The Cyprus Peace Dividend Revisited: A Productivity and Sectoral Approach

PRIO Report

Mullen, Fiona; Alexander Apostolides; & Mustafa Besim (2014) The Cyprus Peace Dividend Revisited: A Productivity and Sectoral Approach, PRIO Cyprus Centre Report, 1. Nicosia: PRIO Cyprus Centre.

Download publication

The Cyprus Peace Dividend Revisited is a new effort to quantify the value of a solution of the Cyprus problem: to the economy as a whole, to different sectors and to individuals. In so doing, it also updates the qualitative analysis and advances earlier efforts, by exploring new approaches and linking these to the existing economic literature on the topic.

In the Day After series, published between 2008 and 2010, Mullen, Antoniadou-Kyriacou and Oğuz-Çilsal made the first substantive attempt to quantify the commercial opportunities of a Cyprus settlement. The award-winning three-part series included the recurring (permanent) benefits, the combined recurring and solution-related benefits, and the benefits that would accrue to Turkey and Greece.

Much has happened to the economic environment since then, while subsequent natural gas finds offshore have also changed long-term prospects. Both parts of the island were significantly underperforming even before the recent economic crisis. In the period 2005-12, growth in total factor productivity (TFP)—a measure of the long-term prospects for growth—was negative in the north and barely positive in the south. This has created risky imbalances such as high current-account deficits and rising debt. Moreover, low TFP growth points to a continued future of very weak overall economic growth and high unemployment.

The dynamic impact of peace is considered in two ways: through a “top-down” approach known as Growth Accounting and through a bottom-up, sector-by-sector approach. In order to arrive at the “peace dividend”—the difference between economic activity with a solution and without a solution to the Cyprus issue—the authors take the geometric mean of these two effectively independent approaches.

The Report concludes that the accumulated peace dividend over 20 years would be approximately €20bn, with all-island GDP (at constant 2012 prices) rising from just over €20bn in 2012, to just under €45bn by 2035 (Year 20), compared with only €25bn without a solution. Annual average incomes at constant prices would be €12,000 higher by Year 20 with a solution than without one. The annual average growth rate would be 4.5% on average over 20 years, compared with just 1.6% without a solution, with the peak growth rates coming in the first ten years. The lift to real GDP growth rates would therefore be 2.8 percentage points on average each year.​

PCC report 'The Cyprus Peace Dividend' mentioned in the Financial Times today 13.01.16

​Cyprus finance minister warns on fiscal rules for reunited island - Tony Barber in Nicosia

Any deal to reunite Cyprus risks failure unless the new federal state envisaged under a peace settlement adopts binding rules on fiscal discipline and financial sector stability, Harris Georgiades, Cyprus's finance minister, has warned.

In an interview with the Financial Times, Mr Georgiades said the new Cyprus must have a balanced budget clause in its constitution that would impose fiscal responsibility not only on the federal government but on the autonomous Greek Cypriot and Turkish Cypriot entities that would run most day-to-day affairs in the island's two communities.

It is a measure of the optimism surrounding the latest peace talks that Cypriot policymakers are giving serious attention to such technical matters. The International Monetary Fund, World Bank, European Central Bank and the European Commission are already supplying advice on the economic and financial aspects of reunification as the latest diplomatic efforts to end the Cyprus dispute, which date as far back as 1963, begin to bear fruit.

"It is imperative that the new union doesn't allow itself to face fiscal issues and that one of the two constituent states doesn't steer off course, because the federal union itself would then be in trouble," Mr Georgiades said.

He had in mind primarily the future Turkish Cypriot entity, which might struggle to begin with because the Turkish Cypriots have relied heavily on Ankara for financial help ever since Turkey invaded the island in 1974. They would need international financial support over a transitional period before operating under strict new fiscal rules on their own, he said.

The Turkish Cypriot banking sector would also need close attention, he said. "It's a bit of a wild-west situation. Nobody knows enough about ownership, capitalisation and supervision in the Turkish Cypriot banking system," he said.

Even so, Mr Georgiades said he considered reunification, in principle, as "a win-win situation" for both Greek and Turkish Cypriots. The former, who control Cyprus's internationally recognised government, would benefit not only from the ability to conduct business across the entire island but from gaining access to the huge domestic market of Turkey, which is currently closed to them. "At the moment, it's as if we don't exist for Turkey and Turkey doesn't exist for us," he said.

Mr Georgiades estimated that the Greek Cypriot shipping industry, which makes a direct contribution of about 7 per cent to Cyprus's economy, would double its business overnight if a peace settlement was reached.

The poorer Turkish Cypriots, whose self-proclaimed state in the north of the island is recognised by no country except Turkey, would benefit from access to the EU market and EU regional aid funds. Crucially, the Turkish Cypriots would enjoy "the free and unobstructed ability to engage in commercial and economic activity legally and openly with the outside world", Mr Georgiades said.

According to an independent 2014 study, "The Cyprus Peace Dividend", a peace deal would give such a boost to Cyprus's economy that all-island economic output would rise to about €45bn by 2035 from about €20bn in 2012. Gross domestic product per capita would rise to €28,000 from €17,000.

One particularly mouth-watering prospect is the potential bonanza from large natural gas reserves discovered since 2011 off Cyprus's coast. However, Mr Georgiades said it was too soon to speak of exporting the gas via a pipeline to and through Turkey. "First things first. Currently, we cannot even export olive oil to Turkey, let alone petroleum, oil or natural gas," he observed.

The prospective financial gains from reunification may be attractive to many Greek Cypriots, whose government required an emergency EU-IMF rescue in 2013 after the banking sector collapsed because of Cyprus's exposure to Greece and an unsustainable financial bubble on the island.

Cyprus is due to leave its three-year EU-IMF aid programme at the end of March, with its economy returning to growth and its budget almost in balance. But its banks are still burdened with a heavy load of non-performing loans. "It wouldn't have been possible to make a last push for reunification while engulfed in the worst financial and economic crisis we've ever faced," Mr Georgiades said.

An error has occurred. This application may no longer respond until reloaded. Reload 🗙