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On August 26, 2008, I published an article titled Greek-American Plan to Resolve Macedonia's Name Issue?. In it, I described an American plan to resolve the name dispute between Macedonia and Greece (see note at the bottom of the first section of this article).

The Plan included five elements: (1) Macedonia will change its constitutional name to Northern Macedonia ("The Republic of North Macedonia"); (2) Macedonia will be granted a transition period to amend its constitution and to alter its registered name with various international and multilateral institutions; (3) Macedonia will be issued an invitation to join NATO; (4) Both countries will be allowed to use the adjective "Macedonian" (both commercially and non-commercially); (5) The parties will renounce any and all claims to each other's territory.

Sure enough, weeks later, Matthew Nimetz, the UN mediator in the name issue published essentially the very same plan. It was promptly rejected by both parties.

Macedonia has hitherto been literally invisible on the Obama's Administration's list of priorities. But this is fast changing. Obama and Clinton still regard the Balkans as essentially a European problem. But, as they tackle the Middle-East head-on, the last thing they need is a "second front" with restive minorities in Bosnia-Herzegovina, or Macedonia. Additionally, countries like Macedonia and Israel are now bound to pay the price for having been staunch supporters of Republican administrations in general, and George Bush in particular.

The Obama Administration will shortly appoint a Balkans Envoy, a person well-known and little-liked in Macedonia for his coarse interference in its internal affairs. His job will be twofold: to calm passions down in Bosnia, if necessary through well-timed and much-publicized arrests and to force both Macedonia and Greece to accept the above-mentioned five-points plan. The USA will not take "no" for an answer and will set a strict timetable for the resolution of the name issue and a NATO invitation by yearend.

Macedonia doesn't stand a chance of resisting such an onslaught. It will be forced into a humiliating retreat. Prime Minister Gruevski can use the country's new President, Gjorge Ivanov, as a scapegoat and "blame" him for any painful compromises Macedonia may be forced to make. But this gimmick won't work: Macedonian s widely (and wrongly) perceive Ivanov to be Gruevski's puppet.

Gruevski will go to a referendum on any compromise struck with Greece. It would be an unwise move, though: If the citizenry rejects the suggested deal, Gruevski will be faced with two stark alternatives: (1) To be the Prime Minister of a disintegrating country (as the Albanians will surely seek to secede from Macedonia or to federalize it, one way or the other); or (2) To lose his job altogether (as the Americans will surely seek to change the regime and depose him, as they have done in 2001-2 when it actively and successfully sought to unseat Ljupco Georgievski).

Following the country's ill-advised early elections in June, 2008, the right-wing VMRO-DPMNE was coerced by the international community (read: the EU and the USA) into joining forces with DUI, the political incarnation of erstwhile Albanian insurgents in the northwest of Macedonia, hitherto an anathema as far as Gruevski was concerned.

Hopping to bed with DUI will likely restrain the government's freedom of action. Every concession to Greece will be portrayed by jingoistic nationalists in Macedonia as capitulation and the consequence of blackmail by the Albanian parties. To the great consternation of the Macedonians, Albania, Macedonia's neighbor, has been invited to join NATO and its economy is growing even in the face of the global crisis. The restive Albanians of Macedonia would like to accede to the Alliance as soon as practicable and at all costs. Understandably, they are less attached to the country's constitutional name than the non-Albanian (Macedonian) majority.

Note: The "Name Issue" between Greece and Macedonia

The "name issue" involves a protracted dispute over the last 17 years between the two Balkan polities over Macedonia's right to use its constitutional name, "The Republic of Macedonia". The Greeks claim that Macedonia is a region in Greece and that, therefore, the country Macedonia has no right to monopolize the name and its derivatives ("Macedonian").

The Greeks feel that Macedonians have designs on the part of Greece that borders the tiny, landlocked country and that the use of Macedonia's constitutional name internationally will only serve to enhance irredentist and secessionist tendencies, thus

adversely affecting the entire region's stability.

Macedonia retorts that it has publicly renounced any claims to any territory of any of its neighbors. Greece is Macedonia's second largest foreign investor. The disparities in size, military power and geopolitical and economic prowess between the two countries make Greek "fears" appear to be ridiculous. Macedonians have a right to decide how they are to be called, say exasperated Macedonian officials.

The Greek demands are without precedent either in history or in international law. Many countries bear variants of the same name (Yemen, Korea, Germany until 1990, Russia and Byelorussia, Mongolia). Others share their name with a region in another country (Brittany in France and Great Britain across the channel, for instance).

In the alliance's Bucharest Summit, in April 2008, Macedonia was not invited to join NATO. Macedonia was rejected because it would not succumb to Greek intransigence: Greece insisted that Macedonia should change its constitutional name to cater to Greek domestic political sensitivities.

Written June 5, 2009

Macedonians in Denial about the Name Issue Dispute with Greece

Faced with an unprecedented choice between their identity and their future, Macedonians resort to a classic psychological defense mechanism: denial. Greece demands that the Republic of Macedonia change its name, or else forget about its Euro-Atlantic aspirations: NATO membership and EU accession. Macedonians react with horror and revulsion to such truly unprecedented bullying. Unable to face reality, they collectively retreat to fantasy.

FANTASY NUMBER 1: Macedonia will not be asked to change its Constitutional name

Macedonian intellectuals and politicians like to pretend (and usually succeed in convincing themselves) that Greece will demand only the change of Macedonia's name in international settings, bilateral relations, and multilateral organizations.

REALITY: Macedonia will be required to change its constitutional name.

FANTASY NUMBER 2: Macedonia is actually negotiating with Greece

REALITY: Greece is negotiating this issue with the United States and, to a lesser extent, with certain members of the European Union. Macedonia is not a party to the negotiations and is completely irrelevant in this context. It will be presented with a "take it or leave it" solution. If it doesn't take it, it will pay a heavy price, both internally (as its restive minorities rebel) and externally (as it is further excluded from the mainstream of the international community).

