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The IMF, The World Bank, and Economic Policy in Bosnia
The IMF, The World Bank, and Economic Policy in Bosnia
David Woodward
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PREFACE 4 DILEMMAS
1 Political conditionality 27
INTRODUCTION 5 9 The Central Bank as currency board 34
3 Inter-regional inequality and transfers 38
A. POLITICAL AND ECONOMIC BACK 4 How to privatise in the federation? 43
GROUND 7 5 Free entry for foreign banks? 47
Al The war and its consequences 7 6 Trade policy 48
A2 Political structures under the Dayton 7 Labour market deregulation 50
Agreement 9 8 Cost recovery 52
A3 The pre-war economy 11 9 Employment creation and the economic
A4 Recent economic developments in the strategy 57
Former Yugoslavia 12 10 Reintegration or partition? 70
This paper was written during the first quarter excellent translation; to Indir Kurtovic for his
of 1997, on the basis of a visit to Bosnia in patience and endurance during our longer-
January of that year. Unfortunately, it has not than-expected drive from Banja Luka to
been possible to up-date the draft since. In Zagreb; and to all of Oxfam's staff in Sarajevo
view of the rapidly evolving situation, this for their exceptional friendliness and hospitali-
inevitably means that it is likely to be some- ty. I would also like to thank all those who
what dated in parts. Hopefully, it will nonethe- generously spared their time to meet me in
less be of some use in helping to understand Sarajevo and Banja Luka.
the economic issues and policy dilemmas in It should be emphasised that the views
Bosnia. expressed in the paper are those of the
I am very grateful to all those in Oxford author, and should in no way be attributed to
and Sarajevo (and in Banja Luka and Bijeljina) Oxfam.
who helped in the planning, preparation and
execution of my visit to Bosnia. I am particu- David Woodward
larly grateful to Marijana Aksin-Macak for her December 1997
Introduction
This paper is the second in a series of studies As a result of this, and of the complexity of the
being commissioned by Oxfam on the role of the economic and political constraints, the paper
IMF and the World Bank in economic policy- concentrates on identifying a number of
making in post-conflict situations. Like the first dilemmas in economic and donor policies,
paper on Rwanda (Woodward, 1996), it rather than on making alternative proposals.
considers the economic effectiveness of the There are no simple answers in BH, and
proposed strategy, its potential social impact whatever course is chosen is likely to raise as
and the implications for the achievement of a many problems as it resolves.
viable solution to the political problems of The paper begins with an outline of the
Bosnia and Herzegovina (BH) in the long term. political and economic situation of BH. The key
This paper is more preliminary than that on political, economic and social constraints on
Rwanda. This partly reflects the current policy are set out, and the current relations
political situation: the author's visit to BH took between the IMF, the World Bank and the
place a little over a year after the end of the war various authorities are discussed in Part B. This
and the signature of the Dayton Agreement, includes an assessment of BH's debt situation,
which established the framework for a com- and the prospects for a satisfactory solution. A
pletely new political structure, and just four discussion of various donor-driven problems,
months after the September elections, which such as delays in disbursements and political
effectively started the process of forming most of conditionality, follows in Part C. Part D contains
the new institutions. As a result, the institutions an extended discussion of the policy proposals
of government are less well-established; and the currently envisaged, in terms of their economic
emphasis is primarily on reconstruction and viability, social impact and political implications.
institution-building rather than on the consid- Part E assesses the social dimensions of econ-
eration and development of detailed economic omic policy. The Conclusion seeks to draw
policies for the long term. together the diverse threads of the paper.
6
A. Political and economic background
A.I The war and its least passive collaboration with the Ustasa
consequences1 regime, or joining the partisans. Inevitably,
most chose the quiet life, leading Serb nation-
Prior to 1991, Yugoslavia was a federation, alists to identify Croats with the Ustasas, and to
consisting of six republics (of which BH was one) see Muslims as collaborators. These caricatures
and two autonomous territories (Kosovo and were revived and accentuated by nationalist
Vojvodina) within Serbia. Decision-making was propaganda in the 1980s.
very decentralised under the 1974 Constitution, The revival of nationalism, actively promoted
and at the central level each republic and by (often crude) media propaganda, culminated
autonomous territory had one representative in the break-up of Yugoslavia in the early 1990s;
on a collective presidency. Central controland and it was this process which led to the war in
coordination were maintained by the personal Bosnia, starting in 1991. However, the conflict
authority of Tito, leaving a serious power in Bosnia, more than any other part of the
vacuum following his death in 1980. former Yugoslavia, arose primarily as a result of
The result was increasing incohesion within forces external to the Republic itself. It is ironic
the Federation through the 1980s, and the that it was here that the war was longest and
reawakening (and political exploitation) of rival bloodiest.
nationalisms and historical resentments. These The process of disintegration began in earnest
arose primarily from Yugoslavia's traumatic when the Serb nationalist Slobodan Milosevic
experience during the Second World War,2 manoeuvred himself into power in Serbia on a
when the Nazis brought the extreme Croat tide of populist nationalism. Once in power, he
nationalist Ustasas back from exile in Italy and proceeded to expand the power of Serbia within
installed them in power in part of Croatia and the then Federal Republic of Yugoslavia. By
the whole of Bosnia-Herzegovina (BH). The fomenting Serb nationalism, he succeeded in
Ustasas 'were terrorists who had overnight been ousting the existing authorities in the two auton-
handed total power' (Bennett, 1995, p43), and omous territories (Vojvodina and Kosovo),
they had as a primary objective a virtual installing his own supporters in their place.
genocide of the Croatian Serbs. 'The objective, Together with the pro-Serbian Montenegro
somewhat crudely but not incorrectly stated, authorities, this gave Milosevic effective control
was to convert one-third of Orthodox Serbs into over four of the eight votes on the collective
Catholics, to expel another third to Serbia, and presidency.
to exterminate the rest' (Crnobrnja, 1996, p65). Slovenia and Croatia became seriously
Estimates of the number of Croatian Serbs killed concerned at the increase in Serbian power, and
vary enormously between Serb and Croat the extreme Serb nationalism which underlay it.
sources. The more methodical estimates suggest The Slovenian authorities ultimately responded
a figure in the order of 300,000. by declaring independence, and, after a brief
Opposition to the Ustasa regime came attempt by the Yugoslav national army (JNA) to
primarily from Tito's partisans (who were force them back into line, achieved it. Croatia
Yugoslav in orientation, and came from all quickly followed suit, motivated partly by
ethnic groups, although the greatest number Serbia's still stronger position in the Federal
were Serbs); and the Serb nationalist Cetniks. institutions in Slovenia's absence; partly by
After an initial period of cooperation, the two growing nationalism among the large Serb
groups came into increasingly bitter conflict as minority in Croatia; and partly by the increasing
Tito's wider political ambitions became appar- Croat nationalism which this provoked.
ent. BH, because of its ethnic mixture, became a Croatia had much greater difficulty in
particularly important area of conflict. Muslims escaping from Yugoslavia than had Slovenia.
and Croats were faced with a choice between at The intervention of the Yugoslav army was
The IMF, the World Bank and economic policy in Bosnia
more forceful and less successfully resisted; and in March 1992. Muslims and Croats voted
the Serb minority within Croatia, with JNA sup- overwhelmingly for secession; but there was an
port, took control ofsubstantial areas of the country almost complete boycott of the vote by the Serbs.
where they were in the ascendant (for example, The tension between the two sides escalated,
the Krajina and Eastern Slavonia). A long and and the Yugoslav national army virtually the
bitter struggle followed, and one-third of the only remaining institution holding the
country's territory remained under Serb control federation together moved in, ostensibly to
when Croatia was internationally recognised in keep the peace. However, as Croats and
January 1992. In early 1997, the Zagreb authori- Slovenians had largely deserted, the JNA was by
ties have only just re-established control over now Serb-dominated; and the remaining
Eastern Slavonia, the last Serb-controlled area. Bosniacs (Bosnian Muslims and other supporters
With the withdrawal of Slovenia and Croatia of a united Bosnia) also left the army as it came
from the Federal institutions, Bosnia was faced into conflict with their compatriots. In May
with a choice between secession and remaining 1992, the army was notionally withdrawn from
within a Federation now heavily dominated by Bosnia; but in practice its Bosnian Serb compon-
Serb nationalists. The situation of the Bosnian ent remained, together with much of the
Serbs, however, was the mirror image of this weaponry, to join with local Serb militias.
they faced a choice between being part of the Thus, while the war was largely brought
majority within a rump Yugoslavia, or being an about by external forces, it was primarily fought
ethnic minority within an independent Bosnia. between Bosnians. It was therefore extremely
The latter option was made more unattractive divisive, splitting Bosnian society into its three
by the rise in nationalism among the Croats and main ethnic components. For most of the war,
Muslims (itself largely a response to increasing the conflict was between the Serbs (whose main
Serb nationalism both in Serbia and within objective was secession and unification with
Bosnia), and by vigorously nationalistic Serbian Serbia) and an alliance of Bosniacs and Croats.
propaganda. However, in April 1993, the Bosniac/Croat
These dilemmas were made more acute by alliance broke down, as it became clear that any
Bosnia's ethnic composition, and the geograph- negotiated solution would take the form of a
ical spread of the various ethnic groups.3 While three-way division of territory, based at least
there was some degree of ethnic diversity partly on military control on the ground at the
throughout the whole of Yugoslavia, it was most time. There was also a large faction, at least on
marked in BH: uniquely, no single ethnic group the Croatian side, for whom the alliance was a
represented an overall majority of the popula- tactical one and the ultimate objective was
tion. I n 1991,44 per cent of the population were secession of the Croat statelet of Herceg-Bosna
Muslims, 31.5 per cent Serbs, and 17 per cent from Bosnia and its unification with Croatia.
Croats. Of the remainder, 2 per cent were of Full-scale war between Muslims and Croats
other ethnic groups, while 5.5 per cent followed in May of the same year.
considered themselves Yugoslavs (mostly The conflict between the Croats and the
people of ethnically mixed parentage). In all, 16 Bosniacs was brought to an end, following
per cent of children in BH were of mixed political intervention by the US, in February
parentage, a higher proportion than anywhere 1994. Nonetheless, this conflict seriously
else in the former Yugoslavia. embittered relations between Bosniacs and
There was a significant regional pattern in Croats, especially in mixed areas. The legacy,
the distribution of ethnic groups, with a which is most clearly illustrated by the current
disproportionate presence of Serbs in Western situation in Mostar, is a serious impediment to
Bosnia, and of Croats in Herzegovina. the establishment of new institutions and policy-
However, there was a very high level of integra- formulation in the Muslim/Croat Federation.
tion. Only three of 112 opstinas (the local Relations have been particularly badly
administrative areas) were essentially homogen- affected by the process of 'ethnic cleansing'.
eous in ethnic terms, while 30 had no overall Fear, intimidation, and violence (including
ethnic majority. Of the remainder, 37 had an massacres in some areas) have brought the
absolute majority of Muslims, 32 of Serbs, and country from a multi-ethnic mix developed over
13 of Croats. centuries to an almost complete polarisation of
The authorities responded to the political dilem- the population into distinctly Muslim, Croat,
ma by holding a referendum on independence and Serb areas. Some mixed areas (generally
8
Political and economic background
Muslim/Croat) remain; but, with the notable A.2 Political structures under
exception of Sarajevo, there is a high level of the Dayton Agreement
tension, and in some areas, such as Mostar,
ethnic cleansing and polarisation continue. Four years of war in Bosnia and Herzegovina
In addition to the death of some 250,000 were brought to an end by the Dayton
people, the war and ethnic cleansing gave rise to Agreement in December 1995. This established
enormous population movements, both Bosnia and Herzegovina (BH) as a single
internally and externally. It is estimated that sovereign country divided into two Entities: the
between lm and 1.4m people left the country as Serb-controlled Republika Srpska (RS), with 49
refugees, while a further million were displaced per cent of the territory and a population of
within the country. In total, this represents around 1.2m; and the Bosniac/Croat-controlled
about half of the country's pre-war population. Federation of Bosnia and Herzegovina, with 51
While the internal displacement largely repres- per cent of the territory and a population of
ented an exchange of members of one ethnic around 2.3m.4 The Federation in turn is divided
group for those of another, it gave rise to major into ten cantons, with boundaries essentially
increases in population in some areas (for fixed on ethnic lines: five are predominantly
example, the Muslim part of Mostar). This both Muslim, three predominantly Croat, and two
added to the strain on housing and infrastruc- ethnically mixed. There is no equivalent
ture resulting from war damage and dislocation, division of Republika Srpska (RS). The lowest
and compounded tensions between ethnic unit of government in each case is the
groups in these areas. municipality. (See Figure 1.)
While the Dayton Agreement envisaged a The ethnic division is strongly reflected in the
return of refugees and internally displaced distribution of power between the different levels
people to their areas of origin, this has yet to of government: in effect, power is concentrated as
happen on any significant scale, and it seems far as possible at the highest level consistent with
unlikely that the economic, social, and political ethnic uniformity. The central government has
conditions for large-scale return will be very limited power, its role being limited to the
achieved in the near future. bare minimum necessary for BH to be considered
As well as its dramatic effect on inter-ethnic as a single sovereign country (foreign policy,
relations, the war was also very destructive in international trade and debt, monetary policy,
physical terms (the economic damage arising immigration, international law enforcement, and
from the war is described in greater detail in air traffic control), plus relations between the
Box 1 in Section B1). Much of the damage was to Entities (inter-Entity transport, communications,
civilian targets, particularly to economic and and law enforcement).
social infrastructure, such as roads, railways, The Entities have responsibility across a
water and electricity supplies, schools, health much broader range of issues, including many
facilities and housing. However, the destruction which are more commonly held by national
was very localised: within areas which remained governments. These include:
under the control of the same ethnic group
throughout, the physical damage was relatively defence;
limited, although such areas are still affected by internal affairs, policing and justice;
the broader effects of the war; in other areas, taxation and customs administration;
where the conflict was most acute and prolonged, agriculture, industry, and other economic
the destruction is almost total. policies;
While the Serb area sustained less physical health and social policies;
damage than the Muslim and Croat areas as a environmental policies;
result of the conflict, it was seriously affected by refugees and displaced persons; and
the more general economic disruption asso- reconstruction programmes.
ciated with war, and especially by UN-imposed Under the Dayton Agreement, each Entity is
economic sanctions. These factors brought about also allowed to establish its own relationships with
a drastic downturn in economic activity and an neighbouring states, and to enter into agree-
almost complete lack of maintenance to ments with states and international organisations
infrastructure and productive facilities, which with the consent of the (national) Parliamentary
deteriorated seriously as a result. Assembly.
9
The IMF, the World Bank and economic policy in Bosnia
Within the Federation, the cantonal level of when elections were held on 14 September 1996,
government is responsible for education, at all levels except for municipalities within the
housing, public services, local land-use, and Federation, where elections were postponed
social transfer expenditures. However, these following allegations of fraud. The elections
responsibilities are automatically devolved to resulted in an overwhelming victory for all three
the municipal level in municipalities where the nationalist parties. While not surprising, this
majority ethnic group is different from that of seriously complicates the process of securing a
the canton as a whole. More generally, munici- constructive, collaborative approach to the
palities in the Federation have 'self-rule on local formation of institutions, both at the national level
matters'. In RS, the responsibilities of munici- and within the Federation. The postponed
palities correspond to those of the cantons and municipal elections are now expected in April.
the municipalities in the Federation. One important issue remains outstanding
Financially, the Entities retain control of under the Dayton Agreement, namely the status
customs and excise receipts within their of the Brcko corridor a narrow strip of land in
respective territories, while in the Federation, northern Bosnia, which links the eastern and
cantons retain revenues from sales, income, and western parts of RS, and which is contested by
property taxes, together with revenues Serbs, Croats and Bosniacs. The corridor is
generated by charges for public services. The currently under Serb control, but is subject to
national government has no independent tax international arbitration. This was originally to
base, at least for the time being, but is wholly be completed by mid-December 1996, but the
dependent on transfers from the Federation deadline has now been extended (for the second
(two-thirds) and RS (one-third). Ultimately, it time) until February 1998. Whatever the find-
will be able to raise tax revenues, if this is ings, the announcement of the arbitration results
approved by the national parliament. could raise the political temperature substantially,
Under the Dayton Agreement, elections were due to the central strategic importance of the area,
to be held at all levels in both Entities within six to the mutually-exclusive claims of the various
nine months, and this deadline was met (just) parties, and the strength of feeling on all sides.
