Textbook example

There is a lot of talk and commenting these days about a certain Macedonian state institution and its policies. It is about the State Fund for Innovation and Technological Development. The controversies surrounding the Fund have rose up to the clouds. And it is completely justified. The Government of Macedonia leads an aggressive interventionist policy in parts of the economy, and this Fund has been turned into an instrument of that policy. The measure is very simple – awarding grants to companies. The gifts are awarded to support micro, small and medium enterprises.

A public call for project financing was announced within the third pillar of the economic growth plan made by the Government. The public call also added that this was the first investment wave. Very complex names for the procedure of granting ordinary grants. According to the power of the authorities, these are essential measures for the progress of the economy. These measures, along with state grants that follow in line with legal solutions to boost economic growth and those for increasing subsidies to agriculture, as well as tremendous resources allocated to construction work in public infrastructure, were supposed to improve the economy.

The concept of government is clear and simple – if the economy does not do well, forget about the standard, but complex and difficult macroeconomic measures that need a lot of research, knowledge and skills, and access the rich allocation of funds from the budget on various grounds for direct delivery of the economy. A concept that has been tried countless times and – just as many times as it does in the world, for which there are a number of relevant examples, studies, books, and received Nobel Prizes.

Simply put, too much direct interventionism and volunteerism of such kind has never been glorified and has not produced sustainable success, so it is possible to doubt that this will be the case as well. It’s a basic example. Market mechanisms, as always throughout history, will prove to be stronger and more persistent than any kind of direct economic interventionism of this kind. It would be better for economic policy to rely on non-favoritism, non-selectivity and indirect incentive, for which there is at least some agreement in the world nowadays.

If you ask the Government, it will unanimously respond that such a policy is the best possible and there is no other alternative in a world in which Trump’s ad hoc economic intervention began to dominate. Here is the basic error. An alternative to the market mechanism that companies should face in conditions of high regulation of the market and stimulating yet sector-neutral macroeconomic policy (with the exception of the production of public goods) that is aimed at growth, development, high employment and macroeconomic stability, de facto does not exist. This will quickly convince all those who think otherwise for whatever reason. Starting with Trump, who thinks that the lower productivity of American steel and aluminum producers (and now we see a growing number of products and companies) will improve with high protective tariffs of 20% on their production, while the Macedonian Government thinks that it will improve the innovativeness of companies with grants, up to the Kosovo government, which thinks that the low productivity of their agricultural sector will improve with the excessive customs duties of 30% of imported production from the countries with which they have reached a Central European Free Trade Agreement (CEFTA).

But let’s go back to our Fund for Innovation and Technological Development and its innovative and technological policy. It seems that it will come down to grants in a few “investment waves” with which something will be supported. I say “something,” because according to the results of the “first wave” investment grants, it can turn into the policy of only awarding grants, and, as the public says, a controversial procedure, from a policy meant to support innovation and new technologies. How else can one interpret grants (gifts) from the state budget to companies that will not use such small funds for “Making new fashion collections” or for producing “Butter from organic hazelnut”, “Construction of a hall for production of automobile parts”, “Eco-delivery of food with electric vehicles” and such? There are dozens and dozens of such examples. Who and what kind of innovation can see in this?

Finally, there are problems with encouraging innovation and technological development with the emphasized subjectivism that led to disappointment by those who decided on subjective criteria before criticism of the public and the withdrawal of projects and grants. It is another valuable lesson about the mechanisms of exaggerated state interventionism in the economy that, necessarily, brings subjectivism of such type with it.

Additional problems of such government mechanisms, which, in truth, introduced the previous government with the Law on Innovation Activity of 2013, arise from its arbitrariness that is systematically built into it. This arbitrariness of state bodies is non-market and does not rely on price mechanisms and market information. It relies on the conviction of civil servants and officials. Of course, such conviction is also non-market-motivated and therefore can, and most often de facto, allocate funds for which profitability, efficiency and effectiveness are unknown. Such actions usually lead to ineffective use of funds or their possible misuse.

Therefore, these instruments and measures of economic and development policy must change rapidly and radically. First, they are established by a former, uninventive government with very dubious intentions. Indeed, it becomes increasingly clear that the misuse of state funds for them was of high priority in the adoption of almost all measures.

As such they can not and must not stay. Second, the systemic legal solution is bad, and the proof of this is precisely the distribution of funds in the so-called “First investment wave”. If the system solutions, that is, the instrument does not change seriously, it will also create the same or similar situations in the future. Thirdly, the measures embedded in, or arising from, the basic instrument for the same reasons should also be changed. Fourth, the practice of functioning of the organs within the competent institutions should also be changed. They are too: an Innovation and Entrepreneurship Committee set up by the Government; Fund for Innovation and Technological Development with its own Steering Committee appointed by the Government; The Investment Approval Committee appointed by the Government and the Director elected by the Government. This adds a number of commissions and expert bodies that serve as expert teams for program evaluation.  There is no need for such large-scale administration and bureaucracy typical of states with poor and inefficient bureaucracy that seamlessly and inefficiently embeds into the economic activities of companies. Fifth and final, the high level of funds allocated from the budget for these inefficient and arbitrary economic policies, in particular the maximum level of funds that an applicant can receive, should be seriously re-examined.

This way, the government can avoid repeating these clumsy or even wrongly guided policies in this domain that already costs the current government its credibility.

Nikola Popovski