Bosnia and Herzegovina After Five Years of Reconstruction
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WIIW Current Analyses and Country Profiles No. 15 October 2001 (Update) ATS 600.-- / EUR 43.60 Josef Pöschl Bosnia and Herzegovina after Five Years of Reconstruction Josef Pöschl Bosnia and Herzegovina after Five Years of Josef Pöschl is WIIW research economist. Reconstruction Abstract Even under favourable conditions economic recovery in Bosnia-Herzegovina (BiH) will take time. In economic terms, the country will probably remain on the track it is already running down. A miracle in terms of GDP, income and employment growth is unlikely, given that no change in the handling of economic matters is in sight. It would be misguided to hope that recent developments such as the abolition of the former accounting system and the ongoing deregulation of companies will yield swift gains. On the contrary, both programmes will lead to disruptions in the short term, the achievement of positive results will take a number of years. The issue of kick-starting economic recovery in the Balkans remains very much an item on the agenda. Over the next few years, the experience gained in Bosnia and Herzegovina should benefit the region as a whole. Keywords: Bosnia, BiH, economy, reconstruction, aid, Balkan, business, investment, banking JEL classification: O52, K42, P30 Contents A brief overview...................................................................................................................1 Fundamental improvements based on foreign support and guidance.....................................1 Discomfort persists..........................................................................................................2 Statistical data – a reflection of reality.....................................................................................4 A warning concerning the reliability of BiH statistical data.....................................................4 Demographic situation.....................................................................................................5 Economic data...............................................................................................................6 Income and impoverishment .......................................................................................... 12 Reasons for industry's failure to recover ............................................................................... 14 Rupture of links on the input side .................................................................................... 14 Restricted market access on the output side..................................................................... 15 A distorted financial sector ............................................................................................. 16 Tax in excess of the tax base......................................................................................... 16 Bureaucratic hurdles ..................................................................................................... 17 Institutional obstacles to economic growth........................................................................ 18 Discouraging conditions for foreign investors .................................................................... 19 Insufficient output quality................................................................................................ 19 Political roadblocks to economic progress............................................................................. 20 Dayton 1995: a common starting point in different directions............................................... 20 A post-war game with arcane rules . ........................................................................... 22 . and unwilling players................................................................................................ 23 The elections in November 2000: disappointing results?.................................................... 24 The problem of legality – another roadblock to economic progress........................................... 29 The law in limbo: an in-built feature ................................................................................. 29 A key issue: reinforcement of the rights of individuals ........................................................ 30 Privatization...................................................................................................................... 31 An absolute priority from the very outset, yet no major gains in the manufacturing sector to date.......................................................................................... 31 A local lack of willing...................................................................................................... 37 Taking the easy route?.................................................................................................. 39 Better preconditions for privatization in the near future? ..................................................... 40 The new payment system: functional, but no panacea............................................................ 44 New developments in the banking sector.............................................................................. 48 Conclusions...................................................................................................................... 52 Outlook ............................................................................................................................ 55 Ethnocentric concepts could move backstage................................................................... 55 Rapid economic progress in sight?.................................................................................. 57 Appendix.......................................................................................................................... 60 List of Tables Table 1: BiH: absorption of domestic and foreign products ........................................................7 Table 2: BiH: current account components in % of GDP ...........................................................8 Table 3: Sector composition of GDP .................................................................................... 11 Table 4: Impoverishment indicators...................................................................................... 13 Table 5: FBiH: corporate sector privatization ......................................................................... 34 Table 6: Forecasts: BiH real GDP growth rates 2000 to 2003.................................................. 59 Table A/1: Bosnia and Herzegovina: selected economic indicators .......................................... 60 Josef Pöschl Bosnia and Herzegovina after five years of reconstruction Update October 2001* A brief overview Fundamental improvements based on foreign support and guidance By the end of 1995, with the cessation of hostilities in Bosnia-Herzegovina (BiH), several hundred thousand people had perished. The greater majority of those who had lived in BiH before the war no longer resided in their pre-war homes. They had abandoned their houses or flats for a variety of reasons: direct violence, massive threats or intolerable living conditions. About one million people had fled the country – some left for other parts of Former Yugoslavia and the more fortunate headed for countries in the West. A similar number had gone into emigration within the country itself: so-called displaced persons. Many of those that remained in the country barely subsisted at best. Most were left without any means of survival and were close to starvation. They relied on external humanitarian aid, relatives living abroad and international organizations. The economy was in a disastrous state. Enormous damage, if not complete destruction had been inflicted on residential buildings, workshops, factories, railways, roads, bridges, telephone and electricity lines, water mains and means of transport. The country had split into small bailiwicks under the tutelage of different ethnic groups. The borders between these areas were almost completely closed – at least to the local population. The all-important divisive element was a person’s ethnic background, something that before the war had been of only minor importance to many people or at least had not hindered interaction in any great measure. To a far greater degree than the destruction of infrastructure and physic al assets, this radical isolation of minor territories was a stranglehold on production activities. In most areas production had shut down entirely or was merely kept at subsistence level. Today, five years on, the picture has changed. The (violent) crime rate is low by international standards. Part of the population is re-engaged in economic activities. Many houses have undergone at least partial repair. Contact between people of different ethnic backgrounds is becoming more frequent. These ties include mutual trading and joint production projects. Throughout the country people use the local currency; they even fly the country’s flag and their cars bear BiH number plates. They can travel all over the country. Traffic jams have become a common feature in larger towns and on main roads. For the most part, the infrastructure has been rebuilt and public utilities are in supply once * There were several reasons for revising the original version of this study: new data, new literature, e.g. from the EBRD and the International Crisis Group, and last but not least critical comments I received from a number of experts. For an author, there is nothing