Macedonia - Quo Vadis?
Issued by: Capital Markets
(Contributor and co-author: Sam Vaknin, Ph.D.)
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Macedonia is geographically positioned to become a trilateral bridge between Asia, Western Europe and Eastern Europe. It is the heart of the Balkans. With the proper promotion and dissemination of information, it could well become an important regional economic hub, as well. To achieve this, it has to adopt an export orientation, to encourage the formation of small businesses, to be friendly to FDI (foreign direct investment), to deregulate and open up to (domestic and foreign) competition in its infrastructure (electricity, internet, telecoms, the banking system, etc.), to emphasize the protection of property rights and to start the process of privatization all over again - this time sincerely.
The World Economy in 2001
The Asian crisis is not over it hasn't even started. It will erupt again, this time much more severely and mainly in Indonesia, Philippines, China, Malaysia and Japan. This will augment the recession shock waves in the USA. The stock exchanges (headed by Wall Street) will be the first to adversely react. The IMF will be fast depleted of resources. The central banks around the world will not be able to implement tighter monetary policies and global inflation will be re-ignited (with the exception of deflation in Asia). This inflation will be exacerbated by currency devaluations in South East Asia (China) and in Russia. The introduction of the Euro has further limit the flexibility of the counter-cyclical reactions of the economic authorities. This overall rigid response will force countries to adopt protectionist measures against the free flow of goods, services and, above all, capital.
The evaluation of the Macedonian economy in this paper, however, ignores this scenario. Should it transpire as we predict the impact on Macedonia might be moderate, as its main markets are in the EU and it is not dependent on foreign direct investment but on multilateral aid and credits.
What We Predicted in 2000
(See article in "Makedonsko Delo" dated April 7, 2000)
At the beginning of the year 2000 we predicted the following:
The Euro will devalue to 0.87 versus the US dollar and then recover to 1.18.
In reality it went down to 0.83 and is now in the process of recovering.
We now predict a cap on Euro appreciation at 1.06 - 1.08 (equivalent to DM at 1.78). The US dollar will then recover and push towards 2.30 and beyond.
We predicted oil hitting 32 US dollars per barrel (Brent crude) and then swiftly declining to 18 US dollars and then (in the long term) back to 7-10 Us dollars. In reality, it reached 35-36 US dollars per barrel and commenced a precipitous decline (to 24 US dollars currently).
We predicted a collapse of Wall Street. NASDAQ (the biggest stock exchange in the USA) has indeed crashed by 60% from its highs in March 2000 - but Wall Street, as a whole, did not experience a market meltdown as we predicted (though it is down by 15% from its highs).
The Denar Must be Devalued Gradually and Transparently
The trade deficit (at 600 million USD) equals 16% of the (admittedly, only the official) GDP and the current account deficit amounts to almost 8% of GDP. This is AFTER unilateral transfers of capital from donor countries and aid agencies and from immigrants and after foreign investment. The reserves of the Central Bank cover 3 months of regular imports and, luckily, are insufficient to excite the big time speculators. Still, the currency is overvalued. In PPP-adjusted terms it should be converted at 37 to the DM (versus 31 now) and at c.70 to the USD (versus 66 now). The exchange rate stability is artificial, discourages exports and encourages imports. It also exerts deflationary forces in a deflation prone economy. The terms of trade of Macedonia have deteriorated by 14% these last few years. The accumulation of foreign exchange reserves is anti-growth and unnecessary. It also runs counter to current economic thinking.
The Macedonian economy is totally illiquid and demonetized. High unemployment, a low money supply and the only slightly improved presence of money multipliers or accelerators (such as functioning credit providing institutions coupled with reasonable credit ceilings and interest rates as imposed by the Central Bank) have depressed any nascent inflation and, lately, led to demand core deflation (without volatile energy and food prices). To encourage growth, Macedonia must tolerate a 10-15% annual level of inflation (versus c. 5% now) and a minimum of 3-5% budget deficit (versus a surplus now, if we ignore the rebalancing of the budget). There is no need to fear hyperinflation because of low demand. A devaluation will be mostly absorbed by importers and manufacturers. The government's fiscal and monetary policies are unduly restrictive and contractionary when they should be expansive. For a country in transition, with c. 40% unemployment, an 8% current account deficit, inter-company debt arrears of c. 30% of GDP and growing, low FDI and languishing private sector - to maintain a 35% tax burden and a structural budget surplus is, to put it mildly, very wrong.
