Foreign Investments and Macedonia – Science or Fiction?

A Dialogue Between Nikola Gruevski
and Sam Vaknin, Ph.D.

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Foreign Investments in the Region

Nikola: The Republic of Macedonia is at the bottom of the ladder, as far as foreign investments are considered, among the countries in transition. It is not a coincidence. The general judgement of all the relevant economic institutions and experts in and out of Macedonia is that there is a need for foreign commercial investments at this time. This dialogue is the commencement of an attempt to analyse the reasons for the absence of foreign investments and to act to change the present situation.

I think that we should above all focus on foreign capital in the form of indirect and direct investments from commercial institutions in the world. That is a priority as far as the needs of Macedonia are concerned. The Receipt of credits (as foreign capital from the EBRD, The World Bank, the IMF and other similar institutions) should not be a subject of these comments.

Moreover, the purpose of our discussions should be to inform the public regarding the situation and the developments in Eastern and Central Europe, which skipped Macedonia.

Sam: I think both your distinctions are very important. Macedonia has grown addicted to a the drug of multilateral financial aid in the forms of grants and credits. The money is used either to finance unproductive consumption or is invested in extravagant infrastructure projects. Macedonia is running a lethal trade and balance of payments deficits covered by donations and other forms of ""ad" capital. No wonder that commercial avoids Macedonia. Moreover, the public is not informed. The facts are available – but the public is not educated to understand them. Thank you for selecting me to be your partner in this exciting dialogue.

Nikola: As an opening comment I would mention the globalization as a world process and the dimensions of this process from Macedonia's point of view.

Last year witnessed the merger of Union Banque Suisse (UBS) with Swiss Bank Co. (SBC). The new bank is now the second biggest bank in the world with a total capital of 687 billion dollars. As of last year, the biggest world-class aircraft manufacturers, Boeing and DC have become one company. It was probably the biggest merger of 1997. The British insurance companies ''Commercial Union'' and ''General Accident'' have integrated to the tune of 15 billion pounds. They will form one of the biggest insurers in Europe. Every month brings along mergers and acquisitions between smaller or bigger companies worldwide. This is a trend. Globalization is a world trend.

Sam: Always has been. Research shows that the world used to be much more globalized than it is today until the outbreak of the Great Depression during the 1930s. We are just resuming an old trend which was interrupted...

Nikola: General Motors has 25 times, and NTT has 52 times the sales figures of the entire Republic of Macedonia, respectively. Decisions are made within the premises of the multinationals and not by ministers. Anyone who stands up in their way is bound to be destroyed. This is a part of the same large trend called globalization, a process that enormously helped the development of transport, telecommunication and other segments of technology, but at the same time tremendously deepened the polarization of countries, as never before. Within 10 years, telephones might look like a wrist watch, a small button or a brooch. According to The London Times dated 17th November 1997, the technologies have finally converged so that there will no longer be a difference between telephones, computers, TV sets, calculators or other home entertainment electronic appliances. The developed technology will be cheap and incredibly user friendly. The developments in telecommunications have caused the world to have 13 billion micro-processors, and 5,7 billion people. Today, there is more computer exchange of information every working day, than all the verbal communications going back to Adam and Eve.

My concern is: How is it possible for any Macedonian company to be competitive against other companies, each with 300.000 workers, the most up to date technology, the most efficient cost structure, the most capable and trained staff and managers? It seems to me that there is only one chance. The bridges between Macedonian firms and the biggest world companies can be established only if the latter come to Macedonia, only if they inject the Macedonian companies with capital, new technology and new markets. It is the only way to join Macedonia with the modern part of the world. Of course, that process has a ''price'', but in the long run, Macedonia will gain much more then that. Macedonia must to prepare STRATEGY how to join in the modern world.

Sam: I share your belief in the purifying and strengthening powers of foreign investors, especially if we are talking about well-equipped, well-managed and well-capitalized multinationals. However, I would like to put things in perspective. Accumulated experience in the world shows that foreign investment does improve considerably the professional, technological and marketing skills of those companies that it invests in. Additionally, foreign owned companies are responsible for the greater part of the exports in their "adopted" countries. But it is equally important to apply market pressures to domestic firms through opening up to competition. Local companies, owned by locals, must adapt or die – and the sooner, the better, the less pain. Foreign investors tend to form their own sector and to isolate themselves from the local economy. Even their contribution to employment (especially of skilled people) and to the local economy through purchases is minimal. Another risk is that multinationals will look upon Macedonia as a source of cheap labour and raw materials, a colony in the guise of sovereignty. Some of them will even try to dictate anti-free market measures to the host government. Audi tried to do it to Macedonia and now the Korean auto-makers are trying to do this to the Ukraine. The government should use the entry of foreign investors – with their active participation – to cajole, threaten, force and weigh upon the local industries to get leaner and meaner. In the long run, this is the main contribution of foreign investment: the transformation of the domestic sectors.

Nikola: Business Central Europe, the leading regional business magazine, in the 1997/8 Annual published information regarding foreign investments in the 27 countries in transition in Central and Eastern Europe. Macedonia is on the last position with 30 million $ (although the December takeover of Makstil is not taken into account here). The data for the other countries are:

- Albania $298 million (1996 figures); Armenia - $44 million (1996); Azerbaijan - $987 million; Belorussia - $110 million; Bulgaria - $1,2 billion (6/97); Croatia - $827 million (6/97); Czech Republic - $7,3 billion (6/97); Estonia - $800 million (6/97); Hungary (6/97) - $16,2 billion; Kazakhstan - (96) $6,3 billion; Kirgizstan - (96) $276 million; Latvia - (6/97) $860 million; Lithuania - (6/97) $ 762 million; Moldavia - (96) $167 million; Poland - (6/97) $16,3 billion; Romania - (6/97) $2.4 billion; Russia (6/97) - $7,3 billion, Slovakia - (6/97) $1 billion; Slovenia - (5/97) $1,7 billion; Tadjikistan - (96) $47 million; Turkmenistan (96) - $544 million; Ukraine - (9/97) $1,6 billion; Uzbekistan - (96) $320 million; Yugoslavia (97) - $1 billion.

The magazine cites the following as sources for the data: EBRD, EIU, IMF, OECD, WIIW.

In the past 5-6 years, the world's most famous banks opened branch offices in almost every state in Central and Eastern Europe. Except in Macedonia.

Citibank, Creditanstalt, ING-Barings, Deutsche Bank, Bank Austria, Bayerische Vereinesbank and others opened branch offices in the Czech Republic. Citibank, ABN Amro, Unicbank and others in Hungary. Citibank, ABN Amro in Romania. Volks Banken Creditenstalt, CSOB and others in Slovakia. In Slovenia, Bank Austria, Societe Generale, Volks Banken and others have opened shop. Chase Manhattan in Uzbekistan, ING Bank, Raifeisen Bank, Dresdner Bank, Societe Generale, Xios Bank, National Bank of Greece and Ionian Bank in Bulgaria and so on. In Bulgaria, for example, there are a lot of joint ventures with foreign banks, as well: Post Bank (Bulgarian Japanese Bank/Nomura) Bulgarian-American Credit Bank, First Investment Bank (Bulgarian and EBRD capital), OBB (Bulgarian, American and EBRD capital), Bayerische Bulgarische Handelsbank (Bulgarian-German capital), Euro Bank (Bulgarian-Czech capital) and so on. Even in Albania branch offices of some foreign (western) banks were opened. The Bank of Albania was the first joint venture bank in Albania (an Italian Albanian Bank) and was established in 1992. There is one other joint venture bank with the Albanian State, foreign private participation (The Albanian Islamic Bank), the only wholly private foreign bank (Dardinia Bank) and the National Bank of Greece.

Except opening branch offices, the banks invested and bought up many local banks in most countries in transition. The above-mentioned magazine comments: It was an unusual year for the miserable banks in the region". After 8 years in transition the question is whether the Central European governments will or won't give up the control over the sector, which they think is the central economic power. The big shift was in 1997. They realized that they have no choice, had they not sold the banks, the banks would have been ruined. But, whether this danger is generally recognized is an open question. The results of a poll conducted among a group of readers of "The Annual" show that people still have a tendency to think that "big is best", regardless of the basic health of the bank.

Sam: There are 23 universal (all-purpose) banks in Macedonia. This is not a healthy situation. The illiquid, tiny, isolated economy of Macedonia cannot support such a large number of financial mediators. The results are poor returns on equity, low quality loan portfolios (assets of the bank), monstrous default rates and, as a result, atmospheric real interest rates and reticence of the bank to fulfil their basic function: to finance economic activities. No reliable credit rating and risk assessment tools have been developed, no reliable, computerized, central registrars of collaterals. Property rights are not protected by inefficient and baffled courts and by legislators who lack all economic expertise and experience. In addition, the Central Bank, terrified by the ghosts of hyperinflation, is implementing an unduly restrictive monetary policy. Money supply, credit acceleration, secondary money formation are all at abysmal level. On top of this, the banks themselves are not modernized, under-computerized, lack professional expertise and management, offer no innovative financial products and services, are not customer oriented, notoriously slow and inefficient. Why should foreign banks enter such a fray? It took Erste Bank almost two years to conclude a deal to purchase a minority stake in Macedonia's largest bank, Stopanska Banka, which control close to 50% of the banking system in the country. This was a major vote of no-confidence, preceded by dire reports issued by the Central Bank and by the World Bank.

Nikola: Hungary was the first state in the region that recognized the danger of a fragile banking system. Hungary suffered a series of bank collapses, but after that the Hungarians learned the lesson of the fiasco and put the other state banks on a strict diet to make them fit for sale. The Czech Republic and Slovakia resisted the sale of their main banks longer. But the bad debt problems made the Czech Republic change its opinion last year, and it sold one of its 4 biggest banks, IPB, to the Japanese (Nomura). The other 3 will most likely be sold to strategic investors by the end of 1998. An American financier said something about the Czech banks to be remembered: "Your banks are like ugly brides. You should be happy if you find a husband for them who only has syphilis." Slovakia endured similar problems.

But, besides banks, large manufacturers of world class are present in every other Eastern and Central European State. I'll mention only a few of them: in The Czech Republic: Tesco (UK), VW (Skoda) - Germany, Unilever (England and Denmark), and in Poland ABB Fiat, Procter and Gamble, in Hungary: IBM General Motors, Unilever, Suzuki..., in Slovakia: VW, Whirpool, Heineken...

There are many companies of this kind in Romania, Russia, Bulgaria, Croatia and in other countries. Except in Macedonia. On the Deloitte & Touche list of the biggest companies in Central Europe there are two from SR Yugoslavia, four from Slovenia, and none from Macedonia.

Sam: There was a lost chance to introduce industrial multinationals to Macedonia during the privatization process. Macedonia had – and still has – many relatively large companies, which could have been of great interest to foreign investors. Pivara, Makpetrol, Ohis, Alkaloid, not to mention the infrastructure firms (such as PTT and ESM). When foreign investors witnessed the transfer of these prize assets (mostly) to their managers – they decided that if you cannot beat the system, join it. So, they established joint ventures with local firms. Pivara has such a collaboration with McDonald's and with a German beer manufacturer, for instance and Ohis has many industrial alliances. Foreigners started buying up bankrupt Macedonian firms. The privatization process has transferred circa 1200 companies to incapable, under-funded hands. The new owners do not know how to run a manufacturing firm in the global marketplace. They are being forced to apply to foreign investors now – unfortunately, at prices much worse than could have been obtained before their mismanagement. I am much more optimistic than you, in this respect. I think that we will see a wave of foreign takeovers and joint ventures starting this year.



Nikola: Other things happened in Eastern Europe, but not in Macedonia in 1997, both in business and in finances.

This trend continued well into 1998.

In January alone, Pepsi Co. completed the purchase of the remaining shares in the Polish manufacturer of sweets and sandwiches Wedel. Pepsi Co. already manages 83,3% of the company. Poland decided to raise the legal ceiling of foreign ownership of the local radio networks to 49%, instead of the previous limit of 31%. The changes were forced upon it because Poland has committed itself, in the accession talks, to the liberalization of foreign ownership limits, in line with the EU.

The Holland brewery Heineken launched a tender to increase its share in the polish brewery Zywiec to 75%, at a price of $125 million. The Holland giant already invested $50 million in the factory, and increased its share from 25% to 32%. Heineken announced that it would like to keep the company on the stock market, and has no intention to increase the capital further.

The Slovakian manufacturer of steel VSZ finally succeeded to take over the problematic Hungarian cast iron manufacturer DAM, after the Hungarian government agreed to a nominal value of $1 if the Slovaks take over its debts of $13 million. Besides that, VSZ sold its 20% to a Czech steel mill.

The American Ford Motor Group declared that there will be a joint investment with Russky Dizel, an engineering group based near St. Petersburg, for the production of $150 million, and annual production of 25 000 automobiles is planned.

In the financial world of Eastern and Central Europe, the following events transpired, among others:

Again, this trend continued, unperturbed well into the first few months of this year.

Investicni a Postovni Bank (IPB) was finally sold to the Japanese NOMURA SECURITIES. The Japanese paid a small amount of 2,9 billion CZKs ($81 million) for the 36% that were supposed to belong to the government, but they agreed to inject an additional 12 billion CZK into it. Nomura and similar funds now control 70% of IPB.

The Polish minister of finance, Balcerowicz, announced that 35% of PKO, the biggest commercial bank will be sold to strategic investors in the third quarter of this year. Also, a listing on the stock exchange will follow in March or April.

Russia issued licences to four western banks for opening branch offices. The German Deutche Bank and Commerz Bank, as well as the American JP Morgan and Bank of America were the most successful candidates from a total of twenty applicants.

Last year Poland had a 7% growth rate. From 1990 to the present, foreign investments in Poland totalled more than 20 billion dollars. The USA has invested 4 billion dollars, Germany 2,1 billion dollars and so on. Among the top foreign investors in Poland, Fiat is in the first place with 1,1 billion dollars, and Daewoo Motors on the second with 1 billion dollars in investments.

These bits of information are only a part of what happened in Eastern and Central Europe in 1997. Where is Macedonia in all of this? How much fresh capital was missed in this period? How many new jobs, new ideas and new markets Macedonia did not obtain, and could have? Why?