LEVEL:
I
Entity Federation of Bosnia Republika Srpska
and Herzegovina (RS)
(President; government; (President; government;
bicameral parliament) bicameral parliament)
Canton 10 cantons
10
Political and economic background
A.3 The pre-war economy Ireland or New Zealand, though less than in
other developed countries (UNDP, 1992, Table
After a brief experiment with central planning 34). While agriculture was an important source
after the Second World War, Yugoslavia of employment, representing about one-
positioned itself both politically and quarter of all jobs in the economy, the driving
economically between the communist East and forces of the economy were industry and (in
the capitalist West. This strategic position Croatia) tourism (Table 1).
enabled the country to receive substantial BH was poorer than Yugoslavia as a whole
financial support from Western donors through before the war, with GDP per capita 32 per cent
the 1950s and 1960s. In 1965-8, there was a less than the national average in 1989 (Vojnic,
temporary move towards market socialism, 1995, Table 4-2). Agriculture was substantially
before the principle of worker self-management more important, particularly in terms of
a form of decentralised socialism was employment: it employed around 40 per cent of
adopted. At the same time, there was a shift the work-force (about half part-time), and
towards commercial borrowing, leaving the accounted for about 14 per cent of output
country seriously exposed when the 1982 (EU/EBRD/World Bank, 1996b, pi03). The
Mexican crisis led to a generalised loss of economic importance of the industrial sector
confidence in lending to developing countries. appears to have been broadly in line with the
While Yugoslavia's debt situation was national average, while services were somewhat
substantially less serious than those of the major less significant, possibly reflecting the limited
Latin American debtors, the authorities development of tourism.
responded with a series of IMF- and World Major industrial sectors in BH included
Bank-supported adjustment programmes and energy (coal, coke and electricity); other raw
rescheduling of bilateral and commercial debts. materials (especially wood and bauxite); textiles;
This entailed a very rapid adjustment of the leather and footwear; and machinery and
balance of payments, and very large net electrical equipment. Much of the former
resource transfers to creditors, especially from Yugoslavia's armaments industry was also
the mid-1980s. This contributed to a serious relocated in BH, following Tito's split with
slow-down in growth from the very rapid rates Stalin, as it was seen as being safer in the most
prior to 1980, rising unemployment, and central of the Republics. Industrial production,
hyperinflation and thereby, arguably to the both extractive and manufacturing, was domin-
conflicts of the 1980s. ated by about a dozen large socially-owned
The pre-1991 Yugoslav economy was conglomerates, which were mainly export-
relatively well developed and diversified, with a oriented, with about a thousand small and
strong industrial base and good infrastructure. medium enterprises, directed mostly towards
The workforce was skilled and well-educated, the domestic market.
with 9.7 per cent of 20-24-year-olds in full-time Electricity production was mostly thermal,
tertiary education more than in the UK, using domestically produced coal, but with
Notes: Employment data are from World Bank (1989); GDP data are from World Bank (1992a).
GDP figures exclude 6.7 per cent representing indirect taxes.
11
The IMF, the World Bank and economic policy in Bosnia
12
Political and economic background
Around half of state industry has been despite marked reluctance on the part of the
privatised, but foreign investment has been Serbian leadership: there has already been some
limited, and rising real wages have driven out liberalisation of foreign investment laws, a
low-wage industries, leaving unemployment at privatisation law has been approved, and some
13 per cent (and rising). Slovenia's greatest trade reform is expected. Progress on reform
advantages relative to its former Yugoslav has been faster in Montenegro than in Serbia.
neighbours are its political stability, its relatively Economic growth was around 2.5 per cent in the
high level of development, its very limited first half of 1996 (down from 6.5 per cent in
involvement in the war, and its geographical 1995); but inflation remains around 30 per cent
position on the fringe of the EU. However, the pa, unemployment is high and rising, and there
benefits of Slovenia's growth to the other is a large ($2bn) trade deficit, financed from
countries in the region will be limited by its hard-currency resources held abroad. Both
preference for stronger economic links with the economic performance and the prospects for
EU rather than any development of stronger economic reform are likely to have been seriously
ties with its Balkan neighbours. affected by political instability following the
In Croatia, economic growth resumed at contested local elections in November.
around 4 per cent in 1996, despite heavy (and The Former Yugoslav Republic of
rapidly increasing) debts in the business sector, Macedonia (FYROM) has been promoted by the
widespread insolvencies, strongly deflationary World Bank as a case of successful structural
macroeconomic policies, and very high real adjustment,0 with significant progress on privat-
interest rates. Despite renewed growth, employ- isation and banking reform. However, this has
ment continues to fall, and the unemployment yet to be reflected in overall economic perform-
rate remains above 20 per cent. Inflation is still ance. Moderate economic growth was achieved
relatively low at 3.5^1 per cent, but there is a in 1996, after a decade of stagnation and
substantial current-account deficit. A three-year decline; and inflation is in single figures and
IMF programme is in preparation, and com- declining. However, exports fell by 30 per cent
mercial debts have been renegotiated. in the first half of 1996, increasing an already
The FRY (Serbia and Montenegro) has been large current-account deficit; access to foreign
pursuing conservative fiscal and monetary commercial lending has not been regained; and
policies, and is expected to negotiate a stand-by unemployment continues to rise. Inter-ethnic
arrangement with the IMF in 1997 (if the polarisation represents a potential threat to
remaining obstacles to IMF membership can be political stability and continued growth. The
lifted8), as a basis for debt renegotiation. regime for foreign direct investment is to be
Broader economic reforms are also possible, liberalised, and trade policy rationalised.
13
B. The IMF, the World Bank and economic policy
B.I The constraints on some donors) see the political tensions within
economic policy the Federation as being at least as problematic as
those between RS and the Federation.
The formulation of economic policy in BH is
complicated by three interlocking sets of Social and ethnic constraints
constraints: political/institutional, social and There are tensions at a number of levels; the
ethnic, and economic constraints. most obvious being between the three major
ethnic groups within BH. Such tension repre-
Political/institutional constraints sents a serious obstacle to any lasting political
These arise directly or indirectly from the terms settlement, and has a central role in the current
of the Dayton Agreement. Among the actual political inertia. These tensions also represent
terms of the Agreement, the most important is an important constraint to economic (or other)
the operation of the Central Bank as a currency interactions between the Entities, for example,
board for six years. This means, in effect, that the intimidation of people who cross between
domestic currency can only be issued against Entities (or their fear of violence), and the likely
foreign currency held by the government, which reluctance by some to buy goods from the other
effectively removes governmental discretion in Entity, if they were available. It is hoped that
monetary and exchange rate policy, and ethnic tensions can be eased by increasing
prevents budget deficits from being financed economic interaction between the Entities; but
domestically. (This is discussed further in the tensions themselves limit the pace at which
Section Dl.) this can be achieved. For economic and short-
A second key component is the administrative and long-term political reasons, it is therefore
arrangement of the country, specifically the essential to avoid compounding inequalities
very high (and arguably excessive) degree of between the ethnic groups, or creating new or
decentralisation of power, to the Entity level exacerbating existing sources of tension.
and, in the case of the Federation, beyond.
While the four levels of administration in the Another potential source of tension,
Federation may have been necessary politically, especially in the Federation, is between those
to secure the agreement, the arrangement will who stayed in Bosnia during the war and those
increase administrative costs substantially, and who left as refugees. Those who stayed,
may well prove cumbersome. especially in enclaves such as Sarajevo, Zenica,
The reliance of the political structures on and Tuzla, have in many cases been impover-
cooperation between ethnically-based political ished and traumatised by the experience. Many
leaderships gives rise to a considerable level of of those who left who include most of those
political inertia, due to the mutual suspicion who were relatively well-off initially and many of
both between the two Entities and between the the most skilled and educated have in varying
Muslims and Croats within the Federation (and degrees escaped these ill-effects; and many
within ethnically mixed cantons such as Mostar). professionals have accumulated substantial
This is exacerbated by the fact that Serb nation- savings while abroad. The resulting disparities
alists, whose ultimate goal is secession from BH in economic opportunities could give rise to
and unification with the FRY, have every considerable resentment as the refugees return,
incentive to ensure that their policies and in direct proportion to the opportunities
economic systems are incompatible with those available. This would be further compounded
adopted by the Federation, as a means of by programmes providing additional assistance
pushing BH towards partition. It should be specifically for returnees, to give refugees an
noted, however, that some observers (including incentive to return.
14
The IMF, the World Bank and economic policy
Overlaying these social constraints is the which coincided with it. The war damage is the
more general need to reduce poverty and access most obvious and severe constraint. BH's econom-
to basic necessities, such as food, health services, ic and social infrastructure and productive
housing, water supply, and sanitation. This is capacity has been severely reduced. (See Box 1.)
partly a moral issue, but also contributes to the In addition, the human capital base has been
political dynamics: increasing poverty was an severely eroded by the exodus of a large number
important factor contributing to the conflict in of educated and skilled people. Of those who
the Former Yugoslavia; and the persistence of remain, people with specialist skills have been
chronic poverty would be a substantial obstacle internally displaced, and it is likely that many
to a durable political solution in BH. Reducing will no longer be in (or able to return to) an area
poverty would require the creation of employ- where their skills can be used productively.
ment opportunities, not only for the 50-60 per The Former Yugoslavia's strategic position
cent of the workforce who are currently between East and West was lost with the end of
unemployed, but also potentially for more than the Cold War, and with it the prospect of favour-
a million refugees if and when they return. able financial and economic support from both
sides. Reconstruction assistance has been a
Economic constraints temporary substitute, but will be of limited
Economic constraints arise not only from the duration (until about 1999). A viable economic
effects of the war, but also from a number of future is unlikely to be based on continued
other changes in the economic environment funding at the pre-war level.
Landmines and other hazards: There estimated to be between 1.5 million and 4 million land-
mines in BH, of which only about 15,000 had been located as of November 1996. These are
mostly concentrated in bands about 5km wide along former lines of confrontation, including
areas around Sarajevo, Banja Luka, Zenica, Vitez, Mostar, Srebrenica, Tuzla, Medugorje,
Bihac, Zepa, Gornji Vakuf, and Gorazde. In addition, there is other unexploded ordnance in
areas of conflict, and booby traps remain in areas of ethnic cleansing. Coupled with uncer-
tainty about the location of mines, this is a serious deterrent to land use. Mines have also been
laid in some areas to obstruct the use and reconstruction of infrastructure.
Transport and communications: More than 2,000km of main roads are in need of immediate
repair, all railway lines have been rendered inoperable, and Sarajevo airport was partly
destroyed and closed to civilian traffic. All bridges connecting BH with Croatia were
destroyed, and a total of 70 bridges have yet to be rebuilt. Public transport vehicles and facili-
ties were destroyed or damaged, or have become run down due to lack of maintenance.
Around 50 per cent of the telecommunications network has been damaged or destroyed,
including transmission and switching equipment, buildings, towers, overhead cables and the
entire backbone transmission network. Call-completion rates in the worst affected areas are
1-2 per cent at peak times, compared with 35-38 per cent before the war.
15
The IMF, the World Bank and economic policy in Bosnia
Energy and heating: Almost all power stations, thermal and hydro, were damaged either
directly or by lack of maintenance during the war, and more than 50 per cent of electricity
generation capacity was put out of operation. At the end of 1995, electricity generation was
estimated to be operating at only 10 per cent of capacity. In addition, 60 per cent of the trans-
mission network and control system was seriously damaged and about 50 per cent of the dis-
tribution network damaged or destroyed. District heating systems were either seriously dam-
aged (as in Sarajevo, where the number of households served fell by about two-thirds) or dis-
rupted by lack of energy supplies (as in Banja Luka, where only 5-6 per cent of installed
capacity was in use in 1995-6). Further damage has occurred due to non-use and lack of
maintenance.
Water and waste management: War damage and lack of maintenance, compounded by popu-
lation movements, imposed serious strains on the water and sanitation systems. Leakage-loss
rates for water increased from 30 per cent to 50 per cent, and 27 of 69 municipalities in the
Federation no longer have 24-hour supplies. Clogged sewage and drainage systems have
caused extensive flooding. While war damage has been relatively limited in RS, facilities have
suffered from lack of maintenance. Cross-boundary access to water supplies has been denied,
further limiting access. Solid waste services have been affected by extensive damage to equip-
ment; and limited access to landfill sites due to landmines has led to over-use of small urban
sites.
Housing: In the Federation, 50 per cent of the housing stock was damaged, and 6 per cent
destroyed; in RS, 24 per cent was damaged and 5 per cent destroyed. Deterioration of the
remainder has occurred due to lack of maintenance. About 90 per cent of destroyed and
damaged housing has yet to be repaired, and some 30 per cent of inhabited housing has no
glass in the windows.
Industry: As well as physical destruction, industry and finance have been affected by the dis-
ruption of domestic and external trade links, and by the legal confusion created by the con-
flict. The industrial sector is operating at about 15-20 per cent of its capacity in the Bosniac
area of the Federation, and at 8-10 per cent in RS. Industrial activity has also been reduced,
though to a much lesser extent, in Croat areas. Non-agricultural unemployment is estimated
at 50 per cent in the Federation and 60 per cent in RS.
Finance: The freezing of foreign exchange deposits at the beginning of the war created a
deep distrust of the banking sector, compounding its already weak financial position. Banks
have large foreign exchange liabilities, while household deposits are negligible, and commer-
cial and public sector deposits very low; 90 per cent of bank assets are non-performing. The
capital of the large state-owned banks has been wiped out, while the newer private banks are
small, under-capitalised and inexperienced. As a result, only limited amounts of short-term
credit are available, and only at very high real interest rates.
Agriculture: 70 per cent of farm equipment and 60 per cent of livestock were lost during the
war, and farm buildings and irrigation equipment damaged or destroyed. Some 15 per cent
of farm land and 20 per cent of forests remain inaccessible due to landmines, and high-value
orchards and vineyards were destroyed. In 1995, wheat, maize and potato crops were 30-40
per cent below pre-war levels, and fruit production was down by about 50 per cent. Forestry
and food-marketing systems were also disrupted.
Health: More than 13,000 people sustained permanent physical injuries during the war, and
communicable diseases increased by between 100 per cent and 400 per cent. Between 35 per
16
The IMF, the World Bank and economic policy
Education: Around 70 per cent of schools were damaged, destroyed or requisitioned for mili-
tary use or as centres for displaced people. In addition, budgetary resources for salaries and
other recurrent expenditure dried up in many areas; many teachers departed, to be replaced
by unqualified volunteers; materials such as textbooks and basic furniture remain scarce; and
many schools are without water and/or electricity supplies. Bosniac areas were worst affected,
while education was sustained in Croat areas by financial support from Croatia. In RS, there
was significant physical damage, but the main problem was lack of recurrent expenditure due
to the UN embargo and hyperinflation. Many students left full-time education prematurely,
or suffered a hiatus, during the war. The quality of education was seriously affected, and both
the school year and the school day were shortened to accommodate a shift system.
Sources: This Box is based mainly on EV'/EBRD/World Bank (1996, passim), with supplementary information from World Bank
(1996b) on population, Muratovic (1997) on population and housing, World Bank (1995c) on landmines, and EBRD (1996) on
electricity and telecommunications.
The economic system of the Former Globalisation and the transition process else-
Yugoslavia was proving unviable long before where in Eastern Europe represent additional
the war. Even without the war, some form of challenges. In particular, BH's exports must
economic transition would have been necessary. compete with those of a number of other
Yugoslavia's debt burden was also heavy prior developing country and Eastern European
to the war. In the light of the war-damage to the economies with (in some respects) similar
economy, BH's share of the debt is clearly unsus- economic endowments, as all scramble to attract
tainable. While die World Bank has already acted foreign investment and increase their foreign
to provide some debt relief, and action is exchange earnings. A viable economic future
expected from bilateral and commercial bank will depend on the country's ability to compete
creditors, some potentially serious problems effectively in the world market.
remain. (See Section B2.) Finally, the current level of aid should also be
In addition to the foreign debt, the govern- regarded as a constraint. Clearly, it would be
ment faces a heavy burden of domestic liabil- possible to provide additional aid; but, given the
ities, particularly foreign exchange deposits tight financial constraints on most donors' aid
frozen during the war; and arrears owed to programmes, this would have to be at the
pensioners, soldiers, and public servants. These expense of current (or increased) allocations to
liabilities are very considerable (in the order of other, mostly poorer, countries. The current
DM13bn); and failure to settle them in a satis- level of aid to Bosnia is already very high
factory manner could be politically destabilis- compared with many other post-conflict
ing. Some 80 per cent of all households had countries in the recent past, although it is both
foreign exchange deposits of up to DM 1,000 richer and better-endowed with economic
frozen; and public sector workers (including resources. Aid commitments to Bosnia for 1996
soldiers) are owed substantial salary arrears. (GNP per capita $250-500) amounted to
Settling arrears to pensioners should be around $400 per capita, compared with $80-90
regarded as a high social priority, in view of the for Rwanda (GNP per capita $80) and $60-70
very high incidence of poverty among elderly for Mozambique (GNP per capita $60) at an
people. equivalent stage of reconstruction.
