In February 2004, the Institute of Labour of the Cypriot Federation of Labour (INEK/PEO) released its first annual Economic and Employment Outlook. The Outlook observes that although the economy of Cyprus is still expanding, its current model of growth is gradually reaching its limits. The way forward proposed by INEK/PEO rejects low labour costs and labour market flexibility, instead emphasising the skills and knowledge of the workforce.
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In February 2004, the Institute of Labour of the Cypriot Federation of Labour (INEK/PEO) released its first annual Economic and Employment Outlook. The Outlook observes that although the economy of Cyprus is still expanding, its current model of growth is gradually reaching its limits. The way forward proposed by INEK/PEO rejects low labour costs and labour market flexibility, instead emphasising the skills and knowledge of the workforce.
On 18 February 2004, the Institute of Labour of Cyprus (INEK) of the Pancyprian Federation of Labour (PEO) issued its first annual Economic and Employment Outlook. The Outlook observes that although the economy of Cyprus is still expanding, with full employment and relatively low inflation, the 'golden era of extensive accumulation of capital mostly in tourism is gradually reaching its limits'. The end of this long wave of development (1983-2004) coincides with two historic changes: first, Cyprus is joining the EU in May 2004; and second, the process of unification of the island is under way. In this context, several changes in the production system, the Outlook suggests, will be needed in order to allow the Cyprus economy to grow at its potential rate and maintain full employment. EU membership, the pegging of the exchange rate of the Cyprus pound to the euro and the imminent reunification of the country are creating new challenges for the economy. This is thus an appropriate time for an analysis of the strengths and weaknesses of the Cyprus economy, as well as the threats and opportunities it is facing. The INEK annual Outlook seeks to contribute to this analysis.
Growth model 'reaching its limits'
The Outlook states that the growth model of the Cypriot economy is approaching its limits, although it has not yet reached them. A fall in many critical economic indicators is showing that the economy is nearing the end of a major wave of growth. This fall is the symptom of structural problems. As a consequence, the Cypriot economy appears to be heading towards a period of low economic growth rates and the reappearance of macroeconomic imbalances. However, the performance of the Cypriot economy is still better than that of the EU as a whole (although this is not true of all variables of critical importance, such as fixed capital formation as a percentage of GDP).
For that reason, INEK concludes, structural changes will be required at the end of this long wave of growth, changes that will permit the Cypriot economy to enter a new period of economic growth and prosperity. The solutions sought to the exhaustion of the growth model adhered to thus far must be long term; they must be accepted by all social partners and must not put social and labour advances, solidarity or social cohesion at risk. The Outlook underlines the need to define structural policies that will allow the Cypriot economy to make a rapid transition from the current growth model to a new model; such a transition must not result in a deterioration of working conditions or everyday life, as has been the case in other EU countries where 'neo-liberal' policies have been implemented.
The Outlook places emphasis on the tourism industry. Tourism is the main source of foreign exchange for Cyprus and produces 'multiplier effects' throughout the economy thanks to its strong inter-industry relations. However, at the same time tourism is a particularly sensitive and vulnerable sector of the economy. In Cyprus, the economy has become excessively dependent on the tourism sector, making the country’s growth fragile. Since the growth model that has been created on the basis of the explosive growth of mass tourism appears to be approaching its limits, and in order for the living standards of all the whole population to continue to improve and for full employment to be maintained, it is necessary to boost the competitiveness of Cypriot products - either industrial products or services. INEK highlights the necessity of forming more 'poles of competitiveness' in Cyprus in addition to tourism, of making provision for reinvigorating existing production activities as well as expanding the production system to include new activities. First of all, the existing sectors that have potential must be strengthened (pharmaceuticals, plastics, education etc). At the same time, on the basis of the analytical framework set out in the Outlook, it is proposed to study the possibility of setting up an agrifood production complex which would include enterprises manufacturing high-quality products (for which international demand is increasing), agricultural operations and business services for food certification, quality and sanitary safety, marketing and advertising in markets abroad etc.
Low wages and labour market flexibility 'not a solution'
The growth path proposed by the INEK Outlook places emphasis on the skills and knowledge of the workforce. It rejects the view that competitiveness depends mostly on labour costs and labour market flexibility. Furthermore, the report indicates that labour costs in Cyprus are not high enough to be blamed for reduced competitiveness. Labour’s share in GDP is not higher than the average for the current 15 EU Member States. In INEK’s view, competitiveness must be based on increased labour productivity and on improved non-price competitiveness of the economy. All this, however, requires an improvement in the labour force, because in the present conditions of the 'knowledge-based economy' the most important factors for competitiveness are the labour force, workers’ education and training levels, skills, technical knowledge, and workplace culture.
For this reason, the growth model proposed by the Outlook is opposed to neo-liberalism, which it claims the experience of Cyprus in the 1990s has already shown is not able to offer a solution. The model proposed by INEK involves quality, knowledge, a well-educated labour force and improved living conditions for workers as the main factors for the competitiveness of the Cypriot economy.
Commentary
The first annual Outlook published by INEK/PEO was received with very favourable comments. Similar reports are issued by the Central Bank of Cyprus and the Planning Office of the Cypriot Ministry of Finance. However, these reports attribute importance to the monetary indicators of the Cypriot economy and to short-term developments. The INEK report, on the contrary, lays the emphasis on indicators of the real economy (production, employment, fixed capital formation, private consumption, total demand), on wages and on labour costs. It also analyses long-term statistical series of the Cypriot economy so that long-term trends can be discerned and the country’s growth model can be described. Thanks to this analysis, the Outlook gives a timely warning that the growth model of the economy adhered to from the early 1980s to date is reaching its limits and therefore structural changes in the production system will be required. This finding runs counter to the euphoria prevalent in Cyprus regarding the benefits to be derived from coming market deregulation and privatisations. The Outlook thus sets a framework for discussing the economic problems that are very likely to arise in Cyprus in the years to come, a framework which is radically different from the predominant framework of neo-liberal thinking. (Elias Ioakimoglou, INEK/PEO)
Eurofound recommends citing this publication in the following way.
Eurofound (2004), INEK/PEO issues Economic and Employment Outlook, article.
