Cyclopedia Of Economics 3rd edition

The parameter of the imbalances of the current account should be observed parallel with the policy of exchange rates and structural factors, such as the level and the composition of the foreign debt, the level of market openness and the composition of trade, the levels of savings and investments. The longer-termed deficit of the current account basically should cause alarm when the export sector is small, the servicing of the debt is onerous, savings are low, the control of the banking sector is weak and equity investments are small (weak financial system). The ratio of exports to GDP plays an extremely important role. Countries, which successfully adapted themselves, after they experienced gaping imbalances of their current accounts, such as Korea, Israel and Ireland, increased their exports dramatically, as distinct from Mexico in 1982 and Chile, which endured hard external crises. Long-term deficits, as a rule, make foreign investors reluctant to lend to the state, fearing that the country is insolvent and ready to default on its borrowing. Fast growing countries can keep longer-term deficits without increasing their external debt in relation to their GDP. Unfortunately, in RM that is not the case. The ratio of exports to GDP represents the level of openness of an economy.

To make the picture clearer, I would emphasize that all Macedonian exports in 1996 amounted to 1,147,440,000 USD and in 1997 to 1,201,255,000 USD. In global terms,  these amounts are very small and not meaningful in the world economy, not even when contrasted with certain private corporations. For comparison, we could study the annual sales of the top industrial and servicing companies in the world (source: Fortune, a chart in The Economist).

In fiscal year 1997, General Motors (USA) had sales of $178 billion, Ford (USA) $150 billion, Mitsui (Japan) $140 billion, Mitsubishi (Japan) $140 billion, Royal Dutch/Shell (Netherlands/Britain) $138 billion, Itochu (Japan) $137 billion, Exxon (USA) $125 billion, Wal-Mart Stores (USA) $124 billion, Marubeni (Japan) $117 billion, Sumitomo (Japan) $100 billion, Toyota (Japan) $80 billion, General Electric (USA) $78 billion, Nissho Iwai (Japan) $71 billion, IBM (USA) $70 billion, HTT (Japan) $70 billion, AXA (France) $70 billion, Daimler-Benz (Germany) $64 billion, Daewoo (South Korea) $64 billion, Nippon Life Insurance (Japan) $64 billion, BP (Britain) $63 billion. The American car producers led in the list of Fortune 500. Nine of the ten biggest companies worldwide were Japanese and six were American. But, 12 of the 20 most profitable were not American, nor Japanese. Exxon topped the list of the most profitable with $8,5 billion. Intel was on the 125th place, judging by its sales, and on the fourth place according to its profits.

If, after these numbers, we go back to RM and ask ourselves how is it possible that  exports in the last 7-8 years did not increase by at least 50%, we will be forced to conclude that something is wrong in the system. Even if we take into consideration the circumstances in the region (embargoes from north and south, Bosnia and Kosovo) the conclusion that something should be changed, holds. In support of all this I will mention that our neighbour Bulgaria last year had no deficit in the trade balance – rather, it made a small surplus. Russia, under adverse circumstances, also achieved a surplus.

SV: I am the last person to object to your conclusion that something is rotten in the current state of things and that it needs to be amended urgently. But I wish to make a pertinent distinction between "optical surpluses/deficits" in the trade balance and "real surpluses/deficits". The fist kind is generated by factors external to the country and not in any way under its control. For instance: the Russian impressive, consecutive trade surpluses were the result the of stable prices of its commodities in the world markets (over which it has very little influence – it is a "price taker"). The minute the prices of oil collapsed, the Russian surpluses went down under and with them the Russian economy as a whole. The same can be said about Nigeria, Venezuela, Saudi Arabia and dozens of other countries. A surplus can also be the result of the elimination of the purchasing power of the population. When people cut down on consumption – they cut down, first of all, on imports. It is very easy to maintain a trade surplus (and low inflation) in a state of economic depression. Another type of artificial surplus is created through the introduction of protectionist or anti-competitive measures. A country can block all imports, impose levies, customs, duties and quotas on them, deter foreign investment – and, as a result, have an eye-popping surplus.

The "real thing" is the result of open markets in sophisticated, efficient competition. Whether a country has sufficient relative advantages to sustain a trade surplus is discernible only under the "pure" conditions of free markets, unadulterated by state intervention. The country has to be open to international trade and to foreign investment. It must not protect its economic players. It must let the markets determine its exchange rates. It must encourage efficient, frictionless, banks and capital markets. Even then it stands the risk of running trade deficits (witness the USA).

The Macedonian balance of payments is balanced by: 1) rescheduling of debts and 2) new debts. For a real balance to exist in the long-term, without foreign currency restrictions, without frequent devaluation and appreciation and without increasing debts, the presence of an INTERNAL BALANCE is called for. The reasons for having a deficit in the balance of payments can, basically, be either monetary or structural. The latter would involve a divergence between domestic savings and domestic investments – a deficit, which if financed with foreign debts without a long-term irreversible increase of the investment side, leads to even deeper structural imbalances. A temporary remedy is incurring external debts and aiming at long-term recovery, which is the subject of this dialogue.

