Friday, June 25, 2010

Lebanese Natural Gas Deposits: No Free Lunch

The Lebanese authorities are well advised not to “count their natural gas chicken until they hatch”. Almost every day, and maybe even more often than that, various ministers, MP’s, political party officials and common citizens speak of the potential off shore natural gas as being another “divine gift” that will resolve all of the economic and social problems of Lebanon. That is a dangerous mindset that will create arguably more problems for the state than it will resolve.

Natural resources are a great asset for an economy especially when they are abundant and well managed. There are so many examples all over the world, where discoveries of resources have failed to benefit the countries in question. The close association between resource discovery and the inability to use these resources to improve the level of welfare of the state is so widely spread that economists have given it a special name: Resource Curse. This is not to imply that natural riches cannot benefit a country but it simply is a sad statement on the global experience whereby many of these discoveries of natural wealth seem to take place in countries with an undeveloped institutional structure. As a result the income generated from these resources is often wasted on unproductive areas and on conspicuous consumption.
It is hoped that Lebanon will internalize all the research that has been done in this field in order to avoid repeating the mistakes that have been committed by others. Although there is no substitute for serious research to guide the deliberations of the authorities in this area it is very humbly suggested that at least two concepts should be included as part of any final plan to use these resources: (1) Intergenerational equity and (2) balanced growth.

(1) Intergenerational Equity: The most popular definition of Sustainable Development is the one that was popularized by the Brudtland Commission when it issued “Our Common Future” in 1987. Ever since then the idea that "development that meets the needs of the present without compromising the ability of future generations to meet their own needs" has become paramount in the development literature. The above idea was not new. It is nothing else but a restatement of a very well established economic principle that is seminal for mainstream economics and that is known as “Pareto Optimality”. Pareto efficiency is simply the idea that you should not give to Peter by robbing Paul which may be expressed in this case to mean the following: Exhaustible natural resources should not be used to enrich the present generation at the expense of the future.

The concerns of sustainable development and Pareto efficiency can be easily addressed by agreeing to set up a fund for the future that financed through a certain proportion of the annual receipts from the sale of natural gas and possibly oil. The establishment of such a fund is crucial and non negotiable.

(2) Balanced Growth: This is a major problem that can be avoided only if the authorities take specific strong measures as to prevent what has become known as the “Dutch Disease” from taking hold. The name was originally applied to describe the experience of the Netherlands after the discovery of natural gas deposits in the North Sea. The direct result of the boom in the energy field was a major contraction in the manufacturing sector. This same phenomenon was seen in the US but under a slightly different name, that of deindustrialization which again is essentially the rise of a new sector but only at the expense of other sectors in the economy. This phenomenon is a very serious one and should not be dismissed. Currently many economists suspect that the tar sands in Alberta, Canada are starting to pause a serious problem to the rest of the Canadian economy along the lines of the Dutch Disease or what is known in the economic literature as the Rybczynski theorem which states that the discovery of a new major resource leads to growth in that sector and a disproportional decline in others.

Lebanon must develop its natural resources but has no right to expect these resources to be a panacea for the myriad of problems that it has created over the years. In order to ensure that these resources are not wasted and that the potential benefits are to be forthcoming there is no substitute for research, learning from the mistakes of others and setting up an efficient and transparent institutional structure.

The experience so far is not encouraging in the least. The worst indicator of the inability of the Lebanese government to approach this issue objectively and efficiently is best seen in the fact that the discussion for the proper use of a potential natural resource was relegated to the Hiwar/dialogue table. Go figure.


Anonymous said...

It is one thing to suggest avoiding a Dutch Disease and it is a different thing achieving that goal. Maybe a Dutch Disease development should just be accepted as part and parcel of a new discovery a new invention or a new development.

Ghassan Karam said...

What is wrong about Dutch Disease is the unnecessary pain that some sectors are subjected to. Government could adopt policies that will help reduce the cost of adjustment by simply anticipating it.
The US experience , that I am familiar with more than my knowledge of other countries, has demonstrated again that unbalanced development could be very disruptive if left purely to the market.


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