25th June 2019, Skopje – Dear Ladies and Gentlemen, fellow ministers and government representatives; respected Governors of central banks and their representatives; dear IMF and World Bank guests;
It is my pleasure to welcome you in North Macedonia! Through the centuries, in fact through the millennia, this region has been a crossroad and a battleground for various empires and states. Due to the rich history, North Macedonia has since long time ago been cosmopolitan – probably before people even knew what cosmopolitan means. So here in Skopje, you can see Orthodox churches alongside Muslim mosques; there are also catholic churches and a Holocaust Museum in memory of Jews deported during the Second World War. You can walk in the City fortress, whose foundations date from the Roman times, with the current walls built and used in Ottoman times. You can walk down the Old Turkish Bazaar. Wherever you walk, you will hear a variety of languages – Macedonian, Albanian, English, Turkish, German…. You also hear what we call “nash jezik”, which means “our language” – this is a very nice compromise to avoid all the endless linguistic debates of Serbian/Croatian/Bosnian/Montenegrin . You can cross the Stone Bridge to get to the brutalist architecture of the Yugoslav period, which was recently also exposed in the Metropolitan Museum of Art in New York. Ok, you can also see a few monuments and facades – they look old but are in fact brand new … but that one is a different story.
Skopje today has a beautiful energy. We believe in “the life for all”. The people want to go out and be with their friends. Recently, a handball team from Skopje – Vardar, became European Champions in handball. In the battle like David against Goliath, Vardar beat a giant such as Barcelona. This is also a good analogy for today’s topic. If there is a level playing field, the small could also win the game. This is the very definition of fairness in sports – the same should hold in economics as well.
In his outstanding book, “Homo Deus”, the popular Israeli philosopher Yuval Noah Harari, points out that for the first time in history, today more people die from eating too much than from eating too little. Perhaps this one sounds a bit ironic, but there are two irreconcilable facts: 1. Capitalism and the market economy filled supermarket racks and reduced hunger in many countries of the world; but also 2. Inequality is rising.
However, for those here who have never lived in socialism and do not remember the times of hyper-inflation and empty rafts in the markets, I will start with one of the most popular socialist jokes, just to remind you of the poverty (situation?) in the not so distant past.
A man goes into a shop and asks “You don’t have any meat?” “No, replies the sales lady, “We do not have any fish. It’s the store across the street that does not have any meat.”
Well, yes, the world made a few steps forward and remember some bad things from the past through the jokes – it was sometimes the only way out when going got tough. But the world and capitalism are far from perfect, so today we will discuss how to make capitalism work, not for few, but for everyone!
So, how to make capitalism to work for all? Let me briefly provide a few personal thoughts, before giving the floor to the distinguished array of guests.
First, there is no doubt that capitalism is the best economic system – some would add: the best in the current level of development of human conscience. And it is good that this represents a strong consensus in the policy circles, in governments, among the people, and so on. Except for few cases, virtually all countries in the world accept the basic tenets of capitalism.
Second, we must confess not all is rosy. I agree with criticism by Professor Zingales related to Crony capitalism. He says: “When a business gains excessive market power, so that it can increase prices indiscriminately, customers can seek protection through the political process. But when a business obtains both market and political power, escape becomes impossible. Under these circumstances, the system starts to resemble a socialist economy instead of a free market. In a socialist economy, the political system controls business; in a crony capitalist system of this kind, business controls the political process. The difference is slim: either way, competition is absent and freedom shrinks. Without competition, economic life becomes unfair, favoring the connected insider.”
Therefore, we, especially the countries that only three decades ago started the transition from socialism to capitalism, should constantly repeat that the ultimate source of generalized prosperity is competition. Therefore our policies should be pro-market, to create competition in the economy, and not pro-big business. We must not go round in circles. In this context, Professor Zingales rightly emphasises that “launching public-private partnerships is a way to suck money from the government pretending to do good”.
My third point, which is closer to my heart, but also directly related to the topic of the conference, is that there is inequality is not a logical consequence of capitalism – in other words, you can have a capitalist system with both high and low inequality. I believe this is a highly relevant topic in the global scene as well. We are witnessing various political movements and ideas in the world, some of them not so much of our liking, and not at all favourable for economic growth. Today is the time of populism, of overt nationalism and xenophobia, of fake news, of divisions. Unfortunately, I strongly believe that at least some of these trends are actually a result of growing inequality. It is undeniably frustrating that large numbers of people work tirelessly and give their best, but are infinitely poorer and with less opportunities in life than their fellow citizens. With inferior education, with inferior or expensive healthcare, with miserable retirements – this all provides a very fertile ground for the next charlatan to appear and to promise you the moon in exchange for your vote.
Finally, my fourth point, which is also directly linked to the topic, is the importance of human capital. I strongly believe that we can not have a proper capitalist system without highly developed human capital. And, as a social-democrat, but also as a professor of economics and as a Danish school alumni, I also strongly believe that the state, the government has a strong role to play here. Of course there is ample space for private sector involvement and cooperation, but it is the duty of the state towards its citizens to provide good education, good health services, good social services and to help the vulnerable groups. This is I believe the only way in which we can sustain the capitalist system. It is only when we have healthy workers, well educated employees, who can count on good wages and decent retirement, that we can hope to have higher productivity, higher economic growth and excellent living standards.