Foreign Investments in Macedonia

Sam: It may come as a surprise to many, but foreign investors are as interested in psychology as they are in economics. The first things they enquire about have nothing to do with GDP per capita, the rate of inflation and its forecasts, domestic interest rates, the living standards, the available infrastructure, the banking system and other, "hard core" questions. To start with, they are interested to know other things: are property rights protected by the State and by the courts? Is the right legislation in place? What is the crime rate and how pervasive is it? Are people industrious or lazy, corrupt or honest, liars or truthful, educated or ignorant? Is it easy to do business there – or does the bureaucracy stifle everything? Are officials and politicians interested mainly in their own welfare or in that of their country's? These are "soft" issues, which matter much more to the foreign investor in the longer term. It is here that Macedonia failed in projecting to the world an image of a country friendly to business in general – and to foreign business, in particular. Investors don't even know that Macedonia exists, let alone its many advantages.

Nikola: An analysis of the situation of the Macedonian national economy shows the following:

  1. Over 80% of the equipment in Macedonia is considered obsolete, meaning that it is no longer in use in West Europe. 10 to 15% of the equipment is so called medium level, and only 5 to 10% is high technology, completely imported.
  1. The depression level is high, 53%, while the write-off level is approximately 71%.
  1. The structure of the fixed capital is inadequate. Over 60% is in construction operations, compared to a worldwide average of 45%.
  1. The distribution in the sector in inadequate, which is very dangerous because it needs a long period to change.
  1. The capital assets have a low economic value (the market value is often 50% under the accounting value).
  1. The part of the inflow of gross investments in the domestic (social) product in the past years was under 18%, in contrast to 1971 and 1972 when the investment rate reached 40%. Economic investments, being the most important segment, increased from 8% in 1992 to 15% in 1994. After two years of receding, in 1997 they reached 12% (although it was determined to be 16%).
  1. The economic distribution of the investments is very negative. Of the total investment, 17-20% went to infrastructure, and only 46,5% were commercial investments - the engine driving the economy.
  1. The restructuring of property failed with regards to the organizational and technological aspects.
  1. Last year the number of new enterprises and projects decreased.
  1. The savings rate is very low, and it is assumed that the population has funds of 600 million to 1,2 billion US dollars; this item (population) is negligible in the western countries with developed financial infrastructure.
Sam: There is nothing inherently wrong with a low rate of savings, especially in illiquid economies in crisis and transition. The engine of consumption is as important as the engine of investments. But this is true when savings are IMPORTED – in the form of foreign investments – from abroad. Macedonia is doubly cursed: it has a low (official) savings rate (though, in reality, thank the black economy, it is much higher) coupled with the absence o9f commercial foreign investment. Add to this the roaring deficits and the picture that emerges is that of a bleeding economic body. The trade deficit is mostly used to finance consumption and infrastructure projects. Nothing productive and profitable is engendered by it. People prefer to buy Volkswagen cars than plant machinery. The result is a stock of capital assets which is depleted and decrepit – not only in industry. Have a look at the universities, for instance. This is a vicious circle: a problematic economy fosters uncertainty. Uncertain people do not commit themselves to long-term investments. They prefer to consume or to speculate. The result is even a more problematic economy. The low domestic savings rate is linked to the abysmal investment rate. Even when money does come in, the management class and the political-economic decision makers do not know what to do with it. The safest bet is to invest in infrastructure and in construction. It is much easier and more familiar to construct a house than to manage a microchip factory. Lack of management skills, of modern, flexible, organization, of technology means that even the available resources are misallocated, that the productivity rate is bound to deteriorate. Learning from foreigners is an excellent solution, which Macedonia has yet to adopt. But Macedonians find it highly embarrassing to admit that there is something, which they need to learn. When in need of help and advice they feel inferior and humiliated. I can tell you this from my experience as a foreign consultant here.

Nikola: Looking from both from the historical and from the present point of view, and according to many others, also from a prospective point of view, the Balkan is one of the less stable regions in the world. This is why there is no inspiration for capital investment and foreign ownership. When you mention Macedonia to anyone in the world, they do not think individually of Macedonia, but as a part of a region, known around the world for its unpleasant events. The fact that Macedonia, at the moment, is not at war or anything similar, is a small consolation when you look at the history of the state and the region, or at the relations with the neighbors, or at specific recent actual scenarios of terrorist groups from around the world, where Macedonia is included as a possible object of destabilization or worse. Take, as an example, the publication that was issued in 1996 by the London branch office of Bankers Trust International PLC - one of the biggest broker investment institutions in the world with its head offices in America, a research on the markets of the ex-Yugoslav republics. The conclusion of the publication was that Greece will prevent the EU from effectively assisting Macedonia, until the problem of the disputed name is solved. A probable scenario is mentioned in which the Macedonian territory could be a subject to a dispute between Greece and Turkey (both members of NATO), as well as Serbia, Bulgaria and Albania. Even in the recent study of Merrill Lynch, despite the optimistic estimates, there still exists a small reservation regarding the political future of Macedonia. The Kosovo events caused inestimable damage to Macedonia in as much as foreign investments are concerned. The fact that the highest Macedonian political officials, in interviews to the media, are indirectly or directly saying that Kosovo can destabilize Macedonia, is as damaging as what happens on Kosovo. If the prime officials of the state are openly discussing the possibility of ethnic conflict in Macedonia in their statements, a conflict that could be contracted from the neighboring countries, if they are asking for foreign defense forces from the UN and NATO to be stationed on the territory of Macedonia, I wonder why should the potential foreign investors think otherwise?

I think that the first conclusion on this subject is that, basically, the region where Macedonia is located is one of the last where the firms that are involved with international transfers of capital would invest. But that does not mean that the level of foreign investments in Macedonia is a result only of this, and that the situation could not be far better. This a only a starting point.

Sam: I couldn't agree more with your concluding remarks. The regional instability and its chequered history is maybe 10% of the explanation, in my view. Slovenia was part of Yugoslavia, even involved in fighting, initially. Still, it cleverly distanced itself from its former co-federates and identified itself with Europe. The result was prosperity for Slovenia in the middle of the worst ethnic war in the last 50 years. Similarly, Bulgaria and Albania are in the same region as Macedonia and so are Croatia, Romania. All these countries (Albania until recently) enjoyed large inflows of foreign investments despite their regional affiliation. In Russia and India, governments collapse monthly. In Russia, Georgia, foreign businessmen are even often murdered. In all of them, foreign investment is booming. Money seems to be an incentive stronger than life. But foreign investors must be convinced that money is here to be made. They haven't been, hitherto.

Nikola: I think that the following should be also mentioned:

First, in the last seven years, the least foreign capital entered Macedonia than any other country in transition. This is not because somebody in the world hates Macedonia.

Second, certain situations in Macedonia look different from a distance. This is because of (in some cases) the low level of information available about Macedonia in the Western developed countries (they should not be blamed for this), and the common unrealistic interpretation and comments about events in Macedonia, aired by local authorities under the influence of the daily political arguments.

To see how Macedonia looks like to the world, one should read foreign professional magazines (or surf the internet), or even better, leave the country and get in touch with investors, who invest in emerging markets, among others.

They are in for an unpleasant surprise. A year may pass in thorough perusal of foreign financial magazines, before the name of Macedonia pops up, not to mention a detailed analysis. I met many multinational companies which have developed special departments for research and investment in the so called emerging markets (Macedonia's natural place). During the first contact I encountered with the following reactions:

  1. Besides a rough geographical location (sometimes even that is uncertain), and the knowledge that Macedonia is in a way connected to Alexander the Great, regarding everything else there is very little, and often no information whatsoever about anything in Macedonia, including its economy and its companies.
  1. Often Macedonia is being confused with Greece or the question arises which Macedonia is concerned.
  1. Surprise that no one from Macedonia has ever visited them. At the same time, they are pleased to hear something about a totally unknown and unexplored market.
Sam: Type the word "Macedonia" in a few word-processors and you will get a "spelling mistake" sign. I was once asked at the Prague international airport whether Macedonia was … part of Belgrade. This is entirely the fault of the Macedonian authorities. No coherent and serious promotion, public relations and investment relations campaigns were ever undertaken. More than 80 new nations were added to the world in the last two decades. In an age of information glut, sovereignty inflation and fierce competition on economic resources – to be unknown is to be dead, politically as well as financially. In the long term, the survival of Macedonia depends not on meaningless treaties and conventions. It depends on its ability to attract foreign capital and thus to bind its neighbours and the West to it. Money is a strong incentive to refrain from instability and wars. The bitterest enemies become the best friends once they have common economic interests (see the example of France and Germany). Macedonia should immediately develop a multi-year plan for fostering and encouraging recognition among its allies and foes alike. The international media should be used and economic interests should get involved. But to leave the situation as is is nothing short of detrimental.

Nikola: The image of Macedonia is an image of a landlocked country, with poor neighbourly relations. The stationing of foreign forces on its the territory raises the question why is international protection needed? The dispute with Greece, besides the negative implications for the Macedonian economy, (though it was good to finally be noticed) did not help the situation. The existing tension with the ethnic Albanian minority in the country also creates an image of an unstable country.

In the projections for 1998, the government of Macedonia persistently states that it will do anything to increase the foreign direct investments in Macedonia. But it never mentions the indirect and portfolio (through the stock market) foreign investments. Whether these two concepts are mutually inclusive , or mutually exclusive, is not clear.



Nikola: And while one is having a problem with insufficient capital, others have a problem investing the surplus of capital, a problem of high liquidity.

For example, the Nomura company, as one of the most powerful investment banks in the world, with shareholders' capital of over 15 billion dollars, with 63 international offices in 26 countries, approximately 3 million client accounts and over 400 billion dollars in managed client funds, last year, "as a joke", bought 4000 pubs in England. It holds the first place in Central Europe (excepting Russia) as a leading provider of financing. Since 1995, in their capacity as lead managers, they invested 2,7 billion dollars in this region (source: Euromoney Bondware). JP Morgan are right behind them, judging by the same criteria, with 2,2 billion dollars, Daiwa Securities with $1,9 billion, Credit Swiss First Boston $1,6 billion, Merrill Lynch with 1,4 $billion. Nomura was the lead manager of the first public offering of bonds of the National Bank of Slovakia in 1994, to the tune of 25 billion yens. At the same year Nomura bought the municipal bonds of the city of Prague for 250 million US dollars, invested 24 million dollars in corporate bonds in Slovakia, invested 4 billion in Latvia, 15 billion in bonds of the National Bank of Hungary, 60 million $ in international bonds issued by Lithuania. In 1996, besides the issue of municipal bonds of the city of Tallinn, in Latvia (60 million DM), Nomura invested 50 billion yens in Romania, 70 million $ in corporate bonds in the Czech Republic, and in 1997 they invested 500 million $ in bonds of the City of Moscow, 70 million $ in Slovakia, 450 million dollars in international bonds in Ukraine. In 1998 hitherto, they concluded new investments in The Czech Republic (the takeover of IPB Bank), and negotiations in Ukraine and Slovakia are in their final stages. The same company invested 91,2 million $ in Pliva-Croatia, 31,1 million $ in VTS-Slovenia, 24,7 million USD in SKB Bank in Slovenia, and in July 1997 453,3 million $ were invested by it in KGHM Polland Miedrz SA.

Creditanstalt appeared 7 times as a lead manager and 3 times as a co-manager in stock offerings in this region, Credit Suisse First Boston did so 6 times, and 3 times as co-manager, Schroders 4 times and twice, respectively, Dresdner Kleinwort Benson 5 times in both categories, Merrill Lynch 4 times, HSBC 4 times, and Salomon Brothers and UBS 3 times. These data are for 95, 96 and up to July 1997 (source Euromoney Bondware analyzed by number of issues). Last year Romania was a real investment hit and after the stabilization of the economy in Bulgaria, there is a great interest again in new investments there. There are many other similar data from which can be concluded that the big multinationals have much enhanced liquidity, and are looking to emerging markets to invest it in. They have so much money, that they are prepared to invest in risky countries, much more risky than Macedonia, naturally against much higher yields than in low risk countries, or countries with no risk at all.

Sam: Only in the USA in the last two years 2 trillion USD of new wealth were created by investing in stocks. The same pictures repeats itself all over the world. Stock exchanges the world over have set new records and generated fabulous amounts of new wealth. Contributions to pension funds, money pouring in to mutual funds, the globalization of the capital markets and the resulting capital mobility – all created a deluge of money frantically in search of yields. The more mature markets in the West offer less luring returns because of the lower risks that you have mentioned and because of correspondingly lower projected growth rates. New legislation permitted- even encouraged – the international diversification of these funds. Once legally allowed, the dam was opened and a gush of almost 400 billion USD in investments swept over the emerging economies. Some of these investments soured and there are periods of remorse. Sometimes, investors even completely withdraw from a specific market (as they have done in the Czech Republic in 1997). But these are temporary fluctuations. The phenomenon is here to stay: investors and money managers hedge their investments by spreading them across political boundaries. High growth rates attract them. The availability of political risk insurance calms their nerves. It is a golden era for those countries who know how to tempt the right suitors. Macedonia, unfortunately, is not one of them.

Nikola: When we discussing portfolio investments (indirect investments), we must mention that all the serious multinational companies have special departments or separate firms, specializing in investing in the so called Emerging Markets. In these departments, 50, 100 or more account managers and investment officers have an annual amount of money they should invest in some of the countries in East and Central Europe, South and Middle America, Southeast Asia, Russia and the CIS (NIS – New Independent States) and eventually Africa, depending on the strategy of the company. The amount can be between one half and two or more billion German marks. The companies have established in-house research and development (analysis) sections within the departments (or their special firms) which tackle the emerging markets. The professionals, that are working in these departments, are usually divided by regions. For example: Romania, Bulgaria and Croatia, or the Czech Republic, Poland and Hungary or Russia and the NIS. Alternatively, they are grouped according to the type of the securities that they deal with: East and Central European bonds, or shares issued in the same region, or other more complex financial instruments. These departments are obliged to observe everything that happens on their markets, the ones actually invested in or in which there are plans to invest. On the basis on this information, they should provide instructions to the fund and portfolio managers of the company. The latter, after reaching a final decision, issue directives to the dealers of the company to sell or to buy the exact number and type of securities. The dealers of the company are associated with local brokers and the operation is thus completed.

In every meeting that I had with these firms, I concluded that they are (literally) bombarded daily with information, data, brochures, analyses, telephone messages, faxes and e-mail. All of this is sent to them by governments, state agencies and authorities, brokerage houses, by banks and by other private or governmental institutions and individuals, from all the countries, but one: guess which.

