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Trade Deficits and the Health of the Economy-15: Dialog with Nikola Gruevski, former Minister of Finance of Macedonia

Sam Vaknin, Ph.D. - 3/27/2006

SV: You touched upon the three alternatives available to small countries that wish to increase their exports and to extract themselves from a chronic state of poverty (=of deficits). The first alternative, is to attach itself to one big economic power. This is the case of the Czech Republic and used to be the case of Israel, Cuba and dozens of other countries. The lessons show clearly that this is a good strategy as an interim measure. A small country can attach itself, economically, to a bigger one, ONLY if it uses the time that it thus buys to get rid of this dependence. While closely and overwhelmingly collaborating (usually, not only economically but also politically) with the bigger power – the small country should fervently and ceaselessly develop alternatives: other markets. Otherwise, it will end up like Cuba did. It sank into abject poverty when its main "sponsor" (USSR) became economically defunct. "Sponsor-Client" or "satellite" relationships are good as a stopgap measure or in times of emergency. There is no such thing as "pure" economics. In the global arena, economics is a reflection of political and geopolitical realities. Ask Saddam Hussein. There is a political price to pay for attaching oneself to a global power. Many will find this price unacceptable. Germany allows itself to publicly humiliate and chastise the Czechs (regarding the Sudetenland Germans issue) precisely because it is economically dependent. The wish of Macedonia to join the EU has always hampered its ability to negotiate freely with Greece.

The second option is to join a regional trade club. The most prestigious is, of course, the EU. I have expressed my opinion many times: it would be unwise for Macedonia to join the EU now. These are the conditions under which a country should join a regional club:

a. That it includes all the major trade partners of the country;
b. That it will not be overwhelmed by the size, importance, wealth, history, experience, or personality of the other participants;
c. That it will not be consigned to one role (Macedonia – the supplier of cheap and educated labour or the supplier of cheap, good quality raw materials, for instance);
d. That it will benefit by joining. In other words, that due to the privileges of the membership either the net foreign exchange outflows will decrease or the net cash inflows will increase. This could be achieved by lowering trade barriers and simplifying bureaucracy or by providing investment and export incentives;
e. That it will not get involved in a trade war as a result of joining the club and that it will not breach any international treaty or convention;
f. That it will have well defined and clear opt-out options, clear procedures for the settlements of disputes, equitable and fair treatment of all the members and a clear political and economic stance vis-a-vis other clubs and countries;
g. That the rules of the club will not conflict with its rules, the mentality of its people, its ethos, its political structure or any other important component of its identity.


Historically, regional clubs are doomed entities. The trend is to GLOBAL trade, free of all regional restrictions, as embodied in the WTO charter. Most Economists regard regional clubs with horror because they consider them to be obstructions on the way to completely liberalized trade. Regional clubs tend to encourage trade between the members at the expense of trading with external partners. This is bad and counterproductive economically. But reality is that everyone (including the mighty USA) is engaged in initiating, constructing or becoming a member of a regional trade club. If you can't beat them – join them. Like the first option its is a good stopgap, temporary measure until the country's accounts get balanced and it gets fully integrated into the global economy.
The third option is always preferable and admissible. Politicians, diplomats and spies all should participate in the new "Green (economic) World War". Politicians and statesmen should sign bilateral and multilateral agreements. Lesser political mortals should protect the interests of their businessmen and exporters. Diplomats should educate, disseminate information, visit, lecture, cajole, convince, threaten, negotiate and matchmake (joint ventures). This activity is the raison d'etre of modern government.

NG: I wish to concentrate more on Japan as a country which was devastated after the second world war and as a country which with very little natural resources succeeded to become the second rated world economic power. Even though I risk that someone will "teach me a lesson" concerning the weaknesses of the system which Japan had built and which from last year became very evident, and if we connect all of it with certain illusions of the South East Asian countries, I still maintain that the current crisis cannot cast a shadow over the past successes of Japan and even of the countries from that region, which are enduring the recent crisis on a higher developmental phase than tens years ago, which for example is not the case with RM. Of course, it is not right to compare RM Japan in its condition today, but let's talk about: WHEN JAPAN WAS RM, or let's compare Japan's past to Macedonia's past and PRESENT.

I discovered that Japan in the past and RM today have many common characteristics and similarities.

Industrialization in Japan begun slowly with the revival of imperial authority in 1868. Japan remained closed to the external world for 230 years, a period known as the Tokugawa era. The country was very poor by way of natural resources and its people lived an improvised existence, something similar to RM at that time. According to some estimates GDP per capita during this period was $100-200, which placed Japan in the category of the world's poorest countries according to standards which are used by the UN today. People were employed in agriculture, and Japan today as in the past was totally dependent on imported raw materials. Today Japan depends on foreign imports for its carbon (92.9%), distilled oil (99.7%), oil derivatives (19.4%), natural gas (96.1%) (imported frozen in container ships), iron ore (100.00%), bauxite (100.00%), phosphate rock (100.00%), lumber (55.2%), pulp (20.3%), salt (90.2%). The energy and the metals are imported from a few countries in the world and Japan depends on them.

