Transcript The Road to EU Accession

February 2007
Growth, Convergence and
Reunification:
Are the Dynamics Encouraging?
Max Watson
(Oxford University, Adviser to the European Commission)
This paper does not represent views of the European Commission
The Convergence Concept
In Cyprus, convergence refers to 3 principles,
with the potential to be mutually reinforcing:
• Convergence of incomes: CY => EU average
• Convergence of incomes: north => south
• Convergence of the real economy and of
institutional frameworks: north => south
Economic dimensions not everything, but affect
political dynamics via incentives (referenda)…
Context for EU aid, Green Line, Technical talks
Operational Questions
Focus here on recent income trends, and then
4 issues on which we may stand at crossroads:
• Role of economics in Spring 2004 failure?
• Are there major synergies to unlock in a
converging intra-Cyprus economy?
• Can economic reform approaches contribute
importantly to convergence?
• If we miss present opportunity, will economic
gravity pull in divergent directions?
Recent Income Trends
Since 2002, convergence has accelerated intraCyprus and vis-à-vis EU:
South
North
Real GDP (% change)
2001 2002 2003 2004 2005
4.1
2.1
1.9 3.8
3.9
5.4
6.9 11.4 15.4 10.6
Policy frameworks in south: Maastricht, Lisbon
Policy frameworks in north: Mixed incentives
Intra-Cyprus Income Gap
Image during UN discussions also needs to be
revised as regards levels:
• Perception of a steep, persistent gap added to
tensions on convergence strategy/federalism
• Ayres 2003, while warning on measurement
hazards, cited EIU p.c. 2000 of $6k v. $13k
• Mehmet 2004 assumed starting disparity 60%
• Eichengreen et al 2004 Report on Annan Plan
assumed 60% & project (benign) 38% in 2020
World Bank PPP Estimates of n/s Gap
Nominal WB Atlas
North
North – rev. base
South
8.1
9.2
19.4
PPP
(US dollars 000s)
7.2
14.8
8.2
16.9
17.6
22.3
Ratio (north: south)
42
41
66
Ratio (rev. base n.)
48
47
76
Gap n:s (rev. base)
52
53
24
Ratio (n: EU rev. base) 40
39
64
Is PPP factor right? And north receives large transfers
(15-20% of GDP). Size of informal economy (20-35%)
Medium-term Challenges
Sustainability/competitiveness challenge - some
parallels, but far more serious in north:
• Short- to medium-term fiscal adjustment
• Address long-term social security imbalance
• Achieve continuing shift to higher value added
exports, with growing globalisation of services
and monetary union with competitive partners
=>Reforms in north not underway: so bottlenecks,
as well as distortions to trade and investment
Economics and the 2004 Talks
There was little time to prepare underlying
Issues - and are we using time well now:
• Income gap; convergence strategy; framework
• Credible fiscal federalism in EU framework
• Reunification cost (including resettlement,
balance sheet issues in north – which cannot
be left unresolved if incentives are to go right)
But not neglecting market dynamics: winners &
losers among corporate & labour market groups
Intra-Cyprus Synergies
The island faces a huge strategic opportunity
as well as new competitive challenges:
• It is an EU service sector hub in the Eastern
Mediterranean… exploiting scope to upgrade
value added in a globalised service economy
• So concept not intra-Cyprus complementarity
but synergy in services (tourism; education;
and a very wide range of business services)
• …& continued restructuring in manufacturing
Economic Reforms & Convergence
The north will be compelled to embark on farreaching reforms by a range of pressures…
• Economic history points to role of effective
frameworks – or risk distortions affecting all
• Acquis communautaire offers an opportunity
to shape this process & realise externalities
• But reforms such as social security need more
co-ordination, and help set market framework
• Plus other public finance, competition reforms
Economic Gravity
Intra-Cyprus convergence or divergence will
play out on the ground in several markets, eg:
• Labour market: Integrating, but over which
areas? Framework? Net skill flows? Tensions?
• Goods: Distorted and underperforming?
• Services: Tourism: gridlocked by property,
psychology? Health: hazardous integration?
• Financial flows: Same gridlock?
• Real estate: Problematic, & pervasive impact
Constituencies for Reunification
Economic exchanges may embed interests in
rent-seeking distortions, or open-market flows
• So pattern of exchange in markets can affect
strength of constituencies for reunification
• Clearest in property holdings, trade channels
• Also, Turkey reforms change many trade-offs
• Economic convergence across Cyprus – in
frameworks/structures as well as income levels
– as a pervasive Confidence Building Measure
Opportunities & Dynamics
At present time, risks of creeping political
economic divergence need to be squarely faced…
• Can evolving initiatives be steered in a ways
that lead toward greater convergence not just in
incomes but in economic & cultural life?
• Can economic exchanges, including reform
ideas embed constituencies for reunification?
• How fully can communities in Cyprus realise
the immense promise of their regional role?
End of Presentation