international bank for reconstruction...
TRANSCRIPT
Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No. 67989-MK
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
PROGRAM DOCUMENT
ON A
PROPOSED LOAN
IN THE AMOUNT OF 38.7 MILLION EURO
(US$50 MILLION EQUIVALENT)
TO
THE FORMER YUGOSLAV REPUBLIC OF MACEDONIA
FOR A
FIRST PROGRAMMATIC COMPETITIVENESS DEVELOPMENT POLICY OPERATION
October 25, 2012
Financial and Private Sector Development Unit (ECSPF)
South East Europe Country Unit (ECCU4)
Europe and Central Asia (ECA)
This document has a restricted distribution and may be used by recipients only in the performance of their official
duties. Its contents may not otherwise be disclosed without World Bank authorization.
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FORMER YUGOSLAV REPUBLIC OF MACEDONIA
GOVERNMENT FISCAL YEAR
January 1- December 31
CURRENCY EQUIVALENTS
(Exchange Rate Effective as of September 1, 2012)
Currency Unit Macedonian Denar
MKD 1.00 US$ 0.02
US$1.00 MKD 48.94
WEIGHTS AND MEASURES Metric System
ABBREVIATION AND ACRONYMS
ATIRM Agency on Technologies and
Innovation
BERIS Business Environment and
Institutional Strengthening Project
CAD
CEFTA
Current Account Deficit
Central European Free Trade
Agreement
CEM Country Economic Memorandum
CEMT European Conference of Transport
Ministers
CFAA Country Financial Accountability
Assessment
CGAP Code of Good Agricultural Practices
CMT
CPS
Cut-make-trim
Country Partnership Strategy
DTIDZ Directorate of Technological
Industrial Development Zones
EBRD European Bank for Reconstruction
and Development
ECA Europe and Central Asia
EC European Commission
EIA Environmental Impact Assessment
Process
ESA Employment Service Agency
ESW Economic Sector Work
EU European Union
FAO Food and Agriculture Organization
FDI Foreign Direct Investment
FPD Finance and Private Sector
Development
FR Farm Register
GIZ German Society for International
Cooperation
IACS Integrated Administration and Control
System
IBRD International Bank for Reconstruction
and Development
IDEAS USAID Investment Development and
Export Advancement Support Project
IMF International Monetary Fund
IPARD EU Instrument for Pre-Accession
Assistance for Rural Development
ITE Innovation, Technology and
Entrepreneurship
LPI Logistics Performance Index
LPIS Land Parcel Identification System
MAFWE Ministry of Agriculture, Forestry, and
Water Economy
MBDP Macedonian Bank for Development
Promotion
NBRM National Bank of the Republic of
Macedonia
MFN Most-Favored Nation
M&E Monitoring and Evaluation
NPLS Non-Performing Loans
NPDARD
OECD
National Program for Development of
Agriculture and Rural Development
2013-2017
Organisation for Economic Co-
operation and Development
PBG Policy-Based Guarantee
PISA Programme for International Student
Assessment
PLL Precautionary Liquidity Line
PSIA Poverty and Social Impact Assessment
R&D Research and Development
ROAA Return on Average Assets
RSC Regional Steering Committee
SAO Supreme Audit Office
iii
SAR Integrated Systems for Risk
Assessment
SEA Strategy Environmental Assessment
SEZ
SME
Special Economic Zone
Small and Medium Enterprise
TA Technical Assistance
TFP
TIDZ
Total Factor Productivity
Technological Industrial Development
Zone
TIMSS Trend in International Mathematics
and Science Study
TTFSE Trade and Transport Facilitation in
Southeast Europe Program
TVET Technical and Vocational Education
and Training
USAID U.S. Agency for International
Development
VCA Value Chain Analysis
VET Vocational Education and Training
WTO World Trade Organization
Vice President:
Country Director:
Sector Director:
Sector Manager:
Task Team Leader:
Philippe H. Le Houerou
Jane Armitage
Gerardo Corrochano
Lalit Raina
John Gabriel Goddard
FORMER YUGOSLAV REPUBLIC OF MACEDONIA
FIRST PROGRAMMATIC COMPETITIVENESS
DEVELOPMENT POLICY OPERATION
TABLE OF CONTENTS
LOAN AND PROGRAM SUMMARY ......................................................................................................... 3 I. INTRODUCTION ............................................................................................................................ 6 II. COUNTRY CONTEXT ................................................................................................................... 8
RECENT ECONOMIC DEVELOPMENTS ....................................................................... 9 COMPETITIVENESS CONTEXT: SECTORAL AND CROSS-CUTTING ISSUES ....... 15
III. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES ....................... 24 DEVELOPING HIGH-VALUE ADDED MANUFACTURING ........................................ 24 FACILITATING THE RESTRUCTURING OF THE AGRIBUSINESS SECTOR ........... 26 IMPROVING THE EFFICIENCY OF TRADE LOGISTICS SERVICES ......................... 28 ESTABLISHING ENABLING CONDITIONS FOR LABOR MARKET
FLEXIBILITY AND SKILLS DEVELOPMENT ............................................................... 30 IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM ..................................................... 32
LINK TO COUNTRY PARTNERSHIP STRATEGY ........................................................ 32 COLLABORATION WITH THE IMF AND OTHER DONORS ....................................... 33 RELATIONSHIP TO OTHER BANK OPERATIONS ....................................................... 34 LESSONS LEARNED ......................................................................................................... 35 ANALYTICAL UNDERPINNINGS ................................................................................... 35
V. THE PROPOSED COMPETITIVENESS DPL ............................................................................ 36 OPERATION DESCRIPTION ............................................................................................ 36 POLICY AREAS ................................................................................................................. 38
VI. OPERATION IMPLEMENTATION ............................................................................................. 43 POVERTY AND SOCIAL IMPACTS ................................................................................ 43 ENVIRONMENTAL ASPECTS ......................................................................................... 45 IMPLEMENTATION, MONITORING AND EVALUATION .......................................... 46 CONSULTATIONS ............................................................................................................. 47 FIDUCIARY ASPECTS ...................................................................................................... 47 DISBURSEMENT AND AUDITING ................................................................................. 50 RISKS AND RISK MITIGATION ...................................................................................... 50
ANNEXES
ANNEX 1: LETTER OF DEVELOPMENT POLICY ................................................................................ 52 ANNEX 2: DEVELOPMENT POLICY LOAN POLICY MATRIX ......................................................... 58 ANNEX 3: FUND RELATIONS NOTE ....................................................................................................... 61 ANNEX 4: DEBT SUSTAINABILITY ......................................................................................................... 63 ANNEX 5: SECTOR IDENTIFICATION METHODOLOGY .................................................................. 65 ANNEX 6: COUNTRY AT A GLANCE (includes country map) .............................................................. 69
The World Bank greatly appreciates the close collaboration of the Government of FYR Macedonia in the preparation of
this Development Policy Loan (DPL). The Development Policy Loan was prepared by an IBRD team consisting of John
Gabriel Goddard (Task Team Leader), Feyi Boroffice, Gordana Popovik, Aleksandar Nacev, Michael Edwards, Amanda
Schneider (ECSPF), Zeljko Bogetic, Birgit Hansl, Simon Davies, Bojan Shimbov, Evgenij Najdov, Kenneth Simler,
Christian Borja, Maria Davalos (ECSPE), Jose Guilherme Reis, Thomas Farole (PRMTR), Holger Kray, Malathi
Jayawickrama, Bekim Ymeri, Liljana Sekerinska, Natasa Vetma, Asa Giertz (ECSSD), Bojana Naceva, Indhira Santos,
Johannes Koettl (ECSHD), Julie Rieger (LEGEM), Jose Janeiro (CTRLA), Denis Boskovski, Cveta Peruseska-
Joncevska, Jasminka Sopova and Luan Aliu (ECCMK).
3
LOAN AND PROGRAM SUMMARY
FORMER YUGOSLAV REPUBLIC OF MACEDONIA
FIRST PROGRAMMATIC COMPETITIVENESS DEVELOPMENT POLICY LOAN
Borrower Former Yugoslav Republic of Macedonia
Implementing Agency Ministry of Finance
Financing Data IBRD Loan of Euro 38.7 million (US$50 million equivalent)
Operation Type Programmatic (1st of 2), single-tranche
Main Policy Areas Competitiveness and export development, private sector
development, industry and trade, agro-industry, innovation
Key Outcome
Indicators
Pillar 1: Developing high value-added manufacturing
Investments by companies receiving incentives under the Law on
TIDZs increases to €50 million.
Audit of aid incentives is completed annually.
Share of medium- and high-tech exports to total exports increases
to 45%.
80 companies have participated in the Exporter Development
programs of InvestMacedonia.
Pillar 2: Facilitating the restructuring of the agribusiness sector
Lease payment collection rates on state-owned agricultural land
increases to €4.6 million.
Agricultural support budgeted for structural measures in the
National Program for Development of Agriculture and Rural
Development 2013-2017 increases to 15 percent.
Share of beneficiaries of agricultural support that adhere to the
Code of Good Agricultural Practices increases to 5 percent.
Share of agricultural support beneficiaries subject to on-spot
inspections increases to 8%.
Pillar 3: Improving the efficiency of trade logistics services
Waiting time at the border for transit of goods is reduced by 5
percent.
Share of annual CEMT licenses awarded to vehicles with EURO
4 and EURO 5 emission standards increases to 90% percent.
Pillar 4: Establishing enabling conditions for labor market flexibility
and skills development
The share of recipients of social assistance who work formally
increases to 8 percent.
The number of employment contracts registered online increases
to 38,000.
Time required to process visa and work permits reduces to 35
days.
National report for TIMSS is disseminated to the public.
4
Program Development
Objective(s) and
Contribution to CPS
The proposed Competitiveness Development Policy Loan is the first
in a series of two programmatic operations that will assist FYR
Macedonia in implementing its borrowing plan within a consistent
macroeconomic framework.
The main Program Development Objective is to strengthen the
competitiveness of FYR Macedonia’s economy by incentivizing
productive investment and technological upgrading in the
manufacturing, agribusiness and trade logistics sectors, and
establishing enabling conditions to progressively increase labor
market flexibility and skills development.
The actions supported by the proposed DPL will contribute to
achieving the development goals under the Competitiveness pillar of
the CPS FY11-14.
Risks and Risk
Mitigation
Macroeconomic risks are significant, reflecting the deteriorated
environment in the Eurozone countries. The renewed turmoil in the
Eurozone affected FYR Macedonia’s exports and weighed heavily on
the business environment. Due to the negative growth at the start of
the year and the unfavorable external environment, growth is
projected to slow to 0.75 percent in 2012. External economic risks
are somewhat mitigated by buffers currently in place, including the
relatively low public debt level, sound banking system and solid
reserve coverage. Weakened exports and economic activity, and
lower-than-expected fiscal revenues are putting pressure on the
implementation of the 2012 budget and have resulted in budgetary
arrears. The IMF continues to endorse the set of macroeconomic
policies. The proposed Second Policy-Based Guarantee will mitigate
emerging risks by supporting actions to strengthen public financial
management. Sustaining growth in a deteriorating global growth
environment will depend on FYR Macedonia’s ability to undertake
structural reforms that can enhance productivity and strengthen its
credibility with investors and trade partners. The proposed DPL is
supporting reforms to sustain FDI inflows and boost competitiveness,
which will support the medium-term outlook.
Political risks remain moderate. The government has a stable
majority in the parliament following the June 2011 early elections.
However, lack of progress in the resolution of the dispute on the
name of the country could also potentially trigger political instability.
The program of structural reforms that is being supported by the
proposed DPL has strong ownership within the government, as
demonstrated by the recent adoption of programs, strategies and
action plans that map out the concrete steps to be taken over the
period 2011-2015.
Operation-specific risks are significant. Implementation of the
proposed program will strain the capacity of some public sector
institutions. The Agency for Foreign Investment and Export
Promotion will require support to develop the regulatory framework
5
for export promotion and start implementation of the programs. This
risk is mitigated by the advisory services and capacity building that is
being provided by the USAID Investment Development and Export
Advancement Support (IDEAS) Project. The Ministry of Agriculture,
Forestry and Water Economy, will require advisory support to
successfully implement a multiannual Program for Development of
Agriculture and Rural Development with a significantly changed
design. Implementation risks are significant as the reforms will
influence a large number of current beneficiaries of agribusiness
support. These implementation risks are mitigated by technical
assistance provided by the Bank’s Agriculture and Rural
Development team to assess how to best reorient public expenditures
in agriculture. Moreover, the Bank-financed Agriculture
Strengthening and Accession Project is helping to put in place better
information systems needed to monitor public expenditures. Given
the medium-term nature of some of the actions, increased and
prolonged attention to communicating the reform agenda will be
warranted.
Governance risks are significant. As the initiative to establish special
economic zones (Technology Industrial Development Zones, TIDZ)
matures, it is important to reinforce its corporate governance. The
inclusion of private sector representation in the Managing Board will
create checks and balances in the administration of the zones. A
stronger framework of monitoring is needed to ensure that recipients
of aid incentives remain in compliance with national legislation,
which establishes ceilings for aid intensity that are aligned with the
EU State Aid rules. The DPL actions and results indicators will serve
as mitigating measures for these governance risks.
Operation ID P126038
6
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
PROGRAM DOCUMENT FOR A
PROPOSED FIRST PROGRAMMATIC COMPETITIVENESS DPL
TO THE FORMER YUGOSLAV REPUBLIC OF MACEDONIA
I. INTRODUCTION
1. This program document describes the programmatic Development Policy Loan
(DPL) to the Former Yugoslav Republic of Macedonia (FYR Macedonia) to support the
government’s program1 for improving competitiveness of the economy. The DPL will
support the government’s program aimed at strengthening competitiveness, which is
prioritizing the development of a stronger export-oriented enterprise sector. The proposed
program will support reforms that incentivize productive investment and technology
upgrading in the manufacturing, agribusiness and trade logistics sectors; and put in place
enabling conditions that can progressively increase labor market flexibility and skills
development. The medium-long term objective is to create better job opportunities and
increase the economic growth potential.
2. This DPL is proposed in light of FYR Macedonia’s consistent track record as
regards macroeconomic management and improving the business climate. The country
embarked on a major reform program from 2002 that achieved fiscal consolidation, public
sector reform, and labor market reforms. By 2008, gross central government debt fell to 21
percent of GDP from around 50 percent at the start of the decade, and prudent fiscal policies
have maintained government debt under 30 percent of GDP during the recent five years of
turmoil in global financial markets. Recent reforms led to visible improvements in the
business climate, as measured by international rankings. FYR Macedonia was the third most
improved country in the world according to the Doing Business 2012 report, jumping from the
92nd
position in 2006 to 22nd
in 2012, outstripping peer countries in the region (see Table 1).
Key reform areas included improving the construction permits process, making property
registration easier, facilitating access to finance, and reducing trade costs.
3. Despite the recent policy achievements, economic growth has not been sufficient
to reduce long-term unemployment and poverty. GDP accelerated in the period 2004–08
but overall, it has grown more slowly than in many countries of the Western Balkans or
among the new European Union (EU) member states, and living conditions have been
affected by the uncertain economic environment and sluggish economic recovery. Economic
growth rates have been insufficient to make a dent in unemployment and poverty. At 31.4
percent in the first half of 2012, unemployment levels remain among the highest in Europe,
with long-term unemployment of particular concern.
1 The Government Work Program for 2011-2015 (http://vlada.mk/node/260?language=en-gb)
7
Table 1: Doing Business Performance of FYR Macedonia Compared to Peers
Economy
2012 Ease of
Doing Business
Rank
Macedonia, FYR 22
Montenegro 56
Turkey 71
Romania 72
Croatia 80
Moldova 81
Serbia 92
Kosovo 117
Bosnia and Herzegovina 125
Topic 2012
DB Rank
2008
DB
Rank
Starting a Business 6 21
Protecting Investors 17 83
Getting Credit 24 48
Paying Taxes 26 99
Registering Property 49 91
Resolving Insolvency 55 127
Enforcing Contracts 60 84
Dealing with
Construction Permits 61 76
Trading Across Borders 67 72
Getting Electricity 121 n/a
Source: World Bank Doing Business Reports (2012 and 2008)
4. The challenge facing FYR Macedonia is to transition the economy to a higher
growth trajectory by developing a more competitive and export-oriented enterprise
sector. In a small open economy where domestic demand is dampened by long-term
unemployment and relatively low wages, firms must look to export markets for growth.
Exports grew rapidly in the past decade, and in 2011 they accounted for 55 percent of GDP,
but there is reason to be concerned over the sustainability of export growth. Three factors
highlight the vulnerability of the country’s export basket: 1) the export basket is concentrated
in commodities (metals and minerals) where value added is low and prices are vulnerable to
global economic swings; 2) medium and large exporters in other major manufacturing sectors
do not invest sufficiently in quality or innovation as a source of competitiveness, resulting in
pressure on prices and wages; and 3) the majority of exporters are small firms (fewer than 10
employees) that struggle to compete in export markets.
5. The DPL will support reforms that incentivize investment and technology
upgrading in manufacturing, agribusiness and trade logistics. For FYR Macedonia,
developing advanced manufacturing capabilities and accelerating the upgrading of the
domestic enterprise sector is critical to ensure sustainable growth and creation of high-skilled
jobs. The agribusiness sector, which currently employs 20 percent of the workforce, needs
restructuring to unleash its potential. The trade logistics sector is in need of upgrading to
better meet the needs of exporters, especially as they transition to high value added products.
The reforms that will be supported through this operation will increase the effectiveness of the
incentive programs financed by the government to attract foreign investors, promote exports,
support agricultural producers and promote technological modernization. The reforms also
aim to remove bottlenecks that constrain growth in major export-oriented sectors, creating an
enabling environment for private sector entry and technology transfer from FDI to the
domestic economy. The reforms are expected to have an economy-wide impact because of the
size of these sectors and the dense linkages of these sectors with the rest of the economy.
6. In parallel, the DPL policy actions will lay the groundwork to increase labor
market flexibility and the development of job-relevant skills. Improving the efficiency of
the labor market is essential to the competitiveness of FYR Macedonia’s economy and is a
necessary condition to resolve the problem of long-term unemployment. The reforms will
8
strengthen the incentives to participate in the formal labor market, which is characterized by a
low participation rate by regional and European standards, particularly for women, and make
it easier to recruit seasonal workers and foreign employees with skills not available in the
local labor market. The DPL will support the implementation of comprehensive assessments
about the quality of education.
7. This operation is an important element of the 2010 Country Partnership
Strategy, directly advancing the outcomes under the Competitiveness pillar. The DPL
will contribute to the following expected CPS results under the Competitiveness pillar:
increasing financing and investment in competitive fields; establishing a more efficient land
administration system, lowering transport and freight costs by improving border crossing
facilities; and improving the quality in higher education. The DPL will also contribute to the
Inclusive Growth pillar in regards to improving employability by reducing impediments to
hiring and to the Green Growth pillar in regards to aligning the agriculture sector with EU
requirements. The operation will contribute to deepening reforms for improved
competitiveness, one of the main strategic priorities in the 2012 Europe and Central Asia
(ECA) Regional strategy, particularly by establishing good governance for improved business
climate, and making education and training systems more accountable for relevant skills.
