BELGRADESo, Montenegro has become independent (It has regained its independence, say those who supported that option). The crucial political challenge for Montenegro now is to change its political agenda. For many years, the independence issue was of paramount importance and dwarfed all other issues. That provided Montenegrin decision-makers with a general excuse for not moving decisively on other, much tougher issues, like economic growth and fiscal and microeconomic restructuring.
What should be the most important issue on Montenegros political agenda? Preventing the fragmentation of Montenegrin society. The recent independence referendum, which had a turnout of 85%, showed a deeply divided country. Almost 45 percent of participants voted against independenceeven families were divided on the issue. The incumbent government or any other that comes into office in the short term must work to protect the minority that voted against independence and build bridges between the two sides. This issue is particularly important if we take into account that the pro- and the anti-independence camps have substantial ethnic and regional componentssomething very dangerous for a small country that has recently become independent.
The other crucial issue is the long-term perspective for economic growth in the country. With a per capita income that is only $3,000 (U.S.), and with about 10 percent of the population living below the poverty line, economic growth is something Montenegro really needs. Will that growth be pursued with free-market public policies?
For some time now, Montenegro has been praised for adopting economic liberalism, that is, free-market policies. For example, foreign trade liberalization resulted in an average nominal tariff of only 2.5 percent, far below protectionist Serbia, where the figure is at 8.5 percent. Nonetheless, the equilibrium retail prices of many imported goods are substantially higher than the prices in Serbia. The retail price of bananas in Montenegro, for instance, which is subject to a high 15 percent tariff under conditions of ostensibly free import, is 5 percent higher than in protectionist Serbia, which effectively imposes a tariffa rather paradoxical situation. How can that be? The problem is that Montenegrin foreign trade is neither transparent nor free. There are substantial barriers to entry and substantial rents (i.e. non-productive gains) are generated due to these barriers. Those rents are appropriated by businesspeople involved in the industry, and perhaps shared with decision-makers who enable that institutional framework.
Lets consider sugar. The equilibrium price of sugar in Montenegro is $600 (U.S.) per ton; comparable to the EU retail price and roughly double the basic price of imported Brazilian sugar. The difference is overwhelmingly due to the decrease in supply because of monopoly conditions in which the local import industry operates. But if there were no barriers to entry, the expectation of huge profits would attract new competitors and generate competitive prices.
The personal touch is very important in Montenegro, a country of 620,000 people, many of them belonging to clans. The cozy size of the population has produced a fine network of personal connections, interrelations, and dependencies. The problem is that a market economy is by nature depersonalized. As Vito Tanzi pointed out in his definition of corruption, market transactions are based on the arms-length principle. Unfortunately, the prospects for the application of that principle in Montenegro are slim, not necessarily because people are unwilling to operate that way but because of the demographics and the social structure of the nation. When capital-market transactions are dominated by insiders, enforcement of the rules is biased. Therefore, there is no rule of law. Notions like conflict of interest and the Chinese wall are not appreciated enough in Montenegro.
With a consolidated central government expenditure of 45 percent of GDP, the tax burden necessary to keep the fiscal balance and to protect the constituency that heavily depends on transfers from the budget is quite high (only one-third of the budget is spent on the provision of public goods). The public sector generates about 60 percent of jobs. That leaves rather limited room for entrepreneurship and makes most of the constituency dependent on the incumbent government and its fiscal policyquite fertile ground for patronage.
The economic challenges for a newly independent Montenegro will be bigger than its struggle for independence. Free-market rhetoric is no doubt good public relations, but the problems remain unsolved.