Abstract
Bosnia-Herzegovina, started on the long road to Economic Recovery in December 14,
1995 with the signing of the Dayton Peace Accord. Since then, Macro Economics
policies have directly and indirectly affected living standards, and the extent of poverty
and inequality. Macro Economic performance and its links to employment, shows that the
key problems in translating growth into poverty reduction, are related to a poor business
environment. The private sector can deliver more for the poor than it currently does in
Bosnia-Herzegovina.
Bosnia-Herzegovina’s Long Road to Economic Recovery
An Assessment of Growth, Employment, and Business Environment Since 1995
Economic trends since the end of the Bosnian civil war from 1992-1995, that
was started over the fact that the Orthodox Serbs, lead by Slobodan Milosevic, wanted to
create more Serb areas in the country, has been strongly linked to external assistance.
Following the signing of the Dayton Peace Accords, on December 14, 1995, there was an
initial spurt of reconstruction and strong growth. “Economic Strategy was based on strict
adherence to a Currency Board arrangement, prudent fiscal management and access to
large-scale external assistance on concessional terms, such as the need to reform its
commercial legislation, and strengthen the rule of law, and establish an effective and
impartial institutional framework”. [1] These phases were followed by a second period
characterized by the consolidation of stabilization, moderately high growth rates and
important initial reforms. By 2000, however, the economy seemed to have entered a
period of sharp deceleration of growth. “After leveling off at 10 percent in 1998 and
1999, real Gross Domestic Product (GDP) growth dropped to about 5 percent in 2001,
with the Former Bosnia-Herzegovina’s (FbiH’s) GDP slowing to 4 percent in 2001 from
7 percent the previous year and the Repulika Srpska (RS) officially measured GDP
shrinking by 1.9 percent” [2] in both years.
-Kaufman, Daniel and Aleksander Kaliberda. 1996. “An Unofficial Analysis of Economies in transition: An Empirical Framework and lessons for policy.” Harvard institute for international development: Cambridge, MA. Development discussion Paper, p 558. [1]
-World Bank (2000d) “Making Transition Work for Everyone” [2]
In line with large inflows of aid and remittances that covered huge foreign trade
deficits, consumption were constantly well above GDP over the whole period. There is
still no National Accounts Data for Bosnia-Herzegovina (BiH), for breaking down GDP
by its components, but rough estimates suggest that the growth rates of private
consumption were comparable to overall economic growth, remaining well in excess (in
terms of GDP share) of levels observed in other countries in the region. This is very
important structural peculiarity of the BiH economy that helps to explain the context for
the outcome of poverty. The key Macro Economic problem facing BiH is that the aid
financed post conflict boom lost momentum before out put recovered to its pre-war
levels.
While the country has made progress in recovering from the war, reform efforts to
date have not been big enough to place the economy on a sustainable growth path. “Eight
years into the reconstruction and recovery to sustainable growth remains a major
challenge”. [3] Private investment and foreign direct investment have been inhibited by
concerns over political risks, the hostile business environment, and infrastructure
bottlenecks. The export sector in particular has not played a major role in the recovery
process and it is still at the early stage of revitalization and adjustment to new markets
and demands.
-UNDP (2002) Human Development Report: Bosnia and Herzegovina. UNDPO Office of Bosnia and Herzegovina and Economics Institute, Sarajevo 2002. [3]
Employment
Employment in the formal (registered) sector of BiH is substantially below its
pre-war level. “In 1997, it was 575 thousand, or only 59 percent of the comparable 1991
level” [4]. Since 1997, the growth of formal employment has been “anemic”: in FBiH, it
has been slowly increasing so that 2001 it exceeded its 1997 level by 9 percent, however,
the formal sector employment in RS actually fell after 1998. In 2001, 407 thousand
workers were employed in the FbiH, and 220 thousand in the RS. The Living Standards
Measurement Study (LSMS) estimate of total employment in 2001 is 1 million, which is
24 thousand more than the formal sector employment in 1991. It is likely that the
informal economy has increased in the post-war period, but not undoubtedly it was also
significant in 1991. We can therefore conclude that although the reduction in overall
employment exaggerates the reduction in overall employment, the latter must
nonetheless, be very significant. “Such poor performance can be explained by poor initial
conditions” [5], and partly by conflict, but the key source of the problem has been the
unimpressive record of private sector employment growth.
By the end of 2000 half of all those employed in the economy including informal
sector workers, unpaid family workers, etc. were in the public sector, slightly higher than
that in almost all countries in transition. The benefits of recovery have been accruing
mostly to those employed in the formal economy, dominated by the formal public sector.
And, as the World Bank Labor Market Study (2003) has shown, job mobility into and out
of this sector has been very slow.
-Federal Office of statistics, Sarajevo Statistical Yearbook of the Republic of BiH 1992, [4], [5]. These included the high levels of labor hoarding that were prevalent before and after the war, (largely politically driven) and in favor of industrial structure compared to other transition economies of central Europe.
Comparing the profiles of public sector workers based on pension fund records,
the study finds that most jobs are taken by the same people all thru the studied period
(1991-99). During the 1997-99 period of very rapid growth job flow intensity in larger
Bosnian enterprises were very modest.
