20th January 2024, Skopje – Yesterday in Washington, the Executive Board of the IMF concluded the 2023 Article IV Consultation and completed the First Review under the PLL (Precautionary and Liquidity Line) Arrangement, stating that the authorities are progressing towards PLL objectives and managing the crises. Thus, the authorities are given access to additional EUR 200 million as budget support to the policy agenda focused on fiscal consolidation and continued strong economic recovery post the COVID-19 induced pandemic and the energy and price shocks triggered by the war in Ukraine.
As regards building sound economic perspectives and achieving progress in our European agenda, two important events are to take place next week, the first one in Washington DC, with the WB Board of Directors expected to approve the Country Partnership Framework 2024 – 2028 to support the priority areas for economic growth and development of our economy, the second one in Skopje, at the Leaders’ Meeting, with Prime Ministers, Presidents and Ministers of Finance and of EU Integration from Western Balkans countries meeting high officials from the EC, the international financial institutions and the USA to discuss the next steps for a successful implementation of the Growth Plan for the Western Balkans.
Great opportunity for our European perspective and prosperity, which is exceptionally important in times of the world facing big geostrategic challenges and the uncertainty becoming the “new normal”. This calls for a wise approach in using all opportunities and do our part on time!
Missed opportunities turn into future risks. Failing to pick up the pace, the race runner will lag behind and lose the race. This year, we, as well as the whole world, are at a crossroad setting the path to post-crisis economic recovery and long-term development. Political analysts point at 2024 as the biggest election year, with elections taking place in more than 50 countries, representing half of the world’s population. Hence, this is a year of new elections, and also uncertainty, with the world expecting growth slowdown in relation to last year, further reduction of inflation and loosening of the monetary policy of the major central banks.
In this column, I would like to reflect on the complex picture of the global economy with all related risks and possibilities, in the light of building a prosperous future for our country. I will touch upon the new growth models, respective strategies and plans for their implementation, pinpointing on the global investors’ map, how to take advantage of the prevalent surrounding and overcome the internal structural challenges. I would try to be thorough and straightforward, to offer a critical read, which will call for national awareness and broad consensus. Without national consensus on long-term economic strategy, which will provide for consistency of the reforms and the policies, we cannot expect any enduring progress. Only together, equipped with knowledge, we can move faster and get further. Still, there is enough room on this path for idea and solution competition. By being committed to a consistent strategy for long-term sustainable growth, changes in the coming ten years, and the following twenty years, will be huge – faster raising of the living standard (GDP per capita will increase by 70%), significant drop of the poverty rate (percentage of people earning US$ 2.15 per day will decline from 6.1% to 0.4%) and building a more prosperous modern European society.
Moreover, this column marks the wrapping up of the cycle of columns in which I have chronologically presented the challenges we, as a Government, and I personally as a Minister of Finance, faced, as well as the policies and the reforms we implemented throughout this past period. In view of the upcoming pre-election period, and for the columns not to be perceived as a pre-election marketing, I believe this is appropriate moment to wrap up the cycle of analyses and opinions about issues of importance for the development and the economy.
Multipolar World Filled With Multilateral Challenges
Misinformation and disinformation, extreme weather events, societal polarization, cyberattacks, armed conflicts, lack of economic opportunities, inflation, etc. are among the risks over the short term identified in the Global Risks Report 2024 of the World Economic Forum, with extreme weather events, critical changes to Earth system, biodiversity loss and ecosystem collapse, natural resource shortages, misinformation and disinformation, as well as potential adverse outcome of AI technologies, as global risks over the long term. As noted in the Report, which highlights the insights from 1,500 global leaders across academia, business, government and civil society, majority of the respondents reflect certain concern, anticipating some instability and a moderate risk of global catastrophes over the short and the long run. Climate, technological and demographic shifts, raising regional conflicts, increasing geopolitical competition and its impact on supply chains are showcasing many tipping points. Global leaders meeting in Davos sent a message that a multipolar world filled with multilateral challenges requires “trust to be rebuilt” and coming together in addressing the challenges certain countries and regions cannot deal with by themselves.
