Cyprus - The Economy

REPUBLIC OF CYPRUS

The economy

CYPRIOTS HAVE EXPERIENCED A SUBSTANTIAL improvement in their living standards since World War II. Cyprus benefited from the war, and in succeeding decades its economy grew at rates that matched those of other countries that profited from the general West European boom that began in the 1950s and lasted up to the first oil price increase of 1973. Cypriot per capita income increased steadily through this period; the economy diversified and ceased to be that of a Third World colony. This success was achieved despite widespread turmoil stemming from shaking off British rule in the 1950s and intercommunal warfare during the 1960s.

Cyprus was affected in 1973 and 1979 by the first and second oil price increases, for it was almost completely lacking in domestic sources of energy. However, energy-related economic disruption was negligible compared with the effects of the Turkish invasion of 1974, which ended in the de facto partition of the Republic of Cyprus. The island's economy disintegrated as a third of its inhabitants fled their homes and livelihoods and many farming, manufacturing, and commercial relationships were shattered. Thereafter, the island's Greek Cypriot and Turkish Cypriot communities lived separated from one another. Each sought to recreate a functioning economy.

Greeks Cypriots were the more successful. Republic of Cyprus planners adopted an aggressive program of constructive deficit spending, economic incentives, and targeted investments that led the Greek Cypriot economy to reach pre-1974 levels within a few years. This was an astonishing accomplishment in that the island's partition had cost the republic much of its agricultural and manufacturing assets.

The 1980s saw healthy growth and low unemployment. Tourism swelled, and by 1990 more than a million tourists, mostly from Western Europe, visited the republic each year. Housing them caused much construction and an explosion in the value of property along the coast. Manufacturing and trade were encouraged and grew. The destruction of Beirut permitted the republic to become a regional center for services and finance. As the 1990s began, Greek Cypriots were upgrading their tourist trade and aiming at a more diversified and sophisticated manufacturing sector. Leaders of the republic's economy hoped to take advantage of the republic's able and motivated work force and a strong and flexible commercial tradition.

The Turkish Cypriot economy also grew. Facing many obstacles and beginning at a lower point, however, its successes were smaller, and at the beginning of the 1990s Turkish Cypriots enjoyed a per capita income about one-third that of Greek Cypriots. Economic obstacles included the lack of a commercial tradition, a less well-trained work force, and rampant inflation largely imported from Turkey. However, perhaps the most serious economic hurdle Turkish Cypriots had to surmount was their state's lack of international recognition. Its absence deprived them of some international aid and made foreign connections difficult. Despite these difficulties, however, Turkish Cypriots could look with some optimism toward the future. Tourism expanded rapidly in the late l980s and brought in vital foreign exchange. The overall economy had diversified to some extent. Agriculture was more efficient and employed a smaller share of the work force. The service sector had increased in importance. Analysts expected, however, that the Turkish Cypriot economy would likely continue to need Turkish assistance for the foreseeable future.

For more recent information about the economy, see Facts about Cyprus.

From independence in 1960 until the Turkish occupation of the north in 1974, the economy of Cyprus performed well overall, and the gross domestic product (GDP) increased at an average annual rate of about 7 percent in real terms. However, the Turkish Cypriot community did not share in this growth, living in its scattered agricultural enclaves under conditions like those of less developed countries.

The Turkish invasion and occupation of the northern 37 percent of the island severely disrupted the economy of the Republic of Cyprus. Fragmentation of the market, a massive displacement of people (about a third of the island's population), and loss of important natural resources had devastating effects. The government responded with the first and second emergency economic action plans, for 1975-76 and 1977-78. The pre-1974 policy of balanced budgets was replaced by expansionary fiscal and monetary policies aimed at stimulating economic activity. Incentive plans to encourage private economic activity were implemented, as were housing and employment programs for refugees who had fled areas seized by the Turks.

These efforts proved phenomenally successful. The economy expanded at a 6 percent rate in real terms between 1974 and 1978, and by 1978 unemployment stood at about 2 percent, compared with 30 percent at the end of 1974. This growth continued through the 1980s. In 1988 the per capita gross national product (GNP) in current prices was about US$7,200 or C£3,597, compared with C£537.9 in 1973.

The economy of the Republic of Cyprus changed as it grew in size and complexity. The primary sector lost ground, as it had in the decades before the Turkish invasion. Agriculture declined from more than 20 percent of GDP at the end of the 1960s to only about 7 percent by the end of the 1980s, although it employed about 15 percent of the labor force. Mining, vital in the 1950s as a source of exports, became insignificant.

Manufacturing increased at double-digit rates during much of the 1980s. At the end of the decade, it accounted for 15.2 percent of GDP, the second largest share, after the service sector's, and was the second largest source of employment. Manufacturing depended on exports, most to the Middle East and the European Economic Community (EEC). However, rising labor costs and relatively low quality products stood in the way of future industrial growth. Construction provided just under 10 percent of GDP in 1989 and was the fourth largest private employer. Construction had declined in importance since the second half of the 1970s, when much housing for refugees was built and work began on constructing the tourist facilities that were important to the south's economy.

The service, or tertiary, sector was the dominant sector in the Greek Cypriot economy after the late 1970s. In 1988 it accounted for 50.2 percent of GDP. The sector's most dynamic component was trade, restaurants, and hotels (or tourism), which supplied 20.8 percent of the GDP and employed 22.3 percent of the labor force in 1988. The gigantic increase in the number of tourists--from 165,000 in 1976 to 1,376,000 in 1989--was the main cause of this subsector's growth. Tourism was also an important source of foreign exchange, exceeding the income from the export of domestic goods from 1985 through 1988.

The other branches of the service sector--transportation, storage, telecommunications, finance, insurance, real estate, and business services--also experienced steady growth and improvement. Another dynamic component of the sector, important to Cyprus's future economic growth, was offshore enterprises, which conducted diverse businesses abroad from a base in southern Cyprus. Attracted by generous tax concessions, the island's strategic location between Europe and the Middle East, and stable political conditions, many foreign businesses established themselves in the republic. By 1990 more than 5,000 permits for offshore enterprises had been issued.

The government played an active and successful role in planning after 1974. This planning was indicative in nature. That is, the government set goals for the economy and limited its direct participation to improving the nation's infrastructure and supporting and guiding the private sector. These activities were costly, however, and resulted in large and expanding budget deficits. By the end of 1987, the total deficit of the 1975-87 period amounted to C£640.6 million.

Another problem was a consistently unfavorable trade balance. In most years, however, expanding surpluses in the invisibles account, mainly from tourist receipts, nearly offset the trade deficits. At the beginning of the 1990s, it was not yet clear what effect the 1988 Customs Union Agreement with the EEC would have on this deficit. Many Cypriots saw the agreement as an opportunity. Access to the community's market of 320 million people might prove beneficial, provided that the manufacturing sector, consisting of small labor-intensive firms, was restructured and modernized. Undoubtedly, the economy would face more intense competition in the 1990s, but its main asset, a versatile and educated human capital, could make the difference again as it had often done in the past.

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