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In Need of a Vision

Posted by (Author) on November 27th, 2012 - 13 Comments
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  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.

 

 


[1] aa5@princeton.edu

[2] Part of the problem is the upcoming election and the political circus that comes with it. As parties struggle for power, and the stakes now are much higher, they ask voters to think not who can do better for the country but to think who has done worse. Instead of discussing proposals to move forward, parties look back and debate the reasons that got the economy into this mess. And since there is plenty of blame to go around, these debates are endless.

[3] Luanda, the capital of Angola and the richest city in the world, offers a great example for what can go wrong: http://www.dailymail.co.uk/news/article-2183616/Luanda-The-capital-Angola-expensive-city-world.html

Categories → Οικονομία

13 Comments
  1. avatar
    . on November 27, 2012 - (permalink)

    Great Job Alexis. Please stay active with more articles. We need them.

    Also, it would be great to have a few of your articles in Greek, in the local newspapers.

  2. avatar
    KKyriacou on November 27, 2012 - (permalink)

    Alexi, congrats on a good article. This is a great start to a much needed debate. Vision 2030 is an excellent idea that I hope the powers at be in Cyprus follow up on.

  3. avatar
    Economist on November 27, 2012 - (permalink)

    Great article with a great suggestion, that is to provide potential investors a good reason why to invest in a place currently being in a total mess. The key phrase for me is to try to “calm the markets down”.

    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

  4. avatar
    Savvakis Savvides on November 27, 2012 - (permalink)

    I don’t disagree with what you say (except perhaps I wouldn’t rely too much on the promise of natural gas for planning the future). But more than a 15 or 20 year plan in Cyprus we need a leader. Our politicians don’t see and neither care to see beyond their noses. In fact, they don’t even need to see that far. They just smell and grab! That is the real curse of Cyprus.

  5. avatar
    Andreas Assiotis on November 27, 2012 - (permalink)

    “The World in 2030″ by Dr. Michio Kaku

    http://www.youtube.com/watch?v=219YybX66MY&feature=related

  6. avatar
    Επιλήσμων on November 27, 2012 - (permalink)

    This is a challenging and inspiring article that should be read by those who can bring a change in our mentality and have a willingness to change the status quo of our political life.
    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.

  7. avatar
    Michael M on November 27, 2012 - (permalink)

    Good article but I do not think that the author does justice to himself by blaming the past with the benefit of hindsight to support the argument for his vision of 2030. This type of arm-chair critisism any one can do, more so with hindsight. If one looks at the stats from 1960 to 1974 and from 1975 to 2012 the Cyprus economy has done pretty well. All countries are suffering from this debt crisis and the culprits to the eyes of the people are their governments. Cyprus is no exception. In the same way that Obama cannot pursue fully his policies in the USA due to lack of majority support from Congress, the same applies with Christofias and the House of Represenatives. Had the House approved the tax hikes presented to them some 2 to 3 years back on vat, land, and so forth, the government debt would have been lesser (not that it is too high today if one excludes the debt complimented by Laiki). So guys ideas like Vision 2030 help to steer some direction, but the underlying factor is hard work and less politics. The latter have desimated confidence never seen before. M

    • avatar
      αθηνα on November 28, 2012 - (permalink)

      Ωστε έτσι λοιπόν φίλε μου,το δημοσιονομικό μας χάλι οφείλεται στη δυσκολία της κυβέρνησης,να περάσει απο τη βουλή δυο-τρία ξεκάρφωτα φορομπηχτικά νομοσχέδια [αύξηση ΦΠΑ και ΦΑΠ],που θα σκότωναν την κατανάλωση ο πρώτος και τις ήδη μισοπεθαμένες κατασκευές ο δεύτερος.Aλλά τα ίδια έχει και ο …Ομπάμα με το Κογκρέσσο[sic].Προτείνω να ιδρυθεί ένα σωματείο προέδρων που έχουν πρόβλημα με τα νομοθετικά τους σώματα,ούτως ώστε να συντονίζουν τις ενέργειές τους…Εξάλλου όπως είπες,η κρίση χρέους μαστίζει όλες τις χώρες.Ναι αγαπητέ μου,αλλά άλλο η κρίση χρέους ενός βράχου στη Μεσόγειο που λέγεται Μάλτα και δανείζεται άνετα απο τις αγορές,και άλλο εμείς που ζητιανεύουμε δανεικά απο την Τρόικα.Πέραν τούτου,οι χαρακτηρισμοί του αρθρογράφου περί εμμονών,αλαζονείας,άγνοιας της πραγματικότητας,τακτικής τζογαδόρου κλπ,για σένα είναι υποκειμενικές εκτιμήσεις της πολυθρόνας.

