Fiscal Decentralisation and Local Government Financing in Serbia and Montenegro by Sanja Kmezić, Jadranka Kaluđerović, Katarina Đulić and Mijat Jocović

Introduction 
SANJA KMEZIĆ1 
Abstract The introduction explains the context – the lack of strategic 
commitments to fiscal decentralisation – that helps us gauge the relevance 
of the study’s subject matter and set up an adequate analytical framework. 
Further, it outlines the major research problem and articulates the subject 
of the study and main research questions. The fundamental problem 
treated in the book is the fact that fiscal decentralisation and stable local 
finance systems are de facto not among strategic directions of Serbian and 
Montenegrin central governments. The study focuses on the following 
research questions: 1) What are the main features of fiscal 
decentralisation processes in Serbia and Montenegro?; 2) How have legal 
frameworks on local government financing changed over the last 15 years 
in Serbia and Montenegro?; 3) What is the fiscal effect of legislative 
changes on local government budgets?; 4) What are the main differences 
and similarities of fiscal decentralisation processes in these two countries? 
Finally, the Introduction presents the analytical approach and research 
methods used in the study. 
Keywords: • fiscal decentralisation process • legal framework on local 
government financing • fiscal effects of legislative changes • comparative 
similarities and differences 

1 Explication of the context – lack of strategic commitment to 
decentralisation 
Serbia and Montenegro embarked upon their post-communist political and economic 
transition processes more than two decades ago. However, these processes were 
hindered in the 1990s by the dissolution and armed conflicts in former Yugoslavia, 
which postponed fundamental reforms in Serbia and Montenegro for the next decade. 
Montenegro essentially began its reforms in 1997 by standing up to Milošević’s policies 
and carrying out changes in the private and public sectors, which led to the country’s 
independence in 2006. It was further awarded with the status of a candidate state in the 
process of EU accession in December 2010. In Serbia, immediately upon the 
establishment of the democratic regime in late 2000 and early 2001, the process of 
political transformation, the economic transition, and the EU accession efforts resumed, 
culminating in the opening of membership negotiations in December 2015. 
Until 1990, Serbia, as a country, and its system of financing subnational governments 
were quite decentralised. However, under the authoritarian regime of Slobodan 
Milošević, the Government of the Republic of Serbia initiated a rapid process of 
consolidation and centralisation of power by adopting a new Constitution of the 
Republic of Serbia in 1990, which abolished the existence of autonomous provinces and 
diminished the role and mandates of local governments dramatically. The 1990 
Constitution and the subsequent accompanying legislation abolished the fiscal 
autonomy of local authorities and deprived municipalities of having a role in providing 
any social services. The breakup of Yugoslavia, wars, the economic embargo and the 
hyperinflation of the early 1990s contributed to further fiscal limitations and 
additionally worsened local government finance.3 In the mid-1990s, the Milošević 
regime started losing its popularity. As the power of the opposition grew at the local 
level, the Republic’s politics of centralisation became more aggressive and radical. For 
instance, in 1995, the National Assembly adopted the Law on Assets Owned by the 
Republic of Serbia,4 which “nationalised” all public property and established a 
centralised property management system. De facto, this meant that Serbian local 
governments were no longer authorised to manage and dispose of “public” property 
without obtaining the central government’s permission. In other words, local 
governments in Serbia in the 1990s were basically deprived of both revenues and 
property assets, i.e., financial and development instruments. 
Immediately after the Milošević regime was overthrown, the new Serbian government 
began intergovernmental fiscal reform by amending the Law on Public Revenue and 
Public Expenditure5 and the Law on Local Self-Government,6 aimed at increasing 
municipal revenues and devolving certain expenditure functions.7 In January 2002, a 
new Law on Local Self-Government8 was adopted that additionally increased the share 
of local revenues in total public revenues. To summarise, the 2001 and 2002 reforms led 
to a significant increase in municipal budgets, almost doubling municipal revenues 

Fiscal Decentralisation and Local Government Financing in Serbia and Montenegro by Sanja Kmezić, Jadranka Kaluđerović, Katarina Đulić and Mijat Jocović