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CIAO DATE: 06/06
Winter 2005 (Volume 4, Number 4)
THE TURKISH CYPRIOT BUSINESS COMMUNITY AS A POLITICO-ECONOMIC ACTOR SEARCHING FOR A SOLUTION
The paper will assess the changes and continuities in the perceptions and positioning of the Turkish Cypriot economic actors in search of a solution for Cyprus. In particular, it will focus on the Turkish Cypriot business community as an increasingly leading political actor striving for the solution of the conflict during the period from the European Union's Helsinki Summit in December 1999 when Turkey was granted the candidate status for full membership until the referenda in April 2004 for the unification of the island in accordance with the Annan Plan. It will also illustrate the disillusionment of the business community after the referenda and review their endless efforts to end the isolation of the economy of the North.
Canan Balkir*
The Setting of the Turkish Cypriot Economy
When the “Republic of Cyprus”[1] was established in the 1960s, it inherited an economy showing most of the structural weaknesses of underdevelopment of an island economy. The main economic activity was agriculture, which accounted for 16 percent of GDP and 45 percent of employment. Industry was basically restricted to the processing of locally produced agricultural raw materials and exports depended on primary commodities, such as minerals (53 percent of total exports) and agricultural products (32 percent).
Tourism had not yet taken off. Underemployment and disguised unemployment were widespread and not only were people emigrating but capital was also flowing out of the country. The island showed all the economic indicators of underdevelopment. The government of Cyprus adopted the basic principles of indicative planning, an experience shared with many other developing countries including Turkey. The objectives and targets of economic policy were embodied in five-year development plans. However, the constitutional system broke down in 1963, during the first planned period, when the Turkish Cypriots could no longer participate in the government and in the economic gains hereafter. Finally in 1974, when Turkey militarily intervened, by virtue of the 1960 Treaty of Guarantee, to protect the Turkish Cypriot people following the Greek/Greek Cypriot military coup d'état, the bi-communal nature of the Republic came to an end, and the two geographical units and the economic systems of north and south had to evolve separately.
The Turkish Cypriot community lived under various Turkish Cypriot administrations. First under the Provisional Turkish Cypriot Administration in 1967. The term ‘provisional administration' was employed in order to depict that in reality the island Turks had always been loyal to the Cyprus, yet, unfortunately they were forced to establish their own ‘provisional' administration as an extension of their own conflict management stand. Concomitantly, the Autonomous Turkish Cypriot Administration in 1974 can be considered the reflection of the Turkish thesis which was put forth during the Geneva Conference, on the basis of the division of island between six autonomous cantons.
The Turkish Federated State of Cyprus which was established in 1975 was a vivid victory for the Turkish nationalists in the island. The nationalist movement had long desired to establish an independent Turkish state in Cyprus, but after the Turkish intervention in 1974 they deliberately labeled their own entity as federal because they were well aware of the headache the term “independent” would have created in the current international context. In other words, “independent Turkish state” would have invoked unacceptable irredentist designs in a world divided between two hostile blocks.
Eventually, the establishment of the Turkish Republic of Northern Cyprus (TRNC) in 1983 highlighted to what extent the super nationalist clique within the Turkish Cypriot politics was capable to discard rational principles in the formulation of foreign policy priorities of the political entity. Ironically, Turgut Özal warned that the declaration of independence might procure serious problems for Turkey's own foreign policy. However, the timing of the declaration of TRNC, though after the election, was before Özal actually took over authority as Prime Minister.
The economic disparity between north and south part of the island increased enormously during the following period. While the economy of the South had no trouble in meeting the Copenhagen economic criteria for membership of the EU, the economy in the north continued to represent all the structural restraints of a small island economy. It also lacked the main legal and institutional framework necessary for the functioning of free market economy, along with high level of protection, high percentage of unregistered economy, and dependency on Turkey.
The Main Structural Shortcomings of the Turkish Cypriot Economy
For a small island economy, exports and tourism are the potential growth sectors. The lack of recognition of the TRNC (18th November 1983, UN Security Council resolution) by the international community, the fact that it has been under a virtual boycott as its airports and harbors have been declared illegal by Cyprus, and the exclusion of the North in the brochures of large tour operators which sell package holidays were the main limiting factors for the development of tourism in the North.[2] Moreover, the holidaymakers in the south have been prohibited by Greek Cypriot authorities to enter the North for overnight stays, as well as the tourists who have first entered the North were prohibited from crossing the dividing Green Line.
The fact that annually around 425.800 tourists visit the North while the figure for the South is 2.830.000 tourists and on the average, each tourist spends 458 dollars in the North and 750 dollars in the South shows the striking disparity in the tourism revenue between the North and the South. Thus the North had to rely heavily on the Turkish tourists, which made it vulnerable to the economic circumstances in Turkey.
One constructive factor has been the establishment of universities in TRNC which caused a permanent increase in tourism receipts. The universities also boosted the economy, per student's minimum annual contribution being calculated to be around $5000.
On the industrial side, due to high cost of production, weak capital structure and low technology, domestic industry was short of satisfying the domestic demand which was met mainly by imports. Dependency of the economy on imports while the export possibilities were limited resulted in a chronic foreign trade deficit. The final straw was the decision of the European Court of Justice on the 5th of July 1994, which resulted in the EU countries putting an embargo on the importation of agricultural crops and placing 14% tax on industrial imports. Embargoes also hindered trade through TRNC's ports, as penalties were imposed on foreign ships that call at these ports. The need to use the postal code “Mersin-10 Turkey” in the address also caused practical problems in establishing business links.
After the decision of the Court in 1994, the EU share in TRNC foreign trade which was around 40 percent declined constantly over the years. Regarding trade with the other main partner, Turkey, the foreign trade balance has always been to the disadvantage of north Cyprus. Paradoxically, TRNC, receiving financial aid from Turkey for its budget deficit, at the same time, had annually around 250 million dollars foreign trade deficit with Turkey.
