February 2011
Economic Freedom of the World In the 2011 ‘Economic Freedom of the World’ report, published by the Heritage Foundation and the Wall Street Journal, Montenegro’s economic freedom score is 62.5, making its economy the 76th freest out of 179 countries. Its score has decreased by 1.1 points since last year, primarily because of an explosion of growth in government spending. Montenegro ranks as 34 out of 43 countries in Europe, and its overall score is above average in the world. The following are opinions produced in the report regarding different components of the Index of Economic Freedom. Business freedom (ranked 66th). Procedures for setting up a business have been streamlined and the number of licensing requirements has been reduced. The application of regulations is sometimes inconsistent and non-transparent. Trade freedom (ranked 53rd). Montenegro’s weighted average tariff rate was 3.2 percent in 2009. Progress has been made in liberalizing the trade regime as Montenegro has worked toward joining the World Trade Organization. However, some high tariffs, import restrictions, non-transparent standards and regulations, and corruption add to the cost of trade. Ten points were deducted from Montenegro’s trade freedom score to account for non-tariff barriers. Fiscal freedom (ranked 24th). Montenegro enjoys competitive flat tax rates. The flat individual income tax rate was reduced from 12 percent to 9 percent in January 2010. The corporate tax rate is a flat 9 percent, levied at state level. Other taxes include value-added tax (VAT), inheritance tax, and property tax. Excise taxes on cigarettes and oil were increased in 2009. During the most recent year, overall tax revenue, as a percentage of GDP, was 30 percent. Government spending (ranked 160th). During the most recent year, total government expenditure, including consumption and transfer payments, rose to 48.8 percent of GDP. Though this has recently stalled, privatization has advanced. The structural deficit now measures 6 percent of GDP, and public debt has risen to 38.8 percent of GDP. Monetary freedom (ranked 82nd). Inflation has dropped, averaging 4.9 percent between 2007 and 2009. It declined further in 2010. State subsidies and price supports have been eliminated for most goods, and most prices are determined by market forces. However, the government influences a few prices through state-owned enterprises and regulates utility, energy, and transportation prices. Ten points were deducted from Montenegro’s monetary freedom score to account for measures that distort domestic prices. Investment freedom (ranked 75th). Foreign and domestic investors are treated equally. Montenegro allows profit repatriation and guarantees against expropriation. However, the business, legal, and regulatory environment is still in transition, and bureaucracy can be non-transparent, burdensome, and prone to corruption. The implementation and enforcement of regulations and laws can be problematic. Residents and nonresidents may hold foreign exchange accounts, and payments, capital transactions, and transfers are subject to few restrictions.
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Foreign investors may purchase land, but there are some reciprocity-based restrictions. Financial freedom (ranked 70th). Montenegro’s financial sector, though small and underdeveloped, is becoming more competitive. The financial system has been using the euro as legal tender since 2002. Access to financing has gradually increased, and banking is completely privatized. There are 11 banks, two of which are locally owned while the other nine are part of international banks. Participation by foreign banks and investment are significant. Despite growing competition, credit prices remain fairly high. The non-banking financial sector, including insurance and reinsurance, remains underdeveloped. The securities sector is small but is developing. In response to the global financial turmoil, the government has introduced several measures that include a one-year blanket deposit guarantee to slow down deposit withdrawals. Non-performing loans have risen. Property rights (ranked 73rd). The constitution provides for an independent judiciary, but the system is inefficient, and judges are poorly trained. Sales of pirated DVDs, CDs, and software along with the sale of counterfeit trademarked goods are fairly widespread. Montenegro is ranked 80th out of 125 countries in the 2010 International Property Rights Index. Freedom from corruption (ranked 79th). Corruption is perceived as significant. Montenegro ranks 69th out of 180 countries in Transparency International’s Corruption Perceptions Index for 2009, an improvement from 2008. A widespread perception of government corruption remains, however, particularly in the executive and judicial branches and especially with regard to the privatization of state-owned firms. Conflict-of-interest legislation requiring the disclosure of government officials’ salaries and property has not been fully implemented, and many officials refuse to comply. Organized crime, especially the smuggling of gasoline and cigarettes, is well established. Over the past two years, legislation has been introduced in the areas of public procurement, the treasury, the budgetary system, and the courts. This has been enacted to combat corruption. The implementation of these laws is now a priority. Labor freedom (ranked 4th). Montenegro has taken steps to enhance flexibility in the labor market. A labor law passed in mid-2008 still contains employment protection that discourages the dynamic creation of jobs. Severance payments still remain too generous to encourage job creation and longer-term employment contracts.
1. Report published by the Heritage foundation and Wall Street Journal 2. http://www.heritage.org/Index/Country/montenegro
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