UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS MASTHER`S THESIS INDUSTRIAL POLICY IN BOSNIA AND HERZEGOVINA Ljubljana, November 2017 SABINA ĆATOVIĆ AUTHORSHIP STATEMENT The undersigned Sabina Ćatović, a student at the University of Ljubljana, Faculty of Economics, (hereafter: FELU), author of this written final work of studies with the title Industrial policy in Bosnia and Herzegovina, prepared under supervision of Tjaša Redek, PhD, Associate Professor. 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Ljubljana, October 25th, 2017 Author’s signature: _________________________ TABLE OF CONTENTS INTRODUCTION ............................................................................................................... 1 1 INDUSTRIAL POLICY IN THEORY ........................................................................... 3 1.1 What is an industrial policy? ....................................................................................... 3 1.2 Different approaches to industrial policy .................................................................... 4 1.3 Role of industrial policy in developing countries ........................................................ 5 2 SOCIO-ECONOMIC DEVELOPMENT OF BOSNIA AND HERZEGOVINA ....... 6 2.1 Country overview and brief history ............................................................................. 6 2.2. Political organization of Bosnia and Herzegovina today ........................................... 7 2.3 Economic development of Bosnia and Herzegovina ................................................. 10 2.3.1 Bosnia and Herzegovina within Socialist Federal Republic of Yugoslavia ....... 10 2.3.2 Transition in Bosnia and Herzegovina ............................................................... 13 2.3.3 Development of Bosnia and Herzegovina until today ........................................ 16 2.3.3.1 GDP and other macroeconomic characteristics ........................................... 16 2.3.3.2 Labor market................................................................................................ 21 2.3.3.3 Business environment .................................................................................. 23 2.4 SWOT analysis of economic situation in BiH today ................................................. 30 2.4.1 Strengths ............................................................................................................. 30 2.4.2 Weaknesses ......................................................................................................... 31 2.4.3 Opportunities ...................................................................................................... 33 2.4.4 Threats ................................................................................................................ 34 3 INDUSTRIAL POLICY IN BOSNIA AND HERZEGOVINA .................................. 36 3.1 Main development goals ............................................................................................ 36 3.2 Industrial policy in Bosnia and Herzegovina ............................................................ 37 3.2.1 Industrial policy in the past ................................................................................ 38 3.2.2 Industrial policy now .......................................................................................... 40 3.2.2.1 Reform Agenda: public finance, taxation and fiscal sustainability ............. 42 3.2.2.2 Reform Agenda: the business climate and competitiveness ........................ 45 3.2.2.3 Reform Agenda: the labor market ............................................................... 47 3.2.2.4 Reform Agenda: social welfare and pension reform ................................... 49 3.2.2.5 Reform Agenda: rule of law and good governance ..................................... 52 3.2.2.6 Reform Agenda: public administration reform ........................................... 54 4 PROPOSALS FOR THE FUTURE .............................................................................. 55 CONCLUSION .................................................................................................................. 58 REFERENCE LIST .......................................................................................................... 60 APPENDIX ........................................................................................................................... i i LIST OF TABLES Table 1. A matrix of alternative approaches to industrial policy .......................................... 4 Table 2. Public debt as % of GDP and ranking in ex-Yugoslav countries ......................... 20 Table 3. CPI Index 2016 of ex-Yugoslav countries ............................................................ 25 Table 4. Summary of world happiness report rankings for ex-Yu countries ...................... 29 Table 5. Strengths of Bosnia and Herzegovina ................................................................... 30 Table 6. Weaknesses of Bosnia and Herzegovina ............................................................... 32 Table 7. Opportunities of Bosnia and Herzegovina ............................................................ 33 Table 8. Threats of Bosnia and Herzegovina ...................................................................... 35 Table 9. Development goals of Bosnia and Herzegovina ................................................... 36 Table 10. Overview of the industrial policy in the past ...................................................... 38 Table 11. Proposed measures of public finance taxation and fiscal sustainability reform . 43 Table 12. Proposed measures of the business climate and competitiveness reform ........... 46 Table 13. Proposed measures of the labor market reform ................................................... 47 Table 14. Proposed measures of social welfare and pension reform .................................. 50 Table 15. Proposed measures of the rule of law and good governance reform .................. 52 Table 16. Proposed measures of public administration reform ........................................... 54 Table 17. Summary of proposals for the future Bosnia and Herzegovina .......................... 57 LIST OF FIGURES Figure 1. Timeline of history of Bosnia and Herzegovina .................................................... 7 Figure 2. Administrative map of Bosnia and Herzegovina from 1995 until today ............... 7 Figure 3. Legislative and executive bodies of Bosnia and Herzegovina .............................. 9 Figure 4. GDP per capita of SFRY (1990 Int. GK$) from 1947 until 2010 ....................... 12 Figure 5. Average value of GDP pc over GDP pc of SFRY in total from 1947 until1992 . 12 Figure 6. Unemployment rates in socialist republics in SFRY from 1989 until 1990 ........ 13 Figure 7. GDP growth rates of Bosnia and Herzegovina from 1990 until 2019 ................. 16 Figure 8. Imports and exports of goods and services of BiH from 1990 until 2016 ........... 17 Figure 9. Imports and exports of BiH (as % of GDP) from 1990 until 2016 ...................... 18 Figure 10. FDI inflow and outflow of BiH from 1990 until 2016 ...................................... 19 Figure 11. Population of Bosnia and Herzegovina from 1990 until 2015 .......................... 21 Figure 12. GCI rankings of Bosnia and Herzegovina from 2004 until 2016 ...................... 23 Figure 13. GCI individual pillar values 2016-2017 for