Expanding and Diversifying Montenegro’s Exports: A Product Space Analysis

This paper provides an analysis of the export potential and export diversification of Montenegro. Based on this analysis as well as a review of international experience and field discussions, the paper also provides policy recommendations for exploiting its considerable export potential and engendering export diversification. The Product Space (PS) methodology is used to identify prospective comparative advantage by making inferences from the revealed pattern of trade. The indicated products in which Product Space methodology points to export potential have links to information available to entrepreneurs and producers that can be expected to be reflected in private investment decisions and decisions regarding entry into export markets. The analysis shows that Montenegro currently has a limited and highly concentrated export base but it is also in the middle of a major transformation towards a much more tourism and services based economy. The policy challenge is how to foster this process to fully tap into its potential for exports and diversification. Exports allow entrepreneurs and producers in small economies to expand beyond the limitations of the domestic market size. Successful export potential has been realized in other countries through openness in international trade and allowing the private sector to judge profitable opportunities. Thanks to its superior geographic location, adequate human capital and infrastructure base, and natural resources, Montenegro has been found to possess substantial export potential, which could turn into its major growth engine. To convert this potential into success, Montenegro will need to rebalance the role of government policy and improve local incentives towards entrepreneurship and exports. The important policy role of government in Montenegro is to correct mismatches between educational preferences of students and the human-capital requirements for export success. The other important role of government is to foster greater infrastructure connectivity (especially via air, rail and roads, but also the greater use opportunities offered by sea trade and port logistics services). The government also should maintain and promote an open trading regime and flexible, neutral regulatory environment. Finally, the government should avoid subsidizing particular firms or sectors at the expense of taxpayers or other firms or sectors. This would likely distort incentives and channel local private and public resources into rent-seeking as opposed to efforts to improve skills, products, and productivity.