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DR. JIM LEONTIADES
CIIM, The Cyprus Business School
The ability to compete internationally defines a nations competence – what it is good at compared to other nations. For a good number of years the answer in the case of Cyprus was clearly tourism. Tourism was the bringer of foreign currency as well as considerable employment. Cyrus tourism however, has been stagnant for the last 10 years. From 1990 to 2000 tourism arrivals increased 72% reaching a level of 2.6 million. Ten years later there has been zero increase. Tourist arrivals here in 2010 were some 400,000 arrivals lower than the year 2000.
We can speculate on why that may be. Tourism globally has been rising steadily. The short answer is that we have priced ourselves out of the market. Cypriot prices are simply not competitive. The tourist operators that still come here are trying to minimize the local exorbitant prices by adopting “all inclusive tours”, reducing further the amount of money brought to the island by the industry.
Real estate at one time offered considerable promise. It may return at some date but not anytime soon. It has been killed off by various forms of abuse, particularly the famous title deeds fiasco which shows only minimal signs of improvement.
TEST OF COMPETENCE
The test of a nation’s international competence, what it is good at, is of course the ability to compete internationally. With its small size and island location Cypriot firms find it difficult to compete in the large scale manufacturing industries. Hence our miniscule volume of manufactured exports. The growth area in Cyprus which has proved it can compete internationally is that of financial services. In particular, the banks have demonstrated their ability to compete internationally. Ironically they have been so successful that some rating agencies now consider them “too big”, a threat to the Cyprus economy due primarily to their expansion in the Greek market.
Greece unfortunately has been at the forefront of the unprecedented financial crisis and the ensuing downturn in business. No doubt this has ushered in a difficult era for Cypriot banks. Nevertheless, they have still fared better than many famous large banks in the developed world. Goldman Saks, Citibank, Royal Bank of Scotland and other well known names have had to go to their governments for help. The Cypriot banks are still profitable which is not to say that they are not at risk from their exposure to the Greek economy.
Cyprus is fortunate to have an industry that is not only able to compete internationally but also able to provide the sort of jobs that are superior to those associated with the tourist industry. Cyprus desperately needs companies which can offer suitable employment to its many educated young professionals. Tourist jobs are all very welcome but not everyone is eager or suited for the sort of employment which hotels and restaurants provide.
BASIS FOR COMPETITIVE ADVANTAGE
Michael Porter, the well known Harvard economist, has carried out research which indicates that industries which are internationally competitive are typically found in industry “clusters”. This refers to an integrated group of related and supporting industries. For example, the banks themselves are but part of a complex of interrelated financial service industries. This “cluster” includes accounting firms, legal firms, credit card agencies, brokerage houses, programmers, leasing companies, insurance firms and others.
These clusters are difficult to imitate, providing the basis for sustained competitive advantage. The role which government can play is to provide the legislation, tax and other infrastructure which forms the necessary framework for the development and efficient operation of such industries. The real estate sector is an example of where this did not happen.
Governments should not try to select industries which they directly support. There is considerable evidence showing that governments are notoriously bad at picking “winners”. Quite the reverse. The instinct of most governments, not only our own, is to focus on dying industries which threaten to go under, supporting dead and dying companies with taxes collected from the healthy ones. A good example of the former is the millions the government has been pouring into the now defunct Eurocypria and Cyprus Airways.
The problem is always with the money such support requires. Having made very little progress in discussions with the jolly Mr. Hadjipetrou on lowering public sector expenses, the government has decided to tax the banking industry. Parliament has recently approved a tax on bank deposits to establish a “bank stability fund”. This stability fund aims to raise 120 million Euros. The banks will get 40% of the money collected from them. This will be invested in the stability fund to be used in times of financial crisis. It is a small step in the right direction but totally inadequate. The bulk of the fund (60%) will go to the government (a government stability fund?). This is roughly equal to the amount required to finance the demise of Eurocypria and to provide temporary life support for Cyprus Airways, with something left over for public sector pensions.
