Trade Deficits and the Health of the Economy
A Dialogue Between
Nikola Gruevski and Sam Vaknin, Ph.D.
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NG: The characteristics of the Republic of Macedonia, in its post independence period, from a macro point of view of the activities of exports and imports, are:
The Macedonian economy is traditionally dependent on the importation of goods and services, under conditions of deficiencies in domestic raw materials and products for consumption, hi-tech and know how services.
SV: This situation is not unique to Macedonia. With a few exceptions it applies almost fully to the USA, for instance (not to mention Russia). There has been an explosion in international trade in the last two decades (it grew more than threefold). But it has been an asymmetrical explosion: some countries were on the receiving side and benefited disproportionately (like Japan) others financed this largest unilateral transfer of wealth in history. The result is a new form of mercantilism and economic colonialism. Some countries have become the suppliers of raw materials and cheap labour to others and ended up consuming the very finished products created with their own raw materials and labour. No one knows why some countries end up this or that way. Geographical location has some influence: sea bound countries do better than landlocked ones. But all other factors suggested by the pundits are nothing but guesswork. Political stability, lack of corruption, good management, developed capital markets, encouragement of exports, macroeconomic stability all seem to be only mildly relevant. Japan and Germany had endured gross destruction during the Second World War, Brazil and Israel had hyperinflation, Israel went through a bloody path of wars and terror, there are few countries more corrupt than Russia and yet all these are major exporters. Some of them (Japan) do not even have any natural endowments or relative competitive advantages to speak of. It is a mystery to this very day.
NG: The deficit, basically, can have both positive and negative effects.
The positive effects can be generated if the realized imports include equipment, state of the art technology and techniques, investment in production capacity, re-processing etc. After a prescribed period of time, the conclusion of sales and/or exports, above all of final products, will create higher feasibility, competitiveness and profits, a flow of foreign currency into the country, and finally, will animate new investments and exports. Such developmental deficit will mean additional outside accumulation, opening the possibility to exit to foreign markets, higher production and exports.
SV: This distinction, is, of course, critical. There is a "bad deficit" which goes towards financing consumption (like Macedonia's) and a "good deficit" which goes towards financing investments with foreign capital. Few people know that Foreign Direct Investment increases the deficit in the balance of payments of a country. But, of course, this is not considered bad at all! The reason is that a good deficit generates sufficient value in the future to return the borrowed money plus a return on it. A bad deficit generates only debts without the future ability to return them. If a deficit were generated by purchasing a new textile machine it will bring sufficient earnings in its future to cover its cost (which created the deficit in the first place).
But if one buys a fancy Mercedes car it generates no future income. On the contrary, it generates even more foreign exchange losses (fuel, etc.).
NG: Unfortunately, RM in the latest period, by leading an extremely liberal policy of imports and in the absence of a strategy for economic reconstruction and higher exports, instead of a developmental deficit had realized worryingly high non-developmental deficit. This was the result of the import of consumer goods, often with very suspicious quality, and as "substitutes" for what RM anyhow produces in quantities larger than needed (e.g. tomatoes, are officially are protected, yet big quantities of tomatoes from Turkey are imported). Against it, many products, which RM is forced to import, are not produced locally even though there are conditions for their profitable production. But, because of the lack of capital and of insufficient and non-trading distribution of the banks' credits (both domestic and, more so, foreign capital), such projects are not realized.
The consequences of the non-developmental deficits can be noticed in:
SV: It would be naive (and I know that you are far from it) to blame all these dire consequences on a single economic factor, no matter how important. Moreover, deficits are symptoms, not the disease. By treating one's symptoms one does not achieve healing. The brain drain to take one example is the result of the division of wealth among corrupts oligarchs and politicians through bogus "reforms". It is a result of the feeling of the younger generations that there is no where to advance to unless you were born to the right family or are willing to grossly compromise your moral principles. Corruption, low social mobility, bad "communist-socialist" mentality, oppression, dysfunctional institutions, ignorance, intolerance, lack of foreign investment, geopolitical complications, (financial) crime are all as important as the trade deficit in retarding the growth of Macedonia.
NG: The trade deficit in RM in 1995 was $514 million, in 1996 - $479,5, in 1997 - $538,8. No doubt in 1998, a deficit of about half million dollars will increase the foreign debt of the state without creating conditions for the founding of more qualitative export companies. The deficit in the current balance of payments of $216 million in 1995 increased to $276 million in 1997.
It is assumed that current account deficits of over 5% of GDP (over 3-4 years) should turn on the red light, especially if the deficits are financed by short-term debt or foreign currency reserves and if the same are the reflection of excessive spending. RM in 1997 officially reached a current account deficit level of 8.3% of the GDP. That definitely presents the upper limit of tolerance. It cannot be expected (especially not in the longer term) to maintain such a high current account deficit without provoking tremors and cracks in other dimensions of the economic system of RM.
RM is not alone in the group of East European countries in transition with such results (Poland sports a 3.2% deficit, Slovakia 7.9%, Czech Republic 6.3%, Ukraine 1.7%, Hungary 2.2%), but it is after Bulgaria which has a surplus of 4.3%, Russia with a surplus of 0.8%, Slovenia with a surplus of 0.4%, etc. According to Business Central Europe, in absolute numbers, in billions of dollars, the situation in 1997 was as follows: Bulgaria +0.2, Croatia 1.9, Czech Republic 3.2, Estonia 0.6, Hungary 1, Poland 4.3, Russia +3.9, Slovakia 1.5, Slovenia +0.1, Ukraine 1.3, etc. It seems that RM is not alone in the club of countries with current account deficits . According to the summer issue of The Wall Street Journal Europe's Central European Economic Review, RM definitely trails the countries in the region in terms of GDP increases (below 2%) in 1997. Belorussia had 10%, Estonia - 9%, Yugoslavia more than 7%, Poland, Latvia, Slovakia, Lithuania, Croatia, Hungary and Slovenia preceded RM. Furthermore, RM is an impressive record-holder in terms of the rate of unemployment, (the lack of) foreign investments, and finally, more positively, it is second-rated in terms of its low inflation rate. Trade deficits are exhibited by many developed countries, but this is different and not comparable with RM.
SV: The saying goes: "There are white lies, plain lies and statistics". Deficit figures are highly misleading. The important questions are: is the economy on a path of growth? Is it export oriented (that is, most of its foreign exchange income is derived from exports? If so, it can easily service its mounting foreign debt. The larger the GDP growth the smaller the share of the projected deficit. What is the deficit made of? Was the money used to finance the consumption of luxury goods or to finance research, development and capital expenditures? Is it part of an on-going pattern or an aberration? Is the economy booming? If it is prospering deficits are a good thing because they help to prevent inflation. By directing consumption to imports inflationary pressures are, in effect, reduced and "exported". Can the country rely on unilateral transfers? Israel can rely on billions of dollars annually from the World Jewery and from the USA. These transfers amortize a large portion of its deficits. Is the country open to outside competition and highly dynamic and mobile? If so, trade deficits are not necessarily a bad thing. They increase the competitive pressures and force the local industry to become leaner and meaner. There is no economic rule that says: "Trade deficits are inherently bad low inflation is inherently good". In the case of Macedonia, for instance, I think that the low inflation rate is a sign of death the demise of the economic body. Macedonia needs to reflate urgently before its markets are deflated out of existence.
The problem with Macedonia's balance of payments deficit is that it is of the wrong kind. It signifies the collapse of local manufacturing, the death of local industries. The consumer is rarely faced with a choice. He has to purchase imports. A lot of people make money from legal (and less legal) imports in Macedonia. Smuggling, contraband, piracy of intellectual property, are rampant. Members of the political elite were given monopolies over certain types of imports. A sizable part of the trade deficit goes to Macedonian pockets. There is simply no interest to encourage local production or exports. This will hurt the profits of the robbers of the national wealth (not to mention the profits of certain customs officials and police officers). Coupled with a stagnant GDP, high unemployment, foreign handouts and strangely and suspiciously stable currency this is a bad omen.
NG: Indeed, from these data it is easy to conclude that the deficit level is not the only important parameter there are others that count in trying to determine the consequences. It is obvious that the deficit in RM has seriously restricted its economic development (as distinct from some other countries), which complicates the problem.
The parameter of the imbalances of the current account should be observed parallel with the policy of exchange rates and structural factors, such as the level and the composition of the foreign debt, the level of market openness and the composition of trade, the levels of savings and investments. The longer-termed deficit of the current account basically should cause alarm when the export sector is small, the servicing of the debt is onerous, savings are low, the control of the banking sector is weak and equity investments are small (weak financial system). The ratio of exports to GDP plays an extremely important role. Countries, which successfully adapted themselves, after they experienced gaping imbalances of their current accounts, such as Korea, Israel and Ireland, increased their exports dramatically, as distinct from Mexico in 1982 and Chile, which endured hard external crises. Long-term deficits, as a rule, make foreign investors reluctant to lend to the state, fearing that the country is insolvent and ready to default on its borrowing. Fast growing countries can keep longer-term deficits without increasing their external debt in relation to their GDP. Unfortunately, in RM that is not the case. The ratio of exports to GDP represents the level of openness of an economy.
To make the picture clearer, I would emphasize that all Macedonian exports in 1996 amounted to 1,147,440,000 USD and in 1997 to 1,201,255,000 USD. In global terms, these amounts are very small and not meaningful in the world economy, not even when contrasted with certain private corporations. For comparison, we could study the annual sales of the top industrial and servicing companies in the world (source: Fortune, a chart in The Economist).
In fiscal year 1997, General Motors (USA) had sales of $178 billion, Ford (USA) $150 billion, Mitsui (Japan) $140 billion, Mitsubishi (Japan) $140 billion, Royal Dutch/Shell (Netherlands/Britain) $138 billion, Itochu (Japan) $137 billion, Exxon (USA) $125 billion, Wal-Mart Stores (USA) $124 billion, Marubeni (Japan) $117 billion, Sumitomo (Japan) $100 billion, Toyota (Japan) $80 billion, General Electric (USA) $78 billion, Nissho Iwai (Japan) $71 billion, IBM (USA) $70 billion, HTT (Japan) $70 billion, AXA (France) $70 billion, Daimler-Benz (Germany) $64 billion, Daewoo (South Korea) $64 billion, Nippon Life Insurance (Japan) $64 billion, BP (Britain) $63 billion. The American car producers led in the list of Fortune 500. Nine of the ten biggest companies worldwide were Japanese and six were American. But, 12 of the 20 most profitable were not American, nor Japanese. Exxon topped the list of the most profitable with $8,5 billion. Intel was on the 125th place, judging by its sales, and on the fourth place according to its profits.
If, after these numbers, we go back to RM and ask ourselves how is it possible that exports in the last 7-8 years did not increase by at least 50%, we will be forced to conclude that something is wrong in the system. Even if we take into consideration the circumstances in the region (embargoes from north and south, Bosnia and Kosovo) the conclusion that something should be changed, holds. In support of all this I will mention that our neighbour Bulgaria last year had no deficit in the trade balance rather, it made a small surplus. Russia, under adverse circumstances, also achieved a surplus.
SV: I am the last person to object to your conclusion that something is rotten in the current state of things and that it needs to be amended urgently. But I wish to make a pertinent distinction between "optical surpluses/deficits" in the trade balance and "real surpluses/deficits". The fist kind is generated by factors external to the country and not in any way under its control. For instance: the Russian impressive, consecutive trade surpluses were the result the of stable prices of its commodities in the world markets (over which it has very little influence it is a "price taker"). The minute the prices of oil collapsed, the Russian surpluses went down under and with them the Russian economy as a whole. The same can be said about Nigeria, Venezuela, Saudi Arabia and dozens of other countries. A surplus can also be the result of the elimination of the purchasing power of the population. When people cut down on consumption they cut down, first of all, on imports. It is very easy to maintain a trade surplus (and low inflation) in a state of economic depression. Another type of artificial surplus is created through the introduction of protectionist or anti-competitive measures. A country can block all imports, impose levies, customs, duties and quotas on them, deter foreign investment and, as a result, have an eye-popping surplus.
The "real thing" is the result of open markets in sophisticated, efficient competition. Whether a country has sufficient relative advantages to sustain a trade surplus is discernible only under the "pure" conditions of free markets, unadulterated by state intervention. The country has to be open to international trade and to foreign investment. It must not protect its economic players. It must let the markets determine its exchange rates. It must encourage efficient, frictionless, banks and capital markets. Even then it stands the risk of running trade deficits (witness the USA).
NG: The balance of payments, ab definitio, is balanced. It includes all realized income and payments. Nobody can have more financial resources to pay with than he/she receives. That means that payment is either effected immediately or deferred as credit. But in economic analysis the total balance is not important. What is of importance, is only a certain part of it. The partial observation of the balance underlies the surplus or deficit approach to the balance of payments. It is for this reason that we make use of the method of "splitting" the balance of payments. After the horizontal "splitting" of the balance, employing one of three methods, there is no accounting balance left in it. The balance of the balance of payments is an element of the general economic balance, which represents the external balance.
The Macedonian balance of payments is balanced by: 1) rescheduling of debts and 2) new debts. For a real balance to exist in the long-term, without foreign currency restrictions, without frequent devaluation and appreciation and without increasing debts, the presence of an INTERNAL BALANCE is called for. The reasons for having a deficit in the balance of payments can, basically, be either monetary or structural. The latter would involve a divergence between domestic savings and domestic investments a deficit, which if financed with foreign debts without a long-term irreversible increase of the investment side, leads to even deeper structural imbalances. A temporary remedy is incurring external debts and aiming at long-term recovery, which is the subject of this dialogue.
