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Premier Simeon Saxe-Coburg-Gotha visited the NPP in Kozloduy and for a while ran a nuclear reactor. He discussed the future of the NPP with its director Yordan Kostadinov (to the right). "The cabinet is drafting an energy strategy which has to be completed in mid-March and it is then the decision on the Reactors III and IV to be made," the premier said. Both the president and the premier declared they were against a referendum on "the "Kozloduy" NPP. Photo Reuters

by Christopher Deliso
January 29, 2002

In Macedonia, it's an unavoidable fact that economics and politics are connected – and often in rather interesting ways. There are few people as qualified to speak on this subject as Dr. Sam Vaknin. An Israeli who has lived and worked in the Balkans since 1991, Dr. Vaknin is the former economic advisor to the government of Macedonia and a business correspondent for United Press International (UPI). (Dr. Vaknin's collected articles are available on his website.) He has both the insider's knowledge and the analytical skill to cast light on a decidedly murky area. I was fortunate enough to get Dr. Vaknin's thoughts on a number of important issues relating to the effect of war on the Macedonian economy, the effect of foreign intervention and investment, and other current topics of importance. His answers proved candid, well-informed and comprehensive, and are a must-read for anyone interested in Macedonia and its economic future.

CD: Your article, "Greeks Bearing Gifts" presents strong evidence for the wholesale buyout of the Macedonian economy by Greek firms. Is this a concerted action, backed by the Greek state, or should we understand it as merely the outcome of the more robust competition of certain Greek companies, as compared to their rivals?

SV: It is neither. The closest model I can think of is Japan's MITI. The Greek government sets global goals of regional economic collaboration and identifies key sectors to be targeted (banking, infrastructure, telecommunications). It assists Greek businesses interested in investing in the Balkans. It gives them favourable tax treatment, diplomatic succor, intelligence, introductions to key decision makers, political risk insurance of export transactions, and so on. There is nothing unusual in all this. The USA does the same (even more aggressively so). What is unique in Macedonia's case is that Greece refuses to recognize the country which happens to be a major target of its investments. This lends the whole process a sinister air of a hostile takeover. Greece doesn't even have an embassy here (only a liaison office)!

CD: Let me refer to a very interesting report on the Macedonian economy. It discusses the imposition in 2001 of a tax on purchases – the so-called "war tax." The tax, it is stated, will only continue through 2001. Has the tax been successful?

SV: I am the "father" of this tax (I proposed it in a negotiating session with the IMF and worked out its details later) – so I could hardly be expected to be unbiased. But, yes, I think it did achieve its goals. The IMF was very keen on its extension because it plugged the ominous hole in the budget (equal to 9% of GDP, later reduced). Its distortionary effects are minimal because it is levied on all types of transactions – though it does tend to drive large financial deals into the informal economy.

CD: Has the tax's performance followed any clear patterns? Can the Macedonian "war tax" be compared to similar ones in other wartime economies?

SV: It reversed the budget position. Without it, the finances of Macedonia would have been unsustainable. It was based on an in-depth study of laws implemented in other countries, including Israel.

CD: The same report gives the details on Macedonia's payment plan. Who were the sponsors of this plan, and how was it engineered and agreed to?

SV: Like almost every other major economic reform in Macedonia until 1999, the reform in the payment system is the result of combined pressure by the EU, the IMF, and the World Bank. It was the subject of fierce opposition by entrenched interest groups whose venality overcame their alleged zeal for market reforms. The ZPP was a cash cow, milked by its employees, as well as by all previous administrations. Finally, after years of interminable feasibility studies and bloated committees, the reform was successfully implemented. But it took a lot of infighting. The banks themselves – the ostensible major beneficiaries of the reform – placed major obstacles on the way to the abolition of the payment functions of the antiquated and corrupt ZPP. They claimed repeatedly not to be ready, to lack infrastructure and expertise and so on.

CD: The payment plan is designed to "harmonize" the Macedonian economy with Europe's and to help attract foreign investors. In light of the experience with the Greeks that you analyzed, is more foreign investment necessarily a wise thing for Macedonia?

SV: FDI is always good. It is not only the capital; it is also the breath of fresh managerial air from the outside, and the infusion of marketing expertise. It is the contacts and market position provided by the investor. Try as I may, I cannot find a single bad thing to say about FDI. There are three caveats, though:

A level playing field. Too often, foreign investors collude with corrupt local politicians to rob the state of its assets, to thwart competition, to secure privileges, or to reverse economic reforms.

That the investor commits itself to the transfer of technology and knowledge to the host economy. Investment without education of domestic manpower – is colonialism and mercantilism.

Not everything should be up for grabs. Certain defense industries, some infrastructure, certain natural monopolies, a few infant industries in need of temporary (and very limited) protection – should be made unavailable to foreign capital.

CD: No Macedonian I spoke with uses banks. They cite low confidence in both the currency and in accountability of the banks. Does Macedonia have any safety structure, like America's FDIC?

SV: Yes, it does have deposit insurance proffered through a corporation owned by all the banks and backed by implicit and explicit state guarantees. But people trust the state even less than they do the banks, so there you are...

