Nova Makedonija Daily Dose and Interviews (June 2008- )

By: Dr. Sam Vaknin

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Written June 23, 2008, Updated November 2011

No Foreign Banks - A Curse or a Blessing?

Even under the best case scenario (in which banks take a 50% haircut on the credits they have extended to profligate Greece, but there is no default) French, Italian, German, and Austrian banks run a collective capital shortfall of c. 40 billion euros. Add to this the EU's new banking capital adequacy regulations and the figure doubles. Imagine a contagion spreading to Portugal and Spain and we are talking 200 billion euros. Add a crumbling Italy and literally all the major banks in western Europe are insolvent. The EFSF - the euro's emergency kitty - is supposed to recapitalize these tottering financial institutions, but hitherto it has remained largely bereft of the minimal resources required.

Frankly, I'd rather put my money in a Macedonian bank than in any west-European bank. Macedonia's banks have acted far more prudently than their brethren abroad, partly because they derive handsome profits from arbitrage between government bonds and deposits and partly because, accustomed as they are to bad borrowers and defaults, they are hypervigilant and laudably cautious. Macedonian bankers are, thankfully, not sophisticated and so avoided the pitfalls of derivatives, securitization, swaps, and other miracles of western financial engineering.

Ironically, the main risk to the Macedonian banking system stems from the fact that more than 80% of the sector is owned by foreign banks. Contagion from abroad - not the quality of their portfolios - is what keeps Macedonia's bankers awake at night.

In June 2008 , the Austrian Erste Bank has just published a report about the state of the banking system in Central and Eastern Europe. Macedonia was not even mentioned. The banking sectors of Bulgaria, Romania, Russia and Ukraine are poised to grow the fastest, as these countries catch up with the West, said Erste. With the exception of the scandal-ridden French Societe Generale, no prime foreign bank was represented in Macedonia in 2008. Even Societe Generale had merely purchased a local bank rather than open its own branch. Erste Bank itself declined to buy Stopanska Banka in 1997.

How things have changed!

Erste and other major foreign banks are now fully present in Macedonia.

But is foreign banking such a good thing?

Research demonstrates that foreign banks tend to lend to foreign direct investors and foreign clients. They rarely extend credit to local firms, let alone individuals in the host country. True, they bring with them management know-how, access to financial networks and markets, and fresh capital. Their entry fosters competition and improves the overall performance of the banking sector, as well as the terms and conditions offered to domestic clients by domestic banks.

But not all is rosy. Foreign banks bring with them systemic risks. Macedonia was spared the worst of the global credit crunch precisely because it was not exposed to the global financial system. It had no subprime mortgage market, no crazy credit derivatives, no mysterious hedge funds. Its backwardness turned out to be a blessing as it avoided the excesses perpetrated by foreign banks in the USA, in Europe, and in some parts of Asia.

Erste Bank's report was very clear about it: the existence of foreign banks in Bulgaria, Romania, Russia and Ukraine is precisely why the meltdown of the global credit markets has wreaked collateral damage on the banking sectors in these countries.

Greece aside, there is a greater threat looming on the horizon: Basel III.

In the wake of the Great Recession (2007-8) – a crisis largely of the financial system – the multinational Basel Committee and the Group of Central Bank Governors and Heads of Supervision, comprised of central bankers, banking supervisors, and regulators more than doubled the amount of equity (Tier 1) capital banks must have to 4.5%.

Another 2.5% of their assets must be held as an equity “conservation buffer” to be amortized and deployed in case of emergency. Banks which resort to the buffer must, however augment their capital by any (legal) means possible (for instance, by not distributing dividends, by divesting non-core assets, or by issuing new stock). Yet another 1.5% of the balance sheet must be held in “less-than-equity” quality investment vehicles and the total leverage ratio must never go below 3% in equity (admittedly, a liberal number).

Moreover: regulators can impose the equivalent of yet another 2.5% in risk-weighted assets (including off-balance-sheet assets, such as derivatives) in the form of a “countercyclical buffer”. This is intended to counter the pro-cyclical nature of most capital requirements and reserves regimes: the more assets’ prices rise (and commensurate risks increase), the less the capital set aside as loans are deemed “safer” by greedy bankers whose compensation is often tied to their institution’s short-term performance.

The Basel III regime has to be fully implemented by 2019, a concession to under-capitalized banking sectors in various EU members (notably Germany). Ironically, the Basel Committee was created in 1974, following the failure of a German bank and an ensuing near-collapse of the currency markets. Indeed, the Basel regime is as strong as its weakest link: multilateralism has its price. This in-built frailty forces the Committee to remain vague on what constitutes capital; on disclosure regarding derivatives; and on the loaded issue of subordinated debt vs. corporate bonds (subordinated debt would force banks to become a lot more transparent and is likely to foster shareholder activism).

Written June 24, 2008

The Future of Oil and the Economic Future of Macedonia

The price of oil is no longer an important determinant of the economic health of the West. To create the same amount of economic output, manufacturers use much less oil than they used to.

Moreover, today, there are futures contracts, which allow one to fix the price of purchased oil well in advance. There are options contracts which can be used to limit one's risks as a result of trading in such futures contracts. 

So, why is the price of oil going through the roof?

Because oil has become a form of investment and a hedge against rising inflation. People plough their savings into oil and speculators drive the markets. As Saudi Arabia correctly observes, the price of oil is no longer determined merely by supply and demand.

Who decides on the domestic price of oil and its derivatives?

In some countries, prices are fixed entirely by market forces, supply and demand, usually through specialized exchanges (e.g., the Rotterdam Exchange). The market is completely deregulated: exports and imports are totally allowed and free.

In other countries, prices are fixed by a committee of representatives of the government, the oil industry, the biggest consumers of oil, and representatives of households and agricultural consumers.

In most countries, prices are changed every 3 or 6 months based on the cost of oil at a certain port of delivery. In Israel, for instance, the price of oil fluctuates every three months according to the price of oil delivered in certain Italian ports (where Israel gets most of its oil delivered). This is an AUTOMATIC adjustment.

In a few countries the prices are fixed by the competent Ministry in accordance to the ACTUAL costs of the oil (importing, processing and distribution) + a fixed percentage (usually 15%). This is called a COST PLUS basis pricing method.

The international price of oil is determined by the following factors: 

  1. The weather. Cold weather increases consumption. The world is getting hotter. The 14 hottest years in history have been in the last 25 years. The warmer the climate - the less oil is consumed for heating, but the more oil is consumed for air conditioning.
  1. Economic growth - The stronger the growth, the more oil is consumed (mostly for industrial purposes). The incredible economic development of countries like China and India and the emergence of car-owning middle classes in many developing countries enhanced demand and contributed to the current crisis.
  1. Wars increase oil consumption by all parties involved.
  1. Oil exploration budgets are growing and new contracts have just been signed in the Gulf area (including Iraq), Brazil, and Canada. The more exploration, the more reserves are discovered and exploited, thereby increasing the supply side of the oil equation.
  1. Lifting of sanctions on Iraq, Iran and Libya will increase the supply of oil.
  1. Oil reserves throughout the world are low. This tends to enhance demand for newly produced oil.
  1. When there is an economic crisis in certain oil producers (Russia, Nigeria, Venezuela, Iraq) it forces them to sell oil cheaply, sometimes in defiance of the OPEC quotas. This was the case in the late 1990s.
  1. OPEC agreements to restrict or increase output and support price levels should be closely scrutinized. OPEC is not reliable and its members are notorious for reneging on their obligations. Moreover, OPEC members represent less than half the oil produced globally. Their influence is limited.
  1. Ecological concerns and economic considerations lead to the development of alternative fuels and the enhanced consumption of LNG (gas) and coal, at oil's expense. Even nuclear energy is reviving as does solar energy.
  1. New oil exploration technology and productivity gains allow producers to turn a profit even on cheaper oil. So, they are not likely to refrain from extracting and selling oil even if its price declines to 5 US dollars a barrel.
  1. Privatization and deregulation of oil industries (mainly in Latin America and, much more hesitantly, in the Gulf) increases supply. Recent moves in countries like Venezuela, Russia, and Bolivia to re-nationalize their oil industries and unrest in countries like Nigeria raise global oil prices owing to uncertainty and increased political risk.
  1. Price volatility induced by hedge funds and other derivatives has increased lately. But, as opposed to common opinion, financial players have no preference which way he price goes, so they are neutral.

If crude price reaches $200 a barrel, as per the prediction published by Goldman Sachs recently, Macedonia's economy will be adversely affected: the trade deficit and inflation will balloon out of control, the exchange rate of the Macedonian denar will be placed under pressure, and macroeconomic stability will be jeopardized. These developments will have dire effects on investment, both domestic and foreign and will likely increase unemployment. As far as Macedonia is concerned, substantially higher oil prices will result in stagflation.


(Updated column in Brussels Morning)

Written June 26, 2008

Macedonian Stock Exchange to Resume Upward Trend

On June and October 2007, I made two presentations to the members of the Association of Brokers in the Chamber of Commerce. In these presentations, I warned that the market values of most of the firms listed and traded on the Stock Exchange, especially the components of the MBI-10 index, were grossly inflated. The fair value of the MBI-10 should be around 4300, I calculated.

I also predicted a sharp deterioration in the global and Macedonian economic environments. I repeated these prognoses in an article dated December 4,
2007, published by the Los Angeles Chronicle.

Since then, the MBI-10 has gone down by over 50% and is now around 4600.

Last week, I conducted a series of fundamental and technical analyses on behalf of foreign brokers and investors.

The results:

1. The market has hit its technical bottom. The MBI-10 is unlikely to deteriorate much further. On the contrary, the next big move ("trend") is
up, to 5800 and then 7200. In the long term (2-3 years), the MBI-10 should reach 13,300.

2. Out of 10 components of the MBI-10, eight (8) firms are seriously undervalued. The shares of these companies make excellent investments in the
medium (1 year) to long-term (3-5 years).

3. Sentiment among professionals - both domestic and foreign - is turning positive. Buying activity is likely to increase. Non-professionals will join
the market much later, though, so volumes may remain thin for quite a while.

4. The only drag on the market right now is Macedonia's deteriorating macroeconomic outlook (inflation, trade deficit, MKD exchange rate, etc.)
and political instability. But, these have now been largely discounted and are reflected in current prices. Barring a major collapse of the international financial system, these issues will not affect the market in the next few months.

Written June 27, 2008

Who is Paying for Macedonia's Trade Deficit?

Macedonia's trade deficit in the first FOUR months of 2008 ballooned to 903 million USD, almost double the figure for the same period in 2007.

If this continues, Macedonia's trade deficit will equal 2.7 billion USD, or 35% of the GDP, an unprecedented figure and one of the highest in the WORLD.

But who is paying for all this?

There are FIVE SOURCES of foreign exchange flows that are then used to cover (pay for) the trade deficit:

1. Remittances from Macedonian workers abroad, as well as other unilateral transfers. These more or less stabilized over the last 8 months and now
stand at 1.8 billion USD annually.

Contribution to trade deficit coverage in first four months: c. 650 million USD

2. Borrowing in foreign capital markets - virtually non-existent. Macedonia has issued Eurobonds only once, a few years ago, and these amounted to a
paltry 150 million euros.

Contribution to trade deficit coverage in first four months: ZERO

3. Foreign aid and multilateral credits from international financial institutions

Contribution to trade deficit coverage in first four months: c. 50 million USD net

4. Using Macedonia's foreign exchange reserves to finance the trade deficit

But, according to Narodna Banka, foreign exchange reserves declined by a mere 22 million euros this year, owing mainly to interventions in the
foreign exchange markets.

Contribution to trade deficit coverage in first four months: ZERO

5. Foreign Direct Investments (FDI)

The government claims that FDI reached 100 million euros in the first months of the year.

Contribution to trade deficit coverage in first four months: c. 200 million USD. 

Written June 28, 2008

There are four types of interaction between politics and business:

1. Politics can be in the service of business (plutocracy)

2. Business can be in the service of politics (socialism and authoritarian regimes)

3. Business is politics, they are inextricable (corporatism, fascism, failed states).

4. Incestuous relationship between politics and business (rent-seeking).

In Macedonia, the fourth model is in full force.

The State (i.e., the party in power) constitutes one third of economy (employment, investment, budget, taxes).

How can we heal Macedonia's economy?

The first step in every process of healing is: facing the truth.

And the truth is that Macedonia, in its current state, is not a viable economic entity. It suffers from low natural endowments; is economically dependent on foreign flows of capital to survive; has no critical mass for a self-sustaining internal market; has ruined infrastructure and an antiquated legacy of capital goods. Macedonian firms have low profitability. Macedonia's institutions are dysfunctional and self-serving. Macedonia has low-grade elites, owing to negative selection (brain drain) and a low level of knowledge and education; it lacks social cohesion.

If this litany of woes in not enough ...

The governments of Macedonia are a perfect manifestation of Parkinson's Law of Triviality: in a committee, it is easier to agree on a billion dollar atomic reactor than on the roofing of a bikeshed or on coffee procurement for the administration. The reason: politicians know less about mega-projects than they know about bikesheds and coffee.

When lacking in knowledge or experience, politicians concentrate on micromanagement and demonstrative gestures and neglect the big picture (real reforms and macroeconomic management).

Macedonian politicians have repeatedly failed. Macedonia's only hope lies in de-politicization and in having a small, technocratic government at the service of the private sector.

Real reforms in Macedonia include: changing the national ethos and mentality; openness to outside input and constructive criticism; suppression of special interest groups; depoliticization of the civil administration, if necessary by employing foreign managers; second-phase deregulation and privatization (the transfer of government functions to the private sector); transition from dying industries and economic sectors to new ones; overhauling state institutions; reduction of political risk (predictability of laws, regulations, and government decisions; continuity of state commitments and undertakings; less political involvement in business); media ownership rules; special-purpose courts; attracting FDI as an engine of innovation and internal reform (transmission mechanism: competition).

The government's role is to provide the conditions for business to operate and thrive - on both the micro and the macro levels.

Macroeconomic management revolves around the optimal allocation of economic resources. Anything that goes against it should be fought: inflation, cronyism and nepotism, corruption, credit-driven consumption, populist wage and pension increases, unrealistic exchange rates, increased tax burden.

This Government has good intentions and has succeeded in improving the business climate and in implementing some microeconomic reforms. But it lacks the basic knowledge or willingness to implement a wider, more fundamental transformation and on how to manage the economy. In the long run, its achievements (such as the construction and consumption driven growth of GDP and industrial production) are ephemeral and conjectural.

The Macedonian economy is akin to the Macedonian Stock Exchange: the bubble will burst. Macedonians are now living in a state of self-induced psychosis: the preference of fantasy over reality. This may be a pleasant feeling, but denial cannot last long. Sooner or later, Macedonians will have to wake up to a bitter and challenging reality, every bit as harsh as when they started their collective exercise of auto-suggestion.

Written June 30, 2008

Give Vouchers to the Unemployed

Despite all the promises, the increase in FDI, and the improvement in the business climate, unemployment in Macedonia remains stubbornly high, at 35% of the workforce. The government claim that real unemployment is lower because many employees in the informal (black) economy go unreported. The truth is that real unemployment is even higher than the official figure: many are underemployed (they go to work, do nothing there, and return home); about 10% of those officially employed don't get paid; and many stopped looking for a job altogether, they simply gave up.