II. COUNTRY CONTEXT
8. Like other middle-income countries in ECA, FYR Macedonia faces some
inherent disadvantages over which the government has limited influence. First, the
internal market is not large enough to sustain high growth rates in the medium-long term;
GDP is US$10.4 billion in 2011 (current US$), which is about 1-2 percent of Poland or
Turkey’s GDP. Second, external trade prospects are closely tied to the European economy,
with key trade partners such as Greece undergoing prolonged recessions. Third, the legacy of
the transition years continues to constrain productivity, as access to essential inputs such as
land is constrained by the ownership structure. Fourth, being a landlocked country, getting the
goods out depends on the quality of neighboring infrastructure, not just its own, so it has not
been easy to take advantage of the country’s location at the crossroads of two major European
transit corridors.
9. In this context, FYR Macedonia’s government has established a policy
framework to promote growth that underlines macroeconomic stability, regional
economic integration and private sector development. The concrete actions included: i)
Successfully stabilizing the macroeconomic and financial environment, in the face of multiple
external shocks; ii) Pressing forward with reforms to speed up EU accession and enable entry
of Macedonian products to EU markets; iii) Entering into the WTO and signing free trade
agreements that facilitate access to other important markets; iv) Instituting a more attractive
business environment, and strengthening government-business relations to proactively address
private sector concerns; and v) Taking steps to contain labor costs, such as reforming labor
laws and lowering the corporate and personal income tax rates to 10 percent.
10. EU accession prospects have provided a policy anchor that helped to maintain
the momentum on institutional and legal reforms. The continued reforms to bring the
institutional and legal framework in line with the acquis communautaire have been
recognized by the EC Progress Reports. For example, the Progress Report for 2011 concludes
9
that there was good progress in the areas of right of establishment, company law, industrial
property rights, audit, banking and insurance services. The process of entering the EU will
help FYR Macedonia to benefit from the European “convergence machine” that has raised
living standards for each successive wave of new EU member states, but the benefits will
depend on whether the country’s entrepreneurial structures are ready to take advantage of
growing trade opportunities and capital flows, and whether the employment and social
protection practices foster labor participation and efficiency.2
11. Companies have benefitted from the continued approximation to the EU and
trade agreements with other countries. In addition to becoming a member of the WTO in
2003 and a candidate country for EU membership in 2006, the government has signed many
regional and bilateral agreements. About 95 percent of trade is transacted under free trade
agreements. In 2010, the EU accounted for 61 percent of the country’s exports (Germany is
the leading trade partner), and the countries in the Central European Free Trade Agreement
(CEFTA) accounted for 31 percent. The government has also signed approximately 20 new
bilateral agreements on free transit and increased the number of bilateral individual transport
licenses. At the same time, as a country without an outlet to the sea, upgrading the trade
infrastructure is essential to enable efficient freight traffic and thereby take full advantage of
these agreements.
RECENT ECONOMIC DEVELOPMENTS
12. Macedonia’s economy is increasingly diversifying away from its traditional
growth sectors. Traditional growth drivers--agriculture, mining, manufacturing and trade--
still make up over 50 percent of the country’s output (Figure 1). The backbone of the
productive economy remains mining and manufacturing, accounting for 21 percent of total
output and providing an important source of employment and export earnings. Since the mild
recession in 2009 however, growth in several other sectors has accelerated, helping the
country to diversify. Construction contributed 21 percent to growth in 2010 and 2011 (Figure
2) as a result of strong public and private investments. Communications, IT, financial services
and insurance became significant growth contributors during the period, together contributing
28 percent of growth. Exports were worth around 55 percent of GDP in 2011 and have grown
strongly from 39 percent of GDP in 2009. At the same time, imports have also increased,
from 61 percent of GDP in 2009 to 74 percent in 2011, but partly due to imports of
manufacturing components and materials, which are then re-exported.
13. The gradual recovery during 2010 and 2011 from the 2009 global crisis became
increasingly threatened by the worsening Eurozone outlook. Output expanded by 2.9
percent in 2010, led by a trade turnaround, and then accelerated to around 5 percent growth in
mid-2011 giving hopes of a robust growth in the future. FDI performed particularly well in
2011 (through airport concessions, agro-processing, real estate) reaching 4 percent of GDP
according to the National Bank (NBRM). However, the renewed turmoil in the Eurozone took
its toll on trade, capital flows, and impacted domestic demand in the second half of 2011.
Growth fell to 1.1 percent in the second half of the year, resulting in an overall growth rate of
2.8 percent in 2011.
2 See Indermit Gill and Martin Raiser (2012), Golden Growth: Restoring the lustre of the European economic
model, World Bank.
10
Figure 1: Economic Structure, 2011 Figure 2: Contribution to Growth, 2009-2011
14. Economic indicators point toward a difficult year in 2012, but growth is expected
to be positive at 0.75 percent. Output contracted by 1.3 percent (y-o-y) in the first quarter of
2012 reflecting the renewed uncertainty in the Eurozone as well as the severe winter in early
2012. Industrial production and construction were hit particularly hard. In addition, the
Eurozone sentiments affected Macedonia’s exports and weighed heavily on the business
environment. The second quarter saw some improvement with quarterly growth of around 12
percent but year-on-year growth remained negative at 0.9 percent. Second quarter growth was
helped by improved performance in construction and improved industrial performance. In
June and July construction permits were issued for work on large-scale transport projects co-
financed by the European Investment Bank (EIB). Reasonably robust private consumption,
and the fact that Germany, Macedonia’s largest trading partner performed relatively well, also
helped to boost growth. Net FDI inflows reached almost 1 percent of GDP in the first six
months of the year and this is expected to rise to around 2 percent by the end of the year, with
much of this coming from expansion of existing production facilities.
15. The banking sector is highly concentrated but is not exposed to risks. The three
largest banks in Macedonia control over 70 percent of banking assets. One of these banks
is Macedonian, while the others have parent banks in Greece and Slovenia. All banks are
considered sound. Lending is funded by deposits; the Capital Adequacy Ratio increased to
17.4 (up from 16.8) percent at the end of the second quarter of 2012; liquidity is strong and
the sector managed to attract FDI even during the difficult period in 2011. Non-performing
loans (NPLs) are stable at 10 percent of gross loans as of end-June 2012, but they remain fully
provisioned. However, profitability remains low, with Return on Average Assets (ROAA) at
0.4 percent in the second quarter of 2012.
16. External imbalances have remained sustainable during 2011 and 2012 and are
largely funded through FDI and remittances. Sluggish domestic demand and solid private
transfers kept the current account deficit (CAD) low at 2.7 percent of GDP in 2011.
Macedonia was able to attract FDI worth about 4 percent of GDP in 2011, including some
high-profile investors such as Johnson Controls and Johnson Matthey. A lot of FDI are now
11
second generation investments to expand existing production facilities. Private transfers have
remained stable at around 19 percent of GDP, helping to fund the trade deficit. As a result,
reserves increased to slightly below Euro 2.1 billion in mid-2012, or above 4 months of
imports of goods, and have remained relatively stable since. The short-term external debt-to-
reserve ratio remained comfortable at around 86 percent as of July 2012. However, the
external current account deficit is expected to increase to 4 percent in 2012 due to the poor
performance in the first quarter stemming partly from FDI-related imports.
Table 2: Selected macroeconomic indicators
17. Fiscal pressures have increased with the 2012 budget. The fiscal deficit was 2.5
percent of GDP (on a cash basis) in 2011, in line with the government target. With lower-
than-expected growth, revenues underperformed compared with initial budget projections.
This was partly offset by expenditure cuts but also by the accumulation of payment arrears.
The 2012 budget was formulated based on optimistic revenue forecasts. Lower-than-projected
growth affected revenue performance adversely in the first half of 2012. In response to low
revenues and slow growth, the government adopted a Supplemental Budget in April 2012
with measures designed to cut expenditure by 4.5 percent in nominal terms with the aim of
maintaining prudent fiscal accounts. The Supplemental Budget reinforced the authorities’
recent strong record in maintaining fiscal discipline. The main measures included: (i) a
reduction in capital expenditures; (ii) cuts in goods and services; and (iii) lower allocations for
non-social transfers. Nonetheless, by end-August, nearly 80 percent of the fiscal deficit was
already exhausted.
18. The fiscal deficit is expected to increase in 2012 as net taxes fall due to arrears
and the poor economic climate. The fiscal deficit is projected to reach 3.7 percent in 2012,
higher than previously forecasted. Although growth is forecasted to be slightly positive in the
2008 2009 2010 2011 2012 2013 2014 2015
Est.
National Accounts (% change)
Real GDP growth 5.0 -0.9 2.9 3.1 0.75 2.0 3.0 3.5
Domestic demand growth 6.7 -2.9 -0.1 6.0 0.6 1.0 2.2 3.3
Gross Investment 4.7 1.0 -3.6 19.3 2.0 3.0 4.0 4.1
Fiscal Accounts (% GDP)
Revenues 33.1 31.3 30.4 29.6 28.6 28.8 28.8 28.8
Expenditures 34.1 33.9 32.9 32.1 32.3 32.3 31.6 31.3
Balance -0.9 -2.7 -2.4 -2.5 -3.7 -3.5 -2.8 -2.5
Government debt 20.6 23.8 24.2 27.7 30.4 32.7 33.5 33.6
External accounts*
Exports (% change) -7.0 -15.7 24.2 10.5 5.0 8.0 9.8 12.0
Imports (% change) 0.0 -14.3 9.4 14.2 4.8 7.5 9.1 5.7
Current account balance (% GDP) -12.6 -6.4 -2.9 -2.7 -3.5 -5.0 -5.5 -5.2
Gross official reserves (EUR mil.) 1,495 1,598 1,715 2,069 2,271 2,178 2,456 2,775
Gross official reserves (months imports, EUR) 4.4 4.2 3.7 4.3 4.3 3.8 4.1 4.3
FDI (% GDP) 6.1 2.0 3.2 4.0 2.0 3.0 4.0 5.0
External debt (% GDP) 47.4 58.2 59.6 61.7 63.0 64.3 65.1 64.5
Prices
Consumer prices (period average) 8.4 -0.8 1.5 3.9 2.8 2.5 2.0 2.0
Consumer prices (end of period) 4.1 -1.6 3.0 2.8 2.8 2.5 2.0 2.0
Actual Projected
* Based on calculations in USD unless otherwise specified
12
second half of the year, its impact on revenues is not expected to compensate for the poor
revenue performance in the first eight months. In addition, the recent public government
commitment to clear arrears (half of which is planned to be completed by end-November
2012 and half by end-February 2013) will result in lower net VAT collections (VAT accounts
for over a third of tax revenues) and higher expenditure in the final quarter of the year than
previously forecast. The repayment of arrears will support economic activity and is in line
with financing constraints and longer-term sustainability of public finances.
19. During the remainder of 2012, government financing needs will be met through
the issuance of domestic debt, external loans and deposits. Financing needs between
September and January amount to around Euro 277 million (Table 3Error! Reference source
not found.). This includes Euro 102 of deficit financing and Euro 175 million to repay a
Eurobond due in January. All domestic debt due in the period is expected to be rolled over
and does not therefore add to financing requirements. Identified financing sources include
Euro 39 million of external donor financing (World Bank Competitiveness DPL) and Euro 43
million in new domestic debt (largely 3 and 5 year bonds) issued in September and October. If
no new domestic debt is issued, government deposits should be sufficient to close the
financing gap. However, this would result in a 82 percent decline in deposits, and would be a
significant reduction in the buffer designed to help cushion against unexpected negative
shocks in a volatile economic environment.
Table 3: Government Short Term Financing Requirements
(September 2012-January 2013, Euro Million)
September to January Financing requirements
Deficit: Sept-Jan 102
Eurobond 175
Total 277
Available Financing
World Bank DPL 39
Domestic Debt 43
Financing Gap 196
MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY
20. Despite the current difficult climate, the growth outlook for Macedonia is
relatively positive with growth projected to reach 2 percent in 2013. A significant recent
improvement in the business climate (reflected in the Doing Business indicators) combined
with efforts to attract investment is beginning to reap rewards. The country is investing in
Technological Industrial Development Zones (TIDZs) with good access to infrastructure and
tax incentives. In addition, Macedonian wage increases during the boom were more in line
with productivity increases than in many other Eastern European countries. Reasonable
wages, improving infrastructure and an improving business climate are encouraging
businesses to invest in Macedonia. FDI is the cornerstone of future export-oriented growth
(Box 2). Infrastructure investment, largely externally funded (especially by the EBRD), will
also help to boost growth as well as improve transport links and other infrastructure. The
challenge in the future will be to maintain this momentum. Despite the benefits from FDI and
13
infrastructure projects, the external climate remains challenging and growth is likely to remain
constrained by recession in many Eurozone countries.
21. The medium-term outlook hinges on the economic performance in the Eurozone,
the realization of planned FDI, and sound structural reforms that improve
competitiveness. Assuming growth in the Eurozone recovers, GDP growth is expected to
pick up over the medium term. Supportive macroeconomic policies and continued structural
reforms to improve competitiveness will be crucial in further boosting the investment and
increase productivity. Reforms that aim to lower costs for business, including infrastructure
investments and regulatory reforms, as well as those that improve the functioning of the labor
market and raise the skill level of workers will be particularly important for future growth. As
the recent gender diagnostic shows, female entrepreneurship is currently limited and remains
an unexploited source of growth. Efforts to encourage females to start SMEs could stimulate
economic activity and employment in the medium term.
Box 1: Foreign Direct Investment in Macedonia
The government considers FDIs as one of the cornerstones for future growth and, through its agency
InvestMacedonia, has been active in efforts to attract private investors in recent years. In addition to international
fairs, advertisements about the fast-improving investment climate in Macedonia have been published in a
number of global TV and newspaper networks, including CNN, BBC and The Economist. In addition, high-level
officials are often present at the road-shows organized in targeted countries, addressing private businesses
directly. These efforts have helped to attract FDI, which reached 4 percent of GDP in 2011. Unlike other
countries in the region, almost all investments are export-oriented and many are part of a long-term investment
plan for Macedonia. Large companies, such as Johnson Matthey and Johnson Controls, are already expanding
their production through a second wave of investments, a sign of confidence in the country. Several companies
also invested for the first time during 2012 – largely in light manufacturing – and are expected to start production
by the end of the year or in early 2013. New investments are expected to reach Euro 63 million for the remainder
of 2012 and Euro 80 million for 2013 (World Bank estimates based on the minimum investment amounts in state
aid contracts). This could lead to additional production of Euro 400 million in 2013 and Euro 1,510 million in
2014, as the new manufacturing facilities become operational. In addition, a large number of companies are in
an advanced stage of negotiations with the government (mostly in the auto industry, food and construction).
Total greenfield FDI in 2013 (largely by export-oriented industries) is expected to reach around Euro 250 million
(1.9 percent of GDP). Other sources of FDI (largely reinvested earnings) are expected to push this up to 3
percent of GDP. This trend is likely to continue in 2014 as the government continues pursuing its agenda of an
improved business climate, combined with marketing and an expanding number of TIDZs.
22. The external CAD is expected to widen somewhat over the medium term but
remains at sustainable levels. Over the medium term it is projected to further widen as FDI-
related imports increase and domestic demand recovers. Export growth is projected to remain
robust, aided by the expansion of production capacities supported by FDI. Furthermore, the
continued inflow of FDI and the expected increase of exports could provide an additional
stimulus to growth. Private transfers are projected to remain stable at around 19 percent of
GDP3, and continue to help finance the CAD. FDI and external borrowing will also be
important sources of financing. Despite moderate external financing requirements (Table 4),
the pegged exchange rate and volatile capital markets warrant caution.
3 World Bank, Migration and Development Brief 18, April 2012, available at: http://siteresources.worldbank.org/
INTPROSPECTS/Resources/334934-1110315015165/MigrationandDevelopmentBrief18.pdf
14
Table 4: External financing requirements and sources, percent of GDP
Source: WB Staff estimates
23. The fiscal climate is expected to remain difficult into 2013 as the government
makes continued efforts to repay arrears. The deficit is expected to reduce slightly to 3.5
percent of GDP in 2013 as the government introduces measures to increase pensions at a cost
of 0.4 percent of GDP and continues to implement its plan to settle the arrears. The fiscal
accounts will need to be gradually adjusted over the medium-run requiring strong control of
expenditures. Budget financing requirements are projected to remain moderate and stem
mainly from the fiscal deficit and debt repayments.
24. Government debt is expected to increase to about 33 percent of GDP by 2014
from 28 percent in 2001. Higher deficits intended to fund the payment of arrears and
increases in pensions are the main drivers of the increased debt. Despite the increase, the debt
level is sustainable and remains relatively moderate by international standards. A shock that
permanently reduces growth4 throughout the projection period compared with the baseline
would result in public debt increasing to 40 percent of GDP by the end of 2017. This points to
the country’s vulnerability in the face of prolonged turmoil in the Eurozone and the need to
ensure that structural reforms that maintain economic growth are enacted.
25. Debt sustainability would also be tested if the fiscal deficit is not controlled over
the medium-term. An increase in the primary fiscal deficit compared with the baseline
scenario over the projection period would increase public debt to 41 percent of GDP by end-
2017 (see Annex 4 on Debt Sustainability for details). This underscores the importance of
maintaining tight control over government expenditure – including the proposed pension
increases – and timely gradual reduction of the fiscal deficit. Public debt is also vulnerable to
exchange rate shocks with a single 30 percent depreciation increasing debt by more than 10
percentage points of GDP.
26. Despite the sustainable baseline scenario, policy makers need to be cautious given
the unpredictable and still high-risk external environment. The external environment
remains particularly vulnerable to confidence shocks in a scenario of expanding Eurozone
4 Growth reduced compared to the baseline projection by half of one standard deviation of the previous 10 years’
growth.
2011 2012 2013 2014 2015 2016
Financing requirements 11.3 8.9 11.2 10.2 10.7 10.1
Current account deficit 2.7 3.5 5.0 5.5 5.2 4.4
Amortization 4.2 2.6 4.2 1.9 3.5 3.7
Reserve changes 4.4 2.8 2.0 2.8 2.0 2.0
Financing sources 11.3 8.9 11.2 10.2 10.7 10.1
FDI and Portfolio investments 4.0 2.0 3.0 5.4 5.4 5.4
External MLT borrowing 9.9 6.7 8.0 4.7 5.2 4.6
Other capital flows -2.6 0.2 0.2 0.1 0.1 0.1
15
crisis, while financing conditions may deteriorate rapidly in the current environment. Also,
stronger border controls within the EU may dampen prospects for remittances. A domestic
“mini crisis” cannot be ruled out in case of a wider contagion from the Eurozone. Heightened
concerns over fiscal imbalances in the Eurozone could affect the health of banks in other
economies, trigger a credit crunch and a rapid contraction in domestic demand leading to a
prolonged and severe recession.
27. Despite the identified risks, the government’s track record and macroeconomic
policies are considered adequate for the purposes of the proposed DPL. The set of
macroeconomic policies are adequate given the overall economic environment and should
support economic activity but also keep the external and fiscal balances manageable. Still,
policy-makers need to stand ready to take measures in case the situation deteriorates. This
operation and the proposed Second Policy-Based Guarantee (PBG II) should help to moderate
some of the risks by ensuring timely reforms and access to financing. The PBG II will support
reforms to ensure the continued competitiveness of FYR Macedonia’s economy, improved
public financial management, and protection for vulnerable groups.