If, however, the Central Bank will be forced by the market to devalue the denar the result will be profits for speculators and an inflation out of control. This will lead to stagflation runaway inflation coupled with economic stagnation (the worst possible scenario for Macedonia). However this scenario is unlikely as long as the IMF is seen to be supporting current structural reforms and monetary policies.
The Macedonian Central Bank is forced by the IFIs (especially by the IMF) to maintain a DUAL TRACK policy, namely to observe BOTH an inflation target AND a stable exchange rate. This is a classic mistake, badly regretted in many countries now (examples: Brazil, Russia, Argentina, Turkey and Israel). By law, the Central Bank should ascertain the stability of the denar exchange rate. It is advisable to alter the law so that the bank observes an INFLATION TARGET, with a floor and a ceiling (an inflation band).
The Banking System
The sale of "Stopanska Banka" to "National Bank" (from Greece) - as well as the sale of a few other minor players to foreign investors cum management - has finally opened up the banking sector to outside influences. Still, most foreign owners are either hesitant (Erste Bank, which withdrew from the bid for Stopanska Banka in 1999) or too institutional (EBRD, IFC and even "National Bank" itself) or marginal. The whole sector needs to be opened up to competition by allowing the introduction of credit unions, non-bank lenders, specialized (such as mortgage) banks, leasing companies, insurance companies, etc. into the banking scene.
The banks are ossified, unable to cope with the newly emerging market economy. They react either by disregarding the quality of their portfolio while over-emphasizing mere size (Stopanska Banka) or by being too conservative. Instead of developing effective methods to monitor and evaluate risks they preferred to raise the commercial interest rates to outlandish levels (now being reduced drastically). They offer no new services or products, lend only against real estate, favour cronies and cater to political wishes. The management in many of the banks in less professional than in the West. It is very likely that corruption is rampant due to favouritism and lack of transparency.
Only foreign ownership and CONTROL will alter this sorry state of things. In this respect, Macedonia is on the right path.
The Trade Deficit
The Macedonian economy is a "scavenger economy". At first, it benefited from the siege imposed on Serbia by the international community. Greek and other goods were shipped through Macedonia to Serbia. A lot of people got rich in the process. Now, Macedonia lives off its reputation as a "stable" country. The USA and other countries finance its trade deficit and other financial excesses just to keep it as a buffer and a protection against instability in the region. More than 50% of all Macedonian firms are trading firms. This cannot last and is no substitute to long term policies. Macedonia must move from scavenging to being a "predator economy": eager to conquer new markets and prey on the competition.
A trade deficit is not inherently evil. If the money is spent on the importation of industrial raw materials and capital goods, the future profits will easily offset current deficits. But the Macedonian trade deficit goes to finance consumption goods and food. This is a malignant type of deficit, which will ultimately boomerang and hurt the local economy gravely.
What is needed is an orderly devaluation, the imposition of VAT on ever larger sectors of the informal economy and the imposition of some temporary import restrictions on luxury goods as well as the active encouragement of exports and, to a very limited extent, import substitution.
The Private Sector
The Macedonian people are very entrepreneurial. The level of corporate taxation is tolerable (though the total tax burden is NOT). But there is no private sector to talk about. This is because there is no management culture, a lot of bureaucratic red tape, no capital markets, no business-oriented banking system, no real incentives or environment available to exporters and to small businesses and a crowding out of credit by failing, politically connected, or state owned businesses. The privatization process transferred state assets to the hands of an elite of managers at a discount on real values. The workers also received shares but could not dispose of them in any meaningful way. Even companies which could easily have been sold to foreign investors were privatized in this manner: Alkaloid, Pivara, Ohis, to mention but a few (Makpetrol, the PTT, Elektrostopanstvo can also be included in the lists of "easily sellable companies"). The companies thus privatized still rely too heavily on the state and engage in political lobbying rather than in production.
Macedonia has this year, for the first time, embarked on a path of serious and painful structural reform (mainly by shutting down or selling the loss making state owned enterprises). This is commendable, courageous and important. But this is only half the job - and NOT the important half. The important part is to create the conditions to encourage the formation of a vigorous and viable private sector.
