Weekly Briefing, Vol. 24, No. 2 (MK), December 2019
Macedonia’s Economy in 2019
Introduction
For the Republic of North Macedonia (hereinafter Macedonia), 2019 was another year of stable but mediocre economic performance. Overall, its GDP grew 2.8% on a year-to-year basis, which is a respectable growth rate compared to the European average, right about the same compared to the regional average (2.4%), and far below the necessary level for Macedonia to actually be able to catch up with the more developed parts of the continent (at least 5%). There have been some changes in the social policy, but no major structural changes in the economy or the country’s economic policy in 2019.
General Trajectory: Not Good, Not Terrible?
In 2019, Macedonia’s economy had yet another undistinguished year that will likely be easily forgotten. The GDP growth was below the desired range of 5-6% (and promised as an average growth rate for the period 2016-2020 by SDSM), and below the initial projections for 2020 of more than 3%. A major reason for the lower than expected growth level has been the continuously low rate of capital investments, and in particular the public under-investment in strategic projects. While initially the government originally planned to invest more than ~420 million EUR, in the course of the year the amended projection was that the government can only manage to invest ~370 million EUR; whereas they managed to invest only ~290 million EUR by the end of the year. There has been no coherent explanation for the reasons behind the inability or reluctance of the state to invest funds that have been already sourced for the purpose, which has accompanied the governance of SDSM and DUI since 2017. One assumption is that SDSM has spent considerable amount of time in sorting out the finances, reviewing previously made arrangements, reforming the taxation system, and trying to tame and reduce the level of the public debt – all while being focused primarily on redistributive policies – all of which has inhibited the drive for public investment. In other words, the administration was afraid to take risks, which runs counter to the core assumptions of how a state should work.
Nevertheless, despite acknowledging the issue of under-investment, the government officials – and in particular the former Vice Prime Minister in charge of economic affairs, Kocho Angjushev, have often repeated their assessment that even though lower than projected, Macedonia’s growth in recent years is healthier and more sustainable compared to the growth in the years under the rule of VMRO-DPMNE, thanks in particular to the new, more prudent and risk-averse approach to public investment. The major argument is that the government sees the growth as generated by the “real economy” and the production sector, and not artificially inflated by pouring money into “empty shell” construction projects (as they tend to describe the previous policies of VMRO-DPMNE). Former Prime Minister Zaev, however, has been more concerned about fixing the issue of under-investment and has kept on promising an increase in public investments in infrastructure and other sectors in the period to follow.
The government pursued some pro-active policies aimed at sustaining and improving the support for foreign direct investment (FDI), and attracting more investors in the country. However, despite these measures being undertaken – and FDIs being an intrinsic part of the rhetoric of the government – in 2019 Macedonia attracted significantly less investments than in 2018 (326 million EUR in 2019 compared to 624 million EUR in 2018). The government, while not having an ambitious industrial and technological policy, pursued some policies to boost domestic innovation. In this, it noted mixed success – while it bolstered the role of the national Fund for Innovation and Technological Development as an incubator of ideas, vehicle for creating new jobs, and stimulating growth and development – the Fund was also a subject to a number of scandals about potential conflicts of interests and corruption.
Political stability, a functional, agile bureaucracy and the rule of law are some of the cornerstones of a fertile business environment, which in 2019 were insufficient in the country, at least in the eyes of domestic and foreign businesses. The government has had a number of swerves with regards to a number of policies, especially with regards to revenue collection, which were also perceived as unfavorable by entrepreneurs. Increasingly, companies in the country have complained that there is a lack of trained, highly skilled labor, as Macedonian highly skilled workers kept on leaving the country – brain drain has intensified in 2019. Some of the key reasons behind the brain drain are non economic – i.e. many people leave the country because of overall lower life quality – but economic policy has also been a push factor for some categories of emigrants. Scores of medical professionals – ranging from nurses to doctors – have left the country because of the low salaries, leaving it with decimated medical workforce. Engineers and operators of machinery have also massively left the country in pursuit of more lucrative appointments abroad. The latest group of emigrants are professionals working in the information technology sector – including both workers and entrepreneurs, who in part have cited the new progressive taxation and the income tax as a push factor.
