Foreign trade by countries in northern Cyprus in selected years

Note: Values are in 1977 millions of dollars.

Source: State Planning Organization (SPO) of Northern Cyprus, Statistical Yearbook of 2006.

Since 1974, U.N. peacekeepers on the divided Mediterranean island of Cyprus have patrolled a buffer zone that divides the Greek-leaning, government-controlled south from the northern third, the self-declared Turkish Republic of Northern Cyprus (TRNC). The economy of Northern Cyprus resembles that of other small islands with negligible industrial production that rely on the service sector to generate income. What makes Northern Cyprus unique, however, is that the rest of the world does not acknowledge it as a separate political entity. This limits economic functions because the “country” cannot trade freely and depends on Turkey, the only nation to formally recognize Northern Cyprus.

The table summarizes the trading activity of Northern Cyprus in a random selection of years. Turkey is the TRNC's largest trading partner; because the share of trade with other countries is so small, the State Planning Organization combines these numbers. Although Northern Cyprus exports agricultural products and a percentage of its meager light industrial products to Turkey, the volume of exports falls far short of imports and has increased only marginally. By contrast, the rate of import growth has soared, implying an increasing dependence on all countries, but particularly Turkey.

The level of exports sold to trading partners other than Turkey has declined since 1994, when the European Court of Justice banned trade with Northern Cyprus. Unable to sell many products abroad, Northern Cyprus has nonetheless continued buying, thanks in part to real growth in its gross national product. Nonetheless, the increasing volume of imports has three important implications:

1. 1. Northern Cyprus did not combat the effects of international embargoes with effective policies, such as import substitution, export promotion, or more efficient production.

2. 2. As the trade balance has deteriorated over the years, the trade deficit has grown. This deficit has been financed by other sectors of the economy.

3. 3. Because these other sectors are not large enough to compensate for the enormous import expenditures, Northern Cyprus relies on foreign assistance to correct the deficit in the balance of payments.

Turkey extends generous economic aid packages to the TRNC every year. In 2005, for instance, Turkey infused Northern Cyprus with $217.2 million in assistance—enough to finance most of the TRNC trade deficit. In a way, the Turkish economy helps the Northern Cypriot economy so that Cypriots can continue purchasing Turkish products. Turkey is investing in expanding its export market. Although imbued with goodwill and mutual benefits, the relationship between the two governments has created a pattern of dependence somewhat burdensome to the TRNC economy.

According to recent scholarship, foreign aid spurs growth in developing countries with good policies, but has little impact in countries with poor policies.Footnote ¹ Good policies efficiently direct donated dollars to areas that provide long-term benefits for society, such as improved infrastructure, education, and health care. In many cases, however, instead of “breaking the endless cycle of poverty,” foreign aid has become the opiate of the developing world. “The U.S. Agency for International Development and other donors have trained Third World governments to rely on handouts instead of on themselves for development.”Footnote ² Because Northern Cyprus uses foreign aid to make up for trade deficits, the assistance holds no promise of increasing the TRNC's economic self-reliance.