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Entrepreneur of the year 2007
Macedonia's "Entrepreneur of the year 2007". Photo: Government of Macedonia

The performance of the Macedonian economy since the transition from socialism has not been impressive. For years Macedonia had lower growth, higher official unemployment, and lower FDI than its neighbours. The 2001 uprising, which left the country on the brink of civil war, plunged the economy into recession. In 2001, GDP declined by 4.5 percent. In the years since, GDP grew, but only slowly. Only very recently has the situation begun to improve.

The weak performance of Macedonia's economy is strongly linked to its socialist legacy. Until the late 1940s, the area that today makes up the Republic of Macedonia – battered by the two Balkan wars and the two World Wars – was backward, rural and poor. It was only alongside communism that industrialisation came to Macedonia; it was to leave a lasting mark on the country’s economy.

The creation of urban industrial centres led to an important demographic shift, as people left the rural areas to take up jobs in towns and cities. The country's most important industries were metal processing, textiles, food processing and chemicals (Economist Intelligence Unit). Until the collapse of Yugoslavia, these sectors were able to survive thanks to protected markets and the lack of trade barriers within the Socialist Federal Republic. Nevertheless, Macedonia remained one of the country’s poorest areas.

After the disintegration of Yugoslavia, Macedonia's socialist enterprises were exposed as inefficient and overstaffed. Macedonia entered a period of deindustrialisation. Factories laid off workers and sharply cut production. A private sector – entrepreneurial businesses that could promote industrial development – failed to materialise. Between 1990 and 2006, the industrial sector’s contribution to GDP declined from 45 percent to 28 percent (EIU). Deindustrialisation led to a large increase in unemployment. In the Kumanovo region, for example, there were 18,000 people employed in the industrial sector in 1990; by 2003 only 7,000 jobs remained, with about half of these under threat. In Kicevo, the number of jobs in industry declined from 6,600 to 2,800 between 1989 and 2005. At the national level, official unemployment stood at 36 percent in the first half of 2007, being especially high among young people.

Foreign direct investment in Macedonia was the lowest in the region in 2002, 2003, 2004 and 2005 (CRPM). In 2005 Macedonia attracted only 1 percent of the FDI that went to South East European countries (ICEG EC). This figure is especially striking considering Macedonia's relative progress – as compared to that of other countries in the region – towards EU accession.

Private investment is also low. A 2006 IMF report found private capital accumulation to be the lowest in the region. The process of insider privatisation, through which many of Macedonia's socialist firms were privatised, generated no new capital. Transferring ownership to existing managers and workers also prevented companies from restructuring: these new shareholders had no incentives to lay off workers.

Remittances play an important role in Macedonia's economy. Estimates suggest remittances doubled between 2000 and 2005, reaching a level of 18 percent of GDP by 2005 (IMF). Migration and remittances have proved especially vital for the Albanian minority. For decades Albanians found it more difficult than ethnic Macedonians to secure jobs in the public sector or in industry, leading many of them to emigrate to Western Europe and the United States.

As a landlocked country, Macedonia is dependent on its neighbours for trade and access to ports. When Greece imposed a trade embargo on Macedonia in the course of the long-running dispute about Macedonia's name, the country found itself cut off from the Greek ports that handled much of its trade. It was further buffeted by the 1997 crisis in Albania and the 1999 war in Kosovo, over the course of which Macedonia accepted over 300,000 refugees. Given the importance that Macedonia attaches to regional stability, low trade barriers and good relations with its neighbours, the economic benefits of EU membership would be especially high.

In September 2006, the Prime Minster of Macedonia, Nikola Gruevski, announced:

"It's high time Macedonia became a new economic tiger, in the footsteps of Ireland and Slovakia. The country is committed to doing so through assistance of all sectors in our society." (News, Government of Republic of Macedonia)

Indeed, economic performance has recently improved. GDP growth in 2007 was estimated at 5.1 percent (CIA World Factbook). The Macedonian government predicts that the gradual upswing will continue in 2008, projecting growth of 6.1 percent. Industrial output increased by 10 percent in January-February 2008 (US embassy). An encouraging example of industrial development is the growth and creation of jobs in the textile sector.

Macedonian Economy Key Facts

GDP Growth (2007)

5.1 %

Per capita GDP (2006)

$ 7,500

Inflation (2007)

2.3%

Population below poverty line (2006)

29.8%

Official Unemployment (2007)

34.8%

Official Employment rate (2007)

36.4%

GDP by Sector: (Employment by Sector) (2007)

 

Agriculture

10.3% (19.6%)

Industry

28.1% (30.4%)

Services

61.6% (50.0%)

Foreign Direct Investment Net inflows (2007)

$ 320 million

Exports (2007)

$ 3,356 million

Imports (2007)

$ 5,228 million

Sources: World Bank, CIA World Factbook, Economist Intelligence Unit, US Embassy Macedonia

May 2008

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