Cyprus Mail
Cyprus Opinion

Avoiding the ‘resource curse’

By Theodore Panayotou

DESPITE the government’s determination not to give in, Turkey’s threats and actions within Cyprus Exclusive Economic Zone concerning the exploitation of natural gas can potentially result in an experience similar to that of S-300, when we were forced to pay the cost of a defence system without ever enjoying its benefits.

As the ancient Greeks used to say, “Necessity forces even the hand of gods”.

But this is not inevitable if the government and the parliament act instantly to create a special fund for depositing the proceeds from the exploitation of natural gas, with the share of Turkish Cypriots (20 -30%) going into a special escrow account in the fund to be released to the Turkish Cypriots, with interest, only upon the solution of the Cyprus problem.

The simple statement that the Turkish Cypriots will begin to benefit when the Cyprus problem is solved is not enough and creates the suspicion that we stall the solution of the Cyprus problem to usurp their share.

This is a totally unfounded claim on the part of the Turkey which finds a fertile ground among some foreign policy-makers and in a part of the international public opinion.

The creation of a fund to guarantee the share of Turkish Cypriots would create an ever-increasing financial incentive for Turkish Cypriots to seek understanding and a solution to the Cyprus problem sooner rather than later.

I made this proposal three years ago and several times thereafter as a voluntary action on our part to pre-empt Turkey’s claims on resources that belong to all the Cypriots and only the Cypriots regardless of ethnicity.

Such an action would help to defuse the crisis with Turkey without any retreat on our part.

If not, we will be pre-empting Turkey’s arguments and pretexts and prove that its real motives are not the economic interests of Turkish Cypriots, but its own geopolitical expansionism.

It will also demonstrate in a practical way to our partners in the European Union and the UN, our good intentions towards our Turkish Cypriot compatriots and our sincere desire for a just solution and peaceful coexistence.

Best of all, it would be a resounding testament that we consider Cyprus as an indivisible entity whose wealth belongs to all Cypriots, irrespective of whether the wealth is found in the south or north.

Any other approach would cast shadows of partition.

The benefits of such an action would not only be political. It would also be economic. By establishing such a fund we will be escaping the “resource curse”, the paradox that countries with abundant non-renewable natural resources such as oil and natural gas tend to have lower levels of social development and economic growth than countries with fewer natural resources.

This is due to several reasons such as the reduction of the competitiveness of other sectors of the economy, volatility in government revenue due to price volatility of fossil fuels, mismanagement, inefficiency, and corruption caused by the easy wealth.

There is abundant evidence that the income from the exploitation of natural resources reduces the pressure and the incentive to develop a knowledge-based economy and promote entrepreneurship and innovation while it retards the rationalisation of public finances and the practicing of sound macroeconomic management.

This has been the experience of Venezuela and several Arab and other countries, rich in mineral wealth, which literally have wiped out their development prospects with the inevitable distortions and the complacency that the easy wealth has created.

The money collected in this fund should not be spent on the running costs of the state but be invested in long-term investments such as research and innovation, renewable energy and the infrastructure needed to increase the productivity and competitiveness of the economy, just as Norway, Australia, New Zealand, Kuwait, Alberta in Canada and Alaska in the US have done.

These forward-looking countries and states have been saving all or part of their revenues from oil and other natural resources in special long-term investment funds such as the Fund of Future Generations of Kuwait, the Pension Fund of Norway, and the Heritage Fund of Alberta.

And why not Cyprus Heritage Fund or even better the Cyprus Fund of Future Generations? Only the income from these investments is being used for recurrent expenditures.

This is Israel’s approach to the discovery and exploitation of hydrocarbons in its EEZ. But, unlike Israel with its prudent fiscal policies, and strong technological base for efficient use of natural gas revenues, Cyprus faces a serious risk of waste distortion of economic priorities. In Cyprus, in particular, revenues from natural gas risk being wasted to maintain an inflated and wasteful public sector and to increase social benefits and subsidies to organised interest groups, pressures that our political system finds very difficult if not impossible to resist.

Our national interest requires of us to urgently establish by law the Cyprus Future Generations Fund with clear provisions to secure the interests of all Cypriots, whether they live in the free or the occupied areas, whether they live in the present or in the future.

We should not wait for a hot episode to take initiatives in the right direction to defuse the crisis, because then they may not count the same as when they are done voluntarily as a practical expression of goodwill.

Likewise, we should not wait for the revenue from natural gas to begin flowing into the state coffers to take measures to protect our economy and the interests of our children from the “resource curse”.

Then we would not need research committees to investigate and to convey responsibilities. The government and the House will bear full responsibility.

 

Dr Theodore Panayotou, 2007 NOBEL Peace Prize Contributor, is Professor of Economics and Ethics and Director of the Cyprus International Institute of Management (CIIM), Visiting Professor at Tel Aviv University and Member of the Cyprus President’s Council of the National Economy. He taught Economics for 25 years at Harvard University, served as Senior Economist at the Rockefeller Foundation and advised Presidents and Premiers in 15 countries including China, Mexico, Russia and the USA. He has published over 100 books, monographs and peer-review articles on economics and business and served as consultant to companies, governments, the UN and the World Bank. Contact: [email protected]

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