Trade Deficits and the Health of the Economy - Part VII

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

NG: I wish it too, what you are saying, and I would be very happy when RM becomes a country which is not in need of state simulative intervention in order to change the economic structure.

However, I am not talking about some strictly managed system, about which I don't even think. Every country wants to stimulate exports, and beside the measures that you mention and which I fully accept, there are other measures, with which, this way or the other, governments try to help their companies in penetrating export markets.

This is done even by the biggest and most developed countries in the world, and that's a fact. RM, AT THIS MOMENT, IS FAR FROM A POSITION OF IMPLEMENTING A PURE MARKET ECONOMY, and for now that's only a pleasant dream. It's wonderful to dream pleasant dreams, but in the meantime we must live. If Japan and many other countries could adopt such measures, why shouldn't RM for one LIMITED AND PREDETERMINED PERIOD do so? Here, the question what the country knows about financing, what the country knows about international trade, production, etc is irrelevant. I accept your thesis that the country doesn't know much about these matters, even though under the conditions of the (generally) current bad management structure sometimes it is different. BUT THE COUNTRY KNOWS ONE THING: IT NEEDS HIGHER EXPORTS, AS FAST AS POSSIBLE, and this is why I suggest these measures.

Every country minds its interests. Such interventions exist also in the EU, especially in the area of agriculture, and much wider.

Disputes between Switzerland and France about agriculture, threaten to become a trade war, especially after the accession of Poland to the EU. You will see what will happen with the USA if it is engulfed by the crisis of the recession, as you predict in your text in "Nova Makedonija" dated 30-th of April this year. Then you will see what state intervention means and what is "market economy". What I am suggesting will be "a sugar-cube in the coffee" against what the USA administration will legislate and what from time to time other countries do (not to mention John Maynard Keynes in the crisis of 30s). Above all, RM isn't in the classical crisis situation, which means that in the past its capacities were used well and now less, and there is a worry as a result. In RM for a long time a very big number of manufacturers DO NOT WORK AT ALL, AND NEW ONES ARE ESTABLISHED IN MUCH LOWER NUMBERS. I think it's unnecessary to describe the situation and the role of RM in the borders of SFR Yugoslavia and the consequences. This means that the country faces a difficult task. It is not to create conditions for increasing the production up to the capacities, but to foster conditions for a part of the old and very new capacities to start working practically from zero.

The tax simulation for exporters in the first 4-5 years is the minimum that the country can do until a few production cycles will be activated. I agree with you that there is a danger that these companies will "go to sleep", but when it will be made clear in advance that their chance is limited in time, I believe that most of them will behave otherwise. From most of these companies the country at this moment doesn't collect taxes, because they don't work or aren't established. It follows that in the future the country can eventually produce new income and in no way losses.

RM very often makes the same mistakes. The Macedonians were the most ardent Yugoslavs before 1991, almost up to the last moment, while all the other republics were preparing themselves for independence - materially, financially and militarily. RM led in the last 6-7 years a more liberal import policy than much more powerful countries (Croatia, Slovenia...) and the results aren't better.

A similar mistake was done by RM in the period 1993-1994 when hyper inflation was defeated and interest rates remained on the same level for the following two years (25-30% per month). Tell me which company in the world can work successfully paying credit bearing a 25% monthly interest rate with an inflation of 18-20% yearly? The country then decided to adopt a market economy and not to intervene. The companies had to take credits to finance their production and the result was hundreds of bankrupt companies, unable to return the credits together with the high interest charges. Besides this the companies' insolvency strongly changed to the worse the picture of the banks' balances. Even today we feel the consequences: strong falls in production, in exports, enormous and increasing unemployment, the instability of the bank's.

IT'S VERY EASY TO READ THE LESSON HOW THE MARKET ORIENTED ECONOMY SHOULD LOOK LIKE AND THEN FOR IT TO FAIL. IT'S DIFFICULT TO SAVE IT EVEN BY A COUNTRY'S SHORT-TERM INTERVENTION. Shock therapy didn't present itself as very successful "medicine" in Eastern and Central Europe. Before implementing a pure market economy, a pre-preparatory period must exist, same as helping a child when it makes the first steps or helping a man when he is sick.

The fact is that reconstruction is expensive. But, it is worthwhile. Examples from other countries have proved it. The government, which supports such a project, has to be very efficient, honest and decent, determined and decisive. Decisiveness develops like a muscle. Practice is needed. It may again lose its position (especially in the first phase of the reconstruction). Maybe, because of this, the fastest and most efficient reconstruction is to be found in countries with half-dictatorial or dictatorial regimes, which have strong positions of non-democratic fundamentals. But, this does not mean that democratic governments cannot finish such a project with success and be rewarded for it by the voting citizenry.

The question how the state will finance such a project arises. I think that RM is still in the phase when it has superb possibilities to adopt such a policy. RM, luckily, still has a lot of state property. Above all, I would mention here the public companies. With their sale, without any problem, the project "economic reconstruction" can be financed. So, for example, at this moment, it is known that the state will receive about $800-900 million for the telecommunications company. Imagine that one half of this money will be invested in the Bank for export development and support and the second half will be used to compensate for the budget expenditures caused by the tax holidays and stimuli for supporting exports, providing bonuses, etc. It is understood that this method of financing budget expenditures would be for a limited period of time for two reasons: 1) In the short and medium terms, the financial resources arising from the sale of the state's companies are limited and can only suffice for a limited period of 5 to10 years, 2) In the longer run, the economic reconstruction would require from 10 to 15 years. If administered as foreseen, there will be a possibility for the establishment and development of new successful firms (which today don't exist or have low profitability, which, on the other hand, translates to low tax receipts), which by opening new production and export businesses with the help of the new state policy, will start to gradually fill in the void in the budget created as a result of export bonuses, exemptions, relief, etc. (which I have mentioned above as measures for economic reconstruction). So, for example, if one company operates today with a profit of 100.000 DM yearly, and with the new state measures (an easier access to credits for production, exports and tax holidays on a similar basis) it will increase its business and make a profit of a half million DM, this means that the state will receive about five times more financial resources from taxes.

But, not to forget that in this example we discuss only the money, which RM will receive from the selling of the Telecommunication Company.

If we add to this the financial resources resulting from the sale of the electricity utility, railways, post office, state owned hotels, community enterprises and others which in more sophisticated countries in the last 10 years are subject to a trend of privatization... We are on our way to conclude that RM has a historical chance to reconstruct its economy, to become export- oriented and with high quality products and services.

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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