12. Overview: Identifying strategic opportunities for North Macedonia

Since its independence, the Republic of North Macedonia has achieved significant success in the social, economic and institutional dimensions. Income per capita doubled, and the economy moved from lower middle-income to upper middle-income status. Thanks to a strategic geographic location at the heart of the Western Balkan Peninsula, a relatively cheap labour force and generous tax credits, North Macedonia has appealed to foreign investors and emerged as a manufacturing hub in the region. On the social side, North Macedonia has improved the standard of living for its citizens, reduced extreme poverty overall and undertaken important social protection reforms. Since its identification as a potential candidate for European Union (EU) membership in 2003, North Macedonia has been aligning its legislative framework to the EU acquis relatively quickly. It was the first economy in the region to adopt the Stabilisation and Association Agreement in 2004. It earned the status of "candidate country" for accession to the European Union in 2005 and entered into formal negotiations for accession in March 2020.

To sustain this pace of development and ensure sustainable and inclusive growth in the long term, North Macedonia must tackle a set of important challenges. Foreign investors have had few incentives to create high-skilled jobs and to establish solid linkages with local firms. This makes North Macedonia vulnerable to competition from other economies with relatively cheaper labour forces, and to automation, which may push some multinationals to bring parts of the production chain back into their home economies. The young are seeking opportunities abroad, contributing to the ageing of the population, for which the health and social security systems are not ready. Political instability has become increasingly challenging, and informal behaviours and networks at times interfere with the proper functioning of institutions. Moreover, economic development has taken a heavy toll on the environment; Skopje is one of the most polluted capitals in Europe.

To ensure sustainable and inclusive development and to strengthen North Macedonia’s economic and social resilience, a long-term vision should take precedence over short-term politics. A long-term strategy can provide a strong basis for policy coherence that goes beyond special interests and divisions and can provide a pathway for economic transformation and growth. This Multi-dimensional Review (MDR) aims at supporting North Macedonia to define a shared vision for the economy in 2030, charting the path and key objectives for achieving this vision and tackling the most important constraints that can hold back development. The next phase of the project will focus on peer learning to find solutions for the challenges that emerge from the initial assessments as shared across the region.

This overview chapter presents the main results of the initial assessment of development in North Macedonia. First, the chapter presents inputs for a development vision for North Macedonia for 2030, elaborated by participants of a strategic foresight workshop. Second, the chapter takes a bird’s-eye view to assess North Macedonia’s development performance on the basis of key statistics on well-being and the Sustainable Development Goals (SDGs) and summarises the key constraints to development identified in this report. It concludes by suggesting key strategic directions for the future. Given the global impact of COVID-19, this overview is followed by a special chapter on the impact of the pandemic in North Macedonia. Chapter 14 contains the full assessment of North Macedonia along the pillars of Sustainable Development: People, Prosperity, Partnerships and financing, Peace and institutions, and Planet.

Whenever relevant and subject to data availability, North Macedonia is compared with four groups of benchmark economies. These groups are: 1) Western Balkan economies (Albania, Bosnia and Herzegovina, Kosovo, Montenegro and Serbia); 2) Organisation for Economic Co-operation and Development (OECD) economies (Costa Rica, Czech Republic, Greece, Slovak Republic, Slovenia and Turkey); 3) EU economies that are not part of the OECD (Croatia and Romania); and 4) economies that are neither in the OECD nor in the European Union (Kazakhstan, Morocco, the Philippines and Uruguay). The selection of benchmark economies is based on historical similarities (including their paths towards EU integration), economic structures, geographic proximity and mutual partnerships. The selection of non-OECD economies is based on similar economic and social challenges (such as high migration rates), shared history as transition economies, and similar development patterns. Such a broad set of benchmark economies can bring an additional perspective to North Macedonia and other Western Balkan economies and create valuable learning opportunities across selected policy dimensions.

This report benefited from close collaboration with the Government of the Republic of North Macedonia, especially the Cabinet of the Deputy President of the Government in charge of economic affairs and co-ordination of economic departments, and its Sustainable Development Unit. Moreover, it benefited from collaboration with and comments from multiple Directorates of the OECD and the financial and collaborative support of the Swedish International Development Cooperation Agency, which is gratefully acknowledged.