Besides assuming credits and debts, RM has lately covered the deficit through substantial non-returnable foreign help, which has decreased from year to year. Last year it had been only $7 million against $52 million in the previous year. This says that RM has to start living without a foreign, non-returnable "infusion". The sooner it prepares itself for such a life, the less painful will prove to be the habit of spending only as much as it makes. Alternatively, it has to implement some measures to earn more (produce and export). The large amounts transferred by Macedonian immigrants who help their relatives in the country financially, appear in the state's balance of payments in the second place after the exporting of goods, and before the exportation of services. This only confirms the sick situation in the country.
The external balance of the Macedonian economy is long-term, realistic, fundamental and destructive.
SV: Macedonians (politicians as well as "the people") adopted a magical mode of thinking. They believe that Macedonia is geo-strategically so important, that it will never be abandoned by the West. True, unilateral grants, aid and other non-returnable transfers have dwindled lately (to the point of disappearing altogether). But Macedonia is getting increasing amounts of credits, loans, military aid, structural aid (EU through PHARE) and other forms of lending. Some of this money is directly injected to the arthritic veins of the banking system in the vein hope that it will trickle down into the real economy. But most Macedonians find the idea that these monies have to be returned one day hilarious. They believe that, when push comes to shove, these debts will be rescheduled, rolled over, renamed, converted, diverted, reverted, anything just NOT PAID. The West will take care of it.
A parasitic economic culture has developed, dependent to an unhealthy degree upon handouts, charity, donor conferences and tacit blackmail (Kosovo, Albanians, anything goes). Instead of developing their businesses managers dedicate all their energy to lobbying, wining, dining and bribing the politicians that hold the right purse's strings. Instead of production and exports the country sprouted a breed of financial mediators, financial consultants, contact men and go-betweens who know (or purport to know) how to extract money from international financial institutions. Instead of worrying about structural changes the elite concerns itself with the perpetuation of tense geopolitical situations. The nation becomes submissive, obedient and oppressive. Central Planning by faceless bureaucrats has been replaced by the Central Planning of Eurocrats, dictates from Moscow now come from Washington, Communism is now called IMF-ism. How convenient it all is!!! How cozy!!! If the economic policies fail the minister can blame the IMF. If they succeed surely it is the undeniable fruit of his towering intellect.
NG: In 1949, Stalin asked a specially formed group of professionals to calculate the exchange rate of the ruble against the US dollar. Their final calculation was 14:1 to the dollar. Stalin became angry and from "14" he deleted "1". That way the USSR nationalized their first post war "exchange rate": ruble dollar 4:1. Unfortunately, that didn't help them much in their economic development.
The dilemma: Has RM lately paid too high a price for the stability of its currency, the denar, is getting more pressing recently. The balance of payments deficit as a percentage of the GDP according to the data of the National Bank is as follows: 1994 - 5.5%, 1995 5.8%, 1996 6.4%, and according to official sources in 1997 it is pretty high, 8.13%. It seems that the macro-economic policies of RM in this respect were created only to maintain currency stability, until the balance of payments was in its function. RM should lead a more balanced policy of these two very important parameters: exchange rate of the domestic currency and balance of payments deficits. That means that in no case should the unlimited (or considerable) fluctuation of the exchange rate of the denar be allowed. Such a phenomenon will become entrenched and will foster a bigger volatility of the domestic currency. This will facilitate the conditions for an extremely unstable economy. Rather, we should create an atmosphere for a more realistic exchange rate of the domestic currency with the possibility to control the average fluctuation instead of the present de-facto fixed exchange rate. This will create a better export climate in the short-term. Even the variant of programmed monthly fluctuation of the domestic currency is already exercised in some countries, and can be subject to discussion. Anyhow, a higher instability of the domestic currency will have, besides the positive consequences, some negative ones, as well. It is like poisoned medicine which, while curing one organ harms the other. But if the patient is in a very difficult condition, the first thing, which should be done is resuscitation, the better of two evils. A More flexible domestic currency is a measure of the same caliber as short-term debts, but it seems that, at this moment, it should be a less harmful short-term interventionist measure.
By the way, maintaining an unnaturally stable domestic currency has its own time limits, following which it becomes extremely exposed, because the consequences increase geometrically and are borne by future generations.
SV: "The Economist" referred to the Macedonian denar as "eerily stable". There can be no question that it is artificially stable. The Central Bank is evidently at play and is doing a commendable job in as far as its goals are defined. Prices are stable and the domestic currency is stable what more can a Central Banker ask for in life?
But this is an illusion, which will cost the country dearly and very shortly. It is useful to be reminded that Russia had low inflation, a trade balance surplus and a stable Ruble rate for two years. Now it has none of these "achievements". It lost its illusory stability because it was illusory. No country in the world can maintain an average of 6% of its GDP in balance of payments deficits year in and year out and maintain a stable exchange rate. This can be done only through strangling the economy. The money supply is draconically curtailed, liquidity is snuffed, cheap imports are encouraged, inflation remains subdued and even turns into deflation. With price stability exchange rate stability is obtained. But at what a horrible economic price!!! In a graveyard there is no inflation and the exchange rate remains eternally stable.
Granted, Macedonia should not succumb to the latest fashions. It should not allow its currency to be fully convertible internationally or traded in foreign stock exchanges. These steps are advisable only after a certain level of foreign exchange reserves is reached together with a high credibility of the Central Bank, the result of a long and successful track record of reliability. Only an exporting country with its balances in equilibrium can afford itself these luxuries of the absence of exchange controls. Even the foremost free marketers (Hong Kong, the USA) manage their currencies and intervene in their capital markets. This is not only legitimate it is essential.
But the unnaturally overvalued denar damages Macedonia greatly. It encourages the export of scarce foreign exchange (also known as the importation of goods and services). It distorts the domestic interest rates structure. It destroys whole industries. It leads to deflation. It threatens a run on the currency, a panic similar to the one that engulfed Russia. What will the government do if Wall Street will collapse, the IMF and the World Bank will cease all disbursements, foreign investments will completely dry and thousands of citizens will want to buy dollars at any price? Will the government impose exchange controls? Freeze denar savings? Lose what remains of the credibility of the banking system?
NG: All this makes for social instability in the country, because, even ignoring the stable currency, investment rapidly decreases. Under such conditions, interest rates not only do not decrease (for which there are other reasons), but they remain at incomprehensibly high levels, where especially big margins between active and passive interest rates (about 18%) exist, a situation which sends many messages. According to some experts even this interest rate level is not very high taking into consideration the whole social instability and uncertainty as much in the economy as in the political and geopolitical situations.
SV: High interest rates in Macedonia do not intend to insure lenders against inflationary risks, because today there are deflationary risks rather than inflationary ones. Taking deflation into account, real interest rates are outlandishly high. We are forced to believe, therefore that the high interest rates are intended to compensate lenders for the risk of lending money in Macedonia (country risk) to Macedonians (half of whom never pay back) in denars (which might be severely devalued within the life of the loan).
NG: The monetary policy is an important auxiliary measure for improving the balance of payments deficit, but not the main one, especially in countries where the problem nests are of a structural (realistic) character. Its basic aim should be: matching the money supply with the money demand (transactions) while realizing the planned rate of inflation in a given year. At the same time, the monetary policy should find an optimal relation between maintaining a more realistic exchange rate together with reasonable deficits/surpluses as a function of a dynamically stable economy and in support of exports.
The balance of payments is a mirror of the national economy, and the exchange rate is the reflection in that mirror. RM has a twisted picture of that mirror.
To balance the balance of payments (realistically, not only for accounting purposes), the main aim of every macro-economic policy should be to reach a medium sized surplus in the trade balance. Of course, that is impossible to achieve in the short-term. But by implementing additional measures, which we will discuss later, the realization of the new trend in this direction should start.
The first and the most important step intended to change the situation in the long-term and to find the exit from the never-ending labyrinth of the heterogeneous structure of the problems of RM, is to present a developmental-monetary-political strategy and STATE STRATEGY FOR STIMULATING A TRANSFORMATION OF THE CURRENT ECONOMIC STRUCTURE. The sooner the basics of this policy will be revealed, the sooner the realistic solution of the problems we are discussing will start.
In the beginning I would like to emphasize that privatization doesn't mean re-structuring (transformation of the economic structure). The state can fully privatize its property and again to have an extremely bad economic structure. To start to develop the Macedonian economy, first an act is needed in the direction of changing its current structure... because a man cannot go ahead with a view to the stars if he has needles in his shoes.
The long-term aim of the Macedonian macro-economic policies should be to reduce the imports and at the same time to increase the exports.
Promoting exports (and import substitution) is a strategy around which the development of RM should revolve, through which the biggest economic problems should be solved, such as the deficit in the balance of payments, unemployment, and the indebtedness of the country.
Basically, as I have already mentioned, to secure more serious results in the field of the trade deficit and exports, a change of the economic structure is needed. Something like this, basically, should be a spontaneous process. But if that is not the case anymore, or it is being realized very slowly, the state should more actively, using the democratic and usual instruments available in the world economy, chart a way to the harder basics for the Macedonian economy.
SV: It is a paradox of sorts that only governments can secure the conditions necessary for the operation of free markets. A good government prepares the way for its own act of disappearance from the marketplace. It should construct the edifice and let other tenants occupy it. There are a few things that only a government can do. Maintaining law and order, defending the country, providing certain unprofitable public goods (education, health). But I agree with you that a government's most important role in the economic arena is to provide working conditions, a structure. Such a structure should include pro-competition policies (antitrust), protection of intellectual property, encouragement of high value added activities, training and qualification of manpower, maintaining transparency and equality as well as the supremacy of the law, providing functioning institutions (courts, customs, tax authorities, banks, capital markets, social security), mass re-education, investment in the future (for instance, in research and development activities), fostering good international relations through treaties and agreements, pursuing peace, actively encouraging foreign investment and the importation of know-how and technology, the encouragement of small businesses - and this is a very partial list.
The main orientation within the restructuring of the economy should be exports. The government should help companies and research institutions identify the relative advantages of Macedonia, in general and of particular regions, industries and companies in particular. It should then proceed to assist them to put these advantages into good use. It should put at their disposal all the information and assistance that they might need. It should speed up or, better still, eliminate altogether, bureaucratic hurdles and procedures. It should connect them to businessmen, companies, industry associations and authorities in their target countries. It should then proceed to intercede on their behalf, protect them, lobby, cajole, negotiate in short, the state should be the exporter's partner not only in the income side (through taxes) but also in the efforts, in the expenses and in the capturing of new markets. The government should encourage exporters financially (tax holidays, grants, exemptions, other incentives) and non-financially (awards, rewards, consultative capacities within specially constructed councils of exporters and government representatives, special speedy courts). There is no need to invent the wheel: there is the accumulated experience of tens of successful exporting countries to derive from.
NG: What should be the instruments and sources for the financing of such a project?
A suitable instrument for starting the policies of the restructuring of the Macedonian economy is THE BANK FOR EXPORT DEVELOPMENT AND SUPPORT through which the export-oriented production companies will be supported by providing them with suitable long-term credits. For these reasons, an argument can be advanced for a bigger capitalization of the above-mentioned bank of not less than DM 200 million (the best would be DM 400 million). This capital should be provided from the privatization of the Telecom, donations from other countries (specifically for this aim), the sale of the rest of the property of the state (including the sale of the public companies in RM, which will generate very high foreign non-returnable revenues). Besides a higher capitalization, this bank should provide more credit lines from abroad. The most important part of this bank's work, should be the multileveled supervision and control of the issuance of credits in accordance with pre-determined criteria. The state banks, by definition, are beset by corruption and non-commercial working methods. According to this, only a high quality control system to supervise the managerial work in this bank, which is in the process of being founded, can ensure its qualitative functioning and positive results in the long run.
SV: Many economists dispute the efficacy of such a bank.. "The Economist" dedicated a whole cover story to methods that governments use to encourage their exports. Banks such as Ex-Im Bank in the USA are considered highly ineffective. So much so that the American Senate is seriously debating the elimination of organizations such as OPIC (the Overseas Private Investment Corporation). They are forced to act indiscriminately both geographically and sectorally. They are bloated bureaucracies. Their actions are politically rather than commercially motivated. They often fall prey to swindlers and bogus transactions. But, above all, they create a moral hazard. In other words: traders and exporters take upon themselves risks that otherwise - without the bank's support - they would have refrained from. They know that if they lose money - it is the bank's money, not theirs. This makes them callous and haphazard. Granted, such banks make it possible for domestic businesses to conquer new, potentially dangerous, export markets. But why go into risky markets in the first place? Just witness how much money was lost by these "special purpose banks" in Russia in the space of two weeks. The EBRD alone lost between 1.5 and 4.7 billion USD of taxpayers money. I am absolutely against the intervention of the state in what should be processes powered by pure profit calculus. If an exporter finds a market appealing enough - he will be there, with or without such a bank. If he does not - why do we, the taxpayers, have to hedge his bets and participate in his losses (while not benefiting from his profits)? There are only two exceptions. First, the government should subsidize exports to destinations, which suffer from high trade protectionism and state subsidies. If Japan subsidizes its rice heavily - rice exporting countries should subsidize their exporters and help them penetrate this market, crooked by illegitimate state intervention as it is. The second exception is if the country has no functioning banking system. Even then, the bank should act strictly under commercial considerations and refuse to finance non-profitable transactions, no matter how politically desirable or expedient they are. On the one hand, in RM, there is a great need for such a bank, as all the other banks are dysfunctional when it comes to international trade finance (either because of their shaky standing in the world or because of ignorance, corruption and a host of other ills). On the other hand, experience shows that it might turn into a hotbed of corruption, exploitation and worse. A way must be found to supervise such a bank thoroughly and, preferably, with outside assistance.