It seems that there is a double barrier to information: data from Macedonia never reaches potential financiers from the West , and information from the West doesn't reach the citizens and legal entities in Macedonia. Without exaggeration, I can say that Macedonia is in an information vacuum, when it comes to financial events and opportunities that the world offers.

Sam: I think that the second type of vacuum is less threatening. Today, anyone who is really interested and is willing to devote the time and resources, can hook up to the world at a minimal cost. Professional magazines, the Internet, foreign radio and television stations. The problem is that I see so little interest. People are much more interested in politics, in football or in Cassandra than they are in economics. It may be because matters economic are perceived to be the "government's headache". The government did little to expose the citizens to the realities of the market economy. Most people here replaced "socialism" with "IMF-ism" or with "governmentalism". They await a miracle cure, a solution from above. The psychological barrier to learning that I mentioned before, the twisted superiority-inferiority complex ("no one can teach us anything that we already do not know") – are a major hindrance. I reviewed your economic textbooks and spoke at length to may students of economics. You lack a lot of knowledge. You teach out-dated doctrines to uninterested students. This will not work. You must open up and accept the fact that you need help: urgently and a lot of it.

The first kind of information barrier is much more serious. That Macedonia is absent from the information cum investments race is suicide.

Nikola: That is why many things that are normal and regular, in the financial world, (stock exchange, shares, capital markets, investment banking), seem very distant to most people in Macedonia. Actually, Macedonia is very far from all this. It is not like the public imagines when it sees on the local television an old replay of a chaotic and messy stock market. On the contrary, everything is in perfect order, and that is not something that only a few people can understand.

All of this can be compared to basketball. 7 or 8 years ago nobody in Macedonia knew what was happening in the NBA league, but today, after regular TV broadcasts and commentary, the bulk of the populace feels the league to be its own. Many know the names, success stories, the good and the bad side of every team in the most lofty basketball league. If anyone were to inform the public about the events in the world's capital markets, as well they do regarding the events in basketball, the picture would have been different. Many of the citizens would have put this knowledge to good use, especially in view of the emergence of the capital markets in Macedonia. Unfortunately, not only has the domestic public been until now in a so called informational vacuum, but the passiveness of Macedonia with regards to this question, obstructed the ideas or opportunities of the investment multinationals to invest their capital in Macedonia. This caused great damage to the country, and it is a missed opportunity.

Sam: From the very beginning it was clear that no one knew what is a stock exchange and what to do with it, once it was established. It was perceived more as a nuisance than as a tool for the formation and allocation of domestic and foreign wealth. The privatization was conducted completely outside it, new shareowners were not allowed to trade their shares there, the government did not finance its needs through it. It was relegated to the margins, devoid of liquidity and basically useless as a corporate financing arena. This was a major strategic mistake, which would require many years to reverse. The stock exchange could have become a source of cheap credits and equity capital to the struggling, illiquid, domestic economy. It could have competed with the local, inefficient, banks. It could have attracted portfolio investments and even domestic "undeclared" capital. All this could have been achieved had the right number of companies been listed, had the supply been varied and of good quality. But a stock exchange does not go well with cronyism.

Nikola: However, nothing will help Macedonia in its plan for self-promotion, if it does not help itself. Macedonia must lead an aggressive policy in this respect. Bearing in mind that the private institutions, which are participants in the capital market, are still not fully developed and formed to carry this project alone, the state should take over. The state must be a generator in the process of promoting itself, and later, when the conditions will change for the better, the state can gradually leave the "scene" to a certain minimal level, relegating its role to the private institutions.

Foreign capital is important for faster development as well as for a prompt exit from the economic crises and isolation. Foreign capital is also important in preparing the country to EU entry. Until and unless it finds interest in Macedonia, the probability of entering EU are very small. At the moment, this is better, because if Macedonia were to enter the EU now or in the near future, it would have become an even bigger base for the supply of raw materials to that community than it is now. Macedonia must deeply enmesh itself in the process of globalization, and to ask for the acquirements from it. In that game every side has its own "mathematics". The rich can get richer, and the poor can get less poor. This option is possible, but if one is not careful, the poorer can get even more so.

The second lesson is, that multinationals are looking at emerging markets, and have extra funds to invest. What share of it can Macedonia attract depends on:

  1. How aggressive will Macedonia be in its propaganda;
  2. How much "substance" it has to offer, and
  3. The conditions offered by it.
Since these companies invested in Malaysia, Vietnam, Bulgaria, Albania, Romania, Kazakhstan or Afghanistan - there is no reason that they should not invest in Macedonia, which was bypassed until now, and with a reason.


Promoting the Macedonian Market

Sam: The world has gone through a major cycle of physical colonization in the last five centuries. European countries conquered, by military means, large swathes of land with rich raw materials and mineral resources. They clashed with each other often and the outcomes of these clashes were eternalized in the form of international borders. Whole continents were subjected to this mercantilist behaviour. Raw materials and cheap labour were "sold" at ridiculous prices by the colony to the colonizer – and expensive finished goods and services were imported by it. This led to economic depletion and social unrest which resulted in two world wars and in the de-colonization of the world. But a second cycle started in 1989, with the fall of the Berlin Wall. This time no physical presence is required. Money and other symbols (information and know-how, technology and science, cultural imports) do the job. Again, the Western powers colonize parts of the world for the same reasons: cheap raw materials, cheap labour, new markets. Yet, this time, they do it more subtly: through credits, joint ventures, film festivals and television serials. A reaction is already developing. I, personally, believe that the countries of Central and Eastern Europe will rebel (mainly against the EU), once they understand what is being done to them. A world of regions and ethnic groups will supplant the world of nation-states. All over the world, political units are disintegrating to smaller and smaller ones. Macedonia should be aware of these trends and should not fall in the trap of the new form of colonialism without extracting a hefty price. But it would be able to demand this price only if it will become an interesting place, economically and financially. This is the most basic mistake of the Macedonian national strategy: It strives to join the EU as soon as possible – without going through the pains of real reform, the creation of a real market economy and the sacrifice of special interests of powerful groups.

Nikola: In the meanwhile, the Western countries understood the East European market to include all the ex communist countries in Eastern and Central Europe except Macedonia (and SR Yugoslavia and Albania to a certain degree). Forgotten, on the financial chart of the world the name Macedonia almost doesn't appear, more often marked only with five letters (FYROM).

In the prestigious SBC-Warburg-Dillon-Read the present director of equity investments, the executive director of the head office covering equity investments in the European emerging markets, and another person from the so called "emerging markets" discussed the Macedonian capital market. While mentioning the state telecommunications company in Macedonia, I was asked: "Can you dial a foreign country from Macedonia, or the people can dial only between them, inside the country?"

This question was asked when the Macedonian government was announcing the privatization of the state telecommunications company, probably not loudly enough.

Similar questions were asked regarding other fields and concerning concrete and potential opportunities related to investment in Macedonia. My conclusion was that their knowledge about the State, in general and about the Macedonian national economy, in particular, was equal to the knowledge that the average Macedonian has about Tanzania. The above mentioned company has invested billions in: The Czech Republic, Uzbekistan, Poland, Russia, Romania, Bulgaria, Ukraine etc. except in Macedonia. I could notice the same thing in almost every similar multinational. Most of these companies, with no exaggeration, have so much money that they could buy, without any problem, all the companies in Macedonia. For example, the seven funds of Flemings manage, between them, 64,99 billion pounds (June 30 1997), equivalent to 188 billion German marks.

In the plan for attracting foreign capital, the government must, besides the agency for the promotion of Macedonia, appoint a person in the government (for example a minister without portfolio, with a special and unique assignment - attracting foreign commercial investments to Macedonia). This person must have high authority and the confidence of the prime minister to whom he should also report. His aim will be to generate concrete suggestions, decisions, activities and laws "to be passed" by the legislature. He should encounter no obstacles in the government, despite the resistance of certain ministers, under the influence of external interest groups or as a result of direct pressures applied by these groups or through lobbying. All of this is assuming that the minister has both the will and the determination to persist to the end of the battle to make Macedonia attractive for foreign capital, regardless of the internal pressures and influences. Maybe in this game, the prime minister, as a politician, for a short period of time, might lose some support, but for the longer period, he stands to gain much more, above all from the voters - the citizens of the country, that will undoubtedly feel the positive changes brought on by the politics.

Sam: This solution, a "Czar" of investments or of privatization has been tried elsewhere, with little success. Very few politicians – anywhere, not only in Macedonia, give up so easily on lucrative state enterprises. They can reward their cronies by providing them with jobs, profitable contracts and other benefits, material and intangible. To open the country to foreign investments – means to lose economic control. A lot of people make money from imports, for instance. Will they be happy if local produce replaces imports? A lot of wealth is transferred from the state to select individuals and enterprises in the forms of concessions, monopolies, favourable tax and customs tariffs and "customized" public tenders. Foreign investors will not put up with this. They are a noisy lot. They refuse to play the game. They say what they think and are afraid of no one. Do local politicians really want this kind of trouble? Until a clear separation is made – backed by criminal sanctions and penalties – between money and politics, between businesses affected by decision making and the decision makers, the incentives to introduce foreign capital to Macedonia are few and far between. Foreign investments will come, with or without government involvement. It is the negative involvement of the state that must first be eliminated. Its positive assistance is less important by far.

Nikola: Should one Western firm enter the Macedonian market by purchasing only 10% to 20% or more of the ten best companies in Macedonia, that would mean that the foreign company will not only bring fresh capital to expand the domestic companies, but through its own representatives on the Boards of Directors of these local companies, the Western firm will bring new ideas, solutions, product mixes, quality, new investments, exports and new markets. The Western firm could then connect the domestic companies to new individuals and companies in the Western world of finances. The objective of any firm that would purchase securities in Macedonia would be to make the companies and country invested in much more competitive and attractive. After a period of time, they could sell the securities, in order to realize a profit, and thus to invest in another or in the same country with the same purpose.

To start with , if the foreign companies conclude that there is no chance to sell the securities that they would buy, they are not likely to buy them because nobody wants to buy something that later can not be sold at a profit of 20 - 30% or more.

Macedonia is one of the risky countries. Eventual investment of foreign capital in the form of portfolio investments would come after forming a judgment that high profits would be made from speculative investments. There is no other reason why would anyone invest in Macedonia and not in, for example, England where the risk is much lower. The Macedonian companies and the Macedonian market can compete only by offering higher yields through capital gains, dividends or interest payments, and especially the former. Because the capacities in Macedonia are under-utilized, and the level of development is low, higher positive earnings are possible.

I would like to return to the suggestion, that the government should initially take upon itself to attract foreign capital. The minister that I mentioned earlier should suggest a programme with pre-determined deadlines, and submit a report to the government on compliance with it. He should be directly engaged in:

  1. Attracting portfolio investments (selling smaller and/or bigger parts of several our companies to western investors, through the stock exchange). In this case we are talking about indirect investments (through the stock exchange) of large, prestigious, investment banks, brokerage firms, funds etc.
  1. Attracting direct investments (sale of control nuclei of factories and other companies in Macedonia to foreign investors, and with a prior agreement signed with the government and with the Agency of privatization). These deals – in the absence of a law regarding takeovers - would formally be effected through the stock exchange. In this context, we are talking about direct investments where multinational renowned manufacturers of a certain products would buy factories in Macedonia, in their field of manufacturing.
  1. Joint investment in new projects.
  1. Finding buyers - underwriters of eventual issues of Macedonian Eurobonds.
  1. Attracting foreign capital to the field of tourism.
The assignment under point 5 could be eliminated from the jurisdiction of the above mentioned person /and assigned to other person/s, to avoid overburdening him.

It would be best to leave the mission of contacting direct creditors (IMF, WB, EBRD, etc.) of the state to another person(s).

Sam: I think that if such a person will have the backing that you mentioned: from the Prime Minister, by a special law, from the legislature – he might even succeed. All this, subject to the sea change in the political atmosphere. Attracting foreign Direct and Indirect Investment must be declared a national priority and a state of emergency must ensue. This person must be a widely known, appreciated and liked figure, well connected and with the legal authority to cut through red tape, circumvent regulatory procedures, go around commissions, committees and bureaucrats. On the other hand, he must not be given too much power, lest he abuses it. Stringent checks and balances must be implemented to prevent corruption.



The person that this project would be entrusted to, must have enormous knowledge in the field of international finances and must exceptionally well know the problems and needs of Macedonia.

Under the coordination of the specially assigned person by the government (he should be a member of the cabinet) and with the Agency for the Promotion of Macedonia, in the first phase that should last not longer than 6 months, the activities must be taken in 3 directions:

Permanent and regular contact with the direct participants in the capital markets of Macedonia: the managers of the companies, the stock exchange, banks and brokerage firms and big investors. The objective of these contacts is to deeply, and from various points of view, to tackle the essence of the problems, and to avoid any vacuum on the vertical axis of contacts between the government and any other participant on the capital markets.

To prepare several studies regarding Macedonia, in general and certain companies, in particular, where the possibilities and the conditions that this market is offering and is planning to offer are realistically presented. The big financiers in the world should be "bombarded" with these publications. All the positive aspects of investment in this market and, concretely, in certain projects must be mentioned in them. It must also be mentioned that these reports are intended only to attract the interest of the foreign companies in certain projects. This should be followed by engaging a local legal counsel in the second phase, and usually by sending representatives to Macedonia, to consummate the third phase of engaging a broker, and carrying out the deal. After the money is invested (and possible even before that), the research and development departments of the Western companies will start to independently prepare reviews, reports and other printed material regarding Macedonia, in order to realize a profit from the deal, and to interest other multinationals to invest in the Macedonian market. This means that the country must initiate the project and accelerate it. So far, only a couple of companies have prepared reports about Macedonia. One of them is Bankers Trust where in November 1997, I was told that for the time being this famous multinational company has no intention to invest in Macedonia. Recently Merrill Lynch issued a research report concerning Macedonia, but they also have no intention to invest in Macedonia at least till the year 2000. This is what the director of Merrill Lynch Frankfurt, Mr. Wolfgang Eickmann, sincerely told me, in reply to my questions a year ago. But there are many other large multinational companies, that are interested to invest in Macedonia. Unfortunately because of many reasons, and above all, because of lack of information, the small scope of the market and bad legal regulations they don't do so.