COMPETITIVENESS CONTEXT: SECTORAL AND CROSS-CUTTING ISSUES
SECTORAL CONTEXT
28. This section outlines the current conditions, challenges and opportunities in the
manufacturing, agribusiness and trade logistics sectors, key export-oriented sectors in
FYR Macedonia. The Government of FYR Macedonia requested support from the Bank to
identify reforms that could enable faster growth and job creation in export-oriented sectors.
The FYR Macedonia Modular Competitiveness Assessment was the tool used to identify
sectoral and cross-cutting constraints and systemic reforms to address these constraints (see
Box 3). The manufacturing, agribusiness and trade logistics were identified as the sectors to
be covered through an analysis of the potential contribution to growth and employment,
looking at factors such as upgrading potential, unexploited productivity gains, export potential
and sources of comparative advantage (see Annex 5 for details). These sectors are major
contributors to employment, GDP and exports.5 Extensive consultations with the government
and stakeholders were conducted to validate the analysis and discuss whether FYR
Macedonia has or could build a sustainable competitive advantage in these sectors.
5 Other industries and sectors are also important for the competitiveness of FYR Macedonia—for example, the
whole value chain related to the manufacturing of metal products and tourism. In parallel to this operation, the
World Bank is providing technical assistance to the Government to evaluate new policies to support the
competitiveness of the tourism sector with resources from a Multi Donor Trust Fund for Cultural Heritage and
Sustainable Tourism.
16
Box 2. Evaluation of the Sectoral Context: Building blocks and methodologies
Raising long-term economic growth requires tackling binding structural constraints which stifle major
economic sectors. In-depth analysis at the sector level facilitates the development of interventions directed at
removing binding constraints, which could lead to the growth of productive industries that generate jobs and
unleash sustained growth. A sectoral lens can help to overcome specific coordination failures, provide targeted
public goods and make growth more inclusive.
A Trade Competitiveness Assessment was completed in November 2011. The assessment involved: i) an
examination of current and recent historical trade performance along various dimensions including growth, and
market share; orientation and diversification; and quality and sophistication; ii) an evaluation of firm-level
export dynamics to determine patterns of entry, expansion, diversification, upgrading, and exit of exporters; and
iii) a trade competitiveness diagnostic to analyze the factors (such as market access, the macro-incentive
framework faced by exporters, factor conditions, and the trade promotion infrastructure) that contribute to the
observed trade performance. The assessment was based on desk research, firm-level customs transaction data
and field interviews as well as firm characteristics from the Company Registry. In-depth field interviews and
focus groups were conducted with more than 20 public and private sector organizations in several locations
across the country. The findings and policy implications were discussed extensively with policymakers,
stakeholders and private sector representatives.
Trade Competitiveness Diagnostics Framework
A Sectoral Competitiveness Assessment covering manufacturing, agribusiness and trade logistics was
completed in early 2012. This assessment included: i) Value Chain Analyses of two manufacturing industries,
automotive and apparel, which entailed active involvement of international and local industry experts; ii) The
agricultural sectoral analysis included a land market assessment, an assessment of the leading agricultural
exports and an examination of the impact of the EU accession on the sector; iii) For the identified service
sector, trade logistics, a trade facilitation assessment was performed that is broadly based on the World Bank’s
Trade and Transport Facilitation Assessment framework. The assessment provided a sectoral lens that helped to
narrow in on those interventions that have a high likelihood of increasing FYR Macedonia’s economic success
by: identifying the major opportunities for increasing the competitiveness of these sectors; pinpointing
constraints that could have hampered growth in recent years or could do so in future; and offering
recommendations about how the government could accelerate the sectors’ competitiveness.
17
Table 5: Sector Snapshot
Source: State Statistical Office, ITC TradeMap, UN Comtrade
Notes: 1/Food Production is excluded from the manufacturing sector, and included in the agri-business sector
2/ Export for the automotive industry include catalytic converters.
Manufacturing sector
29. Manufacturing is a significant part of FYR Macedonia’s economy, but future
growth prospects depend on the investment in high value added segments and
integration into global supply chains. Manufacturing accounts for a fifth of total
employment. Until recently, the manufacturing base was concentrated in a small number of
industries which employ mostly low-skilled labor and compete on the basis of prices. Around
half of FYR Macedonia’s export value is from low tech products (sheets and plates of iron,
textiles and clothing). According to the 2009 Country Economic Memorandum (CEM), the
main factors that limit the competitiveness of the sector are that: i) investment and total factor
productivity (TFP) growth have been low compared to regional and global trends; ii)
industries are facing increases in production costs as energy subsidies are removed, which
will particularly affect the competitiveness of the metal industries; iii) there was limited
participation in producer-driven global supply chains, although this is changing with the
opening of new factories that produce parts and components. A recent challenge for the
competitiveness of the private sector is that the budgetary arrears linked to government
contracts and VAT refunds have exacerbated the liquidity constraints in an already difficult
economic environment, depressing investment and having a cascading effect on the economy.
30. These competitiveness factors are captured by a review of FYR Macedonia’s
apparel industry, which is one of the traditional export industries, and the automotive
industry, which is an emerging industry driven by FDI:
Apparel industry: The textile and apparel industry continues to be a backbone of
manufacturing in FYR Macedonia, accounting for 28 percent of total manufacturing
employment (75 percent of the workforce in the industry is female). The industry is
coping with global competition by developing a reputation for high quality, quick
turnaround times and production flexibility. However, the industry is vulnerable owing to:
the expected contraction in demand from its major customers in Europe; a global shift
toward suppliers that can also provide value added services such as materials sourcing and
logistics; and declining wage competitiveness in global terms. For the apparel industry to
be competitive in the long term, there needs to be a shift in which firms: i) enter high-
Average wages (2011)(in USD
million) (% of total) No. employees (% of total) Net (USD/month)
2011 2011 2011
Manufacturing 1/ 3,579 80% 80,652 18% 304
------ Apparel 726 16% 35,683 8% 200
------ Automotive 2/ 585 13% 2,627 1% 416
------ Metal Processing 1,072 24% 12,991 3% 376
Agribusiness 650 15% 102,620 22% 338
------ Primary agriculture 267 6% 82,394 18% 296
------ Food production 383 9% 20,226 4% 379
Transport and Logistics Services NA NA 26,453 6% 427
Total 4,455 100% 458,873 100% 417
Exports (2011)
Sectors:
Employment (2011)
18
value segments such as cut-make-trim (CMT) for niche export items that require
production in small batches and specialized manufacturing skills; and ii) develop
advanced in-house capabilities such as integrated logistics and fashion and design.
Automotive industry: The automotive industry is made up of two distinct segments: i)
the global Tier 1 companies that have opened up in the Technological Industrial
Development Zones, which account for 86 percent of total industry revenue; and ii) the
small-and-medium-sized domestic firms, which are small in terms of total revenue and
exports but contribute significantly to employment. The entrance of large-scale
multinational operations has served to build a more modern and globally-integrated
automotive components industry. But because domestic firms mainly produce aftermarket
parts for the local market and export to neighboring countries and Russia, there are limited
opportunities for these firms to become suppliers to the Tier 1 companies. Increasing the
effectiveness of the investment promotion instruments, addressing skills shortages
identified by investors at the managerial and technical level and establishing supplier
development programs would support continued growth of the automotive industry.
Agribusiness sector
31. The agribusiness sector saw exports more than double over the last five years,
but at the same time, deep-rooted structural and institutional bottlenecks weaken the
incentives to invest in restructuring and upgrading. Given that primary agriculture and
food processing account for more than 20 percent of employment and more than 10 percent of
GDP, the removal of constraints to competitiveness can yield outsized results. Currently there
are several bottlenecks to growth, particularly the deficiencies in the functioning of the land
market, which are impeding market entry and access to finance, and custom duties that
increase the input costs in the food processing industry. A consistent set of measures to
facilitate effective restructuring of the primary agriculture sector and an enhanced business
environment for food processors would support the transformation of the sector.
32. The public funding going to agricultural support has grown significantly in
recent years, but the results have been limited. The government has tried to support the
upgrading of the agriculture sector, increasing the value of financial support to the sector from
Euro 9.7 million in 2005 to Euro 130 million in 2012. Recurrent subsidies are divided into
output-based subsidies (one third, most of which is the tobacco subsidy) and direct area/ per
animal based payments (two thirds). To-date support programs have not yielded the desired
effects, due to the following reasons: (i) most of the funding goes to income support measures
and only a fraction is invested, which undermines the potential to build a competitive sector,
given the available resources – only 10 percent of the agricultural support under the 2010
program was allocated to structural measures that directly incentivize investment and
restructuring; and (ii) in specific subsectors and products, the support programs now account
for a significant share of the cost of production, which distorts investment incentives.
33. The poorly functioning rural land market constrains investment and productivity
enhancements in the agricultural sector. Access to land has been identified as a constraint
19
for doing business by 35% of firms, above regional levels.6 There have been improvements in
the access to manufacturing-ready land in urban areas with the creation of the TIDZs and the
development of industrial zones in municipalities. However, availability of agricultural land
remains problematic due to: fragmentation of privately owned land (the average land-holding
is about 0.2 ha); lack of incentives for rural residents to participate in agricultural land sale
and rental markets as a result of which much of the land remains idle; and inefficiencies in the
management of state-owned land. In addition, the Property Tax Code does not encourage land
transactions, as it contains a provision that if land is used for agricultural production, the
annual property tax is waived. Given there are 2 million land parcels in the country, this
provision is hard to enforce, which means that land owners (many of whom have retired or
migrated to the cities) do not have incentives to rent or sell their land.
34. SMEs and firms in agribusiness face challenges in getting access to investment
and working capital finance, primarily due to collateral constraints. Due to deficiencies
in the functioning of the land market, agricultural land cannot be used as collateral, limiting
bank credit to the agricultural sector. The Macedonian Bank for Development Promotion
(MBDP) offers several programs for SMEs (export insurance, factoring), however there is a
need for additional support. For exporters, and particularly for small and incipient exporters,
the finance challenge relates as much to working capital as investment finance. While trade
finance instruments exist, awareness and take up remains limited. It is estimated that only 2%
of total exports are covered by the export credit insurance7 offered by commercial banks
through the MDBP.
35. The limited availability of non-seasonal inputs in the domestic market combined
with high import tariffs limits the development of the food processing industry. As
discussed in the 2009 CEM, FYR Macedonia’s regime for agriculture is far more restrictive
than in the case of industrial products, as the most-favored-nation (MFN) tariffs on
agricultural imports are generally high (about 55-65 percent for off-season vegetables) and the
data indicates there is higher protection where FYR Macedonia seems more competitive. As a
consequence of the substantial costs to securing non-seasonal inputs from foreign markets,
food processing has become a seasonal industry with average capacity utilization at about 40
percent in the last 5 years. This constrains the development of the food processing industry,
which faces strong external competition. The industry continues to be relatively small by
regional and global standards: for example, FYR Macedonia exports 6,000 tons of canned
vegetables per year compared to 20,000 tons for Moldova and 400,000 tons for Netherlands.
Trade logistics sector
36. Inadequate roads and railways continue to constrain trade logistics, hindering
the competitiveness of firms across all sectors of the economy. Road transport is the
dominant mode of freight transportation in Macedonia, accounting for about 90 percent of
freight transported through Macedonia. The European Transport Corridor X is in much better
condition than Corridor VIII (for example, Corridor X has four to six lanes, whereas over 50
percent of Corridor VIII has only two lanes) and therefore accounts for nine times more
6 Business Environment and Enterprise Survey - BEEPS 2008 data.
7 The charge is normally between 0.7% and 1.0% of the value of the insured transactions.
20
freight traffic. The state of the railroad infrastructure limits the interoperability with other
railway systems in the EU: 68% of the Macedonian railway network has not been upgraded in
the last 31 years and only 8% has been upgraded in the last 10 years. In 2009, 70% of
locomotives were older than 30 years and 70% of freight wagons were older than 26 years.
Lastly, being a landlocked country Macedonia has to depend on ports in the region to access
the sea which leaves it vulnerable to disruptions in neighboring countries. The government is
investing in the completion of its two main trade routes, Corridors VIII and X, both in
highway and railway infrastructure. Significant investment will be made to replace rolling
stock and introduce new equipment for freight and passenger transport that offers higher
service quality and improved performance of the railway operations.
37. There has been a reduction in fixed exporting costs faced by firms, but
inspections at the border are still a constraint for the efficiency of trade logistics.
According to Doing Business 2012, FYR Macedonia appears to be relatively competitive in
terms of export and import procedures and costs compared to the other countries in the region
(see Table 6). Nonetheless, the 2012 Logistics Performance Index (LPI) measured by the
World Bank places FYR Macedonia in 99th position worldwide, highlighting the need for
further improvements. The lowering of fees for international driving licenses and the fees for
veterinary and phyto-sanitary inspections at border crossings have recently reduced the
administrative and regulatory burden. At the same time, slow progress in developing a risk-
based approach for custom controls and limited presence of inspectors at the border crossings
and avoid spoilage of goods.
Table 6: Average cost for exporting a 20-Foot container
Country No. of
Export
Document
s
Export
Time
(Days)
Export
Cost
(USD)
No. of
Import
Document
s
Import
Time
(Days)
Import
Cost
(USD)
ECA region 7 27 1,774 8 29 1,990
FYR Macedonia 6 12 1,376 6 11 1,380
Bulgaria 5 23 1,551 7 21 1,666
Croatia 7 20 1,281 8 16 1,141
Czech Republic 4 17 1,060 7 20 1,165
Hungary 5 18 1,225 7 17 1,215
Montenegro 6 14 775 6 14 890
Slovakia 6 17 1,530 8 19 1,505
Source: World Bank 2012 Doing Business Report
38. Increasing the supply of value-added integrated logistics service providers is
critical. At present, the logistics services sector is mainly comprised of basic services
(transportation, warehousing, customs clearance). The sector is highly fragmented, with over
96 percent of logistics companies having less than 10 employees. There is currently an
insufficient supply of integrated logistics services for the manufacturing sector. As an
example, in the apparel industry only a handful of companies provide services such as
sampling, grading and integrated logistics that are critical for suppliers producing for large
global retailers and brand owners. Additional efforts need to be taken to increase incentives to
foster upgrading and increase the export-readiness of the logistics sector.
21
39. Transport companies would need to upgrade to operate effectively in the EU.
Almost 50 percent of third-party carrier vehicles are below the EURO 3 standards that are
required to obtain CEMT (European Conference of Transport Ministers) permits, allowing
companies to transport freight across national borders between member countries (44
countries including OECD and several East and Southeastern European countries). Countries
are assigned quotas for CEMT licenses, and FYR Macedonia was allotted 1,300 CEMT
permits in 2012, which represents an increase of 200 licenses compared with 2011.
CROSS-CUTTING ISSUES
40. There is the need to prioritize cross-cutting reforms related to the labor market,
skills development and the innovation capacity to stimulate growth in the economy. The
combination of high and persistent unemployment at the same time as companies across
sectors report skills shortages points to the existence of continuing rigidities in the labor
market and a disconnect between the education system and private sector needs. This is a
cross-cutting issue and to resolve will require structural reforms that incentivize firms to
create more and better jobs, equip workers to take on available opportunities and improve the
institutional framework and incentives system around jobs. The long-term challenge is to
build an innovative enterprise ecosystem, in which firms invest regularly to build their
technological capacity, and implement managerial and organizational improvements.
41. Despite recent reforms, and improved economic performance before the crisis,
unemployment remains high and overall employment low. FYR Macedonia performs
poorly when it comes to labor market indicators. The employment rate is low (43.5 percent),
only two-thirds of the EU-27 average employment rate (Figure 3). This is a result of high
unemployment rates (31.4 percent) and moderate to low labor force participation rates (63.8
percent). Long-term unemployment is of particular concern.
Figure 3. Employment rates in Macedonia are among the lowest in Europe
Source: Eurostat
22
42. There are important gender gaps in the labor market. While male labor force
participation in Macedonia is comparable to the regional average, female labor force
participation is far below it at 51 percent. In Macedonia, labor force participation among men
is 27 percentage points higher than among women. Even when women do work, there are
important wage differences between men and women8, partly explained by differences in the
sectors of employment (Figure 4). Notably, women are disproportionately likely to be
employed in manufacturing – particularly apparel – and agriculture. Increased FDI in these
sectors is likely, therefore, to have particularly beneficial effects on female employment and
living standards.
Figure 4. Women are disproportionately employed in manufacturing and agriculture
Percentage employed by economic sector, 2010
Source: LFS (2010)
43. After years of first-generation reforms, the remaining labor market issues that
hamper the competitiveness of Macedonian firms include: 1) pockets of stringent
regulations for hiring temporary and seasonal workers; 2) weak (formal) work incentives for
low-wage workers; 3) complicated procedures for bringing skilled foreign workers; and 4)
employers lack of awareness about recent labor market reforms. More specifically:
8 See Gamberoni, E. and J. Posadas, 2012.
23
There is no specific legislative framework for seasonal employment and current
regulations governing seasonal contracts - under temporary employment - lack
flexibility, especially in terms of severance pay and hours worked.9 This is particularly
important for agri-business, tourism and construction sectors with more than 44,000
seasonal workers in 2010. Seasonal employment is subject to the same regulations as
other temporary contracts that can last up to five years. Because of these regulations,
conditions and benefits of seasonal employment are too strict for work that occurs at
irregular intervals and is often short-term, and a large part of seasonal employment is
undeclared.
The tax wedge is regressive for employees with wages below the reference wage,
which affects low-wage earners. Low-wage earners contribute based on a reference
wage that is often higher than their actual wage. In addition, there are no or few income
disregards (exemptions) when calculating eligibility for social benefits, which provides a
disincentive to take on formal employment. As a result, workers often do not take job
offers and prefer to remain registered as unemployed or work informally.
Recruiting skilled foreign workers so they can work in Macedonia is a complicated
process.10
The issues include: delays when obtaining visas as a result of the logistically
complex system of communication between the applicant, the employing company and
the various involved authorities; the burdensome work permit requirements; and the
requirement to renew permits on an annual basis.
Employers, including representatives of employer associations, are largely unaware
or have inaccurate perceptions about labor regulations and procedures. Consultations
with firms indicate that the new online contract registration, part-time regulations, and
conditions for apprenticeships are not widely used. As a result, many firms do not benefit
from labor market reforms implemented in recent years.
44. There is an apparent mismatch between the available skills among the working
age population and the demand for skills from employers. In a 2010 World Bank survey
of 1,700 firms, 30 percent of employers claimed that hiring a worker is either difficult or very
difficult. The study suggested that lack of soft skills (e.g., communication skills, work ethics)
is a fundamental constraint when seeking to hire. Vacancies for highly skilled workers and for
elementary positions are particularly difficult to fill. These findings were confirmed by the
Sectoral Competitiveness Assessment in 2012. Firms in the automotive industry reported
difficulties filling positions at management and technical level as well as low initial
productivity of the workforce. Apparel industry reports difficulties in finding workers with the
right skills as the relevant programs at Macedonian universities and technical colleges have
low enrollments and outdated curricula.
45. At the same time, innovation capacity is low according to standard indicators, as
a result of weak investments and the low knowledge-intensity of economic activities. In
9 Kuddo, A. (2012). “Seasonal Employment: International Experience and Policy Options for FYR Macedonia,”
policy note prepared for the Government of FYR Macedonia, World Bank, Washington, DC. 10
“Assessment on the Visa and Work Permit Regime for Expatriate Employees,” policy note prepared for the
Government of FYR Macedonia, World Bank, Washington, DC, 2012.
