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Foreign Investments and Developing Countries: Dialog With Former Finance Minister of Macedonia Nikola Gruevski, Part XI

Sam Vaknin, Ph.D. - 3/2/2006

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

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

1. Stable prices in the national economy, and
2. Complete employment (in the relative sense of the word),

and external stability means:

1. Stabile rate of the domestic currency,
2. A balanced balance of payments.


It is clear that the present stability is under serious pressures. Also, the reality of the exchange rate is very suspicious, because a real rate is a rate that maintains a dynamically balanced balance of payments, but without control over the foreign currency, without inflation and deflation and with no use of foreign currency reserves. However, besides some imperfections from the point of view of the foreign investors, the macro-economic situation is satisfying, taking into consideration that we are talking about a country in transition.
The low inflation rate is a plus for the introduction of foreign capital into Macedonia, but it must be mentioned that if the other problems are solved, foreign investors are ready to invest even in case of a higher rate of inflation. Proof of this is that almost all the other Eastern European countries have a higher rate of inflation and, yet, much more foreign investment. An inflation rate of up to 20% annually, is not a serious obstacle for foreign investments, providing that the other mentioned problems are improved.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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