Download Università della Svizzera italiana, Lugano Facoltà di Scienze

Università della Svizzera italiana, Lugano
Facoltà di Scienze economiche
Università Cattolica di Milano
Alta Scuola di Economia e Relazioni Internazionali
The Bosnian Economic Development Path after
1995
A Developmental Studies approach
Tesi di Master
Autore: Djordje Andrijasevic
Relatore: Prof. Vittorio E. Parsi
Correlatore: Prof. Emilio Colombo
Data di consegna: 15.05.2013
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1. Table of Contents
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2. List of Tables
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Prolegomena
The so called lost decade of the 1980s in the context of international development has once
more stressed the importance of the need of generating efficient and sustainable development
programs.
Dealing with development studies is thereby becoming more and more important. The
establishment of various university degrees and research centers of development studies in
Europe but also worldwide evidences the high interest for an academic infrastructure in this
field and the broad acceptance of the studies as an individual discipline.
The case of the post-war development in Bosnia and Herzegovina is a very evident case for
the need of assessing certain theoretical and practical development issues within our academic
context.
We have evidenced after 1995 the “making-off” of what is generally being referred to as a
“developing country”.
Bosnia and Herzegovina, previously part of the former Socialist Yugoslavia evidencing a
decent living standard, is the example of a country with a reverse development in which the
population faced a massive loss in living quality if measured by economic indicators such as
the real wage as well as in other fields such as human capital (massive brain drain, etc.),
social and medical infrastructure, security, etc.
A variety of theoretical constructs trying to explain the causes of the political and economic
development as well as trying to predict the further development have been developed. The
most common argumentations in the political and economic context of Bosnian development
are either stressing the importance of joining the EU and continuing to adapt certain (neo)liberal dogmas such as the privatization of state-owned enterprises, the strengthening of the
private sector as well as cutting taxes and customs hindering free trade or are either being
highly skeptical towards >>Western integration<< arguing by a potential loss of political
power and a increase in economic dependence.
A very imaginative and representative picture of this skeptical position was present in the late
1990´s when Bosnia re-started exporting goods, especially agricultural such as milk to former
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Yugoslav states such as Slovenia. Anyone having followed the news those years will have
seen on TV almost every day trucks loaded with milk in front the Slovenian boarder not being
permitted to enter the country. The truck drivers were emptying their trucks full of milk in
front of the boarders as signs of their protest against the protective politics of other countries
against Bosnia whose supermarkets, however, were being flooded with Slovenian milk and
other imported products that were ruining the domestic industry and economy.
Another imaginative example was (and still is) the series of protests of industrial workers of
large industrial complexes striking and blocking supply roads in front of their companies as
most workers were not receiving their salary on time.
Development theories such as the dependency theory and theories of modernization1 may be
useful to explain and permit us to analyze the political and economic development process of
Bosnia and Herzegovina from the perspective of theories that have been used to assess those
processes in other countries long time before Bosnia “developed itself to a developing
country”.
The theories permit us thereby to firstly analyze certain concepts such as economic
dependence from a more neutral perspective, i.e. not originating from a perspective that has
been set up in order to use it as a political instrument.
Secondly, we are able to use those key arguments and aspects in a practical mode when
applying them to our case study.
Our theoretical work will find thereby its practical application when assessing the
implementation of certain development programs enabling us also to fill up a theoretical black
hole as the development process in Eastern Europe has more or less never been seriously
analyzed also by the perspective of dependency theories. The mainstream economic approach
focusing on trade liberalization and privatization has been the dominating one2.
1
The definition of “theories of modernization” will be introduced and discussed in more detail.
2
The 10 prescriptions of the Washington Consensus are the most known agglomeration of the neo-liberal
prescriptions and will be discussed further.
5
Furthermore, by using mainly the inter-disciplinary approach of the development studies, we
will be developing further the practice to use this new, still itself developing discipline for our
assessments.
The present work, in order to fulfill its ambitious plan, is divided into two major parts. A first
part is designed for elaborating the main ideas of our two concurring standpoints, the theories
of modernization and of dependence.
As both theories cannot be regarded as two homogenous political and economic currents, but
rather more as rough accumulations of various theories sub-ordinate to one common category,
we shall furthermore focus on the divisions within the two approaches itself.
The second part, focusing on the after-war economic development of Bosnia and
Herzegovina, will analyze the practical application of the both theories discussed in the first
part.
A major scope of the work is to thereby deliver a two-sided analysis of the development in
contrast to the standard mainstream analysis based on the positivist linear conception of one
true approach.
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1. Research topic and methodology
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The paper analyses the process of economic and political development in Bosnia &
Herzegovina after the signing of the Dayton peace treaty in 1995 that marked the end of the
Yugoslav wars (1991-95) and the newly gained independence of Bosnia & Herzegovina.
The case study is insofar interesting as Bosnia & Herzegovina is one of the few formerly
socialist countries whose overall economic situation did not change for the better after the
process of economic and political transformation has started in 19953.
We are faced today with a country whom political scientist attribute the status quo of a quasi
“failed state” having a national political system divided into two entities who, despite the fact
being part of one state behave as independent states not willing to cooperate amongst each
other.
The fact that the country is being referred to as a failed state is no wonder if we take into
consideration that the artificial system is being kept “alive” by a high representative endowed
with more or less dictatorial rights enabling him to directly influence political outcomes.
This “colonial” character is furthermore present on an economic level if we take the economic
framework of Bosnia & Herzegovina after 1995 into account.
“The Central Bank's responsibilities will be determined by the Parliamentary
Assembly. For the first six years after the entry into force of this Constitution, however, it may
not extend credit by creating money, operating in this respect as a currency board; thereafter,
the Parliamentary Assembly may give it that authority.” (Dayton agreement, Article VII ;
Source: http://avalon.law.yale.edu/20th_century/day14.asp).
The capabilities of the Central Bank are thereby not entirely defined within a national
decision making process but where implied from “outside” limiting the range of action and
national sovereignty leading to a status quo that can be characterized as “colonial”.
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The process of economic and political transformation and transition for the former Yugoslav republics except
Slovenia and Macedonia began in 1995 with the signing of the Dayton peace treaty that has officially ended the
armed conflicts in the region as the period of war (1991-1995) cannot be regarded as period of successful
economic transformation as it was the case for other Eastern European countries.
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The work is primarily based on a qualitative literature research as well as on quantitative
evaluations used to sustain certain arguments.
A first step of the work establishes the theoretical framework evaluating core aspects of the
theories of modernization and dependence making them usable for our case study.
The second step of the work deals with the Bosnian development path after 1995 that will
mainly be displayed by quantitative means (statistics) and by a qualitative evaluation of
previously published literature on the economic and political development of the country
2. Development studies – A theoretical framework
The field of the development studies is to be regarded as the (inter-)disciplinary scientific field
of our topic of research.
Development studies and development research have established themselves as a scientific
discipline only in the last 50-60 years being initially constituted of scientists from various
other disciplines such as the political science, economy, sociology and others.
The scope was primarily to be able to deliver a set of solutions to political, social and
economical problems coped to international development whereby a multi-disciplinary
approach was needed as one single discipline was simply too limited to be able to analyze
highly complex social and political phenomenon.
The development studies have been, as we shall also see in more detail in further chapters of
this work, subject to massive manipulation on an ideological and methodological scale.
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Ideological manipulations have been the case as development research was initiated in order
to assess certain problems coped to political, social and or economic development in
developing countries of the Third World.
Those countries assumed thereby (after WWII) the role of a free ideological terrain in which
the global hegemonic powers, the US and the Soviet Union were seeking for political
influence. Development research and development aid were characterized by a high political
connotation in which the programs to be implemented were mainly aiming to enlarge one
owns sphere of (political) influence.
Development aid played the role as a political instrument.
Manipulations on a methodological level have been causes not so much of the political
influence but were rather more caused (and are still caused) by the ideological mainstream
“governing” scientific discourses.
Theories are thereby always being developed in a certain context. Certain clusters of ways of
thinking that are much more profound then ideologies are what Michel Foucault calls a
dispositif4.
Dispositifs are the ideal point of a departure for analyzing distortions on a methodological
level as a dispositive encompasses more than a simple discourse.
Positivism and the postmodernist critique are hereby two very important dispositifs that have
most significantly influenced development researches. It is thereby important to note, that
whilst ideological distortions, created mainly on a political level leading to development
cooperation that is politically distinguishable from others, ideological manipulations may be
present in the same sense and as in countries with different political system.
4
"What I’m trying to pick out with this term is, firstly, a thoroughly heterogeneous ensemble consisting of
discourses, institutions, architectural forms, regulatory decisions, laws, administrative measures, scientific
statements, philosophical, moral and philanthropic propositions–in short, the said as much as the unsaid. Such
are the elements of the apparatus. The apparatus itself is the system of relations that can be established between
these elements.“, in: The Confession of the Flesh” (1977) interview. In Power/Knowledge Selected Interviews and
Other Writings (ed Colin Gordon), 1980: pp. 194-228. This interview was conducted by a round-table of historians.
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This was for instance the case with development programs. Both the United Stated and to
former Soviet Union have presented their development programs as the ultima ratio of
development.
This work will thereby too be based on the approach used within the development studies and
its methodological and theoretical foundations.
A theoretical approach will be enrolled by presenting certain theories, mainly, however,
being represented by the one of the political economy.
A methodological standpoint will be constituted by the >>interpretative social research<< as
certain aspects of our topic such as migration and dependency cannot be strictly attributed to
one single discipline but require a more encompassing approach.
