Foreign Investments and Developing Countries - Macedonia as a Case Study - Part

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Foreign Investments and Developing Countries - Macedonia as a Case Study - Part I A dialog with Nikola Gruevski, former Minister of Trade and Finance of the Republic of Macedonia By Sam Vaknin Author of "Malignant Self Love - Narcissism Revisited"

Nikola: The Republic of Macedonia is at the bottom of the ladder, as far as foreign investments are considered, among the countries in transition. It is not a coincidence. The general judgement of all the relevant economic institutions and experts in and out of Macedonia is that there is a need for foreign commercial investments at this time. This dialogue is the commencement of an attempt to analyse the reasons for the absence of foreign investments and to act to change the present situation.

I think that we should above all focus on foreign capital in the form of indirect and direct investments from commercial institutions in the world. That is a priority as far as the needs of Macedonia are concerned. The Receipt of credits (as foreign capital from the EBRD, The World Bank, the IMF and other similar institutions) should not be a subject of these comments.

Moreover, the purpose of our discussions should be to inform the public regarding the situation and the developments in Eastern and Central Europe, which skipped Macedonia.

Sam: I think both your distinctions are very important. Macedonia has grown addicted to a the drug of multilateral financial aid in the forms of grants and credits. The money is used either to finance unproductive consumption or is invested in extravagant infrastructure projects. Macedonia is running a lethal trade and balance of payments deficits covered by donations and other forms of ""ad" capital. No wonder that commercial avoids Macedonia. Moreover, the public is not informed. The facts are available - but the public is not educated to understand them. Thank you for selecting me to be your partner in this exciting dialogue.

Nikola: As an opening comment I would mention the globalization as a world process and the dimensions of this process from Macedonia's point of view.

Last year witnessed the merger of Union Banque Suisse (UBS) with Swiss Bank Co. (SBC). The new bank is now the second biggest bank in the world with a total capital of 687 billion dollars. As of last year, the biggest world-class aircraft manufacturers, Boeing and DC have become one company. It was probably the biggest merger of 1997. The British insurance companies ''Commercial Union'' and ''General Accident'' have integrated to the tune of 15 billion pounds. They will form one of the biggest insurers in Europe. Every month brings along mergers and acquisitions between smaller or bigger companies worldwide. This is a trend. Globalization is a world trend.

Sam: Always has been. Research shows that the world used to be much more globalized than it is today until the outbreak of the Great Depression during the 1930s. We are just resuming an old trend which was interrupted...

Nikola: General Motors has 25 times, and NTT has 52 times the sales figures of the entire Republic of Macedonia, respectively. Decisions are made within the premises of the multinationals and not by ministers. Anyone who stands up in their way is bound to be destroyed. This is a part of the same large trend called globalization, a process that enormously helped the development of transport, telecommunication and other segments of technology, but at the same time tremendously deepened the polarization of countries, as never before. Within 10 years, telephones might look like a wrist watch, a small button or a brooch. According to The London Times dated 17th November 1997, the technologies have finally converged so that there will no longer be a difference between telephones, computers, TV sets, calculators or other home entertainment electronic appliances. The developed technology will be cheap and incredibly user friendly. The developments in telecommunications have caused the world to have 13 billion micro- processors, and 5,7 billion people. Today, there is more computer exchange of information every working day, than all the verbal communications going back to Adam and Eve.

My concern is: How is it possible for any Macedonian company to be competitive against other companies, each with 300.000 workers, the most up to date technology, the most efficient cost structure, the most capable and trained staff and managers? It seems to me that there is only one chance. The bridges between Macedonian firms and the biggest world companies can be established only if the latter come to Macedonia, only if they inject the Macedonian companies with capital, new technology and new markets. It is the only way to join Macedonia with the modern part of the world. Of course, that process has a ''price'', but in the long run, Macedonia will gain much more then that. Macedonia must to prepare STRATEGY how to join in the modern world.