One solution which is gaining traction in the West (mainly in the USA, the UK, and northern Europe) is to use vouchers to alleviate the nefarious side-effects of unemployment.

"Voucher Communities" are communities of unemployed workers organized in each municipality. The unemployed exchange goods and services among themselves in a barter-like or countertrade system. They use a form of "internal money": a voucher bearing a monetary value.

Thus, an unemployed electrician can offer his services to an unemployed teacher who, in return, gives the electrician's children private lessons. They pay each other with voucher money. The unemployed are allowed to use voucher money to pay for certain public goods and services (such as health and education).

Voucher money is redeemed or converted to real money - so it has no inflationary or fiscal effects, though it does increase the purchasing power of the unemployed; vouchers enhance the purchasing power of the unemployed and the homeless; they restart the economic cycle in deprived neighborhoods and regions; they increase the psychological well-being and motivation of deprived and dysfunctional strata of the population; vouchers engender networks of service-providers and customers which can later integrate into the formal, monetized economy.

Written July 1, 2008

What is Wrong with Macedonia's Inflation Figures?


Inflation in May 2008 declined, on an annual basis, from 10.2% to 9.5%.

The government claims that the sources of inflation in Macedonia are external and that inflation is imported INTO Macedonia through the ever-increasing prices of foodstuffs, raw materials, and energy.

In other words:

Prices INSIDE Macedonia are increasing because prices of foodstuffs and energy OUTSIDE Macedonia are increasing.

But, if this is true, inflation in May in Macedonia should have gone sharply UP, not down!

Global prices of foodstuffs and energy soared to their highest levels in April-May. Oil prices, for instance, increased more in April-May than they did in January-March (and they continued their vertiginous climb in June). So did the prices of many foodstuffs, especially corn and rice.

How can we explain that inflation in Macedonia went down even as prices of imported foodstuffs, raw materials, and energy exploded?


There are two possible explanations, both of them unpalatable:


(i) That the official figures, published by the Bureau of Statistics cannot be trusted. Remember how annual inflation suddenly shot up from 3.2% in December 2007 to 10.5% in January, February, and March 2008? Such a dramatic rise is suspicious and indicative of "tampering with the evidence".

(ii) Or that most of Macedonia's inflation is home-made, not imported. The government increased wages in the public sector and pensions were indexed to inflation. Government spending has also risen. Still, if the central budget is indeed in surplus (as the government keeps telling us and the IMF), this should harness inflation, not increase it.


My money is on option (i), especially in an election year. Inflation in Macedonia is higher than we are told and the budget is in deficit, not in surplus. Time will tell if I am right.

Written July 2, 2008

Don't believe these fairy tales

The government wants you to believe these fairy tales. Don't.

1. This year cannot end with 5% inflation. Inflation in the first 6 months was 10% (on an annual basis). Inflation would have to drop to 2% and less in the next 6 months in order to end up at 5% for the entire year. More likely, inflation this year will be between 9-11%. Even this projection is based on the official, suspicious figures. Real inflation is probably higher still.

2. Macedonia's out-of-control trade deficit (the difference between its imports and its exports) is mostly financed with remittances (transfers that Macedonian workers abroad send back to their families). Remittances tend to drop when there is a global recession and foreign workers are fired and sent back home. As remittances decline, the government will have to dip into the country's foreign exchange reserves in order to finance the trade deficit. This may jeopardize the stability of the denar's foreign exchange rate against the euro. While devaluation is not on the cards, macroeconomic instability is.

3. Even if the government succeeds to attract foreign direct investment (FDI), this will not even begin to solve Macedonia's unemployment problem. Economic research teaches us that FDI is employment-neutral: some people get hired, others get fired. Foreign investors employ foreign managers and rely on automation, rather than on manpower. At best, FDI will create 20-30,000 jobs in the next ten years. This figure is less than 10% of the total number of unemployed people.

4. Real unemployment is higher than the official figure, not lower. Many ostensibly employed people are actually underemployed (they go to work, do nothing there, and return home); about 10% of those officially employed don't get paid; and many stopped looking for a job altogether, they simply gave up. The government has no coherent national plan to cope with unemployment or to encourage domestic investment.

Written July 3, 2008

Is Foreign Direct Investment (FDI) the Solution to Macedonia's Economic Problems?

In 2007, with 239 million euros, Macedonia was yet again in the last place among the 20 countries of Central and Eastern Europe as far as foreign direct investment (FDI) goes. The situation may improve next year when, the Vienna Institute for International Economic Studies says, FDI will double to half a billion euros.

But is FDI the solution to Macedonia's main problems: unemployment and the poverty it engenders?

Recent economic research says: no, it isn't.

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 FDI. 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.

Written July 6, 2008

Don't Trust Foreign Reports about Macedonia!

The Heritage Foundation and the Wall Street Journal are the joint publishers of the much-vaunted "Index of Economic Freedom". The annual publication purports to measure and compare the level of economic freedoms in 155 countries.

Undisputed data pertaining to 2001 now widely available, I decided to scrutinize how accurate the Macedonia chapter of the 2002 index was (it was not) and whether its authors knew what they were talking about (they didn't).


Here are some of the numerous factual mistakes I found in this oft-quoted international index:


In 2001, Macedonia's GDP was $3.4 billion and not $2.7 billion as the index states. Macedonia's GDP exceeded $3 billion in the 4 years prior to 2001. Nor has GDP grown by 2.7 percent in 2001: it has actually declined by 4.3 percent . As a result, GDP per capita was wrongly computed in the index. The trade deficit was not $300 million, as the index states - but double that. It has been above $500 ever since the mid-1990s. Net foreign direct investment has been closer to $100 million in 1999-2000 (excluding extraordinary privatizations, such as Makedonski Telekom) - rather than the paltry $29 million the index misreports.

The index made rice one of Macedonia's "major" agricultural products. It was, actually, first on its list. Alas, little rice was grown in Macedonia in 2001. Nor did the country produce noticeable quantities of citrus, or grains, as the index would have us believe.

The authoritative-sounding introduction to the 2002 index informed us that Macedonia maintained a budget surplus "from the sale of state-owned telecommunications". Yet, in its first decade of existence, Macedonia enjoyed a budget surplus only in 2000 and it had nothing to do with the sale of its telecom to the German-Hungarian MATAV. The proceeds of this privatization were kept in a separate bank account. Only a small part was used for budgetary and balance of payment purposes.

The index stated that Ljubco Georgievski had "privatized approximately 90 percent of (the country's) state-owned firms". These were actually privatized by the SDSM when it was in power until 1998. It is true that major assets, such as Macedonia's refinery and its leading bank were privatized under Georgievski. It is also true that the bulk of state-owned loss making enterprises were either sold or shut. But these constituted less than 15 percent of the number of companies the state owned in 1992.

The fiscal burden of Macedonia was 34 percent of GDP in 2001 - not 23 percent as the index stated. It has surpassed 30 percent of GDP years before. Moreover, in the sub-chapter titled "Fiscal Burden of the Government" the authors contended that "government expenditures equaled 23.3 percent of GDP". A mere three lines later they contradicted themselves: "the government consumes 19 percent of GDP". Which is it?

The "monetary policy" segment of the index is a misleading one-liner: "Between 1993 and 2000, Macedonia's weighted annual average rate of inflation was 7.15 percent." The term "weighted annual average rate of inflation" is not explained. Whatever happened to the hyperinflation followed by near-deflation of Macedonia's first decade? The straight average in this period was 56 percent, not 7 percent.

The index says that "the country's political instability has had a debilitating effect on foreign investment". It sounds logical but does not stand up to scrutiny. Investment flows actually increased in the conflict year 2001 as bargain hunters from Greece, Slovenia, Germany, and other countries converged on Macedonia.

And so this list of errors and misrepresentations continues.

Macedonia is a tiny and unimportant country. But many of the erroneous data used by the index could have been avoided merely by using Google! Sloppy editing, internal contradictions, and outdated information regarding one country, regardless of how inconsequential it is, render the entire index suspicious.

Unfortunately, indices such as these affect both portfolio and direct investment flows, the country's rating, its image in the international media, and the government's standing domestically. The golden rule with such indexes is: "handle with care". 

Written July 12, 2008


Myths and Facts about the State Budget

In a television interview Vice-Premier Stavreski said that he does not understand the critics: clearly a state budget that has a surplus is anti-inflationary. The more the government collects in taxes, the less money there is in the economy. The less money there is in the economy, the less the upward pressure on the general level of prices. Professor of Economics Trajko Slaveski confidently stated that the budget promotes growth and he prefers growth with inflation to no growth with no inflation.


Vice-Premier Stavreski is, of course, mistaken as is Professor Slaveski.


Recent economic studies teach us that what is important is not only whether the budget is in surplus or in deficit - but also what is the composition of the budget; in other words: what is the money in the budget used for.


A budget that serves to increase wages in the public sector is inflationary because it increases the ability of consumers to purchase and to compete for goods and services. It sends a wrong signal to workers in the private sector: they also demand wage increases. This is called a "wage spiral" and leads directly to an increase in inflation.


Moreover, a budget that is geared mainly to pay salaries, pensions, the construction of non-productive objects such as churches and basketball halls, and the consumption of various perishable goods has inflationary effects without having a positive influence on long-term growth. On the contrary: economic theory teaches us that the more the government taxes, the more it wastes the taxes it collects. Governments are very bad at managing investments. This is called "the misallocation of economic resources". Rhetoric aside, this government spends precious little on infrastructure and other growth-promoting projects.


Macedonia's budget equals a whopping 45% of GDP. Of every 100 euros produced by the economy, this government promptly confiscates 45 euros (as opposed to 25-35 euros in taxes collected by previous governments). This has a negative impact on growth. Instead of letting the markets, businessmen, and entrepreneurs do their work, the government forcibly becomes their largest partner, taxes them directly and indirectly (inflation is also a kind of tax), and then goes on harmful spending sprees. Its good for gaining votes in elections - it is bad for the economy. Stavreski and Slaveski: take note.


Zoran Stavreski gets his numbers wrong


M-r Zoran Stavreski, Vice-Premier of the Republic of Macedonia, published an article titled "The Story of the Auto Industry".


The article contains only two sets of economic figures. Both of them are seriously wrong (not on purpose, I am sure).


Stavreski writes:


"The auto industry is the largest industrial sector in the world and constitutes above 10% of GDP in the developed countries."


Here are the actual figures for 2006. The figures will be even lower in 2007-8, owing to the collapse in auto sales, the rise in the prices of fuels, and the global recession:




The automotive industries amounted to 3.3% of GDP (direct manufacturing) - or up to 7.8% (taking into account all indirect suppliers and service


United Kingdom 3.9%


Italy 8.5%


Spain 5%


Only Germany comes close at 10.5% (or 13%, according to the EBRD).


Stavreski also writes:


"The production of Johnson Controls and Johnson Mathey will increase Macedonia's GDP by 15-20%".

There is no way this can happen. Not even remotely so. Let us study the figures:


Macedonia's GDP is c. 5 Billion euros, excluding the grey economy.


GDP (Gross Domestic Product) =


Consumption + investment + government expenditure + net exports (exports minus imports)


In other words, according to M-r Stavreski, the investments+NET exports of the 2 plants will amount to c. 1 billion euros.


The value added (the closest approximation of net exports) of the automotive industry is c. 30%.


(I am ignoring the investments in the 2 plants which are small relative to Macedonia's GDP)


To justify Stavreski's figures in the article:


The total ANNUAL EXPORTS of the 2 plants must be 3.5 BILLION euros (!!!)


Of which 30% will be NET exports = 1 BILLION euros


Only then will these net exports will increase Macedonia's GDP by 20%.


This is NOT a realistic projection. These figures are not realistic.


Johnson Matthey's GLOBAL sales of catalysts in the fiscal year to 3/2007 amounted to 2.7 billion euros. Will the Macedonia plant DOUBLE Johnson Matthey's sales???


Let's examine the contribution of the automotive sector in other DEVELOPING countries:


The automotive industries contribute 5% to India's GDP


Russia 2%


Poland 4%


Only Slovakia comes up with 25% of its GDP due to automotive industries.

Why This Government Likes Inflation

This government likes and encourages inflation because inflation masks the true situation and makes them look good. In reality, the economy hasn't been in worse shape since 1996. Inflation helps to deceive the public and even experienced observers. How?


1. As the general price level increases (in other words, as the prices of virtually everything go up), companies derive more income from the sales of the same goods and services. Consequently, of course, they pay more taxes. This allows the government to spend more: to raise salaries, construct sports halls, and generally make the population at large feel better. Without inflation, the state budget would have been in deficit, not in surplus.


2. Inflation means that the value of the currency goes down. The Macedonian denar is worth less at the end of the year than it did at its beginning. Thus, when the government pays suppliers, or returns its debts, it does so with a depreciated currency. It borrows when the denar is strong and pays out when it is weak. Inflation acts, therefore, like a kind of tax on the economy.


3. As inflation sets in, people are afraid that prices will continue to go up. So, they stop saving money and instead spend it and consume in order to "lock down" the current prices, before they increase again. This creates an artificial and short-term boom. GDP grows as consumption soars. It is bad for investments, though: people stop saving or withdraw their existing savings and the banks have no money to lend to businesses. But, who cares? The effects of this irresponsible and destructive economic policy will be felt only after the next elections. And, in the meantime, carpe diem.

Written July 12, 2008

Global recession Threatens Macedonia

The world is sinking into one of the worst global recessions ever. How will this affect Macedonia?
In two major ways:
1. Less foreign direct investment (FDI)
Historically, in times of global recession, foreign direct investment (FDI) dries up. During the last global recession (2000-2002), FDI flows declined by more than 50%.
The government of Macedonia gambled everything it has on FDI - and ONLY on FDI. This government is obsessed with FDI as the only solution, the nostrum, the panacea to Macedonia's pressing economic problems. The government has no Plan B.
Even in good times, FDI has never been the solution to Macedonia's pressing problems (such as unemployment).
Now, with the world in crisis, FDI transactions already concluded will be cancelled and FDI, in general, will decline precipitously.
2. Life-threatening trade deficit
Until now, Macedonia's incredibly high trade deficit (c. 35% of GDP this year and 25% of GDP last year) was covered by remittances (transfers) from abroad. Macedonians working in other countries sent money back to their families. These money transfers fully financed the trade deficit.
With the onset of global recession, Macedonian workers abroad will be the first to be fired and sent back home.
Remittances will decline. The trade deficit will not be covered anymore. This could threaten the stability of the Macedonian denar and the Macedonian economy.
Macedonia can still shift its emphasis from FDI to domestic investment and job creation. It is not too late. It is not shameful to admit to a mistake in orientation.


Can Gross Domestic Product (GDP) Figures be Trusted?

GDP figures are not an exact science. All over the world, GDP numbers are politicized and subject to heavy manipulation. There are at least 3 known methodologies to calculate GDP and, for each of these methodologies, there are two alternative formulas which take into account completely different economic sets of data.


