Cyclopedia Of Economics 3rd edition
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NG: Within the scope of the roles of increasing investments and changing the economic structure there is the implementation of an efficient court system, which will create an environment in which the commercial banks of RM, by a speedier settlement of their own claims, will make long-term and cheaper credits available. This, indirectly, will influence the process of structural economic change and start to create an export-oriented efficient economy. At this moment, financial resources available in RM, from the banks' point of view, are really "a cat in a bag". The bank can never be certain that its financial resources will be recovered. First, the court mechanism is very slow and inefficient. This means that even if the bank were able to recover its financial resources within a year, or more - the principal plus regular and penalty interest rates would amount to more than the mortgage value and the bank will not be able to recover the full amount of the debt. Second, the realization of a mortgage is a real BINGO in RM. There are a thousand ways to cheat the bank and the creditors with the aim of not returning the credit. The system, instead of protecting the banks, protects the debtors. Thus, in the long run, the basics of the financial system are damaged and it boomerangs. The desperate banks lose the courage to place financial resources because of the uncertain environment, which doesn't guarantee the recovery of their financial resources, or the danger that an eventual devaluation will erode a part of the property's value, especially of the banks of foreign origin, which directly invested in foreign currency after increasing their capital. Slow justice is injustice. Because of that, the banks choose to impose high active interest rates, as they will cover the risk of investing in the economy with a judicial system with the appearance of "Swiss cheese". On the other hand, high interest rates increase the costs of production, which realistically diminishes the export competitiveness of firms' products, casts in doubt new investment projects, and at worst, casts in doubt the very survival of the company and its ability to return the invested money to the bank. This never-ending spiral is vicious if not nipped in the bud. RM is in the situation "invest and export or die". To start with, what should be done is what is written in one of Hitler's biographies: "the negative appearances should be destroyed in the very beginning, not to be analyzed later". SV: Needless to say that I fully share your views. I just want to remind all of us that an efficient court system is only one of a long series of measures that should be adopted prior to the establishment of a healthy and functioning banking system. Assets need to be registered reliably using advanced computer systems. There should be centralized, real time registers of liens and mortgages. Bad debtors should be blacklisted and the lists should be made public. Bankruptcy proceedings have to be streamlined and implemented. Personal bankruptcy should be introduced with severe restrictions imposed upon such individuals. Legal procedures of seizing assets and materializing them should be made much simpler. A lot of the functions of collection and appropriation of collateral by creditors should be transferred to the private sector. This is a very partial list. There is nothing I can say about the courts that hasn't been said before. They are slow, inefficient, clogged and subject to political meddling. Special commercial courts need to be established to cater to the needs of special groups such as exporters and foreign investors. Judges urgently need to be retrained. But the banks themselves have a lot to do. Their image will be transformed only through actions. It is easy not to repay a loan to an "enemy of the people" (as banks are perceived to be). Banks should become more personal, attuned to the needs of small businesses, young couples, students, industry, exporters. The level of professional education of bank employees must improve. They must be exposed to financial products and instruments in the West. They must innovate and be active partners in the economy and not just money conduits. They must charge interest discriminately: good borrowers should pay MUCH LESS than bad ones. They must share their profits with their employees and with the public. They must be forthcoming to the client: ATM machines, simpler procedures, smaller queues, home banking, information services, capital markets services. They must get rid of political decision making, cronyism and corruption – all rampant nowadays. NG: Also, RM should impose a policy for the export of finished products, and discourage the export of semi-finished goods and raw materials, of course, after it has already secured the conditions for it. Credits, from the bank for export development and support and from international institutions, should be directed exactly at stimulating the production and the export of as many finished products as possible and towards investments in the construction and tooling of highly profitable factories, in which the bigger part of the production will be export oriented, or import substitution. As a result of the bad structure of the Macedonian economy (created as part of the old Yugoslav Federation and as result of the extreme liberalization of imports lately), the import coverage ratio in RM drastically decreased. In 1992 the coverage of imports with exports was 99.3%, in 1993 90.6%, in 1994 it drastically plummeted to 73.2%, in 1995 the trend continued to 70.0%, in 1996 it was 70.5% and in 1997 it broke the limit of 