Policies for business in the Mediterranean Countries REPUBLIC OF MACEDONIA (FYRM) Simon Maurano

Transcription

1 Policies for business in the Mediterranean Countries REPUBLIC OF MACEDONIA (FYRM) Simon Maurano

2 C.A.I.MED. Centre for Administrative Innovation in the Euro-Mediterranean Region c/o Formez - Centro Formazione Studi Viale Campi Flegrei, Arco Felice (NA) Italy Tel Fax gpennella@formez.it nvolpe@formez.it The views expressed do not imply the expression of any opinion whatsoever on the part of the United Nations and of Italian Department for Public Administration, Formez and the Campania Ragion Administration

3 1. Macroeconomic context Since the beginning of 1994, the government has been implementing a bold program to restore macroeconomic stability and support a rapid transition towards a market economy, in spite of intermittent conflicts and disturbances that have had an adverse impact on the development of the institutions necessary to support the transition. The reform strategy has been designed around the discipline of a fixed exchange rate coupled with structural reforms to create market institutions, to consolidate private ownership, and reduce the cost of doing business. Financial support from the International Monetary Fund, the World Bank, the European Union, and other bilateral donors has been a key to the successful implementation of the program, 1 but the main social and economic problems of the Republic are not definitively solved. The goal of keeping inflation to a low level has been achieved: in spite of the fact that inflationary expectations still exist, it can be said that stable prices have largely contributed to the basic function of the free market mechanism successful allocation of productive resources. But economic theory (Philips curve) reminds us that in the short term, a trade off between low inflation and higher unemployment exists. For the period from 1995 and onward, it is possible to conclude that as a consequence of the adoption of deflationary policies (fiscal and monetary) there was a constant growth of unemployment in the country. 2 In the National Human Development Report of the 2001 the UNDP suggests a re-examination the priority of maintaining low inflation rather than low employment. The action of the government in favour of economic development faces many structural problems in the institutions: private initiative in Macedonia is hindered by many obstacles like the persistence of lengthy, muddled bureaucratic procedures, corruption, and the inefficiency of the judicial system. 3 Moreover, if on one hand the economic reform led the young republic toward a western economic system, (useful for obtaining the advantage of a free market and the European Union policy), on the other hand it produced some failures and loss of economic potential too: the economic system was not used 1 IMF, Former Yugoslav Republic of Macedonia, Enhanced Structural Adjustment Facility Medium-Term Economic and Financial Policy Framework Paper, UNDP, National Human Development Report 2001, Social exclusion and human insecurity in FYR Macedonia 3 Lovren Markic, Euro-Balkan Institute - Centre for Public Administration and Public Policy, 2003, National Case-Study: Public Administration in the Republic of Macedonia

4 to a market economy, so the economic measures generated an imbalance in the macroeconomic system. The high degree of liberalization of foreign trade, which was a condition for cooperation with the IMF, created more negative than positive effects: there were failures in the restructuring of its production base. This reflects the selected model of privatisation which resulted in a low assessed price for social capital (associated with enterprises) and ineffective state control of the process such that the enterprises were privatized mainly by the managers from the previous period, who otherwise were not characterized by high management capacities. 4 As a result of this, Macedonia had a dramatic fall of its overall production and GDP, amounting to 70% in 2001 in comparison to This had a significant impact on the decline of wages and it caused an increase in unemployment, pushing up the numbers of a relatively poor population whose opportunities for purchasing food, for good quality education, construction of infrastructure and protection of the environment were reduced. There were also public health consequences, with significant increases in disease. After the 2001 international and politic crisis, 2003 real GDP growth is estimated to have been around 3%, an improvement against 2001(-4,5%) and 2002 (+0,7%) but remains insufficient to reduce unemployment and substantially improve living standards. Industrial production increased by approximately 7% in the first three quarters of 2003, but the unemployment rate, according to the Labour Force Survey using ILO standards, increased to around 37% of the labour force, up from 32% in the previous year. This was due to higher participation rates in the labour force, the absence of new job creation and the dismissal of workers linked to the restructuring of large state owned enterprises. While the large size of the grey economy may influence the reliability of the employment statistics, it is undoubtedly a cause for concern that both the percentage and the absolute number of registered unemployed have grown in the first months of The government put considerable hope in a specific measure aimed at encouraging new assumptions by subsidizing payroll contributions (the so-called Branko s Law, adopted in April 2003). 5 Inflation continued to be low in 2003, with consumer prices increasing by 1.2% on average, well below the projected 3.0%. Monetary stability was maintained and the general government deficit was reduced by 4 percentage points compared to the previous year to a low 1.5% of GDP. 4 UNDP, National Human Development Report 2001, Social exclusion and human insecurity in FYR Macedonia 5 Commission Of The European Communities, Brussels 2004, Commission Staff Working Paper Former Yugoslav Republic Of Macedonia, Stabilisation and Association Report FYRM.