The interpretative social research is thereby our space of analysis within which we locate two
poles, positivism and postmodernist critique.
Positivism, as a philosophic approach claims that there are general laws in natural such as in
social sciences according to which society functions. Positivism derives from the philosophic
current of rationalism, claiming that an objective knowledge exists beyond the subjective
sphere; the aim of science is to obtain this knowledge.
Postmodernism is to be regarded as the ideological counterpart of positivism that criticizes all
aims to present objective and universally valid knowledge. The era was initiated with the
student movements starting in 1968 being a movement oriented against the societal
unification created by the era of modernism.
The main approach behind this concept is the critique on the fact that somebody might be in
possession of absolute knowledge. As a philosophical approach, it stresses the possibility of
the peaceful co-existence of various theories, world outlooks, cultures and moral standards.
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In the following chapter we will be systemizing various development theories and approaches
and relating them to our case study with the aim to assess which approach and theoretical
framework is best suited to analyze the Bosnian after-war economic growth model.
We will hereby firstly focus on dividing development theories into universal and particular
theories as this distinction is essentially in order to deal with the dimension and of the theory,
i.e. if the theory claims universal validity and application or if it is to be related to a specific
region.
In a second step we will be dealing with the various branches of development theories such as
the theories of modernization and the dependency theories. It is highly complex (if not
impossible) to make a clear distinction between the various theories as most theories often
share common characteristics with other theories we might connect to another branch.
Having presented this general approach and presented various branches of development
theories, we will be focusing on two very important theoretical models on which most
development theories are based, the approaches of polarization and homogenization. These
two models are very useful as another distinguishing characteristic for theories and of high
interest for our case study as we will be dealing with the impacts of the integration of the
Bosnian economy in the European economy. We will discuss in this context the neo-liberalist
approach and the Washington Consensus that are based on the model of homogenization.
A further part of this chapter is discussing the approach of centre-periphery patterns in our
studies that are the most important theoretical foundation of dependency theories. The last
sub-chapter is considering two strategies of industrialization, the export-oriented
industrialization (EOI) such as the import substitution industrialization (ISI) that is highly
valuable in the context of our case study.
2.1 Universal and particular development theories
The most distinguishable character of development theories is the political and economic
dimension the theory is based on.
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Development theories may either be claiming universal validity or be particular in the sense
of not accepting the universal character of the theories belonging to the first branch, the
universal theories.
These are based on the concept of a development process which is unique meaning it does not
accept any other form of development then one particular.
Development is seen as a linear process, analogous to for instance the growth process of a tree
which follows a unique and linear process.
The process is supposed to bring all countries to one level based on a model divided in phases
and the dynamics within society correlate in a sense with dynamics in studies such as physics
and chemistry.
Most important is however the notion of phases as universal development theories is
teleological in the sense that they are oriented towards a certain final phase that needs to be
reached (see Novy 2010: 42).
Universal “ideas” are thereby not limited to the economic part of development but are rather
more present in politological, sociological and other discourses of social sciences. Max Weber
for instance talked about the process of rationalization within society whilst Karl Marx tried
to elaborate the way how capitalist societies will develop themselves. Lenin, based on the
works of Karl Marx, has described imperialism as the ultimate step of capitalism.
It is hereby very important to note, that universal development theories are not the expression
of a single political ideology such as for instance the US capitalism after the Second World
War. It is rather more a concept that we can identify in all political ideologies of hegemonic
powers.
The Soviet Union had, just as the United States a perception of its own political and economic
structure to be the ratio ultimo in the sense that there was no successful development beyond
one’s own.
A diametric and basically incompatible difference between the political and economic
structures does not exclude the possibility to still be of a universal character.
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2.2 Branches of development theories
Development theories can be a part of their allocation on a political “left-right” scale, also
roughly distinguished by the main concept on which the theory is based on. This “main
concept” is set up by the external and internal factors the theory is focusing on. Three main
branches of development theories can be roughly named if trying to identify those main
concepts.

Modernization theories in their broad sense
In their broader sense, modernization theories are of universal nature and focus primarily on
the process of societal and economic modernization and can furthermore be divided into five
main sub-categories: Liberal-capitalistic, conservative/ anti-communist, liberal and Marxist
approaches as well as theories of imperialism.
Liberal-capitalistic approaches have been developed by the founding fathers of traditional
classical theories such as Adam Smith and David Ricardo who have elaborated the main
economic approaches favoring the market as most optimal mechanism for resource allocation
and international free trade as most favorable trade regime.
On a sociological level, Max Weber has developed the most notable works on human
rationality and its role in a capitalist society.
Karl Marx on the other hand, has too focused on modernization of society but his primary
focus was on class relations and on the revolution he predicted that was to start from the most
suppressed classes in industrial societies.
W. W. Rostow, a US economist has elaborated the most notable conservative and anticommunist approach in the last 60 years having had the major influence on US foreign
development policies.
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His major work, “The stages of economic growth”, subtitled “an anti-communist manifesto”
was the ideological counterpart to Marx´ communist manifesto focusing on a teleological
economic model divided into five stages. Even though it is in sharp contrast to communist
works, it is still based on a modernist approach predicting a certain universal and not
particular development of the world.
The model of Rostow is a so called linear-stage growth model that has been characteristic for
the “development studies” period after the Second World War in the USA in which the
country had no concrete academic experience with assessment of growth in developing
countries.
“When interest in the poor nations of the world really began to materialize following
the Second World War, economists in the industrialized nations were caught off guard. They
had no readily available conceptual apparatus with which to analyze the process of economic
growth in largely agrarian societies characterized by the virtual absence of modern economic
structures. But they did have the recent experience of the Marshall Plan, under which massive
amounts of U.S. financial and technical assistance enabled the war-torn countries of Europe
to rebuild and modernize their economies in a matter of few years”. (p.112)
Rostow´s model is entirely based on a positivist conception of development presenting a “one
size fits all” scheme that Rostow divided into five categories of economic development: (1.)
the traditional society, (2.) the pre-conditions for take-off into self-sustaining growth, (3.) the
take-off, (4.) the drive to maturity and the (5.) age of high mass consumption.
The stages model did however not remain without criticism. Criticism was a part of not
accepting the positivist approach of the model, also oriented against the assumptions of the
theory. European countries did surely profit from the Marshall plan after the Second World
War, they were, however characterized by already existing economic and other infrastructure
such as a functioning political system and a well educated workforce unlike less developed
countries. Just as the Harrod-Domar model (another simple stages model) the Rostow scheme
departs from the assumption that the same pre-conditions are also present in developing and
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underdeveloped countries whilst actually these lack most crucial aspects necessary for the
further development of their economies.
Political and especially cultural aspects were mainly marginalized and not taken into account
within this period and set of analyses. The first major work considering political aspects was
Samuel Huntington’s “Clash of Civilizations”.
Huntington’s work lies within the same approach focusing on the political aspects of
democratization.
Once again, political, economic and societal development is being seen as a teleological
process divided into certain steps of development which all countries and societies should
follow in order to become developed.
Another branch of development theories is the liberalist approach within the modernization
theories. Authors such as Gunnar Myrdal and Talcott Parsons have developed alternative
approaches towards the modernization of countries criticizing the assumption that markets
would auto-regulate them.
Gunnar Myrdal, a former UN-economist and Nobel laureate, has developed alongside with
other economists the concept of Circular cumulative causation.
The main idea behind this concept is that a system, such as for instance the economic system
of a country, is needed to be analyzed by a multi-causal approach with linkages within the
system. Circular cumulative processes appear when there is a change in one or more
institutions. As institutions are linked with each other, changes in one of them have an effect
on the other and create cumulative cycles which can be either of a positive or negative effect.
The most important assumption within this concept is that societal systems do not tend
towards an automatic self-stabilization; society does not reach automatically its balance after
the input of exogenous factors.
Myrdal has explained the application of his concept in national economies by presenting the
example of a region that had lost a big factory giving work to a big share of the regional
population.
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The liberalist approaches accept the resource allocation of capitalist economies to be the most
optimal; they however do not assume the auto-convergence of markets on national and
international level and therefore stress the importance of state interventions in Keynesian style
in development processes.
As we have seen based on various approaches, many development theories and theories
analyzing political development may either fully confirm a certain political and economic
orientation such as for instance capitalism or accept its existence over other ways of
development but criticize certain aspects.
Imperialist theories, being also of universal nature and thereby belonging to the modernist
branch of development theories, claim that imperialism is the ultimate and last phase of
capitalism.
Imperialism, that generally has a negative connotation as it implies a status of foreign
domination and suppression, is being seen as the last phase of a societal and economic system
that others, such as Samuel Huntington see as the last and most profitable phase of human
development.
As we note once again, the theories may be in a sharp and paradox relation to each other, they
can, however, share the universal and positivist notion of development.
 Approaches analyzing Globalization
Approaches focusing on Globalization are a further branch of development theories that,
however, is not very easy to be distinguished from the previous two branches as the main
concepts the theories are based on are present in theories of modernization and in theories of
dependence.
The approaches are especially focused on a larger, global scale and can be subdivided into
neo-liberal theories and world-system theories.