70% coverage down to 69%. Such long-term dynamics cannot be withheld even in stronger economies than Macedonia's, and this leads to the total collapse of the economy and the state in the longer term. SV: Hear, hear. Perhaps it is important to explain to the laymen why. The only reason why a country exports is in order to receive payments in foreign exchange. Why is this needed? After all, internally, all the transactions are concluded using the Macedonian denar. The foreign exchange is needed in order to finance imports. In other words: we export ONLY so that we will be able to use the proceeds to import goods and services. Imports are a good thing. Different countries have advantages in the production of different goods and services. It is better to import a product from a country, which has an advantage in producing it – then to produce it ourselves. Our resources can be better employed where WE have a relative advantage over others. This is why a consistent, multi-annual trade deficit is dangerous. Ultimately, the country will run out of foreign exchange. It will not be able to import. Its resources will be employed in producing goods and services in which it has no relative advantage (and which it used to import) – in other words: its resources will be wasted. Its wealth will decrease. As its wealth decreases, the value of its commitments will diminish – because people will not be sure how risky the country is. This is why currencies depreciate and debt payments frozen when a balance of payments crisis erupts. Currencies and debt instruments (bonds) are commitments made by countries. They are supposed to store value. But if the value of the country itself is reduced (because its wealth is squandered through the inefficient allocation of economic resources) – the currency must be de-valued. As trade deficits mount and accumulate (=as the country's foreign exchange reserves dwindle), the country either loses its independence and becomes the surrogate of its donors – or a crisis sweeps across it. Its currency collapses, it freezes its obligations and is doomed to a prolonged recession and to a shortage of goods and services that it can no longer import.
The bad structure of the exports can be demonstrated by an analysis according to economical uses. The total exports of materials for re-processing in 1995 stood at an extremely high 54.2%, in 1996 it was 49.5% and in 1997 - 52.3%. The export of machine tools in 1995 was 4.2% of the exports, in 1996 - 3.3% and in 1997 -2.9%. Goods for general consumption amounted in 1995 to 37% of the total exports, in 1996 to 47.1% and in 1997 to 44.7%. From these data it is clear that more than half of the Macedonian exports is comprised of the export of materials for re-processing. This is very worrying, especially considering the fact, that the resources, raw materials and mines have a limited life-span, which is about to end soon, and that the price of raw materials might keep falling in the world markets. These are the facts. Naked facts. Every idea has to start developing from facts. The economy, like life, is a drawing where it is not possible to use an eraser. 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.
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.
However, I am not talking about some strictly managed system, about which I don't even think. Every country wants to stimulate exports, and beside the measures that you mention and which I fully accept, there are other measures, with which, this way or the other, governments try to help their companies in penetrating export markets. This is done even by the biggest and most developed countries in the world, and that's a fact. RM, AT THIS MOMENT, IS FAR FROM A POSITION OF IMPLEMENTING A PURE MARKET ECONOMY, and for now that's only a pleasant dream. It's wonderful to dream pleasant dreams, but in the meantime we must live. If Japan and many other countries could adopt such measures, why shouldn't RM for one LIMITED AND PREDETERMINED PERIOD do so? Here, the question what the country knows about financing, what the country knows about international trade, production, etc is irrelevant. I accept your thesis that the country doesn't know much about these matters, even though under the conditions of the (generally) current bad management structure sometimes it is different. BUT THE COUNTRY KNOWS ONE THING: IT NEEDS HIGHER EXPORTS, AS FAST AS POSSIBLE, and this is why I suggest these measures. Every country minds its interests. Such interventions exist also in the EU, especially in the area of agriculture, and much wider. Disputes between Switzerland and France about agriculture, threaten to become a trade war, especially after the accession of Poland to the EU. You will see what will happen with the USA if it is engulfed by the crisis of the recession, as you predict in your text in "Nova Makedonija" dated 30-th of April this year. Then you will see what state intervention means and what is "market economy". What I am suggesting will be "a sugar-cube in the coffee" against what the USA administration will legislate and what from time to time other countries do (not to mention John Maynard Keynes in the crisis of 30s). Above all, RM isn't in the classical crisis situation, which means that in the past its capacities were used well and now less, and there is a worry as a result. In RM for a long time a very big number of manufacturers DO NOT WORK AT ALL, AND NEW ONES ARE ESTABLISHED IN MUCH LOWER NUMBERS. I think it's unnecessary to describe the situation and the role of RM in the borders of SFR Yugoslavia and the consequences. This means that the country faces a difficult task. It is not to create conditions for increasing the production