Still: there are good proxies to GDP. For instance: the consumption of electricity in the residential (household) sector and in the industrial sector, adjusted for the size of the informal economy, for the change in personal incomes (including private credit), and for shifts in weather patterns (as measured by a multiannual time series of average temperatures). Macedonia's energy consumption has been growing by almost 4% annually for a few years now. This means that the economy is either stagnant or slightly contracting - but definitely not growing, as the government would have us believe.


Other proxies: money velocity; wage statistics (especially the wages of urban unskilled workers); crude death rate; infant mortality; and even the amount of mail sent per capita. Fluctuations in purchasing power (PPP) reflect the relative strengths of currencies, but also changes in GDP. All these measures indicate that Macedonia's economy is experiencing either weak growth or no growth at all.


True: Macedonia’s Bureau of Statistics is implementing a 3-year program that will bring it ever-closer to Eurostat standards. BUT: as the case of Greece proves, this fact is completely irrelevant. Statistics are only as good as the government that issues them. If the Bureau is under political pressure to "massage" the figures, no amount of standards can help. The Bureau must be an autonomous body, with an independent budget, under no political pressure, with involvement of foreign experts, and answerable only to parliament. Otherwise, national statistics are only a sham and completely unreliable, never mind which standards are implemented.


The formula to calculate GDP (Gross Domestic Product) is this:


GDP (Gross Domestic Product) = Consumption + investment + government expenditure + net exports (exports minus imports) =


Wages + rents + interest + profits + non-income charges + net foreign factor income earned


But the GDP figure is vulnerable to "creative accounting":


1. The weight of certain items, sectors, or activities is reduced or increased in order to influence GDP components, such as industrial production. Developing countries often alter the way critical components of GDP like industrial production are tallied.


2. Goods in inventory are included in GDP although not yet sold. Thus, rising inventories, a telltale sign of economic ill-health, actually increases the GDP!


3. If goods produced are financed with credits and loans, GDP will be artificially HIGH (inflated).


4. In some countries, PLANS and INTENTIONS to invest are counted, recorded, and booked as actual investments. This practice is frowned upon (and landed quite a few corporate managers in the gaol), but is still widespread in the shoddier and shadier corners of the globe.


5. GDP figures should be adjusted for inflation (real GDP as opposed to nominal GDP). To achieve that, the calculation of the GDP deflator is critical. But the GDP deflator is a highly subjective figure, prone, in developing countries, to reflecting the government's political needs and predilections.


6. What currency exchange rates were used? By selecting the right "points in time", GDP figures can go up and down by up to 2%!


7. Healthcare expenditures, agricultural subsidies, government aid to catastrophe-stricken areas form a part of the GDP. Thus, for instance, by increasing healthcare costs, the government can manipulate GDP figures.


8. Net exports in many developing countries are negative (in other words, they maintain a trade deficit). How can the GDP grow at all in these places? Even if consumption and investment are strongly up - government expenditures are usually down (at the behest of multilateral financial institutions) and net exports are down. It is not possible for GDP to grow vigorously in a country with a sizable and ballooning trade deficit.


9. The projections of most international, objective analysts and international economic organizations usually tend to converge on a GDP growth figure that is often lower than the government's but in line with the long-term trend. These figures are far better indicators of the true state of the economy. Statistics Bureaus in developing countries are often under the government's thumb and run by political appointees.

Miscalculating Inflation in Macedonia

The most accurate yardstick of inflation is the GDP deflator (which includes the prices of capital goods and export and import prices). Regrettably, it is rarely used or mentioned in public.


The Consumer Price Index is not the same as the Living Expenditures Index.


The Living Expenditures Index measures the changes in the prices of the SAME products in a given period of time.


The Consumer Price Index measures the changes in the prices of products bought during a period of time, even if they are NOT the same products (in other words, even with changed consumption habits).


In other words:


The Consumer Price Index reflects the purchasing habits of the households which participate in the surveys.


This means that the measured level of inflation can be manipulated for political reasons by:


1. Changing the composition of the consumption "basket" (deciding the prices of which products and services will be included and what will be omitted)


2. Altering the weights (weight coefficients) of the various products and services within the consumption basket.


3. There is no agreed methodology on how to properly measure the service component in the economy (including government and public goods, rents, and barter or countertrade transactions). Choosing the "right" methodology can have a negative or positive effect on the level of measured inflation.


4. Including or excluding certain retail and shopping venues (such as e-commerce, catalog sales, open air markets, garage sales, and so on).


5. Constructing a non-representative sample of households for the survey by overemphasizing certain locales (e.g., urban, or West vs. east, North vs. South), certain socio-economic classes (e.g., the middle-class), or certain demographics (e.g., minimizing the roles of seniors and teenagers).


6. Exaggerating or minimizing the role of the informal (grey or black) economy.


Macedonia's consumption basket is skewed.




Alcohol and tobacco (4%), health (3%), education (less than 1%), cost of government services and (imputed) rents (8%) are seriously UNDER-weighted.


But, even if we accept the basket as it is, the inflation figures published clearly do not tally with anyone's experience.




Food and alcohol together constitute 41% of the basket.


Everyone knows that food prices AND the prices of alcoholic drinks have gone up by at least 10% in 2007. The prices of many items doubled. The prices of most edible commodities went up by 40% in both Macedonia and in the world. With oil prices touching 100 USD per barrel in 2007, food prices skyrocketed everywhere


Yet, according to Macedonia's Bureau of Statistics, the prices of food products are up by 2.3% in 2007.  Mysteriously, alcoholic drinks also rose by EXACTLY 2.3%. Skopsko i se e mozno.


This kind of blatant wrong data undermines the trust of the citizens in the official statistics published in Macedonia. Foreigners also take note.

Written July 17, 2008

Measures to Contain Inflation and the Trade Deficit

Countries around the world - from Vietnam to Kazakhstan - have adopted these measures to reduce their burgeoning inflation and trade deficit:

Hedging (fixing the future prices of foodstuffs, oil, and commodities by purchasing forward contracts in the global markets)

Removal of import duties, excise taxes, VAT, and other taxes and fees on all energy products and foodstuffs

Subsidizing the consumption of the poorest 10% of the population

Introducing price controls and freezing the prices of essential products

Banning the export of foodstuffs (or introducing customs duties and quotas on such exports)

Raising interest rates and reserve requirements in the banking system to prevent new credit formation

Forcing banks to purchase government bonds to reduce liquidity in the market

Administratively capping credit growth and tightening lending to consumers and for real-estate transactions

Freezing, reducing or waiving public sector fees and charges

Releasing commodities, oil, and minerals from strategic reserves

Capping interest rates on deposits (to prevent credit formation using money from new deposits)

Reclaiming agricultural lands and modernizing farms and agriculture (long-term measures)

Declaring a World Trade Organization (WTO) emergency and introducing import quotas and duties on non-essentials and luxury goods

Introducing an inflation target

Allowing for a gradual devaluation of the currency, within a band or range or as a crawling peg. A strong currency has anti-inflationary effects, so any devaluation must be minimal, slow, and subject to market forces.

Written July 18, 2008

One Reason Why Macedonia is not Prosperous

Macedonia has consistently ranked lowest in Europe in a variety of economic dimensions: from FDI to productivity. Its endemic poverty is the inevitable outcome of multiple factors: its corrupt and incompetent political elite; rent-seeking businessmen; primitive banking system; bankrupt education system, and so on. But, one important factor usually goes unmentioned: Macedonia is landlocked, it lacks access to the sea.

In April 1998, John Luke Gallup and Jeffrey Sachs, published a seminal study titled "Geography and Economic Growth". The two eminent development economists concluded that "location and climate have large effects on income levels and income growth through their effects on transport costs, disease burdens, and agricultural productivity."

Even more crucially, geographical constraints seem to affect economic policymaking. Thus "populations that are located far from coasts and navigable rivers and that thus face large transport costs for international trade, as well as of populations in tropical regions of high disease burden" are automatically disadvantaged. To these we must add the effects of inferior natural endowments and the impact of lack of access to natural resources (such as water, or oil) on growth.

As Irene Botosaru points out in another paper titled "Geography, Demography, Trade, and Economic Growth", geographical determinism is again in fashion among economists. Her recommendations:

(Landlocked countries) "should export more manufacturing goods rather than agricultural raw materials ... (and) would profit from improved political relations with their transshipping partners, from improved information and physical infrastructure, as well as from increased population density in urban areas and in areas close to the border with transshipping countries."

In other words, good relations with Greece should be the cornerstone of Macedonia's economic policies. The current jingoism is not only ridiculous, coming from a tiny nation, but it is also detrimental to economic growth and future prosperity.

All told, lacking access to sea lanes or large rivers "shaves" 0.7-1 percent off GDP growth every year. As these percentages accumulate, poverty is the outcome. till, what's new? Centuries ago, Adam Smith, wrote in "the Wealth of Nations":

"“As by means of water-carriage a more extensive market is opened to every sort of industry than what land-carriage alone can afford it, so it is upon the sea-coast… that industry of every kind… begins… and it is… not till a long time that those improvements extend themselves to the inland parts of the country.”

The Real Threats to the Economy of the USA

The outcry about offshoring (outsourcing - the relocation of domestic jobs to more efficient and cheaper suppliers abroad) is politically motivated. Outsourcing affects the vocal, politically active, emblematic, and well-connected hi-tech industry in a year of presidential elections. No wonder it has become a campaign issue.

But outsourcing is far from being a real threat to America's economic well-being and prospects. As technologies mature, outsourcing is both inevitable and welcome. It encourages the optimal allocation of economic resources, frees up capital and labor for more productive uses, and, in the medium to long run, generates more jobs than it eliminates.

The largest economy in the world is faced with other, structural, more daunting dangers, though.

1. Huge costs are imposed on the American economy by the global geopolitical realignment following the Cold War and its manifestations - ubiquitous instability, ethnic and national tensions, and terrorism. Military budgets soar and the private sector is crowded out of the credit markets.

2. The ageing of the population in the United States portends a crisis of mammoth proportions in the pension and social security systems. The shrinking of the productive age group is not fully compensated for by immigration.

3. The decline of American science and technology requires the importation of brainpower from other countries. This process - of net brain absorption - is about to reverse and become net brain drain as American scientists flee restrictions in the free flow of scientific information and religious constraints on research (e.g., on stem cell studies).

4. The rise in religious sentiment, the "esoteric sciences", and sheer superstitions carries an economic price tag. As economic decisions - for instance: the allocation of funding for research and the arts, foreign aid, the workings of the Internet - become less rational the allocation of scarce economic resources is rendered more wasteful.

5. The shift from productive economic activities to speculative and derivative pursuits (i.e., trading in financial instruments) transformed the United States into a "paper economy", both literally and figuratively. Consequently, as it increasingly opens up to international trade, it imports more than it exports (generating unsustainable trade deficits). The resultant excess capacity (slack) prevents rapid and energetic recoveries from slumps and recessions.

6. American fiscal and personal profligacy buried the United States and its denizens under a mountain of debt. America has a monopoly on printing US dollars and these have become its main export. A global shift in the composition of international reserves (e.g., the emergence of the euro as a reserve currency) threatens America's ability to erode its debt through inflation. The increasing ubiquity and intrusiveness of government - both Federal and in the various states - adds to the economy's underlying inefficiency.

Written July 22, 2008

How Macedonia's Banks Discovered America

Recently, the United States government was forced into literally nationalizing its financial sector owing to the irresponsible conduct of mortgage banks and brokerage houses. In 1983, the Israeli government bought the entire banking system owing to rabid speculation in the Tel-Aviv Stock Exchange. This may soon be happening in Macedonia as well - albeit for a different reason.

Macedonia's banks are not involved in the country's real estate bubble. Over all, they have acted prudently and refused to lend more than 50% of the values of properties pledged as collateral by borrowers. Similarly, by and large, they have refrained from getting directly involved in the pyramid scheme that passed for the Macedonian Stock Exchange in the last 4 years.

But, the banks here are sitting on a time bomb: consumer credits. Their total profits of 60 million euros (up 30% on 2006, on paper, at least), derived also from a growth of 39% in credits given to "non-financial entities". But this was dwarfed by the huge increase in lending to individuals (up 56%), through credit cards (up 122%) and overdrafts (up a whopping 77%). Loans and credits to individuals nearly equal those doled out to businesses.

The quality of all these types of credits worsened throughout the last 18 months. In other words: people are defaulting on the re-payments of the loans they have taken, especially through credit cards. The National Bank estimates that the portfolio risk of the banks has increased by 33% and is the highest in the last 4 years. Moreover, the credits are not taken in order to finance productive activities and thus generate future streams of income: rather, they are mostly used to defray the costs of new cars, vacations, residential property, and consumer goods.

Driven by the need to improve bottom lines and compete in an over-crowded sector, banks such as NLB Tutunska Banka, now relaxed their requirements and lending criteria. People who, in the past, would have been refused credit, now obtain it with little difficulty. Of the total liabilities of the banks (c. 3.6 billion euros in 2007 compared to 2 billion euros in the first quarter of this year alone), the amount of bad loans may be far larger than the banks admit in their financial statements.

Should many more loans turn sour, some banks will inevitably suffer from a liquidity crisis and be rendered insolvent. Runs-on-the-banks may transpire and these will force the government's hand: some banks are too big to fail and the state will have to bail them out to avoid a systemic meltdown of the entire sector.

Written July 26, 2008

Dangerous Liaisons: Online Banking in Macedonia

All of Macedonia's major banks offer to their customers financial services and products through the Internet. However, as opposed to their counterparts throughout Europe, none of them is aggressively pushing its clientele to adopt online banking. This may be the result of multiple reasons: (1) A computer-illiterate public, unaccustomed to working on the Web; (2) Staff lacking in training; (3) Computer systems that do not integrate seamlessly Internet-generated transactions with the banks' ledgers; (4) In Macedonia, online banking may be no less costly to process than "bricks and mortar" transactions at the branch.

But there's another problem: computer security. To withstand the coordinated onslaught of hackers and cyber-criminals, who are constantly trying to empty the bank accounts of their victims, online banking Websites must incorporate many defensive safety features. These render the entire experience cumbersome and complicated and deter the vast majority of clients.

Go through the list below to see how secure is your bank's online presence. It is short and by no means exhaustive and is based on a study conducted at the University of Michigan by Atul Prakash, a professor in the department of electrical engineering and computer science, and two doctoral students, Laura Falk and Kevin Borders:

1. All the pages of the bank's Website must use SSL (Secure Sockets Layer) and TLS encryption technologies. In the Internet Explorer Web browser, a small, yellow padlock icon appears at the bottom of the page when such encryption is available. It prevents hackers from tapping into the exchange of information between the user's computer and the bank's servers and routers.

2. Users should not use their computer keyboard to type in passwords. Many computers are infected with keyloggers: small software applications that monitor the user's typing and pass on the information to networks of criminals. Instead, the bank should provide a "virtual keyboard" (a tiny on-screen graphic that looks like a keyboard). Users can then click their mouse and press the various "keys" of the virtual keyboard to form the password.

3. The banking Website should not re-direct the user to other domains or sites (which potentially are not as secure).

4. The bank should insist on strong passwords: minimum five characters, allowing combinations of numerals and letters, including capitalized ones.

