International Monetary Fund. External Relations Dept.
Before the iron curtain fell, most firms in Central and Eastern Europe and the Soviet Union either were owned by the state or were socially owned. Their behavior was driven by political and social considerations, such as achieving employment targets, rather than by profit-maximizing considerations. Changing the structure of incentives in which enterprises operate is a necessary condition for the successful transition to a market economy. This article, based on a Working Paper by Juan Zalduendo, Senior Economist in the IMF’s Policy Development and Review Department, examines the performance of firms in the former Yugoslav Republic (FYR) of Macedonia, comparing the performance of firms created following privatization (new firms) with that of firms that predated the transition (surviving or old firms).
The economy of the Former Yugoslav Republic of Macedonia suffered a setback owing to the Kosovo crisis. The impact of the crisis, however, was less severe. Inflation remained low, the balance-of-payments position and the fiscal situation improved, and indicators of external vulnerability remained satisfactory. The National Bank of Macedonia faced contrasting challenges in the conduct of monetary policy. The pace of structural reforms picked up and a value-added tax was introduced. However, structural weaknesses in the financial system have prevented a more vigorous economic recovery.
This Selected Issues paper and Statistical Appendix sheds light on the Former Yugoslav Republic (FYR) of Macedonia’s low growth and high unemployment during the 1990s by analyzing enterprise level data. The paper provides some background information on FYR Macedonia’s enterprise sector. It presents an assessment of enterprise sector developments during the 1990s, including the extent of firm entrance and exit. The paper also describes the results of an econometric study that examines the factors that have facilitated restructuring in surviving firms since FYR Macedonia’s independence in September 1991.
This paper reviews developments in corporate performance in the FYR Macedonia during the 1990s. The paper finds substantial differences in performance between surviving old firms and nimbler new ones. The paper reviews factors that facilitated restructuring among surviving firms, and concludes that private sector ownership, hard budget constraints, and market-based economic institutions have served to strengthen corporate performance. The paper also shows that the predominance of insider privatization and the resulting low ownership concentration is one of the reasons for the poor performance of surviving firms.