Thus, Macedonia was utterly shocked by the Greek veto that prevented its accession to the alliance in the NATO Bucharest Summit in April 2008. But this move was coordinated well in advance with both the USA and the EU (they were not happy about it, but they were fully informed and apprised of the Greek decision). They simply did not bother to keep Macedonia in the picture.

On March 30, 2008 (days before the NATO summit took place), I published this text in the Long Beach Chronicle:

"High-placed NATO officials informed the Chronicle a few weeks ago that, if the negotiations between Macedonia and Greece regarding what has come to be known as "the name issue" fail, NATO will invite Macedonia to join the alliance, effective June 30, 2009, and conditioned upon a resolution of its bilateral bone of contention with its much larger neighbor by said date."

FANTASY NUMBER 3: America and many European countries are friends of Macedonia and regard Greek behavior and demands as atrocious.

REALITY: While the United States and the majority of the member-countries of the European Union indeed regard Greek conduct as inexcusable and disruptive, they will all, without exception, side with Greece against Macedonia. This is because Greece is richer, a key member of NATO's ever-more-crucial southern plank, and an important trading partner of many countries. Macedonia, by comparison, is of very limited importance. Hence, it has no leverage.

Macedonia's only hope is to influence American decision-makers through international public opinion; to act against the Greek position in a variety of multilateral and judicial institutions; and to cooperate with core constituencies in the United States in order to change the minds of legislators and bring them to its side.

FANTASY NUMBER 4: Even if there is a referendum in Macedonia on a proposed solution, the West will make sure that it succeeds

REALITY: Nikola Gruevski and his government will not publicly support any solution that they (secretly) find unacceptable. At best, Gruevski will remain neutral and leave it to the people to decide. Gruevski will not collaborate with the International Community in perpetrating what he regards as the coerced abrogation of Macedonian's natural rights.

FANTASY NUMBER 5: The name issue is very important to the ruling coalition.

REALITY: The name issue is a distraction. Gruevski's main priorities are economic growth and prosperity and nation-building, based on history, both modern and ancient. The name issue is not as important to him as it is to many of his detractors. He is willing to wait out the storm, even if it means belated NATO and EU accession. He does regard the name issue as a failure and does take it personally. But he will not let his emotions affect his policies.

FANTASY NUMBER 6: Gruevski is using the name issue to gain political points

REALITY: Gruevski feels very deeply and authentically about this issue. As a person, he reacts badly to injustice and pressure. He hates being blackmailed. He becomes very stubborn when subjected to arm-twisting. On the other hand, it is true that he is overly-sensitive to his rating and popularity and is, indeed, doing everything he can to evade the name issue and put it on the back-burner because he believes that the problem cannot be solved without utterly unacceptable Macedonian concessions. He is a pragmatist, so he concentrates on the here and now and on what can be achieved in the sphere of the economy.

Written June 13, 2009

Steering Macedonia towards Health

As healthcare systems go, Macedonia's is far from being the worst. By various criteria, Macedonia has attained more than all its neighbors and has even done better than the vastly richer countries of the EU or Israel. These accomplishments are rendered even more incredible if one considers the fact that, with an average monthly income of c. 250 euros, Macedonians are among the poorest nations in Europe. Macedonia's Health Insurance Fund has to cope with the same size of population (2 million) as does its Slovenian counterpart, but with 10 times fewer resources (300 million euros in contributions and other income vs. more than 3 billion euros).

Still, while, by objective measures, the system is reasonably successful, by subjective ones (customer satisfaction and trust) it is abysmally deficient. Patients consistently complain about a lack of resources, decrepit equipment, inordinately long waiting times, an all-pervading lack of responsiveness, corruption and informal payments, and other ills of the country's tottering healthcare institutions.

Enter the country's youthful (28) Minister of Health, Bujar Osmani, a medical doctor by profession. Having worked in the United Kingdom for a year, he speaks wistfully of its fabled National Health Service (NHS). This exposure to a model of healthcare delivery and provision that actually works may have been the impetus to the unusual events that took place in his Ministry in the last 4 months or so.

Osmani is soft-spoken, thoughtful, and pragmatic. He is well-educated, intellectually alert, and his English is impeccable. He, thus, reifies a new breed of Albanian politician in a country where Albanians are a much-maligned minority. In the government, he is in the demanding position of belonging to DUI, a party that is the political incarnation of Albanian insurgents and malcontents. In 2001, an armed conflict between the two major ethnic communities - Macedonians and Albanians - resulted in the Ohrid Framework Agreement which regulates their uneasy co-existence. Since then, DUI has twice joined coalition governments with various all-Macedonian parties.

Though naturally mindful of his public image, Osmani is far from vain. He was the one to reach out and initiate the first meeting between us. When I offered him the idea that was to become the Steering Committee for the Advancement of Healthcare in the Republic Macedonia, he unhesitatingly accepted it, an act of exceptional political courage. Attempts to reform the healthcare system - steeped as it is in special interests, political meddling, and resistance to change - have buried many a political career.

Osmani wants to leave a legacy of better health behind. He is a true reformer. But, after months of clashing with various constituencies while trying to implement even minor changes to the system, he understood that reform is not a command-and-control proposition. He had to bring aboard all the stakeholders in the process: doctors, patients, nurses, non-governmental organizations, consumer advocates, and the pharmaceutical industry. A varied group of experts - lawyers, economists, and healthcare advisors furnished by the World Health Organization (WHO) will help them along. The Steering Committee for the Advancement of Healthcare in the Republic Macedonia was launched on June 2, 2009.

Macedonia's long-suffering public has silently witnessed dozens of failed attempts at overhauling the creaking edifice of healthcare. A slew of committees has produced a midsize mountain of reports and recommendations that gather dust in drawers throughout the Ministry of Health. Not surprisingly, the new initiative met largely with skepticism and cynicism.

But Osmani started a truly new process. Its novelty will undoubtedly sink in as it progresses. Regardless of whether this particular committee succeeds or not, it has established precedents that will be impossible to ignore.

Being an active member of this body, I will revert to first person:

For the first time we are attempting a sector-wide analysis with the intention of implementing changes across all institutions, not restricted to certain elements in healthcare delivery, provision, commissioning, and stewardship. Incremental, piecemeal reforms do not work. The entire system must be tackled simultaneously.

