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Better to reform than be lucky

That Greenland’s economy is not already a basket case has less to do with good policy than blind luck. The time has come for lawmakers to open their eyes, warns a group of leading economists
He must not have read the report

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Regardless of your political bent, reading the latest review of Greenland’s economy is an ‘I told you so’ moment.

For those sceptical of Nuuk’s expectation that the country’s road to economic independence is paved with gold, uranium and not least oil, the report, published Monday by the Economic Council, an independent panel of economic advisors, provides yet more evidence that they are in the right.

Those with more faith in the future of the country’s nascent mining industry, on the other hand, will see it as just the latest evidence of an overly pessimistic view of their chances of weaning themselves off their 3.7 billion kroner ($580 million) annual subsidy from Copenhagen in the near term.

What can’t be disputed, however, is that there was little positive in the 32-page outlook, the council’s fifth since being established in 2009. Or as Torben M. Andersen, the council chair, summed up: “The developments of recent years show that the economy has a poor growth outlook. National income levels are not catching up to other countries and there are income differences nationally. Without new commercial activity, the future looks bleak.”

SEE RELATED: Uphill all the way

Despite the gloomy lining, the report did find a pair of silver streaks. First, the economy will grow in 2015. Unfortunately for policy makers hoping that deficit spending planned for next year would plant the seeds for economic expansion in 2016 and 2017, that growth will be uncertain, marginal and short.

“Efforts to solve structural problems through public infrastructure investment,” the report stated, “are ill-advised, given that they will not solve the underling problem. The only thing they do is burden public budgets.”

Greenland’s economic bright spot in recent years has been the migration of mackerel into Greenlandic territorial waters. The 100 million kroner expected to be generated from mackerel fishing this year will push the 6.6 billion kroner budget into surplus for 2014, but this, too, drew a word of caution.

Calling the income “unexpected but welcome” income, the council warned that the funds risked leading the government to rely on happenstance rather than reform as it planned for its economic future. “Economic policy cannot be based on economic surprises,” the report stated.

SEE RELATED: Greenland lawmakers reject gloomy independence outlook

Noting that Inatsisartut, Greenland’s parliament, was likely to put off planned reforms until next year, Andersen warned that the longer the reforms waited, the more painful they would be.

If lawmakers act now, they will need to trim 300 million kroner annually from public spending. Further delays, Andersen said, would only require further cuts. As it is, the economy is unprepared for the future.

“Five years after the implementation of Self Rule, the reforms that would be necessary for the creation of a self-sustaining economy have not been put into place,” the report said. 

Income from mining has been viewed by many lawmakers as the bedrock of an independent Greenland, and the council’s report underscored that while it too felt minerals could contribute to an independent economy it warned against thinking they would be enough.

SEE RELATED: Greenlandic raw materials are worthless

In the first place, mining activity, the report said, must lead to the establishment of a domestic economy that created jobs for Greenlanders. This could be secured, the council reiterated, only through reforms.

Yet, even if those jobs were created, the council found it virtually impossible that mining could generate enough income to equalise foreign transfer payments, which currently account for 35% percent of GDP.

In fact, in order to do so, Greenland would need a sovereign wealth fund that, scaled down to Greenland’s smaller economy, was between five and seven times greater than the amount Norwegians have amassed from the sale of their North Sea oil.

“This is not a realistic scenario,” the council wrote.

SEE RELATED: The thrill is wrong

The report’s message is one that will ring familiar to Greenlanders. It is the latest in a string of economic outlooks cautioning against over-estimating the amount of wealth that can be generated from mining.

Those studies, including a major report delivered in January by academics from the universities of Greenland and Copenhagen, have made similar calls to develop other sectors of the economy in tandem with mining, and to take a longer perspective when planning for economic independence.

Lawmakers brushed aside the January report, which was undertaken at the initiative of the two universities. No official reaction has been issued in response to yesterday’s unusually pessimistic outlook, but business leaders, including Brian Buus Pedersen, the head of GA, a business lobby, urged the government to act on the recommendations.

“These are problems that will take years to solve,” Pedersen said in a statement. “They will require thorough reforms and far more positive business policies.”