17
The IMF, the World Bank and economic policy in Bosnia
18
The IMF, the World Bank and economic policy
favourable (to BH) if it is agreed before the Paris FRY debts. After a re-division, the FRY
Club; but this may be a price which has to be paid. authorities would then be in a position to
If agreement-in-principle is not reached in cancel a substantial part of their own debt.
time, BH's debt would be re-merged with the
It is also possible that there is a political
FRY's; and the FRY could block any reversal of
motivation. By re-merging their commercial
this move, unless (ironically) their legal action
against the Slovenian debt deal were successful. debts with those of BH, the FRY authorities
Any debt agreement would then need to be might be trying to restore an obstacle albeit
negotiated jointly by the FRY and BH authorities a largely symbolic one to BH's autonomy. If
(and the Macedonians if they were in a similar the debts held by the FRY are those attribut-
position), and provide equivalent treatment to able to RS under the final beneficiary
both (or all) parties. This would seriously principle, the authorities could off-set any
complicate the negotiation process, delaying a negative effect on RS by cancelling their debts.
final settlement, possibly for some years; and, This would allow the RS authorities to benefit
given the much more limited goodwill towards financially as well as politically from their
the FRY, it would almost certainly provide less acceptance of thefinalbeneficiary principle for
favourable terms. The prolonged hiatus would the inter-Entity allocation of debts.
also limit BH's access to international financial Some of these motivations, at least, could give
markets until there was a resolution of the issue. the RS authorities themselves an incentive to block
Even if agreement-in-principle is reached, it any extension of the joint and several liability
would seem possible, at least, that the FRY could waiver. In the third case, there would be a direct
block the finalisation of the deal, which gener- financial benefit to RS, in the form of a greater
ally requires a greater than two-thirds majority degree of debt reduction than would otherwise be
of participating creditors. However, the relaxed available, as well as the political advantages. In the
attitude of the authorities to this issue suggests first two cases, the benefits would accrue mainly to
that they expect a loophole to be available. Even FRY; but the RS might wish to support this, either
if it were not, BH's debt would remain legally for reasons of Serb solidarity or in return for a quid
distinct from that of the FRY; and the blockage pro quo of some kind. In view of the likely financial
of afinaldeal would seriously reduce its value on costs (in the form of less favourable treatment of
the secondary market. This could allow the BH debt), a quid pro quo would be essential under
authorities to buy back their debt informally on thefirstcase.
the secondary market and, in effect, to cancel it.13 The question of the complicity or otherwise of
There are various possible motivations for the RS authorities is critical, because this could
the FRY authorities' actions in buying Bosnian encourage them to obstruct the achievement of
debt and seeking to block a deal:14 agreement-in-principle before the end of June.
The most obvious way of doing this would be to
They may be hoping that the FRY could
delay the approval of an IMF programme. The
obtain a more favourable deal on its own
absence of an IMF programme would not
commercial debt if it were treated jointly with
represent an insuperable obstacle to agreement-
that of BH. In these circumstances, there
in-principle, as the procedures for commercial
might well be some pressure on banks from
bank renegotiation are somewhat more flexible
their governments to provide debt reduction,
than those of the Paris Club. Nonetheless, there
so as not to jeopardise BH's economic
would be substantially greater impetus towards
recovery; and this would allow the FRY to
reduction of commercial bank debt with an IMF
benefit from equivalent terms. Such pressure
programme and the prospect of a Paris Club
for favourable treatment would be unlikely if
agreement than without. If an IMF programme
the FRY debt were treated separately.
were delayed, this could lead to a more general
The FRY authorities may hope to reduce disruption of BH's financial arrangements, for
their own debts more directly. While any example by delaying World Bank adjustment
subsequent re-division of the debts would lending, and would effect negotiations with the
again be based on the final beneficiary commercial banks.
principle (so that the FRY-held debts would As noted above, the $825m owed to bilateral
still be owed by BH), it might be possible for creditors can only be reduced once an IMF
the FRY to exchange the debts it holds with programme is in place. The authorities are
other creditors, possibly at a discount, for hoping to secure a reduction of 80 per cent in
19
The IMF, the World Bank and economic policy in Bosnia
net present value (NPV) terms;15 but it seems was terminated). It is now represented on the
possible, at least, that they will be offered only 67 Executive Boards of both institutions by the
per cent. This might be topped up to 80 per cent Executive Director for the Netherlands.
after a track-record of economic adjustment The most important obstacle to IMF and
policies has been established (in line with the World Bank membership was the need to settle
HIPC Initiative). Much will depend on the BH's share of the arrears accumulated by the
strength of the political pressures for more former Yugoslavia. This was a relatively minor
favourable treatment. problem in the case of the Fund, as the arrears
A 67 per cent reduction in the NPV of were fairly small (less than $50m). They were
commercial and bilateral debt, coupled with the settled by a bridging loan from bilateral donors,
consolidation of World Bank debt would reduce enabling BH to join the Fund and make a first
the overall NPV of debt to about $1.5bn, or 250 credit tranche drawing of 25 per cent of quota,
per cent of estimated 1996 exports. The absolute without policy conditionality. This was then
NPV figure would be increased over time by new used to repay the bridging loan.
borrowing, although this should be relatively The problem was much greater on the World
limited, and mostly on concessional terms. The Bank side, as arrears to the Bank amounted to
ratio of NPV to exports should decline rapidly if some $450m. However, this problem was
the predicted rapid growth of exports is resolvedflexiblyand constructively by the Bank,
achieved: based on the World Bank's projections which consolidated the entire amount of
(World Bank, 1996b, Table 5.2), the NPV of BH's Bosnia's $625m debt to the Bank over 30 years,
external debt might reach about $2bn around at 0.5 per cent annual interest. This could be
80 per cent of exports16 in 2000. done only by treating BH as a new member of
However, the export projections appear very the Bank, rather than as a successor state to the
optimistic (quite apart from the political risks), former Yugoslavia, following the precedent
so that the rate of improvement may be established by Bangladesh in 1975.
substantially slower. The effect of slower export Relations between the IMF and the World
growth is threefold: as well as reducing the level Bank and the authorities were complicated
of exports, and thus increasing the NPV/export initially by the Muslim domination of the
ratio directly, the need for additional borrowing national government prior to the September
to finance the larger current-account deficit 1995 elections, and the resulting suspicion of
increases the level of the debt, and the higher the RS and Croat political leaderships. Since the
level of debt increases interest payments, adding elections, problems have included the split of
to the need for additional borrowing. responsibilities between the Federation and the
If export growth were reduced by one-third, RS, and the strong mutual suspicion between
without a corresponding reduction in imports, the two; and the tensions between the Croat and
and the resulting financing gap were filled with Muslim sides within the Federation, resulting in
non-concessional borrowing, the NPV/export the continued de facto operation of the Croatian
ratio would remain at about 250 per cent in 2000. statelet of Herceg-Bosna. These factors contrib-
This outcome could be avoided by reducing the uted to a prolonged hiatus in the formation of
growth rate of imports; but to neutralise die the national government, and a continuing state
impact would imply imports some 20-25 per cent of political inertia.
below the levels currently projected in 2000; and, Nonetheless, the IMF and the World Bank
without the possibility of devaluation (see Section maintained contacts with at least some of the
D1), this would imply a similar reduction in GDP. authorities during this period. The IMF, in
This would have a serious impact on incomes and particular, was among the first to establish links
employment. with the RS authorities, at the beginning of their
relations with BH immediately after the Dayton
Agreement. The Bank was initially in contact
B.3 IMF and World Bank only with the Federation side, but has, since the
relations with the authorities elections, established a more symmetrical
relationship. Both the Fund and the Bank are
BH joined the IMF in December 1995, and the now in regular contact with the authorities of
World Bank in April 1996 (although its both Entities as well as the national government.
membership was back-dated to February 1993, The World Bank started to support
when the membership of the former Yugoslavia reconstruction in BH before the country actually
20
The IMF, the World Bank and economic policy
joined the Bank, through a Trust Fund managed expected to make the transition from concession-
by the Bank, funded by donor contributions. al IDA credits to non-concessional IBRD loans in
This also allowed part of the Bank financing to be 1998, reflecting its increasing per capita income
provided on grant terms. Thefirstproject was the and improving creditworthiness.
Emergency Reconstruction Project in February An IMF programme is also expected in the
1996. A further twelve projects have been near future. While BH is eligible for concession-
approved since, for a total of $325.6m of IDA al funding under the enhanced structural
funds ($ 1,045.5m including cofinancing by other adjustment facility (ESAF), the first programme
donors). (See Table 2.) Only five of the 13 loans will be a twelve-month stand-by arrangement
have included RS: the remainder, accounting for (SBA), on non-concessional terms. The SBA
80 per cent of total funding and 83 per cent of option is preferred because it takes less time to
World Bank resources, have gone exclusively to prepare than an ESAF, which would entail
the Federation. longer and more detailed policy discussions.
Further support is expected to take the form of The important consideration at this stage is to
three approximately annual policy-based get an IMF programme in place, to allow debt
structural adjustment credits (SACs). BH is negotiations to proceed (see Section B2), rather
21
The IMF, the World Bank and economic policy in Bosnia
than the nature of the support provided. reform process is either essential to the establish-
However, the high cost of the funds provided ment of BH as a state or mandated by the Dayton
suggests either that they should not be drawn (a Agreement (for example, the formation of the
'classical stand-by'), or that they should be added Central Bank, customs authorities, and so on).
to the reserves, rather than being used to finance Nonetheless, some elements of the policies
imports. The intention is to negotiate an ESAF, being thus enforced are less clear-cut; and no
which would cover a further three years, while distinction is made between the essential state-
the SBA is in place. forming components of the policy proposals
The policy conditionality included in an SBA and those relating to the particular economic
would effectively be limited in BH's case. The strategy to be adopted. Thus, while the
conditions relate only to macroeconomic variables establishment of a regulatory framework for
such as the budget deficit, the money supply, and international trade is necessary, the abolition of
the exchange rate; and these are in any case administrative controls and the setting of tariffs
effectively imposed by the currency board at a low and uniform rate, with minimal exemp-
arrangement mandated under Dayton. An ESAF tions, is not. Other measures, such as privatisa-
would go beyond this into structural policies. tion, are wholly unrelated to the Dayton terms.
While this would require more extensive policy However, the authorities appear to accept the
discussions, with greater scope for dispute with principles of reform which have been put
and between the Entities, the policies entailed forward, most of which are probably either
would overlap significantly with the World Bank sensible, or inevitable in the current circum-
SACs. stances (subject to the concerns discussed in
The extent of pro-active policy-making by the Section D). It is difficult to assess the balance
authorities appears to be limited. The process is between genuine commitment and compliance
one not so much of negotiation as of consulta- based on financial dependence, but there is at
tion: the IFIs consult the various authorities, least an element of the former. RS (1996) would
formulate policy proposals, and put them to the appear to suggest that the financial aspect may
authorities, who accept them. Moreover, the be of greater importance, and genuine commit-
donors (and other international agencies, such ment more limited, in RS.
as UNOHR) appear to be presenting a very The unanimity of the donors is presumably
united front: all are firmly committed to the based on the fact that much of the package being
general principle of economic reform, and seem proposed is essential, and that it will not be
agreed on virtually all the details. The result is implemented unless they speak with a single
very heavy conditionality: the authorities are voice, and make it impossible for any of the
reminded that if they do not comply with the authorities to dilute or obstruct it. The elements
programme outlined, there will not be another which go beyond the essential are at least accept-
donor conference or, by implication, further able enough to the rest of the international
substantial assistance for reconstruction. community to be seen as a price worth paying
It is clear that the threat is not limited to a for securing the essentials although there is
major failure of the reform. The OHR/EU/UST little evidence of dissent.
(1997) paper, 'elucidated with the cooperation Three more specific concerns may be noted
of the IM F and the World Bank, states explicitly with respect to the international community's
that: approach to promoting the reform process:
There is no roomfor hesitancy or halfmeasures and the The underlying ideology does occasionally
reform program must be implemented quickly and in show through. The OHR/EU/UST (1997)
full...[I]f it were limited in urgency or scope...the paper, for example, concludes that: 'die time
willingness of the international community to provide has come to shift the emphasis of economic
large-scale resources would...be likely to diminish. policy-makers [NB not for policy-makers
themselves to shift their emphasis] from
As a general principle, such heavy-handed reconstruction after the ravages of war to policy
conditionality seems less than ideal. However, it reform after the ravages of socialism.'
would probably be necessary to ensure the imple-
mentation of any kind of policy framework not EU/EBRD/World Bank (1996a, plOl)
because of political opposition, but because of the proposes using the media to promote the
inertia generated by the current political principles of policy reform and transition,
arrangements. Much of the initial part of the through soap operas as well as educational
22
The IMF, the World Bank and economic policy
programmes, documentaries, and debates. to be a great deal of optimism on this score, the
This seems highly questionable, particularly in prospect of achieving it remains uncertain, and
the light of the role of the media in the conflict, at best distant. There is also a conspicuous
and would seem to be at odds with the objec- divergence of views, both between the EU itself
tive of increasing its political independence. and other donors, and between the Federation
As well as the stick of reducing reconstruction and national authorities on the one hand and
assistance and withholding debt reduction, a the RS authorities on the other (Box 2). This
carrot has been dangled before the audiorities tactic would therefore seem to carry with it a
in the form of accession to the European high risk of disillusionment and frustration in
Union. While this is seemingly an almost the medium term; and could create a rift
universally-held objective, and there appears between the two Entities.
23
The IMF, the World Bank and economic policy in Bosnia
This suggests that the European Parliament, at least, may be less enthusiastic about the prospect
of BH membership than the Commission. Some other donor documents co-authored by the
Commission itself have also been noticeably reticent on the possibility of BH accession:
OHR/EU/UST (1997, p6), for example, says only that the EU is 'prepared to consider
establishing a contractual relationship' with BH.
The RS view:
While the second quote above is probably a realistic representation of the aspirations of
Federation representatives on the national government, it is by no means clear that their
enthusiasm is shared by the RS. The RS Policy Statement on 'Foreign Economic Relations Policy'
(RS, 1996, ppl 19-120), for example, does not mention the EU, referring instead to a free-trade
zone within the former Yugoslavia and 'projects for integration within the Balkans'.
24
C. Donor-related issues
Cl. Disbursement delays major factor in the development ofa more coopera-
tive approach on the part of the RS authorities.
As is almost invariably the case in reconstruction There are, inevitably, marked differences
(or other aid) programmes, there has been a between donors in the translation of pledges
substantial difference between pledges and into actual disbursements. (See Table 4). While
actual disbursements and project implementa- this no doubt partly reflects differences in the
tion: as of November 1996, of $ 1,851m nature of their support and its distribution
committed, only $720m had been disbursed. A between sectors, it seems likely that some more
further $456m was under implementation, of general variations, for example, in political
which contracts had been signed for $330m commitment or bureaucratic efficiency, also
(EU/World Bank, 1996a, Table 3). However, play a role.
this is no worse than is normal in such Overall, multilateral agencies have performed
circumstances. A substantial part of the $ 1,851 m somewhat better than bilateral donors in trans-
commitments including all of the World lating pledges into commitments and projects
Bank programmes was designed to be phased under implementation; but a significantly larger
over a period beyond the end of 1996. proportion of pledges have been disbursed by
Moreover, where delays have occurred, this has bilaterals, partly due to the apparent failure of the
EBRD to get any projects to the implementation
often been as a result of political conditionality. stage. The EU has also performed relatively
(See Section C2.) weakly in terms of disbursements, while the
Disbursement delays may have hampered the World Bank has been well above average in both
reconstruction process to some extent, which in implementation and disbursement.
turn suggests some negative effect on employ- Among bilaterals, the G7 have mostly
ment. However, their wider economic effects performed reasonably well, with the exceptions
are likely to have been limited, particularly as ofJapan and Italy. Smaller developed countries
balance-of-payments support has not been have been more variable, the Netherlands per-
greatly affected. The delays to the reconstruc- forming well (possibly reflecting their status as
tion process may have some significance, Bosnia's representative within the IMF and
however, if they mean that other components of World Bank), while Spain has performed partic-
the transition process, such as privatisation, take ularly badly. The weakest performances are
place at a lower level of infrastructure and registered by countries which might be
economic activity than was anticipated. (The expected to be particularly partisan ie the
pace of privatisation is discussed in Section D3.) FRY, Russia and the Islamic countries (Saudi
Disbursement delays, and particularly those Arabia, Kuwait, Turkey and Malaysia)"
related to political conditionality, have altered possibly reflecting lack of experience in aid or
the balance of assistance between the Federation limitations in their administrative capacity.
and RS, as the latter has been much more Between them, these six countries made pledges
affected. (See Section C3.) However, this does of $183.5m (nearly 10 per cent of the total), but
not so far appear to have done any serious had disbursed only $5m (2.7 per cent) of this by
damage to the political situation; and the need October 1996, compared with an average of
for international financial support has been a 48.4 per cent for other bilateral donors.