For the first time, all stakeholders in the health sector are involved directly in a Steering Committee that is not governmental. The government has a seat at the table (in the person of the Minister of Health), but no privileged status. Such wide participation guarantees "ownership" of the committee's work and of its recommendations. No one will be able to say: I have had no part in this process; these proposed changes are imposed on me against my better judgment and will.

For the first time, the public will be consulted directly, through townhall meetings and by constantly submitting ideas, opinions, and suggestions to the Committee.

For the first time, cutting edge, Web 2.0, social networking high-technologies are used to involve the entire public and all the stakeholders in the debate (Wiki, blogs, Facebook, Twitter, and an interactive Website - http://sc-healthreform.org.mk ).

For the first time, the members of the Committee are allowed to invite expert witnesses and seek information, insights, and advice from them.

For the first time, the process commences with the Committee’s recommendations rather than ends with them. Such recommendations will serve as the starting point and the basis for extensive public consultations.

For the first time, the Committee will produce draft laws, amendments to laws, and regulations rather than reports that are ignored and stashed away to be soon forgotten.

Ultimately, elected politicians will decide the fate of these "draft laws, amendments to laws, and regulations". This is how it should be in a democracy. Hopefully, constant exposure of the Committee's work to the public will prevent special, moneyed interests from thwarting true reforms in collusion with corrupt decision-makers and legislators. There's no guarantee of that, of course - just a slightly better chance than before.

Written June 13, 2009

What is the REAL Size of Macedonia's Foreign Exchange Reserves?

Here are the facts as they emerge from the periodical (mostly annual) reports of Macedonia's central bank, Narodna Banka na Republika Makedonija - NBRM, for short.

1. Towards the end of 2008, Macedonia's foreign exchange reserves amounted to c. 1.6 billion euros.

2. Macedonia's foreign exchange reserves were managed by its central bank.

3. NBRM invested about 75% of these foreign exchange reserves in government bonds, issued by countries such as the United States, Germany, United Kingdom, and other countries.

4. On October 24, 2008, I warned the NBRM publicly (for instance, via my column in Nova Makedonija) that government bonds are overvalued and their prices may collapse. I recommended to sell some of the government bonds and invest the resulting cash in bank deposits in banks in the West (which at the time yielded about 3% annually).

The Investment Committee of NBRM reacted, in a letter published by Nova Makedonija on October 30, 2008. They called my text "malicious" and "sensational" and accused me of "hiding the true situation ... leading to public confusion".

More to the point they said that they didn't care what the market prices of the bonds were because they do not intend to sell them. They have every intention of holding them to maturity and collecting from the issuers of the bonds (the various governments) the money they (NBRM) had invested plus the coupon (the interest payments on the bonds).

5. By end November 2008, some government bonds provided negative yield (if you bought them in the open market, you received less money on maturity than you had invested). This was a clear signal to sell. Bonds have never maintained negative yields for more than a few weeks. In other words, the market prices of bonds always collapsed after they reached negative yields.

6. Between December 2008 and early June 2009, the prices of government bonds fell between 7 and 17%, depending on the type of bond in question. On average, 10-year Treasury Notes (USA), Bunds (Germany), and Gilts (UK) fell by 8% (with some US Treasuries falling by 15% and more).

7. Had the NBRM sold the bonds it owned in November, it would have avoided a sizable loss on these bonds. The size of this loss is unknown because the NBRM provides very little data about its investments.

Theoretically, the NBRM said that it had 1.2 billion euros invested in bonds. A decline of even 7% in their market prices means a loss (some it realized, some of it unrealized, on the books) that could have been avoided of c. 90 million euros.

The NBRM does not inform the public what is the market value of its investments (as opposed to the theoretical value of the bonds if they are held to maturity).

8. NBRM got it wrong not only regarding the prices of government bonds, but also regarding whether it would need to sell a meaningful chunk of its bond portfolio on short order. As you recall, the NBRM insisted that there would be no need to sell the bonds until they reach maturity.

The NBRM was wrong. Between December 2008 and May 2009 the NBRM sold more than 300 million euros in a misguided attempt to keep the exchange rate of the Macedonian denar fixed against the euro. Assuming that 75% of this amount was invested in bonds, it would seem that NBRM was forced to sell more than 200 million euros in bonds, in the open markets, at the new, much reduced prices - exactly the scenario that I had predicted.

9. Finally, from around February 2009, the consensus of experts and large government bond portfolio managers around the world is that bond prices will continue to fall, possibly precipitously. If NBRM has changed its policy of investing in government bonds it has yet to inform the public.

NBRM should sell as much of its bond portfolio as it can before it suffers catastrophic losses. In the past 60 years, bond markets have collapsed at least three times, with the market prices of bonds falling by more than 35%.

Written June 23, 2008

No Foreign Banks - A Curse or a Blessing?

The Austrian Erste Bank has just published a report about the state of the banking system in Central and Eastern Europe. Macedonia is not even mentioned. The banking sectors of Bulgaria, Romania, Russia and Ukraine are poised to grow the fastest, as these countries catch up with the West.

With the exception of the scandal-ridden French Societe Generale, no prime foreign bank is represented in Macedonia. Even Societe Generale has merely purchased a local bank rather than open its own branch. Erste Bank itself declined to buy Stopanska Banka in 1997.

But is foreign banking such a good thing?

Research demonstrates that foreign banks tend to lend to foreign direct investors and foreign clients. They rarely extend credit to local firms, let alone individuals in the host country. True, they bring with them management know-how, access to financial networks and markets, and fresh capital. Their entry fosters competition and improves the overall performance of the banking sector, as well as the terms and conditions offered to domestic clients by domestic banks.

But not all is rosy. Foreign banks bring with them systemic risks. Macedonia was spared the worst of the global credit crunch precisely because it was not exposed to the global financial system. It had no subprime mortgage market, no crazy credit derivatives, no mysterious hedge funds. Its backwardness turned out to be a blessing as it avoided the excesses perpetrated by foreign banks in the USA, in Europe, and in some parts of Asia.

