Economic Developments Since the Last CAS

Economic Developments Since the Last CAS

8. 
   The civil conflict in 2001 disrupted a brief period of positive economic momentum. Although direct damage from the conflict was limited, investment activity markedly dropped, and output contracted by 4.5 percent in 2001. Defense-related expenditures pushed the budget and current account deficits to 7 percent of GDP. The effects of the conflict were still clearly felt in 2002 as investment and export growth remained sluggish while budget and current account deficits remained high.
   

9. 
   Economic recovery gradually took hold in subsequent years as the budget deficit was quickly eliminated in 2003 and structural reforms gradually resumed. The budget has remained roughly balanced since 2003 while expenditures were reduced from 40 percent of GDP in 2002 to about 35 percent of GDP in 2005. The tight fiscal policy contributed to a reduction in the current account deficit. In 2005, the current account deficit fell to 1.4 percent of GDP following a 4 percentage points of GDP increase in recorded private transfers to 17.7 percent of GDP, the highest in Southeast Europe. These transfers increased by an additional 1 percentage point of GDP in 2006 as the current account moved to a small surplus of 0.4 percent of GDP. The overall balance of payments has strengthened considerably as gross reserves increased to about 4.5 months of imports. In this environment, external and public debt ratios have gradually declined to less than 40 percent of GDP.
   

10. 
    While prudent macroeconomic policies have firmly established macroeconomic stability, economic growth and formal sector job creation have been disappointing. Recorded growth has averaged only 3.5 percent over the 2003-2006 period. Such growth rates place fYR Macedonia among the slowest growing economies in ECA in this period. Also, the recovery remains narrowly based on a few key sectors and unemployment remains high. While official data have consistently overstated unemployment, fYR Macedonia’s official unemployment rate is among the highest in the region. High and persistent unemployment statistics reflect low new job creation in the formal sector. In part this is due to an overly restrictive labor market and a high tax wedge.² It is also due to the poor corporate governance which emerged following a mainly insider-oriented privatization process in the mid-nineties, which brought neither adequate knowledge and capital transfers, nor access to markets and finance. On the contrary, fYR Macedonia’s corporate structure still tends to favor status quo over encouraging new entry and increased competition. An overly burdensome business regulatory environment until recently hampered new business startups and job creation. Collectively, these forces have contributed to a high unemployment rate by encouraging informality. The informal economy in fYR Macedonia may be well over 40 percent of GDP, significantly above the estimated regional average.
    

11. 
    Conversely, at about 20 percent of GDP the investment rate in fYR Macedonia has lagged significantly behind faster growing economies in the region. The flow of FDI into fYR Macedonia has also been disappointing over the past decade. Apart from the spike in FDI in 2000 and 2001 when the largest bank and the telecom company were privatized and in 2006 when the electricity distribution company was sold, FDI has averaged 1.5 percent of GDP, one of the lowest rates among transition countries. Business climate surveys indicate that the most serious obstacles to private sector development include: an inefficient and opaque judicial system, poor access to credit, heavy regulation (especially in labor markets), political risks, corruption, uncompetitive practices, and policy unpredictability.
    

12. 
    Exports, a major source of growth in transition economies, have performed poorly during the last decade growing by an average of around 4 percent a year in real terms. The country’s share in world exports recovered slightly in 2005-2006 but it is still below its level in the mid-1990s. Macedonian exporters have been able to regain market share in some of its traditional trading partners, in particular Serbia, Greece, and Germany, but lost shares in eastern markets such as Ukraine and Russia, and have been unsuccessful in penetrating new markets. fYR Macedonia still specializes in low-value added goods (iron and steel, textiles, tobacco, agriculture produce) and the lack of FDI has kept the country out of intra-industry trade linkages preventing transfer of technology and limiting market access. In absence of productivity-increasing investments, the country has managed to remain competitive only due to strong prices in recent years and through lowering labor costs.
    

C. FYR Macedonia’s Poverty Profile

13. 
    With only moderate economic growth, poverty has not decreased since 2002. An estimated 21 percent of the population lives below the absolute poverty line indicating that they are unable to meet their basic food and nonfood needs. Some 7 percent of the population has expenditures so low that they are unable to even acquire a minimum level of calories. However, the stagnation in the level of poverty masks internal changes occurring in fYR Macedonia: urban poverty in secondary towns has risen while rural poverty has fallen. This is not surprising, taking into account that these areas were largely dependent on employment by former SOEs which failed to restructure successfully.
    

14. 
    Not holding a job is a major cause of poverty and unemployment affects younger people disproportionately. Only 33 percent of the poor working age population is employed, compared with 46 percent of the non-poor population.³ The differences are particularly important in urban areas. While the poor tend to be active to almost the same extent as the non-poor, they suffer from much higher unemployment rates – some 60 percent of the poor in Skopje were unemployed in 2004. The average unemployed person is 35 years old, compared to 41 years for the employed; two fifths of the unemployed are less than 30 years old, compared to 17 percent of the employed. Labor markets are therefore critical to understanding the poverty situation.
    

Figure 1: Labor market developments are critical to poverty alleviation in FYR Macedonia.

Average consumption (2002=100) and poverty	Labor market indicators, poor and non-poor, 2004.

15. 
    Growth has generated some jobs –but few well paying jobs– which may explain the slow poverty reduction. Between the first quarter of 2004 and the second quarter of 2006, employment rates⁴ increased from around 33 percent to around 35 percent. The higher employment rates reflect an increase in activity rates –more people holding or looking for a job– coupled with a small fall in unemployment rates. Poverty data are not available for this year, but given the strong correlation between poverty and unemployment, chances are that they will have fallen, if only slightly. The welfare of the poor in particular has been adversely impacted by the low level of job creation leaving the poor’s rate of unemployment to stand at 50 percent compared to about 30 percent for the non-poor. Moreover, the jobs poor people find tend to be poorly paid, insecure and seasonal jobs. As a result, poor people derive more of their income from informal sector activity and social assistance compared to the non-poor.
    

16. 
    Employment status, household size and the educational level of the head of household determine income per capita. Thus, people with limited education obtain low paying jobs on which they usually have to support large families, including economically inactive adults. In contrast to the difficulties of the prime age population and their dependents, poverty systematically declines with age, and poverty among the elderly is lower than among other age groups. This suggests that pensions play an important role in mitigating old age poverty. Finally, a cross-cutting correlate of poverty is ethnicity with poverty being higher among the Roma as well as ethnic Albanians.
    

17. 
    Non-monetary dimensions of poverty (in particular, poor housing conditions and low education) affect another 30 percent of the population. However, poverty in all dimensions for individuals is rare, meaning that few persons suffer across all dimensions of income and non-income poverty. Health indicators, school enrollment rates and access to and reliability of infrastructure services appear to be in line with national income per capita. In particular, there have been large improvements in access to secondary and tertiary education over the last 15 years. This being said, access and quality of the services received by the poor or less affluent people lag considerably behind the non-poor.
    

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