The four bigger and the few smaller islands on which Japan exists represent 0.3% of the planet's earth surface, and the Japanese population is 2.4% of the total population of the planet. Within the years following its opening to the world, Japan went from being a poor agricultural county to full industrialization. For them to start and to develop the industry on the basis of the European and American technology was imperative. At that time the Japanese government invited people from different countries, experts from different areas. So, in the period 1880-1910 the establishment of the most important science institutions, which started to conduct research, to transfer and develop western technology, started. The construction of a complete travel infrastructure started. Governmental intervention and planning were big at that time. Prior the second world war, Japan became one of the most advanced countries in the world even though it depended heavily on imports, which means that it had to export and with the foreign currency earned, to import. Unfortunately, in 1936 the controlled economy begun, the economy which was prepared for war, from which Japan emerged totally destroyed (as a result of mass bombarding), territorially and humanly damaged and above all suffering the consequences of the nuclear bomb. It was tortuously difficult to find work for 7.2 million ex soldiers plus 13 million unemployed workers, students and others from factories, faculties etc. The real income in 1946 had been 30% of the average one in the period 1934-1936 and the inflation was 200% in the period August 1946 - March 1947. Everything that was built before had been destroyed and Japan started its development anew.

In the beginning of the 60s Japan had been on a level very similar to former Yugoslavia within whose borders was RM. But where is Japan today (ignoring the current crisis, which is incomparable with the Macedonian one) and where is RM? What is the Japanese secret of success, even taking into consideration the so called "bubble economy"? For the bubble economy to have existed, the system which inflated the bubble should have been formed, though at the end the bubble blew-up (as it happened in Asia last year) and crisis prevailed. The Macedonian bubble, unfortunately, still is just a sad drop. Kuzuhide Okada, a professor in Senshu University, says that the Japanese economy is principally a market economy, but from the very beginning the government understood that somebody should have led the policies to direct or control the operations of the firms, which acted in the specific foreign markets, as well as in their own, domestic one. This is related to the Japanese high level of dependence on the outside (which characterizes RM as well). This is the reason why I began to study the past of this geographically remote country. The government's active policies supported development very strongly. That was not a classical socialist way of planning, even though some similarities can be found. I think that for a country to reach the state of wholly free market economy, a period of governmental policies to direct and control the economy and raise it to a higher level is needed. I have the impression that in certain portions of the trade laws and their practice RM is more liberal than England, Germany or USA. I am not very convinced that it is useful to the nation. The system which Japanese built after the second world war meant strong fiscal, legislative, political and monetary support of exports (not to forget that the yen-dollar exchange rate during the period of development reached 300 yens to the dollar, with the latter falling in value during the period of crisis period) and on the other hand import restrictions. The Japanese motto was "to export or to die". The Japanese success was that it developed the exports mostly, in certain decades even three times faster than its competitors (the USA and Germany). In comparison with the above mentioned period, in the later years the Japanese government drastically reduced its involvement (but it would seem that not enough). The elimination of all governmental management and regulation, however, is not possible. Beside other activities, the Japanese government directly provides public works projects, through which and through the fiscal policies, the government still dominates the determination of the economic trends. Untimely deregulation, a badly structured financial system, and a certain conservatism in the management model (which is transforming itself according to western standards) are the main reasons for the current crisis, which however deeper it goes, will not be in a position comparable to the Macedonian crisis. This says that when one economy is in crisis, and especially when that crisis is during a low developmental phase of the economy and industry, the state should help in the construction of a regular strategy and in putting it into an appropriate framework. When the strategy starts to be implemented and the economy gets better by many parameters, the state should provide a self-withdrawal system from the body economic, because it can be transformed into an obstacle for further development. Today RM is in situation that requires a strategic change in the economy, and this cannot be realized spontaneously, the state should help, very carefully, not to allow an adverse effect to happen.

From the bottom of the list by its economic development and natural resources, the relatively small Japan pulled itself into the position of the second economic power in the world with the biggest foreign currency reserves in the world (which the current currency crisis reduced somewhat), a long term surplus in the trade balance, the second place in the world by GDP per capita (above $36.000), bigger than the USA's or Germany's (above $28.000), a country which almost one third of its exports (one way or the other) are placed ion the very sensitive markets of North America and 22% in Western Europe, transforming itself at the same time to a regional leader, and into a country with an unemployment rate which in the past few years increased from 2.7% to 4.1% (close to the American rate). Only 25 years ago its income per capita was less than one half of the American one. To reach a situation of having an advantage of 25% over the USA is an amazing feat. In the period 1900-1987 Japan with an annual average economic increase of 3.1% digested the biggest increase of the real income per capita. Beside this, from a sizable importer of expertise transformed itself into a big exporter. For example in 1989 about 100 thousand professionals left Japan (more than half went to the USA) and it accepted 65 thousand from other countries (90% from the undeveloped Asian countries). Besides the stable political constellation, the Japanese built a separate strategy for car exports to the USA and Europe. However criticized, as much as it relied on dumping, it helped Japanese firms a lot.

Towards the end of the last decade, Japan became the biggest investor in the world. The Japanese began to invest twice as much abroad than they earned by their exports, their foreign investments in the mentioned period were eight times bigger than their domestic investments. The Japanese penetrated strongly the export of capital. They exporting capital to the West as direct investments in 1988 of more than $30 billion, which translates to ten times their imports of capital in the same year.

A closer look reveals the ten categories of products with at least 2% of the exports in 1989:

1. Cars (17.8%);
2. Office equipment (AOP processing machines) (7.2%);
3. Precision machinery (4.8%);
4. Steel (4.4%);
5. Car spare parts (3.8%);
6. Self-regulated instruments (integral movement, etc.) (3.1%);
7. Internal Combustion Engines (excluding aircraft engines) (2.2%);
8. VCRs (2.2%);
9. Telecommunications equipment (2.1%); and
10. Organic pharmaceutics (2.0%).

From a total of 7.864 thousand transport vehicles manufactured in 1996, Japan exported almost one half (3.232) and imported only 440 thousand. According to the IMF, in 1996 Japan controlled 7.8% of total world imports.

(continued)