The Public Sector
Despite rumours to the contrary, the public sector is less corrupt than in comparable countries (according to Transparency International and to my own experience), well educated and capable. However, it is far too large (it should be cut in half) and inefficient. This sector is subjected to economic laws, which were either copied from the West verbatim or phrased locally by legislators and "experts" who lack the necessary experience. It is not service oriented, poorly paid and considered a "dead end" career.
The ethnic mix of Macedonia is explosive. This may be the reason why the central government was loath to transfer powers, authority and the money to back them to the regions. The regional economy is still very much centralized, planning is done from afar, the regions have no real taxing or spending autonomies (for instance: they cannot lobby abroad freely or raise funds in the capital markets because the land is not theirs to pledge, it belongs to the state).
But Macedonia is uniquely varied. It has an outstanding potential for tourism, transport and telecommunications. All of these can be developed regionally rather than centrally. It is only the political will that is missing. In the world today the central government is consciously transferring budgets and powers to the regions and the EU's motto is: "A Europe of regions". Macedonia has haltingly started to implement it but the process is not fast enough.
About 4% of the population left the country in the three years immediately following independence (1991-4). Another 2-3% left the country between 1994-8 (estimate). Many young people resent the fact the it is not merit that will determines their career path, but connections to the right people. Others face difficult personal choices: unable to buy apartments, they cannot form or raise families properly. Unemployment is a permanent feature and many young and unskilled or semi-skilled people are unemployed for years or reduced to menial jobs. This is a real threat to Macedonia's economic future and competitiveness in the global market. In a way, Macedonia is subsidizing the West with this export of gifted people. Unfortunately, there is not a lot that can be done to directly counter this phenomenon. It will disappear of itself (even be reversed, as happened in Israel) once the economy improves.
This is the cancer of the Macedonian economy: psychologically as much as financially, a burden on the state, a burden on the unemployed. Hitherto there was no serious treatment of this problem. In 1998, the government introduced a structure of tax incentives intended to subsidize new employment. Due to abuses, it was cancelled by the new government. But even that was absolutely insufficient and, in isolation, inefficient. The unemployment rate (already at c. 40% according to official figures) is poised to GROW as the economy becomes more efficient, technology is introduced and real privatization takes root. This will be a social calamity. Experience in the world can guide the government: to increase labour mobility, to decrease the power of unions, to transfer unemployment benefits to the employer (in order to encourage him to employ the unemployed), to initiate public works (a Macedonian "New Deal" even at the cost of budget deficits), to encourage small businesses (microcredits, incubators, tax credits, preference in government procurement), to organize barter communities with voucher money, to encourage part time and flexible forms of employment. Israel, Holland, Britain and the USA are good examples.
The Macedonian workforce is more educated than its equivalents in Southeast Asia, for instance. The quality of higher education is impressive, with a few notable exceptions. Despite some corruption (university diplomas that are bought in cash rather than earned through toil, as the rumours go) the overall picture is encouraging. But the stock of education capital (buildings, laboratories, libraries, computers) has dwindled to the extent that Macedonian higher education is risking becoming obsolete and irrelevant. Moreover, the universities and dedicated schools are churning out graduates with degrees in professions, which are irrelevant to the Macedonian economy. There is a huge mismatch between what Macedonia needs and what Macedonia gets from its higher education institutions. In this sense, these institutions abdicated their social responsibilities. They are no longer subject to planning of any sort: central or via the market forces (because there is no market in Macedonia as of yet). The introduction of accredited private higher education institutions is a welcome step. It may ameliorate feelings of discrimination of minorities and elevate the quality of higher education in general by competing with staid and stultifying state establishments.
The Judicial System and Property Rights
The courts are slow, hesitant and ineffective. Contradicting interpretations of economic laws by different judges are not a rarity. The system is under-funded, understaffed and bogged in a landscape of laws and regulations, which changes arbitrarily. The introduction of autonomous budgeting is a step in the right direction. There are no private or public alternatives to the clogged, backlogged nightmare. The laws are full of irrelevant "dead weed", are too complex and archaic or too open to interpretation. There are no reliable, publicly available central registrars of property and it, therefore, cannot fulfil the role of a collateral to the fullest extent. Intellectual property rights are not protected and Macedonia (with Bulgaria) is the piracy capital of Central Europe. All this and the multi-annual tedious process of applying to the courts in the first place erode the trust in the law enforcement system, in general and can bring about criminal alternatives to enforcement of contracts, for instance. There is no sign of a major reform in this field.
