The Balkans viewed from Brussels
By Sam Vaknin
UPI Senior Business Correspondent
SKOPJE, Macedonia, Jan. 7 (UPI) -- The denizens of the Balkan peninsula have always accused the Western media of ignorance, bias and worse. Reports from Eastern Europe are often written by fly-by-night freelancers with little or no acquaintance with the region.
Even The Economist -- usually a fount of objective erudition -- blundered last week. It made a distinction between "wily" Albanian "rebels" and "moderate" Albanian "nationalists" in the ruling Macedonian coalition. Alas, these two groups are one and the same: the "wily rebels" simply established a party and joined the government.
The European Commission -- which maintains bloated and exorbitant missions in all the capitals of the Balkans -- should be held to higher standards of reporting, though. Last month it published the second issue of "The West Balkan in Transition". Alas, it is informed not by facts but by the official party line of Brussels: all is well in the Balkans and it is largely thanks to us, the international community.
The report's numerical analyses are heavily warped by the curious inclusion of Croatia whose gross domestic product per capita is three times the other countries'. Even with this distorting statistical influence, the regional picture is mixed. Inflation has undoubtedly been tamed -- down from 36 percent in 2000 to 6 percent last year. But the trade deficit, up 25 percent on last year, is an ominous $10 billion, or an unsustainable one-fifth of the region's combined gross domestic product.
About 70 percent of the shortfall is with the European Union and it has grown by a whopping 40 percent in the last 12 months. This gap is the outcome of the EU's protectionist policies. The Balkans' economic mainstays are agriculture, mining and textiles. The European Union has erected an elaborate edifice of non-tariff barriers and production and export subsidies that make it inordinately difficult to penetrate its markets and render the prices of its own produce irresistible.
This debilitating and destabilizing trade discrimination is, of course, not mentioned anywhere in the report, though it sings the praises of utterly inadequate trade measures unilaterally adopted by the European Union in 2000. The sad and terrifying truth is that the region survives on private remittances and handouts. The European Union has done very little to alleviate this dependence by tackling its structural roots.
As assets depreciated in the dilapidated region, foreign direct investment -- mainly by Greeks, Germans, Slovenes and Austrians -- has inevitably picked up, though surprisingly little. At $100 per capita, it is one of the lowest in the world.
The region's GDP is still well below 1991. The "growth" recorded since 1999 merely reflects a very gradual recovery from the devastation wrought on the region by the United States and its European allies in the Kosovo crisis. This, needless to add, also goes unmentioned.
The report's data are sometimes questionable. Consider Macedonia, for instance: its trade deficit last year was $800 million, or 24 percent of GDP -- not 11.4 percent, as the report curiously stipulates. Foreign direct investment in 2001 was heavily skewed by the proceeds from the sale of the national telecoms company, most of which may not qualify as FDI at all. The figures for the inflation and budget deficits in 2002 are, in all probability, wrong. One could do better by simply surfing the Internet.
The report relies clubily on information provided by the International Monetary Fund -- and openly espouses the controversial "Washington Consensus." Thus, it attributes "economic stability" (what is this?)and "price stability" to the use of "external anchors," namely exchange rate pegs.
Yet, there is a good reason to believe that rigid, multi-annual pegs have contributed to burgeoning trade deficits, the crumbling of the manufacturing sector, double digit unemployment (one-third of the workforce in hapless Macedonia and twice that in Kosovo) and the region's dependence on foreign aid and credits. Macedonia's last devaluation was in 1997. Cumulative inflation since then has amounted to almost 20 percent, rendering the currency overvalued and the terms of trade hopelessly unfavorable.
At times, the report reads like outright propaganda. Trade ministers in the region would be astounded to learn that the numerous bilateral free trade agreements they have signed were sponsored by the much-derided Stability Pact. The Stabilization and Association process, crow the authors, "considerably improved the political outlook in the region". Tell that to the Macedonians whose country was torn by a vicious civil war in 2001, after it had signed just such a agreement with the European Union.
To say that donor funding "finances investments and supports reform" is to be unusually economical with the truth. Most of it is sucked by the recipient countries' insatiable balance of payments deficits and gaping budgetary chasms. Donor money encourages inefficiency and corruption, conspicuous consumption and imports. Luckily, international financial institutions, such as the IMF, are increasingly replacing such charity with credits conditioned on structural reforms.
The section of the report which deals with "fiscal consolidation" astonishingly ignores the informal sector of the region's economies. With the exception of Croatia, the "gray economy" is thought to equal at least one half the formal part. More than one tenth of the workforce are employed by underground enterprises.
International trade, tax revenues, internal investments and even FDI are all affected by the penumbral entrepreneurship of the black economy, comprised of both illicit businesses and tax evading but legitimate ones. It renders fiscal policy less potent than in other European countries.
Predictably, the report also fails to note the contradictory nature of Western economic prescriptions.
Thus, wage compression in the public sector -- touted by the IMF and the World Bank -- leads to a decrease in the remuneration of civil servants and, thus, encourages corruption. Yet, the very same multilateral institutions also exhort the countries of the Balkans to battle venality and cronyism. These goals are manifestly incompatible.
Contractionary austerity measures and enhanced tax collection reduce the purchasing power of the population and its ability to save and to invest. This is not conducive to the emergence of a private sector. It also hampers counter-cyclical intervention -- whether planned or through automatic stabilizers -- by the government. This demonetization is further aggravated by restrictive monetary policies, absence of foreign financing and investment and the pervasive dysfunction of all financial intermediaries and monetary transmission mechanisms.
The report ignores completely -- at least on the regional level -- crucial issues such as banking reform, inter-enterprise debt, competition policy, liberalization, deregulation, protection of minority shareholders and foreign investments, openness to foreign trade, research and development outlays, higher education, brain drain, intellectual property rights, and the quality of infrastructure. These matters determine the economic fate of emerging economies far more than their budget deficits. Yet, shockingly, they are nowhere to be found in the 62 pages of "The West Balkans in Transition".
It is disappointing that an organization of the caliber of the European Commission is unable to offer anything better than regurgitated formulas and half-baked observations lifted off IMF draft reports. The narrow focus on a few structural reforms and the analysis of a limited set of economic aspects is intellectually lazy and detrimental to a full-bodied comprehension of the region. Little wonder that more than a decade of such "insightful expertise" has led to only mass poverty, rampant unemployment and inter-ethnic strife.
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Sam Vaknin served as economic adviser to governments in the region.
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