To put all the blame on the embargoes and non-recognition would be the easy way but not accurate, as there were major structural deficiencies in conjunction with the management of the north Cyprus economy. The state, through the state economic enterprises and also being in charge of the distribution of incentives has been the main economic actor. While the annual average growth rate of the economy has been around 3.2 percent between 1983-2001, the public sector current expenses grew over 4.2 percent and transfer payments around 8.9 percent. The share of the public sector in the total bank credits also increased from 15 percent in 1983 to 64 percent in 2001, as the share of private sector decreased from 85 percent to 36 percent. The public sector would also abuse its power of being the major employee to influence the political choices at the time of the elections. Finally, the public sector grew so gigantic that the fiscal system became unsustainable.
The second important limiting factor has been the “dependency on Turkey.” This dependency was reinforced with a strong parallelism in the economic policy of the two countries. The years from 1974 to 1983 was seen as a transitory period; during which Turkish Cypriot economy was expected to develop so it could compete with the South at the time of a solution. The model imported from Turkey was the mixed economic system through the establishment of state economic enterprises with the Turkish counterparts as the chaperon. During this era, the emergence of a Turkish Cypriot private sector was also promoted. The political arena was dominated by the economic and social troubles of migrants from the South as well as from Turkey.
When in the 1980s it became evident that Greek Cypriots were representing Cyprus in international platforms and the newly established TRNC was not recognized, there was a change in the perception of economic policy from transitory to permanency, along with a major shift in the economic policy from mixed economy to a free market economy, again parallel to the transformation in Turkey after the January 24 1980 Stabilization Program.[3]
The relations between Turkey and TRNC expanded within the framework of a comprehensive Economic Protocol.[4] The Economic Protocol signed on 3 January 1997, and others that followed, clearly stated that “Turkey and the TRNC will make joint efforts to ensure the lifting of all restrictions imposed on the TRNC in the international arena with a view to providing unhindered political, economic, cultural and sportive ties between the TRNC and third countries.” The objective of achieving integration between the two countries in the economic and financial fields as well as achieving partial integration in matters of security, defense and foreign affairs has always been the first and foremost item on the agenda. This was strongly supported by Turkish Cypriot business community. Thus a radical suggestion by Turkish Prime Minister Özal in 1986 to turn the whole TRNC into a free zone so it could stand on its own feet was not welcomed by Turkish Cypriots. However, in spite of the fact that many protocols that have been signed on the issue of integration, including the establishment of an Association Council and a decision on March 31 1998 to establish a joint economic zone between the two countries, a functioning economic integration was never realized, or maybe was not really intended to be realized.
The parallel in economic policy as well as the usage of the same currency (although many Turkish Cypriots preferred Cyprus pounds in valuing property), also meant the importation of inflation, as well as economic crises, with a short time lag. This gave the politicians an excuse for their mismanagement of the economy. All economic evils allegedly were being imported from Turkey. The only constructive exception was the financial support[5] provided by Turkey for infrastructural investments as well as supplementing the budgetary deficiencies. The money was used for paying public sector salaries and retirement pensions, saving the day most of the time. There was little money left for contributing to the competitive power of the private sector, a point which has been highly criticized by the business community.
The major turning point in the history of the island came when the Greek Administration of Cyprus applied to the EC for full membership in July 1990, although the relations between Cyprus and European Community dated back to 1972. Even though the UN and Turkey warned EC that the results of the application would dilute the efforts for peace in the island, on 11 September 1990, the EC declared that the application would be administered in normal evaluation procedure. The European Commission handled the application in June 1993 and eventually in the Corfu Summit of European Council in 1994 decided that Cyprus would be adhered to the next round of enlargement process of the Union. The decision was confirmed in the Essen Summit in 1994. In February 1995, the Commission reported that Cyprus met the criteria for full membership and in line with the Council of Ministers decision dated March 6 1995, the negotiations between EU and Cyprus started within six months following the 1996 Summit.
For TRNC, the 1990s were primarily shaped by economic concerns. When the downturn in economic conditions became apparent[6], it led to costs in the political arena. The center-right leadership struggle got harsher and the 1993 elections witnessed the break-up of the National Unity Party (UBP) electoral tradition into two, with the splinter DP's (Democrat Party) triumph in capturing about 29 percent of the vote. CTP's (Republican Turkish Party) move towards the center left gave it an opportunity to be part of the governing coalition for the first time during 1993-96.[7]
In this period a certain tension in Turkish-Greek relations regarding Cyprus is visible. The involvement which raised the tension is the declaration of the Common Defense Doctrine between Greece and the Greek Cypriots. The Kardak Crisis, which occurred right after this doctrine, the events as a consequence of Greek Cypriot attempts to pass the Green Line, the occurrence of the Louzidiou case and the attempts of the Greek Cypriot regime to install the S-300 missiles from the Russian Federation put the Cyprus problem on the top of the agenda in the relations between Turkey and the European Union.
The Luxembourg Summit of the EU on 12-13 December 1997 granted Turkey a special status with a long-term perspective for full membership while the eleven countries including Cyprus were granted candidate status. The decision was violating the basic rights of the Turkish Cypriot people who were one of the two co-founding partners of the Republic. Turkish Cypriots and Turkey, in disillusionment, declared on December 14 that they would take the steps necessary to end the isolation of TRNC. The following declaration of the two countries on 23 April 1998 stated “In line with the joint economic area that has been created between the two countries, and in accordance with the conditions of free trade, common economic and financial policies based on the free circulation of goods, services and capital, and the flow of investment, as well as strategies on developments and economic expansion, will speedily be put into practice.” And finally in the Joint Declaration on July 20, 1999, “target of integration set at the highest level” was announced explicitly.
The conception of economic integration with Turkey was always a favored alternative in the minds of the Turkish Cypriot business community. Even on November 2001, the Turkish Cypriot Chamber of Commerce (TCCC) President Ali Erel, commenting on the economic and political situation in the TRNC emphasized the necessity for economic integration between Turkey and the TRNC. However, both sides knew that it could not take place as Turkey was already in the Customs Union with the EU. As a matter of fact, Turkey was not even in a position to grant the “most favored nation” status to TRNC.
