Op-Ed: “Doing Business” After Gruevski

“Big mountains are shivering, and a mouse is born at the end”

– Balkan proverb

The new government of Macedonia led by freshly appointed Prime Minister Zoran Zaev of the Social Democratic party, SDSM, will be expected to “undo” the damage caused by former premier Nikola Gruevski’s conservative nationalist party VMRO-DPMNE during its more than decade-long reign. One area the new government will be expected to look at is the economy and the degree of economic deterioration caused by the previous government. Gruevski has often been criticized by local organizations and local media outlets for masking the deficiencies of the economic policies of his government, and for consistently attempting to paint a facade of prosperity in the country to cover up for a far less rosy reality.

In the World Bank’s latest “Ease of Doing Business” ranking, Macedonia ranks 10th, which the main pro-Gruevski outlets in Macedonia interpreted to mean that the country is the 10th most developed economy in the world. Such flagrant propaganda and spin were common during VMRO-DPMNE’s years in power, as the government attempted to hyperbolize the country’s achievements to mythical proportions . Pro-government publications were regularly filled with headlines touting the country’s alleged economic success, such as “Macedonia Among the Top Reformers” and “Economic Growth Among the Highest in Europe

The former government’s main intention was to manipulate the opinion of Macedonia’s citizens and have them believe that Macedonia’s economy was like a steam locomotive that was unstoppable on its path towards new successes. However, little known to the ordinary people was the fact that the ‘locomotive’ had already run out of coal. According to the official data of the National Bank of the Republic of Macedonia (NBRM), for the last eight years Macedonia has increased its gross foreign debt from 45.7 percent of GDP in 2006 to 73.1 percent in the second quarter of 2016 . And the country’s credit rating could be downgraded even further. Macedonia went from achieving a BB+ in 2006, held onto a BB in 2010, and has now fallen to a BB-, according to S&P Credit Rating. This means that Macedonia could have difficulties in securing affordable financing on the foreign and domestic financial markets, money which is badly needed for the reforms planned by the new government.

The government budget has also increased from 1.7 billion euros in 2006 to almost 3.4 billion euros in 2017, or a 100 percent surge in government spending in a decade. An additional 1.7 billion euros were taken from the Macedonian citizens and businesses in order to cover government expenditures. These additional funds which flooded the state budget were mostly spent on financing the robust public administration that has ballooned in size since 2006, though even today there is no official data by how much. Public administration was misused by the former ruling party as a voting machine during elections. Possessing the repressive mechanisms with which to control the administrative apparatus, the ruling party created a system in which the public administration also served the party. Another significant amount of the state budget was used for projects with a low return on investments that cost several-fold more than similar projects elsewhere. The two main purposes of this were to demonstrate to the masses that the country was being “built up”, fueling populism and support for the ruling party, and second, to bribe the business sector and therefore ensure it was under government control, because VMRO-DPMNE leaders decided who would get what job, all the while presenting such decision-making as a transparent and independent process. The government was and still is the biggest employer in the country.

Official data from the NBRM reveals another important indicator of the health of country’s economy — its import/export balance. In 2015, Macedonia imported goods valued at $1.91 billion more than exported, with a total export value of just over $5 billion. Elsewhere in the neighbourhood, Bulgaria had an export value of over $35 billion, Croatia over $26 billion, and Serbia over $24 billion (See Figure 1). A trade deficit could be a bad sign for a small developing country struggling to attain economic growth. It is an indicator that the economy is developing at a slow rate, especially if the long-term trend of Macedonia’s export deficit is taken into account. Unemployment and currency value are also linked to the trade deficit.

It is certainly good that Macedonia ranks 10th on the Doing Business report, but that certainly does not mean that Macedonia is among the top 10 economies in the world. The Doing Business report evaluates the ease or difficulty of doing business in a specific country by evaluating 10 selected parameters, such as the ease of launching of a business, securing a stable flow of electricity and tax payments. All these parameters could be fulfilled on paper and exist as laws within the country without being implemented. The Doing Business report measures how easy it is to get electricity set up at your business, but there is no measurement of the reliability of the flow of that electricity.

This would not be the only misrepresented statistic. With regard to business crediting, which is partially based on the level of protection of the legal rights of creditors and debtors, it must be noted that it is not indicated how easily credit can be obtained, nor is there any information about the criteria for granting loans.

Perhaps the most impressive area for Macedonia is the Doing Business parameter that measures ‘starting a business’, where Macedonia is ranked 4th in the world next to Hong Kong. Let’s agree that is easy to start a business in Macedonia, but maintaining that business might be more difficult: many local business owners complain about the “legal racketeering” that they say has grown commonplace in the country, where local inspectors apply pressure on companies and attempt to control the firms that have not sworn their loyalty to the right political parties.

