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Sarajevo School of Science and Technology May, 2009
Economic Development and Transition
Economic Transition as a part of European Business Position of Bosnia and Herzegovina through EU integrations and transition
Professor: Prof. Boris Tihi Assistant: Jasmina Ahmetbašić
Aida Buljubašić, Sarajevo School of Science and Technology
Student: Aida Buljubašić
Sarajevo School of Science and Technology 2 . transmitting it to position. Even though the transition process in Bosnia and Herzegovina is on a very high level of complexity. on its way to EU integrations and the transition process. this paper concludes with recommendations of possible solutions. this paper seeks to give a clear picture of the current Aida Buljubašić. Through a brief account of the history of economic transition and a process of sustainable development in Central Eastern Europe Countries.Economic Development and Transition Abstract The aim of this paper was to research and describe the process of economic transition as an important part of European Business. Bosnia and Herzegovina’s till today’s structure. All researched data is compared with current situation and position of Bosnia and Herzegovina.
.2 Introduction…………………………………………………………………………….10 General government balance………………………………………..11 Reference………………………………………………………………………………..………………………………………………….9 International transactions…………………………………………………9 Prices………………………………………………………………………..9 Monetary and financial indicators………………………………………....6 Communication form the European Institutions to Bosnia and Herzegovina……….10 Conclusion……...……………………………………………………………………….....4 The process of economic transition in Bosnia and Herzegovina…………………….7 Progress in the process of economic transition in Bosnia and Herzegovina…………8 Economic and political developments……………………………………..8 Output and demand….8 Labor market………………………………………………………………...13 Aida Buljubašić.……..5 The European Partnership…………………………………………………………….. Sarajevo School of Science and Technology 3 ....Economic Development and Transition Contents Abstract………………………………………………………………………………….
Based on this fact. Aida Buljubašić. for different purposes. Sarajevo School of Science and Technology 4 . should not be underestimated. especially during the early years of transition when most economies went through a deep recession. it is important to keep in mind that the damage done during the hard times. there are still a number of challenges to be addressed. with the principles of democracy. The main characteristics of transition process are the changing and creating of institutions. mainly among younger people. which is changing from a centrally planned economy to a free market economy. Has the transition been a success? At the moment it is impossible to give a definitive answer. transition process is not over. not only to material well-being but also to general levels of trust and subjective well-being. changes in the role of the state. Even in the most advanced countries of the region. particularly private enterprises. More fundamentally. At last. a judgment about whether transition has worked must involve more than economic issues. The most important positive fact is the sense of optimism for the future. It is true that many people suffered severe hardship. To promote transition it is necessary to do more on convincing people of the benefits of transition and to restore trust in public institutions and in each other. Even though this positive signal. markets and independent financial institutions. for transition to be declared a success it have to lead to a measurable improvement in people’s lives.Economic Development and Transition Introduction Brief definitions of a process called economic transition and its importance as a part of European Business During last two decades a term transition or transition process is used many times in different ways. The process of changes started since the collapse of Communism in the late 1980s and early 1990s has directly affected a quarter of the world’s population and has altered the social and political landscape far beyond the countries immediately affected. to make inquiries about current and future position. such as income. the creation of fundamentally different governmental institutions and the promotion of private-owned enterprises. but at the same time all of them imply the main point. pluralism and the market economy deeply implanted in societies. there is various definition of transition process. One of the aims of this paper is to bring facts about transition process in Bosnia and Herzegovina. trade or employment.
