After this weeks' reading, on "financial globalization", globalization seems to be something very real, a tremendous expansion of trade, investment, worldwide chains of production, communication, information, transportation, and above all, international finance/money exchange. The expression "financial globalization" came to denote the process of reintegration of markets into single, unregulated global market. I am reminded her of Harvey's words, when he says that in his more cynical moments he finds himself wondering whether "the financial press....conned us all...into believing in 'globalization' as something new when it was nothing more than a promotional gimmick to make the best of a necessary adjustment in the system of international finance (8)". However, globalization may be a misleading term which denotes the shift from a global financial system controlled by a hierarchy of governmental agencies headed by USA to an equally global financial system in which governments have little control over their finances and compete for private capital. The argument is not so simple, as far as the readings show - the ability of governments has not been constrained in order to pursue independent monetary policies.

In the following lines, I want to address the questions of unrestricted capital mobility that allows capital to flow to where it can generate the highest return (Leblang) - the case of Montenegro (former YU republic) is going to be presented in order to clarify some issues on foreign exchange rate. What are some of the approaches to the question of capital mobility that countries/governments are faced with?

Let's take Montenegro: The economy of Montenegro is/was suffering from an irresponsible monetary policy over which it had no control. In November of 1999 the Government of Montenegro therefore took what it considered to be the 'least' offensive measure that would still protect its economy and introduced the DM, initially in parallel to the dinar. The Government of Montenegro did not intend to introduce its own national currency, but it hoped that the DM would soon become de facto the currency of Montenegro. This has now happened. Switching to the DM/euro stabilised the economy, but the real incomes of the population are so low that it has become extremely difficult to pursue reforms without external assistance (the same goes on in Bosnia!!!). The most visible element of reform strategy in Bosnia consisted also of the substitution of the highly unstable dinar with the DM in order to provide the population with a stable currency. The introduction of the DM seems also to be success so far. The DM has already become the main transaction currency and most taxes are also paid in DM. However, the continuation of the dual currency system and structural reforms, will be extremely difficult without financial support from the outside. The economy contracted by about 20% during 1999, due to the war in Srpska Krajina/Kosovo... Does this prove that increased international financial integration and interdependence increase the incentive for governments to remove capital controls?

A stable currency and a balanced budget (so the argument goes) are only first steps towards the establishment of a market economy in Montenegro. But the Government is also pursuing further reforms, including for example the judicial system, education, public sector reforms and privatisation of the remaining state owned enterprises. This note concentrates on the need for external financial assistance because some financial support is needed to create basis for the reform efforts to succeed. One cannot wait for the structural reforms, including extensive privatisation, to have an effect on the economy, which will take months and years. As Leblang and Bernhard write, when confronted with speculation against its currency, a government has three options: 1. spend foreign exchange reserves to maintain the value of currency; 2. raise domestic interest rates to attract capital or 3. allow the currency to depreciate...but these options/actions have affect not only on economic performance, but also politics.

For example, there are a lot of myths circulating on these topics and if one looks at Macedonia, another former Yu country, one sees that investors ignored Macedonia mainly, if not only, because of geopolitical external shocks. Despite this, Macedonia succeeded in attracting almost USD 192 million in the year 1997-8.  Macedonia is the first nation in transition to have legislated for free economic zones and it has an impressive array of tax and investment incentives in place.  Macedonia never had problems of currency convertibility. Its debt is low by international standards (60 percent of GDP, most of it long-term). It has three months of imports in foreign currency reserves. Its debts are trading at 75 percent of their face value - better than most developing countries, a sign of international confidence in its obligations (Vojnovic, 1998).

Will the prospect of European integration create positive impetus in the countries of the Western Balkans to strengthen their efforts in developing stable institutions guaranteeing democracy, the rule of law, human rights...?