Cyclopedia Of Economics 3rd edition
PART ONE Foreign Investments in the Region
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- PART TWO Nikola
- In the financial world of Eastern and Central Europe, the following events transpired, among others
- FOREIGN INVESTMENTS (2) Foreign Investments in Macedonia Sam
- The restructuring of property failed with regards to the organizational and technological aspects.
| PART ONE
Foreign Investments in the Region Dialog between Nikola Gruevski (later, Minister of Finance and Prime Minister of Macedonia and Sam Vaknin, later Economic Advisor to the Government of Macedonia) Nikola: The Republic of Macedonia is at the bottom of the ladder, as far as foreign investments are considered, among the countries in transition. It is not a coincidence. The general judgement of all the relevant economic institutions and experts in and out of Macedonia is that there is a need for foreign commercial investments at this time. This dialogue is the commencement of an attempt to analyse the reasons for the absence of foreign investments and to act to change the present situation. I think that we should above all focus on foreign capital in the form of indirect and direct investments from commercial institutions in the world. That is a priority as far as the needs of Macedonia are concerned. The Receipt of credits (as foreign capital from the EBRD, The World Bank, the IMF and other similar institutions) should not be a subject of these comments. Moreover, the purpose of our discussions should be to inform the public regarding the situation and the developments in Eastern and Central Europe, which skipped Macedonia.
Last year witnessed the merger of Union Banque Suisse (UBS) with Swiss Bank Co. (SBC). The new bank is now the second biggest bank in the world with a total capital of 687 billion dollars. As of last year, the biggest world-class aircraft manufacturers, Boeing and DC have become one company. It was probably the biggest merger of 1997. The British insurance companies ''Commercial Union'' and ''General Accident'' have integrated to the tune of 15 billion pounds. They will form one of the biggest insurers in Europe. Every month brings along mergers and acquisitions between smaller or bigger companies worldwide. This is a trend. Globalization is a world trend. Sam: Always has been. Research shows that the world used to be much more globalized than it is today until the outbreak of the Great Depression during the 1930s. We are just resuming an old trend which was interrupted... Nikola: General Motors has 25 times, and NTT has 52 times the sales figures of the entire Republic of Macedonia, respectively. Decisions are made within the premises of the multinationals and not by ministers. Anyone who stands up in their way is bound to be destroyed. This is a part of the same large trend called globalization, a process that enormously helped the development of transport, telecommunication and other segments of technology, but at the same time tremendously deepened the polarization of countries, as never before. Within 10 years, telephones might look like a wrist watch, a small button or a brooch. According to The London Times dated 17th November 1997, the technologies have finally converged so that there will no longer be a difference between telephones, computers, TV sets, calculators or other home entertainment electronic appliances. The developed technology will be cheap and incredibly user friendly. The developments in telecommunications have caused the world to have 13 billion micro-processors, and 5,7 billion people. Today, there is more computer exchange of information every working day, than all the verbal communications going back to Adam and Eve. My concern is: How is it possible for any Macedonian company to be competitive against other companies, each with 300.000 workers, the most up to date technology, the most efficient cost structure, the most capable and trained staff and managers? It seems to me that there is only one chance. The bridges between Macedonian firms and the biggest world companies can be established only if the latter come to Macedonia, only if they inject the Macedonian companies with capital, new technology and new markets. It is the only way to join Macedonia with the modern part of the world. Of course, that process has a ''price'', but in the long run, Macedonia will gain much more then that. Macedonia must to prepare STRATEGY how to join in the modern world. Sam: I share your belief in the purifying and strengthening powers of foreign investors, especially if we are talking about well-equipped, well-managed and well-capitalized multinationals. However, I