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«ECONOMIC INSTITUTIONS AND COMPETITIVENESS OF ECONOMY WITH EMPHASIS ON MONTENEGRO ECONOMIC INSTITUTIONS AND COMPETITIVENESS OF ECONOMY WITH EMPHASIS ...»

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Milivoje Radovic, Radoje Zugic, and Nikola Milovic:

ECONOMIC INSTITUTIONS AND COMPETITIVENESS OF ECONOMY WITH EMPHASIS ON MONTENEGRO

ECONOMIC INSTITUTIONS AND COMPETITIVENESS OF ECONOMY

WITH EMPHASIS ON MONTENEGRO

MILIVOJE RADOVIC1, RADOJE ZUGIC2, and NIKOLA MILOVIC3

JEL Classification: O 11; O 17;

Review Received: May 08, 2012 Accepted: February 23, 2013 Abstract The competitiveness of economy has become a key term in economic trends. It is related to all strategic issues of sustainable economic development. A sure way for its preserving in unstable conditions would include increasing competition, and modernization of the economy which would lead to knowledge economy, innovations and institutional development. Knowledge and innovations also depend on development of institutions and support. This is the reason why the starting point is the hypothesis that the competitiveness of economy dominantly depends on the degree of development and the efficiency of economic institutes.

This paper considers the importance of economic institutionalization, and some elementary causes and conditions that prevented a pluralistic and even monistic performance of individual economic institutes (such as competition, market regulation, etc.) in most transition countries, and led to their objective substitution by the quasi-Institutes of sociopathological and anti-institutional nature. The primary importance pluralistic synergy of economic institutions is stressed for the development of competition. The analysis of the competitiveness in Montenegro points to urgent strengthening of institutional development factors and appropriate ambient.

Key Words: economic institutions, institutional pluralism, competitiveness, anti-institutional behavior, Montenegro.

1. Introduction In the last four decades, the competitiveness has been one of the most analyzed economic categories. The majority of authors look upon the competitiveness from the level of national economies, mentioning the improved well-being, structural changes in economy and its increasingly efficient adjusting to the international market (Bienkowski, 2006.). However, some economists (Krugman 1994, 1996) advocate an extreme attitude that the notion of competitiveness is not applicable at the level of economies, only at the level of companies. According to our opinion, it is logical that the competitiveness of economy represents summed up competitiveness of the companies in a particular country.

The theory of economics recognizes different definition of competitiveness and its importance. Some of them are:

− Internantional competitiveness as a condition in which the countries in terms of free and fair market have to produce goods and services which meet the requirements of the world market, keeping and increasing the real income of its citizens a the same time.

(OECD), University of Montenegro, Fakulty of Economics Podgorica, E-mail: rmico@ac.me Ministry of Finance, E-mail: radoje.zugic@mif.gov.me 3 University of Montenegro, Fakulty of Economics Podgorica, E-mail: nmilovic@ac.me MONTENEGRIN JOURNAL OF ECONOMICS Vol. 9, N0 1 − macro-competitiveness, as a state of competitiveness of a concrete national economy, which relates to the ability of earning higher factor incomes in terms of direct exposure to the influences of international competitiveness and − micro-competitiveness, which is relative efficiency of concrete companies to sell their products and services on a market on which both local and international competitors are present. It is based on relative prices and product quality related to the offers of other companies. The main competitiveness factors (micro-comparative advantages) there are low business costs (especially low labour cost) or a higher rate of factor productivity.

Irrespective of the given classification, all known authors agree that a period of global economic competiton has come. That dominant trend is characterized by the application of the most up-to-date knowledge, innovations and appropriate information, communication, transport and other technology, a very high mobility of production factors, real and virtual flexibility of organizational forms of associations, maximally possible openness of economy and stimulating of human capital. It includes the synergy of many microeconomic and macroeconomic factors, including: high quality management, flexible organization, maximal cost control, higher stimulation of employees for creation and innovations, advanced business strategy, pluralistically developed institutional ambient, engaged instruments of economic policy.

In early 21 century the ability of an economy to be internationally competitive is characterized by the following elements (OECD 1999): a) a higher level of innovations, a widespread usage of new, generic technologies, like information and communication technology, biotechnologies and technologies of new materials, b) a shorter product lifetime and a faster reaction to the consumers’ needs, c) a higher level of flexible automatization, through the usage of computer supported production systems, d) a higher managers’ role and highly qualified and competent workers, e) changes in the usage of new resources and materials and f) changes in the organization of industrial production like, „timely ", LEAN production, total quality control etc.





The analysis of global trade exchange trends makes possible the noticing of some general trends which contribute to the competitiveness:

− state who have the highest export rate have the highest growth rate, − the growth of global resource mobility repesents potential increase of similarity of production capacities worldwide, − technology becomes a key development factor and − knowledge and skills (human capital) become key elements of competitiveness.

The methodology of measuring of international competitiveness of a country has to, above all, take into consideration four groups of factors which influence a country’s economic

efficiency and the efficiency of its companies:

− attractiveness of the local market of a given country compard to the percentage of the penetration of its companies on foreign markets, − the importance of the local market compared to globalization, − wealth in the sense of real assets compared to processes, and − individual risk taking compared to the degree of social cohesion.

