Bosnia's Precarious Economy: Still not Open for Business

Bosnia’s economic reality is still bleak. After more than five years and five billion dollars of Dayton implementation, the country seems only at the beginning of an economic transition that should have begun in 1996.

Since Dayton, many impressive gains have been registered. These include a stable currency and functioning central bank; abolition of socialist-era payments’ bureaus and notable improvements in the banking sector; rudimentary labour reforms and preliminary steps towards pension reform; as well as anti-fraud measures aimed at demolishing illegal parallel structures in the Bosniak-Croat Federation. Yet however necessary or desirable these achievements have been, they have not moved Bosnia significantly closer to sustainable economic growth or created an environment attractive to more than a handful of foreign investors. Most importantly, the international community has taken insufficient action to cut the Gordian knot that binds Bosnia’s politicians to its state-owned firms and allows them to benefit from the funds and jobs they generate. This is seen most clearly in the failure of the international community’s efforts to ensure the rapid and effective privatisation of the commanding heights of the Bosnian economy and the creation of a single economic space.

The spurt of growth that came with post-war reconstruction is now faltering. The numbers of people unemployed and/or living in poverty are rising. Tax and customs evasion remains rife, undermining the power and legitimacy of governments whose coffers are often empty and need regular replenishment by donors. The debt caused by budget deficits is mortgaging Bosnia’s future. Smugglers and traffickers in goods and people easily and regularly violate Bosnia’s still-porous borders. The black economy remains predominant in Republika Srpska (RS), and is relatively widespread in the Federation as well. The privatisation of strategic enterprises – which should be a major engine of growth – has yet to take place. Increasing numbers of young and educated Bosnians are queuing in front of Western consulates seeking a way to a better future outside the country. Those already living abroad show no sign of returning. Three hundred and forty strikes in 2000, numerous demonstrations over the late or non-payment of pensions, and frequent roadblocks set up by dissatisfied workers testify to a deep economic crisis and simmering social unrest.

The engagement of the international community has been unbalanced in one major respect. Rather than attempting to carry out the numerous microeconomic reforms needed to make Bosnia attractive to investors, the international community has focused most of its economic reform effort on strengthening the several Bosnian governments’ abilities to collect and control revenues. Although necessary as a means of creating functional governing structures and reducing corruption, these efforts have not affected the underlying causes of a significant portion of the corruption and tax evasion: the existence of unreasonable and irrational tax codes and business regulations that force much economic activity underground. Various organisations, including the World Bank, USAID, and the Office of the High Representative (OHR), have carried out studies describing the problems in detail; and all their studies agree on what must be done. Yet until autumn 2000, their recommendations were either swept under the carpet or given only rhetorical endorsement.

Meanwhile, the low credibility of Bosnia’s political establishment is further undermined by each new corruption scandal. The myopic pursuit of personal enrichment by many members of Bosnia’s ruling national elites has helped scare away foreign investors. Sadly, Bosnia is still heavily reliant on donor aid and foreigners’ spending for significant portions of its economic activity. The past unwillingness of many Bosnian politicians to enact meaningful reforms, particularly in Republika Srpska and in the Croat majority areas of the Federation, argues for more aggressive and specifically targeted action by the international community.

As political and financial attention turns increasingly to Bosnia’s neighbours to the south and east, both Bosnians and the international organisations working with them must focus urgently on weaning the economy off dependence on foreign aid. This will require a series of thoroughgoing economic reforms. Bosnia’s leaders and their foreign helpmates still face an enormous challenge: to create an economically viable, self-sustainable and governable country with a true common market, functioning institutions, effective and affordable administrations, and a modern, comprehensive economic and legal framework underpinned by the rule of law. Without these things, the business environment will remain unattractive to foreign and domestic investors alike, and Bosnia’s European future will remain in jeopardy.

If Bosnia is to capitalise on the promise held out by peace – as well as on such institutional reforms as have taken place thus far – there must now be wide-ranging microeconomic reforms. These will also demand the active engagement of the international community.


GENERAL RECOMMENDATIONS

1. The international community should continue to press for the rationalisation of Bosnian government structures and, in particular, for the merger of entity-based agencies dealing with banking, customs and railways, making them responsible to the state-level Council of Ministers.

2. The entity governments need urgently to remove bureaucratic barriers to business by enhancing the legal environment and simplifying or doing away with numerous controls, inspections and registration requirements.

3. International agencies should work with the entities to reform their tax systems by reducing the number and rates of taxes, broadening the tax base, and improving revenue collection through the introduction of Value Added Tax (VAT).

4. The entities should reform their judicial systems to assure expeditious, effective and disinterested legal processes in the commercial sphere.

5. OHR should devote as much attention to combating fraud in the RS as it does in the Federation.

6. International agencies and the entity governments should accelerate the privatisation process, particularly of large and strategic enterprises.


Sarajevo/Brussels, 7 August 2001