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Understanding Reforms in Macedonia (PDF) The wiiw Balkan Observatory May Working Papers|042| 2004 Mihail Petkovski and Gligor Bishev Understanding Reforms in Macedonia The wiiw Balkan Observatory www.balkan-observatory.net About Shortly after the end of the Kosovo war, the last of the Yugoslav dissolution wars, the Balkan Reconstruction Observatory was set up jointly by the Hellenic Observatory, the Centre for the Study of Global Governance, both institutes at the London School of Economics (LSE), and the Vienna Institute for International Economic Studies (wiiw). A brainstorming meeting on Reconstruction and Regional Co-operation in the Balkans was held in Vouliagmeni on 8-10 July 1999, covering the issues of security, democratisation, economic reconstruction and the role of civil society. It was attended by academics and policy makers from all the countries in the region, from a number of EU countries, from the European Commission, the USA and Russia. Based on ideas and discussions generated at this meeting, a policy paper on Balkan Reconstruction and European Integration was the product of a collaborative effort by the two LSE institutes and the wiiw. The paper was presented at a follow-up meeting on Reconstruction and Integration in Southeast Europe in Vienna on 12-13 November 1999, which focused on the economic aspects of the process of reconstruction in the Balkans. It is this policy paper that became the very first Working Paper of the wiiw Balkan Observatory Working Papers series. The Working Papers are published online at www.balkan- observatory.net, the internet portal of the wiiw Balkan Observatory. It is a portal for research and communication in relation to economic developments in Southeast Europe maintained by the wiiw since 1999. Since 2000 it also serves as a forum for the Global Development Network Southeast Europe (GDN-SEE) project, which is based on an initiative by The World Bank with financial support from the Austrian Ministry of Finance and the Oesterreichische Nationalbank. The purpose of the GDN-SEE project is the creation of research networks throughout Southeast Europe in order to enhance the economic research capacity in Southeast Europe, to build new research capacities by mobilising young researchers, to promote knowledge transfer into the region, to facilitate networking between researchers within the region, and to assist in securing knowledge transfer from researchers to policy makers. The wiiw Balkan Observatory Working Papers series is one way to achieve these objectives. The wiiw Balkan Observatory Global Development Network Southeast Europe This study has been developed in the framework of research networks initiated and monitored by wiiw under the premises of the GDN–SEE partnership. The Global Development Network, initiated by The World Bank, is a global network of research and policy institutes working together to address the problems of national and regional development. It promotes the generation of local knowledge in developing and transition countries and aims at building research capacities in the different regions. The Vienna Institute for International Economic Studies is a GDN Partner Institute and acts as a hub for Southeast Europe. The GDN–wiiw partnership aims to support the enhancement of economic research capacity in Southeast Europe, to promote knowledge transfer to SEE, to facilitate networking among researchers within SEE and to assist in securing knowledge transfer from researchers to policy makers. The GDN–SEE programme is financed by the Global Development Network, the Austrian Ministry of Finance and the Jubiläumsfonds der Oesterreichischen Nationalbank. For additional information see www.balkan-observatory.net, www.wiiw.ac.at and www.gdnet.org Understanding Reforms in Macedonia Macedonia was the least developed of the republics of the former SFR Yugoslavia, accounting for roughly 5.5 percent of output and 7 percent of total population. The Macedonian economy was strongly integrated with those of the other republics and depended heavily on the overall performance. Yugoslav economy had fallen into deep recession in the mid- 1980s, including high international indebtedness, high inflation that in 1989 was transformed into hyperinflation, and high unemployment. Having in mind that more than 75 percent of goods were sold on the inter-republican markets, the production of non-tradable goods was high. The stagflation was persisting for a decade before the break-up of the former Yugoslavia. At independence, the Macedonian economy had been contracting for more than six years, inflation was at hyperinflation level and unemployment stood at about 24 percent. Furthermore, the country was not internationally recognized, almost without foreign exchange reserves and isolated from international financial markets. 1 Stabilization policies and output development 1.1 Monetary independence, stabilization and early transition The monetary independence followed after the referendum of September 8, 1991, when the citizens of the country voted for an independent state with modern market economy. The monetary order in the Republic of Macedonia was set up on April 26, 1992. The Macedonian currency was issued in the form of coupons. The rate of exchange of Yugoslav Dinar for Macedonian Denar was 1:1. It was born in a hyperinflationary environment (monthly rate of inflation above 50 percent) emanating from the money overhang and monetization of federal government deficit of former Yugoslavia. Furthermore, the Denar was born as a pure paper currency that was not backed either by gold or foreign exchange reserves. Namely, with the break-up of former Yugoslavia, international reserves remained at the Central Bank of former Yugoslavia. 1.2 First stabilization effort Simultaneously with the introduction of the Macedonian currency, stabilization programme of orthodox-heterodox nature was launched. The establishment of the monetary order and introduction of the stabilization policies were carried out in very unfavourable environment. The Republic of Macedonia was still struggling for its’ international recognition and United Nations membership, due to which the assistance from the international financial institutions (IMF, World Bank) was impossible. Military conflicts among some ex- Yugoslavian Republics were underway, which severely affected access of the Macedonian companies to international markets. United Nations embargo was imposed against 1 Yugoslavia, north neighbouring country of Macedonia1. Thus, high political risk hindered the inflow of private capital and borrowing from commercial banks. Furthermore, the top political leadership was mainly preoccupied with activities related to recognition and isolating of the country from the inter-republican conflicts that were getting momentum. The macroeconomic stabilization started without explicit social partnership agreement. However, the implicit consensus was the referendum that took place in September 1991. The programme was designed by a distinguished team of economists under the leadership of the President Gligorov, who enjoyed very high reputation and confidence from both the citizens and leaders of political parties. However, the President and other top political leaders were not free to focus primarily on economic reforms, which meant that they could not supervise the bureaucracy closely and make sure that the bureaucrats assisted rather than hindered the stabilization efforts. The main goal of the stabilization policies was the two digit monthly rate of inflation to be reduced to one digit rate of inflation. Although the country did not have international reserves, fixed exchange rate regime was assessed as the most appropriate, due to the low credibility of fiscal, financial and monetary institutions (Calvo, Mishkin, 2003, p. 16)2. The fixed exchange rate was selected in order to discipline the demand management policies but also as an instrument for gaining credibility. The prices, except for the goods and services of basic necessities, energy, transport, communications and public utilities, were fully liberalized. The controlled prices accounted for 25 percent of total prices. The rate of inflation had started falling with time lag of a month. In June the monthly rate of inflation was reduced to 17 percent from 72.4 percent in May. The deceleration of inflation 1 During the whole decade of transition, Macedonian economy was exposed to severe political shocks out of which four external and one internal. The first external shock was the hostile break-up of former SFR Yugoslavia in October 1991. The international reserves were seized on the federal level at the National Bank of former Yugoslavia and Central Banks of the new states were established without any stock of foreign exchange reserves. In the Macedonian case the domestic market had shrunk from 20 million citizens to 2 million citizens. The second external shock were international sanctions against the north neighboring country – the Federal republic of Yugoslavia (now Serbia and Montenegro) imposed in 1992 (and ban on transshipment of products through the country 1993) were partly lifted in 1995. Third external shock was the trade blockade from the south neighboring country Greece in the period April 1994 – November 1995. Kosovo crisis in 1999 represents the fourth external shock that hit the Republic of Macedonia. The conflict in Kosovo pushed about 350,000 refugees across the border into Macedonia, the equivalent of 17 percent of the country’s population. Simultaneously new sanctions from international community
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