Mind the Gap:Unification, EU Membership and Regional Disparity in Cyprus

This paper examines the possible implications of EU membership for the North-South development gap in Cyprus - assuming that the country would join as a federal entity. It reviews the debate on economic convergence and draws on research findings in the EU context. On balance, the theoretical and empirical work suggests that poorer EU regions have been able to grow faster following the deepening of integration. However, this result is based on a number of restrictive assumptions; the rate of convergence has been very low; and the performance of the regions has not been uniform. There is significant evidence suggesting that regional performance is strongly correlated to ‘institutional strength’ and efficient governance structures. Therefore, convergence between the Northern and Southern Cyprus cannot be taken for granted – even if the North benefits from Structural Funds support on an equal footing with other Objective 1 regions. To shorten the catching-up period, specific arrangements are necessary to address the adverse initial conditions in the North, which suffers from inefficient governance and weakened endogenous institutions. Otherwise, persistent inequality may threaten the sustainability of the federal solution, cause political uncertainty and make both communities worse-off in an age of global competition for markets as well as foreign direct investment.