Thursday, August 31, 2006

A ROARING BALKAN TIGER

Macedonian government, under the leadership headed by youthful Nikola Gurevski, emphasized radical economic reform in its campaign. In fact, Macedonia is the very first country in Balkans to stress the gradual approach to economic reforms and step onto a different path of quick, flexible, rapid and radical structural reforming. Gurevski's plan is to let Macedonia to become "Estonia of Balkans" inspired by youthful and courageous reformers in Eastern Europe, namely Mart Laar and Ivan Miklos. The Macedonia government headed by Gurevski has promised to cut public expediture by 2% of the GDP by 2010. It has promised to cut the red-tape as well. The party plans to implement a flat personal tax rate of 10 percent by 2008 - a turnaround from the current progressive income tax rates of 15, 18 and 24 percent. The tax rate on corporate profits will be reduced from 15 percent to 10 percent and, following the example of Estonia, the tax on reinvested profits will be scrapped altogether:

"In the early 1990s the collapse of the Soviet Union and Yugoslavia meant uncertainty for both Estonia and Macedonia. Both were new and unknown countries on the periphery of Europe. Many Westerners confused the Baltics with the Balkans. Estonia had a sizeable Russian-speaking minority that made up 35 percent of the population. Macedonia had an Albanian minority which was 20 percent of population in 1990 and has now increased to 25 percent. The confusion was not simply due to sheer ignorance. There were as many experts predicting doom for Estonia as there were "sovietologists" failing to predict the collapse of the USSR in the 1980s. A possible ethnic conflict or even a war with Russia was seen as likely. Despite the disadvantaged starting position and ethnic mix, combined with post-socialist politicking, Estonia emerged as a phoenix.

The reasons for Estonia's success remained invisible to the casual observer for years. While Macedonia chose a gradual, stop-and-go economic reform path, Estonia chose a radical and rapid approach by relying on the invisible hand of the market instead of on government intervention. The rapid economic development of Estonia is not just economic achievement: having benefited the Russian-speaking population in Estonia - it has contributed to social peace, as well. Good economic circumstances are less likely to feed social unrest. Indeed, Estonia has not had any large-scale ethnic conflicts, even if relations between the various ethnic groups are far from perfect.


The fact that thinking along those lines has reached the Balkans is a major improvement. Economic reforms do not offer absolute guarantees against potential ethnic conflicts but they will certainly reduce the likelihood of such conflicts. If the new Macedonian leaders run out of ideas and options for the rebirth of the Macedonian economy, they need not look far for inspiration: According to Bangs,- the fountain of youth is located in Macedonia's capital, Skopje - a mere 23 kilometers away (http://www.tcsdaily.com/article.aspx?id=082406A - no subscription required). "

4 comments:

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jin said...

Hey, I wanted to say I disagree with the comparison of MAcedonia and Estonia and their potentials for growth, no matter what tax system they choose.

Estonia is located near the Baltic states and important city of Sankt Peterburg is also near. With its low taxation it benefited from flow of investitions. Later on it also benefited from the growth of Russian Federation.

Macedonia on the other side has only Greece to look for any meaningfull investition flow. It won't come from the north and it definitely won't come from the west neighbour. It cannot be a springpoard to anywhere important, while Estonia is very neatly positioned. Like Ireland, which can serve as a bridge between EU and US, Estonia can serve as a bridge between EU and Russia. Macedonia can do no such thing.

And there is still political instability.

I think Macedonia will not experience any exponential economic growth until the whole region starts developing faster.

Rocks said...

Yeah. Partially you're right. But economically, growth potentials depend on several factors. Economic Geography can contribute a great portion to the exposure of fresh-air free market thinking and growth potentials as well. Let me go through the most affluent factors. First Macedonia must complete its macroeconomic stabilization. Its primary target should be reducing public debt. According to World Bank, Macedonian inflation from 1995 to 2004 has been very low (0,46%) but it must keep an eye on it. Because inflation itself is a monetary phenomena. Macedonian leaders should not allow fiscal bubbles to occur and explode. Macroeconomically, this would result in (i) a larger public debt and in the increase of taxes and foreign debts, or (ii) in a rising inflation since government would have to print more money in order to finance its activities. Second if Macedonia wants to create stunningly impressive growth potentials it must abolish tariffs and import quotes. Free trade is one of the components of making a big room for economic improvement. Of course, the adoption of flat tax would be very admirable as well. Any further reduction in fiscal burden is great but at the same time public consumption must go down or at least not rise more than annual GDP would rise. Second, Macedonia must launch rapid privatization and finish it as quickly as possible. Indeed, privatization should be transparent and flexible as well. If Macedonia would like to overcome the crippling legacy of socialist mismanagement then it must cut its public administration and not let it growing. Third, Macedonia must increase capital flows and technological spillovers. It should enhance a liberal agenda for foreign investors and treat equally as it treats domestic ones. In fact, removing bureaucratic barriers is the most important pain to be cured. Free flow of capital payments must be made accessible and non-restrictive. Government should abolish controls on capital markets. One of the most unpleasent red tapes that occur in Macedonia is the regulatory frame of banking system. Even non-bank financial activities face burdensome restrictions. Banking market is still quite concentrated and should be allowed to become more competitive, flexible and entrepreneurially-supportive. Every successful entrepreneurship needs strong and innovative financial products from private and commercially competitive banks. In fact, enterprises should be radically restructured and exposed strongly to foreign competition without anykind of protections. In fact, the encouragement of entrepreneurship should be enhanced with the abolition of minimum wage. Economic freedom, not minimum-wage socialism is the key to long-term prosperity and wealth. Minimum wage mostly hurts those who are considered to receive it.
http://www.cato.org/pub_display.php?pub_id=6484

Perhaps the most thriving challenge of Macedonia road for progress is the fundamental reform of judiciary. Making judicial system highly independent and strongly protective to property rights is the key to an advanced enhencement of respective recognition of private property. The lack of the rule of law is the key impediment to economic development of Macedonia. Cutting regulation and organized crime is the impediment of the same kind as well. Of course every succseful economic tiger must be accompanied with flexible free market institutions and political stability as well. Not surprisingly, the economic freedom is the main enhencement of political freedom respectively.

When Macedonia will achieve the upper requirements it will easily foster its agenda and become the truest tiger of Balkan. What Macedonia should tell to EU is simply: "Don't give us aid but trade!"

Regards, Rocks

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