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The article published in magazine "CG ekonomist"

Published date: 24.11.2008 12:37 | Author: Intervjui

Ispis Print

The galloping financial crisis and its overflow into the real sector requires any responsible government to be prudent and to assume the obligation for preventive action. No country in the World, apart from some politically and mostly self - isolated ones, can expect to be bypassed by the consequences of the crisis. Even such countries, in some part, will not stay unaffected.

In my own judgement, however, it would be totally wrong to draw any kind of ideological conclusions on the basis of the current economic developments. In any case, the survival of capitalism as a social and economic order is not under question. The market has not been abolished and neither is private ownership questioned. The escalation of the crisis can be measured by excessive interference by the state into economic flows. Through its economic policy, the U.S. government has stimulated the approval of soft loans, as well as non-market schemes of risk insurance for housing loans through parastatal insurance houses. In addition to this, there has been inadequate regulation of financial markets by the central banks and various supervisory institutions that contributed to inadequate transparency of financial flows and induced the creation of the bubble. Besides, further criticism has been directed at excessively loose monetary policy of the American Fed during the first years of this Century (reminiscent of the causes of Great Depression from 1929). Therefore, in assuming responsibility for stabilizing economic circumstances state action was required and necessary. In the absence of such action, the risk of blocking the financial bloodstream of the economy would cause unforeseeable consequences to the whole economic system.

In light of the above, the only thing we can talk about is the failure of neo-liberalism that was founded in the so called Washington consensus, which differs significantly from liberal economy principles. The creators of this consensus were the IMF, the World Bank and the U.S. Treasury. Since every big crisis brings about a new order, the expectation of accelerated reforms of the Bretton Woods institutions should not be excluded, i.e. the IMF whose function was to act preventively in the case of a crisis outbreak. Regardless of the fact that the officials of this institution are preparing for these new arrangements, which look like they surprised them too, there are more and more influential calls for reconsidering their future role. The distribution of todays World GDP is significantly different than it was sixty years ago and it is logical that the developing counties are demanding a more powerful voice in global institutions. However, it is not yet clear what the management instruments of a reformed IMF should be, while the allocation of executive functions might also present a problem.

In actual fact, although for some these matters are mere nuances, such a state level top-down policy contradicts liberal economy principles which, first and foremost, imply economic freedoms of individuals. This means, inter alia, that the state should provide a stable and transparent business framework with the least possible barriers, as well as a very solid and conservative monetary policy. At the same time, individuals are paying taxes and they expect in return to have public services provided, such as the protection of personal safety and freedom, the protection of freedom to enter contracts, and the provision of quality infrastructure. I think it is worth emphasizing that those countries that adopt the so-called social-market models can be expected to be significantly more affected by the crisis because their economic systems have such limited flexibility that, sooner or later, the issue of liberalizing their economic systems will be opened. The growth forecasts for the next year confirm this assessment; France, Germany and Italy will not have any growth.

By carefully monitoring global economic trends, we came to the conclusion that it is necessary to take preventive action in order to avoid drastic impacts of the economic crisis on our economy. In our circumstances, such attention is even more valid than elsewhere. The Montenegrin economy is small and developing and high growth rates in previous years had been directly linked with the growth of direct foreign investments. For that reason, an important issue is how to maintain investment at a satisfactory level. Secondly, bad experience with the banking sector and hardly regained trust of the citizens calls for strong actions in order to protect banking sector.

Following the experience of other countries, the Law on measures for the protection of the banking system was prepared and adopted, with the aim of offering answers to questions such as liquidity provision and solvency of the banking sector. Montenegro was amongst the first countries to react fastest to the crisis. The good thing is that we are not, and I believe that we will not be, in the situation where we need to use all of the instruments laid out in the Law. Our commitment to protect all deposits of citizens and businesses is especially important. Such an approach provided additional trust into the banking sector, and this is confirmed by encouraging trends. At the same time, the successful application of the Plan of EU member states aimed at protecting the banking sector will contribute to the stability of our banks that are connected to the European market. However, a reduction of the banks credit activity can be expected because any stabilization is followed by reduced consumption until the bob is moved again. It is also logical to expect some increase in interest rates and subsequent consequences in the real sector.

For this reason, along with already mentioned monetary measures, it is necessary to introduce through budgetary policy a set of fiscal measures that will counteract the potential contraction of economic activities. The problems facing exporters and the risks confronting the next tourism season emphasize the importance of implementing several measures that will limit negative consequences and dampen a possible deceleration of economic growth. The reduction of income taxes and social contributions with the resulting increase in net earnings, as well as the regular and early repayment of internal debt are designed to maintain satisfactory levels of personal consumption in the economy. Increasing the capital budget to over 6,5% of projected GDP next year (of which 50% is direct investment in infrastructure), and not taking into consideration certain infrastructural contracting loans that would increase this percentage, combined with private sector investment, should provide a satisfactory level of overall investment. All these measures will improve the competitiveness of the Montenegrin economy and promote sustainable economic growth over the longer term.

In terms of the budget structure, early announcements have been fully realized. In the proposed budget, current expenditure by central government and the state funds will decline to approximately 35,5% of GDP, which includes important increased expenditures by the Pension Insurance Fund, while capital expenditure will increase. The cautious fiscal stance in the previous period characterized by high surplus in current budget has made possible such room for manoeuvre. Of course, all of the above-mentioned does not mean that we will not face a certain tightening of the belt next year, so that the responsibility of the Government is to define economic policy that should provide a soft landing .

Mr. Igor Luksic, PhD, Finance Minister