SERBIA AND MONTENEGRO
Rank: Not Ranked Regional Rank: Not Ranked
M
ost of the economic freedom of Serbia and Montenegro cannot be graded because of the violence and political turmoil that the country has endured in recent years. The last time Serbia and Montenegro was wholly graded was in 2003, when it received a score of 39.5 percent. Monetary freedom and trade freedom are weak. Inflation is high, particularly for a European country, and the government reserves the right to re-impose price supports that have been phased out in the past. Belgrade imposes a fairly high average tariff rate, although efforts are underway to liberalize the country’s regulatory non-tariff barriers. BACKGROUND: Following Montenegro’s secession in May 2006, the National Assembly of Serbia declared Serbia the successor to the State Union of Serbia and Montenegro. After suffering from economic sanctions imposed throughout the 1990s, Serbia has started the long road to membership in the European Union by signing a Stability and Association Agreement. However, membership talks have been jeopardized by the failure of Serbian authorities to hand over indicted war criminal Ratko Mladic, and investor confidence is likely to remain stagnant until Mladic is captured. Serbia’s exports include manufactured goods, machinery and transport equipment, and foodstuffs.
The economy is not graded
100
Europe Average = 67.5 World Average = 60.6
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80
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60
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40
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20
0
1995
2007
QUICK FACTS
Population: 8.1 million GDP (PPP): n/a 8.8% growth in 2004 5.2% 5-yr. comp. ann. growth n/a Unemployment: 31.6% Inflation (CPI): 9.5% FDI (net inflow): $966 million (gross) Official Development Assistance: Multilateral: $563 million Bilateral: $611 million (30% from the U.S.) External Debt: $15.9 billion Exports: $4.0 billion (2004 estimate) Primarily manufactured goods, food, live animals, machinery, transport equipment
How Do We Measure Economic Freedom? See Chapter 3 (page 37) for an explanation of the methodology or visit the Index Web site at heritage.org/index.
Imports: $11.4 billion (2004 estimate) Primarily machinery, transport equipment, fuels and lubricants, manufactured goods, chemicals, food, live animals, raw materials (2003 data) 329
BUSINESS FREEDOM — NOT GRADED
Starting a business takes an average of 18 days in Serbia and an average of 24 days in Montenegro, compared to the world average of 48 days. Obtaining a business license can be difficult: It involves 20 procedures in Serbia and 22 procedures in Montenegro. Regulations can be inconsistent and lacking in transparency.
FINANCIAL FREEDOM — NOT GRADED
Serbia and Montenegro have two separate banking systems with central banks for each republic. A 2005 banking law requires that Serbia’s central bank approve purchases of 5 percent or more in any bank. The government has been privatizing state-owned banks, including selling Jubanka, Novosadska Banka, and Kulska Banka in 2005. Serbia enjoys significant participation by foreign banks. Montenegro also has participation and investment by foreign banks. The government privatized the last bank with direct majority state ownership in 2005. Serbia’s insurance sector is dominated by state-owned insurers, although the government has announced its intention to privatize them. Capital markets in Serbia are vigorous, and takeovers are common on the Belgrade Stock Exchange. Montenegro’s capital markets are less developed.
TRADE FREEDOM — NOT GRADED
The weighted average tariff rate in Serbia and Montenegro was 7.9 percent in 2002. Progress has been made toward liberalizing the trade regime, but import licensing, import bans, and corruption still add to the cost of trade. Consequently, if Serbia and Montenegro were graded this year, an additional 20 percent would be deducted from its trade freedom score to account for these non-tariff barriers.
FISCAL FREEDOM — NOT GRADED
Different tax rates exist in Serbia and Montenegro. Serbia has a flat tax rate of 10 percent for both individual and corporate income. Montenegro’s top income tax rate is 22 percent, and its corporate tax rate is a flat 9 percent. Other taxes include a value-added tax (VAT), which Serbia introduced in 2005 and Montenegro introduced in 2003.
PROPERTY RIGHTS — NOT GRADED
The constitutions of the Serbian Union and the Republic of Montenegro serve as the foundation of the legal system and create independent judiciaries in Serbia and Montenegro. The judicial system is inefficient, judges are poorly trained, and corruption is present.
FREEDOM FROM CORRUPTION — NOT GRADED FREEDOM FROM GOVERNMENT — NOT GRADED
Total government expenditures in Serbia and Montenegro, including consumption and transfer payments, are high. In the most recent year, government spending was estimated to equal about 46 percent of GDP. Corruption is perceived as widespread. Serbia and Montenegro ranks 97th out of 158 countries in Transparency International’s Corruption Perceptions Index for 2005.
LABOR FREEDOM — NOT GRADED
Labor costs are relatively low in Serbia and Montenegro. Labor laws have improved the ability of businesses to dismiss non-performing employees without high severance costs. Serbia’s adoption of a new labor law in 2005 was viewed as a step back toward labor market rigidity, but amendments are under consideration. Permitting direct talks between workers and employers, Montenegro has amended its labor code to increase labor market flexibility.
MONETARY FREEDOM — NOT GRADED
Inflation in Serbia and Montenegro is high, averaging 14.2 percent between 2003 and 2005. For most goods, state subsidies and price supports have been eliminated, and prices are determined by market forces. However, the government retains the right to control the prices of certain basic products, including milk, bread, flour, and cooking oil; directly controls the prices of utilities, public transit, telecommunications services, and petroleum; and influences prices through numerous state-owned enterprises. Consequently, if Serbia and Montenegro were graded this year, an additional 15 percent would be deducted from its monetary freedom score to account for these policies.
INVESTMENT FREEDOM — NOT GRADED
Serbian law eliminates previous investment restrictions, provides for national treatment, permits transfer and repatriation of profits and dividends, guarantees against expropriation, and provides investment incentives. Montenegro’s Foreign Investment Law incorporates these same protections for foreign investors. However, the business environment is still weak. Excessive bureaucracy, red tape, and corruption are major impediments to existing enterprises and to the creation of new enterprises. Both residents and non-residents may hold foreign exchange accounts, subject to central bank permission or conditions. Payments and transfers are subject to restrictions, and most capital transactions are subject to controls.
330
2007 Index of Economic Freedom