The Doing Business Report has already been subjected to major criticism for its failure to include highly important parameters, such as level of corruption, financial and political stability and security, market size, infrastructure and qualified labor. Additional criticism has focused on the fact that the report ignores research analysis and business surveys in a given country, instead favouring the examination of laws and regulations within the country — which may or may not be implemented. It favors countries that have proven to be expedient at allowing companies to comply, adopt and establish themselves in a new business environment – thus placing underdeveloped countries with precarious economies “at an advantage”.

Many world leaders have set ambitious goals aimed at getting their countries ranked higher on the Doing Business report. A high position on the list would prove useful in attracting potential foreign investors and improve the country’s image and reputation. However, due to the technical approach of the ranking, many countries manipulate the results, making reforms to certain laws yet without applying them in reality. This is also the case with Macedonia. Figure 2 shows the dynamics of foreign direct investments (FDI) in Macedonia and selected countries also from the Balkan region: Bulgaria, Serbia, Montenegro, Croatia and Albania.

Macedonia may have boosted its reputation as a good place to do business in the world media, presenting itself as a new investment “paradise” that grants foreign companies immense benefits, it has the least foreign direct investment of all measured countries the region, even though Macedonia is ranked significantly higher on the Doing Business ranking (second highest country in the region next to Bulgaria, at 39). Even when we take into account all the incentives like tax cuts, customs benefits, and property rights that the Macedonian government offers to foreign investors who want to start business in the country, the results are desperate. Even Montenegro, a county with a population of 600,000, has three times more foreign investment than Macedonia for the year 2015. (Though Montenegro’s attractive Adriatic coastline might partially explain that).

Another important indicator of a country’s economic health is GDP per capita adjusted for purchasing power parity. Right after Macedonia gained independence in 1991, the country was ranked higher than Albania, Bulgaria and Serbia. Nowadays, the only regional country Macedonia is placed higher than is Albania (See Figure 3).

According to World Bank statistics, youth unemployment in Macedonia is a staggering 50.8 percent. More than 600,000 people are believed to have left the country since independence, most of them skilled and well-educated. The results of all the government reforms and incentives are often zero-sum, even though Gruevski himself  announced that he would fight youth unemployment.

Macedonia’s economy is in desperate need of structural reform in order to achieve long-term sustainable development. The budget deficit is rising each year, meaning the economy is becoming less liquid, with the state owing more and more money to domestic companies, which are in turn unable to pay their own debts. This produces a domino effect where the money is flowing out of the economic cycle.

In order for the economy to be revitalized, business must be set free to operate rather than burdened by the government.  The government must not attempt to exert political control over the business sector; its role should be strictly regulative. The state would probably also have to intervene in the economy in order to saturate the liquidity either by hiring domestic companies for building infrastructure or to perform other services, by increasing the social transfers in the short term, or by adopting new laws to support citizens, such as a VAT return.

In order to provide all companies the same ease of entry into the market, the state must also provide domestic companies the same benefits it offers foreign investors. Right now, Macedonia legally favours foreign investors over domestic investors. The new government’s economic program covers most of these issues, but once again, implementation is key.

Painful but necessary reforms need to be undertaken in both public administration and the country’s pension and health funds . Since these funds are not liquid, both have more outcomes than incomes and this gap is growing wider. Health and pension systems are built based on the socialist economic system, inherited from the Yugoslav era, and are not compatible with the new capitalist economic system adopted by the country. The government is spending a significant amount of money to close this gap, but what it should restructure funds and implement policies and reforms that will normalize the health and pension system. This is very serious problem for which there is no fast and easy solution.

However, not everything is so gloom and doom. Macedonia is a small economy and can therefore easily get back on track. The former government’s tenure lasted for more than a decade, with constant scandals and controversies. Perhaps its biggest ‘achievement’ during that period was the fostering of deep divisions within the Macedonian society. By espousing ‘ethnic’ nationalism as the highest and purest form of patriotism, the former government created an atmosphere of competitive nationalism in the country, thus detracting citizens’ attention from the bleak economic picture.

 

The views expressed in this article do not necessarily reflect those of Balkanist

 

Nikola Kjurchiski
Nikola Kjurchiski

Nikola Kjurchiski is a PhD student in Political Science. He is also a research fellow at the Center for Resource Economics at the Russian Academy of National Economy and Public Administration in Moscow.

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