed a Nicaraguan stamp featuring a smoking Mount Momotambo, the implication being that Nicaragua was too volatile and volcanic to be a safe investment. The stamp, though, was deliberately misleading, since the volcano – unbeknown to most members of Congress – was dormant and almost 100 miles from the proposed canal route. The US law firm of Sullivan & Cromwell earned a staggering $800,000 for that neat piece of skullduggery.

Still, the project marked the rise of US technology – which solved the swamp problem by raising the canal and building the locks to grant ships access to it – as well as key advances in medical science, which identified and isolated the causes of malaria and yellow fever in the nick of time before construction began in 1904. (Not that the project was risk-free – another 5,600 workers perished over the next 10 years.) The canal was completed in 1914, two years ahead of schedule, and quickly earned a reputation as one of the seven wonders of the world.

In many ways, it has endured very well. A series of artificial lakes and dams has ensured a ready supply of water for the passage solving what could have been a problem in a country where rainfall is highly seasonal, creating great disparities in the water level. Politically, Panama (which negotiated its independence from Colombia as part of the deal allowing the Americans in) has remained relatively stable – with the notable exception of the Manuel Noriega regime which, in the late 1980s, scared Washington enough to invade and install a more friendly government in its stead.

One recent development that has been distinctly unwelcome, though, is the erosion of the rainforest around the canal zone, which has, in turn, made it much harder to retain water during the dry seasons. It has also exposed the area, especially the city of Colon, to the risk of flooding. With ocean levels rising because of global warming, Panama could one day be at serious risk – for much the same reasons that those shipping executives are asking questions about opening the North-west Passage.

For now, though, the containers continue to line up, and the one-time malarial swamp is hoping to reap the benefits.