CUTTING public service wages, and investing in technology are the only ways the island can regain its lost competitiveness, economists said yesterday.
The call came in the wake of a report by international ratings agency Moody’s that put the Cyprus economy on notice of review with a possible downgrade.
Moody’s said it was also assessing the country’s ability to overcome challenges to its competitiveness.
According to economists, the biggest challenge in this area is the public sector payroll.
“Competitiveness has been undermined for many years now,” Symeon Matsis told the Sunday Mail. “Wages increase faster than productivity, especially in the public sector. The government must curb public payroll,” urged Matsis, who has served as an undersecretary in various government ministries, the Planning Bureau and the banking sector.
The government’s expenditure for salaries and wages, including pensions and gratuities, was expected to rise to €2.6 billion in 2010, which is some 41.7 per cent above 2005 levels. It will further rise 5.0 per cent this year, according to the Ministry of Finance.
The erosion of Cyprus’s competitiveness is demonstrated in the way prices of domestic and imported goods develop, according to Matsis.
Domestic products were on average 20.9 per cent more expensive in 2010 compared to 2005, according to the Cyprus Statistical Service. In the same period, imported goods became 4.8 per cent cheaper.
Alexandros Apostolides who teaches economics at the European University of Nicosia said that membership in the Economic and Monetary Union prevented Cyprus from devaluing its currency to ease the lack of competiveness.
“If in a monetary union, one economy is more competitive compared to another, the only choice that remains for the less competitive one is either to increase its productivity or to decrease production cost. Since Cypriot small and medium sized companies have difficulties in increasing their productivity without government support, what remains is reconsidering the public payroll,” he said. “If you trim salaries in the private sector, the result will be that university graduates working for companies will earn the same as non-graduates in the public sector.”
The Central Bank has repeatedly warned about the deteriorating competitive position of the economy as it is demonstrated in the gap between the harmonised inflation rates of Cyprus and the euro zone countries. “In the medium run, this will result in undermining the country’s economic growth and domestic competitiveness compared to the euro zone,” the Central Bank said in its economic bulletin last month.
Competitiveness also requires investment in technology and innovation as low pricing alone may not guarantee access to the market, according to economist Bernard Musyck.
“Competitiveness is the ability to bring to the market a product or a service that is unique and for which people are willing to pay a premium price,” Musyck, who teaches economics at Frederick University said. “It is the ability to market the highest possible value added”.
If Cypriot scientists could develop a desalination plant working on solar thermal energy, this “would be a fantastic innovation for Cyprus,” Musyck said.
“The price that this product would command on the international market would be very high indeed; an order of magnitude above the value of our red soil potatoes,” he added.
