Cyclopedia Of Economics 3rd edition
The government of Macedonia should revive the issuing of bonds in Macedonia, and above all, Government and Municipal bonds. The government will appear as the guarantor
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- Nikola
- Nikola: The nonexistence of foreign capital as commercial direct and especially indirect investment is very expensive for Macedonia
- Low standard of living, with a chance for further deterioration; Missing the opportunity to increase the exports and to conquer new markets;
- And as a result of all above mentioned, sooner or later, a stronger pressure on the domestic currency and inflation, meaning new debts and impoverishment.
- Macedonia, Trade
| PART SEVEN
The government of Macedonia should revive the issuing of bonds in Macedonia, and above all, Government and Municipal bonds. The government will appear as the guarantor, and at the beginning, the government can serve as the guarantor of corporate bonds issues of the best Macedonian companies (with a prior mortgaged property of the company and the state as a collateral). When it comes to capital projects, in the absence of a big and modern bank (or a consortium of banks) which would serve as a guarantor to the corporate bonds the government should jump start the "game". This would be a positive example for the banks to support quality projects in quality domestic companies by issuing bond guarantees. There is a great interest of foreign companies to invest in Macedonian bonds, providing that they are guaranteed by the state or by a consortium of the prime banks. Sam: I don't think that I can support this idea. To me it would seem like nationalization through the back door. What if the enterprise will not pay his debts? The government will have to take over, own and manage it. I am afraid that the government will end up, this way, with more assets than it succeeded to "privatize" hitherto. Nikola: Actually, the state issued a small package of bonds against a part of the obligations for the so called "frozen deposits" in the amount of $120 million. These bonds mature in 2001, and are not traded on the Macedonian Stock Exchange, what seems, at first sight, to be a great pity. But if some unofficial sources are correct, the state intends "with a law" to prolong the maturity of these bonds. In that case the damage will be much bigger if they are traded on the Stock Exchange, and thus possessed of a greater transparency. The government must understand that in the eyes of the foreign investors (although in this situation they are not directly involved, nevertheless with the present moves of the government they would anticipate its next), postponing the payment of issued state bonds - "with a law" is not very far from making a decision "with a law" to deprive them of their property in the future. That would be a classical example of loosing the low international rating. In the future the state must think twice before assuming any financial obligations.
The state should issue a small amount of Eurobonds in spite of the availability to obtain credits without interest, in order to improve its own rating. According to many rating agencies (e.g. Euromoney) the access to capital markets plays a significant role when it comes to ranking the country. The country must demand to obtain a rating from a renowned country rating agency. At this moment any kind of rating is better than none. For example, in 1996 Kazakhstan in its first emission of bonds on the European market reached $200 million. Even the bankers from this country were concerned about the success. The assumption was that the investors would not be convinced about the expected economic perspectives of Kazakhstan, and that they will not be ready to invest their money in the bonds. The experts advising this emission, taking stock of the circumstances in Kazakhstan, thought that this country did not have an urgent need to raise money by issuing bonds. The emission was with a view to establishing its ranking for future lending from the European bond market and for attracting foreign investments in the country. That would be an incentive and opportunity for some of the best domestic companies to demand and obtain foreign capital in the form of the sale of bonds in the future.
Some of the above mentioned countries managed to secure a quick economic development with this strategy, and they even became exporters of capital. Sam: Playing with lions can be dangerous to one's health. Big western firms bring with them an abundance of capital, know-how, technology and access to export markets. However, they are never found in a missionary capacity. They are not looking to educate the "natives". They teach the locals the minimum needed to comply with their demands. They mostly import their management and skilled labour. They prefer to buy parts and capital assets outside the host country. They rarely transfer technology, let alone share it or the ownership of it. They are quick to dismantle their tent and move on, to greener pastures, they have no local patriotism. Their contribution to the economy – with the exception of opening up export markets and discounting the tax and investment benefits and grants that they normally demand and get – is now in great doubt. It was China, though, who found the redeeming formula. It forced all the foreign companies which wanted access to its enormous market, to establish plants on its soil. Additionally, it compelled them to transfer technology and share it, to buy local goods and services and to participate in the development of the local economy and of the capital markets. But very few ations can offer the investor a choice of 1.2 billion people. To the rest of the nations, this subordination of the foreign investment beast must await better, more prosperous, times. Nikola: The global approach to the privatization in Macedonia was commercial, as opposed to the mass character of the processes of privatization in many other central and eastern countries. As a result several inconveniences appeared: First, the business associations are owned and controlled by their managers and by their employees, which, in the process of privatization should buy off 51% of the shareholders capital within 5 years. In many cases that made the associations pay large dividends, for the management and the employees to be able to finance the privatization. As a result the reserves of the associations, that are needed for financing the further development drastically decreased. Also, because of the obligation to buy 51% of the capital, the incentive to collect additional (foreign or domestic) capital through the stock market is