Prime Minister Zoran Zaev’s new cabinet faces a number of economic challenges, exacerbated by the economic consequences of the pandemic on the global economy. In 2021, North Macedonia will make economic decisions that will shape the future of the country.
The problems Skopje faces
Despite a modest population of 2 million, North Macedonia regularly makes headlines, often due to seemingly intractable disputes with neighboring countries. The trade embargo imposed by Athens on North Macedonia in the 1990s marked the start of a 27-year standoff between the two countries., which ultimately blocked North Macedonia’s accession to the EU. Only recently Skopje resolved the dispute with neighboring Greece regarding its official name, with which Greece had already disputed the fact that “Macedonia” is also a region of Greece, and the use of this name was interpreted by Greece as an affirmation. territorial ambitions of the region.
This dispute affected the country’s other diplomatic adventures. In 1999, North Macedonia was one of the first post-Yugoslav signatories to the NATO Membership Action Plan, but Greece vetoed its membership in 2008. Stabilization and Association Agreement with the EU has not been the diplomatic catalyst that Skopje hoped would ease localized tensions and draw it into closer relations with Brussels.
Under the leadership of Nikola Gruveski (2006-2016), corruption and state capture were endemic in North Macedonia. Gruveksi was opposed to opening negotiations with major Greek governments and it was only when the center-left Social Democratic Union of Macedonia ousted Gruveski from power that there was a breakthrough. Gruveski’s successor, Zoran Zaev, capitalized on Greek Prime Minister Tsipras reformism to negotiate controversy Prespa agreement who settled the name dispute. Two years later, North Macedonia was finally admitted to NATO, demonstrating that Greece was the last obstacle to NATO membership.
A tamed economy
However, North Macedonia soon realized that NATO membership was not a passport to joining the EU. Internal ethnic tensions have created friction with EU member states. Relations with Bulgaria deteriorated during the July 2020 election campaign, during which the campaigns of the two main political parties played on anti-Bulgarian sentiment.Zaev managed to seize power by agreeing to a coalition with most of the Albanian minority.y. The new cabinet’s economic obstacles, particularly in terms of budgetary redistribution, could be exacerbated by new ethnic tensions between the Slavic majority and the Albanian minority. If tensions reach the levels of the 2001 civil war, the deepening of this divide would slow reforms and discourage investment.
Bounce back after falling
Balkan countries suffered greatly from the Great Recession due to their proximity in Greek economy at a time when Athens was going through the worst downturn in recent history. As Greece’s second largest export partner, NMR has been particularly hard hit.(Figure 3a). The region had barely entered recovery when containment measures crippled global economic growth.. Furthermore, North Macedonia’s small domestic market relies heavily on external demand, which the crisis has depleted. In the first and second quarters of 2020, exports fell by 22.3% and industrial production by 14.6% compared to the same period of the previous year. Thus, GDP fell by 14.9% in the second quarter of 2020 and by another 3.3% in the third quarter, contrary to the projected growth of 3.2% (Figure 7). Although forecasts suggest growth of 5.5% in 2021, the unpredictability of the pandemic’s economic influence could further undermine this figure.
At the same time, rating agencies lowered North Macedonia’s national debt rating, thereby increasing financing costs. RNM’s debt has been downgraded by some rating agencies, thereby increasing financing costs. Fitch, the US credit rating agency, as well as Moody’s, another US-based credit rating agency, both view North Macedonia’s debt as a non-recommended investment asset to be reserved for gains short term. Since May 2020, the outlook has been negative, suggesting a worsening of the situation. Yet, with one of the region’s comparatively lowest debt-to-GDP ratios, these ratings remain the best in Southeast Europe after Bulgaria, meaning the MNR has a relatively strong economic base ( Figure 4).
The country’s effective response to the pandemic partly explains why North Macedonia is economically stronger than some of its neighbors. The caretaker government introduced a partial unemployment program, worth around 5.5 percent of GDP, as well as a helicopter money initiative. Going forward, the government is prioritizing policies that will boost economic growth, such as reducing parafiscal taxes and reduce VAT. However, as North Macedonia does not have the economic resources to engage in long-term reforms, recovery will be slow.
