A New Mandate: And Now?

Also available in: Montenegrin 

Author: Jan-Peter Olters, World Bank Representative in Montenegro

Published in Monitor, Vol. 20, No. 963 (April 3, 2009),

“I šta sad,” pp. 24–26.

The ruling coalition has sought—and been given—a solid political mandate to implement reforms necessary to take the next steps in the European integration process and to fend off, to the extent possible, negative consequences from the global financial (or rather economic) crisis. The situation could not be more difficult.

First, the European Union is currently not placing enlargement on top of its agenda. Its policymakers in Brussels and the other 26 capitals are preoccupied with internal challenges of avoiding permanent paralysis; they are consumed by the difficulty in adjusting the institutional framework and decision-making processes and aggravated by the unexpected ratification obstacles. The process of enshrining the draft constitution into law already failed, following the rejection by the French and Dutch electorates of the draft constitution in mid-2005. Now, the Lisbon Treaty’s ratification has been put in jeopardy, with the Irish having expressed their concerns in a referendum in mid-2008. Only ten days ago, the enormity of the politico-economic twin challenges was highlighted (if any proof were needed) by the collapse of the Mirek Topolánek-led government in Prague—notwithstanding the fact that his country is currently holding the EU’s rotating presidency. Internal Czech politics add to the concerns over the future of the Lisbon Treaty, with which the EU is seeking to enhance its efficiency and democratic legitimacy while improving the coherence of its actions. For reasons entirely outside Montenegro’s control, these developments influence the time period, within which the government can expect to receive a response to its membership application. The EU’s “inward-looking” phase will, however, pass. In the meantime, and irrespective of any political impasse in Brussels, the Stabilization and Association process provides countries in Southeastern Europe with a comprehensive framework for policy reforms, en route to achieving candidate status and beginning membership negotiations. Clearly, by pursuing these reforms in times of uncertainty, it will help the applicant countries to increase their credibility when questions of candidacy and membership will finally be negotiated.

Second, and much more immediately, the new government is being formed under gale warning, under the dark clouds of an economic hurricane that is pounding against the shores of economies worldwide, including Montenegro’s. The severity and longevity of this crisis is not yet clear to anyone. For Montenegro, the immediate challenges, however, whether in the aluminum or banking sectors, whether in terms of social, fiscal, or economic consequences, are obvious and require all the wisdom, courage, and persistence the government can muster. The third wave of the crisis will hit Montenegro full force.

All over the world, economic news becomes dimmer by the day. The IMF and World Bank have forecast negative growth rates for the world as a whole—for the first time in 60 years—, with economies of the euro zone and Russia (Montenegro’s main trading partners) expected to contract between 3 and 5 percent in 2009. In recent weeks, governments in Iceland, Latvia, Hungary, and (as mentioned before) the Czech Republic have already been forced to step down. In Europe alone, a considerable number of countries—Armenia, Belarus, Georgia, Hungary, Iceland, Latvia, Serbia, and the Ukraine—have requested IMF support, and others are following suit. Trade is collapsing, large and prestigious companies everywhere are under threat of closure. Rising unemployment and increasing social unrest is feared throughout the continent.

With the Great Depression in mind, the US and most industrialized countries have adopted very large, deficit-financed fiscal stimulus packages. Assuming things go well and as intended, with confidence in economic prospects returning also to the banking sector, we should be able to see some life in at least some of the major economies by mid-year, entailing the potential that the mood might change. If indeed the case, confidence could improve much more quickly than thought possible right now. In that case, the current crisis would be U-shaped, unfreezing liquidity and lifting economies, including those in the region, out of their current difficulties.

However, if major economies remain lifeless by summer, the current policies will have proven blunt, without fiscal or monetary ammunition left to give it a second shot. In that case, the crisis will be L-shaped—that is, severe and long drawn out. The immense difficulty in forecasting the crisis’ shape reflects the detachment of economic fundamentals from business sentiment, the almost complete collapse of confidence in and among financial institutions, resulting in the drying up of liquidity, in Montenegro as much as elsewhere. Once lost, confidence is, of course, the trickiest ingredient to restore.

What does this all mean? The short-hand answer is as sobering as the economic environment. Montenegro will need a new growth model—one that does not (entirely) depend on foreign direct investment and external credits as engine for growth. Irrespective of whether the crisis will prove U- or L-shaped, growth in years to come will have to come from within, grounded on innovation and increased productivity. This highlights the crucial importance of domestic enterprises, small and large, domestic and foreign, connected or not, to find an environment that provides a perspective for profitability. Further improvements in the overall business climate, streamlined bureaucracy, the transparent and uniform application of rules and regulations, effective public administration, and reinforced central bank supervision over the financial market will have to support improved productivity, innovation, and the production of new technologies. In these areas, carefully designed policy measures by government—with minimal costs to the budget—can have a large impact on the economy’s potential growth rate. There is no one headline-grabbing policy that can achieve this, but a set of reforms improving the overall environment within which private-sector activities take place.

In crises and during periods of fiscal pressures, two budgetary items tend to be most affected—public investments and social expenditures. These are, of course, the expenditures with the highest socio-economic impacts. As a result, reforms in all other areas of the budget will have to be implemented with a view to increasing the value of every euro spent, allowing the government to place appropriate emphasis on social issues as well. Apart for reasons valid in themselves, this focus stems from experiences that social tension and large income inequalities result in lower rates of potential growth, weaken political cohesion, contribute to environmental degradation, and add considerable costs to societies in terms of foregone opportunities. It is thus in the country’s interest that the social consequences of the crisis be carefully managed. Equally importantly, a prosperous future requires an educational system that offers opportunities to everyone, irrespective of his or her background, giving people the tools, once having graduated, to be able to contribute effectively to the greater good, within the public or private sectors.

Foreign investments would help the government in realizing these objectives, but—in an environment of a global liquidity squeeze—they cannot be taken for granted. Thus, policymakers will have few options but to concentrate on those tasks that foster the increase of overall productivity, both in terms of invested capital and employed labor. Government has several powerful instruments—public institutions, laws, regulations, and mechanisms ensuring their rules-based application. Today, even more so than in the years before, it is paramount that attention is being paid to the quality aspects of public expenditure, to the careful definition of objectives and priorities, the strict adherence to highest standards during implementation, and the ex post assessment of whether, or to which degree, pre-specified goals could have been realized with the policies implemented. And that is where good data—the road map to policy-makers—enters this equation.

None of this sounds particularly exciting or novel. It is hard work in areas where benefits can be had only indirectly and often with a considerable delay. However, the government’s task is helped by the fact that the obligations inherent in the European integration process are fully consistent with—in fact, largely define—the development of this new growth model. Thus, irrespective of the developments within the EU, or the time required to sort out the current institutional impasse, the continued focus on reforms strengthening public institutions, increasing the quality of the public goods provided, and ensuring the transparent and uniform application and judicial verification of rules and regulations promises considerable benefits—certainly economic ones.

With that I congratulate the new government on the confidence bestowed upon it by the electorate and wish it the strength and determination to take the opportunity inherent in this crisis and build a truly European Montenegro, even more successful than today’s and better equipped to tackle the challenges ahead, whether the seas are calm or the waters troubled.