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.