5. The bank should never send any information pertaining to the account - especially not passwords - via e-mail.

6. The bank should insist on "two-factor authentication". The user would need a username and password to access the Website. But, to transact in the account, he would make use of one time "tokens" (codes). Each user should be equipped with printed lists of such codes or with a special device that generates them. They can also receive the codes via SMS. The codes are used to transfer money, change the password, change the limit of withdrawal, give instructions regarding securities and deposits, etc.

Crashing and Cashing, Pumping and Dumping: Stock Manipulation in the USA

Two weeks ago, America's Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority and New York Stock Exchange Regulation announced that they will investigate the spreading of unsubstantiated or patently false rumors in order to manipulate the prices of stocks. Networks of broker-dealers, hedge funds and investment advisers allegedly participate in these activities on behalf of short-sellers (clients who make a profit when the prices of stocks collapse).

Other shady operators act through the Internet: they target "penny stocks" (illiquid shares with low market capitalization). They spam millions of e-mail inboxes with "good news", "exclusive tips", and "privileged information". When gullible victims buy the shares, they sell at a huge profit. These operations are known as "pump and dump".

Still, it is not easy to prove that a broker or an investment advisor knew that the information he was parlaying was false. Gossip spreads through ephemeral means, such as texting (SMS), IM (Instant Messaging), and anonymous or encrypted re-mailing. Moreover, the unhampered flow of information is at the foundation of both free speech and the efficient operation of financial markets.

Still, maliciously planted false data can undermine trust among market players, dry out liquidity, and ruin perfectly healthy firms. Banks and brokerage houses are especially vulnerable as their main asset is their reputation.

Some people have already been brought to justice. On July 14, 2008, the New-York Times reported:

"In April, the S.E.C. settled a securities-fraud and market-manipulation charge against Paul S. Berliner, a trader formerly with the Schottenfeld Group. The S.E.C. charged he had spread a false rumor about the price of the Blackstone Group’s potential acquisition of Alliance Data Systems, and profited from short-selling Alliance’s stock."

Written July 28, 2008

Democracy and Prosperity Don't Always Go Together

Many nations have chosen prosperity over democracy. As they see it, yes, they can't speak their mind or protest or criticize or even joke lest they be arrested or worse - but, in exchange for giving up these freedoms, they have safer streets, food on the table, they are fully employed, they receive ample health care and proper education, they save and spend to their hearts' content. In return for all these worldly goods, they forgo the right to vote once every four years. Many insist that they have struck a good bargain - not a Faustian one.

From Venezuela to Russia and from China to Ecuador, democracy is out of favour. The West has transformed the ideal of democracy into an ideology at the service of imposing a new colonial regime on its former colonies. Spearheaded by the United States, the white and Christian nations of the West embarked with missionary zeal on a transformation, willy-nilly, of their erstwhile charges into profitable paragons of "democracy" and "good governance".

The defenders of democracy use the wrong arguments in their fight to preserve and propagate it:

I. They argue that democracies are more peaceful than dictatorships

This is patently untrue. The two most belligerent countries in the world are, by a wide margin, Israel and the United States (closely followed by the United Kingdom). As of late, non-democratic China is one of the most tranquil polities.

II. They argue that democracies are inherently stable (or to successfully incorporate the instability inherent in politics).

This, too, is a confabulation. The democratic Weimar Republic gave birth to Adolf Hitler and democratic Italy had almost 50 governments in as many years. The bloodiest civil wars in history erupted in Republican Spain and, seven decades earlier, in the United States. Czechoslovakia, the USSR, and Yugoslavia imploded upon becoming democratic, having survived intact for more than half a century as tyrannies.

III. They argue that democracies are conducive to economic growth (indeed, are a prerequisite to such)

False. The fastest economic growth rates in history go to imperial Rome, Nazi Germany, the Stalinist USSR, Putin's Russia and post-Mao China.

Granted, democracy allows for the free exchange of information and, thus, renders markets more efficient and local-level bureaucracies less corrupt. This ought to encourage economic growth. But who says that the airing of municipal grievances and the exchange of non-political (business and economic) ideas cannot be achieved in a dictatorship?

Even in North Korea, only the Dear Leader is above criticism and reproach - all others: politicians, civil servants, party hacks, and army generals can become and are often the targets of grassroots criticism and purges. The ruling parties in most tyrannies are umbrella organizations that represent the pluralistic interests of numerous social and economic segments and strata. The composition of the cadre in these parties reflects this shifting landscape as efficiently as any democracy. Totalitarian regimes do react the popular will. For many people, this approximation of democracy - the party as a "Big Tent" - is a more than satisfactory solution to their need to be heard.

Mankind has hyet to invent a better form of governance than democracy. Its proponents, though, would do well to use more realistic, mature, and informed arguments in its defense. So far, they haven't fared well and, consequently, democracy is on the retreat throughout the world.

Written July 29, 2008

Why Apartment Rental Prices in Macedonia Are So High?

In most countries, the renting of residential property (apartments) provides the owner with an annual income equal to 2-3% of the value of his or her real estate. In Skopje, owners make 6-7%. An apartment selling for 100,000 euros will often rent for 7000 euros a year. One pays the same to rent an apartment in Skopje and in Berlin, even though, in Berlin, apartments are three to five times more expensive to buy.

Why this excess yield?

Five reasons:

(1) Limited supply. Despite the construction craze of recent years, there is still a shortage of at least 20,000 apartments, especially properties to let.

(2) Criminals and politicians, whose sources of funding are unlimited, jack up the prices and rarely bargain. They use other people's money to pay for their luxuries and don't care to save or to secure a reasonable price.

(3) Foreigners who live in Skopje are usually employed by NGOs, international financial institutions (IFIs), and multinationals. Their employers pay their expenses and have little time and inclination to haggle over the rent in a crowded market. They pay the asking price every time.

(4) Yuppies - young, upwardly mobile Macedonians, employed mainly in the financial services industry - earn 3 to 6 times the average salary and can afford to pay exorbitant rents.

(5) The process of urbanization in Macedonia is unrelenting. Tens of thousands of peasants and villagers relocate to the cities every year, with Skopje their main destination. They support rental prices by increasing the demand, although they cannot usually afford the more expensive apartments.

Written August 7, 2008

Patriotism in the Service of Inflation

As any behavioral economist will tell you, economics is a branch of psychology. Causes and effects don't always go together and the most well-meaning measures may have the most bothersome effects. Humans are annoyingly unpredictable.


Consider, for example, the recent amendments to the law. From now on, the use of any currency except the Macedonian denar to affect payments within Macedonia would amount to a criminal offense, punishable by up to five years (!) in prison. The Macedonian denar, in other words, is henceforth the only legal tender in the Republic of Macedonia.


Good for patriotism - and bad for the fight against inflation.


When Macedonians use euros to make payments, they "import" the inflation of the euro-zone. When they use denars, they foster inflation. The denar is an inflationary currency. The more denars are available through the money supply and the more often they are used (this is called "money velocity"), the more pronounced their inflationary effects. Because the euro's rate of inflation is far lower, the euro is a disinflationary currency: it reduces inflation. Prices in euros are stable in the long-term, prices denominated in denars tend to rise all the time.


Indeed, many countries - from Argentina to Yugoslavia - succeeded to reduce hyper-inflation drastically merely by allowing the use of a low-inflation foreign currency as a second legal tender in their domestic markets.


As usual, the Minister of Finance means well. It is only his sense of timing that needs fine tuning.

Written August 12, 2008

Macedonian Wages Among the Highest in the World

"Invest in Macedonia", implored the government's campaign, because wages here are among the lowest in Europe. Are they?


The average salary in Macedonia is c. 200 euros per month and the cost to the employer - what with wage taxes and contributions to the pension and health funds thrown in - is c. 320 euros. That translates to c. 4000 euros a year.


What does the typical Macedonian worker give in return? In other words, what is the value of the goods and services that each and every Macedonian employee produces?


Easy: simply divide the country's GDP by the size of its workforce.


According to the IMF, Macedonia's GDP this year would be c. 8 billion USD (or 5 billion euros). The World Bank and the CIA largely agree with this estimate. That's 2500 euros per every Macedonian, man, woman, and child (=GDP per capita).


Of course, only 20% of Macedonia's population are employed, so GDP per employee is c. 15,000 euros (excluding the 10% of those who do not get paid).


It looks like a good business: invest 4000 euros a year in your employee and get back 15,000 euros worth of (pretax) product.


But, how does it compare to other countries?


Start with the region.


Albania's and Bosnia-Herzegovina's GDP per capita are equal to Macedonia's, but rising fast with impressive flows of FDI. Bulgaria's and Serbia's are 40% higher. Croatia's is three times Macedonia's. But, since the rate of employment in Croatia is double that of Macedonia, a Croat worker produces only 1.5 times as much GDP as a Macedonian one. Every Greek, Czech, and Slovene worker is four times as productive as a Macedonian worker (these countries' GDP per capita is 8 times Macedonia's) while the Romanians are almost twice as plentiful and the Russian workers beat the Macedonians 1.7:1 (Russia's GDP per capita is 3 times Macedonia's).


Of course, such a comparison is unfair. The Czech average salary is 722 euros and in Serbia it touches 400 euros. We should, therefore divide the GDP per capita by the cost of labor. This is known as GDP unit labor cost.


Even then, Macedonian workers are spectacularly unproductive. The Macedonian costs 4000 euros a year and produces 15,000 euros of GDP annually. The Serb costs pretty much the same (c. 5300 euros a year), but produces 20,000 euros of GDP every 12 months. The Czechs, Greeks, and Slovene employees do even better: they each cost between 9000 euros (Czech Republic) and 20,000 euros (Greece) a year, but give in return 60,000 euros of GDP! 


Here's a riddle for you:


An unskilled Russian factory worker earns (gross) 1.60 euros per hour. A German - 13 euros per hour. Where is it better to open a factory?


Let's see: the Russian costs 310 euros a month and the German costs 2500 euros a month. Case closed?


Not yet. The Russian produces 2,000 euros a month. The German produces 8,000 euros a month. An investor is left with 4 times more production in Germany than in Russia. He pays more - but, he definitely gets more.


The Macedonian, by comparison, produces a paltry 1200 euros a month. This is why Macedonia is not an attractive destination for foreign direct investors. Salaries here are actually way too high. Judging by this meager output, to render it attractive, the average wage in Macedonia should not exceed 50 euros a month, all included.


Are Macedonian workers lazier or more stupid than their counterparts elsewhere? Not so. Labor productivity does depend on the existence of a work ethic (longer hours and more effort and initiative). But, more importantly, it reflects the workers' level of education and skills, the age and quality of machinery and other capital goods and equipment used in the production process, the availability of knowledge and technology, and the proliferation of better management. Macedonia needs to work hard in all these spheres merely to catch up with the rest of the region, let alone the world.


From my correspondence:



FDI are supposed to fix the problem with aged and inadequate machinery and equipment by providing better ones right? Or are you talking about the privatisation of the old factories which were built and equipped 50 years ago (there are hardly any of those left in state ownership)?

FDI can gradually improve the work ethic as well. If a worker knows that he/she is going to get rewarded for being productive and the company is producing good financial results than the worker is going to try much harder (I would). I think a FDI with a bonus/incentive scheme for the workers would have great results.



I would also like to discuss the Russian worker vs German worker example. I cannot understand your conclusion that "he pays more – but, he definitely gets more". Are you saying that you would rather invest 50M and get 55M back instead of investing 20M and get 30M in return? To illustrate this with your example, if your target was to produce 80K euros worth of goods per month you would need 40 Russian workers or 10 German workers. This operation would cost you 12,400 euros in Russia or 25,000 euros in Germany.


Many non-economists make this mistake. The workforce is not INFINITE. It is finite. The more Russians you try to hire, the higher their salaries will go, until they price themselves out of the competition.


Another thing that caught my attention was the GDP unit labour cost comparisons. Wouldn't a % of return on investment be a better be measure of this? For example if a worker costs 1000 and produces 5000 of GDP then the return on investment is 400%. Applying this to the numbers you provided we get 200% for Greece, 275% for Macedonia, 277% for Serbia and a fantastic 566% for the Czech Republic.


That's not the way we, economists, look at it. We are interested in MARGINAL RETURN or MARGINAL UTILITY. If I invest 4000 USD in a Macedonian, I will get 15,000 in annual production. If I invest another 1300 in a Serb - I get another 5000 in production. The Serb's marginal utility is far higher than the Macedonian's. This is ONE reason why Serbia had 5 billion euros in FDI vs. 200 million in Macedonia (the FDI figures in Macedonia are also questionable, by the way).

Of course, this is NOT the Macedonian worker's fault! He has little to work with by way of capital goods (machinery), infrastructure, skills, education, and access to markets. Macedonian workers are every bit as good as the workers of any other nation, as I made very clear at the end of my article.

Written August 13, 2008

African Economy, American Dreams

Macedonia has an African economy, but, ever since Gruevski came to power, it has American-level consumption: two new cars per family, vacations abroad, unlimited bank credits, and every conceivable electrical gadget and appliance. To sustain this grandiose insanity, Macedonians borrow from everyone and live off remittances (transfers from Macedonian workers and family members abroad). Macedonians have become consummate parasites with the government's blessing and encouragement.

There is only one path to reduce Macedonia's threatening trade deficit: to discourage imports. There are many ways to reduce imports. For starters, the government should correctly price items like electricity and fuel. Subsidies need to be limited only to the neediest 10% of the population. Everyone else should pay much higher, realistic, global market prices.

As far as passenger cars are concerned, the government should make it very expensive to buy a new car and very attractive to keep a used one. The Ministry of Finance, eager to please the population and with an eye on the ratings of the governing coalition, spews out nonsense to justify its irresponsible acts. "New cars consume less fuel and need fewer spare parts", they say. True. But, a new car costs 10,000 euros, paid for with scarce hard currency. The savings that are the results of higher fuel efficiency do not amount, over the life of the car, to 10,000 euros.

Had this government been leading rather than following the opinion polls, it would have embarked on a campaign to encourage the use of public transport; would have cut the costs of owning and maintaining a used car; would have slapped punitive taxes and charges on buyers and owners of new passenger cars; and would have used remedies available to it under the WTO to impose import quotas and other duties, tariffs, and non-tariff (e.g., environmental) limitations on luxury, gas-guzzling vehicles.

Macedonians consume imported vegetables, imported chocolate, imported meat and dairy products; they buy imported "white electronics" and "black electronics"; they vacation outside the country, some of them in order to boast about it to their friends. A craze of conspicuous consumption has gripped this impoverished country that has no economy to speak of. Macedonians are living over and above their means and over and above their economic contribution to society. This will end badly: with a banking crisis, hyper-inflation, and massive indebtedness of both this profligate state and its gullible citizens, who want so much to dream and to fantasize. 

Written August 29, 2008


Foreign Direct Investments in Macedonia - The Facts

As usual, the government spins facts and doctors the evidence to "prove" that its utterly misguided economic policies are working. Well, they are not. The lot of the average Macedonian has never been worse since 1996.


Consider foreign direct investment (FDI). The government tells us that close to 240 million euros flowed into the country in the first 5 months of the year. This is the same as all of 2007. Are congratulations in order?