A clear vision of the desired future state of North Macedonia is an important guidepost for a national development strategy. A vision for a strategy should provide a description of what Macedonians expect from the economy, society, institutions and the environment, and what the most important elements are in each domain. To establish such a vision, a workshop entitled “North Macedonia: Vision and Challenges 2030” was organised in Skopje on 13 February 2020, gathering a broad range of participants from various public-sector ministries and agencies, the private sector, academia and civil society. The vision was built on the basis of simple narratives of the lives of future citizens of North Macedonia and subsequent clustering by the five pillars of Sustainable Development and this report: People, Prosperity, Partnerships and financing, Peace and institutions and Planet.

The narratives proposed for the vision highlighted aspirations for high quality of life, environmental sustainability and innovation. The narratives of the workshop evoked young and middle-age women with high levels of education. Most of them were successful entrepreneurs with innovative business models based on organic farming and agribusiness. All fictional citizens enjoyed middle-class lives, financial stability and access to quality health care. Citizens were involved in environmental activism and enjoyed high environmental quality based on organic agriculture, increased energy efficiency and renewable energies. In the narratives, North Macedonia is becoming an immigration rather than an emigration economy due to its high environmental quality and quality of life. The business environment is encouraging local production of innovative, high-quality goods, and these are exported all over the world. Emphasis was also placed on quality infrastructure and good connectivity within North Macedonia, support for and integration of ethnic minorities, eco-tourism, a decline in corruption and freedom of speech.

The resulting vision centres on innovation and local production, environmental quality and access to quality health care and education as the main levers for greater well-being. Box 12.1 presents the vision statements for North Macedonia in 2030 prepared by participants. North Macedonia of 2030 is envisioned as an economy with a business environment that encourages local production and entrepreneurship built on innovation and technological progress. The environmental quality is high, and energy efficiency and the transformation of the energy sector towards renewable energies are policy priorities. Citizens enjoy access to quality education, health care and public services, including an independent judiciary. Vulnerable groups are supported and integrated into society. In terms of the individual dimensions of this vision, quality education, a clean and healthy environment, rule of law and access to justice were considered most important, identified through a voting exercise (Figure 12.1).

Building on the vision, well-being around the world and sustainable development as benchmarks, this section reviews North Macedonia’s development performance. The proposed vision emphasises well-being and sustainable development as the ultimate objectives of development. To assess the well-being of Macedonians, the OECD’s Well-being Framework uses a mix of objective and subjective indicators across a range of dimensions that matter to people (OECD, 2020[1]) (Box 12.2). A version adapted to the realities of emerging economies compares North Macedonia to the level of well-being outcomes expected given its level of gross domestic product (GDP) per capita in a range of ten dimensions covering material conditions, quality of life and quality of relationships. In a second step, this section assesses North Macedonia’s performance across the five pillars of the SDGs, applying distance-to-target measures across a selection of indicators and building on the analysis in the main body of this report.

North Macedonia’s well-being performance is mixed. Macedonians feel comparatively safe and experience comparatively few homicides given the economy’s level of GDP. The poverty rate is comparatively low, and people’s satisfaction with their incomes and housing is comparatively high. However, there are weaknesses in other aspects of well-being: employment rates are low (in 2019, the employment-to-working-age population ratio was 47.3%) as are access to improved sanitation and satisfaction with water quality. Macedonians are comparatively dissatisfied with other parts of public infrastructure, such as roads and health care, and in 2019, comparatively few Macedonians (12%) reported having voiced their opinions to a public official in the month preceding the interview (Figure 12.2).

