Academic journal article The Journal of Social, Political, and Economic Studies

Aftermath of the Great Recession, the Role of Institutions and Economic Policies: The Cases of Cyprus and Greece

Academic journal article The Journal of Social, Political, and Economic Studies

Aftermath of the Great Recession, the Role of Institutions and Economic Policies: The Cases of Cyprus and Greece

Article excerpt

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To date, an issue that has been studied thoroughly by economists and political scientists is the role of institutions and governance and how they affect the economic development of a country. The pioneering work of North (1990) and Olson (2000) gave food for thought to new political scientists to develop their own knowledge and theories for these particular variables. As mentioned by Dixit (2009), good economic governance involves three basic components a) security of property rights, b) enforcement of contracts, and c) collective action. There is no doubt today that the institutions of each country influence economic governance and development. The magnificent works of Stephen Knack and Phillip Keefer (1995) demonstrate how important institutions are in the economic performance of a country. The same conclusions are found by Mauro (1995), that corruption is negatively associated with economic growth and investment. Also the significant study by Acemoglou et al. (2003) on how weak institutions affect the macroeconomic balances of countries is an indication of the important role that institutions have played throughout history.

With the fall of the Iron Curtain, most studies were focused on the Washington Consensus, the macroeconomic sustainability of many countries both in the former Eastern bloc and the indebted countries of Africa and Latin America. Many economists and social scientists in the last two decades, foreseeing the role institutions play in the evolution of a country, developed their own studies focusing on the relationship between economic performance and political-institutional factors (Acemoglu and Robinson 2000; Acemoglu and Robinson 2002; Krussel and Rios-Rull 1996; Parente and Prescott 1999; Tornell and Velasco; LaPorta et al 1998). With the recent economic crisis that some EU countries have experienced and continue to experience, scientists have shifted their research to how the institutions of a country affect the outcome of a crisis (Bluhm et al 2013; Du 2010; Rodrik 2000). One issue that has received wide analysis in recent years is the effect of governance on economic growth. With the recent economic crisis, research has expanded on how the low quality of institutions that existed before the crisis has influenced the duration of the crisis.

In a report (2014:2), IMF staff argue that the Cypriot government is on track for successfully implementing the IMF stabilization program.1 Even though financial difficulties do exist in the Cypriot economy and are not ignored by the report (ex. high unemployment, high non-performing loans), there is a gradual improvement of economic conditions. On the other side, Greece after five years of prolonged recession is still in a crisis with the prospects of a Grexit to be on the front scene.2 Although Cyprus adopted the Memorandum with Troika in March 2013, we can observe that it took the island about two years to experience positive outcomes. In contrast, Greece, after adopting two Memoranda in 2010 and 2011 (and a recent third one with the SY.RI.ZA government), is still in economic recession with unpredictable consequences for the country and its people.

The reasonable questions then become: Why is there a difference between the two countries' recovery from the Great Recession? What are the reasons that lead Cyprus to a successful or faster recovery from the Great Recession than Greece? What causes the discontinuities in Greece's stabilization program? The purpose of this study is to examine the reasons for the above mismatch based on previous macroeconomic imbalances and the quality of institutions in each country. This paper is divided into three sections. The first will be concerned with a historical description of the creation of the independent Greek and Cypriot states and their economic progress. The second part will analyze the existing macroeconomic imbalances that led the two countries to the economic crisis they experience today and the third part will deal with the quality of institutions in each country and how that affects the recovery of the economies of both countries. …

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