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Tab. 1 Development theories and their main branches (based on the scheme of Kolland 2010:
81)
Modernization theories in their broader sense
Liberal-capitalist approaches
Marxist approaches
Pioneers: D. Ricardo, A. Smith, M. Weber
Karl Marx
Conservative, anti-communist
Liberal approaches
Imperialist theories
W. W. Rostow, S. Huntington
T. Parsons, G. Myrdal
W. I. Lenin, J. A.
Hobson
Dependency theories
First works by Raul Prebisch and the CEPAL, the Economic Commission for Latin America
Reformist approaches
Marxist approaches
F. Cardoso, C. Furtado, J. Galtung, D. Senghaas
A.G. Frank, T. Dos Santos
Arno Tausch, Kunibert Raffer
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Approaches taking Globalization into account
Neo-liberalism
World-System theories
B. Balassa, I. Little, P.T. Bauer
I. Wallerstein, A.G. Frank,
G. Arrighi
2.3 Convergence and divergence of economic systems, the approaches of
homogenization and polarization
Offering a clear and coherent distinction amongst development theories is, as we have seen,
very complex.
Many theories of one branch such as for instance the dependency branch share common
aspects making it difficult to divide them.
Dividing the theories by the main assumption that underlies certain theories is however a
good step forward. One example would be to take a look at how the theories describe the
interaction of the global system and the regions, i.e. which influence the global economic
system has in time on the regions.
The homogenization approach claims an alignment and equalization in time through supraregional interaction leading to regional convergence whilst the approach of polarisation
describes a strengthening of disparities in development by supra-regional interaction.
Regional divergence would then be the cause if we follow theories of polarisation and
dependency.
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The approach of homogenization has its theoretical origins in the neo-classical model which
also has constituted the economic basis for the neo-liberalist model.
Optimal resource allocation is, according to this approach, only guaranteed by the presence of
free markets and private property. Markets, according to Smith lead by an invisible hand,
optimize the usage of resources and lead to the increase in wealth. David Ricardo has
extended this assumption with his theorem on comparative cost advantages to international
markets.
This market-economy principle leads to the conclusion, when conducting an analysis by
means of the approach of the economic geography, that the forces of market of a country
directs its resources towards where they are most profitable and competitive. It is thereby the
market to determine which economic branch is the most profitable and which not.
This principle might only be distorted by interventions apart from the state such as public
subventions or sanctions, minimal salaries and other interventions distorting the functioning
of the market.
The economic concepts of the neoclassical conception of market economy are thus at least in
theory full applicable to “space theories”. The economic geography accepts the fact that the
choice of a location of for instance a factory for an economic activity is chosen with the
intention to have the highest possible output there permitting highest returns.
The theory of comparative advantage leads further to the fact that the productive resources of
a country are directed towards the most productive branches. It is the market forces that
choose the best location and shape the economic geography of a country.
From the point of view of a practical application, it is highly unlikable to be able to reflect the
theoretical concepts on a certain case study.
Certain restrictions such as the assumption of full employment, perfect concurrence and free
mobility of factors are highly doubtable facts as we most often observe interregional
difference in factor outputs, oligopoly structures and regional monopoles that.
Especially in the case of a post-conflict and post-socialist country like Bosnia and
Herzegovina one needs to note the impact of the criminal sphere that has led to the creation of
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oligopoly structures and regional monopoles of companies that are controlled by “mafiotic”
structures.
The theory of polarisation5, however, does not accept the “automatic” tendency of
convergence between regions that are unequal amongst them as represented by the
neoclassical approach.
Rather more are we witnessing a sharp increase in the inequality between regions and, taking
also the socio-economic sphere into account, in inequality amongst social classes.
Gunnar Myrdal whom we have discussed before has made an important contribution for the
theory of polarisation with his concept of circulative and cumulative causes. Cumulativecircular processes cause further growth in the centres6 whilst hampering growth in the
peripheries by the influx of foreign innovative and educated work force (brain drain). In
contrast to the emigration of productive and innovative workforce towards the centre, the
periphery is being left alone by poorly educated workforce inducing furthermore the
cumulative-circular process Myrdal has described.
Positive effects for regional economies when inserted into a globalized free-market economy
are expected by the approach of export orientation. According to this theory, economic
growth of a region is determined by the development of its export sector. The regional
development is thereby dependent on the extra-regional demand for the export from this
region. These exports create income which can be spent on local markets generating a
multiplication effect for the regional economy leading to a new situation of equilibrium.
The outcome can be compared to the Keynesian approach of multiplication whereby the intraregional development is dependent on the extra-regional demand. The variation of extra-
5
It would be more correct to speak of theories of polarisation as there are various “sub”-approaches. For our
work, however, we can limit us to one.
6
It is worth noting, that the dependency theories and in generally “leftist” theories have a strong focus on
unequal growth when for instance dividing the world into centres and peripheries and thereby strongly
neglecting the
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regional demand is a factor that must inevitably be included as the export-sector of a country
is far more vulnerable to external shocks then the domestic market.
A further theory developed in this context is the theory of regulation. It is a multi-disciplinary
approach developed in the 1970´s in France. The pioneer of this theory was the French
economist Michel Aglietta who first talked about a “theorie de la regulation” in his book
“Regulation et crises du capitalisme” first published in 1976.
The theory per se does not focus on if either certain growth models lead towards an economic
convergence or divergence but analyze how the capitalist society and economic model is able
to resist shocks and adapt themselves to new circumstances after every crisis.
Most notable is the breakthrough of the theory to include other methods of social science
disciplines then economy such as sociology, history and political science having as a focus the
identification of structural forms and institutional mechanisms that permit a continual
reproduction of the capitalist mode of production.
“During the development dispositif it was the national state to regulate society. (...) It
where the experts of the state with their economic and political measures to ensure that the
economy would not “overheat” or fall into a recession. The praxis of “social engineering” as
planed intervention into society was the mode of how state intervention into society was
conducted. (...)
Regulation is in this sense though not a mere process of adjusting as it encompasses “social
engineering” just as it includes civil society (...). Regulation describes the complex social
process of how capitalist societies are being stabilized.” (Novy 2010: 100, transl. D.A)
A crucial break-through that this approach has achieved in the social sciences is thus to
include and embed economic activity into social and political structures.
22
Economic activity cannot be analyzed outside of certain structures. Production and
consumption structures are brought into connection with political, societal, and institutional
acting and thus allow us to include methods of other disciplines such as history, sociology and
geography.
The main scope of the theory is however to study and assess how the capitalist system is able
to resist every crisis it undergoes. One needs thereby to note the cyclic conception of capitalist
society, i.e. that the system experiences in certain periods structural crises.
After every structural crisis, a new regulative scheme is created by the acting societal and
economic groups in order to once again be able to regulate society. This new regulative
scheme that is formed every time includes for instance the appearance of new production and
technology structures in order to cope with the new circumstances.
An example from the economic geography would be a different demand towards locations
that initiate factories and companies to outsource their activities into low-income countries.
Another example would be the deregulation and making more flexible of the labour market in
order to contend with the new structural circumstances.
2.3.1 Synopsis of the concepts in the context of our case study of Bosnia and Herzegovina
Whilst the neoclassical and neo-liberal approaches depart from the assumption of an autoconvergence of regional disparities, i.e. claim a homogenization of markets and regions, the
polarisation approach asserts the increase of regional inequalities due to certain factors that
hinder full capital and factor mobility.
The regulation theory criticizes the neo-liberal and neoclassic approach due to its timeless
conception and includes a variety of disciplines in order to explain how capitalist societies
resist crises and how new modes of regulations are being formed after each crisis.
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Both just mentioned approaches suit to assess our case study. The neo-liberalist approach
towards development (mostly incorporated by the Washington Consensus) was the leading
developmental programme after the transition process has begun in 1995. Dragoljub Stojanov
(2004: 5), notes in this context: “Bosnia and Herzegovina, however, is a theoretical case of
failure in transition, despite 100 per cent acceptance of the “Washington Consensus”, whose
free-market ideology (even theology) with a promising role for SMEs and privatization,
coupled with an expected inflow of FDI, were to provide basis of transition success”.
It is thereby inevitable and indispensable to include the neo-liberal development programme
imposed on the country by the international community.
On the other hand, however, we are further forced to include and strongly accentuate on the
works and concepts of the polarisation theory and the regulation theory that allow us to
analyze the negative impacts of the trade integration into the Western World and that further
permit us to embed our analysis into a political and societal dimension.
2.4 Neo-liberalist theory of development and the Washington Consensus
Neo-Liberalism as a political and economic doctrine was the main leading policy prescription
for the countries in transition.
It was mainly incorporated by the so called “Washington Consensus” that was proposed by
John Williamson 1989 and contained 10 main principles based on the power of the free
market. The Consensus was designed as a theoretical model for the transition that aimed to be
fully adopted by the countries in transition as fast and as soon as possible.
1. Fiscal discipline7
7
Scheme based on Rodriguez 2011
24
With the transition of a former centrally planned economy towards a free-market based
capitalist society, countries had to swap from the approach of a “soft-budget” constraint
towards a “hard-budget” constraint. This encompasses furthermore the retraction from the
state to intervene by the means of deficit spending in sectors of the national economy whereby
it should encourage private actors to finance certain projects.
2. Concentration of public expenditure on public goods including education, health, and
infrastructure
This point can be seen as a further contribution to the first point, the fiscal discipline. Public
spending should be primarily oriented towards maintain public spheres such as the
infrastructure, education and health. It is however to be noted, that the neo-liberal dogmas
foresee the privatization of anything that, according to this approach, might be better
regulated by the private sphere then the public8.
3. Tax reform toward broadening the tax base with moderate marginal tax rate
Taxes are a further important aspect. They should be as low as possible in order to encourage
private economic activity and the inflow of FDI9.
