SARAJEVO (Reuters) - Unless EU aspirant Montenegro adopts a new economic growth strategy that would boost productivity and human capital, its incomes will not converge with average EU levels in the next 40 years, the World Bank warned on Tuesday.
The tiny Adriatic country, which started EU accession negotiations in 2012, hopes to speed up its integration with the wealthy 27-member bloc after adopting a comprehensive set of legal frameworks aligned with the European Union.
But its growth strategy, which so far has been based mostly on attracting a few large investment projects in transport, energy or tourism, has left the economy more vulnerable to external shocks, making it hard to maintain an average 3% growth rate, the bank said in a report.
The bank said that stagnant productivity growth was caused by market inefficiencies in the service sector which represents over 70% of GDP, and that Montenegro needed to remove regulatory barriers for firms to enter markets and grow.
Most companies lack innovation and invest little in green technology which is needed to sustain tourism growth and develop Montenegro's comparative advantage in clean energy. Only 8% of firms have implemented energy efficiency measures compared with 25% in peer countries.
Also, a better leverage of trade is needed as travel and tourism services account for 80% of total exports, the bank said, cautioning however that export diversification itself is limited by the low productivity of Montenegrin firms which reduces their competitiveness in foreign markets.
In addition, Montenegro must tackle its income inequality which shrinks the pool of future skilled workers and entrepreneurs and limits its labour productivity growth potential, the bank said.
"By implementing these reforms, Montenegro can expect a thriving private sector, significant job opportunities and ultimately improved wages and benefits for all its citizens," said Christopher Sheldon, World Bank Country Manager for Bosnia and Montenegro.