By Barret Kupelian
Cypriot politicians don’t make good economists. In the past, this didn’t matter. Historically, Cyprus was a small, open market economy, with good British-inspired institutions. Its workforce was entrepreneurial and growing (either through immigration or through a natural increase of its population). All of this meant it retained an edge against its key competitors as long as politicians didn’t meddle.
Clearly, this has now changed.
This article takes a look back at which Cypriot administration was the most economically successful and looks at what lessons we can draw for today.
The chart above shows the average GDP growth rates for the various presidencies in Cyprus which is the variable I use to measure “success”. For the purposes of this analysis, I’ve excluded the bust and boom period of 1974 and focused on completed presidencies post Makarios. The data has been sourced from the Statistical Service.
The message is clear. Based on average GDP growth, George Vassiliou had the most successful presidency in modern times. During his time, the economy grew at an average rate of around 6.8 per cent per annum in real terms. This compares favourably to the 4.4 per cent average over the 1978-2012 period.
There are also some other interesting trends:
Christofias’ presidency was the worst, with GDP at a virtual standstill over the period.
Clerides’ first stint as president was significantly worse in economic terms compared to his second term and awful compared to Vassiliou’s record with a difference of 3.5 percentage points per annum observed. I discuss why later on in the article.
Kyprianou’s record during his second term was comparatively worse compared to his first time as the economy grew slower by 0.6 percentage points per annum.
I haven’t included the Anastasiades presidency in the analysis as his term has not yet finished.
My approach has some disadvantages, which I discuss on my blog, but I still think there is some value in carrying out this analysis and specifically on what we can learn from the Vassiliou presidency.
Reform, reform, and reform: The Vassiliou presidency was revolutionary partly because of the then president’s unwavering commitment to carry out structural – productivity enhancing – reforms.
Who knew, for example, that the office responsible for setting up the NHS was set up under his watch? Or that the measure of rotating permanent secretaries in the ministries was a measure implemented in the early 90s with a view of eventually extending the practice across the entire civil service?
In fact the more I look back at the achievements of that presidency the more baffled I become on how similar they look compared to the spirit of the structural reform measures Cyprus has committed to carry out as part of its bailout, a whole 25 years later.
The evidence is clear. Sensible, structural reforms breed growth in the medium-term. This point could not have come through more clearly by comparing the two Clerides presidencies.
As mentioned above Clerides’ second term was more successful, in economic performance terms, compared to his first. You might be wondering why. I think the relative success of his second term was driven by the fact that most of the European Union inspired structural reforms – liberalising and opening up markets and establishing arms-length regulators where necessary -pushed economic growth by around one percentage point per annum, compared to the 1992-5 period.
Ironically enough it was Vassiliou who oversaw these reforms.
Stability breeds investment: Our politicians constantly bicker on how businesses need to ‘kick start’ the economy by embarking in ambitious investment projects. The narrative is something along the lines of if the private sector builds a hotel, then tourists will somehow flock to our lovely shores, and jobs will spring like mushrooms.
This is a simple-minded way of thinking about economic growth.
What matter most is the ability of our presidents to generate conditions that breed investment. The average rate at which the investment (both public and private) component of GDP grew under different presidencies shows that yet again, the Vassiliou presidency takes the top spot.
So you can see a pattern emerging.
There are a few reasons why investment surged during Vassiliou’s presidency. For me the main reason has to do with the Cyprus problem, which, under his watch, was very close to its final and eventual settlement.
Businesses, households and investors cherish stability as it helps them plan for the future with relative ease. Solving the Cyprus problem goes a long way in breeding stability. Failure to do so remains a key source of uncertainty for all sectors of the Cypriot society and potential overseas investors.
The data shows that prospects of a solution of the Cyprus problem are closely associated with an upswing in investments. This is precisely why investments grew by around nine per cent per annum during Vassiliou’s pro-solution presidency. In contrast, Clerides’ first presidency was masked by the S-300 missile crisis and the effect of this is reflected in the data where an overall contraction in investments was recorded.
So how can we apply the learning from the above to our current situation?
The analysis above shows that Vassiliou was, in effect, a troika in disguise. He reformed the public sector and boosted productivity by opening up markets and setting up new institutions. The numbers show that his government had the best track record on economic growth.
The troika wants to continue this good work. Why shouldn’t civil servants, for example, be disallowed from being permanently transferred to other parts of government bureaucracy where their skills and capabilities are in demand? Why shouldn’t local banks be allowed to collateralise and sell non-performing loans to (foreign or domestic) investors freeing up resources and allowing them to focus on their day-to-day running of the banks?
So lesson number one is if Cyprus wants to return to a situation where its economy grows on a sustainable basis it needs to aggressively implement the structural measures outlined in the deal struck with its international creditors, which are ultimately backed up empirical studies carried out by academic economists.
Lesson number two is solving the Cyprus problem will lead to investment-led growth. If our politicians are serious about helping attract domestic or international investors then they need to focus on the elephant in the room and solve the Cyprus problem.
Barret Kupelian is a consultant economist who works in London. He writes in his personal capacity and his views do not reflect that of his employer. You can follow him on Twitter @BarretK or on his blog on factsright.wordpress.com