The European Union's Role as a Catalyst
The European Union's role as a catalyst for the Cyprus problem became more obvious after the Helsinki Summit held in December 1999 when Turkey was officially recognized as an EU candidate. The recognition was the outcome of the efforts of the Turkish government to fulfill the criteria which EU put forth as well as the outcome of episodes between Ankara and Athens. Abdullah Öcalan, the leader of the terrorist organization PKK, was captured by the Turkish Special Forces in Nairobi where he has taken shelter in the Greek embassy. The incidence had consequences for Greek foreign policy which meant that Turkey could comfortably secure international support to its long-standing thesis on the grounds that Greece endorsed terrorist activities targeting Turkey's territorial integrity.
The Öcalan case also shook the Greek government up internally and forced the Simitis administration to initiate a new rapprochement policy with Turkey. On the other side, personal relationships between the foreign ministers of the two countries, Cem and Papandreou played a very constructive role in the normalization of inter-state relations. The good neighborly relations continued and even cemented after the Marmara region of Turkey was hit by a strong earthquake on 17 August 1999. Turkey reaped the benefits of this new political opening on the verge of the Helsinki Summit.
However, concerning the Cyprus issue, the European Union at the Helsinki Summit adopted the policy that in case of no settlement, the Council's decision on accession will be made without the above being a precondition.[8] This decision meant a settlement was no longer a precondition for Cyprus being a member of the European Union, thus invalidated the conditionality grip of the EU on the Greek Cypriots.
Once again, the North was left with its isolation. The economic situation was at the verge of a breakdown. Even the 2000 Regular Report on Cyprus had to make reference, for the first time, to the difficult economic situation in the northern part of the island. Furthermore, the 2001 Regular Report on Cyprus stated “the northern part of the island faces severe shortages of capital, skills and business opportunities. Thousands of Turkish Cypriots have and still are immigrating to other countries. Brain drain has become a serious problem in the north…” The reports were open evidence of the necessity of urgent steps to be taken to overcome the economic isolation of the North. Many Turkish Cypriots have already immigrated to Commonwealth countries. A poll conducted by KADEM in 2002 had shown that 55 percent of the 18-24 aged group seriously considered emigrating unless a solution to the Cyprus problem was found.
The Turkish Cypriot business community sought urgent steps to overcome economic isolation. The businessmen felt deep inside that the responsibility of the economic situation they were living was partly the economic isolation applied on them by the EU and partly the economic system implemented for the last forty years. The frustrating experience of Turkish Cypriot investors exampled in the cases of Washmaster and Bixi Cola was ironic. These companies had to close down their plants because of not being able to export to Turkey due to tariffs and non-tariff barriers. The industrial sector of the mainland was not ready to have competition from TRNC, nor interested to invest in TRNC. The business community who had enjoyed most of the privileges of this unhealthy economic system began to realize that the system was becoming unsustainable.
While the resolution of the Cyprus conflict gained new saliency as one of the key determinants of the future of Turkey-EU relations, not only has the EU become an integral part of this age-old conflict, but the prospect of becoming incorporated into the EU has also emerged as a key determinant of the ways in which the Turkish Cypriot business community redefined its stance. However, it is also indispensable to take into account the impact of the severe economic and political crises encountered in Turkey and also in TRNC during the period in question so as to understand the political realignments in the latter. In other words, the dynamics of change which eventually led to the acceptance of the Annan plan could be summed up as the transformation of a vibrant business community into a political society in the context of deteriorating economic conditions.
Due to its dependency on the Turkish economy, which has experienced several crises in the preceding decade, the economy in TRNC was already alarming before the banking crisis broke. The banking crisis resulted in the insolvency of many of the private banks (11 banks and PEYAK Cooperative Bank), which caused the bankruptcy of many companies and individuals loosing their savings to banks. According to the business community the crisis was due to the lack of proper inspection of banks, lack of the necessary regulation concerning the establishment of banks, and the government favoring certain families. The business community expected the immediate trial of the people responsible for the banking crisis, and a settlement by selling the properties of those responsible, and in case this is insufficient, the government to find additional resources to reimburse the losses.
The banking crisis was a decision point. The deep economic trauma had caused a major dislocation in the economy resulting in a substantial loss of output and massive unemployment. Per capita income which increased from 300-500 dollars in 1974 to 4.978 dollars in 2000 declined to 4.303. It became clear that it was not possible to speak of a functioning economy in Cyprus. The business community began to voice their demands for serious steps to reform the economy, emphasizing transparency, accountability and good governance principles. They blamed the establishment for causing the crisis by favoritism and demanded urgent steps to remove populism. The crack had already started to emerge between the political establishment and the business community.
From that point onwards, the business community wanted to have more of a say in the future of North Cyprus economy. To achieve this, they increasingly had to assume political roles. And the change in the management of one of the main business NGOs, namely the Turkish Cypriot Chamber of Commerce, made this shift in their positioning apparent. The comments of Ali Erel in 2001 demonstrate the feeling of the business community
The economic crisis and the lack of response from the politicians to our suggestions are creating distress among both the members of our society and our Chamber; and the Chamber Board of Directors is getting many demands to start some kind of action for urgent measures to our problems. In case that the message from our economy and public is not taken, action will be inescapable.[9]
Although later financing came from Turkey to settle the losses due to the banking crisis, at the onset it looked as if the Turkish Cypriots couldn't count on the mainland for economic guarantee, since Turkey was undergoing an economic downturn also. There was also dissimilarity in the way the hardships were handled in two countries. Although in Turkey the insolvent banks were transferred to the Deposit Insurance Fund, enabling account holders to get their money back, this was not the procedure in TRNC which made the account holders wait in uncertainty for a long time. Furthermore, trying to recover from the economic crisis, the TRNC government, lacking available resources, asked for more taxes to finance the budget deficit. In the words of Erel “The reform packages have not been able to improve the economy, they have only managed to apply taxes and raise prices, while being unable to carry out any structural reform to improve the conditions of the economy. The level of welfare of the public has deteriorated.”