There are significant differences in well-being between men and women in North Macedonia, and this report finds that there is scope to improve women’s equal participation in society (Figure 12.3). As in most economies around the world, women in North Macedonia have a higher life expectancy and are more socially connected than men (OECD, 2020[1]). However, as in other economies in the region, the low participation of women in paid work in North Macedonia is striking. After Kosovo, North Macedonia’s gender gap in labour force participation is the highest in the Western Balkans at more than 24%. Women are also more likely to work in low-income jobs than men, and the estimated ratio of female-to-male earned income in North Macedonia is 0.49, which represents the highest regional pay gap (USAID, 2019[14]; Nikoloski, 2019[15]). This is partly why the contribution base for social insurance payments discussed in this report is so meagre. Gender differences in paid work are due to slow school-to-work transition, full-time household activities and cultural norms that encourage traditional division of labour. Indeed, about 41% of women but just 1.3% of men who are not in the labour force cite “personal and family obligations” as their primary reason for not looking for a job. While the economy has seen improvements in preschool enrolment, from 22% in 2012 to 35% in 2017, it is far behind the EU target of 95% (UNICEF, 2020[16]), and quality ratings for childcare services were the lowest of all surveyed economies in the European Quality of Life Survey in 2016 (Eurofund, 2018[17]). Policy options to encourage female labour force participation include expanding the availability and affordability of child care, in addition to promoting their acceptance; expanding barely existent institutional care for the elderly; reforming parental leave rules; and gender-sensitive public education (see the People section in Chapter 14).

The well-being analysis highlights gender differences in terms of safety. Men in North Macedonia are more likely than women to feel safe when walking at night in their neighbourhoods (Gallup, 2020[18]) (Figure 12.3). While this is not a surprising finding (men in every OECD economy feel safer than women), there are indications of prevailing gender norms that normalise violence against women. Some 14.5% of women, compared to 8% in OECD economies, justify husbands hitting or beating their wives for trivial reasons. North Macedonia ratified the Istanbul Convention, which requires the criminalisation of all forms of gender-based violence (GBV), as well as effective prevention and protection measures. However, the economy’s criminal code only criminalises rape. Public policy should focus on implementing legislation for domestic violence prevention and improving data collection, since representative data on the extent of GBV in North Macedonia are currently not available (Tozija, 2020[19])

Gender differences in civic engagement and access to productive resources are apparent. Male citizens are more likely to voice their opinions to an official, and although 39% of parliamentary seats in North Macedonia are occupied by women, there remains a step from reaching parity. The gender quota for the national parliament does not include Roma or Turkish women, and overall female participation is much lower at the local level, where few women hold leadership positions. Only 8.5% of women in rural areas are members of a political party (USAID, 2019[14]). Furthermore, only 28% of women own property, which is traditionally registered in a man’s name, and the share is even lower in rural areas.

Despite progress in recent years, North Macedonia should increase its efforts to provide better opportunities for all its citizens and to improve their productive potential (Figure 12.4). North Macedonia has the highest market income inequality among all benchmark economies and is very far from attaining the SDG by 2030. Almost 25% of the population continues to live on less than USD 5.5 per day, and less than 50% of the working-age population held a formal job in 2019. In 2019, less than 50% of the working-age population held a job. These rates vary significantly across regions in North Macedonia. In 2019, the economy’s youth unemployment rate of about 39% was the second highest in the Western Balkans. The exclusion of women from the labour market is discussed above. Although the literacy rate is very close to the SDG target, the current education system fails to equip people with job-ready skills.

As in other Western Balkan economies, ethnic inequality in North Macedonia is stark, and minority groups are in many ways excluded from economic growth and society as a whole. Over 40% of the poorest quintile are estimated to belong to households of ethnic Albanian origins, with disposable incomes two-thirds those of households of ethnic Macedonian origins (World Bank, 2018[24]).1 Roma communities, which constitute 2.7% of the population according to the 2002 Census, are left behind in multiple ways. For instance, Roma women have worse health indicators (e.g. fewer prenatal visits, lower quality of care), and their children suffer from stunting more than the rest of the population (World Bank, 2018[24]). In 2017, about 20% of Roma aged 15 to 64 were employed, compared to 40% of non-Roma in neighbouring communities – a slight improvement since 2011 but a widening of the gap with non-Roma. The situation is particularly hard on young Roma women, 80% of whom were not in employment, education or training (NEET) in 2017, compared to 60% of young Roma men (World Bank, 2018[24]). Lesbian, gay, bisexual, transgender and intersex (LGBTI) communities face continued discrimination and little acceptance in a rather conservative society. In late 2020, the Parliament voted and passed the new Law on Prevention and Protection against Discrimination, which is in important step in addressing issues related to discrimination.