24
2008, R&D expenditures in the country were 0.2 percent of GDP, whereas the EU average
was around 1.9 percent11
, and over 90 percent of R&D funding comes from government
sources. This is a result of the structure of economic activities, which is specialized in low-
and medium-tech industries and the small size of the average firm. Government sponsored
R&D facilities rarely invest in applied research and lack the mechanisms to transfer
knowledge and technologies to the private sector. In addition, the national R&D system
suffers from shortages of high-skilled personnel, as the share of young researchers is
disproportionally low and there is a brain-drain to wealthier EU countries.
III. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES
46. The Government Work Program for the period 2011-2015 envisages further
improvements in the general business environment, as well as measures that directly
stimulate productivity-enhancing investments. In addition to measures directed toward
further reduction of the time and cost of doing business, new measures have been introduced
to facilitate upgrading and innovation in the private sector. The objective is to facilitate the
transition of industry towards the production of higher value-added products and services,
which is essential to narrow the productivity gap compared to the EU.
47. The government undertook a review of the country’s competitiveness and
adopted a Competitiveness Action Plan in February 2012. The Competitiveness Action
Plan was based on the model and pillars of the Global Competitiveness Index of the World
Economic Forum and it incorporates all ongoing and planned programs and measures in
support of each pillar and indicator. It also proposes additional measures and activities in
support of innovation, technology transfer, entrepreneurship and skills development. The FYR
Macedonia Modular Competitiveness Assessment provided the government with
recommendations that have helped to strengthen its competitiveness program and several of
the proposed actions were incorporated into the Competitiveness Action Plan.
DEVELOPING HIGH-VALUE ADDED MANUFACTURING
48. The government is making significant efforts to accelerate the upgrading of the
manufacturing sector. The government has embarked on a two-pronged policy to stimulate
upgrading in manufacturing and diversify exports into high value added goods and high
income markets: i) transferring advanced manufacturing capabilities through the attraction of
FDI; and ii) upgrading industries with high potential through export promotion support.
49. The investment attraction strategy is at an advanced stage of implementation.
Recognizing that the country was not a destination of first choice for greenfield FDI,12
the
government embarked on a proactive investment attraction strategy since the mid-2000s. This
included the establishment of the Agency for Foreign Investments and Export Promotion
11
“Regional R&D Strategy for Innovation in the Western Balkan Countries” (Draft), World Bank, Washington
DC, 2012. 12
Interviews with potential investors confirmed that FYR Macedonia is not an obvious investment destination
choice given that it is competing with several other countries with larger labor and consumer markets, more
central locations and better infrastructure.
25
(InvestMacedonia), which is the primary institution tasked with attracting and supporting
foreign investment. InvestMacedonia employs a network of international promoters and has
the responsibility to regulate state aid incentives to investors. The government also established
special economic zones managed by a Directorate for TIDZs under the Ministry of Economy
(DTIDZ). This program has been successful in attracting FDI in several industries by
providing high quality infrastructure (helping to overcome one of the main barriers to
investment – problematic access to land and lack of quality industrial infrastructure). One
TIDZ is operational and has attracted several foreign investors (Skopje 1), another is almost
complete (Skopje 2), two others are under construction (Stip and Tetovo), and a pipeline of
other zones has been identified. The Law on TIDZ and the Law on State Aid offer qualified
investors a package of infrastructure, services, customs and trade facilitation, as well as fiscal
benefits (0 percent corporate tax and personal tax for 10 years, and freedom from paying
import duties or VAT combined with a package of other incentives). These incentives are in
line with the EU acquis communautaire in the field of state aid.
Box 3. Using Special Economic Zones to attract investment to FYR Macedonia:
Good practices from international experience
Special Economic Zones (SEZ) have a mixed record of success on a global basis. They are generally viewed as
‘second best’ solutions and, particularly where reliant on fiscal incentives, may result in an inefficient use of
public resources and create market distortions. However, they have also been successful instruments in attracting
FDI and facilitate diversification in many countries, particularly in the East Asian “tiger economies” during the
1980s and in China since the early 1990s, but also in countries like Mauritius, Costa Rica, Dubai, and others. In
Eastern and Central Europe, SEZs have been a key instrument used to attract large-scale investments,
particularly in the automotive sector.
In FYR Macedonia the TIDZs were set up to overcome significant barriers to investment, in particular, the
difficulty in getting access to land and shortage of quality industrial infrastructure. The TIDZs provide high
quality, ready-made infrastructure and a customs “green lane” for export-oriented investment. This reduces risk
for foreign investors and allows them to establish and start operations quickly.
There is evidence that the TIDZs were an enabler for high value added FDI. Interviews with investors confirmed
that the TIDZs were instrumental in their decision to invest. The incentives offered to companies appear to have
factored significantly in this decision. FYR Macedonia faces an intensely competitive environment. Neighboring
countries in the Western Balkans offer generous incentives and EU countries such as Poland and the Czech
Republic have negotiated flexible terms on their state aid policies and also operate free zone programs.
Going forward it is important for the government to ensure the TIDZs: i) are able to deliver more effectively on
their mandate to attract and sustain quality investment; and ii) ensure the program is sustainable financially and
has a governance structure that ensures improved transparency and accessibility. Recommendations based on
good practice learned from SEZ programs internationally include:
a. Give stronger authority to the DTIDZ to deliver services to investors through an empowered one-stop
facility: Lessons from international experience show that one stop facilities often do not work because they
have no mandate to actually make decisions.
b. Improve the governance of the DTIDZ: At the moment there is no private sector representation on the
Board. International good practice calls for significant private sector representation to ensure the voice of
the private sector is heard and that decisions are more transparent.
c. Ensure that public investment in TIDZ follows clear market demand: A study completed under the World
Bank-financed Business Environment Reform and Institutional Strengthening Project (BERIS) in 2010
advised the government to stop funding development of 11 zones (their original plan) and focus only on the
few already under construction and provided guidance on initiating a PPP approach to further investments.
d. Put in place a monitoring and audit system for fiscal incentives: This is for three reasons: i) to improve
transparency, as decisions at the moment are not transparent and incentives can be negotiated with various
parts of the government; ii) for budgeting and financial planning purposes, to better understand the fiscal
implications; and iii) to make sure investment incentives continue to be aligned with EU State Aid rules.
26
50. The government recognizes the need to strengthen the governance framework in
the TIDZ to ensure that the country captures the full benefits of FDI. The TIDZ program
has been a critical enabling factor in FYR Macedonia’s recent success in attracting
manufacturing FDI. In interviews conducted as part of the Sectoral Assessment, the managers
of FDI companies in the automotive industry indicated that the TIDZ were instrumental in
attracting their investment. On the other hand, several actions are needed to ensure transparent
and effective governance and financial sustainability. The government intends to strengthen
its FDI attraction efforts by: i) improving the institutional capacity and instilling an effective
corporate governance system in the DTIDZ; ii) bringing companies that can have direct
linkages to domestic industry; and iii) matching the public investment in TIDZs with the
demand for the zones and regional needs.
51. The tools for export promotion are being enhanced. The government recently
adopted an Export Promotion Strategy and gave InvestMacedonia responsibility for
implementing the export promotion programs. An export promotion unit has been set up
within InvestMacedonia and it is currently developing the design of its support programs with
assistance from USAID. The government plans to allocate resources to staff this new export
promotion unit and start implementation of the first support programs. A business
development program will help companies to generate export orders by leads that could lead
to export orders, through trade fairs, trade missions, contact lists and identification if high-
level opportunities.
FACILITATING THE RESTRUCTURING OF THE AGRIBUSINESS SECTOR
52. The government’s policies in the agribusiness sector seek to incentivize
productive investment and effective sector restructuring. Macedonian agriculture has the
potential to make a large contribution to inclusive growth and poverty reduction, and
transforming agriculture is central to FYR Macedonia’s European integration and social
cohesion objectives. The conditions for restructuring are favorable, as agriculture producers
have seen increasing external demand for food and EU-induced opportunities (market and
fiscal transfers). The goals of the government’s program in the agriculture sector are to
improve access to good quality land by improving the administration of state-owned rural
land that is leased out and to adopt a National Program for Development of Agriculture and
Rural Development for 2013-2017 that gives incentives to invest, adopt technology, and
foster intergenerational asset transfer.
53. The improvements to state land management are critical from both budget
revenue and land use efficiency perspectives. In FYR Macedonia about a quarter of the
agricultural land is owned by the state. Since the introduction of the policy to lease out the
state owned land to the private sector in mid 1990s, the lease contracts were held in paper
form by the 32 branch offices of the Ministry of Agriculture, Forestry and Water Economy
(MAFWE). The absence of a unified registry for such contracts was a major impediment to
efficient asset management and contract enforcement. On top of the negative fiscal impact,
the widespread non-collection of the annual lease payments resulted in significant
underutilization of this productive asset, i.e., about one third of such land was not cultivated.
54. Currently MAFWE is finalizing an electronic land management system that
contains the key provisions of all lease contracts for state-owned land. The information
27
system covers the 6,700 lease contracts signed to date, for a total leased out area of about
100,000 hectares. This database will empower the MAFWE to improve the overall
management of this substantial productive asset and improve contract enforcement, which had
been a major weakness of the state owned agricultural land policy to date. This weakness also
slowed the corporate agriculture sector restructuring since most of the area under long term
land lease contracts are held by the successors of the former state owned farms. In most cases
state farms in Macedonia were privatized through management buyouts that prohibited entry
of fresh capital and genuine private initiatives. The gradual increase of the collection rate over
the past few years has already ignited mergers and acquisitions in the formerly stagnant
corporate agriculture sector that led to increased resource utilization.
55. The government is updating the land valuation methodologies. Until recently, the
agriculture land valuation policy in FYR Macedonia was based on obsolete cadaster crop
principles. In 2010, the government introduced a forward-looking policy change with the
requirement for all real property valuations to be aligned with actual market transactions. The
2010 framework Law on Valuations delegated the responsibility for developing agricultural
and forest land (including water management structures) valuation methodology to the
MAFWE. The development of relevant valuation principles has been partially addressed in
cooperation with an ongoing FAO Land Project. The anticipated longer-term benefit of this
initiative is the emergence of a reliable agriculture land price information system which
should improve access to commercial credit for the agriculture sector. In addition, the new
valuation methodology will help the government to align the minimum lease amount with the
market rates for future lease contracts that will be awarded on a competitive basis.
56. The new multiannual National Program for Development of Agriculture and
Rural Development 2013-2017 (NPDARD) will build in stronger incentives to increase
productivity. Currently only the beneficiaries of the EU co-financed Instrument for Pre-
Accession Assistance for Rural Development (IPARD) program are required to comply with
the Macedonian Code of Good Agricultural Practices (CGAP). The NPDARD envisages
gradual introduction of mandatory CGAP compliance for the recipients of support measures
that are fully financed from the national budget. This policy change, on top of the positive
nature conservation impacts, will enable the Macedonian farming community to penetrate the
more lucrative marketing chains where the basic product entry condition is CGAP
compliance. The current general CGAP noncompliance in FYR Macedonia is a major non-
tariff barrier for Macedonian fresh produce exports to the EU market, including regional
supermarket chains that can provide longer term contracts to primary producers and traders.
Box 4. FYR Macedonia’s Code of Good Agricultural Practices
FYR Macedonia has developed a Code of Good Agricultural Practices (CGAP), which is a mandatory
document prior to EU accession and in line with the EU acquis. The CGAP comprises practices to ensure that
agricultural production is in line with food safety, animal hygiene and welfare, and environmental regulation.
Adherence to this by the agricultural sector is important for exports and the food sector in complying with
international food safety standards. The CGAP sets mandatory minimum standards for IPARD financed
investments and once FYR Macedonia joins the EU, the upgrading of farms to CGAP standards will require
phasing over several years. CGAP certification in the EU context has a strong public good dimension since it is
the public administration that is in charge of setting up and enforcing the certification system. It should also be
seen as the first step toward meeting the more stringent requirements of the multinational supermarket chains
that source inputs globally in order to meet the specific consumer preferences worldwide.
28
57. In the NPDARD, the government plans to allocate additional resources to
IPARD-like structural measures that are investment oriented and necessary for
technological upgrading. The structural measures are in essence co-financing grants for on-
farm competitiveness enhancing investments, but they also provide support to the rural
communities for investments of public good nature. The increased structural measure
resources will help Macedonian farmers to close the competitiveness gap relative to EU
member states. Going forward, the direct payments need to be designed in a way that
minimizes negative externalities or in a way that supports the provision of public goods, in
order to justify this type of public support.
58. The government is also establishing better controls through the Integrated
Administration and Control System (IACS). The IACS and the Agricultural Market
Information Systems have the potential to contribute significantly to developing,
implementing, monitoring, and evaluating agricultural policy. One of critical modules of the
IACS, the Farm Register (FR), is fully operational and will be used for administrative controls
for the 2012 support program. About 105,000 farmers have been entered in the FR. There
were reportedly certain inconsistencies between the FR and the applications for payments,
which interfered with the use of the FR for administrative controls for the 2011 program, but
this has now been corrected in coordination with the Agency for Financial Support of
Agriculture and Rural Development (AFSARD). The FR will be integrated with the other
components of the IACS system (i.e. the Land Parcel Information System—LPIS, Livestock
Identification Database, and the AFSARD network). An important objective of IACS is to
prevent subsidy leakages whereby office based subsidy claim administrative checks are
reinforced by on-the-spot beneficiary controls.
59. The government has reduced the import tariffs for several raw materials used in
food processing, and it is evaluating a reduction for off-season fruits and vegetables. The
Government of FYR Macedonia has reduced the tariff rates on imported raw materials used
by the food processing industry. For example, in 2012 the rate applicable to imported white
sugar was reduced from 30 percent to 5 percent and the rate on imported fruit puree, pulp and
concentrates was reduced from 20-30 percent to 5 percent. The government intends to
conduct an impact analysis of reductions in the tariff rates of major inputs in the vegetable
and fruit processing industry in the off-season period, which would enable the processing
facilities to increase their utilization capacity.
IMPROVING THE EFFICIENCY OF TRADE LOGISTICS SERVICES
60. The government recognizes the importance of upgrading its hard infrastructure
and has made several attempts to accelerate its modernization. The largest airports were
recently upgraded through a concession with a private operator from Turkey, thereby enabling
more and faster passenger and cargo traffic. At the same time, the government has invested in
completing its main trade routes - the European Transport Corridors VIII and X. Given the
global economic environment, a successful PPP transaction to grant 35-year concessions for
the construction, reconstruction and maintenance of Corridor VIII does not appear to be
feasible in the short to medium term.
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61. The Customs Administration is addressing the needs of importers and exporters,
implementing several major reforms.
Simplified customs procedures for imports. These were first introduced in 2006 for
companies that have established a good history with the Customs Administration and the
Ministry of Finance. The use of simplified procedures allows goods to be transported to
the importer’s warehouse and cleared at the company site. In 2010, transporters were
allowed to use the simplified procedures for combined shipments and several logistics
centers authorized by customs began offering this service. As of 2010, 181 companies had
been authorized to use the simplified procedures, representing 20 percent of imports.
Introduction of a single window system for the processing of Export/ Import (EXIM)
licenses. In 2007, the Government of FYR Macedonia launched the Single Window
Initiative to facilitate the electronic exchange of cross-border information between
different public authorities and to speed up the processes of obtaining import and export
licenses. The EXIM system connects 16 governmental bodies and includes 66 types of
import, export, transit and other licenses. The system allows the importer or exporter to: i)
identify the necessary licenses and permits; ii) apply electronically for
import/export/transit licenses; iii) receive tariff quota information; iv) monitor the status
of the application; and v) receive the necessary licenses. By the end of 2010, 595 private
users had registered for the system, which is increasingly used to issue licenses with an
81.9 percent increase between 2009 (28,632 licenses) and 2010 (52,081 licenses).
Integrated System for Risk Assessment (SAR). Starting in 2010, the Customs Authority
has led a working group that has identified necessary and secondary legislation for the
broader application of the SAR and prepared comprehensive technical specifications for
the electronic systems according to applicable standards and customer requirements.
Enhanced inter-ministerial and cross-border cooperation. According to the EU
Progress Report 2011 on FYR Macedonia, the cooperation between the Macedonian
Customs Administration and other government bodies (such as the Ministry of Interior
and the Public Revenue Office) has been strengthened and has shown results in joint
actions against smuggling. In addition, a more systematic application of risk analysis and
risk-based control as well as enhanced cooperation with customs authorities of
neighboring countries (such as Kosovo and Bulgaria) have further increased security at
the borders without impeding trade.
62. The government has increased the number of inspectors from the State
Agricultural Inspectorate and Food and Veterinary Agency at key border points. Imports of plant products are subjected to phyto-sanitary inspection in accordance with the
Law on Food Safety, and importers of food of animal origin such as meat, fish, milk and dairy
products, and so forth, must obtain the appropriate certificate from the Food and Veterinary
Agency for importing those products. The presence of government officials who implement
these regulations will speed up inspections and avoid spoilage of goods.
63. As part of its efforts to align the transport sector with EU environmental
requirements for freight transport, the government is giving a higher priority to vehicles
meeting the EURO 4 and 5 standards when it awards annual CEMT licenses. Vehicle
30
engine standards are very important for obtaining the license for international transportation.
Starting in 2012, the procedure will shift to the public electronic distribution of licenses, with
priority given to vehicles with EURO 4 and EURO 5 standards.
Box 5. Impact of the World Bank Trade and Transport Facilitation in Southeast Europe Program
The World Bank Trade and Transport Facilitation in Southeast Europe Program (TTFSE), which was initiated in
1999, involved eight countries: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Moldova,
Romania, and Serbia and Montenegro. The objective of the program was to increase cooperation among these
countries and to help them meet the requirements for their accession to the EU by a) reducing non-tariff costs to
trade and transport, and (b) reducing smuggling and corruption at border crossings. In total, the Bank provided
about $76 million for the project; governments contributed $32 million, and USAID, $12 million.
FYR Macedonia’s participation in the project included:
$5.9 million allocated to customs infrastructure for physical improvements at 3 border crossings, including a
new truck terminal,
$2 million allocated to customs information system improvement for software, hardware and training,
$2 million allocated to reforms of customs procedures for technical and management assistance and training
on new procedures, and
$0.4 million was allocated to trade facilitation development for technical and advisory
The TTFSE program helped reduce the non-tariff costs of trade and transport in the region (a review of the
project found that waiting times at the pilot border in Macedonia reduced from 5.2 hours per truck in 2001 to 0.6
hours per truck in 2004). A key element in the program’s success was a procedural change: the introduction of
selective border inspection based on risk analysis. Investment in infrastructure made the procedural reforms in
procedures more palatable to customs officials. The program also accomplished considerable capacity-building,
mainly through the Regional Steering Committee (RSC), which comprises the customs administration heads of
the eight countries and has served as a forum for the exchange of information and experience. Indirect evidence
also suggested that a reduction in corruption and smuggling occurred.