Pioneers when Rapprochement is Required
In spite of the fact that the impact of the severe economic and political crises encountered in Turkey and also in Turkish Republic of Northern Cyprus has been a decisive factor, the prospect of becoming incorporated into the EU has also emerged as a key determinant of the ways in which the Turkish Cypriot business community redefined its stance. The material benefits of EU membership became all the more attractive during the period of economic crisis. It was the few leading spokespersons of the business community such as Ali Erel, Erdil Nami and others who would voice these benefits, when the public was not informed. In due time, they began to find themselves in close alliance with other civil society organizations, such as trade unions and NGOs working on different issues.
The business community was also ready to take a proactive role in starting the negotiations between the two sides of the island. They were aware that the solution of the Cyprus conflict should not be left to the mercy of politicians any more. However the difficulty here was that the Turkish Cypriots had long been isolated from the international platforms, thus they had to reestablish links to these platforms. So the first step was to establish contacts with NGOs from Turkey, EU and South Cyprus, and this had to be done urgently.
With the EU becoming a part in the issue, the Cyprus case had been fixed to a calendar. The clock was ticking and the Turkish Cypriot side needed a different approach from the one applied for the past forty years. Even the Turkish Minister of Foreign Affairs Ismail Cem had voiced that the time was running out and that whatever needed to be done needed to be done now. It became obvious that TRNC was now at the threshold of a decision.
There were also redlines for the Turkish Cypriot business community concerning the solution. They believed that whatever the solution in Cyprus, under no circumstances should the Turkish Cypriots be a minority. They were in favor of a solution based on a new partnership between two politically equal states which would protect the balance of powers between Turkey and Greece on the island of Cyprus, as well as the continuation of the guarantee power of Turkey and the protection of the strategic interests of Turkey. They also expected the new partnership formed by two politically equal states to enter the EU. Realizing that EU membership for Turkey was a long process, even given candidacy, some began to voice their aspiration to see the Cyprus conflict solved and the new Cyprus become part of Europe regardless of Turkish accession. Of course, they also wanted to see the accession talks to begin between EU and Turkey, in a parallel process; but they would not accept to be kept hostage until Turkey becomes a member.
Solution in Cyprus Seemed Closer than Ever
The next step was to pressure the government for the start of negotiations. The business community was aware that if the year is wasted without negotiations, the Greek Cypriot side will unilaterally become a member of the EU. A deal had to be made before the Greek part of the island joined the EU, given that the bargaining position would be weaker after accession. The business community recognized that the members of their community as well as the public should be informed on the merits of joining the European Union, promoting the understanding of the opportunities that would be gained through EU membership. For this purpose, a European Information Center was established under the auspices of the Turkish Cypriot Chamber of Commerce, aiming to provide information on the EU and to increase the awareness of the Turkish Cypriots on the issues related to the European Union. This was followed by seminars and conferences on EU which were organized in collaboration with the EU institutions, foreign embassies, academics and experts from Turkey.
The business community also established close relations with Brussels and used every means to convince Brussels to take urgent steps to overcome the economic isolation of the North. At the same time, they were strongly rejecting the approach of the government, concentrating on a political settlement only, by leaving economic integration to be tackled in the future. As the current economic structure was not sustainable, the government's approach could not be approved. In addition, concentrating on political issues solely had so far proven futile.
During the same period, the TRNC government[10] was launching an economic reform package. However, Turkish Cypriots were aware that there were other ills that played a role in the rising support for a solution, although the deterioration of the economic situation had triggered the demand for new approaches to the Cyprus Problem. The answer is evident in the statement by Mustafa Akinci, the founder of the Peace and Democracy Movement ( BDH) which also included some businessmen in its ranks. In his speech on the “Future of Cyprus” at Harvard University Akinci strongly supporting the peace process and EU accession confirmed that:
It will not be enough to try to explain this situation only by the poor economic conditions in North Cyprus. Even if one of the main motivations behind the wish for a solution and EU membership is a better prospect for economic life; there are other important reasons for the Turkish Cypriots to demand for a quick solution. First of all, they are aware of the continuing emigration of their family members.It is estimated that around 16000 Turkish Cypriots have emigrated in the last decade. A solution, it is believed, will not only stop this process; but on the contrary it will be reversed; so that those who left the country may come back. Secondly, Turkish Cypriots learned by experience that they are not living in a real democracy. Their demographic structure has been changed continuously after 1974. Granting citizenship to preferred Turkish Nationals became a simple procedural act, sometimes, of half an hour…[11]
The Critical Year 2002
The year 2002 was critical because the accession negotiations were scheduled to be finalized with most of the candidate countries including Cyprus.[12] Aware that the calendar was set, the business community began to warn the President and the government regarding the time pressure, but there was always some kind of illusion that this accession can not take place since it would be against international law.
Frustrated with the lack of progress, the business community initiated their own international platforms for the settlement. At the invitation of the International Peace Research Institute Oslo (PRIO), a series of meetings between Greek and Turkish Cypriots were held in Athens on 16th and 17th January 2002. The participants examined the progress of the efforts for a solution and agreed to form a study group to prepare the founding of an “Economic Forum for the Island of Cyprus.” The Economic Forum's aim was to contribute to the eventual solution of the Cyprus conflict, by proposing policies that aim at the strengthening of the economy of the Turkish Cypriots and the Greek Cypriots. Two main targets were the equalization of competitiveness and eventually the income per capita of Turkish Cypriots and Greek Cypriots. The Turkish Cypriot participants who formed the Study Group for the founding of this forum were Mustafa Damdelen, Ali Erel and Erdil Nami, along with Greek Cypriots Constantinos Lordos, Andreas Matsis, and Nicos Severis.
The business community increasingly found themselves in close alliance with other business and civil society organizations. Particularly important in this context was the combining the forces between two main civil initiatives. The first established initiative named ‘This Country is Ours Platform' was a left wing grouping including most of the labor unions. The second initiative ‘The Common Vision' included business NGOs and other civil society groups supporting solution of the Cyprus issue and pro- EU. The combination was the emergence of a broad-based civil initiative called The Common Vision and This Country is Ours Platform, which was very active during the campaign before the referenda and successfully organized mass demonstrations. Another important initiative was The North Civil Initiative[13] who responded to the Turkish Cypriot Chamber of Commerce's call to form a bi-communal civil initiative in order to act as a pressure group for a solution based on the Annan Plan.