8
It occurs to note that, especially following the last financial crisis that has forced most European countries
towards an aggressive fiscal discipline, health services (health insurance, cure ...) have been often or sold to
private entrepreneurs or outsourced leading to a decline in the quality of the service. The same approach of
privatization and/or outsourcing can be observed in the politics of road and railway infrastructure whereby
states offer highways in concession or liberalize the access to the railway system leading to the appearance of
private firms controlling a large share of the public transport.
9
The adaptation of a flat-tax was an important characteristic in some Eastern European countries. Slovakia,
which introduced the flat-tax, was able to attract a high number of FDI generating wealth and prosperity in
certain regions. Following the economic crisis of 2007, the model proved itself to be not able to generate
enough income for the state and was abolished by the last Social-democratic government under Robert Fico.
25
4. Interest rates to be market determined and positive
A full financial liberalization and deregulation ensures that there is no government
interference in the financial system and that the market is the main mechanism for
determining prices. Incentives for companies such as negative interest rates are contraproductive.
5. Competitive exchange rates
Exchange rates had to be determined by “market forces” leaving open the option of the
devaluation of a certain currency that would lead to an improvement in the national
competitiveness further boosting exports.
6. Trade liberalization
The openness towards international trade is the most important aspect on an international
scale within the neo-liberal approach.
7. Openness to foreign direct investment
FDI is not only seen as something generating economic growth but also as a donor of
technological development.
8. Privatization of state enterprises
26
The WC foresaw a fast privatization of state-owned activities that have led towards a very
aggressive approach towards privatization that was furthermore conducted by all countries in
transition.
9. Deregulation or abolishment of regulations that impede entry or restrict competition,
except for those justified on safety, environmental, and consumer protection grounds,
and prudential oversight of financial institutions.
10. Legal security for property rights
27
2.5 Centre-periphery structures as basis of dependency theories
Centre-periphery structures are one of the most important concepts and fields of study within
the dependency theories.
Locating them within global history enables us furthermore to study problems resulting from
spatial inequality resulting from certain historical processes. The most important characteristic
that the dependency approaches share is their historical approach towards development
studies.
They differ from neoclassical and neo-liberalist approaches not only by the different policy
prescriptions but also from the point of view of a time and spice dimension as dependency
theories always include a historical approach that is necessary in order to be able to explain
centre-periphery structures.
Neoclassical and neo-liberalist approaches are often being criticized for their timeless
dimension; economic factors are being seen as given and not as the result of a historical
process.
Centre-periphery structures are inevitably analyzed in a historical perspective focussing on the
distribution of production and trade on a global scale.
The world economy is the thereby the most important analytical framework. Authors such as
Immanuel Wallerstein and Fernand Braudel who have for the most part developed this field of
study, have primarily described the inter-actions of regions in the context of the world
economy.
Andrea Komlosy (2011:28ff) has described in this context that the organizational principal of
the state-building process whereby territorialisation ended at the boarders of the political
entities of the states was not the same as the organizational principle of the world economy.
The early process of state building was not intended to unify political territory and economic
activity. Rather more did this process we date with the beginning of the 15th century lead to
the creation of over regional and supra-national consolidation of trade and international work
division.
28
The newly developing world economy was characterized by a large, spatially not limited
radius of action which started expanding onto other continents.
Increasing trade and work division created a world economic system which, however, did not
expand equally on all regions leading to a highly asymmetric world economy.
The main actors being traders, factories and companies controlling more than one location
have benefited from the different offers in production, qualifications, price and wage levels
leading to the creation of a capitalist world economy (see Komlosy 2011:29).
It is more than obvious, that the establishment of the world economy has been characterized
by strong asymmetric relations amongst the actors; different technology levels, divergent
levels of trade and craft such as different price and wage levels have contributed to the
establishment of a world-system that notable scientists such as Immanuel Wallerstein have
divided into centre, periphery and semi-periphery.
The centre is thereby the region having the highest cost of labour focussing primarily on high
value-added activity whilst the periphery mainly focuses on the production and extraction of
basic resources such as on unfinished goods.
A region that is defined as semi-periphery has characteristic of both centre and periphery.
The following scheme summarizes the main differences between the regions (based on
Komlosy 2011: 30)
Tab. 2: The centre, semi-periphery and periphery in a global context
Centre
Semi-periphery
Periphery
Production of finished goods,
Production and export of
Extraction of raw materials,
export
semi-finished goods
farming sector oriented
29
towards export
Import of raw materials and
Import of finished goods and
Import of finished and semi-
aliments
raw materials
finished products
Free wage work
Co-existence of free wage-
Forced working dominating
work and forced work
the labour sector
Diverse economy, various
Place for modernisation
Monoculture dominating
specialisations
projects
economy
High capital reserves, place
Import of capital
Lack of capital
of capital accumulation
Even though the graphic has been designed to explain the centre-periphery structures in the
15th century, most aspects are still valid for a modern analysis, so as for our case study.
Forced work is gratefully a rare case in Europe and so also in Bosnia, but can however be
compared to work in the informal sector as occupation in this sector dominates in many
transition countries.
The centre-periphery model, as already mentioned, is thereby usually the essential analytical
framework for dependency theory approaches. Critiques on the model of Wallerstein such as
the critique of Andre Gunder Frank have been mainly oriented towards to euro-centric vision
of the model, not however on the systemic character of the concept per se.
2.6 EOI and ISI, two approaches towards Industrialization
It is indispensable to not take into account these two strategies of industrialization as they
both represent two important and concurring branches of development theories we are
discussing in this work.
30
The Import substitution industrialization descends primarily from a dependency approach
whilst the Export-oriented industrialization has its origins in a free-market and neo-liberal
approach towards economic growth.
Both strategies however depart from the assumption that industrialization is the key to fast
economic growth leading to a high living standard within a country.
Industrialization was expected to boost economic growth in the global South creating a
trickle-down effect for the poor ones and further more annulling current deficits in the balance
of payments by the accumulation of foreign exchange and induce a process of sustainable
growth.
The ISI-approach stems from the assumption that the integration of developing countries that
do not have a competitive national economy and a high technological input into the world
market will have negative effects.
Its policy encompassed the focus on a domestic focus on production and self-sufficiency of
the internal market which was to be protected behind high-tariff walls. The economic system
is further to be led by a high input and control of the state that, through programs of
nationalization and the subsidization of core branches of the industry.
ISI-policies have however shown low effects in developing countries as Karunaratne (1980:
219) notes:
“Import substitution had distorted the product and factor markets and biased
manufacturing towards capital-intensive methods. Empirical evidence from newly
industrialised countries showed that nearly 80% of their exports were labour-intensive. (...)
Furthermore, empirical evidence based on a regression analysis of 45 nations showed that
countries with high protection had lower growth performance than “open” countries. Thus
Import substituting strategies had lower growth stimuli than export oriented strategies in
developing countries”.
31
As developing countries that have adopted the ISI-strategy were suffering from a lack of
capital that might for instance be used to incorporate capital intensive technology instead of
the usage of industrial capacities and facilities that are characterized by a low productivity,
economic choices were very often suboptimal and led to monopolistic behaviour of big
corporations that were mainly state owned. This
3.
The Bosnian
Economic development after 1995 – Between modernization and dependency
Bosnia and Herzegovina is a very notable case of a developing country in our contest as it is
one of the rare cases in which a country, that previously recorded a decent living standard and
a high level of industrialization faced a development oriented backward and is now once
again facing the phase of economic development.
B-H was, just as the other states of former Yugoslavia bound into the socialist Yugoslav
development model that shaped the particular economic and political status of the country
from the Second World War until the break-up of Yugoslavia.
Analyzing the new development path of the country from 1995, the end of the war and the
signing of the Dayton peace agreement, by also contrasting it with the previous development
path it has faced is thereby a highly interesting as it offers us the possibility to contrast both
development paths.
Another further interesting fact is the aspiration of B-H to access the European Union.
The country is characterized by the central position in the Western Balkan region requesting
to enter the European Union together with the other successor states that, a part of Slovenia,
are orienting their politics in order to gain full membership in the European Union, even if the
magnitude of the pro-European orientation and the process of implementing the conditions of
the EU vary from country to country.
The relations between the EU and B-H are thereby another starting point for assessing the
(asymmetric) relationship and the conditions set up by the EU in the context of the Bosnian
development after 1995.
32
In order to fulfil the intentions of this work, i.e. assess certain aspects of the development
studies and its related theories we already discussed in the first part of the work, we are now
aiming to analyze the Bosnian after-war economic development.
The most important aspect >>guiding<< our work is the fact that we are presenting a outline
of this phase of the Bosnian economic history by trying to exclude various explanations that
are legitimized by a certain ideology such as neo-liberalism... Explain furthermore
It would be furthermore very essential to embed our work into the geopolitical and globaleconomic constellation present on a worldwide scale after 1995. As the further inclusion of
political aspects would.....work only focussed on economic aspects, no space for the inclusion
of political aspects. The work will thereby not try to hide certain problems of the county (and
the region) and characterize them by “ethnic-nationalist” problems (most common approach)
but to stress the factor the author of this work identifies as most crucial: socio-economic
problems.
3.1
Yugoslav
Socialism and the Bosnian economy before 1991
Bosnia was in the first years of the Yugoslav socialist era together with Montenegro and the
later on autonomous region Kosovo one of the rather poorer areas of Yugoslavia.
