Macedonia - Quo Vadis?

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(Contributor and co-author: Sam Vaknin, Ph.D.)

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General

Macedonia is geographically positioned to become a trilateral bridge between Asia, Western Europe and Eastern Europe. It is the heart of the Balkans. With the proper promotion and dissemination of information, it could well become an important regional economic hub, as well. To achieve this, it has to adopt an export orientation, to encourage the formation of small businesses, to be friendly to FDI (foreign direct investment), to deregulate and open up to (domestic and foreign) competition in its infrastructure (electricity, internet, telecoms, the banking system, etc.), to emphasize the protection of property rights and to start the process of privatization all over again - this time sincerely.

The World Economy in 2001

The Asian crisis is not over – it hasn't even started. It will erupt again, this time much more severely and mainly in Indonesia, Philippines, China, Malaysia and Japan. This will augment the recession shock waves in the USA. The stock exchanges (headed by Wall Street) will be the first to adversely react. The IMF will be fast depleted of resources. The central banks around the world will not be able to implement tighter monetary policies and global inflation will be re-ignited (with the exception of deflation in Asia). This inflation will be exacerbated by currency devaluations in South East Asia (China) and in Russia. The introduction of the Euro has further limit the flexibility of the counter-cyclical reactions of the economic authorities. This overall rigid response will force countries to adopt protectionist measures against the free flow of goods, services and, above all, capital.

The evaluation of the Macedonian economy in this paper, however, ignores this scenario. Should it transpire as we predict – the impact on Macedonia might be moderate, as its main markets are in the EU and it is not dependent on foreign direct investment but on multilateral aid and credits.

What We Predicted in 2000

(See article in "Makedonsko Delo" dated April 7, 2000)

At the beginning of the year 2000 we predicted the following:

The Euro will devalue to 0.87 versus the US dollar and then recover to 1.18.

In reality it went down to 0.83 and is now in the process of recovering.

We now predict a cap on Euro appreciation at 1.06 - 1.08 (equivalent to DM at 1.78). The US dollar will then recover and push towards 2.30 and beyond.

We predicted oil hitting 32 US dollars per barrel (Brent crude) and then swiftly declining to 18 US dollars and then (in the long term) back to 7-10 Us dollars. In reality, it reached 35-36 US dollars per barrel and commenced a precipitous decline (to 24 US dollars currently).

We predicted a collapse of Wall Street. NASDAQ (the biggest stock exchange in the USA) has indeed crashed by 60% from its highs in March 2000 - but Wall Street, as a whole, did not experience a market meltdown as we predicted (though it is down by 15% from its highs).

The Denar Must be Devalued Gradually and Transparently

The trade deficit (at 600 million USD) equals 16% of the (admittedly, only the official) GDP and the current account deficit amounts to almost 8% of GDP. This is AFTER unilateral transfers of capital from donor countries and aid agencies and from immigrants and after foreign investment. The reserves of the Central Bank cover 3 months of regular imports and, luckily, are insufficient to excite the big time speculators. Still, the currency is overvalued. In PPP-adjusted terms it should be converted at 37 to the DM (versus 31 now) and at c.70 to the USD (versus 66 now). The exchange rate stability is artificial, discourages exports and encourages imports. It also exerts deflationary forces in a deflation prone economy. The terms of trade of Macedonia have deteriorated by 14% these last few years. The accumulation of foreign exchange reserves is anti-growth and unnecessary. It also runs counter to current economic thinking.

Inflation

The Macedonian economy is totally illiquid and demonetized. High unemployment, a low money supply and the only slightly improved presence of money multipliers or accelerators (such as functioning credit providing institutions coupled with reasonable credit ceilings and interest rates as imposed by the Central Bank) – have depressed any nascent inflation and, lately, led to demand core deflation (without volatile energy and food prices). To encourage growth, Macedonia must tolerate a 10-15% annual level of inflation (versus c. 5% now) and a minimum of 3-5% budget deficit (versus a surplus now, if we ignore the rebalancing of the budget). There is no need to fear hyperinflation because of low demand. A devaluation will be mostly absorbed by importers and manufacturers. The government's fiscal and monetary policies are unduly restrictive and contractionary when they should be expansive. For a country in transition, with c. 40% unemployment, an 8% current account deficit, inter-company debt arrears of c. 30% of GDP and growing, low FDI and languishing private sector - to maintain a 35% tax burden and a structural budget surplus is, to put it mildly, very wrong.

If, however, the Central Bank will be forced by the market to devalue the denar – the result will be profits for speculators and an inflation out of control. This will lead to stagflation – runaway inflation coupled with economic stagnation (the worst possible scenario for Macedonia). However this scenario is unlikely as long as the IMF is seen to be supporting current structural reforms and monetary policies.

The Macedonian Central Bank is forced by the IFIs (especially by the IMF) to maintain a DUAL TRACK policy, namely to observe BOTH an inflation target AND a stable exchange rate. This is a classic mistake, badly regretted in many countries now (examples: Brazil, Russia, Argentina, Turkey and Israel). By law, the Central Bank should ascertain the stability of the denar exchange rate. It is advisable to alter the law so that the bank observes an INFLATION TARGET, with a floor and a ceiling (an inflation band).

The Banking System

The sale of "Stopanska Banka" to "National Bank" (from Greece) - as well as the sale of a few other minor players to foreign investors cum management - has finally opened up the banking sector to outside influences. Still, most foreign owners are either hesitant (Erste Bank, which withdrew from the bid for Stopanska Banka in 1999) or too institutional (EBRD, IFC and even "National Bank" itself) or marginal. The whole sector needs to be opened up to competition by allowing the introduction of credit unions, non-bank lenders, specialized (such as mortgage) banks, leasing companies, insurance companies, etc. into the banking scene.

The banks are ossified, unable to cope with the newly emerging market economy. They react either by disregarding the quality of their portfolio while over-emphasizing mere size (Stopanska Banka) – or by being too conservative. Instead of developing effective methods to monitor and evaluate risks – they preferred to raise the commercial interest rates to outlandish levels (now being reduced drastically). They offer no new services or products, lend only against real estate, favour cronies and cater to political wishes. The management in many of the banks in less professional than in the West. It is very likely that corruption is rampant due to favouritism and lack of transparency.

Only foreign ownership and CONTROL will alter this sorry state of things. In this respect, Macedonia is on the right path.