would like to put things in perspective. Accumulated experience in the world shows that foreign investment does improve considerably the professional, technological and marketing skills of those companies that it invests in. Additionally, foreign owned companies are responsible for the greater part of the exports in their "adopted" countries. But it is equally important to apply market pressures to domestic firms through opening up to competition. Local companies, owned by locals, must adapt or die – and the sooner, the better, the less pain. Foreign investors tend to form their own sector and to isolate themselves from the local economy. Even their contribution to employment (especially of skilled people) and to the local economy through purchases is minimal. Another risk is that multinationals will look upon Macedonia as a source of cheap labour and raw materials, a colony in the guise of sovereignty. Some of them will even try to dictate anti-free market measures to the host government. Audi tried to do it to Macedonia and now the Korean auto-makers are trying to do this to the Ukraine. The government should use the entry of foreign investors – with their active participation – to cajole, threaten, force and weigh upon the local industries to get leaner and meaner. In the long run, this is the main contribution of foreign investment: the transformation of the domestic sectors. Nikola: Business Central Europe, the leading regional business magazine, in the 1997/8 Annual published information regarding foreign investments in the 27 countries in transition in Central and Eastern Europe. Macedonia is on the last position with 30 million $ (although the December takeover of Makstil is not taken into account here). The data for the other countries are: - Albania $298 million (1996 figures); Armenia - $44 million (1996); Azerbaijan - $987 million; Belorussia - $110 million; Bulgaria - $1,2 billion (6/97); Croatia - $827 million (6/97); Czech Republic - $7,3 billion (6/97); Estonia - $800 million (6/97); Hungary (6/97) - $16,2 billion; Kazakhstan - (96) $6,3 billion; Kirgizstan - (96) $276 million; Latvia - (6/97) $860 million; Lithuania - (6/97) $ 762 million; Moldavia - (96) $167 million; Poland - (6/97) $16,3 billion; Romania - (6/97) $2.4 billion; Russia (6/97) - $7,3 billion, Slovakia - (6/97) $1 billion; Slovenia - (5/97) $1,7 billion; Tadjikistan - (96) $47 million; Turkmenistan (96) - $544 million; Ukraine - (9/97) $1,6 billion; Uzbekistan - (96) $320 million; Yugoslavia (97) - $1 billion. The magazine cites the following as sources for the data: EBRD, EIU, IMF, OECD, WIIW. In the past 5-6 years, the world's most famous banks opened branch offices in almost every state in Central and Eastern Europe. Except in Macedonia. Citibank, Creditanstalt, ING-Barings, Deutsche Bank, Bank Austria, Bayerische Vereinesbank and others opened branch offices in the Czech Republic. Citibank, ABN Amro, Unicbank and others in Hungary. Citibank, ABN Amro in Romania. Volks Banken Creditenstalt, CSOB and others in Slovakia. In Slovenia, Bank Austria, Societe Generale, Volks Banken and others have opened shop. Chase Manhattan in Uzbekistan, ING Bank, Raifeisen Bank, Dresdner Bank, Societe Generale, Xios Bank, National Bank of Greece and Ionian Bank in Bulgaria and so on. In Bulgaria, for example, there are a lot of joint ventures with foreign banks, as well: Post Bank (Bulgarian Japanese Bank/Nomura) Bulgarian-American Credit Bank, First Investment Bank (Bulgarian and EBRD capital), OBB (Bulgarian, American and EBRD capital), Bayerische Bulgarische Handelsbank (Bulgarian-German capital), Euro Bank (Bulgarian-Czech capital) and so on. Even in Albania branch offices of some foreign (western) banks were opened. The Bank of Albania was the first joint venture bank in Albania (an Italian Albanian Bank) and was established in 1992. There is one other joint venture bank with the Albanian State, foreign private participation (The Albanian Islamic Bank), the only wholly private foreign bank (Dardinia Bank) and the National Bank of Greece. Except opening branch offices, the banks invested and bought up many local banks in most countries in transition. The above-mentioned magazine comments: It was an unusual year for the miserable banks in the region". After 8 years in transition the question is whether the Central European governments will or won't give up the control over the sector, which they think is the central economic power. The big shift was in 1997. They realized that they have no choice, had they not sold the banks, the banks would have been ruined. But, whether this danger is generally recognized is an open question. The results of a