5 The agreement reached with the IMF in April 2003 on a new 14-month Standby Arrangement contributed to the maintenance of a stable macroeconomic and fiscal framework and allowed the release of substantial foreign financial assistance from donors. 2. Two different views of the economic reform Since the onset of the process of economic transition in Macedonia, two basic views have existed with regard to the time needed for this process. Those who advocated shock therapy or fast change, believed that the transition, in its initial phase, will cause increased unemployment and a reduction of the social and economic security of the citizens, but also believed that by strengthening the private sector, the unemployment will begin to drop while the social and economic security of the people will begin to grow. As a response to the expected social costs of higher unemployment, the creation of a minimal social fund was suggested. On the other hand, the followers of the gradual approach, or slower change, indicated that the shock therapy will cause mass long term unemployment with huge consequences for the standard of living of the citizens. In that context, they paid special attention to the possible pressure on the budget of the country with respect of social security requirements for the unemployed. 3. Economic reforms The Macedonian government took various measures to manage the economy and to benefit private initiative, not long after independence from the Republic of Yugoslavia, in spite of the difficult internal and external situation. One of the most important steps taken by the government towards a free market economy was the privatization of public firms, developed by the Privatization Agency of the Republic of Macedonia; this is the key institution responsible for the administration and the support of the privatization program. Its goal is to offer for sale the available public capital, in an open auction at the Macedonian Stock Exchange. By the end of 2002, 1688 public-capital companies had been privatised, inclusive the three main banks. At this time, the priority task of the Macedonian Privatization Agency was to accelerate the privatization process and conclude the privatization program by the end of the year.

6 The privatization process Privatized firms Source: Privatisation Agency of the Government of the Republic of Macedonia (2003) Sectors N of firms Employees Capital stocks (in ) Manufacturing Agriculture Construction Trade Transport and Traffic Finance and Services Craft Catering and Tourism Total The privatization process Public firms in progress Source: Privatisation Agency of the Government of the Republic of Macedonia (2003) Sectors N of firms Employees Capital stocks (in ) Manufacturing Agriculture Construction Trade Transport and Traffic Finance and Services Craft Catering and Tourism

7 % of privatized companies by size Large 16% Medium 19% Small 65% Source: Government of the Republic of Macedonia Privatisation Agency The privatisation scheme adopted by the Macedonian government calls for 30% of capital stock to be offered to employees in the form of equity shares or stock options; 15% of capital stock automatically flows into a State Pensions Fund, which can then autonomously decide whether to sell the stock; finally, 55% of capital stock is available to be placed on the market by national and foreign investors. Employees are offered a discount scheme. They have an initial discount of 30% plus 1% for each year of work in the enterprise. Employees can buy shares at a discount of up to an amount not higher than DM in five-year instalments without down payment and with a two-year grace period. 6 Macedonia has conducted a model of paid privatization, or case-by-case privatization. It was believed that fast (mass) privatization would be more acceptable and fairer with respect to the equality aspect in the distribution of the so called societal ownership and in that way it would minimize the exclusion of a large number of citizens from the privatization process. Nevertheless in reality, many citizens employed in the public sector (education, science, health etc.), have remained outside this process. 6 Government of the Republic of Macedonia Privatisation Agency

