Historical background

Macedonia gained its independence peacefully from Yugoslavia in 1991, but Greece's objection to the new state's use of what it considered a Hellenic name and symbols delayed international recognition, which occurred under the provisional designation of "the Former Yugoslav Republic of Macedonia." In 1995, Greece lifted a 20-month trade embargo and the two countries agreed to normalize relations. The United States began referring to Macedonia by its constitutional name, Republic of Macedonia, in 2004 and negotiations continue between Greece and Macedonia to resolve the name issue. Some ethnic Albanians, angered by perceived political and economic inequities, launched an insurgency in 2001 that eventually won the support of the majority of Macedonia's Albanian population and led to the internationally-brokered Framework Agreement, which ended the fighting by establishing a set of new laws enhancing the rights of minorities. Fully implementing the Framework Agreement and stimulating economic growth and development continue to be challenges for Macedonia, although progress has been made on both fronts over the past several years.

Economic overview

Having a small, open economy makes Macedonia vulnerable to economic developments in Europe and dependent on regional integration and progress toward EU membership for continued economic growth. At independence in September 1991, Macedonia was the least developed of the Yugoslav republics, producing a mere 5% of the total federal output of goods and services. The collapse of Yugoslavia ended transfer payments from the central government and eliminated advantages from inclusion in a de facto free trade area. An absence of infrastructure, UN sanctions on the downsized Yugoslavia, and a Greek economic embargo over a dispute about the country's constitutional name and flag hindered economic growth until 1996. GDP subsequently rose each year through 2000. In 2001, during a civil conflict, the economy shrank 4.5% because of decreased trade, intermittent border closures, increased deficit spending on security needs, and investor uncertainty. Growth averaged 4% per year during 2003-06 and more than 5% per year during 2007-08. Macedonia has maintained macroeconomic stability with low inflation, but it has so far lagged the region in attracting foreign investment and creating jobs, despite making extensive fiscal and business sector reforms. Official unemployment remains high at nearly 35%, but may be overstated based on the existence of an extensive gray market, estimated to be more than 20% of GDP, that is not captured by official statistics. In the wake of the global economic downturn, Macedonia has experienced decreased foreign direct investment, lowered credit, and a slowdown of export growth. The Government of Macedonia now predicts growth in 2009 to be no more than 3%.