Manja slova Veća slova RSS


Tech Central Station: The Full Montenegro

Published date: 22.11.2004 18:51 | Author: Kliping inostranih medija

Ispis Print

The Full Montenegro
By Roger Bate

The success of small countries with free economies is not a new phenomenon. Hong Kong, Singapore, Luxembourg and Switzerland always come at or near the top of indices of economic freedom and are all very wealthy. Indeed, on a per capita basis, 9 of the 10 wealthiest countries have a population smaller than eight million (the only exception is the United States). Recently Ireland, Iceland and Estonia have been added to the list of fast growing small countries.

But we can now add another new country to the list - Montenegro will soon have one of the lowest corporate tax rates in Europe. The smallest of the states of the former Yugoslavia, its population is only just over 600,000. For decades it has maintained its independence from Serbia, and never caved in to the Ottoman Empire centuries ago. Today its leaders are determined to turn that strength and resourcefulness into improving an already strong economy into a star performer of the next ten years.

I just spoke with the deputy finance minister of Montenegro, Vladimir Kavaric. He was adamant that the country's history had prepared it for the tiring negotiations required for EU accession. "We have already adopted the euro, since our people were very happy to say goodbye to the Yugoslavian dinar, and we are ready for all useful negotiations, especially those that further trade," he said. He thinks that Montenegro is capable of contesting the tariff battles with EU and its more powerful and protectionist neighbor, Serbia, and supporting free trade messages at the World Trade Organization. He wants his countrymen's products to compete with the rest of Europe, and while he knows that unilaterally opening his borders to total free trade would benefit his consumers, Montenegrin producers would protest somewhat. But even here he claims a greater understanding of the importance of free trade from his country's producer than is usual in a former socialist country.

Kavaric's Ministry has helped push through a 20 percent top corporate tax rate, and he assured me that by the end of next month there will be a corporate flat tax rate of only 9 percent - one of the lowest in Europe. Furthermore, there are no capital flow restrictions, or limits on foreign ownership of business and even banks. Furthermore, 99 percent of prices are freely determined, and foreigners are treated as nationals in all business legislation. Foreigners can also repatriate all profits to their home nations if they wish. And privatization of key services like telecoms and aluminum plants has already begun.

With a 17 percent sales tax (except on staple products) and a top rate of personal tax of 25 percent, Montenegro now has one of the most attractive climates for foreign investment in Europe. According to economist, Marta Bengoa of the University of Cantabria in Santander, Spain, "Montenegro also has great human capital and decent infrastructure as compared to other countries in the region."

Montenegro is currently not on various indices of economic freedom since it is such a new country. So far only Croatia of the former Yugoslavia has been listed, but Dr. Robert Lawson of Capital University and an expert in such matters says it's only a matter of time before it joins.

Foreign exchange is earned by certain key exports. Although tourism provides significant returns (25 percent of total exports of goods and services), the main contributor is aluminum production (30 percent), since there is plentiful cheap energy from hydro power, as well as significant domestic supplies of bauxite (from which aluminum is produced). Remarkably, Montenegro can compete against the cheapest producers from Australia and Africa, and is now supplying much of the region with aluminum.

But Kavaric expects that by lowering tax rates investment from overseas will flood into other areas where Montenegro has competence, such as telecoms and computing. The current per capita GDP is about 2,200 ($2,700) and wage costs are far lower than in the EU.

Farming also has great possibilities, although some opportunities are unfortunately driven by the EU Common Agricultural Policy. EU subsidized rearing of pigs, especially in Scandinavia, has led to cheap enough pigs for them to be brought to Montenegro where the pigs are slaughtered and cured and ham is produced, which is then exported back to EU as well as non-EU countries. Although this provides useful revenue for Montenegrin producers, and genuinely adds value, it is only viable because of the artificially low price of pigs due to subsidies. Without the subsidies the trade would be uneconomic. But as a whole Montenegro would be far better off if EU subsidies were generally removed, since it would increase it food exports, perhaps by 40 percent overnight.

Kavaric concluded his comments to me with much optimism: "I anticipate Montenegro joining the EU within the next decade, but probably not the next five years." To have another low tax pro-growth country within the EU will further demonstrate the benefits of lower tax rates and make it harder for the high tax treasuries in Paris and Berlin. This has to be beneficial, not only to Montenegrins but for the rest of us as well.

Roger Bate is a visiting fellow of the American Enterprise Institute