TCS Daily

Balkan Tiger

By Meelis Kitsing - August 24, 2006 12:00 AM

The fountain of youth found in Macedonia? So claims travel writer Richard Bangs. If true, it is surprising that rejuvenation of the Macedonian economy has been so elusive for so long. In fact, the arrival of Macedonian independence in the 1990s came with high levels of unemployment inherited from the structural weaknesses of the Yugoslav economy and international isolation fed by intransigent Greek foreign policy wonks.

The late 1990s saw some economic reforms under the center-right government, but the onslaught of violence between ethnic Albanians and Macedonians forced any type of economic reforms to the backseat, where they remained until just last month. The outcome of elections held on July 5 gives reason to believe in the rebirth. The Western media have emphasized the peaceful nature of these elections in comparison with the violence that accompanied the last elections, in 2002. Yet this primary emphasis understates the implications and significance of the elections results. Some leading papers have even predicted the potential rise of violence stemming from the victory of the center-right and supposedly nationalist Macedonian Internal Revolutionary Organization (VMRO- DPMNE).

The VMRO-DPMNE has learned the right lessons. The party, headed by the youthful Nikola Gruevski, a former trade minister and finance minister in the government headed by the VMRO-DPMNE in 1998-2002, emphasized economic reform in its campaign, not Macedonian nationalism. "We believe that Macedonians want to do more than just survive -- they want to succeed. And to succeed we need a stronger, healthier economy -- one that delivers jobs and growth, that frees individuals to pursue their God-given potential with a minimum of government interference and that opens up the creative spirit in people," wrote Gruevski in the Washington Times on July 4. VMRO-DPMNE's election platform was based on a comprehensive and detailed study of reforms by other countries in the Central and Eastern Europe. Radical reformers of Central and Eastern Europe are seen as examples to be followed.

The VMRO-DPMNE promises to cut public expenditure by 2 percent of the GDP by 2010. It plans to cut red-tape by 2007, thereby enabling registration of new companies to be completed within three days. The party plans to implement a flat personal tax rate of 10 percent by 2008 - a turnaround from the current progressive income tax rates of 15, 18 and 24 percent. The tax rate on corporate profits will be reduced from 15 percent to 10 percent and, following the example of Estonia, the tax on reinvested profits will be scrapped altogether.

Certainly, the implementation of these ideas does not depend on VMRO-DPMNE alone. Having received 34 percent of the vote, implementation of the party's plans depends on the compromises reached with its coalition partners. The negotiations concerning new coalition formation with three smaller parties and one independent candidate ended in principle agreement, giving the VMRO-DPMNE-led coalition 65 seats out of 120 in the Macedonian parliament. The new coalition includes an ethnic Albanian party, DPA, while keeping out of the cabinet another Albanian party, DUI. The DUI was formed on the basis of former Albanian guerillas from the National Liberation Army and was in a previous coalition with social democrats. Inclusion of one Albanian party in the new government coalition indicates that focusing on economic issues has allowed VMRO-DPMNE (which used to be seen as Macedonian nationalist) to make compromises with its former rivals. Being a senior coalition partner in the government and having a strong mandate from the electorate certainly increases the odds of pushing through many of the radical reforms proposed in its election program.

Nevertheless, skeptics may argue that the nature of the new Macedonian government and its ideas may not be sufficient for achieving economic success. The notion that Macedonia could learn from success stories in Central and Eastern Europe rests on assumptions that we can change factors beyond our control - like the weather. Macedonia is located in the Balkans, i.e. its geopolitical situation is different and imposes tough constraints that no government can change.

Certainly some conditions are beyond our control, but there are so many ways we can deal with them. The way we prepare for unpredictable weather carries some lessons for the post-socialist politics of countries such as Macedonia. If we live in a cold climate, we can build houses that are warm for the winter. If we live in a warmer climate, we can build houses with air conditioning. We would make these modifications even if some winters may be unbearably freezing and others milder, a more bearable cold. Some summers can be enjoyably warm and others unbearably hot. We prepare for the worst because we know that the weather is unpredictable.

Judging from the recent history of reform in former socialist countries as well as conventional expectations, nobody would have suspected Estonia to become a wunderkind of economic reform. Comparing Estonia (a country constantly given as an example in VMRO-DPMNE's election program) with Macedonia, it becomes obvious that 20 years ago one would have expected Macedonia to do better than Estonia. The quality of life was better in socialist Macedonia than in socialist Estonia. Yugoslavia offered more economic freedom than the Soviet Union, to which Estonia had been incorporated. Macedonians were able to travel and work abroad - even the thought alone was out of the question in socialist Estonia.

In the early 1990s the collapse of the Soviet Union and Yugoslavia meant uncertainty for both Estonia and Macedonia. Both were new and unknown countries on the periphery of Europe. Many Westerners confused the Baltics with the Balkans. Estonia had a sizeable Russian-speaking minority that made up 35 percent of the population. Macedonia had an Albanian minority which was 20 percent of population in 1990 and has now increased to 25 percent. The confusion was not simply due to sheer ignorance. There were as many experts predicting doom for Estonia as there were "sovietologists" failing to predict the collapse of the USSR in the 1980s. A possible ethnic conflict or even a war with Russia was seen as likely. Despite the disadvantaged starting position and ethnic mix, combined with post-socialist politicking, Estonia emerged as a phoenix.

The reasons for Estonia's success remained invisible to the casual observer for years. While Macedonia chose a gradual, stop-and-go economic reform path, Estonia chose a radical and rapid approach by relying on the invisible hand of the market instead of on government intervention. The rapid economic development of Estonia is not just economic achievement: having benefited the Russian-speaking population in Estonia - it has contributed to social peace, as well. Good economic circumstances are less likely to feed social unrest. Indeed, Estonia has not had any large-scale ethnic conflicts, even if relations between the various ethnic groups are far from perfect.

The fact that thinking along those lines has reached the Balkans is a major improvement. Economic reforms do not offer absolute guarantees against potential ethnic conflicts but they will certainly reduce the likelihood of such conflicts. If the new Macedonian leaders run out of ideas and options for the rebirth of the Macedonian economy, they need not look far for inspiration: According to Bangs,- the fountain of youth is located in Macedonia's capital, Skopje - a mere 23 kilometers away.

1 Comment

Balkan Tiger
23 km from where?

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