An Econometric Study of the Cyprus Economy Stahis Solomon Panagides Iowa State University

Iowa State University Capstones, Theses and Retrospective Theses and Dissertations Dissertations 1967 An econometric study of the Cyprus economy Stahis Solomon Panagides Iowa State University Follow this and additional works at: https://lib.dr.iastate.edu/rtd Part of the Economics Commons Recommended Citation Panagides, Stahis Solomon, "An econometric study of the Cyprus economy" (1967). Retrospective Theses and Dissertations. 3174. https://lib.dr.iastate.edu/rtd/3174 This Dissertation is brought to you for free and open access by the Iowa State University Capstones, Theses and Dissertations at Iowa State University Digital Repository. It has been accepted for inclusion in Retrospective Theses and Dissertations by an authorized administrator of Iowa State University Digital Repository. For more information, please contact [email protected]. This dissertation has been microfilmed exactly as received 67-8929 PANAGIDES, Stahis Solomon, 1937- AN ECONOMETRIC STUDY OF THE CYPRUS ECONOPIY. Iowa State University of Science and Technology, Ph.D., 1967 Economics, general University Microfilms, Inc., Ann Arbor, Michigan AN ECONOMETRIC STUDY OF THE CYPRUS ECONOMY by Stahis Solomon Panagides A Dissertation Submitted to the Graduate Faculty in Partial Fulfillment of The Requirements for the Degree of DOCTOR OF PHILOSOPHY Major Subject: Economics Approved: Signature was redacted for privacy. In Charge of Major Work Signature was redacted for privacy. Head of Major Department Signature was redacted for privacy. 1 of G"ra«l^ate College Iowa State University Of Science and Technology Ames 5 Iowa 1967 ii TABLE OF CONTENTS Page QUOTATION V CHAPTER I. INTRODUCTION 1 Some Historical and Demographic Characteristics 1 CHAPTER II. THE ECONOMY DURING THE PERIOD 1950-1963 - 5 AN OVERVIEW CHAPTER III. AN ECONOMETRIC STUDY OF THE ECONOMY 21 Formulation of the Economic Policy Problem 21 General Characteristics of the Models 23 Feasible Growth Rates 28 Investment Requirements and Projections 33 An Interdependent Model and Econometric Forecasting 37 Policy Multipliers 50 The Welfare Function; Some General Remarks 56 Model Evaluation 59 CHAPTER IV. AGRICULTURE 64 Agriculture in the Cyprus Economy 64 Econometric Findings and Policy Implications 71 Land Fragmentation 79 Agriculture and Structural Change 81 CHAPTER V. MANUFACTURING 85 The Low Share of Manufacturing Output 85 Economies of Scale and Manufacturing Development 86 Econometric Findings and Policy Implications 99 i ii TABLE OF CONTENTS (Continued) Page CHAPTER VI. OTHER SECTORS 108 Construction 108 Mining 112 Transportation 115 Services 117 Consumption 119 Public Finance 122 CHAPTER VII. TRADE AND TRADE POLICY 131 Imports 131 Balance of Payments 136 Projections to 1970 139 CHAPTER VIII. THE ECONOMICS OF THE GREEK AND TURKISH 147 COMMUNITIES The Background of the Conflict 147 Cultural Dichotomy 148 Some Thoughts on Economic Integration 153 Relative Communal Contributions to Gross Domestic 155 Product CHAPTER IX. CONCLUSIONS 165 BIBLIOGRAPHY 172 ACKNOWLEDGMENTS 179 APPENDIX A 180 A Linear Programming Formulation 180 APPENDIX B 186 Alternative Econometric Models and Forecasts 186 iv TABLE OF CONTENTS (Continued) Page APPENDIX C 203 Datas Concepts and Tables 203 APPENDIX D 240 Selected Alternative Equations 240 APPENDIX E 254 Communal Data 254 V ""Hv ôé xat 7tapa7i;\T)aL0uç Y&wpyLaq YEwpyoDvTaq -zovç \iiv aTioXwXévaL cpdcfKovTaç y&wpyLaq xai àTcopot3vi;aç, TOUC ôé ctcp'&ovcjoç naC xaXôjç navra 'éxovraç, oatov ôéovuat, ôc7t6 %fiQ yeupyCac,; Eau fid AC, "And that when men farm the same kind of land, some are poverty stricken and declare that they are ruined by agriculture, and others do well with the farm and have all they want in abundance?" "Yes, of course; *Xenophon. Oeconomicus, with an English translation by E. C. Marchant. Harvard University Press, p. 384. 1923. 1 CHAPTER I. INTRODUCTION A study of Cyprus is of great interest to the analyst. To the de velopment economist, the island is of interest being faced with most problems typical of developing countries. It is a small economy charac terized by a combination of export-consumption led development, intrinsi cally, until very recently, to Britain, the metropolis. To the economic historian, Cyprus provides an excellent example, showing how man through out history used a small Mediterranean island for his livelihood and how this association of man and the island has changed through the centuries. Presently, Cyprus is a major source of international tension; a place where man's inherited "myths" surpass the hard realities of his true interest and where the common tillage of land and the sweating side by side for four centuries, of Greeks and Turks alike, failed to unite the two peoples. Some Historical and Demographic Characteristics Cyprus is an island in the Eastern Mediterranean having been in habited since neolithic times. Around the 10th century B. C., due to Greek colonization, the island was given an almost thorough Greek character. Due to its location, famous wines, copper mines