Dr Sam Vaknin

Macedonia was heavily damaged during Operation Allied Force, but one would do well to separate the irreversible damage from the reversible damage. The former has a corrosive, pernicious effect; the latter, though harmful and painful, can be remedied through added aid and investment and the adoption of the right frame of mind.

The trade sector in Macedonia suffered about 50 million US dollars in damages over the past three months. This loss can be attributed to the blocking of 18% of the trade turnover (with former Yugoslavia), 40% of which was net value added to the economy. Some of this trade can and will be revived.

Some companies - the larger and more resourceful ones - will survive. Many small and medium sized trading and manufacturing firms, on the other hand, are doomed. The latter is an irreversible type of damage and has no beneficial effects on the economy; it is the result of the UNnatural selection of war. Perhaps the introduction of microcredits and loans directed at small to medium enterprises could help revive this sector, but I doubt the entire loss could be undone.

50 million dollars were also added to the transport costs of Macedonian exporters who had to ship and truck their goods in roundabout ways throughout half Europe in order to circumvent the war zone. Over 10,000 truckloads were directly affected. More than 80% of Macedonian trade (to the EU, to the republics of the former Yugoslavia, to the Danube countries and to the Commonwealth of Independent States (CIS)) - an annual total of about three billion US dollars, of which 15% are transport costs - has been adversely hit. Overall, transportation costs have risen 30% on average during the three months of this war, and this predicament is not entirely behind Macedonia just yet, though the situation is slowly improving.

The textile industry, tourism, the electro and heavy machinery sector and chemical industries suffered a direct loss of 150 million US dollars. Some of that is irreversible - the tourism season is behind us, for instance. The hope is to resuscitate orders and thus the business cycle next year. It is a long shot, perhaps, but it a must if the economy as a whole is to survive.

The result of all the above was an increase in unemployment, both hidden and official. My estimate is that 50,000 people lost their jobs during the crisis. This cost the government more than a million US dollars in direct unemployment benefits. More importantly, this in itself cost the nation about 25 million US dollars in lost GDP (GDP per capita in Macedonia is 1900 US dollars annually). It is part of the 5% decrease in the GDP directly attributable to the war. While a cyclical reaction, due to the closure of firms, some unemployment will remain with Macedonia structurally.

The list of other damage is long. Macedonian infrastructure (such as roads, electrical grid, sewage system, water system, cellular and fixed telephony, etc.) endured a minimum of 25 million US dollars in damages. Roads do not take kindly to tanks, and airports do not react favourably to multiple landings of heavy cargo planes. Macedonia has expended more than 100 million US dollars as direct outlays on the 250,000 refugees (equal to about 12% of the population) who descended upon the country in a matter of days and remained there for three months. Macedonia's net foreign borrowing increased by about 190 million USD (the equivalent of 7% of GNP), and its debt-servicing bill has already increased by 4 million US dollars quarterly.

Unless donor conferences and foreign governments meet their pledges, Macedonia will be in dire straits indeed. Out of 60 million US dollars of recently pledged aid, Macedonia has hitherto received only half. Of the total pledges of aid, grants, credits and donations, it has received only 10%.

The government's cash inflow has collapsed both externally (unfulfilled pledges and the apparent intransigence of the IMF) and internally (lost tax and customs revenues amounting to about 25 million US dollars).

But some losses are more "catastrophic" than others. Who will help Macedonia change the mind of those investors who chose NOT to invest in Macedonia due to the war? Foreign Direct Investment decreased by 42 million US dollars this quarter from a miserable level of only 50 million US dollars last year. Will there ever be a reversal of the 14% devaluation of the Macedonian denar against the US dollar which increased Macedonia's foreign debt servicing bill (in denar terms) by 70 million US dollars? And the clear, though as yet unquantifiable, increase in inflation - how can one quantify the long term, all-pervasive and venomous effects of this disease?

Macedonia's credit rating which improved by an average of 50 points in the last three years(!) went all the way back to where it started.

The damage in added costs of foreign borrowings is incalculable.

Inflation and devaluation signify a DOMESTIC loss of trust in the economy. The decrease in credit rating indicates a FOREIGN loss of trust in it. This loss of trust both internally and externally is the most worrisome of all. It has to be fought tooth and nail so that it does not become well-rooted. Coupled with (hopefully a cyclical and reversible) increase in crime, politically motivated terrorism, social unrest (an increasing number of strikes) and a massive diversion of management resources on all levels - it could prove insurmountable if not determinedly targeted.

It is in such times that a nation is tested. It is in such times that the mettle of international solidarity is exposed. Macedonia must restore itself to its previous course of growth and stability. All of us - locals and foreigners - must take part in this effort and not only in Macedonia but in the whole region of the Balkans.

This region knew only occupation and abuse by the outside world. Its nations turned inwards and took weapons to one another because violence is what the world taught them. It is time for them to learn and be taught a different language - the language of growth, of investments, of the joy of entrepreneurship, of communications and of belonging to the family of nations rather than being excluded from it.

Dr Sam Vaknin, 20 July 1999

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.