Macedonia - Overview of economy

An agricultural economy before World War II, Macedonia was the least developed of the 6 former republics of Yugoslavia. The country inherited a poorly located state-owned industry, predominantly heavy, from the Yugoslav socialist period (1945-91), which is now largely seen as a deterrent to foreign investment. The breakup of Yugoslavia in 1991 deprived the country of protected markets and federal funds. In the first half of the 1990s, the economy suffered additionally from the United Nations (UN) embargo against Yugoslavia (Serbia and Montenegro) as all exports to Serbian markets, especially of agricultural produce, were terminated, and land corridors to western Europe through Serbia were cut. Many violations of the sanctions occurred, fueling organized crime and corruption, and generating some huge illicit fortunes. Worse yet, when Macedonia declared independence in 1991, Greece imposed an economic blockade that was not lifted until

1995 and badly impaired foreign trade. Finally, in 1999, the country was affected by the Kosovo war and the in-flux of ethnic Albanian refugees.

In 1991, the gross domestic product (GDP) per capita was US$1,140; between 1991 and 1994 it shrank by over 10 percent annually; by 1997 it had rebounded slightly to US$1,100 a person, signaling a period of growth. The country's isolation and underdevelopment, and the instability generated by the conflicts in neighboring Serbia, have made it unattractive to investors. Money transfers from Macedonian workers abroad and foreign aid have helped towards a recovery, and the Stability Pact—a U.S. and European Union (EU)-backed regional plan for economic development, democratization and security—may generate new investment opportunities. Most importantly, the toppling of Yugoslavia's dictator, Slobodan Milosevic, is perceived as a major advantage towards achieving stability and growth in the region.

The decision of the EU in late 2000 to open up its market to imports from southeastern Europe, including Macedonia, brought up to 95 percent the proportion of industrial and farm goods not subject to EU customs fees. To the disappointment of the Macedonian government, however, the country was still regarded as a "potential" EU member when it had expected firm guarantees that it would be considered a membership candidate like Slovenia or neighboring Bulgaria. Macedonians expect their country to be more highly favored for its record of cooperation with the international community and are unimpressed with current EU plans to spend $2.4 billion of Stability Pact funds in the region as a whole, anticipating that they would receive only a minor portion of the money.

Economic progress depends on the Macedonian government's ability to attract foreign investment, redevelop trade with its neighbors and the EU, and liberalize the economy by disbanding loss-making state enterprises and privatizing those that might be profitable in the long term. Implementation of such structural reforms is vital for economic growth and integration with the European Community.

Macedonia's external debt was $1.13 billion in 1997. Although quite moderate by international standards, without substantial support the cash-stripped country could not meet its short-term financial obligations. Financial aid has been forthcoming in the late 1990s and early 2000s, with $10.5 million received from Taiwan, and an EU grant of $100 million to be split with Albania. The World Bank also granted an adjustment loan worth $50 million, of which $20 million came under conditions applying to the poorest countries and is interest-free for 35 years with a 10-year grace period, and the balance— on terms for credit-worthy but poorer countries—for 17 years, with an 8-year grace period.