The Trade Deficit

The Macedonian economy is a "scavenger economy". At first, it benefited from the siege imposed on Serbia by the international community. Greek and other goods were shipped through Macedonia to Serbia. A lot of people got rich in the process. Now, Macedonia lives off its reputation as a "stable" country. The USA and other countries finance its trade deficit and other financial excesses – just to keep it as a buffer and a protection against instability in the region. More than 50% of all Macedonian firms are trading firms. This cannot last and is no substitute to long term policies. Macedonia must move from scavenging to being a "predator economy": eager to conquer new markets and prey on the competition.

A trade deficit is not inherently evil. If the money is spent on the importation of industrial raw materials and capital goods, the future profits will easily offset current deficits. But the Macedonian trade deficit goes to finance consumption goods and food. This is a malignant type of deficit, which will ultimately boomerang and hurt the local economy gravely.

What is needed is an orderly devaluation, the imposition of VAT on ever larger sectors of the informal economy and the imposition of some temporary import restrictions on luxury goods as well as the active encouragement of exports and, to a very limited extent, import substitution.

The Private Sector

The Macedonian people are very entrepreneurial. The level of corporate taxation is tolerable (though the total tax burden is NOT). But there is no private sector to talk about. This is because there is no management culture, a lot of bureaucratic red tape, no capital markets, no business-oriented banking system, no real incentives or environment available to exporters and to small businesses and a crowding out of credit by failing, politically connected, or state owned businesses. The privatization process transferred state assets to the hands of an elite of managers at a discount on real values. The workers also received shares but could not dispose of them in any meaningful way. Even companies which could easily have been sold to foreign investors were privatized in this manner: Alkaloid, Pivara, Ohis, to mention but a few (Makpetrol, the PTT, Elektrostopanstvo can also be included in the lists of "easily sellable companies"). The companies thus privatized still rely too heavily on the state and engage in political lobbying rather than in production.

Macedonia has this year, for the first time, embarked on a path of serious and painful structural reform (mainly by shutting down or selling the loss making state owned enterprises). This is commendable, courageous and important. But this is only half the job - and NOT the important half. The important part is to create the conditions to encourage the formation of a vigorous and viable private sector.

The Public Sector

Despite rumours to the contrary, the public sector is less corrupt than in comparable countries (according to Transparency International and to my own experience), well educated and capable. However, it is far too large (it should be cut in half) and inefficient. This sector is subjected to economic laws, which were either copied from the West verbatim or phrased locally by legislators and "experts" who lack the necessary experience. It is not service oriented, poorly paid and considered a "dead end" career.

Regional Devolution

The ethnic mix of Macedonia is explosive. This may be the reason why the central government was loath to transfer powers, authority and the money to back them to the regions. The regional economy is still very much centralized, planning is done from afar, the regions have no real taxing or spending autonomies (for instance: they cannot lobby abroad freely or raise funds in the capital markets because the land is not theirs to pledge, it belongs to the state).

But Macedonia is uniquely varied. It has an outstanding potential for tourism, transport and telecommunications. All of these can be developed regionally – rather than centrally. It is only the political will that is missing. In the world today – the central government is consciously transferring budgets and powers to the regions and the EU's motto is: "A Europe of regions". Macedonia has haltingly started to implement it – but the process is not fast enough.

Brain Drain

About 4% of the population left the country in the three years immediately following independence (1991-4). Another 2-3% left the country between 1994-8 (estimate). Many young people resent the fact the it is not merit that will determines their career path, but connections to the right people. Others face difficult personal choices: unable to buy apartments, they cannot form or raise families properly. Unemployment is a permanent feature and many young and unskilled or semi-skilled people are unemployed for years or reduced to menial jobs. This is a real threat to Macedonia's economic future and competitiveness in the global market. In a way, Macedonia is subsidizing the West with this export of gifted people. Unfortunately, there is not a lot that can be done to directly counter this phenomenon. It will disappear of itself (even be reversed, as happened in Israel) once the economy improves.

Unemployment

This is the cancer of the Macedonian economy: psychologically as much as financially, a burden on the state, a burden on the unemployed. Hitherto there was no serious treatment of this problem. In 1998, the government introduced a structure of tax incentives intended to subsidize new employment. Due to abuses, it was cancelled by the new government. But even that was absolutely insufficient and, in isolation, inefficient. The unemployment rate (already at c. 40% according to official figures) – is poised to GROW as the economy becomes more efficient, technology is introduced and real privatization takes root. This will be a social calamity. Experience in the world can guide the government: to increase labour mobility, to decrease the power of unions, to transfer unemployment benefits to the employer (in order to encourage him to employ the unemployed), to initiate public works (a Macedonian "New Deal" even at the cost of budget deficits), to encourage small businesses (microcredits, incubators, tax credits, preference in government procurement), to organize barter communities with voucher money, to encourage part time and flexible forms of employment. Israel, Holland, Britain and the USA are good examples.

Higher Education

The Macedonian workforce is more educated than its equivalents in Southeast Asia, for instance. The quality of higher education is impressive, with a few notable exceptions. Despite some corruption (university diplomas that are bought in cash rather than earned through toil, as the rumours go) – the overall picture is encouraging. But the stock of education capital (buildings, laboratories, libraries, computers) has dwindled to the extent that Macedonian higher education is risking becoming obsolete and irrelevant. Moreover, the universities and dedicated schools are churning out graduates with degrees in professions, which are irrelevant to the Macedonian economy. There is a huge mismatch between what Macedonia needs and what Macedonia gets from its higher education institutions. In this sense, these institutions abdicated their social responsibilities. They are no longer subject to planning of any sort: central or via the market forces (because there is no market in Macedonia as of yet). The introduction of accredited private higher education institutions is a welcome step. It may ameliorate feelings of discrimination of minorities and elevate the quality of higher education in general by competing with staid and stultifying state establishments.

The Judicial System and Property Rights

The courts are slow, hesitant and ineffective. Contradicting interpretations of economic laws by different judges are not a rarity. The system is under-funded, understaffed and bogged in a landscape of laws and regulations, which changes arbitrarily. The introduction of autonomous budgeting is a step in the right direction. There are no private or public alternatives to the clogged, backlogged nightmare. The laws are full of irrelevant "dead weed", are too complex and archaic or too open to interpretation. There are no reliable, publicly available central registrars of property and it, therefore, cannot fulfil the role of a collateral to the fullest extent. Intellectual property rights are not protected and Macedonia (with Bulgaria) is the piracy capital of Central Europe. All this – and the multi-annual tedious process of applying to the courts in the first place – erode the trust in the law enforcement system, in general and can bring about criminal alternatives to enforcement of contracts, for instance. There is no sign of a major reform in this field.