Sam: My experience has been similar. The "biggies" – Merril Lynch and the like – are not likely to invest in Macedonia until it is a much more developed market, internally. The size is simply too small. It is not cost efficient to dedicate research manpower and other resources to a market where the number of transactions is likely to be very small. But smaller financial institutions – and there are hundreds – might be interested. The World Bank lists more that 20 private, small, mostly equity, funds that are interested to invest here. But these funds are under-staffed, do not have serious research departments (if at all), are short on budgets. They are flooded by waves of business plans, brochures, offers and requests. Their attention must be attracted. The first factor in attracting attention is the identity of the market that the proposal is coming from. A business plan from Slovenia will get much more attention than its twin from Macedonia. Admittedly, the fundamentals of the two markets are very different – but there is also a heavy problem of image and market awareness. I myself was told by an IFC official that the Macedonians are a "Kaffana nation". The Macedonians are perceived to be lazy, unreliable, unknowledgeable, not decisive, fickle, unaware of the most basic concepts of time, obligation, contract and loyalty. The lack of disclosure in financial statements, the inefficient courts, the corruption, the bad working habits, the high unemployment – all accentuate this flawed image. No one, until now, made a serious effort to courageously confront this image, dismantle it and offer an alternative. No one markets Macedonia, its people, its culture, its markets, its industries. No one has bothered to learn the mentality of the money providers, their language, their worldview, their hopes and fears.

Nikola: It would be useful if the government of Macedonia, besides the specially appointed person, and the specialized Agency for the Promotion of Macedonia, also engages:

Sam: I wholeheartedly support these two recommendations. Not because I am a foreign consultant, who lives in Macedonia. I render my services to the government (when they are required), my lectures and my articles free of charge. I think that Macedonia should be instructed as to how to market itself – it is doing such a bad job now, that nothing can be worse. Moreover, Macedonians seem not to believe in their own country. They keep telling me how deficient and defunct it is and how much they would have like to leave it and to go to greener, Western, pastures. Whenever I express optimism, they put me down, or even accuse me of some political collusion. Sometimes, you look to me like a nation of pessimists, waiting for the worst to happen with a masochistic joy. This is not the way to promote a country. Let others do the work for you until your mood improves. Agree to be taught, only the truly wise know that they do not know.

Nikola: The Agency for the Promotion of Macedonia, that was recently established, must not transform itself from its promotional and marketing roles into some kind of a mediator, that would add to the bureaucracy of this sphere.

The impression is that the external problems could be solved much faster than the internal ones, because of, as one high-level financial expert and politician in Macedonia stated: "the hostility of the domestic managers of the companies towards the foreign capital", which more or less is the generator of every other problem in Macedonia with regards to the attraction of foreign investments. This situation will sooner or later change, but the conditions and the environment will no longer be the same. The favorable conditions for foreign investments have its timing, just like everything else.

The lagging behind the technical-technological developments and the enormous insufficiency of capital in Macedonia, will very quickly lead to the so called "third degree" privatization. Most people that are generating today the negative situations in Macedonia will be disposed to sell in panic the already privatized companies, realizing that even the low price with which they managed to buy the company is already too high, because of the stagnation in its development. We will not even dare to estimate the damage to the Macedonian national economy. We will see to what extent will the current long-term stagnation in development make the Macedonian products less competitive, and to what extent it will affect the (un)employment. The entire lack of foreign investments is indirectly or directly damaging the budget and the trade balance of Macedonia.

Sam: I have been warning for a year regarding this forthcoming forced privatization. Years were lost. Any competitive edge that Macedonia might have had has been completely eroded. World markets have been lost to competitors. The nation has lost the wealth that could have been generated to it through the orderly sale of the privatized firms. Now, the bulk of these firms, still badly managed, under-funded, without export markets, new ideas, new technology and new management – will collapse. Unemployment will surge. Foreign investors will come in (if they will know what is happening!) and pick up the shards cheaply. The process has already started and agro-businesses are offered for a pittance by both Agencies (Privatization and Rehabilitation of the Banks).

Nikola: There is a saying: " you can take something away from somebody by force, but not give something to him (by force)…"

If Macedonia wants to be successful at attracting foreign investments, it should demonstrate that it has investment possibilities. This can be accomplished by permanent travels of a representative of the government, by attracting foreign delegations, by collaborating with representatives of the industry and commerce. The promotion of Macedonia in business and financial newspapers and magazines in the world must be frequent. Advertising in other kinds of magazines (for example: magazines of air-carriers) should not be excluded.


Legal Environment

The legal environment is the starting point of serious intentions for attracting large amounts of foreign investments. There is a need for customized laws and/or for the introduction of changes to existing laws, which will give the capital market in Macedonia at least approximately equal conditions with the same in other countries in transition, not to mention more favorable ones.

You can get the impression that the legal environment in Macedonia regarding foreign capital, is made to prevent foreign investments from entering. This is the case with certain regulations under the Law for Business Associations, the Law for Foreign Exchange Transactions, tax laws and other laws.

First of all there is no law for foreign investments as a ''lex specialis''. It is a big lacuna in the legislation in Macedonia. Of course it would mean discrimination against domestic companies, but we must know that if we want foreign investment, the discrimination is unavoidable. Even now there are a few discriminatory articles in the laws of Macedonia (e.g., tax laws), but obviously it is not enough. All East European countries gave strong stimuli (and this means discrimination) to foreign investors. This is our fate.

But Macedonia is an opposite case. In Macedonia, more laws contain discrimination against foreign investors or non-standard legal conditions for investment.

The Macedonian courts must accord faster treatment to all the matters involving a foreign company or a foreign investor.

Sam: Laws are complex things. They are like organisms. They evolve, prosper, die, inherit and bequeath. The legislation in Macedonia is no worse than in other countries. In certain respects it is better. It has been copied – almost verbatim – from the laws of more advanced countries (like Germany). Though it contains a lot of inapplicable provisions – largely, it should have been sufficient. The problem, therefore, is not with the laws. The problems lie in extra-legal matters. To start with, people have no respect for economic laws. They violate them openly, all the time. Then, special interest groups collude with politicians to generate laws suitable for their own, highly idiosyncratic needs, or to change existing laws accordingly, or to prevent potentially harmful legislation, or openly and flagrantly violate them with immunity. The laws that are enforced are subject to the court system. Notoriously over-burdened, inefficient, slow and confused (it is not rare to get conflicting interpretations to the same text by different judges) – the courts are considered by foreign investors to be the problem, not its solution. This means the extra-legal (criminal and private) enforcement systems are likely to develop and this deters investors even further. A court decision is nothing much without an efficient, largely non-corrupt police to enforce it. Special incentives (taxes, grants), special industrial zones and trade zones, off shore banking – all are very important. The ability to operate without too much bureaucracy (permits, red tape) – is also very important. Geopolitical stability counts. But, above all, the investor is concerned about his property and his ability to "repatriate" it in case of trouble. Will he be able to buy the necessary amount of foreign exchange? Will he be able to transfer all of it freely in one day? Is the collateral given to him by his local partner / borrower secure and properly registered? Will his rights as a minority shareholder be fully upheld? Can he get reasonably quick justice from the courts? Can he enforce court decisions in his favour? The answers to all these questions are, unfortunately, still negative.

In the past, I proposed to establish a special court (within the existing court system) for foreign investors. This court will be obliged by law to render a decision and judgement in six months time. Otherwise, it will have all the authority and responsibility of a regular court. This single act may be more important than reams of paper imprinted with the right verbiage of non-applicable laws.

Nikola: I will try to review the more important bits of legislation now. The first is the Law for Business Associations (in the following text LBA):

The most significant change in every legal act that the government must take, if it seriously plans to begin a project of this kind, is to delete paragraph 2 article 290 in LBA. This paragraph gives an opportunity to the managing organs of private enterprises to condition the transfer of shares issued by the company. Instead of that there should be: "the transfer of the shares is free and the managing organs of the associations have no right in any way to condition the transfer of shares, when the buyer and the seller of the shares made a transfer - buying and selling of capital shares- in accordance to the existing legal regulations."

Besides this, in the section dealing with the penal aspects of the same law, there should be serious punishment for the company and for the managing organs in case of a violation of this regulation. The deviations from this regulation should be regulated in details with a law. For example, for performing a transaction with bank shares above a certain percentage, a prior consent is needed from the NBRM. If this consent (permit) is not provided, the managing organs have the right and the obligation to condition the transaction.

The Securities Commission of the Republic of Macedonia asked for an opinion from SEC of the USA, and received the following answer:

"Regarding the provisions of the Macedonian Law for Business Associations concerning the questions mentioned above, we think that the Macedonian provisions are too general and can create confusion and misuse. The regulations do not deal with the permitted limitations, and a conclusion can be reached that they are giving carte blanche to the association or to the managing board. The regulations do not elaborate on the types of notification of limitations which is necessary if they should be applied against another person, especially the persons that according to the American concept would appear as bona fide buyers. Also, the regulations create an unacceptable opportunity to transfer the ownership of the shares to another person, without the consent of the owner, in order to take away significant property rights. (Capital no. 10, the magazine of the SEC of the Republic of Macedonia).

The creators of the Macedonian stock exchange, Mr. Andy Wilson and Barry J. Bird from the consultancy ISC (the first is the former Executive Director of the London Stock Exchange), also estimated that this article is the main reason for the absence of foreign capital in Macedonia in the form of portfolio investments, and for the stagnation in the development of the stock exchange in Skopje.

"It is very difficult to imagine a good reason why an association whose shares are publicly traded, prohibits the legitimate shareholders to sell their shares, except if their intention is not to allow the members of the Board of Directors to buy shares at prices suitable for them."

Most of the stock companies in Macedonia have this regulation in their statute. Most of them even predicted that their administrative organs will determine the price of the shares, which will be sold to the members of the Board.

If the companies whose shares are traded in public must grant permits for any transfer of their shares, than there is a very serious risk that nobody will care to invest in them. This refers, particularly, to foreign investors who don't think that it is reasonable to ask for a prior approval from the business associations to sell their own shares. Members of the board of directors, who want to buy other shares, need to do so in competition with the public, and not to have privileges at the expense of other shareholders. Due to this provision in the Law for Investment Funds in Macedonia it will be very difficult to trade shares. Now the probability that the Investment Funds in Macedonia (whose development is likely to encounter other problems), will not function properly is very high, and that will have inevitable negative results on the saving and on the Macedonian economy.

One of the arguments for including this article in the Law for Business Associations is that this will help the stock companies in preventing unwanted actions. However, it is not a way to achieve that goal; it could be stopped with regulations and a behavior codex in the case of taking over and associating.

Sam: When it comes to introducing new partners into their businesses – especially foreign partners – the Macedonian managers become very defensive. They refrain from disclosing or voluntarily divulging information. They instruct their accountants to hide more than to tell. They assure the workers (most of them uneducated) that they are doing all this so as to prevent mass layoffs. They are waving the scarecrow of the mean, brutal, profit seeking, capitalist, who has no concepts of social solidarity or humanity. This article – and others like it – reflects the mentality, it does not create it. It is a bunker, fortress mentality. People, on all levels, are afraid to face the inevitable shocks of mass redundancies (as industry grows more efficient, technology replaces labour intensive functions and the economy moves up scale). All the major companies that I met and worked with regarded the stock exchange as a threat, not as a source of financing. Today, the managers maintain a monopoly of information. The financial reports are tax driven and do not reflect reality. Inn this kind of environment it is easy to benefit privately. Throwing the company open to all manner of non-collaborating foreigners with their strange notions of equity, justice and transparency – is not good for business.

Nikola: My experience with potential Western investors, shows that to talk about more serious portfolio investments under these conditions is almost impossible and not serious.

This is because of the possibility, given to the Board of Directors of the companies to manipulate the ownership structure. To foreign investors, the possibility that the future of their investment will depend on the good will of a company's administrative organ is unacceptable, not serious, and deters them from investing. There are precedents (for example in Russia). In 1946, the communist government of the " new social order" took away the property of the citizens, "by law". From the legal point of view, everything was fine. Today, in some ex-communist countries, there are still attempts to limit the freedom of the use and disposition of private property.

This problem concerns both foreign investors and thousands of small shareholders in the country.

The most alarming thing in Macedonia regarding this question, is that, until now, not one serious force or lobby appear, that concretely and seriously addressed this issue. Potential candidates include: political parties, journalists, powerful non-governmental organizations, trade unions, the political opposition, the professors' lobby, the management lobby etc.

Sam: this supports my previous thesis, that everyone is content with these calm waters, no matter how infested they are…

Nikola: The government of Macedonia, according to unofficial sources, will be required by the International Financial Institution to delete this article, as a condition for further investments.

This article is a result of the ineffective law of privatization in Macedonia. This fact (the inefficacy of the whole process) is less and less disputed in Macedonia both by those who authored the law and by those who were responsible to implement it.

Once the primary and secondary cycles of privatization in Macedonian ended (and the shares were concentrated at the management levels) - the third cycle of privatization will begin. Then, the defenders of this law will ask for changes in it, because of the impossibility - without foreign capital - to keep up with the industrial development of competitive companies in the countries in the area and worldwide. Unfortunately, many opportunities will been missed by then, and the citizens of the middle and poorer classes of Macedonia are likely to feel the brunt. 90 per cent of the nation belongs to middle and poor class of citizens. There is low probability that this law will be changed till the next parliament elections in Macedonia, so as to avoid conflict between the government and the management lobby. The resolution of this question depends on the pre-election government calculus, on pressure applied by international financial institutions. In the best case it will be changed just before or after the elections. In worst case, only after completion of the privatization process in Macedonia in the year 2001.

When we discuss the Law for Business Associations, it seems that there is a need for a clear distinction between the open and closed types of stock companies, also known as public and private companies of the Anglo-Saxons type of legislation. The first ones should have much more facilities and faculties than the second ones.

Sam: Just so that the wrong impression is not created, such provisions are to be found in laws in many countries, both developing and developed. In the Russian Joint Stock Companies (JSC) Act of 1/1996 it is expressly stated that a shareholder (in a closed company) will not be allowed to sell his shares, or transfer (assign) them to another – unless such a move has been approved by ALL the other shareholders. Shareholders, even in public companies (if the Statute says so) have preemptive (first refusal) rights to buy the shares of other shareholders who wish to sell their holdings. The situation is not much different in the Czech Republic and in Slovenia, to mention but two examples. Actually, even in German legislation we can find traces of this attitude. The USA and the UK are exceptions, in this sense, and not the rule. Even today, limitations apply to the free transferability of shares following a flotation (Initial and Subsequent Public Offerings).



Nikola: A second big problem for the entry of foreign capital, is that in the current Foreign Exchange Working Law (Official newspaper of RM No 30/93) a specific possibility for the entry of foreign currency into Macedonia for the purposes of buying securities is not foreseen.