Taxation and the Black Economy
The "Black Economy" is called in Macedonia "The Grey Economy" because it is tolerated with a smile. Maybe luckily so: it comprises over 50% of the economy and is the less moribund and more vital part in it. Despite the fact that the taxes in Macedonia are very reasonable collection is abysmal. Workers go unreported, income tax is paid only by employees in state or big firms, profit tax is eliminated by creative (false) accounting. Accountants in Macedonia are people who falsify books of firms so as to minimize the tax payable by them. Reform of the payment system and the customs is being discussed for months on end but, for some reason, its implementation is always postponed. Smuggling is rampant. This situation cannot be cured by "strong arm" tactics because it amounts to a universal civil rebellion. A massive education campaign needs to be launched to demonstrate to the citizens the benefits that they stand to gain from paying their due taxes. Because the distrust between citizen and government (no matter of which party, government in general) runs so deep it will not be an easy or short term task. Corruption in high places - an all pervasive phenomenon - won't help either.
Government Structure and Budget
Economic Legislation and Property Rights
I suggest to embark on a project of harmonization of all the economic legislation in Macedonia within a coherent and compact code, phrased in a manner which should be understandable to all, free of contradictions and unsuitable articles and provisions.
To do this, the government can create a special Council, which should be composed of legal experts, business and financial consultants,representatives of the private sectors and the relevant Ministries. All laws should be reviewed and, where necessary, re-written, to protect property rights including protection of intellectual property rights: copyrights, brandnames, registered trademarks.
Data and Statistics
The government should develop interlinked national databases, which should serve the executive branch in its fight against crime, tax evasion and corruption. All the organs of the state should be bound by law to transfer all the data that they accumulate to these national, computerized databases.
The Ministry of Finance should establish the following public access and right to know (freedom of information) institutions:
Taxation - Direct and Indirect
Inflation, Interest Rates, Exchange Rates and the Central Bank
The issues to be tackled in this amendment should be:
Banking, Finance and the Capital Markets
Foreign Direct Investment (FDI) and Free Trade Zones (FTZ)
Foreign investment can be attracted by:
The Informal Economy
Reporting Requirements and Transparency
Reduction of Cash Transactions
Firms competing for government tenders should be obliged to acquire a certificate from the tax authorities that they owe no back-taxes. Otherwise, they should be barred from bidding in government tenders and RFPs (Requests for Proposals).
Databases and Information Gathering
Reforms and Amnesty
The Tax Code
Customs and Duties
The government should embark on a massive Public Relations and Information campaign. The citizens should be made to understand what is a budget, how the taxes are collected, how they are used. They should begin to view tax evaders as criminals. "He who does not pay his taxes is stealing from you and from your children", "Why should YOU pay for HIM?" "If we all did not pay taxes- there would be no roads, bridges, schools, or hospitals" (using video to show disappearing roads, bridges, suffering patients and students without classes), "Our country is a partnership and the tax-evader is stealing from the till (kasa)" and so on.
The phrase "Grey Economy" should be replaced by the more accurate phrases "Black Economy" or "Criminal Economy".
These chapters in the report have not been released for publication by the client:
The Orientation of Macedonia (Equidistance, EU, NATO, Balkan)
Data and Statistics
Pensions Social and Welfare Benefits
Information and Knowledge Infrastructure and Industries
Transportation and Telecommunications
Tourism and Catering
The Capital Markets
Foreign Direct Investments
Macedonia's Report Card - 10 Things that Could Go Wrong
Like Blanche Dubois in "Streetcar Named Desire", Macedonians now prefer fantasy over harsh reality. They lash out at anyone who wishes to offset their euphoria with a long, hard look at hazards, real achievements, and true future prospects.
