Former Yugoslav Republic of Macedonia
Selected Issues and Statistical Appendix

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 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.

I. The Enterprise Sector after Ten Years of Transition1

1. The objective of this paper is to shed light on FYR Macedonia’s low growth and high unemployment2 during the 1990s (text figure) by analyzing enterprise level data. The paper has three sections. The first provides some background information on FYR Macedonia’s enterprise sector. The second presents an assessment of enterprise sector developments during the 1990s, including: (i) the extent of firm entrance and exit, (ii) the performance of surviving3 firms and new firms, and (iii) the concentration of losses in the economy. The last section 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. Concluding remarks follow.

2. The enterprise level data used in this paper was collected by FYR Macedonia’s now closed payments bureau—the ZPP. The dataset includes annual income statement and balance sheet information of individual firms for 1994-2000 and the presentation is broadly in line with the accounting standards of market economies. It also provides information for each firm on the type of ownership, economic sector, employment and regional location.

A. Background

3. As in other planned economies, the behavior of firms in the Socialist Federal Republic of Yugoslavia (SFRY) was driven largely by objectives other than profit-maximization. The decisions taken by enterprises were influenced by political and social considerations such as employment and regional development objectives. Often, the result was the creation of large enterprise conglomerates spanning several sectors. Enterprises in the FYR Macedonia are no exception. A number of large enterprises were created in backward regions where they provided a large share (often more than 40 percent) of the available jobs. For example, about 60 percent of employment in the Kumanovo, Ohrid and Tetovo regions in 1994 was provided by the ten largest firms in the respective region. Restructuring or closing large loss-making firms has been a major challenge in transition economies as it entails sharp reductions in employment that negatively affect entire regions.

4. But enterprises in the SFRY also had features that distinguished them from enterprises in other transition economies. The most important of these was that most enterprises were socially-owned rather than state-owned. In FYR Macedonia at the time of independence socially-owned enterprises accounted for 85 percent of the employment recorded in the ZPP database and 90 percent of the value added. The main features of socially-owned firms were that employees had the right to appoint the managerial staff of the firm (Law on Self-Management, 1974) and to elect a council of workers that would review all major employment and investment decisions taken by management. Workers did not own shares in their company, however, and thus could not freely sell their stake, a feature which introduced a short-term bias into decisions.

5. Partly because of the prevalence of social ownership in FYR Macedonia, privatization proceeded slowly and favored insiders. As regards the speed of privatization, the process was initiated in 1989 but entered a lull after FYR Macedonia’s independence. The Law on Transformation of Social Capital, which set up the framework for privatization, was enacted in mid-1993, but no privatizations took place under this law until late 1994. The sale to insiders—employees and managers—was supported by providing them with generous payment terms. In the end, some 60 percent of all privatizations (either in terms of employees or total equity) were to insiders while strategic investors accounted for less than 20 percent of all privatizations (text table). Many of the large enterprises were sold to managers, but management buyouts had many of the features of employee buyouts since they were the result of agreements between the workers in the enterprise and the enterprise managers, who were themselves selected by the council of workers of the firm. In FYR Macedonia, as in other transition economies, such insider privatization often led to weak accountability and the pursuit of policies that do not maximize shareholders’ value. In addition, also in line with international experience, insider privatization in FYR Macedonia seldom brought the resources and trade links needed to modernize and expand production (Claessens and Djankov, 1999).

Privatization Developments in the FYRM (as of end-2000)

In millions of Euros.

B. Corporate Performance in the 1990s

6. Profitability indicators in FYR Macedonia improved significantly during the 1990s but still lag behind those of other transition economies. Gross losses have declined over time (text table) and gross profits have improved (from 2.5 to 6.5 percent of GDP between 1994 and 2000). Although cross-country comparisons should be interpreted with caution owing to the underlying differences in accounting standards, the data suggests that FYR Macedonia has significantly closed the gap with other transition economies. Nonetheless, FYR Macedonia still lags behind many other transition countries: in 2000 net profits were the lowest among the countries in the text table.