poll conducted among a group of readers of "The Annual" show that people still have a tendency to think that "big is best", regardless of the basic health of the bank. Sam: There are 23 universal (all-purpose) banks in Macedonia. This is not a healthy situation. The illiquid, tiny, isolated economy of Macedonia cannot support such a large number of financial mediators. The results are poor returns on equity, low quality loan portfolios (assets of the bank), monstrous default rates and, as a result, atmospheric real interest rates and reticence of the bank to fulfil their basic function: to finance economic activities. No reliable credit rating and risk assessment tools have been developed, no reliable, computerized, central registrars of collaterals. Property rights are not protected by inefficient and baffled courts and by legislators who lack all economic expertise and experience. In addition, the Central Bank, terrified by the ghosts of hyperinflation, is implementing an unduly restrictive monetary policy. Money supply, credit acceleration, secondary money formation are all at abysmal level. On top of this, the banks themselves are not modernized, under-computerized, lack professional expertise and management, offer no innovative financial products and services, are not customer oriented, notoriously slow and inefficient. Why should foreign banks enter such a fray? It took Erste Bank almost two years to conclude a deal to purchase a minority stake in Macedonia's largest bank, Stopanska Banka, which control close to 50% of the banking system in the country. This was a major vote of no-confidence, preceded by dire reports issued by the Central Bank and by the World Bank. Nikola: Hungary was the first state in the region that recognized the danger of a fragile banking system. Hungary suffered a series of bank collapses, but after that the Hungarians learned the lesson of the fiasco and put the other state banks on a strict diet to make them fit for sale. The Czech Republic and Slovakia resisted the sale of their main banks longer. But the bad debt problems made the Czech Republic change its opinion last year, and it sold one of its 4 biggest banks, IPB, to the Japanese (Nomura). The other 3 will most likely be sold to strategic investors by the end of 1998. An American financier said something about the Czech banks to be remembered: "Your banks are like ugly brides. You should be happy if you find a husband for them who only has syphilis." Slovakia endured similar problems. But, besides banks, large manufacturers of world class are present in every other Eastern and Central European State. I'll mention only a few of them: in The Czech Republic: Tesco (UK), VW (Skoda) - Germany, Unilever (England and Denmark), and in Poland ABB Fiat, Procter and Gamble, in Hungary: IBM General Motors, Unilever, Suzuki..., in Slovakia: VW, Whirpool, Heineken... There are many companies of this kind in Romania, Russia, Bulgaria, Croatia and in other countries. Except in Macedonia. On the Deloitte & Touche list of the biggest companies in Central Europe there are two from SR Yugoslavia, four from Slovenia, and none from Macedonia.
Nikola: Other things happened in Eastern Europe, but not in Macedonia in 1997, both in business and in finances.
This trend continued well into 1998. In January alone, Pepsi Co. completed the purchase of the remaining shares in the Polish manufacturer of sweets and sandwiches Wedel. Pepsi Co. already manages 83,3% of the company. Poland decided to raise the legal ceiling of foreign ownership of the local radio networks to 49%, instead of the previous limit of 31%. The changes were forced upon it because Poland has committed itself, in the accession talks, to the liberalization of foreign ownership limits, in line with the EU. The Holland brewery Heineken launched a tender to increase its share in the polish brewery Zywiec to 75%, at a price of $125 million. The Holland giant already invested $50 million in the factory, and increased its share from 25% to 32%. Heineken announced that it would like to keep the company on the stock market, and has no intention to increase the capital further. The Slovakian manufacturer of steel VSZ finally succeeded to take over the problematic Hungarian cast iron manufacturer DAM, after the Hungarian government agreed to a nominal value of $1 if the Slovaks take over its debts of $13 million. Besides that, VSZ sold its 20% to a Czech steel mill. The American Ford Motor Group declared that there will be a joint investment with Russky Dizel, an engineering group based near St. Petersburg, for the production of $150 million, and annual production of 25 000 automobiles is planned.