and natural beauty, the island has been conquered by various powers throughout its history. The Ottoman Turks conquered Cyprus in 1570 and ruled the island to the year 1878 when, by agreement, it was passed over to Great Britain on lease. The British became masters of Cyprus in 1914 when Turkey sided with Germany against the Allies. In 1925 Cyprus was declared by Britain 2 a Crown Colony and it remained as such until 1960 when the Cyprus Republic was established (59, 61). A significant result of the Turkish occupation was the settlement on Cyprus of a Turkish minority among the predominantly Greek community. Vf Cyprus, the third largest island in the Mediterranean presents in teresting contrasts within her shores both in demography and morphology which give her the character of a much larger nation in microcosm. The island's main morphological characteristics are two mountain ranges, one of which culminates in Mount Olympus, 6,403 feet above sea level (see map Fig. 1). The lower altitudes of the mountain ranges and the plain that connects them provide the major share of agricultural land. Mediterranean agriculture led by citrus, grapes, cereals, other fruit and vegetables (where water is not scarce) typifies production. Rainfall is a constant problem especially during the summer months. The subsequent econometric findings show rainfall to be a very signifi cant explanatory variable of agricultural production. The rainfall in dex (assigning a higher weight for plain rainfall) gives an annual aver age of 18.2 inches for the period 1950-1963, but the mountain rainfall is much higher than that of the plains. Only 10 percent of privately owned land (3,200,000 donums) is perennially or mechanically irrigated . The rainfall pattern is not always a blessing. Heavy winter rains after long dry summers continue to erode an already depleted topsoil. Though 18-20 Total area is 3,572 square miles. 1 acre = 2.025 donums. 3 percent of the island is covered with national forests, the agricultural lowlands continue to erode at dangerous proportions. In addition to agriculture, mining (copper) and tourism are other profitable activities for the island. The location of Cyprus renders it of strategic importance especially to Britain which maintains major mil itary bases on the island. In the last fifteen years income from British military expenditure has been a most important source of wealth but not without considerable repercussions on the country's development. What follows is not a comprehensive study of the Cyprus economy such as would be needed for the formulation of development plans. We concen trate, instead, on what economic theory the econometric results and ex perience of other countries show to be important economic variables in the future of Cyprus development. An alternative title of this work though tautological to the one given, could have been; ^ econometric study of a small country economy; Some overriding consideràtions. 32°30' 33* 33®32' 34®30' I ( Rizokarpssso MEDITERRANEAN SEA Viaîoussâ -35®30'-- -35°30'- Kyrenia •. -Akanthou, MORPHOU ELEVATIOiN BAY FAiVAGUSTA METERS f FEET Morohou : NICOSIAX: BAY 1500 ' 4,921 and over and over KflRYSOIŒOU Famagusta 1.000 3,231 rofî Larpa LARNACA BAY CYPRUS — District bo'j' '.3fy Nationaf cac'iaf Ktima ® 'District adrr.inislrative PaphdsX. • seat Limassol AKROTIRf M E D I T F. R R A E A N EPISKOP/ BAY 20 Ki!j<rate'« BAY I 34* J FIG. 1. CYPRUS 5 CHAPTER II. THE ECONOMY DURING THE PERIOD 1950-1963 - AN OVERVIEW This work is a first attempt to study the economy of Cyprus econo- metrically. The economy is investigated via a number of econometric models with concentration on: 1. Alternative projections of relevant economic variables and their policy implications, 2. The role of the import-export sector and the projected re straint to growth posed by the balance of payments deficit in a small, highly open economy, 3. Individual sectors and the implications from the estimated sectorial equations on future policy, especially of agricul ture and manufacturing, 4. Policy multipliers and the effect of alternative "policy mixes" on GNP and the balance of payments, 5. Some economic aspects of the Greek-Turkish conflict in view of the overall objectives of economic policy, 6. A 45 equation model used in the maximization of national output with the use of linear programming at a projected period (1970). The logic of the models presented follows the national income account concepts of measuring the performance of an economy. It is of the type; 1, Yg^= f^ (Y^, Y^, Yg) supply - (value added) 2. Yp = fg (C, X, G^) demand - (expenditure) 6 3. Yg^ e Yp equilibrium condition Where Yi, C, X, and are endogenous or exogenous variables, with the necessary definitions incorporated in the above basic structure. The years 1959, 1960 (a turning point) and 1963 are in the sample period. The forecast for 1964 is a true forecast since that year was not included in the single stage least squares (SSLS) estimation of the stochastic equations, except for three equations which are discussed later.

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