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A strategy for economic recovery: safety net

The Church and other groups look out for the poor but so should the state

 

By Costas Apostolides, Economist

THIS WAS originally foreseen as a three part series but owing to the complexity of the subject it looks as if we would need another part to follow next week. The six dimensions of a recovery plan are set out below, with the first part of the series covering 1 and 2, the second part 3 and 4, and this article 5 and an introduction to 6. The 6 dimensions of a recovery plan are set out below:

  1. Achieving agreement on the Plan of Action to get back to growth between the President and the Governor of the Central Bank, the political parties, the trade unions and the business interests.
  2. Implement the Memorandum of Understanding with the troika and Eurogroup.
  3. Mitigating the damage to the economy that has been and will be done by the Memorandum.
  4. Develop a fall-back position in case the Memorandum cannot be implemented (i.e. in case the effects of the Memorandum are such that it cannot be implemented).
  5. Reform social policy to create safety net for those in need and exclude present beneficiaries that can do without (announced for implementation in 2014).
  6. Develop a Plan and appropriate policies for Achieving Growth, without which the whole strategy will fail, because the international crisis may not go away and the Memorandum owing to its inconsistencies could cause further misery and fail.

Provide a Safety Net

Before proceeding to encourage growth which will ameliorate or solve many of the current problems currently faced, it is important that safety nets are in place so that those facing the most serious consequences of the recession, such as the unemployed and those not covered by welfare or humanitarian relief, receive help. We cannot allow people to die on the streets, from lack of food or health care or shelter. To its credit the Government has announce a plan to reform the welfare system so that it is the most needy that receive assistance, and through targeting and diversion of funds extend assistance to the unemployed for longer periods than at present. However, much one appreciates the initiatives to help of the municipalities, the church and such groups as doctors and other NGO’s,  the state cannot allow people to fall through the social assistance net without income, food and shelter.  The idea is that targeting by income will create savings that will provide funds to cover extended support to those in need. Even the troika has supported this effort to reform all the social welfare and assistance schemes.

One area which does not appear to be touched is that of support and housing assistance to those displaced owing to the Turkish invasion of 1974, and their heirs. The right to support has become hereditary. After almost 40 years, however, it is time that there is one social assistance system for everyone, with universal criteria for assistance. This would save millions that could be used to fund an expansionary economic effort aimed at getting growth and development and creating jobs. This would be highly controversial, and have political cost, but it is one area where real and substantial savings can be made beyond the Troika Memorandum thereby enabling funding of investment and development.

Growth and Development

Whenever the question of growth comes up, everyone responds and states critically “How is it to be financed?”  In the period 1974 to 1980 growth was financed by printing money, which financed investment and consumption and created a growth boom which enabled the losses in real income of the Turkish invasion (not wealth) to be covered, and GDP to be recovered within four years. This was the Cyprus miracle. It included a whole range of policies from reductions in salaries, increased taxes for business, special banking schemes to encourage investment, and massive infrastructure construction including roads, housing for the displaced, re-establishment of industry, and many other features undertaken under a planned economy bringing together the state and the private sector. The limiting factors were the foreign exchange reserves that were enough for a year’s imports, but they were never used up, because the economy expanded and revenues from agriculture, manufacturing and tourism picked up quickly. Contrary to popular belief foreign assistance was not a crucial feature of the recovery (though always useful), but the crucial feature was that we had the Cyprus pound, its value remained strong, and we had an independent monetary policy (there was no devaluation).

Such a policy cannot be followed now because Cyprus is in the eurozone and has to function within the rules of the European Union and the European Central Bank. Unfortunately even the modern equivalent of printing money, monetary easing, that is the process of buying back government bonds to put cash back into the economy, cannot be used because of the German opposition.

Quantitative easing has been used with a degree of success in the USA by the Federal Reserve, and has spurred still modest recovery which contrasts with eurozone stagnation.

In the eurozone the response to recession has been austerity, cutting of government expenditure, lower wages, rents and payments to factors of production in the name of improving competitiveness. This austerity policy has been proven to be wrong by the IMF, which has found that the downward multiplier it creates is significantly greater than expected.  In the case of Cyprus the initial cause of recession was the depreciation of currencies in its major markets that is tourism and property arising from depreciation of the UK pound and the Russian rouble and the subsequent recession in these markets.  Sterling fell by a massive 30% against the euro between December 2006 and December 2008, and Cyprus entered recession in 2009. Since then, sterling recovered somewhat but is still 21% below the euro rate in December 2006. Hence Cyprus suffered a loss of competitiveness because it entered the eurozone in January 2008.

In view of the government acceptance of the Eurogroup decisions and the troika memorandum, forcing austerity on Cyprus and the haircut of deposits (something which should never have been accepted) the question is how can the funds be found to spur growth? The answer is by cutting out the fat and improving the way state funds are utilised. To a considerable extent the troika memorandum helps in saving funds and raising state revenue. Not all in the memorandum is negative. But the memorandum savings are calculated to facilitate repayment of Cyprus’s loans from the Eurogroup, not to spur growth. What I am arguing above is that there is scope for further economies and savings that could raise funds for an expanded development budget of the state to generate investment and jobs, while at the same time placing social provisions on a common basis.

The fourth part of the series will go into specific growth measures by sector.

Costas Apostolides is Chairman of EMS Economic Management Ltd ([email protected])

 

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