North Macedonia needs better health care to tackle rising burdens of lifestyle diseases, a more inclusive social protection system and a financially viable pension system. There is room to restructure underused hospital services and boost underdeveloped and fragmented preventative and primary health care (PHC). Furthermore, the current social protection system can do more to target poor families with social assistance and remove disincentives to labour participation. Pensions in North Macedonia face challenges of sustainable financing given relatively generous benefits, low contribution rates and low labour force participation. The 2019 Law on Social Protection introduced price indexation of pension incomes in order to reduce the pension fund deficit in the short run. It envisaged the consolidation of existing social assistance programmes, introduced an improved equivalence scale, simplified administrative procedures and increased benefit eligibility thresholds and amounts. The People section in Chapter 14 identifies five major bottlenecks to the well-being of North Macedonia’s population (Table 12.1).

Over the past decade, North Macedonia’s economy has become more broad based, but spillovers have been limited. Since the 2008 global financial crisis, North Macedonia has been able to attract significant export-processing foreign direct investment (FDI) in its special economic zones. This has revived the automotive manufacturing sector and strongly contributed to the growth, diversification and upgrading of the export sector. However, with a high share of imported inputs and few supplier linkages with the domestic economy, the creation of spillovers throughout the economy and the contribution to higher GDP growth by the FDI sector has been limited. Looking forward, the conditions to create better linkages and specialise in high-end segments of regional and global value chains (GVCs) are slowly forming. For example, the sharp rise in Internet access among citizens over the years hints at the economy’s increasing readiness to digitalise. The amount of resources dedicated to research and development (R&D), although low, is increasing (Figure 12.5).

Three major obstacles undermine the creation of strong linkages between domestic small and medium-sized enterprises (SMEs) and the FDI sector. First, firms lack the capacities to innovate, adopt new technologies and meet the quality standards required by GVCs. Second, human capital is weak, and the skills that the market needs do not match those that Macedonian students can offer. Third, the political and regulatory environment is unstable, creating uncertainties that are often overcome through informal means. A biased playing field penalises the growth and development of SMEs. By addressing these underlying constraints, North Macedonia could not only foster the development of the SME sector but also strongly improve labour market outcomes and strengthen employment in higher-wage and higher-productivity jobs, thereby reducing unemployment and the brain drain. The Prosperity section in Chapter 14 identifies three major bottlenecks to a more dynamic development path (Table 12.2).

North Macedonia needs to make considerable progress in improving the public sector revenue performance and increasing productivity-enhancing public investment. Over the past two decades, tax revenue as a share of GDP has increased marginally and is still well below the 2030 SDG target (Figure 12.6). Revenue performance is constrained by a low tax base, significant tax evasion, low tax rates and fiscal subsidies and exemptions aimed at promoting investment and employment. On the expenditures side, high and rising current expenditures, particularly pension-related transfers, have been constraining the growth of much-needed capital expenditures.

Financing for the private sector remains a considerable constraint. Recently, the offer of financing instruments for innovation, start-ups and SMEs has been expanding and diversifying. However, bank financing for enterprises is still limited by high collateral requirements and lack of good-quality projects. The limited non-bank financing and capital markets further limit the financing options, particularly for risky innovative projects. The Partnerships and financing section in Chapter 14 identifies three major bottlenecks to a more dynamic development path (Table 12.3).

Since its independence, North Macedonia has made concrete institutional progress amid political instability and uncertainty. As part of the Stabilisation and Association Process (SAP), the economy has been aligning its legislative framework to the EU acquis relatively quickly and partly successfully and adopted a Stabilisation and Association Agreement in 2004. Moreover, North Macedonia has signed multilateral agreements (such as the Central European Free Trade Agreement [CEFTA]) and bilateral free trade agreements with Turkey and Ukraine, opening up access to markets with more than 650 million consumers. Property rights are not as salient a problem as in neighbouring economies, although private agricultural land remains fragmented. The economy is relatively more peaceful than other economies in the region and is increasingly safer (the intentional homicide rate has been decreasing over the past 20 years). These results are even more impressive considering the economy is highly politically unstable and has been hit by serious scandals; indeed, perceived corruption is mounting (Figure 12.7).