8 By selecting the model of rapid paid privatization, equality in the distribution of the socially owned assets was sacrificed for the future economic efficiency of the enterprises. This model caused several types of exclusion of ordinary citizens. First, foreign investors were favoured over domestic investors on account of the fact that there was insufficient domestic capital available for investment purposes. Second, after foreign investors did not show special interest (except for the natural monopolies), the privatization process had to be continued with our own resources through the reduction of the price of the capital and other benefits. In order to privatize a large number of enterprises, managerial buyouts were favoured, in which the management teams were given large concessions, thus placing them in a more advantageous position than the rest of the employees. Third, not infrequent was the case where the managerial teams applied various pressures on the employees so that these latter would give up their shares against their will. 7 Now that the privatization process is nearing completion, there are no easy options for stimulating investment. The Government Programme for Stimulating Investments in Macedonia is outlining the following reform priorities: - Creation of a detailed Action Plan to reduce barriers to investment; - Creation of the Foreign Investment Agency. The Foreign Investment Agency of Republic of Macedonia will focus on: - Image building and promotion of Macedonia as an attractive site for investment; - Investment generation; - Proposing measures for improvement of the investment policy and amendments to the respective legislative; - Servicing investors. - Intensification of the fight against corruption, bribery and favouritism; - Reform of the tax system and associated investment incentives. With the aim of enabling the environment for private sector and investments, the Ministry of Economy has already undertaken these measures, among others: - It implemented the strategy for the finalisation of the privatisation process (public auction) through the Macedonian Stock Exchange; - It improved transparency in the process of issuing licences for import and re-export through the introduction of the "first come, 7 UNDP, 2001, National Human Development Report 2001, Social exclusion and human insecurity in FYR Macedonia

9 first served" principle, an important development in the attempt to reduce corruption; - It initiated a programme for the development of small and mediumsized enterprises, including a new implementation agency, Agency on Entrepreneurship, designed to stimulate start-ups and early growth companies. Other measures undertaken by the Macedonian Government has the goal of modernizing the financial sector. Modernizations were introduced in the payment and bank system, but it is still quite weak. As a result, the financial system is still very small and its role as intermediator of financial flows limited. Nonetheless, the soundness of the banking system has been improving in recent years. A core group of banks with relatively prudent and sound practices is emerging. The entrance of foreign strategic investors, combined with enhancements in regulation and supervision, has fostered this process. However, the system remains vulnerable to weak governance in smaller banks and weaknesses in the banks balance sheets. Macroeconomic vulnerabilities could stem from the effect on banks of potential exchange rate instability, or a dramatic reversal in donor support. 8 The structural reform process regained momentum in the course of The Action Plan for the restructuring, liquidation or privatisation of 40 large lossmaking enterprises, which was launched in 2000, was finally completed. The authorities are now focusing on a new priority: private sector development. In September 2003, the Parliament approved a law setting up the Agency for Promotion of Entrepreneurship. However, the generally poor business environment and, in particular, the inability to effectively enforce contracts and creditors rights hampers the lending activity of the banks, in turn affecting investment and economic development. Banking supervision in the country is improving, while banks are expected to implement a new regulation on consolidated accounting and banking supervision. The difficulties of a few, mainly small, banks in 2003 did not affect the financial stability of the whole system. Competitiveness and efficiency of the banking sector must improve in 8 International Monetary Fund, November 2003, IMF Country Report No. 03/374Former Yugoslav Republic of Macedonia: Financial System Stability Assessment, including Reports on the Observance of Standards and Codes on the following topics: Banking Supervision, Payment Systems, Monetary and Financial Policy Transparency, and Anti-Money Laundering and Combating the Financing of Terrorism.

10 order to allow easier access to finance for SMEs. Finally, progress was made in the implementation of the pension reform program Legislation in favour of foreign investment Legislation on foreign investment is contained in many different laws, some of which have been recently adopted, others that arise out of Yugoslav legislation. The Constitution also enshrines several important principles on the matter. Neither the Macedonian Constitution (articles 31 and 59) nor the Law on Foreign Investment include any provisions to discriminate against foreigners, who can invest directly in any economic sector or industry, with the exception of the following sectors, for which they would require, by law, special government authorisation: production and commerce of weapons, commerce of narcotics, protection of the artistic and cultural heritage. Foreigners have the right to freely transfer invested capital and profits. Existing legislation encourages the participation of foreign capital in public firm privatisation processes on the condition that foreign participation favours export opportunities and the growth of the employment rate. Foreign investors can go so far as to become majority owners of public firms that are being privatised (Law for Transformation of Enterprises with Social Capital). Foreign capital participation is also encouraged in the banking and financial sector (Law on the Banking Sector G.U. N 63/00), since Macedonia feels that foreign participation could improve the performance and governance system of these sectors; and in the insurance sector, where the threshold for foreign ownership has been raised from 25% to 80% (Law on Insurance Official Gazette n 49/97). The June 2001 Law on Ownership Relations and the recently modified Law on Construction Land do not penalise foreigners. With respect to preceding laws on these issues, the new laws removed certain restrictions on the sale of land, mortgage, and leasing for foreign investors. There is no discrimination against foreigners in the field of expropriation (Law on Expropriation). Property cannot be expropriated even if it is owned by foreigners, except in cases detailed in the law: war, natural disasters, or conflict with public interests (building of roads, aqueducts, civil defence infrastructure, schools, hospitals, etc.). In these cases, the state must pay compensation. The only real limit has 9 Commission Of The European Communities, Brussels 2004, Commission Staff Working Paper Former Yugoslav Republic Of Macedonia, Stabilisation and Association Report FYRM.

