In Need of a Vision
Cyprus has finally accepted the bailout agreement. While this is no news to celebrate, Cypriots should breathe a sign of relief if and when the agreement is signed. Not for long though;there are tough times ahead. For some, president Christofia’s stubbornness and unwillingness to compromise were key factors in achieving a more manageable and less painful bailout agreement. But for others, his actions show arrogance, disillusion, and ignorance of the fact that Cyprus’ economy was on the brink of failure. Worse, his actions reveal a gambler’s attitude. But theagreement seems to be now in place and such progress reflects the hard work, commitment, and professionalism of several individuals whose actions speak louder than words. So now it is time for Cypriots to look ahead and move forward. How do you move forward from here and what does the future look like? In this article I argue that the discovery of natural gas has massive implications for the island and holds the answer to both questions. If managed correctly, natural gas can jump-start the economy by instilling back confidence in the markets even before the extraction begins. Moreover, it can lead Cyprus to a golden age. But to get there requiresleadership, vision, and commitment. Unfortunately, as we speak there is little evidence to suggest that policy makers understand what it takes to turn the discovery into an engine for growth and development, or even that they are seriously thinking about it.[2] Setting up a sovereign wealth fund and establishing a National Oil Company is necessary but not sufficient. What Cyprus needs is a vision.The country must draft a well-thought and very detailed master plan describing where the country wants to be by 2030 and must carefully explain how it plans to get there. That is, the country must immediately draft Cyprus National Vision 2030. A vision is more than an academic nuisance: (i) it raises the likelihood that the discovery of natural gas becomes a blessing for Cyprus and not a curse, (ii) it helps investors look beyond the current mess and see future possibilities, and (iii) it provides guidelines for good policy-making so that each government acts in a responsible, transparent and accountable manner that focuses on long-term objectives and not on short-term grabbing. Let me explain. For those thinking that Cyprus’ problems will be miraculously fixed simply because natural gas is discovered and that everyone will become rich, I have news for you.Economies endowed with natural resources tend to grow less rapidly than resource-scarce economies (see graph below). This finding is known as the resource curse. Source: Frederick Van Der Ploeg, Journal of Economic Literature 2011, 49:2. 371 Sala-I-Martin and Subramanian (2003) provide a great example of the resource curse. In 1970, Nigeria’s PPP adjusted GDP per capita was $1,113, a bit higher than that of Hong Kong, Taiwan, Indonesia, and Taiwan. The top 2% of the population had the same wealth as the bottom 17% of the income distribution, and 36% of the population faced absolute poverty by earning less than $1 per day. Nigeria had also discovered oil. By 2000, and after selling some $350 billion worth of oil, Nigeria’s GDP per capita decreased to $1,084, the top 2% now earned the same income as the bottom 55%, and the share of the population facing absolute poverty jumped to 70%. In contrast, during the same period the economies of the East Asian tigers (Hong Kong, Korea, Taiwan, Indonesia, Singapore, Malaysia, Thailand, and Indonesia) had not discovered oil, but managed to grow at the fastest rate as a region, and did so by maintaining income equity. There are several reasons why natural resources can be a curse and not a blessing. The discovery of natural resources may lead to: (i) insufficient economic diversification that makes the economy more susceptible to volatile commodity prices, (ii) rent seeking by politicians, developers, citizens and foreigners and more conflicts, (iii) more corruption and weaker institutions that hamper economic development, (iv) shrinkage in the manufacturing and services sector due to rising costs and an appreciating real exchange rate, and (v) loose economic policies and poor fiscal management. That natural resources can be a curse instead of a blessing should not be surprising to Cypriots. Cyprus is not Nigeria, but recently the country had its own share of experience with natural resources. Instead of selling oil and gas, Cyprus was selling a different commodity: real estate. The country was selling plenty of it, for an extended period of time, and for sky-high prices. But the outcome was disastrous. Revenue from selling real estate to foreigners went to the minority who, for the most part, took the money out of the country instead of investing it domestically. The economy became extremely prone to shocks in the real estate market. The banks took bigger risks and accumulated ahuge real estate exposure in