Interview realised by Carole Grimaud Potter and Valérie Geneux
Irena Kikerkova
Irena Kikerkova, Ph.D., is a full-time professor at the oldest and biggest university in the Republic of Macedonia – the Ss. Cyril and Methodius University in Skopje – of which the Faculty of Economics in Skopje is an integral unit. She is engaged at the first cycle of studies on subjects on international economics and international trade. At present she is the Head of the Department of International Trade at the Faculty of Economics – Skopje and the member of the Faculty Board. Her research preoccupation is focused on international economics, regional integration, international trade, WTO –trading system and foreign direct investment issues.
In 2009 she helped the establishment of the Regional Training Center – World Customs Organization (RTC-WCO) as a unit of the Organizational Chart of the Faculty of Economics – Skopje, on an initiative and in cooperation with the Customs Administration of the Republic of Macedonia and the World Customs Organization from Brussels, Belgium. Since, she has been appointed Director of the RTC –WCO and coordinated a serial of regional trainings on different customs issues, as well as international conferences and other international events.
Prof. Kikerkova published over 70 articles and three text-books as author, three text-books as co-author, three research monographs as co-author and edited two international research monographs, all of them focused on topics of international trade, international economics, regional integration and foreign direct investment.
What are the most attractive economic sectors for FDI, specifically from the Western countries, Russia, China and Turkey? Switzerland is an important investor and partner in the Balkans, what are the main assets for the partners?
Since the beginning of the transition towards full market economy (at the beginning of the 90’s) foreign investors emphasized many times that each individual economy within the Western Balkans has a very limited potential to attract the interest on investing significant amounts of capital in the form of FDI. This was due to the very backward economic structure of the countries in the region, low level of productivity, outdated technology, obsolete transport infrastructure, as well as a very fragmented market structure and low purchasing power. The macroeconomic instability, the lack of full implementation of the rule of law, as well as political turmoil additionally diverted the interest of potential foreign investors. However, all of the potential foreign investors agreed that the region might attract significant amounts of FDI if it eliminates artificial barriers that infringe free movement of goods and services. Hence, FDI that could be invested in projects that would have a regional perspective and would cover a market of about 22 million of population would increase the attractiveness of the region as a whole.
The recovery of the economies within the Western Balkans was very slow and very much unlike the one of Central and Eastern European economies. Each of the countries within the region started to create its own national strategy on FDI and they all started to compete among themselves in order to attract as much as possible foreign investors within their economies. These strategies performed poorly and did not provide any significant positive impact upon the economic growth of each of the national economies.
The Amended Agreement on CEFTA-2006 provided that except of free movement of goods and services, member-states would also provide free movement of investment within the free trade area. This seemed to be a positive step towards creating preconditions for the increment of foreign investment with regional orientation. However, the financial crises form 2008 badly affected this process. The recovery of the region took additional four years, and the situation started to improve since 2012 until nowadays, but with a very slow pace.
According to data presented in the UNCTAD World Investment Report, in 2016 annual FDI inflow within CEFTA-2006 reached about 4 billion Euros, while FDI stocks reached 54 billion Euros. These figures, according to the report, were similar to those of medium size EU member-states in the same period. However, the region attracted only 0.3% of the global annual FDI inflow in recent years and accumulated 0.2% of the global inward stocks in 2016. Changing the perspective of observation, though, points out that CEFTA countries received more FDI than expected, as FDI stocks created about 60% of the regional GDP, so they were higher from both the global and the EU average (35% and 47% respectively).
The attractiveness of different CEFTA member-states differs significantly. According to data provided by the CEFTA Secretariat, at present the most attractive economy within the region is Serbia with about half of all regional inflows. Serbia is also the economy with highest production, as well as biggest market potential within the FTA and this is one of the reasons it attracts major projects in comparison with the rest of the member-states that manage to attract only small and medium-size investment. The second reason for the increased attractiveness of the Serbian economy is the fact that it is at the beginning of the privatization process, which was accomplished more than a decade ago in most of the countries in the region.
The second most attractive economy by inflow of FDI within CEFTA is Albania with 0.8-1.0 million Euros in the last few years, while Montenegro is ranked on the third place since 2005 (CEFTA Secretariat, 2017).
