Law System in Growth Diagnostics for Macedonia

Stimulus or Binding Factor?

Abstract

Macedonian economy is under-performing. The key problems with
Macedonia’s economic policy are elusive growth and huge
unemployment. Average real gross domestic product (GDP) is slightly
above one percent since transition. The level of the GDP per capita is
65% lower than the average of the European Union. One third of the
labour force is unemployed. To overcome these challenges the
reforms should be made on use of the scarce resources to maximize
future economic growth. The paper applies “growth diagnostics”
analytical framework, developed by Hausmann, Rodrik and Velascso
(2005), for figuring out the policy priorities. Its goal is to identify the
most binding constraints on economic activity, and to set policies that
will target these constraints. This strategy is opposite than the
prevailing approach today, which is “laundry-list” approach (“any
reform is good”, “the more areas reformed, the better”). The
functioning of the law system in the country is found to be the most
binding constraint on Macedonian economy. The analysis also
suggests that infrastructure, human capital, and information
externalities will be possible binding constraints in the near future.