These broad based civil society organizations not only addressed their society but also the President of Turkey and Turkish political leaders, trying to attract their attention to the Cyprus conflict before it is too late.[14]
TRNC Businessmen Association (ISAD) also took a step in addressing the leaders in Turkey about the historical opportunity for solving the Cyprus problem, urging them to strengthen the advisory team of President Denktas with EU experts. Both ISAD and its counterpart in Turkey, TUSIAD, made a joint visit to Verheugen on 12th November 2002, to discuss the Cyprus problem. On December 18 2002, on return, ISAD publicly announced that the Annan Plan was also protecting the rights of Turkish nationals, trying to reassure the Turkish citizens living in TRNC.
In Fall 2002, the Belgium model as a solution was being discussed in TRNC and in Turkey, mentioned even by the Turkish Prime Minister and included in the election manifesto of AKP. However, nothing came out of this proposal. The contentment of the Turkish Cypriot business community was apparent in the press release by ISAD on November 7th, welcoming this concrete option for the solution pronounced by the newly elected Turkish government. The business community were not only involved with the Belgium model but also continued to voice their concern about the domestic economy, this time about the basics of the new economic reform programme. On November 29th 2002, North Cyprus Young Businessmen's Association (GIAD)[15], expressed their concern about the production based growth target of the programme, as due to high production costs the industry had already lost most of the domestic and the export market.
The Annan Plan: Weakest in Economic Issues
The report of the UN Secretary General entitled ‘The Basis for the Agreement of a Comprehensive Settlement of the Cyprus Problem' which sought an equidistance to the demands of the parties was brought to the negotiation table in November 2002. However, on 10 March 2003, the talks under the scrutiny of the Secretary General in Lahey ceased upon the disagreement between the parties.
Although the business community had fully supported the comprehensive settlement of the Cyprus issue based on the Annan Plan, they were also aware of the weaknesses of the plan with respect to economic power sharing in a federal settlement.[16] In successful federal systems, in order to achieve parity, the economically stronger partner is expected to subsidize the economically weaker partner through fiscal transfers via the federal government. However, under the Annan Plan, the system did not seem to work for the benefit of the economically weaker state. The business community was also worried about issues such as the future source of financing for the budget deficit of TRNC, which has always been covered by Turkey. Concerning the property issue, although the business community was not in total agreement, generally they were for a solution based on international law.[17]
The other major concern of the business community in 2003 seemed to be achieving economic viability especially after the opening of the borders on 23rd of April between the two sides. Economic activity was sliding to the south. The Turkish Cypriot businessmen were not able to cope with the competition they faced uncontrolled and unprepared. Their best scenario was to reach the goal of being integrated into the EU. However, the TRNC government was still eager to sign a customs union deal with Turkey on August 8 2003, although both sides knew it could not be implemented. The annoyed reaction of the business community was voiced by ISAD on August 11, questioning the signing of the customs union and asking both parties to discontinue this kind of arrangement which do not take into account the reality.
During the summer of 2003, the leading figures in the Turkish Cypriot Chamber of Commerce including Ali Erel and Mustafa Damdelen took a further step and established a centre-right political party under the name, “Solution and European Union Party” (ÇABP). Ali Erel was the leader of the party. The party abstained from forming close relations with the old politicians and emphasized clean politics. Although they were not successful in the elections, they played an important role in increasing the pro-EU votes. After the elections they returned to their Chamber.
During this period, the agenda was overshadowed by the possible outcomes of the accession of the Greek half of the island to the EU for the ongoing Turkish military existence on the island. The Greek party stressed that with the ratification of the full membership of Cyprus in the EU, the island would automatically become the territory of the Union and Turkey would inevitably turn into a power invading the soil of the EU. This problem came to the agenda of the European Security and Defense Policy (ESDP) and fortunate for Turkey, it was overrun with the signing of the Istanbul Act which declared that the EU would not be a party in the case of a possible military confrontation in the Aegean and Cyprus.
November 2002 elections in Turkey raised much hope among the Turkish Cypriot business community due to the new approach on Cyprus adopted by the AKP Government which openly stated that it did not regard the status quo as a solution in Cyprus. The Turkish Cypriots had their own election on 14 December 2003 with results showing an almost equal split between the parties supporting a settlement along the lines of the Annan Plan, and those opposing it. Turkish Cypriots supported the solution based on the Annan Plan but at the same time they had serious concern on some of its stipulations. The election revolved mainly around the ‘resolution of the Cyprus conflict through the Annan plan' and ‘Cyprus EU membership'.
Contrast to the previous elections, where the classical political ideologies of the parties had played a role in debates, this time electors had to choose between the ‘status quo' and ‘change'. President Denktas¸ openly opposed to the Annan Plan. Non status-quo groups organized mass rallies under the slogan ‘This Country is Ours'.[18] The pro-Annan Plan group scored a narrow victory over the ‘status quo' group. CTP-BG (Republican Turkish Party-United Forces)[19] formed a coalition with DP (Democrat Party).
The next challenge for the Turkish Cypriot business community was to get a positive result from the simultaneous referenda on 24 April for the Annan Plan. According to the opinion polls on the 3rd of January, 65 percent of the Turkish Cypriots were saying “yes” to the plan. By February 20, this figure had dropped to 59 percent. It was noteworthy that the same poll indicated 56 percent support for the Plan among the settlers from Turkey. This was contradictory to the official view stating that the Cyprus should join the EU only simultaneously with Turkish accession.
The negotiations based on the Annan Plan were resumed once again. During the talks in New York, in March 2004, under the auspices of the Secretary General, it was decided to continue the negotiations on the island and to invite Greece and Turkey as facilitator to the talks between the parties. Furthermore, parties consented that Annan would have the right to say the ultimate word on the negotiations in case they came to an impasse.