Taxation and the Black Economy

The "Black Economy" is called in Macedonia "The Grey Economy" because it is tolerated with a smile. Maybe luckily so: it comprises over 50% of the economy and is the less moribund and more vital part in it. Despite the fact that the taxes in Macedonia are very reasonable – collection is abysmal. Workers go unreported, income tax is paid only by employees in state or big firms, profit tax is eliminated by creative (false) accounting. Accountants in Macedonia are people who falsify books of firms so as to minimize the tax payable by them. Reform of the payment system and the customs is being discussed for months on end but, for some reason, its implementation is always postponed. Smuggling is rampant. This situation cannot be cured by "strong arm" tactics because it amounts to a universal civil rebellion. A massive education campaign needs to be launched to demonstrate to the citizens the benefits that they stand to gain from paying their due taxes. Because the distrust between citizen and government (no matter of which party, government in general) runs so deep – it will not be an easy or short term task. Corruption in high places - an all pervasive phenomenon - won't help either.

Some Recommendations

Government Structure and Budget

• The development modern budgeting tools such as on-budget analyses, employment adjusted budgets, etc.

• Independent budgeting for each Ministry and a system of incentives to those in the service of the government who save the moneyof the taxpayers. The Ministry of Finance should place budget-compliance supervisors in all the ministries (perhaps with the power to counter-sign budgetary expenditures together with the responsible Minister).

• All public procurement is already subject to public, competitive, bidding in domestic and international tenders but reports about each should be submitted to a special Procurement Committee in the Ministry, headed by the Minister of Finance.

• All NEW expenditures in the budget and ADDED budgetary items should be covered by corresponding items of income by LAW. All legislative initiatives concerning EXPENDITURES should, first, have to clear this hurdle: where will the money come from? This is theoretically so - but not in practice.

• A clear division should be instituted in the budget between Development items - and current items. Borrowing should be encouraged and dedicated to the former - and abolished from the latter.

• The government should introduce an amendment to the constitution regarding a budget deficit cap AND a budget surplus cap (limit) over the business cycle and, thus, ensure that future governments will not stray from the path of responsibility and fiscal rectitude.

• I suggest to establish a National Budget Planning Office, which should provide the government with five year forecasts based on demographic, economic, geopolitical and technological trends.

Economic Legislation and Property Rights

I suggest to embark on a project of harmonization of all the economic legislation in Macedonia within a coherent and compact code, phrased in a manner which should be understandable to all, free of contradictions and unsuitable articles and provisions.

To do this, the government can create a special Council, which should be composed of legal experts, business and financial consultants,representatives of the private sectors and the relevant Ministries. All laws should be reviewed and, where necessary, re-written, to protect property rights  including protection of intellectual property rights: copyrights, brandnames, registered trademarks.

Data and Statistics

The government should develop interlinked national databases, which should serve the executive branch in its fight against crime, tax evasion and corruption. All the organs of the state should be bound by law to transfer all the data that they accumulate to these national, computerized databases.

Public Access

The Ministry of Finance should establish the following public access and right to know (freedom of information) institutions:

• Institutions of appeal on all levels and subject itself, willingly, to criticism and legal challenges.

• It should encourage feedback from the people and promises to study each suggestion carefully and to respond on it in a reasoned manner.

• An office of Ombudsman (for citizen complaints) should be established. The ombudsman should have real powers and should answer directly to the Minister.

• Citizens and businesses should be able to obtain pre-rulings and opinions regarding tax matters from the tax authorities. The pre-rulings should be binding upon the Ministry and the tax authorities. They should introduce an element of certainty into the economic sphere.

• Citizens and businesses should have full access to their files.

Taxation - Direct and Indirect

• The Ministry of Finance should establish national databases to track property purchases and compare them to declared income.

• On the other hand, this government should rationalize the tax system by extremely simplifying it, by eliminating numerous loopholes, exemptions and deductions, by increasing the personal allowances, by drastically reducing the tax rates and by introducing other consumption and excise taxes. SIMPLIFICATION AND STREAMLINING of the TAX CODE are a major challenge.

• It should be evident to the citizen that the money that he paid to the tax authorities was used to his immediate benefit. This is why this government should embark upon a massive campaign in the media and by direct mail, to explain to the citizens the benefits of paying taxes with DIRECT and IMMEDIATE examples. This is why this government should earmark 50% of all VAT revenues to educational, sports, academic and other public benefit or infrastructure projects.

Inflation, Interest Rates, Exchange Rates and the Central Bank

• The Central Bank of Macedonia should switch to inflation targeting rather than foreign exchange management.

• The bank should be allowed to determine the targets for the money supply, interest rates, inflation and other monetary parameters.

• We should liberalize the trading of foreign exchange, abolish all manner of exchange controls and allow the market to fix the exchange rates. The Central Bank should be confined to managing the daily inter-bank trading and settlement in foreign exchange and it should publish a non-binding "middle exchange rate" for the day. Otherwise, it should have no involvement in this market.

• The Supervision of the Banks should be removed from the Central Bank and become an independent unit, nominally under the Minister of Finance.

• The Central Bank should have its own budget. It should be barred by law from transferring any of its profits to the national budget. Its autonomy should rest on its financial self-sufficiency.

• An amendment to the National Bank Act concerning the investment of the country's foreign exchange reserves should be introduced.

The issues to be tackled in this amendment should be:

• WHAT constitutes foreign exchange reserves (is the stabilization fund included? Other state deposits? foreign credits? etc.);

• IN WHAT can these reserves be invested (TYPES of investments: bonds, equities, CDs, repos, etc.);

• The QUALITY and MATURITY of said investments (only investment grade bonds, gold 99.9% bullion, etc.);

• The PROPORTION of investments in each type of investment vehicles (e.g. 80% in T-bills, 10% in gold, etc.);

• WHO can and is authorized to decide about the investment of the foreign exchange reserves;

• The decision making PROCEDURES, forms, quora, fora, etc.;

• USES of foreign exchange reserves;

• Obligatory STABILIZATION FUNDS;

• REPORTING procedures, periods, format, extent of disclosure.

Banking, Finance and the Capital Markets

• The government should reduce the capital requirements to open a bank, to allow for increased competition in this sector. It should, however, screen applications more carefully and refuse investors with no thorough background in banking or with a suspicious background.

• The government should encourage non-banking financial institutions and encourage banks to open branches throughout the country by reducing the capital required to do so.