25
The IMF, the World Bank and economic policy in Bosnia
EU 367.1 105 58 28
World Bank 330.0 99 89 49
EBRD 80.2 109 0 0
Islamic Dev. Bank 15.0 127 40 40
other multilateral 25.0 95 55 51
TOTAL MULTILATERAL 817.3 103 64 35
26
Donor-related issues
27
The IMF, the World Bank and economic policy in Bosnia
28
Donor-related issues
Productive Sectors
Agriculture 65 96 62
Industry/Finance 140 53 74
Social Sectors
Education 118 63 75
Government/Social 136 78 106
Health 58 42 25
Housing 165 78 129
Miscellaneous
Landmine Clearance 61 52 32
Peace Implementation n/a 89 n/a
Balance of Payments n/a 84 n/a
Notes: All figures are approximate, being based on figures transcribed manually from EU/World Bank (1996a), Chart 1 .
29
The IMF, the World Bank and economic policy in Bosnia
RS $24m
Federation:
General/Multi-Canton $462m
Federation:
Mixed Cantons $137m
30
Donor-related issues
proportion in Croat cantons in the Federation. This applies particularly to NGOs, which in
Most of the aid from which Serbs and Croats some cases fail even to inform the authorities of
benefited were at the national level or (for Croats) their activities. This complicates the planning
to the Federation or mixed cantons that is, it process, and results in geographical imbalances
represents their notional shares of aid provided in social provision. If the projects established
to administrative units in which the Bosniacs are were ultimately to be continued with govern-
also represented. It seems quite possible that the ment resources, it could also skew government
benefits of such aid are skewed towards Bosniacs; budgets towards those areas favoured by NGOs
and, to the extent that it is aimed at promoting in the future. This could, in principle, contrib-
reunification and cooperation, this may be seen ute to increasing tensions within or between
as furthering a primarily Bosniac objective. Entities.
Some skewing of aid towards Bosniac areas is This situation is now improving; and the
justifiable in economic terms, to the extent that budget problem, at least, should be eased by the
it is here that the physical damage, human costs, Federation authorities' intention that NGO
and economic disruption caused by the war projects should ultimately be taken over by local
were greatest. However, the extent to which the NGOs rather than by the public sector. Nonethe-
aid is skewed seems less clear-cut, since the less, NGOs should, where necessary, increase
economic situation in RS is now no better and their consultation and coordination with the
may well be significantly worse than in
relevant authorities; and the lesson should be
Bosniac areas.
learned for the future.
There may be important costs from a political
More generally, there is a certain feeling of
point of view. Firstly, the almost exclusive focus
of aid on Bosniac and part-Bosniac adminis- suspicion with regard to the motivations of both
trative units risks compromising perceptions of NGOs and official international agencies. Many
political neutrality on the part of the donors. are seen in some quarters as having hidden
This could weaken the legitimacy of their agendas of one kind or another (particularly,
attempts to influence the political process. but by no means exclusively, religious-based
Secondly, the minimal levels of financial NGOs); and both types of organisation, and at
support to the RS and to the Croat cantons least some of their staff, are seen as being moti-
means that their authorities are likely to see little vated by financial rather than purely altruistic
financial incentive to comply with political motives. The high salaries they pay (by local
conditionality. This could seriously jeopardise standards) contribute to this problem, as does
the whole political process: quite simply, the the habit of flying in expatriate consultants (at
Serb and Croat authorities may see little reason even greater cost), often to perform tasks which
to comply with the political objectives of could have been done (and in some cases are
agencies they believe to be siding with their seen as already having been done) equally well
opponents, and little to lose by failing to do so. by locally-recruited personnel. Officials, at least
and quite possibly many ordinary people, are
acutely aware that the cost of all this comes out of
C.4 Donor coordination and the funds pledged by donors, so that the more
NGOs extravagant foreign agencies are, the less
reconstruction gets done.
A third donor-driven problem arises from the The tendency of some NGOs to go their own
failure of donors to coordinate their activities way, without consulting or informing the rele-
effectively with the authorities. According to the vant authorities, does nothing to help, particul-
BH Minister for Foreign Trade and Economic arly in a country with a strong bureaucratic
Relations:
tradition. The fact that international agencies
Overall reconstruction coordination is still not were virtually absent from Bosnia until the last
satisfactory. The donor sector task forces still operate few years (in contrast to many poorer post-
too much in isolation from the Government. conflict countries) probably also contributes to
(Muratovic, 1997, p4) this problem.
31
D. Economic policies
32
Economic policies
The second option allowing the exchange exchange to match the value of base money (ie
rate to become over-valued might therefore notes and coins in circulation), and not, for
appear more attractive. However, this is at best a example, bank deposits. While it would in
temporary solution; and the scope for taking theory be possible to require the currency board
this path will be critically dependent on Bosnia's arrangement to operate against the total stock of
debt situation. There would again be a cost in money (including bank deposits), 'this would
terms of employment, as export and import- effectively mean a shutdown of the banking
substituting industries would be less able to com- system' (World Bank, 1996c, pi8).
pete than with a more competitive exchange rate. With the narrower system, a general loss of
The over-valuation option is only viable to the confidence domestically would create serious
extent that the country is able to borrow inter- problems. If people try to withdraw their bank
nationally to finance its balance of payments deposits and convert them into foreign exchange
deficit. If it already has an unsustainable level of as well as their cash holdings, 'the authorities
debt, creditors will be unwilling to lend. More- have only two options...: they can try to block the
over, their reluctance will be greatly increased deposit withdrawal or refuse the exchange of
(and the sustainable level of debt greatly reduced) money, that is, they can choose between a bank-
if creditors see the country's debt-servicing capa- ing crisis or a foreign exchange crisis' (World
city as being compromised by institutional Bank, 1996c, pi 8).
arrangements which prevent adjustment of an The currency board also means that the
exchange rate which is already over-valued. country will face a binding constraint on public
The problem of over-valuation could be expenditure, which can only be financed from
compounded in the event of adverse political government revenues and receipts from donors.
developments, such as rising social or political While the tax base has not collapsed to the extent
tensions. During the reconstruction phase, this to which it has in many other post-conflict
could disrupt financial flows, either because of countries, and the exceptionally high level of the
political conditionality or by impeding policy authorities' domestic and foreign liabilities would
changes or specific reconstruction projects. In make further significant borrowing both difficult
the longer term, it would represent a serious and unwise, this will represent an important
obstacle to private borrowing. In either case, the limitation on the flexibility of policy.
effect would be to reduce the supply of foreign Thus the currency board arrangement raises
exchange, and thus reduce the (notional) some potentially very serious problems.
market exchange rate; and this would widen the However, from a political perspective, it is
gap between the fixed official rate and the probably inevitable over the medium term,
notional market rate; in other words, it would precisely because of the constraints it impose on
increase the degree of over-valuation. economic policy. In the current political circum-
Adverse political developments, or the stances, a discretionary monetary policy would
perception of exchange rate over-valuation, only be viable if all decisions were made jointly
could also cause a loss of domestic confidence. If by representatives of all three ethnic groups, on
people believe that the exchange rate is over- a consensus basis. Disagreements would be
valued to such an extent that some form of down- inevitable, leading to a very damaging inertia in
ward adjustment (ie a change in the currency decision-making, which would undermine
board system) is likely, this will encourage people economic policy, macroeconomic stability, and
to convert their local currency into foreign confidence, with potentially serious knock-on
exchange, to avoid losing out. A loss of confidence effects. For example, there would be a strong
for political reasons could well have a similar temptation to resolve inter-Entity (and intra-
effect, as well as a more direct effect in making the Federation) disputes over resources by
exchange rate even more over-valued. competitive inflationary financing. In view of
In principle, people have the right to convert the extent of the needs for resources and the
their local currency to foreign exchange at the very low level of cooperation, there is a serious
mandated exchange rate. This is not an immed- risk that this would lead ultimately to hyper-
iate problem, precisely because the Central inflation, as in the former Yugoslavia.
Bank has to hold enough foreign exchange to It should also be noted that the currency
meet the resulting demand. However, currency board broadly represents a continuation of the
board arrangements generally require the policies being pursued in both Entities since
Central Bank only to hold enough foreign 1994.
33
The IMF, the World Bank and economic policy in Bosnia
34
Economic policies
35
The IMF, the World Bank and economic policy in Bosnia
not generally willing to contribute towards wage (1996b, p34) points out, the system 'clearly runs
costs. As a result, the tight fiscal constraints in the risk of vulnerability to the transfer from
BH limit both the numbers and the quality of below not being forthcoming'. This problem will
staff; and this represents a potential bottleneck be the more acute if, as one World Bank study
in project implementation and policy-making: suggests, 'Tax rates will need to be higher in the
Serb Republic than in the Federation to generate
While most of the Bosnian implementing agencies
the respective revenue contributions because of
have competent staff, their number is very limited,
the greater aggregate population and incomes in
and their capacity to handle a large number of
the Federation' (Foxand Wallich, 1997, pi2).-
projects may be stretched to the limit. Furthermore,
The implications of this vulnerability are
there is competition for highly-qualified people
extremely serious: 'The state's sustainability is a
among foreign institutions located in Bosnia and a
concern in this environment, where a strong degree
growing demand coming from the private sector,
of distrust exists' (Fox and Wallich, 1997, p 11).
resulting in a salary structure that makes it hard to
keep staff in the public sector.
RS, like the Federation, itself faces a tight
financial constraint. At the same time, the RS
(EU/World Bank, 1996a, p6)
authorities have no real political commitment to
The World Bank's approach to public-sector the BH government: given the choice, they
salaries has been based primarily on raising would prefer autonomy or unification with the
salaries at the Federation level into line with those FRY. This provides them with little incentive to
in the Croat areas (and at die national level to divert resources from their own spending prior-
about 25 per cent higher), so as to attract an ities to finance the national government. In
ethnically balanced civil service. This is an essen- 1996, the RS authorities made no contribution
tial objective; but it still leaves some problems. In to the national government, and their initial
particular, the financial support for this policy budget was sent back for adjustment by the
totals only $5m, compared with an annual addi- Parliament because it envisaged expenditure 50
tional cost of $9m pa.19 This leaves die authorities per cent above anticipated revenues, with no
to find an extra $6.5m pa until March 1998, and means of financing the deficit. Further
$9m pa diereafter. Also, no support is planned for spending reduction was required because of a
the cantons or municipalities; and no account is 15 per cent shortfall in revenues (Fox and
taken of salary levels available in die private sector Wallich, 1997, pi6).
or from donor agencies and NGOs themselves. There are signs that the RS authorities
It is interesting to compare the level of remain very reluctant to fund the national gov-
support for salary supplements with the cost of ernment; and, while it is possible that this is only
providing consultants under the Emergency political posturing, this can by no means be
Reconstruction Credit. The former is $5m, to assumed. Overcoming this reluctance may well
support 2,520 staff over the two years of the require heavy-handed donor conditionality;
project's duration an average of about $ 1,000 and to some extent this will be automatic, since a
per person-year. Almost the same amount viable national budget would be an essential
($4.53m) is allocated for some 26 person-years precondition for an IMF programme, and thus
of consultancy services an average of for debt reduction (see Section B2), quite apart
$174,000 per person-year (World Bank, 1996a, from more direct donor conditionality.
Annex I Appendix 5). In other words, the However, it is not clear that this form of
externally-financed salary supplement for the conditionality will be effective; in fact, there
average civil servant for a year is enough to would appear to be a risk that it could prove
finance the average consultant for about one seriously counter-productive. As noted earlier,
and a half working days. it is possible that the RS authorities would see a
Another potential problem is the distribution political advantage in derailing the debt reduc-
of revenues between levels of government. The tion process, and delaying the IMF programme
most sensitive aspect of this problem is the until after June could contribute significantly to
requirement of contributions from the Entities this objective. This in turn would require no
to the national government. This is essential to more than procrastination on their commit-
the operation of the BH government, which has ment to funding the national government. More
no independent source of revenue (until such direct and explicit (and possibly heavy-handed)
time as the national parliament approves taxes donor pressure may therefore be required to
at the national level); but, as the World Bank secure a favourable outcome.
36
Economic policies
A second issue in RS is that of transfers from The problem is that there are marked differ-
the Entity level (where most revenues are ences in the levels of economic activity, incomes
collected) to the municipalities. While Serb and employment between different areas of the
nationalists dominate the Entity authorities, the country; and these differences are, to a great
dependence of municipalities on such transfers extent polarised along ethnic lines. Most Croat
provides an opportunity to manipulate the areas escaped both the worst of the direct effects
system to penalise more moderate authorities at both of the war (which afflict the Muslim areas)
the local level. There are signs that this is already and of the UN sanctions (which have severely
occurring: the authorities in Banja Luka (the affected the RS economy); and they have received
centre of the more moderate political forces in substantial support from Croatia. As a result,
RS) have 'argued strongly that [Banja Luka] is these areas have substantially higher living
receiving less than its legislated share of taxes' standards than the rest of the country (Table 6).
(Fox and Wallich, 1997, pl6). If, as seems likely, the effects of UN sanctions on
A related issue is the direct or indirect transfer RS can be reversed more quickly than the
of resources between administrative units at the destruction and disruption resulting from the
same level (for example, between the Entities or war in Bosniac areas, a similar gap could open
between cantons within the Federation). This is up between these two regions.
critically important because of the high level of In the absence of transfers between the various
decentralisation and the ethnic base of admin- administrative units, the very tight fiscal con-
istrative units. As the World Bank has observed: straints imposed by the currency board limit
as the failure of the Former Yugoslavia demon- spending within each Entity, canton, and munici-
strates, a decentralized structure is only viable if pality to the amount of revenue which can be
inter-Entity and cantonal links are mutually raised by its authorities. This would allow a much
beneficial. It is essential...that there not be too much higher level of spending (and thus of social
cross-subsidization. provision, and support to production) and/or
(World Bank, 1996b, p xx) lower tax rates in richer areas, while imposing
37
The IMF, the World Bank and economic policy in Bosnia
very harsh financial constraints and/or higher lower in the areas with the higher rates of pov-
taxation in poorer areas. The result would be an erty), and widen the political gaps between the
increasing polarisation between the areas inhab- ethnic groups (since richer areas seldom want the
ited by the three ethnic groups. This would both encumbrance of poorer areas within the same
increase poverty (as income growth would be country).
38
Economic policies
One possible approach to this problem would This would not eliminate potential political
be for donors to establish a fund for support of problems. It would require the initial approval
recurrent expenditure, on a regional basis. This of all parties, which would be difficult to secure
could be done using anticipated balance-of- without additional aid flows; it would mean
payments support, for example, under World skewing funds strongly away from Croat areas;
Bank adjustment loans. Resentment against and some areas would inevitably receive less
donors could be limited by basing the geograp- than they are currently expecting. However,
hical distribution of funds clearly on an explicit the use of a transparent formula based on
formula measuring needs22 (for example, income levels would at least make the rationale
providing funds in direct proportion to the of the process explicit, and the use of aid flows
shortfall of local income in the jurisdiction of rather than domestic resources would make
each administrative unit relative to the national the trade-off" between the interests of different
average). areas somewhat less acute.
D.3 Privatisation and the and frozen foreign exchange deposits held by
settlement of domestic liabilities 80 per cent of the population), failure to settle
them could have high social and political costs.