The leaders of the two leading north and south Cypriot business community, Cyprus Chamber Of Commerce and Industry and The Turkish Cypriot Chamber Of Commerce made a joint declaration on 15 March 2004 expressing their satisfaction for the resumed negotiations based on the Annan plan for a solution before the 1st of May, so that a reunited Cyprus can join the European Union.” Concerning the economic issues, the two Chambers believed “… that the solution should provide for a fully functioning market economy while any transitional measures and periods should not exceed what is absolutely necessary. The aim must be that the economy becomes fully integrated as soon as possible and that the economic inequalities between the two communities disappear rapidly. We underline the importance of the EU funds to alleviate the economic disparities.”
The Greek Cypriot Administration had already signed the accession treaty on 16 April 2003 in Athens. The Acquis Communautaire was to be applied only to the South, although Turkish Cypriots were allowed to become individually European citizens and obtain a passport from the Cyprus. The business community, being concerned with all these developments, prepared a list of measures to be taken in the scenario of no settlement. Their economic expectations ranged from the 259 million euros assistance to the lifting of economic, transport and cultural embargoes.[20]
Both sides of the island knew that there was no alternative to the UN Plan and that it would be null and void if any one side rejected it. However, after returning from Burgenstock, the Greek Cypriot government organized a “no” campaign against the Plan. Although the priorities of Papadopolous concerning the Annan Plan were the functionality of the state, financial matters, and implementation, later security became the top priority on the list, knowing that it would draw more sympathy from the international community. Addressing the European Parliament on 21st of April 2004, EU Enlargement Commissioner Günter Verheugen recalled that in 1999, the then Greek Cypriot government had promised to do everything possible to secure a settlement in return for which the EU would not make the solution of the Cyprus Problem a prerequisite for accession. An irritated and disappointed Mr. Verheugen stated to the European Parliament :
“….President Papadopoulos's statements after the end of the talks in Switzerland amount to the fundamental rejection of the basic principles set out in the plan. Based on what President Papadopoulos said, I can only conclude that the Government of the Republic of Cyprus now rejects the federal solution to the Cyprus problem, which is based on the coexistence and equality of the Greek and Turkish Cypriots and is endorsed by the United Nations and the entire international community. Let me be quite undiplomatic. Ladies and gentlemen, I feel personally cheated by the Government of the Republic of Cyprus. For months – for months – I have done my utmost, like everyone else, in good faith and trusting in the promises made by the Greek Cypriot Government, to establish parameters which would enable the Greek Cypriots to endorse this plan. Sadly, this has not been achieved…”[21]
On the other hand, in the TRNC, despite the opposition of President Denktas and ultra nationalist groups, CTP-BG the bigger partner of new Turkish Cypriot coalition government led by Prime Minister Mehmet Ali Talat had supported the UN Plan, although its coalition partner DP did not. Whilst the U.S. and EU did not conceal their sympathy to CTP leader Talat, the Russians went on endorsing the Papadopoulos by hinting that they would exert their veto on the Plan in the Security Council if the demands of the Greek Cypriot side were not met. Concomitantly, the AKEL, a left wing political party which was well-known with its moderate stand on the issue deserted its long-time position and joined the lines of opposition. It was no surprise therefore that on the 24th April 2004 referenda, 65 percent of Turkish Cypriots voted for the settlement while 75 percent of Greek Cypriots rejected the Plan.[22] The developments created a festive atmosphere in Brussels and Washington and they congratulated the Turkish party for its positive contributions to the process that was supposed to be an outlet to the conflict.
Two days after the referenda, ISAD declared publicly that President Denktas should resign as he has openly rejected the Annan Plan, and that the present government was not representing the 65 percent who had supported the Plan. This was an unmistakable sign for the early elections, which actually took place in February 2005.
The international community was aware that a new state of affairs had emerged in Cyprus as the result of the referenda and this required the development of new policies to match the new needs. On April 26, the European Council declared its determination to put an end to the isolation of the Turkish Cypriot Community and to facilitate the reunification of Cyprus by encouraging the economic development of the Turkish Cypriot Community. On the same date, Günter Verheugen, EU Enlargement Commissioner stated that the Turkish Cypriots must not be punished because of this result and the isolation of the North has to be ended. Parallel to this statement, the European Parliamentary Assembly Resolution no. 1376 (2004) stated that “The international community and in particular the Council of Europe and the European Union cannot ignore or betray the expressed desire of the majority of Turkish Cypriots for greater openness and should take rapid and appropriate steps to encourage it. The Turkish Cypriots' international isolation must cease.” The Council invited the Commission to bring forward comprehensive proposals to this end. Acting on that, the European Commission came up with three regulations; Green Line, Direct Trade and Financial Aid Regulations.
Settlement Begins via Business
The Turkish Cypriot business community was pleased with the declarations of the EU and felt confident that the Green Line Regulation entering into force on 1 May 2004 would be an indication of a new era in trade for the economy of the North. Ali Erel expressed this expectation by the following statement. “From May 1 onward we can sell products wholly produced in [North] Cyprus to the south, and within two months a policy will be devised by the EU Commission allowing us to sell goods partly produced here…..2.6 million tourists go to the south each year and these people will now be able to visit north too and stay overnight.” He added that tourist trade coming to the island through the North could also bring benefits to the South. “Each year around four million tourists go to Antalya [in southern Turkey]. These people will be able to come to the Island via the North, and many of them will go to the South. This adds to the overall appeal of Cyprus as a tourist destination.”[23]
However, in order for Turkish Cypriot businessmen to sell their goods, they first had to obtain a Certificate of Origin. The Council Regulation (EC) No 866/2004 (Green Line Regulation) of 29 April 2004 has given this important role to the TCCC to promote inter-communal business cooperation.[24] And as of August 23 2004, Turkish Cypriot Chamber of Commerce was anticipated to start issuing the certificate of origins for the goods to be sold to the South. This was supposed to be the first step of lifting the isolation of the North thus strengthening the Turkish Cypriot economy. However, both the business community and the TRNC government were very much aware that this was not a substitute for a solution. As Prime Minister Mehmet Ali Talat confirmed at the meeting with the Foreign Affairs Committee of the European Parliament on 27th April 2004, “…we do not conceive the removal of the embargoes as a substitute to a solution. We, the Turkish Cypriots, did not lose our vision for a solution and reunification of our island”.