very small, because this would lead to diluting the percentage of the shareholders capital owned by the management and by the employees. Second, in the countries where the method of mass privatization was applied, the public discovered very soon how to use the stock market as a venue for issuing and trading securities and for raising capital. In some cases, the basis that is used for evaluating the enterprises in Macedonia proved damaging for the development of the Macedonian stock exchange (for example the City Shopping Center). Sam: To be fair, no one knows what is the "right" model of privatization, or whether there is one at all. In Britain, Margaret Thatcher was accused of cronyism long before Eastern Europe dreamt of privatization. In Israel companies were sold for a fraction of their real worth to a select elite of businessmen long before the Czech Republic repeated the procedure and Russia perfected it. Vouchers spread the national wealth equally – but prevent the formation of ownership and management nuclei. Management Funds are hotbeds of corruption and mismanagement. Incestuous relationships characterize them more than any Western methods of modern organization. Management and Employee buyouts are wasteful in the long run. How should something that nominally belongs to everyone – be sold to the few that must control it, risk their capital in it and reap the rewards, if any? No one succeeded to come up with a model which will be, at once, equitable, workable and implementable. Nikola: The nonexistence of international accounting standards does not only negatively affect the establishment of foreign investment institutions in Macedonia, but also influences global investments in Macedonia negatively. Without uniform accounting standards it is very difficult for brokerage firms and for investors to evaluate the shares of the traded companies. Sam: It is not only a problem of the adoption of international standards. Anyhow, there is no agreement as to which standards reflect reality best. The SEC refuses to accept the IAS (International Accounting Standards) and demands the strict implementation of the GAAP (Generally Accepted Accounting Principles) as a precondition for being listed in any American Stock Exchange. The problem is that the financial reports ae tax driven. Put less gently: accountants and managers collaborate to cheat the tax authorities by falsifying financial reports. This can be done with IAS and with GAAP, as well. It is the intention that counts. Tax evasion in Macedonia is a civil war – the citizens against the tax authorities. It indicates an abyss of trust between the populace and the various establishments. Unless and until this more fundamental problem is solved, no accounting standards will suffice. Nikola: The nonexistence of foreign capital as commercial direct and especially indirect investment is very expensive for Macedonia:
Until the above mentioned "open questions" are resolved, the probability of generating a greater interest in institutional investment in Macedonia is very small. This still doesn't mean that steps should not be taken to facilitate this kind of investing. The broker associations and the stock exchange can achieve very much in promoting the Macedonian market through the major investment firms and investment funds in Great Britain and in the USA. Even convincing these institutions to start seeing Macedonia as an investment opportunity could take a long time. To reach this stage, this it is necessary to establish contacts, and to activate the government of Macedonia on all the fronts mentioned in this dialogue. Detailed studies of the market and its promotion must be embarked upon. The foreign institutions will want to conduct their own analyses, but the existence of institutions in the country to which they can refer for the collection of local data and inside information is always helpful. Until Macedonia does not open up its economy, except through declarations, it will remain without the necessary foreign commercial investments, and will wait a long time to enter the EU and other economic alliances. Macedonia, Trade Dialog between Nikola Gruevski (later, Minister of Finance and Prime Minister of Macedonia and Sam Vaknin, later Economic Advisor to the Government of Macedonia) NG: The characteristics of the Republic of Macedonia, in its post independence period, from a macro point of view of the activities of exports and imports, are:
This, put together, led to an increase in the debts of Macedonia, and to the rescheduling of its older debts, though with no built-in strategy for their gradual decrease. The Macedonian economy is traditionally dependent on the importation of goods and services, under conditions of deficiencies in domestic raw materials and products for consumption, hi-tech and know how services. SV: This situation is not unique to Macedonia. With a few exceptions it applies almost fully to the USA, for instance (not to mention Russia). There has been an explosion in international trade in the last two decades (it grew more than threefold). But it has been an asymmetrical explosion: some countries were on the receiving side and benefited disproportionately (like Japan) – others financed this largest unilateral transfer of wealth in history. The result is a new form of mercantilism and economic colonialism. Some countries have become the suppliers of raw materials and cheap labour to others – and ended up consuming the very finished products created with their own raw materials and labour. No one knows why some countries end up this or that way. Geographical location has some influence: sea bound countries do better than landlocked ones. But all other factors suggested by the pundits are nothing but guesswork. Political stability, lack of corruption, good management, developed capital markets, encouragement of exports, macroeconomic stability – all seem to be only mildly relevant. Japan and Germany had endured gross destruction during the Second World War, Brazil and Israel had hyperinflation, Israel went through a bloody path of wars and terror, there are few countries more corrupt than Russia – and yet all these are major exporters. Some of them (Japan) do not even have any natural endowments or relative competitive advantages to speak of. It is a mystery to this very day. NG: The deficit, basically, can have both positive and negative effects. The positive effects can be generated if the realized imports include equipment, state of the art technology and techniques, investment in production capacity, re-processing etc. After a prescribed period of time, the conclusion of sales and/or exports, above all of final