However, Montenegro is far ahead in comparison with the rest of the member-states if FDI inflow is measured as a percentage of the Gross Fixed Capital Formation. Moldova, Bosnia and Herzegovina and Macedonia recorded the worst results in regard of this measurement (CEFTA Secretariat, 2017).
The same source also provides data that confirm that the FDI stocks as a percentage of GDP in CEFTA economies resembles very much or is even higher than in the EU and CEE economies. Nevertheless, FDI per capita are still rather low throughout the whole region.
Looking at the FDI economic structure within CEFTA member-states it is evident that at the beginning of the transition it was dominated by services, mostly trade, telecommunications and lately, finances. It is important to point out that trade attracted about 10% of total FDI stocks within the region, which is less compared to the EU average. The financial sector attracted almost an even share in each of the economies. Later the economic structure shifted towards the manufacturing industries and FDI turned out to be efficiency seeking or export oriented. However, FDI in the manufacturing sector are very unevenly distributed within the region and the FDI stocks in this area vary between 7% in Kosovo and 35% in Macedonia. The vast portion of FDI in Albania went into the services (info-communication), and 12% of the invested FDI went into the mining industries which is the highest percentage of invested FDI in the extraction industry within CEFTA. In Moldova FDI in electricity happen to be dominant, while in Kosovo the most attractive sectors are real estate development and non-classified activities (CEFTA Secretariat, 2017).
All member-states prefer green-field investment and grant numerous incentives provided through their national strategies and governments to foreign investors to support their decisions to invest their capital in new plants that would be export-oriented or efficiency seeking. Despite of all the effort to attract and keep the interest of foreign investors, all nationally adopted strategies happen to compete with each other and do not provide the expected results in terms of increasing the attractiveness of the economies. Some of those strategies happen to be a source of open discrimination in favor of foreign investors, thus creating un-loyal competition between foreign and domestic investors and harming domestic investors seriously. This was especially true in the Macedonian case, where by providing abundant incentives and subsidies for foreign investors in the so-called Technological Development Industrial Zones as an exemption from the customs and the fiscal territory of the economy, the well trained and highly skilled professional working force was overtaken from already established and performing domestic companies within the regular customs and fiscal area. Thus, the government subsidized overtaking of the already employed working force and missed the realization of the most important goal of its national development strategy – the creation of new working posts and decrement of the extremely high rate of domestic unemployment.
The most important foreign investors within the region are the Netherlands and Austria. The Netherlands dominates transport infrastructure and partly manufacturing, while Austria dominates the financial and electricity producing sector within the region. To a certain extent German and Italian foreign investors are also present in the manufacturing sector. Cyprus, Russia, Greece and Turkey are present as foreign investors within CEFTA, as well. Russia and Turkey are present in particular economies due to their cultural or political linkages. Russia is basically oriented towards investment in the oil and gas industry, as well as in the establishment of oil and gas pipe infrastructure within the region. Turkey is present in the civil construction industry, textiles and to some extent finances. Lately, Chine also expressed its interest for the region, predominantly investing in transportation infrastructure. Regarding FDI with Swiss and Cyprus origin, in most of the cases it seems that the region attracts the interest of its own Diaspora, or once extracted capital from the region because of various reasons, later comes back in the form of FDI. In most of the cases it is invested in the mining industry or in the metal-processing industry. Its output is with a very low level of finalization and a low level of value added; these industries suffer from inadequate technology and low productivity, they are source of high environmental pollution and happen to belong to the so-called sensitive industries (such as production of steel and products thereof) which are extremely vulnerable to the fluctuation of prices at the commodity exchange world markets.
Under the Berlin Process, at the summit in Trieste in the summer of 2017, CEFTA member-states decided to transform the established free trade area into a regional economic area where special emphasize was put on full trade liberalization of movement of goods, services, investment and labor force. The regional economic area should be fully operational by 2023. Two new Protocols to the Amended CEFTA Agreement were passed (Protocol 5 on trade in goods and Protocol 6 on trade in services). Creating new legal basis which provides a time framework for all of the member-states could be a very efficient tool to provide full elimination of non-tariff, as well as administrative barriers to trade. If this is going to be implemented as planned, it could be a significant reinforcement of the attractiveness of the whole region for FDI.