In article 90, item 3 of the above mentioned Law, it is predicated that a domestic party, on the basis of a foreign exchange deposit of a foreign depositor, may keep foreign exchange on a foreign exchange account in an authorized bank for working abroad, if said party has contracted to keep the foreign exchange in the foreign exchange account, or to use it for purposes consolidated in the deposit agreement.

In 1993, when this law was passed, there was no stock exchange in Macedonia, but after its inauguration, and after the passing of a law which stated that any trade in securities must be conducted through the stock exchange (article 186 of the Law for Issuing and Trading Securities), no one in Macedonia found a reason (nor wanted to find one) to amend this Law.

A lot of illogical situations regarding foreign capital are to be found in the chapter dealing with the purchase of securities and titled "Frozen Savings", - facts which are contrary to the statements of Macedonia that there is a great need and great wish to attract foreign capital.

These problems are regulated with the Manual for the Means and Procedures for using the Deposits of Foreign Exchange which belongs to the citizens for buying shares and portions of Companies with Social Capital (Official newspaper of RM No 7/95).

This manual constituted a permit to use the deposited foreign currencies which belonged to the citizens, for the purposes of buying shares and portions of companies in transformation. This was allowed only to domestic or foreign individuals who are buying shares or portions of these companies. Because the serious foreign investors are legal entities (although exceptions do occur), in practice this Manual meant that insiders in the companies (called: "The Management Team", the establishment) who were in control of the management could buy the company at a 35%-45% discount, through the so called "frozen foreign exchange" and buy stock companies according to the Law. If any foreign company wanted to buy the same company through the Agency for Privatization it would have had to pay in cash without such a discount. This deprived the legal companies of their right to have received an equal discount of 40% of the price they should have paid for the Macedonian non-privatized social enterprises. And this is when Agency for Privatization and the government of Macedonia were proclaiming that they would gladly sell to a foreign investor, but such an investor is nowhere to be found.

Sam: I do not need to protect my reputation as a severe critic of the way that the privatization was handled. I just, again, would like to put things in perspective. The same gimmicks – and worse – were employed by virtually all the nomenclatures throughout the former socialist block. National wealth was plundered not only in Macedonia. Foreign exchange restrictions which applied to purchase and sale of securities were in existence as late as 1990 in Israel and even in the USA some form of them existed until 1971. I suggest not to be too harsh on yourselves. Cronyism, nepotism, corruption, legal stupidity – are human traits, not confined to Macedonia. They are typical of all the corners of the Earth inhabited by humans. To my mind, the question is not what has been done wrong – because it cannot be reversed. Any reversal now will damage Macedonia more than any status quo. The future should interest us. The big guys finished their lunch, let us enjoy the crumbs. There is no point in going home hungry. This is why I appreciate your practical suggestions: the elimination of these parts in the laws that make foreign investments prohibitive and dangerous. Let us hope that the incentive – that evidently existed – to keep them on the books has waned.

Nikola: I did not mention the domestic legal entities on purpose, because the largest part of the sale (privatization) of the social enterprises in Macedonia, was made to domestic physical persons (management teams and employees).

The stock exchange in Skopje is less and less transparent. You can see the reports of the trade from time to time in only one Macedonian newspaper.

The domestic investors can be informed about the operation on the stock exchange only if they call the brokers and probably the stock market on the phone. That is not a problem of the newspapers, but of the stock exchange. The foreign investors can follow the happenings on Telerate and sometimes on Reuters (without information regarding the prices of the shares that can be bought with frozen foreign currency) and the lack of a stock market index is discouraging them.

There are other possibilities for changing some existing systems in Macedonia: changing the concept of the stock exchange, that is introducing computer trading and/or new members of the stock exchange, dealers, or specialists who will offer prices for selling and buying at every moment (Law for Issuing and Trading Securities). This would improve the liquidity of the stock exchange, and would allow to create a kind of an index (better than none). This is a subject that should be explained separately. Changing the stock exchange model will give more efficient results, if it is followed by changes in the laws that I mentioned.

Sam: The Macedonian Stock Exchange really deserves a separate treatment. But I am afraid that changes that are merely technical or technological in nature will not suffice to revive it. An index is very important when there is liquidity. Liquidity is there when shares are on offer. Shares are on offer when companies think that they will benefit by listing. But in Macedonia, there are no companies, there are only managers. They have very little incentive to introduce new shareholders to their little kingdoms. Shareholders ask questions, sometimes uncomfortable questions. So, very few companies are listed. The dull supply attracted even duller demand, lack of liquidity ensued and the market died. It was up to the government to resuscitate this vital instrument. It could have privatized through it, borrowed through it and it could have forced the new class of shareholders to conduct trading through the stock exchange. None of this happened. There was no political commitment to the success of a stock exchange. There was no mass education campaign, there was nothing to offer, there was too much paranoia and hostility.

Nikola: The impression, to put it mildly, is that the indeterminate strategic objective of the Macedonian legislation regarding foreign investments is not coincidental. This can be seen in the following:


According to many domestic and foreign legal and economic commentators, in this group of laws, the tax laws in Macedonia regarding the taxation of capital, especially foreign capital, are written as though they should not be understood. Unintelligible would also mean ambiguous. It means that they can be interpreted "either way", at whim, as it suits somebody in a given moment.

One part the law states that in Macedonia every physical and legal person, resident or not, is a taxpayer of the income tax, that is the profit that will be realized on the territory on the republic, and on another place (article 33 of the Law for the income tax) it is stated that in the first 3 years, under certain circumstances, the profit generated by the foreigner from invested funds is exempted from tax.

The uncertainty about existing official secret gazettes as a remainder from the communist period is increasing the confusion.

A repatriation of profit is encumbered by a 10% tax (article 33 of the Income Tax Law) and article 26 of the same Law states that potential investors who would like to invest in speculative deals (short term buying and selling with profit) are de-stimulated. Under current conditions, with a totally illiquid capital market - this is pure masochism.

According to this article, capital gains from the sale of shares and bonds (the capital generated by a sale minus the respective liability or cost assumed during the purchase) that the taxpayer held for a period of less than 12 months will be completely included in the tax base. Long-term capital gains from the sale of shares and bonds that the taxpayer owned for12 months or more, will be included in the tax base in an amount equal to 50% of the difference between the cost of purchase and the sale's income.

To think and act long-term, an investor needs security, something that the foreign investors doesn't see in Macedonia (for now). Without their risk capital there will be very little or no liquidity at all on the stock exchange. No businessman is against quick profit. The only difference between the investor and the speculator is in how long they remain in the same market. The joke that the investor is a speculator who did not succeed in his speculation is very famous.

There are similar regulations in the laws of other countries. For example, in Germany there is a deadline of 6 months, instead of 1 year in Macedonia. Not only is the deadline twice shorter, but the fact that Germany is not as risky a state as Macedonia is crucial.

The speculators are essential in the markets with high uncertainty and in the economies in transition. They are very important in this phase of the economic cycle in Macedonia. In these circumstances when long term investors are hard to attract, the speculators would be a good temporary replacement, and the Macedonian tax law should not stop it.

Sam: Speculators have two important functions. Firstly, they provide liquidity to illiquid markets. They are like high risk bankers. They stop the gap between conventional financing (mainly debt) and long term financing (equity and multilateral lending). Additionally, they help the markets generate a price mechanism. In other words, speculators fix prices by taking into consideration all the information, both publicly available and less available. The prices fixed by speculators in themselves constitute important information: corporate warnings, exciting announcements, major crises – the speculators know it all and convey these data to us through the prices that they trade in. Speculators also carry out invaluable arbitrage transactions. They equate the prices of the same good, commodity, or securities in two or more markets by buying (at a rising price) in the cheaper market and selling (at a declining price) in the more expensive one.

However, experience in tiny to small stock exchanges (example: Vancouver, Tel-Aviv) teaches us that it is better to discourage speculation as long as the market is thin and immature. In the absence of transparency, sophistication, experience and, above all, liquidity, speculation deteriorates very fast to market cornering, stock manipulation and insider trading. This, in turn, leads to major crashes and, ultimately, to long years of illiquidity. I, therefore, do support the law. I think that it is reasonable, under the circumstances. I know of no country in the world that does not have similar provisions – a discrimination in the treatment of capital gains in accordance with the length of the period of holding. Some countries prefer not to levy capital gains at all – or to treat capital gains as a regular income to all intents and purposes. The former approach might be the best for Macedonia. Israel has no capital gains tax applicable to traded securities. It helped to turn the Tel-Aviv Stock Exchange from a puny, criminal ridden, place to the vibrant, interesting small stock exchange that it is today.



Nikola: The possibility for certain privileges on the basis of the invested foreign capital is provided in the Law of Customs Officials (The Gazette of the Republic of Macedonia no. 20/93, 1/95, 24/95, 31/95,63/95,40/96 and 15/97) and in the Income Tax Law (Gazette of RM no. 80/93……71/96) which are not sufficiently compared to the same laws in some other countries in transition.

At first sight, article 33 of the Income Tax Law provides some benefits, but when one analyzes the article, one sees that only a small number of foreign investors (those who plan to keep the capital in Macedonia for a period longer than 6 years) are able to enjoy these benefits. According to this article, to the three years of tax exemption, at least three more years should be added, in which the capital must not leave the firm of the foreign investor in order not to have to return the tax exemption to the state. Again, the speculators that are needed so much at this moment are discouraged.

It is interesting that the new laws (for example the Law of Business Associations) that replaced some old ones (Law for Foreign Investments) do not have any particular planned modifications for improving the conditions for attracting foreign capital.

The transfers of the deposit and the profits of a foreigner are regulated in article 28 of the Law for Business Associations, paragraph 2 and in article 48 of the Law for Working with Foreign Capital (Gazette of RM no. 30/93 and 40/96). Again, these are all right at first sight, but when it is scrutinized, many unascertained things are revealed.

Some countries, Poland for example, which are very successful in promoting shareholding and their domestic companies, introduced tax benefits in the years when their stock exchanges were forming. They exempted from taxation the capital gain realized with issuing securities through brokerage firms. Besides that, countries like France and Great Britain offered tax benefits for collective investment programs. The objective of Macedonia must be to create the most favorable environment for attracting foreign capital. The means for achieving this, must not have any negative effect on the budget income, and should contribute to the global development of the national economy in the country.

Actually the main problem in the tax sphere is not the low degree of exempting foreigners from taxes, but the large and slow bureaucratic procedures in carrying it out, the indetermination and the ambiguity of the Macedonian laws.

For example, on the question how many percent should the legal persons - foreign investors pay on interest income from bonds, on dividends and capital gains in Macedonia, one Macedonian expert answered: "maybe they will pay 15% and maybe nothing. Many details in this field are not regulated, so if they don't pay nobody will charge them … except, if they are in the way"...

Is it all accidental, or is it a result of a thought-out policy in Macedonia?

Sam: I, personally, am no fan of conspiracy theories. There is a famous "Hanlon's Razor" which says "Never attribute to malice that which can be adequately explained by stupidity". I think that in the case of Macedonia, a shock was involved, so enormous, that it paralyzed the elites. Short term thinking is the daughter of insecurity. People began to seize whatever they could, as though there will be no tomorrow. The legislation reflected the total chaos that ensued. I see no policy in the mess that Macedonian laws are – I see human beings cast into a totally unknown situation, fearsome and awesome, with enormous potential and even greater risks.

Nikola: Besides the provision for unlimited participation of foreigners (in the Law of Business Associations) in an enterprise partly or wholly foreign-owned, foreigners can not obtain a majority stake in other associations.

If this case, the rights of the association which holds the majority will be limited at the depending association based on the number of shares.

The bureaucratic procedure for foreign capital according to the same law is too complicated. The investments of foreigners in the newly founded or the existing association must be registered at the Ministry for Economic Relations with Foreigners. On the request of the foreigner, the authorized ministry will issue a permit for the foundation of an association which is totally in the ownership of one or more foreigners, meaning that they have the majority (article 27 from LBA). If within 60 days from the day of submitting the request, the authorized ministry does not issue a permit then the permit for foundation i.e. foreign holding is deemed to be denied (!!!). When the foreigner does not reach or exceed a major holding, the participation in the newly formed that is the existing association is only registered in the Register of Foreign Investments, in this Ministry.

The question is asked:

What will happen to the prices of the shares of a Macedonian private company on the stock exchange, when one whole Ministry (which means the entire public) will find out that a certain foreign company intends to buy the majority of the shares? (especially if the domestic company is totally privatized through an employee buyout scheme). We must not forget that Macedonia is a small country, and news travel fast. We are forced to conclude that the small shareholders will ask for a higher price for their shares, even before the foreign company asks for a permit from the ministry. This is a serious reason why the foreign investor should reexamine his intention. This method is acceptable (in a milder form) for taking over a domestic bank or specifically determined legal entities which are of a strategic importance for the state. But does Macedonia need this kind of barriers in its present conditions?

Sam: When I go to a hotel with my Macedonian girlfriend, I pay twice as much as she does, in the best case. My passport is confiscated and my details are immediately reported to the police on a special form. This is discrimination, not to say xenophobia. The law should treat locals and foreigners in the same way as far as ownership is concerned. Trading shares, buying and selling them from other shareholders voting rights, capital rights – there should be no difference. That there is still a registrar of foreign investors is outlandish. That a foreign investor should depend for his investment on a bureaucrat who usually is not qualified or educated to deal with these matters is surrealistic. These things, these remnants of a dark past of idiocy should be immediately and unconditionally abolished if Macedonia wishes to become a respectable (European …) member of the family of economic nations. There is nothing to fear. Foreign investors don't bite and most of them do not even have horns. This is provincial thinking of the worst kind.

Nikola: Legislating a law of investment funds is one of the conditions for the creation of a free and liquid market. The investment funds are an ideal medium for saving, through which the domestic and foreign investors will be able to invest money in Macedonia. These funds will allow the potential investors to diversify the risk and through one policy of long-term investments to contribute to the stabilization of the prices.

In the Macedonian law the term "open funds" does not exist, and the status of the trusts is not regulated. Although conditions for proper forming and regulating investment funds can be created with a law, their formation and operation can not be brought about only by a law. Additionally, a market for their functioning can not be provided by making a law in this field.