11 to do with land ownership rights: foreigners have users rights but not ownership rights. Fiscal legislation is also very favourable to foreign capital, and includes a series of incentives to encourage such investment. Foreign investors do not pay customs taxes on the import of equipment and goods if the investment period exceeds five years and when the capital quota owned by the firm amounts to at least 20% of social capital. There are exemptions on the payment of taxes on profits generated in the first three years of activity on the condition that the capital quota invested in the firm is at least 20%; further exemptions can be granted on the condition that profits be re-invested in fixed activities or used for environmental protection. Taxes on profits can be eliminated completely if the investments take place in economically underdeveloped areas (mountain, rural, or border areas). Finally, for foreign firms, company taxation is reduced to 15%. There are no particular limits on the purchasing of raw materials: foreign investors can either buy them from local producers or import them from abroad. In this last case, the law calls for lighter fiscal burdens in the case that raw materials are imported from countries that have ratified the Free Trade Agreement with Macedonia. There are no limits on exports. Administrative reform is taking steps to favour the entry of foreign firms in Macedonia. One of the main obstacles to foreign investment has been the persistence of lengthy, muddled bureaucratic procedures. In order to overcome these obstacles, Macedonia launched two important administrative reform processes. The first regards the computerisation of the cadastral register, which allows for faster updating and transmission of information on real estate. This project is implemented by the Ministries of Justice and Agriculture along with the National Land Bureau. The second project is coordinated by the Ministry of Economics and involves the creation of a one-stop shop that would handle all the necessary bureaucratic obligations for foreign firms who want to establish themselves in Macedonia. Finally, the Employment Relations Law does not discriminate against foreigners working in Macedonia, who must nevertheless have a valid job permit. There are no limitations on the number of foreign workers who can be employed in a Macedonian firm, nor are there any limitations on the duration of the contracts.

12 3.2. Measures in favour of SMEs In recognition of the growing importance of SMEs to the national economy, the Macedonian authorities are increasingly supporting the SME sector. This political support is reflected in developments such as: - A new programme to stimulate domestic and foreign investment. - A new strategy to support entrepreneurship and competitiveness of SMEs. - A new Agency to support entrepreneurship and competitiveness. - A new co-ordinating Council for Entrepreneurship and Competitiveness, which includes participants from relevant ministries, private sector and other SME stakeholders. The main issues identified can be summarised as relating to the practicalities of: - Communicating and consulting effectively with SMEs spread throughout the country. - Co-ordinating the activities of the various bodies working to support SME development. - Reducing complexity and ensuring coherency and consistency in policy, laws, regulations, procedures and support programmes, particularly between fiscal and developmental policies. - Avoiding unnecessary changes in laws, regulations and programmes to facilitate planning of investments. OECD research in 2003 demonstrated the state of relations between public administrations and enterprises. The organisational responsibility of the various institutions for SME policy was not very clear to most of the SME managers and owners. There was general discontent among the SME focus group participants with regard to the overall treatment of the SME sector by the government. Entrepreneurs are particularly concerned with the lack of co-ordination between the public and the enterprise sector. The activity of the National Enterprise Promotion Agency (NEPA), now operating on an interim basis (the SME implementation agency) and its network of Regional Enterprise Support Centres (RESC), were assessed by the majority of entrepreneurs as inadequate and insufficiently transparent. In addition, the SME owners and managers held the opinion that NEPA acts as another bureaucratic institution, operating under the patronage of government and foreign donors.

