Trade Deficits and the Health of the Economy - Part XIV

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

SV: As I said earlier, imports, in themselves are good to the economy because they optimize the use of economic resources through increased efficiency of the allocation of economic resources. The question is only: WHAT is imported. There are imported goods which generate sufficient income in the future to cover their cost plus a reasonable return on equity. Others (such as cars) only get depreciated with time and consume more and more foreign exchange (fuel, spare parts). I think that a few rules are cast in stone. They should be applied cumulatively, not separately:

1.. Import goods and services that can be manufactured and provided more cheaply abroad than domestically. Simply, if something costs more at home (and is of comparable quality) - import it. 2.. Import goods and services the will increase the use of your economic resources and your future inflows of income in foreign exchange. 3.. Minimize imports of goods and services that will have no effect or a negative effect either on the optimization of the use of the economic resources - or will generate outflows of foreign exchange in the future for further consumption. 4.. Emphasize the quality of imports - not their quantity. Buy state of the art goods and services. Buy the few best rather a lot of the mediocre. 5.. Refrain from financing your purchases with debts. The only exceptions are the financing of infrastructure and public health (defense, education, health). Very few goods and services provide a return that it sufficient to cover the principal and interest of such debts. 6.. Have clear priorities and preferences. What is more important: to have sufficient foreign exchange to buy food - or to preserve and improve the environment? I think that the answer is self-evident. 7.. Employ discriminatory policies. Impose customs duties and quotas on some goods and services - and exempt others. Tax cars prohibitively - but exempt catalytic converters (or even help to finance them) and, thus, preserve the environment. 8.. Encourage import substitution only when it is clear that the domestically manufactured or provided goods and services will be cheaper (=economically more efficient) than the imported equivalents. 9.. Punish smugglers, bootleggers and other trade violators. Be fair and evenhanded. Make your priorities, punishments and rewards known and lucid. 10.. Act fearlessly against other countries that violate the acceptable principles of international trade. Impose duties and quotas or quality and health requirements on their products as well. 11.. Encourage importers to establish factories and open offices in your country. Go ton the extent of subsidizing their presence. It is important to be revealed to these people. A lot of trade is the result of mere presence, of daily friction with reality and with its needs. NG: This way and only to a certain extent, not only will the domestic production be protected and the outflows of foreign exchange decrease, but the Macedonians will also be able to buy goods with a better and verified quality, though understandably more expensive than the domestic ones. Protecting the agricultural sector is not unknown either to the USA, or to the EU. The latter absorbed negative energy from the USA's 1988 Trade Act concerning the issue of trading agricultural produce within the Union, especially from France. Even though the USA claimed that it will cancel the subvention of agricultural produce, protectionism and even measures of "economic revenge" are present. In the framework of export stimulation and import de-stimulation in order to reduce debts, should include reciprocal measures against countries which do not respect signed free trade agreements. Also, in order to reduce the Macedonian deficit in the balance of payments it is needed to implement retaliatory duties against countries which block the import of Macedonian products for consumption and otherwise.

For the purposes of protection against imports and the outflows of foreign exchange it is preferable to use fiscal instruments such as taxes and fees (and rarely duties), prior to imposing administrative quotas. The administrative taxes open wide possibilities for corruption and crime and they are not very popular. I think that definitely the duty on the imports of investments, equipment and raw materials, should be reduced to a minimum or cancelled altogether, which will make the production enterprises more competitive.

SV: Absolutely. This is a fine example of discriminatory practices. Raw materials, infrastructure, computers, investments - should be exempted. This will be a tremendous boost to domestic manufacturers. There is, of course, an even simpler way: the introduction of a Value Added Tax (VAT). Such a tax applies to imported goods and services - but not to exported ones (the tax is returned to the manufacturer or exporter). Research has conclusively demonstrated that in the first year after the introduction of VAT there is a surge in exports and a decrease in imports (which become more expensive). People either consume goods produced domestically and which substitute for the imports - or they resort to exporting.

NG: We shouldn't forget the leading role of an active anti dumping policy as applied to import products, which are more expensive in their domestic market and for which there is an obvious knowledge that they fall within the scope of the anti-dumping measure.

At the same time, the efforts of RM to enter in the World Trade Organization should be more vigorous. But, until such time it is possible to take advantage with regards to certain limitations, which are not obligatory for non-members of that organization. The membership in WTO guarantees a mutual respect of the issued rules of the game between the trading countries.

For a small country like RM, it is interesting to regard the idea of an economic relationship with some other very big and powerful economic power (if the latter will find any interest in it: concessions, extra investment bonuses or even a covert political benefit). For a small country that would mean a lot, and for the bigger one the trade with the small partner would not even be noticed.

For sure there is a danger of long term political dependence, but if a few moves would be adopted cautiously, the two parties would be satisfied. The second danger is the so-called "butterfly effect" - an economic crisis in the big country. The waving of the butterfly's wings in the big country would mean severe hurricane over the smaller country a week later. Following the Asian crisis, everything is regarded with fear. The speed of the crisis hopping from one country to another appears like a thunder.

The scale of dissertation process on the basis of exports made the country more or less sensitive to the fluctuations in the conditions of trade.

Of course that are some other problems. First, RM doesn't have access to the sea nor the ideal geographic position necessary to become the subject of this kind of collaboration in the sense that it is not territorially close to one economically powerful country, as for example is the case with the Czech Republic and Germany, or Japan and some other countries in the south-east Asian region.

Second and very important component is that RM has a serious problem with its manpower requirements.

The whole export of RM is a drop in the ocean compared to the export of the big economical powers. For example the whole export of Japan in 1996 was $333.832 billion and the whole export of RM in the same year was less than $1.2 billion. The exports of Japan that year were about 278 times the exports of RM. A similar conclusion would be reached when we compare RM with other economic powers (USA, France, England, Germany, Canada, etc.).

The regional free trading zones appear to be a better option for the smaller countries, supported by WTO, which battle fiercely against duty restrictions. But, taking into consideration prices of the competition and more rarely the quality of the products of neighbouring and other countries in the region, there is a danger of such situation developing (regional free trade zone). In this development phase, RM could experience a rude awakening if excluded from such a regional club.

In my opinion, RM should definitely institute new policies for its economy by more actively and more vigorously pursuing foreign policies for the opening of new markets in a political way (through bilateral and regional agreements), parallel with the internal economic reconstruction, preparing the conditions for a free market economy and stimulating the enterprises to think about their development and future by themselves. The latest example, the involvement of the Minister of Agriculture in the sale of Macedonian wines in the Slovenian market, should be a positive example for further dealings. I think that with bilateral contacts at the highest level, RM will be able to significantly increase its exports and to contribute to the opening of new markets in the long run and to the attraction of foreign investments. Of course these measures are not economically healthy, nor are they the ultimate solution. The Macedonian economic situation is not very healthy , so they can be used more pervasively in the short and medium term. Such an idea should not be understood that domestic economic entities should rely on the government for help, on the contrary, it should be only an additional effort on the way to achieving quicker economic prosperity.

In this context I will mention one recent example. While I stayed in Japan, I discovered that RM doesn't have an Ambassador or a Consul or any other representative (Macedonian) in the SECOND LARGEST ECONOMIC POWER IN THE WORLD with 126 million people and a nominal GDP per capita of $36.572 (source: Japan 1998 an International Comparison - Keizai Oho Center - The Japanese Institute for Social and Economic Issues). I assume that the answer to the question "why" is that RM conducts only small business with Japan. According to my opinion it should be an additional reason for a representative to be sent there in order to prepare the territory and to make conditions for this situation to be changed drastically.

(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