The segment into which Macedonia can attract foreign investments the quickest, is state and municipal bonds. But the legislator created a "riddle" here both for those who want to issue the bonds and for those who are interested in investing their money in them. In the Law for Changing and Supplementing the Law for Building Terrain (Gazette of RM no. 21/91) the legislator, in article 5 declares: "the terrain in the cities and other regions prepared for housing construction and other complex construction for which an urban plan is made belongs to the republic."

This means that the communities don't nave their own property – in the form of territory, and if they want to construct with their own and/or borrowed money (bonds) they have three negative alternatives:

First, to tear down an old building on already existing locations that belong to them and with an alteration to the urban plan, to construct anew with the taxpayers money. This is a very long and complicated procedure, and in most cases impossible.

Second, to ask the republic (government) to award them a land plot for construction, which is even more complicated and the probability for realizing it is smaller. When one considers the bureaucracy, politics and the incomplete concept regarding when, where and to whom the state can (not) award land… and

Third, not to build, which means to stagnate. This is the most likely variant, judging by my conversations with several mayors of the biggest communities in Macedonia. Who is winning and who is loosing? It seems that everybody is loosing (the state, people, municipality, investors etc.) and nobody is winning.

The arguments "for" this law, which later is incorporated in several other laws, is not to endow the municipalities with greater power, especially those whose leaders have "suspicious intentions". But there are many other methods and means for the state to control the municipalities and their leaders, then to take away their land.

Sam: In very few countries is the majority of the land mass owned by individuals or even by municipalities. In countries as diverse as China, the United Kingdom and Israel the situation is very similar to Macedonia. Again, I think that the problem is not the land, or the construction, or the laws. I think that the basic isue is that of the breakdown of trust. In the USA "munis" (municipal bonds) are issued against future tax receipts or against future income from specific projects. People believe each other, they believe the issuing municipalities and, above all, they believe the financial markets. True, municipalities here do not own land and hardly have any tax receipts and this is bad. But no investor – foreign or domestic – would lend his money to a Macedonian municipality. They are mismanaged, corrupt, unreliable. Would you put your money in a construction project initiated by a municipality, even if the land was owned by it? Allow me to doubt it. The more realistic approach, would be to act in partnership with big private firms within well-defined specific projects with Western advisory services and auditing involved. These projects can be financed by issuing municipal bonds, because they have a projected or even a guaranteed stream of income. Such future income should go into a "sinking fund" under the control of a Western auditing firm. Legally, the whole things has to be tightly wrapped up. Sewage treatment plants, local toll roads, municipal hospitals, water treatment facilities, a shopping mall – all are such possible projects.

Nikola: When a serious investor wishes to invest his funds in another country, among the first things that he does, is to consult an in-house legal expert or to engage a lawyer, to make his idea legally possible and profitable. This lawyer will correspond with a local lawyer who will provide him with all the relevant laws in the country, translated and with his opinion. After joint consultations of both lawyers, the potential investor will develop or forget the idea for investing in that country.

I hope that this explains the present situation with foreign investments in Macedonia, and why the foreign investors are bypassing Macedonia. But that is not all.


Branch Offices of Known West Banks and Macro-Economy

Nikola: Besides the promotion of Macedonia and legal provisions, the third very important component of attracting foreign capital is the opening of foreign Western mega-national bank branches. At least four reasons can be given. They are:

  1. Decreasing the risk to the foreign investor's money transfer;
  2. Creating competition between the domestic banks, which results in a healthier and more resilient banking system;
  3. Possibility for the injection of direct foreign credits to the economy and to the population;
  4. To return the trust of the clients in the banks.
Probably, at the beginning, the clients will deposit their savings, now kept in their homes, though for a much smaller interest rate, in the foreign banks. But, in the longer run, the competition will strengthen the Macedonian Banks. By providing just a bit more acceptable terms (because the risk will still be much bigger in the Macedonian Banks) they will begin to reestablish the trust of the population in Macedonia and its confidence in the banking system. It would be the most effective and fastest way for changing the culture of savings in Macedonia and to eliminate the fear from the banks. It would be recommendable to have two branch offices of this type of banks opened, which would create competition between them, this being particularly important at the beginning.

Even the biggest Macedonian banks are to the big investment companies from the West:

  1. Totally unknown (they never heard about them, and they can find their name only if they open the bank register);
  2. High risk with low performance;
  3. Banks with low capitalization, the same or lower than the amount of the transfer that would be done if they choose to invest 50 or 100 millions DEM in Macedonia in opening their own branch.
It is a positive sign that foreign Western capital entered one Macedonian Bank, and that the other perhaps will be bought by Western banks and institutions very soon, but it is still far from enough. The big brokerage houses are not interested in that. They ask which known banks (City Bank, Deutsche Bank, ABN – AMRO) have opened branch offices in Macedonia, and they are surprised that Macedonia is not the same as the other countries in transition where there are many branch offices of various west banks (see wider information in our first dialogue). E.g., in Bulgaria there are six branch offices of the west banks.

In Macedonia there were objective factors, which prevented banks from opening branches (instability of a region in war, closed borders, small market etc.). Still, there is information that in the first 5-6 years of the existence of Macedonia as an independent state, the Macedonian negotiators have been setting specific conditions to the interested Western banks: they were not allowed to accept savings, so that the Macedonian population was not likely to have transferred its money from the Macedonian banks to the foreign ones. Another prohibition was to ban them from making foreign exchange transactions, transfers, etc. Besides the already existing obligations for limited financial placements, in financing that was more than an unreal request. Subject to such restrictions and in view of the mentioned problems in Macedonia, we could ask what will those banks have done? Our opinion is that equal working terms should be completely supplied and extra state advantages should be given to the branch offices of the foreign banks: free location, unlimited financing, tax benefits for a longer period, time allowances for realizing the juridical processes which the bank will conduct in Macedonia until the law provisions in this field are settled etc.

Some of the domestic banks can not fight the competition and they will join or merge with the other banks or they will stop working.

The sick part of the Macedonian banking system will be amputated, the healthy part will become healthier and stronger. The foreigner's money transfer risk (short term and long term) and the risk of working with our banks (midterm and long term) for foreign investors and domestic investors and clients will decrease. The domestic banks will emulate the working methods of the Western developed banks, and this will influence the domestic economy (midterm and long term) By the way, without a doubt, the law that regulates the payments of the credit requirements of the banks must be urgently copied from the Anglo-Saxon law, because the existing situation in this field would seriously question the positive implications from the above mentioned suggestions.

Attracting at least two branch offices of famous Western banks to Macedonia will be a big plus in the eyes of the potential foreign investors. Also, the more efficient healing of the banking system on the domestic front will be thus achieved. This will have strong positive effects on the national economy, and obtaining credit will not be a privilege, or a result of personal interest, family relations and friendships, but the outcome of the quality of a project.

Besides that , the banks will expand and modernize the volume and quality of the operations, and will achieve the form of real banks - secure and more resistant.

Sam: There is nothing much that I can add to your excellent analysis. I just want to emphasize the importance of the existence of a healthy banking system to the operation of a thriving capital market. In the West these two are either complementary or competitive. On the one hand, the stock exchanges have taken over a lot of the corporate business of the banks. On the other hand, the banks themselves access the stock exchanges in order to raise capital for their operations. Many times a collaboration is forged. Mortgages, for instance, are still provided to individuals by banks. But the money comes from securitizing the mortgages: selling packaged mortgages to investors through the stock exchanges. Thus, the crystallization of a vibrant, innovative, customer-oriented, capital-adequate banking sector is very likely to encourage the formation of an equally exuberant stock exchange.

It is somewhat misleading to talk about "banks" as though they were uniform entities. They are not. There are important differences between a retail bank and an investment bank or a commercial bank. Because of the restrictive Glas-Steagall act, there are major differences between American and Continental (all-purpose) banks. Macedonia should open itself, initially, to retail banks and to investment banks. The appropriate legislation should be adopted. The right infrastructure should be made available. That foreign banks should not be discriminated against, goes without saying. Maybe a good place to start is with the capital requirements. A branch of a foreign bank has to come up with 21 million USD. This is a huge amount, unjustified by the size of the territory and by the potential to do business. Local banks require only 9 million USD. The conclusions?

(a) A branch of Chase Manhattan is less secure than a newly established Macedonian bank (this is why the larger capital requirement). And (b) Macedonia is a more interesting and lucrative market than Israel (it takes less money to open a bank in Israel).

Nikola: When the state will hasten the payment of the requirements of the banks on the basis of given credits with a law, the foreign banks (and in their footsteps, the domestic banks) will lower the interest rate and the housing mortgage market will revive, as a part of the long-term provision of credit based on a mortgage collateral, as invented and developed a long time ago in the Western countries. In these newly formed conditions, the interest rate on the domestic market will stabilize between the present interest rates in Macedonia and the interest rates of the banks in the Western countries. This will eliminate the main problems that high interest rates generate:

  1. Capital Risks;
  2. Capital (Credit) Supply.
Changing the consciousness of the individuals that are demanding credits, and raising the quality of the projects for which the credit is sought will follow quickly after realizing the above mentioned. Only in this way can Macedonia emulate the picture in the West, where instead of having individuals and companies compete for credits, the banks compete and advertise for clients, emphasizing their superior conditions. This way, the banks will start thinking about expanding the business, into investment banking etc. In the world today the banks are realizing the largest share of their profits through the trading of securities and derivatives in the global markets. Better conditions for reviving the trade in an effective stock exchange in Skopje will be created with the influx of foreign capital. At the same time the domestic capital will participate by finding direct interest in profit-making and investing in a portfolio of securities.

Sam: The present interest rates in Macedonia reflect not only the balance between meager supply of money and a much larger demand for it. They also reflect the fact that the default rate is probably more than 50%. I repeat: half the credits and loans are non-performing, not paid back (not even the interest) on time. It is a wonder that the interest charged is that LOW – not that it is that HIGH. Within the general disregard for contracts and obligations, it is considered acceptable not to pay back loans. People prefer to fantasize instead of face reality and this is reflected in the poor quality of the projects for which finance is sought. Even the concept of collateral is thwarted. A bank cannot rely on the debtor's cash flow precisely because the morale of payments is so low. The debtor might get paid by HIS debtors – and yet he might not. So, a lender has to rely on real estate as the only collateral realizable in case of trouble. I share your optimistic scenario as to what will happen with the introduction of branches of foreign banks in Macedonia – but I think that the process will be much longer and will not happen at all if the government does not reverse its erroneous monetary policies. A full blown restrictive monetary policy is now in force, leading to a contraction of the economy. In the absence of real liquidity, for instance, no mortgage market will take off. Buyers will simply be unable to pay the market prices of apartments. In Israel, the government stepped in and provided potential buyers with subsidized loans. Here the government is too poor to do even this. If you ask me, this – the reduced of money supply – is the heart of the problem. The economic body is starved almost to death. Under these conditions it is ridiculous to talk about investment banking. Equity investments rely mostly on discounted future streams of income and dividends. These will not be available unless the Central Bank changes its policy dramatically.

Nikola: In this context it is very important to prevent the politicization of the banks. Some lessons from the Asian tigers and the Eastern European countries must be learned in Macedonia. The banks must be apolitical, they should lend money only for commercial, and not political reasons. The recent collapse of JRB, a big Slovak bank that was used for supporting sick companies is a classical case. South Korea was an inspiration for many Eastern European companies that were diversifying to many different fields. If you ask the Russian banks like Unexim why they took control over the key industrial segments, they will refer to Korea. But now when the Asian mirror shattered, the Koreans that had politicized banking system are not suitable as an example. Only one country in the region learned this lesson: Hungary whose banks are in foreign hands today and whose companies must justify it if they want money to invest. This is improved further by the restored expansion and the increased productivity.

Romania has this problem of involving politics and finances, and it seems that the reforms in this country were blocked because the ex prime minister did not dare to jeopardize his cozy relations with business and finances.

The Czech failure at restructuring its industry because of the "old boys" network that connects the banks, the funds and the managers of the companies was similar.

But the Asian collapse demonstrated one truth: businessmen and politicians can realize their dreams of poor judgement, but when the income stops, the collapse is inevitable.

Sam: It is better to generalize and say that the government should supply the conditions for the private sector to work. It should ameliorate market failures, attend to social problems, ensure a competitive environment. Market failures are situations when the private sector has no economic incentive to act. The provision of defense, crime prevention, welfare transfers and medical are for the poor are oft cited examples. The government must also ensure a competitive environment by fighting monopolies, opening up the market to foreign and domestic competition, liberalizing the foreign exchange and payments regime (gradually and carefully and after the establishment of a realistic exchange rate). It also means heavily deregulating and cutting red tape. So, there is no need to single out a specific sector. The government should definitely take its hands off the banking sector by selling it to foreigners or by refraining from politically dictating whom to lend to and how much. Politicians are unable to properly manage businesses, they are not skilled to face the harsh realities of the market. In an ideal world, politicians should do politics and businessmen should do business. This not being an ideal world – the two intermix but this should be minimized even by law. Otherwise, businessmen will find themselves engaged in lobbying and in political wheeling and dealing – rather than in profit maximization.

Nikola: It's clear that in the next few years there will be a technological revolution in banking in the world (especially in the biggest banks). The process of globalization will not skip the banks. That technological revolution will be available only to the biggest banks with the highest capitalization, biggest profits, and high quality staff and management. Investments in technology and staff training will be similarly sizable. So, the banking scene will witness the arrival of the so called ''Global Players". The legal limits to Macedonian banks (It is possible to invest only 25% in fixed investments) will constitute a big problem. These limits are very strenuous. They would be possible in banks with big capitalization, but to the Macedonian banks, it will, obviously, be problem. The upper limit has to be 50 percent.

Sam: As you know, banks are merging fervently. Only in March 1998 there have been financial mergers worth more than 200 billion USD (including the Citigroup merger of Citibank and Travelers' Group). There are undeniable economies of size and competitive advantages in being big today. To cope with a global world, with global, around-the-clock, markets – global, around-the-clock banks are formed by merging and acquiring. The same trend is evident in manufacturing and in telecommunications. This is why it is surprising and very worrying that Macedonia is left out of this reshuffling. It looks as though the giants of tomorrow do not consider it to be a viable member of tomorrow's global networks. We must also not forget the Internet. Once a satisfying solution will be found to the problem of secrecy over public computer networks, it will become serious challenger to the established, old fashioned banks and financial houses. Already, shares are offered successfully through it and many off-shore banks have opened "virtual branches". The dream of "home banking" is about to come true. The Macedonian banks must be integrated into international banking alliances – otherwise none of them will survive. Even if all their capital were to be invested in technology it would have hardly been sufficient. Their clients are already complaining that they are not getting the minimal services that they require. So, technology in itself is not enough. Training is called for. The staff must become well acquainted with Western banking. There is a Macedonian Banking Operations Center (MBOC) in Skopje and I heard that it has to beg the banks to accept its (mostly free) services. It provides both training and advice in all banking matters. The banks would do well to use it while still available.

