Cyprus - Development of the Economy Since Independence

Development of the economy since independence

Cyprus faced a number of structural problems when it gained independence in 1960. Agriculture, the dominant sector, was subject to fluctuating weather conditions and characterized by low productivity. The island's small manufacturing sector centered on small family firms specializing in handicrafts. Tourism was limited to a few hill resorts. The main exports were minerals. The country's infrastructure was that of a Third World country.

These problems and the prevailing view that the market system alone would not be able to provide the basis for major structural changes and for intensive infrastructure building led to the conclusion that economic planning was necessary. The government adopted a system of indicative planning, setting goals for the economy and seeking to encourage and support the private sector's efforts to reach those goals through legislation and monetary and fiscal policies. In addition, the state spent substantial resources to improve the country's physical and institutional infrastructure. Planners believed such measures would be sufficient for the island's dynamic private sector to function well and reach by itself the selected goals, with minimal government participation in the day-to-day operations of the economy. Indicative planning was managed by the Planning Bureau under the Ministry of Finance. The bureau, aided by expert advice from abroad, formulated three fiveyear development plans before the Turkish invasion in 1974, four emergency economic action plans after 1974, and a revised five-year plan for 1989 to 1993.

The first five-year plan, for 1962 to 1966, aimed at achieving higher incomes, full employment, price stability, an improved balance of payments, and greater economic equality between rural and urban areas. The plan provided for a sizeable public investment expenditure, C�62 million, on development projects for roads, ports, airport facilities, irrigation projects, and telecommunications and electricity systems. The Agricultural Research Institute was established in 1962 to improve the quality of agriculture, and the Central Bank of Cyprus was created in 1963 to ensure that an appropriate volume of credit was available to the private sector. This first plan achieved remarkable success, most obviously in agricultural production.

The second five-year plan, for 1967 to 1971, moved beyond the fundamental approach of the first plan, seeking to provide the social and legal structures needed by a more advanced economy. It also gave the business community a more active role in planning. The third five-year plan, for 1972 to 1976, stressed regional planning, to promote more even economic growth throughout the island. This plan also concerned itself with the social and cultural aspects of development. The Cyprus Development Bank was established to provide medium- and long-term loans for development projects, as well as technical and administrative assistance. The Higher Technical Institute and the Hotel and Catering Institute were established to provide specialized training.

The success of these plans was shown by the great gains the Cypriot economy made in the first fourteen years of independence. Although agriculture had become much more productive, the secondary and tertiary sectors had shown even greater productivity as Cyprus became a more developed nation. The primary sector's share of GDP declined from 26.3 percent in 1960 to 17 percent in 1973, while the secondary and tertiary sectors' shares expanded, respectively, from 19.5 to 25 percent and from 54.2 to 58 percent. In addition, the productivity of these two latter sectors was considerably higher than that of the primary sector.

The economy was devastated by the 1974 Turkish invasion and the subsequent occupation of the northern 37 percent of the island. Serious problems included a large number of refugees (about a third of the populations of both communities), fragmentation of the island's market, and the loss by the government-controlled area of land containing raw materials, agricultural resources, and important infrastructure facilities such as the Nicosia International Airport and Famagusta, the island's largest port. The need for reconstruction and development was critical. To meet this challenge, a series of emergency economic action plans for two-year periods was instituted.

The first and second emergency economic action plans, covering the period from 1975 to 1978, aimed mainly at aiding the refugees, then living in camps, by establishing a housing program for them. The plans also directed the government to stimulate the economy by adopting expansionary fiscal and monetary policies. The results were positive. The economy expanded by about 6 percent per year, and the unemployment rate declined to about 2 percent in 1978. Increased domestic consumption and rising oil prices, however, produced some overheating of the economy; the inflation rate reached 7.4 percent in 1978. Despite this problem, the achievement of housing the refugees and getting the economy going again with fewer resources in such a brief period of time was considered almost miraculous.

The third Emergency Economic Action Plan, covering 1979 to 1981 (the last of the two-year plans), aimed at countering the overheating of the economy by adopting a restrictive monetary policy. The main goal of the fourth Emergency Economic Action Plan, covering 1982 to 1986, was to balance economic expansion with monetary stability. These goals were reached. Retail price inflation fell from 13.5 percent in 1980 and 10.8 percent in 1981 to 5 or 6 percent in the next few years and 1.2 percent in 1986. High growth rates with low unemployment continued.

Overall, the economy of Cyprus performed relatively well in the three areas of economic growth, full employment, and monetary stability between 1976 and the late 1980s. Between 1976 and 1986, GDP grew at an average annual rate of 8.4 percent in real terms. Per capita GNP in current prices increased from C�537.9 in 1973 to C�3,597 in 1988, or US$7,200, one of the highest in the Mediterranean area. Unemployment averaged 3.2 percent per year, and price increases 6.3 percent per year, during the 1976-88 period. The price increases of 1980 and 1981 pushed the average up, and the increases of the late 1980s were substantially lower (2.8 percent in 1987 and 3.8 percent in 1989). Government support of the private sector, through tax incentives, loan guarantees for export-oriented industries, grants and loans to agriculture and small industries, training programs for the manufacturing sector, and the substantial improvement of the infrastructure, contributed greatly to this success.

Analysts believed that the 1990s would challenge the economy. The Customs Union Agreement with the EEC could be disastrous if manufacturing were not fundamentally restructured. The high tariffs that had protected manufacturing for decades would be dismantled in the 1990s under the terms of the agreement. The republic's seemingly permanent trade deficit would have to be substantially reduced if it were not to damage the economy in the long term. Agriculture would also be affected; some of its branches, mainly cereals and livestock, which enjoyed direct or indirect subsidies, might fall to foreign competition. The service sector would grow in importance. Tourism, which could not expect further growth in quantity, would have to bring in more receipts by improving the quality of its product. Financial services and offshore enterprises would likely increase in importance.

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