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Trade Deficits and the Health of the Economy-6: Dialog with Nikola Gruevski, former Minister of Finance of Macedonia

Sam Vaknin, Ph.D. - 3/16/2006

SV: Macedonia belongs to a much derided economic club, whose members are fervently trying to abandon it: the club of the group of countries who export mainly raw materials and semi finished goods and import finished products. This is the classical definition of a colony in the old mercantilist theory. Colonies are doomed to run deficits, equal to the value that is added by the industrialized countries to the raw materials that they import from the colonies. Additionally, the colonies get "hooked": they get addicted to the advantages that poor labour, for instance, provides. They tend to suppress anything that is perceived as a threat to their status as a colony: democracy, better education, higher wages, better infrastructure (not related to production) and so on. In this restricted sense, Russia, India and Macedonia belong to the same club. Even if they do get integrated (as poor relatives) into a more prestigious grouping of nations (such as the EU) – they are likely to maintain the "poor relation", "handout prone" status – see Greece and Portugal. They will become the sources of cheap labour, the junkyard (chemical waste, ecological catastrophes) of the richer members, the preferred vacation spots, the industrial hinterland and the fuel in the growth engine of the industrial and service nations. Colonies are not only endless sources of raw materials and high-quality-low-pay workers – they are also superb, reliable markets for finished products. In this sense, it is a mistake to try to join the club of prosperous nations at this stage. To do so is to eternalize the sorry state of Macedonia's economy and the sorry status of the composition of its exports.

NG: The step, which RM should urgently make, is the direct intervention of fiscal politics in the transformation of the economic structure to export oriented. Within this scope, it should provide the commercial and private banks with strong fiscal stimulus for the placement of credits in the production of goods for export (with a well-matched mechanism for the control of the delivery of goods) and with tax stimulus for the financing of final projects. Such stimulation should be given to private firms, which do or will start to produce and export finished products. Much more tax stimulation should be provided to those companies whose production of finished products is in accordance with international quality standards. The state can also provide credits for (pre-defined) strategically important products in the first few years through the Bank for export development and support. Such loans should come with a lower interest rate, and even through the commercial banks under the same conditions, wherein the state will cover the difference between the bank's interest rate and the interest rate approved by some commercial company.

If the state will tell the Banks that they will pay lower taxes on their income realized through the financing of projects for the production of finished products or for export-oriented production (providing that the products were indeed exported) or for the production of products of higher quality, it is logical that the managers of the banks will finance such projects more often.

Also, if the state will explain and promise (by law) to the manufacturers and to the potential manufacturers of finished products (especially to those which are on the import-substitution list) and to the current and potential manufacturers of products for export and especially to the manufacturers of high quality products (by international quality standards) that they will pay less tax or, in certain cases, will be fully released from this obligation, and on the other hand will be entitled to receive bank credits and support from commercial or from state banks (under the condition that they have a qualitative project by Western standards), it is most likely that within a few years of the positive effects of this policy, the trade deficit will seriously drop or be annulled. All this combined with additional stimulation of foreign direct and portfolio investors, make the chances of terminating the agony much higher.

SV: I am flatly and unequivocally against any kind of state intervention in what should be pure economic and commercial processes. Only profit and loss calculations and considerations should determine whether a bank lends, an investor invests and an exporter exports. Such considerations are bound to take into account the feasibility of the transaction or the project and the risks associated with them. Where no money is lent – there are, usually, excellent reasons for it. Where no exports are effected, it is proof of lack of competitiveness. Where no investment is consummated – the environment is wrong. By intervening, stimulating, encouraging and so on, the state puts itself in the position of a judge. Why should we assume that the state knows better? Why should we entrust it with our tax money to dispense to banks and to manufacturers? What does the state know about financing, international trade and manufacturing – that the market participants do not know? If a market player (=a bank, an investor, an exporter) changes its behaviour due to state intervention – this is not a free market. It is a distorted imitation, which leads to waste and inefficient use of scarce economic resources.

There is a lot the state can do to encourage exports. First it should create the right environment for conducting business. It should encourage competition, discourage cartels, improve the judicial system, tax evenhandedly, eliminate excess bureaucracy, improve infrastructure, take its hands off the capital markets, really privatize (as opposed to robbing the assets of the country and dividing them among a select few), sign international and bilateral economic treaties, ensure macro-economic stability, disseminate information and professional knowledge, train manpower, use its public procurement to enhance market activity, stamp on corruption and crime, protect property rights and intellectual property, reduce taxes – and this is a very partial list. In other words: governments should ensure the conditions for a fair play. They should supervise the rules of the game – but not become a player in it. Create the right conditions in the economic garden – and the right export flowers will bloom.

Whenever and wherever (domestically and internationally) governments encounter injustice, distortion of allocation of economic resources, favouritism, cronyism – they should fight back. They should impose quotas and duties on products subject to similar quotas and duties elsewhere. They should retaliate in economic warfare. They should act against dumping, market cornering and other anti-competitive or politically motivated dimensions of economic activity worldwide. Governments should never be vegetarian in a carnivorous world – lest they find themselves preyed upon. But they should only re-act, not act.

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