Cyclopedia Of Economics 3rd edition

In the whole system, the most painful point is the fact, derived from past experiences, that the individual always succeed to con the state and to abuse its "big ideas". The big ideas sometimes are like big old trees – they make more shadow than they give fruit. That means that, even before we embark upon this policy, a control system and an efficient penalty system, geared to tackle abuse of the functions, the laws and cases of corruption, should be created (or copied from  countries in which they were implemented successfully). For as long as the corruption is very deep inside the system, no project stands any theoretical chances to succeed, even one which brings development and prosperity to the state. The dilemma in this situation, is the state guilty or the individual, isn't a dilemma anymore – it is the state. The individual's psychology is to earn more (especially in times of crisis) even at the state's expense, when everyone else does the same. This psychology, if one wants to preserve civilization, is changeable only by the introduction of an efficient penalty system with multi-level control. For as long as the state creates a system, which applies to all, but not to "us and ours", it doesn't stand a chance for success, no less because RM is small country and most people succeed to find a way to belong to the group of "ours". The system, which the state creates, determines the business etiquette and culture, the mode of thinking, the environment and the habits, both negatively and positively. The state first has to make order with a multi-level control system of penalties, and only many years after that will follow the spontaneous creation of "moral shame" associated with the acts that I am talking about. Maybe the penalty isn't  always justified, but it serves to block a hundred other evil deeds. Who doesn't punish evil, provokes it. So, first is fear and than shame will join it. The shame after discovering the act of deceiving the state is almost not present in RM. Some people perhaps don't even understand the meaning of these words. This is the way new habits and customs are created among people, and also the transformation, from the roots, of the individual's psychology in view of its responsibilities towards the state. About the fear and especially about the system of shame, much can be learned from the Japanese system, certain parts of which can serve as an interesting example for RM and for the people who live in the Balkans. In Japan the court is not a very frequented institution. In the USA statistically there is one lawyer per 323 citizens. In Britain 723, in Germany 1345, in France 2099, and imagine in Japan 8200 citizens to one lawyer. In Japan the lawyers are not very rich people. But, to reach this level, a long evolution, also a tradition, which it is obvious that the Japanese will not retract, are needed. We will get back to Japan later.

The USA is a supreme example of such a country.

Within the scope of the financing sources we should not forget a few foreign credit lines and the foreign credit and insurance organizations/institutions such as: the EBRD, The World Bank, MIGA, IFC, OPIC, SEAF, USTDA, West Merchant Bank Ltd., Alliance Scan East Fund LP., East Europe Development Fund Ltd., NEPA and others.

One of the possible decisive factors in the financial choices of the firm is the level of the development of the financial markets, especially the securities market.

In the last 10 years the total capitalization of securities exchanges worldwide increased threefold, from 4.7 trillion DM to 15.2 trillion DM. After the realized liberalization of stock exchanges and after the successful effort to attract foreign portfolio flows, many developing countries removed the restrictions on foreign ownership, liberalized the transactions through the capital account and improved the accounting and information standards. The role of the stock exchanges in collecting and publishing information is more important to larger firms, because their shares are traded more often. The high fixed expenses of issuing securities handicap the smaller companies. The stock exchanges offer new possibilities for providing capital and new investments. Unfortunately, in RM this is not the case, because of many reasons: the privatization model, lack of political motivation for attracting foreign investors, unsuitable and fuzzy judicial system, the absence of state bonds and of branches of the big western banks, the absence of a central share register, the absence of a stronger presentation of the possibilities of the domestic stock exchange and its role, etc. The privatization model in RM was built on the basis of inside relationships between shareholders and managers, in most cases they were the same people. It led into a situation whereby companies preferred to abandon the stock exchange and to rely on bank guarantees with high interest rates coupled with slow or no development. This state at the micro level created implications at the macro level. If the companies in a country stagnate or don't prosper, the question is how is it possible for the production and the exports to increase on the macro level? Almost everything that we see as data pertaining to the macro level is a result of micro units working in unison. There is only small hope that in the next 2-3 years companies, which are in the process of privatization or which still have a diffuse ownership structure, will be provoked to conceive new big projects and markets. This means that the new private companies and the privatized companies with a more centralized structure of ownership should carry the weight of the reconstruction and be the first quoted companies, which will try to raise new capital through the stock exchange in RM. Unfortunately, according to The Wall Street Journal Europe's – Central European Economic Review, from a total 15 countries in transition in Central and Eastern Europe, RM (judging by the coefficient of private property per GDP) is fourth - but from the end of the table, with 50 percentage points.