Profits and Losses in Transition Economies (in percent of GDP; before taxes)

Source: World Bank’s Slovakia CEM (1999), Statitical Yearbooks and ZPP dalaset.

7. The high degree of firm turnover may account in part for the improving profitability. Some sixty percent of the firms in existence in 1994 had closed by 2000; and two thirds of the firms existing in 2000 had started up after 1994 (text table). Market economies rely heavily on entry and exit to weed out poor performers and foster efficiency in the allocation of resources; the high turnover rates suggest that such a process has a strong footing in the FYR Macedonia.

8. But aggregate profitability indicators and turnover data mask the profound difference in performance between surviving older firms and newly created firms. The performance of surviving firms (those that remained in existence throughout the period under study) is unconvincing. These firms exhibit a marked decline in operating profits between 1994 and 1997 and only a partial recovery between 1997and 2000. Specifically, operating profits as a share of value added declined from 33 to 24 percent between 1994 and 1997, and the recovery between 1997 and 2000 left operating profits at 30 percent, still lower than in 1994. In addition, the share of loss-making firms among surviving enterprises (35 percent of firms) has remained broadly unchanged. In contrast, new firms, which account for 40 of total employment in 2000, have shown significant improvements in profitability; gross losses equivalent to 1 percent of GDP in 1997 were succeeded by gross profits of 1.1 percent of GDP in 2000.

Indicators of Enterprise Performance (all firms) 1/

Surviving firms are firms that exist throughout the period 1994-2000. Dying firms are defined as firms in existence in 1994 but that cease to exist before 2000. New firms are firms that are created after 1994.

9. Other indicators confirm the contrast in performance between older surviving firms and the growing number of nimbler new firms. On the one hand, in spite of significant labor shedding, surviving firms exhibit a deterioration in labor productivity following the sharp decline in real value added (i.e. value added per employee deflated by sector-specific prices4) between 1994 and 19975. Only a partial recovery in labor productivity is observed among these firms after 1997. On the other hand new firms show a marked increase in labor productivity, which was also reflected in a 38 percent increase in nominal wages between 1997 and 2000.

10. Finally, the concentration of losses in the economy has declined, indicating some success of government policies in addressing the status of large loss-makers. High concentrations of losses are common in transition economies given the bias towards the creation of large enterprise conglomerates. Data for the largest loss makers for each year in the period 1994-2000 show that the share of the 25 largest loss-makers declined from 68 percent of total losses in 1994 to 48 percent in 2000 (text figure).


Share in Total Losses by the One Hundred Largest Loss Makers

Citation: IMF Staff Country Reports 2003, 136; 10.5089/9781451826050.002.A001

C. Factors Facilitating Enterprise Restructuring

11. This section of the paper reports on a series of regressions intended to assess the impact of three factors—ownership, hard budget constraints and competitive pressures—on enterprise restructuring in FYR Macedonia (see Table 1). The analysis is based on a set of firms that existed throughout the period 1994-2000 and thus focuses on the effects of institutional structure on a given set of firms, abstracting from the effects discussed above related to the entrance of new firms and the exit of the unsuccessful firms.

Table 1.

Estimation Results 1/

The dependent variable is profits as a percent of revenue. All regressions include a constant term. The 1-slalistics are reported between parentheses; * significant at the 1% level, ** significant at the 5% level, *** significant at the 10% level.

Balanced panel random effects model.

Unbalanced panel random effects model for all firms averaging 10 employees or more in any two years; i.e. 13,561 firms with a total of 51,055 observations (i.e. an average of 3.8 years per firm).

Calculated by multiplying the import penetration index by the ownership dummy.

Dummy variables based on labor skills and capital intensity. LL and HL stand for low and high labor skill. LK and HK stand for low and high capital intensity.