The Second Trade and Transport Facilitation project in Macedonia, which closed in June 2012, built on the first
project with a strong investment focus - supporting the development of an efficient and effective transport
system by upgrading a road segment on Corridor X, promoting the electronic inter-agency and cross border
exchange of trade data, and strengthening the functioning of key transport corridors. Targeted assistance from
TTFSE2 was used to upgrade the Inward Processing System and the Integrated Information System (IIS) which
has: (i) improved processing time, which currently stands at 2 minutes (earlier processing time was 7 minutes),
(ii) improved administrative tax collection, (iii) improved operational effectiveness of the customs
administration, (iv) increased security of information managed through the system and (v) increased
transparency of this aspect of Customs operation.
Source: Assessments of the Trade and Transport Facilitation in Southeast Europe Program, WB IEG, 2006,
2010; and discussions with the TTFSE2 project team.
ESTABLISHING ENABLING CONDITIONS FOR LABOR MARKET FLEXIBILITY
AND SKILLS DEVELOPMENT
64. The government has been actively reforming labor markets aiming at improving
incentives for formal work. Supported by stronger growth, labor market outcomes improved
in the recent years leading up to the global economic crisis. For example, the share of the
population aged 15-64 that is employed increased from 40.1 percent in 2007 to 43.5 percent in
2010, mostly driven by a fall in measured unemployment. These improvements partly reflect
measures that the government has taken in recent years to improve the environment for job
creation, but also the incentives for workers to take on (formal) jobs.
31
65. In addition to reforms affecting job creation through improvements in the
business environment, the government has focused on improving labor taxation
incentives. There have been significant reforms to lower both the personal income tax and the
social contributions in recent years. With the transformation of the personal income tax into a
flat tax of only 10% (from previous rates of 15, 18 and 24 percent), FYR Macedonia now
belongs to the group of countries with the lowest personal income tax in the world. Similarly,
the government has reduced social contributions from 32 percent of gross wages in 2008 to 28
percent in 2009, with further reductions planned by 2015. Through the previous World Bank’s
PBG, there were also targeted reductions in social contributions. Despite these efforts, the tax
wedge is still regressive below the reference wage, which affects low-wage earners. There
are, therefore, still additional efforts needed to reduce the costs of hiring, especially low-wage
workers.
66. In addition, the government has simplified labor regulations, and has made
certain provisions more flexible. FYR Macedonia has carried out important reforms in 2003,
2005, 2006 and 2008 that made labor markets more flexible, especially in terms of temporary
employment. The government has also introduced a system of online registration of work
contracts that can reduce labor costs and facilitate the administration employment relations.
The government is aiming to address pockets of inflexibility that persist. For example, the
regulations applying to seasonal employment and severance pay remain rigid. In addition,
social assistance, unemployment benefits and pensions have stringent limitations on
employment and could generate disincentives to work, especially for low-wage earners and
their families.
67. The government has also made significant efforts to streamline the
unemployment registry and remove incentives to over-register. The Employment Services
Agency (ESA) offers modest support to workers and, until recently, was mostly focused on
managing health insurance, unemployment benefits and registry. However, recent reforms—
supported by the previous World Bank’s PBG— delinked unemployment benefits and health
insurance. This should make it easier for the ESA to spend more time and resources on its
core functions and be more effective in matching workers to jobs. ESA has also established an
online system of registration of unemployed, which should make it easier to service them and
to ensure that those registered are actively seeking employment.
68. Despite recent progress, increasing employment continues to be critical for
Macedonia’s inclusive growth as a means to taking advantage of the labor resources
available in the economy at a time of increasing demographic, fiscal and competitive
pressures. Moving forward, the employment agenda is to focus on communicating to the
public many of the reforms that have already taken place and focusing on second-generation
reforms that tackle disincentives to work, especially for low-wage earners. The Government
of FYR Macedonia is also working closely with the European Union, the International Labour
Organisation and the World Bank in supporting evidence-based policy-making in labor
markets and developing more effective employment strategies.
69. The government wants to better understand the apparent disconnect between the
education system and the labor market in FYR Macedonia. In order to assess the quality
of its educational system, FYR Macedonia is participating in the 2011 Trends in International
Mathematics and Science Study (TIMSS). The study collects educational achievement data in
32
mathematics and science at the fourth and eighth grades to provide information about trends
in performance over time, together with extensive background information to address
concerns about the quantity, quality, and content of instruction. FYR Macedonia participated
in the study in 1999 and 2003 with disappointing results in both years. The international
TIMSS 2011 report will be disclosed in December 2012, after which the National
Examination Center will prepare and publish a national report which should support the
government’s efforts to improve mathematics and science education in the country. In the
medium term, the government is also planning to participate in the 2015 cycle of the Program
for International Student Assessment (PISA). In the addition, the government, together with
the World Bank, is carrying out a skills measurement study (the System Assessment and
Benchmarking for Education Results Workforce Development Review, SABER) to assess the
cognitive, non-cognitive and technical skills gaps existing in today’s labor market.
70. As a short-term measure to tackle the managerial and technical skills gap faced
by new investors in FYR Macedonia, the government set up a working group to speed
up the work permit and visa/residence permit procedures. Understanding and rectifying
the shortcomings of the educational system is a long-term process, the government is working
to support companies, particularly foreign owned, that have to import talent in the short term.
The government, with assistance from the World Bank and USAID, has reviewed the
legislative and procedural bottlenecks as well as international best practices in the EU to
determine ways to accelerate the issuance of visas and work permits, while demonstrating
commitment to address the problems which investors are facing to employ foreign personnel.
The recommendations are being implemented by enacting legal amendments that will make it
easier for companies to apply for visas and work permits on behalf of their employees. These
reforms will build on the steps taken to establish a central database of foreigners, providing
for an information exchange among ministries on the foreign work permit applicants.
71. The long-term goal of developing a more innovative economy is being advanced
through the introduction of a new Innovation Strategy that would lead to setting up an
Innovation Fund. The government received technical support from the Organisation for
Economic Co-operation and Development (OECD) to develop an Innovation that can
gradually strengthen policymaking and implementation capacity. FYR Macedonia is also
participating in the preparation of a Western Balkans Regional R&D Strategy that is
supported by the EU Instrument for Pre-Accession Assistance (IPA) and the World Bank.
After the Innovation Strategy is approved, the government’s priority will be to strengthen the
regulatory framework and set-up an Innovation Fund that would provide matching grants and
equity investment to support high-impact projects by companies. A functional review of the
R&D and innovation expenditures and a review of international best practices would provide
a blueprint for the Innovation Fund. The government has requested the World Bank support
for the implementation of these reforms and programs through an investment operation.
IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM
LINK TO COUNTRY PARTNERSHIP STRATEGY
72. The proposed operation will support the priorities of the 2010 Country
Partnership Strategy (CPS). The objective of the Bank’s CPS in FYR Macedonia over the
33
period FY11-FY14 is to provide selective and targeted financing and knowledge advisory
services in support of faster, more inclusive and greener economic growth. The proposed DPL
contributes to the first CPS outcome of ensuring faster growth by supporting competitiveness
and macroeconomic stability, building on improvements in the business climate, continued
sound macroeconomic management, further efforts to reduce bottlenecks in the business
environment and infrastructure, and stepped-up investments in education and skills.
73. The proposed DPL will support policies and interventions which foster job
creation, better living standards and increased institutional support to exports and
investment. By supporting growth of investment and innovation as well as by enhancing the
institutional support for exports, the proposed DPL will contribute to two pillars of
interventions on which the 2010 CPS for FYR Macedonia is based, namely, (i) fostering job-
creating economic growth and increasing living standards; and (ii) improving governance and
transparency in public sector delivery to support a market economy. The proposed DPL builds
on the DPL series of 2009, the PBG of 2011 and ongoing analytical and advisory services.
COLLABORATION WITH THE IMF AND OTHER DONORS
74. The Bank maintains close collaboration with the International Monetary Fund
(IMF) team, seeking synergies among the respective operations, harmonizing policy
recommendations, and avoiding overlaps. The World Bank team remains in close
coordination with the IMF resulting in largely shared views of the economic situation in the
country. The Bank maintains a robust dialogue with the IMF on issues related to the proposed
DPL, including receiving feedback on the recommendations of the analytical work that
underpins the operation, and engaging in regular discussions about emerging macroeconomic
and financial issues that could impact the competitiveness of the private sector.
75. The Bank’s coordination and cooperation with the EU, the most important
current and future development partner of FYR Macedonia, is increasing and
deepening. A specific example is that the World Bank and the Delegation of the European
Commission (EC), on the donor side, along with the Ministry of Economy, on the government
side, are focal points in the Program Based Approach in the area of business environment,
competitiveness and innovation which provides a common ground for cooperation and
alignment between the government and the donor community.
76. The Bank has maintained a constructive dialogue and collaboration with the
donor community on issues related to the proposed DPL. Frequent discussions are
conducted with other development partners, most notably the United States Agency for
International Development (USAID), the German Agency for International Cooperation
(GIZ) and the European Bank for Reconstruction and Development (EBRD). There is close
collaboration in the export promotion area, where the USAID-funded Investment
Development and Export Advancement Support Project assisted in the development of
Strategy for Export Promotion and is currently supporting capacity building in
InvestMacedonia. The Sectoral Assessment has also incorporated the results of the USAID
AgBiz Project, which is supporting the competitiveness of the agribusiness sector, and the
GIZ Export Promotion Project, which provides opportunities for growth of the apparel and
automotive sectors.
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RELATIONSHIP TO OTHER BANK OPERATIONS
77. The World Bank’s lending program consists of nine lending operations and one
grant, totaling around US$313 million. The operations are aligned along the main
development goals of the CPS: i) faster growth; ii) more inclusive growth; and iii) greener
growth. Activities in other operations have underpinned the program supported by the
proposed DPL operation. In particular, the proposed DPL takes the next step in the
development agenda supported by the BERIS Project, which closed at the end of 2010. The
synergy is in several important areas, including the strengthening of the regulatory business
environment, competitiveness policies and innovation policy. The operation builds on the
successful engagement under the previous DPL/ PBG series, which supported the government
program to strengthen fiscal and financial sector stability and competitiveness of the
economy, including by improving the functioning of the labor market. The Agriculture
Strengthening and Accession Project (ASAP) that was initiated in 2007 and will close in 2012
has supported improvements in the delivery of government assistance to the agriculture sector
in a manner consistent with the EU’s pre-accession requirements, including the establishment
of information systems to monitor agricultural support programs. In the area of trade logistics,
the Second Trade and Transport Facilitation Project that closed in 2012 has facilitated the
movement of trade between the FYR Macedonia and neighboring countries in South East
Europe through investments that remove bottlenecks at selected border crossings and improve
the efficiency and quality of road and rail services along the main transport corridors.
78. The proposed DPL has also benefited from non-lending technical assistance (TA),
for example, the Public Expenditure Review (PER) in Agriculture, the Employment Policies
and Job Creation Economic Sector Work (ESW), the MILES TA on informal employment,
the Study on Visas and Work Permits for Expatriate Employees (which the World Bank
conducted in collaboration with USAID) and the MDTF-funded Value Chain Analysis of the
Tourism Sector currently underway. The proposed DPL relies on synergies and knowledge
exchange with IFC in FYR Macedonia and in the Western Balkans, namely through IFC’s
Trade Logistics Project and corporate investment activities, as well as with the FPD Global
Practices in Innovation, Technology and Entrepreneurship (ITE) and Competitive Industries.
Synergies with the IFC
79. IFC remains an active partner in the private sector, and its support is
substantially aligned with the DPL pillars. IFC supported the government’s growth and
competitiveness agenda though advisory services and financing of the banking and corporate
sectors. As of April 2012, the committed portfolio includes 5 projects - two in the financial
sector, two in the energy sector, and one in the telecom sector. Total IFC commitments
amount to US$103.3 million, and the outstanding portfolio is US$90.1 million. In addition,
IFC is implementing a US$7 million portfolio in 10 advisory services in the private sector and
institutional capacity building.
80. In particular, the measures included in this operation will be supported by the
Western Balkans Trade Logistics advisory services program the IFC is implementing
with support from IPA. The program is aimed at reducing regulatory and administrative
constraints related to trade logistics and at harmonizing cross-border clearance systems in the
Western Balkans (countries covered include Albania, Bosnia and Herzegovina, Croatia, FYR
35
Macedonia, Montenegro, Serbia, and Kosovo). The project will cooperate closely with the
CEFTA Secretariat. The program aims to achieve $10 million in private sector savings from
improved/simplified procedures within 1 year of project completion.
LESSONS LEARNED
81. The program supported by the proposed DPL builds on lessons learned from
earlier activities, including:
Country ownership of the proposed policies and actions is essential for success: Close
involvement of all stakeholders in program design has increased the ability to respond
quickly and adequately to government demands. As a consequence, the measures of this
DPL are firmly geared towards supporting the objectives of the 2011-2015 Government
Work Program and Competitiveness Action Plan.
Bank assistance in aligning government policies with EU requirements has been
largely successful. Supporting policies which are harmonizing national systems with the
EU norms and practices considerably strengthens the ownership of the program. Reforms
in the agriculture sector and in logistics services supported by the proposed DPL aim to
bring the country in closer compliance with prevailing practices in EU member countries.
Coupling technical assistance with policy dialogue on a timely basis can help
promote results. In the case of FYR Macedonia, the technical assistance was provided
under the BERIS Project, which initiated the policy dialogue on competitiveness issues.
The program supported by the DPL has also benefitted from the work described in the
section on analytical underpinnings.
The World Bank has been actively using Development Policy Lending as the
principal tool to assist the FYR Macedonian authorities with the design and
implementation of structural reforms since 2000. Over the past 15 years, the Bank and
the authorities have successfully implemented reforms supported by DPL-type of
operations in the financial and enterprise sectors, public administration as well as in the
areas of business environment and investment climate. The operations have introduced a
number of reforms which had an important development impact on the country.
ANALYTICAL UNDERPINNINGS
82. The DPL is supported by extensive analytical work undertaken by the World
Bank in recent years. The 2009 Country Economic Memorandum focused on reforms
needed to improve growth performance and also called for more inclusive policies to ensure
shared growth. The BERIS Project implemented in 2005-2010 produced several assessments
with recommendations for improving the business environment and strengthening the
institutional framework for FDI attraction and export promotion.
83. The following analytical work was produced in order to prepare the DPL.
The FYR Macedonia Modular Competitiveness Assessment ESW identifies new
measures to strengthen the country’s exporting and growth performance. The
36
assessment consisted of a Trade Competitiveness Assessment and a Sectoral
Competitiveness Assessment which provided a detailed review of the performance and
competitiveness potential in four major export-oriented sectors – Automotive, Apparel,
Agribusiness and Logistic Services (see Box 3 and Annex 5 for details).
The Public Expenditure Review (PER) in Agriculture has produced an assessment of
the allocation of financial support to agriculture. The analysis examines the allocation
over time to different types of measures and beneficiaries and makes recommendations
that could incentivize competitiveness-enhancing investments in the sector and reduce
distortions.
A Policy Note on seasonal employment analyzed the legal and institutional
constraints associated with seasonal employment in FYR Macedonia and suggested
policy options based on the international experience. The analysis produced a note
which looked at the nature and the extent of seasonal employment in FYR Macedonia,
reviewed international good practices and provided available policy options to address
existing constraints associated with seasonal employment.
The Job Creation and Employment Policy ESW, which will assess the main
constraints to employment in Macedonia and the nature of the skill mismatches. The
report will include an in-depth analysis of available labor market data, including labor
force surveys and administrative labor market data. In addition, two new surveys will
measure (i) the available technical, cognitive, and non-cognitive skills among the working
age population; and (ii) the existing skills demand from employers. The report will
document the inequalities across gender and identify policies that could alleviate some of
the constraints that affect women in particular.
V. THE PROPOSED COMPETITIVENESS DPL
OPERATION DESCRIPTION
84. The proposed DPL will support reforms to strengthen competitiveness of FYR
Macedonia’s economy by incentivizing productive investment and technological
upgrading in the manufacturing, agribusiness and trade logistics sectors, and
establishing enabling conditions to progressively increase labor market flexibility and
skills development. The actions to be supported aim to develop high value-added
manufacturing, facilitate the restructuring of agribusiness and improve the efficiency of trade
logistic services. This will be achieved by prioritizing actions that incentivize investment and
technological upgrading as well as removing bottlenecks that hinder firm entry and firm
growth in major export-oriented sectors of the economy. The DPL will also support actions
that put in place enabling conditions that can foster labor market flexibility and develop job-
relevant skills. Combined with the improvements achieved by FYR Macedonia in its general
business environment, this reform program has the potential to raise economic growth over
the medium-long term.
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Box 6. Prior Actions / Triggers for the DPL series
The prior actions for the first DPL in the series are:
1. The Borrower has enacted the Law on Amendments to the Law on Technological Industrial Development
Zones (TIDZ), of October 15, 2012 (Official Gazette 127) that gives DTIDZ the authority to (i) issue
construction permits and use permits for the companies established in the TIDZ, (ii) provide aftercare services
for companies in TIDZ, and (iii) appoint three members to the Steering Board of the DTIDZ that will represent
the private sector.
2. The Borrower has: (a) adopted on November 26, 2011 a Strategy for Export Promotion containing an action
plan for implementing support programs for exporters; and (b) established an export promotion unit within the
Borrower’s Agency for Foreign Investment and Export Promotion ‘InvestMacedonia’.
3. The Ministry of Agriculture, Forestry and Water Economy has established a functional electronic land
management system that includes all lease contracts for state-owned agricultural land.
4. The Borrower has adopted the multiannual National Program for Development of Agriculture and Rural
Development 2013-2017 (NPDARD) of October 24, 2012 that: (i) makes at least 25 percent of resources
budgeted under the NPDARD conditional on adherence of beneficiaries to the Borrower’s Code of Good
Agricultural Practices (CGAP); and (ii) increases the resources allocated to structural and investment measures
to 25 percent of the total resources allocated under the NPDARD.
5. The Borrower has adopted a resolution on March 23, 2012 providing its Customs Authority with
responsibility to coordinate inspections of relevant inspection authorities at key border crossings.
6. The Customs Administration has, from October 19, 2012, commenced quarterly publication of the data
about the waiting time for customs clearances and inspections at key border crossings.
7. The Ministry of Transport and Communications has commenced distribution of annual European
Conference of Transport Ministers (CEMT) licenses through a system that gives priority to vehicles with EURO
4 and EURO 5 emission standards.
8. The Borrower has enacted the Law on Amendments to the Law on Employment and Insurance in Case of
Unemployment of September 14, 2012 (Official Gazette No. 114) to add the criterion of active job search to the
definition of ‘unemployed’, and to establish the rules on what qualifies as an active job search.
9. The Borrower has enacted the Law on Amendments to the Law on Employment of Foreign Citizens of July
4, 2012 (Official Gazette No. 84) and the Law on Amendments to the Law on Foreigners of July 4, 2012
(Official Gazette No. 84) to streamline the procedures for issuing visa and work permits to foreign personnel.
The triggers for the second DPL in the series are:
1. The DTIDZ has adopted a three-year investment program for the TIDZs that is aligned with an assessment
of market demand in each zone and regional development priorities.
2. The Borrower has developed a monitoring and audit system for aid incentives under the Law on TIDZs and
confirmed compliance through an audit report.
3. InvestMacedonia has a dedicated budget and staff, and has implemented the first generation of exporter
support programs.
4. The Ministry of Agriculture, Forestry and Water Economy has issued a methodology for agricultural and
forest land valuation based on actual market transactions.
