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Trade Deficits and the Health of the Economy-4: Dialog with Nikola Gruevski, former Minister of Finance of Macedonia

Sam Vaknin, Ph.D. - 3/13/2006

SV: It is a paradox of sorts that only governments can secure the conditions necessary for the operation of free markets. A good government prepares the way for its own act of disappearance from the marketplace. It should construct the edifice and let other tenants occupy it. There are a few things that only a government can do. Maintaining law and order, defending the country, providing certain unprofitable public goods (education, health). But I agree with you that a government's most important role in the economic arena is to provide working conditions, a structure. Such a structure should include pro-competition policies (antitrust), protection of intellectual property, encouragement of high value added activities, training and qualification of manpower, maintaining transparency and equality as well as the supremacy of the law, providing functioning institutions (courts, customs, tax authorities, banks, capital markets, social security), mass re-education, investment in the future (for instance, in research and development activities), fostering good international relations through treaties and agreements, pursuing peace, actively encouraging foreign investment and the importation of know-how and technology, the encouragement of small businesses - and this is a very partial list.

The main orientation within the restructuring of the economy should be exports. The government should help companies and research institutions identify the relative advantages of Macedonia, in general and of particular regions, industries and companies in particular. It should then proceed to assist them to put these advantages into good use. It should put at their disposal all the information and assistance that they might need. It should speed up or, better still, eliminate altogether, bureaucratic hurdles and procedures. It should connect them to businessmen, companies, industry associations and authorities in their target countries. It should then proceed to intercede on their behalf, protect them, lobby, cajole, negotiate – in short, the state should be the exporter's partner not only in the income side (through taxes) – but also in the efforts, in the expenses and in the capturing of new markets. The government should encourage exporters financially (tax holidays, grants, exemptions, other incentives) and non-financially (awards, rewards, consultative capacities within specially constructed councils of exporters and government representatives, special speedy courts). There is no need to invent the wheel: there is the accumulated experience of tens of successful exporting countries to derive from.

NG: What should be the instruments and sources for the financing of such a project?

A suitable instrument for starting the policies of the restructuring of the Macedonian economy is THE BANK FOR EXPORT DEVELOPMENT AND SUPPORT through which the export-oriented production companies will be supported by providing them with suitable long-term credits. For these reasons, an argument can be advanced for a bigger capitalization of the above-mentioned bank of not less than DM 200 million (the best would be DM 400 million). This capital should be provided from the privatization of the Telecom, donations from other countries (specifically for this aim), the sale of the rest of the property of the state (including the sale of the public companies in RM, which will generate very high foreign non-returnable revenues). Besides a higher capitalization, this bank should provide more credit lines from abroad. The most important part of this bank's work, should be the multileveled supervision and control of the issuance of credits in accordance with pre-determined criteria. The state banks, by definition, are beset by corruption and non-commercial working methods. According to this, only a high quality control system to supervise the managerial work in this bank, which is in the process of being founded, can ensure its qualitative functioning and positive results in the long run.

SV: Many economists dispute the efficacy of such a bank.. "The Economist" dedicated a whole cover story to methods that governments use to encourage their exports. Banks such as Ex-Im Bank in the USA are considered highly ineffective. So much so that the American Senate is seriously debating the elimination of organizations such as OPIC (the Overseas Private Investment Corporation). They are forced to act indiscriminately both geographically and sectorally. They are bloated bureaucracies. Their actions are politically rather than commercially motivated. They often fall prey to swindlers and bogus transactions. But, above all, they create a moral hazard. In other words: traders and exporters take upon themselves risks that otherwise - without the bank's support - they would have refrained from. They know that if they lose money - it is the bank's money, not theirs. This makes them callous and haphazard. Granted, such banks make it possible for domestic businesses to conquer new, potentially dangerous, export markets. But why go into risky markets in the first place? Just witness how much money was lost by these "special purpose banks" in Russia in the space of two weeks. The EBRD alone lost between 1.5 and 4.7 billion USD of taxpayers money. I am absolutely against the intervention of the state in what should be processes powered by pure profit calculus. If an exporter finds a market appealing enough - he will be there, with or without such a bank. If he does not - why do we, the taxpayers, have to hedge his bets and participate in his losses (while not benefiting from his profits)? There are only two exceptions. First, the government should subsidize exports to destinations, which suffer from high trade protectionism and state subsidies. If Japan subsidizes its rice heavily - rice exporting countries should subsidize their exporters and help them penetrate this market, crooked by illegitimate state intervention as it is. The second exception is if the country has no functioning banking system. Even then, the bank should act strictly under commercial considerations and refuse to finance non-profitable transactions, no matter how politically desirable or expedient they are. On the one hand, in RM, there is a great need for such a bank, as all the other banks are dysfunctional when it comes to international trade finance (either because of their shaky standing in the world or because of ignorance, corruption and a host of other ills). On the other hand, experience shows that it might turn into a hotbed of corruption, exploitation and worse. A way must be found to supervise such a bank thoroughly and, preferably, with outside assistance.

I want to mention that an export development bank is one instrument at the disposal of governments. Insurance companies are another. In the past many governments set up special insurance arms. Their role was to insure exporters or investors against country risk, political risk, war, terror, expropriation, non-payment, sovereign default ad a host of other problems which private insurers were unwilling or unable to tackle. These insurers acquired monstrous proportions (OECD in Britain, COFACE in France, OPIC in the USA and others). They were notorious for their laxity, lack of professionalism, unreliability (they mostly refused to pay up when trouble struck) and incredible losses and creative accounting. The nineties witnessed the privatization of these behemoths. Today, every risk is insurable for the right price. If it is not insurable – the exporter is advised not to venture into that market, no matter how tempting.

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