ACHIEVEMENTS AND DIFFICULTIES
Summary of a report prepared by Mersiha Hukic (Sarajevo) on behalf of the the Center for Balanced Development (CBD) (Sterling, Va., USA)
Vienna, 9 February
As part of the efforts to set the country back on track, numerous activities are being undertaken in order to bring about renewal of the economy and to foster growth. Nonetheless, at the beginning of the new millennium, Bosnia and Herzegovina is still facing tremendous challenges, including a high unemployment rate, slow pace in extending economic recovery beyond reconstruction activities, and a high number of refugees and internally displaced families.
The most pressing problem, however, is how to maintain the current level of economic spending and social programs, given the fact that external financial support seems to be gradually waning. Moreover, the transition from a centrally planned to a market-driven economy requires strengthening private enterprises and empowering the institutions of civil society, as well as establishing social net schemes to save the most vulnerable from falling into destitution.
Even though much of the development efforts are focused onreviving the economy, the reality is that these efforts are either being implemented slower than expected or that they are conditioned by the achievements of other non-economic factors that do not receive high priority on the rebuilding agenda. Through external financial assistance and internal reform, Bosnia-Herzegovina has been able to make significant progress. A full recovery is, though, still a distant goal.
The effects of the 1992-1995 war
The current economic conditions in the country are a cruel outcome of the devastating 4-year long war. Prior to the war, Bosnia-Herzegovina was among the lower income republics of the Socialist Federal Republic of Yugoslavia (SFRY). Its GDP was estimated at US$10.6 billion, or about US$2,429 per capita. The economy was industrially diversified. Heavy industry, energy distribution, mining and metallurgy, as well as textiles, leather and machinery counted for about half of the output and employment. In the service sector, the most developed was the civil engineering sector. Overall labor force was highly educated, with a capable entrepreneurial class.
The end of the war brought about devastating figures. The GDP fell to less than US$500 per capita, which was about 20% of the pre-war level. Total output collapsed to 10-30% of pre-war production. Most of the existing physical capital was destroyed. Instead of going hand in hand with other central European transition economies, the economy suffered a huge setback.
The human loss was immense. Half of the pre-war 4.5 million people were displaced, a quarter of a million people lost their lives, and the social fabric of the Bosnian people was profoundly disturbed and forever altered. The end of the war has, indeed, brought along a complex situation for Bosnians. Not only did they have to find ways to heal the physical and psychological wounds of the war, but they also had to move very fast towards the transition from a centrally planned to a market-driven economy.
The neighboring countries are far ahead in the transition process. No other former SFRY republic suffered, or even came close to, the level of destruction and economic setbacks as Bosnia-Herzegovina. Bosnia has come a long way and is now on the second lowest level among central European countries (Slovenia, Czech Republic, Hungary, Croatia, Poland) in terms of GDP.
Estimated damage is approximately four to ten times higher than US$ 5.1 billion, which is the financial projection for reconstructing the country as per the three to four year Priority Reconstruction and Recovery Program endorsed by the international donors.
The Bosnian economy in 1999 and projection
for the future
The post-war period has brought a significant improvement in the economic recovery and reconstruction. The average annual growth rate from the end of war until the end of 1998 of about 40% needs to be taken with caution. While the GDP has increased to US$ 4.1billion, this still represents a mere 40% of the pre-war GDP level. The rate of unemployment was reduced to 35% in 1998, from 70% -80% a couple of years earlier.
The Priority Reconstruction Program has been directing the funds in the form of credit lines to small- and medium-sized enterprises and entrepreneurs, which boosted the activities of private service and light industry. However, private investments are not nearly enough to boost or even sustain current economic growth.
The main trading partner of the Federation in 1998 was Italy, with about 32% of the exports and 45% of imports.
Even before the war Bosnia-Herzegovina had a significant unemployment rate. The war has actually aggravated an already difficult situation. Official post-war unemployment reached 70 to 80% level.
While the current 35% unemployment rate is still very high, the reduction of the unemployment level was generally due to the creation of jobs in the growing public administration, construction industry and international organizations. The majority of the unemployed people are displaced persons and refugees, while women in female-headed households have lower employment rate and lower wages.
Unfortunately, these numbers might be even greater in reality, since many of the workers are on waiting lists, and do little or no work at all. In 1998, average monthly wages were KM357 (DEM357), while the minimum wages were KM200 (DEM200). The unattractive employment profile in Bosnia-Herzegovina had caused many young and educated people to leave the country and search for jobs elsewhere, as they saw no job opportunities in the country.
From June 1996 to December 1998, a total of 555 small public projects were implemented. Being labor-intensive, they eased a difficult employment situation. Most of the activities included repair of roads, electrical lines, reforestation and other activities related to war damage. This short-term employment of the people immediately after the war was quite helpful in reducing financial problems.
Privatization is one of the pillars of economic reform in Bosnia-Herzegovina and is viewed as vital to the success of the reconstruction program. Among other things, privatization also strives to bring greater transparency to corporate ownership and to introduce incentives to an economy still strangled by its socialist heritage.
The process of the privatization was seriously obstructed by power politics, which delayed the necessary legislation process. The state-level privatization law was enacted in 1998. The privatization of the assets is done by the combination of cash and vouchers, distributed since May 1999, a year later than planned. Bank privatization in both entities is expected to be completed during the year 2000. The Bosnian state privatization law requires companies and banks to be audited prior to privatization.
Because much of the economic reconstruction hinges on private enterprise, the short- and medium-term outcome might be very modest indeed. Taking into consideration the war damage and that more than 60% of the people live below the poverty line, there is a danger that the war profiteers and political elites would dominate the privatization process.
Capital market development
Paramount in the World Bank's and IMF's efforts to create a market economy is the development of the capital market in Bosnia. Based on the experience of other Eastern European countries, a master plan was developed. One of its features is the creation of regulatory agencies that will be in place before the market is established.
As a result, today there are capital market institutions such as the Securities Commission and Share Registry, established to closely monitor and support the privatization process. A public education program is being implemented to inform the public about the privatization process. Further, intensive training in regard to the rules of a free market economy is currently underway to prepare the future participants of the capital market, such as brokers, dealers, and SROs. The establishment of the Stock Exchange is also in progress. Depending on the completion of the privatization, the projection for the functioning of the capital market is set for the year 2001.
Taking into consideration the effects of the war, the large number of refugees and displaced persons, demobilized soldiers and young people with incomplete education, the economic prospects hold many troublesome issues, which need to be resolved urgently. Still, the outlook is far from being gloomy. The hard work of the Bosnian people and the support extended by the international community hold strings of hope. It remains to be seen, however, whether economic achievements can be matched by meaningful development on the social and political planes.