It is currently proposed that there should be a This problem does not arise in RS, where the
rapid and wholesale privatisation of the econ- authorities claim to have no such liabilities.
omy. This idea, and the outline of the approach It is proposed that state companies should sell
to privatisation, appears to originate with the off functioning assets (eg vehicles and other
World Bank, appearing in their first post-war equipment) as quickly as possible, retaining the
paper on BH (World Bank, 1995b, Chapter proceeds, before the enterprises themselves are
IV). privatised. The companies would also hive off
As elsewhere, the recommendation for non-viable operations (which would be
privatisation is partly motivated by the view that liquidated) and assets not related to their core
it will lead to a more efficient industrial sector, activities, such as workers' housing, which would
promoting faster economic recovery, while be sold where possible. The large conglomerates
limiting the cost to the public sector. In partic- would then be split into their component parts,
ular, coupled with efforts to promote the which would be privatised. The intention is that
development of new enterprises (see Section small-scale privatisation should begin during
D4), it is intended to avoid any tendency to the first half of 1997, and large-scale privatisa-
recreate the pre-war industrial sector. This tion during the second half; and that at least one
objective is entirely appropriate. (See Box 2.) bank should be privatised by the end of the year
In the Federation, at least, there is also a (OHR/EU/UST, 1997).
second motivation for privatisation: to provide There is a high level of decentralisation in the
the means for the authorities to settle the proposed approach to privatisation, at least
domestic liabilities accumulated during the war. within the Federation. Each enterprise (or com-
This linkage is important: since it is unlikely that ponent of a conglomerate) is to be sold by the
the proceeds even of the full privatisation canton or group of cantons in which it operates.
programme will be sufficient to settle all of the This is largely intended to preserve the ethnic
liabilities in full, any reduction in its scale would identities of enterprises, so as to prevent resent-
need to be matched by a reduction in the ments arising from ownership transfers
payments to holders of such liabilities; and, in between ethnic groups, or the operation of
view of the nature and spread of the liabilities enterprises by different ethnic groups from
(which include arrears on wages and pensions, those in the areas where they operate.
39
The IMF, the World Bank and economic policy in Bosnia
On the buyers' side, the proposal is that suggests that this is unlikely to be viable. The
outstanding liabilities (for example, salary and vouchers could then be used, together with cash,
pension arrears, restitutions for war damage, to buy privatised assets, including housing, and
and frozen foreign exchange deposits) should be company assets such as vehicles and equipment,
settled by issuing their holders with vouchers. as well as shares in privatised companies. In
There has been some suggestion of an additional some cases, priority may be given to bids which
issue of vouchers to the population at large, as include a cash component, or full payment in
elsewhere in Eastern Europe; but the scale of the cash may be required.
liabilities (estimated at more than DM]3bn23) There is a great deal of urgency in the
relative to the likely proceeds of privatisation recommendations on privatisation. Wherever it
40
Economic policies
is proposed, the emphasis is always on The strong statements of the plight of socially-
completing the process as quickly as possible. The owned conglomerates is at odds with assess-
reason advanced is that privatisation will be ments made elsewhere sometimes elsewhere
necessary for a resumption of production by the in the same documents where a more positive
enterprises concerned (which will itself be essen- picture is presented, for example as evidence of
tial to recovery, given their importance), since the 'indicators of a revival of the industrial sector'.
government does not have the resources to
Only a small proportion of the overall industrial
finance their rehabilitation.
capacity has been damaged, and some regions have
The need for rapid privatisation is generally
been almost completely spared (Banja Luka and
supported by a strong emphasis on the severity
southern Herzegovina, for example)....[MJany
of the enterprises' plight:
plants are still relatively well-equipped with
Most of these conglomerates were...heavily serviceable machinery capable of producing and
damaged during the conflict. marketing good quality products.
(EU/World Bank, 1996b, p8) (EU/EBRD/World Bank, 1996, Box 1, p78)
The prewar conglomerates were especially hard hit Equally, the financial constraints on the
by the war.... Most of them were split between the government's ability to rehabilitate socially-
Entities, their industrial facilities have been owned enterprises arise primarily because the
damaged, and their management methods are donors are unwilling to provide support for this
inappropriate in the new market economy. purpose. This, in turn, is presumably because
(EU/EBRD/World Bank, 1996, Box 3, p82) they have a preference for the rapid privatisation
option.
However, the speed at which privatisation is
Confidential survey evidence for the donors'
expected to take place has some severe disad-
Industry Task-Force suggests a picture of the
vantages: situation of socially-owned conglomerates
Selling off assets and enterprises quickly will somewhere between the two extremes quoted
greatly reduce the proceeds. In the current above. Of the 50 largest socially-owned enter-
situation, where the economy is still at a very prises in the Federation (ie those 'especially hard
low ebb, domestic demand is weaker than it is hit' by the war, in the Entity with the more severe
likely to be in a few years. This will sub- war damage), enterprises accounting for 35 per
stantially reduce the profitability of the enter- cent of pre-war employment had 70 per cent or
prises. At the same time, incomes are low and more of their pre-war capacity still operable in
savings in many cases depleted. This will limit 1996 in some cases more than 95 per cent.
the extent of cash contributions to purchasing Those accounting for a further 45 per cent of pre-
assets. war employment had between 40 per cent and 65
per cent of their previous capacity.
Where cash contributions are required or A greater problem than the damage to pre-war
preferred, rapid privatisation will skew capacity is under-utilisation of the capacity which
participation towards those with money. In remains. Of die 50 enterprises, 20 (accounting
Muslim areas, at least, these broadly include for 60 per cent of pre-war employment) were
returnees (who are, in some areas at least, operating at 20 per cent or less of their present
resented by those who stayed to suffer the capacity, while only nine (5.5 per cent of pre-war
privations of the war); war profiteers and employment) had capacity utilisation of more
criminals (who are resented even more); and than 50 per cent. Only two enterprises, repres-
employees of international agencies (who enting just 1 per cent of pre-war employment,
may be seen as profiting further from the were operating at more than 75 per cent of
policies of their employers). capacity.
Selling off functioning company assets (unless In many cases, the capital investment
they are genuinely surplus to requirements) required to achieve full utilisation of the remain-
is likely to reduce the value of the companies ing capacity, or the restoration of pre-war
themselves, since they will ultimately have to capacity, is very limited. By providing capital
be replaced, almost certainly at higher cost. selectively to socially-owned enterprises to this
end only where the cost is DM 11,000 ($6,500) or
It is also unclear that the justification put less per job, it would be possible to generate
forward for rapid privatisation is wholly valid. nearly 45,000 jobs at a total cost of less than
41
The IMF, the World Bank and economic policy in Bosnia
DM200m ($120m). This represents a one-time transfer which could be gained in the case of
capital cost of DM4,350 ($2,570) per job less foreign investors. There is thus a risk of
than half the cost per person-year of employ- creating an economy based on technologically
ment created by the Emergency Public Works backward and under-capitalised companies,
programme.24 The scale of the benefits could be which would substantially weaken BH's long-
increased further by expanding the scheme to term prospects.
cover smaller enterprises and those in RS.
The weak financial position of most of the
At present, orthodox commercial lending is
population would give rise to considerable
very limited, almost entirely short-term, and
pressure to sell shares, raising the risk that the
extremely expensive, so the main sources of
market would be flooded and prices would
financing for the industrial sector are various
plummet. Once again, those with cash would
credit schemes being supported by donors such
be able to buy up assets very cheaply, skewing
as the World Bank and USAID. However, these
economic power to a relatively small elite, and
schemes are exclusively for small and medium
greatly reducing the benefits to the bulk of
enterprises and focused heavily on the private
the population (who might understandably
sector, and are therefore likely to exclude most
feel hard done by).
of the above investments. Socially owned enter-
prises are eligible for support under the World The decentralised basis of privatisation will en-
Bank programme only if they are 'have good trench the ethnic division of ownership, imply-
privatisation potential'. ing a strong polarisation ofownership, with major
To the extent that the larger socially-owned enterprises clearly divided along ethnic lines.
enterprises are excluded from access to these (or
other affordable) funds, the result will be to Politically, there was initially some degree of
impede their rehabilitation, by limiting their ambivalence towards privatisation on the part of
ability to invest; to force them into more the RS authorities. The 1996 policy statement,
expensive sources of funding, damaging their for example, seems somewhat at odds with the
long-term financial position; and to force them objectives of rapid and near-universal privatisa-
to sell assets which may be needed for their tion and the operation of market principles:
future operation, or which might be sold in
In the sector of the economy with majority state
more favourable market conditions later. The
ownership (state corporations), the state will
overall effect will be to weaken their financial
determine prices. The essential principle governing
position, possibly to jeopardise their viability, this...is 'cost plus'....The role of the state is to 'iron
and almost certainly to reduce the proceeds if or out' losses and income between state corporations.
when they are ultimately privatised.
(RS, 1996, pp 120-1)
As well as the pace of privatisation, the mech-
anisms proposed also raise some potentially However, this now appears to have been
serious problems: resolved, and there seems to be a reasonable
degree of commitment to privatisation
Sale to domestic buyers through the voucher although the depth of such commitment may be
system will not provide the capital necessary to open to question.
finance rehabilitation. Enterprises will be under-
The privatisation process envisaged in RS is
capitalised and critically dependent on their
very different from that in the Federation.
ability to borrow; but the availability of
Under the Privatisation Act of July 1996, 55 per
commercial lending is likely to remain
cent of shares in enterprises to be privatised will
relatively limited over the medium term. This
be transferred to six social funds,25 which will
could represent a significant obstacle to econ-
ultimately be transformed into stock-holding
omic recovery.
companies, but will not participate in their
Because of the war, enterprises have fallen management; 30 per cent of shares will be distrib-
several years behind in technology compared uted free to the adult population, through a
with foreign competitors; and for some indus- voucher system; and the remaining 15 per cent
tries, catching up in technology will be essen- of shares will either be offered for sale on the
tial to regaining their competitive position. capital market, or be sold to strategic investors
However, selling enterprises to domestic subject to conditions relating to business
investors is unlikely to provide the technology activities, investment, employment, and so on.
42
Economic policies
43
The IMF, the World Bank and economic policy in Bosnia
However, the World Bank does not agree from a rapid privatisation. Moreover, a slower
with this approach. The social funds are seen as pace of privatisation is arguably more viable in
too passive; individual investors are seen as too RS than in the Federation, because the problems
small to take an active interest in the manage- of state-owned enterprises arise primarily from
ment of firms; and the stake to be offered to economic sanctions (which have now been lifted)
strategic investors is seen as inadequate to rather than from war-damage. This suggests
provide them with an incentive to overcome the that rehabilitation costs (which arise mainly from
resulting inertia. In addition, the conditional lack of maintenance) should be relatively
sale of strategic stakes is seen as unnecessarily limited, so that the financial constraints on the
restrictive, unenforceable, and non-transparent. government will not be such an important
The Bank would like to see the privatisation limiting factor; and that the financial situation of
of the social funds, consolidation of their claims the enterprises (and thus the potential revenues
in individual enterprises, and the development from privatisation) should improve fairly
of a more active role in enterprise management; quickly as recovery progresses.
the abandonment of conditions on strategic There is also a significant political dimension
investments; and a greater role for foreign to this issue. The exclusive focus of the privatisa-
investment (EU/World Bank, 1996b, p8). tion programme within RS at the Entity level
These differences are probably not insuper- suggests a consolidation of RS as a self-contain-
able, since the RS position appears to be ed economic unit. With an immediate 100 per
negotiable. However, the process of negotiation cent privatisation, ownership of each enterprise
and the passage of new legislation is likely to can be expected to extend, to a greater or lesser
delay the process somewhat. extent, throughout RS, without crossing the
The pace of privatisation is again an issue. As boundary into the Federation, or therefore to
in the Federation (if not more so), the current non-Serb investors. Once again, this implies a step
weak economic position will limit the proceeds towards separation rather than reunification.
44
Economic policies
This effect could be moderated by a phased of this process, intended to allow the develop-
(51 per cent-49 per cent) approach, to be ment of domestic sources of financing over the
completed on a BH-wide basis if and when the medium term.
political circumstances permit. The govern- SME development is seen as a major source of
ment's share of rehabilitation costs could readily employment generation, together with the
be financed from the proceeds of the 51 per cent rehabilitation and privatisation of public enter-
sell-off, since (according to the authorities) there prises. The promotion of SMEs is probably wise:
are no competing government liabilities which while many of the management and financial
need to be settled. skills required for a thriving SME sector are
However, there are two critical obstacles to currently lacking, there was a significant level of
this option: small-scale private sector activity before the war;
and in Sarajevo, at least, the SME sector has
Since the authorities' objective is separation already recovered significantly. The manage-
from the Federation, they cannot be expected ment skills required should be developed in the
to adopt a policy aimed explicitly at reunifica- future with the help of donor-supported
tion. training courses, although the process may take
In the absence of outstanding liabilities, the some time.
proceeds from the 15 per cent stake sold on However, there are some caveats to the likely
the market or to strategic investors will benefits of SME development. Firstly, there
contribute directly to government spending. appears to be a strong sectoral bias in SME
In view of the high expenditure needs, the development so far, at least in the Federation,
relatively weak revenue base, and the tight towards trading, retailing, and other services
fiscal constraint imposed by the currency such as restaurants and transport, with much
board, the authorities might well prefer to less activity in the productive sectors
receive lower proceeds now rather than especially the production of internationally
higher proceeds in the future. This incentive tradeable goods. This may change over time, as
problem is much more acute because the some service-providers are reportedly
second instalment would be conditional on a diversifying into the production of goods; but it
degree of national reconciliation which could is also likely to be a slow process.
almost certainly not occur until the current An SME sector based too heavily on non-
RS authorities had lost power. tradeable services raises two important problems:
It will be critically dependent on the state of
the domestic economy; and if declining aid
D.4 Private sector development flows, coupled with the currency board
system, lead to a severe recession within three
The long-term development strategy envisaged
to five years (as suggested in Section Dl), the
for Bosnia is based on development of the sector could be disproportionately affected,
private sector. This entails three broad compon- with knock-on effects on employment.
ents:
It implies a substantial negative impact of
privatisation of state-owned enterprises (as enterprise development on the balance of
discussed in Section D3); payments: within the Federation, firms
promotion of small and medium enterprises import 60 per cent of their inputs, but export
(SMEs); only 3 per cent of their output28
rehabilitation and privatisation of the (EU/EBRD/World Bank, 1996, p81).
banking system (as discussed in Section D5). Secondly, at least some of the SME funds
The encouragement of SMEs is partly direct, seem likely to be unduly biased in favour of the
through the provision by donors of lines of better-off. The requirement of the World Bank
credit (World Bank and USAID) and equity fund that an enterprise should have been
funds (EBRD) in the Federation. In addition, operating for at least two years before receiving
the intention is to provide a favourable environ- credit limits its use to those who have the
ment for private sector development through resources needed to sustain an enterprise for
deregulation, particularly of the labour market two years without credit.29
(as discussed in Section D6). Rehabilitation and Thirdly, there would appear to be a danger of
privatisation of the banking sector is also a part a regional and ethnic bias in the support of
45
The IMF, the World Bank and economic policy in Bosnia
SMEs. This could arise both directly and them of their existing overhang of bad debts,
indirectly. The focus of the SME support funds with a view to putting them on a sound financial
at present is strongly, if not exclusively, on the footing and privatising them where possible, or
Federation; and some funds have an explicit liquidating them where the situation is
regional focus even within the Federation, for irredeemable;
example, the USAID programme in the providing technical assistance and other
(Bosniac) Tuzla area. The World Bank's two- support to existing small private banks;
year rule limits access to funds in areas where 'supporting the development and growth of
the private sector was worst affected during the
new private banks' (EU/World Bank, 1996b,
war, most notably the enclaves and areas of
P9);
conflict, where most enterprises are likely to
opening the market quickly (by end-1997) to
have been established more recently; and in
foreign competition; and
areas where the economy remains most
developing effective mechanisms for banking
depressed, so that few people have their own
supervision.
resources to sustain enterprises.
Overall, while SME development is approp- The first of these elements is clearly
riate as an element of employment generation, appropriate. The financial situation of the
greater consideration should be given to what major banks is such that their ability to operate is
type of enterprises are being supported, in what seriously impaired; and this represents an
areas, and who owns them. It is also important important constraint on private sector
to avoid over-optimism: the potential of this development. In the long term, there is no good
sector to absorb labour is likely to remain reason to retain the banking system within the
relatively limited, at least over the medium public sector, although the appropriate pace of
term; and there is a real risk that many of the privatisation is open to debate (as discussed in
jobs created will be lost later if the sector is Section D3). The last element improving
severely affected by the macroeconomic effects supervisory mechanisms is clearly essential.
of declining aidflows,especially if this coincides
Support for existing small banks is less clearly a
with the period when credits are due to be
priority, but probably desirable. The small
repaid.
private banks are under-resourced and inexper-
ienced, but they provide a useful alternative
source offinancialservices. Their role will remain
D.5 Financial sector important at least until the larger banks are
rehabilitation rehabilitated. However, encouraging the devel-
opment of new private banks is more question-
The banking system faces extremely acute
able. The banking sector is already over-
problems; and this constitutes a major constraint
populated, with a total of 49 banks operating in
to the rehabilitation of socially-owned enterprises,
early 1996 (World Bank, 1996b, p52); and both
the development of the private sector, and
new and existing private banks would probably
economic recovery. An estimated 90-95 per cent
be too small to compete effectively in the long
of the assets of the banking sector are non-
performing, and the sector is divided between term most of the current private banks have
large socially-owned banks virtually paralysed by less than DM2.5m of net capital (EU/World Bank,
this encumbrance, and small under-capitalised 1996b, p9). A shake-out of the system is likely
private banks with very limited experience of over the medium term, through a combination of
financial intermediation. The overall result is that mergers and bankruptcies. The benefits of
very litde commercial lending is available, and opening the banking sector to foreign compet-
what there is is short-term and at very high real ition or at least of doing so immediately are
interest rates (2-6 per cent per month). also debatable.