I want to mention that an export development bank is one instrument at the disposal of governments. Insurance companies are another. In the past many governments set up special insurance arms. Their role was to insure exporters or investors against country risk, political risk, war, terror, expropriation, non-payment, sovereign default ad a host of other problems which private insurers were unwilling or unable to tackle. These insurers acquired monstrous proportions (OECD in Britain, COFACE in France, OPIC in the USA and others). They were notorious for their laxity, lack of professionalism, unreliability (they mostly refused to pay up when trouble struck) and incredible losses and creative accounting. The nineties witnessed the privatization of these behemoths. Today, every risk is insurable for the right price. If it is not insurable the exporter is advised not to venture into that market, no matter how tempting.
NG: Within the scope of the roles of increasing investments and changing the economic structure there is the implementation of an efficient court system, which will create an environment in which the commercial banks of RM, by a speedier settlement of their own claims, will make long-term and cheaper credits available. This, indirectly, will influence the process of structural economic change and start to create an export-oriented efficient economy. At this moment, financial resources available in RM, from the banks' point of view, are really "a cat in a bag". The bank can never be certain that its financial resources will be recovered. First, the court mechanism is very slow and inefficient. This means that even if the bank were able to recover its financial resources within a year, or more - the principal plus regular and penalty interest rates would amount to more than the mortgage value and the bank will not be able to recover the full amount of the debt. Second, the realization of a mortgage is a real BINGO in RM. There are a thousand ways to cheat the bank and the creditors with the aim of not returning the credit. The system, instead of protecting the banks, protects the debtors. Thus, in the long run, the basics of the financial system are damaged and it boomerangs. The desperate banks lose the courage to place financial resources because of the uncertain environment, which doesn't guarantee the recovery of their financial resources, or the danger that an eventual devaluation will erode a part of the property's value, especially of the banks of foreign origin, which directly invested in foreign currency after increasing their capital. Slow justice is injustice. Because of that, the banks choose to impose high active interest rates, as they will cover the risk of investing in the economy with a judicial system with the appearance of "Swiss cheese". On the other hand, high interest rates increase the costs of production, which realistically diminishes the export competitiveness of firms' products, casts in doubt new investment projects, and at worst, casts in doubt the very survival of the company and its ability to return the invested money to the bank. This never-ending spiral is vicious if not nipped in the bud. RM is in the situation "invest and export or die". To start with, what should be done is what is written in one of Hitler's biographies: "the negative appearances should be destroyed in the very beginning, not to be analyzed later".
SV: Needless to say that I fully share your views. I just want to remind all of us that an efficient court system is only one of a long series of measures that should be adopted prior to the establishment of a healthy and functioning banking system. Assets need to be registered reliably using advanced computer systems. There should be centralized, real time registers of liens and mortgages. Bad debtors should be blacklisted and the lists should be made public. Bankruptcy proceedings have to be streamlined and implemented. Personal bankruptcy should be introduced with severe restrictions imposed upon such individuals. Legal procedures of seizing assets and materializing them should be made much simpler. A lot of the functions of collection and appropriation of collateral by creditors should be transferred to the private sector. This is a very partial list. There is nothing I can say about the courts that hasn't been said before. They are slow, inefficient, clogged and subject to political meddling. Special commercial courts need to be established to cater to the needs of special groups such as exporters and foreign investors. Judges urgently need to be retrained. But the banks themselves have a lot to do. Their image will be transformed only through actions. It is easy not to repay a loan to an "enemy of the people" (as banks are perceived to be). Banks should become more personal, attuned to the needs of small businesses, young couples, students, industry, exporters. The level of professional education of bank employees must improve. They must be exposed to financial products and instruments in the West. They must innovate and be active partners in the economy and not just money conduits. They must charge interest discriminately: good borrowers should pay MUCH LESS than bad ones. They must share their profits with their employees and with the public. They must be forthcoming to the client: ATM machines, simpler procedures, smaller queues, home banking, information services, capital markets services. They must get rid of political decision making, cronyism and corruption all rampant nowadays.
NG: Also, RM should impose a policy for the export of finished products, and discourage the export of semi-finished goods and raw materials, of course, after it has already secured the conditions for it. Credits, from the bank for export development and support and from international institutions, should be directed exactly at stimulating the production and the export of as many finished products as possible and towards investments in the construction and tooling of highly profitable factories, in which the bigger part of the production will be export oriented, or import substitution.
As a result of the bad structure of the Macedonian economy (created as part of the old Yugoslav Federation and as result of the extreme liberalization of imports lately), the import coverage ratio in RM drastically decreased. In 1992 the coverage of imports with exports was 99.3%, in 1993 90.6%, in 1994 it drastically plummeted to 73.2%, in 1995 the trend continued to 70.0%, in 1996 it was 70.5% and in 1997 it broke the limit of 70% coverage down to 69%. Such long-term dynamics cannot be withheld even in stronger economies than Macedonia's, and this leads to the total collapse of the economy and the state in the longer term.
SV: Hear, hear. Perhaps it is important to explain to the laymen why. The only reason why a country exports is in order to receive payments in foreign exchange. Why is this needed? After all, internally, all the transactions are concluded using the Macedonian denar. The foreign exchange is needed in order to finance imports. In other words: we export ONLY so that we will be able to use the proceeds to import goods and services. Imports are a good thing. Different countries have advantages in the production of different goods and services. It is better to import a product from a country, which has an advantage in producing it then to produce it ourselves. Our resources can be better employed where WE have a relative advantage over others.
This is why a consistent, multi-annual trade deficit is dangerous. Ultimately, the country will run out of foreign exchange. It will not be able to import. Its resources will be employed in producing goods and services in which it has no relative advantage (and which it used to import) in other words: its resources will be wasted. Its wealth will decrease. As its wealth decreases, the value of its commitments will diminish because people will not be sure how risky the country is. This is why currencies depreciate and debt payments frozen when a balance of payments crisis erupts. Currencies and debt instruments (bonds) are commitments made by countries. They are supposed to store value. But if the value of the country itself is reduced (because its wealth is squandered through the inefficient allocation of economic resources) the currency must be de-valued.
As trade deficits mount and accumulate (=as the country's foreign exchange reserves dwindle), the country either loses its independence and becomes the surrogate of its donors or a crisis sweeps across it. Its currency collapses, it freezes its obligations and is doomed to a prolonged recession and to a shortage of goods and services that it can no longer import.
NG: Besides the low quantity of exports, RM has a huge problem with the structure of its exports. The bigger part of the exports of Macedonian products is comprised of cheap raw materials with low-level processing (zinc, tobacco), classical semi-finished products (a hot-cast composite of iron and nickel), pre-paid production (lower level working force and low profitability) or (fresh) agricultural produce. In support of this thesis, here is the list of products, which generated the most foreign exchange income for RM (data from the Bureau of statistics of RM) between 1/1/97 and 1/12/97. At the top of the list appears zinc (raw material) with a value of 54,268,000 USD. Second place is occupied by male shirts (pre-paid production) with 53,706,000 USD, followed by cigarettes and tobacco 50,102,000 USD, other hot-cast iron products (raw material, semi-finished) 49,222,000 USD, tobacco (raw material) 47,508,000 USD, Feronickel (raw material, semi-finished) 33,607,000 USD, Ferosilicium (raw material, semi-finished) 32,252,000 USD, female shirts and blouses (pre-paid production) 31,361,000 USD, mineral water 28,963,000 USD and wine made of fresh grapes (mostly not bottled) 28,944,000 USD.
The bad structure of the exports can be demonstrated by an analysis according to economical uses. The total exports of materials for re-processing in 1995 stood at an extremely high 54.2%, in 1996 it was 49.5% and in 1997 - 52.3%. The export of machine tools in 1995 was 4.2% of the exports, in 1996 - 3.3% and in 1997 -2.9%. Goods for general consumption amounted in 1995 to 37% of the total exports, in 1996 to 47.1% and in 1997 to 44.7%. From these data it is clear that more than half of the Macedonian exports is comprised of the export of materials for re-processing. This is very worrying, especially considering the fact, that the resources, raw materials and mines have a limited life-span, which is about to end soon, and that the price of raw materials might keep falling in the world markets. These are the facts. Naked facts. Every idea has to start developing from facts. The economy, like life, is a drawing where it is not possible to use an eraser.
SV: Macedonia belongs to a much derided economic club, whose members are fervently trying to abandon it: the club of the group of countries who export mainly raw materials and semi finished goods and import finished products. This is the classical definition of a colony in the old mercantilist theory. Colonies are doomed to run deficits, equal to the value that is added by the industrialized countries to the raw materials that they import from the colonies. Additionally, the colonies get "hooked": they get addicted to the advantages that poor labour, for instance, provides. They tend to suppress anything that is perceived as a threat to their status as a colony: democracy, better education, higher wages, better infrastructure (not related to production) and so on. In this restricted sense, Russia, India and Macedonia belong to the same club. Even if they do get integrated (as poor relatives) into a more prestigious grouping of nations (such as the EU) they are likely to maintain the "poor relation", "handout prone" status see Greece and Portugal. They will become the sources of cheap labour, the junkyard (chemical waste, ecological catastrophes) of the richer members, the preferred vacation spots, the industrial hinterland and the fuel in the growth engine of the industrial and service nations. Colonies are not only endless sources of raw materials and high-quality-low-pay workers they are also superb, reliable markets for finished products. In this sense, it is a mistake to try to join the club of prosperous nations at this stage. To do so is to eternalize the sorry state of Macedonia's economy and the sorry status of the composition of its exports.
NG: The step, which RM should urgently make, is the direct intervention of fiscal politics in the transformation of the economic structure to export oriented. Within this scope, it should provide the commercial and private banks with strong fiscal stimulus for the placement of credits in the production of goods for export (with a well-matched mechanism for the control of the delivery of goods) and with tax stimulus for the financing of final projects. Such stimulation should be given to private firms, which do or will start to produce and export finished products. Much more tax stimulation should be provided to those companies whose production of finished products is in accordance with international quality standards. The state can also provide credits for (pre-defined) strategically important products in the first few years through the Bank for export development and support. Such loans should come with a lower interest rate, and even through the commercial banks under the same conditions, wherein the state will cover the difference between the bank's interest rate and the interest rate approved by some commercial company.
If the state will tell the Banks that they will pay lower taxes on their income realized through the financing of projects for the production of finished products or for export-oriented production (providing that the products were indeed exported) or for the production of products of higher quality, it is logical that the managers of the banks will finance such projects more often.
Also, if the state will explain and promise (by law) to the manufacturers and to the potential manufacturers of finished products (especially to those which are on the import-substitution list) and to the current and potential manufacturers of products for export and especially to the manufacturers of high quality products (by international quality standards) that they will pay less tax or, in certain cases, will be fully released from this obligation, and on the other hand will be entitled to receive bank credits and support from commercial or from state banks (under the condition that they have a qualitative project by Western standards), it is most likely that within a few years of the positive effects of this policy, the trade deficit will seriously drop or be annulled. All this combined with additional stimulation of foreign direct and portfolio investors, make the chances of terminating the agony much higher.
SV: I am flatly and unequivocally against any kind of state intervention in what should be pure economic and commercial processes. Only profit and loss calculations and considerations should determine whether a bank lends, an investor invests and an exporter exports. Such considerations are bound to take into account the feasibility of the transaction or the project and the risks associated with them. Where no money is lent there are, usually, excellent reasons for it. Where no exports are effected, it is proof of lack of competitiveness. Where no investment is consummated the environment is wrong. By intervening, stimulating, encouraging and so on, the state puts itself in the position of a judge. Why should we assume that the state knows better? Why should we entrust it with our tax money to dispense to banks and to manufacturers? What does the state know about financing, international trade and manufacturing that the market participants do not know? If a market player (=a bank, an investor, an exporter) changes its behaviour due to state intervention this is not a free market. It is a distorted imitation, which leads to waste and inefficient use of scarce economic resources.
There is a lot the state can do to encourage exports. First it should create the right environment for conducting business. It should encourage competition, discourage cartels, improve the judicial system, tax evenhandedly, eliminate excess bureaucracy, improve infrastructure, take its hands off the capital markets, really privatize (as opposed to robbing the assets of the country and dividing them among a select few), sign international and bilateral economic treaties, ensure macro-economic stability, disseminate information and professional knowledge, train manpower, use its public procurement to enhance market activity, stamp on corruption and crime, protect property rights and intellectual property, reduce taxes and this is a very partial list. In other words: governments should ensure the conditions for a fair play. They should supervise the rules of the game but not become a player in it. Create the right conditions in the economic garden and the right export flowers will bloom.
Whenever and wherever (domestically and internationally) governments encounter injustice, distortion of allocation of economic resources, favouritism, cronyism they should fight back. They should impose quotas and duties on products subject to similar quotas and duties elsewhere. They should retaliate in economic warfare. They should act against dumping, market cornering and other anti-competitive or politically motivated dimensions of economic activity worldwide. Governments should never be vegetarian in a carnivorous world lest they find themselves preyed upon. But they should only re-act, not act.
NG: I wish it too, what you are saying, and I would be very happy when RM becomes a country which is not in need of state simulative intervention in order to change the economic structure.