Nikola: The macroeconomic policy in Macedonia is relatively well received by foreign investors. According to the recent report of Merrill Lynch the stability in Macedonia will be preserved only if the real economy is rebuilt. So far this is not happening, judging by the slow growth and stagnating export incomes.

On the other hand, if you start from the formulation that the inner economic stability of a country means:

  1. Stable prices in the national economy, and
  2. Complete employment (in the relative sense of the word),
and external stability means:
  1. Stabile rate of the domestic currency,
  2. A balanced balance of payments.
It is clear that the present stability is under serious pressures. Also, the reality of the exchange rate is very suspicious, because a real rate is a rate that maintains a dynamically balanced balance of payments, but without control over the foreign currency, without inflation and deflation and with no use of foreign currency reserves. However, besides some imperfections from the point of view of the foreign investors, the macro-economic situation is satisfying, taking into consideration that we are talking about a country in transition.

The low inflation rate is a plus for the introduction of foreign capital into Macedonia, but it must be mentioned that if the other problems are solved, foreign investors are ready to invest even in case of a higher rate of inflation. Proof of this is that almost all the other Eastern European countries have a higher rate of inflation and, yet, much more foreign investment. An inflation rate of up to 20% annually, is not a serious obstacle for foreign investments, providing that the other mentioned problems are improved.

Sam: In my opinion the macro-economic success – and success it is – was bought at a very high price. In the past, this price had to be paid but today it is wrong and dangerous to continue fighting the last war rather than the current one. The money supply was cut down sharply, the exchange rate was maintained artificially high, liquidity was suppressed. The beast of hyperinflation was tamed and this really is a major achievement. But now the risk of inflation is small. There is no pent up demand for goods and services, which might translate into inflation. On the contrary, Macedonia seems to me to be in the throes of a deflationary cycle. Thus, the Central Bank can afford to relax the reins a bit. The exchange rate should be adapted (a devaluation of 20-30% must ensue). The budget deficit must be allowed to grow (and the excess money must be used wisely, to encourage economic activity), the money supply must be increased, credit must be made available through the banks. An inflation target of 10-15% is not destructive to an economy in transition and in growth. If these measures are not adopted, the economic outlook might turn to the worse: a widening trade and current account deficits, a panicky collapse of the currency, a depletion of the foreign exchange reserves of the country (which, anyhow, suffice for only 2 months of regular imports) and a major financial crisis leading to a recession.


Competition, Privatization and other Issues

Nikola: While in Macedonia certain companies are preoccupied with the exploitation of the unusual opportunities that article 290 of the Law for Business Association is offering, and are acquiring 51% of the shares through their managers, their competitors from the other ex-Yugoslav republics are moving ahead with great speed.

For example, the Serbian pharmaceuticals factories are producing medicines that they did not manufacture until now and that they used to import from Macedonia. This is closing the Serbian market to Macedonian exporters. Furthermore, their products started penetrating the Macedonian market. A lot of foreign capital was invested in the Croat firm, Pliva, (only Nomura invested 92 million German marks in 1996). It bought a pharmaceuticals and veterinarian food factory on the brink of destruction in Poland for a very high price. This way, the company will penetrate the Polish 35 million strong market through the back door. Also, thanks to the large export markets and connections that the factory has in Russia, Pliva will also enter the 200 million strong market of the Russian federation, where at the moment, Macedonian manufacturers are placing large quantities of exports. Following this deal, the German corporation BASF offered to Pliva to buy the mentioned ruined Polish factory for a higher amount. Pliva refused, but that represented an additional appreciation of the deal. The market capitalization of PLIVA before being listed on the London Stock Exchange was 500 million dollars, and after a short period of time it reached 2 billion dollars. In February 1998 PLIVA, according to its capitalization, was ranked on the 466th place among all companies in Europe.

The Slovenian Krka is building (from scratch) a new factory in Poland. Many western companies, directly (by buying Russian factories) or indirectly (by constructing new ones) are now penetrating Russia and are competing in the Russian market, so the Macedonian exporters are wasting their time in exploiting article 290 from the LBA and are missing great opportunities for foreign investments. In the meantime, they are "gaining" serious competition in their traditional Eastern European export markets.

Two years ago, two Czech research institutes prepared a special detailed study concerning foreign investments and the national economy of the country, and reached a conclusion that the Czech companies, without foreign capital, are realizing only 64% of their productivity potential compared to those with foreign capital. In certain industrial branches, for example in textiles, the processing of lumber, printing, the glass industry and the ceramics industry the number was only 50% or less. The companies that didn't have foreign capital were exporting on average 10% of their own production, while the companies with foreign investments were placing approximately 40% of their production on the foreign markets. The presence of foreign capital can bring fresh capital from abroad, enhance productivity and exports and establish a new work ethos , something that Macedonia needs badly.

Sam: This is precisely what worries me. Time does not stand still for anyone. While one country is held back by its internal problems, the others take its place. Luckily, international trade is not a "zero-sum" game. It is not that what is gained by others is eternally lost to us. Markets are constantly growing and we can still re-enter them but the price of penetration increases steeply the more a country is out of tune with the world.

Nikola: The model of privatization, whose strategy closed the door to foreign capital, regressed Macedonia, and obviously did not achieve the anticipated - paid privatization with a full state treasury.

The idea behind the mass privatization in the Czech Republic was based on the assumption that the state should not try to realize profits from the process: that will slow privatization down, and with the exception of selling monopolies, like telecommunications, is not successful. The fact that the Czechs weren't burdened with large state debts, like Macedonia and others, contributed to avoiding this stupid mistake. The importance was to eliminate the state or the party from making business decisions as fast as possible, and to leave a space for developing a system, open enough to evaluate from within itself. This does not mean that this kind of a system doesn't have certain weaknesses, but they are far less damaging.

The concept of "case by case" privatization (Macedonia) requires the existence of financially powerful individuals and institutions (big amounts of domestic savings), that will be interested in what is offered and of a developed financial system. The alternative is to open the doors and to attract foreign investments. Unfortunately, Macedonia had neither, but a quasi-system of domestic insider purchases, after which the state was again left with an empty treasury as a result of this "commercial privatization".

When we talk about the domestic potential investment audience, it should be noted that choosing this direction, the state media should educate and inform the domestic public. A series of educational programmes on subjects related to the capital markets, five minutes every day in the main news and one page in a weekly newspapers should have been devoted to the current financial events in the world.

Millions of transactions are taking place daily in the world markets, and they are prime news on foreign television networks, because of their importance and influence. Only in Macedonia nobody seems to care. The Macedonians are living in an informational void with regards to business information from the planet Earth.

Sam: It is amazing how little the media – especially the electronic media – dedicate to matters economic. The only program on MTV fully concerned with finances and economics ("Business") was lately abolished. The print media are more interested – but much less all-pervasive. Television is still the preferred medium. People hardly read newspapers. But even in newspapers, there is a shortage of qualified economic reporters. They either copy whole sections from news agencies, or add on interpretations which do not always match reality. The Macedonian government has at its disposal the means – mostly free of charge – to effect an educational campaign. Foreign experts from all around the world are ready to come and teach, lecture or guide on and off the media. It is not only that the public doesn't know what is a stock exchange, or LIBOR, or loan-loss reserves. The public doesn't know what is capitalism and how – in the deeper, philosophical sense – is it different from socialism. The pursuit of personal profit is common to humans under all regimes. This is not what makes up capitalism. To properly judge the performance of their elected representatives, to understand their place and the place of their country in this rapidly changing world, people need to learn economics. No one pays attention to politics in the West. Politics has become a branch of economics. Presidents and prime ministers go up and down on the waves of economic performance. But in Macedonia, time stands still in this respect as well.

Nikola: Forming a central register and a clearing house is inevitable, and must be completed very soon. Introducing a legal obligation of every stock company with over 30 employees, to keep their shareholders books in a central register, will solve many problems.

Sam: Central Registrars of EVERYTHING are essential. Today, if someone puts up his factory as a collateral – there is no certainty that it has been mortgaged over five times to six different lenders. Minority shareholders are not registered properly anywhere. Ownership of all sort is not properly attested to by any central state functionary. The absence of mutually acceptable, universal, central, well-maintained registrars means that property rights are not protected. Investments and lending are the first victims of this lack. They cannot be affected. The inefficiency and notorious slowness of the courts only adds to the deceleration of economic activities.

Nikola: The privatization of the public enterprises should be the next step by the government. This will mean more efficient and profitable operations, higher income from taxes, better customer service, etc. This should be performed very carefully, and at the same time care should be taken not to leave large space for monopolies. After the telecom, railroads would follow, the lottery, water supply, gas lines, the electrical supply industry etc. The fiasco of the state in the privatization of the City Shopping Center should serve as a good basis for a more serious approach to the next projects.

Concluding international agreements for a free customs zone will significantly annul one of the biggest imperfections of the Macedonian economy (if not the biggest, looking from the aspect of foreign investments): the "small market". Macedonia should solve its problems with the neighbors and the other countries in the region more intensively. This way, the Macedonian companies will gain a multimillion dollar market, where they should have equal competitive conditions.



The government of Macedonia should revive the issuing of bonds in Macedonia, and above all, Government and Municipal bonds. The government will appear as the guarantor, and at the beginning, the government can serve as the guarantor of corporate bonds issues of the best Macedonian companies (with a prior mortgaged property of the company and the state as a collateral). When it comes to capital projects, in the absence of a big and modern bank (or a consortium of banks) which would serve as a guarantor to the corporate bonds the government should jump start the "game". This would be a positive example for the banks to support quality projects in quality domestic companies by issuing bond guarantees. There is a great interest of foreign companies to invest in Macedonian bonds, providing that they are guaranteed by the state or by a consortium of the prime banks.

Sam: I don't think that I can support this idea. To me it would seem like nationalization through the back door. What if the enterprise will not pay his debts? The government will have to take over, own and manage it. I am afraid that the government will end up, this way, with more assets than it succeeded to "privatize" hitherto.

Nikola: Actually, the state issued a small package of bonds against a part of the obligations for the so called "frozen deposits" in the amount of $120 million. These bonds mature in 2001, and are not traded on the Macedonian Stock Exchange, what seems, at first sight, to be a great pity. But if some unofficial sources are correct, the state intends "with a law" to prolong the maturity of these bonds. In that case the damage will be much bigger if they are traded on the Stock Exchange, and thus possessed of a greater transparency.

The government must understand that in the eyes of the foreign investors (although in this situation they are not directly involved, nevertheless with the present moves of the government they would anticipate its next), postponing the payment of issued state bonds - "with a law" is not very far from making a decision "with a law" to deprive them of their property in the future. That would be a classical example of loosing the low international rating.

In the future the state must think twice before assuming any financial obligations.

Sam: I hope that your sources are wrong. There is no such thing as "prolonging the maturity" or "postponing the payment" without the consent of the holders of the bonds. If this will be done unilaterally by the government, it will amount to a default on its obligations. A state which does not respect its obligations towards its own citizens – is not very likely to respect its outside obligations, either. Such an act will mean an abrogation of property rights in the worst sense of the word.

Nikola: The government and the local authorities should review the question of issuing domestic bonds. Besides that, it must be explained to the future owners of bonds what happens in situations when the association that issued the bonds is not in the condition to fulfill its obligations for payment of the principal and the interest. Also, some changes must be made in the Macedonian law, which would determine the status of trusts.

The state should issue a small amount of Eurobonds in spite of the availability to obtain credits without interest, in order to improve its own rating. According to many rating agencies (e.g. Euromoney) the access to capital markets plays a significant role when it comes to ranking the country. The country must demand to obtain a rating from a renowned country rating agency. At this moment any kind of rating is better than none.

For example, in 1996 Kazakhstan in its first emission of bonds on the European market reached $200 million. Even the bankers from this country were concerned about the success. The assumption was that the investors would not be convinced about the expected economic perspectives of Kazakhstan, and that they will not be ready to invest their money in the bonds. The experts advising this emission, taking stock of the circumstances in Kazakhstan, thought that this country did not have an urgent need to raise money by issuing bonds. The emission was with a view to establishing its ranking for future lending from the European bond market and for attracting foreign investments in the country. That would be an incentive and opportunity for some of the best domestic companies to demand and obtain foreign capital in the form of the sale of bonds in the future.

Sam: Good idea. I think – as you do – that just to establish a presence and generate a benchmark rating are sufficient reasons to have a Macedonian Eurobond issued. The only caveat I suggest is that the proceeds of this issue should not go into the regular budget, but rather should be earmarked for amore "noble" (that is, profitable) cause. For instance, the money can be used to encouraged small businesses through business incubators. Inventions by Macedonian citizens are now plundered by rich companies in the West because the money is not available to develop them inside the country.

Nikola: The strategy of developing and attracting foreign capital, called "development by demand" is based on developing cooperation with companies from the developed countries, above all, with the transnational companies. In other words, it is based on attracting investment capital from abroad. This was successful in many examples like Hungary, Czech, Poland, China, Singapore, South Korea, Taiwan and others. This strategy is applied by countries which don't have an internal market, and the main channels and outlets for their sales should be abroad. The countries that wish to be successful in realizing this strategy must provide some legal guarantees and privileges to the capital from the developed countries.

Some of the above mentioned countries managed to secure a quick economic development with this strategy, and they even became exporters of capital.

Sam: Playing with lions can be dangerous to one's health. Big western firms bring with them an abundance of capital, know-how, technology and access to export markets. However, they are never found in a missionary capacity. They are not looking to educate the "natives". They teach the locals the minimum needed to comply with their demands. They mostly import their management and skilled labour. They prefer to buy parts and capital assets outside the host country. They rarely transfer technology, let alone share it or the ownership of it. They are quick to dismantle their tent and move on, to greener pastures, they have no local patriotism. Their contribution to the economy – with the exception of opening up export markets and discounting the tax and investment benefits and grants that they normally demand and get – is now in great doubt. It was China, though, who found the redeeming formula. It forced all the foreign companies which wanted access to its enormous market, to establish plants on its soil. Additionally, it compelled them to transfer technology and share it, to buy local goods and services and to participate in the development of the local economy and of the capital markets. But very few ations can offer the investor a choice of 1.2 billion people. To the rest of the nations, this subordination of the foreign investment beast must await better, more prosperous, times.