Again, this trend continued, unperturbed well into the first few months of this year. Investicni a Postovni Bank (IPB) was finally sold to the Japanese NOMURA SECURITIES. The Japanese paid a small amount of 2,9 billion CZKs ($81 million) for the 36% that were supposed to belong to the government, but they agreed to inject an additional 12 billion CZK into it. Nomura and similar funds now control 70% of IPB. The Polish minister of finance, Balcerowicz, announced that 35% of PKO, the biggest commercial bank will be sold to strategic investors in the third quarter of this year. Also, a listing on the stock exchange will follow in March or April. Russia issued licences to four western banks for opening branch offices. The German Deutche Bank and Commerz Bank, as well as the American JP Morgan and Bank of America were the most successful candidates from a total of twenty applicants. Last year Poland had a 7% growth rate. From 1990 to the present, foreign investments in Poland totalled more than 20 billion dollars. The USA has invested 4 billion dollars, Germany 2,1 billion dollars and so on. Among the top foreign investors in Poland, Fiat is in the first place with 1,1 billion dollars, and Daewoo Motors on the second with 1 billion dollars in investments. These bits of information are only a part of what happened in Eastern and Central Europe in 1997. Where is Macedonia in all of this? How much fresh capital was missed in this period? How many new jobs, new ideas and new markets Macedonia did not obtain, and could have? Why? FOREIGN INVESTMENTS (2) Foreign Investments in Macedonia Sam: It may come as a surprise to many, but foreign investors are as interested in psychology as they are in economics. The first things they enquire about have nothing to do with GDP per capita, the rate of inflation and its forecasts, domestic interest rates, the living standards, the available infrastructure, the banking system and other, "hard core" questions. To start with, they are interested to know other things: are property rights protected by the State and by the courts? Is the right legislation in place? What is the crime rate and how pervasive is it? Are people industrious or lazy, corrupt or honest, liars or truthful, educated or ignorant? Is it easy to do business there – or does the bureaucracy stifle everything? Are officials and politicians interested mainly in their own welfare or in that of their country's? These are "soft" issues, which matter much more to the foreign investor in the longer term. It is here that Macedonia failed in projecting to the world an image of a country friendly to business in general – and to foreign business, in particular. Investors don't even know that Macedonia exists, let alone its many advantages. Nikola: An analysis of the situation of the Macedonian national economy shows the following:
Sam: There is nothing inherently wrong with a low rate of savings, especially in illiquid economies in crisis and transition. The engine of consumption is as important as the engine of investments. But this is true when savings are IMPORTED – in the form of foreign investments – from abroad. Macedonia is doubly cursed: it has a low (official) savings rate (though, in reality, thank the black economy, it is much higher) coupled with the absence o9f commercial foreign investment. Add to this the roaring deficits and the picture that emerges is that of a bleeding economic body. The trade deficit is mostly used to finance consumption and infrastructure projects. Nothing productive and profitable is engendered by it. People prefer to buy Volkswagen cars than plant machinery. The result is a stock of capital assets which is depleted and decrepit – not only in industry. Have a look at the universities, for instance. This is a vicious circle: a problematic economy fosters uncertainty. Uncertain people do not commit themselves to long-term investments. They prefer to consume or to speculate. The result is even a more problematic economy. The low domestic savings rate is linked to the abysmal investment rate. Even when money does come in, the management class and the political-economic decision makers do not know what to do with it. The safest bet is to invest in infrastructure and in construction. It is much easier and more familiar to construct a house than to manage a microchip factory. Lack of management skills, of modern, flexible, organization, of technology means that even the available resources are misallocated, that the productivity rate is bound to deteriorate. Learning from foreigners is an excellent solution, which Macedonia has yet to adopt. But Macedonians find it highly embarrassing to admit that there is something, which they need to learn. When in need of help and advice they feel inferior and humiliated. I can tell you this from my experience as a foreign consultant here. Nikola: Looking from both from the historical and from the present point of view, and according to many others, also from a prospective point of view, the Balkan is one of the less stable regions in the world. This is why there is no inspiration for capital investment and foreign ownership. When you mention Macedonia to anyone in the world, they do not think individually of Macedonia, but as a part of a region, known around the world for its unpleasant events. The fact that Macedonia, at the moment, is not at war or anything similar, is a small consolation when you look at the history of the state and the region, or at the relations with the neighbors, or at specific recent actual scenarios of terrorist groups from around the world, where Macedonia is included as a possible object of destabilization or worse. Take, as an example, the publication that was issued in 1996 by the London branch office of Bankers Trust International PLC - one of the biggest broker investment institutions in the world with its head offices in America, a research on the markets of the ex-Yugoslav republics. The