Erste Bank's report is very clear about it: the existence of foreign banks in Bulgaria, Romania, Russia and Ukraine is precisely why the meltdown of the global credit markets has wreaked collateral damage on the banking sectors in these countries.

Written June 24, 2008

The Future of Oil and the Economic Future of Macedonia

The price of oil is no longer an important determinant of the economic health of the West. To create the same amount of economic output, manufacturers use much less oil than they used to.

Moreover, today, there are futures contracts, which allow one to fix the price of purchased oil well in advance. There are options contracts which can be used to limit one's risks as a result of trading in such futures contracts.

So, why is the price of oil going through the roof?

Because oil has become a form of investment and a hedge against rising inflation. People plough their savings into oil and speculators drive the markets. As Saudi Arabia correctly observes, the price of oil is no longer determined merely by supply and demand.

Who decides on the domestic price of oil and its derivatives?

In some countries, prices are fixed entirely by market forces, supply and demand, usually through specialized exchanges (e.g., the Rotterdam Exchange). The market is completely deregulated: exports and imports are totally allowed and free.

In other countries, prices are fixed by a committee of representatives of the government, the oil industry, the biggest consumers of oil, and representatives of households and agricultural consumers.

In most countries, prices are changed every 3 or 6 months based on the cost of oil at a certain port of delivery. In Israel, for instance, the price of oil fluctuates every three months according to the price of oil delivered in certain Italian ports (where Israel gets most of its oil delivered). This is an AUTOMATIC adjustment.

In a few countries the prices are fixed by the competent Ministry in accordance to the ACTUAL costs of the oil (importing, processing and distribution) + a fixed percentage (usually 15%). This is called a COST PLUS basis pricing method.

The international price of oil is determined by the following factors:

The weather. Cold weather increases consumption. The world is getting hotter. The 14 hottest years in history have been in the last 25 years. The warmer the climate - the less oil is consumed for heating, but the more oil is consumed for air conditioning.

Economic growth - The stronger the growth, the more oil is consumed (mostly for industrial purposes). The incredible economic development of countries like China and India and the emergence of car-owning middle classes in many developing countries enhanced demand and contributed to the current crisis.

Wars increase oil consumption by all parties involved.

Oil exploration budgets are growing and new contracts have just been signed in the Gulf area (including Iraq), Brazil, and Canada. The more exploration, the more reserves are discovered and exploited, thereby increasing the supply side of the oil equation.

Lifting of sanctions on Iraq, Iran and Libya will increase the supply of oil.

Oil reserves throughout the world are low. This tends to enhance demand for newly produced oil.

When there is an economic crisis in certain oil producers (Russia, Nigeria, Venezuela, Iraq) it forces them to sell oil cheaply, sometimes in defiance of the OPEC quotas. This was the case in the late 1990s.

OPEC agreements to restrict or increase output and support price levels should be closely scrutinized. OPEC is not reliable and its members are notorious for reneging on their obligations. Moreover, OPEC members represent less than half the oil produced globally. Their influence is limited.

Ecological concerns and economic considerations lead to the development of alternative fuels and the enhanced consumption of LNG (gas) and coal, at oil's expense. Even nuclear energy is reviving as does solar energy.

New oil exploration technology and productivity gains allow producers to turn a profit even on cheaper oil. So, they are not likely to refrain from extracting and selling oil even if its price declines to 5 US dollars a barrel.

Privatization and deregulation of oil industries (mainly in Latin America and, much more hesitantly, in the Gulf) increases supply. Recent moves in countries like Venezuela, Russia, and Bolivia to re-nationalize their oil industries and unrest in countries like Nigeria raise global oil prices owing to uncertainty and increased political risk.

Price volatility induced by hedge funds and other derivatives has increased lately. But, as opposed to common opinion, financial players have no preference which way he price goes, so they are NEUTRAL.

If crude price reaches $200 a barrel, as per the prediction published by Goldman Sachs recently, Macedonia's economy will be adversely affected: the trade deficit and inflation will balloon out of control, the exchange rate of the Macedonian denar will be placed under pressure, and macroeconomic stability will be jeopardized. These developments will have dire effects on investment, both domestic and foreign and will likely increase unemployment. As far as Macedonia is concerned, substantially higher oil prices will result in stagflation.

Written June 26, 2008

Macedonian Stock Exchange to Resume Upward Trend

On June and October 2007, I made two presentations to the members of the Association of Brokers in the Chamber of Commerce. In these presentations, I warned that the market values of most of the firms listed and traded on the Stock Exchange, especially the components of the MBI-10 index, were grossly inflated. The fair value of the MBI-10 should be around 4300, I calculated.

I also predicted a sharp deterioration in the global and Macedonian economic environments. I repeated these prognoses in an article dated December 4,
2007, published by the Los Angeles Chronicle.

Since then, the MBI-10 has gone down by over 50% and is now around 4600.

Last week, I conducted a series of fundamental and technical analyses on behalf of foreign brokers and investors.

The results:

1. The market has hit its technical bottom. The MBI-10 is unlikely to deteriorate much further. On the contrary, the next big move ("trend") is up, to 5800 and then 7200. In the long term (2-3 years), the MBI-10 should reach 13,300.

2. Out of 10 components of the MBI-10, eight (8) firms are seriously undervalued. The shares of these companies make excellent investments in the
medium (1 year) to long-term (3-5 years).

3. Sentiment among professionals - both domestic and foreign - is turning positive. Buying activity is likely to increase. Non-professionals will join
the market much later, though, so volumes may remain thin for quite a while.

4. The only drag on the market right now is Macedonia's deteriorating macroeconomic outlook (inflation, trade deficit, MKD exchange rate, etc.)
and political instability. But, these have now been largely discounted and are reflected in current prices. Barring a major collapse of the international financial system, these issues will not affect the market in the next few months.

Written June 27, 2008

Who is Paying for Macedonia's Trade Deficit?

Macedonia's trade deficit in the first FOUR months of 2008 ballooned to 903 million USD, almost double the figure for the same period in 2007.

