Equity, Europe, Investments
Three Wrong Orientations in the Macedonian Economy

By: Sam Vaknin, Ph.D.

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Economic theory describes the individual player in the marketplace as rational and cold blooded, always calculating risks versus profits. But reality is much more complex. Economy is 90% psychology: fashions, emotions, fears, hopes and expectations, past history and future visions. A phenomenon like entrepreneurship cannot be fully explained by classic economic theories.

Moreover, the market is not always right. Sometimes it is dead wrong. The fax machine had to wait more than 100 years (!) before it was widely used. Television had to wait 20 years. Most innovations were rejected by the economic gurus and businessmen of the day. The "Invisible Hand" which regulates the market economy is not always active.

The Macedonian economy is driven by three dangerously wrong orientations, three myths:

  1. It is better to invest your own money than to take loans and credits;
  2. The main goal of Macedonia should be to join the European Union;
  3. Macro-economically, we should prefer investors to mere speculators.

It is better to invest your own money than to take loans and credits.

This is sometimes true and sometimes wrong. It depends on certain quantitative parameters.

Psychologically, everyone is deterred by credits. The debtor (=the person or firm who take the credit from the bank or any other lending institution) has to pay back more than he has taken, because he has to add interest payments to the original principal of the loan.

Moreover, the credit is a burden on the finances of the individual or the firm. It ruptures the cash flows. It introduces an intrusive and unwelcome partner: the creditor (=the person, bank or institution which lent the capital to the debtor).

But the decision whether to finance a business through credits or by investing in equity (=your own money) should be based on the following TWO simple questions:

1. Will my business be able to pay back the principal and interest payments of the credits / loans that I intend to take? If Not - don't take credits. If Yes - move on to the next question.

To answer this question, you must take into consideration not only the field of economic activity that you want to establish a business in and not only the likely future development of your own project. You must incorporate the political and economic situation of Macedonia in particular and of the Balkan area in general. Geopolitical and macroeconomic uncertainties are negative factors.

2. If I put my money (=equity investment) elsewhere - will it provide me higher yields than the ones that I will get by investing it in this business?

An example: If I invest 100,000 DM in my business - I will generate an average of 10,000 DM in annual income in the next 5 years. If I invest the same money in another business, or in a bank deposit, or in stocks in the stock exchange, or in Government bonds - I will earn 12,000 DM in annual income. In this case, it is better to put the money elsewhere and to finance the business with credits/loans.

And that is all. A decision to take or not to take credits has to be based on the answers to these two questions. Otherwise, it will be an irrational (and, long term, an unwise) decision.

Investments are financed by savings. They can be financed by the investor's savings and that is called "equity". They can be financed by someone else's savings - and that is called debt in the form of credits. If an investor needs 100% of an investment and saves 2% each year - it would take him 50 years until he accumulates all the capital that he needs. Many times an investor cannot save the total amount of capital needed. This is where credit is helpful.

The main goal of Macedonia should be to join the European Union.

Geographically, Macedonia is a European country. Commercially it trades foremost with Europe. Its leaders incessantly repeat the mantra: "Our goal is to join the European Union".

Is this necessarily the wisest choice?

We know of many countries which aligned themselves with continents or groups of countries to which they did not belong. Israel, for instance, is definitely European (or American) - although it is in Asia. Australia was part of the Anglophile world - despite the indisputable geographical fact that it is closer to the Far East (Japan, China, Indonesia). In today's world of rapid, limitless means of communication and transport - geography's role is exponentially diminishing.

Lesson number one: Macedonia can decide where to belong to economically.

Another thing we know is that countries maintain close ties with communities of expatriates throughout the world. Israel has close historical, emotional AND ECONOMIC ties with the Jewish diaspora. Most of the foreign investment in mainland China comes from Investors of Chinese origin - living outside its borders.

There are almost 750,000 Macedonians living outside Macedonia - but not in Europe. They are concentrated in Australia, Canada and the USA. They are an invaluable source of foreign investments, foreign exchange and political clout.

Lesson number two: Macedonia's immediate future may be with the immigrant communities - and those are not in Europe.

Economies in transition - from centralized state controlled to private sector driven - do not enjoy foreign investments by the private business sectors. They must live off credits and investments provided by international financing institutions. Organizations such as the IMF, World Bank (and its private sector arm, the IFC), the EBRD and OPIC - have already channelled hundreds of millions of Dollars to the Macedonian economy. Yet, these organizations are controlled and financed mostly by the USA - not by Europe. Moreover, in many respects, Macedonia stands in direct competition with the other countries comprising the European Union. These countries will not view the Macedonian newcomer favourably and will do whatever they can to obstruct him - rather than assist it in its first fledgling steps. It will not be easy to be accepted to the club. There are 83 such clubs in the world today (according to WTO figures) - why belong exclusively to only one of them?

Lesson number three: the USA controls the money that Macedonia needs and the European club is only one of many - and not necessarily the friendliest one.

This is what the former President of the EBRD, Mr. Jacques Attali, has to say about Europe ("Time Magazine" - Golden Anniversary Issue - 50 Years Europe - Winter 1996):

"Conventional predictions lead us to fear that Europe? has entered a period of decline? that? seems unstoppable. Europe now has, compared with its main competitors, the lowest birthrate (with the exception of Japan) the highest unemployment rate, the oldest population, the highest social expenditures, the lowest industrial growth rate, the weakest industrial research in key sectors of information technology, the fewest new patents. Even its renowned financial markets are heading towards fragility. And though its share of the worldwide GNP remains high - above 20% - this too will drop rapidly in the future.

Thus everything is shaping up for 21st century Europe to become little more than a 'Venetian Continent', visited by millions of Asians and Americans, inhabited by tourist guides, museum caretakers and hotelkeepers. In the big global bazaar, the place occupied by European companies, products, ideas, literature, music and cinema will soon be taken over by objects, services, sounds, noises, words and images from elsewhere."

Lesson number four: who wants to join such a club anyhow?

Macro-economically, we should prefer investors to mere speculators.

This used to be the sentiment until the end of the 1960s. Breakthroughs in economic theory revealed the importance of the Speculator and somewhat tarnished the hitherto impeccable image of the investor.

An old financial joke goes like this: "An investor is a speculator who failed in his speculation". This is half true. No businessman objects to a quick turn of profit.

The only difference between investor and speculator is how long they hold on to the very same goods. The shorter they hold on to it - the more "speculative" the nature of their investment.

But speculators perform a highly needed task: they bridge risky gaps in the economy. They assume risks where no other would.

This is their first important function: they facilitate the mobility of goods and services. They are like oil on the cogs of the economic machine.

They take advantage of market imperfections. If a merchandise would fetch two different prices in two geographical locations - they would buy it in one (where the price is low) and sell it in the other (where the price is high), materializing a profit in the process.

But their very purchasing activity would raise the prices in the one market - and their wish to get rid of the merchandise as fast as they can would help to reduce the prices in the other market.

This is their second important function: they equalize prices through the delicate, real time mechanism of arbitrage.

Speculators are essential for markets with high levels of uncertainty and for economies in transition. They are essential in this phase of the economic cycle in Macedonia. Investors are nowhere to be found in these circumstances. Most economic activities in such situations are performed by the speculators.

Speculators thrive on market inefficiencies. When things will stabilize in Macedonia - the speculators will vanish. Stable prices, open, friendly markets, efficient dissemination of information - they are all a poison to speculators.

Then and only then will the stage be set for the investors: deep thinking, thorough, methodical and long term. To act long term and to think long term an investor needs certainty - and this is scarce commodity in Macedonia nowadays.

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