Commentary

Montenegro Can Seize Its Chance to be Friendly to Business

This article appeared in the Financial Times, May 23, 2006.
Montenegrins voted this week to sever their remaining ties with Serbia. The May 21 referendum, in which 55.5 percent of Montenegro’s voters chose independence, completes the process of disintegration of federal Yugoslavia that began in 1991. It is important to recognize, however, that national sovereignty is not a good thing in and of itself.

Depending on the choices they make, countries can either succeed or fail to improve their lot. As such, the consequences of the victory by the pro-independence camp will go far beyond settling Montenegro’s international status. As the government charts Montenegro’s future economic policies, it should remember how an open economy and business-friendly environment can benefit the people and provide an example for other regional countries.

In recent years, Montenegro has made much progress. The government replaced the Yugoslav dinar with the euro, which significantly reduced exchange rate risk for companies doing business in Montenegro. Inflation has declined sharply, reaching just 1.8 percent in 2005. The movement of capital is free and the corporate tax rate is 9 percent. Personal income tax rates, between 15.5 percent and 23.5 percent, are among the lowest in Europe. Montenegro’s flat value-added tax of 17 percent is also low compared to the rest of Europe. Net foreign direct investment in 2005 was Euros €380 million ($490 million) or four times more than in 2004. The World Bank’s “Doing Business in 2006” report found that “Serbia and Montenegro led in making the kinds of reforms that can spur growth in firms and jobs”.

The overall ranking of Serbia and Montenegro remains very low, however. Out of the 155 countries surveyed, the report ranked Serbia and Montenegro in 92nd place. Evaluation of Montenegro together with Serbia was, in some ways, misleading. It takes only four days and three documents to register a limited liability company in Montenegro, but 16 documents and 71 days in Serbia. It is true that under the terms of the state union with Serbia, Montenegro has been allowed to pursue its own economic policy. But the continued association with economically more restrictive Serbia harmed Montenegro’s international reputation.

Improving Montenegro’s image, tarnished by the violent dismemberment of former Yugoslavia, should be high on the agenda of Milo Djukanovic’s government. Fortunately, the prime minister seems open to the idea of economic reform. His thinking, like that of Igor Luksic, his finance minister, was partly influenced by Veselin Vukotic, a professor at the University of Montenegro. Mr Vukotic’s proposals emphasize the importance of political and economic freedom, entrepreneurship and limits on the role of the government in the economy. He champions protection of property rights, reduction of the administrative burden and introduction of English as one of the country’s official languages, as well as abolition of the armed forces.

It is not yet clear how many of those ideas will be adopted, but Montenegro’s economic transformation could define the budding nation as one of the world’s most business-friendly countries. Among proposals before the government is complete abolition of the corporate tax, which would make Montenegro unique in the world, as Estonia’s zero percent tax rate applies only to corporate profits reinvested in the country. Similarly, partial social security privatization, another possible reform, would enable Montenegro’s workers to provide for retirement by investing in private pension accounts. Meanwhile the Montenegro Business Alliance, a private chamber of commerce set up by Peter Ivanovic, another University of Montenegro professor, has launched a campaign to cut value-added tax and personal income tax to a flat 10 percent.

Those reforms cannot come soon enough. Between 2000 and 2004, Montenegro’s gross domestic product per capita grew at an average annual rate of a mere 2.1 percent and GDP per capita averaged only €2,473 in 2004. The economy must expand more rapidly if living standards are to catch up with the west. The referendum showed that Montenegrins have the courage to go it alone. They must now show they have the courage to take on the difficult task of transforming the economy.

Adam Smith said that “little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice”. Montenegrins may be nearing the end of their journey from the barbarism of Yugoslav wars to future opulence.