If this continues, Macedonia's trade deficit will equal 2.7 billion USD, or 35% of the GDP, an unprecedented figure and one of the highest in the WORLD.

But who is paying for all this?

There are FIVE SOURCES of foreign exchange flows that are then used to cover (pay for) the trade deficit:

1. Remittances from Macedonian workers abroad, as well as other unilateral transfers. These more or less stabilized over the last 8 months and now
stand at 1.8 billion USD annually.

Contribution to trade deficit coverage in first four months: c. 650 million USD

2. Borrowing in foreign capital markets - virtually non-existent. Macedonia has issued Eurobonds only once, a few years ago, and these amounted to a
paltry 150 million euros.

Contribution to trade deficit coverage in first four months: ZERO

3. Foreign aid and multilateral credits from international financial institutions

Contribution to trade deficit coverage in first four months: c. 50 million USD net

4. Using Macedonia's foreign exchange reserves to finance the trade deficit

But, according to Narodna Banka, foreign exchange reserves declined by a mere 22 million euros this year, owing mainly to interventions in the
foreign exchange markets.

Contribution to trade deficit coverage in first four months: ZERO

5. Foreign Direct Investments (FDI)

The government claims that FDI reached 100 million euros in the first months of the year.

Contribution to trade deficit coverage in first four months: c. 200 million USD.

Written June 28, 2008

There are four types of interaction between politics and business:

1. Politics can be in the service of business (plutocracy)

2. Business can be in the service of politics (socialism and authoritarian regimes)

3. Business is politics, they are inextricable (corporatism, fascism, failed states).

4. Incestuous relationship between politics and business (rent-seeking).

In Macedonia, the fourth model is in full force.

The State (i.e., the party in power) constitutes one third of economy (employment, investment, budget, taxes).

How can we heal Macedonia's economy?

The first step in every process of healing is: facing the truth.

And the truth is that Macedonia, in its current state, is not a viable economic entity. It suffers from low natural endowments; is economically dependent on foreign flows of capital to survive; has no critical mass for a self-sustaining internal market; has ruined infrastructure and an antiquated legacy of capital goods. Macedonian firms have low profitability. Macedonia's institutions are dysfunctional and self-serving. Macedonia has low-grade elites, owing to negative selection (brain drain) and a low level of knowledge and education; it lacks social cohesion.

If this litany of woes in not enough ...

The governments of Macedonia are a perfect manifestation of Parkinson's Law of Triviality: in a committee, it is easier to agree on a billion dollar atomic reactor than on the roofing of a bikeshed or on coffee procurement for the administration. The reason: politicians know less about mega-projects than they know about bikesheds and coffee.

When lacking in knowledge or experience, politicians concentrate on micromanagement and demonstrative gestures and neglect the big picture (real reforms and macroeconomic management).

Macedonian politicians have repeatedly failed. Macedonia's only hope lies in de-politicization and in having a small, technocratic government at the service of the private sector.

Real reforms in Macedonia include: changing the national ethos and mentality; openness to outside input and constructive criticism; suppression of special interest groups; depoliticization of the civil administration, if necessary by employing foreign managers; second-phase deregulation and privatization (the transfer of government functions to the private sector); transition from dying industries and economic sectors to new ones; overhauling state institutions; reduction of political risk (predictability of laws, regulations, and government decisions; continuity of state commitments and undertakings; less political involvement in business); media ownership rules; special-purpose courts; attracting FDI as an engine of innovation and internal reform (transmission mechanism: competition).

The government's role is to provide the conditions for business to operate and thrive - on both the micro and the macro levels.

Macroeconomic management revolves around the optimal allocation of economic resources. Anything that goes against it should be fought: inflation, cronyism and nepotism, corruption, credit-driven consumption, populist wage and pension increases, unrealistic exchange rates, increased tax burden.

This Government has good intentions and has succeeded in improving the business climate and in implementing some microeconomic reforms. But it lacks the basic knowledge or willingness to implement a wider, more fundamental transformation and on how to manage the economy. In the long run, its achievements (such as the construction and consumption driven growth of GDP and industrial production) are ephemeral and conjectural.

The Macedonian economy is akin to the Macedonian Stock Exchange: the bubble will burst. Macedonians are now living in a state of self-induced psychosis: the preference of fantasy over reality. This may be a pleasant feeling, but denial cannot last long. Sooner or later, Macedonians will have to wake up to a bitter and challenging reality, every bit as harsh as when they started their collective exercise of auto-suggestion.

Written June 30, 2008

Give Vouchers to the Unemployed

Despite all the promises, the increase in FDI, and the improvement in the business climate, unemployment in Macedonia remains stubbornly high, at 35% of the workforce. The government claim that real unemployment is lower because many employees in the informal (black) economy go unreported. The truth is that real unemployment is even higher than the official figure: many are underemployed (they go to work, do nothing there, and return home); about 10% of those officially employed don't get paid; and many stopped looking for a job altogether, they simply gave up.

One solution which is gaining traction in the West (mainly in the USA, the UK, and northern Europe) is to use vouchers to alleviate the nefarious side-effects of unemployment.

"Voucher Communities" are communities of unemployed workers organized in each municipality. The unemployed exchange goods and services among themselves in a barter-like or countertrade system. They use a form of "internal money": a voucher bearing a monetary value.

Thus, an unemployed electrician can offer his services to an unemployed teacher who, in return, gives the electrician's children private lessons. They pay each other with voucher money. The unemployed are allowed to use voucher money to pay for certain public goods and services (such as health and education).

Voucher money is redeemed or converted to real money - so it has no inflationary or fiscal effects, though it does increase the purchasing power of the unemployed; vouchers enhance the purchasing power of the unemployed and the homeless; they restart the economic cycle in deprived neighborhoods and regions; they increase the psychological well-being and motivation of deprived and dysfunctional strata of the population; vouchers engender networks of service-providers and customers which can later integrate into the formal, monetized economy.

Written July 1, 2008

What is Wrong with Macedonia's Inflation Figures?

Inflation in May 2008 declined, on an annual basis, from 10.2% to 9.5%.