conclusion of the publication was that Greece will prevent the EU from effectively assisting Macedonia, until the problem of the disputed name is solved. A probable scenario is mentioned in which the Macedonian territory could be a subject to a dispute between Greece and Turkey (both members of NATO), as well as Serbia, Bulgaria and Albania. Even in the recent study of Merrill Lynch, despite the optimistic estimates, there still exists a small reservation regarding the political future of Macedonia. The Kosovo events caused inestimable damage to Macedonia in as much as foreign investments are concerned. The fact that the highest Macedonian political officials, in interviews to the media, are indirectly or directly saying that Kosovo can destabilize Macedonia, is as damaging as what happens on Kosovo. If the prime officials of the state are openly discussing the possibility of ethnic conflict in Macedonia in their statements, a conflict that could be contracted from the neighboring countries, if they are asking for foreign defense forces from the UN and NATO to be stationed on the territory of Macedonia, I wonder why should the potential foreign investors think otherwise? I think that the first conclusion on this subject is that, basically, the region where Macedonia is located is one of the last where the firms that are involved with international transfers of capital would invest. But that does not mean that the level of foreign investments in Macedonia is a result only of this, and that the situation could not be far better. This a only a starting point. Sam: I couldn't agree more with your concluding remarks. The regional instability and its chequered history is maybe 10% of the explanation, in my view. Slovenia was part of Yugoslavia, even involved in fighting, initially. Still, it cleverly distanced itself from its former co-federates and identified itself with Europe. The result was prosperity for Slovenia in the middle of the worst ethnic war in the last 50 years. Similarly, Bulgaria and Albania are in the same region as Macedonia and so are Croatia, Romania. All these countries (Albania until recently) enjoyed large inflows of foreign investments despite their regional affiliation. In Russia and India, governments collapse monthly. In Russia, Georgia, foreign businessmen are even often murdered. In all of them, foreign investment is booming. Money seems to be an incentive stronger than life. But foreign investors must be convinced that money is here to be made. They haven't been, hitherto. Nikola: I think that the following should be also mentioned: First, in the last seven years, the least foreign capital entered Macedonia than any other country in transition. This is not because somebody in the world hates Macedonia. Second, certain situations in Macedonia look different from a distance. This is because of (in some cases) the low level of information available about Macedonia in the Western developed countries (they should not be blamed for this), and the common unrealistic interpretation and comments about events in Macedonia, aired by local authorities under the influence of the daily political arguments. To see how Macedonia looks like to the world, one should read foreign professional magazines (or surf the internet), or even better, leave the country and get in touch with investors, who invest in emerging markets, among others. They are in for an unpleasant surprise. A year may pass in thorough perusal of foreign financial magazines, before the name of Macedonia pops up, not to mention a detailed analysis. I met many multinational companies which have developed special departments for research and investment in the so called emerging markets (Macedonia's natural place). During the first contact I encountered with the following reactions:
Sam: Type the word "Macedonia" in a few word-processors and you will get a "spelling mistake" sign. I was once asked at the Prague international airport whether Macedonia was … part of Belgrade. This is entirely the fault of the Macedonian authorities. No coherent and serious promotion, public relations and investment relations campaigns were ever undertaken. More than 80 new nations were added to the world in the last two decades. In an age of information glut, sovereignty inflation and fierce competition on economic resources – to be unknown is to be dead, politically as well as financially. In the long term, the survival of Macedonia depends not on meaningless treaties and conventions. It depends on its ability to attract foreign capital and thus to bind its neighbours and the West to it. Money is a strong incentive to refrain from instability and wars. The bitterest enemies become the best friends once they have common economic interests (see the example of France and Germany). Macedonia should immediately develop a multi-year plan for fostering and encouraging recognition among its allies and foes alike. The international media should be used and economic interests should get involved. But to leave the situation as is is nothing short of detrimental. Nikola: The image of Macedonia is an image of a landlocked country, with poor neighbourly relations. The stationing of foreign forces on its the territory raises the question why is international protection needed? The dispute with Greece, besides the negative implications for the Macedonian economy, (though it was good to finally be noticed) did not help the situation. The existing tension with the ethnic Albanian minority in the country also creates an image of an unstable country. In the projections for 1998, the government of Macedonia persistently states that it will do anything to increase the foreign direct investments in Macedonia. But it never mentions the indirect and portfolio (through the stock market) foreign investments. Whether these two concepts are mutually inclusive , or mutually exclusive, is not clear.
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