• The function of Bank Supervision should be separated from the Central Bank and transferred to a distinct government agency with judicial and criminal prosecution powers. However, liquidity and reserves policies should still be determined by the Central Bank.

• All the banks should be required to manage their accounts using western accounting methods and to be audited by a Western auditor.

• The banks should supply the Supervision authorities with quarterly exposure and asset risk assessments.

• To reinstate the trust between the population and the banking system, the government should strengthen considerably the role and the financing of the Deposit Insurance Agency. The government fully guarantees its obligations by law - but should make the necessary funding allocation to back up this promise.

• By providing tax incentives, the government should encourage the banks to computerize and to reduce their costs (and the waste of their clients' resources) by performing more and more banking functions through unmanned teller machines, ATMs, internet banking and so on.

• The banks should NOT administer the government's plans for small businesses and for export encouragement.

• This government should regard the Stock Exchange as a prime financing instrument in the economy. It should encourage its activities in many ways. It should offer tax breaks (up to total exemption from capital gains tax) to owners of stock in listed companies, it should educate the public as to how to use the Stock Exchange as a capital market - and as to how to trade in it, it should encourage employees and managers who received stock during the privatization process to trade their shares through the the Stock Exchange by introducing local and foreign investment funds and investment pools as well as investment managers, it should establish free legal and accounting services for firms who wish to be listed, it should continue the process of privatization through the Stock Exchange, it should raise and recycle some of its internal debt through the Stock Exchange and establish (with the Central Bank) Open Market Operations, it should not tax long term holding of shares, it should support the creation of mutual funds and voucher funds.

Foreign Direct Investment (FDI) and Free Trade Zones (FTZ)

Foreign investment can be attracted by:

• Appealing to Macedonians abroad, offering them special treatment. Their funds should be invested in a "Macedonia Fund", managed by a FOREIGN trustee.

• Participating in a Venture Capital Fund for Macedonia.

• Encouraging prime Macedonian firms to list and trade their securities abroad (in the form of Depository Receipts).

• Establishing a court dedicated only to Foreign Investors and obliged to render its judgements speedily (the law will define an obligatory period).

The Informal Economy

Reporting Requirements and Transparency

• All banks should be obliged to report foreign exchange transactions of more than 10,000 DM (whether in one transaction or cumulatively by the same legal entity). The daily report should be submitted to the Central Bank. In extreme cases, the transactions should be investigated.

• All the ZPP account numbers of all the firms in Macedonia should be publicly available through the Internet and in printed form.

• Firms should be obliged by law to make a list of all their bank accounts available to the ZPP, to the courts and to plaintiffs in lawsuits.

• All citizens should be obliged to file annual, personal tax returns (universal tax returns, like in the USA). This way, discrepancies between personal tax returns and other information can lead to investigations and discoveries of tax evasion and criminal activities.

• All citizens should be obliged to file bi-annual declarations of personal wealth and assets (including real estate, vehicles, movables, inventory of business owned or controlled by the individual, financial assets, income from all sources, shares in companies, etc.).

• All retail outlets and places of business should be required to install – over a period of 3 years – cash registers with "fiscal brains". These are cash registers with an embedded chip. The chips are built to save a trail (detailed list) of all the transactions in the place of business. Tax inspectors can pick the chip at random, download its contents to the tax computers and use it to issue tax assessments. The information thus gathered can also be crossed with and compared to information from other sources (see: "Databases and Information Gathering"). This can be done only after the full implementation of the recommendations in the section titled "Databases and Information Gathering". I do not regard it as an effective measure. While it increases business costs – it is not likely to prevent cash or otherwise unreported transactions.

• All taxis should be equipped with taximeters, which include a printer. This should be a licencing condition.

• Industrial norms (for instance, the amount of sugar needed to manufacture a weight unit of chocolate, or juice) should be revamped. Norms should NOT be determined according to statements provided by the factory - but by a panel of experts.  Each norm should be signed by three people, of which at least one is an expert engineer or another expert in the relevant field. Thought should be dedicated to the possibility of employing independent laboratories to determine norms and supervise them.

• Payments in wholesale markets should be done through a ZPP counter or branch in the wholesale market itself.  Release of the goods and exiting the physical location of the wholesale market should be allowed only against presentation of a ZPP payment slip.

Reduction of Cash Transactions

• Cash transactions are the lifeblood of the informal economy. Their reduction and minimization is absolutely essential in the effort to contain it. One way of doing it is by issuing ZPP payment (debit) cards to businesses, firm and professionals. Use of the payment cards should be mandatory in certain business-to-business transactions.

• All exchange offices should be obliged to issue receipt for every cash transaction above 100 DM and to report to the Central Bank all transactions above 1000 DM. Suspicious transactions (for instance, transactions which exceed the financial wherewithal of the client involved) should be duly investigated.

• The government can reduce payroll taxes if the salary is not paid in cash (for instance, by a transfer to the bank account of the employee). The difference between payroll taxes collected on cash salaries and lower payroll taxes collected on noncash salaries – should be recovered by imposing a levy on all cash withdrawals from banks. The banks can withhold the tax and transfer it to the state monthly.

• Currently, checks issued to account-holders by banks are virtually guaranteed by the issuing banks. This transforms checks into a kind of cash and checks are used as cash in the economy. To prevent this situation, it is recommended that all checks will be payable to the beneficiary only. The account-holder will be obliged to furnish the bank with a monthly list of checks he or she issued and their details (to whom, date, etc.). Checks should be valid for 5 working days only.

• An obligation can be imposed to oblige businesses to effect payments only through their accounts (from account to account) or using their debit cards. Cash withdrawals should be subject to a withholding tax deducted by the bank. The same withholding tax should be applied to credits given against cash balances or to savings houses (stedilnicas). Alternatively, stedilnicas should also be obliged to deduct, collect and transfer the cash withdrawal withholding tax.

• In the extreme and if all other measures fail after a reasonable period of time, all foreign trade related payments should be conducted through the Central Bank. But this is really a highly irregular, emergency measure, which I do not recommend at this stage.

• The interest paid on cash balances and savings accounts in the banks should be increased (starting with bank reserves and deposits in the central bank).

• The issuance of chequebook should be made easy and convenient. Every branch should issue chequebooks. All the banks and the post office should respect and accept each other's checks.

• A Real Time Gross Settlement System should be established to minimize float and facilitate interbank transfers.