The government claims that the sources of inflation in Macedonia are external and that inflation is imported INTO Macedonia through the ever-increasing prices of foodstuffs, raw materials, and energy.

In other words:

Prices INSIDE Macedonia are increasing because prices of foodstuffs and energy OUTSIDE Macedonia are increasing.

But, if this is true, inflation in May in Macedonia should have gone sharply UP, not down!

Global prices of foodstuffs and energy soared to their highest levels in April-May. Oil prices, for instance, increased more in April-May than they did in January-March (and they continued their vertiginous climb in June). So did the prices of many foodstuffs, especially corn and rice.

How can we explain that inflation in Macedonia went down even as prices of imported foodstuffs, raw materials, and energy exploded?

There are two possible explanations, both of them unpalatable:

(i) That the official figures, published by the Bureau of Statistics cannot be trusted. Remember how annual inflation suddenly shot up from 3.2% in December 2007 to 10.5% in January, February, and March 2008? Such a dramatic rise is suspicious and indicative of "tampering with the evidence".

(ii) Or that most of Macedonia's inflation is home-made, not imported. The government increased wages in the public sector and pensions were indexed to inflation. Government spending has also risen. Still, if the central budget is indeed in surplus (as the government keeps telling us and the IMF), this should harness inflation, not increase it.

My money is on option (i), especially in an election year. Inflation in Macedonia is higher than we are told and the budget is in deficit, not in surplus. Time will tell if I am right.

Written July 2, 2008

Don't believe these fairy tales

The government wants you to believe these fairy tales. Don't.

1. This year cannot end with 5% inflation. Inflation in the first 6 months was 10% (on an annual basis). Inflation would have to drop to 2% and less in the next 6 months in order to end up at 5% for the entire year. More likely, inflation this year will be between 9-11%. Even this projection is based on the official, suspicious figures. Real inflation is probably higher still.

2. Macedonia's out-of-control trade deficit (the difference between its imports and its exports) is mostly financed with remittances (transfers that Macedonian workers abroad send back to their families). Remittances tend to drop when there is a global recession and foreign workers are fired and sent back home. As remittances decline, the government will have to dip into the country's foreign exchange reserves in order to finance the trade deficit. This may jeopardize the stability of the denar's foreign exchange rate against the euro. While devaluation is not on the cards, macroeconomic instability is.

3. Even if the government succeeds to attract foreign direct investment (FDI), this will not even begin to solve Macedonia's unemployment problem. Economic research teaches us that FDI is employment-neutral: some people get hired, others get fired. Foreign investors employ foreign managers and rely on automation, rather than on manpower. At best, FDI will create 20-30,000 jobs in the next ten years. This figure is less than 10% of the total number of unemployed people.

4. Real unemployment is higher than the official figure, not lower. Many ostensibly employed people are actually underemployed (they go to work, do nothing there, and return home); about 10% of those officially employed don't get paid; and many stopped looking for a job altogether, they simply gave up. The government has no coherent national plan to cope with unemployment or to encourage domestic investment.

Written July 3, 2008

Is Foreign Direct Investment (FDI) the Solution to Macedonia's Economic Problems?

In 2007, with 239 million euros, Macedonia was yet again in the last place among the 20 countries of Central and Eastern Europe as far as foreign direct investment (FDI) goes. The situation may improve next year when, the Vienna Institute for International Economic Studies says, FDI will double to half a billion euros.

But is FDI the solution to Macedonia's main problems: unemployment and the poverty it engenders?

Recent economic research says: no, it isn't.

The role of foreign direct investment (FDI) in promoting growth and sustainable development has never been substantiated. There isn't even an agreed definition of FDI. In most developing countries, other capital flows - such as remittances - are larger and more predictable than FDI and ODA (Official Development Assistance).

Several studies indicate that domestic investment projects have more beneficial trickle-down effects on local economies. Be that as it may, close to two-thirds of FDI is among rich countries and in the form of mergers and acquisitions (M&A). All said and done, FDI constitutes a mere 2% of global GDP.

FDI does not automatically translate to net foreign exchange inflows. To start with, many multinational and transnational "investors" borrow money locally at favorable interest rates and thus finance their projects. This constitutes unfair competition with local firms and crowds the domestic private sector out of the credit markets, displacing its investments in the process.

Many transnational corporations are net consumers of savings, draining the local pool and leaving other entrepreneurs high and dry. Foreign banks tend to collude in this reallocation of financial wherewithal by exclusively catering to the needs of the less risky segments of the business scene (read: foreign investors).

Additionally, the more profitable the project, the smaller the net inflow of foreign funds. In some developing countries, profits repatriated by multinationals exceed total FDI. This untoward outcome is exacerbated by principal and interest repayments where investments are financed with debt and by the outflow of royalties, dividends, and fees. This is not to mention the sucking sound produced by quasi-legal and outright illegal practices such as transfer pricing and other mutations of creative accounting.

Moreover, most developing countries are no longer in need of foreign exchange. "Third and fourth world" countries control three quarters of the global pool of foreign exchange reserves. The "poor" (the South) now lend to the rich (the North) and are in the enviable position of net creditors. The West drains the bulk of the savings of the South and East, mostly in order to finance the insatiable consumption of its denizens and to prop up a variety of indigenous asset bubbles.

Still, as any first year student of orthodox economics would tell you, FDI is not about foreign exchange. FDI encourages the transfer of management skills, intellectual property, and technology. It creates jobs and improves the quality of goods and services produced in the economy. Above all, it gives a boost to the export sector.

All more or less true. Yet, the proponents of FDI get their causes and effects in a tangle. FDI does not foster growth and stability. It follows both. Foreign investors are attracted to success stories, they are drawn to countries already growing, politically stable, and with a sizable purchasing power.

Foreign investors of all stripes jump ship with the first sign of contagion, unrest, and declining fortunes. In this respect, FDI and portfolio investment are equally unreliable. Studies have demonstrated how multinationals hurry to repatriate earnings and repay inter-firm loans with the early harbingers of trouble. FDI is, therefore, partly pro-cyclical.

