articles | 14 March 2014

Cyprus solution to benefit island's economy

Cyprus could see its GDP rise by an extra €18 billion two decades after reunification, say researchers and economists.

Economists Fiona Mullen, Alexander Apostolides and Mustafa Besim yesterday revealed the findings of a preliminary study on the 'Cyprus peace dividend', published by PRIO Cyprus Centre and funded by Sweden, Denmark, Finland and Norway. The results were first presented to Greek Cypriot and Turkish Cypriot business representatives earlier in Brussels who were asked to give their own input to the estimations of the potential benefits of a solution. The researchers will incorporate that input to produce a final report in the coming weeks.

The study followed a two-pronged approach, looking at total factor productivity (TFP) or the capacity for long-term growth with and without a solution, and then potential growth on a sector-by-sector basis, then looking at the average of the two combined. They found that 20 years after a solution, GDP at today’s prices (not including inflation) would be more than €18 billion higher than it would be without a solution; that is, the united island economy’s benefit would be more than twice the size of the Cyprus Republic economy today. GDP per capita would be €10,379 higher for Greek Cypriots and €15,095 higher for Turkish Cypriots than if there was no solution (or €11,653 per Cypriot).

Based on forecasts, Besim said the researchers calculated that per capita income, based on 2012 prices, between the two communities will converge in 15-17 years after a solution. The study indicated that the retail and wholesale sector would benefit the most from a solution, while construction and the financial sector would also benefit considerably. Tourism would have a multiplier effect on the economy, while higher education has significant potential. Mullen said the most realistic feedback they got from the recent conference was that if a solution is implemented properly, then the ‘peace dividend’ has probably been underestimated, while if it’s badly done, then they have overestimated the benefit.

A positive outcome of the conference was that businesses from across the island said realised they need to plan properly for a solution sector by sector. “If you’ve got business behind a solution, it will make these figures, and asolution, more able to come true,” she said. The economist highlighted that the research painted a pretty grim picture of economic life on the island without a solution. “One of the things we found was that on both sides of the island, at the moment, the capacity for long-term growth is appalling,” she said. “If we stay as we are, we’re going to have high unemployment on both sides of the island for a very long time,” added Mullen.

Research showed that the economies in both parts of the island are currently “significantly underperforming” and that this was the case even before the recent crisis. In the period 2005-12, real GDP growth in the Turkish Cypriot community recorded an average rise of 0.3%, compared to 0.2% for the government-controlled areas.

Both economies are very volatile, with extreme highs and lows, and unsustainable sources of growth, said Mullen. The Greek Cypriot economy before the crisis was characterised by weak competitiveness, rising unemployment and debt. After the crisis, its weaknesses are banking fragility (liquidity and capital), high household, corporate and government debt and exposure to the severe long-term effects of deleveraging.

Meanwhile, the Turkish Cypriot economy has to deal with a bloated public service, is largely aid-dependent, and suffers a lack of direct access to international markets. The island’s continued division hampers property investment in the north, which remains exposed to the volatile Turkish Lira and inflation and high interest rates. As a result, the study points to a continued future of “very weak growth and high unemployment” for both economies.

On calculating the peace dividend, researchers worked on the assumption that negotiations would lead to a united Cyprus with a functioning federal government and that the property issue would be settled in a way that would not lead to a ballooning of already high sovereign debt. They found that the existing division hampers the ability of the two communities to capitalise on their achievements in productivity and so would benefit from the “positive shock” that would come from a settlement.

Apostolides said the known costs of the conflict are only the tip of the iceberg that one can see. They include: loss of life; post traumatic stress; reduced capabilities of the state and individuals; high defence cost; lost labour through conscription and higher cost of insurance and borrowing. The unknown costs - the hidden part of the iceberg - are: reduction of trade and trade opportunities; reduced economic opportunity; brain drain; lack of economies of scale; unproductive use of labour, land and capital. “These are hugely damaging in terms of lost productivity: the ability of a society to produce more while using the same resources,” he said, adding Japan and Korea developed advanced economies, creating real, long-term, sustainable benefits by doing better with what they had. “This is all about using technology and young people better. It is inexcusable to have highly educated young people not doing the jobs that they were educated to do.”

Former head of the Cyprus Chamber of Commerce and Industry Manthos Mavrommatis said yesterday the “biggest revelation” for him was “how abysmally the two economies performed” in the last eight years, and how the prospects for the future are even worse. Regarding the belief that the Cyprus economy will somehow see a return to the “good old days”, he said: “It seems there is no way of doing that in either the Greek Cypriot or Turkish Cypriot community. This brings the realisation that the only way a great leap forward can come is through a solution of the Cyprus problem,” he said, adding that: “I do not claim it will be easy to do, there will be a great many obstacles ahead. But the realisation is obvious, there is no other way.”

He further argued that Greek Cypriots have for too long failed to contemplate the economic benefits of a solution. For example, a double taxation agreement with Turkey could make Cyprus a truly regional hub for business, providing a safe and secure zone for businesses in an unstable region. “It’s difficult to think of. It looks too surrealistic for many Greek Cypriots. We have to make it tangible for them to grasp,” he added.

On criticism that the economists were putting the cart before the horse since negotiations have only just started, KEVE head Phidias Pilides said: “I think we are following the right process because it may be too late if we do not influence the content of the agreement on economic issues.” He added that the two negotiators expect support from the business community and society in their efforts to reach a solution.

Source: Cyprus Mail

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