In reality, the accession of the Greek half of Cyprus to the EU can be evaluated as a reward to solutionlessness. This development erected serious barriers before the Union policies regarding the Turkish side. Consequently, the threat of a Greek veto prevented the plans which envisaged direct commercial relations with TRNC. Although the Article 133 of the Union Agreement regulates this issue, the Greek side insisted that the involved provision regards commercial relations between the Union and other states. Accordingly, by accepting Cyprus into the EU, the island as a whole has been placed under the Union law as a member country the mentioned article cannot be upheld. As for the isolation of the North, the Greek side stressed that this situation is provisional. Moreover, the U.S. government also abstained from ratifying the act regulating direct flies to and from Ercan Airport.
On August 24 with the first goods consignment, which was fresh fish, the Turkish Cypriot business community faced the cold reality. The goods could not cross the greenline, they were not accepted by the Veterinary Department of the Cyprus and were sent back, based on the clause of the same regulation stating “Until sufficient information is available with regard to the state of animal health in the abovementioned areas, the movement of animals and animal products will be prohibited.”
Although the Green Line Regulation was far from meeting the interests of the Turkish Cypriot side, there were still some positive changes in the economy due mainly to the opening of the border and entry into force of the Green Line Regulation. The amount of money in circulation in the North has increased, raising the GNP to 1.604 million dollars and per capita income to 7.350 dollars. The growth rate had increased to 11.4 percent in 2003 and 15.4 percent in 2004, the highest in the history of TRNC. The money entered the economy mainly through property sales to foreigners and the increase of tourism revenue due to the freedom of movement and accommodation of foreigners in the North. Moreover, the income of approximately seven thousand workers commuting daily to the South needs to be included.
The opening of the border has surfaced a conflict of interest between the domestic commercial and industrial sectors. The companies involved in trade were trying to push the doors more open, while the industrialists were concerned for the outcome. This was voiced on October 10 2004, by the President of the Chamber of Industry, Salih Tunar, in the opening speech of the nineteenth General Assembly of the Chamber claiming that the economy would slide to the South if precautions were not taken immediately.
In the meantime, the business community continued to voice their demands from the EU, including the promised 259 million euros assistance and the need to lift economic, transport and cultural embargoes immediately, even expressing their desire to participate in the Olympic Games in Athens. Unfortunately, Brussels was deaf to such calls and the Turkish Cypriots' discomfort as a result of the uncertainty over their future has continued. Therefore it had become vital to take initiative once more before the 20 February 2005 elections in TRNC to ensure that a strong government supporting the peace settlement would be elected. The result of the election was the victory of the CTP-BG (Republican Turkish Party-United Forces). The leader Mehmet Ali Talat would be again the Prime Minister, and shortly afterwards, the president of TRNC (April 2005).
The affirmative response of the EU to the constructive attitude of the Turkish Cypriots in the aftermath of the referenda by providing new measures in economic terms could not be materialized due to the obstructionist approach of the Greek Cypriot side. The Turkish Cypriot business community for a long time has believed that it is up to the business communities on both sides of the Green Line to lead the way toward true reconciliation and it can best be done under the European framework. EU as a community based on the free-trade principle, can not tolerate forever the Greek Cypriot blockade and the lifting of the isolation of the North will be supportive to the solution of the long-lasting conflict. However, much to their disappointment, the Greek Cypriot administration after becoming a member of the European Union on May 2004, has successfully blocked the measures to end the Turkish Cypriots' isolation. The prospect of Taiwanisation of the North frightened Greek Cypriots. The Turkish Cypriot business community felt that they were facing a deadlock and in an effort to make their voice heard at the EU level, the Turkish Cypriot Chamber of Commerce opened its Brussels Representation on 19 September 2005.
As soon as it was clear that the Green Line Regulation with a monthly trade figure of 100,000 euros was not contributing to the development of the economy of the North as anticipated, the Turkish Cypriot Chamber of Commerce took a step further and proposed an expansion arrangement on Green Line Regulation that will allow free movement of goods throughout the Island and the European Customs Union area. It was an open declaration expressing their desire to become a part of the European Customs Union when Turkey signs the protocol to the Ankara Agreement and starts normalizing the relations with the Republic of Cyprus. They also claimed that the communication of the External Trade Undersecretary's Office of Turkey dated 1st November 2004 had already freed trade by stating that documents from the Cyprus marks shall be accepted.
Another concern of the business community was based on the fact that since there is no possibility of trading imported goods in Cyprus over the Green Line, most of the Turkish Cypriot agents or distributors of Turkish originating goods will have to move their activities to the South in order not to lose their agencies or distributorships. Obviously, this will be followed by an increase in the flow of capital and skilled labor to the South. The end result will be more isolation to the North economy.
Many members in the Chamber did not support this free trade argument, believing it to be unrealistic. Furthermore, many blamed Erel and his Board being too occupied with the resolutions coming from Brussels rather than supporting and cooperating adequately with the TRNC leadership. The opposition to Erel was a coalition composed of various political groups in the Chamber, more in line with the TRNC new leadership, supporting the view that the pressure being exerted on Turkey to recognize the Greek Cypriot administration and open up its ports is unacceptable.
The confrontation within the Chamber came to an end when Erel lost the elections and Erdil Nami became the new President of the Chamber. The quest for a solution to end the international economic isolation of the TRNC is said to be continued under the new leadership. Yet, it remains to be seen whether this split will weaken the business community or whether it will continue to play a leading role under the new leadership as one of the key domestic actors interacting with other regional and European actors towards a solution of the Cyprus conflict.
*Prof.Dr. Canan Balkir is Chair of the Department of EU Graduate Studies at the Dokuz Eylül University, Izmir, Turkey
[1] This term has been used in the text without prejudicing the fact that the said Republic has ceased to exist in practice since 1963 and there are two different states in the Island now.
[2] No airlines have been allowed to fly directly to northern Cyprus' Ercan airport without first stopping at Izmir or Istanbul. These obligatory stopovers added travel time and also made flights to Northern Cyprus from Europe expensive.
