Cyprus Mail
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The economics of a solution

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By Costas Apostolides

The economics of a Cyprus settlement have come to the fore this week because both Nicos Anastasiades and Mustafa Akinci were invited to the Davos Economic Forum to meet with the United Nations Secretary General Ban Ki moon and various political and economic leaders, and consider the economics and financial aspects of a Cyprus settlement.

Given the recent statement by the UN Secretary General that the prospects for an agreement during 2016 are considered good, and news reports that a solution before the summer is feasible and parliamentary elections south of the green line may be rescheduled as a result, it is natural the focus is on the economics of a settlement.

At Davos, Espen Barth Eide is wearing two hats, that of the UN Secretary General’s special advisor for Cyprus, and that of chief executive of the Davos Economic Forum. It is, therefore, somewhat puzzling that he recently stated that the public’s concern over the cost of a solution is misplaced as all the figures mentioned are wrong, because we do not yet have a settlement.

Since he has been working on the economics and financing of a Cyprus settlement for some months now, and has encouraged studies by the World Bank, the European Commission and other international institutions – some of which have sent teams to Cyprus – one wonders what all these consultations have been about.

The aim of this article is to lay the ground work for the serious study of the economics of a possible Cyprus settlement.

First, it must be emphasised that after independence in 1960, a problem arose immediately because separate municipalities between Greek and Turkish Cypriots had been agreed in principle, but were not established, primarily because of disagreements regarding their area and population. This led to a Turkish Cypriot veto on tax legislation, which led to a financial crisis and the Greek Cypriot demand for a change in the constitution. Fighting erupted over Christmas 1963 and the Cyprus problem was reborn from the troubles of the 1950s.

In view of this history, Espen Barth Eide stated on January 15 that a settlement must be credible, implementable and sustainable, which means in effect that the economic and financial arrangements must be sound, and that the funds for implementation must be available. But EU officials and Cyprus’ minister of finance have stated that a metamorphosed united federal Cyprus must stay within the fiscal constraints established by the EU and other bodies during the implementation period of the agreement. This will be impossible unless all the required funds are provided in grants, and shows a total lack of understanding of what the economics of a settlement would look like.

A solution will require substantial funds to be implementable within a reasonable time period (say five to 10 years)  and must have priority over all other issues, otherwise the implementation schedule cannot be kept, and a return to conflict becomes probable. For example, if territorial adjustment is delayed over lack of funds to resettle Turkish Cypriots, it is possible that the Turkish army may halt its schedule (over three years in the Annan Plan) for withdrawing from the area under adjustment, on the grounds of Turkish Cypriot security. A major crisis would be inevitable.

Territorial adjustment must have top priority because the Turkish Cypriots that may have to be resettled for a solution to be agreed (the Greek Cypriot requirement is for 50 per cent of the displaced to be resettled under territorial adjustment) will have to vacate the houses they reside in, and must be rehoused. But the win-win philosophy of the talks necessitates that this be done within the time schedule, and in a manner that in most cases provides improved housing (new housing units) for most of the affected Turkish Cypriot families. This provision of housing involves private property, and appropriate funding mechanisms must be in place, something which has not been studied.

The most comprehensive estimates of the costs of a solution, based on the Annan Plan, were those of the Planning Bureau in 2004. These estimates calculated an overall cost of about €29 billion, spread over a number of years (not stated). Of this amount, about €19 billion (68 per cent) were for land compensation, for both affected communities but mainly to displaced Greek Cypriots. Therefore, the infrastructure for reuniting the country and the requirements of those affected by territorial adjustment are about €10 billion. Most of this was for territorial adjustment (€6 billion), but it was to be spent over a number of years (feasible within seven years).These figures terrify people because they question how this could be financed under the present difficult conditions, and the heavy debt of both communities.

Clearly Eide is right and the estimates are wrong, but not only because an agreement is not in place. What should be done then? Certainly the costs of a solution need to be estimated so that the financial needs can be assessed, and the mechanisms and assessments made regarding financing and assistance requirements. Clearly a very serious estimate of costs is required with a view to guiding the negotiators on how total costs can be reduced, while still ensuring that the overwhelming majority of the affected population should be better off as a result of the solution than they are today.

The focus of a serious study of the costs of a solution should be the investment and resettlement costs, and not the compensation costs. All costs should be placed in categories according to who should carry the cost, for housing involves private property in Cyprus and is a wealth factor. This means the costs to be carried by the federal government, the two federated states/provinces, and local government on the one hand, and the European Union under regular programmes on the other. In the case of Northern Ireland there was massive funding by the EU as well, but mostly for improving relations between Catholics and Protestants, not for physical structures. The cost assessments should be based on assumptions and surveys, and at least three scenarios prepared. For example, there is plenty of state land in Cyprus which, even if “forest land” is excluded, could be used for compensation. But the focus of financial assistance should be the funding of territorial adjustment.

The economics of a settlement are highly complex, and a combined effort by both communities is required, working together to research the issues in depth and find ways of overcoming the problems. The first step is to establish a common data base, undertake research into issues like comparative land prices, and advise as to how the negotiations can reduce costs and yet make the majority of the affected population better off than they are today. At the same time, the focus must also be on integrating the economy and stimulating growth for the benefit of everyone.

 

This is the first in a series of articles on the costs of a settlement. Costas Apostolides is an economist and a visiting lecturer in Negotiation of Conflict Resolution at the University of Malta for the joint MA/MSc programme by the universities of Malta and George Mason (USA).Email: [email protected]

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