Trade Deficits and the Health of the Economy - Part IX

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

NG: Besides the above-mentioned sources of financing, the development of the capital markets, as a source of financing in RM, will depend on the establishment and development of investment funds. The privatization model wasn't best suited for the development of this kind of institutions, which will probably reflect upon the long term. They basically should secure the mobilization of small financial resources to different investments and of much bigger amounts to be directed to the economy by investing in securities, foreign currencies and money.

Within the scope of the financing sources we should not forget a few foreign credit lines and the foreign credit and insurance organizations/institutions such as: the EBRD, The World Bank, MIGA, IFC, OPIC, SEAF, USTDA, West Merchant Bank Ltd., Alliance Scan East Fund LP., East Europe Development Fund Ltd., NEPA and others.

One of the possible decisive factors in the financial choices of the firm is the level of the development of the financial markets, especially the securities market.

In the last 10 years the total capitalization of securities exchanges worldwide increased threefold, from 4.7 trillion DM to 15.2 trillion DM. After the realized liberalization of stock exchanges and after the successful effort to attract foreign portfolio flows, many developing countries removed the restrictions on foreign ownership, liberalized the transactions through the capital account and improved the accounting and information standards. The role of the stock exchanges in collecting and publishing information is more important to larger firms, because their shares are traded more often. The high fixed expenses of issuing securities handicap the smaller companies. The stock exchanges offer new possibilities for providing capital and new investments. Unfortunately, in RM this is not the case, because of many reasons: the privatization model, lack of political motivation for attracting foreign investors, unsuitable and fuzzy judicial system, the absence of state bonds and of branches of the big western banks, the absence of a central share register, the absence of a stronger presentation of the possibilities of the domestic stock exchange and its role, etc. The privatization model in RM was built on the basis of inside relationships between shareholders and managers, in most cases they were the same people. It led into a situation whereby companies preferred to abandon the stock exchange and to rely on bank guarantees with high interest rates coupled with slow or no development. This state at the micro level created implications at the macro level. If the companies in a country stagnate or don't prosper, the question is how is it possible for the production and the exports to increase on the macro level? Almost everything that we see as data pertaining to the macro level is a result of micro units working in unison. There is only small hope that in the next 2-3 years companies, which are in the process of privatization or which still have a diffuse ownership structure, will be provoked to conceive new big projects and markets. This means that the new private companies and the privatized companies with a more centralized structure of ownership should carry the weight of the reconstruction and be the first quoted companies, which will try to raise new capital through the stock exchange in RM. Unfortunately, according to The Wall Street Journal Europe's - Central European Economic Review, from a total 15 countries in transition in Central and Eastern Europe, RM (judging by the coefficient of private property per GDP) is fourth - but from the end of the table, with 50 percentage points.

SV: Sometimes I simply fully agree with you without needing to add anything.

NG: The feeling of uncertainty, which is all around us in RM, (in the judicial, economic and political systems) is still a strong de- motivating factor, as much for the domestic as for the foreign investor. In a country where "(with) and without Skopsko beer everything is possible" it is a real risk to invest. This doesn't mean that if someone invests, he will loose his money or will not earn, but the fear is meaningful and such an atmosphere often de- motivates. The political instability in the region, and the recently obvious uncertainty in the internal political and inter-ethnic scene - indicate that this bad atmosphere might last longer.

The Macedonian stock exchange will continue, for a long time, not to be a very important source of corporate financing, perhaps never, unless certain steps are taken to make it an alternative for the bigger and more powerful companies at least in the medium-term (3-7 years).

Of course, the improvement of the global economic environment in RM, the increase of the manufacturing and exports sectors is very important for the stock exchange's development and its transformation into a source of capital. One joke says that the economy and the stock exchange are like an old man with his dog. The old man walks ahead very slowly and stops from time to time. The dog runs around him, behind and before him, sneaks and goes back. It is thought that the stock exchange anticipates the economic processes at least six months in advance. If we put to one side two or three big takeovers (a process which is usually conducted in the world by KHV, apart from the stock exchange), we will still obtain poor trading results in the stock exchange in Skopje. If the domestic companies do not have interest in publishing their financial results, the state has to find a way to change their mind (as it was done with the banks, which are obliged to publish their results in a daily newspaper).

But let us go back to the basic theme - the trade deficit, the new economic structure, the increase of exports. In addition to changing the economic structure higher export bonuses and preferences for products with a higher level of finish should be provided. The financial resources for paying bonuses to the exporters for penetrating foreign markets should be provided from the already mentioned sources in the first few years and from the non-returnable financial help (which RM receives gradually less of and which we should stop making a habit to live off).

I think that RM should directly force the production of certain goods traditional to RM, for which the markets are sizable and there are preconditions for their production. For example:

To financially assist the increased sophistication of wine production, to improve the quality of seeds, more sophisticated bottling and marketing with an aim for better placement of the Macedonian wine abroad as one of the more strategic export products. An American expert team, a few years ago, noted that RM has superb geographical conditions for high-quality wine production, but it is necessary to upgrade the technology of production, to change the variety of seeds and to improve the bottling. Despite the fact that competition among wine producers in the world is great, RM, with small efforts can find itself in a much higher place in the list as a quality wine producer. In England there are three big supermarket chains and one of them is SAINSBURY. Last autumn, I was able to see Macedonian wine only there, and, though cheaper than the Bulgarian wine - it was still selling less. One friend of mine, in London, told me that in the above-mentioned chain of supermarkets the wine produced by others in Macedonia used to be sold, but because of the fact that wine deliveries were never on time and in the exactly agreed quantities, the English partner decided to cancel the collaboration.

Or, for example, the stimulation of lower exported quantities of fresh apple and higher export quantities of finished apple products (juice, jam, etc.). The private companies, which will buy equipment for such purposes should, by law, receive bonuses from the state.

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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