Box: A Sample of Surviving Manufacturers

The 823 manufacturing firms studied are selected from the ZPP database on the basis of firm i history and firm size. Specifically, the sample is composed of firms which operated without interruption since independence (i.e. with data for 1994, 1997 and 2000) and which have 10 or more employees (i.e. medium- and large-size firms). Firms facing administered prices (e.g. utility companies) were excluded from the sample, Although it is restricted to manufacturing firms with market-based prices, the sample represents 52 percent of total enterprise sector employment recorded in the ZPP database in 1994 and 44 percent of total employment in 2000. The analysis focuses on two periods of equal duration but with different growth rates. In the first period (1994-1997) real GDP grew by ½ percent per annum; in the second period (1997-2000) growth averaged 4 percent per annum.

12. Of the three factors under study ownership structure is perhaps the most important determinant of corporate governance in transition economies. In the FYR Macedonia, even though a large number of firms have been privatized, most privatizations went to insiders, as noted above. The prevalence of insider privatization is in part responsible for the lack of significant improvement in private firms’ performance over time (see text table). Nonetheless, their performance has been consistently stronger than that of other firms. The profitability of mixed firms (privatized firms where the State owns residual shares or has a potential ownership Claim) deteriorated between 1994 and 1997, with only limited turnaround after 1997. Still worse was the performance of firms that were socially- or state-owned at the end of 2000: these firms exhibited a sharp decline in both profits and labor productivity during the period under consideration.

Performance and Ownership (only surviving firms) 1/

The ownership classification is based on the status of each “surviving firm” at a the end of 2000.

Privatized firms where the State still has residual shares.

13. Second, FYR Macedonia’s experience in hardening budget constraints has been mixed. Direct budget support to firms declined during the 1990s, but budget constraints are still softened by the toleration of wage, tax and social contribution arrears. Consequently, the arrears of the manufacturing firms under consideration were high (3 to 4 percent of GDP) throughout the period. Over time these arrears exhibit sharp changes, rising as a share of total short-term liabilities between 1994 and 1997 before falling back in the late 1990s. There has been progress on the institutional and structural front—a new bankruptcy law has been enacted and new private banks have emerged. In principle these developments should compel firms to tighten financial discipline, but in practice enforcement remains weak. Moreover, experience in other transition economies shows that improvements in bank lending practices take place in a gradual manner.

14. Finally, the exposure to competition, usually transmitted through market-based economic institutions, is likely to have played a positive role in corporate performance. Strengthening the role of the market by liberalizing trade, removing price controls and introducing market institutions, compels firms to increase efficiency, particularly when managers are disciplined by the threat of bankruptcy (Angelucci et. al., 2002). Progress in this front has been notable: FYR Macedonia has low tariffs, few trade restrictions, and a market-based price system—only a handful of firms still face administered prices. At the same time bankruptcy procedures need to be strengthened.

Econometric Implementation

15. In the regression equations reported in Table 1 the degree of enterprise restructuring is proxied by profits as a share of sales revenue. This measure does not suffer from inflation accounting problems and corrects for the impact of firm size in total profits.

16. The type of ownership in each firm is captured by a time-invariant dummy variable that takes the value of one for firms in private hands at the end of 2000 and zero for all other firms.

17. The hardness of budget constraints is represented in the equation by the share of wage and tax arrears (including arrears in social contributions) in total short-term liabilities. The rationale for using arrears as a proxy for financial discipline is that financial discipline weakens when firms can rely on arrears as a source of financing.6 In principle a correlation between arrears and profits could reflect the effect of corporate performance on arrears rather than the effects of financial indiscipline (proxied by arrears) on profits. The possibility of such endogeneity has been addressed here by using the ratio of arrears to total liabilities instead of the level of arrears as the explanatory variable. This ratio eliminates endogeneity because it measures not the level of arrears but the relative importance of arrears among sources of short-term financing. It also avoids a potential bias linked to the size of the firm, both because arrears are represented as a share and because it excludes long-term liabilities which are more common among large firms.