Not so fast. Close to 80% of this amount are in the form of acquisitions: foreign companies (mainly banks) buying Macedonian firms (mainly banks). This is meaningless FDI that has little effect on the domestic economy. Has anything changed after Societe Generale bought Ohridska Banka? No. Will anything change after Steyermark Savings Bank completes its purchase of Invest Banka? Not likely. Is unemployment still the same since 2006? Yes, it is. Did the trade deficit narrow? It tripled. Bad news piled on even worse tidings.


Moreover, economic studies demonstrate conclusively that foreign banks tend to do business with foreigners, not with local firms and that the profits they repatriate (the foreign exchange they take out of the country) exceeds their initial investment.


But, what about the remaining 20%? We are still talking about 50 million euros!


Most of this money is invested in construction of objects such as shopping malls. What do shopping malls contribute to the economy? Zilch. Shopping centers are non-productive. They don't increase exports. They barely increase employment. They do elevate the trade deficit (by importing goods) and inflation (by encouraging consumption). This is the wrong kind of investment.


How much new foreign money was invested in greenfield industry and manufacturing? A negligible amount. During the election campaign of 2008, the entire government embarked on a flying circus of sorts, signing up foreign companies and touting their achievements to a retinue of obsequious (and happy to travel free of charge) journalists.


What happened with these deals? Nothing. They were not real. Macedonia had signed numerous memoranda-of-understanding and memoranda-of-intent, but very few firm contracts. Bunardzik is still an empty lot.


Finally, how is FDI calculated?


There are four methods. The World Bank's, the cash method (actual flows of foreign exchange as monitored by the Central Bank), the accrual method (counting the entire value of the deal when it is signed), and the realization method (considering as part of FDI only the value of the various phases of the agreed projects, as they are realized).


Which method is the government using to calculate FDI? Who knows. They may be using all four, thus counting the same transaction multiple times and inflating the FDI figures in the process. It sure feels this way. Where are these alleged flows of foreign capital? Nowhere to be seen or felt.


Transparency and honesty are called for- and, preferably, some real foreign investors.


The Economics of Social Solidarity and National Identity

Declaring oneself a nation is the easy part. Any group of people can wake up one morning and decide that they have a common history, common language, and, especially, common enemies. Yet, do people treat each other decently, as compatriots? Social cohesion and social solidarity are the real and only litmus tests of nationhood.


The government of Macedonia was elected by an overwhelming majority of the electorate. It is, undoubtedly, the reification of the nation's will and mentality. It invests a lot of money in supernumerary churches, basketball halls, tennis courts, and public relations stunts. This money would have been far better used to improve the country's dismal hospitals, horrible prisons, and unspeakably atrocious mental health asylums.


A society that values entertainment more than it does the protection and treatment of its weakest members (prisoners, the physically sick, and the mentally ill) is doomed. Most poor countries spend much more than Macedonia on social services. Even the impoverished and besieged Hamas government in the Palestinian Territories doles out 3 times as much (per capita and adjusted to purchasing power) on schools, healthcare, public kitchens, and similar services.


This is why I welcome the Prime Minister's initiative to distribute free textbooks to students and pupils in primary and secondary education. This modest and inexpensive gesture goes a long way towards righting social wrongs and is the best conceivable investment in the country's economic future. Well-done, Nikola Gruevski!

Written August 30, 2008

How the Government of Macedonia Revolutionized the Economic Sciences

The 29th of August this year will be remembered as a crucial date in the annals of the science of economics: Zoran Stavreski, in his column in "Dnevnik", has proved conclusively that Macedonia's unprecedented trade deficit is actually a sign of its growing economic health. In his magnum opus, he relied on economic beliefs and theories which were proven wrong and became obsolete more than a decade ago.

The consensus among economists today (those who bother to read the latest economic literature) is that trade deficits of more than 4% of GDP and which are financed with borrowing or remittances are cancerous and should be reduced post haste. The IMF think the same, but Stavreski dismisses them and other experts, both domestic and foreign, whom he derisively calls "independent". It is well known, of course, that the only two truly independent economic experts in Macedonia are Stavreski and Trajko Slaveski, the Minister of Finance. All the others are automatically suspect and should be ignored.

In his presentation, Stavreski makes seven crucial mistakes, none of them intentionally, I am sure:

1. He says that the growth in Macedonia's imports in current dollar terms is owing to the increase in the prices of goods and commodities imported. Not true. Actually, the quantities of many imported items (such as passenger cars) rose considerably over the last 12 months.

2. He attributes the meteoric and vertiginous rise of the trade deficit to the increase in the prices of crude oil and other raw materials. But, the costs of oil, foodstuffs, and minerals have risen by an average of 30% this year - while the trade deficit has tripled during the same period.

3. He boasts that Macedonian exports have soared by 28%. Not exactly, The prices paid for Macedonian produce, mining extracts, and other goods have increased. Judging by various measures of GDP unit labor costs, Macedonia is no more competitive or productive than it has been a year ago.

4. He fallaciously reassures his trusting readers that foreign direct investments (FDI) pouring into Macedonia explain the sorry state of the country's current account and balance of payments. But, FDI has grown by a mere 130 million euros year on year, while the trade deficit is up one billion dollars and the deficit in the current account is 341 million euros. Hitherto, Macedonia was lucky to have received 1.2 billion euros annually in remittances from abroad. This money was used to defray the profligacy of its citizens, intoxicated as they are by the government's fantasies. The bonanza is at its end, however, as Macedonians working abroad are cutting back on their transfers. As remittances decline, Macedonia will be forced to borrow money externally or to dip into its foreign exchange reserves to cover its trade/current account/balance of payments deficits.

5. This government has constructed its entire macroeconomic policy around the twin pillars of FDI and remittances. This is the Macedonian version of playing Russian roulette. As the global economy enters one of the worst recessions on record, both FDI and remittances will decline precipitously. The government has no plan B.

6. This government is obsessed with foreigners and their money because it refuses to acknowledge the fact that there is a lot of money in the informal sector (the grey economy). Contrary to what Stavreski says, Macedonia has sufficient domestic resources to foster growth. The government needs only to legalize these resources and to level the playing field by granting domestic investors the same treatment, the same benefits, and the same red carpet that they extend to foreigners.

7. Finally, FDI in Macedonia is of the wrong sort: acquisitions (mainly of banks), construction of shopping malls, and consumption. Such FDI does not lead to economic growth. At 35% of GDP no sane economist - independent or not - will call the trade deficit a positive sign of economic health and growth. It takes a politician to make such an outlandish statement. Stavreski used to be a damn good monetary economist. Judging by his column, he is now merely a politician.

Written September 4, 2008

In their unwise statements (that Macedonia can survive and grow economically even without NATO and the EU), the Prime Minister and the Minister of Foreign Affairs are confusing cause and effect. The growth in Macedonia's FDI (foreign direct investment) and GDP (Gross Domestic Product) in 2007 and 2008 was and is a direct result of Macedonia's process of Euro-integration.

Without European prospects, Macedonia's economy will stagnate, the educated young will emigrate (brain drain) and the country will become hopelessly addicted to foreign aid and remittances from Macedonians working abroad.

In the last 5 years, foreign investors have flocked to Macedonia because they believed that it will join the EU shortly. Domestic consumers and domestic investors consumed and invested in Macedonia because they believed  that it will join NATO soon.

Macedonia is an anomaly:

While all other countries seek to join NATO in order to defend themselves against an EXTERNAL threat (Russia) - Macedonia needs to join NATO to fend off an INTERNAL threat (its restive minorities). A NATO membership guarantees peaceful and harmonious inter-ethnic relations and the kind of stability that attracts investors and fosters growth.

Moreover, Macedonia already has literally unfettered access to the EU through its CEFTA membership and other free trade agreements; its WTO membership; and its liberalized customs regime. While all other countries seek to join the EU to gain access to its enormous common market, Macedonia needs to join the EU so that the EU can force Macedonia's politicians to
implement painful but inevitable reforms.

Written October 4, 2008

Public Debt, Partial Truth

Having prepaid some of the country's foreign debt, the Ministry of Finance is boasting that Macedonia's public debt is down by well over 100 million euros. At the same time, the total public indebtedness is up by close to 300 million euros because the private sector has been borrowing furiously.

This is not a bad thing. Some of these new debts were surely accrued as businesses have invested in new machinery, tools, intellectual property, and marketing. This is "good" debt. Future profits from these investments will more than cover the interest payments and the repayment of the principal.

Still, private sector debt is more expensive than public sector debt because lenders charge businesses a higher interest rate than they charge the government. In other words: not only has the total debt of Macedonia gone up, but the cost of servicing this debt has grown.

The Ministry of Finance never lies: it merely presents a partial and distorted picture of reality by omitting crucial facts. This is called in America "spin doctoring". This case is no exception. The Ministry could have been completely honest and say: "Public debt is down, but you should know that private borrowing is up and the average cost of servicing the debt - the payments of interest and principal - is up". Instead, the Ministry only says: "Public debt is down, another great achievement of our infallible and farsighted policies."

Increase the Bank Deposit Insurance!

In the last few days, literally every country in the West has doubled or tripled its deposit insurance. This served to harness the panic that spread through the financial system and to prevent runs on vulnerable banks.

Deposit insurance is the guarantee that the state - or a special institution owned by the local banks - gives to depositors. It covers bank fixed-term deposits and, in some countries (for instance, in the United States) it also pertains to certain types of liquid accounts, known as money market funds.

If a bank collapses, the deposit insurance scheme kicks in and depositors get their money back up to a certain amount. If someone has several deposits in a few banks, all these deposits are covered.

Macedonian banks will not survive a systemic collapse of the European banking system. Many of them are owned by foreign banks. Their capital is invested with and deposited in European banks. They enjoy credit lines issued by Western banks.

If Greek, Bulgarian, Turkish, Swiss, German, French, and British banks begin crumbling one after the other, depositors in Macedonia will lose trust and try to withdraw their money all at once. Very few banks can outlive such an onslaught. Macedonian banks are not diversified. They depend exclusively on deposits for their business.

The government should increase the deposit insurance. It is the only way to counter a potential panic. With their deposits insured, people will sleep better at night and will be less likely to go back to stashing their money under the mattress.

Written October 6, 2008

Mexican Lessons for the Macedonian Economic Leadership

As opposed to Macedonia, Mexico is lucky to have oil. It generates the country's main flow of foreign exchange. Mexico's second largest source of US dollars is remittances: money sent back home by Mexican workers in the USA. It sounds familiar: Almost 20% of Macedonia's GDP is in the form of remittances. These transfers help pay for the country's insane trade deficit. Macedonians are living way beyond their means because they have family members abroad who keep bankrolling them, month in and month out.

In the last 12 months, remittances by Mexicans to their homeland dropped by 12% and are still declining fast. Experts predict an even sharper outcome: 20% less remittances by year's end. Remittances to Macedonia have also been ebbing since November 2007.

Macedonian decision-makers would do well to read what Luis Pena, a Mexican economist, had to tell the CNN:

"Temporary workers are always the first to lose their jobs in crises like this one. Since many Mexicans in the United States are there illegally, they are most vulnerable to unemployment."

With reduced remittances, the Macedonian government will be forced to borrow - or to dip into the country's foreign exchange reserves - in order to finance imports. Many families will be left without a source of income. Banks will do less business and the National Bank will have fewer resources at its disposal. This is not a hypothetical situation. It is happening now.

Written October 8, 2008

Too Much Politics - Or Not Enough?

Macedonians often complain that their country has "too much politics". Politicians and political parties are everywhere, as they make sure that their cronies get lucrative jobs, their supporters land sinecures, and their family members run the state. It is impossible to be employed in the public administration unless one joins a political party in power and displays a "party membership booklet" (knishka). It is outlandishly difficult to obtain needed licenses and permits without the right connections and without pledging future benefits to decision-makers.

Still, it is wrong to say that Macedonian public life and private business are too politicized. Macedonia's political parties are not political and they are definitely not parties in the Western sense of the word. Macedonia's political parties revolve around money, not around competing ideologies and platforms. They function as part business concern, part employment agency, part tour operator for their members.

Macedonia's political parties use the guise of politics and the bluster of perpetual campaigning to hide the fact that they care little about social issues and the country's future. They are concerned with one thing only: upward social mobility. The political organizations here - the parties and the NGOs they spawn and finance behind the scene - are out to maximize income for their members, personal wealth for their leadership, profits for their oligarch supporters, perks for everyone involved.

In Britain, the government pays the salary of the head of the main opposition party. There, the opposition is an integral and crucial part of governing the state. The government consults the opposition on issues of national interest and involves it in decision-making processes. In Macedonia, the opposition is merely the competition. Macedonia's resources are scarce and both coalition and opposition are rapacious business organizations, not political parties. They are both out to maximize their take and they prey on Macedonia's impoverished population.

Macedonia doesn't have too much politics - it doesn't have enough politics. It has no political parties, no true opposition, no politicians to speak of. The day this changes, Macedonia will have joined Europe. Until that time, though, it is merely an African country with European pretensions.

Irish Trash and Macedonian Plastic Bags

The Connecticut, Massachusetts, and Maine legislatures have recently rebuffed proposed legislation to ban the use of plastic bags. Americans dispose of more than 100 billion of them every year. Supermarket checkout counters, dry cleaning outfits, and other establishments all furnish their customers with plastic carrying bags which cannot be efficiently recycled and are taking up expensive and scarce space in trash landfills. Moreover, plastic bags are made of non-renewable energy resources, such as natural gas and petroleum. Thus, they contribute to global warming and, when they end up in the ocean, they endanger marine life.

So, why not ban them altogether?

Because there is a much better idea.

In 2002, Ireland imposed a tax on plastic bags. Within one year, their number dropped by 90 percent. The proceeds from the tax on the remaining ten percent of bags in circulation went to finance environmental causes.

Lessons? Tax, don't ban. Tax, don't recycle. It would also make Minister of Finance, Slaveski, happy, as the government's share of Macedonia's economy grows even further.

Written October 11, 2008

It is Europe's and Asia's Turn Now

The crisis in the United States has little to do with its real economy. Last quarter, GDP there grew by an impressive 3.3%. IBM's profits are up 22% year on year. American commercial banks, though in need of re-capitalization, are sound. Its investment banks - the sources of the current crisis - are gone. The Dow Jones is unlikely to drop below 7100. The end of the crisis is near. The Treasury will semi-nationalize some banks (take equity positions against an injection of capital), buy some toxic debts and that's it. Within 12 to 18 months, the USA will emerge from this crisis, strengthened and Wall Street will be back at 10,000.

Not so Europe.

Europe's real economy as well as its financial sector are a mess. France's GDP declined by 0.3% last quarter. In sliding officially into a recession, it has joined Spain, Ireland, and, now, the United Kingdom and Germany. Battered by a strong euro, expensive energy, and mighty competition from China, the US, and India, European exports have stagnated. As opposed to the USA (where exports constitute 18% of GDP), Europe is dependent on foreign carbon fuels and foreign markets for its goods and services. Exports constitute more than 40% of Eurozone GDP.

Moreover, Europe's commercial banks are in horrible shape - far worse than America's. This year alone, European banks must pay 1.41 trillion US dollars in principal and interest, mainly to bondholders. They don't have the money and they cannot borrow it from other banks because interbank lending has all but dried up. Many of them are already technically insolvent.