However, I am not talking about some strictly managed system, about which I don't even think. Every country wants to stimulate exports, and beside the measures that you mention and which I fully accept, there are other measures, with which, this way or the other, governments try to help their companies in penetrating export markets.
This is done even by the biggest and most developed countries in the world, and that's a fact. RM, AT THIS MOMENT, IS FAR FROM A POSITION OF IMPLEMENTING A PURE MARKET ECONOMY, and for now that's only a pleasant dream. It's wonderful to dream pleasant dreams, but in the meantime we must live. If Japan and many other countries could adopt such measures, why shouldn't RM for one LIMITED AND PREDETERMINED PERIOD do so? Here, the question what the country knows about financing, what the country knows about international trade, production, etc is irrelevant. I accept your thesis that the country doesn't know much about these matters, even though under the conditions of the (generally) current bad management structure sometimes it is different. BUT THE COUNTRY KNOWS ONE THING: IT NEEDS HIGHER EXPORTS, AS FAST AS POSSIBLE, and this is why I suggest these measures.
Every country minds its interests. Such interventions exist also in the EU, especially in the area of agriculture, and much wider.
Disputes between Switzerland and France about agriculture, threaten to become a trade war, especially after the accession of Poland to the EU. You will see what will happen with the USA if it is engulfed by the crisis of the recession, as you predict in your text in "Nova Makedonija" dated 30-th of April this year. Then you will see what state intervention means and what is "market economy". What I am suggesting will be "a sugar-cube in the coffee" against what the USA administration will legislate and what from time to time other countries do (not to mention John Maynard Keynes in the crisis of 30s). Above all, RM isn't in the classical crisis situation, which means that in the past its capacities were used well and now less, and there is a worry as a result. In RM for a long time a very big number of manufacturers DO NOT WORK AT ALL, AND NEW ONES ARE ESTABLISHED IN MUCH LOWER NUMBERS. I think it's unnecessary to describe the situation and the role of RM in the borders of SFR Yugoslavia and the consequences. This means that the country faces a difficult task. It is not to create conditions for increasing the production up to the capacities, but to foster conditions for a part of the old and very new capacities to start working practically from zero.
The tax simulation for exporters in the first 4-5 years is the minimum that the country can do until a few production cycles will be activated. I agree with you that there is a danger that these companies will "go to sleep", but when it will be made clear in advance that their chance is limited in time, I believe that most of them will behave otherwise. From most of these companies the country at this moment doesn't collect taxes, because they don't work or aren't established. It follows that in the future the country can eventually produce new income and in no way losses.
RM very often makes the same mistakes. The Macedonians were the most ardent Yugoslavs before 1991, almost up to the last moment, while all the other republics were preparing themselves for independence - materially, financially and militarily. RM led in the last 6-7 years a more liberal import policy than much more powerful countries (Croatia, Slovenia...) and the results aren't better.
A similar mistake was done by RM in the period 1993-1994 when hyper inflation was defeated and interest rates remained on the same level for the following two years (25-30% per month). Tell me which company in the world can work successfully paying credit bearing a 25% monthly interest rate with an inflation of 18-20% yearly? The country then decided to adopt a market economy and not to intervene. The companies had to take credits to finance their production and the result was hundreds of bankrupt companies, unable to return the credits together with the high interest charges. Besides this the companies' insolvency strongly changed to the worse the picture of the banks' balances. Even today we feel the consequences: strong falls in production, in exports, enormous and increasing unemployment, the instability of the bank's.
IT'S VERY EASY TO READ THE LESSON HOW THE MARKET ORIENTED ECONOMY SHOULD LOOK LIKE AND THEN FOR IT TO FAIL. IT'S DIFFICULT TO SAVE IT EVEN BY A COUNTRY'S SHORT-TERM INTERVENTION. Shock therapy didn't present itself as very successful "medicine" in Eastern and Central Europe. Before implementing a pure market economy, a pre-preparatory period must exist, same as helping a child when it makes the first steps or helping a man when he is sick.
The fact is that reconstruction is expensive. But, it is worthwhile. Examples from other countries have proved it. The government, which supports such a project, has to be very efficient, honest and decent, determined and decisive. Decisiveness develops like a muscle. Practice is needed. It may again lose its position (especially in the first phase of the reconstruction). Maybe, because of this, the fastest and most efficient reconstruction is to be found in countries with half-dictatorial or dictatorial regimes, which have strong positions of non-democratic fundamentals. But, this does not mean that democratic governments cannot finish such a project with success and be rewarded for it by the voting citizenry.
The question how the state will finance such a project arises. I think that RM is still in the phase when it has superb possibilities to adopt such a policy. RM, luckily, still has a lot of state property. Above all, I would mention here the public companies. With their sale, without any problem, the project "economic reconstruction" can be financed. So, for example, at this moment, it is known that the state will receive about $800-900 million for the telecommunications company. Imagine that one half of this money will be invested in the Bank for export development and support and the second half will be used to compensate for the budget expenditures caused by the tax holidays and stimuli for supporting exports, providing bonuses, etc. It is understood that this method of financing budget expenditures would be for a limited period of time for two reasons: 1) In the short and medium terms, the financial resources arising from the sale of the state's companies are limited and can only suffice for a limited period of 5 to10 years, 2) In the longer run, the economic reconstruction would require from 10 to 15 years. If administered as foreseen, there will be a possibility for the establishment and development of new successful firms (which today don't exist or have low profitability, which, on the other hand, translates to low tax receipts), which by opening new production and export businesses with the help of the new state policy, will start to gradually fill in the void in the budget created as a result of export bonuses, exemptions, relief, etc. (which I have mentioned above as measures for economic reconstruction). So, for example, if one company operates today with a profit of 100.000 DM yearly, and with the new state measures (an easier access to credits for production, exports and tax holidays on a similar basis) it will increase its business and make a profit of a half million DM, this means that the state will receive about five times more financial resources from taxes.
But, not to forget that in this example we discuss only the money, which RM will receive from the selling of the Telecommunication Company.
If we add to this the financial resources resulting from the sale of the electricity utility, railways, post office, state owned hotels, community enterprises and others which in more sophisticated countries in the last 10 years are subject to a trend of privatization... We are on our way to conclude that RM has a historical chance to reconstruct its economy, to become export-oriented and with high quality products and services.
SV: If the government decides to finance exports directly, it can, indeed, do so through export subsidies or through credits provided by a specialist bank or through the general banking system, as you suggest. I think it is wrong. But I agree with you that the best source would be the proceeds of the privatization of the assets of the state. These are one off income items. Normally, the proceeds of the sales should be kept off the regular budget (extra-curricular). Most governments sell their capital (=the companies that they own) and use the money for current budgetary expenditures, not for development. This is very wrong. The money should be used either to finance infrastructure or to support the reconstruction of the economy, as you have delineated. Your approach is a bit "Reaganomic", though. You believe that if money is injected into the economy fiscally it will translate to bigger tax receipts in due course. History does not support this (apparently reasonable) assumption. During the eighties, the USA was engaged in supply side economics. Money was injected by the government (including introduction of the biggest programs ever for encouraging exports). The result was a quadrupling of the national debt and chronic budget deficits. By the way, the USA engaged, during this period in mass privatization. For instance, it sold its airwaves to private telecoms operators, the air control system, prisons, hospitals and numerous other state enterprises.
NG: I must explain because I noted that I was not understood. My idea was not the idea of the protagonists of supply side economy, because I don't think that with the reduction of taxes, investments will increase, the total (macro) revenues will increase, and so on. The idea was much simpler: lower tax rates for those which produce products for export in order to stimulate the others , which do not produce or export, or which produce but not export, or which just started in business, to get them to be oriented towards export projects. This doesn't mean that a reduction of the taxes of exporters will increase the investments, rather that it will motivate potential and actual producers to think more about exports as a more profitable business (we agreed that exports are very important for any country). But all these matters must be within a pre-defined period (in which the companies must begin to work), because if this is a long-term standing opportunity, the exporters can become inefficient, non-competitive and a problem for the country.
In the whole system, the most painful point is the fact, derived from past experiences, that the individual always succeed to con the state and to abuse its "big ideas". The big ideas sometimes are like big old trees they make more shadow than they give fruit. That means that, even before we embark upon this policy, a control system and an efficient penalty system, geared to tackle abuse of the functions, the laws and cases of corruption, should be created (or copied from countries in which they were implemented successfully). For as long as the corruption is very deep inside the system, no project stands any theoretical chances to succeed, even one which brings development and prosperity to the state. The dilemma in this situation, is the state guilty or the individual, isn't a dilemma anymore it is the state. The individual's psychology is to earn more (especially in times of crisis) even at the state's expense, when everyone else does the same. This psychology, if one wants to preserve civilization, is changeable only by the introduction of an efficient penalty system with multi-level control. For as long as the state creates a system, which applies to all, but not to "us and ours", it doesn't stand a chance for success, no less because RM is small country and most people succeed to find a way to belong to the group of "ours". The system, which the state creates, determines the business etiquette and culture, the mode of thinking, the environment and the habits, both negatively and positively. The state first has to make order with a multi-level control system of penalties, and only many years after that will follow the spontaneous creation of "moral shame" associated with the acts that I am talking about. Maybe the penalty isn't always justified, but it serves to block a hundred other evil deeds. Who doesn't punish evil, provokes it. So, first is fear and than shame will join it. The shame after discovering the act of deceiving the state is almost not present in RM. Some people perhaps don't even understand the meaning of these words. This is the way new habits and customs are created among people, and also the transformation, from the roots, of the individual's psychology in view of its responsibilities towards the state. About the fear and especially about the system of shame, much can be learned from the Japanese system, certain parts of which can serve as an interesting example for RM and for the people who live in the Balkans. In Japan the court is not a very frequented institution. In the USA statistically there is one lawyer per 323 citizens. In Britain 723, in Germany 1345, in France 2099, and imagine in Japan 8200 citizens to one lawyer. In Japan the lawyers are not very rich people. But, to reach this level, a long evolution, also a tradition, which it is obvious that the Japanese will not retract, are needed. We will get back to Japan later.
SV: There is always time for some philosophy in an economic discourse. I maintain that economics is a branch of psychology. Your thesis is so nicely put (seriously) that I have nothing much to add to it. I think, though, that to guilt and shame one can add a third force: utility. In general, therefore, I believe that human societies can be divided to Fear-driven, Shame-driven and Utility (or agreement)-driven. The first type of societies is characterized by a constant battle between the state and other institutions and the individual. Brute force, subtle force, threats, intimidation, censorship are applied by the state to its citizens. They react with sabotage, crime, subterfuge, subversion, dissidence and terror. Shame-driven societies apply peer pressure and consensus building mechanisms to their members. The individual is subjected to a barrage of ethos, myths, conformity, social do's and don't's, social sanctions, social rewards, stereotypes and is in a constant trial by his compatriots, colleagues, peers, suppliers, clients, family, social stratum and so on. The individual reacts by losing a big part of his identity and adopting a surrogate identity instead. In due time this leads to extraordinary cruelty and violence or to milder forms of sadism. The revolt exists but it is more disguised and it does not involve open defiance, dissent, sabotage, or terror. The third category of states is the most stable, enduring, flexible, adaptive, functional and ideal for wealth creation. It involves an agreement between the individual and the state. Both parties acknowledge the supremacy of individual utility (money, pleasure, comfort, entertainment) over any other consideration or constraint. Individual utility supersedes even the utility of the state in most cases (with a few exceptions, such as taxation or army service). Both parties retain the right to remedy any breach of the agreement through predetermined mechanisms of arbitration. The attitude is businesslike and game-like. Nothing is sacred, everything is subject to review. Mutual belief in the good (read: rational) intentions of the parties prevails. Violations are punished severely because they constitute not only a breach of contract but the undermining of sacred trust.
The USA is a supreme example of such a country.
NG: Besides the above-mentioned sources of financing, the development of the capital markets, as a source of financing in RM, will depend on the establishment and development of investment funds. The privatization model wasn't best suited for the development of this kind of institutions, which will probably reflect upon the long term. They basically should secure the mobilization of small financial resources to different investments and of much bigger amounts to be directed to the economy by investing in securities, foreign currencies and money.
Within the scope of the financing sources we should not forget a few foreign credit lines and the foreign credit and insurance organizations/institutions such as: the EBRD, The World Bank, MIGA, IFC, OPIC, SEAF, USTDA, West Merchant Bank Ltd., Alliance Scan East Fund LP., East Europe Development Fund Ltd., NEPA and others.
One of the possible decisive factors in the financial choices of the firm is the level of the development of the financial markets, especially the securities market.