Dear distinguished guests,
My wish is to see my country get closer to the European societies – in terms of the political system, the economic system, the way of living. In fact, membership of the European Union has been the strategic priority of my country since independence.
I am glad that the European Commission recognizes the progress that we have made as a country. In particular, in its latest country Progress Report, the Commission notes that, as regards the economic criteria, North Macedonia has made progress and is at a good level of preparation in developing a functioning market economy. Needless to say, the functional market economy is the very key pillar of capitalism that works for all – and also one of the key 3 criteria for EU membership.
Our progress was also recognized last week by Fitch, which revised our rating from BB to BB+ – this is the first increase of the country rating in 13 years, which is one more clear sign of the progress in political and economic terms.
Let me highlight some of the key changes in public finances that we made that are directly related both to our country progress (as recognized by European Commission, Fitch and other institutions) and to the issues of discussion today:
- We started a process of gradual fiscal consolidation, carefully balanced between revenue and expenditure measures, which helped to stabilise the public finances. Let us not forget that the public debt more than doubled between 2008 and 2016 – from 23,2 to 48,8% of GDP. On the other hand, in the end of 2018, public debt was 48,5% of GDP, or 0,3 percentage points lower than in 2016.
- On the revenue side:
- We reformed the personal income tax. This was made to in order to lower the inequality in our society, and at the same to improve our budget revenues so we could spend more on our most vulnerable fellow citizens. Similar like most other ex-communist countries, we abolished the flat tax system, and introduced a second bracket for the PIT at still fairly low and competitive 18% (while maintaining the base rate of 10%).
- With the pension reform, we put the rising deficit of the pay-as-you-go system under control. We managed this by sharing the burden across citizens and generations in a fair manner and without increasing the retirement age: the social contributions were slightly increased, the indexation was moved to full CPI, and the accrual rates were changed.
- On the expenditure side:
- We adopted the new Law on public procurement, which is aligned with EU legislation. This will enable us to minimise the space for abuses, and at the same time increase the possibility to get best value for the citizens money.
- We introduced a comprehensive reform of the social assistance system to support and activate vulnerable categories of citizens and improve social transfer targeting. We had a social transfer system that was almost equally “helping” the poor and the higher income citizens. Now we are directing the money where they are actually needed.
- We greatly enhanced fiscal transparency. Our Fiscal strategy, Budget, PFM progress, ERP preparation (Economic Reform Programme) and all other key activities are subject to public consultations. We have prepared citizens budgets and also greatly increased the amount and kinds of data that we publish. We underwent the IMF Fiscal Transparency Evaluation, which provided a clear diagnostics and a roadmap for the period ahead. We also acceded to the SDDS+.
- With all these changes, we managed to create fiscal space to increase investing in human capital while maintaining fiscal discipline. The under-investment in the past is clearly reflected in the low human capital index in our country. Therefore we decided to pay much more attention – and money! – in this system. Besides the social assistance reform, we are also increasing spending on active labour market policies, and are building new kindergartens, including with help by the World Bank and the EU. Further, we are continuously increasing spending on education and health, including by raising wages of teachers and doctors. These are the most important links in the entire system – and weak links produce weak pupils and unhealthy citizens. We strongly believe that the respect the society shows to doctors, nurses and teachers will have multiple effects in future generations.
Finally, before concluding, let me very briefly state some of the key results we have achieved in economic terms. After stagnation in 2017, GDP growth reached 2,7% in 2018, and further intensified to 4,1% in the first quarter of 2019. The net wages grew by almost 6% in 2018, which is the highest growth rate in the past 9 years; they continued growth in the first quarter of 2019 by 3,4%. The unemployment rate continued falling to 17,8% in the first quarter of this year – still high, but it is by far the lowest for North Macedonia. In the first four months of 2019, industrial production grew by 7,9%, way higher than the average 2,7% of the previous 7 years. At the same period, exports grew by 15% – as opposed to the average of 9,2% in the last 7 years. Further, last year the FDI’s reached the historically highest level of EUR 625 million (5,8% of GDP), which was a clear message to us from the investors that they value North Macedonia’s prospects. Last but not least, the yields on government bonds clearly show the immediate effects of our work. In early 2018, we issued the historically best Eurobond of 7-years at coupon rate 2,75% – this was reflecting primarily positive expectations and confidence in the country. Currently, the same bond is trading at a yield of around 2% – this would have been unimaginable for us in the past, and shows the serious foreign investors value our achievements and have even higher confidence in us.
Dear fellow guests,
I could continue with this, but I believe the message is clear: when there is will – there is way! With help by the international partners, including the IMF and the World Bank, we managed to achieve huge results in a very short period of time. I believe even better times are waiting for us. Most certainly, I will not consider any of this a success unless it is properly shared among all our fellow citizens. We have the privilege, but also the duty to enable the prosperity to be shared among all!
I am convinced that the discussions today, the informal conversations today and tomorrow, the links that will be established during the entire event, will provide a very sound foundation for us achieving these goals.
Let me finally stop here, and wish you a very successful discussion today and a very good time here in Skopje and in North Macedonia!