The discovery of the highly promising Aphrodite gas field in 2011 presented Cyprus with economic and political opportunities, while at the same time it risked a worsening of its already tense relations with Turkey. There was euphoria that the discovery of this resource would not only contribute to national energy independence but that more discoveries would be made which combined could generate great wealth. However, Cyprus has seen five natural gas discoveries since 2011 but none have been developed despite the presence of major energy companies in its offshore waters.
So, is Cyprus experiencing the ‘natural resource curse’ that has afflicted a number of countries that have discovered large deposits of oil and natural gas? Early economic studies provide evidence that major oil-exporting countries such as Nigeria, Venezuela and Angola experienced a strong negative relationship between their resource wealth in the form of oil and natural gas and economic development. It was argued they suffered from the ‘natural resource curse’, defined as the notion that countries with abundant resources have worse economic growth and development than those with few natural resources. This detrimental effect on economic growth was attributed to diverse factors such as sharply fluctuating commodity prices, the Dutch disease, weak institutions and poor governance.
However, later research cast doubt on the robustness of the negative relationship between resource wealth and economic performance, with mounting evidence revealing that resources could be a curse or a blessing. An important contingency is the level of institutional quality, which determines the extent to which resource revenues are put to effective use for advancing economic and human development. Resource wealth can be a curse when it fuels pervasive corruption and lavish expenditure on wasteful projects and monuments, as in Nigeria and Angola. In contrast, resource wealth appears to have been more of a blessing in Norway, Canada and Botswana where it has been invested productively in national development
More recently, World Bank economists James Cust and David Mihalyi have focused on the ‘presource curse’, supporting the curse is not an effect of fossil fuel exports, as is the case with the better-known resource curse, but rather an effect of the discovery of oil, gas or other natural resources. That is, countries experience problems prior to production, before a single barrel of oil or unit of natural gas is taken out of the ground.
These economists argue that optimistic expectations are formed on the basis of natural resource discoveries with countries, governments and citizens alike exhibiting a strike-it-rich euphoria. This emboldens governments to increase spending and borrowing, including for poorly-designed and managed projects that in turn result in the wasteful and often corrupt use of scarce capital. Indeed, difficult challenges associated with extraction, refinement and distribution of natural resources confront countries following their discoveries of new wealth.
The Cyprus case
Energy expert Charles Ellinas, in a recent article stated that the long-delayed development of the Aphrodite gas field and the many “other unsettled major energy issues that bedevil Cyprus” including “the GSI interconnector, the LNG import project at Vasilikos, the power supply system, an uncompetitive RES market, and abolition of Defa’s gas import monopoly” pose key problems for the Republic. In so far as these problems stem from the lengthy inability of Cyprus institutions to arrange and implement viable projects for the efficient extraction and distribution of its ample resources of untapped natural gas deposits, Cyprus could be said to be experiencing a presource curse similar to that described by Cust and Mihalyi.
In truth, in common with certain resource-rich less developed countries, Cyprus has weak institutions. The government has not been able to design an overall detailed energy plan, particularly on the reliance to be placed on supplies of fossil fuels against renewable energies and on the need for supporting infrastructure, such as expanding and upgrading the grid for the distribution of electricity. Even given the ad hoc nature of energy policies, Cyprus does not have the institutional capability to competently formulate the appropriate design and terms for key infrastructure projects. The government seems to bow to the pressures of politicians and special interest groups, including foreign companies, in its decision-making, enabling the elite to seek and obtain rents through the control of resources.
The overwhelming need to iron out corruption and the gross violation of laws and regulations in Cyprus through a more effective judiciary is essential. Equally important is the requirement to create an independent institution to study and evaluate the economic viability and risks of major projects where the state is involved as repeatedly advocated by economist Savvakis Savvides. Notably, Savvides adds it is no coincidence that in several European countries such projects are studied in depth and evaluated by an independent authority, rather than the state which tends to approve projects that one or another politicians or bureaucrats prefer or ‘seems right’.
Furthermore, it is the poor relations of Cyprus with Turkey and the failure to resolve between them the dispute on what is the exclusive economic zone of the island, which contributes to the delay in efforts to exploit natural gas deposits and draft firm plans for the distribution of energy from and to Cyprus. Turkish Cypriot leader Ersin Tatar stated recently that the “Greek Cypriots are not ready to share power with the Turkish Cypriots over the administration of the island, its wealth, and its resources”. He added “that in the event of a two-state solution, the sides would then cooperate on matters of energy, water, natural resources and in many other areas”. Indeed, the challenges on energy issues outlined by Ellinas resulting from the discovery of natural gas in offshore waters around Cyprus would have a greater chance of being met if relations with Turkey are greatly improved (most likely by a solution to the Cyprus problem), thus turning the resource curse into more of a blessing.
Les Manison is a former senior economist at the International Monetary Fund, an ex-advisor in the Cyprus finance ministry and a former senior advisor at the Central Bank of Cyprus