The Macedonian stock exchange will continue, for a long time, not to be a very important source of corporate financing, perhaps never, unless certain steps are taken to make it an alternative for the bigger and more powerful companies at least in the medium-term (3-7 years).

Of course, the improvement of the global economic environment in RM, the increase of the manufacturing and exports sectors is very important for the stock exchange's development and its transformation into a source of capital. One joke says that the economy and the stock exchange are like an old man with his dog. The old man walks ahead very slowly and stops from time to time. The dog runs around him, behind and before him, sneaks and goes back. It is thought that the stock exchange anticipates the economic processes at least six months in advance. If we put to one side two or three big takeovers (a process which is usually conducted in the world by KHV, apart from the stock exchange), we will still obtain poor trading results in the stock exchange in Skopje. If the domestic companies do not have interest in publishing their financial results, the state has to find a way to change their mind (as it was done with the banks, which are obliged to publish their results in a daily newspaper).

But let us go back to the basic theme - the trade deficit, the new economic structure, the increase of exports… In addition to changing the economic structure higher export bonuses and preferences for products with a higher level of finish should be provided. The financial resources for paying bonuses to the exporters for penetrating foreign markets should be provided from the already mentioned sources in the first few years and from the non-returnable financial help (which RM receives gradually less of and which we should stop making a habit to live off).

I think that RM should directly force the production of certain goods traditional  to RM, for which the markets are sizable and there are preconditions for their production. For example:

To financially assist the increased sophistication of wine production, to improve the quality of seeds, more sophisticated bottling and marketing with an aim for better placement of the Macedonian wine abroad as one of the more strategic export products. An American expert team, a few years ago, noted that RM has superb geographical conditions for high-quality wine production, but it is necessary to upgrade the technology of production, to change the variety of seeds  and to improve the bottling. Despite the fact that competition among wine producers in the world is great, RM, with small efforts can find itself in a much higher place in the list as a quality wine producer. In England there are three big supermarket chains and one of them is SAINSBURY. Last autumn, I was able to see Macedonian wine only there, and, though cheaper than the Bulgarian wine – it was still selling less. One friend of mine, in London, told me that in the above-mentioned chain of supermarkets the wine produced by others in Macedonia used to be sold, but because of the fact that wine deliveries were never on time and in the exactly agreed quantities, the English partner decided to cancel the collaboration.

Or, for example, the stimulation of lower exported quantities of fresh apple and higher export quantities of finished apple products (juice, jam, etc.). The private companies, which will buy equipment for such purposes should, by law, receive bonuses from the state.

SV: Wine and apples are two fine examples of the "Macedonian Malaise" (typical to most so called "countries in transition"). The condition is characterized by an overwhelming sense of inferiority. Having been oppressed and subjugated for so long, small nations convince themselves that they deserve it, that something is wrong with THEM, that they are no good, bums, stupid, or simply unlucky. But always lacking and deserving of punishment. With such a national mood, there is no room for initiative, self confidence, self worth, trust, belief in the future, planning, legal behaviour, postponement of immediate satisfaction (also known as savings and investments) and capturing of markets. The weapons of the weak are socialist: poverty for all, steal from your employer, increase the information fog and dis-information, think now, there is no future, no loyalty, hide your true emotions and so on. The weapons of the strong are capitalistic: market yourself, believe that you are the best, improve constantly, think big, think ahead, fight your competitors on equal terms, honour obligations. Macedonians still have to make this transition. This is the ONLY transition that they have to make – because the only transition is in the mind and the rest follows from it.

The second symptom of the "Macedonian condition" is laziness brought about by the "Big Brother" phenomenon. Central planning is a very comfortable thing: no responsibilities, just blind obeisance of faceless instructions and plans, no headaches, no profits but also no losses. Each one has his own, undisputed, irrevocable and irreversible place. Admittedly, the former Yugoslavia suffered less from this malignant form of communality (thanks to Tito). Still, Macedonia had to export all its raw materials to Croatia and Slovenia. The latter would process them and sell the finished products to Macedonia. The Macedonians remained poor but happy: their lives were uncomplicated, straightforward, predictable, clear and controllable. Many Macedonians still miss these times of black and white. Now that the world has been coloured by the palette of personal profit, it is less easy. I personally met wine manufacturers in Macedonia who refuse to even entertain an idea of introducing bottling, packaging, branding and marketing of their wine – even if it means TEN TIMES the income! I met people in Gevgelia who preferred to let their apple crops rot rather than transform it to HOME MADE jam (no complicated industrial processes and no costs involved – the buyer was willing to pre-finance the whole operation). This is the power of comfortable habits and hundreds of years of sabotage, avoidance of all effort and labour and being someone else's colony (cheap labour and raw materials).