Undue use of institutions, multi-level governance and pending ethnic grievances are three major obstacles that still prevent the economy from reaching its true potential (Table 12.4). Politicians and representatives of special interests have been using the tight interpersonal relationships that characterise the economy to distribute public jobs in exchange for support. This has had consequences for citizen trust in institutions, especially for trust in the judiciary (Figure 12.7) and has undermined the effectiveness of public administration. A complicated regional development framework, together with poorly implemented decentralisation laws, hinders the distribution of resources across the economy, leaving places (especially outside of Skopje) behind. The mechanisms to safeguard power sharing among ethnic groups have sometimes impeded the basic functioning of the state, such as the appointment of judges, as well as its statistical capacity. Partly because of ethnic tensions, the economy has not had a census in the past 20 years, which in turn hampers evidence-based policy making.

North Macedonia must do much more to reduce persistently high levels of air pollution and carbon dioxide (CO2) emissions (Figure 12.8). Air pollution continues to pose a significant challenge. The economy’s annual exposure to particulate matter (PM) 2.5 decreased from 39.1 µg/m3 in 2005 to 33 µg/m3 in 2017 but remains the worst value in the region and above the World Health Organization (WHO) recommended maximum (annually) of 10 µg/m3. Skopje remains one of the most polluted capitals in Europe. The CO2 emissions from fossil fuel combustion cover almost 80% of the total greenhouse gas (GHG) emissions in the economy, with a dominant share from the energy supply, buildings and transport sectors (Government of the Republic of North Macedonia, 2015[29]). North Macedonia has committed to reducing CO2 emissions from fossil fuel combustion by up to 72.8% in 2040, compared to business as usual (Government of the Republic of North Macedonia, 2019[30]). To meet this objective and the SDG targets for air pollution and CO2 emissions for 2030, energy efficiency policies must be strengthened significantly, and North Macedonia’s supply of renewable energies must be stepped up. Except for hydro, the share of renewables in North Macedonia’s energy mix remains low and considerably below both the 2030 SDG target of 10.3% and the 2040 target of 35%-45% (including hydro) in North Macedonia’s new energy strategy 2040 (Government of the Republic of North Macedonia, 2019[30]).

North Macedonia needs to protect its rich environment better. When it comes to biological diversity, the economy is located in one of the richest European regions, with a high degree of endemism, and has 86 protected areas covering 10% of the territory, which is similar to the regional average but very low compared to the 2030 target of 44.7% (Ministry of Environment and Physical Planning, 2018[36]). The Planet section in Chapter 14 identifies three key challenges to a more sustainable path (Table 12.5).

The combination of visioning and multi-dimensional constraints analysis in this report points to seven strategic priorities for North Macedonia. Achieving them will require a strong focus on evidence-based action and addressing the problems that hold back opportunity. Clear problem definitions and implementation mechanisms are key to evaluating the immediate impact of actions and improving or adjusting actions during implementation (Rumelt, 2011[37]). The six priorities are: 1) quality of life for all citizens; 2) stronger education and skills (including for digitalisation); 3) aiming for the high end of international value chains; 4) capable local governments and service delivery; 5) a more sustainable revenue base and willingness to contribute; 6) a better energy mix for a better environment; and 7) appreciation for diversity.

Improving the quality of life of Macedonians should be the overarching goal of a development strategy. The visioning workshop revealed the value citizens attach to good health care, clean air and economic and job opportunities. The rule of law is another important element of quality of life. Providing the best quality of life possible in all regions and for all citizens (i.e. women and men, citizens of different ethnic backgrounds) and leaving no one and no places behind should form the guiding principle of future strategies. It will entail a strong focus on effective service delivery, and on creating a high-performing economy that generates opportunities and revenue.