5. The Ministry of Agriculture, Forestry and Water Economy has established a functional Integrated
Administration and Control System (IACS) for agricultural income support and rural development payments and
increased the controls for direct payments based on a risk-based approach.
38
85. The actions will also improve the effectiveness of the public programs supporting
private sector development, thereby increasing the efficiency of public expenditures. In
an effort to jumpstart high value-added production and exporting capabilities, the government
is deploying fiscal resources into infrastructure and incentive programs that include tax breaks
and training grants for foreign investors as well as discounted credit and direct support to
farmers. By improving the institutional basis and budget for these support programs, the DPL
will raise the efficiency of public expenditures and strengthen accountability.
86. A policy matrix containing all policy actions is attached as Annex 2. The prior
actions for board approval and the triggers for the DPL series, and the expected results of the
policies supported by the DPL are included in Annex 2.
POLICY AREAS
Pillar 1 – Developing high value-added manufacturing
87. Pillar 1 of the proposed DPL will support the development of high value-added
manufacturing through measures that: (i) maximize the impact of government
interventions to stimulate greenfield investment in advanced manufacturing plants; and (ii)
enhance support to exporters so that local firms can become more closely connected to global
firms and global markets. At the same time, the measures will establish stronger regulatory
and monitoring and evaluation (M&E) frameworks to improve the allocation of fiscal
resources in the instruments that are being deployed.
Objective 1.1. Attracting greenfield investment
88. This first DPL will support reforms to enhance the effectiveness and governance
of the TIDZs, so that FDI companies developing greenfield projects can start their
operations without delays. The first DPL will support the legal reforms to establish a one-
stop-shop for investor servicing, which give the DTIDZ delegation of signature for the issuing
of construction permits and use permits, as well as aftercare services for companies located in
the zones. This will reduce the time needed for investors to launch their projects, encourage
6. The Customs Administration has implemented the regulatory phase of the Single Integrated Electronic
System for risk-based customs control, in line with EU best practices.
7. The Borrower has enacted amendments to the Law on Labor Relations that facilitate seasonal employment
contracting.
8. The Borrower has enacted amendments to the Law on Social Protection and the Law on Employment and
Insurance in Case of Unemployment to allow for income disregards in social assistance which enables a limited
amount of wages to be earned before workers are de-registered from the beneficiary list and benefits are reduced.
9. The Ministry of Labor and Social Policy has initiated a campaign about the new procedures of the online
employment registry and possible contract types available, including for seasonal employment.
10. The Ministry of Education and Science has disseminated the national report for the Trends in International
Mathematics and Science Study (TIMSS) and signed an agreement to participate in the 2015 cycle of the
Programme for International Student Assessment (PISA).
39
reinvestment by existing enterprises and make FYR Macedonia a more attractive destination
for FDI. The governance reforms will introduce effective representation by private sector and
other stakeholders that will enhance the quality of decision making. At the moment, the
DTIDZ governance is heavily tilted towards the public sector, as all its Steering Board
members are representing government entities.
89. Concentrating the DTIDZ investment budget in the zones with the largest project
pipeline will improve the quality of the infrastructure, help to develop more integrated
manufacturing clusters and increase sustainability. The second DPL will support better
targeting of investment resources used in the construction of the pipeline of TIDZs, aligning
these investments with market demand assessments and regional development priorities.
Although the vision is to eventually have eleven TIDZs, only one is fully operational; given
the need to develop world-class infrastructure to attract top-quality companies and the need to
pursue fiscal consolidation, a careful use of scarce resources is warranted.
90. The second DPL will support additional measures to strengthen the
accountability framework for aid given under the Law on TIDZ, ensuring a predictable
environment for investors and more effective monitoring of the associated fiscal costs.
As the number of enterprises receiving incentives increases, it is critical to step up the control
function at a central location by establishing a system to monitor and audit the state aid that is
being awarded under the Law on TIDZ and the Law on State Aid. This is particularly
important given that incentives are being provided by different public entities at the national
and local levels, and over time, there will be heightened risks that investors are confused or
that the incentive system is abused.
Objective 1.2. Scaling-up export promotion
91. The DPL actions will strengthen the institutional framework for exporter
promotion and support the implementation of the first generation of programs to help
exporters that are seeking to integrate into global supply chains or diversify into high
value-added segments. The first DPL supports the adoption of the Strategy for Export
Promotion and the establishment of the export promotion unit within InvestMacedonia. The
second DPL will support the implementation of the exporter support programs outlined in the
Strategy for Export Promotion, ensuring that appropriate institutional mechanisms are
operating at the ministerial and agency level and that the programs with high potential impact
are designed and have the resources to be implemented within the next year. The exporter
support programs will help build the capabilities of exporters that are aiming to increase the
quality of their products or reach new markets, which will progressively increase the share of
medium and high tech exports.
Pillar 2 – Facilitating the restructuring of the agribusiness sector
92. Pillar 2 of the proposed DPL will facilitate the restructuring of the agribusiness
sector through measures that: (i) improve agricultural land administration in FYR
Macedonia, focusing on state-owned land that is leased to private sector; (ii) reorient the
public resources available to agriculture producers, channeling funding in ways the promote
upgrading and long-term investments.
40
Objective 2.1. Improving agricultural land administration
93. The DPL series will support reforms to improve the administration of
agricultural land by increasing lease collection efforts, bringing valuations closer to
market realities and implementing a better administration and control system. The first
DPL will support the electronic land management system will improve the overall
management of state-owned land and improve contract enforcement. The second DPL in the
series will support a new valuation methodology which will be aligned with actual market
prices, making it more attractive to sell landholdings where the demand is strong, and
facilitating the acceptance of agricultural land as collateral; and also the establishment of a
functional Integrated Administration and Control System (IACS) for agricultural income
support and rural development payments. In parallel, the second operation will support
increased controls for direct payments based on a risk-based approach.
94. In addition to improving agribusiness competitiveness, the actions supported by
the DPL will create additional revenues for national and municipal authorities. The
better enforcement of lease payments for state-owned land will add to national revenues,
although the amounts will be small until lease terms are aligned to market realities. Realistic
valuations will generate incentives for municipal authorities to collect the property tax on
unused agricultural land, which could be a significant source of revenue for municipalities
that are predominantly rural.
Objective 2.2. Better targeting of incentives for agricultural producers
95. The first DPL will support the adoption of the new National Program for
Development of Agriculture and Rural Development 2013-2017, which will direct more
resources to upgrading of farming methods and long-term investments. Reforming the
public expenditures in agriculture is crucial given the plans to increase the funding envelope
to €150 million annually. Moving toward a multiannual program will improve predictability
for beneficiaries, allowing for more long-term investments. The first DPL will support
reforms in the allocation of funding to promote adherence to the CGAP and increase the share
allocated to structural measures from around 10 percent to 25 percent over the term of the
program, bringing this closer to the levels observed in the EU (32 percent). This will open the
doors to exporting to new markets, and increase the share of subsidies that are tied to capital
expenditures and productivity-enhancing investments.
Pillar 3 – Improving the efficiency of trade logistics services
96. Pillar 3 of the proposed DPL will support the ongoing upgrading of the trade
logistics sector through measures that: (i) facilitate trade at border crossings, especially
improving the efficiency of the inspections; and (ii) increase the export-readiness of the
transport industry by incentivizing upgrading of the vehicle fleet so this meets the emission
standards applied in the EU.
41
Objective 3.1. Facilitating transport of goods at border crossings
97. The DPL will support measures to make border inspections more efficient, a core
element of a well-functioning facilitation system. The first DPL will support ongoing
actions to enhance coordination of the Customs Authority and the inspection agencies, which
will largely address the inspection issues faced by transporters and reduce the wait time for
international transport of goods. These include changes in the institutional set-up that give
additional coordination responsibilities to the Customs Authority and mandate the presence of
inspectors at major border crossings, and that initiates the transition to a single electronic
system for risk analysis in the control of imports and the transit of goods. Publicizing the
waiting times at key border crossings will help to monitor the impact of these reforms and
assist the private transport companies in their planning.
98. The second DPL will support the expansion of the risk-based approach for
customs control, in line with EU best practices. The DPL will support the implementation
of the regulatory phase of the Single Electronic System for risk-based customs control.
Expanding the application of the risk-based approach by upgrading the regulatory framework
and the electronic systems will be particularly helpful for agribusiness as the trade of fresh
agriculture produce is subject to extensive controls that, given the perishable nature of the
goods, can entail substantial costs. As the system is implemented, it is expected to result in
significant reductions in the waiting time at the border for transit of goods.
Objective 3.2. Increasing export-readiness of the transport industry
99. This operation will support the measure to distribute CEMT annual licenses13
to
transport companies that meet the highest emission standards, which will strengthen the
incentives of the transport industry to upgrade. Starting in 2012, the distribution of the
CEMT annual licenses will prioritize vehicles that meet higher emission standards (EURO 4
and EURO 5 standards). This will increase the number of transport companies that are export-
ready, and will lead to the development of a more environmentally friendly transport fleet.
Pillar 4: Establishing enabling conditions for labor market flexibility and skills
development
100. Pillar 4 of the proposed DPL will support measures that improve the incentives
for formal work and lay the groundwork for developing job-relevant skills through: (i)
improving incentives for formal work through reforms which redefine unemployment and
facilitate seasonal employment contracting and publicizing reforms; and (ii) addressing skills
bottlenecks through easing the hiring of foreign personnel and assessing the skills supply.
Objective 4.1. Improving incentives for formal work
101. The first DPL will support legal amendments to add the criterion of active job
search to the definition of unemployed. This reform will help to improve the efficiency of
13
A CEMT (CEMT= Conférence Européenne des Ministres des Transports) license allows companies to
transport freight across national borders between CEMT countries, which include the OECD as well as many
East and Southeast European countries.
42
the labor market by allowing the Employment Service Agency to distinguish clearly between
those that are truly looking for jobs and those who register as unemployed but are either
informally employed or inactive. This measure will allow the public employment agency to
concentrate resources on increasing employability and attachment to the labor market among
those who are really interested in getting a job.
102. A new legislative framework that facilitates seasonal employment contracting will
be supported by the second DPL. This new framework which will govern the type,
conditions and duration of seasonal contracts. Reforming the labor laws governing seasonal
employment, making it easier for workers to hire and register seasonal workers, can help
promote dynamism as well as increase formalization of this type of work.
103. The Law on Social Protection and the Law on Employment and Insurance in the
Case of Unemployment will be reformed to allow income disregards in social assistance. The second DPL will support this reform which already exists in several other countries in the
region which will allow limited amount of wage to be earned before workers are de-registered
from the beneficiary list and benefits are reduced. Improving the incentives for workers to
take on at least a certain amount of work should help increase the work that is declared,
reduce registered unemployment and increase workers’ attachment to (formal) employment.
104. A public information campaign on the new procedures for online employment
registration and possible contracts available will be initiated. Firms are often misinformed
about existing labor regulations and procedures. The second DPL will support a campaign to
communicate and explain effectively current regulations and recent changes would help firms
to better use the available flexibility and reduce labor costs.
Objective 4.2. Addressing skills bottlenecks
105. This operation will support legal reforms to ease the hiring of foreign personnel,
which will address the short-term need for technical and managerial skills in new
manufacturing plants. The first DPL will support the introduction of amendments to the
Law on Employment of Foreign Citizens and the Law on Foreigners that will make it far
easier for companies to hire the high-skilled personnel needed to make the projects work. This
reform will facilitate FDI inflows, particularly in growing industries where the required
managerial and technological skills are still not available within FYR Macedonia.
106. The second DPL will support actions to assess the skills supply, which is a
necessary condition for identifying necessary reforms in higher and vocational
education. The second DPL will support the decision of the Government of FYR Macedonia
to participate in two major international assessments of educational quality, TIMSS and PISA
as a way to identify the shortfalls in the supply side of skills that originate in the educational
system. The findings are essential for designing evidence-based reforms that connect the
education system and the private sector’s labor needs in FYR Macedonia. The findings will
help with the design of the skills project that the World Bank has in the pipeline, which will
advance financing reforms and quality assurance mechanisms.
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Box 7. Good Practice Principles for Conditionality
Principle 1. Reinforce ownership. The government’s program supported by this operation is well articulated in
the 2011–15 Government Work Program and 2012 Competitiveness Action Plan. The government’s strategic
vision is to facilitate the movement of industry toward higher value-added products and services and this
operation supports this goal. The policy actions promoted by this operation stem from the analytical work
performed and discussed with the government to boost specific outcome targets of the competitiveness plan.
They focus on key measures that the government believes are important and politically feasible.
Principle 2. Agree up front with the government and other financial partners on a coordinated
accountability framework. The program proposed by the World Bank has been actively discussed with
government counterparts from the beginning of the analytical work supporting the DPL. The government is in
agreement with the policy matrix that was carefully discussed and coordinated with all relevant ministries and
agencies. There has also been extensive discussion with the European Commission Delegation and the U.S.
Agency for International Development (USAID) on ensuring that the institutions’ programs are complementary
and build on each other. In several instances, there has been joint work between both institutions in support of
the conditions included in this operation.
Principle 3. Customize the accountability framework and modalities of Bank support to country
circumstances. The policy matrix reflects the government’s priorities and lessons learned in connection with
support for similar government programs. The Bank has been flexible with regard to the loan amount and the
government’s preferences in terms of the timing of disbursements and the preparation schedule. Because of the
global financial crisis, the Bank is moving quickly to parallel the government’s commitment to accelerate
reforms.
Principle 4. Choose only actions that are critical for achieving results as conditions for disbursement. The
government has asked the Bank to maintain the focus of this program on three sectors: manufacturing,
agribusiness and trade logistics, all of which are crucial to economic growth and competitiveness. This focus
enables the Bank to be more effective and to choose prior actions and triggers that are critical to the program’s
success.
Principle 5. Conduct transparent progress reviews conducive to predictable and performance-based
financial support. The selected prior actions and trigger disbursement conditions can be effectively monitored,
providing predictable and performance-based financial support. FYR Macedonia has always strived to
implement all the measures of its program matrix in prior operations.
VI. OPERATION IMPLEMENTATION
POVERTY AND SOCIAL IMPACTS
107. The DPL series is designed to improve FYR Macedonia’s competitiveness by
supporting policies aimed at increasing investment, exports and employment. These
policies are expected to have positive poverty and social impacts overall, predominantly by
increasing total employment and in some cases increasing the returns to employment. Several
of the prior actions in the first DPL are expected to have positive or neutral poverty and social
impacts. These include (i) adopting measures to attract greenfield investment (one-stop shop
for licenses and permits, broadening DTIDZ representation), (ii) enhancing export promotion
through improved institutions and processes, (iii) facilitating transport of goods at border
crossings, (iv) distributing annual CEMT licenses through a system that prioritizes transport
vehicles that meet higher EU emissions standards, and (v) streamlining procedures for
allowing foreign workers for positions that cannot be filled by Macedonian citizens. These
44
prior actions are judged to have unambiguously neutral or positive social and poverty impacts,
with no foreseeable negative impacts for any population sub-groups.
108. Measures in the second DPL to facilitate the formalization of seasonal
employment and allow income disregards for recipients of social financial assistance are
also expected to have positive poverty, social, and gender impacts. Seasonal employment
is concentrated in the agricultural, construction, and tourism sectors. Introduction of a special
regime in the labor code for seasonal labor is expected to increase the demand for seasonal
labor by reducing the hiring costs for employers of seasonal workers, while at the same time
providing additional protection for seasonal workers by regulating probation periods,
severance notification periods, and working hours and conditions. Women seasonal workers
are expected to benefit disproportionately from these reforms, as women presently constitute
about one-half of the workforce in the tourism and agriculture sectors, compared to being a
minority of the workforce in most other sectors. The complementary reform of income
disregards for social financial assistance recipients also has a positive poverty impact, by
encouraging low income persons to engage in seasonal work without having to re-register for
benefits. This effect of this reform is generally more pronounced for “second earners,” who
are more likely to be women.
109. The reform of agricultural support envisioned in the first DPL is expected to
have neutral or positive poverty and social impacts, with no adverse impacts on any sub-
groups. The increase in the share of agricultural funding directed to structural measures to
enhance land and labor productivity is being made in the context of rapid increases in the total
envelope for agricultural subsidies. The increased share for structural measures in the near
term will come entirely from the addition to the total. Thus, although the share of the current
subsidies (some of which function as general income supports) will decline, their monetary
value is expected to remain unchanged. Assessment of the progressivity of the current and
planned subsidy regimes (including the increased share for structural measures) is greatly
hampered by the lack of micro-data linking payments to the socioeconomic characteristics of
the recipients and non-recipients. To help inform the second DPL, the team is presently
working on simulations with more aggregate data and the recent toolkit developed by Araar
and Verme (2012) to get general results, which will be refined with new information from the
IACS and qualitative focus group information to be collected in 2013.
110. Actions to improve the management of state-owned agricultural land are
expected to have net positive poverty and social impacts, although there is a possibility
of negative poverty and social impacts in the short run. The policy of better monitoring of
lease payments for state-owned land is intended to help stimulate the land market,
encouraging land to be put to its most productive use, while managing state resources more
efficiently. The policy does not increase rental payments for existing leases, but focuses on
improved enforcement. In doing so it promotes fairness in the leasehold land market by
ensuring that all lease holders pay the rates for the state resource that they have previously
agreed. For individual farmers who have not been paying their rental fees, making lease
payments will represent a new cash outflow. This cost is relatively low, as land rents are
generally below market value, as noted earlier. The distributional impacts of higher
enforcement are difficult to gauge, as very little is known about the characteristics of
leaseholders of state-owned land because the decentralized, paper-based records of state-
owned land leases have only recently been entered in a central computerized database.
45
Anecdotal evidence indicates that lease nonpayment is higher among richer, larger farming
operations; if this is true, then the reform would have positive distributional impacts. The new
lease database, complemented with qualitative information from focus group interviews to be
conducted in 2013 will provide information to better assess the distributional impacts in the
preparation for the second DPL. It also bears noting that government land policy over the past
six years has been increasingly accommodating to small farmers, including making smaller
plots available for lease and introducing usufruct arrangements for landless rural social
assistance beneficiaries, permitting them to cultivate state land without paying rent.
111. The gender dimension is being mainstreamed into the PSIA so that policymakers
and the team can better articulate gender-specific responses and monitoring. The
supported reforms directly address several of the key issues raised in the recently-completed
Country Gender Assessment. Among the main findings of the gender assessment are that
learning outcomes through 8th
grade are better for girls, but they tend to follow general
programs and social sciences that may not equip them as well for the labor market.
Differences in training, combined with family obligations and other factors contribute to a
labor force participation rate of only 51 percent of women aged 15-65, compared to 78
percent among their male counterparts. The seasonal employment and income disregards
reforms are expected to improve employment and earnings outcomes for women. The actions
of this DPL will also fill many currently existing gaps when it comes to gender-disaggregated
data, especially in the agricultural sector. For example, the IACS should provide sex-
disaggregated information on the incidence of different classes of agricultural subsidies.
Likewise, when analyzing the impact of reforms in the system of agricultural subsidies, the
focus group discussions with rural agricultural households will include a mixture of men-only,
women-only, and both men and women.
112. Extensive consultations have taken place concerning the supported reforms,
cutting across sectors and involving key counterparts, industry groups, stakeholders and
international donors. As an example, the preparation of the reforms to improve the
functioning of the labor market included extensive consultations with trade unions,
employers, vocational education providers, and community groups.