[3] The transformation was from a state-led inward oriented growth strategy to export promotion with strong incentive to private sector and gradually phased import liberalization, together with managed floating exchange rate and regulated capital movements.
[4] In 1997, after a break of almost three years in direct negotiations, the Greek Cypriot and Turkish Cypriot leaders at the invitation of UN Secretary-General Kofi Annan held two rounds of talks: the first in Troutbeck (9–13 July) and the second in Glion (11–15 August). These talks produced no result. Following Troutbeck, Turkey and the TRNC made a joint declaration announcing a policy of integration between the two states in the spheres of economy, finance, defense and foreign affairs. This policy was further enhanced after the December 1997 decision of the European Council not to include Turkey among the candidates for EU membership.
[5] The financial aid from Turkey to TRNC during 1974 to 2004 was over 3.071 million dollars.
[6] Due to exogenous variables such as the Gulf crises, as well as the domestic crisis concerning the Turkish Cypriot tycoon Asil Nadir, the economy suffered negative growth rates (-5.7percent in 1990, -5.3 percent in 1991).
[7] A. Çarkoglu and A. Sözen, “The Turkish Cypriot General Elections of December 2003: Setting the Stage for Resolving the Cyprus Conflict,” South European Society & Politics, Vol.9, No.3 (winter 2004) p.129.
[8] See Presidency Conclusions, Helsinki European Council of 10-11 December 1999.
[9] See web page of Turkish Cypriot Chamber of Commerce, Economic-Political Opinion, Nov. 2001 Nicosia.
[10] In 1990 elections, CTP and left-of-centre TKP (Communal Liberation Party) and YDP (Rebirth Party) made a coalition opposing UBP. The break up of UBP, gave way to DP-CTP coalition during 1993-96, which was later replaced by DP-UBP coalition. 1998 elections gave way to UBP-TKP coalition, which later was replaced by UBP-DP coalition, when TKP resigned from the government because of the banking crisis. In 2003 elections, the centre-right lost ground to the left. CTP and BDH had 25 seats which was not enough to form a government and a grand coalition between CTP-BDH-DP was blocked by DP, the result being CTP-DP government.
[11] www.barisvedemokrasi.com
[12] The agreement for accession talks with the Cyprus Republic was part of a deal encouraged by the United States, under which Greece agreed not to veto Turkey's Customs Union agreement with the EU. At the Helsinki Summit in December 1999, it was decided that a political settlement of the Cyprus problem would not be a precondition for the accession of Cyprus. The same meeting offered Turkey the status of candidate for the EU membership.
[13] Organizations forming the North Civil Initiative are as follows: Turkish Cypriot Chamber of Commerce, Cyprus Turkish Chamber of Industry, Northern Cyprus Hoteliers Association, TRNC Businessmen Association, Turkish Cypriot Association of University Women, Women Research Centre, Cyprus Turkish Medical Association, Association of Cyprus Turkish Pharmacists, Turkish Cypriot Heart Association, Cyprus Turkish Managers Association, Association of Improvement and Development of District of Güzelyurt, Cyprus Turkish Journalists Union, Press Laborers Union, Eastern Mediterranean University Academic Personnel Union, Hands Across The Divide, North Cyprus Association of Socially Insured People, Cyprus Turkish Booksellers and Publishers Association, Cyprus Turkish Building Contractors Association, Dillirga Solidarity Association, Doganci Peace Fire Committee, Doganci Producers Association, EKIM Culture Association, EMAA -European Mediterranean Art Association, Folk Arts Foundation, Food and Packaging Producers Association, Initiation for Peace and Democracy, KAYAD, Kutlu Adali Foundation, Rights and Freedom Association, TRNC Certifying Officers (NOTARY) Union, Turkish Cypriot Advertisers Union, KAMU-SEN Cyprus Turkish Public Servants' Union.
[14] See http://www.ktto.net/turkce/basinbildirileri.html, Declaration on June 4, 2002 by the Turkish Cypriot Chamber of Commerce, TRNC Businessmen Association, North Cyprus Young Businessmen's Association, Northern Cyprus Hoteliers Association, Cyprus Turkish Building Contractors Association, Turkish Cypriot Association of University Women, Junior Chamber North Cyprus, North Cyprus Banks Association.
[15] The North Cyprus Young Businessmen Association was established in 1989. One of the founders was Serdar Denktas, the son of President Denktas. Although in their public announcements, they expressed their desire for north Cyprus to be integrated to the global community, supported the Annan Plan, they were much more conscious in their wording concerning criticism of the present system. They backed up the freeing of the passing from north-south, as well as the Agency Law, anti-dumping law, consumer protection law. They also made a press release on 2nd January 2003, stating that a political solution must be reached before 28th of February.
[16] Canan Balkir, Economic Evaluation of the Annan Plan (Ankara: TOBB, 1993), p.9.
[17] The decision of the European Court of Human Rights on 18 December 1996 invalidated the Article 159 of the TRNC Constitution stating that "immovable property within the borders of the TRNC that has been declared abandoned on 13 February 1975 shall be state property". Turkey, having effective control in the North was held responsible for the results of the military operation and had to pay compensation to Loizidou.
[18] The idea behind was that it should only be the Turkish Cypriots who rule the North .
[19] CTP-BG was established in fall 2003. In the election, it reserved half of the places to individuals from different political backgrounds who currently supported a solution based on the Annan Plan.
[20]These were addressed to the Permanent Representative of the Republic of Ireland to the EU
[21] See European Parliament, Debates, Strasbourg, 21 April 2004, http://www.europarl.eu.int/omk/sipade3?PUBREF=-//EP//TEXT+CRE+20040421
[22] On the 1st of May 2004, under the claim that the Greek Cypriot Government of Cyprus represents the whole island, the Cyprus Republic joined the EU. Paradoxically, the Greek Cypriots had voted ‘no' to the Plan and entered the EU whilst the Turkish Cypriots had said ‘yes' and were outside.
[23] See www.ktto.net, press statement, 4 May 2004,
[24] Greek Cypriots accepted TCCC to issue certificates of origin because it was an NGO and not an official TRNC body.