Good education must be a top priority, both as a core element of a vision of well-being and an informed citizenry and to drive innovation and economic development. The participants of the foresight workshop placed quality education as the most important element of a positive future for North Macedonia. At the same time, skills mismatches and deficiencies are important obstacles to job creation and economic success. Education in North Macedonia should focus on delivering more practical skills and hands-on experience while empowering students to engage in the democratic process through civic education, regardless of their gender or their ethnic or socio-economic background. Putting schools in the driver’s seat – equipping them with effective power and good governance – would be an important step. Many workers in North Macedonia have obtained skills and competencies without formal education. They should have the opportunity to have them validated.

The high-end segments of regional and global supply chains hold potential for North Macedonia; domestic micro-, small- and medium-sized enterprises (MSMEs) can play an important role. Around 70% of companies in North Macedonia operate with fewer than ten people. Because of their size, MSMEs could become ideal providers of the types of services GVCs are increasingly asking for. For instance, logistic and business services could boost exporting firms’ capacity, optimise their production systems and improve the quality of their products. Most of these services are highly human-capital intense and require the mastery of digital tools, big data and other transferable skills. The mobilisation of MSMEs require reforms that level the playing field, remove administrative barriers to doing business and eradicate corruption.

Empowering local governments and effective regional development present major strategic opportunities. North Macedonia has the institutional framework in place for a strong bottom-up process of economic development. However, too many channels of resource distribution from the centre to local governments create inefficiencies and open the door to special interests. This needs streamlining, with a strong role for the regional fund, which gives voice to local communities in setting local development objectives. Future strategies must focus on making local governments more capable of delivering quality services and local development. This will require a genuine reform of multi-level governance, introducing the right incentives and budget framework.

Insufficient tax revenues and contributions to social protection systems pose a significant constraint to North Macedonia’s ambitions. In the face of significant investment needs, fiscal space is limited, and low labour force participation and generous benefits undermine the financial sustainability of pensions. Envelop wages are common, and undeclared income has been recorded among 44% of employees. Under-reporting of sales and non-issuance of fiscal receipts are also highly prevalent, and the share of companies operating entirely in the grey economy appears to be high. New reforms are on their way and need timely monitoring and assessment of their impact on informality and tax elusion. A new tax regime that was able to broaden the tax base would increase the resources that central and subnational governments could invest in public goods and services. It would moreover improve the viability of the health and social security systems, which is of utmost importance given the ageing population and the outmigration of the young.

The transition towards a new development model must be respectful of the economy’s natural resources. Authorities have acknowledged the negative externalities that growth has imposed on the environment, particularly in terms of air quality. North Macedonia has committed to reducing the CO2 emissions from fossil fuel combustion by up to 72.8% until 2040 (Government of the Republic of North Macedonia, 2019[30]). This creates momentum for a radical restructuring of the energy mix and further diversification of renewables away from hydroelectric power.

The success of North Macedonia's development will depend on its ability to ensure social cohesion and to respect diversity. Reforms work best with a shared social fabric, where individuals feel part of the same long-term project. This can happen if authorities and citizens were accepting of the economy's historically multi-ethnic nature. Ethnic divisions are still a challenge and the reason for some complications in the institutional set-up. Ethnic diversity should become a strategic resource for long-term sustainable growth, as the juxtaposition of various cultural inheritances could contribute to the economy’s unique trademark. In practice, this means going beyond the existing framework and finding a new balance with a stronger emphasis on the effectiveness of institutions and policy, rather than quotas.

The process of integration into the European Union is one of the drivers of North Macedonia’s development. The strategic importance of EU accession for North Macedonia is clearly stated in key policy documents. North Macedonia was the first economy in the region to adopt the Stabilisation and Association Agreement in 2004, and the European Union officially opened negotiations for accession in March 2020 (Box 12.3).2 This process offers North Macedonia new opportunities to address the constraints identified in this report.


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← 1. Estimations are based on the nationally representative 2017 Quality of Life population survey carried out by the Finance Think research institute. Official poverty breakdowns by ethnicity can only be confirmed in the next census round, planned for 2021.

← 2. At the time of the OECD’s fact-finding mission and the visioning workshop in Skopje 2-7 February 2020, the decision to start negotiations was still on hold, which affected elaboration of challenges and the inputs for the vision.

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