Why is our export to the EU so high?

Nikola Popovski

Our country, which represents only 0.4 percent of the EU population and only 0.065 percent (0.65 percent) of the scope of its economy, has a population standard measured by the GDP per capita indicator at a level of 16 percent of the average of the EU (4,800 versus 30,000 euros per capita in 2017) managed to realize about 82 percent of the value of its total exports and about 63 percent of the total imports into the trade with the EU member states. It is a very high level of foreign trade with the EU countries, and that’s good because we have long tied our exchange rate with our denar to the euro and we want to be part of the European Union one day, certainly because its single market is one of the most competitive and the most desirable in the world to which everyone would like to take a piece of the cake. Macedonia does so in conditions where, primarily because of the small size of its economy and the relatively low share of services in the GDP structure, the total exchange with the world each year exceeds the value of the volume of its own GDP. There is nothing strange and unusual here. But the volume of trade with the EU still shows high value and this is due to several factors: the traditional connection of our economy to those markets; one part of the larger domestic companies and FDI in the industry that have a high volume of import and export directly in the EU and finally the EU’s expansion in our wider region with which we have strong trade ties. If we assume that, for example, Serbia and Turkey as our major trading partners would become EU members, without any particular effort our exchange with the EU would be raised to an even higher level.
One of the interesting questions is to discover the reasons and factors for the so great connection of our trade to that of the EU, especially the export side which exceeds 4/5 of our total exports. There must be some serious comparative advantages that our exports, although in absolute values ​​are not so great and valuable, make them competitive on elite and competitive European markets. It is likely that from most factors, four can be very important.
One of them, and of course a very important one, is the cheap labor in our country. That component in the export goods, in other invariable circumstances, makes them more competitive than the EU’s domestic goods. As evidence of this, two indicators are important – the labor cost per hour in our country and in the EU, and the comparison of the regulation of the amount of the minimum wage. Prices of average gross wage in the form of costs per working hour in the EU are very high. According to Eurostat data, in 2018 they were on average about 27 euros per hour and with a spread of 44 euros in Denmark and 39 euros in Belgium to about 7 in Romania and 5 in Bulgaria. In Macedonia, according to own calculations, the average is about 3.5 euros per hour. There is no doubt that this represents a huge comparative advantage and gives special chances of export because in the goods that are exported there are about 7 to 8 times less labor costs. Is it acceptable to us, and whether it is actually a huge “exploitation” of domestic labor resources in Macedonia is a very serious issue that requires a separate analysis. On the other hand, the regulation of the amount of the minimum wage is also a very important factor. While in the EU, according to Eurostat, in January 2019, the minimum monthly salary was set in the range of about 280 euros in Bulgaria and 400-450 euros in Latvia and Romania, and up to over 1,500 euros in Great Britain, France, Belgium, the Netherlands, Germany, etc., while in our country it is at the level of 200 euros and in the region of the Western Balkans, it is only higher than the salary in Albania. The data are very clear and complement the previous statement. This greatly stimulates our exports to the EU.
Another factor is the energy prices, especially the electricity that is calculated as a significant expense in most of the export products, especially our traditional export products. It is significantly lower in North Macedonia than in the EU, and for the corporate sector at the end of 2018, it was around EUR 0.065 per KW/h versus the EU average, which is almost twice as high as around EUR 0.11 per KW/h. In addition to this, we are a country that does not impose any other taxes or charges on the price of electricity other than VAT, which is not the case anywhere else in the Union in which, on average, according to Eurostat, those fees participate with 30% in the final price of energy. Most often these are excise taxes and other environmental taxes or other charges. It is similar to the price of electricity for households, but they are not an export sector. This system setup additionally makes the export of goods from our country into the EU more competitive for the differences in those prices. Furthermore, the serious comparative advantage of exports is our complete negligence for our own environment, for which we have almost no serious regulation and serious charges that would compensate the negative externalities of its degradation and destruction. As we know, we do not have any other serious protective measures. Even when we have them, they are not enforced. This is not the case in the EU, and therefore the lack of such production costs is for the most part transferred as a comparative advantage in the prices of the export of finished goods. In addition, the value of natural resources is underestimated in Macedonia. They, especially the construction land for FDI, are practically non-existent cost item (there is a system of exemptions and symbolic assignments), and are known to be relatively high for domestic companies and EU companies themselves. Such undervalued value becomes the comparative advantage of our exports. This is also the case with the price of other natural resources (exploitation of mineral and non-mineral resources, other types of land, water resources, frequencies, etc.) which are very low for concession prices to their users. In contrast, natural wealth in the EU is becoming more expensive.
Finally, one of the great comparative advantages in the country is the extremely low taxes, especially those of incomes – personal incomes and profits of the companies. They, with rates of only 10 percent, are very competitive in the EU, since they reach up to two or three, and four times higher levels there. Thus the low tax burden with direct income taxes in the country is competitive. Unfortunately, the reform of progressive taxation has less than 2% of the people with personal incomes in the country, and does not significantly affect the total costs of companies, especially the exporters. Normally, this in turn creates a permanent shortcoming of a satisfactory level of quality public goods in Macedonia and pressure on budget deficits, but that is also another matter altogether.
Of course, there are many other factors that are favorable to our competitiveness and do not represent problem areas of competitiveness as the previous one, but rather affect the positive comparative advantage of our exports to the EU, but for them on some other occasion. The ones we are talking about may not be the best chosen mix of economic policy to build our inter-sectoral comparative advantages for the overall economy, but they manage to sustain our country’s export presence in those markets at a satisfactory level for us.