Whether money incentives will solve this state of things is an open question. There is a lot of fear of the new and untried. A lot of ingrained conservatism. A lot of hostility towards the educated, the foreign, the "superior", a lot of false pride (which is truly stupidity in its purest form). People are not used to a life of cut-throat competition. Many will prefer to stay poor. A few will take up the challenge. Will their number be sufficient?

NG: These are the things, which the Macedonians for a long time cultivated and thus experienced the "Slovenian complex" - the state bought unfinished wine, apples and other agricultural produce from its citizens and placed them for export for a price much higher than the one paid to the Macedonian producer.

There is one inevitable condition, which has to be satisfied to enable these "plans": the realization of a satisfying profit and the ability of the relevant  companies to survive and develop by themselves.

I think that the development policy of RM in the future should be directed at stimulating and developing the industrial sector and products, which are not  "tradable commodities". That does not mean that tradable commodities should be de-stimulated, only that the tremors of the commodities exchanges can reverberate very strongly in small countries such as RM.

SV: It is essential for a country in the process of modernization and integration in the global economic community to decouple itself from the volatile prices of commodities. One of the main reasons for the recent crisis in Russia was its over-dependence on energy products. But I would like to add two recommendations. First, whenever and wherever possible, the state should strive to hedge its commodity exposure. In other words, it should buy futures contracts in the world markets (Chicago Board of Trade, Chicago Mercantile Exchange). These contracts are like insurance policies. By paying a small premium, the future price of the commodity is guaranteed. True, if the price goes up above the guaranteed price – the difference is lost. But, if it goes down, the guaranteed (higher) price is paid to the holder of the contract. In the last three decades commodities were a one way business: down. Almost every type of commodity has such contracts available: pork bellies, lamb cuts, certain species of tobacco, corn, wheat, rice, currencies, interest rates – everything. It would be a wise idea to use financial futures to limit the exposure of Macedonia to variations in international interest rates or in exchange rates. All this can be done today. The second recommendation is to establish an "Exchange Rate Guarantee Corporation". The state will ensure exporters against foreign exchange fluctuations. The exporters will pay a premium and will purchase from the state an insurance contract, which will guarantee the rate of the foreign exchange that they are going to receive in terms of denars. This will enable them to price their products with an element of certainty. In most economically advanced countries in the world, such mechanisms do exist. Gradually, the state will be able to pass on this function (of insuring exporters against currency exchange fluctuations) to entrepreneurs in the private sector.

NG: A few months ago we have discussed attracting foreign investments to RM. One of the most important measures, for attaining a suitable balanced state in RM, should be directed at attracting foreign commercial investments in RM.

Foreign investments bring fresh and non-returnable capital, which doesn't have negative implications on the state's balance of payments, because the state doesn't have obligations to return and to pay interest rates on it. Foreign investments open new markets for domestic companies, where they haven't invested their domestic financial resources, by increasing the exports, the foreign currency income (or by reducing the foreign currency outflows if they substitute for imports), increase the  financial resources of the budget, provide new ideas, technologies, working methods, management, and new employment. Very often the profit is reinvested in the same state. All this will have strong positive influence on the balance of trade.

The basic task is to create a safe legal environment for foreign investment and laws of a western standard.

From this point of view, it is needed to provide a secure and fast judicial system, which will finish all processes in a few months time.

Concurrently, the strong promotion of the Macedonian market should be done to potential investors using all the possible promotional tools (human and material). The relationship with multinational companies is the only bridge between the Macedonian companies and the world markets, the only possibility for development. From the macro aspect, this will have a strong positive influence in RM. In this context, the creation of conditions for the opening of branches of the big western banks, which will reduce investment risk, will offer new credits and financial resources to the domestic companies according to standardized methods and evaluation of the credit applications, will revive domestic savings, will introduce new methods of work and behavior, etc – is inevitable. I will not continue with this subject, because we explored it in detail in our first dialogue.