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Commercial Law and Institutional Review 2003 Macedonia

Commercial Law and Institutional Review 2003 Macedonia - USAID. Written by Wade Channel (Principal Author and Editor), Samir Latif, Darrell Brown and Gregory Maassen.

Since independence, Macedonia has been undergoing tremendous transition at every level, including law. In 2000, the United States Agency for International Development conducted an assessment to understand the status of commercial legal and institutional reform (CLIR) in order to provide assistance more effectively. The first diagnostic howed a mixed record of success in commercial laws and rather poor performance by institutions. This autumn, a second assessment has been conducted to determine progress and identify priorities for further assistance. The results clearly show that Macedonia has improved its CLIR environment in accordance with international standards. It is also clear that the assistance provided in legislation and institutional support has been effective in producing the desired results.

The CLIR diagnostic methodology measures seven areas of essential commercial laws across three dimensions of implementation while also examining the social dynamics involved in achieving progress and overcoming constraints. The areas of law examined are: bankruptcy, collateral, company, competition, foreign direct investment (FDI) and trade.

The examination focuses on existing laws and regulations (Framework Laws), the government institutions responsible for implementing those laws (Implementing Institutions), and the civil society and private sector organizations that are essential for the system to function effectively (Supporting Institutions), providing quantitative scores for each area. The scores are based on hundreds of questions regarding compliance with emerging international standards in each area. In addition, the methodology examines the various forces supporting or undermining reform efforts, including cultural, social, and economic factors that bear upon the results desired.

In all areas, Macedonia has shown significant progress. The scores for Framework Laws demonstrate a 7% overall improvement, with the greatest improvements in collateral, competition and trade. Implementing Institutions did even better, with a 10% overall increase. If low scores for courts (bankruptcy and contract) are eliminated along with the low score for collateral registry (because it already has a very high score), the average improvement in Implementing Institutions goes to 18%, with the greatest improvements in competition (29%) and FDI (20%).

Supporting Institutions also fared well, with an average advance of 9%. The greatest change was in the Customs Agency, which was described by respondents as a difference of “night and day.” In terms of overall success, the Collateral Registry continues to stand out, as it did in the prior assessment. It received very high scores in law (91%) and implementation (87%), and had good scores for Supporting Institutions (70%). The more important indicator, owever, came from interviews with banks that are using the system. One bank noted that the Collateral Law system enabled them to increase lending in Macedonia and increase investment in the bank from abroad. In other words, this aspect of the commercial regime is promoting economic growth and development, which is the sole reason for undertaking investment in this registry system.

Additional work is still needed. Although most of the laws are actually quite good, implementation still lags. The greatest weakness is in courts, which actually declined in perceived quality since 2000. This finding is in keeping with problems noted in the FIAS Report on Administrative Barriers and the Programme for Stimulating Investment and  Attracting Foreign Investment by the Ministry of Economy. Moreover, members of the Macedonian Business Lawyers’ Association identified court reform as their number one priority in a survey of problems encountered by these legal professionals.

Another significant finding was that the existing laws – and thus the overall investment environment – are threatened by the system for adopting and amending laws. Macedonia, like its neighbors, has historically used the “classic model” of legislative process in which a few technical experts draft laws or amendments before they are passed, with little or no public debate or discussion. Thereafter, implementation is usually quite slow, if it occurs at all. Under this non-democratic model, it is possible for special interests to undercut reforms by changing laws in the wrong direction. For example, the bankruptcy law, which received a high score of 87%, is currently being proposed for amendments that will completely undercut the purpose of the law, with inevitable negative economic impact.

Several Ministries have shown a positive tendency to use a democratic model, in which there is extensive input in and discussion with the private sector in order to create laws that will facilitate economic development. For example, the Ministry of Economy, working with USAID’s Corporate Governance and Company Law Project, is holding a series of roundtable discussions around the country on proposed changes to the company law. Interested end users have been able to provide extremely valuable input to the process to avoid future problems. At the same time, the process has ensured shared commitment for the reforms, education about the new system, and increased likelihood of lasting implementation. Unfortunately, such enlightened lawmaking is voluntary, not mandatory, under current regulations; a better system needs to be adopted for all lawmaking.

Perhaps the most important implication of the assessment is that the investments made by various donors over the past three years are paying off in the commercial legal environment. Necessary changes in the rules of commercial activity are being made, which affect the attractiveness of Macedonia as an investment destination. While it is true that additional work is needed in a number of areas, it is important to note that donor assistance can be quite effective in achieving those needed reforms.

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Maassen, G.F. (2002). An International Comparison of Corporate Governance Models. A Study on the Formal Independence and Convergence of One-Tier and Two-Tier Corporate Boards of Directors in the United States of America, the United Kingdom and the Netherlands.

Maassen, G.F. (2002). An International Comparison of Corporate Governance Models. A Study on the Formal Independence and Convergence of One-Tier and Two-Tier Corporate Boards of Directors in the United States of America, the United Kingdom and the Netherlands. Amsterdam: Spencer Stuart Executive Search.