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

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

Sam: It may come as a surprise to many, but foreign investors are as interested in psychology as they are in economics. The first things they enquire about have nothing to do with GDP per capita, the rate of inflation and its forecasts, domestic interest rates, the living standards, the available infrastructure, the banking system and other, "hard core" questions. To start with, they are interested to know other things: are property rights protected by the State and by the courts? Is the right legislation in place? What is the crime rate and how pervasive is it? Are people industrious or lazy, corrupt or honest, liars or truthful, educated or ignorant? Is it easy to do business there - or does the bureaucracy stifle everything? Are officials and politicians interested mainly in their own welfare or in that of their country's? These are "soft" issues, which matter much more to the foreign investor in the longer term. It is here that Macedonia failed in projecting to the world an image of a country friendly to business in general - and to foreign business, in particular. Investors don't even know that Macedonia exists, let alone its many advantages.

Nikola: An analysis of the situation of the Macedonian national economy shows the following:

1.. Over 80% of the equipment in Macedonia is considered obsolete, meaning that it is no longer in use in West Europe. 10 to 15% of the equipment is so called medium level, and only 5 to 10% is high technology, completely imported.

2.. The depression level is high, 53%, while the write-off level is approximately 71%.

3.. The structure of the fixed capital is inadequate. Over 60% is in construction operations, compared to a worldwide average of 45%.

4.. The distribution in the sector in inadequate, which is very dangerous because it needs a long period to change.

5.. The capital assets have a low economic value (the market value is often 50% under the accounting value).

6.. The part of the inflow of gross investments in the domestic (social) product in the past years was under 18%, in contrast to 1971 and 1972 when the investment rate reached 40%. Economic investments, being the most important segment, increased from 8% in 1992 to 15% in 1994. After two years of receding, in 1997 they reached 12% (although it was determined to be 16%).

7.. The economic distribution of the investments is very negative. Of the total investment, 17-20% went to infrastructure, and only 46,5% were commercial investments - the engine driving the economy.

8.. The restructuring of property failed with regards to the organizational and technological aspects.

9.. Last year the number of new enterprises and projects decreased.

10.. The savings rate is very low, and it is assumed that the population has funds of 600 million to 1,2 billion US dollars; this item (population) is negligible in the western countries with developed financial infrastructure.

Sam: There is nothing inherently wrong with a low rate of savings, especially in illiquid economies in crisis and transition. The engine of consumption is as important as the engine of investments. But this is true when savings are IMPORTED - in the form of foreign investments - from abroad. Macedonia is doubly cursed: it has a low (official) savings rate (though, in reality, thank the black economy, it is much higher) coupled with the absence o9f commercial foreign investment. Add to this the roaring deficits and the picture that emerges is that of a bleeding economic body. The trade deficit is mostly used to finance consumption and infrastructure projects. Nothing productive and profitable is engendered by it. People prefer to buy Volkswagen cars than plant machinery. The result is a stock of capital assets which is depleted and decrepit - not only in industry. Have a look at the universities, for instance. This is a vicious circle: a problematic economy fosters uncertainty. Uncertain people do not commit themselves to long-term investments. They prefer to consume or to speculate. The result is even a more problematic economy. The low domestic savings rate is linked to the abysmal investment rate. Even when money does come in, the management class and the political-economic decision makers do not know what to do with it. The safest bet is to invest in infrastructure and in construction. It is much easier and more familiar to construct a house than to manage a microchip factory.

Lack of management skills, of modern, flexible, organization, of technology means that even the available resources are misallocated, that the productivity rate is bound to deteriorate. Learning from foreigners is an excellent solution, which Macedonia has yet to adopt. But Macedonians find it highly embarrassing to admit that there is something, which they need to learn. When in need of help and advice they feel inferior and humiliated. I can tell you this from my experience as a foreign consultant here.

Nikola: Looking from both from the historical and from the present point of view, and according to many others, also from a prospective point of view, the Balkan is one of the less stable regions in the world. This is why there is no inspiration for capital investment and foreign ownership. When you mention Macedonia to anyone in the world, they do not think individually of Macedonia, but as a part of a region, known around the world for its unpleasant events. The fact that Macedonia, at the moment, is not at war or anything similar, is a small consolation when you look at the history of the state and the region, or at the relations with the neighbors, or at specific recent actual scenarios of terrorist groups from around the world, where Macedonia is included as a possible object of destabilization or worse. Take, as an example, the publication that was issued in 1996 by the London branch office of Bankers Trust International PLC - one of the biggest broker investment institutions in the world with its head offices in America, a research on the markets of the ex- Yugoslav republics. The conclusion of the publication was that Greece will prevent the EU from effectively assisting Macedonia, until the problem of the disputed name is solved. A probable scenario is mentioned in which the Macedonian territory could be a subject to a dispute between Greece and Turkey (both members of NATO), as well as Serbia, Bulgaria and Albania. Even in the recent study of Merrill Lynch, despite the optimistic estimates, there still exists a small reservation regarding the political future of Macedonia. The Kosovo events caused inestimable damage to Macedonia in as much as foreign investments are concerned. The fact that the highest Macedonian political officials, in interviews to the media, are indirectly or directly saying that Kosovo can destabilize Macedonia, is as damaging as what happens on Kosovo. If the prime officials of the state are openly discussing the possibility of ethnic conflict in Macedonia in their statements, a conflict that could be contracted from the neighboring countries, if they are asking for foreign defense forces from the UN and NATO to be stationed on the territory of Macedonia, I wonder why should the potential foreign investors think otherwise?

