Macedonia: trying hard – can it do it?

A third of the population is below the poverty line and unemployment is running at more than 30 per cent. Macedonia is one of the poorest countries in Europe. That hasn’t stopped the government running a concerted and doubtless expensive campaign to promote the country as an investment destination – and as a regional poster boy for economic reform.

The tiny country of just over 2m people is indeed outperforming some of its neighbours. But translating this into job creation has proved difficult.

As the International Monetary Fund’s Article IV consultation with Macedonia noted last week, the government and its predecessors have done a remarkable job of locking in macroeconomic stability, in a region where not a few countries are nearing basket-case status. Macedonia has done reasonably well in attracting foreign direct investment during some tough years for the global economy.

But growth remains well below levels needed to catch up even with the more successful former Yugoslav countries, let alone the norms for central and eastern European members of the EU, which Macedonia seeks to join.

The IMF forecasts 2 per cent growth for this year, down from 3 per cent in 2011. But it says that, despite the slowdown, the “medium-term outlook remains generally favourable”. Hardly a thumping endorsement, admittedly, but more upbeat than the outlook for the likes of Serbia, Croatia and Bulgaria – and, of course, Greece.

The eurozone crisis has been a drag on exports and investment. But Macedonia’s well-provisioned and well-capitalised financial sector, much reformed since a pyramid savings collapse in 1997, has weathered the storm well. The government has also steered a fairly careful fiscal course, broadly meeting deficit targets, to the IMF’s approval.

As the Fund noted, Macedonia has been successful in attracting FDI in recent years, due to the advantages that the country’s investment agency has trumpeted in glossy advertisements across the international business press: advantageous geographical location, low labour costs and taxes, and the offer of industrial zones with investment incentives.

FDI was worth 4.1 per cent of GDP in 2011. While this is below the pre-crisis level of 6.1 per cent achieved 2008, and even though the IMF forecasts a drop back to 2.6 per cent this year, the medium-term trend is expected to be 4.5 to 5 per cent. The greenfield FDI pipeline between 2012 and 2015 totals €518m. Of this, €204m will go to the automotive component sector, perhaps the country’s foremost economic success story.

Most recently, the country has been encouraging Chinese investors to consider Macedonia as a base for exporting to the rest of Europe.

The question, however, is whether decent economic performance will gather momentum to become the strong growth that Macedonia seeks – and how it can deliver desperately needed jobs.

“We should give all credit to the fact that Macedonia has achieved a high level of macroeconomic stability,” Aleksandar Dimishkovski, a Skopje-based business consultant, told beyondbrics. “And Macedonia has certainly been put on the map by the government. But the results have yet to materialise in the real economy, and very few new job opportunities have been created.”

Dimishkovski suggests that Macedonia needs growth to average 6 per cent a year over the medium term to catch up with the likes of Bulgaria, already an EU member, and Croatia, which will join next year.

The IMF has called for labour market reforms as well as “well-designed” infrastructure investments that would better enable the country to capitalise on its geographical position and export potential; funding from the EBRD and EU should help with the latter.

Dimishkovski adds that the administrative burden on businesses can still be oppressive, and frustrates many investors, but is optimistic that cutting back on red tape would have “a dramatic effect on growth”.

Macedonia’s success is somewhat relative and comes from a low base. But at least it is going somewhere – and it has the opportunity to punch above its weight.