The solution is, of course, to allow competition into the sector (especially by foreign banks), to remove the inept Macedonian managements and replace them with outsiders, to strengthen the bank supervision and separate it from the National Bank of Macedonian (NBRM). Some steps have been taken in this direction lately, but not nearly enough.

CD: War in Macedonia was bad for most sectors of business. The increased lawlessness of some sections of the Kosovo-Macedonia border, however, seems to have enhanced conditions for criminal activity. The war was a boon for arms smuggling, what with soldiers to equip, and traffic in women, what with the arrival of large amounts of NATO and other international personnel. Is there any way of quantifying the effect of war on illegal business? And is it a loss for only Macedonia, or Europe in general?

SV: Macedonia is too negligible (economically) to have any kind of impact on Europe. It is lucky to have an informal ("black") economy. It is the only vibrant, viable, and job-creating sector in an otherwise moribund scene. In a way, Macedonia was "serendipitous" to have been involved in the Kosovo crisis of 1999. I think that the net effect on its economy was beneficial (in terms of NATO/UNMIK spending in the local economy, foreign aid, grants, foreign credits, the stabilisation and association agreement with the EU, and so on).

Not so this last conflict. It took place on its own territory. It obliged Macedonia to increase its spending on defense and internal security. It hindered its access to important local markets (e.g., Kosovo). It consumed very scarce resources, ruined its foreign trade, scared away investments in the pipeline. It cost Macedonia well in excess of $500 million (or c. 15% of its GDP). It has been devastating.

Moreover, this conflict will have a lasting adverse impact on ethnic relations, trust in democratic institutions and in the political class, and on future interaction with foreigners and the outside world. Macedonia has become an unpleasant place: radicalized, tense, xenophobic, violent, fractured. Social networks and social safety nets as well as social solidarity have crumbled. Economics is a branch of mass psychology. A traumatized and pathologized nation is unlikely to produce a healthy economy.

CD: So when we get down to it, is this conflict about economics or about politics?

SV: It's about money and influence and territory. At the risk of sounding narcissistic, allow me to quote myself, in my article "The Macedonian Lottery":

"Albanians and Macedonian crime gangs (in cahoots with kleptocratic and venal local politicians) regard Macedonia as a vital route for drugs, stolen cars, smuggled cigarettes and soft drinks, illegal immigrants, white slavery, and weapons dealing. These criminal activities far outweigh the GDP of all the adversary states combined. This conflict is about controlling territory and the economic benefits attendant to such control.

"Crime and war provide employment, status, regular income, perks, and livelihood to many denizens of Macedonia, Albania, and Bulgaria. They constitute an outlet for entrepreneurship, however perverted. Fighting for the cause and smuggling often means travel abroad (for instance, on fundraising missions), five-star accommodation, and a lavish lifestyle. It also translates into powers of patronage and excesses of self-enrichment.

"Moreover, in ossified, socially stratified, ethnically polarized, and economically impoverished societies, war and crime engender social mobility. The likes of Hashim Thaci and Ali Ahmeti often start as rebels and end as part of the cosseted establishment. Many a criminal dabble in politics and business.

"Hence the tenacity of both phenomena. Hence the bleak and pessimistic outlook for this region. The 'formal' economies simply cannot compete. Jobs are not created, the educated are often bitterly idle, salaries are minuscule if paid at all, the future is past. Crime and politics (one and the same in the Balkans) are alluring alternatives."

CD: One of the incentives for Macedonia to make peace with the NLA was to hold a donor conference. Yet this conference has been postponed at least four times. Can you explain why?

SV: The West has no choice but to reward Macedonia for its "flexibility," in a generous $200 million donor conference. It has been the explicit carrot at the end of the EU (and, to a lesser degree, USA) stick. It was postponed one time too many last month, but it will take place. It will be "successful." And it will prolong the Macedonian addiction to aid. Development aid and international credits have come to be regarded by Macedonians as tools of extortion and manipulation. To some extent, they are. What should have been a purely economic matter has been entangled with political and geopolitical agendas.

Whether Macedonia should or should not receive aid and loans should be determined solely by how far its structural and institutional reforms have progressed, how it preserves its macro-economic stability, how receptive it is to the private sector, how untainted is its privatization, and so on. Regrettably, Macedonia is a drug addict. Its drug is "aid," "credits," "donations," "charity." It is more adept at lobbying foreign politicians for handouts than at developing its economy. It has become an expert at self-pity and exaggerated grievances. It uses the enormous infusions of money it gets to line the pockets of its politicians or to to indulge in the consumption of imported goods made attractive by an unrealistic exchange rate. The West has created another dependency in the Balkans – the Third Protectorate after Kosovo and Bosnia.

CD: Finally, how would you characterize Macedonia's relations with international bodies that have economic influence, like the IMF, World Bank, and European Union?

SV: The EU has been undermining the IMF consistently – and so, to a lesser extent, has the World Bank. They dole out cash and credits to Macedonia, knowingly exacerbating its addiction and the insatiable venality of its politicians. This way, they "reward" Macedonia for painful political concessions and "motivate" its politicians to "cooperate." These funds, dispensed with after each phase in the implementation of the Framework Agreement, come with no strings attached, unsupervised, without proper governance clauses. It is intended to bribe – rather than to better. And it destroys everything the international financial community has achieved here in the last decade.