Croatia, Serbia and Slovenia had a well funded industrial capacity that helped boost the fast
growing Yugoslav economy. The economic model of Yugoslavia of the1960´s was often seen
as a model par excellence of Socialist efficiency as the country evidenced GDP growth rates
of 6-7% on annual basis.
US-credits boosted the Yugoslav economy having furthermore the political effect of
>>moving<< the Yugoslav economy and politics from the Soviet sphere of influence.
33
Shortly after World War II, however, Bosnia and Herzegovina started to be one of the most
important targets of Yugoslav military and economic investments.
Thus Bosnia profited from being part of the Yugoslav federation as large military investments
such as underground complexes were constructed and built in central Bosnian regions. A
notable example is the military underground airport >>Željava<< in the Bosnian mountains
that took 20 years to be built containing 5 underground runways and a capcity of 50 aircraft or
the so-called bunker of Tito near Sarajevo being a 6500 square meter underground anti-atomic
bunker that cost 4.6 billion USD.
Economic investments were especially directed towards exploiting natural resources such as
coal and copper and lead to the creation of large industrial companies that later on started to
operate worldwide.
“Twelve big companies produced 35 per cent of the gross domestic product (GDP), and
four of them generated more than 40 per cent of total exports. Companies were organized as
self-managed companies of associated labour, in accordance with the principle of a selfmanaged market economy, which was half way between a centrally planned and a modern
market economy”. (Stojanov 2004: 44).
Especially the 1970s were a period of economic prosperity in which the country evidenced a
high increase in urbanised population and a decent living standard far beyond the one of other
Socialist countries in Eastern Europe. A “new generation” started developing itself too in the
1970s as a high number of women started to become wage employed (mainly in the textile
sector) and as the foundation of major universities across the countries permitted people to
educate themselves without the necessarily leaving the country. Most university degrees were
directed towards technical subjects such as civil engineering, mechanics and metallurgy.
Employment for young graduates was guaranteed in the big industrial corporations around the
country. As of the late 1980s, 14% of the Bosnian workforce had a university qualification
(ESI 2004: 13).
34
It is furthermore highly notable that Bosnia, having established close commercial ties with
EEC countries such as Germany and Italy had a surplus with EEC countries in 1991 whilst
today the country is facing a massive trade deficit with the EU.
B-H developed from 1945 a solid economic growth model obtaining a trade surplus whilst
half of the GDP was generated in the industrial sector producing mainly electric energy.
The previously mentioned 12 big companies offered work to half of the Bosnian workforce
(see Kumalic 2004).
“During the 1970s, Bosnia acquired 322,000 new jobs – a 59 percent increase – at a rate
of nearly 3,000 jobs a month for a decade. This was accompanied by rapid urbanisation. The
economic geography of the republic changed substantially. The Tuzla basin doubled its
employment between 1970 and 1990. Peripheral areas such as Herzegovina acquired for the
first time a network of enterprises. In all, more jobs were created in the 1970s and 80s than
over the previous century” (ESI 2004: 13).
Bosnia & Herzegovina, however, remained as most other Yugoslav regions a country
characterized by a high percentage of Agrarian economics in the total economic output.
Agrarian industrialization, as conducted in other Socialist countries was not the case in
Yugoslavia so that the Agrarian system of the country is constituted by small farms of which
most were designated for a subsistence house economy.
Being furthermore one of the poorer regions (together with Macedonia and the autonomous
region Kosovo) of former Yugoslavia, Bosnia benefited and relied on the investments from
the structural funds for the less-developed regions of Yugoslavia. These were however foreign
funded (mainly by the World Bank) and have partially led to the problem of the high
indebtedness of Yugoslavia.
35
3.2
The
disintegration and destruction of the Bosnian economy after 1991
The 10-days bombing of Slovenia by the Yugoslav air force 1991 marked the beginning of the
(violent) disintegration of the Bosnian economy.
The declaration of independence of Croatia and Slovenia left Bosnia officially “alone” in the
Yugoslav federation together with Serbia and Montenegro which lasted only until 1992 when
Bosnia declared independence, too.
3.2.1
Economy of
War in Bosnia and Herzegovina
The break out of the war in B-H in 1992 has fundamentally changed three most important
components of the Bosnian economy: 1. The terms and factors of production, 2. the economic
framework per se and 3. the economic policies of the country.
B-H was faced with the collapse of its system of values that was founded on a solid socioeconomic basis, characterized by full employment and a egalitarian distribution of income
such as, from a socio-anthropological point of view, by a ethno-cultural stability.
From an economic point of view, we can observe that factors and terms of production have
more or less vanished from 1992 onwards whilst the demands of the economic system has
36
shifted towards war demands transforming the regulation and functioning of the economic
system into a system of strategic management adapted towards war planning.
Economic policies were now designated to maintain the economy of war by installing a
logistic system for the defence of the country.
The most brutal influence of the war on the Bosnian economy has been the destruction of
several human and material resources of the country by planned targeting of industrial,
cultural and religious sites whilst the territorial occupation of B-H lead to a quasi total
isolation of the country making it rely on humanitarian aid from outside.
Whilst it is still discussable if the economic consequences of the war a direct/indirect cause of
the war or if it was the direct scope of the expansionist ideology of the Serbs, mainly
represented by the “SANU Memorandum” in Belgrade, (whom the Bosnians are blaming for
the war), Bosnian economists such as Basic (2006) further speak of a economically motivated
aggression against Bosnia and Herzegovina.
According to Basic (2006: 131ff), this aggression was especially motivated in order to profit
from the geo-strategic position of the country and to profit from the developed industry and
infrastructural capacities.
He further discusses six important aspects of the economy of war in B-H.
1. The war logistics has been mainly sustained from outside by the natural allies of the
war parties, the Croats and the Serbs.
2. The main economic characteristic was the primary target to destroy economic
resources that could not have been stolen.
3. A further important aspect is according to Basic the fact that the war was total in the
sense that it involved the entire economic potential of the country, the military as well
as the civil. All segments of the civil life such as households, small and medium-size
companies, humanitarian and non-governmental etc. have been involved in the war
and were directly affected.
37
4. As Bosnia was totally surrounded by the countries whose nations were involved in the
war, the country was faced with a quasi total economic isolation eliminating all forms
of foreign trade.
5. Another important aspect was the role of the financial and monetary system of the
country, the money lost its role as “lubrificator” of the economy as the exchange
model was not anymore a “goods-money-goods-money” but a “goods-goods” relation.
Whenever possible, the Bosnian citizens tried to accumulate hard currencies such as
German marks and Swiss Francs.
6. Since the supply-side oriented economic model basically did not exist anymore (as a
direct cause of the quasi non anymore existing domestic production), prices for food
were astronomically high as the humanitarian aid, substituting the supply-side of the
economy, often was commercialized by locals instead distributed.
7. As a direct cause of the high prices dominating the “market”, war profiterism was
prospering. It is not a secret that a truck smuggling goods for the every-day needs of
the population made a profit of up to a million DM.
3.3
After War
Economics – State of Destruction and Economic Depression
The happenings between 1992 and 1995 have, a part of leaving behind a crippled economy,
caused massive transformations of the Bosnian demography.
Bosnia lost almost 1 million inhabitants who have left the country during the war or shortly
after the war benefiting from the liberalized immigration rules in Western European countries
enabling refugees from Bosnia to obtain a residence permit.
The economy yet started to grow fast and recorded in the first years after the war increases of
even 70% which are, however, caused by the low initial level of the GDP in 1999 and
certainly did not reflect a healthy economy. In 1998 for instance, 61% of the population was
living at what was defined a poverty level.
38
As public institutions regulating and intervening into the labour market were either not
existing, ineffective or not able to operate efficiently due to lack of financial resources and the
macroeconomic situation of B-H reflecting a precarious and unstable labour market, many
people had to seek their chances in the informal sector.
The period of quasi total isolation has lead to the establishment of “war profiteering” and the
creation of a black market for fuel, food and humanitarian aid.
According to official statistics, 47% of the Bosnian workforce was employed in the informal
sector in 2001, most of those however in the Serbian entity, the Republika Srpska in which
55.7% were employed informally (Krstic/Sanfey 2006: 6).
Further deteriorations are to be noticed in the industrial structure of the country that is in a
state of deconstruction as many industrial plants have been destroyed or are either not
anymore competitive due to technological obsolescence. Whilst B-H was once heavily relying
on its strong industry, it is now faced with the expansion of the trade sector that is, especially
with the EU countries, in a deficit as many goods are being imported from the EU whilst the
Bosnian economy is not able to counterweight the imports by its exports leading to a trade
deficit.
3.4
Interventions
from Outside – The role of the IFI in Bosnia & Herzegovina
As was the case in most cases of political and economic transformation and transition in
Eastern and South-Eastern countries, the economic framework has been mainly shaped by the
so called Bretton Woods Institutions, namely the International Monetary Fund and the World
Bank.
Soon after the war in 1995, the World Bank launched its activities in B-H aiming at adopting
the same “rules of the game”, mainly represented by the Washington Consensus in Bosnia as
it started doing much earlier, from 1989 onwards, shortly after the fall of Communism in
Eastern Europe.
39
The scope of the World Bank (1996) was very clear and represented the mainstream politics
towards countries in the phase of transition to a full market-economy.
“The basic strategy for economic recovery should rest upon the private sector as the
main starting device of the growth of the economy and employment. Further, most of mediumterm economy growth will have to come from the extension (the development) of the service
sector and the development of light industry on the basis of private enterprises”.