Government Tenders

Firms competing for government tenders should be obliged to acquire a certificate from the tax authorities that they owe no back-taxes. Otherwise, they should be barred from bidding in government tenders and RFPs (Requests for Proposals).

Databases and Information Gathering

• Estimating the informal economy should be a priority objective of the Bureau of Statistics, which should devote considerable resources to this effort. In doing so, the Bureau of Statistics should coordinate closely with a wide variety of relevant ministries and committees that oversee various sectors of the economy

• All registrars should be computerized: land, real estate, motor vehicles, share ownership, companies registration, tax filings, import and export related documentation (customs), VAT, permits and licences, records of flights abroad, ownership of mobile phones and so on. The tax authorities and the Public Revenue Office (PRO) should have unrestricted access to ALL the registers of all the registrars. Thus, they should be able to find tax evasion easily (ask for sources of wealth- how did you build this house and buy a new car if you are earning 500 DM monthly according to your tax return?).

• The PRO should have complete access to the computers of the ZPP and to all its computerized and non-computerized records.

• The computer system should constantly compare VAT records and records and statements related to other taxes in order to find discrepancies between them.

• Gradually, submissions of financial statements, tax returns and wealth declarations should be computerized and done even on a monthly basis (for instance, VAT statements).

• A system of informants and informant rewards should be established, including anonymous phone calls. Up to 10% of the intake or seizure value related to the information provided by the informant should go to the informant.

Law Enforcement

• Tax inspectors and customs officials should receive police powers and much higher salaries (including a percentage of tax revenues). The salaries of all tax inspectors – regardless of their original place of employment – should be equalized (of course, taking into consideration tenure, education, rank, etc.).

• Judges should be trained and educated in matters pertaining to the informal economy. Special courts for taxes, for instance, are a good idea (see recommendation below). Judges have to be trained in tax laws and the state tax authorities should provide BINDING opinions to entrepreneurs, businessmen and investors regarding the tax implications of their decisions and actions.

• It is recommended to assign tax inspectors to the public prosecutors' office to work as teams on complex or big cases.

• To establish an independent Financial and Tax Police with representatives from all relevant ministries but under the exclusive jurisdiction of the PRO. The remit of this Police should include all matters financial (including foreign exchange transactions, property and real estate transactions, payroll issues, etc.).

• Hiring and firing procedures in all the branches of the tax administration should be simplified. The number of administrative posts should be reduced and the number of tax inspectors and field agents increased.

• Tax arrears and especially the interest accruing thereof should be the first priority of the ZPP, before all other payments.

• All manufacturers and sellers of food products (including soft drinks, sweetmeats and candy, meat products, snacks) should purchase a licence from the state and be subjected to periodic and rigorous inspections.

• All contracts between firms should be registered in the courts and stamped to become valid. Contracts thus evidenced should be accompanied by the registration documents (registrar extract) of the contracting parties.  Many "firms" doing business in Macedonia are not even legally registered.

Reforms and Amnesty

• A special inter-ministerial committee with MINISTER-MEMBERS and headed by the PM should be established. Its roles: to reduce bureaucracy, to suggest appropriate new legislation and to investigate corruption.

• Bureaucracy should be pared down drastically. The more permits, licences, tolls, fees and documents needed – the more corruption. Less power to state officials means less corruption. The One Stop Shop concept should be implemented everywhere.

• A general amnesty should be considered. Citizens declaring their illegal wealth should be pardoned BY LAW and taxed on the hitherto undeclared wealth.

The Tax Code

• The Tax code needs to be simplified. Emphasis should be placed on VAT, consumption taxes, customs and excise taxes, fees and duties. To restore progressivity, the government should directly compensate the poor for the excess relative burden.

• After revising the tax code in a major way, the government should declare a moratorium on any further changes for at least four years.

• The self-employed and people whose main employment is directorship in companies should be given the choice between paying a fixed % of the market value of their assets (including financial assets) or income tax.

• All property rental contracts should be registered with the courts. Lack of registration in the courts and payment of a stamp tax should render the contract invalid. The courts should be allowed to evidence and stamp a contract only after it carries the stamp of the Public Revenue Office (PRO).  The PRO should register the contract and issue an immediate tax assessment. Contracts, which are for less than 75% of the market prices, should be subject to tax assessment at market prices. Market prices should be determined as the moving average of the last 100 rental contracts from the same region registered by the PRO.

• Filing of tax returns – including for the self-employed – should be only with the PRO and not with any other body (such as the ZPP).

Legal Issues

• The burden of proof in tax court cases should shift from the tax authorities to the person or firm assessed.

• Special tax courts should be established within the existing courts. They should be staffed by specifically trained judges. Their decisions should be appealed to the Supreme Court. They should render their decisions within 180 days. All other juridical and appeal instances should be cancelled – except for an appeal instance within the PRO. Thus, the process of tax collection should be greatly simplified. A tax assessment should be issued by the tax authorities, appealed internally (within the PRO), taken to a tax court session (by a plaintiff) and, finally, appealed to the Supreme Court (in very rare cases).

• The law should allow for greater fines, prison terms and for the speedier and longer closure of delinquent businesses.

• Seizure and sale procedures should be specified in all the tax laws and not merely by way of reference to the Income Tax Law. Enforcement provisions should be incorporated in all the tax laws.

• To amend the Law on Tax Administration, the Law on Personal Income Tax and the Law on Profits Tax as per the recommendations of the IRS experts (1997-9).

Customs and Duties

• Ideally, the customs service should be put under foreign contract managers. If this is politically too sensitive, the customs personnel should be entitled to receive a percentage of customs and duties revenues, on a departmental incentive basis. In any case, the customs should be subjected to outside inspection by expert inspectors who should be rewarded with a percentage of the corruption and lost revenues that they expose.

• In the case of imports or payments abroad, invoices, which include a price of more than 5% above the list price of a product, should be rejected and assessment for the purposes of paying customs duties and other taxes should be issued at the list price.

• In the case of exports or payments from abroad, invoices which include a discount of more than 25% on the list price of a product should be rejected and assessment for the purposes of paying customs duties and other taxes should be issued at the list price.

• The numbers of tax inspectors should be substantially increased and their pay considerably enhanced.  A departmental incentive system should be instituted involving a percentage of the intake (monetary fines levied, goods confiscated, etc.).

• The computerized database system (see "Databases and Information Gathering") should be used to compare imports of raw materials for the purposes of re-export and actual exports (using invoices and customs declarations). Where there are disparities and discrepancies, severe and immediate penal actions should be taken. Anti-dumping levies and measures, fines and criminal charges should be adopted against exporters colluding with importers in hiding imported goods or reducing their value.