Economic stability as a requirement for the normalization of the social status of the population. This is the reason why the term ‘transition’ implies changes in the sphere of social relations. more precisely. trade. which started at that point. is dependent on the establishment of normal inter-state relations.1999) BiH has experienced high GDP growth rates but the annual growth rates slowed down to an average of 5% between 2000 and Aida Buljubašić. at the lowest threshold of social tolerance. in the legislative. In addition to what seems common for all the countries in transition. which is at present extremely poor or. in the ownership basis. the Federation is further decentralized consisting of ten cantons. in the function and nature of the state administration and in the functioning of ordinary people.Economic Development and Transition The process of economic transition in Bosnia and Herzegovina Since the collapse of the former Yugoslavia in 1992 Bosnia and Herzegovina (BiH). Current constitutional structure is set up of two state-like entities. This means that BiH is highly decentralized. The war ended 1995. the Federation of BiH (Federation). constitutional organization. and the Republika Srpska (RS). a huge part of population became refuges. but at the same time it was impossible to continue with process of transition. At its very beginning it was forced to impediment it because of the war. Bosnia and Herzegovina started its transition process since 1992. Bosnia and Herzegovina is faced with the need simultaneously to establish normal relations with its neighbors and with a radically new internal organization in accordance with the intentions and basic prospects predicted by the Peace Agreement. territorial integrity and a functional quality for Bosnia and Herzegovina as an independent state. political and economic system. it would be natural for economic links to be congruent with existing presuppositions. by signing the Dayton Peace Agreement established a new constitutional order which defines the responsibilities of BiH in future recovery of the country. There were a huge number of issues which needed to solve. During the first years after the war (1996 . the lack of human rights. a highly regarded part of population was killed. because Bosnia and Herzegovina was devastated in every sense. Sarajevo School of Science and Technology 5 . the possibilities of production. in regards of that certain conditions were necessity. such as the normalization of the political situation. 1995. Economy was destroyed. In the light of the economy and the entire infrastructure of the country being linked to the countries of the former common state. the necessity of interconnectedness. and District Brcko. the rights and freedoms they are entitled to and which they will be able to realize under the new democratic circumstances. The normalization of relations with the neighboring countries is not only a territorial and security issue but also a socio-economic one. The process of introducing changes in Bosnia and Herzegovina is very complex and contains the elements of the implementation of the peace and the sweeping away of the results of the war. have experienced massive economic and political changes.
But constitutional elements established by the Dayton/Paris peace agreement have been challenged by key political leaders in both entities. Aida Buljubašić. the fast implementation of enacted laws is certainly necessary in order to achieve concrete improvements. p. (COM (2008) 674 final. while the rise in industrial production in the RS mainly came from mining (European Commission 2004. Although a large number of laws have been adopted. particularly due to an increase of the industrial and agricultural production. The unemployment rate at the end of the year 2003 was at an – at least to OECD standards – incredibly high value of 42%. confirmed by the signing of the Stabilization and Association Agreement. The consolidated budget moved from a deficit of 3. Bosnia and Herzegovina began implementing the interim agreement in July.3% of GDP in 2001 to a surplus of 1. estimates including employment in the grey economy point to an actually lower unemployment rate of around 20% in 2003 which came down from 23% in 2001. Major achievements have been reached with respect to the establishment of the Indirect Tax Authority. a further significant adjustment took place in 2004. pg. as well as reforms improving the business environment and budget control. Structural reforms are proceeding.5%). Sarajevo School of Science and Technology 6 . 5). the increase was mainly attributed to growth in the processing industry as well as in the utilities. The signing of the Stabilization and Association Agreement (SAA) with Bosnia and Herzegovina confirmed the EU’s commitment to the country’s European future. Consensus remains weak on key reform priorities. with an unemployment rate of 44% in the Federation and 37% in RS. The European Partnership Bosnia and Herzegovina at the moment is in the contract relationship with the European Union. made by the Central Bank.46). However. New estimates of the size of the grey economy. Following several years of progressive fiscal consolidation.Economic Development and Transition 2002. although progress has been unevenly distributed among different areas of potential reforms. Although the slowdown of the growth rates continued in 2003 (3%). The main reason for the slowdown has been the limited capacity of BiH to substitute the aid driven growth with mobilization of domestic sources of growth. and EU related reforms have stagnated.8% in 2004. the economic rebound initiated the increase of the GDP growth rates in 2004 (6%) and 2005 (5. which will unify indirect taxation across the entities. In the Federation. suggest that the grey economy roughly corresponds to 40% of official GDP figures.