Nikola: The global approach to the privatization in Macedonia was commercial, as opposed to the mass character of the processes of privatization in many other central and eastern countries. As a result several inconveniences appeared:

First, the business associations are owned and controlled by their managers and by their employees, which, in the process of privatization should buy off 51% of the shareholders capital within 5 years. In many cases that made the associations pay large dividends, for the management and the employees to be able to finance the privatization. As a result the reserves of the associations, that are needed for financing the further development drastically decreased. Also, because of the obligation to buy 51% of the capital, the incentive to collect additional (foreign or domestic) capital through the stock market is very small, because this would lead to diluting the percentage of the shareholders capital owned by the management and by the employees.

Second, in the countries where the method of mass privatization was applied, the public discovered very soon how to use the stock market as a venue for issuing and trading securities and for raising capital. In some cases, the basis that is used for evaluating the enterprises in Macedonia proved damaging for the development of the Macedonian stock exchange (for example the City Shopping Center).

Sam: To be fair, no one knows what is the "right" model of privatization, or whether there is one at all. In Britain, Margaret Thatcher was accused of cronyism long before Eastern Europe dreamt of privatization. In Israel companies were sold for a fraction of their real worth to a select elite of businessmen long before the Czech Republic repeated the procedure and Russia perfected it. Vouchers spread the national wealth equally – but prevent the formation of ownership and management nuclei. Management Funds are hotbeds of corruption and mismanagement. Incestuous relationships characterize them more than any Western methods of modern organization. Management and Employee buyouts are wasteful in the long run. How should something that nominally belongs to everyone – be sold to the few that must control it, risk their capital in it and reap the rewards, if any? No one succeeded to come up with a model which will be, at once, equitable, workable and implementable.

Nikola: The nonexistence of international accounting standards does not only negatively affect the establishment of foreign investment institutions in Macedonia, but also influences global investments in Macedonia negatively. Without uniform accounting standards it is very difficult for brokerage firms and for investors to evaluate the shares of the traded companies.

Sam: It is not only a problem of the adoption of international standards. Anyhow, there is no agreement as to which standards reflect reality best. The SEC refuses to accept the IAS (International Accounting Standards) and demands the strict implementation of the GAAP (Generally Accepted Accounting Principles) as a precondition for being listed in any American Stock Exchange. The problem is that the financial reports ae tax driven. Put less gently: accountants and managers collaborate to cheat the tax authorities by falsifying financial reports. This can be done with IAS and with GAAP, as well. It is the intention that counts. Tax evasion in Macedonia is a civil war – the citizens against the tax authorities. It indicates an abyss of trust between the populace and the various establishments. Unless and until this more fundamental problem is solved, no accounting standards will suffice.

Nikola: The nonexistence of foreign capital as commercial direct and especially indirect investment is very expensive for Macedonia:

Until the above mentioned "open questions" are resolved, the probability of generating a greater interest in institutional investment in Macedonia is very small. This still doesn't mean that steps should not be taken to facilitate this kind of investing. The broker associations and the stock exchange can achieve very much in promoting the Macedonian market through the major investment firms and investment funds in Great Britain and in the USA. Even convincing these institutions to start seeing Macedonia as an investment opportunity could take a long time. To reach this stage, this it is necessary to establish contacts, and to activate the government of Macedonia on all the fronts mentioned in this dialogue. Detailed studies of the market and its promotion must be embarked upon. The foreign institutions will want to conduct their own analyses, but the existence of institutions in the country to which they can refer for the collection of local data and inside information is always helpful.

Until Macedonia does not open up its economy, except through declarations, it will remain without the necessary foreign commercial investments, and will wait a long time to enter the EU and other economic alliances.

Nikola Gruevski's Way Out

Title of Book: The Way Out: Foreign Direct Investment, Economic Development, and Employment
Author: Nikola Gruevski
Publisher: Evropa 92 Kochani
Month, Year of publication: October 2007

# of pages: 210

Nikola Gruevski, the youthful and dynamic Prime Minister of Macedonia, has just published his Master's Thesis in the form of a book, titled "The Way Out". In an earlier book, co-authored with the author of this review and titled "Macedonia at a Crossroads" (1998), Gruevski expounded on the same themes and suggested very much the same remedies. Though, surprisingly, his earlier book is not mentioned anywhere in his new tome, it is instructive to study it and to discover that Gruevski had the same vision for Macedonia in 1998 as he does in 2007. And this is precisely the source of my disagreement with some of his work: in the intervening 10 years, the world has changed and economic research has advanced.

Macedonia is not known as a bastion of economic studies. Most of its professors were educated and trained under Tito's socialist regime and find the transition to capitalism baffling. Many of them don't even know English. It is, therefore, to Gruevski's great credit that he succeeded to produce a comprehensive, erudite, and thought-provoking review of issues tackled in his thesis. As an introduction to the topic of foreign direct investment and its role in emerging, developing, and transition economies, Gruevski's book is more than adequate. It measures up to many textbooks on the topic that it so aptly covers.

Alas, the two pillars of his proposed way out for Macedonia's economy are somewhat shaky. Macedonia cannot be compared to Ireland, Singapore, or even Romania and Poland. These countries have advantages that Macedonia can only dream of: proximity to mega-markets, knowledge of foreign languages, or a huge domestic population. Their experience is inapplicable to Macedonia: a landlocked, tiny polity with a xenophobic and poorly-educated population.

More importantly: the role of foreign direct investment (FDI) in promoting growth and sustainable development has never been substantiated. There isn't even an agreed definition of the beast. In most developing countries, other capital flows - such as remittances - are larger and more predictable than FDI and ODA (Official Development Assistance).

Several studies indicate that domestic investment projects have more beneficial trickle-down effects on local economies. Be that as it may, close to two-thirds of FDI is among rich countries and in the form of mergers and acquisitions (M&A). All said and done, FDI constitutes a mere 2% of global GDP.

FDI does not automatically translate to net foreign exchange inflows. To start with, many multinational and transnational "investors" borrow money locally at favorable interest rates and thus finance their projects. This constitutes unfair competition with local firms and crowds the domestic private sector out of the credit markets, displacing its investments in the process.

Many transnational corporations are net consumers of savings, draining the local pool and leaving other entrepreneurs high and dry. Foreign banks tend to collude in this reallocation of financial wherewithal by exclusively catering to the needs of the less risky segments of the business scene (read: foreign investors).

Additionally, the more profitable the project, the smaller the net inflow of foreign funds. In some developing countries, profits repatriated by multinationals exceed total FDI. This untoward outcome is exacerbated by principal and interest repayments where investments are financed with debt and by the outflow of royalties, dividends, and fees. This is not to mention the sucking sound produced by quasi-legal and outright illegal practices such as transfer pricing and other mutations of creative accounting.

Moreover, most developing countries are no longer in need of foreign exchange. "Third and fourth world" countries control three quarters of the global pool of foreign exchange reserves. The "poor" (the South) now lend to the rich (the North) and are in the enviable position of net creditors. The West drains the bulk of the savings of the South and East, mostly in order to finance the insatiable consumption of its denizens and to prop up a variety of indigenous asset bubbles.

Still, as any first year student of orthodox economics would tell you, FDI is not about foreign exchange. FDI encourages the transfer of management skills, intellectual property, and technology. It creates jobs and improves the quality of goods and services produced in the economy. Above all, it gives a boost to the export sector.

All more or less true. Yet, the proponents of FDI get their causes and effects in a tangle. FDI does not foster growth and stability. It follows both. Foreign investors are attracted to success stories, they are drawn to countries already growing, politically stable, and with a sizable purchasing power.

Foreign investors of all stripes jump ship with the first sign of contagion, unrest, and declining fortunes. In this respect, FDI and portfolio investment are equally unreliable. Studies have demonstrated how multinationals hurry to repatriate earnings and repay inter-firm loans with the early harbingers of trouble. FDI is, therefore, partly pro-cyclical.

What about employment? Is FDI the panacea it is made out to be?

Far from it. Foreign-owned projects are capital-intensive and labor-efficient. They invest in machinery and intellectual property, not in wages. Skilled workers get paid well above the local norm, all others languish. Most multinationals employ subcontractors and these, to do their job, frequently haul entire workforces across continents. The natives rarely benefit and when they do find employment it is short-term and badly paid. M&A, which, as you may recall, constitute 60-70% of all FDI are notorious for inexorably generating job losses.

FDI buttresses the government's budgetary bottom line but developing countries invariably being governed by kleptocracies, most of the money tends to vanish in deep pockets, greased palms, and Swiss or Cypriot bank accounts. Such "contributions" to the hitherto impoverished economy tend to inflate asset bubbles (mainly in real estate) and prolong unsustainable and pernicious consumption booms followed by painful busts.

Alphabetical Bibliography

Austria’s Foreign Direct Investment in Central and Eastern Europe:‘Supply-Based’or ‘Market Driven’? - W Altzinger - thInternational Atlantic Economic Conference, Vienna, 1999

Blessing Or Curse?: Domestic Plants' Survival and Employment Prospects After Foreign Acquisition - S Girma, H Gφrg - 2001 -

Competition for Foreign Direct Investment: a study of competition among governments to attract FDI - CP Oman - 2000 -

(The) Contribution of FDI to Poverty Alleviation - C Aaron - Report from the Foreign Investment Advisory Service - 1999 -

Corruption and Foreign Direct Investment - M Habib, L Zurawicki - Journal of International Business Studies, 2002

Determinants Of, and the Relation Between, Foreign Direct Investment and Growth - EG Lim, International Monetary Fund - 2001 -

Direct Investment in Economies in Transition - K Meyer - Cheltenham and Northampton (1998), 1998

(The) disappearing tax base: is foreign direct investment (FDI) eroding corporate income taxes? - R Gropp, K Kostial -

Does Foreign Direct Investment Accelerate Economic Growth? - M Carkovic, R Levine - University of Minnesota, Working Paper, 2002

Does Foreign Direct Investment Crowd Out Domestic Entrepreneurship? - K De Backer, L Sleuwaegen - Review of Industrial Organization, 2003

Does Foreign Direct Investment Increase the Productivity of Domestic Firms? - BS Javorcik - American Economic Review, 2004

Does foreign direct investment promote economic growth? Evidence from East Asia and Latin America - K Zhang - Contemporary Economic Policy, 2001

The Economics of Foreign Direct Investment Incentives - M Blomstrom, A Kokko - 2003 - NBER

The effects of foreign direct investment on domestic firms Evidence from firm-level panel data - J Konings - The Economics of Transition, 2001

Effects of foreign direct investment on the performance of local labour markets–The case of Hungary - K Fazekas - RSA International Conference, Pisa, 2003

(The) Effects of Real Wages and Labor Productivity on Foreign Direct Investment - DO Cushman - Southern Economic Journal, 1987

Employment and Foreign Investment: Policy Options for Developing Countries - S Lall - International Labour Review, 1995

Export Performance and the Role of Foreign Direct Investment - N Pain, K Wakelin - The Manchester School, 1998

Exports, Foreign Direct Investment and Employment: The Case of China - X Fu, VN Balasubramanyam - The World Economy, 2005

Facts and Fallacies about Foreign Direct Investment - RC Feenstra - 1998 -

FDI and the labour market: a review of the evidence and policy implications - N Driffield, K Taylor - Oxford Review of Economic Policy, 2000

Foreign Direct Investment and Capital Flight - C Kant - 1996 -

Foreign Direct Investment and Economic Development - T Ozawa - Transnational Corporations, 1992 -

Foreign Direct Investment and Employment: Home Country Experience in the United States and Sweden - M Blomstrom, G Fors, RE Lipsey - The Economic Journal, 1997

Foreign Direct Investment and Income Inequality: Further Evidence - C our FAQ, R Zone - World Development, 1995

Foreign Direct Investment and Poverty Reduction - M Klein, C Aaron, B Hadjimichael, World Bank - 2001 -

Foreign Direct Investment as a Catalyst for Industrial Development - JR Markusen, A Venables - 1997 - NBER

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Foreign Direct Investment, Employment Volatility and Cyclical Dumping - J Aizenman - 1994 - NBER

Foreign Direct Investment in Central and Eastern Europe: Employment Effects in the EU - H Braconier, K Ekholm - 2001 -
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Foreign Investment, Labor Immobility and the Quality of Employment - D Campbell - International Labour Review, 1994

Foreign direct investment-led growth: evidence from time series and panel data - L de Mello - Oxford Economic Papers, 1999

Home and Host Country Effects of FDI - RE Lipsey - 2002 - NBER

How Does Foreign Direct Investment Affect Economic Growth? - E Borensztein, J De Gregorio, JW Lee - Journal of International Economics, 1998

The Impact of Foreign Direct Investment Inflows on Regional Labour Markets in Hungary - K Fazekas - SOCO Project Paper 77c, 2000

(The) Impact of Foreign Direct Investment on Wages and Employment - L Zhao - Oxford Economic Papers, 1998

(The) link between tax rates and foreign direct investment - SP Cassou - Applied Economics, 1997

Location Choice and Employment Decisions: A Comparison of German and Swedish Multinationals - SO Becker, K Ekholm, R Jδckle, MA Muendler - Review of World Economics, 2005

Much Ado about Nothing? Do Domestic Firms Really Benefit from Foreign Direct Investment? - H Gorg - The World Bank Research Observer, 2004

Should Countries Promote Foreign Direct Investment? - GH Hanson - 2001 -

Taxation and Foreign Direct Investment: A Synthesis of Empirical Research - RA de Mooij, S Ederveen - International Tax and Public Finance, 2003

Trade, Foreign Direct Investment, and International Technology Transfer: A Survey - K Saggi - The World Bank Research Observer, 2002

Troubled Banks, Impaired Foreign Direct Investment: The Role of Relative Access to Credit - MW Klein, J Peek, ES Rosengren - The American Economic Review, 2002

Vertical foreign direct investment, welfare, and employment - W Elberfeld, G Gotz, F Stahler - Topics in Economic Analysis and Policy, 2005

Volatility, employment and the patterns of FDI in emerging markets - J Aizenman - 2002 - NBER

Who Benefits from Foreign Direct Investment in the UK? - S Girma, D Greenaway, K Wakelin - Scottish Journal of Political Economy, 2001

Why Investment Matters: The Political Economy of International Investments - Singh, Kavaljit - FERN (UK and Belgium)

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