This opinion was originally published in Macedonian by MIA on March 14, 2024. Sanja Madzarevic-Sujster is a Senior Economist, and Joana Madjoska is an Economist at the World Bank.
Moving from middle-income to high-income status will require boosting productivity, inclusion, and sustainability while reducing dependence on fossil fuels and energy intensity—all in a context of narrower fiscal space, rising costs of capital, and persistent global economic uncertainty, argues the 2023 update of the Systematic Country Diagnostic for North Macedonia. In the wake of the global financial crisis, a sustained increase in the incomes of households in the bottom 40 percent of the distribution halved the headcount poverty rate to about 20 percent, and years of inclusive growth drove one of the world’s steepest declines in inequality. However, further progress may be halted unless the country’s growth potential rises.
Even prior to the pandemic the country’s growth performance lagged peer countries. At the current growth rate (below 2 percent) it will take several generations for North Macedonia to reach the average EU income level. Convergence has been slow: North Macedonia’s per capita GDP rose from 25 percent of Germany’s (the major destination for Macedonian migrants) GDP per capita in 2000 to 29 percent in 2021. This gap must be narrowed faster to stem the tide of emigration among young workers to that country in particular. The report argues that low productivity, especially of firms, among else, is behind low potential growth. Boosting it is critical to spur growth but also create more high-paying jobs.
The World Bank Enterprise Survey showed that productivity of manufacturing firms in North Macedonia was low even before the outbreak of the pandemic and was lagging its peers (Figure 1). Firm productivity, calculated on micro firm-level data, also varies widely across firms: firms in the 90th percentile are on average four times more productive than those in the 10th percentile. The trade sector exhibits a particularly high productivity dispersion: firms in the 90th percentile are more than eight times as productive as firms in the 10th percentile (Figure 2). Such high dispersion in productivity between firms in the same sector is a sign of market distortions and resource misallocation.
When factors of production are efficiently allocated, more productive firms expand by taking on additional labor and capital, generating economies of scale that can further increase their productivity. This is not the case in North Macedonia, where many medium and large firms are less productive than small firms. Surprisingly, the median large-sized firm (employing 100 or more workers) is 3 percent less productive than the median medium-sized firm (employing 10 to 99 workers) and 14 percent less productive than the median small-sized firm (employing less than 10 workers).
Over the past decade, numerous underperforming firms have continued to operate in North Macedonia. From 2018 to 2020, the motor vehicles manufacturing, health, transportation, and tourism sectors experienced a decline both in revenue and productivity. These sectors, which account for most jobs in the country, have lower productivity levels and fewer firms that have experienced positive revenue growth.
However, high productivity firms tend to pay higher wages. In both manufacturing and services sectors, in North Macedonia, higher productivity firms paid higher wages (Figure 3). In the services sectors, from 2018-2020, the most productive firms paid wages that were on average 29 percent higher than those paid by the least-productive firms. Yet, most new jobs were created in less productive service sector firms, where more than 55 percent of the total workforce is employed.
The persistence of low productivity highlights the limited extent to which existing firms are upgrading their internal capabilities, including their capacity to innovate, adopt new technologies, or improve managerial practices. Creating an environment where underperforming firms exit, and new firms enter, can promote market competition, and allow for more efficient allocation of resources in the economy.