13 The Government has stated its intention of replacing NEPA with the Agency to Support of Entrepreneurship (ASE). Despite the existence of a number of SME support programmes and facilities for private sector development promotion, the average entrepreneur typically had a very low level of knowledge and information on what is on offer to the SME sector. The regularity and quality of consultation between Government and the private sector on SME policy are given the lowest possible rating by entrepreneurs. Although there are signs of improvement, the regulatory environment in Macedonia is in urgent need of reform in line with international best practices in the spheres of enterprise registration and procedures for obtaining licenses, permits and approvals for operation. Corruption in the administration is an issue: SMEs pay 0.8% of total annual revenues in unofficial payments/gifts to public officials. Overall, the Macedonian tax system has witnesses a marked improvement in recent years. The tax reforms are producing less onerous and more transparent system. However, the discussions have indicated that the immediate consequences for the private sector, small business in particular, are not necessarily very beneficial. The SME owners and managers argue that double standards are applied by the tax administration (tax authorities, courts, etc.) in the sanctioning of large enterprises as compared to small ones. SMEs feel that they are immediately exposed to stringent mandatory measures for delays and failure to pay taxes due, whereas large companies are treated leniently. 4. International cooperation with the European Union The close relationship between the EU and the Republic has been made highly visible during the course of the last few years through the activities of the large EU presence in the country (Delegation of the European Commission, EU Special Representative, European Agency for Reconstruction). The European Agency for Reconstruction 2003 programme, worth 33 million, has focused further on economic and social development, through the implementation of local infrastructure projects, the design of vocational education & training (VET) programmes and the promotion of human resources in enterprises. In the area of justice & home affairs, the Agency's work focused on strengthening the customs administration and the control of

14 the green border, developing police training systems and the drafting of immigration & asylum strategies. 10 To encourage more liberalised trade and to help integrate Macedonia into the global economy, the EU is providing technical assistance to draft new commercial laws. Managed by the European Agency for Reconstruction, the project will assist in drafting primary and secondary legislation affecting domestic and foreign trade. European and American know-how has come together on a trade law reform project designed to establish a clearer set of rules and guidelines to enhance the business climate and improve investor confidence in FYR Macedonia. US specialists provided through USAID, and their EU counterparts provided through the European Agency for Reconstruction, have been busy adapting the best elements of their two legal traditions, to make Macedonian legislation compliant with World Trade Organization and EU Stabilization and Association Process requirements. The project includes training for officials in implementing and enforcing the proposed new legal framework which will be in accordance with the Stabilization and Association Agreement and World Trade Organization requirements. All work will be undertaken in close consultation with the country s Ministry of Economy and with those institutions responsible for managing other non-tariff barriers to trade. During the last few years, Macedonia has been progressively opening its market and has made progress in liberalising its economy. At the end of March, Macedonia became the 146th member of the World Trade Organization and must, as a result, continue to reform its national trade legislation to meet the WTO's standards. Some legal redrafting has already taken place to meet minimum WTO requirements, but the process is not yet complete. Macedonia businesses need to make EU contacts, and they can be helped to do this through specially-created institutions. In Skopje, an EC-funded Euro Info Correspondence Centre (EICC) has been set up to provide local small and medium-sized enterprises with information about EU markets, and to put them in touch with potential business partners abroad. The EICC in Macedonia is one of 320 such centres in 42 countries, including all the EU Member States. It can help the small business sector in Macedonia to grow, and that growth will be key to the country s future economic health and its ability to create jobs. Another EU-funded project, managed by the European Agency for Reconstruction, had the aim of drafting new Trade Laws. The project itself worked in drafting 13 trade laws, five of which (Law on Trade companies; Law on Trade; Law against prevention of competition; Law on consumer 10 The European Agency for Reconstruction in FYR Macedonia News bulletin, March 2004,

15 protection; and three by-laws for State Aid) have already been adopted by the Government, and are currently in parliamentary procedure. This project contributes towards growth in the competitiveness of Macedonian companies and their operations, and should also cut down on the grey economy and on corruption by measures that ensure the free movement of goods and services, as well as the protection of the rights of small shareholders.