The World Bank (1996b, p58) presages a
In view of the private-sector orientation of the
current economic strategy, this makes banking difference of view with the authorities on the
sector rehabilitation a high priority. This is to be nature of the financial sector. The Bank antici-
based on five main elements: pates that the authorities will opt for a universal
banking system, in which the same financial
the rehabilitation and restructuring of the institutions provide the whole range of financial
large state-owned banks, including relieving services (insurance, for example, as well as
46
Economic policies
deposit-taking and lending), partly because this Bank argues that this option is inappropriate to
is in line with the situation in Western Europe, BH, because it 'may create major regulatory
and may thus be seen as contributing to BH's difficulties'. There seems little reason to
ultimate accession to the EU. However, the question this judgement.
47
The IMF, the World Bank and economic policy in Bosnia
unification of rates at a lower level would imply unless distrust or national solidarity were suffic-
a greater fiscal cost to RS than to the Federation. ient to overcome this, the RS authorities would
In any event, the RS authorities appear to face a substantial loss of revenue as a result.
have little desire to reduce tariffs, in view of the They may be forced to match the Federation's
current tight fiscal constraints. They also appear tariff levels; but, to the extent that they are able
to envisage at least the possibility of introducing to, they may prefer the alternatives of obstruct-
new trade barriers in some circumstances: ing the free movement of goods and fostering
distrust and anti-Federation solidarity.
Restrictive measures and import limits, as well as
The immediate needs for low and uniform
customs tariffs will not be introduced without a
tariffs are relatively limited. The potential
detailed assessment of domestic costs and resources
benefits of WTO membership are small; and, as
and effective protection levels.
discussed above, the prospect of even starting
(RS, 1996, pi 19)
the laborious process of EU accession remains
The operation of different trade regimes distant. There could also be some economic
between the two Entities would raise substantial benefits from maintaining (temporarily) a
problems. If there is free movement of goods, moderate level of protection, on a selective basis,
there will be a strong incentive for importers in in the form of higher import tariffs although
RS to import goods through the Federation, in there are some potentially important trade-offs
order to benefit from the lower tariffs; and involved.
48
Economic policies
the level of the real exchange rate would benefits in the form of employment. The
throughout be lower (and thus the balance negative effect on exports generally associated
of payments stronger) than under the with protection should be limited, as it arises
immediate liberalisation option, ending up largely from upward pressure on the nominal
at the same level at the end of the process; exchange rate, which cannot be reflected in
actual rates under the currency board system.
to the extent that producers benefited from If there were thought to be a significant neg-
the breathing-space offered by temporary ative effect on exports, this could be countered
protection, and thus achieved a higher level by a system of export subsidies at a rate no
of production of import substitutes (or were higher than import tariff levels. Since the trade
in a stronger position to move into export balance is likely to remain substantially in
production), the balance-of-payments posi- deficit for the foreseeable future, the net effect
tion would be strengthened for a given real on the public finances should remain positive.
exchange rate, and a higher real exchange To limit the distortionary effect, it would be
rate would thus be appropriate; and critical to ensure that higher tariffs were
the reserves accumulated during the earlier genuinely temporary, and the schedule for their
part of the process would provide an reduction strictly adhered to. This often proves
additional cushion, to finance a current- difficult; and in BH could be a particular prob-
account deficit; and any reduction in the lem if the benefits of protection were signifi-
accumulation of debt would improve the cantly skewed in ethnic terms." There appears
current-account deficit by lowering interest to be a need for the schedule of tariff reduction
payments. to be embodied in entrenched (ie unchange-
able) legislation. However, the general aspira-
After the six-year period for which the
tion to membership of the European Union
currency board is mandated, if the political
would represent an increasingly strong
circumstances were conducive, it would be
possible to adjust the exchange rate if necess- incentive for tariff reduction, as the prospect of
ary. The mitigating factors noted above should accession came (at least slightly) closer.
at least delay the point at which over-valuation There is a critically important caveat to any
of the real exchange rate occurs, reducing the automatic process of import liberalisation
likelihood of a financial crisis in the interim. through entrenched legislation. Whatever the
A second caveat is the argument that merits of this particular case, allowing the
protection would give rise to a distorted set of authorities to pass entrenched legislation
economic incentives, encouraging production would create a precedent; and could allow the
of goods which could be imported more present nationalist leaderships to tie the hands
cheaply, and discriminating against export of future moderate authorities. Even with the
production. However, while the economy is requirement of consensus, this could create
operating far below full capacity, over-produc- serious obstacles to a long-term political
tion of import substitutes would do little eco- solution, unless there were some form of
nomic harm, and could bring substantial external control or constraint.
49
The IMF, the World Bank and economic policy in Bosnia
D.7 Labour market deregulation the former Yugoslavia was widely seen (not least
by some Bosnians) as 'living beyond its means'.
As noted above, part of the strategy for the Bosnia's means are now more limited than ever;
development of the private sector and the and it is not realistic to expect the high wage-
creation of employment is the liberalisation of levels and long holidays which existed before
the labour market, so as to remove an obstacle to the war to be reinstated. Neither is it realistic, in
SME viability and to encourage enterprises of all the current state of economic uncertainty and
sizes to take on more employees. Liberalisation change, to expect employers to take on staff
is also intended to discourage the diversion of whom they cannot later shed (or only at a
economic activity into the informal sector, which prohibitive cost); and, with the current
would both remove workers from even the most exceptionally high level of unemployment, an
basic protection, such as health and safety artificially high minimum wage would merely
provisions, as well as reducing the tax base. add to the problem, making any kind of social
This policy encompasses three main safety-net unviable.
elements: Lowering tax rates is probably also necessary.
At present, well over 50 per cent of the gross wage
the removal of restrictive regulations on is taken up by taxes and social contributions; and
employment contracts (eg those making it this is likely to be a significant impediment to
difficult and/or expensive to fire workers, employment. It is argued by some that a
requiring very favourable annual leave reduction in rates could actually have a positive
arrangements, etc); overall effect on the public-sector finances, by
lowering minimum wage rates, or removing encouraging more formal-sector employment
them altogether; and (and thus broadening the tax base) and reducing
lowering tax rates on wages (including emp- the need for expenditure on unemployment
loyer and employee contributions for state benefits and other social safety-nets. However,
pensions, unemployment benefits and health this view is probably exaggerated.
services). In all three aspects, the question is how far to go;
It seems fairly clear that some movement in and the details of these policies are as yet too vague
this direction is necessary. Even before the war, to assess whether they are likely to go too far.
50
Economic policies
However, there are some important caveats: labour market prospects of the two Entities
(and of the two parts of the Federation) may
Potential investors (foreign and domestic) be very different, the prospects of a satis-
could be deterred by the prospect of having factory agreement on re-regulation being
to increase wages and improve contractual reached at the national level are limited. It is
terms in the future. This risk could be likely that this would entail a long process of
reduced by limiting changes to newly- negotiation, which would take up scarce
contracted staff, which would also provide a administrative resources, as well as creating
disincentive to shedding staff unnecessarily; considerable potential for dispute. It is not
but investors would still anticipate an clear that this is necessarily preferable to later
increase in production costs, (albeit a more arguments about low-wage competition.
gradual one). The investors discouraged
As in the case of trade, whatever the merits
would be those who might otherwise make a
of this particular case, establishing a
long-term commitment to production in
precedent for entrenched legislation would
BH, rather than foot-loose industries ready be unhelpful unless such legislation were
to move on once real labour costs increased subject to some form of external control.
although the latter may also be put off if
they thought their window of opportunity
All in all, this may be an issue worth
would be reduced so far as to make considering; but it is far from clear that an
investment unviable. automatic labour-market re-regulation is
If BH is to perform well in an increasingly desirable. A more general commitment to
globalised world economy, it will have to move gradually towards provisions in line with
retain its international competitiveness over the EU's Social Chapter might be more
the long term. It will be important to ensure appropriate; but the potential for dispute and
that any re-regulation of the labour market thus for political inertia would again be
does not compromise this objective, either considerable.
through its nature or through its rate of A third alternative would be to establish a
implementation. non-entrenched schedule of changes, begin-
ning in, say, three to five years' time, leading
It would be very difficult to make a realistic
progressively from the (post-deregulation)
estimate ex-ante of the rate at which mini-
status quo to reach the standards of the EU's
mum wages could realistically be increased,
Social Chapter at the (conservatively) expected
or contractual regulations reimposed. Since
time of accession. It would be preferable to
an automatic re-regulation would probably
allow some scope for delaying the start of the
need to take the form of entrenched legisla-
process and adjusting its pace after the initial
tion passed at the outset (to overcome politi-
grace period, in accordance with the economic
cal inertia), over-optimism could be very
circumstances of the time and revised
damaging, unduly increasing unemploy-
expectations on the timing of accession.
ment.
Allowing for more detailed amendment would
Since responsibility for labour-market probably not be desirable, as this would
regulation is held at the Entity level, and the provide much greater scope for dispute.
51
The IMF, the World Bank and economic policy in Bosnia
D.8 Utilities and public services quick: for water, sanitation, and solid waste, the
objective is to recover all operations and main-
Beyond physical reconstruction and rehabil- tenance costs in three years, with full cost
itation, the intention is to reunify the public utility recovery afterfiveyears. Social-pricing mechan-
infrastructure between the Entities. Energy, water, isms (to limit the social impact) are regularly
and telecommunications systems were originally mentioned in Bank documents in this context,
developed for Bosnia as a whole, and were but only in passing. There is no discussion of the
intricately linked between the Entities prior to the types of mechanism which could be used, or of
war. They have now been effectively separated issues in their design and application.
along the inter-Entity boundary, to the detriment The desire to increase cost recovery is
of efficiency, service costs, and financial viability. motivated primarily by the fiscal constraints on
Reintegration is highly desirable from an economic the public sector no doubt considerations of
perspective, and would be a significant step economic efficiency are also at play, but these
towards reunification. However, precisely because are not emphasised. It should be noted that cost
of the latter aspect, there may be important recovery was well developed prior to the war, so
political obstacles to movement in this direction. the perception problem which arises when fees
A second, and more controversial, policy in are introduced for previously free services
this area is to develop and extend cost recovery should not be serious.
for services such as water, sanitation, and solid- Nonetheless, there are potential concerns
waste disposal, as well as for energy supplies about the extent of cost recovery, the pace of its
(electricity, gas, and district heating). The implementation, the potential social impact,
proposed timetable for cost recovery is relatively and the regional/ethnic dimensions.
52
Economic policies
53
The IMF, the World Bank and economic policy in Bosnia
These aims require very different policies in labour could contribute to rural unemployment,
some respects; and it seems possible that policies declining real wage levels, and rural-urban
directed towards longer-term objectives are migration (adding to urban unemployment rates).
being started too soon. For example, support A long-term agricultural strategy is needed.
for farm mechanisation (financing for tractors, However, uncertainties relating both to BH's
for example), and the land bank will tend to political future and to the prospects for EU
increase the size and capital-intensity of farms, accession make devising a strategy a compli-
which implies a reduction in labour use. In some cated process. Creating the conditions for EU
areas, population shifts from rural to urban membership will be an important objective; but
areas have already occurred and are unlikely to it will be important to be realistic about the likely
be reversed in the near future. However, there time-frame of accession, and to ensure the
may be other areas where the shedding of viability of the sector in the interim.
54
. Social dimensions
55
The IMF, the World Bank and economic policy in Bosnia
of small and medium enterprises. However, it is A fairly limited adjustment to take account of
recognised that this will not be achieved quickly; these considerations would have a substantial
and that domestic social safety-nets will be effect on the results. If the growth rate of employ-
inadequate to fill the gap in incomes for the ment were one-third lower than the World Bank
immediate future. Thus the World Bank projections for output growth (by no means a
(1996b, pi5) acknowledges that: pessimistic assumption), unemployment would
A significant share of the population will continue
remain between 24 per cent and 39 per cent in
to depend on assistance in the medium
2000; and full employment of the current popula-
term...Temporary programs are required until tion would be achieved only between 2006 and
pension, unemployment and social assistance 2010. It would take until 2019-27 to reabsorb all
systems are restarted. of the refugees into the labour market.
At present, emergency food-aid is an impor-
If the World Bank's projections for output tant form of social support. However, it is largely
growth (World Bank, 1996b, Table 5.3) prove an overhang from the war, and is being phased
correct, and employment grows in line with out by donors. The proportion of the population
output, unemployment would fall to somewhere receiving food aid is officially estimated to have
between 6 per cent and 25 per cent in 2000 reached 80 per cent in 1995, although some
(assuming that no refugees return, but allowing informed observers believe the figure to be
for 0.6 per cent pa population growth). In other much lower. The Federation authorities expect
words, there would be no scope for reabsorbing
food-aid recipients to decline to 40 per cent of the
refugees into the labour market without adding
population in 1997, 20 per cent in 1998 and less
to unemployment until at least 2001. At the
higher starting-point for unemployment, full than 5 per cent in 1999 (World Bank, 1996b, pi5).
employment of the current population would be Apart from food aid, there are two main
reached only in 2004. If the projected growth temporary programmes for income support:
rate for 2001-5 were continued thereafter, The Emergency Public Works (EPW) pro-
refugees could then be fully reabsorbed into the gramme is intended to increase employment
labour market by 2006 on the most optimistic opportunities until private-sector employment
scenario, or 2011 on the most pessimistic. generation takes over, by providing funds for
However, these projections are fairly sensi- small, labour-intensive rehabilitation projects.
tive to the assumptions on which they are based. The Emergency Social Fund (ESF) is intended
Moreover, as noted above, the World Bank mainly to provide a minimum level of social
projections appear very optimistic; and extra- support to the poorest households, in the form
polating the projected 2001-5 growth rate (8.4 of monthly cash payments, until the pensions,
per cent pa) into the indefinite future is almost unemployment benefit, and other social support
certainly not realistic. It also seems questionable systems are once again fully operational.
that a 1 per cent increase in output would lead
directly to a 1 per cent increase in employment. However, there are serious doubts about the
Apart from anything else, real wages are size of these programmes relative to the scale of
currently very low, and capital very scarce (at the problem; and their duration appears to fall
least in RS and Bosniac areas); and a one-to-one far short of the likely time-frame for the restora-
relationship between output growth and tion either of full employment or of benefit
employment growth would imply avoiding any payments. Both of these problems are com-
increase in either the real wage rate or the share pounded by the major shortfalls in cofinancing
of capital in total income. Apart from the for these two programmes, which will further
question about its realism, the assumption of reduce their scale and duration.
constant real wages would imply very high levels The EPW programme is, in principle, very
of poverty (and therefore a considerable need helpful, although its scale is very limited. The
for social support) for employed workers and total amount originally envisaged was $45m
their families. (It should also be borne in mind over two years, implying the creation of about
that the jobs associated with externally- 3,800 jobs for the two years of its operation33
supported reconstruction will be lost by 2000 as enough to reduce unemployment by less than
the reconstruction programme winds down; 0.4 per cent. If the current financing gap for this
and that demobilisation will further reduce project is not filled, this will be reduced to about
employment from the 1996 level.) 0.1 percent.
56
Social dimensions
The ESF is also very welcome, but limited in current scale of assistance aimed at meeting
terms of its coverage, the level of payments them; and that the time-frame for reducing
provided, and its likely duration. Coverage rep- dependence on social safety nets, and for the
resents less than half of the number of people return of refugees, is considerably longer than
unemployed (and is likely to include a large the World Bank appears to envisage. The
proportion of recipients not classified as unem- statement quoted above, that 'a significant share
ployed, such as those above working age and of the population will continue to depend on
dependent on pensions, orphans, and house- assistance in the medium term' does not come
holds with some employment but including close to reflecting the gravity of the situation.
members with war-related disabilities). Coupled with the very short time-frame of the
The ESF is supposed to provide monthly ESF and EPW programmes, and the rapid phasing
payments to households totalling DM5m out of food aid, this implies a choice between
(US$3m), spread between 150,000 poor house- widespread and severe poverty, or an intolerable
holds across the country, and 100,000 orphans burden on the public finances to support safety-
and war disabled in four municipalities (World net programmes for the next 20-30 years.