The world is halfway to the deadline set by the UN 2030 Agenda, while progress under the 17 Sustainable Development Goals (SDGs) is weak and insufficient for more than 50% of the goals, with progress either stalled or even reversed on more than 30% of the goals. As UN Secretary-General, António Guterres, said, “Unless we act now, the 2023 Agenda will become an epitaph for a world that might have been”. Differences between developing and developed countries have intensified after the pandemic and the subsequent shocks, considering that the developed economies had the liberty to design sizable anti-crisis package, helping them to get back to the pre-pandemic growth trajectory, while the developing countries struggled. Moreover, tightened financial conditions led to interest rates hikes in the developing countries much higher than the one in the developed countries. Vulnerable economies got no haircut in their debt repayment. Climate financing was below the set target of US$ 100 billion per year, with funds allocated for development assistance below the target of 0.7% of GDP. Taking into account that sustainable development goals are universally adopted aspirations to overcome economic and geopolitical gaps, failure to meet them showcases further deepening of inequality and rising risks for the ever more fragmented world.
New Bretton Woods moment is needed, as well as ensuring necessary financing, above all, for implementing the goals (SDGs), wise and coherent economic policies and decisions, putting humanity and planet’s wellbeing, shifting to low carbon emissions and resilient, sustainable and inclusive growth first. What remains are the goals related to reduction of poverty and inequality through social protection systems and job creation, overcoming the challenges in the education process, gender equality and improvement of digital inclusion. These reforms need to be supported with strengthened institutions, enhanced accountability, effective regulatory framework and stronger digital infrastructure and capacities.
Green Transformation
Climate challenge and artificial intelligence were the central theme during the discussions held in Davos. They are the prime root of risks, but also a potential for prosperous future.
2023 was the hottest year on record, with global temperatures surpassing pre-industrial levels by more than 2°C. As per World Economic Forum Global Risks Report 2024, half of the potential economic results are triggered by climate change. Over the past half century, as per the UN data, climate crisis has caused economic damage in the amount of US$ 4.3 trillion, as well as destruction of natural ecosystems. Conditions can only get worse given that climate change impact on the resources vital to human survival – water and food.
Long-term strategy pertaining to climate, nature and energy, as well as durable systemic response are needed, as indicated by the leaders in Davos, in order to meet the targets for a net-zero CO2 emissions by 2050 worldwide, with an inclusive access to energy, food and water for all of humanity. Green transition can be used as an opportunity for many businesses and economies, in view of scaled-up investments and boosted job creation. Investments in renewable energy sources (solar, hydropower and wind energy) may lead to putting entirely new energy infrastructure in place, opening new markets and creating jobs, thus generating plenty of opportunities, such as: energy efficiency, which will provide for lowered production costs, thus maintaining low inflation rates, followed by sustainable agriculture, green financing, eco tourism, services related to climate change adaptation (water resource management, infrastructure resilience and similar) and consulting services related to green transition. By taking actions for climate change adaption, businesses will not only contribute to a sustainable future, but they will be also able to turn into in a changeable economic landscape driven by environmental awareness and regulatory changes.
Digital Transformation
Digital transformation, by its nature, is an opportunity for boosting the productivity, streamlining the processes, accelerating the economic growth, but it can also be the cause of deepened inequality and rising global poverty rates. Fourth Industrial Revolution (Industry 4.0), comprising integration of advanced technologies, such as artificial intelligence and synthetic biology (Mustafa Suleyman, 2023), already contributes to boosted productivity in various industries, expedite processes and lower operational costs. Enhanced connectivity also brings about strengthened supply chains, thus creating a more flexible and efficient economic ecosystem. Access to big data for analytical processes and information-based decision-making has already provided for improved resource allocation and strategic planning. Robotics and automation have boosted the production processes, while also creating new opportunities in the field of health and logistics. Generative artificial intelligence is recording extremely rapid progress, while the expected effects are still uncertain. Positive implications are unquestionably anticipated, however, for the purpose of preventing any mistreatment, regulating the application and the development of this area at international level, is of exceptional significance.