Under the tutelage of the Gruevski government, Macedonia made great strides in a surprisingly short period of time. The government should be lauded and complimented for its energy and initiative and its inordinate ability to transform Macedonia into a modern participant in globalization. The pace and extent of its accomplishments is incredible.
Yet, Macedonia faces 10 risks and the government is doing precious little to confront them:
1. Asset Bubbles
At a multiple of 37, the Macedonian Stock Exchange is a bubble, by any definition of the word.
The Macedonian Stock Exchange, as measured by its MBI-10 index, rose to a record high of close to 10,500 in mid-2007. It has since shed 30% of its gains. This correction, or, rather, rout has its roots is a series of converging factors.
Macedonia benefited from globalization. As its informal economy emerged from the shadows, capital controls were lifted, capital mobility increased, and foreign firms and investors entered the scene. The more the business climate improved, the better Macedonia's prospects appeared, the higher Macedonian stocks were valued by an euphoric public. Macedonia's professionals did nothing to restrain the hysteria or to ameliorate the casino mentality that pervaded the entire system. They benefited personally from the bubble.
The newfound optimism of Macedonia led to a repricing of risk and to heightened expectations of corporate profits, boosted by a more lenient tax regime and by decreasing interest rates. Equity risk premium plummeted until it vanished altogether and even became negative. The P/E multiple reached a stratospheric 50 before the recent correction. It is still pegged at an unsustainable 37.
Throughout this Bacchanalia, foreigners flocked into the Macedonian Stock Exchange, constituting 30-40% of the buy side. But they have begun to withdraw owing to big privatizations back home, troubles in their domestic financial systems, a more restrictive monetary policy in some countries, and the changing fortunes of the Macedonian marketplace.
The down trend in the Macedonian Stock Exchange is not a mere correction. It is a repricing of assets. It still has a long way to go. Even at 4300 - the next massive technical support - Macedonian shares are inanely overvalued.
Similarly, real estate prices are stratospheric, but this can be justified by the lack of reliable, scandal-free supply and the underdeveloped market for mortgages and real estate leasing.
Should one or both bubble burst, the adverse effects on consumption are likely to be noticeable.
2. Credit Bubble
In December 2007, holiday spending in Macedonia surged 100 million euros to 350 million euros. Most of the increase was financed with credits, as were the purchases of shares on the stock exchange, cars, and housing. High interest rates virtually guarantee that many of these loans will go bad. When they do, the government will be called upon to bail out the banking system. In all probability, it will.
3. Trade Deficit
Macedonia's trade deficit now equals 20% of its formal GDP (excluding the informal economy). It is unsustainable. Yet, the more vigorous the economy, the more the country's consumers and businessmen are likely to import. The culprits in engendering this imbalance are an overvalued currency, a hyper-liberalized trade regime, an antiquated and badly-managed industrial sector, and the profligacy of the population.
As long as unilateral transfers (such as remittances) cover the yawning gap in the current account deficit, Macedonia can survive with such irresponsible conduct. But, if the global economy turns sour, Macedonian Gastarbeiter will be forced to return home. This will likely precipitate a currency crisis.
4. Living Standards and Inflation
Inflation in Macedonia is severely under-reported by the government's Bureau of Statistics. Even so, living standards have dived with the rise in energy and food prices. The government doles out wage and pension increases but cannot compete with the global surge in the prices of commodities. Coupled with the aforementioned credit bubble, this is an ominous sign. Macedonia could end up having its own mini-version of the crisis in the USA: bankruptcies, credit crunch, and recession.
5. Foreign Direct Investment (FDI)
While Macedonia's image and perception as a business destination and the business climate have improved considerably under Gruevski's government, in reality, not much else has changed.
Consider the following numbers, pertaining to Macedonia:
Control of Corruption Indicator, published by the World Bank: 113 (2006) vs. 111 (2007)
Country Credit Rating, published by Institutional investor: 85 (2006) vs. 84 (2007)
Index of Economic Freedom, published by The Heritage Foundation and the Wall Street Journal: 75 (2006) vs. 71 (2007)
Quality of National Business Environment Ranking, issued by the World Economic Forum in its Global Competitiveness Report: 87 out of 121 countries.