products, will create higher feasibility, competitiveness and profits, a flow of foreign currency into the country, and finally, will animate new investments and exports. Such developmental deficit will mean additional outside accumulation, opening the possibility to exit to foreign markets, higher production and exports. SV: This distinction, is, of course, critical. There is a "bad deficit" which goes towards financing consumption (like Macedonia's) – and a "good deficit" which goes towards financing investments with foreign capital. Few people know that Foreign Direct Investment increases the deficit in the balance of payments of a country. But, of course, this is not considered bad at all! The reason is that a good deficit generates sufficient value in the future to return the borrowed money plus a return on it. A bad deficit generates only debts without the future ability to return them. If a deficit were generated by purchasing a new textile machine – it will bring sufficient earnings in its future to cover its cost (which created the deficit in the first place). But if one buys a fancy Mercedes car – it generates no future income. On the contrary, it generates even more foreign exchange losses (fuel, etc.). NG: Unfortunately, RM in the latest period, by leading an extremely liberal policy of imports and in the absence of a strategy for economic reconstruction and higher exports, instead of a developmental deficit had realized worryingly high non-developmental deficit. This was the result of the import of consumer goods, often with very suspicious quality, and as "substitutes" for what RM anyhow produces in quantities larger than needed (e.g. tomatoes, are officially are protected, yet big quantities of tomatoes from Turkey are imported). Against it, many products, which RM is forced to import, are not produced locally even though there are conditions for their profitable production. But, because of the lack of capital and of insufficient and non-trading distribution of the banks' credits (both domestic and, more so, foreign capital), such projects are not realized. The consequences of the non-developmental deficits can be noticed in:
The last consequence mentioned implies long term non-pay-back consequences, because in the last 10 years we witnessed the following process: the drain of a high percent of the well educated people, against an inflow in the last 50-70 years of which the bigger part was from the less educated classes. So, if in that period we had "cleansing", today we register the process of "brain drain". SV: It would be naive (and I know that you are far from it) to blame all these dire consequences on a single economic factor, no matter how important. Moreover, deficits are symptoms, not the disease. By treating one's symptoms – one does not achieve healing. The brain drain – to take one example – is the result of the division of wealth among corrupts oligarchs and politicians through bogus "reforms". It is a result of the feeling of the younger generations that there is no where to advance to – unless you were born to the right family or are willing to grossly compromise your moral principles. Corruption, low social mobility, bad "communist-socialist" mentality, oppression, dysfunctional institutions, ignorance, intolerance, lack of foreign investment, geopolitical complications, (financial) crime – are all as important as the trade deficit in retarding the growth of Macedonia. NG: The trade deficit in RM in 1995 was $514 million, in 1996 - $479,5, in 1997 - $538,8. No doubt in 1998, a deficit of about half million dollars will increase the foreign debt of the state without creating conditions for the founding of more qualitative export companies. The deficit in the current balance of payments of $216 million in 1995 increased to $276 million in 1997. It is assumed that current account deficits of over 5% of GDP (over 3-4 years) should turn on the red light, especially if the deficits are financed by short-term debt or foreign currency reserves and if the same are the reflection of excessive spending. RM in 1997 officially reached a current account deficit level of 8.3% of the GDP. That definitely presents the upper limit of tolerance. It cannot be expected (especially not in the longer term) to maintain such a high current account deficit without provoking tremors and cracks in other dimensions of the economic system of RM. RM is not alone in the group of East European countries in transition with such results (Poland sports a 3.2% deficit, Slovakia 7.9%, Czech Republic 6.3%, Ukraine 1.7%, Hungary 2.2%), but it is after Bulgaria which has a surplus of 4.3%, Russia with a surplus of 0.8%, Slovenia with a surplus of 0.4%, etc. According to Business Central Europe, in absolute numbers, in billions of dollars, the situation in 1997 was as follows: Bulgaria +0.2, Croatia –1.9, Czech Republic –3.2, Estonia –0.6, Hungary –1, Poland –4.3, Russia +3.9, Slovakia –1.5, Slovenia +0.1, Ukraine –1.3, etc. It seems that RM is not alone in the club of countries with current account deficits . According to the summer issue of The Wall Street Journal Europe's Central European Economic Review, RM definitely trails the countries in the region in terms of GDP increases (below 2%) in 1997. Belorussia had 10%, Estonia - 9%, Yugoslavia more than 7%, Poland, Latvia, Slovakia, Lithuania, Croatia, Hungary and Slovenia preceded RM. Furthermore, RM is an impressive record-holder in terms of the rate of unemployment, (the lack of) foreign investments, and finally, more positively, it is second-rated in terms of its low inflation rate. Trade deficits are exhibited by many developed countries, but this is different and not comparable with RM.
The problem with Macedonia's balance of payments deficit is that it is of the wrong kind. It signifies the collapse of local manufacturing, the death of local industries. The consumer is rarely faced with a choice. He has to purchase imports. A lot of people make money from legal (and less legal) imports in Macedonia. Smuggling, contraband, piracy of intellectual property, are rampant. Members of the political elite were given monopolies over certain types of imports. A sizable part of the trade deficit goes to Macedonian pockets. There is simply no interest to encourage local production or exports. This will hurt the profits of the robbers of the national wealth (not to mention the profits of certain customs officials and police officers). Coupled with a stagnant GDP, high unemployment, foreign handouts and strangely and suspiciously stable currency – this is a bad omen. Download 5.66 Mb. Share with your friends:
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