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By Dr Theodore Panayotou
Cyprus International Institute of Management
Having suffered from the colonial rule of more invaders than we care to remember, we Cypriots are mildly xenophobic and allergic to others meddling in our affairs. We are very comfortable in our little island paradise where a phone call to the right person can get us a well-paid job for life with short hours of work, a good pay and job security. We love our good life; our luxury cars, our only mode of mobility even within our neighbourhood; our extravagant feasts in which more food is wasted than eaten; and our multiple wedding gifts each week, our primary form of taxation. And, we have been managing very well, until recently. Thank you. Goddess Fortune has been good to us: a civil war in Lebanon, trouble in the Balkans, the fall of the Soviet Union and the arrival of wealthy Russians, the Arab Spring, and most recently the discovery of offshore natural gas deposits. We cannot complain, although someone might say “beware of Greeks receiving gifts!”
We are, therefore, understandably apprehensive about the arrival of the Troika this week to hard nose about our books and tell us how to run our economy. True, as of lately we fell a bit short of cash (not our fault, the result of the world economic crisis) and asked our European partners for help. Couldn’t they send us the money by money transfer, like the Russians did, no questions asked? Do they have to come in person? Do they have to ask questions? All we are asking is for a few billion to recapitalise our banks (not our fault, the result of the haircut of the Greek debt), to pay public sector salaries and close a few other holes here and there.
The arrival of the Troika this week makes us all nervous. They are nosy people and they ask too many questions. We are not happy with what they did to our motherland. Of course, we know that they have learned their lesson from Greece: that extreme austerity without growth is deadly. We also know that the case of Cyprus is different and not as bad. But when you are asking for a loan more than half your Gross National Income you cannot blame your lenders if they impose strict terms and conditions to ensure that one day you will be able to pay them back. So, all our efforts now focused on getting the money we need with the mildest possible terms.
We are making a big mistake and the Troika would be making a big mistake if they play our game. There is something we need much more than the money. We need reforms! The deficits are nothing but symptoms. The real problem is that we have relied too much on the opportunistic economic model whose good performance in good economic times lulled us into complacency and as a result we underinvested in our productivity growth and international competitiveness. Instead, we accumulated a pile of distortions and imbalances that raised our cost of production and lowered our productivity.
7 RECOMMENDATIONS
The EU’s seven recommendations are necessary but not sufficient to get us on a healthy and sustainable growth path. We need more and deeper reforms to regain our lost competitiveness! They are a good point to start from but should not stop there.
The recommendation to re-establish the link between wage increases and productivity growth in both the public and the private sector is a sine qua non condition for both controlling public sector deficits and for regaining competitiveness. Instead of automatic cost of living allowance and union- negotiated wage increases that bare no relation to productivity, workers should be given the means (training, technology, opportunity, incentives) to increase their productivity and to be rewarded accordingly. Neither the number of years of service nor the wages in other sectors or other countries are measures of productivity and hence they should not be used as criteria to determine wages and wage increases; otherwise, work incentives get weakened, the labour market becomes distorted, labour costs rise, productivity is reduced and competitiveness suffers.
The recommendation to re-establish the link between the skills of the labour force and the needs of the market and especially those activities with high growth potential and large value added is a sine qua non condition for the reduction of unemployment and the eventual return to full employment. The mismatch between the demand and supply of skills along with the inflexibility of the labour market are responsible for the growing level of unemployment which for the first time in the history of the Republic has reached a double digit level (3-4 times the historically low level of 3-4%). Retraining is part of the solution but reforms should go deeper to re-invent our educational system and totally rethink our misguided professional career guidance.
CLOSED PROFESSIONS
The recommendation to open closed professions and liberalise the market of professional services is another necessary condition to reduce costs, increase productivity and regain competitiveness. It may be claimed that we don’t really have many, if any, closed professions but the reality is different. In general, openness and competition are often on paper but not in practice; monopolistic and oligopolistic practices are widespread and account for the high cost of many services and products ranging from taxi services to pharmaceuticals and from gasoline to electricity. The Commission for the Protection of Competition has never really worked as it was supposed to, when it worked at all.
It is high time that the state divests itself from the state enterprises, including money-losing Cyprus Airways, inefficient Electricity Authority and money-making Telecommunications Authority. Likewise the Cyprus Tourist Organisation and other semi-government bodies should stop being trophies for party-sharing and become autonomous, professionally run and accountable; and those which have outlived their mission should be abolished. Such a reform would reduce public spending, generate public revenues and boost competition and competitiveness.
The recommendation to implement strict control of public spending is another indispensable condition not only for the control of budget deficit but also for the enhancement of competitiveness, provided that it is accomplished in part through the reduction of bureaucracy and the simplification of procedures for investment approval and for the issue of permits to start a business or other forms of private sector investments while observing environmental and other standards. Similarly, the effective control of tax evasion should be accompanied by a reduction of taxes on businesses to stimulate economic activity and job creation.
BANKING REFORM
The recapitalisation and reform of the banking sector and cooperative financial institutions should bring about increased liquidity and reduced interest rates but it should also be accompanied by improved assessment and management of risk, better investment appraisal and more selective project lending that has been the case in the past.
Finally, the recommendation to re-establish the link between the retirement age and life expectancy is a sine qua non condition for the solvency of the pension system. With the aging of the population (more pensioners and fewer working contributors to social security) only an increase in the retirement age and a link of benefits to contributions will put the social security system into sustainable solvency. Anything less is patchwork that postpones instead of solving the problem once and for all.
While all the above will go along way to help Cyprus regain its competitiveness by lowering costs and increasing productivity, in addition to reducing public sector deficits, there is a further need to boost innovation and entrepreneurship in sectors of high growth potential such as energy saving and renewable energy technologies, organic farming for high value crops, medical and convention tourism, etc. Immediate action is needed to retrain the unemployed university graduates for occupations with a future and the creation of business startups and innovative products and services that utilise new technologies and create new jobs. For this we need strong and user-friendly incentives, including the creation of a venture capital fund. Rather than throwing development funds on big public projects with high cost and low technological content, low job creation and low social benefit is far preferable to invest in helping young people be more innovative and entrepreneurial.
POTENT MEDICINE
Understandably, we prefer to get the EFSF’s money with the lightest possible conditions, so we can keep carrying on as we have been doing in the past. The Troika should not oblige us because there is something we need much more than money: we need reforms, many and deep. What we don’t need are punitive austerity measures a la Greece, or an increase of our corporate tax rate. We know that effective reforms, like potent medicine, tend to be painful but every effort should be made to minimise unnecessary side effects.
Particular care must be taken not to make things worst even temporarily for the victims of the economic crisis: the unemployed, the lowest-paid workers and the small businesses; they have suffered enough already so the rest of us can continue enjoying our privileges and generous allowances. The bailout for the country must be, first and foremost, a bailout for them.
People’s expectations are high that the Troika will preserve what is good about Cyprus and change what is not, as to create the conditions for the new economic miracle Cypriots are capable of, if given the chance. We finally received the wakeup call and are ready to roll up our sleeves and work hard to produce real value for ourselves and our children.
Dr. Theodore Panayotou is the Director of the CIIM Business School and Professor of Economics and the Environment at Harvard Universit. He served as consultant to the UN and to governments in the U.S., China, Russia, Brazil, Mexico and Cyprus. He has published and was recognised for his contribution to the Intergovernmental Committee on Climate Change that won the Nobel Peace Prize in 2007. [email protected]
