It is now 21 years since the Bosnian civil war ended. In 1995, representatives of Croatia, Serbia and Bosnia agreed to terms of peace and the future of how Bosnia-Herzegovina (BiH) would be governed. Agreed upon near Dayton, Ohio in the US in November 1995, and formally signed in Paris in December of that year, the accords ended the three-year Bosnian civil war – the longest of the multiple conflicts that erupted after the break-up of Yugoslavia.
Since then, the government has faced a momentous task in rebuilding the economy, which was devastated by the war. Following the war’s end, the GDP of BiH was at just 20 percent of its pre-civil war level. In this regard, the economy of BiH has made great strides in recovering, thanks to a spurt of growth in the decade leading on from the war’s conclusion. Dr Vesna Bojicic-Dzelilovic, Senior Research Fellow at the London School of Economics and Political Science, told European CEO that in real terms, between “1997-2007, GDP grew at an average of 11.2 percent”. Weaknesses within its economy and finances, however, persist. Relying on loans from the IMF and the World Bank, the country has had to increasingly search for alternative credit streams. With growing public debt and a growing fiscal gap to be plugged, there are a number of weaknesses in the economy that need addressing.
Complex mosaic
Following the war, the country’s divisions were also reflected in its economic organisation. At the time, BiH had three separate currencies and, in practice, three diverging economic systems. Therefore, as Bojicic-Dzelilovic noted: “The establishment of the central bank in 1997 and the introduction of a common currency in 1998 were the first reforms that set the foundation for the country’s macroeconomic institutional framework.”
Following the war, the country’s divisions were also reflected in its economic organisation. At the time, BiH had three separate currencies and, in practice, three diverging economic systems
Part of the agreement was the division of political administration between the different ethnic groups that lived in BiH. The Federation of Bosnia and Herzegovina, with mostly Bosniaks and Croats, formed one half of BiH, while the Republika Srpska, populated mostly by Serbs, formed the other. This has made economic policy and state financial activity rather complicated.
Bojicic-Dzelilovic explained how economic policy is decided by “a range of state-level institutions and legislative frameworks”. These umbrella institutions facilitate economic policy formulation, which is then passed down to the different administrative areas. How economic policy is subsequently implemented becomes more complicated. The Serbian-dominated Republika Srpska is more streamlined, and therefore has implemented economic reforms in a much easier manner, while the more complex Federation of Bosnia and Herzegovina is composed of a number of complex constitutional arrangements, inevitably making policy implementation more difficult. Importantly too, in terms of raising public funds, both administrative areas have the power to issue bonds independently.
Import focused
In general, however, Bosnia has a poor productive base. Despite fast economic recovery rates, as a recent Brookings Institute report noted in late 2015, this recovery “did not create new foundations for sustainable economic growth”. As Bojicic-Dzelilovic noted: “The productive base of the BiH economy has been modest, and BiH has effectively undergone severe deindustrialisation, whereby only a handful of pre-war industries have been revived.”
Rather, in the post-war recovery period, the economy of BiH became reliant on “external borrowing and remittances”. The Brookings report further underlined this point: “Financial inflows, and particularly aid and remittances – averaging around 20 percent of GDP, fuelled consumption-based economic growth.” Consumption stands at over 100 percent of the country’s GDP, and is significantly higher than in most countries.
With such a narrow productive base and an overemphasis on consumption, the economy of BiH suffers from a large trade deficit. Bojicic-Dzelilovic observed that “export/import coverage is, at the best of times, around 56 percent”. With exports accounting for just 30 percent of GDP, the Brookings Institute noted, the economy is far behind what it was in the years prior to the war: “If BiH exported as much as it did during Yugoslav times, its exports would be three times as high. Achieving this today would require firms that can compete internationally.” Without a productive economic base, the economy of the BiH misses out on a productive tax base, which could be used to service debts or reduce the need for them in them future, while exports would earn the country more foreign cash reserves.
There are a variety of reasons for the current situation, including a poor business climate and perceived investor fears of political instability. Along with this, labour costs are particularly high, while transportation is poor. Furthermore, a degree of political sectarianism has contributed.
For instance, in 2012 The Guardian reported that “Bosnia cannot export fruit and vegetables to the EU without a national food standards agency, but the Serb leadership has obstructed its creation, insisting on two entity-based agencies”. While exporting more vegetables would be no substitute for a genuinely productive industrial base, the self-damaging incident underlines the scale of the problem; even within the borders of BiH, there is no single united market.
Building for the future
Efforts to improve the productive base of the economy would allow for the closing of the country’s fiscal gap, and would also allow for increased revenue with which to pay off existing debts. The constitution of the country prioritises the servicing of foreign debt – the point would be to build up a productive base within the economy from which to do this.
Despite clichés about the descent into war in the 1990s being due to historical and ancient hatreds, many academics now cite the brewing economic crisis in the 1980s in Yugoslavia as instrumental in allowing the conflict to start. Yugoslavia’s dictator Josep Tito allowed a more liberal form of Communism than other eastern European states. While this openness to the world made Yugoslav socialism more bearable than most, it also saw the country rack up large debts it eventually couldn’t service. The resulting crisis gave nationalist leaders room to build up support.
BiH is in no such crisis situation now, nor is it even close, either politically or economically. However, the continued existence of peace in the multi-ethnic state is partly dependent upon its ability to provide a solid economy. The country must push forward with reforms to boost its productive base. Some efforts have already been made, such as the 2015 labour market reforms, while, as Sharon Fisher, an economist at HIS told European CEO: “Bosnian GDP did strengthen in 2015, thanks to rising manufacturing, construction, agriculture, and retail trade.” At the same time, public debts are still moderate, although they have accelerated in the past few years. Overall, the country must look ahead, ensuring it has an adequate industrial base to rely upon, particularly as it increasingly turns to bond markets.