The overall rate of job creation in agricultural, construction, and manufacturing
was a mere 4.2 percent, the job destruction rate was 5.3 percent, and measures of
enterprise restructuring were also quite low, the gross job reallocation rate was 7.8
percent. The rates were even smaller for enterprises with more than 100 workers, putting
Bosnia behind other transitions economies in job flow dynamics. Small and medium
enterprises were the key source of new jobs. According to the Labor Market Study,
enterprises with less than 25 workers were the only ones that created new jobs in the
period 1997-99, however, other formal sector forms were either not creating new jobs, or
were not destroyers of jobs. In terms of the role of small and medium enterprises in total
employment, BiH is similar to other countries in transition.
Self-employment is very important role in providing jobs to workers in transition
economies is self employment. Non-agricultural self-employment in BiH lags behind
several Central and Eastern Europe (CEE) transition economies, suggesting that the
potential of this sector is still underdeveloped. And we shall see there are important
barriers inhibiting the development of self-employment in BiH. But this factor in itself
cannot explain a huge difference in employment rates between BiH and other countries,
nor its weak employment generation record over the last several years, however, it
reflects the generally poor state of the business climate BiH.
Wage setting mechanisms have contributed to very slow employment creation and
limited distribution of the benefits of growth. Despite strong growth of wages in recent
years, earnings per worker are still below what is needed for a family with children.
Nominal average net wages roughly doubled between 1997 and 2001. But the “average
wage of 400 Konvertible Marka (KM) per month will only bring 1200 KM per person per
year for a family of four, which is insufficient to raise it above poverty line, which is
currently 1263KM a year for a family of four”[6].
To understand how poverty is related to economic growth and productivity,
I examined the changes in poverty rates across employment sectors over time. In fact, at
any given point in time, a high poverty rate associated with one sector of employment
does not mean that working in that sector is a cause of poverty. In fact, the opposite may
be true, however, the sector may be offering income earning opportunities in difficult
times for the most under privileged.
-UNDP/Economic Institute Sarajevo, “Human Development Report 2001, Bosnia and Herzegovina”, p 20. [6].
While the LSMS and Community Information and Epidemidogical Technologies
(CIET) surveys are not comparable; we can roughly compare the sector poverty rates in
1997 and 2001 to seek some insights into stability of the poverty profile. One of the most
striking results of this rough comparison is a significant change in sectored poverty rates.
Bisogno and Chong (2002) find that the public enterprise employees have the highest
poverty rates of all employment groups, they as well constitute more than 50 percent of
all the poor. This striking result is not confirmed in the LSMS data, which indicate that
the public sector employees have the lowest poverty rates. But on the other hand, I did
not find that the position of workers in state owned enterprises have improved.
Business Environment
Some recent progress with structural reforms, the business environment in BiH
remains weak and unable to attract desperately needed private investment. Several studies
agree, that overly complex and costly government structures and regulations, coupled
with a lack of transparency, unpredictability and high costs have led to many prospective
investors to consider the risk of doing business in BiH are too high.
A Wall Street Journal Survey of leading economist ranked BiH’s investment
climate “19th among the 27 countries covered (between Amernia and Moldova); 18th for
business ethics (just ahead of Russia and Ukraine); 21st for integration into the world
economy (behind Ukraine and Azerbagan), BiH’s own assessment” [7] ranked BiH
lowest among 59 countries on most measures of competitiveness, such as openness,
governance, finance, infrastructure, technology, management, labor and civil institutions
-wall Street Journal’s Central European Economic Review, November 1999
Some progress has been achieved recently in creating the infrastructure necessary
for privatizing large state enterprises. The FBiH has made significant progress in the area
of bank privatization. In both entities “payment bureaus” have been replaced by a
commercial bank-based payments and clearing system. Bank regulation and supervision
has been strengthened over the past year, although procedures in place to continue to fall
short of best practices in some areas, the RS still lags behind FBiH.
Post-war employment outcomes in BiH have not kept pace with economic
growth. In addition, the economy has seen limited reallocation of labor resources.
Economic revival has resulted in simply keeping the previously employed where they
were, before the war. Little has been achieved in facilitating labor reallocation to more
productive firms and occupations. As a result the quality of employment deteriorate,
while the quality remained below the necessary threshold.
The key message from this assessment is that there is a price to pay for delaying
reforms, and the poor often pay the price. This essay strongly supports the focus of the
national Poverty Reduction Strategy Paper (PRSP), on measures that would promote a
single economic space. One of the key elements essential to the credibility of a single
economic space remains the common Central Bank and Currency Board arrangements.
But the poor also have adequate human capital to be able to benefit from improved
opportunities.
References
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Transition”. William Davidson Institute; Ann Arbor, Michigan. Working paper,
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Kaufmann, Daniel and Aleksander Kaliberda. 1996. “An Unofficial Analysis of
Economies in Transition: An Empirical Framework and Lessons for Policy”.
Harvard Institute for International Development: Cambridge, MA. Development
Discussion Paper, 558.
UNDP (2002) Human Development Report: Bosnia and Herzegovina. UNDPO office of
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World Bank (2000d) “Making Transition Work for Everyone: Poverty and Inequality in
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