their lending portfolio. The consumers were living beyond their means just because they felt part of a richer society. But the majority of the population sold no real estate and received no income; instead, Cypriots saw their purchasing power diminish as the cost of living, and especially housing prices, rose. And recent governmentsfailed to collect the majority of the taxes that the State was entitled to, failed to use the limited tax revenue from this massive selloff to improve infrastructure, health, and education, to plan the seeds for future growth, and to enhance the standard of living. Without a Vision, there is a risk that governments will try to extract as much as they can. There is a risk that the revenuegenerated will not be invested in a way that promotes sustainable growth and development. And there is a risk that the cost of living will increase, Cyprus will loose its competitiveness in the non-hydrocarbon sectors, and the tourism and services industries will shrink considerably.[3] A carefully drafted Vision minimizes these risks. It provides a master plan for how the gas revenue will be invested in a way that strengthens existing sectors and establishes new industries so that economic growth is maximized and income inequality is minimized. It creates a framework where policy-making becomes more transparent and is driven, monitored, and evaluated by the objectives of the Vision. And it limits the ability for governments to engage in myopic policies that serve self-interests, because it allows voters to hold policy makers accountable for any deviations from the strategies listed in the Vision and any failures to achieve the goals. The immediate contribution, however, of Cyprus National Vision 2030 is to offer investors something tangible that allows them to focus more on the future potential and less on the current, and transitory, situation. Raising investors’ morale and re-establishing Cyprus as a good destination for foreign investment is desperately needed. Right now the word on the street is that Cyprus’ problems are no different than Greece’s and that austerity as required by the bailout agreement will cause Cyprus to follow Greece’s tumble-to-the-bottom example. What is the name of the game for the government? To calm the markets down. How? Accept that fundamental problems exist in the economy but these problems are now recognized.And with the help of the European partners the governmentis working hard tofix them so that when the economy comes out from the crisis it will come out stronger, more efficient and more productive. Signing the bailout agreement is a robust proof for that. Moreover, let the markets know that unlike Greece, Cyprus has gas revenue to be devoted entirely for development so that growth is boosted and not stall. Most importantly, communicate the Vision to investors and help educate them on where the future opportunities on the island will be. These simple steps remove panic from the markets and help investors focus on the future potential of the economy instead of the current mess.With enough credibility, the Vision will help attract investments and jump-start the economy before extraction of natural gas even begins. And it will make the provisions of the bailout agreement less painful for the country. So what should the pillars of the Cyprus National Vision 2030 be? As someone who knows a bit about economics, a bit about Cyprus, and a bit about what it takes to develop and diversify resource-endowed economies I have some thoughts. But the Vision should not represent the views of one person. It should represent the vision of the country as it is formed through careful analysis and a healthy dialogue involving all people. So let the dialogue begin and let’s start moving the economy forward in a way that balances growth and equity. Dr. Alexis Antoniades[1] Princeton University Bio: Dr. Alexis Antoniades is the Niehaus Fellow for Globalization and Governance at Princeton University (2012-2013) and an Assistant Professor of Economics at Georgetown University School of Foreign Service in Qatar. He is also a member of the European Union Program at Princeton University. In his research, Antoniades studies the economies of countries endowed with natural resources, mainly the Gulf countries, and uses massive micro-level data to answer questions in International economics. He is the recipient of a three-year, $1,050,000 grant from the Qatar National Research Fund to undertake the first micro-level study on the economies of the Gulf countries A CASP/Fulbright Scholar, Antoniades holds a PhD in Economics from Columbia University. Between 2001 and 2002, he served as an Assistant Economist at the Federal Reserve Bank of New York.
Also, it would be great to have a few of your articles in Greek, in the local newspapers.
Marketing in a successful way our abundant natural gas resources can
really prove crucial for our future for the years before the actual extraction of gas begins.