In the last 10 years the total capitalization of securities exchanges worldwide increased threefold, from 4.7 trillion DM to 15.2 trillion DM. After the realized liberalization of stock exchanges and after the successful effort to attract foreign portfolio flows, many developing countries removed the restrictions on foreign ownership, liberalized the transactions through the capital account and improved the accounting and information standards. The role of the stock exchanges in collecting and publishing information is more important to larger firms, because their shares are traded more often. The high fixed expenses of issuing securities handicap the smaller companies. The stock exchanges offer new possibilities for providing capital and new investments. Unfortunately, in RM this is not the case, because of many reasons: the privatization model, lack of political motivation for attracting foreign investors, unsuitable and fuzzy judicial system, the absence of state bonds and of branches of the big western banks, the absence of a central share register, the absence of a stronger presentation of the possibilities of the domestic stock exchange and its role, etc. The privatization model in RM was built on the basis of inside relationships between shareholders and managers, in most cases they were the same people. It led into a situation whereby companies preferred to abandon the stock exchange and to rely on bank guarantees with high interest rates coupled with slow or no development. This state at the micro level created implications at the macro level. If the companies in a country stagnate or don't prosper, the question is how is it possible for the production and the exports to increase on the macro level? Almost everything that we see as data pertaining to the macro level is a result of micro units working in unison. There is only small hope that in the next 2-3 years companies, which are in the process of privatization or which still have a diffuse ownership structure, will be provoked to conceive new big projects and markets. This means that the new private companies and the privatized companies with a more centralized structure of ownership should carry the weight of the reconstruction and be the first quoted companies, which will try to raise new capital through the stock exchange in RM. Unfortunately, according to The Wall Street Journal Europe's Central European Economic Review, from a total 15 countries in transition in Central and Eastern Europe, RM (judging by the coefficient of private property per GDP) is fourth - but from the end of the table, with 50 percentage points.
SV: Sometimes I simply fully agree with you without needing to add anything.
NG: The feeling of uncertainty, which is all around us in RM, (in the judicial, economic and political systems) is still a strong de-motivating factor, as much for the domestic as for the foreign investor. In a country where "(with) and without Skopsko beer everything is possible" it is a real risk to invest. This doesn't mean that if someone invests, he will loose his money or will not earn, but the fear is meaningful and such an atmosphere often de-motivates. The political instability in the region, and the recently obvious uncertainty in the internal political and inter-ethnic scene indicate that this bad atmosphere might last longer.
The Macedonian stock exchange will continue, for a long time, not to be a very important source of corporate financing, perhaps never, unless certain steps are taken to make it an alternative for the bigger and more powerful companies at least in the medium-term (3-7 years).
Of course, the improvement of the global economic environment in RM, the increase of the manufacturing and exports sectors is very important for the stock exchange's development and its transformation into a source of capital. One joke says that the economy and the stock exchange are like an old man with his dog. The old man walks ahead very slowly and stops from time to time. The dog runs around him, behind and before him, sneaks and goes back. It is thought that the stock exchange anticipates the economic processes at least six months in advance. If we put to one side two or three big takeovers (a process which is usually conducted in the world by KHV, apart from the stock exchange), we will still obtain poor trading results in the stock exchange in Skopje. If the domestic companies do not have interest in publishing their financial results, the state has to find a way to change their mind (as it was done with the banks, which are obliged to publish their results in a daily newspaper).
But let us go back to the basic theme - the trade deficit, the new economic structure, the increase of exports In addition to changing the economic structure higher export bonuses and preferences for products with a higher level of finish should be provided. The financial resources for paying bonuses to the exporters for penetrating foreign markets should be provided from the already mentioned sources in the first few years and from the non-returnable financial help (which RM receives gradually less of and which we should stop making a habit to live off).
I think that RM should directly force the production of certain goods traditional to RM, for which the markets are sizable and there are preconditions for their production. For example:
To financially assist the increased sophistication of wine production, to improve the quality of seeds, more sophisticated bottling and marketing with an aim for better placement of the Macedonian wine abroad as one of the more strategic export products. An American expert team, a few years ago, noted that RM has superb geographical conditions for high-quality wine production, but it is necessary to upgrade the technology of production, to change the variety of seeds and to improve the bottling. Despite the fact that competition among wine producers in the world is great, RM, with small efforts can find itself in a much higher place in the list as a quality wine producer. In England there are three big supermarket chains and one of them is SAINSBURY. Last autumn, I was able to see Macedonian wine only there, and, though cheaper than the Bulgarian wine it was still selling less. One friend of mine, in London, told me that in the above-mentioned chain of supermarkets the wine produced by others in Macedonia used to be sold, but because of the fact that wine deliveries were never on time and in the exactly agreed quantities, the English partner decided to cancel the collaboration.
Or, for example, the stimulation of lower exported quantities of fresh apple and higher export quantities of finished apple products (juice, jam, etc.). The private companies, which will buy equipment for such purposes should, by law, receive bonuses from the state.
SV: Wine and apples are two fine examples of the "Macedonian Malaise" (typical to most so called "countries in transition"). The condition is characterized by an overwhelming sense of inferiority. Having been oppressed and subjugated for so long, small nations convince themselves that they deserve it, that something is wrong with THEM, that they are no good, bums, stupid, or simply unlucky. But always lacking and deserving of punishment. With such a national mood, there is no room for initiative, self confidence, self worth, trust, belief in the future, planning, legal behaviour, postponement of immediate satisfaction (also known as savings and investments) and capturing of markets. The weapons of the weak are socialist: poverty for all, steal from your employer, increase the information fog and dis-information, think now, there is no future, no loyalty, hide your true emotions and so on. The weapons of the strong are capitalistic: market yourself, believe that you are the best, improve constantly, think big, think ahead, fight your competitors on equal terms, honour obligations. Macedonians still have to make this transition. This is the ONLY transition that they have to make because the only transition is in the mind and the rest follows from it.
The second symptom of the "Macedonian condition" is laziness brought about by the "Big Brother" phenomenon. Central planning is a very comfortable thing: no responsibilities, just blind obeisance of faceless instructions and plans, no headaches, no profits but also no losses. Each one has his own, undisputed, irrevocable and irreversible place. Admittedly, the former Yugoslavia suffered less from this malignant form of communality (thanks to Tito). Still, Macedonia had to export all its raw materials to Croatia and Slovenia. The latter would process them and sell the finished products to Macedonia. The Macedonians remained poor but happy: their lives were uncomplicated, straightforward, predictable, clear and controllable. Many Macedonians still miss these times of black and white. Now that the world has been coloured by the palette of personal profit, it is less easy. I personally met wine manufacturers in Macedonia who refuse to even entertain an idea of introducing bottling, packaging, branding and marketing of their wine even if it means TEN TIMES the income! I met people in Gevgelia who preferred to let their apple crops rot rather than transform it to HOME MADE jam (no complicated industrial processes and no costs involved the buyer was willing to pre-finance the whole operation). This is the power of comfortable habits and hundreds of years of sabotage, avoidance of all effort and labour and being someone else's colony (cheap labour and raw materials).
Whether money incentives will solve this state of things is an open question. There is a lot of fear of the new and untried. A lot of ingrained conservatism. A lot of hostility towards the educated, the foreign, the "superior", a lot of false pride (which is truly stupidity in its purest form). People are not used to a life of cut-throat competition. Many will prefer to stay poor. A few will take up the challenge. Will their number be sufficient?
NG: These are the things, which the Macedonians for a long time cultivated and thus experienced the "Slovenian complex" - the state bought unfinished wine, apples and other agricultural produce from its citizens and placed them for export for a price much higher than the one paid to the Macedonian producer.
There is one inevitable condition, which has to be satisfied to enable these "plans": the realization of a satisfying profit and the ability of the relevant companies to survive and develop by themselves.
I think that the development policy of RM in the future should be directed at stimulating and developing the industrial sector and products, which are not "tradable commodities". That does not mean that tradable commodities should be de-stimulated, only that the tremors of the commodities exchanges can reverberate very strongly in small countries such as RM.
SV: It is essential for a country in the process of modernization and integration in the global economic community to decouple itself from the volatile prices of commodities. One of the main reasons for the recent crisis in Russia was its over-dependence on energy products. But I would like to add two recommendations. First, whenever and wherever possible, the state should strive to hedge its commodity exposure. In other words, it should buy futures contracts in the world markets (Chicago Board of Trade, Chicago Mercantile Exchange). These contracts are like insurance policies. By paying a small premium, the future price of the commodity is guaranteed. True, if the price goes up above the guaranteed price the difference is lost. But, if it goes down, the guaranteed (higher) price is paid to the holder of the contract. In the last three decades commodities were a one way business: down. Almost every type of commodity has such contracts available: pork bellies, lamb cuts, certain species of tobacco, corn, wheat, rice, currencies, interest rates everything. It would be a wise idea to use financial futures to limit the exposure of Macedonia to variations in international interest rates or in exchange rates. All this can be done today. The second recommendation is to establish an "Exchange Rate Guarantee Corporation". The state will ensure exporters against foreign exchange fluctuations. The exporters will pay a premium and will purchase from the state an insurance contract, which will guarantee the rate of the foreign exchange that they are going to receive in terms of denars. This will enable them to price their products with an element of certainty. In most economically advanced countries in the world, such mechanisms do exist. Gradually, the state will be able to pass on this function (of insuring exporters against currency exchange fluctuations) to entrepreneurs in the private sector.
NG: A few months ago we have discussed attracting foreign investments to RM. One of the most important measures, for attaining a suitable balanced state in RM, should be directed at attracting foreign commercial investments in RM.
Foreign investments bring fresh and non-returnable capital, which doesn't have negative implications on the state's balance of payments, because the state doesn't have obligations to return and to pay interest rates on it. Foreign investments open new markets for domestic companies, where they haven't invested their domestic financial resources, by increasing the exports, the foreign currency income (or by reducing the foreign currency outflows if they substitute for imports), increase the financial resources of the budget, provide new ideas, technologies, working methods, management, and new employment. Very often the profit is reinvested in the same state. All this will have strong positive influence on the balance of trade.
The basic task is to create a safe legal environment for foreign investment and laws of a western standard.
From this point of view, it is needed to provide a secure and fast judicial system, which will finish all processes in a few months time.
SV: Perhaps even special courts, dedicated to foreign investors, with judges who had special training in applying the relevant domestic and international laws. These courts could operate within the existing court system but will be endowed with special powers and will be obliged to terminate all cases that come before them in six months. This will not constitute a discrimination against domestic firms because many joint ventures with foreigners involve domestic firms and they will benefit from these special courts as well. Secondly, anyhow foreign investors are "discriminated" in the tax code, in the company law and so on. They are given special incentives (example: tax holidays) isn't this discrimination? It is legitimate to discriminate in favour of a good thing.
NG: For a start-up period (2-3years) until the whole change and reform of the judicial system will be done, it would be better to accept your idea to form another court for foreign investors, which will have the same rights and obligations as the domestic investors, with a difference that they will be obliged to finalize all legal processes within a given period of time. On the other hand, this does represent a kind of discrimination towards the domestic subjects, but in the current situation in RM, if there is a wish to attract foreign commercial investments, the presence of discrimination, at least in the medium-term, is required. Also there is a need to change many laws: the law for trade associations, the securities law, the law for foreign currency operations, the tax laws, the banking laws, etc., and create new laws (law for foreign investments, law for investment funds, etc.).
Concurrently, the strong promotion of the Macedonian market should be done to potential investors using all the possible promotional tools (human and material). The relationship with multinational companies is the only bridge between the Macedonian companies and the world markets, the only possibility for development. From the macro aspect, this will have a strong positive influence in RM. In this context, the creation of conditions for the opening of branches of the big western banks, which will reduce investment risk, will offer new credits and financial resources to the domestic companies according to standardized methods and evaluation of the credit applications, will revive domestic savings, will introduce new methods of work and behavior, etc is inevitable. I will not continue with this subject, because we explored it in detail in our first dialogue.
SV: True, we did explore it in great depth. The dialogue is available (in English) on the internet at: http://samvak.tripod.com/nm059.html and deals not only with foreign investment but also with country marketing, the banking system and the capital markets. I want to make one comment, though: Macedonia is a lesson in the abject failure of its self promotion. It is virtually unknown outside a part of the Balkans. It has so many advantages that the fact that it does not attract foreign investors is amazing. It is macro-economically by far the most stable in CEE (Central and Eastern Europe), the manpower is the cheapest (if the wages are adjusted for the level of education). It is superbly located geographically (better than Slovenia), it is naturally endowed, it has reasonable infrastructure (much better than Russia's). Still, it attracted 30 million USD in FDI (Foreign Direct Investment) last year. This is a shame. It is easily marketable as a tourism country, an industrial hub, a crossroads between all parts of Europe and Asia, an island of macro-economic and geopolitical stability. True, the Kosovo crisis and before it, the Serb Wars and the conflict with Greece marred this outlook considerably and still do. But these conflicts will be over some day and Macedonia has to prepare for this day. The task is so challenging and rewarding that I would gladly promote Macedonia abroad in international forums, banks, multinationals for one denar a year. This would be one denar more than I am getting currently for the same work that, anyhow, I am doing voluntarily. I am doing it now not only because I fell in love with Macedonia (and I did). I am doing it because I am a great believer in the future of this country. Having lived in five other countries in CEE I am saying it openly: no place like Macedonia. I prefer it to any other country in this region. And if I do why not other foreigners?
NG: The foundation of the state's Agency for Marketing, as a means for increasing the exports, will also enhance export's ability to increase domestic production.
The small domestic market and the strong pressure of foreign competition on the domestic market, in the conditions of the strong liberalization of the Macedonian economy, forces the Macedonian companies to achieve a better competitive performance of their products and to be keen to conquer new markets.
The bad economic undercurrents come from the bad situation of a big number of Macedonian firms, which is a product of unutilized capacities, as a result of their inability to place their products on the market.
The reasons for this are:
NG: The first problem of the three that I mentioned can be solved by the employment of managerial techniques involving better organization and the combining of resources and by the state creating a better economic environment (monetary measures, bonuses, etc.).