Only the World Bank's Doing Business Ranking jumped from 96 (2006) to 75 (2007). Yet, even this indicator hides some unpalatable truths: Macedonia has deteriorated in certain respects. It is more difficult and cumbersome to hire workers, to register property, to obtain credit, to protect investor rights, and to enforce contracts. In any case, this indicator has more to do with public relations, expectations, and psychology, rather than with the hard facts on the ground.
And the hard facts are:
Macedonia is not ready to absorb and accommodate foreign investors and their capital. It still has a long way to go. This government has put the cart before the horses;
The youthful, populist, and inexperienced administration is overwhelmed and ill-equipped to deal with its obligations towards and promises to foreign investors. Decision-making bottlenecks (especially in the office of Vice-Premier Zoran Stavreski) conspire with red tape and blatant favoritism to render nightmarish both greenfield and brownfield ventures.
In a long-running arbitration, the country was slapped with multimillion dollar damages payable to the Greek investors in Okta. This did not deter the government from conflicting vocally and publicly with Macedonia's other large investor, the Austrian EVN, owner of the electricity utility;
To its credit, the government has reformed the tax system, introduced a flat tax, and reduced the tax rates, all laudable. But it is still illegal for foreigners to own land and real estate (as individuals) and all but impossible to trade in the local stock exchange. The government has only now resorted to tackling these archaic limitations;
The country is dysfunctional. No institution works properly: the cadastre, the courts, law enforcement agencies, the civil service are all in chaotic disarray. Even the banking system, despite a decade of FDI, is rudimentary. Infrastructure of all sorts is dismal, though improving. The government's anti-corruption drive is much lauded but highly politicized and one-sided, aimed as it is exclusively at the hapless politicians of the opposition. Macedonia's laws are not geared to welcome and assimilate foreign investment, foreigner businessmen, and foreign workers;
Macedonia lacks skilled manpower. The education deficit is pervasive. More than half the adult population has eight years of schooling or less. A multi-generational brain drain saps the country's vitality and prospects in the global information economy of the 21st century. Contrary to the government's claims in its "Invest in Macedonia" campaign, costs and taxes associated with wages are among the highest in the world.
The country suffers from other problems: a huge informal economy, skyrocketing consumer and enterprise indebtedness, ominous asset bubbles in both the stock exchange and the real estate market, a crippled middle class and crippling poverty and unemployment rates, an unmanageable and increasing trade deficit (c. 20% of GDP), and a whopping current account deficit offset only by remittances from Macedonian workers abroad. The global credit crunch constitutes a major threat to polities with such precarious finances.
Despite a slew of expensive PR and advertising campaigns; the appointments of two ministers and the formation of a special agency to deal with FDI; incessant trips abroad by every functionary, from the prime minister down; and innovative marketing initiatives - FDI figures for 2007, at c. 180 million USD (c. 3% of GDP), are a major disappointment. Moreover, a sizable part of Macedonia's FDI is in construction, retail, financial services, and trade, economic sectors with minimal contribution to future growth.
In comparison, FDI doubled in decrepit, post-bellum Serbia, to 4.5 billion USD in 2006. Croatia garnered 3.6 billion USD (2.7 billion euro) - twice the 2005 figure. Even strife-torn Bosnia-Herzegovina, under a EU peacekeeping mission, attracted 2.9 billion USD (2 billion euros). Bulgaria absorbed 6.5 billion USD. FDI amounted to 10% of Balkan GDP in 2006.
The conclusion is inescapable: Macedonia has failed in its bid to attract FDI. This is not the first time that Macedonian politicians and their downtrodden and destitute people prefer the fantasy of foreign saviors to the hard slog of painful and much-needed reforms at home. The current prime minister, Gruevski, served in the government of Ljubco Georgievski, whose nostrum and panacea to Macedonia's economic woes was dollops of money, supposed to be funneled via illusive Taiwanese investors. The person most identified with this policy, Vasil Tupurkovski, now faces criminal charges.
Gruevski can learn many lessons from the debacles wrought by his predecessors. It is not too late to get his priorities straight: reforms, education, domestic investment, and employment first, and only then an open invitation to foreigners to come and invest in Macedonia.