ENVIRONMENTAL ASPECTS
113. The proposed operation has been screened against OP 8.60 and none of the policy
reforms to be supported by the DPL are expected to result in significant direct negative
environmental impacts. Most policy actions are expected to have a neutral or positive
environmental impact. For example, the prior action that is supporting distribution of annual
CEMT licenses to vehicles with EURO 4 and EURO 5 emission standards will have a positive
impact on environment.
114. The following policy actions within pillars 1 and 2 could have an indirect impact
on the environment, but this will be mitigated through existing environmental practices
and the design of the operation:
Investments in existing Technology Industrial Development Zones and the development of
new zones could increase pressure on the environment. However, the potential impacts
will be mitigated through higher environmental standards in the zones and the oversight of
46
state authorities over the activities in the TIDZs. The newly developed zones will have
high quality infrastructure and services, and this will facilitate compliance with permits
requirements. The establishment of the one-stop shop for permits that is supported by the
operation will help with compliance with the legislation. The one-stop shop will
coordinate with different state institutions to help clients obtain all permits, including
environmental permits. In addition, Strategic Environmental Assessment (SEA) for the
TIDZs will be carried out as part of the program for industry, which will mitigate the risk
of harming valuable natural habitats.
The new National Program for Development of Agriculture and Rural Development is
intended to accelerate growth of agriculture production, which could lead to increased use
of fertilizers or more intensive agriculture methods. This is mitigated by the policy action
that is supporting adherence with the CGAP, which is currently not implemented on a
large scale. Current information from the State Statistical Office of the Republic of
Macedonia suggests that smaller farms use larger amount of pest control substances due to
uncontrolled and untrained owners. CGAP guidelines cover sustainable land use, fertilizer
use, animal husbandry, manure management, plant protection, water management and
water pollution, and agriculture systems and biological diversity. The DPL expects at least
25% of compliance to be achieved by the new agriculture subsidies program, which will
help to attain full compliance within 7 years. The participants in the subsidies program
will be entitled to training and advisory services for CGAP.
115. The potential environmental impacts are also mitigated by the quality of the
institutional and legal framework. FYR Macedonia is making sustained efforts to align its
legislation with the EU environmental acquis and to effectively implement and enforce it in
the field of environment in the medium term, and the harmonization has been assessed
positively by the EU. The current environmental and EIA legislation will serve as a good
mechanism to address environmental aspects that could arise through the policy actions
supported by the DPL. The countries basic environmental impact assessment (EIA)
competence remains high. Sector environmental analyses are done on a regular basis by the
country itself as well as the EU. These analyses are further supported by contributions from
different IFIs. Areas where further efforts are needed, as reported in the 2011 EU Progress
Report for FYR Macedonia, include monitoring of industrial pollution control and risk
management.
IMPLEMENTATION, MONITORING AND EVALUATION
116. The Ministry of Finance will be responsible for overall implementation of the
proposed operation and for coordinating actions among other concerned ministries and
agencies. Other agencies involved include the Cabinet of the Deputy Prime Minister of
Economic Affairs, the Ministry of Economy, Ministry of Agriculture, Forestry and Water
Economy, the Ministry of Education and Science, the Ministry of Labor and Social Policy, the
Ministry of Transport and Communications, InvestMacedonia and the Directorate of
Technological Industrial Development Zones. The Bank will monitor actions and review
progress of the implementation of the proposed operation, as well as the subsequent
operations through frequent visits to the country and constant communication with authorities.
47
117. At the same time, the overall status of the program will be monitored during
supervision to determine whether the specific conditions of the proposed operation have
changed. Supervision visits will allow the Bank to continue the policy dialogue with the
institutions involved in the implementation of the program of reform. Implementation Status
Reports (ISRs) will be prepared to assess compliance of the authorities with contractual
undertakings under the program and the loan agreement. An Implementation Completion
Report (ICR) will be completed within six months of the closing date of the DPL series.
CONSULTATIONS
118. The framework in place allows for extensive consultative process in decision
making. The government has had regular and extensive consultations with private sector and
civic society regarding the various measures proposed in the matrix. There is broad based
support for most of the reforms as they are primarily targeted towards supporting the private
sector. However, implementing some of them (particularly in the agribusiness pillar) may be
difficult, especially if the deteriorating external environment slows growth, resulting in slow
improvements in living conditions. The government has established a number of bodies and
channels to discuss planned policies; but, additional efforts are needed to build capacities
among stakeholders in order to be able to constructively engage in these processes.
119. The program reflects input from various stakeholders. During the preparation of
the various labor laws consultations were conducted with the employers’ organization and
trade unions. The authorities have also taken considerable efforts to discuss the reforms in the
agricultural support with the farmers associations.
120. Consultations and discussions of World Bank analytical work played a role in the
design of policy options and mobilization of stakeholders. The findings of the Modular
Competitiveness Assessment that served as the analytical underpinning for many of the
reforms in the program have been discussed with government and stakeholders. The broad
consultation process in the preparation of all Bank operations have resulted in broad
consensus for the recommendations proposed. The PSIA of proposed measures in the labor
markets and agribusiness sector will also include extensive consultations.
FIDUCIARY ASPECTS
121. The overall fiduciary risk is moderate. There has been a significant improvement in
the procurement arrangements, an area in which the risk rating was assessed as “significant”
in earlier assessments (CFAA 2004 and CFAA 2007). The financial management assessment
for the aspects considered in these assessments was considered “moderate”. The financial
management risks continue to be moderate. The 2009 review of the National Public
Procurement System noted improvements in the procurement system, and further progress has
been reported in the area of external audit and internal audit and control. However, the
emergence of public sector arrears recently suggests still evolving mechanisms for control and
recording of commitments.
122. Public procurement. FYR Macedonia has considerably improved the public
procurement processes over the last few years. The 2008 Law on Public Procurement has
been fully harmonized with the EU acquis and the institutional framework has been
48
strengthened to ensure its effective implementation. The government adopted comprehensive
implementing regulations, promulgated standard procurement documents and forms of
contract, established a state administrative body for public procurement within the Ministry of
Finance (Public Procurement Bureau). The legal framework also allows for electronic
procurement, envisages a “one-stop-shop” system for central registration of tenderers’
qualifications and requires for publishing all contract notices on the website of the Public
Procurement Bureau. The authorities also proactively responded to the findings of the 2009
World Bank review of the national Public Procurement System which identified good
progress with legislation adoption, some improvement in implementation and relatively
limited progress in remedies. For example, it has substantially increased the use electronic
procurement practices. In 2010, 30 percent of auctions were conducted as electronic auctions.
In 2012 it is expected that 100 percent of auctions will be electronic because e-auction is now
a mandatory requirement. After 1 July 2012, all procurements above Euro 5,000 will be
published and all procurement notices will be accessible in one place. Tender submissions
remain predominantly in paper but there has been a substantial increase in the number of
electronic submissions.
123. Budgeting, accounting and reporting. FYR Macedonia continues to have strong
public financial management arrangements compared with other countries in the region;
however, the international financial crisis, and internal economic challenges, have exposed
risks and stresses in the public financial management system and have made the need for
remedial action more pressing. The Budget Law provides for an orderly budget process,
including provision for medium term fiscal and budgetary projections. However, budget
revenue estimates for the last three years have been overly optimistic and medium-term
expenditure planning has not been fully implemented resulting in incomplete and unclear
baselines for budgets in subsequent years. On the Budget execution side, effective
implementation of the Rulebook on Treasury operation should ensure that adequate
information is available to the Ministry of Finance on expenditure plans and commitments.
Still, existing commitment controls have not been sufficient to provide confidence that
accounting records are fully compliant with the legal and regulatory requirements. The
proposed PBG II will support measures to strengthen public financial management.
124. Internal controls and internal audit. The internal audit system within FYR
Macedonia continues its progress on implementing the public internal financial control
framework required for EU accession. The legal and regulatory framework is in place and the
coverage of internal audit and financial control is being extended. A new certification
program will commence in late-2012 with 40 auditors enrolled in the professional
certification course. However, there are still gaps in implementation of the Public Internal
and Financial Control framework and some government bodies remain without financial
management units but the establishment process is nearing completion. The major challenge,
that will continue to be difficult for Macedonia, is the adoption and application of
responsibilities and appropriate management culture in budget organizations. This will
require ongoing effort by the Ministry of Finance and others to raise awareness of the
responsibilities and obligations of managers and instill the skills and behaviors necessary for
effectively devolved financial management.
125. External audit. There has been progress in strengthening the State Audit Office
(SAO). The SAO is independent from the executive branch and its mandate covers all public
49
sector activities. The government increased resources for the SAO and amended legislation to:
require an annual audit opinion on the government’s annual financial statements; require the
auditor to summarize the audit findings for the year into common themes on high-risk areas
for the government to address; adopt a risk-based audit approach to the annual audit planning
process; report on the government’s progress in implementing current and all outstanding
audit recommendations; perform performance-based audits; and implement international
auditing standards covering all aspects of its work. The State Audit Law was last revised in
November 2010 to strengthen harmonization with the acquis communautaire and provide the
status of civil servants for state auditors, giving them the associated protections and
conditions of service. The rulebook on state audits was revised to increase the harmonization
with international auditing standards and to incorporate the 2010 changes in the law. In
response, the State Audit Office has increased the scope and quality of its work. In 2011 it
conducted 70 regularity audits and 7 performance audits and issued 1213 findings. It found
that 46 percent of audits conducted in 2011 were unqualified, which was an improvement
over 2010. The SAO is working on improving the effectiveness of its relations with the
Parliament and its audit management system.
126. Further improvements in several areas of public finance management are
necessary. These include: (i) improved budget revenue estimates and adopting conservative
approach in setting expenditure ceilings; ii) strengthened regulation on commitment
accumulation and multi-year commitments; iii) improved reporting on state-owned
enterprises; and (iv) strengthened internal financial controls in the public sector.
127. Anticorruption measures. The fight against corruption is an important feature of the
government’s work program resulting in FYR Macedonia; however, the momentum might
have been slowed most recently. The country has put in place an elaborative framework to
fight corruption, including a State Commission on Prevention of Corruption, a specialized
unit within the Ministry of Interior as well as a specialized Public Prosecutor for fight against
corruption and organized crime. The legal framework generally transposes good international
practices in this area. The ongoing improvements in the areas of public procurement, internal
audit, and strengthening of the role of the SAO contribute to the fight against corruption.
Still, the track record on the implementation of policies needs to be improved while agencies
responsible for preventing corruption remain understaffed and underfinanced. The 2008
BEEPS shows a marked improvement (compared to the 2005 round of the survey) in the
percentage of firms indicating corruption as a problem of doing business; at the same time,
the country’s ranking on the Transparency International Corruption Perception Index
improved from 106th
in 2006 to 62nd
in 2010, before retreating to 69th
in 2011.
128. The latest IMF update of the safeguards assessment was completed in May 2011.
The assessment found that a good governance framework is in place and the NBRM had taken
steps to strengthen its safeguards framework and implemented recommendations from the
2005 assessment. Reinforcement of governance practices and implementing an internal risk
management framework was recommended by the IMF and the NBRM has already started
implementing the main recommendations. The actions taken by the NBRM to safeguard funds
are deemed adequate.
50
DISBURSEMENT AND AUDITING
129. The proposed DPL will follow the Bank’s disbursement procedures for
development policy lending. No withdrawal shall be made unless the Bank is satisfied with
the Program being carried out by the Borrower, and with the adequacy of the Borrower’s
macroeconomic policy framework. The untied budget support will be disbursed in compliance
with the agreed prior actions and will not be tied to specific purchases. No procurement
requirements will be needed. Upon approval of the Loan and notification by the Bank of
Loan effectiveness, the government will submit a withdrawal application. At the request of
the government, the Bank will disburse the Loan, less the amount of the front-end fee, and the
net proceeds of the Loan will be deposited in the Treasury’s Euro account in the NBRM, this
account being available for budget financing. This Treasury Euro account forms part of the
foreign exchange reserves of the country. The Borrower shall ensure that upon deposit of the
net proceeds of the Loan into said account, an equivalent amount will be credited in the
Borrower’s budget management system. If after the proceeds are deposited in the NBRM
account the proceeds of the Loan are used for ineligible purposes as defined in the Loan
Agreement, the Bank will require the Borrower to promptly, upon notice from the Bank,
refund an amount equal to the amount of said payment to the Bank. Amounts refunded to the
Bank upon such request shall be cancelled.
130. The administration and accounting of the loan will be the responsibility of the
Ministry of Finance. The standard country rules will be followed by treasury for
administration and accounting. The Ministry of Finance will provide the Bank within 30 days
with a confirmation letter stating that the DPL funds have been received and deposited into
the deposit account designated by the borrower. Considering the Bank’s knowledge of the
public finance management systems, the ongoing improvements of these systems and the
assessment of the NBRM made by the IMF, no audit will be necessary of the deposit account.
RISKS AND RISK MITIGATION
131. The macroeconomic risks are significant, largely reflecting the deteriorated
environment in the Eurozone countries. The renewed turmoil in the Eurozone affected FYR
Macedonia’s exports and weighed heavily on the business environment. Due to the negative
growth at the start of the year and the unfavorable external environment, growth is projected
to slow to 0.75 percent in 2012. External economic risks are somewhat mitigated by buffers
currently in place, including the relatively low public debt level, sound banking system and
solid reserve coverage. Weakened exports and economic activity, and lower-than-expected
fiscal revenues are putting pressure on the implementation of the 2012 budget and have
resulted in budgetary arrears. The IMF continues to endorse the set of macroeconomic
policies. The proposed PBG II will mitigate emerging risks by supporting actions to
strengthen public financial management. Sustaining growth in a deteriorating global growth
environment will depend on FYR Macedonia’s ability to undertake structural reforms that can
enhance productivity and strengthen its credibility with investors and trade partners. The
proposed DPL is supporting reforms to sustain FDI inflows and boost competitiveness, which
will support the medium-term outlook.
132. Political risks remain moderate. The government has a stable majority in the
parliament following the June 2011 early elections. However, lack of progress in the
51
resolution of the dispute on the name of the country could also potentially trigger political
instability. The program of structural reforms that is being supported by the proposed DPL
has strong ownership within the government, as demonstrated by the recent adoption of
programs, strategies and action plans that map out the concrete steps to be taken over the
period 2011-2015.
133. Continued high unemployment may directly affect the social balance in the
country, provoke social tensions and undermine government support to the reform
program. The proposed is focused on strengthening the labor market, and supports
interventions in social protection and skills development with the aim of translating economic
growth and the recent increases in labor participation into more and better jobs for all
Macedonians.
134. Implementation risks are significant. Implementation of the proposed program will
strain the capacity of some public sector institutions. InvestMacedonia will require support to
develop the regulatory framework for export promotion and start implementation of the
programs. This risk is mitigated by the advisory services and capacity building that is being
provided by the USAID IDEAS Project. The Ministry of Agriculture, Forestry and Water
Economy, will require advisory support to successfully implement a multiannual National
Program for Development of Agriculture and Rural Development with a significantly changed
design. Implementation risks are significant as the reforms will influence a large number of
current beneficiaries of agribusiness support. These implementation risks are mitigated by
technical assistance provided by the Bank’s Agriculture and Rural Development team to
assess how to best reorient public expenditures in agriculture. Moreover, the Bank-financed
Agriculture Strengthening and Accession Project is helping to put in place better systems
needed to monitor public expenditures. Given the medium-term nature of some of the actions,
increased and prolonged attention to communicating the reform agenda will be warranted.
135. Governance risks are significant. As the initiative to establish special economic
zones (TIDZs) matures, it is important to reinforce its corporate governance. The inclusion of
private sector representation in the Managing Board will create checks and balances in the
administration of the zones. A stronger framework of monitoring is needed to ensure that
recipients of aid incentives remain in compliance with national legislation, which establishes
ceilings for aid intensity that are aligned with the EU state aid rules. The DPL actions and
results indicators will serve as mitigating measures for these governance risks.
52
ANNEXES
ANNEX 1: LETTER OF DEVELOPMENT POLICY
53
54
55
56
57
58
ANNEX 2: DEVELOPMENT POLICY LOAN POLICY MATRIX
Objectives Prior Actions for First DPL Triggers for Second DPL Indicators Baseline Expected results
PILLAR 1: DEVELOPING HIGH VALUE-ADDED MANUFACTURING
1.1. ATTRACTING
GREENFIELD
INVESTMENT
- The Borrower has enacted the Law on
Amendments to the Law on
Technological Industrial Development
Zones (TIDZ), of October 15, 2012
(Official Gazette 127) that gives
DTIDZ the authority to (i) issue
construction permits and use permits
for the companies established in the
TIDZ, (ii) provide aftercare services for
companies in TIDZ, and (iii) appoint
three members to the Steering Board of
the DTIDZ that will represent the
private sector.
- The DTIDZ has adopted a three-year
investment program for the TIDZs that
is aligned with an assessment of
market demand in each zone and
regional development priorities.
- The Borrower has developed a
monitoring and audit system for aid
incentives under the Law on TIDZs
and confirmed compliance through an
audit report.
Investments by
companies receiving
incentives under the
Law on TIDZs
Audit of aid
incentives is
completed annually
2011: €10 mn
2011: -
2012: €30 mn
2013: €50 mn
2012: -
2013: Audit
report completed
1.2. SCALING-UP
EXPORT
PROMOTION
- The Borrower has: (a) adopted on
November 26, 2011 a Strategy for
Export Promotion containing an action
plan for implementing support
programs for exporters; and (b)
established an export promotion unit
within the Borrower’s Agency for
Foreign Investment and Export
Promotion ‘InvestMacedonia’.
- InvestMacedonia has a dedicated
budget and staff, and has implemented
the first generation of exporter support
programs.
Share of medium-
and high-tech
exports in total
exports
Companies in
exporter support
programs
2011: 40.7%
2011: -
2012: 42%
2013: 45%
2012: 50
2013: 80
PILLAR 2: FACILITATING THE RESTRUCTURING OF THE AGRIBUSINESS SECTOR
2.1. IMPROVING
AGRICULTURAL
LAND
ADMINISTRATION
- The Ministry of Agriculture, Forestry
and Water Economy has established a
functional electronic land management
system that includes all lease contracts
for state-owned agricultural land.
- The Ministry of Agriculture,
Forestry and Water Economy has
issued a methodology for agricultural
and forest land valuation based on
actual market transaction.
Collection of lease
payments on state-
owned agricultural
land
2011: €4.2 mn 2012: €4.4 mn
2013: €4.6 mn
59
Objectives Prior Actions for First DPL Triggers for Second DPL Indicators Baseline Expected results
2.2. BETTER
TARGETING OF
INCENTIVES FOR
AGRICULTURE
PRODUCERS
- The Borrower has adopted the
multiannual National Program for
Development of Agriculture and Rural
Development 2013-2017 (NPDARD)
of October 24, 2012 that: (i) makes at
least 25 percent of resources budgeted
under the NPDARD conditional on
adherence of beneficiaries to the
Borrower’s Code of Good Agricultural
Practices (CGAP); and (ii) increases
the resources allocated to structural and
investment measures to 25 percent of
the total resources allocated under the
NPDARD.
- The Ministry of Agriculture,
Forestry and Water Economy has
established a functional Integrated
Administration and Control System
(IACS) for agricultural income
support and rural development
payments and increased the controls
for direct payments based on a risk-
based approach.
