1. MAKING EXPORTS A CATALYST FOR ECONOMIC GROWTH Macedonia Competitiveness Assessment Policy Note 1

2. Context 2 Macedonia is a top reformer:  Sound macroeconomic framework  Conducive business regulatory environment However, GDP has grown more slowly compared to SEE and new EU member states (EU12)… and high unemployment persists Increasing sustainable growth will require a more competitive export sector Economy 2012 Ease of Doing Business Rank Macedonia 22 Montenegro 56 Turkey 71 Romania 72 Croatia 80 Moldova 81 Serbia 92 Kosovo 117 Bosnia and Herzegovina 125

3. TRADE DIAGNOSTICTRADE DIAGNOSTIC

4. What is new? Detailed analysis of trade and export performance as a lens to identify main constraints to competitiveness Different dimensions of the export basket are investigated  Growth and orientation  Diversification  Quality and sophistication Countries do not export, firms do  Firm level analysis of firm performance  Identifying patterns and determinants of entry, exit and survival of firms in the export market Complemented with structured interviews with exporters and stakeholders A few caveats…

5. Why are exports key to jumpstarting sustainable growth? 5 Exporters in Macedonia account for only 5% of firms in the country, however they:  Generate 55% of total revenue  85% of manufacturing revenue  Employ one third of the workforce  Have 6 times more revenue per employee than non- exporters  FDI has an even higher ratio

6. The traditional export basket is vulnerable 1. Increasing concentration in commodities (metals and minerals) 2. Other medium and large exporters failing to upgrade 3. Vast majority of exports dominated by small firms 6

7. Concentration of exports in commodities 7 Up to recently, increasingly concentrated export basket due to lack of new products and impact of global commodity prices.  Low value added  Susceptible to price swings  Limited job creation

8. But relatively low concentration in terms of markets 8 Diversification across markets relatively high and stable in recent years. Small economies are expected to show higher market- than product- diversification.

9. Low sophistication of the export basket 9 Macedonia’s export basket shows a lower level of sophistication when compared to its peers. Up to 2008, no clear upward trend. Around half of the country’s export value is from low tech products.

10. Declining quality in traditional sectors 10 Macedonia’s export basket has experienced a decline in quality compared to its peers.  For example average unit price of products in textiles and clothing sector is decreasing relative to competition

11. Stagnant export basket 11 Lowest number of export products in region: In 1996- 98 Macedonia exported one of the highest number of products in the region, a decade later it is one of the lowest. Lack of new product introductions: Only 6.5% of export growth over the past decade (up until 2010) came from new products, one of the lowest shares in the region.

12. Majority of exporters are too small to be competitive 12 Small firms enter the export market “prematurely” – contributes to  Low export survival rates  Lack of investment in innovation, skills, and quality The median exporter in Macedonia is a micro business with less than 6 employees!

13. FDI entrants are changing the landscape 13 New FDI is having a dramatic impact on the export basket:  Supported Catalyst (new product in Macedonia produced by Johnson Matthey) constituted 8.3% of exports in 2010  In 2011, chemicals will be the largest export sector, the UK the largest export market Sector2008 % of Exports Sector2010 % of Exports Metals40.3%Metals29.5% Textiles & Clothing 21.8%Textiles & Clothing 22.2% Foodstuffs8.7%Chemicals10.2% Minerals6.7%Foodstuffs9.7% Vegetables4.4%Minerals8.2%

14. POLICY RECOMMENDATIONS

15. Competitiveness Diagnostic FDI Attraction TIDZs are the key instrument, but are they sustainable in their current form? Enclave FDI with few links to local firms Export Promotion Export promotion still nascent SME support programs relatively small, fragmented, and uncoordinated Skills, Quality Innovation Scarcity of skills despite high unemployment rate Standards harmonization lagging Lack of investment in R&D at national and firm level Business Environment Firms face high collateral requirements Non-tariff barriers are common throughout the region 15

16. Recommendation #1: Maximize the benefits of foreign direct investment Introduce new measures to facilitate the integration of FDI firms into the domestic economy Target future efforts to attract FDI in export- oriented industries where Macedonia has clear competitive advantages Promote institutional reforms to enhance the effectiveness of the Technological Industrial Development Zones (TIDZs)

17. Recommendation #2: Strengthen the institutional set-up for export promotion Adopt Export Promotion Strategy and Action Plan Develop an “export enterprise development” program for SMEs Facilitate the development of local business development services through matching grants Consolidate existing government-based SME support schemes as well as donor funded programs

18. Recommendation #3: Address the skills, innovation and quality gap Set-up training programs and/or fund training undertaken by firms Promote adherence to regional and global quality standards to facilitate integration in global supply chains Provide more support to facilitate industry coordination and cluster formation Provide targeted incentives for firms to invest in innovation Strengthen the wider national innovation system

19. Recommendation #4: Deepen implementation of business environment reforms Improve access to finance for SMEs Address non-tariff barriers, particularly in the agricultural and food sector Strengthen implementation of investment projects located in industrial zones

20. The way ahead A Second Policy Note will identify constraints for competitiveness in four export-oriented sectors:  Textiles and clothing  Auto parts  Food products  Logistic services