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A simple solution to the complex problem of managing the hydrocarbons wealth in Cyprus?

Yesterday I met Prof Rick Van Der Ploeg[1], Research Director of the Oxford Centre for the Analysis of Resource Rich Economies of the University of Oxford. The objective of the meeting was to get more information on two very interesting papers that he has published: «Natural Resources: Curse or blessing?”[2] and «War and natural resource Exploitation»[3]. Both of these papers make very interesting reading. I will summarise his articles in a different blog.

At the end of the conversation, I asked Prof.Van Der Ploeg if he was Cypriot what would he suggest as the method for the best way to share the future wealth of  hydrocarbon discoveries of the island. The answer was direct and surprising simple: use the “Alaskan model”. What is this model? Basically the Alaskan government has set up a Permanent Fund that required that at least 25% of the royalties collected from the sale of all state owned natural resources would go to this fund.  The Fund would invest only in income producing assets and only the fund earnings and never the principal could be spent. For the last 30 years every man, woman and child which is an Alaskan citizen living in Alaska has received an annual dividend amount that has resulted from the income that the investments of the Fund have produced. The Fund has grow from an initial investment of $734,000 in 1977 to approximately to $42.1 Billion in 2012. The idea behind this was that by establishing the fund they were safeguarding that at least a part of the money received would not be spent immediately – thus ensuring wealth for the next generations as well. At the same time it also ensured that the money that would be kept away from «politicians who, it was feared, would spend them on wasteful government operations and capital projects»[4]. In fact the support for the Fund is so strong that in 1999 due to oil prices reaching a record low of 9$ per barrel there was a referendum on whether the government could spend some of this money to cover other needs. The result was an overwhelming 84% no. The Funds continuity is protected by the fact that any measure that negatively impacts the dividend pay-out of the Fund represents a loss to the whole population and as such has wide public support.

The first time I heard this idea was at a conference where a Lebanese politician proposed this model to distribute the wealth from natural resources in his country due to the complexity of the political situation there.[5] Hearing the suggestion again yesterday, particularly from a very well known economist who specialises in the economics of resource rich countries made me think again.

The more I have considered this idea the more convinced I am that this would be a way forward for Cyprus. Some of the reasons are the given below:

  • Due to the financial crisis there is a big risk that the hydrocarbon wealth will be spend quickly and inefficiently with only the short term perspective in mind is very high thus «robing» future generations of its positive effects
  • The credibility of the political system and the trust in politicians and political parties is currently very low and therefore this model “ring-fences” the natural resources wealth from potentially wrong political decisions and turns each citizen into a co-responsible for the wealth.
  • The two biggest parties have such opposite views on the way forward for the economy that it would be very difficult to imagine that there will be a consensus decision on the way forward with this wealth which could come out of dialogue between the political parties.
  • The still unresolved Cyprus problem that inherently reflects the lack of trust between the two communities. The “Alaskan Model” applied to Cyprus would by definition treat all Cypriots as equal thus eliminating yet another complication of a potential solution. Greek Cypriots, Turkish Cypriots, Armenians, Latins, and Maronites as well as anybody who has subsequently received citizenship and lives on the island would benefit equally. The question of who is a Cypriot citizen would still need to be agreed by the two communities however.
    Each person would have to declare the “hydrocarbon dividend” income as part of their taxable income. For the very poor this would mean a considerable increase in income for the very rich not – so in a way helping to close the gap income between the two groups. Families with lots of children will also benefit more than others. The government budget will benefit from this wealth through the tax system that is put in place.
  • Giving each individual citizens of the Republic “hydrocarbon dividend” income will give each person the right to take their own decisions on what is important for them and their life on how to spend it.  The Alaskan population of 600,000 people receive annually about 1,000$ each although this has been fluctuating and in some years was over 2,000$. Some people may want to spend it on consumables, others may save it for their kids’ education, others may invest it. The role of the state in this case is to use wisely the taxes that it will receive from the citizens and not to take decisions for how it will be spend.
  • One of the negative effects of sudden wealth to a country from natural resources is that often the government uses this wealth to substitute for taxes that they would have gotten from the citizens. The result of this is that citizens tend to be less interested on what and how the government is spending funds since these don’t come out of “their own pockets”. The net effect is that democratic accountability of the government is therefore reduced. Adopting the “Alaskan Model” will mean that the state will continue to be judged on the way it uses the taxes that citizens will pay and the pressure for government accountability tis maintained, which is a good thing for democracy.

Alaska has being applying this model for over 30 years and their experience has evolved and adapted over the years.  Although I am not suggesting a cut and paste the “Alaskan Model” to Cyprus, the “Alaskan Model” has serious advantages that should be considered in the current context on the island.


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About Androulla Kaminara

SCR member of St.Antony's College, Oxford University, 2013-24 Academic Visitor and 2012-13 EU Fellow Senior Academic Associate- Non-resident of EUCERS, King's College, London University Views are personal.

Discussion

5 thoughts on “A simple solution to the complex problem of managing the hydrocarbons wealth in Cyprus?

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  2. Great idea from Prof Rick Van Der Ploeg and grateful to Ms Androulla Kaminara for sharing it! There could be nothing better than this idea considering present economical situation my adopted country unfortunately finds itself in and historical problems.
    Pradeep Ranjan

    Posted by Pradeep Ranjan | August 17, 2013, 3:33 pm
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