Bank, 1996c, pp 9, 93). The average monthly There are also potentially serious implications
payment per recipient household would thus be in the shorter term. If, as seems quite possible,
DM20. Allowing for an average household size unemployment remains at 25-40 per cent in the
of three, this implies payments of about $0.13 year 2000, and specific employment creation
per person per day, a fraction of the absolute and externally-supported social safety-nets have
poverty line ($1 per person per day at been phased out, the prospects for reconcilia-
purchasing-power parity exchange rates). tion or a shift towards political moderation
The planned duration of the ESF is only could be seriously jeopardised. This could be
twelve months; and this could be further compounded if there were a contraction in the
shortened by the substantial financing gap. The economy due to the reduction of aid flows and
funding gap has so far been filled partly by the the exchange rate rigidities associated with the
Bank accelerating its own disbursements, and currency board arrangement in 1998-9. Since
partly by the authorities diverting some of their the World Bank's growth projections (and thus
balance-of-payments support to fill the gap. the decline in unemployment) rest heavily on a
However, disbursements nonetheless seem to return to pragmatism and moderation in the
have been slowed down: as of mid-November political sphere, there is a real risk that the
1996, eight months after the Emergency whole political and economic future of BH
Recovery Project (of which the ESF forms a part) could be irrevocably compromised.
became effective, disbursements totalled only It is not realistic to assume that the donors will
DM9.4m (World Bank, 1996c, p4). This continue to fund social programmes on the scale
represents a monthly rate less than one-quarter required over the next 20-30 years. However, it
of that assumed in the last paragraph. would seem essential that programmes such as
Moreover, the Bank resources available for the the ESF and the EPW project are both substan-
ESF will soon run out; and, in view of the strict tially enlarged and extended over at least the
budget constraints imposed by the currency next five years. Only if the decline in
board, the diversion of balance-of-payments unemployment and poverty can be greatly
support puts additional pressure on other areas accelerated can there be any hope of creating
of government spending. the political conditions for long-term economic
It seems clear that there is a considerable gap growth. This raises some important questions
between employment and social needs and the about the economic strategy being pursued.
57
The IMF, the World Bank and economic policy in Bosnia
effective in reaching this objective, or whether The jobs created directly by EPW schemes
potentially beneficial changes are limited to would be temporary, lasting only as long as
minor modifications to the current strategy. there was appropriate work to be done and
It would be possible to envisage a rather adequate donor funding to pay for it. The
different strategy, modelled in part on the longer-term benefits would be limited to the
Emergency Public Works programme. This secondary effects on employment, through
would increase the emphasis on (and donor increased demand.
support for) labour-intensive reconstruction
and rehabilitation work. There is clearly a very In practice, an approach centred on labour-
considerable amount of such work, only a intensive public works is therefore unlikely to
fraction of which has, as yet, been done. The be viable as a basis for sustainable long-term
spending of those employed in such projects growth. To have any significant positive effect,
would generate additional demand in the it would be essential to reduce the cost of EPW
economy, strengthening small and medium projects substantially. At present the cost per
enterprises and creating more (hopefully job seems unnecessarily high 130 per cent
sustainable) jobs. more than the average net wage in Croat areas,
However, there are some important limita- and nearly five times that in Bosniac areas.
tions to this alternative: However, a detailed assessment of how the cost
could be reduced is well beyond the scope of
Increasing support for labour-intensive
this paper.
public works could only be achieved by
increasing total aid (which would be difficult Even at a much lower cost, the argument for
to justify), or by reducing support to other increasing support for EPW is essentially politi-
programmes. If other components of the cal: as long as unemployment and poverty
reconstruction programme were substan- remain at their current very high levels, this
tially reduced (for example, institution- will be a serious impediment to the creation of
building, infrastructure rehabilitation, or a political climate conducive to peace, stability,
support to the social sectors), there would be and economic growth. It is possible but only
a danger of compromising long-term sustain- possible that greater employment creation
ability and other aspects of basic needs in the could shift the political process in the direction
interests of short-term employment gains. of moderation and conciliation; and that this
would substitute for the effects of those projects
The cost of employment generation under which would need to be forgone to finance a
the EP W programme to date is very high - in major EPW programme.
the order of $5,500 per person-year. A A more limited shift in this direction (coupled
rough estimate suggests that this may be with a substantial cost reduction) would be more
only slightly lower than the equivalent figure viable. This would entail a detailed appraisal of
for the overall aid programme.34 Based on the whole aid programme, to identify those
this estimate, transferring the entire components which are, on the whole, less
financing for the reconstruction programme beneficial than support to EPW.
in 1996 would have led to a net reduction in
However, employment creation based on
unemployment of only about 3 per cent.
public works can be no more than a temporary
The potential for labour-intensive public palliative; it is no substitute for an economic
works is much greater in the Federation policy programme designed to generate
(where there is substantial war damage) employment. The alternative approaches to
than in RS (where the main damage has privatisation and trade policy outlined in
been done by economic sanctions). An EPW- Dilemmas 4 and 6 might help to strengthen
based strategy would therefore have more and accelerate job creation under the current
limited scope in RS, so that shifting the private-sector-led strategy.
emphasis towards this type of programme
could inhibit any correction of the regional
imbalance in aid.
58
Social dimensions
Sources: Numbers of pensioners and of formal sector workers in RS (in 1995) are taken from World Bank (1996b, pp 24, 26, 28).
Population and labour force are the author's estimates: overall population is based on estimates of the total pre-war population
(4.4m) and numbers of refugees (l-1.4m); and the overall labour-force (1.1m) is taken directly from EU/EBRD/World Bank, 1996,
p93. These figures are combined with the pre-war ethnic composition of the population (from Crnobmja, 1996, p22, with self-identi-
fied Yugoslavs and other ethnic groups divided pro rata between the three areas). Total employment is based on the resulting labour-
force figures, combined with rough estimates of regional unemployment rates (Bosniac areas and RS 60 per cent; Croat areas 20
per cent). It should be noted that all the percentage figures are very approximate.
59
The IMF, the World Bank and economic policy in Bosnia
reabsorbed into the formal sector, increasing formal employment to perhaps 1-1.25 in the
the formal sector's share of total employment Federation and 1.75-2 in RS. This would be a
from around 20 per cent to 60 per cent, each substantial improvement, but the ratio remains
formal-sector worker in RS would be paying for very high: in the order of 2.5-3 times that in the
1.5-2 pensions and 2.5 unemployment benefits. UK for the Federation, and 4.5-5 times for RS.
The situation in the Federation is somewhat It would also be greatly increased by any signifi-
better overall, because of the more favourable cant return of refugees; if all the refugees were
circumstances in the Croat areas. On similar to return during this period, the ratios for
assumptions (60 per cent formal-sector employ- unemployment benefits would be at least
ment, with unemployment of 60 per cent in doubled.
Bosniac, and 20 per cent in Croat areas), each The problem of inequality between Croat and
formal-sector worker would have to pay for Bosniac areas would also be moderated in this
around 1-1.5 pensions and 1.5-2 unemploy- scenario, but would remain serious even without
ment benefits. However, if the benefits system the return of any refugees. On the same assump-
were operated on a uniform Entity-wide basis, tions, and allowing for a halving of income
the inequality between Bosniac and Croat areas differentials between the two areas (from 50 per
would imply a considerable transfer of resour- cent to 25 per cent), Croat areas would make
ces between the two areas: taking account also of about 40 per cent of contributions, while
wage differentials, Croat areas would make receiving around 20 per cent of pensions and
about 60 per cent of total contributions, while perhaps 15 per cent of unemployment benefits.
receiving only about 20 per cent of pensions and The donors recognise the existence of this
12-15 per cent of unemployment benefits. This problem. The EU/EBRD/World Bank (1996)
could raise serious political problems. paper observes with reference to 1997 that
In view of the very low wage-levels, especially 'there are still significant gaps between the
in Bosniac areas and RS, the high dependency needs for protecting vulnerable groups and the
ratio and unemployment rate means that pay- revenues that can possibly be generated by the
roll contributions are very high, even at the domestic economy' (op. cit. pl45). However, the
current very low levels of pensions and benefits donors appear to under-estimate (or at least
17.5 per cent of wages in Croat areas and 24 they under-state) the extent of the problem; and
per cent in Bosniac areas for pensions alone. they give little consideration either to its likely
The current situation also makes for a very acute duration or to its regional dimension.
trade-off between formal-sector incomes and In the short term, the gap is to be filled by
pensions/benefits: increasing pensions by DM 1 donors. However, the level of donor support
would require an increase in the cost to formal- envisaged appears to be grossly inadequate even
sector workers of DM 1.50-2.00 in RS and to bring pensioners and the unemployed in RS
DM 1.00-1.50 in the Federation, while a similar and Bosniac areas up to the absolute poverty
increase in unemployment benefit would cost line. For pensioners alone, this would cost
around DM2.50 per worker in RS and something in the order of $80m; and the
DM 1.50-2.00 in the Federation. Since the amount needed for the unemployed might be of
average net wage in Bosniac areas is DM160 pm a similar order of magnitude. By comparison,
(about US$3 per day), any household with three the amount deemed necessary in the EU/EBRD/
or more members and only one (average) wage World Bank paper is $20m in 1997. This is
is already on or below the absolute poverty line. roughly $20-25 per unemployed or pensioned
This means that poverty among pensioners or person, making no allowance for other potential
those dependent on other domestically-financed recipients. This would represent an average
benefits can only be reduced by increasing additional income equivalent to about 6 per cent
poverty among people in employment. of the absolute per capita poverty income.
The problem is not likely to be resolved in the Taking account of dependents would reduce
near future. As noted in Section El, unemploy- this figure still further.
ment could well remain at 25-40 per cent in In the medium term, the intention is to shift
2000, even without any return of refugees. Even towards a self-financing, pay-as-you-go pension
if the share of the formal sector in total and benefit system, wholly financed from
employment could be increased to 80 per cent payroll contributions. Pensions would be based
over this period, this would reduce the ratio of on a three-tiered model, with a universal
pensioners and the unemployed to those in minimum pension, supplemented by earnings-
60
Social dimensions
61
The IMF, the World Bank and economic policy in Bosnia
a. Federation
Unemployment (%)
60 50 40 25 10 0
0 31 38 47 58 69 76
wages:
25 38 48 58 71 85 95
real % 50 46 58 68 85 103 114
change
from 100 61 76 92 114 138 153
1996
150 76 95 114 143 172 191
200 92 114 138 172 206 229
b. Republika Srpska
Unemployment (%)
60 50 40 25 10 0
0 8 10 12 14 17 20
wages: 25 10 12 14 18 22 24
real % 50 12 14 17 22 26 29
change
from 100 15 20 23 29 35 39
1996 44 49
150 20 24 29 36
200 23 29 35 44 52 58
Notes: Author's estimates, assuming 1.1m work-force (one-third in RS), 0.42m pensioners (0.17m in RS), wage con-
tributions at 15 per cent, and administrative costs equal to 10 per cent of the total amount collected. The shaded
area represents pensions less than $ 1 per day. Base-line wages are estimated on the basis of the net monthly
wage figure given in Table 5, assuming current taxes and wage contributions of 50 per cent.
62
Social dimensions
a. Federation
Unemployment (%)
60 50 40 25 10 0
0 78 51 34 17 6 0
25 62 41 28 13 4 0
wages:
real % 50 51 34 23 11 3 0
change
from 100 39 26 17 98 3 0
1996 150 31 21 13 74 2 0
200 26 17 11 6 2 0
b. Republika Srpska
Unemployment (%)
60 50 40 25 10 0
0 230 153 102 51 17 0
Notes: Author's estimates, assuming unemployment benefit of $3 per day ($1 per person per day for a three-person
household). Other assumptions are as in Table 7.
63
The IMF, the World Bank and economic policy in Bosnia
64
Social dimensions
only to 15-20 per cent and 40-50 per cent in These figures are probably somewhat
2000. In the long term, assuming real wages exaggerated. Costs should be reduced to some
100-200 per cent above current levels and 0-10 extent by the proposed shift towards primary
per cent unemployment,the rate would become health care; and (in the short and medium term
sustainable in the Federation, at 5-10 per cent. only) by low salary levels. Nonetheless, even
In RS, however, the rate would remain in the allowing for a halving of per capita health
order of 15-25 per cent, which is clearly unsus- spending from the pre-war Yugoslav level,
tainable (Table 9). together with the costs of minimum pensions
a. Federation
Unemployment (%)
60 50 40 25 10 0
0 40 32 27 22 18 16
25 32 26 22 17 14 13
wages:
real % 50 27 22 18 14 12 11
change
from 100 20 16 13 11 9 8
1996 150 16 13 11 9 7 6
200 13 11 9 7 6 5
b. Republika Srpska
Unemployment (%)
60 50 40 25 10 0
0 119 96 80 64 53 48
wages: 25 96 76 64 51 42 38
real % 50 80 64 53 42 35 32
change
from 100 60 48 40 32 27 24
1996 150 48 38 32 25 21 19
200 40 32 27 21 18 16
Notes: Author's estimates, based on 1987 health expenditure of $120 per person per year, Other assumptions are
as in Table 7 (excluding administrative expenditure, which is included in the $120 figure).
65
The IMF, the World Bank and economic policy in Bosnia
and unemployment benefits, this would leave In the education sector, financial support has
tax and contribution rates on wages at very high been concentrated on school reconstruction
levels, in marked contrast with the objective of (more than 80 per cent of funding), with
reducing the rates of wage taxes and smaller-scale support for institution-building,
contributions. (See Table 10.) teacher training, educational materials, and
Despite the very conservative assumptions support for students whose education was
used in Table 10 (including the absence of any disrupted by the war, traumatised children, and
form of taxation on wages for any other purpose), children with special needs. The future direc-
the short-term levels of wage contributions are tion of education policy remains unclear, partly
clearly unrealistic in both Entities around 100 as a result of uncertainty about the roles of
per cent of gross wages in the Federation, and 3- different levels of government and limited
400 per cent in RS. In the Federation, a moder- capacity for policy-making at the cantonal level.
ate reduction from current levels might be As in the health sector, teachers salaries are a
possible in the medium term (ie by about 2000), serious problem; and this is 'a fundamental
a sustainable level of 10-20 per cent being reached threat to education in the future' (EU/EBRD/
only in the long term (ie when unemployment is World Bank, 1996, pi22). This is again partly
reduced to 10 per cent or less and average real due to uncertainty about government roles,
wages at least doubled from their current levels. largely as a result of inadequate administrative
In RS, the situation remains clearly impossible capacity (and in most cases financial resources)
until well after 2000, and even the very opti- to plan and manage education effectively at the
mistic assumptions of the long-term scenario cantonal level. However, in view of the import-
leave wage contributions for these three purposes ance attached to this issue, it is far from clear that
alone at 31-54 per cent, suggesting that a this is an adequate reason for the complete
significant reduction is likely to be impossible. absence of donor support to teachers' salaries.
Notes: Author's estimates, based on Tables 7-9, assuming unemployment of 50-60 per cent in the short-term, 25-
40 per cent in the medium-term and 0-10 per cent in the long-term; and real wage increases of 0 per cent, 50 per
cent and 100-200 per cent respectively. Pension contributions are assumed to be 15 per cent, subject to a mini-
mum pension of $30 pm and a maximum of $60 pm. Unemployment benefit is set at $90 pm throughout. Annual
health expenditure is set at $60 pc, half of the 1987 Yugoslav level.
66
Social dimensions
There is a proposal to develop cost recovery The World Bank also appears to be
for higher education. There is likely to be less promoting the idea of private provision of
resistance to this in principle than in some education and health services at the primary
countries, as cost recovery was well established level. A recent Bank publication on Bosnia
prior to the war. However, there is a risk of noted that 'a combination of direct provision
skewing the benefits of higher education and regulated private provision has generally
towards those better able to pay; and in the been adopted' elsewhere, although it stops short
Bosnian context, this would almost certainly of recommending this as a policy (World Bank,
entail an ethnic bias towards the Croats and 1996b, p47). This option should be approached
better-off returnees, at least over the medium with great caution.
term, due to current income differentials. This
In the health sector, there is a risk that
would tend to compound and entrench inter-
competition among private providers (with at
ethnic inequalities, and could also generate an
least partly public funding) could bid up the
ethnic imbalance among decision-makers over costs of health inputs particularly the
time. It is also important to avoid any substantial salaries of health professionals relative to a
reduction in overall attendance of higher educa- system based on a public sector monopoly or
tion, as the disproportionate number of grad- near-monopoly. This could substantially
uates and professionals among refugees is likely increase the cost of publicly-funded health
to leave an increasing shortfall in the supply of services in the longer term. There is also a
human capital as the economy recovers, unless danger of perverse effects on incentives,
there is a large-scale return (which is not reducing the quality of health services.
expected in the near future).
