At independence the manufacturing sector consisted almost entirely of small, family-owned enterprises, most with fewer than five workers. Production consisted mainly of consumer goods and items for the construction industry, all for the local market. Obstacles to the development of larger establishments were the limited domestic market, a generally low level of income, a lack of available capital, and a shortage of skilled labor.
During the period of the second five-year plan (1967-71), steps were taken by the government to encourage industrial development. Import duties on raw materials were reduced or abolished, and tariffs were imposed to protect domestic industry. Generous depreciation allowances and tax remissions were granted. In addition, training centers were set up for management, technical personnel, and workers. Industrial parks were established in Nicosia, Limassol, and Larnaca. Government policy generally left manufacturing to private enterprise, but in some cases, such as the petroleum refinery at Larnaca, the government made direct investments.
During the plan period, some seventy larger manufacturing plants were constructed. These plants included a petroleum refinery, biscuit and margarine factories, fruit- and meat-canning plants, a brewery, an edible oil plant, paper products factories, textile and hosiery mills, pharmaceutical plants, and metal fabricating plants. A 1972 census of industrial production, covering Greek Cypriot establishments plus estimates for the Turkish Cypriot community, showed that more than four-fifths of the 7,612 plants in manufacturing (excluding cottage industries) still had 1 to 4 employees; only about thirty establishments had more than 100. These larger establishments, however, accounted for 81.4 percent of the value added by manufacturing. Despite this change, manufacturing as a whole remained largely geared to the local market, the principal exception being canned goods, most of which were exported.
The Turkish occupation resulted in a major division of the island's manufacturing sector, because one-third of the larger enterprises were located in the north. Another immediate effect was disruption of the domestic market. The division also cut off the sources of some raw materials and intermediate goods.
The sharp general drop in incomes in the south after mid-1974 forced the manufacturing industry to reorient production toward exports. A principal objective of the first Emergency Economic Action Plan (1975-1976) was the reactivation of manufacturing with emphasis on the development of such labor-intensive industries as clothing and footwear aimed at the export market. This effort also included measures to reestablish in the Greek Cypriot area the operations of entrepreneurs who had fled the Turkish Cypriot zone. During this plan period, 200 new or reopened plants went into production, and at the end of the period more than 130 additional ones were under construction.
The Greek Cypriot government took other steps to create an export climate attractive to industrial entrepreneurs. Raw material and machinery imports were duty-free, a guarantee scheme was established for bank credits for exports, and a tax allowance was granted on foreign exchange earnings from exports. Trade centers were also set up abroad, and there was participation in foreign trade exhibitions. Some indication of the success of the overall effort was seen in the tripling of exports of manufactured goods from Cú22.5 million in 1975 to Cú66.5 million in 1978. By the late 1970s, manufacturing was very close to wholesale and retail trade in its contribution to GDP, and there were some 1,320 manufacturing enterprises covering a broad range of industrial activity.
During the decade of 1979-88, the contribution of manufacturing to GDP at current prices nearly tripled. Manufacturing's share of GDP, however, declined slightly during this period, beginning in 1984. The decline moved manufacturing into second place, after the category of wholesale and retail trade, restaurants, and hotels.
The principal industrial products were food, beverages, and tobacco; textiles, wearing apparel, and leather; wood and wood products; paper and paper products; printing and publishing; chemicals and toiletries, petroleum, rubber, and plastic products; nonmetallic mineral products, such as cement; and metal products, machinery, and equipment.
The three subsectors of food, beverages, and tobacco; textiles, wearing apparel, and leather; and chemicals and toiletries, petroleum, rubber, and plastic products represented 65.4 percent of the total gross industrial output in 1979, and in 1987 they represented 64.7 percent. In 1987 the relative share in industrial output of food, beverages and tobacco was 27.4 percent; of textiles, wearing apparel, and leather 23.2 percent; and of chemicals and toiletries, chemical, petroleum, rubber, and plastic products 14 percent. During the period 1979-87, the two most important subsectors for exports were food, beverages, and tobacco and textiles, wearing apparel, and leather. In 1987 they accounted for 21.6 and 54.2 percent of total industrial exports, respectively.
Industrial output came to depend on exports. The Arab Middle East was a key market for industrial production, but the EEC purchased 39.3 percent of exported manufactures in 1987. These two markets and the protected domestic market absorbed about 90 percent of manufactured products.
The traditional markets for Cypriot manufactured goods could not be regarded as secure at the beginning of the 1990s. The Arab Middle East markets were often highly volatile, for both political and economic reasons, and the European market had also become increasingly competitive. A main threat to Cypriot exports in these areas were Asian manufacturers with lower labor costs and higher quality goods. The domestic market was also increasingly threatened because the terms of the Customs Union Agreement with the EEC required the country to gradually dismantle its highly protective tariff system. (In the late 1980s, for example, Cypriot tariffs on clothing imports from the EEC were over 80 percent.)
In meeting these mounting challenges, Cypriot manufacturers were striving to raise the quality of their production, improve marketing, and contain labor costs through productivity gains as tariffs came down. The government continued its longstanding policy of encouraging manufacturing by improving the infrastructure and creating industrial parks and free industrial zones. It also identified new industries and products suitable for future development. Because of the number of small labor-intensive plants with well-qualified workers adept at learning new technologies, the government recommended that these plants adopt the principle of "flexible specialization," with modern design techniques, quick turn-around times, and computer-controlled machinery, to meet the rigors of the global market of the 1990s.
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