Europe's recession will be profound and protracted. Asia is likely to follow suit: Singapore is already technically in recession and China's growth rate is abating. It seems that yet again, the USA will be faced with the daunting task of dragging the rest of the world back to growth and profitability.

Written October 13, 2008

Who Needs the European Dis-Union?

The current global financial crisis should have been the European Union's finest hour. The countries comprising this much coveted club could have joined to battle the waves of bank failures, industrial closures, layoffs, and bankruptcies that are threatening to overwhelm their economies from Iceland to Italy.

The European Union finance ministers should have come with a coherent plan to introduce cross-border regulation, a Europe-wide bank bailout fund, clear, continent-wide guidelines as to state subsidies and export stimulation, and other joint policies. Instead, pompous declarations aside, each government rushed to implement unilateral steps, regardless of the needs of their allies and the risks to the Union. The EU was reduced to pathetic and disheartening caricature in the space of less than a week. Iceland was so disgusted by the spectacle that it asked Russia for a loan rather than approach the EU.

But the cracks in the Union were evident long ago. A much-trumpeted EU Constitution was soundly and multiply rejected by the French, the Dutch, and the Irish. Rows erupted over the dispatch of a contingent of soldiers to Afghanistan and 24 helicopters (!) to Darfur. An EU-brokered truce in Georgia was humiliatingly ignored by Russia. Members disagree on virtually every issue: from how to treat Kosovo to how to deal with terrorism.

Both passport-free travel (the Schengen Agreement) and the single currency, the euro, do not apply to the entire EU. The process of enlargement to the Balkans and to Turkey is contentious and may not come to pass. "What's the point of having an EU?" - wondered the Associated Press last week. The Financial Times called the current disarray "a suicidal position".

Moreover, the EU's new (formerly communist or socialist) members differ strongly from old members (Germany, France) on a host of topics, including the extent of collaboration with the United States and whether to nationalize crumbling financial institutions. "The politicians in Europe are crazy. We didn't live under communism for 40 years just to return to it on EU soil," said Czech Finance Minister Miroslav Kalousek.

Written October 18, 2008

Cash is King

Libya has recently emerged as the second-biggest shareholder in Unicredit, Italy's number one bank and Europe's sixth largest banking institution, with a massive presence in Central and Eastern Europe. Japanese, Chinese, and Arab investors and sovereign wealth funds are purchasing Western assets at bargain basement prices: banks, brokerage houses, factories, and real estate.

The last 5 years witnessed a massive transfer of wealth from the West to the developing world. As the international prices of oil and commodities soared, Western consumers had to pay double and triple in hard currency. Trying to cut costs in a competitive, globalized world, Western companies established facilities and back offices in countries with cheap labor and tax benefits (a process called "offshoring").

The US dollars and euros accumulated by the likes or Russia, China, Venezuela, South Korea, Vietnam, and Nigeria were invested in bonds issued by Western governments and institutions. China alone holds more than 1 trillion (!) US dollars in American debt. The West pays an average of 6% in interest on these obligations, thus enriching the bondholders further.

It is safe to say that close to 7 trillion US dollars have relocated from the USA and Europe to Asia, Africa, and Latin America. Add to these another 10 trillion US dollars in losses in the various stock exchanges of the West and we are faced with an unprecedented situation: an impoverished West, financed by rich and increasingly more self-assertive Third World countries. Colonialism in reverse.

Gambling with the Foreign Exchange Reserves

Macedonia's foreign exchange reserves, assures us the governor of the central bank of Macedonia (NBM), are safe. Why are they safe? Because they are invested in bonds issued by governments of rich nations, such as Germany and the USA. Only if these governments default on their obligations will these bonds become worthless. But, such an event - a default by the governments of the USA or Germany or Switzerland - is unlikely.

True, but highly misleading.

To start with, most of these bonds do not provide a protection against inflation. If the NBM owns a US treasury bond that pays 6% interest annually and inflation in the USA shoots up to 8%, the NBM will lose 2% annually (the difference between the interest coupon and inflation).

Secondly, the value of the bond is determined daily in bond markets around the world. Prices of bonds have been known to decline by up to 35% (!). If the NBM buys a bond and holds it to maturity then I agree with the governor, the investment is safe and guaranteed. But, if the NBM has to buy and sell the bonds prior to their maturity there is no way it can foretell their value.

Imagine that the NBM suddenly needs 500 million euros. It would have to sell the foreign bonds it owns in the open global markets. If the prices of the bonds declined in the weeks or days preceding the sale, the NBM would get less money than it has invested when it purchased the bonds in the first place!

How likely are bond prices to collapse? Very likely. Countries from China to Saudi Arabia are reluctant to purchase newly issued American bonds because of the low interest rates they are paying (the low coupons). The prices of European bonds will crumble as Europe enters a continent-wide recession and as government issue and sell to the public 2 trillion euros worth of new bonds to allow them to recapitalize the ailing banking system. The NBM better pay heed.

Written October 25, 2008

Why all the Stock Exchanges Collapsed

In the wake of the global credit crunch, stock exchanges throughout the world collapsed in tandem. Why?

1. All of them - from the mighty Wall Street to the puny Macedonian Stock Exchange - have come to depend on a regular and inexorable flow of foreign portfolio capital to sustain the bull market. When this influx of hot, speculative funds ceased and foreigners began to sell their holdings, the bubbles burst everywhere at once.

2. The sharp reversal from negative real interest rates (in 2000-2001) to high positive interest rates (in 2004-7) rendered equities unattractive. It was safer and often more profitable to simply park one's money in a fixed-term deposit, money market fund, or bonds. At first, this had no effect on the bull market. But, when sentiment turned, this yield spread favored risk-free instruments over risky ones. At the crucial moment, all markets dried up: it was difficult to sell stocks or real estate; to trade in collateralized debt obligations (CDOs) and other derivatives; and to obtain new loans. Banks refused to lend to each other or even to open letters of credit on behalf of perfectly solid customers. As the real economy soured (and, in Europe, devolved into a recession), corporate profit projections were slashed and stock prices reflected the gloom.

3. Over the last 3 years, market volatility has soared to record highs. Stock indices habitually went up and down 2-3% daily and, in the last 12 months, even 5-8% daily. This did not merely reflect investors' lack of certainty and fear. It was also the outcome of massive stock manipulation, a lack of education (as many small-time, uninitiated investors entered the fray), and the deleveraging of debt-financed investments.

4. Over the last 2 years, the number of new IPOs (Initial Public Offering) declined precipitously and companies began to go private, withdrawing their listed shares from the stock exchanges. This dearth on the supply side affected liquidity and hampered investors' ability to diversify their portfolios and thus reduce their risks.

5. Finally, as real economies were affected by the global financial crisis, macroeconomic indicators flashed alarm. Foreign direct investment is on the wane; remittances - which buttress numerous emerging economies - sharply declined; inflation shot up, together with the prices of commodities, foodstuffs, raw materials, minerals, and energy products, chiefly crude oil; current account and trade deficits ballooned. Emerging economies provide 75% of world economic growth. They are the true engine of globalization. Their decline is ominous. Their domestic stock exchanges are merely reflecting this potentially apocalyptic state of affairs.

Vox Populi, Vox Gruevski: Time for Plan B

Macedonian politicians and analysts often confuse populism with a true expression of the popular will. Populism, in the derogatory sense, is when a leader manipulates his supporters by fanning their base emotions, by making unrealistic, fantastic promises, and by doling out money. Popular will, on the other hand, is what we call "democracy".

By rejecting any meaningful compromise on the name issue, Gruevski is fully in accord with the will and sentiments of the vast majority of Macedonians. Only the (often self-designated) "elite" is unhappy with the course he is taking.

Of course, such intransigence has a price. Gruevski is acting as a populist when he refuses to reveal to the people the painful cost of his nationalist and popular policies. Macedonia can forget about the EU for the next few years. Anyhow, it is not welcome by this august club. I won't be surprised if it joins it after Serbia, or not at all (though NATO is a different story).

Consequently, Macedonia can also forget about becoming an attractive business destination. Foreign direct investment will become even more of a pipe dream. Access to international credit lines will be highly restricted. Exports will languish. Even tourism will be adversely affected. The Albanians in Macedonia are likely to be extremely unhappy with this glorious isolation. Who knows what form this dissatisfaction may take?

It is time for Plan B. Macedonia has to reorient its geopolitical and economic policies: to develop Asian export markets; to attract foreign direct investment from North America, Eastern Europe, Russia, Asia, the Middle East, and Latin America; to establish itself as a free zone, catering to banking, manufacturing, and transport; to offer back office IT services; to encourage domestic rather than foreign investment (perhaps by offering a conditional amnesty to tax evaders).

In the absence of such Plan B, Macedonia will find itself an isolated, backward, impoverished backwater an African enclave at the heart of Europe.

Written October 31, 2008

What not to Learn from the National Bank of the Republic of Macedonia

On October 30, 2008, Nova Makedonija published a harsh attack on me by the Investment Committee of the National Bank of the Republic of Macedonia. I will ignore the personal slights (without which no Macedonian can communicate, it seems) and get straight to the core: the worryingly amateurish and manifestly wrong claims made by the authors.

1. The authors refer me to the biannual reports published by NBRM and available on their Website. Alas, either by design or by omission these reports are meaningless, partial, and fail to contain the most critical information. The reader cannot learn from them how the Committee selects its investments,what specific financial instruments were chosen (except in the most vague terms), in which banks the reserves are deposited, etc.

2. The authors are correct in noting that as inflation rises, the prices of traded bonds drop. This is precisely my point: the prices of bonds already owned by NBRM will drop steeply if and when inflation in the issuing countries were to rise. In the near future, inflation will begin to climb, as the enormous injections of money (1 trillion USD in Europe alone!) will affect the money supply.

3. The authors' next claim that the investment portfolio of the NBRM can never lose more than 2.7% is utter nonsense. No one can predict the losses and profits on money invested in bonds and gold. No one can predict future prices of bonds and gold with certainty. No one can predict the future direction of interest rates (up or down) with certainty. If the geniuses of NBRM were truly able to limit their future losses to 2.7% they would be working in Wall Street, not in Skopje and making billions of dollars in salary.

4. To say that NBRM will never have to sell bonds at a loss is again an example of lack of experience, amateurism, and ignorance. No one can predict the future. It is possible that Macedonia will suddenly need a big sum in foreign exchange (for instance, if it has to bail out a big bank about to go insolvent). In that case, NBRM will have to sell bonds in the marketplace and may incur a loss.

5. Finally, the authors come to my help in order to teach me about the global bond market. It would have been comic had it not been tragic. I am the author of a bestselling book about modern portfolio management theory and have spent the last 32 years analyzing and writing about financial markets and instruments all over the world. I have traded bonds in Wall Street long before Macedonia became an independent state.

And what do the esteemed authors say? Because prices of bonds have climbed during this financial crisis, they will continue to climb.

Wrong. As governments issue trillions of USD in new bonds, the prices of bonds are bound to come under pressure. As interest rates drop below 1%, buyers will lose interest in bonds and move to other assets. As countries that hold trillions in bonds begin to feel the pinch of the global crisis, they will be forced to liquidate their bondholdings in order to finance their needs.

In other words, bond prices are poised to crash precipitously. In the last 50 years, bond prices have collapsed by more than 35% at least on three occasions. Should this happen, the NBRM will lose a fortune.

The NBRM Investment Committee should not behave as individual investors do. They should not predict prices and then act on their predictions. They should not gamble with money that belongs to the people. They should keep it safe. And they should hire professional money managers, and not rely on recent university graduates, oligarchs, professionally unqualified politicians, and failed bank managers to manage their investment portfolio.

Written November 1, 2008

Why Minister Trajko Slaveski Deserves the Nobel Prize for Economics

Professor-turned-Minister, Trajko Slaveski, goes around, gloating and bragging: "I told you so! You see, inflation was nothing to worry about after all!". But, he is ignoring the two main criticisms leveled at him: (1) That most of the high inflation during the first months of the year was not imported from the outside, but was the inevitable outcome of the government's profligate and populist spending plans and (2) That the government took no steps whatsoever to quell the inflation that it has wrought. Macedonian paid a high price for its unnecessary inflation.

Slaveski further says: "Our main problem now is deflation, not inflation." In years of working with and for governments in Macedonia, I have come to strongly distrust the official figures released by the pliant and heavily politicized Bureau of Statistics. I cannot understand how deflation is possible in Macedonia.

Deflation is a drop in the general price level. Such a drop occurs under these conditions: (1) That the prices of raw materials, energy, and foodstuffs are collapsing. Indeed, this is happening. Imported inflation may well have become imported deflation; (2) That bank lending and, consequently, the real economy is contracting. In Macedonia, the opposite is true: both bank lending and GDP (Gross Domestic Product) are growing strongly; (3) That the amount of money in circulation and the velocity of money (how many times money changes hands) have dropped precipitously (for instance, as a result of bursting asset bubbles or much higher interest rates). Again, this is not happening in Macedonia. On the contrary: money supply has been growing vigorously; (4) That government spending is drastically cut and the personal savings rate is meteorically up (and, thus, consumption equally down). In Macedonia, the reverse is true.

No question that inflation in Macedonia should drop from the dizzying heights of January-June 2008. But the science of economics teaches us that conditions for deflation do not exist in Macedonia. Even more suspicious is the fact that inflation in Macedonia mysteriously began to abate two months before the end of the uptrend in global commodity and energy prices. Macedonia, actually, was the only country in Europe whose inflation turned into deflation when it did. Slaveski deserves the Nobel prize for Economics as he was the only Minister of Finance and economist who correctly predicted the level of inflation in his country - down to the last decimal point.

Telling Macedonians What They Want to Hear

Macedonians love a certain type of foreigner: ambassadors, authors, columnists, and visitors who tell them how great and wonderful Macedonians are; how perfect their country is; how right Macedonians are to feel aggrieved ("the whole world is really against you, poor things!"); how impeccable and infallible their customs, traditions, and way of thinking are; and how it will all turn out well in the end. These fake friends, who tell them what they want to hear, Macedonians embrace and adore.

Macedonians hate a certain type of foreigner: ambassadors, authors, columnists, and visitors who tell them how flawed Macedonians are; how imperfect their country is; how counterproductive it is to nurture grudges that spawn xenophobic paranoia; how ill-suited to modern life are their customs, traditions, and way of thinking; and how, if they don't wake up and reform themselves and their dysfunctional institutions, the Macedonian experiment may well turn out badly and short-lived. These true friends, who confront them with the truth, Macedonians hate, despise and threaten. They suspect their motives and develop all kinds of inane conspiracy theories to account for their involvement in the country's affairs.

I am true friend of Macedonia and Macedonians. My wife is Macedonian. I have given years of my life to teach and write in this country. I never charge for my work here: my columns in Nova Makedonija, Fokus, and Kapital are free of charge; my lectures and seminars are free of charge; consultancy services that I provide are free of charge. At a grave risk to my personal safety, I have contributed to Nikola Gruevski's career in all its crucial stages. Judging by election results and opinion polls, most Macedonians seem to regard Gruevski as the only good thing to have happened to Macedonia since its independence.