I will suggest Mr Antoniades to fornally send his ideas to the President himself, or directly to relevant Ministries and then try to get appointments with Ministers. People like Mr Antoniades are much needed in a place full of mediocre people
Thoughts of a mandarin
http://www.youtube.com/watch?v=219YybX66MY&feature=related
I do not expect the majority of politicians to be willing to surrender their power derived from nepotism and corruption in order to create a masterplan - "The Cyprus National Vision 2030" - which in effect will limit their freedom to do what they know best!
But it is up to us, the people, to coerce them. So, it is important that the people demand change and not expect that change to the better will come from the politicians. (It is of course not an analogy but we can draw lessons from the 1789 French Revolution).
I congratulate Mr Antoniades for bringing in such an articulate way the immediate need for a strategy and long-term vision of how to avoid duplicating Nigeria's sorry and disastrous outcome. And that the handling of resources like natural gas and oil, are not and should not be allowed to become one man's show - (or even two: a minister's and an official's).
That Mr Antoniades chose to end his article with the word "equity" only shows that he is a person with strong social sensibilities.
PS I only hope that during his time (2001-2002) that he served at the Federal Reserve Bank in New York, he was not too close to Alan Greenspan.
Unless the causes are clearly understood and avoided the gas propsect will not make any difference as politcians may seek to enrich themselves since clietelism in Cyprus has been rife. Until a few weeks and months ago most politcians were playing with fire and setting red lines and arguing about sovereinty loss; sovereinty has for the most been lost since joining the EU and the eurozone and some pretend to be living in self denial; next when fiscal union happens it will complete the loss since Europe is moving ahead with more political union. Some like the UK may leave the Union and possibly others may follow.
Politcians used the example of Greece to argue against the Troika changes as if there was a choice of getting the funding from another source than the IMF/EU/ECB. They tried hard to avoid the Troika as if other lenders would not want to know how they will be repaid. As most borrowers know the banks now ask, not before, how they will be repaid. Some candidates have even gone far enough to suggest to sell forward the revenues as if there are investors/lenders willing to part with their billions with the hope that one day the gas will repay the billions; if someone knows such lenders please do call as we have lots of safer deals to show.
This attitude betrays what Cyprus is lacking. Vision, leadership, a comitment to change over time and proper governance. The banks are surely to blame but the blame game, which Cypriots are experts at, must also be laid at the respective governemnts, politcians and banks' boards who did not have the foresight and understanding that their arrogance and literal hubris would bring the banks down. Where was vision and leadership; gone with the wind since everyone profitted form the state of affairs. Could anyone have stood up against the BoC buying a Russian bank and spend half a billion? Politcians applaued and wanted to shine in the publicity. Now with hindsight some say it was a grave mistake.
Vision, in itself, will not bring the desired benefits Dr Anotniades quite rightly sets out. The need is for structural reform, implemenation of change at every level of governance in terms of accoutability, transparency and business practise and a medium term roadmap to make Cyprus a centre of business services offering value and quality; this takes time and needs commitment. Foreign direct investment has very little choice in Cyprus and it is concentrated on energy which is not enough since there may be better rewards elsewhere in the world. There is a need to remodel the economy away from real estate and there is scope, within the EU , to make Cyprus the Singapore of the Mediterranean focusing on shipping, business ervices, healthcare and education so long as these offer quality and are not opportunitistic investments. This will require all the attributes which Dr Antoniades has explained and much more. The political elite and establishment which has governed Cyprus may have to face this change in circumstances if people become active citizens and demand more for their vote; unless there is a change from the bottom it is hard to see why the top will want to change. The Troika reforms offers a chance to rethink the business of government, banks and business services. If the opportunity is wasted because of the gas curse then the future will not offer hope to young Cypriots who want to be gainfully employed when they return from their studies.
Finally I have nothing againt the author as you seem to think I have. All I said was that with the benefit of hindsight all are wiser when critisizing.