If the option of cost recovery for higher The education sector is critically important to
education is to be pursued, it should at least be the development of the political environment
delayed until the bulk of the population can over the long term. If, as seems likely, educa-
afford to pay, and then be phased in gradually, tion were provided by organisations moti-
in line with ability to pay among the poorer vated by nationalist agendas, in the absence of
ethnic groups. Donors should fill most of the extremely rigorous monitoring and regula-
tion, this could seriously jeopardise progress
gap between the costs of higher education and
towards national reconciliation.
the available government resources and fee
revenues. They should also finance a It seems unlikely that there would be substantial
scholarship fund for those who are academically long-term benefits in the private provision of
able to continue with their education, but health services. In the case of education, this could
unable to bear the financial cost (including be positively dangerous from a political perspec-
forgone income) of doing so. Explicit ethnic tive. It would be better to avoid any movement
targeting should, however, be avoided. towards private provision in either case.
67
F. Conclusion
There are no easy options in Bosnia and payments support could be allocated between
Herzegovina. The situation is both very difficult Entities and Cantons on the basis of an
economically and extremely complex socially explicit formula measuring needs, for use in
and politically. Economic policy has to be form- support of recurrent expenditure.
ulated and implemented within three interlock-
ing sets of very tight constraints, political, social/ 4 Privatisation in the Federation raises a
ethnic, and economic, which seriously limit the number of issues relating to the role of
available options. Where alternative approaches foreign investment, the pace of privatisation,
to those currently proposed can be envisaged, and the proposed level of decentralisation. A
they often raise as many problems as they possible alternative approach is outlined,
resolve. which would be more gradual and more
In consequence, this paper has focused on closely related to the needs and circum-
exploring dilemmas, and the options they stances of individual enterprises, with a
suggest, rather than recommending specific greater role for foreign investment where
policy changes. Nine such dilemmas have been there is a substantial need for capital inputs
discussed: and/or imported technology.
1 Political conditionality is necessary to achieve 5 Free entry for foreign banks could help to
any progress against the background of improve the availability and reduce the cost
extreme political inertia in BH. However, it of financial services, but, in the current
raises the risk of skewing the allocation of aid, circumstances could give rise to a heavily
jeopardising economic recovery in RS, and foreign-dominated financial sector in the
compromising the donors' neutrality. A future. Delaying this process could reduce
carefully designed, graduated approach is this risk, but could also have a negative effect
suggested, avoiding conditionality on factors on economic recovery in the short term.
beyond the control of the authorities.
6 The trade policy envisaged for BH is based on
2 The currency board arrangement is probably a rapid reduction of tariffs to low, uniform
necessary in a highly decentralised political levels. A case could be made, on both political
system with a high level of political conflict and economic grounds, for delaying this
and inertia. However, it seriously constrains process, to allow a breathing space for the
economic policy, and raises theriskof a serious development of 'infant' and 'convalescent'
financial crisis after 1998-9. Two options are industries. This would also ease financial con-
proposed for further consideration: straints on government spending. However,
further consideration is needed of the
a self-financing system of import tariffs and interaction of trade policy with the constraints
export subsidies, to achieve effective on exchange-rate policies imposed by the
exchange rate adjustment within the currency board system.
currency board system; and
a temporary support facility for the 7 Labour market deregulation may be helpful
Central Bank, to be activated in the event to employment creation in the short term, but
of a crisis beyond the authorities' control. a gradual and flexible restoration of employ-
3 Regional inequality is a particular problem ment standards (for example, to bring
because of the political obstacles to inter- standards into line with the EU's Social
regional resource transfers. It is suggested Chapter) may be both feasible and desirable
that part of the anticipated balance-of- over the long term.
68
Conclusion
8 Rapid movement towards full cost recovery Further consideration needs to be given to the
for public services and utilities fails to take establishment of a sustainable system of
account of public goods, and could give rise financing for social expenditures over the long
both to a substantial social impact and an term.
increase in regional disparities. This suggests Clearly, the economic, social, and political
the need for a more selective and gradual problems of BH are intractable in the extreme;
approach, and for social-pricing mechan- and they are compounded by the critical
isms. However, this would take resources tensions which remain among the various ethnic
away from other uses and entail potentially groups, and particularly their political leaders.
problematic inter-ethnic resource transfers. The current institutional arrangements have
prevented these tensions from turning into
9 Employment creation is recognised by donors renewed physical violence; but they have
as a fundamental objective, essential to social neither resolved the tensions nor allowed them
and political stability. However, the to be set aside so that normal political processes
reconstruction process to date has had a and policy-making can be resumed.
limited impact. There might be a case for a Any progress towards resolving the problems
limited and selective shift of external resources will require a great deal of effort and
towards job-creation through public works pragmatism on all sides. This includes the
projects, particularly if their cost could be donors (and NGO advocates) as well as the
reduced from the current very high level. authorities and political agents within BH itself.
More generally, the implications for At present, the movement of the authorities (or
employment should be a key factor taken into at least the Serb and Croat authorities) towards
account in assessing the alternative moderation and pragmatism remains limited.
approaches to privatisation and trade policy There also seems to be a question-mark over the
outlined in Dilemmas 4 and 6. pragmatism of the donors, in that the policies
they are advocating for BH closely resemble the
A further serious problem arises from the cost free-market model which conforms to their
of minimum pensions, unemployment benefits, ideological position. These policies are not
and health services. These cannot be adequately necessarily wrong, but nor should it be
financed from wage contributions in the short automatically assumed that they are necessarily
term, or, in RS, in the medium term. Even with right.
a reduction of unemployment to 10 per cent and The need for pragmatism extends well
a doubling of real wage levels, the wage beyond the realm of economic policy, in partic-
contributions required to sustain pensions and ular to the long-term political future of BH.
unemployment benefits on the absolute poverty There is a tendency on the part of the major
line and half the pre-war level of health donors and international NGOs to assume
expenditure would be more than 50 per cent in that the long-term solution to the Bosnian
RS. This is clearly at odds with the objective of problem is a reunification of the country as a
reducing wage-based social contributions and single multi-ethnic state. This is neither valid as
taxes. an assumption, nor defensible as an objective in
Greater donor support for safety-nets and itself. If the ultimate objective is a peaceful and
recurrent expenditure on health and education prosperous future for the people of BH, the
is essential in the short term, extending well country's political future must be subject to
beyond 2000 in RS. Such support has been critical and objective evaluation.
totally inadequate so far, and will become This raises the most fundamental and
progressively more so if the donors' plan to intractable dilemma of all: how many countries
phase it out over three years is implemented. should Bosnia-Herzegovina be?
69
The IMF, the World Bank and economic policy in Bosnia
70
Conclusion
71
The IMF, the World Bank and economic policy in Bosnia
72
Conclusion
This leaves the international community the form of a withdrawal of support. (If
with two viable alternatives: contingency planning were taking place,
however, it is unlikely that it would be overt,
to design their interventions with the specific since openly planning for partition would risk
objective of pushing BH towards reunifi- legitimising and encouraging separatist
cation, and/or on the assumption that the tendencies, ultimately making partition more
country will ultimately be reunited; or likely.)
to design policies in this way, while The impression created by this single-
planning explicitly for the possibility of minded pursuit of reunification is of a rather
ultimate partition. superficial and patronising view of the
divisions generated by the war, like parents
At present, donors appear to be following telling squabbling children to be friends
the former approach, with little outward sign again. This is not obviously helpful, and could
of contingency planning: to the extent that itself alienate nationalist leaderships and/or
there is a contingency plan, it appears to take their supporters.
73
Notes
1 This is a very brief and grossly over-simplified entering BH is estimated at 2-300,000, and
account of the war and the factors leading up there were about 300,000 Yugoslavs and
to it. Readers are referred to the substantial members of other ethnic groups pre-war, this
number of books on the subject, such as would imply that, at the very least, 25 per cent
Malcolm (1994), Bennett (1995) and of the current population of Bosniac areas
Crnobrnja(1996). would be Serbs and Croats; and, since the
2 There were some tensions before this, eg difference between the pre-war Croat popu-
Croat fears of Serb expansionism under King lation and the estimated current population of
Alexander in the 1930s, which was an Croat areas is only 300,000, at least half of
important factor motivating the Ustasas. these people would be self-identified Serbs.
According to Bennett, the notion of centuries These implications seem implausible.
of animosity between Serbs and Croats is a 5 Following the de-collectivisation of agricul-
'historical myth', based on media propaganda ture in 1953, private land holdings were
rather than actual history: 'until this century, limited to 10 ha.
most Serbs and Croats had virtually no contact 6 GSP (gross social product) is the nearest
with each other' (Bennett, 1995, p6). Bosnian equivalent to GDP in the national accounting
Muslims were at most collaborators with the system used in most socialist countries,
Serbs' actual enemies (the Turks), rather than including the former Yugoslavia.
there being any direct conflict between them. 7 This Section is based mainly on EIU (1996a,
The Second World War was not the beginning 1996b, 1997a, 1997b), supplemented by
of ethnic tensions in the region; but it various articles from The Economist.
represented (with the benefit of hindsight) the 8 The US, in particular, has linked the FRY's
point of no return. reentry to the IMF to progress on the extradi-
3 Thefiguresin this paragraph and the next are tion of war criminals and its policy towards
taken from Crnobrnja (1996), pp22-3. Kosovo. Progress on both has so far been
4 Fox and Wallich (1997, p3) give very different limited.
figures for population: 0.7m in RS and 2.9m in 9 'A Country with a Vision: Former Yugoslav
the Federation (2.5m in Bosniac and 0.4m in Republic of Macedonia Sets Regional Example',
Croat areas). However, these figures seem World Bank News, 15 February 1996, pp 3-4.
difficult to account for in terms of the pre-war 10 As the name suggests, the final beneficiary
ethnic distribution of the population. Accord- principle means that the debt is divided up
ing to Crnobrnja, pre-war census data (based according to which Republic, Entity, etc was
on self-identification) show 44 per cent of the the ultimate recipient of each individual loan.
population (1.9m people) to have been 11 The HIPC Initiative phases debt reduction
Muslims, 31.5 per cent (1.4m) Serbs, 17 per over a period of six years, each phase being
cent (0.7m) Croats, leaving 7.5 per cent (0.3m) conditional on a favourable track-record of
other ethnic groups and self-identified structural adjustment policies. The other
Yugoslavs. If the Muslim share of deaths and complication of the HIPC Initiative with
refugees is equivalent to their pre-war share of regard to BH is that, while its per capita
the population (which is probably a conserv- income is currently low enough to qualify, if
ative assumption), the Fox and Wallich figures economic recovery proceeds at the rate
would be correct only if there were 1.2m currently hoped for, it would exceed the
refugees from other Republics and members income threshold before the final stage was
of non-Muslim ethnic groups resident in reached.
Bosniac areas that is, if these groups constitute 12 An agreement-in-principle, in this context, is
roughly half the current population in these an agreement between the government of a
areas. Since the total number of refugees country and an appointed committee of its
74
Notes
commercial bank creditors. The agreement 21 This is illustrated by the dispute between
cannot be finalised until the terms agreed in Bosniacs and Croats in Mostar following the
principle have been accepted by creditors September 1996 elections: the EU's ability to
holding a specified percentage of the debt - secure a favourable outcome was seriously
typically about 95 per cent. compromised by the fact that virtually all its
13 Strictly speaking, this would almost certainly aid had already been disbursed, so that the
be illegal without a formal waiver by the banks Croats had nothing to lose by intransigence.
of the negative pledge clauses and sharing 22 This is proposed by the World Bank (1997b,
provisions in their loan contracts; and the FRY pp xxv, 37, 42), although they appear to
would once again have a sufficient share of the envisage subsidies from domestic resources
debts to block such a waiver. However, rather than aid receipts. The current status of
mechanisms are readily available to purchase this proposal is unclear.
debts informally; and some Latin American 23 EU/World Bank (1996b), p3.
governments are believed to have undertaken 24 The cost of the EPW programme per person-
such transactions during the 1980s. While the year of employment is estimated at $5,440.
FRY could make a legal challenge, it would be (SeeSection El.)
difficult to prove the offence, if it were well 25 The Fund for War Veterans, Invalids and
executed. Families of Deceased (20 per cent); the Fund
14 It should be noted that the following for the Protection of War Veterans (8 per
discussion is entirely speculative in nature. cent); the Retirement Fund (7 per cent); the
15 Net present value (NPV) is a measure of debt Education Fund (5 per cent); the Family
which takes account of its terms as well as its Planning Fund (5 per cent); the Population
absolute amount. For a loan at the market rate Resettlement Fund (5 per cent); and the
of interest, the NPV is the same as its face Restitution Fund (5 percent).
value, but it becomes progressively smaller as 26 Current and former soldiers are important
the interest rate declines. Increasing the holders of public sector liabilities, in the form
repayment period of a loan at a concessional of salary arrears.
interest rate also reduces its NPV, as the 27 A bond which is never repaid, but on which a
benefits of the lower interest rate are enjoyed constant stream of income is paid.
for longer. 28 This problem is much less serious in RS, where
16 This and the figures in the next two 69 per cent of inputs are imported, but 53 per
paragraphs are the author's estimates, based cent of output is exported.
on World Bank (1996b), Tables 5.2 and 5.3. 29 The SME funds were 'almost the only sources
Because of the rather unhelpful presentation of cash resources for enterprises in 1996'
of the Bank's projections, the figures given (EU/EBRD/World Bank, 1996, p83).
should be regarded as very approximate. 30 As discussed in Section B2, there is a risk that
17 A conspicuous exception is Brunei, which the World Bank's balance of payments projec-
pledged only $2m, but committed $ 18.7m, of tions will not be achieved, which could
which $ 16.7m had been disbursed by October seriously damage BH's external debt situation.
1996. Strengthening the balance of payments
18 World Bank financing was limited to $8m through changes in trade policies could help
mobility aids and training for die disabled and to avert this problem.
$2m for institutional and implementation support. 31 The likely ethnic locus of pressure for
19 Compared with current salary levels. This continued protection in unclear: the relative
estimate is based on World Bank estimates of strength of producers in the Croat areas
staff requirements (World Bank, 1996a, suggests that they would be best able to take
Annex II Appendix 2), assuming a 50-50 split advantage of the resulting opportunities in the
of staff between Bosniac and Croat areas, and a short term; but equally, if this approach were
900 per cent increase in salaries of those from successful in promoting local production,
Bosniac areas. producers in RS and Bosniac areas might be
20 As noted above, however, that this assessment more dependent on the maintenance of tariffs
is based on population figures very different for their continued viability.
from those used elsewhere in this paper (0.7m 32 According to EU/EBRD/World Bank (1996,
in RS and 2.9m in the Federation, as against p93), 'About 425,000 soldiers have been or are
1.2m and 2.3m respectively). See footnote 5. being demobilized.' If, say, 300,000 were
75
The IMF, the World Bank and economic policy in Bosnia
demobilised at a constant rate during the jobs at its peak (EU/EBRD/World Bank, 1996,
course of 1996, the average employment p94). Again assuming an average level of
figure for the year would need to be adjusted employment-creation for the year as a whole of
downwards by 150,000. This would leave a half this level, this implies an average cost per
further 125,000 jobs to be shed by further person-year in the order of $7,000.
demobilisation, so that employment would be 35 In Croat areas, no pension payments were
reduced by 275,000 (25 per cent of the labour- made in 1992-3; in Bosniac areas, payments
force) from its 1996 level overall. were six months in arrears in early 1996
33 Up to mid-November, 38 sub-projects had (World Bank, 1996b, p48).
been financed at a total cost of $2.96m; and 36 These figures are affected significantly if the
6,530 person-months of employment had population figures in Fox and Wallich (1997)
been created. This implies an average cost of are used. Assuming that the numbers of
$5,440 per person-year. The total value of the pensioners in World Bank (1996b) remain
project is $41.4m, spread over two years, valid, this would increase the pension levels in
implying the creation of an average of 3,800 Table 7 by about 10 per cent in the Federation,
jobs over that period, from a labour force of but reduce them by about 40 per cent in RS.
1.1m. At that time, three months after the 37 The Fox and Wallich (1997) population
project had come into operation, none of the estimates would increase the cost of a given
non-World Bank-managed funds had been level of wage contributions in the Federation
identified, leaving a financing gap of $31 m, or for a given level of unemployment benefit by
three-quarters of its total value (World Bank, about one-eighth, because they imply a
1996a, pi5). substantially greater share of population in the
34 Aid disbursements up to October 1996 were (lower-income) Bosniac areas. The RS figures
$720m (EU/World Bank, 1996a, Table 3), an are unaffected.
annual rate of $864m. It is estimated that the 38 The conclusion of the Brcko arbitration has
reconstruction programme created 250,000 been deferred until February 1998.
76
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