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PRIO researchers update view on Cyprob solution benefits

30 May 2014

Researchers at the PRIO Cyprus Centre have published even more optimistic predictions than initially made on the benefits of a solution to the Cyprus problem.

Their calculations predict that a solution could increase per capita income by about 12,000 euros over 20 years and that the economy would expand by around 20 billion euros, ‘Cyprus Mail’ reported.

Last March, economists Fiona Mullen, Alexander Apostolides and Mustafa Besim published a preliminary report on the ‘Cyprus peace dividend’ funded by Sweden, Denmark, Finland and Norway, which estimated GDP to rise by an extra 18 billion euros two decades after reunification.

However, new research on the study published yesterday by PRIO Cyprus Centre showed that after closer scrutiny, the benefits to each sector of the economy following reunification could be even greater.

The initial results were first presented to Greek Cypriot and Turkish Cypriot business representatives in Brussels in early March. They were asked to give their own input, which was then incorporated by the researchers to produce the final report presented yesterday.

Speaking at the event UN Special Representative Lisa Buttenheim welcomed the “timely contribution” to the public debate on the talks, as well as the decision made by both Presidents to speed up the negotiation process by meeting twice a month.

“As the negotiations intensify, Cypriots will naturally have many questions about the impact of a settlement on their own lives and on their own ‘pockets’,” said Buttenheim, who is now the acting UN Special Adviser following the resignation of Alexander Downer.

The researchers have attempted to address these issues by quantifying the benefits to the economy as a whole and to individuals, she said.

The acting special adviser was very enthusiastic about the potential rewards of a solution which were estimated at about 20 billion euros over 20 years, declaring it as a “a great prospect”.

She also invited people to challenge the models and figures used by the researchers in the study and engage in an inclusive debate.

“Because in engaging, you take a step, for just a moment, into a future united Cyprus. You dare to imagine what the future can look like together.

“You start to focus on the opportunities—not only those that come from a settlement itself but also the permanent gains that may arise… as the authors say, ‘from opening up a Turkish market of 74 million people to Greek Cypriots and a European Union market of 500 million people to Turkish Cypriots’. Imagine that.”

Buttenheim said yesterday’s launch was the result of “a renewed vibrancy of civil society, which has a crucial role to play in building public confidence in a better future”.

The study was based on two perspectives which looked at total factor productivity (TFP) or the capacity for long-term growth with and without a solution, and then potential growth on a sector-by-sector basis, and looking at the average of the two combined.

“In the past, the tendency has been to see the costs and benefits of a solution in a static way: there was an appreciation of the immediate costs, but there was little understanding of the dynamic benefits,” said the research team in a press release.

The study works on the basic assumption that a settlement comes into force in 2016, and that a united Cyprus will be based on a bi-communal, bi-zonal federation with political equality as outlined in the joint declaration of 11th February, 2014.

Island wide GDP at constant 2012 prices would rise from just under 20 billion euros in 2016 (Year 1) to just under 45 billion euros by 2035 (Year 20) compared with around 25 billion euros without a solution. In other words, the benefit of a solution over 20 years would be a gain of about 20 billion euros.

The study claims that the average peace dividend per annum would be just over 2 billion euros on average in the first five years after a solution, just under 5 billion in the first ten years and just over 10 billion in the first 20 years.

GDP per capita, that is, the income to individuals, would rise from around 15,500 euros in 2016 to around 28,500 in 2035, compared with approximately 16,500 euros without a solution.

Thus, annual incomes, at constant 2012 prices, would be around 12,000 euros higher by Year 20 with a solution than without one, said the researchers.

The annual average growth rate would be 4.5% per 20 years, compared with just 1.6 % without a solution, with the peak growth rates coming in the first ten years. The boost to real GDP growth rates would therefore average around 2.8 percentage points each year.

Currently per-capita incomes in the Turkish Cypriot community are 60% of Greek Cypriot earnings and are predicted to rise to 91% of Greek Cypriot community incomes in 20 years, nearing full convergence.

The various sectors analysed are: tourism; construction; wholesale and retail trade; transport; financial and professional services; and higher education.

Researches also looked at solution-specific investment like natural gas (potential pipeline to Turkey in addition to an LNG plant), housing and the reconstruction of Famagusta.

“A pipeline to Turkey would generate 1.3 billion euros in additional gross investment. More importantly, it would yield much earlier government gas revenues than would be the case without a solution,” the study said.

Rejuvenating Famagusta, including Varosha and Famagusta port, could generate, in a low-investment scenario, 5 billion euros.

However, sector specialists  told the researchers that a “big-vision idea”, such as a state-of-the art eco-city that integrated the whole of Famagusta, could generate investment of up to 15 billion euros, and is more likely to attract private investment than the low-investment scenario. The researchers used the lower scenario for their calculations.

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