In 2019, the Macedonian government has been involved in regional economic integration efforts, which became known as Little Schengen – which aims to first and foremost reduce the barriers for the movement of people between Albania, Serbia and Macedonia, and potentially Montenegro and Bosnia and Herzegovina. With the prospective relaxation of the borders and migration regulation in the region, a common labor market may emerge, which could help tackle the numerous issues that have arisen with the continuous brain drain experienced by all countries in the region. These measures are also expected to facilitate the intra-regional and external trade, and facilitate the movement of goods from and to the countries involved. Yet, despite the measures to strengthen regional connectivity – and despite the delays in Macedonia’s EU accession – Macedonia’s economy remains closely intertwined with the one of the EU, and in particular with the German one. As a result of the integration of Macedonia in the German automotive industrial supply chain (as Macedonia hosts several car parts producers), Macedonia had a trade surplus in the relationship with Germany. In general, 2019 was better for export-oriented companies, as the domestic market and consumption seems to be inconsistent and too small.
Taxation, Redistribution and Criticisms
Some of the accomplishments in 2019, according to former Prime Minister Zaev, were the 300% increase in social aid, the provision of public pensions, the increase in support for children in socially endangered situations, the increase of salaries for the kinder garden employees (21% raise), social workers (21% raise), education workers (20.6% raise), medical workers (depending of degree of specialization, up to 40% raise), and the Army. The minimal wage has been increased to 14.500 MKD (about 240 EUR). This has been the latest in the series of increases of the minimal wage under the SDSM-led government. By introducing this measure, the government triggered an increase in the median wages as well. The government has also foreseen some form of subsidies for the private companies that would increase wages, a temporary measure that is set to last during the next three years. The unemployment rate has been reduced to 20.7% which is still high, but shows a downward trend. Some critics argued that these are unsustainable measures, and can backfire in the event of the first serious crisis down the road.
In 2019, the progressive taxation system took off. In order to warm up the population to the progressive taxation and to stimulate businesses to pay taxes, the government launched a program for returning 15% of VAT paid to the consumers. To facilitate this process, the government launched a mobile application that citizens use to scan special QR codes printed on receipts issued by businesses. The government has also introduced a lottery for citizens who scan their receipts. This has motivated citizens to be pro-active and demand receipts for all the transactions that they make. 2019 was also a year of open finances, as in an unprecedented move, the government has made available the complete public expenditures data. This move was aimed towards increasing the transparency and combating corruption.
VMRO-DPMNE has harshly criticized the government’s economic performance. They have often pointed out to three key aspects which they see as a failures: a) the GDP growth is lower than projected and far from the necessary level (and way below SDSM’s own promises); b) the public debt continues to increase, despite the pledges for a more prudent policy from SDSM (these claims are done despite the fact that VMRO-DPMNE, while in power, heavily borrowed money); c) all of the social welfare measures follow a particular political logic and serve the interest of SDSM and DUI to build up their clientelistic network (worth noting, VMRO-DPMNE itself championed such policies as well). Furthermore, VMRO-DPMNE voices have repeatedly argued that most of the successful stories – e.g. the rise in foreign investment or the rise in industrial production are consequences of the economic policies set in motion by the VMRO-DPMNE-led governments and that the SDSM-led government should get no credit for it.
VMRO-DPMNE’s criticisms may have been excessively partisan and contrarian. However, that former Prime Minister Zaev himself was also not satisfied with the implementation of economic policies in the country was seen in Fall 2019, when surprisingly, during a reshuffling of his cabinet members, he decided to let go of the former Minister of Finance, Prof. Dragan Tevdovski. Initially, Zaev wanted to take over the Ministry of Finance himself. His argument was that he has an ambitious economic agenda, and needs to be fully in charge in order to implement it. However, after his motion to take over the Ministry of Finance (and serve both as a Prime Minister and Minister of Finance) was deemed unconstitutional, Zaev withdrew the proposal and instead appointed Nina Angelovska, a young e-commerce entrepreneur to the position of a new Minister of Finance. The move raised a lot of eyebrows – while Tevdovski prioritized social welfare and higher taxes (especially for businesses), Angelovska is considered to have a salient pro-business, low taxes orientation. In fact, some of the landmark policies introduced by Tevdovski were the progressive taxation system; some of these newly introduced measures (e.g. with regards to the increase of the personal income tax for higher income categories) were “frozen” by Angelovska. At the end of the year, another shuffle in the government took place, as part of the pre-electoral change of government – Vice Prime Minister in charge of economic affairs Kocho Angjushev stepped down, and was replaced by Mila Carovska, former Minister of Labor and Social Policy. While Angjushev hailed from the business sector and was known as a pro-business advocate, Carovska was a pivotal figure in the advancement of redistributive policies. The older contradictions – between the more socially-oriented face of SDSM, and the pro-business one – have thus been a major driving force of Macedonia’s economic policy in 2019, and are likely to shape 2020 as well.