• Often final products are imported and declared to the customs as raw materials (to minimize customs duties paid). Later these raw materials are either sold outright in the domestic or international markets or bartered for finished products (for example: paints and lacquers against furniture or sugar against chocolate). This should be a major focus of the fight against the informal economy. I follow with an analysis of two products, which are often abused in this manner.

• I study two examples (white sugar and cooking oil) though virtually all raw materials and foods are subject to the aforementioned abuse.

• White Sugar is often imported as brown sugar. One way to prevent this is to place sugar on the list of LB (import licence required) list, to limit the effective period of each licence issued, to connect each transaction of imported brown sugar to a transaction of export, to apply the world price of sugar to customs duties, to demand payment of customs duties in the first customs terminal, to demand a forwarder's as well as an importer's guarantee and to require a certificate of origin. The same goes for Cooking Oil (which – when it is imported packaged – is often declared as some other goods).

• All payments to the customs should be made only through the ZPP. Customs and tax inspectors should inspect these receipts periodically.

• All goods should be kept in the customs terminal until full payment of the customs duties, as evidenced by a ZPP receipt, is effected.

Public Campaign

The government should embark on a massive Public Relations and Information campaign. The citizens should be made to understand what is a budget, how the taxes are collected, how they are used.  They should begin to view tax evaders as criminals. "He who does not pay his taxes – is stealing from you and from your children", "Why should YOU pay for HIM?" "If we all did not pay taxes- there would be no roads, bridges, schools, or hospitals" (using video to show disappearing roads, bridges, suffering patients and students without classes), "Our country is a partnership – and the tax-evader is stealing from the till (kasa)" and so on.

The phrase "Grey Economy" should be replaced by the more accurate phrases "Black Economy" or "Criminal Economy".

These chapters in the report have not been released for publication by the client:

The Orientation of Macedonia (Equidistance, EU, NATO, Balkan)

The Budget

Data and Statistics

The Media

Pensions Social and Welfare Benefits

Healthcare

Information and Knowledge – Infrastructure and Industries

Construction

Agriculture

Industry

Transportation and Telecommunications

Tourism and Catering

The Capital Markets

Foreign Direct Investments

Macedonia's Report Card - 10 Things that Could Go Wrong

January 2008

Like Blanche Dubois in "Streetcar Named Desire", Macedonians now prefer fantasy over harsh reality. They lash out at anyone who wishes to offset their euphoria with a long, hard look at hazards, real achievements, and true future prospects.

Under the tutelage of the Gruevski government, Macedonia made great strides in a surprisingly short period of time. The government should be lauded and complimented for its energy and initiative and its inordinate ability to transform Macedonia into a modern participant in globalization. The pace and extent of its accomplishments is incredible.

Yet, Macedonia faces 10 risks and the government is doing precious little to confront them:

1. Asset Bubbles

At a multiple of 37, the Macedonian Stock Exchange is a bubble, by any definition of the word.

The Macedonian Stock Exchange, as measured by its MBI-10 index, rose to a record high of close to 10,500 in mid-2007. It has since shed 30% of its gains. This correction, or, rather, rout has its roots is a series of converging factors.

Macedonia benefited from globalization. As its informal economy emerged from the shadows, capital controls were lifted, capital mobility increased, and foreign firms and investors entered the scene. The more the business climate improved, the better Macedonia's prospects appeared, the higher Macedonian stocks were valued by an euphoric public. Macedonia's professionals did nothing to restrain the hysteria or to ameliorate the casino mentality that pervaded the entire system. They benefited personally from the bubble.

The newfound optimism of Macedonia led to a repricing of risk and to heightened expectations of corporate profits, boosted by a more lenient tax regime and by decreasing interest rates. Equity risk premium plummeted until it vanished altogether and even became negative. The P/E multiple reached a stratospheric 50 before the recent correction. It is still pegged at an unsustainable 37.

Throughout this Bacchanalia, foreigners flocked into the Macedonian Stock Exchange, constituting 30-40% of the buy side. But they have begun to withdraw owing to big privatizations back home, troubles in their domestic financial systems, a more restrictive monetary policy in some countries, and the changing fortunes of the Macedonian marketplace.

The down trend in the Macedonian Stock Exchange is not a mere correction. It is a repricing of assets. It still has a long way to go. Even at 4300 - the next massive technical support - Macedonian shares are inanely overvalued.

Similarly, real estate prices are stratospheric, but this can be justified by the lack of reliable, scandal-free supply and the underdeveloped market for mortgages and real estate leasing.

Should one or both bubble burst, the adverse effects on consumption are likely to be noticeable.

2. Credit Bubble

In December 2007, holiday spending in Macedonia surged 100 million euros to 350 million euros. Most of the increase was financed with credits, as were the purchases of shares on the stock exchange, cars, and housing. High interest rates virtually guarantee that many of these loans will go bad. When they do, the government will be called upon to bail out the banking system. In all probability, it will.

3. Trade Deficit

Macedonia's trade deficit now equals 20% of its formal GDP (excluding the informal economy). It is unsustainable. Yet, the more vigorous the economy, the more the country's consumers and businessmen are likely to import. The culprits in engendering this imbalance are an overvalued currency, a hyper-liberalized trade regime, an antiquated and badly-managed industrial sector, and the profligacy of the population.

As long as unilateral transfers (such as remittances) cover the yawning gap in the current account deficit, Macedonia can survive with such irresponsible conduct. But, if the global economy turns sour, Macedonian Gastarbeiter will be forced to return home. This will likely precipitate a currency crisis.

4. Living Standards and Inflation

Inflation in Macedonia is severely under-reported by the government's Bureau of Statistics. Even so, living standards have dived with the rise in energy and food prices. The government doles out wage and pension increases but cannot compete with the global surge in the prices of commodities. Coupled with the aforementioned credit bubble, this is an ominous sign. Macedonia could end up having its own mini-version of the crisis in the USA: bankruptcies, credit crunch, and recession.

5. Foreign Direct Investment (FDI)

While Macedonia's image and perception as a business destination and the business climate have improved considerably under Gruevski's government, in reality, not much else has changed.

Consider the following numbers, pertaining to Macedonia:

Control of Corruption Indicator, published by the World Bank: 113 (2006) vs. 111 (2007)

Country Credit Rating, published by Institutional investor: 85 (2006) vs. 84 (2007)

Index of Economic Freedom, published by The Heritage Foundation and the Wall Street Journal: 75 (2006) vs. 71 (2007)

Quality of National Business Environment Ranking, issued by the World Economic Forum in its Global Competitiveness Report: 87 out of 121 countries.

