Author: Prof. Dr. Anđelko S. Lojpur, Montenegrin Economic Night Academy (price)

“No country can achieve development that is stable and sustainable without developing its own capacity for growth!” Ljubo Jurčić(1)

The ongoing political and economic turbulence has led to a lack of cohesive economic development policies in Montenegro, with crucial decisions failing to create a solid ground for recovery.

We may have been pondering our future prospects for quite some time, and we are eager to see the promised, hoped-for, and sustained recovery of the Montenegrin economy come to fruition. However, the current global economic and geopolitical situation complicates matters and heavily influences our decision-making process, reducing it to a state of some uncertainty.

Transitioning from the experience of several countries, including Montenegro, we have long lived beyond our means, mistakenly believing that we could sustain prolonged growth. Furthermore, the pressures of globalization and the dynamic nature of international economic encounters have led to the loss of former advantages and have made it more challenging to secure new competitive positions. The geopolitical and geo-economic contexts remain perilously intricate, with indications of further complications ahead.

Since the onset of the global economic crisis in 2008, we have been navigating through a time of “POLI crises“, characterized by multiple simultaneous crises with diverse origins and potential resolutions. Within such a volatile global environment, which reflects a new socio-economic structure that lacks a specific description as capitalism morphs into something else, smaller economies are squeezed. In this context, decisive action is imperative. Despite societal burdens from political and other disputes, we must seize the present moment to enhance competencies on individual, industrial, and national economic fronts, effectively crafting a new developmental framework for the Montenegrin economy.

In our view, the opportunity for meaningful connections with developed economies has yet to be realized, and the risk of missing such opportunities has never been greater. Failing to respond to this historical challenge would not only diminish the economy in the long term but also incur the ire of future generations who would justifiably hold us accountable.

Given the intricate and challenging landscape facing Montenegro—characterized by economic, social, political, and geopolitical conditions compounded by several unresolved issues—it’s critical to ask whether less developed countries, burdened by decades of accumulated problems, can redirect their threats into tangible opportunities for sustainable economic revival, thereby progressively improving citizens’ living standards. Are these nations aware of the historical imperatives to revise their development models, which fundamentally involves embracing a decolonization approach? These essential questions should prompt far-reaching dialogues and actions focused on weighing their significance.

Failure to Adapt to Globalization

Current research highlights that not only Montenegro’s economy but also those of many Southeast European (SEE) countries grapple with numerous unresolved issues and developmental challenges stemming from about three decades of stagnation. This stagnation coincides with the uncontrolled globalization and opening up of these nations to the world market since the early 1990s.

Among the key reasons for stagnation in Southeast Europe are states that have neither adapted their economic policies to meet globalization demands nor successfully leveraged the opportunities it offers. Instead, many have pursued policies (often aligned with the Washington Consensus) that conflict with their capabilities and often undermine national interests.

In examining these dynamics specifically through the lens of Montenegro as a small, open economy engaged with the European market yet uncertain in its trajectory towards EU membership, we recall Prof. Lj. Jurčić’s insights: “The EU provides opportunities but also escalates competition! Each nation (including EU members) prioritizes its own development.” Thus, Montenegro’s development commitments must be appraised concerning both domestic economic reforms and competitiveness on the global stage.

Decision Makers Have Neglected Reality

In contrast to this backdrop, it appears that decision-makers in Montenegro have overlooked the prevailing reality for decades. As a result, Montenegro has painfully paid the price for previously “reformist” attitudes, fostering the erroneous belief that simple solutions exist to resolve all our problems swiftly. The following misconceptions have emerged:

• That “joining” the EU will resolve all our economic challenges;
• That a single governmental mandate can address the majority of our issues;
• That Montenegro is appealing to foreign investors, who are merely awaiting political stability;
• That we have successfully navigated the global economic crisis and the COVID-19 pandemic;
• That increasing taxes is the simplest way to fill the budget;
• That enhancing citizens’ living standards is as easy as raising salaries and pensions;
• That we possess a capable, highly educated workforce;
• That economic policies can exist without consideration of (modern) fiscal and monetary regulations;
• That discussions of re-industrialization can be postponed until more favorable circumstances arise.

“Middle Income Trap”

When observed alongside its global competitors, Montenegro, as a small and open economy, lacks the power to influence international trends amidst disrupted geopolitical affiliations. Having long remained categorized within the World Bank’s classification of investment-driven economies, the current scenario illustrates the possibility that Montenegro is ensnared in a “Middle Income Trap“. This term refers to a circumstance in which medium-income countries experience stagnation and fail to advance to high-income status due to structural limitations such as insufficient innovation, an inflexible labor market, low competitiveness, and productivity.

In essence, for a country to be stuck at a certain level of development signifies a failure to transition into higher income categorization. By 2023, this group contained 108 countries, accounting for 75 percent of the world’s population and generating two-fifths of global GDP, underscoring the complexities of this predicament. The World Bank’s 2013 study revealed that from 1960 to 2008, only 13 out of 101 medium-income nations succeeded in crossing into a higher developmental phase. This includes countries like Japan and the so-called “Asian Tigers” (Hong Kong, Singapore, South Korea, and Taiwan), along with several European nations such as Spain, Portugal, and Greece.

To avoid the peril of remaining stagnant, Montenegro must adopt a comprehensive view of its developmental level. Critical development decisions, strategies, and public policies should initiate a process of thorough structural revisions.

Fundamentally, this transformation should represent a significant shift, often described in literature as Structural transformation. This approach transcends mere procedural changes; it necessitates a transition away from growth models reliant on cheap labor, natural resources, and debt towards a knowledge-based and innovation-driven economy. Such changes are vital for aligning Montenegro with developed, innovation-centric economies. Ultimately, escaping the Middle Income Trap calls for diversifying the Montenegrin economy to foster more resilient economic growth while prioritizing knowledge, technology, and economic activities that promote environmental sustainability and enhance citizens’ social conditions.

Ultimately, revamping the current structure of the Montenegrin economy—often recognized as innovation-driven—demands an elevation in productivity within existing industries and an entry into new, competitive sectors. On a macro level, this transition involves shifting from comparative to competitive advantages while, on a micro level, development strategies focus on international markets instead of solely relying on cost competitiveness, emphasizing product and service quality and differentiation. We believe that a strategically-designed approach will necessitate a genuine National Consensus, which remains a cornerstone for achieving favorable outcomes.

In conclusion, there must be an ongoing commitment to fostering a stable macroeconomic environment, serving as the foundation for stimulating investments, particularly in underdeveloped regions, allowing the Montenegrin economy to realize its full potential. The emphasis should be on sustainable growth and a green economy, as Montenegro possesses all the necessary prerequisites for such a trajectory.

(1)Ljubo Jurčić, Doctor of Economic Sciences, Professor at the Faculty of Economics in Zagreb, President of the Association of Economists of Croatia, previously served as the Minister of the Croatian Economy in the Government of Ivo Račan.

(2)The World Bank classifies economies based on GDP per capita: low-income (under $1,135); lower-middle-income ($1,135 to $4,465); upper-middle-income ($4,465 to $13,845); high-income (over $13,845). Note: These thresholds are scheduled to be adjusted on July 1, 2024.