Montenegro Becomes Independent
With increased autonomy and now independence, the government of Montenegro has enacted a policy of the privatization of the previously socialist economy
July 1, 2006
Fred Foldvary, Ph.D.

Montenegro became the 192nd member of the United Nations on June 28, 2006. The country, Crna Gora in the Montenegrin language, became an independent state on June 3, after a vote in favor of independence in the referendum of May 21. "Montenegro" means "black mountain" in Italian, named after the dark color of the forests on Mount Lovcen.

Crna Gora was one of the republics of the former Yugoslavia in the Balkan Peninsula of Europe. It is located at the Adriatic coastline, and borders Croatia, Bosnia-Hercegovina, Serbia, and Albania. It is a relatively small country about the size of Connecticut, with 13,812 square km. and a population of some 620,000. The Montenegrin language, the Zeta dialect of Ijekavian, is closely related to Serbian. The East Herzegovinian dialect is also spoken in the country.

The Montenegrins were Slavs who migrated to the region after the collapse of the western Roman Empire. In the 800s, the area was a vassal state of Byzantium called Duklja or Doclea. In 1042, King Vojislav won a battle against Byzantium, and Duklja, larger than present-day Montenegro, became independent. In the 1300s the area was the semi-independent principality of Zeta in the Serbian Empire. The Turkish empire then took most of the Balkan region, including Montenegro in 1496, but the Turks never completely conquered Montenegro, which retained much of its autonomy.

In 1799, Sultan Selim III recognized the independence of Montenegro. An international conference, the "Congress of Berlin," in 1878 recognized Montenegro as an independent state. The country issued stamps inscribed "Crna Gora" in Cyrilic. Montenegro was annexed by Serbia in 1918 and then become part of Yugoslavia. After the independence of the other republics of Yugoslavia, the remaining two became the State Union of Serbia and Montenegro in 2003, which came to an end with the independence of Montenegro.

With increased autonomy and now independence, the government of Montenegro has enacted a policy of the privatization of the previously socialist economy. The euro is the official currency, which provides a stable currency and facilitates trade with Europe. However, the reforms have also included the copying of economy-damaging policies such as the value-added tax.

Besides the VAT rate of 17 percent, Montenegro has a personal income tax with a recent top rate of 23.5 percent, and a corporate income tax with a recent rate of 9 percent. There are also social security taxes, a tariff, a tax on the transfer of real estate, and a property tax of .4 percent of the market value.

The 2006 index of economic freedom computed by the Heritage ranked Serbia and Montenegro at 4.28 on a scale of 1 to 5, 5 having the least economic freedom, due to its taxes and excessive restrictions and bureaucracy. Montenegro's ranking will improve when it is listed as a separate economy. A May 25, 2006, article by the Cato Institute by Marian L. Tupy, entitled "Montenegro Can Seize Its Chance to be Friendly to Business," notes that the Montenegrin economy was hampered by its association with Serbia. (The article also appeared in the Financial Times, May 23, 2006.)

Montenegro can achieve what economist Mason Gaffney has called a "quantum leap" in economic growth by not just reducing but totally replacing taxes on income, value added, and transfers, with the tapping of the economic surplus that arises from the land. Using public revenue from land rent would eliminate the burden of taxation, as land rent is a surplus that does not shrink, hide, or flee when tapped for public revenue.

It is unfortunate that the people of eastern Europe have chosen to reform their economies only up to the economic freedom prevalent in western Europe. The freedom-loving mountaineers of Montenegro have fought for freedom for centuries against many tyrants. Now they should fight against economic tyranny. The restoration of independence for Crna Gora presents a unique opportunity for it to become the first truly free-market economy in the world.

Just maybe some entrepreneurs and reformers in Montenegro will read this article and take action. The black mountain state could become the gold mountain of extreme economic growth. An joint international conference of free-market economists of all schools of thought, including the Austrian-school and the geoclassical, held in Montenegro, could be the catalyst that would get Crna Gora to make that quantum leap into the most prosperous economy on earth.

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Fred Foldvary, Ph.D.

FRED E. FOLDVARY, Ph.D., is an economist and has been writing weekly editorials for since 1997. Foldvary's commentaries are well respected for their currency, sound logic, wit, and consistent devotion to human freedom. He received his B.A. in economics from the University of California at Berkeley, and his M.A. and Ph.D. in economics from George Mason University. He has taught economics at Virginia Tech, John F. Kennedy University, Santa Clara University, and currently teaches at San Jose State University.

Foldvary is the author of The Soul of LibertyPublic Goods and Private Communities, and Dictionary of Free Market Economics. He edited and contributed to Beyond Neoclassical Economics and, with Dan Klein, The Half-Life of Policy Rationales. Foldvary's areas of research include public finance, governance, ethical philosophy, and land economics.

Foldvary is notably known for going on record in the American Journal of Economics and Sociology in 1997 to predict the exact timing of the 2008 economic depression—eleven years before the event occurred. He was able to do so due to his extensive knowledge of the real-estate cycle.