Interview with Dr. Sam Vaknin
International Financial Consultant
 

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NM: Dr. Vaknin, you travel a lot and you are in constant touch with the international financial community. How has the TAT affair effected the image of Macedonia in the world?

SV: Much less than you imagine. TAT is regarded as a regrettable affair - but a local one. In the first days of panic, it is normal to overestimate the damage. Much of this exaggeration was politically motivated. I - and all my colleagues - believe that when the dust settles, the real damage - if any - will be found to be much more limited. It seems to me that the Stedilnica's assets should cover its liabilities.

NM: Still, what could be done to avoid such occurrences in the future?

SV: Unfortunately, a lot of international experience has been accumulated with this type of financial scandals. MMM in Russia, CARITAS in Bulgaria, Albania, the banking crisis in Israel in 1983 and - of course - the biggest crisis of savings and loans associations in history in the USA. A few universal remedies emerged from all these affairs:

First and foremost: public trust has to be restored immediately. The government has to be seen to be impartially and fearlessly investigating the matter. A long term arrangement with depositors has to be promised instantly and the Central Bank has to inject liquidity and free foreign exchange reserves as much as may be needed to quell the panic.

Admittedly, a fine balance has to be struck between inflationary concerns and public policy ones. But if I had to choose, I would momentarily put aside the battle against inflation in favour of maintaining a healthy social and economic fabric. Albania may be without inflation now - but it is also without a state, law and order. This kind of order of priorities is ridiculous, to use a mild term.

A second important element in any recovery program is to separate the supervision of financial institutions from the Central Bank. There is an inherent conflict of interests between certain of the functions of these venerable institutions (the Central Banks) and supervisory functions. On many occasions, the supervisors end up criticizing the Central Bank and its functioning. All the various agencies and authorities which deal with banking institutions should be kept separate from each other and totally independent: both budget-wise and politically. There should be a clear division of labour between these zealous guardians of the public good: one agency should deal with insuring the deposits, one should be in charge of supervising and of examining liquidity and one should review operations with an eye to unearthing illegal or dangerous practices. All these authorities should be equipped with unlimited powers. They should be allowed to close down a banking institution, depose of its management, take over its assets, in short: they should be permitted to do anything within their power to preserve decency and proper management.

NM: And all these steps will guarantee that there will be no more financial scandals?

SV: I can guarantee you that there will be additional financial scandals. This is human nature. There are ways around any regulation and techniques which can - and will - be used to mislead any supervisor. But at least the damages will be minimized.

Long term, I think that there is no reason to maintain two kinds of banking institutions. The Stedilnicas should be eliminated as they are being in Britain and in the USA. Only banks should exist as financial mediators. Stedilnicas could consolidate, increase their equity and get bank charters. That is a much healthier course than trying to keep the Stedilnicas alive while imposing somewhat bizarre constraints on their activities.

On the other hand, your central bank must ask for a more realistic amount of minimum equity necessary to have in order to open a bank. It is not reasonable to ask an investor to put 9 million DM to open a bank in a country with 2 million people and 3 billion GDP. Israel is 30 times larger (100 billion GDP) - and it demands less of anyone who wishes to open a bank there. A more realistic capital requirement of 4 to 5 million DM would encourage foreigners and locals to open banks here, increase the competition, enhance the geographic coverage and the distribution of branches, reduce financing costs and commissions to Western levels and through this reduce the ominous default rates and the currently insupportable lack of business ethics.

NM: Let us move to another subject. Why do foreign investors refrain from investing in Macedonia?

SV: I wouldn't say that. In general, I think that you should be very optimistic about the future of Macedonia. In a matter of a few years it can - if it so chooses - become the Switzerland of the Balkans. The international financial community thinks that you may well be the next Slovenia. This is why Macedonia is getting disproportionate amounts of foreign aid and foreign credits. Per capita, Macedonia is getting much more than Russia does, for instance.

Macedonian sovereign debts are trading almost at the same price as Slovenian sovereign debt. This means that the financial markets - which are analytical and have no sentiments for or against anyone - believe that Macedonia will pay its international obligations at least as well as Slovenia will. As opposed to commonly held beliefs, Macedonia is not indebted heavily to the West. It is a medium sized borrower and in a fairly reasonable international credit standing. The recent events in the Balkan only demonstrate its stability relative to its neighbours and its high value as a safe transit area.

I predict a flow of foreign investments in the forthcoming 12 months. This flow will increase and become a deluge in the next four or five years. Investments will flow to hi-tech sophisticated agriculture, information technologies, outsourcing of data processing functions by multinational firms. Capital will also be invested in textiles, the wood industry, food production and basic manufacturing (e.g. cars). But the latter are the industries of the past.

One by-product of all this will be the establishment of prosperous capital and money markets. The stock exchange will flourish and become a major profit centre. For instance.