Agricultural support
budgeted for
structural measures
Beneficiaries of
agriculture support
that adhere to CGAP
Agricultural support
beneficiaries subject
to on-spot
inspections
2011: 10%
2011: -
2011: 5%
2012: 10%
2013: 15%
2012: -
2013: 5%
2012: 6%
2013: 8%
PILLAR 3: IMPROVING THE EFFICIENCY OF TRADE LOGISTICS SERVICES
3.1. FACILITATING
TRANSPORT OF
GOODS AT BORDER
CROSSINGS
- The Borrower has adopted a
resolution on March 23, 2012 providing
its Customs Authority with
responsibility to coordinate inspections
of relevant inspection authorities at key
border crossings.
- The Customs Administration has,
from October 19, 2012, commenced
quarterly publication of the data about
the waiting time for customs clearances
and inspections at key border crossings.
- The Customs Administration has
implemented the regulatory phase of
the Single Integrated Electronic
System for risk-based customs control,
in line with EU best practices.
Average waiting
time at the border
from arrival to
release of goods:
Transit
Import
Export
2011:
60mins
1hr 57 mins
35 mins
2012:
57mins
1hr 27 mins
34mins
2013:
5% reduction in
each indicator
3.2. INCREASING
EXPORT-READINESS
OF THE TRANSPORT
INDUSTRY
- The Ministry of Transport and
Communications has commenced
distribution of annual European
Conference of Transport Ministers
(CEMT) licenses through a system that
gives priority to vehicles with EURO 4
and EURO 5 emission standards.
Share of annual
CEMT licenses
awarded to vehicles
with EURO 4 and
EURO 5 certificate.
2011: 78% 2012: At least
90%
2013: At least
90%
60
Objectives Prior Actions for First DPL Triggers for Second DPL Indicators Baseline Expected results
PILLAR 4: ESTABLISHING ENABLING CONDITIONS FOR LABOR MARKET FLEXIBILITY AND SKILLS DEVELOPMENT
4.1 IMPROVING
INCENTIVES FOR
FORMAL WORK
- The Borrower has enacted the Law on
Amendments to the Law on
Employment and Insurance in Case of
Unemployment of September 14, 2012
(Official Gazette No. 114) to add the
criterion of active job search to the
definition of ‘unemployed’, and to
establish the rules on what qualifies as
an active job search.
- The Borrower has enacted
amendments to the Law on Labor
Relations that facilitate seasonal
employment contracting.
- The Borrower has enacted
amendments to the Law on Social
Protection and the Law on
Employment and Insurance in Case of
Unemployment to allow for income
disregards in social assistance which
enables a limited amount of wages to
be earned before workers are de-
registered from the beneficiary list and
benefits are reduced.
- The Ministry of Labor and Social
Policy has initiated a campaign about
the new procedures of the online
employment registry and possible
contract types available, including for
seasonal employment.
Recipients of social
assistance who work
formally
Employment
contracts registered
online
2011: 0.2%
2011: 32,996
2012: 4%
2013: 8%
2012: 34,000
2013: 38,000
4.2. ADDRESSING
SKILLS
BOTTLENECKS
- The Borrower has enacted the Law on
Amendments to the Law on
Employment of Foreign Citizens of
July 4, 2012 (Official Gazette No. 84)
and the Law on Amendments to the
Law on Foreigners of July 4, 2012
(Official Gazette No. 84) to streamline
the procedures for issuing visa and
work permits to foreign personnel.
- The Ministry of Education and
Science has disseminated the national
report for the Trends in International
Mathematics and Science Study
(TIMSS) and signed an agreement to
participate in the 2015 cycle of the
Programme for International Student
Assessment (PISA).
Time required to
process visa and
work permits
Reliable information
about the quality of
the education
system (including
information by
gender) is publicly
available.
2011: 45 days
2011: -
2012: 45 days
2013: 35 days
2012: -
2013: National
report for TIMSS
is disseminated
to the public
61
ANNEX 3: FUND RELATIONS NOTE
IMF Executive Board Concludes 2011 Article IV Consultation with
Former Yugoslav Republic of Macedonia Public Information Notice (PIN) No. 12/58 June 8, 2012
On June 1, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Macedonia.
Background
The economic recovery is losing steam due to adverse external developments. Growth was 3
percent in 2011, but was slowing in the second half of the year, which was visible in softening
exports, sales, production, and credit. Growth is expected to slow to 2 percent in 2012. The
absence of significant imbalances in the Macedonian economy and limited external financial
linkages will help to contain the impact on Macedonia of weak growth and financial stress in
the euro area. Meanwhile, inflation peaked at 3.9 percent on average in 2011 on the back of
sharp rises in food and fuel prices, but core inflation was lower at 1.1 percent. Inflation is
expected to decline to 2 percent in 2012. The current account deficit was contained in 2011,
at 2.8 percent of GDP, as a pick-up in domestic demand and higher fuel prices were largely
offset by private transfers. The current account deficit is expected to widen and then level off
at around 5 percent of GDP in the medium term, largely matching the inflow of foreign direct
investment. Meanwhile, international reserves increased significantly to over €2 billion at
end-2011, which is a broadly adequate level, and have been stable in 2012.
In the financial sector, non-performing loans (NPLs) remained at elevated levels at just below
10 percent. Still, provisions exceed NPLs, and the system remained free of pressures on
liquidity or solvency. Moreover, the banking system remained profitable after provisioning,
capital adequacy ratios remained close to 17 percent, well-above their regulatory minimum,
and bank liquidity was ample. Reliance on domestic deposits as the primary funding source,
combined with minimal reliance on external funding and the lack of exposure to risky external
assets, have helped shield the banking system from euro area developments. Both deposits and loans have continued to increase modestly.
On fiscal policy, the authorities achieved their 2011 deficit target on a cash basis, by reducing
spending in line with revenue shortfalls, although the deficit would have been somewhat
larger if arrears on government payments and VAT refunds were included. The 2012 budget
called for a deficit of 2½ percent of GDP, but was based on highly optimistic growth and
revenue assumptions. The supplementary budget submitted to parliament in April 2012
reduced projected revenues and also reduced expenditures, preserving the original deficit
target. The revised revenue assumptions are still somewhat optimistic—by about 1 percent of
GDP according to staff projections—but the government has committed to adjust
expenditures further if necessary to achieve its deficit target. In this context, Macedonia has
a track record of meeting its cash deficit targets, cutting expenditure when needed to achieve its target.
The authorities announced that they have secured a foreign bank loan that will meet
remaining 2012 fiscal financing needs and provide resources to repay a Eurobond maturing in January 2013. The loan is expected to be disbursed in the first half of 2012.
The National Bank left interest rates unchanged from December 2010 until April 2012, while
modestly relaxing prudential requirements that had been tightened as a crisis response in
2008–09. In April, it introduced a set of measures aimed at easing credit conditions and
62
furthering money market development, including a gradual reduction in the amount of
outstanding 28-day central bank bills, the introduction of a 7 day and overnight deposit
facility and a weekly repo auction. In early May 2012, it lowered the maximum rate on
central bank bills by 25 bps to 3.75 percent. These gradual easing measures were taken
against a background of favorable balance of payments conditions, slowing growth, subdued inflation, and modest credit growth.
Executive Board Assessment
Executive Directors noted that, while economic growth has slowed, Macedonia’s medium-term
outlook remains generally favorable. To address challenges posed by possible adverse
spillovers from the euro area, Directors encouraged the authorities to persevere in their pursuit of macroeconomic and financial stability, building on advances made thus far.
Directors considered the current fiscal stance appropriate. They noted that continued fiscal
consolidation will be important to stabilize the debt-to-GDP ratio at prudent levels. In this
context, Directors were reassured by the authorities’ intention to meet the 2012 deficit target
but noted that further expenditure restraint might be needed. They underscored that a sound medium-term fiscal framework would help prioritize needed social spending.
Directors agreed that measures to improve public debt management and deepen the
domestic debt markets should remain policy priorities. Progress on these fronts would reduce
dependence on external financing, which could be volatile. Directors also emphasized the
need for stronger public financial management that would improve budget planning and prevent arrears.
Directors agreed that the current exchange rate arrangement has served Macedonia well.
They encouraged the central bank to stand ready to increase policy rates in the event that
external risks materialize and exchange rate pressures emerge.
Directors concurred that the banking sector remains stable and well capitalized. They noted
its limited reliance on external financing and ample liquidity. Nonetheless, Directors
recommended continued vigilance and encouraged the authorities to make further progress on addressing regulatory gaps and strengthening their crisis response capacity.
Directors agreed that well-designed infrastructure investments and further labor market
reforms are essential to raise potential growth and durably reduce unemployment. Steps in
these directions would also cement Macedonia’s success in attracting foreign direct investment.
63
ANNEX 4: DEBT SUSTAINABILITY
Despite a slightly widening CAD in the short term, external debt remains sustainable under
the baseline scenario, falling to 57 percent of GDP over the projection period. However,
external debt sustainability would be tested under a growth or current account shock14
. A
shock to growth would increase external debt to around 66 percent of GDP by the end of the
projection period while a widening current account shock would increase external debt to 67
percent by 2017. External debt sustainability would also be under threat from an exchange
rate shock with a single 30 percent depreciation increasing external debt by over 15 percent of
GDP over the medium term. However, around 60 percent of external debt is generated by
intra-company lending, reducing the risks associated with any shock.
Figure 5: General government debt under the baseline and alternative scenarios
Source: Bank staff estimates.
Figure 6: Gross external debt under the baseline and alternative scenarios
Source: Bank staff estimates.
14
Growth shock is a reduction in growth of half of one standard deviation of the previous 10 years’ growth
compared with the baseline scenario over the projection period. The CAD shock is a one half standard deviation
increase in the CAD over the projection period.
64
Despite the sustainable baseline scenario, policy makers need to be cautious given the
unpredictable and still high-risk external environment. The external environment remains
particularly vulnerable to confidence shocks in a scenario of expanding Eurozone crisis, while
financing conditions may deteriorate rapidly in the current environment. Also, stronger border
controls within the EU may dampen prospects for remittances. A crisis cannot be ruled out in
case of a wider contagion from the Eurozone. Heightened concerns over fiscal imbalances in
the Eurozone could affect the health of banks in other economies, trigger a credit crunch and a
rapid contraction in domestic demand leading to a prolonged and severe recession.
65
ANNEX 5: SECTOR IDENTIFICATION METHODOLOGY
The identification of sectors to be included in the assessment was based on the following
criteria, in addition to their overall potential to contribute to growth and employment:
Sectors where quality differentiation and upgrading is possible and most urgent.
Sectors with unexploited productivity (and export) potential
Emerging sectors that can take advantage of existing sources of comparative
advantage
Services sectors that can contribute horizontally to improved (export) competitiveness
Assessing quality orientation
Given the importance of quality and sophistication, and based on the preliminary analysis
conducted, it was important to analyze at least one sector encompassing products where FYR
Macedonia currently exports, and where the potential exists to improve comparative quality
and differentiate export products relative to competitors. This is assessed by a comparison—at
the sectoral level—of how FYR Macedonia’s exports fare in their main exported market (the
EU) along two dimensions: gains in market shares and gains in relative quality.
Figure 7 presents the relation between the growth in quality and growth in market share of
FYR Macedonia’s exports in their main exported market: the EU. Each bubble represents a
sector, defined by a two-digit HS code. The x-axis shows the growth rate of market share (log
difference of market shares) in the EU market between 2003 and 2008. The y-axis represents
the growth rate of the average quality of sectors in the EU market between 2003 and 2008.
The size of each bubble is the importance of each sector in FYR Macedonia’s export basket.
See Box 8 for a detailed description of the methodology used to assess quality.
Apparel and footwear, metals, and food products are the main exporting sectors in FYR
Macedonia. During the last five years, exports from these products have gained market share
in the European market, but there is no general tendency for quality upgrading in the market.
Taking a more in-depth look at the determinants of the lack of quality upgrading in these
sectors may prove useful to finding constraints to export competitiveness in FYR Macedonia.
Given that one way a country can increase the absolute amount of export per capita is to
augment the quality of exports and thus the unit value of exports, the relative decline in
quality is a cause for concern.
Identifying unexploited export potential
Industries are typically characterized by the presence of a few highly productive firms and
many low-productivity firms. Generally, the less productive firms participate only in domestic
markets and the more productive firms export. Therefore, the greater the gap between high
and low productivity firms, the greater the “unexploited” export potential.15
We therefore aim
to include a sector where the potential is greatest to increase exports should the constraints to
productivity be addressed. This involves an analysis of the distribution of total factor
15
Thierry Mayer and Gianmarco I.P. Ottaviano, The Happy Few: The Internationalisation of European Firms,
New Fact Based on Empirical Evidence, Bruegel Blueprint Series, vol. 3 (Brussels: Bruegel, 2007).
66
productivity (TFP) across firms within sectors, in order to identify the variation in
productivity. The more pronounced this distribution, the greater fraction of firms will have
productivity below the export “cut-off” point. Thus, any fall in fixed export costs will mean
ever greater numbers of firms that have the potential to export. Based on analysis from other
European countries,16
among the manufacturing sectors with the greatest variation in TFP are:
food and beverages, textiles and apparel, footwear, paper, plastics, and machinery and
equipment.
Figure 7. Analysis of Quality and Market Share Performance of FYR Macedonia’s Exports
Box 8. Measuring Relative Quality of Exports Using Highly Disaggregate Trade Data
The analysis is based on the COMEXT database from EUROSTAT to characterize the relative unit
values of imports for each EU member country. Following Schott (2004), unit values were calculated
as the quotient of general imports values and quantities.17
Within any eight-digit CN product for any
given year, there is a distribution of unit values of imports from the different source countries. For
each good i and exporting country c, in time year t, a measure of relative quality R is calculated as:
Where uitc denotes de unit value of the good and uit
90 denotes the value at the 90th percentile of the unit
value distribution across countries for that product. Ritc denotes the relative quality of the country’s
export of that good, i.e., quality relative to other countries exporting the same good.
16
Ibid. 17
Peter Schott, “Across Product versus Within Product Specialization in International Trade,” Quarterly Journal
of Economics 119, no. 2 (2004): 646–77.
-2-1
.5-1
-.5
0.5
Log
diffe
ren
ce in
re
lative q
ualit
y (
03-0
8)
-2 -1 0 1 2Log difference in market shares (03-08)
Market Share and Quality in the European Union
FYR Macedonia
72-83 Metals
50-63 Textiles
84-85 Machinery
44-49 Wood
12-14 Food Products
06-15 Vegetables
16-24 Footwear
86-89 Transport
25-27 Minerals
39-40 Plastic
90-97 Miscellaneus
28-38 Chemicals
01-05 Animal
41-43 Hides/skins
68-71 Stone/glass
67
Product space analysis
The analysis identified “emerging” product/sector exports using either market indications,
such as extensive margin products showing low survival rates of exporters, or a product space
analysis of the potential evolution of the country’s export products, given the empirical
evidence showing that barriers to exports tend to be less binding when countries move from
exporting products that are “nearby” (in terms of the capabilities required to successfully
produce and export them) to those where the country currently has a comparative advantage.
This is assessed by analyzing FYR Macedonia’s export composition using the “product-
space” tool pioneered by Hidalgo in 2007.18
Figure 8: Product Space Assessment of Identified Sectors
The product-space analysis looks in more detail to these sectors to see how feasible it is for
FYR Macedonia to concentrate on products within these sectors. Figure 8 shows the
likelihood of the country to “jump” to products within these sectors. The x-axis is a measure
of how easy it is to start exporting a given product (four-digit HS code) given FYR
Macedonia’s current revealed comparative advantage. The closer the point is to the
intersection with the y-axis, the easier it is to start exporting that product. The y-axis
represents the PRODY of the product, a measure of the income level associated with each
product. Ideally, and according to Hausmann, Hwang, and Rodrik,19
a country should try to
export goods with high PRODY. This preliminary analysis shows that auto parts, and some
set of textiles and apparel and food products, are within the possibilities of FYR Macedonia
and represent an opportunity to increase the degree of sophistication of its current export
basket. The second graph in Figure 8 suggests that some of the products in the Industrial
Policy vision20
represent a substantial increase in PRODY, but also require a larger effort
from the country, as they are well beyond current capabilities.
18
Hidalgo 19
Ricard Hausmann, Jason Hwang, and Dani Rodrik, “What You Export Matters,” NBER Working Paper 11905
(Cambridege: National Bureau of Economic Research, 2005). 20
Specifically, the vision of the Industrial Policy (2009–2020) states: “…By 2020, Macedonia will develop the
dynamic mix of sustainable and authentic industries like: organic wine and foods, eco-steel, eco-friendly
6515
6571
6516
65816584
6513
6552
65766589 6575
6512
6583
6582
6522
65776543
6596
65446542
6592
6535
6534
6573
6572
6521
6579
6560
65396538
65946514
6531
6541
6546
65326595
6536 65916517
65496519
6597
6593 6545
6553
6511
0
10
00
020
00
030
00
0
PR
OD
Y (
US
$)
.05.1.15.2.25.3Density (Inverse)
MKD Garments & Textiles
1211
1121
1212
372
1213
586
484
6201110
1222
980251
589
585
4811123
583
488240
616
223
1124
582
612
913
914
483 619
1221
1223224
615611
371
230
1122
252
482
0
10
00
020
00
030
00
0
PR
OD
Y (
US
$)
.05.1.15.2.25.3Density (Inverse)
MKD Foodstuff
68
Competitiveness-inducing services sector
It was important to include a services sector, given the compelling evidence of the growing
importance of trade in services as a strategy of diversification and quality upgrading. As
pointed out in World Bank (2011)21
for a landlocked country in Eastern Europe like FYR
Macedonia, expanding trade in services can be a powerful mechanism not only to increase
exports but also to fully reap the benefits of regional integration. This sector may not
necessarily be export oriented, but should have horizontal potential to improve the
competitiveness across export sectors.
Due to data limitations in the services sector, no quantitative analysis was conducted to
identify potential sectors. The three main services sector candidates for analysis are: tourism,
information and communications technology (ICT), and logistics. Given the focus on sectors
that can contribute to horizontal productivity improvements, ICT and logistics were
shortlisted. From this, it was decided to focus on logistics, as the ICT has recently been
studied in detail, and transport facilitation is increasingly being seen as a critical success
factor for Macedonian firms that want to participate in European regional value chains.
Conclusions on sectors to be evaluated
Based on the analysis, the sectors recommended for additional analysis were food products,
textiles and apparel, automotive components, and logistics services. All three goods sectors
are an important source of low-skilled employment. Textiles and apparel as well as foodstuffs
currently constitute a significant segment of the country’s exports and will benefit greatly
from a quality upgrade. The automotive components sector, on the other hand, occupies an
area of the “product space” close to metals (FYR Macedonia’s largest export sector) in terms
of the capabilities required, and therefore the transition to automotive components should be
attainable for FYR Macedonia. Among the services sectors, trade logistics is critical for
competitiveness due to its wide-ranging impact on the economy and potential to generate low-
skilled jobs.
construction, ITC, specialized electronic parts, renewable energy production, creative industries, medical
equipment and services, authentic tourism and other industries.” 21
Trade Competitiveness Analysis: Making Export a Catalyst for Economic Growth in FYR Macedonia (Policy
Note 1, World Bank, November 2011).
69
ANNEX 6: COUNTRY AT A GLANCE (includes country map)
70
71