02 December 2014 Partition would be worse for the economy than unification

With people starting to say that maybe partition is the answer, it is worth comparing partition to reunification in terms of its impact on the economy.

There are a number of reasons why partition would be a costlier exercise than reunification and worse for the economy more generally.


Property compensation would be up to 80% higher


First and foremost, is the property issue, the cost of which would be considerably higher without a solution than with one because no one would get their property back.

According to the report to the UN Security Council in May 2004 the Annan Plan would have allowed for “the return of most displaced persons to their homes (including a majority, some 120,000, under Greek Cypriot administration)”.

Assuming that the provisions are similar in any new plan, then this would automatically cut the compensation bill.

According to my own calculations, details of which should be published by PRIO in the new year, a solution of the Cyprus problem that involved a mixture of territorial adjustment, exchange and reinstatement could cut the compensation bill by 80%.

Without it the compensation bill would be considerably bigger than all-island GDP.

Depending on valuations and so on, one might be able to cut the no-solution compensation bill by up to 30% by exchanging property with Turkish Cypriot land in the south. But it would still be considerably higher than the bill one could achieve with reunification.

Moreover, in the case of velvet divorce, one might expect demands for compensation to be higher than in the case of reunification, especially if gas revenues are expected to be used to compensate people.

Expected government tax revenues from gas are nowhere near what Greek Cypriots think their property is worth.


Fewer synergies with Turkey, less attractive to foreign investment


With a velvet divorce there would be fewer incentives for Greek Cypriots and Turkish Cypriots to work together to do business with Turkey.

So while business with Turkey would still open up for Greek Cypriots, without the help of Turkish Cypriots who know the language, the opportunities are likely to be fewer.

Just as importantly, a velvet divorce will create fewer opportunities for foreign investors. Investing on an island with one set of business rules is far more attractive than dealing with two different regimes.


No economies of scale


Partition would make it less likely that the two sides of the island would work together to improve economies of scale.

This is particularly important because both sides of the islands suffer from competitiveness problems, which hamper growth prospects and keep unemployment high.

One area in which this problem is most critical is energy, with high electricity costs on both sides.

But with partition, we are more likely to have two separate electricity providers, with low economies of scale and high prices keeping competitiveness low.


No “feelgood factor” boost


If Cyprus reunified, then it can market itself as the peace centre of the region, with all the accompanying conferences, seminars and education centres and tourism revenues that go with it.

It is also more likely to attract some rewards in terms of EU funds. One cannot imagine countries like Spain supporting any reward for deciding on partition. EU members are likely to be far more generous to a country that can stick itself back together again than one which decided to split, even if peacefully.

In sum, while all solutions carry economic risks that need to be addressed, partition is a costly exercise with few of the spin-off effects that would come from reunifying the island.