Sam: I share your belief in the purifying and strengthening powers of foreign investors, especially if we are talking about well- equipped, well-managed and well-capitalized multinationals. However, I would like to put things in perspective. Accumulated experience in the world shows that foreign investment does improve considerably the professional, technological and marketing skills of those companies that it invests in. Additionally, foreign owned companies are responsible for the greater part of the exports in their "adopted" countries. But it is equally important to apply market pressures to domestic firms through opening up to competition. Local companies, owned by locals, must adapt or die - and the sooner, the better, the less pain. Foreign investors tend to form their own sector and to isolate themselves from the local economy. Even their contribution to employment (especially of skilled people) and to the local economy through purchases is minimal. Another risk is that multinationals will look upon Macedonia as a source of cheap labour and raw materials, a colony in the guise of sovereignty. Some of them will even try to dictate anti- free market measures to the host government. Audi tried to do it to Macedonia and now the Korean auto-makers are trying to do this to the Ukraine. The government should use the entry of foreign investors - with their active participation - to cajole, threaten, force and weigh upon the local industries to get leaner and meaner. In the long run, this is the main contribution of foreign investment: the transformation of the domestic sectors.

Nikola: Business Central Europe, the leading regional business magazine, in the 1997/8 Annual published information regarding foreign investments in the 27 countries in transition in Central and Eastern Europe. Macedonia is on the last position with 30 million $ (although the December takeover of Makstil is not taken into account here). The data for the other countries are:

- Albania $298 million (1996 figures); Armenia - $44 million (1996); Azerbaijan - $987 million; Belorussia - $110 million; Bulgaria - $1,2 billion (6/97); Croatia - $827 million (6/97); Czech Republic - $7,3 billion (6/97); Estonia - $800 million (6/97); Hungary (6/97) - $16,2 billion; Kazakhstan - (96) $6,3 billion; Kirgizstan - (96) $276 million; Latvia - (6/97) $860 million; Lithuania - (6/97) $ 762 million; Moldavia - (96) $167 million; Poland - (6/97) $16,3 billion; Romania - (6/97) $2.4 billion; Russia (6/97) - $7,3 billion, Slovakia - (6/97) $1 billion; Slovenia - (5/97) $1,7 billion; Tadjikistan - (96) $47 million; Turkmenistan (96) - $544 million; Ukraine - (9/97) $1,6 billion; Uzbekistan - (96) $320 million; Yugoslavia (97) - $1 billion.

The magazine cites the following as sources for the data: EBRD, EIU, IMF, OECD, WIIW.

In the past 5-6 years, the world's most famous banks opened branch offices in almost every state in Central and Eastern Europe. Except in Macedonia.

Citibank, Creditanstalt, ING-Barings, Deutsche Bank, Bank Austria, Bayerische Vereinesbank and others opened branch offices in the Czech Republic. Citibank, ABN Amro, Unicbank and others in Hungary. Citibank, ABN Amro in Romania. Volks Banken Creditenstalt, CSOB and others in Slovakia. In Slovenia, Bank Austria, Societe Generale, Volks Banken and others have opened shop. Chase Manhattan in Uzbekistan, ING Bank, Raifeisen Bank, Dresdner Bank, Societe Generale, Xios Bank, National Bank of Greece and Ionian Bank in Bulgaria and so on. In Bulgaria, for example, there are a lot of joint ventures with foreign banks, as well: Post Bank (Bulgarian Japanese Bank/Nomura) Bulgarian-American Credit Bank, First Investment Bank (Bulgarian and EBRD capital), OBB (Bulgarian, American and EBRD capital), Bayerische Bulgarische Handelsbank (Bulgarian-German capital), Euro Bank (Bulgarian-Czech capital) and so on. Even in Albania branch offices of some foreign (western) banks were opened. The Bank of Albania was the first joint venture bank in Albania (an Italian Albanian Bank) and was established in 1992. There is one other joint venture bank with the Albanian State, foreign private participation (The Albanian Islamic Bank), the only wholly private foreign bank (Dardinia Bank) and the National Bank of Greece.

Except opening branch offices, the banks invested and bought up many local banks in most countries in transition. The above-mentioned magazine comments: It was an unusual year for the miserable banks in the region". After 8 years in transition the question is whether the Central European governments will or won't give up the control over the sector, which they think is the central economic power. The big shift was in 1997. They realized that they have no choice, had they not sold the banks, the banks would have been ruined. But, whether this danger is generally recognized is an open question. The results of a poll conducted among a group of readers of "The Annual" show that people still have a tendency to think that "big is best", regardless of the basic health of the bank.

