Trade Deficits and the Health of the Economy - Part XVI

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

SV: It is a big debate whether the state should intervene in the operation of free markets. Granted, the state is not the most efficient economic player. It is slow, corrupt, ignorant, influenced by non-commercial considerations, short-sighted and either too aggressive or too placid. On the other hand, markets are not a panacea, either. There are some goods and services, which markets simply refuse to provide because they are inherently unprofitable or require some non-monetary motivation. Most of the public goods cannot be efficiently provided by free markets or can be provided only at a prohibitively extravagant price. This includes health, defense, education, prisons, police and welfare. There is no question then that governments should step in to fill the void. Another class of cases where the state is called to intervene is when the market fails. Markets can - and do - fail for a myriad of reasons. Speculative bubbles are market failures. Lack of investments, research and development, qualified and trained labour, patents and other intellectual property, work ethic, economic crime and corruption, anti-competitive behaviour are all market failures or lead to them. The government then is called to intervene, to regulate, to investigate, to imprison, to stimulate, to direct - and legitimately so. There is simply no one else to do the job. But industrial policy (which is what Japan has engaged in) is more of a mixed bag. Some countries have done very nicely without it (Estonia, for instance). Others have botched it to the point of self destruction (the USSR). Yet others regarded it as a "starter" (Israel, which adopted the Japanese path of government directives - but now has almost no involvement in the micro-economy). Japan simply did not know how to say to its industrialists and bankers: "enough is enough". As a result, Japan is in the worst financial mess in human history. It will recover, but at the cost of a recession which will erase many of its achievements.

Japan is an amazing economic experiment. It is the first time in human history that a government was more interested at micro- managing world trade than at managing its own markets and economy. Some of the Japanese products (the CD, the VCR) CREATED whole markets, that is fostered demand which was not there in the first place. But this neglect - the result of an obsession with attaining hard currency self sufficiency - was detrimental. Without the proper spine, even the best runner collapses ultimately.

World economic history teaches us that there is a benign and beneficial form of industrial policy. These are its characteristics:

1.. That the government succeeds to attract top flight talent to manage the policy. In Japan, the brightest university graduates wanted to work . in the Ministry of Finance! 2.. That the economy is so depressed that any stimulant would be better to no stimulant. Keynes was right. The IMF is dead wrong and has plunged 80% of the world into a very dangerous deflationary spiral. Sometimes, it is better to reflate. Sometimes, it is critical to reflate. Industrial policy is inherently reflationary because it involves the injection of state funds into the economy. 3.. That the bases of material and human infrastructure are there. Japan was an industrial country and a regional military power long before the second world war. 4.. That the core of the industrial policy would be the provision of a orientation as to the future of the markets worldwide and domestically. Direct and indirect monetary or fiscal involvement has to be minimized. The emphasis should be put on coordination, guidance, counseling, orientation, research, intellectual property, matchmaking (with investors), development of banking and capital markets. In short: industrial policy should prepare the CONDITIONS for an industrial and export-led expansion of the economy, but not for its financing. 5.. That there exists a national consensus regarding the agenda of the nation in the economic sphere (and, preferably, in the political sphere, as well). NG: The medium and small enterprises in Japan, which are indispensable partners of the large industry in Japan, employ 31% of the total number of employees. The big corporations hold a chain of small companies, with lower management expenses, to which they transfer part of the modern technology and in return they receive many components for the production plans. The European producers almost fully depend on American and Japanese components - microprocessors (chips) and memories. Japan has a high surplus with many countries but the low profitability of its companies gave it its negative image in the last few years. Japan really doesn't have armed forces which can be compared to its competitors (even though the parameter of military expenses in 1997 , according The Economist, is after the USA with more than $50 billion and before France, Germany, Britain, Russia and others) but that's why according to the Japanese, their chip industry and their microproessors don't have competitors anymore. The Japanese, in the last 35 years, took over (discovered, stole or paid for) all the possible strategic technological knowledge in the world, registering thousands of patents and licenses. Their business philosophy - to be the biggest imitators, compilers or innovators in the world, brought them big success. Their patents mostly are the result of the mistakes and weaknesses of their competitors. Japanese patents look the same as the Japanese do: small and efficient. The country, which was destroyed by the Americans in 1945 and which quietly fell on its knees while signing the surrender on the command ship of general McArthur, didn't provie the Americans with peace until recently. And when the winner started to ask himself what and how that happened to it, the financial Japanese "sinner" was exposed, in June this year, now the ex premier Hashimoto, again fell on his knees, this time in front of the man who became famous for putting others on his knees - Bill Clinton. But once the "Japanese dwarf", this time it is so big that its crisis (currency-bank-stock exchange) again won't leave the Americans and Europeans peaceful, because the possibility of the contagion of the crisis from Japan and its economic satellites in south-east Asia, as well as from Russia and eventually China haunts them.

Despite the above mentioned successes, in which even we find "rotten beams in the building", in the last few years (which by the way are already recognized as such by the creators of the Japanese policies themselves), fascinate, especially when we come back to the domestic territory. Today if you ask a Japanese how their economy is doing, they will answer "very bad", because the Japanese regard their country from another angle, from the position of their biggest competitor - USA, without turning back. From the Macedonian point of view the Japanese crisis starts from such a higher level of the economy than Macedonia's, that it will make us uncomfortable to confirm "yes, your economy isn't doing well". The philosophy of the weaker and the smaller towards the stronger and bigger is still to regard it as bigger and stronger even when it is wounded.

The logic of the Japanese economic development was based on OFFENSIVE export politics, a subject, which we discussed and analyzed as a necessity for the development of Macedonia. It is not by mistake that I don't say survival, but development. I don't want to hear about "survival" eight years after acquiring independence. We must talk about "development" otherwise tomorrow can be too late. Actually, tomorrow is always too late.