I think that the first conclusion on this subject is that, basically, the region where Macedonia is located is one of the last where the firms that are involved with international transfers of capital would invest. But that does not mean that the level of foreign investments in Macedonia is a result only of this, and that the situation could not be far better. This a only a starting point.

Sam: I couldn't agree more with your concluding remarks. The regional instability and its chequered history is maybe 10% of the explanation, in my view. Slovenia was part of Yugoslavia, even involved in fighting, initially. Still, it cleverly distanced itself from its former co-federates and identified itself with Europe. The result was prosperity for Slovenia in the middle of the worst ethnic war in the last 50 years. Similarly, Bulgaria and Albania are in the same region as Macedonia and so are Croatia, Romania. All these countries (Albania until recently) enjoyed large inflows of foreign investments despite their regional affiliation. In Russia and India, governments collapse monthly. In Russia, Georgia, foreign businessmen are even often murdered. In all of them, foreign investment is booming. Money seems to be an incentive stronger than life. But foreign investors must be convinced that money is here to be made. They haven't been, hitherto.

Nikola: I think that the following should be also mentioned:

First, in the last seven years, the least foreign capital entered Macedonia than any other country in transition. This is not because somebody in the world hates Macedonia.

Second, certain situations in Macedonia look different from a distance. This is because of (in some cases) the low level of information available about Macedonia in the Western developed countries (they should not be blamed for this), and the common unrealistic interpretation and comments about events in Macedonia, aired by local authorities under the influence of the daily political arguments.

To see how Macedonia looks like to the world, one should read foreign professional magazines (or surf the internet), or even better, leave the country and get in touch with investors, who invest in emerging markets, among others.

They are in for an unpleasant surprise. A year may pass in thorough perusal of foreign financial magazines, before the name of Macedonia pops up, not to mention a detailed analysis. I met many multinational companies which have developed special departments for research and investment in the so called emerging markets (Macedonia's natural place). During the first contact I encountered with the following reactions:

1.. Besides a rough geographical location (sometimes even that is uncertain), and the knowledge that Macedonia is in a way connected to Alexander the Great, regarding everything else there is very little, and often no information whatsoever about anything in Macedonia, including its economy and its companies.

2.. Often Macedonia is being confused with Greece or the question arises which Macedonia is concerned.

3.. Surprise that no one from Macedonia has ever visited them. At the same time, they are pleased to hear something about a totally unknown and unexplored market.

Sam: Type the word "Macedonia" in a few word-processors and you will get a "spelling mistake" sign. I was once asked at the Prague international airport whether Macedonia was . part of Belgrade. This is entirely the fault of the Macedonian authorities. No coherent and serious promotion, public relations and investment relations campaigns were ever undertaken. More than 80 new nations were added to the world in the last two decades. In an age of information glut, sovereignty inflation and fierce competition on economic resources - to be unknown is to be dead, politically as well as financially. In the long term, the survival of Macedonia depends not on meaningless treaties and conventions. It depends on its ability to attract foreign capital and thus to bind its neighbours and the West to it. Money is a strong incentive to refrain from instability and wars. The bitterest enemies become the best friends once they have common economic interests (see the example of France and Germany). Macedonia should immediately develop a multi-year plan for fostering and encouraging recognition among its allies and foes alike. The international media should be used and economic interests should get involved. But to leave the situation as is is nothing short of detrimental.

Nikola: The image of Macedonia is an image of a landlocked country, with poor neighbourly relations. The stationing of foreign forces on its the territory raises the question why is international protection needed? The dispute with Greece, besides the negative implications for the Macedonian economy, (though it was good to finally be noticed) did not help the situation. The existing tension with the ethnic Albanian minority in the country also creates an image of an unstable country.

In the projections for 1998, the government of Macedonia persistently states that it will do anything to increase the foreign direct investments in Macedonia. But it never mentions the indirect and portfolio (through the stock market) foreign investments. Whether these two concepts are mutually inclusive , or mutually exclusive, is not clear.

(continued)

===========================================================================================================================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