Bosnia and Herzegovina’s Political Economy and Possibilities for Reform

By Dana Terry*

Since the Dayton Peace Accords put an end to the bloody ethnic war in 1995, Bosnia and Herzegovina (BiH) has been a transitional economy wrought with unemployment, stagnation, and corruption.  The Dayton Peace Accords ended in an agreement to divide the country into two, self-governing entities with a weak centralized government.   Though the Agreement ended the bloodshed, the economy has greatly suffered.  The state’s largely decentralized government has hampered economic policy coordination and reform.  There has been little done to reform the country’s segmented markets, and the excessive bureaucracy has discouraged foreign investment[1].  It is apparent that the economic system of BiH is in dire need of reform, but the answer to how to initiate reform is not as clear.  Arguably, the best solution is to unify the state through fostering a common Bosnian identity, reallocate the funds saved from cutting government to industries in the private sector, and then employ Keynesian Shovel Ready Projects in the short term to spark enough economic growth to attract foreign investment.

There are several obstacles that stand in the way of successful economic reform in BiH.  In addition to the central government’s stagnation, BiH also faces an immense lack of funds.  The economy relies heavily on foreign aid, and most of the banking sector is controlled by foreign banks – primarily from Austria and Italy.  The state spends 50% of its GDP on redundant government offices at the state, entity, and municipal level[2].  Plus, because BiH has an ethnic-based political system, it is nearly impossible to get the ethno-political parties to agree on anything given the still substantial ethnic-tensions.  Ethno-political deadlock has made economic policy formation and the privatization of state enterprises particularly slow.  Other major issues include poor property rights, high corruption, and the most serious macroeconomic problem, pervasive unemployment.

It is important to note the state’s strengths when assessing possibilities for economic reform.  While foreign investment has been on the decline, the private sector has been on the rise.  BiH also has a high level of trade and economic freedom.  In particular, the state has the Central European Free Trade Agreement[3] with several states in the region, and an average tariff of 1.8% for other trade partners[4].

Through examining both the political and economic strengths and weaknesses of BiH, several things become apparent.  First, it is evident that BiH must fix its ethno-political system before it can efficiently move forward in economic policy and market reformation.  Ideally, fixing the ethno-political system would involve unification of the state’s two entities which would reduce the current massive bureaucracy, reduce excessive funds allocated to redundant political offices, and eradicate the demobilizing ethno-politics that constantly hinders progress.  Such a step would necessitate the formation of a common Bosnian identity and political parties based, not on ethnicity, but diverse policies.  Naturally, the notion of unification attracts concern as there is still question as to whether the citizens of BiH are ready to cooperate peacefully with one another or whether unification could spiral back into ethnic conflict.

In the event that unification is achieved, BiH could then reallocate the funds spent on redundant government offices to job creation in the private sector.  Right now, the two industries BiH depends on to prop up its economy are tourism and metal exportation[5].  One idea for minimizing unemployment is to allocate money to programs that teach a trade related to one of these two industries and then offer companies subsidies in exchange for hiring more people.  If successful, this approach could help ease unemployment, foster business expansion that would lead to greater trade, and ultimately create a stronger, more stable economic system that is attractive to foreign investors.  In addition, employing Keynesian Shovel-Ready Projects, designed for the sole purpose of job creation and economic expansion in the short term, could help reboot the economy and combat unemployment.[6]  The Shovel-Ready Project concept could be utilized for reconstructing infrastructure such as schools, hospitals, bridges, and roads.

We can suggest ways to bolster and reform the economy of BiH, but any substantial reforms are contingent upon true political restructuring.  Ethnic politics will continue to cause deadlock to reform, and incur massive amounts of debt.  Half of the state’s GDP is spent on largely redundant government offices, but imagine how these funds could be better spent towards fostering growth and combating unemployment. Unification should be reconsidered.

Dana Terry is an M.A. candidate at the John C. Whitehead School of Diplomacy and International Relations where she also serves as a Research Assistant and Associate Editor for the Whitehead Journal of Diplomacy. Dana attained her B.A. degree in International Affairs from Florida State University where she participated in a university conference in Southeast Europe while studying post conflict peace and security.  Her specializations include International Organizations and Conflict Negotiation.

[1] Central Intelligence Agency, 2013. The World Factbook, Washington D.C.:United States Government

[2] ibid

[3] International Business and Diplomatic Exchange, 2011. Country Report – Bosnia and Herzegovina, London

[4] The Heritage Foundation, 2013. Index of Economic Freedom, Washington D.C.

[5] Central Intelligence Agency, 2013. The World Factbook, Washington D.C.:United States Government

[6] Reddy, S., 2009. The New Old Big Thing in Economics: J.M. Keynes. The Wallstreet Journal, p. A10.


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