up to the capacities, but to foster conditions for a part of the old and very new capacities to start working practically from zero. The tax simulation for exporters in the first 4-5 years is the minimum that the country can do until a few production cycles will be activated. I agree with you that there is a danger that these companies will "go to sleep", but when it will be made clear in advance that their chance is limited in time, I believe that most of them will behave otherwise. From most of these companies the country at this moment doesn't collect taxes, because they don't work or aren't established. It follows that in the future the country can eventually produce new income and in no way losses. RM very often makes the same mistakes. The Macedonians were the most ardent Yugoslavs before 1991, almost up to the last moment, while all the other republics were preparing themselves for independence - materially, financially and militarily. RM led in the last 6-7 years a more liberal import policy than much more powerful countries (Croatia, Slovenia...) and the results aren't better. A similar mistake was done by RM in the period 1993-1994 when hyper inflation was defeated and interest rates remained on the same level for the following two years (25-30% per month). Tell me which company in the world can work successfully paying credit bearing a 25% monthly interest rate with an inflation of 18-20% yearly? The country then decided to adopt a market economy and not to intervene. The companies had to take credits to finance their production and the result was hundreds of bankrupt companies, unable to return the credits together with the high interest charges. Besides this the companies' insolvency strongly changed to the worse the picture of the banks' balances. Even today we feel the consequences: strong falls in production, in exports, enormous and increasing unemployment, the instability of the bank's. IT'S VERY EASY TO READ THE LESSON HOW THE MARKET ORIENTED ECONOMY SHOULD LOOK LIKE AND THEN FOR IT TO FAIL. IT'S DIFFICULT TO SAVE IT EVEN BY A COUNTRY'S SHORT-TERM INTERVENTION. Shock therapy didn't present itself as very successful "medicine" in Eastern and Central Europe. Before implementing a pure market economy, a pre-preparatory period must exist, same as helping a child when it makes the first steps or helping a man when he is sick. The fact is that reconstruction is expensive. But, it is worthwhile. Examples from other countries have proved it. The government, which supports such a project, has to be very efficient, honest and decent, determined and decisive. Decisiveness develops like a muscle. Practice is needed. It may again lose its position (especially in the first phase of the reconstruction). Maybe, because of this, the fastest and most efficient reconstruction is to be found in countries with half-dictatorial or dictatorial regimes, which have strong positions of non-democratic fundamentals. But, this does not mean that democratic governments cannot finish such a project with success and be rewarded for it by the voting citizenry. The question how the state will finance such a project arises. I think that RM is still in the phase when it has superb possibilities to adopt such a policy. RM, luckily, still has a lot of state property. Above all, I would mention here the public companies. With their sale, without any problem, the project "economic reconstruction" can be financed. So, for example, at this moment, it is known that the state will receive about $800-900 million for the telecommunications company. Imagine that one half of this money will be invested in the Bank for export development and support and the second half will be used to compensate for the budget expenditures caused by the tax holidays and stimuli for supporting exports, providing bonuses, etc. It is understood that this method of financing budget expenditures would be for a limited period of time for two reasons: 1) In the short and medium terms, the financial resources arising from the sale of the state's companies are limited and can only suffice for a limited period of 5 to10 years, 2) In the longer run, the economic reconstruction would require from 10 to 15 years. If administered as foreseen, there will be a possibility for the establishment and development of new successful firms (which today don't exist or have low profitability, which, on the other hand, translates to low tax receipts), which by opening new production and export businesses with the help of the new state policy, will start to gradually fill in the void in the budget created as a result of export bonuses, exemptions, relief, etc. (which I have mentioned above as measures for economic reconstruction). So, for example, if one company operates today with a profit of 100.000 DM yearly, and with the new state measures (an easier access to credits for production, exports and tax holidays on a similar basis) it will increase its business and make a profit of a half million DM, this means that the state will receive about five times more financial resources from taxes. But, not to forget that in this example we discuss only the money, which RM will receive from the selling of the Telecommunication Company. If we add to this the financial resources resulting from the sale of the electricity utility, railways, post office, state owned hotels, community enterprises and others which in more sophisticated countries in the last 10 years are subject to a trend of privatization... We are on our way to conclude that RM has a historical chance to reconstruct its economy, to become export-oriented and with high quality products and services.
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