Economic Development and Transition Bosnia and Herzegovina is a potential candidate for EU membership. the Council adopted an updated European Partnership for Bosnia and Herzegovina in February 2008. – reviews Bosnia and Herzegovina's capacity to implement European standards. – analyses the situation in Bosnia and Herzegovina on the basis of the economic criteria for membership. At the same time some constitutional elements established by the Dayton peace agreement have been frequently challenged by some of the key political leaders. This approach ensures equal treatment across all reports and permits an objective assessment. i. – analyses the situation in Bosnia and Herzegovina in terms of the political criteria for membership. in line with a Stabilisation and Association Agreement and the European Partnership priorities. and conflict prevention. to improve links with vital transport and energy routes. 6) Communication form the European Institutions to Bosnia and Herzegovina Communication in the form of the Progress report has started since March 2002. As a rule. and to increase the EU's weight in the world. which focuses on trade-related areas.e. A shared vision on the direction of the country is very important and highly necessary for creating more functional and efficient state structures. The Interim Agreement. Sarajevo School of Science and Technology 7 . has been in force since July 2008. legislation or measures which are being prepared or awaiting parliamentary approval have not been taken into account. It has helped to increase prosperity and growth opportunities. security. also by the bodies set up by the Interim Agreement. (COM(2008) 674 final pg. institutions and for speaking with one voice on EU and international matters. (SEC(2008) 2693 final pg. Progress on these reform priorities is encouraged and monitored by Reform Process Monitoring (RPM) meetings and following the signing of the SAA. Following a proposal from the Commission. This progress report generally follows the same structure: – briefly describes relations between Bosnia and Herzegovina and the Union.2) The EU provides guidance to the authorities of Bosnia and Herzegovina on reform priorities as part of the European Partnership. to gradually approximate its legislation and policies with the acquis. Enlargement is one of the EU's most powerful policy tools. It serves the EU's strategic interests in stability. when the Commission of the European Communities has reported regularly to the Council and the Parliament on progress made by the countries of the Western Balkan region. Aida Buljubašić. The first meeting of the Interim Committee was held in October 2008. legislation adopted and measures implemented. Progress is measured on the basis of decisions taken. Eight RPM meetings have been held since the last progress report was published. including two Economic Dialogue meetings.
Economic Development and Transition The report is based on many sources. capital goods and nondurable consumer goods contributed positively to the annual growth rate of industrial Aida Buljubašić. among other criteria on the implementation of the four key areas in which Bosnia and Herzegovina have to work and progress on its way of EU integrations and transition process: 1) Implementation of police reform in compliance with the October 2005 agreement on police restructuring. Progress in the process of economic transition in Bosnia and Herzegovina Economic and political developments 2008 progress report for Bosnia and Herzegovina: the country had made some. the country's most important export sectors. these include contributions from the government of Bosnia and Herzegovina and from the Member States. As usual. The Commission draws detailed conclusions regarding Bosnia and Herzegovina in its separate communication on enlargement2. Sarajevo School of Science and Technology 8 . energy. have recently announced output cuts and lay-offs. 2) Full co-operation with the ICTY. Every report made by European Institutions is based. Output and demand The global economic slowdown has started to reveal an impact on BiH: The metal and automobile industries. higher inflation and expansionary fiscal policy. based on the technical analysis contained in this report. and 4) Development of the legislative framework and administrative capacity to allow for proper implementation of the SAA. Growth rates of industrial production are still quite optimistic In the FBiH. The wood processing industry and the service sector report a worsening of performance. European Parliament report1 and information from various international and non-governmental organisations. progress towards becoming a functioning market economy and that the macroeconomic stability had weakened as a result of worsening trade balance. although uneven. 3) Adoption and implementation of all necessary public broadcasting legislation. A joint report of the EU High Representative for the Common Foreign and Security Policy Solana and the Commissioner for Enlargement Rehn on the EU's policy in BiH: The report calls on BiH to show more political responsibility and greater ownership of the reform process to advance to the next stages of European integration.
International transactions During the first three quarters of 2008 the current account deficit increased by 48. Employment increased by 4.5% to 5.8% year-on-year during the first three quarters of 2008. Labor market The consolidated national official rate of registered unemployment further decreased from 42.5% in November. Reflecting global tendencies.4% to 6. while the increase in food prices fell from 8. Most remaining commodity groups also reported slowing price increases. this is the result of the high basis and may not be interpreted as a withdrawal of investors from BiH. after a year of increasing rates. In November. the opposite scenario was observed in other investments which grew from a negative base to EUR 818million during the first three quarters of 2008.1% higher than in the same month of the previous year. The overall trend is similar in both entities: Annual consumer price inflation in November stood at 6.2%. while it decreased in capital goods. Prices Since August 2008.1% in the RS. Wages have grown rapidly in 2008. energy and intermediate goods increased. Sarajevo School of Science and Technology 9 . Improving income and current transfer accounts partially offset the effect of the worsening trade balance.9% (October data). The annual growth rate of transport prices came down from 11. In the RS the production of both durable and non-durable consumer goods.7% in October to 3% in November. annual end-of-period inflation rates have been declining from 9.9% in December 2007 to 40. This decline was caused by an increasing trade deficit during that period when import growth was persistently above export growth.Economic Development and Transition production from January to November 2008.3% year-on-year. nominal net wages in the RS were 30. Gross wages increased by roughly the same percentages in both entities. this moderation was caused by the slowdown in transport and food prices. Net FDI declined sharply by 76. while a decline was observed for intermediate goods and durable consumer goods.7% to an estimate 41% of GDP. Figures for 2008 suggest that the volume of FDI will be in line again with the years 2004-2006. so it widened by 21. Aida Buljubašić.3% in October2008. In the FBiH they increased by 14.1% in the first ten months of 2008 as compared to the same period 2007.0% in the Federation and 5. In the meantime.
