As wealth inequality rises in Cyprus both people and democracy suffer

It has profound socioeconomic effects, as well as political consequences in shaping the outcome of elections and policies

Cyprus is a wealthy nation; but that wealth is very unevenly divided. These inequalities exist, and are mounting, between individuals and families, between generations and genders, and between people from different ethnic backgrounds. However, owing to limited space this opinion piece focuses on household and intergenerational wealth inequalities.

In fact, the latest estimates in the ECB‘s Household Finance and  Consumption Survey (HFCS) for 2021 reveal that Cyprus households are quite wealthy with their median net wealth amounting to €200,400 in 2021 compared with a median of €123,400 for households in the euro area.

In addition, wealth inequality is increasing as shown by the rising Gini coefficient for wealth distribution over recent years and is markedly more severe than income inequality for Cyprus households, which has been relatively stable over the last decade.

In fact, HFCS data for 2021 indicate that the top 10 per cent of Cyprus households held a very high 46.1 per cent of the net wealth, while the bottom 50 per cent owned just 9.5 per cent. And according to estimates of Credit Suisse the Gini coefficient for wealth distribution per adult in Cyprus rose from 61.3 in 2010 to 69.9 in 2013 and further to 79.1 in 2021.

Also, there are large differences in the holding of wealth by generations in Cyprus and most countries with the proportion of wealth owned by younger generations decreasing over time.

Wealth statistics for the United Kingdom show that “every generation since the baby boomers (born 1945 to 1960) have had less wealth than the generation before them had at the same age”. Indeed, ever since the 1960s most children in Western countries have become increasingly less wealthy than their parents.

While similar wealth statistics do not exist for Cyprus there is much evidence that such intergenerational wealth differences prevail and are rising. For instance, data from the HFCS indicate that the generation from 45 to 64 years old held over 50 per cent of the net household wealth in Cyprus in 2010, while the young generation from 16 to 34 years old owned only around 5 per cent of this wealth.

By 2021 it is estimated that the aforementioned older generation in Cyprus still held more than 50 per cent of the net household wealth despite steep falls in the prices of their large real estate holdings and the deposit haircut of 2013, whereas the acquisition of wealth, particularly of houses, by the younger generations has been hurt by their inability to secure well-paying jobs.

Indeed, quite strikingly, data from the HFCSs indicate that the median income of households in the 16 to 34 years age group fell by nearly 30 per cent between 2010 and 2021.

Causes and consequences

However, what are the causes and consequences of the high and escalating wealth inequality in Cyprus and other countries? Various studies for European countries such as that of Thomas Piketty for Europe and the US, and Rehm and Schnetzer for the eurozone using HCFS data, conclude that intergenerational transfers (inheritances and gifts) are the largest single factor explaining wealth inequality. In fact, Rehm and Schnetzer estimate that inheritance and bequests contributed 39 per cent among the factors explaining wealth inequality in Cyprus in 2010.

Piketty’s 2014 seminal work on the dynamics of wealth and income distribution under capitalism distinguished between two kinds of households: those that own capital or wealth – such as land, housing, and financial assets which generate rent, dividends and interest – and those households that solely own their labour, which only generates wages.

From his analysis of old tax records from Europe and the US revealing the growth trend of different sources of income, he concluded that the returns to capital tended to grow much faster than economic growth, resulting in relatively greater wealth accumulation by households owning capital.

Furthermore, Piketty and other studies add that larger wealth begets greater political influence as the rich engage in campaign financing, lobbying and even bribing so as to maintain prevailing power relations and their command over the allocation of the economy’s resources, thus, undermining democratic societies in the process.

Approximate estimates for Cyprus using national accounts data show that since the last years of the more socialist government of Demetris Christofias returns to capital as approximated by the net operating surplus and mixed income have grown more rapidly than returns to labour in the form of the compensation of employees.

Indeed, between 2010-2012 and 2021-2023 (the years of the centre-right administrations of Nikos Anastasiades and Nikos Christodoulides) income from capital is roughly estimated to have increased by 80 per cent, whereas income from the compensation of employees rose by a much lower 23 per cent.

And with policies in Cyprus including no inheritance tax, minimal taxes on immovable property, and low marginal tax rates on high incomes, as well as the crushing weight of the housing market bearing down on young people, wealth inequality reinforces itself with each generation faring worse than the previous one.

More generally, as a result of high and mounting wealth inequality in the Western world there are not only profound socioeconomic effects, but also important political consequences in shaping the outcome of elections and related policies.

In this connection political elections are increasingly pitting older voters and their inheritors, who have benefited from massive property price increases since the 1990s, against younger voters, who are increasingly locked out of the housing market. Undeniably, politicians seeking to attract young voters could do well to take a long hard look at the plight of the younger generation and formulate policies aimed at reversing their descent into inadequate living conditions.

However, it is evident that politicians of centre-right and centre-left political parties are failing to convince voters that they have answers to the issues ordinary citizens view rightly or wrongly as causing wealth and income inequalities, including notably mass immigration.

In fact, Roger Cohen in the New York Times last week stated that “the working class, long the cornerstone of socialism in Europe, have migrated in mass to the anti-migrant far-right as an expression of frustration at growing inequality and stagnant paychecks”.

And in Cyprus in the runup to the European Parliamentary elections there has been a large movement of voters from centre and moderate right political parties to the far-right party of Elam, owing most importantly to its strong stance against immigration. Indeed, members of Elam tend to associate the deterioration of the living and work conditions of many Cypriots with the large inflow of migrants and refugees in their political campaigning.

 

Leslie G Manison is an economist and financial analyst, specialising in macroeconomic policy analysis, bank viability assessments, and international financial relations. He is a former senior economist at the International Monetary Fund, an ex-advisor in the Cyprus finance ministry and a former senior advisor at the Central Bank of Cyprus