However, there is another side of the story, as President of the International Monetary Fund, Kristalina Georgieva highlighted not long ago. A study carried out by the IMF points to the potential adverse impact of artificial intelligence on the global labor market. Although artificial intelligence would increase productivity, it will affect 40% of jobs around the world. Hence, prudently balanced policy and strategy for wise usage of the technologic potential is required. Spectacular technological progress enhances the total factor productivity growth, one of the most important determinants of economic growth. Therefore, I will briefly turn to the economic theory prior to drawing any conclusions about the future.
Sustainable Economic Growth Models
Economic theory recognizes multiple approaches in ensuring economic growth by incorporating policies for social and economic sustainability, such as environmental responsibility, social protection and long-term resilience.
Circular economy is a distinguished model, based on reusing and recycling existing materials and products. Another illustration is the regenerative economy, being built on ecosystem restoration and natural capital enhancement. “Doughnut economic model” is a striking concept of the Economist and the Senior Teaching Associate at Oxford University, Kate Raworth, which aims to meet the needs of all people within the means of the living planet. Social and solidarity economy recommendation promotes the social economy’s potential to pioneer new business models. Natural capitalism aims for sustainable use of resources by valuing natural and human capital, thereby proposing incorporation of environmental and social costs into accounting costs, all to the end of encouraging accountability in the practices implemented by companies. Forming B corporations is another model urging companies to meet stringent social and environmental standards, by taking into account the impact of their activities on the most numerous stakeholders. Localism and decentralization pertain to focusing on local manufacture and consumption, for the purpose of reducing carbon emissions related to transport of goods and improving the local community resilience.
Green growth model promotes investments in green technologies, renewable energy sources and eco-friendly practices, as drivers of economic growth, as well as minimization of the adverse environmental impact.
Plenty of these contemporary or popular models overlap and can be adapted to the specific regional or sectoral setting. However, the basis of each of them is the synergy of governments, the business sector and the local communities in support of a balanced and resilient economy.
Present-Day “Economic Wonders”
I will hereby touch upon research on the economies, becoming “economic wonders” nowadays. It is a matter of 15 economies recording remarkable recovery after major disturbances, i.e. experiencing huge growth in just a few decades. This comparative analysis is pertinent to Germany, Ireland, Netherlands, Spain, Turkey, Israel, Qatar, United Arab Emirates, Hong Kong, Taiwan, Singapore, South Korea, Japan, China and India. Each of these economies initially confronted adverse circumstances, for instance the German, Spanish and Japanese economies were destroyed in the period upon the Second World War, Ireland had been of the Europe’s poorest countries for more than two centuries, the initial development of Turkey, Israel, Qatar, Hong Kong, Taiwan and South Korea was evidenced in the 60s and 70s of the last century, Singapore’s economy was destroyed after Malaysia declared independence, whereby India embarked on its path of development in the 90s.
What do all these economies have in common? What was the cause for their transformation? Human capital, stable macroeconomic policy, foreign direct investments, innovations, and competitiveness stand out as the most common factors, or the least common denominator (LCD) in the successful outcome of these economies. Every economy is undoubtedly different in size and structure, hence, other factors also play a role in their development, although the aforementioned ones are present in each of them.
How to Achieve Average Growth of 5% in the Next Two Decades?
When speaking about domestic economy, a relatively young market economy on the rise, I believe that the aforementioned factors would contribute to the acceleration of growth and maintaining its sustainability. In more specific terms, I am speaking here about investments in human capital and implementing demographic policies for sustainability, sustainable fiscal policy, continued growth of public investments in the priority areas and infrastructure development, state support in public sector competitiveness development, further streamlining of administrative procedures for doing business, building partnerships, pinpointing on investors’ maps by pursuing sound policies and favorable investment climate, using EU accession process benefits, supporting balanced regional and local economic development, green and digital transformation.
The annual growth in the last two decades accounted for around 2.5% of GDP. According to the economic growth scenarios, annual growth rate of 2.6% of GDP in real terms is projected in the next twenty years. Moreover, we can accelerate this growth twice as fast, more specifically to 5%, needed for achieving faster convergence with the European economy, by taking actions in the following areas, part of the National Development Strategy: 1. Sustainable, Innovative and Competitive Economy 2. Sustainable Local and Regional Development that Ensures Cohesion, 3. Demographic Revitalization and Social and Cultural Development, 4. Rule of Law and Good Governance, 5. Secure, Safe and Resilient Society and 6. Green and Digital Transformation.