6. Geopolitical Risks
Geopolitical instability (in Kosovo) is exacerbated by the current Macedonian regime's jingoism, its overt and manipulative religiosity, and greenhorn fickleness. Within the last year, Macedonia has considerably retarded its chances to enter NATO and the European Union (EU), having clashed unnecessarily and spectacularly with Greece, Serbia, Bulgaria, and the Albanian minority at home.
The government's obsession with FDI as the solution for Macedonia's unemployment precluded a reasoned and coordinated effort to tackle unemployment head-on, especially by encouraging domestic investment. To this very day, the government has failed to come with a plan on how to fight unemployment in the short to medium term.
Consequently, unemployment has remained largely the same, at 35%. In certain sectors - such as mining and manufacturing - it even went up (by a whopping 8%, compared to 2005).
The government's concurrent attempts to fight the informal economy have the unfortunate effect of removing the only effective social safety net and source of income available to the unemployed.
As is its habit in all other fields, the government is more concerned with grandiose schemes (computer for every child) than with the mundane and dreary reality of education in Macedonia: lack of infrastructure, no teaching cadre, no supportive social services (day care, for instance), or cultural ambience (the education of girls is still controversial in certain segments of Macedonian society).
The government is attempting to respond to the perceived needs of foreign investors by teaching skills to young and older alike. This is a step in the right direction. But, carried out in a vacuum of other policy measures, it is bound to backfire and end in a brain drain or in deep and lasting frustration.
Instead of acknowledging that Macedonia's agriculture is non-competitive for a variety of reasons, the government keeps pouring tens of millions of scarce euros into dying crops (tobacco, for instance). The solution is, of course, to scrap the entire Macedonian agriculture, retrain the farmers and embark on a bold plan to reorient the sector to off-season vegetables and flowers, high-value crops, organic produce, and bioengineering.
When a government in a country as destitute as Macedonia wastes its money on the early repayment of debts to International Financial Institutions and ends up with a surplus in its central budget, its policies are wrong and constrictive. Rather than promote growth, the government is over-taxing. This leads to an inefficient allocation of resources. Rather than invest, the government increases wages in the public sector, augments pensions, and showers subsidies on dying sectors.
Paradoxically, such colossal waste is bound to end up in a demonetization and contraction of the economy as the private sector gives up its futile attempt to compete with the largesse of the government and as businesses are rendered rent-seekers.
The Gruevski government is business-friendly and growth-oriented. It is truly reformist. However, its policies of benign neglect and over-reliance on foreigners and their money as a nostrum and panacea threaten Macedonia with stagflation: inflation coupled with recession, increasing unemployment and negative growth.
Visa Liberalization: A Threat to Macedonia?
An Executive Summary of a Research Report Dated 07/06/2009
The client authorized the publication of the Executive Summary only.
Macedonian citizens will enjoy visa-free travel to most destinations in Europe starting in early 2010. The liberalization of the visa regime is welcomed in the tiny, landlocked and claustrophobic country: it will provide its long-suffering denizens with access to higher education and jobs in a common market with 300 million people and a GDP to equal the United States.
But, the change in the visa regime also presents multiple threats to the fragile polity. To start with, it could encourage an exodus of ethnic Macedonians from the country and alter to their disfavor the demographic balance with their Albanian nemeses.
This is a realistic scenario: Macedonia's membership in NATO was vetoed by an irate Greece last year when the two parties failed to reach a compromise regarding the "name Issue" (Greece's insistence that Macedonia change its name). Similarly, Macedonia was not given a date to commence its accession talks with the European Union. Economic and Euro-Atlantic integration prospects look dim and youngsters and elders alike are frantically looking for a way out. Rumblings of a renewed ethnic conflict have recently escalated.
Based on experience from other countries in Central and Eastern
Europe - such as Poland and Bulgaria - and on experience from other regions (for
instance: Israel and Vietnam), we conclude:
Macedonia is likely to lose 3-5% of its population over the next 5 years (assuming that Europe undergoes a mild economic recovery starting in 2012). Most of these are expected to take advantage of the visa liberalization regime and leave Macedonia for good (emigrate). Another 3-5% are likely to try to find temporary jobs as Gastarbeiter. Consequently, Macedonia will plunge into negative population growth.
