CUPRINS - Universitatea George Bacovia

Savvas C. Savvides“skipping” the traditional industrialization stage. 9 The contribution of the primarysector currently stands at 5% of GDP and 10% of employment (down from 25%and 45%, respectively, in 1960), while the services sector currently contributesclose to 80% of GDP’s value added and accounts for about 70% of employment(up from 54% of GDP and 32% of employment in 1960).In more recent years, of course, the recessionary global macroeconomicenvironment following the 9/11/2001 terrorist events, and more recently thepolitical insecurity surrounding the War in Iraq as well as the substantial oil priceincrease, could not have left the economy of Cyprus unscathed. Graph 1 belowshows this deceleration in growth, in line with the EU-15 average. Economicdevelopments in 2004 have improved due to a more favourable externalenvironment and the gradual improvement in business and consumer confidence,and medium-term prospects for 2005 and beyond remain positive. There are tworisks in this positive scenario: (1) the potential continuation of appreciation in thenominal effective exchange rate of the Cyprus Pound (in line with the similarappreciation of the Euro); and (2) the maintenance of oil prices at the current highlevels.With regard to fiscal finances, the government expenditures have beenrising steadily, and with revenues always subject to the current state of theeconomy, the fiscal deficit of the country has been oscillating around an increasingtrend, from around 4% in 1998-1999, to 2.3% in 2000-2001, to 4.5% in 2002 and6.3% in 2003, substantially above the 3% Maastricht criterion. This increasingfiscal deficit has led to an increasing public debt to levels courting the 60%Maastricht benchmark. Even though the Maastricht Treaty does not makeadherence to these fiscal criteria a prerequisite for accession, it is neverthelessexpected that candidate countries should endeavour to adopt appropriate stability10and convergence measures, especially those aspiring to enter the Euro zone.9 Economic historian W. W. Rostow postulated (in his book The Stages of EconomicGrowth, pp. 1-12) that the transition from underdevelopment to development can bedescribed in terms of five stages that all countries must go through: the traditional society,the pre-conditions for take-off into self-sustaining growth, the take-off into self-sustaininggrowth, the drive to maturity, and the age of mass consumption. In Rostow’s words, thesestages “… constitute, in the end, both a theory about economic growth and a more general,if still highly partial, theory about modern history as a whole.” According to this doctrine,it seems that most advanced economies have passed into the take-off and maturity stagesand some are already in the mass consumption stage.10 In order to be in the Euro zone, member states should participate for at least two years inthe exchange rate mechanism of the European Monetary System without devaluing theircurrencies. In the framework of the Stability and Development Pact member countries inthe Euro zone are required to submit annual stability programmes and to target to achieve abalance of fiscal magnitudes or achieve fiscal surplus. Penalties are imposed to countrieswhose fiscal deficit exceeds 3% of GDP.194