National Development Strategy implementation implies implementation of many sectoral strategies and programs with action plans per areas and priorities, revised and prepared in the last two years: Human Capital Development Strategy, Smart Specialization Strategy, Export Promotion Strategy, Sustainable Development Strategy, Energy Development Strategy, Digitalization and Cybersecurity Strategy, Local and Regional Development Strategy, Public Finance Management Strategy, Strategy for Formalization of Informal Economy, as well as strategies in the field of agriculture and food safety development, social protection, health, education, culture, tourism, support for youth and sports, security and defense.
First and foremost, the most precious resource we have at our disposal and we are to invest in its development is the human capital. According to the WB Human Capital Index, our children use merely half of their potential when reaching working age, i.e. by 25-30% less compared to the potential of children living in developed countries. This is insufficient despite our noticed improvement as per this index in the last couple of years. Therefore, it is crucial for us to continue implementing the Human Capital Development Strategy, in particular considering both that these policies are not short-term ones and require political will, multi-annual dedication and consistence for achieving adequate results. The human capital development goes hand in hand with the smart specialization process for staff development and its restructuring, responding to the demands of the economy and the labor market. Retaining the workforce on the home front is another link in the chain, which can be achieved by creating better living conditions, and further down the line attracting expertise from other states (global nomads) or so-called brain gain. The support of the productivity as development factor can be boosted through digitalization, i.e. by smart use of the artificial intelligence and the process improvement technology.
The second factor we are to work on is the capital, i.e. the investments. One of the key questions is how to better pinpoint ourselves on the maps of the foreign investors. The answer to this question lies in the policies for support of investments (transparent, simple procedures with tax benefits), rule of law, development of infrastructure, investments in human capital and providing professional staff, stable political environment, access to markets and trade agreements, investing in economic zones and global connectivity and ties. Equally important are the aspects of stimulating domestic investments, boosting entrepreneurship and innovativeness, especially in new technologies which usually bring much more added value to the table. In the context of developing the second production factor – capital, I will concentrate on the Growth Acceleration Plan, which is to multiply the capital, both public and private, through innovative solutions for the purpose of development.
As seen from the global context perspective, in future, the focus is to be placed on innovativeness, entrepreneurship, finding new solutions to the risks that are to accumulate over the long run. The smart use of technological discoveries and preservation of the planet are the topics of concentrated interest among the world leaders. These are also topics our economy can benefit from, especially by nurturing connectivity and ties, building partnerships and supporting innovations.
The third factor, the last but not the least in precedence, is the factor of sustainability, such as the environment and policy sustainability. Pursuing consistent and sound evidence-based policies is of essence to economic development.
Our European Transformation
What kind of economy would most of us like to see in 2030? Above all, we would like for our country to be a member of the European Union, a full-fledged member enjoying its rights and commitments, a country with GDP per capita reaching EUR 12 thousand and unemployment rate dropping to around 6%. We are expecting optimization and digitalization of the public sector, in capacity of true service to both citizens and businesses, businesses that are competitive, innovative, resilient, export-orientated, being part of global and European value chain networks.
I am confident that by implementing the reforms based on well-designed strategies, we will succeed in bringing “Europe home” even prior to becoming full-fledged member. Europe is handing us the opportunity, and it is up to us to use it for the well-being of present and future generations.
Each passing day of not being part of EU represents a missed-out opportunity for us. Sometimes it only suffices to look around so as to understand what we are losing out on, such as the position of Croatia and Slovenia today, countries which have made a significant economic progress upon entering EU. They have used considerable EU economic support through various structural and development funds, while also achieving increase in investments and decrease of unemployment, thus moving far ahead of us. The same goes for the countries from Central and Southeastern Europe, i.e. the former countries in transition which, by being EU members, already have access to around thirty times more funds per capita in relation to the IPA funds available to us prior to accession, as well as their access to the European Single Market and many other benefits along with the advantages pertaining to foreign direct investments.
This could also be us, with no waiting in line or wasting time, we just need to walk the path of European transformation together!
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