LIU-IEI-FIL-A--10/00714--SE / . I / / / Nedim Kahvedzic Samir Losic Master thesis in Economics Department of Management and Engineering The University of Linkoping 2010 !¢≥¥≤°£¥ The state of Bosnia and Herzegovina (BiH), a developing country that once was a part of the communist Yugoslavia, is struggling to move from wartime to peacetime, to shift from a centrally controlled economy to a free market economy, and to stir from a socialist style government to a democracy. All of these processes lend themselves to great corruption. The aim with this paper, thus, is to provide a frame of reference that can be used when writing and implementing policies against corruption in BiH. This paper tries to identify the sectors in BiH that are most affected by corruption and to discuss possible causes of corruption in the country. The paper also discusses possible effects that corruption in BiH has on the country’s economic growth, how corruption can be fought in the country and how a successful reduction in corruption affects BiH’s economic growth. This work finds several flaws and weaknesses in the society of BiH. BiH faces today weak policies, weak institutions and weak penalty systems. There are strong regulations and no institutional controls. The economy is weak and leads to poverty. This paper argues that it is through these weaknesses in the society that corruption in BiH has arisen, and has consequently affected all major sectors and institutions in the country; it can be seen in the political parties, the Police and other Enforcement Structures, the Judiciary, public utilities, the Health System and the Education System. Corruption has furthermore slowed down the privatization process and is used by employers during recruitment processes to exploit citizens in need of a job. This paper also finds that corruption in BiH brings with it its own distortions as it undermines social capital by creating mistrust between various actors in the country, hinders both domestic and foreign investment, increases poverty and encourages growth of the black market. All of these distortions lead to a slowdown in the economic growth. Furthermore, this paper asserts that BiH needs help from the European Union, the Office of high Representative and possibly other international actors in the fight against corruption. They must help BiH to implement strategies that will give the leading politicians incentives to fight corruption. The paper stresses the lack of politicians’ will to fight corruption in BiH today as the biggest and most central problem in the fight against corruption. The anti- corruption program in this paper therefore emphasizes the importance of anti-corruption measures that first and foremost deal with this problem. Only when this issue is resolved can BiH move to anti-corruption strategies on national level. The anti-corruption strategies on national level themselves should contain effective government anti-corruption strategies. They should also promote anti-corruption education and secure free access to information. Finally, this work identifies probable positive effects on BiH’s economic growth if corruption is successfully fought; the country will experience higher domestic and foreign investment, the mistrust will decrease and result in higher social capital, and both poverty and the black- market activity will be reduced. 2 !¢¢≤•∂©°¥©ØÆ≥ °Æ§ °£≤ØÆπ≠≥ BiH: Bosnia and Herzegovina BiH HoR: BiH House of Representatives CCI: Center for Civic Initiatives EUSR: EU Special Representative FBiH: The Federation of Bosnia and Herzegovina HDZ: The Croatian Democratic Union HR: High Representative JASP: Judicial System Assessment Program KM: Konvertibilna Marka, KM 1 € 0.5 NGO: Non-govermental organizations OHR: Office of High Representative PDP: Party of Democratic Progress RS: Republika Srpska SAA: Stabilization and Association Agreement SBiH: Party for BiH SDA: The Bosniak Party of Democratic Action SNSD: Serb Union of Independent Social Democrats TI: Transparency International UNDP: United Nations Development Programme UNMIBH: UN mission in Bosnia and Herzegovina 3 &©ßµ≤•≥ °Æ§ ¥°¢¨•≥ Figure 2.1: Wage level and corruption ..................................................................................... 18 Figure 3.1: GDP Growth 2001-14 ............................................................................................ 28 Figure 3.2: Import and Export .................................................................................................. 29 Figure 6.1: Prisoners’ dilemma ................................................................................................ 44 Figure 6.2: The phase diagram ................................................................................................. 47 Figure 7.1: The phase diagram and the scenario 1-development ............................................. 49 Figure 7.2: The phase diagram and the scenario 2-development ............................................. 51 Figure 7.3: The corruption-output relationship.........................................................................52 Figure 9.1: The phase diagram and the scenario 1-alternative development…………………62 Figure 9.1: The phase diagram and the scenario 2-alternative development…………………64 Table 3.1: Key macroeconomic indicators 2007-10 ................................................................ 28 4 #ØÆ¥•Æ¥≥ Preface ....................................................................................................................................... 8 )Æ¥≤اµ£¥©ØÆ 1.1 The problematization of corruption ...................................................................................... 9 1.2 Problem formulation .......................................................................................................... 10 1.3 Aim ..................................................................................................................................... 10 1.4 Method ............................................................................................................................... 11 1.4.1 Methodology ........................................................................................................... 11 1.4.2 The empirical research ............................................................................................ 12 1.4.3 Method criticism ..................................................................................................... 12 1.5 Disposition ......................................................................................................................... 13 0°≤¥ /.% 0≤•∂©Øµ≥ ≤•≥•°≤£® 2.1 Causes of corruption ........................................................................................................... 15 2.1.1 Political factors ........................................................................................................ 15 2.1.2 Economical factors .................................................................................................. 17 2.2 Economic consequences of corruption ............................................................................... 19 2.2.1 Size and composition of government expenditure .................................................. 19 2.2.2 Domestic investment ............................................................................................... 20 2.2.3 Corruption and the underground economy .............................................................. 21 2.2.4 Urban bias, poverty and other consequences .......................................................... 21 &°£¥≥ °¢Øµ¥ "©( 3.1 The history of BiH .............................................................................................................. 23 3.2 The political situation today ............................................................................................... 25 3.3 The economical development ............................................................................................. 27 4®• £Ø≤≤µ∞¥©ØÆ ©Æ "©( ! 4.1 Politicians, governing and institutions ............................................................................... 30 4.1.1 Corruption in political parties ................................................................................. 31 5 4.1.2 Corruption in the Police and other Enforcement Structures ................................... 31 4.1.3 Corruption in the Judiciary ...................................................................................... 32 4.1.4 Corruption in public utilities ................................................................................... 32 4.1.5 Corruption in the privatization process ................................................................... 33 4.2 Corruption in the Public Sector Service Delivery .............................................................. 33 4.2.1 Corruption in the Health System ............................................................................. 33 4.2.2 Corruption in the Education System ....................................................................... 34 4.3 Employment, salaries and the standard of living ............................................................... 35 #°µ≥•≥ ض £Ø≤≤µ∞¥©ØÆ ©Æ "©( $ 5.1 Root Causes ........................................................................................................................ 37 5.2 Causes due to the political atmosphere .............................................................................