A the­ory of eco­nomic growth, unions, pol­i­tics and Cyprus

Financial Mirror (Cyprus) - - FRONT PAGE -

A Bri­tish sol­dier ob­serv­ing the pros­per­ous Ger­man coun­try­side a decade or so af­ter WWII com­mented to his col­league: “Makes you won­der who won the war”. Only a few years ear­lier, most of Ger­man in­dus­try and many of its cities were in ru­ins. How was it, then, that the coun­try ap­peared more pros­per­ous than vic­to­ri­ous Bri­tain which had not been oc­cu­pied and had not suf­fered the same de­gree of dam­age?

This was the ques­tion that also puz­zled Man­cur Olson, an econ­o­mist with de­grees from both Har­vard and Ox­ford. The Ger­man post-war eco­nomic mir­a­cle was even­tu­ally fol­lowed by sim­i­lar eco­nomic “mir­a­cles” in a num­ber of the other de­feated coun­tries: Italy, France, Ja­pan and even Greece.

Com­mon sense in­di­cated that Bri­tain, as well as those coun­tries whose industrial struc­ture emerged more or less in­tact from the war, should have been the growth lead­ers. But this was not the case. Olson’s the­ory of eco­nomic growth de­vel­oped out of this ap­par­ent para­dox. His ex­pla­na­tion: The de­feated coun­tries grew more rapidly not de­spite the de­struc­tion of World War II but be­cause of it. Th­ese “mir­a­cle” economies grew faster pre­cisely be­cause their pre-war eco­nomic and so­cial in­fra­struc­ture had been de­stroyed.

Man­cur’s view is that so­cial sta­bil­ity gives rise to the for­ma­tion of groups and as­so­ci­a­tions aimed at pro­mot­ing the spe­cial in­ter­ests of group mem­bers. Over time, work­ers, doc­tors, lawyers, teach­ers, etc., will form groups to pro­mote their spe­cial in­ter­ests. Th­ese pro­vide pref­er­en­tial benefits for their mem­bers, much like a car­tel. Th­ese benefits may take the form of higher wages, prices, re­duced work­ing hours and other forms of pref­er­en­tial treat­ment, of­ten gained through their in­flu­ence on the leg­isla­tive process.

In­so­far as th­ese groups suc­ceed in se­cur­ing higher wages, prices and other benefits be­yond those mer­ited within a freely com­pet­i­tive sit­u­a­tion, there is a mis­al­lo­ca­tion of re­sources. They gain at the ex­pense of the gen­eral public. Fur­ther­more, the reg­u­la­tions, laws and other re­stric­tions pro­moted by such groups to pro­tect their priv­i­leged po­si­tions im­pede and slow­down eco­nomic ac­tiv­ity. Both the spe­cial priv­i­leges and the com­plex­ity of the bu­reau­cracy and reg­u­la­tions de­signed to pro­tect th­ese priv­i­leges ad­versely af­fect eco­nomic growth.

The the­ory pre­dicts that there will be a pe­riod of rapid eco­nomic growth af­ter ma­jor desta­bil­is­ing events which re­duce or elim­i­nate spe­cial in­ter­est groups. The rate of eco­nomic growth grad­u­ally di­min­ish­ing as th­ese groups grad­u­ally in­crease their pres­ence and ef­fec­tive­ness.

Cyprus was not di­rectly in­volved in World War II but the Turk­ish in­va­sion of 1974 may be con­sid­ered as an anal­o­gous desta­bil­is­ing event. The in­va­sion de­stroyed much of the in­fra­struc­ture of pre-in­va­sion Cyprus, dis­rupt­ing the econ­omy and the so­cial struc­ture. A good por­tion of the is­land was oc­cu­pied. Many thou­sands be­came refugees, los­ing not only their jobs but their homes. Did Cyprus ex­pe­ri­ence the rapid eco­nomic growth and sub­se­quent slow­down pre­dicted by Olson?

Na­tional statis­tics show quite clearly that shortly af­ter the Turk­ish in­va­sion, Cyprus ex­pe­ri­enced its own eco­nomic mir­a­cle. Af­ter a brief down­turn in 1975, in 1976 the Cypriot econ­omy ex­pe­ri­enced an as­ton­ish­ing 18% GDP growth rate, fol­lowed by a 15% in­crease in 1977. In the five years be­tween 1975 and 1980, GDP grew at an av­er­age of over 11% an­nu­ally. The decade of 1980-1990 saw av­er­age an­nual growth of 6.5%. Dur­ing the decades 1990-2000 and 20002010 the econ­omy grew at an av­er­age an­nual rate of 5% and 3%, re­spec­tively (all in con­stant prices).

Olson also pre­dicts that spe­cial in­ter­est groups will ac­tively lobby gov­ern­ments to for­ward their spe­cial in­ter­ests. Such ac­tiv­ity is rou­tinely ob­served in Cyprus. Po­lit­i­cal in­flu­ence and the po­lit­i­cal life of the is­land re­volve about such pres­sures and the in­flu­ence of spe­cial in­ter­est groups. The gov­ern­ment goes out of its way to pro­tect the jobs, pen­sions, work­ing hours etc., of public sec­tor work­ers, or­gan­ised labour and other groups with hardly a men­tion of the thou­sands of un­or­gan­ised work­ers who have lost both jobs and pen­sions. Politi­cians out­raged by the thought of small shop keep­ers work­ing seven days a week show no con­cern for the gen­eral shop­ping public or the thou­sands of ho­tel work­ers for which this has been nor­mal prac­tice for years.

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