Whilst the World Bank substantially shaped the economic framework in Bosnia and
elsewhere, the Dayton peace accord of 1995 created the political framework being a unique
aspect of political transformation in Eastern and South-Eastern Europe and leading to a quasi
colonial political situation of the country.
Main objections of the after-war economic situation have been (and partially still are) (see :
1. The renewal of the civil infrastructure and the re-launching of public activities
2. The increasing need for a effective social infrastructure as the war had brought many
citizens into the situation to rely on social support and protection
3. The need to increase production in the manufacturing sector and in the financing
sector by developing small- and medium size enterprises (SME)
4. The launching of transitional reforms towards a functioning market economy
5. The creation of institutional authorities capable of intervening and supporting the
process of becoming a modern economy
The World Bank furthermore evaluated its projects in Bosnia in a evaluation paper (2004) and
summed up the priority of its interventions:
40
“The first priority of the Bank’s assistance from 1996 through 1999 was to support
reconstruction across all sectors of the economy. Other strategic objectives were to establish
and sustain a viable macroeconomic framework and to support BiH’s transition from a
socialist to a market economy. Additional objectives, implicit from the beginning, but more
explicit starting in 2000, were to strengthen governance and establish affordable and
equitable social services. Underlying these primary objectives were such essential building
blocks as sound fiscal and monetary policies; reforms of the tax system; privatization of stateowned enterprises (SOEs), including banks; deregulation of an over-regulated economy; and
institutional and policy reforms in government administration, in the judicial system, and in
delivery of social services, including health, education, and social welfare benefits.” (World
Bank 2004: 5).
Macro-economic recovery, as noted in the paper, was an essential point of departure for relaunching economic activities and sustaining the process of economic transition. As we have
however noted previously, macro-economic stability meant primarily the establishment of a
currency board and the pegging of the BAM to the DM (later on to the Euro) whereby the
country detained the role as a simple “price-taker”. Monetary politics was not in the hands of
the country!
The Central Bank of Bosnia was furthermore controlled by a foreign governor.
3.5 Price and Fiscal Policy in Bosnia & Herzegovina
The price and fiscal policy is the essential instrument of a state in order to intervene into and
stimulate the national economy having three important scopes: Resource allocation, Resource
distribution and a stabilizing effect for the national economy.
Fiscal policy in after-war B-H is one of the most crucial aspects in the post-war development
phase as the state was faced with the necessity to re-establish traffic communication,
41
restructuration of the civil and industrial infrastructure as well as, most important in a social
sense, re-launch health and educational services.
If taking a closer look at our case study Bosnia & Herzegovina, we will immediately identify
that the fiscal policy is organized and conducted on four levels of organization which are...??
The fiscal capacity10 of Bosnia is furthermore negatively influenced by following factors (see
Tahmaz Year: 2):
 A high percentage of the economic output is generated by the inclusion of the base
industry
 The country is furthermore characterized by a high energetic dependency
 A lot of intermediate “in-between” phases (with a low economic efficiency)
characterize the assembly process of industrial and other goods
 Small inclusion of SME-enterprises, instead a large concentration of gigantic
industrial conglomerates
 High import dependency
 Low export rates after war
The main problem is however, a part of the above mentioned factors having a negative
influence on the economic activity is that the low “after-war” economic output generated only
a very small fiscal capacity that is needed for a however high resource using economy in need
of a high level fiscal capacity (page 4.) .
The fiscal decentralization of B-H is thus unique even though trade and customs policies are
designed on a state level as in other countries. There is, however, a notable difference in the
level of authorities who decide tariffs and customs politics and the level of authorities who
10
The fiscal capacity of a country is its capacity to ...
42
conduct it and who collect the tax and customs revenues. The country is responsible for
defining its foreign-trade and customs politics but it is entirely relying on the transfers from
the both entities, the Federation and the Serb Republic which share a high level of financial
autonomy.
3.6 The Bosnian financial system – full financial liberalization and deregulation
but no economic growth
The establishment of a financial system of Bosnia & Herzegovina is a crucial element of the
post-war economic development of the country which we need to assess in the context of our
analyses.
Before considering general characteristics of the system, we need to note that the country’s
financial system is, just as the ones of other SEE-countries11 characterized by a total financial
liberalization and deregulation. This implies that there is basically no government control over
the interest rates of banks or over the credit policies of commercial banks. Furthermore are
liberalized financial systems open which means that banks and other financial institutions
may be freely founded and that there are no controls over their capital flows. The state retains
from any form of financial repression.
Bosnia & Herzegovina is even a case of extreme financial liberalization and deregulation!
11
Albania, Bulgaria, Bosnia-Herzegovina, Croatia, Macedonia, Romania and Serbia
43
The in August of 1997 founded Central Bank of Bosnia-Herzegovina (CBBH)12 took over the
role as a mere coordinator for the single monetary regime13.
B-H was furthermore the first country to entirely outsource the internal payments of the
country to commercial banks which were the only financial institutions to be able to credit the
private business sector. Commercial banks enjoy a full autonomy in their business politics
without any influence from the governmental sphere and do not face concurrency from stateowned banks. Interest rates are freely determined by market mechanisms.
Having however discussed the Bosnian economic situation we are rather noticing a harsh
economic depression and a low-equilibrium economy instead of a prospering economic
growth.
This fact is surely to be attributed to the financial system of Bosnia that, being totally
liberalized and deregulated is nevertheless characterized by the presence of only commercial
banks and insurance corporations. Last one is of basically no importance for crediting the
private business sector and we are rather more faced with the presence of a high number of
small commercial banks.
“The view that the financial sector should be allowed to establish as many commercial
banks as possible, and that the competition of those banks would lead to a decrease of interest
rates in the first four years after the war, did not prove correct, since it implied a low ratio of
founding capital, which facilitated the establishment of a large number of banks. The
establishment of a large number of banks with modest capital, seen within the context of
12
Before 1998 the country had no single currency but used the currencies of the neighbouring countries,
mainly the Yugoslav Dinar and the Croatian Kuna such as the German Mark which was the preferred hard
currency.
13
Fikret Causevic (Year: 90) used following citation to describe the mode of functioning of the CBBH: “If
commercial bank lends excessively, the borrowers spend the excess, for instance by writing cheques. In the
payment systems, more funds flow out of the bank than flow into the bank. To prevent the outflow from
bankrupting it, a commercial bank holds reserves. The loans of commercial banks are limited by their need to
maintain sufficient reserves to enable depositors to convert deposits into reserves on demand and to withstand
outflows of reserves through the payment system”.
44
application of provision of the Basle Committee for Banking Risk Management, meant that
practically no bank in B-H was able to support a large investment project of a potential
multiplication effect on economic growth and employment”. (Causevic Year: 91).
As we have however previously noted in this work, the country’s economy was based upon a
high proportion of industrial production and constituted by mainly big industrial
conglomerates. The war and the economic recession after the war have made disappear those
large society-owned14 corporations leaving the country without almost any serious economic
infrastructure.
All financial aid and crediting after the war have been directed towards the private sector,
SOE were excluded from any kind of financial assistance nor was there any serious intention
to restructure and reintegrate those companies into a new economic framework.
Furthermore was and is the fact that the crediting of private business is fully dependent on the
business philosophy of commercial banks a big problem. Those banks are for-profit
institutions and obviously have individual operating modes which have, however, not been
compatible with the urgencies of the Bosnian after-war economic model which required a
high level of financial resources for crediting the re-launching of industrial production.
Instead, most commercial banks turned “towards business sectors with rapid financial
turnover with a significant share held by the grey and black economy” (Causevic Year: 93).
Fikret Causevic (ibid.) notes further that the country’s Central Bank is not able to act as a
lender of last resort within the framework of the currency board having no possibilities to
manage eventual financial crises. Instead, the country is fully vulnerable to external shocks.
The problem of lack of financing methods and resources that arose after the war is a serious
aspect that has moreover influenced the establishment of a new model of economic growth of
14
Unlike in other socialist countries where companies were state-owned, most companies in former Yugoslavia
were owned by the society within the system of “self-management”. Only after the war, in order to be able to
privatize them, has this type of ownership been transferred into “state-owned”.
45
the country characterized by a high input of microfinance methods that we will be further
discussing in this work
3.7 Privatization in Bosnia & Herzegovina
The aggressively requested privatization is a key element of the economic transformation that
in Eastern Europe was already started in Eastern Europe in 1989/91 and 1997 in B-H.
46
Privatization of state-owned property is one of the crucial elements of the Washington
Consensus and of the neoclassic economic approach.
It is one of the most important aspects of (neo-)liberal economic thoughts and has been a
fundamental condition in the Structural Adjustment Programs (SAP)set up by the World
Bank in the 1980’s and 1990’s for third world countries that have not been able to pay back
their debts.
As it was a central pillar of the post-Dayton economic program imposed by the international
institutions in B-H, the Bosnian government was preparing from 1995 onwards a legal basis
for mass privatizations of state-owned enterprises which was ready in 1997.
It was thought not clear (and still is not…) how to transfer the ownership from the state to the
private sphere. The main motto was however to conduct it as soon and as fast as possible.
Timothy Donais (2002: 4) for instance, reports in this context about the intentions of the
international organizations in Bosnia: “(…) the privatization process, which was put together
beginning in 1997, seemed to operate on a different timeline from other elements of the
reform process, as USAID officials originally envisaged a transparent and rapid privatization
process that was to be largely completed within a two-year period”.