The demographic evolution of North Macedonia
North Macedonia faces massive emigration alongside falling fertility rates (Figure 5), both of which reduce human capital. The official estimate of two million inhabitants is questionable, with some experts hypothesizing a true figure of around 1.5 million. Inaccurate projections of a state’s total population undermine the effectiveness of government decision-making. In the MNC, where resources are redistributed between ethnic groups according to quotas, this makes budgetary management particularly difficult. If, for example, the proportion of Albanians in the total population was lower than estimated, then this group will receive more public resources than they are entitled to.
Given that the EU acts in a decidedly protectionist manner by restricting trade with third countries, greater cooperation is in the NMR’s interest. In fact, Brussels could reduce trade barriers in the context of a stronger association with Skopje even before the latter formally joins the Union.
The government can take certain steps to encourage citizens not to emigrate. The first and most crucial step would be to improve the education system. Overall, North Macedonia spends a much smaller share of its GDP than the EU average country in terms of education. As a result, few people complete their secondary level They are educated and therefore find themselves either in poorly paid jobs or unemployed and are forced to emigrate. Another step would be to invest in the underfunded research and development (R&D) sector. In fact, North Macedonia’s budget allocates only 0.36% of GDP to R&D, compared to an average of 2.2% in the EU and 0.77% for neighboring Bulgaria. Research and development is essential to creating good-paying jobs, boosting productivity, and stimulating the economy through innovation and market competition.
Infrastructure, engine of future growth
The positive side of North Macedonia’s economic strategy is infrastructure development. This is especially true for roads and highways. GruevskiThe administration has been instrumental in investing in road infrastructure, starting work on two new highways in 2014.
Yet roads can be pretty useless if they don’t lead anywhere. So comes commercial infrastructure. In addition to the new road, the construction of new border checkpoints and crossing points with Greece and Bulgaria will strengthen the trade infrastructure that North Macedonia shares with the EU, boosting trade with a global economic powerhouse. These investments will also reduce the RNM’s dependence on Yugoslav-era north-south arteries, which currently pose an obstacle to the development of a “functional market economy”, a necessary condition for EU membership. . To achieve this goal, the RNM must improve road connections to the west (with Albania) and the east (with Bulgaria, an important trading partner). Establishing better connections within the country and with its non-Yugoslav neighbors will strengthen the country’s internal cohesion by facilitating travel from one part of the country to another, which will provide additional infrastructure to promote international trade.
Figure 6 Highways represent a key segment of RNM investments.
A secondary and related benefit of improved connectivity with EU trade routes is reduced economic dependence on Russia. This should reduce Moscow’s potential diplomatic influence in future disputes in the region. In fact, withdrawing from Moscow’s orbit is almost a prerequisite for full EU membership – which would bring more financing opportunities and increase financial stability. Yet Russia’s main asset is not trade in short, but energy. In fact, the Balkans serve as strategic crossroads for oil and gas from Moscow and Baku via Bucharest and Ankara. Thus, North Macedonia should also consider developing its energy infrastructure as a path towards closer integration with the EU. In order to reduce the Western Balkans’ dependence on Russian fossil fuels, the region needs investment. For cash-strapped countries like North Macedonia, the opportunity to make real progress in this area could come from the “green” funds that the EU has earmarked for energy projects in current member states and in candidate countries. In addition, Greece has established a LNG terminal on the Aegean Sea, to which the RNM plans to connect its network. We also speak of a electrical connection with Albaniathrough which the RNM could import as much as necessary and even export possible surpluses.
Forecast: The RNM can get there… with a little help
Without radical reform, corruption, bureaucracy and public sector inefficiency will hamper growth in the years to come. Fortunately, the EU could be the answer to Skopje’s economic woes. The Union should grant 3.3 billion euros for the Western Balkans countries to revive economic recovery after the pandemic. This package, however, comes with conditions: the country will have to accelerate its progress towards regulatory harmonization with the EU. It is notoriously a difficult and a resource-consuming task, which may hinder other reforms.
In addition, North Macedonia faces pre-pandemic economic difficulties. The government could return to infighting within the coalition and thus prolong the economic reform process. For investors, a cautious approach is recommended, in anticipation of positive economic developments.
Thanks The author thanks Charlotte Millington, parliamentary researcher at the UK House of Commons, specializing in European politics and international security, for her suggestions.