Besides assuming credits and debts, RM has lately covered the deficit through substantial non-returnable foreign help, which has decreased from year to year. Last year it had been only $7 million against $52 million in the previous year. This says that RM has to start living without a foreign, non-returnable "infusion". The sooner it prepares itself for such a life, the less painful will prove to be the habit of spending only as much as it makes. Alternatively, it has to implement some measures to earn more (produce and export). The large amounts transferred by Macedonian immigrants who help their relatives in the country financially, appear in the state's balance of payments in the second place after the exporting of goods, and before the exportation of services. This only confirms the sick situation in the country.

The external balance of the Macedonian economy is long-term, realistic, fundamental and destructive.

A parasitic economic culture has developed, dependent to an unhealthy degree upon handouts, charity, donor conferences and tacit blackmail (Kosovo, Albanians, anything goes). Instead of developing their businesses – managers dedicate all their energy to lobbying, wining, dining and bribing the politicians that hold the right purse's strings. Instead of production and exports – the country sprouted a breed of financial mediators, financial consultants, contact men and go-betweens who know (or purport to know) how to extract money from international financial institutions. Instead of worrying about structural changes – the elite concerns itself with the perpetuation of tense geopolitical situations. The nation becomes submissive, obedient and oppressive. Central Planning by faceless bureaucrats has been replaced by the Central Planning of Eurocrats, dictates from Moscow – now come from Washington, Communism is now called IMF-ism. How convenient it all is!!! How cozy!!! If the economic policies fail – the minister can blame the IMF. If they succeed – surely it is the undeniable fruit of his towering intellect.

The dilemma: Has RM lately paid too high a price for the stability of its currency, the denar, is getting more pressing recently. The balance of payments deficit as a percentage of the GDP according to the data of the National Bank is as follows: 1994 - 5.5%, 1995 – 5.8%, 1996 – 6.4%, and according to official sources in 1997 it is pretty high, 8.13%. It seems that the macro-economic policies of RM in this respect were created only to maintain currency stability, until the balance of payments was in its function. RM should lead a more balanced policy of these two very important parameters: exchange rate of the domestic currency and balance of payments deficits. That means that in no case should the unlimited (or considerable) fluctuation of the exchange rate of the denar be allowed. Such a phenomenon will become entrenched and will foster a bigger volatility of the domestic currency. This will facilitate the conditions for an extremely unstable economy. Rather, we should create an atmosphere for a more realistic exchange rate of the domestic currency with the possibility to control the average fluctuation instead of the present de-facto fixed exchange rate. This will create a better export climate in the short-term. Even the variant of programmed monthly fluctuation of the domestic currency is already exercised in some countries, and can be subject to discussion. Anyhow, a higher instability of the domestic currency will have, besides the positive consequences, some negative ones, as well. It is like poisoned medicine which, while curing one organ harms the other. But if the patient is in a very difficult condition, the first thing, which should be done is resuscitation, the better of two evils. A More flexible domestic currency is a measure of the same caliber as short-term debts, but it seems that, at this moment, it should be a less harmful short-term interventionist measure.

By the way, maintaining an unnaturally stable domestic currency has its own time limits, following which it becomes extremely exposed, because the consequences increase geometrically and are borne by future generations.

SV: "The Economist" referred to the Macedonian denar as "eerily stable". There can be no question that it is artificially stable. The Central Bank is evidently at play and is doing a commendable job in as far as its goals are defined. Prices are stable and the domestic currency is stable – what more can a Central Banker ask for in life?

But this is an illusion, which will cost the country dearly – and very shortly. It is useful to be reminded that Russia had low inflation, a trade balance surplus and a stable Ruble rate for two years. Now it has none of these "achievements". It lost its illusory stability because it was illusory. No country in the world can maintain an average of 6% of its GDP in balance of payments deficits year in and year out and maintain a stable exchange rate. This can be done only through strangling the economy. The money supply is draconically curtailed, liquidity is snuffed, cheap imports are encouraged, inflation remains subdued and even turns into deflation. With price stability – exchange rate stability is obtained. But at what a horrible economic price!!! In a graveyard there is no inflation and the exchange rate remains eternally stable.

Granted, Macedonia should not succumb to the latest fashions. It should not allow its currency to be fully convertible internationally or traded in foreign stock exchanges. These steps are advisable only after a certain level of foreign exchange reserves is reached together with a high credibility of the Central Bank, the result of a long and successful track record of reliability. Only an exporting country with its balances in equilibrium can afford itself these luxuries of the absence of exchange controls. Even the foremost free marketers (Hong Kong, the USA) manage their currencies and intervene in their capital markets. This is not only legitimate – it is essential.