Only the World Bank's Doing Business Ranking jumped from 96 (2006) to 75 (2007). Yet, even this indicator hides some unpalatable truths: Macedonia has deteriorated in certain respects. It is more difficult and cumbersome to hire workers, to register property, to obtain credit, to protect investor rights, and to enforce contracts. In any case, this indicator has more to do with public relations, expectations, and psychology, rather than with the hard facts on the ground.

And the hard facts are:

Macedonia is not ready to absorb and accommodate foreign investors and their capital. It still has a long way to go. This government has put the cart before the horses;

The youthful, populist, and inexperienced administration is overwhelmed and ill-equipped to deal with its obligations towards and promises to foreign investors. Decision-making bottlenecks (especially in the office of Vice-Premier Zoran Stavreski) conspire with red tape and blatant favoritism to render nightmarish both greenfield and brownfield ventures.

In a long-running arbitration, the country was slapped with multimillion dollar damages payable to the Greek investors in Okta. This did not deter the government from conflicting vocally and publicly with Macedonia's other large investor, the Austrian EVN, owner of the electricity utility;

To its credit, the government has reformed the tax system, introduced a flat tax, and reduced the tax rates, all laudable. But it is still illegal for foreigners to own land and real estate (as individuals) and all but impossible to trade in the local stock exchange. The government has only now resorted to tackling these archaic limitations;

The country is dysfunctional. No institution works properly: the cadastre, the courts, law enforcement agencies, the civil service are all in chaotic disarray. Even the banking system, despite a decade of FDI, is rudimentary. Infrastructure of all sorts is dismal, though improving. The government's anti-corruption drive is much lauded but highly politicized and one-sided, aimed as it is exclusively at the hapless politicians of the opposition. Macedonia's laws are not geared to welcome and assimilate foreign investment, foreigner businessmen, and foreign workers;

Macedonia lacks skilled manpower. The education deficit is pervasive. More than half the adult population has eight years of schooling or less. A multi-generational brain drain saps the country's vitality and prospects in the global information economy of the 21st century. Contrary to the government's claims in its "Invest in Macedonia" campaign, costs and taxes associated with wages are among the highest in the world.

The country suffers from other problems: a huge informal economy, skyrocketing consumer and enterprise indebtedness, ominous asset bubbles in both the stock exchange and the real estate market, a crippled middle class and crippling poverty and unemployment rates, an unmanageable and increasing trade deficit (c. 20% of GDP), and a whopping current account deficit offset only by remittances from Macedonian workers abroad. The global credit crunch constitutes a major threat to polities with such precarious finances.

Despite a slew of expensive PR and advertising campaigns; the appointments of two ministers and the formation of a special agency to deal with FDI; incessant trips abroad by every functionary, from the prime minister down; and innovative marketing initiatives - FDI figures for 2007, at c. 180 million USD (c. 3% of GDP), are a major disappointment. Moreover, a sizable part of Macedonia's FDI is in construction, retail, financial services, and trade, economic sectors with minimal contribution to future growth.

In comparison, FDI doubled in decrepit, post-bellum Serbia, to 4.5 billion USD in 2006. Croatia garnered 3.6 billion USD (2.7 billion euro) - twice the 2005 figure. Even strife-torn Bosnia-Herzegovina, under a EU peacekeeping mission, attracted 2.9 billion USD (2 billion euros). Bulgaria absorbed 6.5 billion USD. FDI amounted to 10% of Balkan GDP in 2006.

The conclusion is inescapable: Macedonia has failed in its bid to attract FDI. This is not the first time that Macedonian politicians and their downtrodden and destitute people prefer the fantasy of foreign saviors to the hard slog of painful and much-needed reforms at home. The current prime minister, Gruevski, served in the government of Ljubco Georgievski, whose nostrum and panacea to Macedonia's economic woes was dollops of money, supposed to be funneled via illusive Taiwanese investors. The person most identified with this policy, Vasil Tupurkovski, now faces criminal charges.

Gruevski can learn many lessons from the debacles wrought by his predecessors. It is not too late to get his priorities straight: reforms, education, domestic investment, and employment first, and only then an open invitation to foreigners to come and invest in Macedonia.

6. Geopolitical Risks

Geopolitical instability (in Kosovo) is exacerbated by the current Macedonian regime's jingoism, its overt and manipulative religiosity, and greenhorn fickleness. Within the last year, Macedonia has considerably retarded its chances to enter NATO and the European Union (EU), having clashed unnecessarily and spectacularly with Greece, Serbia, Bulgaria, and the Albanian minority at home.

7. Unemployment

The government's obsession with FDI as the solution for Macedonia's unemployment precluded a reasoned and coordinated effort to tackle unemployment head-on, especially by encouraging domestic investment. To this very day, the government has failed to come with a plan on how to fight unemployment in the short to medium term.

Consequently, unemployment has remained largely the same, at 35%. In certain sectors - such as mining and manufacturing - it even went up (by a whopping 8%, compared to 2005).

The government's concurrent attempts to fight the informal economy have the unfortunate effect of removing the only effective social safety net and source of income available to the unemployed.

8. Education

As is its habit in all other fields, the government is more concerned with grandiose schemes (computer for every child) than with the mundane and dreary reality of education in Macedonia: lack of infrastructure, no teaching cadre, no supportive social services (day care, for instance), or cultural ambience (the education of girls is still controversial in certain segments of Macedonian society).

The government is attempting to respond to the perceived needs of foreign investors by teaching skills to young and older alike. This is a step in the right direction. But, carried out in a vacuum of other policy measures, it is bound to backfire and end in a brain drain or in deep and lasting frustration.

9. Agriculture

Instead of acknowledging that Macedonia's agriculture is non-competitive for a variety of reasons, the government keeps pouring tens of millions of scarce euros into dying crops (tobacco, for instance). The solution is, of course, to scrap the entire Macedonian agriculture, retrain the farmers and embark on a bold plan to reorient the sector to off-season vegetables and flowers, high-value crops, organic produce, and bioengineering.

10. Over-taxation

When a government in a country as destitute as Macedonia wastes its money on the early repayment of debts to International Financial Institutions and ends up with a surplus in its central budget, its policies are wrong and constrictive. Rather than promote growth, the government is over-taxing. This leads to an inefficient allocation of resources. Rather than invest, the government increases wages in the public sector, augments pensions, and showers subsidies on dying sectors.

