Transcript Chapter 14 - Eastern Mediterranean University

Chapter 14
The business case
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READING 5
• Construction development and the BON –Curve
analysis
• Draw and explain the Bon-curve
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Data
Does the volume follow the share
LDC NIC AIC
How about the micro states? In order to answer
this question go to page 264 and read Mehmet
and Yorucu (2008)
Bon Curve analysis
• Inverted U-curve is not valid for micro
states. Inverted V-curve is an evidence for
North Cyprus.
• The shape of the Bon-curve varies…
•
Figure 1 The Implementation of Bon’s U-shaped profile of Construction on
micro-states
Backward and Forward Linkages of the Construction Sector: an InputOutput Analysis and the Bon Curve in the case of North Cyprus
Ozay Mehmet & Vedat Yorucu
Department of Economics, Eastern Mediterranean University, Salamis
Road, Famagusta, Cyprus.
North Cyprus (NC) is a micro-state in the Mediterranean
Population size: 256,644 (2006 census)
Surface: 3298 km square
Total GNP: US $ 2, 327.8 million
Per capita income: US $ 10,567 (2006)
Construction growth rate: 35.2% (2006)
Real GDP growth rate: 13.5% (2006)
Construction sector in NC had a boom which is triggered by the Annan
Plan (2004) Referandum in May 2004 which aimed at ending political
division in Cyprus.
Expansion in construction volume had a significant growth in real GDP
and drew the attention of the researchers.
An input output analysis is used to see the backward and forward
linkages of the construction sector.
In micro-states, where the land constraint is encountered earlier
compared to large economies, the drive to maturity which is the first
and early stage of economic development (construction growth exceeds
the real GDP growth rate-steep positively sloped curve) appears to
entail a shorter time frame.
This evidence confirms the Bon curve, but it suggests that the shape of
the curve may be more like an inverted “V” rather than a “U”- curve.
i.e.
Singapore (growth triangle-”transnational construction”
Hong Kong (“vertical construction”, “multi-storey category”
NC (inverted V rather than U-curve) (vertical expansion is not an option in NC)
In NC with land constraint and access to cheap labor supply, the
expansion portion of the Bon-curve may be steeper, the peak much more
pronounced and the declining portion relatively flatter compared to the
original Bon-curve.
The steeper portion of the curve mirroring explosive construction growth
in North Cyprus has shown to be unsustainable and it is already being
checked by tougher environmental and land zoning standards.
The rate of decline in the downward portion of the curve is the function of
political commitment in the implementation of the standards.
Backward Linkages
Backward linkages in this study relate to direct input interdependence
between the construction sector and other sectors.
In another words, they refer to purchases by the construction sector of
intermediate goods in inter-industry transactions. These input purchases,
priced at producer prices, are the fixed coefficients indicating required
amounts per unit of construction output.
Principal source of intermediate inputs for the construction sector was
sub-sector 5 (0.218 coefficient) in 1998 and (0.214 coefficient) in 2005.
It is important to note that in 1998 one unit of output required just 0.055
units of input from the financial sub-sector, however, in 2005 this
coefficient rose to 0.33; which means the production of construction
output in North Cyprus became significantly driven by availability of
finance.
There is low capital intensity in NC construction production since there
was bulk influx of cheap wage labor from Turkey.
Forward Linkages
Forward linkages relate to deliveries of construction outputs to other
sectors, as intermediate goods, plus final demand components.
The forward linkage coefficients represent how much construction sector
delivers to other producers and final demand users per unit of output.
In 1998, hotels and bungalows represented the top intermediate users of
construction output (0.512).
By 2005 this sub-sector was overtaken by the wholesale and retail trades
(0.458).
One important aspect of construction in North Cyprus is the fact that
outputs are primarily delivered for final demand users, intermediate users
accounting for a much less share of total sector output.
1998 -- 96.5% total construction output went to final demand users.
2005 -- 53.7%, total construction output went to final demand users.
(a very large decline)
Final demand components were collectively still ahead of intermediate
consumption.
Environmental Degradation
There is no concern for the unique ecology of North Cyprus by
speculative investors and profit driven contractors.
In the process, the natural assets on the shoreline and mountains are
being depleted.
Infrastructural constraints are encountered with inadequate roads,
electricity and water resources.
NC Government took immediate action:
• World Bank Report on NC (2006) – suggesting significant increase in
property taxes. (Ministry of Finance increased property taxes by 3 fold in
April 2007)
• Enactment of cabinet decrees
Impact of decrees may be higher prices and better quality
construction.
Conclusion:
In NC, an environmental limits are encountered and government
authority is then obliged to step in to protect net public benefit putting
the brakes on explosive construction growth by accepting 7 cabinet
decrees over the last three years.
The inverted “V” hypothesis advanced here does not invalidate, but
merely modify the Bon Curve.
Thank you.