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Cyprus

Nobel economist says reforms put on backburner

Nobel Prize winner Christopher Pissarides

National economy council has not met in two years

THE national economy council, an informal body set up amid the maelstrom of the financial meltdown to advise President Anastasiades on economic affairs, has not met in two years. The anecdote is perhaps emblematic of the fact that the drive toward structural economic reforms has fallen by the wayside.

“Since Cyprus exited the Economic Adjustment Programme (EAP) in 2016, we’ve grown lax in our pursuit of structural reforms,” the council’s chairman and Nobel prize laureate Christopher Pissarides told the Sunday Mail.

Asked why the government hasn’t asked for the council’s input for a long time, the always gracious Pissarides put it diplomatically:

“The finance ministry’s focus has been on the fiscal side and on shoring up the banking sector, and on both counts it has done well, take nothing away from that. But by the same token we seem to have forgotten about modernising our economy, making it more efficient.”

This, he added, is not a luxury, but rather essential to creating a sustainable long-term economic model.

“Call it the perils of democracy…all governments around the world tend to think short-term.”

Sustainable growth would be an annual GDP increase of anywhere between 2.5 and 3 per cent –  though Pissarides is quick to acknowledge that even the most advanced European economies can only dream about those numbers right now.

But according to the economic expert, Cyprus’ international lenders – commonly known as the troika – are partly at fault for the apparent shelving of structural reforms.

What the lenders are primarily concerned with is the fiscal balance of countries – something repeatedly stressed by European Central Bank chief Mario Draghi.

And since Cyprus has delivered on this level, posting budget surpluses, the lenders have cut the island some slack, walking back their initial demands for sweeping changes.

One example being the privatisation of semi-state organisations, like telecoms and electricity, which in the days of yore was said to be a precondition for disbursing the next loan tranche – a mantra soon forgotten.

The government’s cash flow is arguably doing well. Tourism is going through a boom, with record revenues – but this is a windfall, made possible through sheer good luck.

With European tourists staying away from rival regional destinations like Turkey and Egypt, it was inevitable that Cyprus would pick up that slack.

Meanwhile an estimated €4 billion has flowed into state coffers through the investment for citizenship scheme, mostly from wealthy Russians, Chinese and people from the Middle East.

Yet both these revenue streams are not dependable, long term, argues Pissarides.

“You can’t issue passports to foreign nationals forever,” he remarks.

The underlying issues remain largely unaddressed.

Among European countries, Cyprus is close to the bottom of the heap in economy competitiveness rankings, faring just a little better than Greece and Moldova.

The lead-time required to set up a business in Cyprus is much longer than the EU average, as are delays in the legal system.

The legal system in particular is a drag on doing business. Whether it’s a company challenging the results of a public tender, or a consumer launching legal proceedings against a private business, these cases are tied up in the courts for years, in some cases taking as long as a decade to resolve – a preposterous state of affairs, says Pissarides.

Securing property rights is another major pending issue. In some instances, a property buyer may not obtain a title deed until after 15 years.

“Or when you file an income tax return, you get it back after four years. Which is ridiculous, especially if you compare with, say, the UK, where you’ll get the refund within 12 months at most.”

Pissarides cites what he thinks is a prime example of poor efficiency. Cyprus has consistently scored very low in the Programme for International Student Assessment (Pisa), a triennial international survey which aims to evaluate education systems worldwide by testing the skills and knowledge of 15-year-old students.

But at the same time, the working conditions and pay of public school teachers in Cyprus are among the best in Europe.

“There’s clearly a disconnect there. And whenever the education minister tries to bring in reforms, the teachers will strike, parents are inconvenienced, the government backs down, and we’re back to square one.”

In the provision of public health services, again Cyprus lags behind the rest of the EU. Cypriots are top when it comes to private healthcare spending.

And whereas the pending introduction of the National Health Scheme (Gesy) is a step in the right direction, the details of the system have yet to be properly worked out, Pissarides opines.

Meanwhile the coming reinstatement of Cost of Living Allowance (Cola), albeit in a modified version, likewise does not bode well for economic efficiency.

“Cola is OK, provided its granting is contingent on prior increases on productivity. Otherwise on its own it’s a giveaway to workers.”

Staying on the handling of Cola, Pissarides says it illustrates the approach of all governments – not only the present administration.

“You put the hard stuff on the backburner. No one – and this goes both for the government and the parties – wants to rock the boat until after the elections.”

Pissarides, who is Regius Professor of Economics at the London School of Economics and Professor of European Studies at the University of Cyprus, says one should give credit where it’s due.

“Actions such as the privatisation of Limassol port, and the introduction of Guaranteed Minimum Income, are certainly laudable. But it’s not enough.”

Asked to describe the current trajectory of the economy, Pissarides offered: “Right now we’re in a recovery – a very slow recovery. But for the economy to be viable in the long run, we need to do all the things we talked about.”

 

 



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