Surviving the Uprising
By: Dr. Sam Vaknin)

Also published by United Press International (UPI)

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Macedonia is a small (25,000 sq. km.) landlocked country in the Balkan. It serves as a natural bridge between Serbia, Bulgaria, Greece and Albania. As an inevitable result, its economy consists mainly of trading, services, low-tech, low value added industries, such as textile and plastics, and agriculture. Countries such as Slovenia and Germany import wine from Macedonia, bottle it, label it and re-sell it at a much higher price. This pattern is repeated with tobacco and a host of other agricultural produce. Italian designers contract with family textile firms to seasonally manufacture for them. The banking sector is basic, though privately owned.

In recent years and especially following the Kosovo crisis, the country benefited from increasing foreign direct investment, unilateral transfers of multilateral aid and credits and local spending by the likes of NATO and KFOR. Its biggest bank - Stopanska Banka - was sold to a Greek bank (National Bank). Many of the loss makers (communist era industrial dinosaurs) were either shut down or sold to foreigners. The Macedonian Telecom firm was sold to a consortium led by MATAV. A host of critical economic laws passed parliament and long postponed structural reforms were implemented. Value Added Tax was introduced, The re-payment of Macedonia's internal debt has accelerated and bank lending as well as money supply aggregates increased dramatically. With GDP growth in excess of 5% (2000), Macedonia was poised for an economic take-off.

The current Albanian uprising (there has been a minor precedent in 1997 in Tetovo) is low intensity warfare. It is unlikely to adversely affect the main monetary parameters (stability of the Macedonian denar, low to medium inflation rate, declining interest rates). With its budget in a surplus of close to 4% of GDP, the government is in no need to raise taxes. Tax receipts from the western part of Macedonia - now virtually non-existent - were never sizable. Capital flight is bound to increase but this is predicted to be more than fully offset by increased transfers of Macedonian and Albanian expatriates. Foreign exchange reserves are sound and cover c. 4 months of imports. Moreover, past experience - of which, unfortunately Macedonia has plenty - shows that both a possible (though improbable) devaluation of the currency and capital flight are reversed once the crisis is over (or becomes a way of life). Following an initial panic during Operation Allied Force in Kosovo (1999), the Central Bank actually had to absorb excess foreign exchange in the markets as people sought to purchase denars. The same happened after the imposition of the Greek embargo and the sanctions on Yugoslavia (which used to be Macedonia's main trading partner).

The danger lies in the fickleness of international investors. Cancellations of commitments to invest in the local economy have started. If FDI dries up, Macedonia will be hard pressed to cope with its current account deficit (c. 6.5% of GDP). This can be exacerbated if the international banking system were to wean Macedonian firms off trading and documentary credits. Foreign firms - especially American ones - tend in these circumstances to cancel orders for textile and light industrial products. Macedonia has diversified its trade considerably and now does most of its business with the European Union but its products - steel, textile, wine, tobacco, grain, lamb meat - are still subject to European protectionist measures. These were not relaxed even during the more parlous war in Kosovo. No special
concessions are likely to be offered now.

One cannot expect international donors to cover the difference. Patience with the region and its endless squabbles has worn thin and a potentially isolationist USA administration is not likely to provide the leadership needed to revive it. Macedonia can be left high on insurgency and dry on cash. But this is not a necessary scenario. It can be averted with goodwill and good planning. Foresight has often eluded the West's involvement in the Balkan. Here is an opportunity to make amends.