Dr Sam Vaknin

If history is anything to go by, the Macedonian economy should have been scuppered long ago. After all, interwar Germany's economy collapsed following a reparations agreement which sapped less than 10% of its GDP. In the same period, America's economy collapsed, its unemployment soared, its stock exchange vanished and it entered a deflationary period which necessitated the most pervasive federal intervention in its history - primarily because of simple multilateral trade restrictions.

Today's Macedonia has endured trade embargoes, international isolation, wars, an influx of refugees - and still, it survives as an intact, functioning economy. There is no civil war, no hyperinflation and no famine. It even has a stable currency. This is nothing less than a miracle: no textbook economist could have predicted this outcome.

Still, Macedonia is trying to cope with its predicament in the wrong way.

It is trying to change other countries, trying to convince them to change their policies or to engage in "Voodoo Economics." An economy cannot be run on the basis of promises, contingencies, gifts, aid and a Lottaria na Makedonija approach. Economic policy must not be based on the usual but rather on the normal.

In politics, most magic is black, and mostly bad things tend to happen. Macedonia is situated in an accident-prone area. It cannot and need not pretend (as Slovenia and - less successfully - Croatia do) that it is part of Western Europe. This denial of the painful truth - that we are at the mercy of forces beyond our control in a region resembling a mental asylum - is at the root of our economic malaise. What if Montenegro erupts tomorrow?

Macedonia cannot change other countries, nor can it influence them to change their policies. It is too small and insignificant and it has no real policy options. Will it really deny NATO next time around if it does not receive its desired compensation from the Alliance? Will the nature of its relationship with the EU change if the EU does not honour its promises and obligations? Macedonia is constrained to a very limited set of diplomatic and economic choices.

Instead of changing others, we must change ourselves. We must force Macedonians to change and allow ourselves to be convinced of the need to change our policies. We must, in other words, introduce magic - the magic of trust. Trust in our banks will encourage domestic savings and domestic investments. It will draw out one to two billion dollars from under mattresses and into bank deposits. This amount is equal to five years of aid or FDI (foreign direct investment).

Trust in our courts will attract foreign investments. Trust in our government will end the current civil disobedience. Our citizens are rebellious. They don't pay their taxes, they do not collaborate with their own government. They don't trust it to do the good and the right thing.

Macedonia is not perceived to be European by the Europeans. It is, quite simply, too poor to become a member of the EU - public relations exercises (the Stability and Growth Pact) notwithstanding. It is too needy, and donor weariness is setting in. Money will be harder and harder to come by. And our products compete head on with European products protected and promoted by the strongest lobbies in Brussels.

We have to live with these facts. A sound, prosperous economy is the result of minute, mundane, routine and boring activities - not the result of rabbits pulled out of a hat. Even if the rabbits are European.

Dr Sam Vaknin, 11 July 1999

Address given to the Council of the VMRO-DPMNE, Macedonia's ruling party, chaired by Minister of Defense and Former Prime Minister of the Republic of Macedonia, Mr Nikola Kljusev on 16 July 1999.

Useful link: Cologne, 10 June 1999 Stability Pact for South Eastern Europe

The author is General Manager of Capital Markets Institute Ltd, a consultancy firm with operations in Macedonia and Russia. He has recently been appointed Economic Advisor to the Government of Macedonia.

Dr Vaknin's website is here.