DEMAND DRIVEN GROWTH IN SMALL OPEN, IMPORT DEPENDABLE ECONOMY

Sa？etak Demand driven growth is rather common approach in many countries in short run. Growth in aggregate demand pushes production to higher level, increasing employment and income. But what is the case in small open economies which are highly import dependable, service oriented and have to import most consumers’ goods? We will analyze this issue in case of Montenegro. Economy of Montenegro is small, open and services oriented. National savings is moderate, while import dependency is very high. Agriculture and manufacturing make less than 20% of GDP, which influence high import of both nondurable and durable goods. Financial markets are open and significantly relay on imported capital. Since independence (2006), Montenegro attracted significant amount of foreign investments and financial inflows, transferred through commercial banks into household consumption. Great increase in loans influences high aggregate demand, which contributed significantly to import growth, but compensated with higher financial surplus. GDP growth was achieved through growth in construction, trade and tourism sector. Since global financial crisis, financial inflows dropped, leaving Montenegrin economy to struggle with increased debt (both public and private), unfinished investment project to provide value added and low level of domestic production leading to high trade deficit. Investments failed to increase domestic manufacturing production and at least partially substitute increased import or reduce trade deficit with increased export. Now, Montenegrin economy needs new investments to increase production, but due to low national savings, capital has to be provided from international market, where interest rates are rather high. Future growth can be achieved only if it is driven by investments, as growth in aggregate demand will more likely lead to higher trade deficit than production growth