Innovative ways to resume international travel – Modern Diplomacy

Prime Minister Zoran Zaevs new cabinet is confronted with a number of economic challenges, exacerbated by the economic hit to the global economy caused by the pandemic In 2021, North Macedonia will take economic decisions that will shape the course of the countrys future.

Despite a modest population of 2-million, North Macedonia repeatedly makes headlines, often due to apparently intractable disputes with neighbouring countries. Athenss trade embargo imposed on North Macedonia in the 1990s marked the start of a 27 year deadlock between the two countries, which ultimately stalled North Macedonias accession to the EU. Only recently did Skopje resolve the dispute with neighbouring Greece over its official name which Greece had previously taken issue with due to the fact that Macedonia is also a region of Greece, and the use of this name was interpreted by Greece to be an assertion of territorial ambitions in the region.

This dispute affected the countrys other diplomatic ventures. In 1999, North Macedonia was one of the first post-Yugoslav signatories of the NATO membership action plan, only to have its accession vetoed by Greece in 2008. Ultimately, North Macedonias Stabilization and Association Agreement with the EU has not been the diplomatic catalyst that Skopje hoped would ease localised tensions and draw it into a closer relationship with Brussels.

Under the leadership of Nikola Gruveski (2006-2016), corruption and state capture were endemic in North Macedonia. Gruveksi was averse to opening negotiations with mainstream governments in Greece and it was not until the centre-left Social Democratic Union of Macedonia ousted Gruveski out of power, that there was a breakthrough. Gruveskis successor, Zoran Zaev, capitalised on Greek Prime Minister Tsiprass reformism to broker the controversial Prespa Agreement which settled the name dispute. Two years later, North Macedonia was finally admitted to NATO, demonstrating that Greece was the final hurdle to NATO membership.

A tamed economy

However, North Macedonia soon found that NATO membership was not a passport to joining the EU. Internal ethnic tensions have created friction with EU member states. Relations with Bulgaria soured during the election campaign for July 2020 during which the campaigns of both main political parties played on anti-Bulgarian sentiment..Zaev managed to gain power by agreeing to a coalition with the main part of the Albanian minority. The new cabinets economic hurdles, specifically fiscal redistribution, could be exacerbated by renewed ethnic tensions between the Slav majority and the Albanian minority. Should tensions reach the levels of the 2001 civil conflict, the deepening of this fracture would slow down reforms and deter investments.

The Balkan countries suffered greatly during the Great Recession due to their proximity to the Greek economy at a time when Athens navigated the worst slowdown of recent history. As Greeces second largest export partner, the RNM was particularly hard hit(Figure 3a). The region had barely entered recovery before lockdown measures crippled world economic growth. In addition, North Macedonias small internal market is heavily reliant on external demand which the crisis has depleted. In Q1-Q2 2020, exports fell by 22.3% and industrial production by 14.6% compared to the same period of the previous year. Thus, GDP fell by 14.9% in Q2 of 2020 and another 3.3% in Q3 contrary to the projected 3.2 percent growth (Figure 7). Whilst forecasts suggest growth of 5.5% in 2021, the unpredictability of the pandemics economic influence may yet compromise this figure.

Meanwhile, rating agencies downgraded North Macedonias national debt, in turn raising financing costs. the RNMs debt was downgraded by some rating agencies, raising financing costs. Fitch, the American credit rating agency, as well as Moodys, another US-based credit rating agency, both value North Macedonias debt as a non-recommended investment asset to be reserved for short-term gain. Since May 2020 the outlook has been negative, suggesting the situation will worsen. Yet, with one of the comparatively smallest debt-GDPs of the region, these ratings are still the best in South-Eastern Europe after Bulgaria meaning the RNM has a relatively solid economic base (Figure 4).

The countrys effective response to the pandemic is in part the reason that North Macedonia is economically stronger than some of its neighbours. The caretaker government introduced a furlough scheme, worth approximately 5.5 percent of GDP, as well as a helicopter money initiative. Going forward, the government is prioritising policies that will stimulate economic growth such as slashing parafiscal charges and cutting VAT. Yet, since North Macedonia lacks the economic resources to commit to long-term reform, recovery will be slow.