Besides, all these problems come from not implementing marketing methods and concepts by Macedonian firms. Those, which do, are the most successful. The word marketing for many, even today, is synonymous with TV advertising. Today people don't buy shoes simply for their feet to be hot and dry anymore. They buy them because they feel manly, feminine, young, gorgeous, or sophisticated wearing this or that brand. Buying shoes becomes an exciting act. Today the shoe manufacturer's job is to sell excitement not only shoes. Cosmeticians don't sell only cosmetics, but also hope. We drink labels. From the bottle of Coca-Cola we drink the picture of a pretty girl or a boy from the TV screen or from the billboard, we drink the motto "a rest which refreshes", we drink the big American dream, and we drink less with our jaws and more with our brain. Marketing is a philosophy and a knowledge, which influence all senses.
SV: "We drink less with our jaws and more with our brain". This is the best summary of what is marketing that I ever heard. I wish Macedonian managers would understand this. Marketing is a branch of mass psychology. Throwing money at advertising is not everything there is to it.
NG: Every enterprise has to subject its business policy to His Majesty the consumer. The time when you could produce a product and sell it through a strong propaganda campaign on the global market has passed a long time ago. Marketing policies, especially international marketing, demands continuous market research, and the dedication of professionals and financial resources. Most Macedonian enterprises don't have the possibilities to engage in these.
Knowing that the implementation of a marketing strategy, is a fundamental of management philosophy, and that it is imperative for the success of Macedonian economic subjects - the establishment and financing of the state's marketing agency, which will serve as a service to the economy, by the Macedonian government, is a big necessity.
The basic functions of the agency will be:
I will illustrate the need for this agency by one concrete example. The production of oil for consumption is relatively well protected. But even so, a good part of the Macedonian market is controlled by foreign producers, even though their prices are higher on average by 10%. One study showed that what deters consumers and repulses them and forms their negative position towards the producer is that the bottles are oily. Regarding the quality of the product there are no more serious claims. That is why those consumers with a higher standard decide in favour of the foreign producer. The domestic producer didn't conduct market research because probably he assumed that something like that is not needed because the oil is a basic consumer product which people have to buy and it is the cheapest on the market. By adopting the suggestion of the consumers, the manufacturer may obtain a bigger market share and from this the national economy will derive undoubted benefits. Recently data were published which demonstrated the physical growth of production. Even if we accept these data without any deeper analysis, the question regarding the financial results of the production appears, or about the feasibility of the production and of the employment of the assets.
SV: It is customary to say today that the investor has gained an added measure of sophistication and choice. He will no longer be dictated to, coerced, or cajoled. He fiercely objects to brainwashing. Information is freer. In the sixties, the tobacco companies were able to hide results of studies regarding the addictive properties of tobacco. In the eighties this was no longer possible. Information is more widely distributed and through a myriad of channels. Just think what the internet has done to knowledge and the VCR to motion pictures. It is more pluralistic and relativistic the consumer is given several options or points of view and the decision is usually his. It is faster the full text of Kenneth Starr's report regarding President Clinton's conduct was available within 24 hours on the internet. The whole world has been consumerized. Sex, pregnancy (through surrogate motherhood), soft drink, political candidates, books are all products to be bought and sold. This blurs the traditional distinction between reality and fiction. Spin doctors (political marketing gurus) created the myths of Tony Blair and Boris Yeltsin. Presidents play themselves in movies (as President Clinton has done a few times). Actors become presidents. We consume, as you say, images.
The second pertinent point has to do with images. A product evokes in us a host of related images, every time we consider buying it or we consume it. These images determine the objective properties of the product. This is the mistake of managers, which deride marketing and advertising. Products have no OBJECTIVE qualities only subjective ones formed in the consumer by layer upon layer of data, memories, associations, fears, images, sound bites. The VHS standard in VCRs prevailed over the Beta standard DESPITE the fact that it was technologically inferior. MS-Windows is far inferior to the Macintosh operating system but who is the market leader? Quality counts to a certain extent, of course. But packaging, labeling, positioning, imaging are as important, usually more so.
Macedonian products suffer both from inherent quality problems and from a lack of set of associated images. Say Britain and we see the queen, Diana, pompous aristocrats, dry humour, an island, the Tower of London. Say Japan and we conjure up images of small, clever, yellow men toiling at making products better, more reliable and cheaper. Say Macedonia and we draw a blank. It rings no bell. This is bad but changeable. This is one field of the economy where I welcome government intervention: marketing. Today, all over the world, politicians regard themselves as directors in a huge firm called The State. Presidents conclude export deals. Ambassadors promote trade and joint ventures. Ministers of Finance market their country. This, perhaps, is the main role of the state in the Post Cold War World.
NG: Macedonian products have to attain a higher level of quality.
Macedonian exporters should be stimulated to obtain a higher quality of the working organization and its products, or ISO 9001/2/3 standards of quality and ISO standard certificates for product quality. The data that only 20 Macedonian companies own this standard (and not for all processes and products, but for one, two or three of all the products which are produced by one company) says that the situation is unsatisfactory and worrying. Many Macedonian companies lose markets because of lack of ISO 9001 or 9002 certificates. In today's world of competition one of the most important things, which separates the leading companies from the rest, is quality. Even companies, which are renowned for their qualitative products or services, must work on getting better in everything they do with an aim to remain on top. This is quality management. Quality means the fulfillment of all the agreed demands, not more nor less, which satisfy the clients. But, to reach work quality it is not enough only for the company to implement an internal system of standards. In the chain of consumers, buyers, partners, distributors, etc. there must be present a certain quality of work. The European Union issued many directives, which made exporting to it extremely hard without having the above-mentioned certificates. For trading within the Union these certificates used to be only a good recommendation, but not a prerequisite for the external traders, more and more they became a condition. The quality standard ISO 9000 is also needed for export destinations in the USA and for many other countries, including even the Arab countries. This means that in the future it will be more difficult to export even to the poorer countries without having this certificate. The quality is not something, which can be guaranteed by controlling the work of others and uncovering their mistakes. The key is in preventing the mistakes, above all by securing the right finish of the work. The systems for quality control should cover everything that we do, or do not do, and which can influence the quality of the product or the service quality, which we forward to our clients. Implementation of the quality standards system represents a documented way of introducing control of the quality. ISO 9001, above all, requests management responsibility and expects it to come up with a policy for quality and to make sure that everyone in the organization understands it. Also, the managers should obtain enough financial resources and trained personnel for doing the job, to appoint a quality coordinator for the system and to check the system in real time for quality to make sure that it is still adequate and efficient. In the other 19 of a total of 20 points of the Agreement it is mentioned that the quality system should be fully documented, to satisfy the requests and expectations of the clients, etc. A review of the Agreement with the confirmation that the order is fully understandable and that we are capable to fulfill it precisely anytime is also a point in it. I will only mention, not analyze, all the other points: the control of the design (projection), control of the documents, ordering, control of the product ordered from the seller, identification of the product, control of the process, inspection and testing, control of the inspection's measurements and testing of the equipment, the situation during the inspection and testing, control of defective products, corrective and preventive measures, operations, warehousing, packing, storing and delivering, control of quality reports, internal quality check-ups, training, service and statistical techniques. To achieve such work and organizational standards, the company needs to employ specialists, whose job it is to prepare the companies to receive a certificate from an independent and juridical body of certification, which, on the other hand, will confirm that the company operates according to the world standard. In the Macedonian Chamber of Commerce there is a register of specialists, which are trained, noted and recommended by the very well known English house Bywater, which has provided the training and comments through the exactly defined standards. This will provide a certain preparation for the time when the representative of the one of the many companies, which issue this kind of licenses, will try to find errors in the system and abstain from granting the license (the money, which is paid in advance, is lost, in such a case). Well known world institutions, which grant ISO 9000 certificates are: BSI England, Lloyds England, Bureau Veritas, OQS Austria, TUF Germany and others. A big problem is that the preparation and the check-ups needed in order to receive the above mentioned certificate, require an investment of between 8.000 and 25.000 DM (depending on how big the company is) with a validity of three years. Within this price are not included the costs, which the company will, probably, have to commit to for an increase in the level of technical equipment (computers and so on), and are a variable depending on the firm's developmental level. It is important to mention that the company, which issues the certificate, makes regular inspections of the company, which receives the certificate, and if it discovers a breach of the agreement, it has, according to the Agreement, the right immediately to revoke the license without reimbursing the expenses that the company incurred.
Besides the quality standards of the working-organization, there are ISO certificates attesting to the quality of certain products, which is also very important for penetrating and surviving in the world's markets.
There are even higher standards for quality than ISO 9000, such as TQM (Total Quality Management), which I noticed during my visit to the Toyota factory in Japan. But it seems that RM is in too premature a stage for such type of certificate (TQM).
SV: One technical comment, though. TQM is a more comprehensive management philosophy, which revolves around the assurance of quality in all phases of the economic activity of the firm. But TQM is one of many such philosophies (and lately very much out of favour). These fads are by no means comparable to ISO, which is a set of procedures and processes which are rigorous, clearly defined, objective, management-independent to a large degree and widely and unanimously accepted. ISO is a standard, almost mathematical in its purity. TQM is a management fashion. Comparable to TQM is the system of thought developed by Isaac Adijes, a Macedonian (!!!) Jew. Adijes deals less with quality and more with corporate survival as a function of the corporate life cycle. There are numerous such management theories. Their implementation depends to a very large degree on the instructor or teacher in charge. ISO is a science, TQM is an art.
NG: Having ISO 9000 doesn't mean that the company reached the top. It only means that a specific production process offers guaranteed quality standards, which afterwards can be graded. Such a certificate would be very useful also for firms, which do not export, because it makes it possible to improve the firm's operations.
We discussed earlier the way to stimulate producers in RM - tax stimulation, bonuses and in certain cases tax holidays for limited periods of time, providing advantages for using credit financing (stimulation both of the users and of the banks). For a start, the state can cover the basic costs for obtaining quality certificates to the 20 to 40 most strategic Macedonian companies, elected according to predetermined criteria for qualifying. With this the process of economic reconstruction in the export sector will be much quicker. This represents the state's investment, which will be returned very soon, through increased exports (and production), increased inflows of foreign currency and finally bigger income to the budget from the companies, which will increase their production and their exports. I am convinced that if RM will ask for it, it will receive non-returnable help from some foreign funds for this purpose, with a big part of the financial resources obtained on this basis. If RM plans to become a member of the EU and to increase the trade exchanges with it, it has to achieve higher standards of operations and production. This means that, basically, this should be a concern of the producers and the managers of the national economy have to find the way to speed up this process.
SV: Quality plays a dual role in the advanced and developed economies of the West. True, it is intended to guarantee some kind of uniformity and predictability, which make the consumer's life easier. He knows what to expect when he buys a product. Uniform quality standards also facilitate economic activity because the amount of information, which has to be exchanged is reduced dramatically and disputes are more easily solvable. When the two parties agree through the medium of the quality standard what should be the minutest and precise characteristics of a product or a service, there is an ever smaller room for misunderstandings and arguments.
But there is an uglier side to "quality standards". This is the side of protectionism. Countries use quality, health, environmental and other standards to protect domestic producers from foreign competition. Shielding them from competition is costly because it is economically inefficient. It is always better to buy cheaper imports than to manufacture the same products locally and expensively (the relative advantage theorem). But it is politically popular because it saves jobs and makes some people richer. Crazy health, safety and environmental regulations mix with unearthly and outlandish demands for purity and performance to protect rich countries from their poorer brethren. It is virtually impossible to sell agricultural produce or textiles to the EU or textiles to the USA unless the exports are regulated in special agreements and treaties. It is totally impossible to export to Japan and very difficult to export to China. But the same produce (wine, meat) or textiles refused under the quality or health pretext when it emanates from Macedonia - are often sold in the very same markets under Italian or German or South East Asian labels. This only serves to expose the amount of hypocrisy with which quality standards are applied in order to block free trade. To this there is only a political solution and small countries are too insignificant to influence market giants like the EU. But they can and should operate through the mechanism of the WTO and the various international commercial arbitration courts available even to small countries. The advantage of puny trade players like Macedonia is that their nuisance value is higher than the potential damage that their negligible produce can inflict if given free access to the target markets. In most cases, they will be given exemptions and preferred treatment on condition that they do not rock the boat of international trade. Shut up and export as much as you like is the warning-cum-promise. Macedonia should take advantage of its nuisance value.
NG: Every company, which has attention to enter or to invest in another market, has a need for reliable data on which it will base its decisions and plans. It needs to know the potential market's volume, the preferences and principles of the buyers, the characteristics of the distribution channels, the competition. As the more sophisticated companies reach the decision to invest or to act in the markets of undeveloped countries (such as the countries in transition) they need more detailed and reliable data without incurring big expenses. Also, the local investors have such needs, and it is very important for the small and medium enterprises, most of which are oriented towards the domestic market. That's why I think that RM needs a database for each economic field. The data will be detailed, efficiently processed and presented through the internet, in publications, bulletins and at the request of the clients. Similar databases exist in the Chamber of Commerce of RM (an information center) and in the Bureau of Statistics, but I think that they are not sufficiently analytical, and are inadequate for certain types of market research and not sufficiently available to the wider circle of users. Such a database can be managed within the Agency for Marketing and it can be under the same budget. Its data will be on disposal free of charge to every economic entity and to any other interested party. Even though, in the beginning, the interest in using these data will be low, because of the low level of investment activity and the wide rejection of the concept of marketing in the enterprises, it will start very fast to play a big role in the improvement of work of the economic entities and in their development, as in that of the whole economy.
Beside the export-oriented policies, great care to secure the substitution of imported goods is needed, in order to prevent the outflow of foreign exchange, through the provision of cheaper credits, tax holidays (especially for higher quality goods), projects from the governmental agencies and eventually through duty protection.