At least 40% of these emigrants are likely to be students, white-collar workers, academics, and skilled laborers. This massive brain drain will create labor shortages in crucial sectors (healthcare, education, academe, research and development, banking and finance, hi-tech industries and manufacturing). As Macedonia's economy recovers and improves, the brain drain will increase, not decrease!
Barry Chiswick and Timothy Hatton demonstrated ("International
Migration and the Integration of Labour Markets", published by the NBER in its
"Globalisation in Historical Perspective") that, as the economies of poor
countries improve, emigration increases because people become sufficiently
wealthy to finance the trip.
Remittances are likely to recover as emigrants and Gastarbeiter send money back home and, thus, replenish the country's foreign exchange reserves by an extra 200-300 million euros a year. By 2013, remittances will exceed the record level of 2007 and foster a new wave of consumption, construction, and GDP growth. Levels of unemployment inside Macedonia will drop and unemployment of the well-educated and skilled will be all but eliminated.
Quotes from the report:
"Macedonia invests an average of $50,000 of its painfully scarce resources in every university graduate, only to witness tens of thousands of them emigrate to richer places. Macedonia ends up subsidizing the rich countries by exporting to them its human capital, the prospective members of its dwindling elites, and the taxes they would have paid had they stayed put. The formation of its middle class is often irreversibly hindered by an all-pervasive brain drain. The kleptocracies that run Macedonia may actually welcome the brain drain as it also drains the country of potential political adversaries." (p. 6)
"Emigration also tends to decrease competitiveness. It increase salaries at home by reducing supply in the labour market (and reduces salaries at the receiving end, especially for unskilled workers) ... The countries of origin, whose intellectual elites are depleted by the brain drain, are often forced to resort to hiring (expensive) foreigners." (p. 18)
How can Macedonia take advantage of the communities of expats
(expatriates) that are likely to form after the visa regime has been
"Countries - from Mexico to Israel, and from China to Guatemala - are trying to tap into the considerable wealth of their diasporas by issuing remittance-bonds, by offering tax holidays, one-stop-shop facilities, business incubators, and direct access to decision makers - as well as matching investment funds.
Migrant associations are sprouting all over the Western world,
often at the behest of municipal authorities back home. The UNDP, the
International Organization of Migration (IOM), as well as many governments
(e.g., Israel, China, Venezuela, Uruguay, Ethiopia), encourage expatriates to
share their skills with their counterparts in their country of origin. The
thriving hi-tech industries in Israel, India, Ireland, Taiwan, and South Korea
were founded by returning migrants who brought with them not only capital to
invest and contacts - but also entrepreneurial skills and cutting edge
Thailand established in 1997, within the National Science and Technology Development Agency, a 2.2 billion baht project called "Reverse the Brain Drain". Its aim is to 'use the 'brain' and 'connections' of Thai professionals living overseas to help in the Development of Thailand, particularly in science and technology.'
The OECD ("International Mobility of the Highly Skilled") believes that:
'More and more highly skilled workers are moving abroad for jobs, encouraging innovation to circulate and helping to boost economic growth around the globe.'
But it admits that a "greater co-operation between sending and receiving countries is needed to ensure a fair distribution of benefits".
The OECD noted, in its "Annual Trends in International Migration, 2001" that (to quote its press release):
'Migration involving qualified and highly qualified workers rose sharply between 1999 and 2000, helped by better employment prospects and the easing of entry conditions. Instead of granting initial temporary work permits only for one year, as in the past, some OECD countries, particularly in Europe, have been issuing them for up to five years and generally making them renewable. Countries such as Australia and Canada, where migration policies were mainly aimed at permanent settlers, are also now favoring temporary work permits valid for between three and six years ... In addition to a general increase in economic prosperity, one of the main factors behind the recent increase in worker migration has been the development of information technology, a sector where in 2000 there was a shortage of around 850,000 technicians in the US and nearly 2 million in Europe...'
But the OECD underplays the importance of brain drain:
'Fears of a "brain drain" from developing to technologically advanced countries may be exaggerated, given that many professionals do eventually return to their country of origin. To avoid the loss of highly qualified workers, however, developing countries need to build their own innovation and research facilities ... China, for example, has recently launched a program aimed at developing 100 selected universities into world-class research centers. Another way to ensure return ... could be to encourage students to study abroad while making study grants conditional on the student's return home.' " (p.23-6)
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