Trade Deficits and the Health of the Economy - Part II

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Trade Deficits and the Health of the Economy - Part II Dialog with Nikola Gruevski, former Minister of Finance of the Republic of Macedonia By Sam Vaknin Author of "Malignant Self Love - Narcissism Revisited"

NG: Indeed, from these data it is easy to conclude that the deficit level is not the only important parameter - there are others that count in trying to determine the consequences. It is obvious that the deficit in RM has seriously restricted its economic development (as distinct from some other countries), which complicates the problem.

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

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

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

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

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

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

NG: The balance of payments, ab definitio, is balanced. It includes all realized income and payments. Nobody can have more financial resources to pay with than he/she receives. That means that payment is either effected immediately or deferred as credit. But in economic analysis the total balance is not important. What is of importance, is only a certain part of it. The partial observation of the balance underlies the surplus or deficit approach to the balance of payments. It is for this reason that we make use of the method of "splitting" the balance of payments. After the horizontal "splitting" of the balance, employing one of three methods, there is no accounting balance left in it. The balance of the balance of payments is an element of the general economic balance, which represents the external balance.

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

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

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

(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