Budva by night
Budva: Little Kuwait
Budva is also known as Montenegrin Kuwait and is perhaps the case of most notable explanation of real estate boom back at the very beginning of 2000s when prices soared after foreign investors rushed in for underestimated real estate prices. After the declaration of independence on June 3, 2006, Montenegro experienced a significant output increase fueled by the net direct investment and sound monetary conditions resulted in non-inflationary growth. According to official estimates, inflation has edged a moderate level of 3,5 percent. The output continues to grow at a brisk 8 percent and above rate according to officially recognized estimates. The real output growth is expected to anchor 6 percent over the business cycles in the years to come. Public debt is expected to decrease gradually to 32,6 percent by 2010 and IMF's statement fuels optimism and confidence and the commitment to transition from backlash socialist economy into open free-market economy.
Macroeconomic and fiscal outlook
Medium-term macroeconomic and fiscal outlook seems to be favorable to sound conditions for growth according to current trends and output forecast over the target range. Due to the reduction of volatility of fiscal consumption and public spending relative to growth and inflation pressures, the macroeconomic framework enjoys a high support from normalized inflation pressures despite the fact that the Central Bank of Montenegro has not yet undertaken officially announced inflation combat strategy. The Bulletin of the Ministry of Finance of the Republic of Montenegro succinctly exposes the ambitious medium-term goals of the macroeconomic policy:
"Estimation of public spending of the Republic of Montenegro in mid-term frame 2008-2010 is based on evaluated data on GDP trend, data on public spending trend in the period 2003-2006, and on realised public spending for the first six moths of 2007. Public spending policy in next three years is based on basic goals of economic programme of the Government of the Republic of Montenegro and macroeconomic trends for the next period. In accordance with the goals of economic policy the balancing of the Budget in 2008 will be provided, with relative reduction of share of public spending in GDP. Furthermore, basic parameters of the fiscal policy will be harmonised with frameworks and goals agreed with the International Monetary Fund and World Bank, and their harmonisation with the Directives of the European Union will be provided. According to data from Montstat, amount of GDP and annual rates show stabile trend of economic growth in the period from 2003. Estimations show that the GDP will amount in 2007 2.155,00 mil.€ and that annual real growth rate will be 6 %. For 2008, growth rate is projected to the amount of 9 % (real growth rate 6 %), and amount of GDP 2.349,00 mil.€. Projection of macroeconomic indicators estimates that GDP in 2009 will amount 2.549,00 mil. € (current prices) and that the real growth rate will amount 6 %. It is planned that consolidated public spending is to be reduced for 3% by 2010, while the capital expenditures will slightly grow in relation with the estimated GDP. Projected share of capital spending in GDP in 2010 amounts 7,9 %. Share of current public spending (consolidated public spending reduced for total capital expenditures- Capital budget of the Republic of Montenegro, capital expenditures in the current budget and capital expenditures of funds and municipalities) in the period 2008-2010 indicates tendency of fall – from 43,21 % in 2007, to 38,6% GDP in 2010. Surplus of public revenues over consolidated expenditures in period 2008-2010 will provide reductions of tax rates without endangering of fiscal balance, settlement of all legal liabilities, capital investments and repayment of debts and debt in arrears with simultaneous fall of public spending when compared to GDP. "
Source: Bulletin of the Ministry of Finance of the Republic of Montenegro (link)
Montenegro's real GDP in transition
Medium-term fiscal projections regarding Montenegro's state of public finance forecast stable output growth rates, a decline in net foreign direct investment inflows and the moderation of default credit boom. According to these observations and estimated forecast, the level of household spending and consumption should decline and sounder investment conditions may benefit the business cycle.
Privatization as a pre-condition for an entrepreneurial economy
One of very important aspects of graduating from economic progress into advanced free-market economy is the privatization. The reasons for privatization are simple and concisely supported by empirical evidence and fundamental reasons. The government ownership of means of production is a pillar on which a socialist economy is based. The choice of gradualism for the privatization style could seriously endanger the international competitiveness of small and open economy. In fact, all sorts and types of resources are better utilized and allocated under private management where risk is a key feature of deciding where and how to allocate a particular resource. Due to wealth creation and gains from productivity, private sector effectively enforces risk management compared to the government which eventually can't absorb neither information nor sufficient risk management to maximize wealth and boost the economic performance. The ultimate goal of the government ownership is to provide consumption resources instead of generating wealth and providing conditions for output growth. Even through conditions may be sound in this respect, the government functionally present a burden to the private sector since public sectors' investment and operations are financed through taxes, thus reducing the overall ability of the economy to compete in the international global economy and benefit from low aggregate tax burden respectively.
The Empirics of Privatization
Alongside with price liberalization, privatization has been regarded as a key component of transition from communism to capitalism. Regarding privatization and its effects on economic growth, Bennet, Estrin and Urga (2005) found out that the impact of mass privatization is positive and that "other-than-mass" types of privatization have no significant impact on growth. Through microeconomic empirical studies, Megginson and Netter (2001) found that privatization acts to enhance enterprise productivity in middle-income and advanced countries. According to Transition Report, Montenegro is quickly accomplishing major aims and areas of privatization and is especially successful at all-scale privatization, price liberalization and openness to international trade with far more prospects to pursue such as enterprise restructuring and the implementation of competitive law.
Public Spending Forecast 2007-2010
Low taxes: Thumbs up!
In December 2006, Montenegro's legislative body approved a 15 percent flat tax rate on personal income. Effectively, the new tax code started on July 1 2007. The new tax system replaced previous progressively treated taxation of individual income with three rates: 16% on monthly taxable income between €65-218, 20% on monthly taxable income between €218-381, and 24% on monthly taxable income exceeding €381. Current flat tax rate of 15 percent is set to reduce to 12 percent by 2009 and 9 percent by 2010. The Montenegro's parliament abolished the dual taxation of corporate profits. Previous tax code included a 15 percent tax rate on profit up to EUR 100,000 and 20 percent tax rate on corporate gain exceeding EUR 100 000 (Rabushka, 2004). Montenegro is a nice example how international tax competition yields investment and thus helps to reduce unemployment and generate job growth. Tax cuts and the reduction of real aggregate tax burden is not supposed to result in less tax revenue as static experiments presume. Yet, revenue growth is brisk and has already enabled Montenegro's budget to sustain surplus together with annually lowering public spending as a share of GDP.
Competitive Business Environment
Montenegro ranks 70th in the world in measuring the ease of doing business (link). While the level of protection of investors is high and on par with top 20 jurisdictions in the world, tax complexity and administrative burden persent a huge source of self-induced cost push shocks such as compliance burden, excess regulation and administrative inefficiency or/and failure to provide a sound framework for dealing with official matters. Despite the significant macroeconomic and fiscal progress in reducing the real aggregate tax burden, Montenegrin business environment still shows the signs of a rampant post-communist economy with inefficient institution which fail to deliver the rule of law and business-friendly environment in spite of significant competitive potentials of Montenegro's small and open economy.
Montenegro's Transition Progress and Advancement
From sick man of Balkans to the top reformer of the region?
The future of Montenegro will, I believe, crucially depend on the macroeconomic, fiscal and structural conditions to sustain high, stable and non-inflationary growth, low public spending, low tax burden in the share of GDP, competitive business environment and openness to international trade and foreign direct investment. To match-up global conditions for job growth and competitive output growth rates, enterprise restructuring is essential for a vital framework of international competitiveness. Nevertheless, the creation of human capital in long-term growth process will determine the income per capita, standard of living and prosperity rank of Montenegro.