The idea to conduct the privatization within two-years was obviously just as out of touch with
reality as the “500 days” idea of transforming Russia into a functioning market economy
within 500 days.
A part of the fact that basically no Bosnian citizen disposed over the necessary financial
resources to buy at least a quote of participation in a company to be privatized, the legal and
political separation of B-H into two parts furthermore severally aggravated the conduction of
a fair and equal privatization on national level.
Since the Dayton peace agreement did not “equip” the country with an effectively functioning
nation-wide government, the country got split into fractious state dominated by two
governments for each entity but one weak central government.
47
Instead, it was carried out on municipal level leading to the problem of ethnical privatization.
As the both entities, the Bosnian/Croat Federation and the Serb Republic were divided in
ethnical terms, authorities conducting the privatization for more or less free whom to prefer.
“Complicating matters further was that fact that the country’s Muslim-Croat
Federation was itself divided into ten cantons, with both Muslim and Croat nationalist parties
demanding control over the privatization process in cantons they controlled. At the end of the
day, therefore, Bosnia was saddled with an immense and cumbersome privatization
infrastructure of 10 cantonal and two entity privatization agencies”. (Donais 2002: 5).
It is hereby further to be noted, that the institutional vacuum on a nation-wide level created by
the Dayton agreement caused, a part of the fractioned and over-dimensioned political system,
is further constituted by other lacks in the institutional system such as (see Donais 2002:5): a
only rudimentary functioning system of the rule of law, a barely existing capital market, a
completely out-of-time banking system, a efficient tax-collecting regime, etc.
An efficient rule of law system is thereby surely the crucial element that is missing still
nowadays and that hindered the implementation of a just and equal process of privatisation.
Control mechanisms were missing to efficiently fight corruption and abuse of legal power that
has lead to ethnic privatization and to fraudulous cases of privatization in which formerly
state-owned propriety was sold for a fraction of its market value.
Another problem that has lead to a perverted privatization was the problem of Bosnia’s
capital markets that were barely functioning. National Banks were too in the process of
privatisation and highly illiquid which made them unable to credit potential national investors.
The population was highly impoverished and there was basically hardly any domestic investor
with the financial capability to buy and re-invest in a company to be privatized. Instead, war
profiteers having enriched themselves on the cost of society maintaining the black economy
that was established during the war even after war, were free to choose which company and
which real estate to buy being the only potential buyers.
Foreign investors were at that time mainly still to sceptical to invest in a politically and
economically ruined country and retained from investing.
48
3.8 Crisis and Anti-crisis politics in B-H
Considering the affects of the global economic crisis of 2007 on Bosnia & Herzegovina as
well as the measures undertaken by the government in order to fight the crisis permits us to
discuss two important aspects. The first aspect is the influence and transmission of the crisis
on the country and its specific economic development model that allows us to analyse this
model in a global context as well as enables us to compare the outrange of the crisis with
other transition countries.
Another important aspect in this context is to analyse the measures of the Bosnian
government, the national anti-crisis politics as we can thereby assess to which extent the
government is acting in autonomous mode and to point out the major limits to use all
resources and capacities in order to tackle the crisis.
The crisis of 2007 that swept over from the United States to Europe and to other regions of
the world has also reached Bosnia and Herzegovina.
The “pre-crisis” growth model was based upon a high level of import and a fast accumulating
external debt of the crisis and a high influx of foreign capital. The main channel of
transmission was through Western European banks that are basically in full control of the
Bosnian banking market.
49
64% of the banking assets are in the hands of foreign banks (as of 2003), mainly Austrian
banks as Austria, having close political and economic ties with the country was one of the
pioneer countries to invest in Bosnia & Herzegovina15.
Tab. 3: Total Assets of the Bosnian banking market
The crisis was transmitted in the same manner not only to Bosnia & Herzegovina but to all
other successor states of former Yugoslavia having highly open economies (especially
Croatia, Montenegro and Serbia). Countries with rather closed economies such as the FYR
15
It is also worth nothing that former Yugoslav banks such as the Croatian “Zagrebacka banka” detained a large
market share but were however bought by foreign banks such as the Italian “Unicredit” group in this case.
50
Macedonia and Albania16 evidenced a much less intense influence on their economies.
Albania was furthermore the only country of the region to register positive growth rates even
though the momentum of its fast growing economy was surely hit by the crisis.
Tab. 4: Economic trends of the region, 2008-201217
Real variation of GDP in %
2008
2009
2010
2011
2012
Albania
7,5
3,3
3,5
2,0
0,5
BiH
5,7
-2,9
0,7
1,7
0,0
Croatia
2,2
-6,0
-1,2
0,0
-0,5
Kosovo
6,9
2,9
3,9
5,0
3,8
FYROM18
5,0
-0,9
1,8
3,0
2,0
Montenegro
6,9
-5,7
2,5
2,5
0,2
Serbia
3,8
-3,5
1,0
1,8
0,5
Weighted
4,0
-3,5
0,5
1,3
0,3
mean
16
Albania is not a former Yugoslav republic, shares however similar economic characteristics with Kosovo and
the FYR Macedonia.
17
Own representation based on the data from IMF (2012)
18
Former Yugoslav Republic of Macedonia
51
Mean
5,4
-1,8
1,7
2,3
0,9
Croatia, being not only the most open economic country but also the country with strongest
ties to Western Europe is the country that definitely suffered most from the crisis. Serbia and
Montenegro, too, were hardly hit by the crisis with a even more negative growth rate then
Bosnia recovered however faster from the crisis, especially Montenegro which induces us not
only to take external factors into account.
The crisis has further sharpened the internal problems of the Bosnian economy and the
government(s)19 is lagging behind to finally initiate a concrete anti-crisis programme.
An effective programme that hinders the country from recovering much faster from the crisis
(and also endangering economic growth in general terms) is caused by a series of factors that
were elaborated in a study conducted by the Bosnian “Centre for Policy and Governance”20
and which merit to be presented.
The study stresses as first aspect the urgent necessity to boost investments as share of GDP as
investments (both public and private) are a very important indicator for countries in transition
and with low living standard.
Following the global crisis, all countries (except Kosovo21) of the region experienced a fall of
investments.
19
As Bosnia is a highly decentralized country with two entities we are often forced to speak of governments in
the plural sense as there is also the government of the Republika Srpska and of the Federation of Bosnia and
Herzegovina.
20
The work with the title “Uticaj medjunarodne krize i kljucni izazovi ekonomije Bosne i Hercegovine” (The
influence of the global crisis and key issues for Bosnia and Herzegovina, transl. D.A) was published in June by
the CPU and supported by the National Endowment for Democracy (NED).
21
The definition of Kosovo as a country is here in merely economic terms and does not include any prejudices
based on the resolution 1244 of the United Nations Security Council or the opinion of the International Court of
Justice on the declaration of independence of 2008.
52
The following table represents the investments (as share of GDP) of the countries in the
region22:
Tab. 5: Investments (public and private) as share of GDP in %
2008
2009
2010
2011
Albania
32,5
29,0
25,9
25,0
BiH
28,2
20,9
19,4
19,3
Croatia
30,7
27,0
23,4
22,6
Kosovo
28,6
32,3
33,9
33,2
FYROM
26,8
25,9
25,4
26,7
Montenegro
40,7
27,1
22,8
19,4
Serbia
29,7
22,9
22,7
25,2
Mean
31,0
26,4
24,8
24,5
It is immediately visible that the investments in Bosnia are well below the average. If
excluding Albania (as non successor state) and Montenegro (due to the distorting factor of
speculative investments in the real estate sector) in 2008 we however do not notice any
notable discrepancy of B-H with the other countries. The discrepancy to the other countries
was rather more sharpened in the years after the crisis as Bosnia was lagging behind the other
states with an investment share of only 19,3% in 2011.
Investments are though more than necessary in the current gravity of the situation. This is
especially visible if considering indicators measuring the quality of the infrastructure.
22
Translated by the author and based on CPU 2012: 8)
53
The following table23 represents the quality of four sectors of the infrastructures of water and
waste Recycling, public city transport, streets and railways. The indicator ranges from 1 to 4+
whereby 4+ represents the standard of an industrialized economy such as for instance Austria.
Tab.6: Quality of infrastructure in SEE-countries
Water and Waste
Public city
Recycling
transport
Albania
2+
BiH
Streets
Railway
3-
3-
2
2
2+
3
3+
Croatia
3+
3+
3
3-
FYROM
2+
3-
3-
3-
Serbia
2+
3-
3-
3
The Bosnian indicators are especially low in the first two sectors, the water and waste
recycling sector and the public city transport. Investments in these two sectors would surely
launch economic activity and create effects of economic multiplication onto other economic
sectors!
3.9 The Industrial policy and the Microfinance approach – The (failed) Bosnian
growth model
Industrial policies are macroeconomic policies and essential instruments of a state to
influence core sectors of the national economy.
23
Translated by the author based on CPU 2012: 7
54
They are one of the core elements of governmental economic planning in modern capitalist
economies miring to develop and improve the competitiveness of the manufacturing sector.
Assessing the industrial policy of Bosnia & Herzegovina is crucial in our context as we are
dealing with a country whose development path of the last 60 years was characterized by a
massive industrialization of the country.
This chapter is thereby focused on the one hand on examining the present industrial policy in
order to be able to valuate current economic policies in the context of our analysis and
barriers to economic development. On the other hand, however, we are embedding the current
Bosnian industrial policy into the context of a dependent economy trying to understand why
most industrial policies fail to succeed.