But I still ask myself if the entrenched national prosperity was only the result of the justified Japanese state policies. If we ignore the work ethic and the loyalty and strong feelings towards the company and the country, which is still very characteristic of the Japanese even in today's conditions, we will conclude that to succeed in such a short period of time to raise the economy so many levels higher many highly qualified professionals would be required. Technology and methodology could theoretically be transferred in this way or that in a short period of time, as foreign experts in various fields can be summoned. But it isn't possible to import a whole army of professionals, shaped through a well-constructed educational system. As much as we say that RM has strong professionals, as much as we are proud of individuals, who achieved many business successes in the USA or Germany, generally viewed (the exceptions only prove the rule) except the general knowledge of many areas (the philosophy is to know a little about everything) the Macedonian educational system doesn't produce a big number of well specialized professionals in specific areas. Even the bigger number of those very rare professionals, formed along these lines, do not encounter understanding and support and they leave RM very soon.

The essence of every weak long-term economy, actually lies in the weak educational and vocational education systems.

Macedonian manufacturers and other companies generally encounter serious problems with highly educated professionals, professional managers and other business operators. The fact, which was recently promoted in the media and which says that from the total number of students registered in the economic faculty in Skopje, only about 30% finish the faculty on time, means that something is defective in the educational system in RM, because in most faculties the same or similar trends can be discerned. The obvious non-existent minimal practice and training of students from almost all Macedonian faculties, as well as an insufficient theoretical background, very often the low level of mastery of foreign languages (needed for professional upgrading, because there is very little professional literature translated to Macedonian, as well as for business communication), have their effect in the future, when these former students attain more meaningful positions in business firms. The educational system very often is based on dull lectures, which would help the student as an orientation to find the professional literature after finishing the faculty.

Both of the state's universities still do not have a monopoly role in the system. While the youngsters are in high school their parents think more about how will they find a way to help their children to register in the faculty and less about how much they will be ready for it, and such a practice I believe is not accidental and is not the parent's or future students' guilt at all. Passing the exams in the best part of the cases is based on the parents' connections or on friendships. High grades go to the regiment of students who bought or who copied the professor's new book, to the students who learned the material by heart without a depth analysis and understanding. Students go through the tortuous process of overcoming the low level of professionalism and low authority of certain professors (not all). This all transforms some exams into "impenetrable barriers". It trains the students to be corrupt in the years when they have to practice by themselves to form their own thinking and to defend themselves with open and impartial discussions. Of course this is not relevant to all the professors and the faculties, but unfortunately it is relevant to the bigger part of them.

The scholarships for professional advanced studies abroad, even though a few, very rarely reach those who will make the best use of them.

In the Macedonian bigger companies there are almost no educational centers, as very important post-university education facilities, especially with more practice-oriented education and experiences. For example, if one economist in England is employed in Merill Lynch, the first six months or a year, he will have additional training in the same company during and after his working hours. Even in the smaller and poorer countries the bigger companies have this practice (e.g. Zagrebachka Banka - Zagreb). From this point of view, it would be a big handicap for RM or one idea for faster national prosperity.

The level of the management in RM is another story. Unfortunately, that is an important part of any strategy for economic reconstruction and export-oriented drive. Management is a distinct science, a separate economic branch, in many respects closer to politics and to psychology than to economics. Besides, it is a natural gift as well, which not everyone possesses.

The second unfortunate fact is that a big part of today's managers of the most important Macedonian companies are the same as in the socialistic period. Many of them were appointed to their current positions by a political key and through loyalty towards the party, without taking into consideration if they are suitable for the job or not. Actually, at the time, it wasn't very important if they were capable, because the bigger part of the production and trading was planned in advance on the union level. Maybe not as strictly as in the Russian block's socialist countries, but definitely very differently compared to the situation today. For example, it was known exactly, in advance, how many shoes Gazela - Skopje will manufacture for export and these shoes, would be exported to Russia through Centotextil (or to Italy or to some other country). There were some big trading and export firms and with political assistance all questions of distribution, production and placement were solved. The small luck in this misfortune was that one part of these people had a natural gift for managing (which was not very important in the selection process) and the practice of many years covered up for their educational deficiencies by specialization in a sophisticated management system. But the bigger part of this group have not advanced even by one centimeter in their professional development and do not speak English or German at all. It is interesting that they still survive very well, a result of timely political acquiescence and support, which not only insured their continued successful and cushioned business existence, but also, in this or that way, made it much better.

All this is acceptable until we start talking about a new policy of development based on the construction of a new economic structure, export-oriented, on the basis of market economy, but with a modicum of state policies in order to creat a framework for the new ways. It is a fact that this situation is difficult and slow to change. The logic of the bigger number of managers, is based on local principles instead of on the global. The philosophy of thinking of most managers, is different from the same ones in the developed countries or, putting it more politely, demodé. In this plane the country has limited possibilities. It is an impossible and unacceptable way of appointing managers of the stock companies. That can do only the shareholders who control the company, but unfortunately in RM the shareholders and the managers are the same people. Only the state could influence the firms indirectly, through the marketing agency, which we have discussed before, as well as by stimulating the introduction of the ISO 9001/2/3 international quality standards for operating enterprises. All this is actual in RM, at a time when the world is discussing the management revolution, the notion promoted 60 years ago according to which the technological changes in the production process separated the capitalist-owner from the management, and that function is effected more by the managers. The revolutionary changes in this plane can happen by creating possibilities and support for the entry of foreign capital into the companies, by the fact that the foreign investors will provide new markets for the domestic firms and will exercise a strong influence for changing certain negative habits and standards of the work of the Macedonian management.

(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