Trade Deficits and the Health of the Economy - Part XI

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

NG: A few months ago we have discussed attracting foreign investments to RM. One of the most important measures, for attaining a suitable balanced state in RM, should be directed at attracting foreign commercial investments in RM.

Foreign investments bring fresh and non-returnable capital, which doesn't have negative implications on the state's balance of payments, because the state doesn't have obligations to return and to pay interest rates on it. Foreign investments open new markets for domestic companies, where they haven't invested their domestic financial resources, by increasing the exports, the foreign currency income (or by reducing the foreign currency outflows if they substitute for imports), increase the financial resources of the budget, provide new ideas, technologies, working methods, management, and new employment. Very often the profit is reinvested in the same state. All this will have strong positive influence on the balance of trade.

The basic task is to create a safe legal environment for foreign investment and laws of a western standard.

>From this point of view, it is needed to provide a secure and fast judicial system, which will finish all processes in a few months time.

SV: Perhaps even special courts, dedicated to foreign investors, with judges who had special training in applying the relevant domestic and international laws. These courts could operate within the existing court system but will be endowed with special powers and will be obliged to terminate all cases that come before them in six months. This will not constitute a discrimination against domestic firms because many joint ventures with foreigners involve domestic firms and they will benefit from these special courts as well. Secondly, anyhow foreign investors are "discriminated" in the tax code, in the company law and so on. They are given special incentives (example: tax holidays) - isn't this discrimination? It is legitimate to discriminate in favour of a good thing.

NG: For a start-up period (2-3years) until the whole change and reform of the judicial system will be done, it would be better to accept your idea to form another court for foreign investors, which will have the same rights and obligations as the domestic investors, with a difference that they will be obliged to finalize all legal processes within a given period of time. On the other hand, this does represent a kind of discrimination towards the domestic subjects, but in the current situation in RM, if there is a wish to attract foreign commercial investments, the presence of discrimination, at least in the medium-term, is required. Also there is a need to change many laws: the law for trade associations, the securities law, the law for foreign currency operations, the tax laws, the banking laws, etc., and create new laws (law for foreign investments, law for investment funds, etc.).

Concurrently, the strong promotion of the Macedonian market should be done to potential investors using all the possible promotional tools (human and material). The relationship with multinational companies is the only bridge between the Macedonian companies and the world markets, the only possibility for development. From the macro aspect, this will have a strong positive influence in RM. In this context, the creation of conditions for the opening of branches of the big western banks, which will reduce investment risk, will offer new credits and financial resources to the domestic companies according to standardized methods and evaluation of the credit applications, will revive domestic savings, will introduce new methods of work and behavior, etc - is inevitable. I will not continue with this subject, because we explored it in detail in our first dialogue.

SV: True, we did explore it in great depth. The dialogue is available (in English) on the internet at: samvak.tripod.com/nm059.html and deals not only with foreign investment but also with country marketing, the banking system and the capital markets. I want to make one comment, though: Macedonia is a lesson in the abject failure of its self promotion. It is virtually unknown outside a part of the Balkans. It has so many advantages that the fact that it does not attract foreign investors is amazing. It is macro-economically by far the most stable in CEE (Central and Eastern Europe), the manpower is the cheapest (if the wages are adjusted for the level of education). It is superbly located geographically (better than Slovenia), it is naturally endowed, it has reasonable infrastructure (much better than Russia's). Still, it attracted 30 million USD in FDI (Foreign Direct Investment) last year. This is a shame. It is easily marketable as a tourism country, an industrial hub, a crossroads between all parts of Europe and Asia, an island of macro-economic and geopolitical stability. True, the Kosovo crisis and before it, the Serb Wars and the conflict with Greece marred this outlook considerably and still do. But these conflicts will be over some day and Macedonia has to prepare for this day. The task is so challenging and rewarding that I would gladly promote Macedonia abroad - in international forums, banks, multinationals - for one denar a year. This would be one denar more than I am getting currently for the same work that, anyhow, I am doing voluntarily. I am doing it now not only because I fell in love with Macedonia (and I did). I am doing it because I am a great believer in the future of this country. Having lived in five other countries in CEE I am saying it openly: no place like Macedonia. I prefer it to any other country in this region. And if I do - why not other foreigners?

NG: The foundation of the state's Agency for Marketing, as a means for increasing the exports, will also enhance export's ability to increase domestic production.

The small domestic market and the strong pressure of foreign competition on the domestic market, in the conditions of the strong liberalization of the Macedonian economy, forces the Macedonian companies to achieve a better competitive performance of their products and to be keen to conquer new markets.

The bad economic undercurrents come from the bad situation of a big number of Macedonian firms, which is a product of unutilized capacities, as a result of their inability to place their products on the market.

The reasons for this are:

1.. The product is not price-competitive (is too expensive); 2.. The product is not up to the consumers' needs and requirements; 3.. The products are adequate, competitive, but cannot find their way to the consumer. SV: To this I would add the bad image of the Macedonian industry. It is world notorious for its unreliability. Promises are not kept, contracts not honoured, schedules ignored, the quality of the products is shoddy. The managers are ignorant (possess no minimal knowledge of finances or marketing), ill-qualified, selected arbitrarily. There is usually no identifiable center of command and control. The whole structure of a typical Macedonian (big) firm is diffuse, "magla-fied". No foreigner wants to do business under these conditions. The placement of Macedonian products abroad is also influenced by the domestic conditions in Macedonia which prevent foreign investment (political meddling in business, no protection of property rights because of an inefficient court system and so on). The trend today is that most exports are done through multinationals, which open branch offices or factories in the country of export. Thus, for instance, the Japanese carmakers manufacture most of the cars that they sell in the USA inside the USA. Multinational food companies open branches and import food from the host country - and so do big retail chains (like Marks and Spencer, Tasco and others). So, today THERE IS NO DIFFERENCE BETWEEN EXPORTS AND FOREIGN INVESTMENTS. One is the mirror image of the other. If Intel opens a factory in the Czech Republic or a research facility in Israel - the products are then exported to the USA. EXPORTS ARE THE CHRONOLOGICAL END RESULT of the FOREIGN INVESTMENT PROCESS. Most of the exports of the Vysehrad Three (Poland, Hungary, the Czech Republic) are the products of multinationals, not of domestic firms. Most domestic firms tend to concentrate on domestic markets. Like everything else, exporting has become a global specialty, which requires expertise and experience.

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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