The competitive ability of economy is the result of the existence of a range of its competive advantages. The can stem from various factors, starting from socio-economic system (systm measures and mechanisms), stimulation instruments of macroeconomic policy, institutional environment, normative and legal acts and general conditions for business and entrepreneurship, through the levels of organization, management and commercial abilities ending with geographic, demographic, resource, infrastructure, innovative and microeconomic capacities

Milivoje Radovic, Radoje Zugic, and Nikola Milovic:

ECONOMIC INSTITUTIONS AND COMPETITIVENESS OF ECONOMY WITH EMPHASIS ON MONTENEGRO

2. Theoretical approach The problem of competitiveness has a universal, global character. Kitson et al. (2004, p.

991) think that it has become “the natural law of modern economy.” The concept of competitiveness of economy has undergone important changes it its history. A. Smith and D. Ricardo were linking its definition with the availability of national resources.

M. Weber explained the diffrences in economic results of particular countries with particular socio-economi factors like value systems, religions etc which make up the socio-cultural capital.

J. Schumpeter stressed the importance of entrepreneurship, innovations and technology. P. Drucker has developed a concept of management as the basic competitiveness factor. R. Solow stressed the idea of education (knowledge) and technological innovations in the economic growth. M. Porter generated all the mentioned ideas into the model known as “Porterov competitive diamond.” He is a true guru of discussions on competitiveness. In his many papers (1998, 2001, 2003) he stressed the importance of export oriented clusters which represent the basis for the reaching of economic and regional competitiveness.

H. Trabold (1995) went further in theoretical considerations through the analysis of the following possibilities as competitiveness aspects: a) export, b) attraction of investments, c) adjustment of economy and d) creation and increase of available income (measured by GDP growth).

He thinks that the given aspects make up a certain hierarchy in the sense of mutual interdepending. Porter (1990, 2003) and Krugman (1994) marked productivity as the best measure of competitiveness. It can be regarded as a comparative relationship between advantages and disadvantages of particular countries measured according to some indicators and factors. By itself it has no ideal goal and it is a condition of competitive relation among states, the ability to achieve high comparative qualities of some foundations and indicators. For more than two and a half decades, thanks to Nobel Prize Winner, D. Nort (1990, p. 107) the opinion prevails that institutional factors and the competitiveness of the economy are of the biggest importance for the growth of economy.

Global business conditions impose constant challenges for the improvement of competitiveness. Swiss institutes World Economic Forum and International Institute for Management Development define competitiveness as a functional set (system) made up from institutions, transparent public policies and factors which determine the productivity level of a country. Productivity is important in the context of competitiveness because a) it shows the state of prosperity which is achieved with a high level of standard of living and b) profitability degree of the capital invested in economy, which influences a long term growth of economy and sustainable development. In that context competitiveness presents a challenge in a constant race for reaching productivity, economic prosperity and improvement of life quality.

The mentioned Swiss institutes regularly publish annual reports on world competitiveness, which show the rating of particular countries. The rating is set according to the two types of indicators: Growth Competitiveness Index, GCI and Business Competitiveness Index, BCI. The reflect macro and micro economic position of a particular country representing useful data sources about main comparative advantages and disadvantages of particular countries, according to the criteria of factor measurement which influence competitiveness and productivity of the economy.

GCI is aimed at the identifying of factors which stimulate or prevent entrepreneurship, economic growth and the development of a country’s economy. In the so-called Green Book titled „Entrepreneurship in Europe”, European Commission stressed the following dimensions of the

social importance of entrepreneurship:

it helps open new jobs and economic growth, − it has decisive importance for competitiveness, − it develops personal potentials, and − it develops general social interests.

− MONTENEGRIN JOURNAL OF ECONOMICS Vol. 9, N0 1 The notion of competitiveness includes both static and dynamic components. Some data can, however, be only considered reservedly since the sources are limited. This is why the mentioned reports can serve as a general framework for the conclusions about key reform challenges, in order to improve the competitiveness of the economy. Of course, quantitatively competitiveness of a particular country can be defined also with its participation in the world market and through the world export figures. Some experts observe competitiveness through devaluation of a national currency, the existence of certain resources and similar things. Many authors (Florida, 2002; Malecki, 2002 and others) stress the growing importance of some determinants in the analysis of competitiveness, like knowledge, learning or creativity which are the basic elements of innovations.

An interesting approach in the form of “Competitiveness tree” was created by D. Constantin and G. Banica (2007). According to their interpretation, the roots of the competitiveness consist of human resources, innovations, connections and industrial structure. The trunk is made of

productivity, the branches are made of income, employment, profit and taxes and the fruits are:

well-beign, sustainable development and social involvement.

3. Economic institutions and competitiveness of economy The economy can become more competitive by improving its achievements in the wide range of factors which influence productivity growth. It includes innovations, creating of more convenient institutional and system ambient, transferring or adopting new technologies, the development of the sector of services, knowledge, science and education, entrepreneurship, new companies and so on. Actually, all the mentioned factors depend on the development of economic institutions. The Strategy (2011, p. 7) clearly points out that „it is necessary to thoroughly change institutional infrastructural basis of the development of competitiveness, because the earlier ones were unsuccessful.” Big companies in Montenegro are practically dead. Stimulation and strengthening of competitiveness of small and medium sized companies is imposed as a priority of the development strategy and economic policy. Moreover, the development of institutional ambient must be prioritized. Why? Because the development of small and medium sized companies represents the basic factor of all modern economies. Montenegro failed to develop a private sector becaue it has been developing it unsuccessfully for more than two decades (unsuccessful privatizations in the part of institution of property, unsuccessful neo-liberal economic policy in the part of institution of state regulation and monopolizing of economy and stimulation of quasi-markets in the part of institution of market regulating).



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