For all this to happen, Macedonia has to contribute its part. It has to legislate to protect property rights and especially intellectual property rights. It has to modernize its law enforcement systems with emphasis on the courts. Courts have to act more resolutely and more speedily to enforce property rights. The reform commenced in adopting Western accounting standards has to continue vigorously. Full, accurate and timely information is a precondition to any foreign investment. The situation in Macedonia in this sense is abysmal: there is no disclosure whatsoever of the true state of businesses. Financial statements are tax driven, false and hide more than they tell.

There are other problems: lack of certain skills within the (overall educated) workforce, arbitrary and retroactive panic legislation, lack of physical infrastructure, high business costs and a dysfunctional banking system.

But those are problems common to economies in transition and, judging by my personal experience, they are fast improving. Unless Macedonia does a major mistake - it is destined to become a prosperous, entrepreneurial country.

NM: So, why do we, the Macedonians feel so differently? Why is the general mood depressed rather that elated?

SV: That may well be the biggest problem of Macedonia as a country and of Macedonians as a nation. Centuries of repression and lack of hope tended to have shaped your mood in the pessimistic mould. Ever since Macedonia was born, it faced great difficulties, both economic and political. It has endured a double siege and an erasure of 80% of its export markets. Those are traumatic events and you are in a post traumatic shock. It is natural - and it will pass. You are staging one of the most remarkable recoveries in recent history. True, it is fraught with the childhood disorders of capitalism. So what? You have a breathtaking country, strategically situated, blessed by nature, with great human resources, not overburdened financially, well behaving macroeconomically. Stop being so pessimistic. Whatever you say about yourselves and about your country is what the world will believe about you.

In 1993, when it was made completely legal and available to the public - 90,000 small businesses were registered by individuals in Macedonia. Most of them, are defunct by now, but this is hardly the important point. What is important is that this was an exciting demonstration of the entrepreneurial spirit of Macedonians. This holds a great promise for the future. With your back to the wall, you did not give up. You fight in the jungle of capitalism using market economy tools - and I do not have the slightest doubt that you will succeed.

NM: What do you think about the privatization process in Macedonia?

SV: I am afraid that this is one of the points that I have to sound a lot less optimistic.

As I had the chance to write in your newspaper, there is privatization - and there is privateering, or what is called in polite terms, transformation.

I have my clear and unequivocal views about this subject. It would be only fair to say that the body of evidence is not at all conclusive and that very little and short experience was accumulated both in the West and in the East. Many economic thinkers say that passing the ownership of firms to the hands of their managers and employees is socially more just than selling it to a few wealthy businessmen. This sounds true to me: privatization all over the world has degenerated into crony-capitalism. Only those with political clout won the fat parts and this is highly unfair. So, I vote against the Western privatization methods (Britain, Israel).

But I think that state enterprises belong to all the citizens of the country and not to select groups of people, no matter how closely they are related the privatized enterprises and/or to the political elites. So, I personally would vouch for something akin to a voucher system, where each and every member of the community has the option to share in the wealth of the country.

But, frankly, it is not only - or even primarily - a question of social justice. We have to think about the long term good of everyone involved in the privatization process. A factory which changes ownership and is transferred (at ridiculously low prices) to its workers - is not necessarily better off. The workers are not necessarily better off either (see the case of the Pelagonija construction group). The paramount idea behind privatization is that the newly privatized businesses should thus gain access to capital, ideas, technology and management to which they hitherto had no access. The same old hands cannot innovate, invigorate and vitalize. The same failure patterns will reappear and the factory and its new owners will be doomed from the very start.

Another thing that long years of experience have taught us is that it is unwise to mix ownership with management. All the groups involved with the company should participate in an intricate checks and balances dance. The owners should conflict with the management and supervise their operations and the management should take all the necessary steps to ensure the profitability and longevity of the business. When everything is mixed: owners are employees who are managers - conflicts of interests arise which irreparably damage the implementation of the right decision making processes and hinder the proper functioning of the firm. This is why I support noncash universal systems (which always lead to real privatization in the end) and not classic privatization or classic transformation.

NM: One final question: why are you here?

SV: That's an easy one. I am here because I believe in the future of this country. My business is to make businesses get the finances that they require from international financing sources. A lot of money is available to the Macedonian private sector from these sources - yet, Macedonian firms did not use almost any of it. By helping them get access to these funds - I, naturally, help myself.

But something emotional has happened to me here: Macedonia is so very much like Israel in its first few years (I am an Israeli and a Jew, so I am very good with money). I feel that helping Macedonia find itself and its role in this new, brave world - is like helping a young brother. Sometimes you are mad at him - but you always love him. I, therefore, am engaged in a series of voluntary activities of which I am very proud: writing, teaching and lecturing.



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