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Cyprus The State and Economic Development
In the first years after the de facto partition of the
island,
the Turkish Cypriot community had sought by any means
possible to
establish a viable economy. Faced with the problem of
creating an
economy from a very small base, the government became the
employer
of first resort. Numerous semipublic economic enterprises
were set
up with Turkish aid, and a functioning economy was put in
place.
The Cyprus Turkish Industrial Enterprises Holding Company,
the
Cyprus Turkish Tourism Management Company, and the Cyprus
Turkish
Maritime Company were examples of these state-sponsored
entities.
They were nonprofit and service-oriented and staffed by
stateappointed managers. State planners created them to meet
economic
needs the private sector was unable to satisfy.
The State Planning Organisation (SPO) was the agency
responsible for planning. The SPO was subordinate to the
prime
minister, but its daily activities were conducted in
cooperation
with the Ministry of Economy and Finance. The SPO helped
establish
long-term economic goals and coordinated the planning
activities of
ministries. The two main components of the SPO were the
State
Planning Section and the Coordination, Executive, and
Technical
Assistance Section.
The State Planning Section was responsible for
preparing
economic and social development plans. Such plans required
research, analysis, and project evaluation. The section
also
monitored the implementation of plans and cooperated in
preparing
the government's Annual Development Budget.
The Coordination, Executive, and Technical Assistance
Section
prepared the Annual Development Budget and supervised its
implementation. It also implemented development plans,
provided
technical data for the working committees of the National
Assembly,
and prepared requests for technical and economic
assistance. In
addition, the section published statistical reports on all
sectors
of the economy.
The Turkish Cypriot economy was mixed, neither wholly
statemanaged , nor privately owned. Although the state economic
enterprises were significant actors, and the state set the
overall
direction of the economy, the state did not generally
interfere in
the private sector beyond legislation that set wage rates
and
taxation. The state supported and encouraged the private
sector
through investments in the national infrastructure and
other
measures. For example, it set up "free economic zones" to
attract
foreign investment. By the late 1980s, about fifty foreign
investors had taken advantage of these zones' generous tax
provisions.
In the second half of the 1980s, however, the
government
changed its policy in response to persistent economic
dependence on
Turkey. In late 1986, the "TRNC" signed an economic
agreement with
Turkey, and in 1987 a development plan was formulated.
Both the
agreement and the plan aimed at transforming the Turkish
Cypriot
economy into one based on liberal economic doctrines. The
long-term
result, it was hoped, would be a stronger economy less
dependent on
Turkish aid and one that in time would become
self-sustaining.
The movement toward a liberal, market-oriented economy
was to
be realized by making tourism the driving force. Tourism
would pull
the rest of the economy into growth and reduce the
importance of
state-owned and state-managed enterprises. Turkey
increased its
aid, much of which went toward improving the
infrastructure, and
promised to guarantee all foreign investments in the
"TRNC." The
government offered tax concessions, long-term, low-cost
leases, and
reduced controls on transfers of foreign exchange. These
and other
measures were successful. Tourism's earnings tripled
between 1986
and 1989. Manufacturing also increased its share of GDP,
as did
nongovernment services, and the size of the state sector
and
agriculture began to fall. The ratio of the public sector
to the
private sector in fixed capital investments gradually
changed from
two to one to the reverse.
A key aim of the new liberal policies was to reduce the
burden
of a swollen government sector. Although some reduction
was
achieved, serious problems in this area remained at the
beginning
of the 1990s. Expenditures for wages and pensions, for
example,
made up two-thirds of the government's budget. Reforms of
very
generous pension plans for civil servants were needed, as
was a
streamlining of the government's cumbersome bureaucratic
procedures.
Chronic inflation was another problem that needed to be
addressed. Inflation rates ranged from lows of 33 percent
in l982
and l983, to a high of over 100 percent in l979. The year
1988 saw
a rate of 62 percent. The most serious cause of inflation
was the
use of the Turkish lira (TL; for value of the
lira--see Glossary)
as legal tender. This currency's persistently high
inflation rate
was imported into the "TRNC." There were from time to time
discussions of the desirability and practicality of the
Turkish
Cypriots's having their own currency, but as of 1990 no
steps in
this direction had been taken. Some inflation, however,
was
domestic in origin, stemming from excessive state
spending.
Although the government's share of GDP declined
somewhat as the
economy grew and modernized, at the beginning of the 1990s
the
"TRNC" still relied on Turkish aid. Turkey's aid to
Turkish
Cypriots in 1990, in both loans and grants, was expected
to amount
to TL140 billion (US$60.5 million), a sizeable increase
over the
TL88 billion provided in 1989. An indication of the
increasing
health of the Turkish Cypriot economy, however, was that
in 1988,
for the first time, local government revenues
substantially
exceeded Turkish aid. The figures for 1989 also reflected
this
change.
A potentially serious problem for the Turkish Cypriot
economy
at the end of 1990 was the apparent collapse of the
economic empire
of Asil Nadir, the only major foreign investor in the
"TRNC." Nadir
was a native-born Turkish Cypriot long resident in London.
As
chairman of a large multinational company, Polly Peck
International, Nadir had taken advantage of the
government's "free
economic zone" policy and invested heavily in industry,
citrus
production, and tourism. He was surpassed only by the
state as an
employer in the "TRNC," with as many as 8,000 people, by
some
estimates, earning their livings from his varied
enterprises. Late
in 1990, however, Nadir's international empire suffered
reverses
and faced possible bankruptcy and liquidation. The
long-term
effects of Nadir's legal and financial difficulties on his
investments in the "TRNC" were not known, but the
short-term
effects were painful.
Data as of January 1991
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