8% year-on year at end-November. Both entity budgets are in line with the provisions of the Fiscal Council of a maximum increase of 6% as compared to 2008. Aida Buljubašić. though still revealing a positive position. Since the State Parliament budget committee proposed certain amendments to the draft 2009 budget in order to harmonize it with a decision of the National Fiscal Council limiting its annual increase to 12%.Economic Development and Transition Monetary and financial indicators Tensions in the financial market led to a withdrawal of deposits by the population and liquidity shortages in the banking system.6% year-on-year in the first three quarters of 2008 to EUR 94 million. General government balance Government Finance Statistics revealed a drop in the surplus of the consolidated budget by 76. Sarajevo School of Science and Technology 10 . the Council of Ministers had to define provisional financing for the first quarter 2009. it was not adopted before year end. The Central Bank of Bosnia and Herzegovina (CBBH) and the government have introduced a number of measures in order to strengthen and restore confidence in the Bosnian currency board arrangement and national financial markets. amounting to a quarter of the 2008 budget. Therefore. Liquidity indicators declined slightly. Provided cash to the banking system and lowered the minimum reserve requirement rate from 18% to 14% in October. Credit growth slowed down to 24.
particularly private eneterprises. • Dissatisfaction with life varies by age and income. Sarajevo School of Science and Technology 11 . and little difference among income groups regarding access to public services. For transition to be declared a success it have to lead to a measurable improvement in people’s lives. • Corruption is perceived to be widespread but the frequency of “irregular payments” to public officials is generally low. changes in the role of the state. pluralism and the market economy deeply implanted in societies. with the principles of democracy. Has the transition been a success? At the moment it is impossible to give a definitive answer. transition process is not over. there is strong dissatisfaction among older people and in the lowerincome group whereas the young and richer are in general much happier. The process of changes started since the collapse of Communism in the late 1980s and early 1990s has directly affected a quarter of the world’s population and has altered the social and political landscape far beyond the countries immediately affected. There is a high level of distrust of public institutions and of people in general.Economic Development and Transition Conclusion The main characteristics of transition process are the changing and creating of institutions. markets and independent financial institutions. Aida Buljubašić. all those conclusions are starting with the same ending such as: • There is limited difference between urban and rural areas in terms of ownership of consumer goods. • People surveyed overwhelmingly believe that the current economic and political situation is worse than in 1989 while opinions are fairly evenly divided about whether life will be better in the future. the creation of fundamentally different governmental institutions and the promotion of private-owned enterprises. • People generally support democracy but many favour a planned economy in some circumstances over a market economy. To conclude with one of the many conclusions form different kinds of reports.
The prescribed activities include the following issues: harmonization of the domestic legislation with the EU acquis communautaire. Sarajevo School of Science and Technology 12 . The signing of the Stabilisation and Association Agreement (SAA) with Bosnia and Herzegovina confirmed the EU’s commitment to the country’s European future. and integration of the market into the regional and European market.Economic Development and Transition The main issue of BiH is the lack of legal and political basis and the will for efficient decision-making and for delegation of responsibilities and efficiency at all levels of government. reform of the tariff system. structuring of the market compatible with the relevant rules in the EU. At the same time by signing the SAA there is no doubt that BiH will adjust its legal framework to the EU standards and regulations. organization of wholesale and retail markets. Aida Buljubašić.
SEC(2008) 2693 final 5.COM(2008) 674 final 6.ECFIN Unit D-1 3.The European Bank for Reconstruction and Development Aida Buljubašić. BOSNIA AND HERZEGOVINA 2008 PROGRESS REPORT . INTERIM AGREEMENT ON TRADE AND TRADE-RELATED MATTERS BETWEEN THE EUROPEAN COMMUNITY 7. priorities and conditions contained in the European Partnership with Bosnia and Herzegovina and repealing Decision 2006/55/EC 4. COUNCIL DECISION of 18 February 2008 on the principles. EU CANDIDATE AND PRE-ACCESSION COUNTRIES ECONOMIC QUARTERLY 2008 . “Life in Transition” A survey of people’s experiences and attitudes . Council Regulation (EC) No 594/200 2.Economic Development and Transition References: 1. COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT Enlargement Strategy and Main Challenges 2008-2009 . Sarajevo School of Science and Technology 13 .