  8. avatar
    Erol Riza on November 27, 2012 - (permalink)

    An excellent article to bring home to the politcians that they must have a vision of where Cyprus should be aiming to be as a European country with a successful economy. But the three prequisites highlighted by Dr Antoniades, namely, vision,leadership and commitment are what have been lacking in Cyprus. When you add to these economic nationalism, clientelism, short termism, lack of proper governance and arrogance you get the result we have seen.

    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.

  9. avatar
    Phylarchus on November 28, 2012 - (permalink)

    Η Κύπρος χρειάζεται την ενεργό συμμετοχή νέων επιστημόνων και ερευνητών όπως του κ. Αντωνιάδη. Μόνο έτσι θα καταπολεμηθεί η αντεπιστημονικότητα που είναι ένα καταστροφικό γνώρισμα και αίτιο την δεινών μας. Η πλήρης έλλειψη σχεδιασμού, προγραμματισμού και συστηματικής διεκπεραίωσης και εφαρμογής σε όλους σχεδόν τους τομείς και η τακτική των συνεχών μπαλωμάτων είναι μια κατάρα που ταυτόχρονα ευνοεί την παραμονή των ανικάνων στις ψηλές θέσεις της κοινωνίας. Αυτό που εισηγείται ο κ. Α., κυρίως η εκπόνηση και εφαρμογή ενός στρατηγικού μακρόχρονου προγράμματος οικονομικής ανάπτυξης είναι η προϋπόθεση μιας σωστής πορείας κοινονικοοικονομικής προόδου.

  10. avatar
    Thomas on November 28, 2012 - (permalink)

    Excellent article, well done…….

  11. avatar
    Michael M on November 29, 2012 - (permalink)

    In reply to Athina’s comment: The fact is that had those taxes been implemented at the time, then the public debt (excluding the Laiki bailout) would have been smaller today. What has the House of Reps achieved? A steeper hike in vat and immovable property taxes, and a tougher bail-out plan. As regards the consumption do you not see the increasing decline over these years? Wait and see next year where the decline will go compliments of the HoR and their short-sighted polemics.As for Malta, their banks do not have exposure to Greece and so do not have imported provisions landing on the governments balance sheet. You should read a bit more to acquaint yourself with the facts.

    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.

    • avatar
      αθηνα on November 29, 2012 - (permalink)

      Μα δεν χρειάζεται να είμαι διαβασμένη όπως η αφεντιά σου,για να γνωρίζω ότι η Μάλτα,ανεξάρτητα αν δεν ήταν εκτεθειμένη στα ελλ.ομόλογα,έχει μιά κυβέρνηση που ζει στον 21ο αιώνα,και όχι στη λενινιστική περίοδο της Σοβιετικής Ενωσης.Γιατί, τί άλλο απο εμμονή σε μαρξιστικές ιδεοληψίες ήταν η πεισματική άρνηση του προέδρου να μην δίνει άδειες για καζίνο,οπότε να μην εισπράττουμε εμείς την προμήθεια απο τα on-line casino,αλλά η φτωχή Μάλτα.Μα θα μου πεις,θα μας έσωζαν τα καζίνο;Mα όταν εσύ θεοποιείς τους υφεσιακούς φόρους που πρότεινε η κυβέρνηση και θα δεχθεί και η άβουλη βουλή,θα σου αντιτείνω και γώ ότι οι άδειες καζίνο θα ήταν πρώτης τάξης αναπτυξιακό μέτρο.Εκείνο όμως που με εντυπωσιάζει μαζί σου,είναι ότι τα φορτώνεις όλα σε άλλους,εκτός απο εκείνους που κυβερνούν.Αν είναι δυνατόν.

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