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Media Watch 2003

02 March 2005
Source: Cyprus Weekly
Author: Costas Apostolides
Comment: The following article appeared in the Cyprus Weekly of Nicosia on 2 May 2003
Economic aspects of the political developments


THE announcement of limited freedom of movement across the ceasefire line by the Turkish Cypriot leadership just before Easter and the decision this week by the National Council to introduce the long-awaited measures designed to improve the situation for Turkish Cypriots, have changed the outlook for a solution of the Cyprus problem and have brought to the fore economic issues that have not been considered for some time. 

Essentially, Pandora’s Box has been opened, the people are leading the way, and they want peace and a solution, and governments all around are struggling to adapt and catch up.

The aim of this article is to raise some of the economic aspects of the situation, as it is emerging, in order to improve understanding of the likely repercussions and to provide some guidance as to issues that must be addressed. 

The basic principle is that economics has its own rules and politicians can never have full control of the economy, and therefore economic measures create their own situation which comes back to influence the political situation.

No trouble

The first lesson from the freedom of movement has been that Greek Cypriots and Turkish Cypriots have no trouble getting along together. In fact the reception the Greek Cypriots have received in the north has been moving and very friendly.

Furthermore, both Greek and Turkish Cypriots appear to have similar views with respect to the Turkish settlers, whose reaction to the present situation demonstrates that they are aliens and have not become integrated into Cyprus society. 

The implication of this is that both sides have to take difficult decisions; the settlers have to leave but those that are married to Turkish Cypriots have to stay under the normal provisions of marriage to foreigners. Unfortunately, in economics the settlers, too, will benefit, and Cyprus will become more attractive to them, even if they are not allowed to come to the south or acquire Cyprus and European citizenship. It is surprising how many Greek Cypriots found that their taxi drivers were settlers.

Difficult

If the arrival of settlers in the occupied area is not controlled the economic improvements there arising from the measures will attract more settlers, making the solution of the Cyprus problem more difficult. 

The main outcome of what has occurred is that it will be clear to everyone that the economic improvement for Turkish Cypriots does not depend on Turkey or even the European Union, but on integration with the economy of the Republic of Cyprus. To most Cypriot economists this has been obvious, but the foreign economists and Turkish and United States experts in general, have always ignored or underplayed the role of integration, because they have generally accepted Mr Denktash's fantasy land economics for fact. 

Already the expenditure of Greek Cypriots passing into the occupied area when annualised surpasses the total export earnings of the northern part of the island (about $60m a year). 

Shot down

Denktash's outdated and unfounded mercantalist economics have been shot down as a politically-motivated myth. How can the people and the economy be separated into north and south? They cannot, in a globalised world with freedom of movement, freedom of trade and all the other freedoms. Every obstruction to stop the so-called danger of economic domination will victimise the Turkish Cypriots in economic terms and prevent welfare equalisation. In the modern world economic autonomy does not mean a fortress mentality, of quotas and tariffs, but it means efficiency, productivity and innovation. Economic autonomy is not gained through handouts, and there the Turkish Cypriots have for years held the world record in economic aid received. Autonomy, in economic terms, is based on the ability to earn income through legitimate production in a competitive world.

Cyprus has had a successful economic history since independence, assuming the political situation does not obstruct economic policy, there is every reason to believe that the economy will continue to prosper. 

With the Turkish Cypriot economy being less than 10% the size of that of the government controlled areas, under conditions of integration, economic laws will cause the Turkish Cypriots to gain quickly from the four freedoms, while for the Greek Cypriots the benefits are more marginal. 

Every barrier to the freedoms will restrict the improvement of Turkish Cypriot welfare.

Appreciated

One aspect not yet given publicity or attention is the role of the Cyprus pound in the occupied area. The Turkish Cypriots have always appreciated the strength and stability that the Cyprus Pound has always offered, not least because they have suffered acutely from the constant depreciation of the Turkish Lira. At the time of the Turkish invasion in 1974, the value of the Turkish Lira to the Cyprus Pound was 38 TL, while today it is less than three million. A clear indication of massive economic failure that has not been the responsibility of the Turkish Cypriots, but has been imposed upon them by Turkey. 

With freedom of movement the Cyprus pound will dominate in northern Cyprus, also. The Turkish Cypriots themselves are demonstrating that Denktash's position in the Cyprus talks of trying to eliminate the Cyprus Pound has no public support whatsoever. 

The large scale circulation of the Cyprus pound will also allow Turkish Cypriots to open bank accounts in the Government-controlled area. A fact that will be greatly improve their situation given the terrible state of the whole Turkish banking system, and the frequent collapse of banks in the occupied area.

In fact it would be to everyone's advantage if the Central Bank of Cyprus would allow Turkish lira to be exchanged for Cyprus pounds. This could be done in a controlled manner until the May 2004 EU accession date and would in any case occur freely thereafter, with full capital harmonisation. The result would be that the Cyprus pound would dominate much earlier and the two economies will be more closely integrated. 

The risks would be minimal given that the Turkish lira is an internationally quoted currency, and the risks would be reflected in the exchange rates. 

A further advantage of this would be to stabilise the Turkish Cypriot banking system by adoption in practice of the Cyprus Pound, reducing dependence on the unstable Turkish lira. This would lead to the radical improvement of the Turkish Cypriot banking system to meet the new challenge from the south. Such improvement would arise because the main threat to banking in the occupied area comes from Mickey Mouse economics, based on Turkish practice, which basically means the banks take the people's money and make profits by buying Turkish government bonds, leaving the people without effective banking services and limiting access to loan facilities. 

By contrast, in southern Cyprus, the banks are geared to dealing with the people and providing loans and service. 

The fundamental weaknesses of the banking system in occupied Cyprus must be addressed if the population is to gain fully from economic integration. 

Competition with the south would be a factor that would force change, but the subordinate local administration of the occupied area should at the same time introduce modern banking standards bases on EU directives. The sooner this is done the greater the benefits from economic integration for everybody. The last thing the Turkish Cypriots need is another Turkish banking crisis.

The above constitutes only a sketch of some of the economic implications of what is occurring in Cyprus. The examples given are by no means exhaustive. The views are likely to be controversial. 

Basically what Dentash considers to be a nightmare scenario is in fact the only way the Turkish Cypriots can quickly improve their lot in economic terms, and what he considers economic domination, is in fact economic independence since it gives every individual the right in a full employment situation to earn a decent living and to exercise their economic rights freely. while it also provides Turkish Cypriot businesses with the opportunity to respond under free market conditions to the new opportunities. 

Some businesses will gain while others will fail, but the whole economic environment will be much better and many will prosper. There are many more issues to consider, such as tariffs, VAT and property rights, but those will have to wait for a sequel."