Paradoxically, such colossal waste is bound to end up in a demonetization and contraction of the economy as the private sector gives up its futile attempt to compete with the largesse of the government and as businesses are rendered rent-seekers.

Conclusion

The Gruevski government is business-friendly and growth-oriented. It is truly reformist. However, its policies of benign neglect and over-reliance on foreigners and their money as a nostrum and panacea threaten Macedonia with stagflation: inflation coupled with recession, increasing unemployment and negative growth.

Visa Liberalization: A Threat to Macedonia?

An Executive Summary of a Research Report Dated 07/06/2009

The client authorized the publication of the Executive Summary only.

Macedonian citizens will enjoy visa-free travel to most destinations in Europe starting in early 2010. The liberalization of the visa regime is welcomed in the tiny, landlocked and claustrophobic country: it will provide its long-suffering denizens with access to higher education and jobs in a common market with 300 million people and a GDP to equal the United States.

But, the change in the visa regime also presents multiple threats to the fragile polity. To start with, it could encourage an exodus of ethnic Macedonians from the country and alter to their disfavor the demographic balance with their Albanian nemeses.

This is a realistic scenario: Macedonia's membership in NATO was vetoed by an irate Greece last year when the two parties failed to reach a compromise regarding the "name Issue" (Greece's insistence that Macedonia change its name). Similarly, Macedonia was not given a date to commence its accession talks with the European Union. Economic and Euro-Atlantic integration prospects look dim and youngsters and elders alike are frantically looking for a way out. Rumblings of a renewed ethnic conflict have recently escalated.

Based on experience from other countries in Central and Eastern Europe - such as Poland and Bulgaria - and on experience from other regions (for instance: Israel and Vietnam), we conclude:

Macedonia is likely to lose 3-5% of its population over the next 5 years (assuming that Europe undergoes a mild economic recovery starting in 2012). Most of these are expected to take advantage of the visa liberalization regime and leave Macedonia for good (emigrate). Another 3-5% are likely to try to find temporary jobs as Gastarbeiter. Consequently, Macedonia will plunge into negative population growth.

At least 40% of these emigrants are likely to be students, white-collar workers, academics, and skilled laborers. This massive brain drain will create labor shortages in crucial sectors (healthcare, education, academe, research and development, banking and finance, hi-tech industries and manufacturing). As Macedonia's economy recovers and improves, the brain drain will increase, not decrease!

Barry Chiswick and Timothy Hatton demonstrated ("International Migration and the Integration of Labour Markets", published by the NBER in its "Globalisation in Historical Perspective") that, as the economies of poor countries improve, emigration increases because people become sufficiently wealthy to finance the trip.

Remittances are likely to recover as emigrants and Gastarbeiter send money back home and, thus, replenish the country's foreign exchange reserves by an extra 200-300 million euros a year. By 2013, remittances will exceed the record level of 2007 and foster a new wave of consumption, construction, and GDP growth. Levels of unemployment inside Macedonia will drop and unemployment of the well-educated and skilled will be all but eliminated.

Quotes from the report:

"Macedonia invests an average of $50,000 of its painfully scarce resources in every university graduate, only to witness tens of thousands of them emigrate to richer places. Macedonia ends up subsidizing the rich countries by exporting to them its human capital, the prospective members of its dwindling elites, and the taxes they would have paid had they stayed put. The formation of its middle class is often irreversibly hindered by an all-pervasive brain drain. The kleptocracies that run Macedonia may actually welcome the brain drain as it also drains the country of potential political adversaries." (p. 6)

"Emigration also tends to decrease competitiveness. It increase salaries at home by reducing supply in the labour market (and reduces salaries at the receiving end, especially for unskilled workers) ... The countries of origin, whose intellectual elites are depleted by the brain drain, are often forced to resort to hiring (expensive) foreigners." (p. 18)

How can Macedonia take advantage of the communities of expats (expatriates) that are likely to form after the visa regime has been liberalized?

"Countries - from Mexico to Israel, and from China to Guatemala - are trying to tap into the considerable wealth of their diasporas by issuing remittance-bonds, by offering tax holidays, one-stop-shop facilities, business incubators, and direct access to decision makers - as well as matching investment funds.

Migrant associations are sprouting all over the Western world, often at the behest of municipal authorities back home. The UNDP, the International Organization of Migration (IOM), as well as many governments (e.g., Israel, China, Venezuela, Uruguay, Ethiopia), encourage expatriates to share their skills with their counterparts in their country of origin. The thriving hi-tech industries in Israel, India, Ireland, Taiwan, and South Korea were founded by returning migrants who brought with them not only capital to invest and contacts - but also entrepreneurial skills and cutting edge technologies.

Thailand established in 1997, within the National Science and Technology Development Agency, a 2.2 billion baht project called "Reverse the Brain Drain". Its aim is to 'use the 'brain' and 'connections' of Thai professionals living overseas to help in the Development of Thailand, particularly in science and technology.'

The OECD ("International Mobility of the Highly Skilled") believes that:

'More and more highly skilled workers are moving abroad for jobs, encouraging innovation to circulate and helping to boost economic growth around the globe.'

But it admits that a "greater co-operation between sending and receiving countries is needed to ensure a fair distribution of benefits".

The OECD noted, in its "Annual Trends in International Migration, 2001" that (to quote its press release):

'Migration involving qualified and highly qualified workers rose sharply between 1999 and 2000, helped by better employment prospects and the easing of entry conditions. Instead of granting initial temporary work permits only for one year, as in the past, some OECD countries, particularly in Europe, have been issuing them for up to five years and generally making them renewable. Countries such as Australia and Canada, where migration policies were mainly aimed at permanent settlers, are also now favoring temporary work permits valid for between three and six years ... In addition to a general increase in economic prosperity, one of the main factors behind the recent increase in worker migration has been the development of information technology, a sector where in 2000 there was a shortage of around 850,000 technicians in the US and nearly 2 million in Europe...'

But the OECD underplays the importance of brain drain:

'Fears of a "brain drain" from developing to technologically advanced countries may be exaggerated, given that many professionals do eventually return to their country of origin. To avoid the loss of highly qualified workers, however, developing countries need to build their own innovation and research facilities ... China, for example, has recently launched a program aimed at developing 100 selected universities into world-class research centers. Another way to ensure return ... could be to encourage students to study abroad while making study grants conditional on the student's return home.' " (p.23-6)

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