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The State and Economic Development

In the first years after the de facto partition of the island, the Turkish Cypriot community had sought by any means possible to establish a viable economy. Faced with the problem of creating an economy from a very small base, the government became the employer of first resort. Numerous semipublic economic enterprises were set up with Turkish aid, and a functioning economy was put in place. The Cyprus Turkish Industrial Enterprises Holding Company, the Cyprus Turkish Tourism Management Company, and the Cyprus Turkish Maritime Company were examples of these state-sponsored entities. They were nonprofit and service-oriented and staffed by stateappointed managers. State planners created them to meet economic needs the private sector was unable to satisfy.

The State Planning Organisation (SPO) was the agency responsible for planning. The SPO was subordinate to the prime minister, but its daily activities were conducted in cooperation with the Ministry of Economy and Finance. The SPO helped establish long-term economic goals and coordinated the planning activities of ministries. The two main components of the SPO were the State Planning Section and the Coordination, Executive, and Technical Assistance Section.

The State Planning Section was responsible for preparing economic and social development plans. Such plans required research, analysis, and project evaluation. The section also monitored the implementation of plans and cooperated in preparing the government's Annual Development Budget.

The Coordination, Executive, and Technical Assistance Section prepared the Annual Development Budget and supervised its implementation. It also implemented development plans, provided technical data for the working committees of the National Assembly, and prepared requests for technical and economic assistance. In addition, the section published statistical reports on all sectors of the economy.

The Turkish Cypriot economy was mixed, neither wholly statemanaged , nor privately owned. Although the state economic enterprises were significant actors, and the state set the overall direction of the economy, the state did not generally interfere in the private sector beyond legislation that set wage rates and taxation. The state supported and encouraged the private sector through investments in the national infrastructure and other measures. For example, it set up "free economic zones" to attract foreign investment. By the late 1980s, about fifty foreign investors had taken advantage of these zones' generous tax provisions.

In the second half of the 1980s, however, the government changed its policy in response to persistent economic dependence on Turkey. In late 1986, the "TRNC" signed an economic agreement with Turkey, and in 1987 a development plan was formulated. Both the agreement and the plan aimed at transforming the Turkish Cypriot economy into one based on liberal economic doctrines. The long-term result, it was hoped, would be a stronger economy less dependent on Turkish aid and one that in time would become self-sustaining.

The movement toward a liberal, market-oriented economy was to be realized by making tourism the driving force. Tourism would pull the rest of the economy into growth and reduce the importance of state-owned and state-managed enterprises. Turkey increased its aid, much of which went toward improving the infrastructure, and promised to guarantee all foreign investments in the "TRNC." The government offered tax concessions, long-term, low-cost leases, and reduced controls on transfers of foreign exchange. These and other measures were successful. Tourism's earnings tripled between 1986 and 1989. Manufacturing also increased its share of GDP, as did nongovernment services, and the size of the state sector and agriculture began to fall. The ratio of the public sector to the private sector in fixed capital investments gradually changed from two to one to the reverse.

A key aim of the new liberal policies was to reduce the burden of a swollen government sector. Although some reduction was achieved, serious problems in this area remained at the beginning of the 1990s. Expenditures for wages and pensions, for example, made up two-thirds of the government's budget. Reforms of very generous pension plans for civil servants were needed, as was a streamlining of the government's cumbersome bureaucratic procedures.

Chronic inflation was another problem that needed to be addressed. Inflation rates ranged from lows of 33 percent in l982 and l983, to a high of over 100 percent in l979. The year 1988 saw a rate of 62 percent. The most serious cause of inflation was the use of the Turkish lira (TL; for value of the lira--see Glossary) as legal tender. This currency's persistently high inflation rate was imported into the "TRNC." There were from time to time discussions of the desirability and practicality of the Turkish Cypriots's having their own currency, but as of 1990 no steps in this direction had been taken. Some inflation, however, was domestic in origin, stemming from excessive state spending.

Although the government's share of GDP declined somewhat as the economy grew and modernized, at the beginning of the 1990s the "TRNC" still relied on Turkish aid. Turkey's aid to Turkish Cypriots in 1990, in both loans and grants, was expected to amount to TL140 billion (US$60.5 million), a sizeable increase over the TL88 billion provided in 1989. An indication of the increasing health of the Turkish Cypriot economy, however, was that in 1988, for the first time, local government revenues substantially exceeded Turkish aid. The figures for 1989 also reflected this change.

A potentially serious problem for the Turkish Cypriot economy at the end of 1990 was the apparent collapse of the economic empire of Asil Nadir, the only major foreign investor in the "TRNC." Nadir was a native-born Turkish Cypriot long resident in London. As chairman of a large multinational company, Polly Peck International, Nadir had taken advantage of the government's "free economic zone" policy and invested heavily in industry, citrus production, and tourism. He was surpassed only by the state as an employer in the "TRNC," with as many as 8,000 people, by some estimates, earning their livings from his varied enterprises. Late in 1990, however, Nadir's international empire suffered reverses and faced possible bankruptcy and liquidation. The long-term effects of Nadir's legal and financial difficulties on his investments in the "TRNC" were not known, but the short-term effects were painful.

Data as of January 1991

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