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Cyprus 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.
Data as of January 1991
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