By Alexander Apostolides on August 19, 2009

Another poor but nessesary descision?

Another bad decision by the government in terms of economics. Phileleitheros reports today that the government is suspending all major investment works until after the crisis. This is undoubtedly due to the fact that the projection for GDP this year will be negative.

The problem is that at a time that the revenues from tax are shrinking and the expenditure on unemployment benefits is rising, the government deficit needs to remain within 3% of GDP. Thus when GDP is shrinking the government is in trouble even if it does not increase expenditure in the economy. This will put into trouble with the European central bank, with the possibility of a huge fine.

However the problem is that recessions are exactly the time when large infrastructure project should take place. The construction industry is alleviated from its crisis by government funding, while the government can get a good price because of the distress of the building companies.
Large investment projects also help the country move out of recession since investment is the basis of continued economic growth. It is true that Cyprus has investment bottlenecks that can only be solved by the government: the harbour is in a dreadful condition with outdated technology, and the ICT depth of the government bureaucracy is woeful. Stopping such projects in order to stay within the Maastrict limits not only prevent a faster recovery but also compromises economic growth in the future.

7 comments:

  1. Unfortunately this is what happens in a recession. people lose their confidence, spend less and invest less and as a result the economy gets worse. This could be a good time to invest in order to create an upward momentum. I still can't answer the primary question of your post whether it is a necessary decision however..

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  2. It is necessary in order not to be fined by the European commission for missing the Maastrict criteria of the Euro.

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  3. Indeed it is true that large projects may help the country get out of the recession, but large projects need money, and the government has obviously targeted easy targets instead of the inelastic payroll, or other subsidies which do not add anything to GDP growth.
    You can read a few articles mainly criticising the economic policy of the government in my blog.

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  4. Thank you for your kind words and interesting articles. I would like to invite you to participate on the syndicated blog for economists set up at the website provided. Just sent me an email at my email address so i can send you an invitation to be able to be an author to the blog - you could even re-host your articles under your name. Apologies for writing in English - i do not have Greek access to this computer.

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  5. Γεια σου Αλέξανδρε, ναι είμαι οικονομολόγος, η τουλάχιστον το σπούδασα στο UCL πριν από καιρό. Θα ηταν πρόκληση να εμφανιζονται τα κειμενα μου σε ένα χώρο για οικονομολόγους, οπότε γιατί όχι;
    Δεν βρισκω το email address σου, το δικό μου βρίσκεται στο προφίλ μου, στο “Για να ξέρετε που είστε”.

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  6. Interesting point. You touch on ICT, and as an English guy living and working in Cyprus, I'm amazed how little the internet has touched Cypriot life.

    The government could deliver much better services using the internet - though I appreciate the cost base, at least in terms of salaries is fixed.

    Improvements in service provision in this way would encourage external investment in Cyprus that can only be good for the economy here.

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  7. In terms of investment the priorities should be :
    1) a complete overhaul of the Limassol harbour to accomodate larger container ships (this will reduce costs of all products in Cyprus)
    2) a greater investment in ICT
    3) the overhaul of the police including the construction of adequate buildings and ifrastructure for the force
    Sadly these projects were not in the delayed investment measures,

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