Monday, July 24, 2006

Leader Wows Macedonia with Boom Pledge

Incoming premier promises economic revival and fight against corruption.

By Petre Dimitrov in Skopje

Macedonia 's future prime minister has pledged to lead his impoverished country out of the wastelands of economic muddle to the sunny uplands of a boom through a 100-point reform plan.
Ten days after the inaugural session of the new parliament on July 26, President Branko Crvenkovski will grant a mandate to the leader of the rightist VMRO-DPMNE, Nikola Gruevski to establish a government, after his party beat the Social Democrats in the July 5 elections.
Gruevski has said no parties will be invited to join his coalition unless they support his economic manifesto, "Revival in 100 steps".
"The economy is the number-one priority," said Gruevski - repeatedly.
Economic experts say the appointment of a leader familiar with market logic comes not a moment before time.
About 40 per cent of the adult population is officially unemployed and foreign direct investment is minimal, not least on account of rampant corruption.
The future prime minister has based his renewal plans on a few main pillars.
One is a new, flat, ten per cent income tax, along the lines of the flat taxes established in several former communist countries in Eastern Europe and the former Soviet Union .
At present profit taxes in Macedonia range from 15 to 24 per cent, while VAT is 18 per cent.
Another pillar is to improve the investment climate by changing the country's foreign image through an invigorated fight against corruption.
The government promises that these changes will lead to annual economic growth rates of six to eight per cent within four years. The current one is around four per cent.
Experts say the promises are attainable, as they are mostly based on the experience of other countries in similar economic situations.
However, they note that Gruevski will head a government of more than 18 parties, which could provide an obstacle.
Vanco Uzunov, an economics professor in Skopje , said Gruevski's programme could end the long-term recession that began after independence in the 1990s.
"The measures ... are not a novelty, as they have been implemented in other countries and have given results," he said. "The most important thing is not to retreat before political interests."
This relative optimism is based on Gruevski's record as a successful minister in Ljubco Georgievski's right-wing government from 1998 to 2002.
As trade minister, Gruevski launched a successful campaign to encourage the purchase of Macedonian products, and as finance minister he introduced a new VAT in only three months.
Dimitar Bogov, of the Centre of Economic Analysis, said that as a minister "Gruevski proved himself a liberal economist, committed to a market economy, free of monopolies and state control of the market".
Many maintain it was this business-friendly image that brought Gruevski's party to victory on July 5.
The pillar of the new economic programme, the planned flat tax, aims to make Macedonia a country with one of the lowest tax rates in Europe .
The basic principle is that the application of a single, low rate of tax on profits, as well as exemptions from taxes for profits that are reinvested, will yield a higher income for the government in the long term than high tax rates and complicated and variable tax bands.
This model has already been tried and proved successful in Estonia , Latvia and Lithuania , which experienced booms after low taxes began to draw in massive foreign investment.
The first stage of Macedonia 's plan is expected to begin in January 2007, when a flat tax of 12 per cent will be introduced. This will be cut to 10 per cent a year later.
Vanco Uzunov said the tax reform could be implemented relatively easily, would reduce labour costs and "stimulate businessmen to hire more people", as they would have more profits left over to spend on the workforce.
Bogov agreed that a flat tax would also help solve another key problem - the untaxed "grey" economy, which is estimated to absorb about 40 per cent of the country's economic activity.
"With the reduction of employment costs, businessmen will feel encouraged to register their employees," he said. "The flat tax will be an incentive for many people who run businesses to legalize them."
Bogov added that tax changes would stimulate competitiveness in the economy and thus stimulate exports.
"The resistance of the business sector to the [current] taxes is huge, so this measure should release the burden and bring in investments," said Bogov.
The economic programme promises to stimulate foreign investments also through administrative and educational reforms and the involvement of foreign consultants.
Gruevski said he intended to hire up to 50 international consultant companies, tasked with bringing in more direct investment.
Past governments have failed to lure much investment. Statistics shows only 1.9 billion euro were invested in Macedonia in the past decade.
The only European countries with lower investments were poverty-stricken Albania and Moldova and troubled Bosnia and Herzegovina .
"If they [the consultants] succeed in bringing in an investor they will get a bonus - this will be their motivation to do their job successfully," Gruevski told the economic weekly, Kapital, just before the elections.
Two ministers without portfolio will be given responsibility for attracting investments.
Not everyone is optimistic that Macedonia 's long-term failings can be rectified with a few structural adjustments.
Dimitar Eftimov, of Skopje 's Economic Institute, said modifying taxes would not change much if the state continued to intervene in business through the National Bank of Macedonia , which has a restrictive monetary policy, setting high interest rates that discourage investment.
"There will be results only if the existing economic policy of the country changes and the influence of the National Bank is reduced," said Eftimov.
Such experts warn that no simple "magic formula" will succeed in attracting investments without other deep-seated reforms.
"The new government will succeed only if it continues to improve the business environment and finishes the reforms started by the previous government in the judiciary.. and public administration," said Uzunov.
The government says it will tackle Macedonia 's high unemployment by encouraging more young people - who represent the bulk of the jobless - to start businesses and gain further qualifications.
While the official unemployment rate is almost 40 per cent, the real figure is around 25 per cent, once those employed in the "grey" economy are subtracted. But it is still far too high.
"There is a significant number of people who are poorly qualified and the only solution for them is to obtain further qualifications," said Bogov.
A key part of the Gruevski programme is the fight against corruption, which is rife, and deters many investors.
The widely-read corruption perception index of Transparency International lists Macedonia in 103rd position - next to Swaziland - in a survey of 158 countries. Of the Balkan countries, only Albania is seen as more corrupt.
"The fight against corruption will start from the lowest levels," the future premier said in the election campaign, "from those working at the counters up to the level of ministers who must be role models for everyone."
The centrepiece of the new campaign will be the establishment of a new body, the Agency for Combating Corruption and Organized Crime.
This will be empowered to seize assets and property and even ban people from pursuing political activity.
Experts agree that the fight against corruption will be a litmus test of the government's seriousness in implementing all the other measures.
But, at this stage, most are very reserved in predicting whether the new premier will be successful against such an endemic feature of Balkan society.
"When we speak of the fight against corruption," said Uzunov, "the real issue is whether the institutions truly function, and not declarations about fighting corruption."

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