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Chapter 14

Chapter 14. The business case. Go to page 261 READING 5. Construction development and the BON –Curve analysis Draw and explain the Bon-curve Data Does the volume follow the share LDC NIC AIC

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Chapter 14

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  1. Chapter 14 The business case

  2. Go to page 261 READING 5 • Construction development and the BON –Curve analysis • Draw and explain the Bon-curve • Data • Does the volume follow the share • LDC NIC AIC • How about the micro states? In order to answer this question go to page 264 and read Mehmet and Yorucu (2008)

  3. Bon Curve analysis • Inverted U-curve is not valid for micro states. Inverted V-curve is an evidence for North Cyprus. • The shape of the Bon-curve varies…

  4. Figure 1 The Implementation of Bon’s U-shaped profile of Construction on micro-states

  5. Backward and Forward Linkages of the Construction Sector: an Input-Output Analysis and the Bon Curve in the case of North Cyprus Ozay Mehmet & Vedat Yorucu Department of Economics, Eastern Mediterranean University, Salamis Road, Famagusta, Cyprus. North Cyprus (NC) is a micro-state in the Mediterranean Population size: 256,644 (2006 census) Surface: 3298 km square Total GNP: US $ 2, 327.8 million Per capita income: US $ 10,567 (2006) Construction growth rate: 35.2% (2006) Real GDP growth rate: 13.5% (2006)

  6. Construction sector in NC had a boom which is triggered by the Annan Plan (2004) Referandum in May 2004 which aimed at ending political division in Cyprus. Expansion in construction volume had a significant growth in real GDP and drew the attention of the researchers. An input output analysis is used to see the backward and forward linkages of the construction sector. In micro-states, where the land constraint is encountered earlier compared to large economies, the drive to maturity which is the first and early stage of economic development (construction growth exceeds the real GDP growth rate-steep positively sloped curve) appears to entail a shorter time frame. This evidence confirms the Bon curve, but it suggests that the shape of the curve may be more like an inverted “V” rather than a “U”- curve. i.e. Singapore (growth triangle-”transnational construction” Hong Kong (“vertical construction”, “multi-storey category” NC (inverted V rather than U-curve) (vertical expansion is not an option in NC)

  7. In NC with land constraint and access to cheap labor supply, the expansion portion of the Bon-curve may be steeper, the peak much more pronounced and the declining portion relatively flatter compared to the original Bon-curve. The steeper portion of the curve mirroring explosive construction growth in North Cyprus has shown to be unsustainable and it is already being checked by tougher environmental and land zoning standards. The rate of decline in the downward portion of the curve is the function of political commitment in the implementation of the standards.

  8. Backward Linkages Backward linkages in this study relate to direct input interdependence between the construction sector and other sectors. In another words, they refer to purchases by the construction sector of intermediate goods in inter-industry transactions. These input purchases, priced at producer prices, are the fixed coefficients indicating required amounts per unit of construction output.

  9. Principal source of intermediate inputs for the construction sector was sub-sector 5 (0.218 coefficient) in 1998 and (0.214 coefficient) in2005. It is important to note that in 1998 one unit of output required just 0.055 units of input from the financial sub-sector, however, in 2005 this coefficient rose to 0.33; which means the production of construction output in North Cyprus became significantly driven by availability of finance. There is low capital intensity in NC construction production since there was bulk influx of cheap wage labor from Turkey.

  10. Forward Linkages Forward linkages relate to deliveries of construction outputs to other sectors, as intermediate goods, plus final demand components. The forward linkage coefficients represent how much construction sector delivers to other producers and final demand users per unit of output. In 1998, hotels and bungalows represented the top intermediate users of construction output (0.512). By 2005 this sub-sector was overtaken by the wholesale and retail trades (0.458).

  11. One important aspect of construction in North Cyprus is the fact that outputs are primarily delivered for final demand users, intermediate users accounting for a much less share of total sector output. 1998 -- 96.5% total construction output went to final demand users. 2005 -- 53.7%, total construction output went to final demand users. (a very large decline) Final demand components were collectively still ahead of intermediate consumption.

  12. Environmental Degradation • There is no concern for the unique ecology of North Cyprus by speculative investors and profit driven contractors. • In the process, the natural assets on the shoreline and mountains are being depleted. • Infrastructural constraints are encountered with inadequate roads, electricity and water resources. • NC Government took immediate action: • World Bank Report on NC (2006) – suggesting significant increase in property taxes. (Ministry of Finance increased property taxes by 3 fold in April 2007) • Enactment of cabinet decrees • Impact of decrees may be higher prices and better quality construction.

  13. Conclusion: In NC, an environmental limits are encountered and government authority is then obliged to step in to protect net public benefit putting the brakes on explosive construction growth by accepting 7 cabinet decrees over the last three years. The inverted “V” hypothesis advanced here does not invalidate, but merely modify the Bon Curve. Thank you.

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