In a sense, I am more of a Macedonian patriot than most Macedonians. But, I am a true friend, not a fake one. I will never tell Macedonians what they want to hear. I owe Macedonians the truth (as I see it), the whole truth, and nothing but the truth.

As we all know, though, the truth threatens the vested interests of many groups in Macedonia. The self-appointed "elites" who enrich themselves at the people's expense, don't want Macedonians to know the truth. People like me, who expose their lies, ignorance, and shenanigans constitute a threat. So, they fight back by spreading ugly rumors and deception, by labeling truth-sayers and truth-seekers "traitors".

And so, when I criticized its policies, the National bank of Macedonia called me "malicious" on the pages of Nova Makedonija (October 30) and said that my aim is to destabilize the trust in the country's institutions.

On October 17, Nova Makedonija published another long "pismo" (letter to the editor) in which the anonymous reader wrote that I am a "dokazen neprijatel" (proven enemy) of Macedonia and am here in order to damage it. In the name of "national interests" and "national unity", the reader called upon the editors not to publish my column any more.

Recently, a government official warned a visiting foreign analyst that I am "an enemy of Macedonia" and publicly berated the journalists present for associating with me.

A senior minister is spreading false rumors (knowing full well that they are false) that my Ph.D. is fake. Luckily for me, my Ph.D. thesis is listed in the online catalog of the Library of Congress and in the UMI repository of dissertations in Michigan.

"Don't worry, these are mere words" - my friends try to reassure me. But, if words were to fail the members of these "elites", the next stage in such a campaign may not be limited to verbiage. Look what happened in Croatia to the courageous editor-in-chief of "Nacional". Macedonians' freedom of speech is at stake and their ability to tell apart their true friends from those who only pretend to be their friends in order to further their diplomatic careers or enrich themselves.

Macedonia's Steel Industry: Too Big To Fail?

Steel prices are down 40-80% since July (depending on the product). Such a precipitous drop threatens the very existence of the steel processing sector in Macedonia. Should the government extend a helping hand? Should it provide the steel industry with handouts, or, as a minimum with -heavily subsidized loans?

The answer is: yes. Steel products make up a sizable part of Macedonia's exports at a time when its trade deficit is record-shattering and its current account deficit equals 8% of GDP. Thousands of families depend on income from that sector in a country where the official unemployment rate hasn't budged from 35% in years. In the United States, they call firms and sectors that are critical to the economy TBTF (Too Big To Fail).

Still, any assistance granted by this poor state to the rich shareholders of the steel industry must come with many strings attached:

To start with, the government should take shares in the companies it helps as collateral. It should charge a hefty interest rate for trade credit facilities and subsidize only the loans whose proceeds are to be invested in machinery and other capital goods and infrastructure. It should impose onerous conditions on the shareholders: as long as they enjoy the government's largesse, they should receive a minimum wage and no bonuses. The companies should not distribute dividends until they have paid back the state in full. And, most importantly, the government should impose a "windfall tax" on profits made by the shareholders in the past as a result of the steep rises in commodity prices. Justice must be done and be seen to be done.

Written November 3, 2008 

Macedonia's Miraculous GDP


To remind all of us (including former employees of the World Bank):


The formula to calculate GDP (Gross Domestic Product) is this:


GDP (Gross Domestic Product) = Consumption + investment + government expenditure + net exports (exports minus imports) =


Wages + rents + interest + profits + non-income charges + net foreign factor income earned.

Remittances make up close to 20% of Macedonia's GDP. In the last 12 months, they have fallen by 20% (or c. 300 million USD). This alone has subtracted 4% from the country's GDP. This shortage was balanced by a spurt of growth in FDI (Foreign Direct Investment) of c. 300 million USD (if we believe the official figures). Yet, net exports have declined by 1 billion USD over the last 12 months (in other words, the trade deficit and the current account deficit have both shot up). Moreover, Macedonia's exports are in decline, owing to the global crisis, and so this gap is bound to widen and further depress GDP growth.

Professional economist-turned-amateur politician, Deputy Prime Minister Zoran Stavreski, promises us that GDP this year will grow by 5%, as predicted. This is possible only if consumption and government expenditures will shoot up. As consumption is likely to stagnate (at best), we are left with the state budget as the sole engine of growth. The government will simply tax more, spend more and make sure that GDP grows. It will raise wages, pay higher rents, employ more people, spend more on self-promotion, and build additional churches and tennis courts. That's what it did last year, when the budget ballooned into 42% of GDP - and GDP grew by 5.2%.

Written November 11, 2008

Borrowing Its Way into a Financial Crisis

At 2.7 billion euros, Macedonia's central budget equals c. 50% of its Gross Domestic Product (GDP). A year ago, I met the representatives of the IMF, then on one of their endless missions here, and warned them that Macedonia will have a budget deficit this year and next. They laughed me off: the Minister of Finance had assured them that tax receipts were high and climbing; a budget surplus was literally guaranteed.

Fast forward 12 months: Macedonia's 2009 budget contains an in-built deficit (the difference between taxes and expenditures) equal to 2.8% of GDP. Where will the government find the money to cover the deficit? It will borrow it. Public sector borrowing will increase.

And where will the government find the money to pay for the skyrocketing trade deficit (now at 2.2 billion US dollars and projected to total 3 billion US dollars by the end of the year)? You guessed right: It will borrow it. Public sector borrowing will increase.

Moreover, a deficit of 2.8% of GDP is by no means guaranteed. On the one hand, as economic activity contracts (consumption, employment, and exports are very likely to go down), in the wake of the global crisis, tax intake will stagnate or even decline. On the other hand, the government's profligate and irresponsible promises, wage increases, "projects", campaigns, and other ostentatious displays of populism will put pressure on the expenditure side. I wouldn't be surprised if the actual budget deficit ended up being 4-6% of GDP.

Can the government afford such a spiral of debt or will it become the spiral of death?

In the short-term, Macedonia can afford to borrow money from its citizens and abroad (for instance, in the form of Eurobonds). Macedonia's public debt is actually down this year (although the debts of the private sector are up sharply). This can go on for 2, maybe 3 years. After that, no one in his right mind will lend money to such a spendthrift state; capital will begin to flee the country ("capital flight"); interest rates will go up sharply; and the denar may have to be devalued. Macedonia appears to be borrowing itself straight into a financial crisis.

Written January 6, 2009; Updated October 2011

Gruevski's Macedonia, Greece, and Alexander the Great, History's Forgotten Madman

The government of the Republic of Macedonia (OK, technically: Skopje's Centar municipality) has recently erected a statute of a "warrior" (a thinly-disguised Alexander the Great) smack in the middle of its capital city's main square. Prior to that Macedonia changed the name of its puny airport to "Alexander the Great". These were only the latest symptoms of a growing cult of personality. Modern-day Macedonians, desperately looking for their ancient roots in a region hostile to their nationhood, have latched onto their putative predecessor with a zeal that defies both historical research and the howls of protest from their neighbor, Greece.

In a typical Balkan tit-for-tat, Greece blocked Macedonia's long-sought entry into NATO, citing, among a litany of reasons, the "irredentist provocation" that was the renaming of the airport. Macedonia has designs on a part of Greece, Greek politicians claim with a straight face, and the denizens of this tiny polity have no right to the heritage of Greece of which Alexander the Great is an integral part.

Not to be outdone, Macedonian television is now awash with a lengthy ad depicting the precocious leader berating his pusillanimous and craven commanders ahead of a crucial battle. He speaks fluent Macedonian (the current day, Slav language) and ignores their wise counsel. This pathetic abuse of screen time is supposed to indoctrinate latter-day Macedonians to dare, be decisive, and to face challenges. Alexander the Great would have greatly disliked contemporary Macedonians: they are peace-loving, overly-cautious, consensual, and compromise-seeking. It seems that their own government finds these laudable qualities equally offensive.

It is beyond me why both Macedonia and Greece wish to make a deranged mass murderer their emblem and progenitor. There is little that is commendable in both Alexander's personality or his exploits. Having shed the blood of countless thousands to fulfill his grandiose fantasies of global conquest, he declared himself a god, suppressed other religions bloodily, massacred the bulk of his loyal staff, and betrayed his countrymen by hiring the former enemy, the Persians, to supplant his Macedonian infantry.

Alexander the Great was clearly insane, even by the cultural standards of his time. According to Diodorus, a month before he mercifully died (or, more likely, was assassinated) his own generals invited Babylonian priests to exorcise the demons that may have possessed him. Plutarch calls him "disturbed". He describes extreme mood swings that today would require medication to quell and control. The authoritative Encyclopedia Britannica attributes to him "megalomania and emotional instability". It says:

"He was swift in anger, and under the strain of his long campaigns this side of his character grew more pronounced. Ruthless and self-willed, he had increasing recourse to terror, showing no hesitation in eliminating men whom he had ceased to trust, either with or without the pretense of a fair trial. Years after his death, Cassander, son of Antipater, a regent of the Macedonian Empire under Alexander, could not pass his statue at Delphi without shuddering."

Alexander was paranoid and brooked no criticism, or disagreement. When Cleitus, his deputy, had a petty argument with him in 328 BC, Alexander simply ran a lance through his trusted general and had the army declare him a traitor and, thus, justify the slaying. The same fate befell Cleitus's unfortunate successors as second in command.

From his early youth, Alexander has been reckless (though fortunate) and unusually bloodthirsty. He used the fortuitous occasion of his father's murder to liquidate anyone who opposed him, even implicitly. He then went on a rampage that alienated and united all the Greeks against him. Even his famed campaign against the Persians owed its success to the latter's precipitous decline rather than merely to Alexander's military genius. Long before he came on the scene, other Greeks (the Ten Thousand, Agesilaus of Sparta) have defeated the Persians decisively. His bloodlust never abated: when his army mutinied in India and forced him to return to Babylon, once there, he executed scores of his satraps, military commanders, and other functionaries.

Alexander was known for his hubris and unmitigated narcissism. Using humiliating language, he twice rejected offers of peace from Darius the Great King of Persia, whose family he held captive. When Parmenio advised him to accept the second offer by saying: "I would accept, if I were Alexander", he retorted: "So would I, were I Parmenio". Parmenio paid for his independence of mind with his life: Alexander later ordered him assassinated and his son executed. He also murdered anyone who had anything to do with the two.

When he tried to impose on his free-spirited troupes the obligation to prostrate themselves in his presence, he was subjected to such ridicule that he reversed his decision. But, he kept on wearing the Persian royal garb and he did execute Calisthenes, an hitherto obsequious historian (and nephew of Aristotle) who wouldn't bow to him. The Spartans held Alexander in derision. They published a decree that read: "Since he (Alexander) wishes to be a god, let him be a god".

Wherever he went, Alexander was escorted by scribes whose job it was to embellish history and manufacture legends about their employer. Consequently, most of what is commonly "known" about Alexander is false. But, even so, numerous accounts of his drunken and violent reveries remain, in which he habitually murdered people and tore down cultural treasures (such as the palace of Xerxes). That Alexander was a prodigious imbiber of wine cannot be denied. Virtually all the eyewitnesses concur: Ptolemy, Alexander's bodyguard; Nearchus, his admiral; Eumenes the scribe, his secretary; Chares, his chamberlain; Aristobulus, his military engineer. So do historians who relied on such accounts: Diodorus, Plutarch, Arrian, and the anonymous author of "Historia Alexandri Magni" (History of Alexander the Great").

One could only fervently hope that the government of Macedonia fails in its campaign to transform its citizens into mini-versions of this monster. If Macedonians insist on tracing their roots to ancient Macedonia then why adopt a mass murderer as their role model? Why not a philosopher (Hermagoras, Zoilus, Stesimbrotus), an author (Hippolochus, Posidippus, Samus), a historian (Marsyas), or artists (Parmeniskos group)?


Visitors to modern Macedonia are greeted with an insane SMS: "Welcome to the cradle of civilization". In October 2011, the rectors of Macedonian universities sent a letter to the EU enlargement commissioner, Stefan Fule, attributing to Macedonia the "sparking of literacy and culture in Europe". Such ludicrous statements are counterproductive and counterfactual. They are rendered even more so by linking them to a megalomaniac such as Alexander. Macedonians, their national aspirations, and their country used to be taken seriously. Now they are fast becoming a joke - witness the recent opinion pieces in the New-York Times by Matthew Brunwasser. 


Interview granted to "Kapital", April 6, 2009


-Колку и зошто е потребно и неопходно во сегашната економска ситуација Македонија да побара помош од ММФ?




Macedonia's external financing needs (as expressed in its current account deficit, currently at 15% of GDP) are big. The trade deficit, at 40% of GDP and growing, is also unsustainable. Macedonia's sources of foreign exchange are drying up, as well: FDI is down and so are remittances from Macedonian workers abroad.


This creates an external financing gap that may threaten macroeconomic stability and the denar's exchange rate.


However, Macedonia's foreign debt is moderate. Moreover, the denar is not a convertible currency and is unlikely to come under speculative attack of the type suffered by the ruble, or the forint. Macedonia can still tap foreign credits and foreign aid to finance its external account. It can also devalue its currency without any major repercussions (as not many credits here are denominated in foreign currency).


At this stage, I see no need to have an arrangement with the IMF. On the contrary, such an arrangement will likely be counterproductive: it will restrict the government's ability to reflate and re-monetize the economy with counter-cyclical deficit spending. It will also hamper the country's monetary flexibility.

-Кој е Вашиот став за владината идеја за задолжување на државата во странски комерцијални банки за финансирање на буџетските расходи?


There is nothing inherently wrong either with budget deficits, or with external indebtedness. The only condition is that the money borrowed should be used to finance long-term, income-yielding projects (in infrastructure, healthcare, education, information technology, etc.).


However, borrowing money to pay for CURRENT expenses (increased wages in the public sector; indexed pensions; self-congratulatory advertising campaigns; populist construction projects; etc.) is detrimental to the health of the Macedonian economy. Borrowed money has to be repaid and if it was invested non-productively, future governments will have to raise taxes or default on the country's obligations.




The Gruevski governments have rendered Macedonia and Macedonians addicted to flows of foreign capital (FDI and remittances) to consumption credits. The Gruevski governments failed to come up with a Plan B. They failed to encourage domestic investment, for instance. Now that all forms of foreign capital are drying up simultaneously, the government faces two options only: (1) To borrow and spend its way out of the recession or (2) To devalue the currency and implement protectionist measures. This is a stark choice. Macedonia's current economic malaise is NOT the result of the global crisis, as the government would have us believe. Rather, it is the direct outcome of the governments' amateurish and irresponsible mismanagement of the economy.

THESES and ANTITHESES for Macedonia and the Global Crisis: Weighing the Options

Forum organized by the  Association of Chambers of Commerce , May 28, 2009



Macedonia's external financing needs (as expressed in its current account deficit) are big. The trade deficit is also unsustainable. Macedonia's sources of foreign exchange are drying up, as well: FDI is down and so are remittances from Macedonian workers abroad. This creates an external financing gap that may threaten macroeconomic stability and the denar's exchange rate.
THESIS: Macedonia's foreign debt is moderate. Moreover, the denar is not a convertible currency and is unlikely to come under speculative attack of the type suffered by the ruble, or the forint. Macedonia can still tap foreign credits with few strings attached and foreign aid to finance its external account. An arrangement with the IMF will likely be counterproductive: it will restrict the government's ability to reflate and re-monetize the economy with counter-cyclical deficit spending. It will also hamper the country's monetary flexibility. It should be used only as a last measure. An arrangement with the IMF may also send the wrong signal to the markets (that Macedonia's macroeconomic stability is threatened).