What about employment? Is FDI the panacea it is made out to be?

Far from it. Foreign-owned projects are capital-intensive and labor-efficient. They invest in machinery and intellectual property, not in wages. Skilled workers get paid well above the local norm, all others languish. Most multinationals employ subcontractors and these, to do their job, frequently haul entire workforces across continents. The natives rarely benefit and when they do find employment it is short-term and badly paid. M&A, which, as you may recall, constitute 60-70% of all FDI are notorious for inexorably generating job losses.

FDI buttresses the government's budgetary bottom line but developing countries invariably being governed by kleptocracies, most of the money tends to vanish in deep pockets, greased palms, and Swiss or Cypriot bank accounts. Such "contributions" to the hitherto impoverished economy tend to inflate asset bubbles (mainly in real estate) and prolong unsustainable and pernicious consumption booms followed by painful busts.

Written July 6, 2008

Don't Trust Foreign Reports about Macedonia!

The Heritage Foundation and the Wall Street Journal are the joint publishers of the much-vaunted "Index of Economic Freedom". The annual publication purports to measure and compare the level of economic freedoms in 155 countries.

Undisputed data pertaining to 2001 now widely available, I decided to scrutinize how accurate the Macedonia chapter of the 2002 index was (it was not) and whether its authors knew what they were talking about (they didn't).

Here are some of the numerous factual mistakes I found in this oft-quoted international index:

In 2001, Macedonia's GDP was $3.4 billion and not $2.7 billion as the index states. Macedonia's GDP exceeded $3 billion in the 4 years prior to 2001. Nor has GDP grown by 2.7 percent in 2001: it has actually declined by 4.3 percent . As a result, GDP per capita was wrongly computed in the index. The trade deficit was not $300 million, as the index states - but double that. It has been above $500 ever since the mid-1990s. Net foreign direct investment has been closer to $100 million in 1999-2000 (excluding extraordinary privatizations, such as Makedonski Telekom) - rather than the paltry $29 million the index misreports.

The index made rice one of Macedonia's "major" agricultural products. It was, actually, first on its list. Alas, little rice was grown in Macedonia in 2001. Nor did the country produce noticeable quantities of citrus, or grains, as the index would have us believe.

The authoritative-sounding introduction to the 2002 index informed us that Macedonia maintained a budget surplus "from the sale of state-owned telecommunications". Yet, in its first decade of existence, Macedonia enjoyed a budget surplus only in 2000 and it had nothing to do with the sale of its telecom to the German-Hungarian MATAV. The proceeds of this privatization were kept in a separate bank account. Only a small part was used for budgetary and balance of payment purposes.

The index stated that Ljubco Georgievski had "privatized approximately 90 percent of (the country's) state-owned firms". These were actually privatized by the SDSM when it was in power until 1998. It is true that major assets, such as Macedonia's refinery and its leading bank were privatized under Georgievski. It is also true that the bulk of state-owned loss making enterprises were either sold or shut. But these constituted less than 15 percent of the number of companies the state owned in 1992.

The fiscal burden of Macedonia was 34 percent of GDP in 2001 - not 23 percent as the index stated. It has surpassed 30 percent of GDP years before. Moreover, in the sub-chapter titled "Fiscal Burden of the Government" the authors contended that "government expenditures equaled 23.3 percent of GDP". A mere three lines later they contradicted themselves: "the government consumes 19 percent of GDP". Which is it?

The "monetary policy" segment of the index is a misleading one-liner: "Between 1993 and 2000, Macedonia's weighted annual average rate of inflation was 7.15 percent." The term "weighted annual average rate of inflation" is not explained. Whatever happened to the hyperinflation followed by near-deflation of Macedonia's first decade? The straight average in this period was 56 percent, not 7 percent.

The index says that "the country's political instability has had a debilitating effect on foreign investment". It sounds logical but does not stand up to scrutiny. Investment flows actually increased in the conflict year 2001 as bargain hunters from Greece, Slovenia, Germany, and other countries converged on Macedonia.

And so this list of errors and misrepresentations continues.

Macedonia is a tiny and unimportant country. But many of the erroneous data used by the index could have been avoided merely by using Google! Sloppy editing, internal contradictions, and outdated information regarding one country, regardless of how inconsequential it is, render the entire index suspicious.

Unfortunately, indices such as these affect both portfolio and direct investment flows, the country's rating, its image in the international media, and the government's standing domestically. The golden rule with such indexes is: "handle with care".

Written July 12, 2008

Myths and Facts about the State Budget

In a television interview Vice-Premier Stavreski said that he does not understand the critics: clearly a state budget that has a surplus is anti-inflationary. The more the government collects in taxes, the less money there is in the economy. The less money there is in the economy, the less the upward pressure on the general level of prices. Professor of Economics Trajko Slaveski confidently stated that the budget promotes growth and he prefers growth with inflation to no growth with no inflation.

Vice-Premier Stavreski is, of course, mistaken as is Professor Slaveski.

Recent economic studies teach us that what is important is not only whether the budget is in surplus or in deficit - but also what is the composition of the budget; in other words: what is the money in the budget used for.

A budget that serves to increase wages in the public sector is inflationary because it increases the ability of consumers to purchase and to compete for goods and services. It sends a wrong signal to workers in the private sector: they also demand wage increases. This is called a "wage spiral" and leads directly to an increase in inflation.

Moreover, a budget that is geared mainly to pay salaries, pensions, the construction of non-productive objects such as churches and basketball halls, and the consumption of various perishable goods has inflationary effects without having a positive influence on long-term growth. On the contrary: economic theory teaches us that the more the government taxes, the more it wastes the taxes it collects. Governments are very bad at managing investments. This is called "the misallocation of economic resources". Rhetoric aside, this government spends precious little on infrastructure and other growth-promoting projects.

Macedonia's budget equals a whopping 45% of GDP. Of every 100 euros produced by the economy, this government promptly confiscates 45 euros (as opposed to 25-35 euros in taxes collected by previous governments). This has a negative impact on growth. Instead of letting the markets, businessmen, and entrepreneurs do their work, the government forcibly becomes their largest partner, taxes them directly and indirectly (inflation is also a kind of tax), and then goes on harmful spending sprees. Its good for gaining votes in elections - it is bad for the economy. Stavreski and Slaveski: take note.