18. The presence of market-based economic institutions and competitive forces is proxied by an import penetration index. The index used is the share of imports in total sales revenue in each two-digit sector. Import penetration is a direct measure of the importance of competition from abroad and may also signal a political decision to give freer rein to domestic competition in the sector in question. In order to explore the interaction between competitive pressures and private ownership, some equations also include a variable constructed as the product of import penetration and the private sector dummy. In this case the hypothesis would be that private firms, which have less access to political influence, have less of a cushion against the impact of competition. In contrast, for state-owned firms, the risk of bankruptcy arising from competition is reduced by the likelihood of government bail outs. The interaction term in the equation also highlights the complementarity between private ownership and other market-based economic institutions (Roland, 2000): private ownership and competitive forces together are more effective in strengthening corporate performance than either of these in isolation.

19. Control variables are also added for firm size and sector characteristics.7 A dummy variable on firm size has a value of one for firms with 100 or more employees and is used to control for the role of size in determining firm behavior. The interpretation is that large firms have access to political influence because of their potential impact on employment levels, particularly at the regional level. The resulting access to soft financing leads to weak financial discipline and poor corporate performance. Three dummies based on sector characteristics are added as a proxy for sector shocks.8 The dummies are constructed by grouping firms according to labor skills and capital per employee. High labor-skill firms are those that have gross wages above the average for the economy. Likewise, capital intensive firms are those with higher than average capital equipment per employee. Figure 1 depicts average wages and capital intensities for each sector and is broken into four quadrants based on average levels over three years.9

Figure 1
Figure 1

Labor Skills and Capital Intensity (averages for 1994, 1997 and 2000)

Citation: IMF Staff Country Reports 2003, 136; 10.5089/9781451826050.002.A001


20. The main results of the OLS regressions are (see Table 1, columns A to F):

  • The coefficient on private ownership is positive and statistically significant in most estimated equations. This supports the view that private ownership has a positive impact on profits. In addition, the magnitude of the coefficient increases over time, suggesting that the importance of private ownership for profitability has been increasing, perhaps as the institutional environment for private sector activity strengthened during the 1990s.

  • The coefficient for arrears has a negative sign and is statistically significant in most equations. This is consistent with the interpretation that arrears reflect lax financial discipline (i.e. soft-budget constraints) and result in weak firm performance.

  • The coefficient on import penetration is statistically significant only when applied to private firms, and suggests a positive relationship between performance and market institutions. The existence of complementing forces between private ownership and competition supports the use of this index as a proxy for market institutions.

21. The dummies on firm size and sector characteristics are difficult to interpret. The dummy on firm size has a negative coefficient in 1994, a positive coefficient in 1997, and was not significant (at the 5 percent level) in 2000. This suggests that in the earlier years large firms were the most affected by the lack of profit-maximizing objectives, perhaps reflecting the social role played by large firms (for example, maintaining employment), but that this role has disappeared over time. The positive coefficient in 1997 is harder to interpret, however, and suggest caution in drawing conclusions about the influence of firm size. The dummies on sector characteristics are positive and, in most cases, statistically significant, and the coefficients are larger among high labor skill sectors. The coefficients weaken over time, however, suggesting a certain degree of diversification of strong performance across sectors.

22. A pooled regression confirms the results described so far: private ownership is positively related with profits as a share of revenues, the non-tolerance of arrears hardens budget constraints and improves firm performance, and the import penetration index is positively related with profits only when applied to private firms (see Table 1, columns G and J). Sector dummies suggest that firms in high labor skill sectors perform better than firms in other sectors. Capital intensity makes less of a difference. This pooled regression is estimated using all observations in a balanced panel. The Hausman test indicates that the random-effects model is appropriate.

23. Two checks on the robustness of these results have been carried out.

  • OLS and pooled regressions for alternative measures of corporate performance—such as labor productivity and profits per employee, not reported—provide similar results. This is particularly true with regard to the sign and significance of the ownership dummy. Although the Hausman test rejects the random-effects model in favor of the fixed-effects model, suggesting against the use of a time-invariant ownership dummy, this does not undermine the conclusions presented in this paper.