ANTITHESIS: An arrangement with the IMF will restore confidence in Macedonia's macroeconomic stability and in its ability to preserve a foreign exchange anchor. It will increase foreign exchange reserves and allow Macedonia to implement proper and much-needed fiscal and monetary policies. The cost of borrowing from the IMF is also lower than any other form of indebtedness.




THESIS: When the economy goes sour, rational individuals and households save more and spend less. The aggregate outcome of their newfound thrift is recessionary: decreasing consumption translates into declining corporate profitability and rising unemployment. These effects are especially pronounced when financial transmission mechanisms (banks and other financial institutions) are gummed up: frozen in fear and distrust, they do not lend money, even though deposits (and their own capital base) are ever growing. Businesses refrain from investing as credits dry up.


In times of economic crisis, as consumption and investment plummet and unemployment is on the rise, the only way to effectively cancel out this demonetization of the national economy (this "bleeding") is through enhanced government spending and by cutting taxes and reducing fees for government services and goods. Where fearful citizens save, their government should spend on infrastructure, health, education, and information technology. The state's negative savings should offset multiplying private savings and negate the "Thrift Paradox". In extremis, the state should nationalize the financial sector for a limited period of time (as Israel has done in 1983 and Sweden, a decade later). Other steps include: removal of import duties, excise taxes, VAT, and other taxes and fees on all energy products and foodstuffs; freezing, reducing or waiving public sector fees and charges; and subsidizing the consumption of the poorest 10% of the population.


ANTITHESIS: Government stimulus should be symbolic or moderate. The role of the government in Macedonia is already way to big: the tax burden is high and the state is the largest single employer. It is crowding out the private sector and competing with it for scarce capital. Government extra spending should go towards capital investments and not current expenses. In times of anxiety and uncertainty, it is far more important to safeguard fiscal discipline and, by implication, macroeconomic and monetary stability which are the preconditions for true, long-term, and sustainable growth. Enhanced government spending on wages, pensions, and other discretionary current items will only translate into increased imports and an even larger trade deficit. The government should actually cut spending by rebalancing the budget and try to avoid sizable deficits. This way it will be sending a signal to the market that it is a responsible economic player, committed to the long-term health of the economy.




THESIS: The real risk to Macedonia's economy is deflation, not inflation. The National Bank should allow credit formation, reduce interest rates and reserve requirements, buy government bonds and, thus, encourage consumption, bank deposits, and investment. To increase interest rates and depress consumption and investment amidst a global crisis is unwise.


ANTITHESIS: The real risk to Macedonia is inflation, possibly brought on by a devaluation of the denar. In the long-term, real growth will resume only if inflation remains subdued. Additionally, the stability of the banking system is at stake as the quality of the banks' loans portfolios deteriorates owing to an increase in the number of bad loans. Steps should include: Raising interest rates and reserve requirements;  capping interest rates on deposits in the banking system to prevent new credit formation; forcing banks to purchase government bonds to reduce liquidity in the market; administratively capping credit growth and tightening lending to consumers and for real-estate transactions.




THESIS: The government should shield local industry and manufacturing from the effects of the global crisis by imposing import quotas, non-tariff barriers, and other trade restrictions. It could also prefer domestic businesses in tenders and institute a "Buy Local" campaign. It can offer export subsidies; levy duties and excise on nonessential and luxury imported goods as well as on strategic products; cut duties and excise on raw materials. In extremis, it can declare a World Trade Organization (WTO) emergency (which Macedonia's trade deficit fully justifies).


ANTITHESIS: Macedonia relies on flows of foreign capital in the forms of FDI, export proceeds, and remittances. It is fully integrated with the global economy and cannot afford to declare a trade war. Protectionist measures only serve to cushion inefficient industries and manufacturers and will provoke retaliatory measures by Macedonia's trade partners. External competition is a good thing as it forces domestic firms to streamline and cater to the needs and requirements of the marketplace.




THESIS: Foreign Direct Investment (FDI) is the key to Macedonia's prosperity and economic growth. 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. While all forms of investments - both foreign and domestic - should be encouraged, the government should play a decisive role in attracting foreign investment and in providing the conditions for its success. As the business climate improves, local businessmen and entrepreneurs will establish firms, manufacture, and export. The government should not directly subsidize the formation or the operation of domestic businesses. This is better left to the private sector.


ANTITHESIS: The government should encourage domestic investment and even subsidize the formation and operation of local businesses. This is the only way to put into use nonproductive capital; prevent capital flight; and guarantee the long-term economic welfare of the citizens of Macedonia. 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.




THESIS: Macedonia's macroeconomic stability depends on maintaining an exchange rate anchor: a stable exchange rate against the currency of Macedonia's main trading partners, the euro. To that end, the National Bank should intervene in the markets to support the denar, if necessary by using its foreign exchange reserves. A stable exchange rate guarantees low endogenous inflation and economic growth. The claim that the denar is overvalued and hampers export growth is false. Macedonian firms are not exporting more not because of the exchange rate, but because of outdated technology, wrong or deficient marketing, lack of compliance with standards, antiquated design, and a general lack of competitiveness.


ANTITHESIS: Macedonia would do better to introduce a flexible exchange rate policy coupled with inflation targeting. Introducing an inflation target would create as much macroeconomic stability as any currency peg. The government has at its disposal policy instruments that allow it to control inflation: introducing price controls and freezing the prices of essential products, or even wages, healthcare costs and pensions; releasing commodities, oil, and minerals from strategic reserves; hedging (fixing the future prices of foodstuffs, oil, and commodities by purchasing forward contracts in the global markets).


The National Bank should allow for a gradual devaluation of the currency, within a band or range or as a crawling peg. This will prevent speculative attacks on the denar that currently are depleting the foreign exchange reserves of the country. It will increase the competitiveness of Macedonia's exports and reduce its trade deficit. A strong currency has anti-inflationary effects, so any devaluation must be minimal, slow, and subject to market forces. Still, Macedonia can also devalue its currency without any major repercussions (as not many credits here are denominated in foreign currency and inflation is subdued).



THESIS: The global crisis discredited the doctrine of the free, laissez faire market. The role of governments is growing and they are assuming additional functions and responsibilities. Strict regulation should be introduced and enforced in various areas: the financial industry; healthcare; employment; international trade; the environment; and so on. The government should become more involved in every phase of the economic cycle: from entrepreneurship to taxation; from banking to manufacturing; and from education to healthcare. It should even consider re-nationalizing some utilities.


ANTITHESIS: This is a temporary crisis that has to do with excesses and imbalances of the system and not with the core beliefs and theories that underlie it. This is not a crisis of capitalism, but of certain capitalists. Governments should let the private sector sort itself out and interfere only to provide public goods and where there are systemic market failures (such as in the banking sector). Even so, governments' involvement should be time-limited and with a clear exit strategy.

Written on May 27, 2009

Israel, Obama, Iran, and Journalism

"During Netanyahu's visit, Israel shared intelligence with the CIA regarding the potential for a terrorist attack which will dwarf 9/11 if Iran is allowed to continue with its nuclear designs and share its outcomes with allies such as Hamas and the Hizbullah. Iranian proliferation is a direct threat to US National security.

Obama's staff is ignoring the intel (HUMINT) because they believe that it is intended to manipulate the Administration into accepting Israel's planned bombing of two facilities in Iran.

They are also ignoring intel regarding a Hamas cell in Cairo that is bent on mischief. The Israelis are shunned. The CIA is exasperated."

How reliable is this information? Can journalists be trusted not to be manipulated; not to substitute opinion and wishful thinking for facts; not to be corrupted with the trappings of power or outright pecuniary incentives?

Consider my case:

On January 20, 2009, I appeared as a guest in the most popular political affairs program in Macedonia ("Glasot na Narodot", or The Voice of the People). I warned that Israel is willing to wait 6 to 8 months for Obama's "diplomacy" with regards to Iran's nuclear capability to show some progress. If Iran remains recalcitrant, Israel plans to bomb two facilities in Iran as it did in Iraq in 1981, I said. Refueling won't be a problem, I assured the program's host: both Egypt and Saudi-Arabia offered to help.

This and other interviews provoked speculations in Balkan media and on the Internet:

"Vaknin probably had assumed that the NSA (which has a presence in Skopje, having recently moved some of its facilities there from Athens) will be monitoring the program and will report to Washington, suggested one of them."

"Vaknin' sister is Sima Gil-Vaknin, the IDF's (Israel Defense Force's) Chief Censor (true) and Vaknin is a senior Israeli intelligence operative (which I deny emphatically)."

Recently, the leading Balkan newsmagazine "Fokus" published a long article about the Eligibility Problem (Obama's missing original birth certificate and other personal documents). In that article, Fokus speculated that Israel may have written off Obama and has embarked on a worldwide campaign to discredit him and counter his dangerous diplomatic and military moves. Vaknin, contended the magazine, spearheaded these activities in Central and Eastern Europe and the Balkans in conjunction with the Hasbara's clandestine unit, which is under the direct control of the Prime Minister's office. I have since denied these rumors, too.

I am a journalist of long standing (since the mid-eighties), have lived and worked in Israel and maintain a network of top-level, unimpeachable sources. I am made privy to a lot of information and disinformation (see my articles about Macedonia's accession to NATO and the name issue). Like every journalist, I sometimes can't tell the difference and get duped. But this is one of the risks of the First Amendment.

As I see it, my job is not to block or filter content. My task is publish with appropriate disclaimers regarding the sources of my information. I should serve as an eBay of data, ranking the past performance of "vendors" of intelligence and letting the fully-informed reader make up his or her mind whom to believe and whom to discredit.

Back to the opening scoop:

Is it true? Did it happen?

Who knows! All I can say is that someone wanted this information leaked. It could be a arrow shot across the Obama administration's bow. It could be part of a much larger picture. It could be a signal aimed at Iran. It may be a brazen fabrication. History will tell.

But one thing it is for sure: a story. Someone(s) told me, a journalist, this story. They wanted it out. The importance of a story sometimes lies not with its content, but with its very release. It is the role of the discerning reader to read between the lines, connect the dots, and come up with his or her own narrative.

Interview granted to Maja Mihailovska of "Spic", May 29, 2009 

1. Yesterday you said that Macedonian economy have to stop with obsessively keeping up to fixed exchanged rate and to turn on to flexible exchange rate. How do you argument that suggestion when everyone here has awful remembering of devaluation of the denar in the past and dangerous of inflation spiral? Many of experts here agree that would be disaster for Macedonian economy?


A flexible exchange rate is not the same as a devaluation. A devaluation is a one-time act. A flexible exchange rate is a long-term regime of managing the exchange rate of the domestic currency against a basket of foreign currencies. In a flexible exchange rate, the local currency can go down (devaluation) OR up (appreciation), usually within a band (pojas) according to demand and supply in the market.


There are many types of flexible exchange rate regimes. An exchange rate band is only one of them. Another type is called "crawling peg": the local currency is devalued in infinitesimal daily increments so that the devaluation over one year is equal to the level of inflation over the same period as measured by the Consumer Price Index (CPI).


A flexible exchange rate should always be implemented with another policy called "inflation targeting". It means that the government and the national (central) bank make a commitment to use all the policy tools at their disposal to achieve a specific target of inflation.


The vast majority of countries in the world have a flexible exchange rate coupled with some form of inflation targeting. This combination has proven to provide macroeconomic stability and prevent speculative attacks on the currency. Albania, for instance, has been implementing this policy for a few years now. The result? Albania's economy will grow this year by 3-4%. We know where Macedonia with its "stability" is by comparison to Albania.


Macedonia is among the few with an antiquated and rigid system of an exchange rate anchor (effectively: a fixed exchange rate). This is for two reasons: (1) The trauma of Macedonia's past hyperinflation (2) The very low level of economic "experts" and "professionals" in Macedonia (a flexible exchange rate regime requires sophistication and up to date expertise). Most of them don't know what they are talking about, they are simply repeating like parrots things they have heard somewhere.

2. What is the price we pay for stable denar, is it too much high? What are the implications?


A "stable" denar is the most unstable option of all. In a fixed exchange rate regime (such as exists in Macedonia), the National Bank has to spend hundreds of millions of euros to "defend" the local currency by supplying the demand for foreign exchange from its own reserves. Another problem is that a strong denar makes imports very attractive (very cheap in terms of denars). As people and firms buy more imports, the trade deficit increases. As the trade deficit balloons, macroeconomic stability is threatened because the country needs to borrow money to finance it (especially because Foreign Direct Investment and remittances from abroad - doznaki - are decreasing). Finally, in a fixed exchange rate environment, exporters, when they convert their foreign exchange earnings, receive fewer denars. So, while their expenses in denars are growing all the time (owing to inflation), their income remains the same.

3. How long still Macedonian Central Bank could go on and to keep the stable and fixed denar in the same position toward euro 61,5 in such a economic circumstances? How you explain latest measures of Central Bank from yesterday towards commercial banks in order to keep on a stable denar?


Not for long. Current foreign exchange reserves must be used to finance imports and the repayment of foreign debts (about 90 million euros this year). FDI is dropping, remittances fell 26% in the first quarter. There simply isn't enough foreign capital flowing into Macedonia to continue to defend the exchange rate.


The National Bank's steps (to increase the reserve requirement regarding foreign exchange loans and deposits) are intended to encourage a move by banks, depositors and borrowers from foreign exchange denominated instruments to domestic currency. Such measures usually mean that the National Bank is anticipating a devaluation. Following a devaluation, many firms and households default on foreign exchange loans because they don't have a sufficient quantity of denars to pay back their obligations: after the devaluation, they need more denars to pay back the same amount in euros. The banks can then use the higher reserves deposited with the National Bank to cover their losses and avoid insolvency.


Interview granted to Nova Makedonija on March 12, 2020


Q. I would like to ask you for an opinion on the impact that the corona virus has on the economy. The media mention the term "Black Swan", a unique phenomenon with a huge
impact on the economy. Can you tell me what your view of the events is, how the situation is expected to develop in the future and what damages can be expected?

A. There is no question that pandemics have an impact on economies. But modern economies are infinitely more resilient than in earlier periods of human history. So, while the Black Death completely decimated and structurally altered the economies of Europe in the 14th century - the much larger Spanish flu (1918) and AIDS (1980 to the present) pandemics had a considerably smaller or even minimal economic impact.

The current Coronavirus (really, a variant of the SARS virus) is self-limiting and far less virulent than other respiratory viruses. Consequently, it has a fraction of the fatality of the flu, for example. It is now moving around the globe and the same pattern we have seen in China and South Korea will repeat itself elsehere: 3 months of spread, containment, and latency (the virus becomes inactive).

The effect on the global economy will be limited: a reduction in growth rather than contraction. Some countries will go into recessions that they would have had in any case, with or without the virus.

There will be a spike in global growth rates by the end of this year due to fiscal stimulus packages offered by governments, coupled with a pickup in economic activity after the worst is over.

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