But the unnaturally overvalued denar damages Macedonia greatly. It encourages the export of scarce foreign exchange (also known as the importation of goods and services). It distorts the domestic interest rates structure. It destroys whole industries. It leads to deflation. It threatens a run on the currency, a panic similar to the one that engulfed Russia. What will the government do if Wall Street will collapse, the IMF and the World Bank will cease all disbursements, foreign investments will completely dry and thousands of citizens will want to buy dollars at any price? Will the government impose exchange controls? Freeze denar savings? Lose what remains of the credibility of the banking system?

The balance of payments is a mirror of the national economy, and the exchange rate is the reflection in that mirror. RM has a twisted picture of that mirror.

To balance the balance of payments (realistically, not only for accounting purposes), the main aim of every macro-economic policy should be to reach a medium sized surplus in the trade balance. Of course, that is impossible to achieve in the short-term. But by implementing additional measures, which we will discuss later, the realization of the new trend in this direction should start.

The first and the most important step intended to change the situation in the long-term and to find the exit from the never-ending labyrinth of the heterogeneous structure of the problems of RM, is to present a developmental-monetary-political strategy and STATE STRATEGY FOR STIMULATING A TRANSFORMATION OF THE CURRENT ECONOMIC STRUCTURE. The sooner the basics of this policy will be revealed, the sooner the realistic solution of the problems we are discussing will start.

In the beginning I would like to emphasize that privatization doesn't mean re-structuring (transformation of the economic structure). The state can fully privatize its property and again to have an extremely bad economic structure. To start to develop the Macedonian economy, first an act is needed in the direction of changing its current structure... because a man cannot go ahead with a view to the stars if he has needles in his shoes.

The long-term aim of the Macedonian macro-economic policies should be to reduce the imports and at the same time to increase the exports.

Promoting exports (and import substitution) is a strategy around which the development of RM should revolve, through which the biggest economic problems should be solved, such as the deficit in the balance of payments, unemployment, and the indebtedness of the country.

Basically, as I have already mentioned, to secure more serious results in the field of the trade deficit and exports, a change of the economic structure is needed. Something like this, basically, should be a spontaneous process. But if that is not the case anymore, or it is being realized very slowly, the state should more actively, using the democratic and usual instruments available in the world economy, chart a way to the harder basics for the Macedonian economy.

The main orientation within the restructuring of the economy should be exports. The government should help companies and research institutions identify the relative advantages of Macedonia, in general and of particular regions, industries and companies in particular. It should then proceed to assist them to put these advantages into good use. It should put at their disposal all the information and assistance that they might need. It should speed up or, better still, eliminate altogether, bureaucratic hurdles and procedures. It should connect them to businessmen, companies, industry associations and authorities in their target countries. It should then proceed to intercede on their behalf, protect them, lobby, cajole, negotiate – in short, the state should be the exporter's partner not only in the income side (through taxes) – but also in the efforts, in the expenses and in the capturing of new markets. The government should encourage exporters financially (tax holidays, grants, exemptions, other incentives) and non-financially (awards, rewards, consultative capacities within specially constructed councils of exporters and government representatives, special speedy courts). There is no need to invent the wheel: there is the accumulated experience of tens of successful exporting countries  to derive from.

A suitable instrument for starting the policies of the restructuring of the Macedonian economy is THE BANK FOR EXPORT DEVELOPMENT AND SUPPORT through which the export-oriented production companies will be supported by providing them with suitable long-term credits. For these reasons, an argument can be advanced for a bigger capitalization of the above-mentioned bank of not less than DM 200 million (the best would be DM 400 million). This capital should be provided from the privatization of the Telecom, donations from other countries (specifically for this aim), the sale of the rest of the property of the state (including the sale of the public companies in RM, which will generate very high foreign non-returnable revenues). Besides a higher capitalization, this bank should provide more credit lines from abroad. The most important part of this bank's work, should be the multileveled supervision and control of the issuance of credits in accordance with pre-determined criteria. The state banks, by definition, are beset by corruption and non-commercial working methods. According to this, only a high quality control system to supervise the managerial work in this bank, which is in the process of being founded, can ensure its qualitative functioning and positive results in the long run.

I want to mention that an export development bank is one instrument at the disposal of governments. Insurance companies are another. In the past many governments set up special insurance arms. Their role was to insure exporters or investors against country risk, political risk, war, terror, expropriation, non-payment, sovereign default ad a host of other problems which private insurers were unwilling or unable to tackle. These insurers acquired monstrous proportions (OECD in Britain, COFACE in France, OPIC in the USA and others). They were notorious for their laxity, lack of professionalism, unreliability (they mostly refused to pay up when trouble struck) and incredible losses and creative accounting. The nineties witnessed the privatization of these behemoths. Today, every risk is insurable for the right price. If it is not insurable – the exporter is advised not to venture into that market, no matter how tempting.