Zoran Stavreski gets his numbers wrong

M-r Zoran Stavreski, Vice-Premier of the Republic of Macedonia, published an article titled "The Story of the Auto Industry".

The article contains only two sets of economic figures. Both of them are seriously wrong (not on purpose, I am sure).

Stavreski writes:

"The auto industry is the largest industrial sector in the world and constitutes above 10% of GDP in the developed countries."

Here are the actual figures for 2006. The figures will be even lower in 2007-8, owing to the collapse in auto sales, the rise in the prices of fuels, and the global recession:

USA:

The automotive industries amounted to 3.3% of GDP (direct manufacturing) - or up to 7.8% (taking into account all indirect suppliers and service
providers).

United Kingdom 3.9%

Italy 8.5%

Spain 5%

Only Germany comes close at 10.5% (or 13%, according to the EBRD).

Stavreski also writes:

"The production of Johnson Controls and Johnson Mathey will increase Macedonia's GDP by 15-20%".

There is no way this can happen. Not even remotely so. Let us study the figures:

Macedonia's GDP is c. 5 Billion euros, excluding the grey economy.

GDP (Gross Domestic Product) =

Consumption + investment + government expenditure + net exports (exports minus imports)

In other words, according to M-r Stavreski, the investments+NET exports of the 2 plants will amount to c. 1 billion euros.

The value added (the closest approximation of net exports) of the automotive industry is c. 30%.

(I am ignoring the investments in the 2 plants which are small relative to Macedonia's GDP)

To justify Stavreski's figures in the article:

The total ANNUAL EXPORTS of the 2 plants must be 3.5 BILLION euros (!!!)

Of which 30% will be NET exports = 1 BILLION euros

Only then will these net exports will increase Macedonia's GDP by 20%.

This is NOT a realistic projection. These figures are not realistic.

Johnson Matthey's GLOBAL sales of catalysts in the fiscal year to 3/2007 amounted to 2.7 billion euros. Will the Macedonia plant DOUBLE Johnson Matthey's sales???

Let's examine the contribution of the automotive sector in other DEVELOPING countries:

The automotive industries contribute 5% to India's GDP

Russia 2%

Poland 4%

Only Slovakia comes up with 25% of its GDP due to automotive industries.

Why This Government Likes Inflation

This government likes and encourages inflation because inflation masks the true situation and makes them look good. In reality, the economy hasn't been in worse shape since 1996. Inflation helps to deceive the public and even experienced observers. How?

1. As the general price level increases (in other words, as the prices of virtually everything go up), companies derive more income from the sales of the same goods and services. Consequently, of course, they pay more taxes. This allows the government to spend more: to raise salaries, construct sports halls, and generally make the population at large feel better. Without inflation, the state budget would have been in deficit, not in surplus.

2. Inflation means that the value of the currency goes down. The Macedonian denar is worth less at the end of the year than it did at its beginning. Thus, when the government pays suppliers, or returns its debts, it does so with a depreciated currency. It borrows when the denar is strong and pays out when it is weak. Inflation acts, therefore, like a kind of tax on the economy.

3. As inflation sets in, people are afraid that prices will continue to go up. So, they stop saving money and instead spend it and consume in order to "lock down" the current prices, before they increase again. This creates an artificial and short-term boom. GDP grows as consumption soars. It is bad for investments, though: people stop saving or withdraw their existing savings and the banks have no money to lend to businesses. But, who cares? The effects of this irresponsible and destructive economic policy will be felt only after the next elections. And, in the meantime, carpe diem.

Written July 12, 2008

Global recession Threatens Macedonia

The world is sinking into one of the worst global recessions ever. How will this affect Macedonia?

In two major ways:

1. Less foreign direct investment (FDI)

Historically, in times of global recession, foreign direct investment (FDI) dries up. During the last global recession (2000-2002), FDI flows declined by more than 50%.

The government of Macedonia gambled everything it has on FDI - and ONLY on FDI. This government is obsessed with FDI as the only solution, the nostrum, the panacea to Macedonia's pressing economic problems. The government has no Plan B.

Even in good times, FDI has never been the solution to Macedonia's pressing problems (such as unemployment).

Now, with the world in crisis, FDI transactions already concluded will be cancelled and FDI, in general, will decline precipitously.

2. Life-threatening trade deficit

Until now, Macedonia's incredibly high trade deficit (c. 35% of GDP this year and 25% of GDP last year) was covered by remittances (transfers) from abroad. Macedonians working in other countries sent money back to their families. These money transfers fully financed the trade deficit.

With the onset of global recession, Macedonian workers abroad will be the first to be fired and sent back home.

Remittances will decline. The trade deficit will not be covered anymore. This could threaten the stability of the Macedonian denar and the Macedonian economy.

Macedonia can still shift its emphasis from FDI to domestic investment and job creation. It is not too late. It is not shameful to admit to a mistake in orientation.

Can Gross Domestic Product (GDP) Figures be Trusted?

The formula to calculate GDP (Gross Domestic Product) is this:

GDP (Gross Domestic Product) = Consumption + investment + government expenditure + net exports (exports minus imports) =

Wages + rents + interest + profits + non-income charges + net foreign factor income earned

But the GDP figure is vulnerable to "creative accounting":

1. The weight of certain items, sectors, or activities is reduced or increased in order to influence GDP components, such as industrial production. Developing countries often alter the way critical components of GDP like industrial production are tallied.

2. Goods in inventory are included in GDP although not yet sold. Thus, rising inventories, a telltale sign of economic ill-health, actually increases the GDP!

3. If goods produced are financed with credits and loans, GDP will be artificially HIGH (inflated).

4. In some countries, PLANS and INTENTIONS to invest are counted, recorded, and booked as actual investments. This practice is frowned upon (and landed quite a few corporate managers in the gaol), but is still widespread in the shoddier and shadier corners of the globe.

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