Cyprus Economic Development

Cyprus has a record of successful economic performance reflected in rapid growth, full employment conditions, and external and internal stability, almost throughout the post-Independence period (from 1960). In terms of per capita income - currently estimated at US $12,687 (2003) - Cyprus is classified among the high-income European countries. The economy of Cyprus is 73.1 percent free, according to our 2007 assessment, which makes it the world's 20th freest economy. Its overall score is 0.2 percentage point lower than last year, partially reflecting new methodological detail. Cyprus is ranked 12th out of 41 countries in the European region, and its overall score is higher than the regional average. The first development plan (1962-66), designed to broaden the base of the economy and to raise the standard of living, resulted in an average annual real growth rate of 5.4%. The second development plan (1967-71) called for an annual growth rate of 7% in the GDP; actual growth during this period was nearly 8% annually. The third development plan (1972-76) envisaged an annual economic growth rate of 7.2%, but a drought in 1973 and the war in 1974 badly disrupted development programs. Physical destruction, a massive refugee problem, and a collapse of production, services, and exports made it impossible for Cyprus to reach the targets.

Until July 1974 the Cyprus economy was developing vigorously, particularly the agricultural sector which accounted for more than one third of the GDP. The tourist and light industry sectors were also growing. After the events of 1974 light industry was the engine of growth until the mid 1980's. By the late 1980's services replaced industry with tourism being the driving force of economic development. Since 1974 there has been a de facto partition of the island with the Turkish Cypriot community in the north and the Greek Cypriots in the south. Since 1975, multi-year emergency economic action plans inaugurated by the Republic of Cyprus have provided for increased employment, incentives to reactivate the economy, more capital investment, and measures to maintain economic stability. Since its military intervention in 1974, Turkey has provided substantial financial aid to the Turkish Cypriot area. In 1996, this assistance was estimated to be approximately one-third of the area's GDP, or approximately $175 million. The 1994-98 Strategic Development Plan emphasized a free-market, private-sector economic approach with a target GDP growth of 4% annually. The plan called for a domestic savings rate of 22.3% of GDP; an increase of labour productivity of 2.8% between 1994-96; an inflation rate of approximately 3%, and unemployment no greater than 2.8%. As of 1996, Cyprus has largely met these goals with the exception of less than target levels of savings and productivity.

Membership in the European Union (EU) is a major goal of the Republic of Cyprus. As a result, Cyprus is harmonizing its laws in accordance with EU standards. At the December 1999 EU summit in Helsinki, Cyprus joined the list of candidates for entry. The Republic of Cyprus has also offered to allow a Turkish Cypriot delegation in its negotiating group. Turkish Cypriots, however, oppose Greek Cypriot entry into the EU prior to both a political settlement of the island's division and Turkish accession to the EU. Many observers believe it unlikely that the EU will allow the Republic of Cyprus to join prior to the island's reunification. Greece, however, has threatened to veto any EU expansion if Cyprus is denied entry, regardless of the political situation on the island. The Greek Cypriot economy is dominated by the service sector, especially tourism and financial services. The desire to meet EU requirements has helped to liberalize the economy. Since EU accession, Greek Cypriot fiscal policy has focused on consolidating the budget to prepare for entry into the Economic and Monetary Union, the central bank has sped the liberalization of capital flows, and government control of the economy has declined to around 25 percent. The government, however, enjoys significant trade union support and is unlikely to privatize remaining state-owned companies such as airports, power utilities, or the Cyprus Telecommunications Authority. In simultaneous referenda on 24 April 2004, a clear majority of Turkish Cypriots voted "yes" to UN Proposals for a 'Comprehensive Settlement to the Cyprus Problem', while a majority of Greek Cypriots rejected them. As a result, on 1 May, a divided Cyprus joined the EU but with the EU acquit suspended in the north of the island. EU Foreign Ministers, meeting in Luxembourg on 26 April, asked the European Commission to bring forward comprehensive proposals to put an end to the isolation of the Turkish Cypriot community, with particular emphasis on the economic integration of the island and on improving contact between the two communities and the EU. The Council also recommended that the 259 million Euros earmarked for the northern part

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