According to the Bureau of Statistics the structure of imports in RM, classified by economic use, is as follows: materials for re-processing constituted 57.6% of the total imports in 1995. In 1996 55.6% and in 1997 61.4%, which still has to increase. Imported machine tools constituted 4.2% of the import structure in 1995. In 1996 3.3% and in 1997 2.9%. The situation with imported consumer goods is not good: in 1995 37%, in 1996 47.1% and in 1997 44.7%. It is remarkable that consumer goods represented almost one half of the total imports to RM. It is known who drinks and who pays, but can it be known until when?
Within the Macedonian imports, the highest part belongs to oil and oil derivatives, because of the absence of gas, as cheaper energy sources and the dependence of RM on energy imports. But it is interesting that in the second place, according to the amount of foreign currency spent, is the import of cars. Car imports comes second in the structure of Macedonian imports and this implies that the state should increase the cost of purchasing cars, which, on the other hand, is against the improvement of the environment and the renewal of the fleet of vehicles in RM, which still is on a very low level. The arguments for and against this measure are strong and they can be a subject for a separate discussion.
I think that the policies of the state should also be directed at limiting the imports, but by more sensitive measures and at the same time more useful, for instance, by determining high standards for the quality of the imported products. The quality standards should be determined in advance and be compatible with the EU standards. This policy would be implemented especially regarding the import of agricultural products and consumer goods.
SV: As I said earlier, imports, in themselves are good to the economy because they optimize the use of economic resources through increased efficiency of the allocation of economic resources. The question is only: WHAT is imported. There are imported goods which generate sufficient income in the future to cover their cost plus a reasonable return on equity. Others (such as cars) only get depreciated with time and consume more and more foreign exchange (fuel, spare parts). I think that a few rules are cast in stone. They should be applied cumulatively, not separately:
In the framework of export stimulation and import de-stimulation in order to reduce debts, should include reciprocal measures against countries which do not respect signed free trade agreements. Also, in order to reduce the Macedonian deficit in the balance of payments it is needed to implement retaliatory duties against countries which block the import of Macedonian products for consumption and otherwise.
For the purposes of protection against imports and the outflows of foreign exchange it is preferable to use fiscal instruments such as taxes and fees (and rarely duties), prior to imposing administrative quotas. The administrative taxes open wide possibilities for corruption and crime and they are not very popular. I think that definitely the duty on the imports of investments, equipment and raw materials, should be reduced to a minimum or cancelled altogether, which will make the production enterprises more competitive.
SV: Absolutely. This is a fine example of discriminatory practices. Raw materials, infrastructure, computers, investments should be exempted. This will be a tremendous boost to domestic manufacturers. There is, of course, an even simpler way: the introduction of a Value Added Tax (VAT). Such a tax applies to imported goods and services but not to exported ones (the tax is returned to the manufacturer or exporter). Research has conclusively demonstrated that in the first year after the introduction of VAT there is a surge in exports and a decrease in imports (which become more expensive). People either consume goods produced domestically and which substitute for the imports or they resort to exporting.
NG: We shouldn't forget the leading role of an active anti dumping policy as applied to import products, which are more expensive in their domestic market and for which there is an obvious knowledge that they fall within the scope of the anti-dumping measure.
At the same time, the efforts of RM to enter in the World Trade Organization should be more vigorous. But, until such time it is possible to take advantage with regards to certain limitations, which are not obligatory for non-members of that organization. The membership in WTO guarantees a mutual respect of the issued rules of the game between the trading countries.
For a small country like RM, it is interesting to regard the idea of an economic relationship with some other very big and powerful economic power (if the latter will find any interest in it: concessions, extra investment bonuses or even a covert political benefit). For a small country that would mean a lot, and for the bigger one the trade with the small partner would not even be noticed.
For sure there is a danger of long term political dependence, but if a few moves would be adopted cautiously, the two parties would be satisfied. The second danger is the so-called "butterfly effect" - an economic crisis in the big country. The waving of the butterfly's wings in the big country would mean severe hurricane over the smaller country a week later. Following the Asian crisis, everything is regarded with fear. The speed of the crisis hopping from one country to another appears like a thunder.
The scale of dissertation process on the basis of exports made the country more or less sensitive to the fluctuations in the conditions of trade.
Of course that are some other problems. First, RM doesn't have access to the sea nor the ideal geographic position necessary to become the subject of this kind of collaboration in the sense that it is not territorially close to one economically powerful country, as for example is the case with the Czech Republic and Germany, or Japan and some other countries in the south-east Asian region.
Second and very important component is that RM has a serious problem with its manpower requirements.
The whole export of RM is a drop in the ocean compared to the export of the big economical powers. For example the whole export of Japan in 1996 was $333.832 billion and the whole export of RM in the same year was less than $1.2 billion. The exports of Japan that year were about 278 times the exports of RM. A similar conclusion would be reached when we compare RM with other economic powers (USA, France, England, Germany, Canada, etc.).
The regional free trading zones appear to be a better option for the smaller countries, supported by WTO, which battle fiercely against duty restrictions. But, taking into consideration prices of the competition and more rarely the quality of the products of neighbouring and other countries in the region, there is a danger of such situation developing (regional free trade zone). In this development phase, RM could experience a rude awakening if excluded from such a regional club.
In my opinion, RM should definitely institute new policies for its economy by more actively and more vigorously pursuing foreign policies for the opening of new markets in a political way (through bilateral and regional agreements), parallel with the internal economic reconstruction, preparing the conditions for a free market economy and stimulating the enterprises to think about their development and future by themselves. The latest example, the involvement of the Minister of Agriculture in the sale of Macedonian wines in the Slovenian market, should be a positive example for further dealings. I think that with bilateral contacts at the highest level, RM will be able to significantly increase its exports and to contribute to the opening of new markets in the long run and to the attraction of foreign investments. Of course these measures are not economically healthy, nor are they the ultimate solution. The Macedonian economic situation is not very healthy , so they can be used more pervasively in the short and medium term. Such an idea should not be understood that domestic economic entities should rely on the government for help, on the contrary, it should be only an additional effort on the way to achieving quicker economic prosperity.
In this context I will mention one recent example. While I stayed in Japan, I discovered that RM doesn't have an Ambassador or a Consul or any other representative (Macedonian) in the SECOND LARGEST ECONOMIC POWER IN THE WORLD with 126 million people and a nominal GDP per capita of $36.572 (source: Japan 1998 an International Comparison - Keizai Oho Center The Japanese Institute for Social and Economic Issues). I assume that the answer to the question "why" is that RM conducts only small business with Japan. According to my opinion it should be an additional reason for a representative to be sent there in order to prepare the territory and to make conditions for this situation to be changed drastically.
SV: You touched upon the three alternatives available to small countries that wish to increase their exports and to extract themselves from a chronic state of poverty (=of deficits). The first alternative, is to attach itself to one big economic power. This is the case of the Czech Republic and used to be the case of Israel, Cuba and dozens of other countries. The lessons show clearly that this is a good strategy as an interim measure. A small country can attach itself, economically, to a bigger one, ONLY if it uses the time that it thus buys to get rid of this dependence. While closely and overwhelmingly collaborating (usually, not only economically but also politically) with the bigger power the small country should fervently and ceaselessly develop alternatives: other markets. Otherwise, it will end up like Cuba did. It sank into abject poverty when its main "sponsor" (USSR) became economically defunct. "Sponsor-Client" or "satellite" relationships are good as a stopgap measure or in times of emergency. There is no such thing as "pure" economics. In the global arena, economics is a reflection of political and geopolitical realities. Ask Saddam Hussein. There is a political price to pay for attaching oneself to a global power. Many will find this price unacceptable. Germany allows itself to publicly humiliate and chastise the Czechs (regarding the Sudetenland Germans issue) precisely because it is economically dependent. The wish of Macedonia to join the EU has always hampered its ability to negotiate freely with Greece.
The second option is to join a regional trade club. The most prestigious is, of course, the EU. I have expressed my opinion many times: it would be unwise for Macedonia to join the EU now. These are the conditions under which a country should join a regional club:
The third option is always preferable and admissible. Politicians, diplomats and spies all should participate in the new "Green (economic) World War". Politicians and statesmen should sign bilateral and multilateral agreements. Lesser political mortals should protect the interests of their businessmen and exporters. Diplomats should educate, disseminate information, visit, lecture, cajole, convince, threaten, negotiate and matchmake (joint ventures). This activity is the raison d'etre of modern government.
NG: I wish to concentrate more on Japan as a country which was devastated after the second world war and as a country which with very little natural resources succeeded to become the second rated world economic power. Even though I risk that someone will "teach me a lesson" concerning the weaknesses of the system which Japan had built and which from last year became very evident, and if we connect all of it with certain illusions of the South East Asian countries, I still maintain that the current crisis cannot cast a shadow over the past successes of Japan and even of the countries from that region, which are enduring the recent crisis on a higher developmental phase than tens years ago, which for example is not the case with RM. Of course, it is not right to compare RM Japan in its condition today, but let's talk about: WHEN JAPAN WAS RM, or let's compare Japan's past to Macedonia's past and PRESENT.
I discovered that Japan in the past and RM today have many common characteristics and similarities.
Industrialization in Japan begun slowly with the revival of imperial authority in 1868. Japan remained closed to the external world for 230 years, a period known as the Tokugawa era. The country was very poor by way of natural resources and its people lived an improvised existence, something similar to RM at that time. According to some estimates GDP per capita during this period was $100-200, which placed Japan in the category of the world's poorest countries according to standards which are used by the UN today. People were employed in agriculture, and Japan today as in the past was totally dependent on imported raw materials. Today Japan depends on foreign imports for its carbon (92.9%), distilled oil (99.7%), oil derivatives (19.4%), natural gas (96.1%) (imported frozen in container ships), iron ore (100.00%), bauxite (100.00%), phosphate rock (100.00%), lumber (55.2%), pulp (20.3%), salt (90.2%). The energy and the metals are imported from a few countries in the world and Japan depends on them.
The four bigger and the few smaller islands on which Japan exists represent 0.3% of the planet's earth surface, and the Japanese population is 2.4% of the total population of the planet. Within the years following its opening to the world, Japan went from being a poor agricultural county to full industrialization. For them to start and to develop the industry on the basis of the European and American technology was imperative. At that time the Japanese government invited people from different countries, experts from different areas. So, in the period 1880-1910 the establishment of the most important science institutions, which started to conduct research, to transfer and develop western technology, started. The construction of a complete travel infrastructure started. Governmental intervention and planning were big at that time. Prior the second world war, Japan became one of the most advanced countries in the world even though it depended heavily on imports, which means that it had to export and with the foreign currency earned, to import. Unfortunately, in 1936 the controlled economy begun, the economy which was prepared for war, from which Japan emerged totally destroyed (as a result of mass bombarding), territorially and humanly damaged and above all suffering the consequences of the nuclear bomb. It was tortuously difficult to find work for 7.2 million ex soldiers plus 13 million unemployed workers, students and others from factories, faculties etc. The real income in 1946 had been 30% of the average one in the period 1934-1936 and the inflation was 200% in the period August 1946 - March 1947. Everything that was built before had been destroyed and Japan started its development anew.
In the beginning of the 60s Japan had been on a level very similar to former Yugoslavia within whose borders was RM. But where is Japan today (ignoring the current crisis, which is incomparable with the Macedonian one) and where is RM? What is the Japanese secret of success, even taking into consideration the so called "bubble economy"? For the bubble economy to have existed, the system which inflated the bubble should have been formed, though at the end the bubble blew-up (as it happened in Asia last year) and crisis prevailed. The Macedonian bubble, unfortunately, still is just a sad drop. Kuzuhide Okada, a professor in Senshu University, says that the Japanese economy is principally a market economy, but from the very beginning the government understood that somebody should have led the policies to direct or control the operations of the firms, which acted in the specific foreign markets, as well as in their own, domestic one. This is related to the Japanese high level of dependence on the outside (which characterizes RM as well). This is the reason why I began to study the past of this geographically remote country. The government's active policies supported development very strongly. That was not a classical socialist way of planning, even though some similarities can be found. I think that for a country to reach the state of wholly free market economy, a period of governmental policies to direct and control the economy and raise it to a higher level is needed. I have the impression that in certain portions of the trade laws and their practice RM is more liberal than England, Germany or USA. I am not very convinced that it is useful to the nation. The system which Japanese built after the second world war meant strong fiscal, legislative, political and monetary support of exports (not to forget that the yen-dollar exchange rate during the period of development reached 300 yens to the dollar, with the latter falling in value during the period of crisis period) and on the other hand import restrictions. The Japanese motto was "to export or to die". The Japanese success was that it developed the exports mostly, in certain decades even three times faster than its competitors (the USA and Germany). In comparison with the above mentioned period, in the later years the Japanese government drastically reduced its involvement (but it would seem that not enough). The elimination of all governmental management and regulation, however, is not possible. Beside other activities, the Japanese government directly provides public works projects, through which and through the fiscal policies, the government still dominates the determination of the economic trends. Untimely deregulation, a badly structured financial system, and a certain conservatism in the management model (which is transforming itself according to western standards) are the main reasons for the current crisis, which however deeper it goes, will not be in a position comparable to the Macedonian crisis. This says that when one economy is in crisis, and especially when that crisis is during a low developmental phase of the economy and industry, the state should help in the construction of a regular strategy and in putting it into an appropriate framework. When the strategy starts to be implemented and the economy gets better by many parameters, the state should provide a self-withdrawal system from the body economic, because it can be transformed into an obstacle for further development. Today RM is in situation that requires a strategic change in the economy, and this cannot be realized spontaneously, the state should help, very carefully, not to allow an adverse effect to happen.