Sam: There are 23 universal (all-purpose) banks in Macedonia. This is not a healthy situation. The illiquid, tiny, isolated economy of Macedonia cannot support such a large number of financial mediators. The results are poor returns on equity, low quality loan portfolios (assets of the bank), monstrous default rates and, as a result, atmospheric real interest rates and reticence of the bank to fulfil their basic function: to finance economic activities. No reliable credit rating and risk assessment tools have been developed, no reliable, computerized, central registrars of collaterals. Property rights are not protected by inefficient and baffled courts and by legislators who lack all economic expertise and experience. In addition, the Central Bank, terrified by the ghosts of hyperinflation, is implementing an unduly restrictive monetary policy. Money supply, credit acceleration, secondary money formation are all at abysmal level. On top of this, the banks themselves are not modernized, under-computerized, lack professional expertise and management, offer no innovative financial products and services, are not customer oriented, notoriously slow and inefficient. Why should foreign banks enter such a fray? It took Erste Bank almost two years to conclude a deal to purchase a minority stake in Macedonia's largest bank, Stopanska Banka, which control close to 50% of the banking system in the country. This was a major vote of no- confidence, preceded by dire reports issued by the Central Bank and by the World Bank.

Nikola: Hungary was the first state in the region that recognized the danger of a fragile banking system. Hungary suffered a series of bank collapses, but after that the Hungarians learned the lesson of the fiasco and put the other state banks on a strict diet to make them fit for sale. The Czech Republic and Slovakia resisted the sale of their main banks longer. But the bad debt problems made the Czech Republic change its opinion last year, and it sold one of its 4 biggest banks, IPB, to the Japanese (Nomura). The other 3 will most likely be sold to strategic investors by the end of 1998. An American financier said something about the Czech banks to be remembered: "Your banks are like ugly brides. You should be happy if you find a husband for them who only has syphilis." Slovakia endured similar problems.

But, besides banks, large manufacturers of world class are present in every other Eastern and Central European State. I'll mention only a few of them: in The Czech Republic: Tesco (UK), VW (Skoda) - Germany, Unilever (England and Denmark), and in Poland ABB Fiat, Procter and Gamble, in Hungary: IBM General Motors, Unilever, Suzuki..., in Slovakia: VW, Whirpool, Heineken...

There are many companies of this kind in Romania, Russia, Bulgaria, Croatia and in other countries. Except in Macedonia. On the Deloitte & Touche list of the biggest companies in Central Europe there are two from SR Yugoslavia, four from Slovenia, and none from Macedonia.

Sam: There was a lost chance to introduce industrial multinationals to Macedonia during the privatization process. Macedonia had - and still has - many relatively large companies, which could have been of great interest to foreign investors. Pivara, Makpetrol, Ohis, Alkaloid, not to mention the infrastructure firms (such as PTT and ESM). When foreign investors witnessed the transfer of these prize assets (mostly) to their managers - they decided that if you cannot beat the system, join it. So, they established joint ventures with local firms. Pivara has such a collaboration with McDonald's and with a German beer manufacturer, for instance and Ohis has many industrial alliances. Foreigners started buying up bankrupt Macedonian firms. The privatization process has transferred circa 1200 companies to incapable, under-funded hands. The new owners do not know how to run a manufacturing firm in the global marketplace. They are being forced to apply to foreign investors now - unfortunately, at prices much worse than could have been obtained before their mismanagement. I am much more optimistic than you, in this respect. I think that we will see a wave of foreign takeovers and joint ventures starting this year.

(continued)

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AUTHOR BIO (must be included with the article)

Sam Vaknin ( samvak.tripod.com ) is the author of Malignant Self Love - Narcissism Revisited and After the Rain - How the West Lost the East. He served as a columnist for Global Politician, Central Europe Review, PopMatters, Bellaonline, and eBookWeb, a United Press International (UPI) Senior Business Correspondent, and the editor of mental health and Central East Europe categories in The Open Directory and Suite101.

Until recently, he served as the Economic Advisor to the Government of Macedonia.

Visit Sam's Web site at samvak.tripod.com