North Macedonia is contending with mass emigration in tandem with declining fertility rates (Figure 5) both of which reduce human capital. The official estimate of two-million residents is dubitable, with some experts hypothesising an actual figure of approximately 1.5 million. Inaccurate projections of a states total population jeopardises effective government decision making. In the RNM, where the resources are redistributed amongst ethnic groups pro quota, this makes fiscal management particularly difficult. If, for example, the proportion of Albanians of the total population was lower than estimated, then this group will be receiving more public resources that they are entitled to.

Given that the EU acts in a starkly-protectionist way by restricting trade with third countries, greater cooperation is in the RNMs interest. In fact, Brussels could reduce trade barriers in the context of a stronger association with Skopje even before the latter formally joins the Union.

There are steps the government can take to encourage citizens not to emigrate . The first and most crucial step would be to improve the education system. Overall, North Macedonia spends much less of its GDP than the average EU country on education. As a result, few people complete their secondary-level education, and therefore either end up in low-paying jobs or unemployed, andare forced to emigrate for work. Another step would be investment in the underfunded Research and Development (R&D) sector. In fact, North Macedonias budget allocates only 0.36% of GDP to R&D, compared to an EU average of 2.2% and neighbouring Bulgarias 0.77%. Research and development is essential to creating high-paying jobs, driving productivity, and boosting the economy through innovation and market competition.

The silver lining in North Macedonias economic strategy is infrastructure development. This especially true for roads and highways. Grueveskis administration was instrumental in the investment into road infrastructure, starting works for two new highways in 2014.

Still, roads can be rather useless if they do lead nowhere. Thus come trade infrastructures. In addition to new road, the building of new border checkpoints and crossing points with Greece and Bulgaria, will bolster the trade infrastructure that North Macedonia shares with the EU, thereby driving trade with a global economic powerhouse. These investments will also reduce the RNMs dependence on the Yugoslav-time north-south arteries, which currently present a barrier for the development of the functioning market economy that is a requirement for EU membership. To achieve this goal, the RNM needs to improve, road connections towards the west (with Albania) and the east (with Bulgaria, an important trading partner). Building better connections within the country and with non-Yugoslav neighbours will boost the countrys internal cohesion by making it easier to move from one part of the country to another proving supplemental infrastructures to foster international trade.

Figure 6 Highways represent a key segment of the RNMs investments.

A secondary and related benefit of improving connectedness with EU trade routes is reduced economic dependence on Russia. This should reduce Moscows potential diplomatic leverage in future disputes in the region. As a matter of fact, pulling out of Moscows orbit is almost a precondition to full membership in the EU which would bring in more funding opportunity and increase financial stability. Yet, Russias main asset is not trade tout court, but energy. In fact, the Balkans serve as a strategic crossroad for oil and gas coming from Moscow and Baku through Bucharest and Ankara. Thus, North Macedonia should also consider developing its energy infrastructure as a route to closer integration with the EU. In order to reduce the Western Balkans dependence on Russian fossil fuels, the region needs investments. For cash-strapped countries, like North Macedonia, the opportunity to make real progress in this field may come from green funds the EU has earmarked for energy projects in both current member states and candidate countries . In addition, Greece has established an LNG terminal on the Aegean to which links the RNM is planning to adjoin its grid. There are also talks of an electric-grid link to Albania, through which the RNM could import as much as needed and even export eventual surpluses.

Without radical reform, the extant corruption, bureaucracy and public-sector inefficiency will stymy growth in the coming years. Luckily, the EU might be the answer to Skopjes economic woes. The Union is expected to grant 3.3 billion to Western-Balkan countries to kickstart economic recovery following the pandemic. The package does however come with strings attached: the country will have to accelerate progress towards regulatory harmonisation with the EU. This is a notoriously difficult and resource-consuming task, which may hinder other reforms.

Furthermore, North Macedonia must confront pre-pandemic economic struggles. The government could revert to coalition infightings and therefore prolong the process of economic reform. For investors, a cautious approach is recommended, in preparation for positive economic developments.

Acknowledgments The Author thanks Charlotte Millington, parliamentary researcher at the UK House of Commons specialising in European politics and international security for her suggestions.

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Innovative ways to resume international travel - Modern Diplomacy