  • An unbalanced panel regressions for all firms in the ZPP dataset also confirms the results described; namely, a (i) positive relationship between private ownership and corporate performance, (ii) negative effect of soft-budget constraints on profitability, and (iii) positive effect of import penetration on profits (Table 1, column K). Once again the Hausman test rejects the random-effects model in favor of the fixed-effects model, with the implication noted above regarding the time-invariant ownership dummy.10

D. Conclusions

24. The enterprise level data shows some improvement in corporate performance during the late 1990s. In particular, new firms are performing strongly, perhaps mirroring the turnaround in economic growth and employment observed in the late 1990s. The dataset also exhibits a sharp reduction in the concentration of losses in the economy. Finally, firm turnover is high.

25. But progress in enterprise restructuring among surviving firms has been limited. Labor productivity at the end of 2000 is still weak and largely below the levels reached in 1994 in spite of substantial labor shedding. Profitability levels are unconvincing, though there are significant differences depending on the type of ownership: private firms have maintained stable and high levels of profits, and mixed firms are doing better than socially-owned or state-owned firms.

26. The predominance of insider privatization in FYR Macedonia is one reason for the weak record among surviving firms. Diffuse ownership, against the backdrop of soft budget constraints and weak institutions, leads to either significant power in the hands of managers who have incentives to use corporate resources in a manner that does not maximize shareholders’ value, or to the pursuit of policies that support the short-term, often unsustainable, goals of employees. In either case enterprise restructuring is slowed and the turnaround in performance is delayed.

27. As to the factors that facilitate restructuring, the paper’s conclusions are consistent with the literature on other transition economies; namely, private ownership, hard budget constraints, and market-based institutions play a positive role in strengthening profitability. In particular, the role of market-based institutions is stronger if accompanied by private ownership.

28. Looking ahead, FYR Macedonia’s challenge is to accelerate and complete the transfer of ownership to private hands and to ensure that government policy does not soften budget constraints. The paper suggests that non-tolerance of arrears, improvements in bank lending practices, and mechanisms to increase private ownership will all serve to strengthen the enterprise sector. In particular, if the large group of mixed firms is to improve its performance, then a key role is to be played by full enforcement of bankruptcy procedures and other measure that harden budget constraints.


  • Angelucci, M., S. Estrin, J. Konings, and Z. Zólkiewski, October 2001, “The Effect of Ownership and Competitive Pressure on Firm Performance in Transition Countries: Micro Evidence from Bulgaria, Romania and Poland,” Centre for Economic Policy Research, No. 2985.

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  • Claessens, S., and S. Djankov, 1999, “Ownership Concentration and Corporate Performance in the Czech Republic,” Journal of Comparative Economics, Volume 27, p. 498-513.

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  • Claessens, S., and K. Peters, Jr., 1997, “State Enterprise Performance and Soft-Budget Constraints,” Economics of Transition, Volume 5 (2), p. 305-322.

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ANNEX I FYRM; Tax Summary as of March 31, 2003


Table A1.

FYRM: Basic Economic Indicators, 1997–2002

Sources: Data provided by the FYRM authorities; World Bank; and IMF staff estimates.

Persons seeking employment as percent of total labor force.

Excludes foreign-financed capital expenditure projects.

Includes domestic debt of central government and external debt of the public sector. Figures include bonds issued in 2001 for the frozen foreign currency deposits, as well as liabilities assumed by the government as of end-March 2000 on account of bank and enterprise restructuring, but exclude obligations for retroactive payments to pensioners.

Includes foreign currency deposits.

Debt service due, including IMF, as a percentage of exports of goods and services.

Including IMF.

An increase means appreciation of the denar. Partner countries include Federal Republic of Yugoslavia and Bulgaria.

January-Novemebr 2002

Table A2.

FYRM: Selected Real Sector Indicators, 1997–2002

(Annual percentage change)

Sources: Data provided by the FYRM authorities; and IMF staff estimates.


Table A3.

FYRM: Gross Domestic Product at Current and Constant Market Prices by Economic Activity, 1997-2001

Source: Data provided by the Statistical Office.

Includes imputed rents, value added tax (VAT), and import duties, less imputed banking services and subsidies on products

Table A4.

FYRM: Gross Domestic Product at Current and Constant Market Prices by Expenditure Items, 1997-2001

Source: Data provided by the Statistical Office.