Are the relatively low birth rate coupled with the departure of the young population and the brain drain we notice today, worrisome for the region and the impact it may already have on the economy? If so, what are the measures taken by the government?
This is a very serious problem that overcomes the regional aspect and affects almost the whole European continent.
The justification for the low birth rate and outflow of the young population from all the former Yugoslav states, as well as from the rest of the CEFTA member-states, can be partly justified with the unusually difficult transition period accompanied with high political instability and many war conflicts, some of them rather severe. Especially high pressure upon the region was caused by the Kosovo crises and NATO bombing of Serbia. Looking in demographic charts not only in these two countries, but also in their neighbors and throughout the region, a severe demographic gap appeared in the years from 1999-2002 caused by massive outflow of population from the region (mostly permanent) and extremely low level of birth rate. In Macedonia because of these unfortunate events, as well as the war conflict in 2001, the young population that is expected to reach maturity in the following two years is cut to half from what it was previously, regardless of its ethnic origin (www.statistics.gov.mk).
Statistical data from countries from the region that have already become members of the EU however, are also not much different. For example, statistical data for Bulgaria confirm that by 2010 about 45% of the female population in the fertile period permanently left the country, which would have immense negative impact upon the future population growth of the country. Outflows of young population are not unknown even in Slovenia which is one of the most developed countries in the region, and these trends seem to became more intense in Croatia after it became a member of the EU.
The governments in the region seem to had not sufficient capacity to fight simultaneously macroeconomic stabilization and transition reforms, on the one hand, and political turmoil, on the other. They were also incapable to deal with extremely high levels of unemployment and increasing poverty, and they seem to have closed their eyes and did not want to face the serious emigration problem.
In the last decade some of the governments tried to emphasize the importance of the increment of the birth rate by increased propaganda on anti-birth control throughout the media and by some modest social packages in financial support for families that would have more than three children. This went even further, and in the case of Macedonia a very unpopular change of the legislation on abortion was passed by the Parliament several years ago, which was considered to be a violation of women right that was already provided in the legal system 60 years ago. However, with a very low chance for getting permanently employed, an average wage of only 250 Euros, rising costs of leaving, restrictive monetary policy and expensive bank loans for purchases of real estate, overpriced apartments and houses especially in the capital city, and jeopardizing of rights and employment posts of pregnant women, this propaganda did not bring any positive results. Similar propaganda has been recently launched in Serbia. Serbian experts have many doubts on the positive results it could provide, as well.
At present the Macedonian government tries to change its policies. It promotes a new strategy to support firms that would prove that they had an increment of income and growth, as well as increment of opened new working posts in the previous calendar year taken as a basis for comparison. If such is the case, the firm would be subsidized with 30% of the wages of the newly employed by the state budget. The government also promoted a strategy to help the establishment and development of small and medium size enterprises in order to keep existing working posts and to create new ones. It also plans to change the flat tax rate that was the fundament of the fiscal policy in the last 15 years into a progressive tax rate that would protect categories of population with low income. Also, the lowest wage that could be paid by employers was raised from 120 Euros to about 200 Euros. At the same time an increment of the amount of social aid to the unemployed was announced to reach about 150 Euros a month in a year time. It was also announced that the unpopular law on abortion is going to be abolished. However, there is no clear strategy how to keep the well educated, brilliant young people in the country. On the contrary, nobody seems to pay attention to their employment, despite several governmental programs on tuitions for their education abroad.
This is only a small part of the problems that people in Western Balkans face. Neglect of rural areas, lack of schools and inadequate health care in the small towns, bad infrastructure that connects rural areas and small towns with bigger city centers, and since recently, lack of medical staff and doctors – specialist, jeopardize not only life in the neglected areas, but also the life of the population in bigger city centers, as well as in capital cities throughout the region. If young people are not able to leave the country, they want to leave in capitals or in bigger cities. Their infrastructure, however, as well as their working force absorption capacity is near the brink.
It would be very interesting to find the experience of the developed Western European economies to those of the Western Balkans and find out what were the shortages of their demographic policies that led to such a level of depopulation in their economies, as well as the negative impact it had upon the productivity of the EU countries.
