"Microstate": A Mouse Roars

R.A. Hettinga rah at shipwright.com
Wed Jan 19 07:32:37 PST 2005


The Wall Street Journal

      January 19, 2005


A Mouse Roars

January 19, 2005

PODGORICA, Serbia and Montenegro -- Since the publication in 1776 of "An
Inquiry Into the Nature and Causes of the Wealth of the Nations" by Adam
Smith, the impact of free-market activity and international trade on
economic development is well-known. The experience of recent decades shows
that the most successful countries with the highest growth rates are those
that have implemented pro-market policies and allow freedom in economic
affairs. That's why a transition economy like Montenegro sees its best
chance in openness, private initiative, international competition, and
economic freedom.

Montenegro, the smallest state of the former Yugoslavia with little more
than 600,000 inhabitants, presents its economic development concept with
the slogan "Montenegro -- Microstate." Microstate in this case has nothing
to do with the size of the population or the country. Rather, the
Montenegrin Microstate concept, developed by Professor Veselin Vukotic,
assumes a minimal role for the state in the economy, low taxes, simple
business regulations, a stable institutional framework, and the protection
of property rights.

The first steps on this road have already been taken. Montenegro adopted
the euro as the country's legal tender and thereby minimized the inflation
taxation of its citizens. Without that step, the central bank in
Montenegro, a transitional economy with weak institutions, would have been
under constant pressure to print money.

The adoption of the new tax law will introduce one of the lowest corporate
tax rates in Europe: a mere 9%. Capital-exchange restrictions have been
eliminated and the repatriation of profits made by foreign investors in
Montenegro is free. Interest rates are market determined and more than 99%
of the prices are freely set. Treating foreign investors just like domestic
ones, enjoying the same rights and legal protections, is intrinsic to
Montenegro's privatization, investment and business regulations. In order
to encourage new business development, the required starting capital for a
limited liability company has been reduced to $1. The aluminum industry,
which accounts for 60% of total exports, is in the process of being
privatized. The tender for Telekom Crna Gore, the national fixed-line
operator, is also already underway. Tourism is another area where
Montenegro has enormous potential to expand. A majority of hotels are still
state-owned but those are now all up for sale while the country is open for
new investments. According to the World Tourism Organization, Montenegro's
tourism industry will be one of the fastest growing in the world.

The biggest obstacles to economic freedom at the moment are high government
expenditures and the large number of administrative barriers. A reform of
the judicial system would also significantly improve the business ambience.
These barriers are, for the most part, part of the old socialist legacy.

As anywhere else in the world, the most vigorous objections to the
implementation of economic freedom in Montenegro come from rent-seeking
groups, monopolists, and people that benefit from state redistribution.

But Montenegro also has to overcome a barrier that is peculiar to its
political situation. As one of the basic preconditions for signing the
Association and Stabilization Agreement with the EU, Brussels insisted on
the "harmonization" of economic systems between Serbia and Montenegro.
Given the fact that Montenegro wants to develop an open and
service-oriented economy while Serbia wants to protect its agriculture and
inherited heavy industries, the harmonization of these systems is more than
just problematic. The most illustrative example is the harmonization of
custom rates. Through this process, Montenegro was forced to increase its
custom rates from an average 2.8% to 6%. Montenegro even had to increase
custom rates for those products that it doesn't produce itself, such as
sugar and textiles.

There are, however, new encouraging developments in this area. At a recent
conference in Maastricht, the EU proposed a more flexible approach to the
accession process of Serbia and Montenegro, the so-called "dual track"
path. This dual track process demonstrates that the EU recognizes that the
economic realities of Serbia and Montenegro are quite different and that
they need to be taken into account.

Accepting and acknowledging the economic realities of Serbia and Montenegro
would present a new era in interstate relationships in the Balkans.
Montenegro would be given the opportunity to take full responsibility for
its economic policy. At the same time, the international community would
gain stable relations in the region based on respecting mutual interests.
An open economy in Montenegro would add to the competitive landscape of the
region. More competition (and not harmonization) will lead to prosperity in
this part of Europe.

Mr. Kavaric is deputy finance minister of Montenegro.

R. A. Hettinga <mailto: rah at ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'

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