From the bottom of the list by its economic development and natural resources, the relatively small Japan pulled itself into the position of the second economic power in the world with the biggest foreign currency reserves in the world (which the current currency crisis reduced somewhat), a long term surplus in the trade balance, the second place in the world by GDP per capita (above $36.000), bigger than the USA's or Germany's (above $28.000), a country which almost one third of its exports (one way or the other) are placed ion the very sensitive markets of North America and 22% in Western Europe, transforming itself at the same time to a regional leader, and into a country with an unemployment rate which in the past few years increased from 2.7% to 4.1% (close to the American rate). Only 25 years ago its income per capita was less than one half of the American one. To reach a situation of having an advantage of 25% over the USA is an amazing feat. In the period 1900-1987 Japan with an annual average economic increase of 3.1% digested the biggest increase of the real income per capita. Beside this, from a sizable importer of expertise transformed itself into a big exporter. For example in 1989 about 100 thousand professionals left Japan (more than half went to the USA) and it accepted 65 thousand from other countries (90% from the undeveloped Asian countries). Besides the stable political constellation, the Japanese built a separate strategy for car exports to the USA and Europe. However criticized, as much as it relied on dumping, it helped Japanese firms a lot.
Towards the end of the last decade, Japan became the biggest investor in the world. The Japanese began to invest twice as much abroad than they earned by their exports, their foreign investments in the mentioned period were eight times bigger than their domestic investments. The Japanese penetrated strongly the export of capital. They exporting capital to the West as direct investments in 1988 of more than $30 billion, which translates to ten times their imports of capital in the same year.
A closer look reveals the ten categories of products with at least 2% of the exports in 1989:
SV: It is a big debate whether the state should intervene in the operation of free markets. Granted, the state is not the most efficient economic player. It is slow, corrupt, ignorant, influenced by non-commercial considerations, short-sighted and either too aggressive or too placid. On the other hand, markets are not a panacea, either. There are some goods and services, which markets simply refuse to provide because they are inherently unprofitable or require some non-monetary motivation. Most of the public goods cannot be efficiently provided by free markets or can be provided only at a prohibitively extravagant price. This includes health, defense, education, prisons, police and welfare. There is no question then that governments should step in to fill the void. Another class of cases where the state is called to intervene is when the market fails. Markets can and do fail for a myriad of reasons. Speculative bubbles are market failures. Lack of investments, research and development, qualified and trained labour, patents and other intellectual property, work ethic, economic crime and corruption, anti-competitive behaviour are all market failures or lead to them. The government then is called to intervene, to regulate, to investigate, to imprison, to stimulate, to direct and legitimately so. There is simply no one else to do the job. But industrial policy (which is what Japan has engaged in) is more of a mixed bag. Some countries have done very nicely without it (Estonia, for instance). Others have botched it to the point of self destruction (the USSR). Yet others regarded it as a "starter" (Israel, which adopted the Japanese path of government directives but now has almost no involvement in the micro-economy). Japan simply did not know how to say to its industrialists and bankers: "enough is enough". As a result, Japan is in the worst financial mess in human history. It will recover, but at the cost of a recession which will erase many of its achievements.
Japan is an amazing economic experiment. It is the first time in human history that a government was more interested at micro-managing world trade than at managing its own markets and economy. Some of the Japanese products (the CD, the VCR) CREATED whole markets, that is fostered demand which was not there in the first place. But this neglect - the result of an obsession with attaining hard currency self sufficiency was detrimental. Without the proper spine, even the best runner collapses ultimately.
World economic history teaches us that there is a benign and beneficial form of industrial policy. These are its characteristics:
The country, which was destroyed by the Americans in 1945 and which quietly fell on its knees while signing the surrender on the command ship of general McArthur, didn't provie the Americans with peace until recently. And when the winner started to ask himself what and how that happened to it, the financial Japanese "sinner" was exposed, in June this year, now the ex premier Hashimoto, again fell on his knees, this time in front of the man who became famous for putting others on his knees - Bill Clinton. But once the "Japanese dwarf", this time it is so big that its crisis (currency-bank-stock exchange) again won't leave the Americans and Europeans peaceful, because the possibility of the contagion of the crisis from Japan and its economic satellites in south-east Asia, as well as from Russia and eventually China haunts them.
Despite the above mentioned successes, in which even we find "rotten beams in the building", in the last few years (which by the way are already recognized as such by the creators of the Japanese policies themselves), fascinate, especially when we come back to the domestic territory. Today if you ask a Japanese how their economy is doing, they will answer "very bad", because the Japanese regard their country from another angle, from the position of their biggest competitor - USA, without turning back. From the Macedonian point of view the Japanese crisis starts from such a higher level of the economy than Macedonia's, that it will make us uncomfortable to confirm "yes, your economy isn't doing well". The philosophy of the weaker and the smaller towards the stronger and bigger is still to regard it as bigger and stronger even when it is wounded.
The logic of the Japanese economic development was based on OFFENSIVE export politics, a subject, which we discussed and analyzed as a necessity for the development of Macedonia. It is not by mistake that I don't say survival, but development. I don't want to hear about "survival" eight years after acquiring independence. We must talk about "development" otherwise tomorrow can be too late. Actually, tomorrow is always too late.
But I still ask myself if the entrenched national prosperity was only the result of the justified Japanese state policies. If we ignore the work ethic and the loyalty and strong feelings towards the company and the country, which is still very characteristic of the Japanese even in today's conditions, we will conclude that to succeed in such a short period of time to raise the economy so many levels higher many highly qualified professionals would be required. Technology and methodology could theoretically be transferred in this way or that in a short period of time, as foreign experts in various fields can be summoned. But it isn't possible to import a whole army of professionals, shaped through a well-constructed educational system. As much as we say that RM has strong professionals, as much as we are proud of individuals, who achieved many business successes in the USA or Germany, generally viewed (the exceptions only prove the rule) except the general knowledge of many areas (the philosophy is to know a little about everything) the Macedonian educational system doesn't produce a big number of well specialized professionals in specific areas. Even the bigger number of those very rare professionals, formed along these lines, do not encounter understanding and support and they leave RM very soon.
The essence of every weak long-term economy, actually lies in the weak educational and vocational education systems.
Macedonian manufacturers and other companies generally encounter serious problems with highly educated professionals, professional managers and other business operators. The fact, which was recently promoted in the media and which says that from the total number of students registered in the economic faculty in Skopje, only about 30% finish the faculty on time, means that something is defective in the educational system in RM, because in most faculties the same or similar trends can be discerned. The obvious non-existent minimal practice and training of students from almost all Macedonian faculties, as well as an insufficient theoretical background, very often the low level of mastery of foreign languages (needed for professional upgrading, because there is very little professional literature translated to Macedonian, as well as for business communication), have their effect in the future, when these former students attain more meaningful positions in business firms. The educational system very often is based on dull lectures, which would help the student as an orientation to find the professional literature after finishing the faculty.
Both of the state's universities still do not have a monopoly role in the system. While the youngsters are in high school their parents think more about how will they find a way to help their children to register in the faculty and less about how much they will be ready for it, and such a practice I believe is not accidental and is not the parent's or future students' guilt at all. Passing the exams in the best part of the cases is based on the parents' connections or on friendships. High grades go to the regiment of students who bought or who copied the professor's new book, to the students who learned the material by heart without a depth analysis and understanding. Students go through the tortuous process of overcoming the low level of professionalism and low authority of certain professors (not all). This all transforms some exams into "impenetrable barriers". It trains the students to be corrupt in the years when they have to practice by themselves to form their own thinking and to defend themselves with open and impartial discussions. Of course this is not relevant to all the professors and the faculties, but unfortunately it is relevant to the bigger part of them.
The scholarships for professional advanced studies abroad, even though a few, very rarely reach those who will make the best use of them.
In the Macedonian bigger companies there are almost no educational centers, as very important post-university education facilities, especially with more practice-oriented education and experiences. For example, if one economist in England is employed in Merill Lynch, the first six months or a year, he will have additional training in the same company during and after his working hours. Even in the smaller and poorer countries the bigger companies have this practice (e.g. Zagrebachka Banka - Zagreb). From this point of view, it would be a big handicap for RM or one idea for faster national prosperity.
The level of the management in RM is another story. Unfortunately, that is an important part of any strategy for economic reconstruction and export-oriented drive. Management is a distinct science, a separate economic branch, in many respects closer to politics and to psychology than to economics. Besides, it is a natural gift as well, which not everyone possesses.
The second unfortunate fact is that a big part of today's managers of the most important Macedonian companies are the same as in the socialistic period. Many of them were appointed to their current positions by a political key and through loyalty towards the party, without taking into consideration if they are suitable for the job or not. Actually, at the time, it wasn't very important if they were capable, because the bigger part of the production and trading was planned in advance on the union level. Maybe not as strictly as in the Russian block's socialist countries, but definitely very differently compared to the situation today. For example, it was known exactly, in advance, how many shoes Gazela - Skopje will manufacture for export and these shoes, would be exported to Russia through Centotextil (or to Italy or to some other country). There were some big trading and export firms and with political assistance all questions of distribution, production and placement were solved. The small luck in this misfortune was that one part of these people had a natural gift for managing (which was not very important in the selection process) and the practice of many years covered up for their educational deficiencies by specialization in a sophisticated management system. But the bigger part of this group have not advanced even by one centimeter in their professional development and do not speak English or German at all. It is interesting that they still survive very well, a result of timely political acquiescence and support, which not only insured their continued successful and cushioned business existence, but also, in this or that way, made it much better.
All this is acceptable until we start talking about a new policy of development based on the construction of a new economic structure, export-oriented, on the basis of market economy, but with a modicum of state policies in order to creat a framework for the new ways. It is a fact that this situation is difficult and slow to change. The logic of the bigger number of managers, is based on local principles instead of on the global. The philosophy of thinking of most managers, is different from the same ones in the developed countries or, putting it more politely, demodé. In this plane the country has limited possibilities. It is an impossible and unacceptable way of appointing managers of the stock companies. That can do only the shareholders who control the company, but unfortunately in RM the shareholders and the managers are the same people. Only the state could influence the firms indirectly, through the marketing agency, which we have discussed before, as well as by stimulating the introduction of the ISO 9001/2/3 international quality standards for operating enterprises. All this is actual in RM, at a time when the world is discussing the management revolution, the notion promoted 60 years ago according to which the technological changes in the production process separated the capitalist-owner from the management, and that function is effected more by the managers. The revolutionary changes in this plane can happen by creating possibilities and support for the entry of foreign capital into the companies, by the fact that the foreign investors will provide new markets for the domestic firms and will exercise a strong influence for changing certain negative habits and standards of the work of the Macedonian management.
SV: There is no point in separating the issues of education and management. The students of today are the managers of tomorrow. This old generation of mostly corrupt political commissars masquerading as managers and robbing the assets of the firms they are entrusted with is bound to pass. Biology will do it if political processes will not. But is Macedonia looking into a brighter future? I am afraid that not necessarily.
To start with, there is a dramatic brain drain. Those who can leave, physically or intellectually, is doing so or trying to do so. Young people see no hope, they are angry, they never want to look back, they feel betrayed, they talk about Macedonia in terms usually reserved to treacherous wives. Those who stay behind are either patriots or unlucky or stupid or as corrupt as the preceding generations were.
Higher education in Macedonia is a farce. University professors are largely divied to two groups: the inept and the corrupt. Bribery is rampant. Marks are bought. Sexual favours, money and plain old favouritism determine the academic achievements of many students. The curricula are passe, the libraries outdated, the labs antiquated, the teachers do not bother to read foreign literature, the textbooks are plainly plagiarized rehashed. Many of them do not even know foreign languages, never been abroad for an extended period of time. The result is a dangerous mismatch between what the country needs and what the universities churn out. Additionally, many of the diplomas are not worth the material they are made of. There is a crying and desperate need for qualified, trained, skilled and properly educated manpower.
Where will the management cadre come from? From the bloated academia which produces nothing but make believe degrees? From the old socialistic planned economy? From the government's bureaucrats?
This reminds me of one last issue that we neglected to tackle: the disaffection of the Macedonian diaspora with Macedonia. Israel was virtually built with Jewish money, talent and political influence abroad. There is a relatively thriving Macedonian diaspora in Australia, Canada, the USA. It would the first natural conduit for Macedonian exports. It would have been the first grounds for the recruitment of management, technological and financial talents. But it is not. This, to me, tells the whole story. If rich Macedonians do not trust Macedonia, do not support it, ignore it, debase it in public why should the West behave differently? And why doesn't your country organize all these Macedonians into a powerful front wherever they are? The Czechs, the Slovaks, the Armenians, the Kurds, the Jews, the Arabs every nation relies on it "delegates" in the outside world. Every nation, that is, except one. There wil be no prizes for guessing which.
NG: RM must find the way to hasten the spontaneous and very slow process of changing the economic structure, in order to realize bigger exports and debt reduction. Otherwise it will live doomed to disaster. Not to disaster, as one Macedonian theatre play says, because the disaster is a definite state, and even less to welfare, from which RM is still too far, but to a fall. Free fall. In the same holes. In the same way. Again and again. Persistently and stubbornly. Without deriving any lessons. This becomes comic. Even a bear in the circus can learn to ride a bicycle...
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