The trap of the Macedonian economy

Nikola Popovski

No one has the illusion that the Macedonian economy is doing well. As if a strange consensus was established in every country and in international organizations dealing with economic issues that things did not go well. Such a consensus is not accidental. It is based on facts. In fact, the economy, if you observe the standard indicators for its condition, continually displays relatively poor results. The living standard is low, GDP growth rates are disappointing, and unemployment is too high. This is so from the very beginning of the independence of the country and it seems to continue to be so. The only bright side is the macroeconomic stability that has been successfully maintained for 25 years and which is distinguished by price stability, ie low inflation and stable exchange rate of the denar.

If you look globally, where the economic level of development within the most general framework divides the countries in three groups – countries with high, middle-income countries and low-income countries – Macedonia has no such poor economic situation. We are in the group of middle-income countries, in the internal division of that group of countries with low middle and high middle income, we belong to the latter. We provide this with the fact that we have a GDP per capita of 309,000 denars, or 4,936 euros (data is estimated for 2017) and this is not so bad in the world. But this is where optimism and enthusiasm end. If we put the comparison at the level of Europe, we already have great reasons for concern. Namely, Macedonia belongs to the five poorest countries on the continent, along with Moldova, Bosnia and Herzegovina, Albania and Kosovo.

We keep this position firmly, and, unless we do not make any drastic changes, we should be aware that there is already a danger that in the coming years we will fall into the group of the three poorest countries on the continent. Such a development of events follows if we fail to significantly increase the growth rate of real GDP and maintain it. For instance, according to official data, in the last decade (2009-2018), the average growth rate of the economy was only about 2.1 percent annually. The calculation was made assuming that the growth rate in 2017 will be about 0.2 percent, and in this 2018, 3.1 percent. That is too low and does not make any progress or optimistic expectations on the country.
We are at the bottom of Europe according to the unemployment rate, which is about 22 percent. According to developments and expectations, we should not be optimistic that this bad situation will be overcome. According to this data, we are also among the four countries in Europe with the highest unemployment, together with BiH, Kosovo and Greece.
Our economy is structurally bad. For our level of development, we have too much participation in the agricultural activity in the structure of GDP. Namely, in agriculture, we create about 9-10 percent of GDP, but we employ about 18-19 percent of our employees, ie we have a high share of GDP activity whose productivity is twice lower than the average. Therefore, we need to consider very seriously whether the previous and current policies of extensive and excessive state aid (subsidies) in agriculture are useful and whether they are precisely these are part of the “non-development” economic policies in the country. On the other hand, the participation of industry in the structure of the economy is very low and does not reach even 20%. It is a feature of the most developed economies with very high income. An economy like ours, of the group of high middle income countries, should have an industry’s share of GDP of at least 24-26 percent. Such a situation is not a result of the huge growth of service activities in our economy, but literally the low level of development of the industrial activity that systematically lags behind the needs of the economy. It, in a small and open economy like ours, must logically be export-oriented so that it can be successfully developed. But it is obvious that its relatively low competitive ability disables it. Is it time to reassess the position of economic policy in the activities of agriculture and industry, especially its part that is high-tech and with a high level of knowledge in its products? Probably the answer is confirmed, but the competent institutions and state authorities must deal with it more seriously.

The situation with agriculture and industry basically determines the balance of our trade with the world, which is normally dominated by the export and import of material goods versus the service. Our foreign trade which, due to the fact that we are a small and open economy is about 110 percent of GDP, is seriously deficient. For instance, in 2016, for which there are complete data, the total exchange amounted to 11.8 billion euros, but the export was 5.0, and the import was 6.8 billion euros. The 1.8 billion euro deficit accounts for about 17-18 percent of GDP and we must constantly finance it with foreign exchange remittances that our emigrants send to the country, but also with the proceeds from foreign direct investment and private and public borrowing of the country abroad. Long-term trade positions can only be improved by the additional development of high-tech industry products and products with high level of knowledge in them and in addition to restructuring the current extensive farming in intensive. In the very long run of 15, 20 and more years, the burden of balancing the trade balance will have to be taken by the service industries, in particular transport, tourism, financial activity, health care etc.

The next area that needs to be seriously restructured is investments. It is good that in the past 15 years their share in GDP has increased from around 22-24% to around 31-32%. But their structure remains very unfavorable with the still dominant place for investment in construction and lower participation in investments in machines, equipment and stops. It is known that the contribution to the growth of the latter is much higher and the return is faster than the first ones that have an indirect contribution and a slow return. The situation in the last 7-8 years has especially worsened with the wrong allocation of public investments, which are almost entirely aimed at completely non-productive building structures. In addition to all this, and FDI in the country for decades can not exceed the threshold of 2-3 percent of GDP. Turning to maintaining relatively high investment rates, but with serious internal restructuring, will not at all be an easy task that can end with an initial drop in the gross investment rate in the economy. If you add to the many other weaknesses of the economy, the image will not be very pink. Some of these weaknesses are the poor distribution of income among the population, which is known to be getting worse; further relatively poor public spending structure that is too redistributive and less targeted at providing quality and efficient public goods and services for the population and the economy; poor infrastructure satisfaction of the economy, especially in the transport and energy sector; inefficient and bad institutions and the like. All in all, the economic situation in a static and dynamic sense in Macedonia is close to alarming and as if it is in a kind of trap that does not have an easy and simple way out. Therefore, any hesitation about taking urgent and decisive steps towards faster and more efficient development can cost us even more.