When conducting a rough overview over the current state of industrial policies in B-H, one
will immediately realize the problems originating in an institutional sphere as well as a series
of structural problems.
The perhaps most problematic aspect in the institutional sphere is the politic and economic
fragmentation of the country rendering a unique nation-wide industrial policy almost
impossible.
Structural problems are caused by the low efficient capitalist economy that is still in a phase
of transformation in Bosnia being a further barrier to growth. A notable example is the
banking sector that still is only partially if at all integrated in industrial policies leading to the
absence of financial resources for industrial projects.
In this chapter we will evaluate the Bosnian state of Research & Development (R&D) in the
context of globalization focussing especially on the influence of globalization on the
industrial sector in B-H.
We will furthermore deliver an overview of the current technological situation of the country
by analyzing the most crucial industrial sectors.
55
3.9.1 The development of Industrial policies in Bosnia and Herzegovina
Before the War broke out, Bosnia was a heavy industrialized country in which the heavy
industry had a share of more than 39% of the GDP employing 44% of the total workforce and
constituting 99% (!) of the country’s export.
The effects of the war have been tremendous as we have noted in previous chapters. The GDP
fell to 25% of its pre-war level, most civil infrastructure such as streets and railway roads
have been destructed hindering the transport of goods.
The technological “race” with concurrent companies was lost; four years of war have led to a
completely out of date technological status quo of the industrial and to a massive brain drain
of educated work force, especially engineers.
The Bosnian Industrial sector is moreover characterized by a very low productivity. If it
would be a member state of the EU, it would have the lowest productivity as unfortunately the
manufacturing sector is characterized by a low “addition of value”.
Bosnia has furthermore not been able to create a single technological park for research and
development in order to be able to sustain its SMEs24 leading to a very low level of
competitiveness of the domestic companies.
The country was furthermore not able to attract foreign direct investments and in the cases it
was successful, it were mainly investments conducted in order to exploit the cheap working
force and natural resources, only 25% of the investments were directed towards the domestic
market.
The role of technological research and development in the Bosnian Industrial policy
24
59% of the work force in the EU is employed by SME. SMEs are furthermore being regarded as the currently
most important potential employers.
56
The technologic process of the industry of a country is one of the most important factors
influencing the development of a country affecting thereby the well-being of a society.
It is inevitable for an Industrial policy to define the framework for favouring technological
research and development in order to exploit all available resources in the most optimal way.
For Bosnia & Herzegovina it is insofar urgent to develop a sustainable research infrastructure
for technological processes as the country missed many years to do so and lags behind almost
all European countries.
The current technological situation of the country is characterized by a domination of foreign
machinery. 80% of the facilities have been imported from industrialized countries; only a
small share of 10% is of domestic production.
Another critical aspect is the fact that the war has cut all supply and technological information
channels of Bosnian companies with foreign companies. Most of the highly educated
workforce has left the country during or shortly after the war in order to find work abroad.
The country lost furthermore with the disintegration of Yugoslavia its main markets, the fall
of the Iron Curtain 1989 made moreover Yugoslavia loose many important markets in the
former Socialist COMECON community leading to the complete integration of Bosnia into
the globalized world dominated by Western countries and Western technology with which the
domestic companies could not cope and compete with.
The process of globalization made no halt before Bosnia and has a part of offering a series of
positive effects, led to the appearance of a variety of problems. Foreign capital entered the
country in order to maximize profits and to exploit the economic circumstances that offered
optimal condition for a cheap “sale-off” of formerly society owned industrial capacities and
resources. Investments conducted by private foreign companies did not have the creation of a
sustainable economic environment as motif but where directed towards a country where there
seemed no domestic concurrency.
57
Transnational capital dominates the world and Bosnia lost with the war and the destruction of
its large Industrial conglomerates any possibility to compete with its economy of scale making
the country highly vulnerable to any form of foreign competition.
The pressure from the international community towards opening up the market and the further
simple need to do so lead to the creation of a quasi-colonial status quo of the country. Being
dependent on the influx of foreign capital, various forms of criminal activities connected with
it has established themselves.
3.9.2 Considerations for the future of the Bosnian Industrial Policy
As we have seen, Bosnia has lost the driving power and dynamics of its developmental model
during Socialist times which has been it (heavy) industry. Being now highly dependent on
foreign capital, the country may now only generate its own new process of technological
development coped with investments in new industrial facilities and in the revitalisation of the
ones existing before the war.
This is however a highly unlikable process as the country lacks financial resources as well as
it lacks the presence of a modern “IT”-society and universities such as other research
institutions capable of coping with the speed of technological globalization.
As Stojanov (2004: 19) notes: “Left without its own monetary, foreign-exchange rate of
balance-of-payment policies and with different privatization policies in the two regions, the
government could not even consider and industrial policy. Bosnia was left to free market
forces and the international donor community. Four years after peace came; GDP had
reached a little over 50 per cent of its pre-war level. However, since the pre-1991 method of
calculating GDP excluded the service sector, today´s GDP is less than 50 per cent of what it
was in 1991”.
58
3.10 The (failed) approach of the microfinance model in Bosnia & Herzegovina
Microfinance and its aim to combat poverty have been a very important aspect of
development studies and aid projects since the 1970s when the model started becoming the
dominant one in financing the poorest parts of society.
Bosnia & Herzegovina did not have any notable experience with micro financing methods
when it was part of the former Socialist Yugoslavia as most people were employed in big
corporations which were owned and managed by the workers and financed (when needed) by
large state funds.
After the end of the war and the quasi total destruction of the Bosnian economy, microfinance
institutions and micro financing methods became salonfaehig in Bosnia and Herzegovina.
59
Milford Bateman (2006: 2), who has conducted a series on researches on the micro financing
model in Bosnia & Herzegovina, notes the neo-liberal character of the approach which most
researchers do not connect at first sight with this model.
"The microfinance model now constitutes the most important local strand of the neoliberal political project that has been enforced as core economic policy throughout
developing countries since the early 1980s and in the transition economic since 1990. The
World Bank, IMF, the major bilateral (...) and the wider non-governmental international
development assistance community (e.g. Oxfam), have all become convinced that establishing
commercially sustainable micro-finance institutions (MFIs) represents an important
breakthrough in poverty reduction and local economic and social development (...)."
B-H has registered an inflow of ca. 100 million USD that were channelled into the MFIs
around the country since the appearance of this particular financing model in 1996 and
constituted a major policy of the after-war economic reconstruction of the country.
As we noted a series of times, the country relied before on a small number of rather big
corporations in the industrial sectors (especially metallurgy and civil engineering) with high
technological inputs and a manufacturing value chain that was characterized by a high-value
added component.
The collapse of this industrial model was merely "taken as it was" in the after-war period and
within the neo-liberal approach towards development in the country that was conducted by the
IFIs no space was left to conduct large-scale investments in re-launching business activities of
those companies such as any other state-coordinated employment programme was rejected ad
initium. This was, however, the case in after-war Western Europe whereby economic progress
was sustained by the generous Marshall Plan and for instance in the 1970s and 1980s in
Western Germany and in northern Italy (especially in the Venice region) where sub-national
governments played an important role in successfully sustaining the growth of SME who
developed themselves to a core-structure of the respective economies generating
technological innovation and economic growth. A similar approach for Bosnia which might
60
have been most probably effective (given that physical and human capital such as public
infrastructure were present) was rejected.
Instead, micro financing became the dominant form for financing new economic activity. If
we, however take a look at the sectoral distribution of this newly formed SMEs and thereby
assess the business sectors within which these new companies work, we will immediately
note the dominant role of the trade sector which represented 45% of all activities. The sector
of manufacturing attracted 18% of all SME activity in comparison to the 9% of the
construction sector and 12% in the service sector (UNECE 2003: 95).
More or less all activities of the trade and service (together 57% of all SME activity) sector
were represented by small (usually one-person) companies of entrepreneurs who held smallsized retail units such as kiosks, boutiques and cafes which started shaping the landscape of
most cities and towns in Bosnia.
The activities launched were all characterized by a low technological input operating within a
small geographical radius. These "survival"-based microenterprises were expected to
substitute the role of the once prospering large industrial conglomerates but actually led to the
creation of what Milford Bateman named "bazaar economy" in the previously cited article.
Noteworthy is in this context a citation from the American Centre for International Private
Enterprise (CIPE):
"Bosnia (...) going through a process of de-industrialisation on a devastating scale.
The new private sector is dominated by microenterprises in trade and basic services,
generating very little employment. Bosnia seems to be developing backwards: where once it
manufactured jet aircraft, it now exports aluminium; where once it exported furniture and
finished wood products, it now sells raw timber. Outside of the larger cities, many Bosnians
are abandoning the towns and returning to the land their families left a generation ago.
Forced out of the formal economy, they scrape together a living through some combination of
casual labour, informal trade and subsistence agriculture" (cit. in Bateman 2006: 14).
61
What was and is required is a series of sustainable industrial policies which would not only
re-launch economic activities in the most profitable sectors but also create multiplication
effects on other sectors of the economy.
The (neo-liberal) microfinance model has led to a serious and devastating infantilisation of the
Bosnian economy whilst the economic framework, mainly shaped by the Dayton Peace
Accord and furthermore influenced by the international financial community has hindered any
form of financial crediting for big SOE. Even though these could have been financed under
the pre-condition to later on privatize them by public tenders has any form of financial
assistance for SOEs has been from the beginning on consequently not accepted.
This has furthermore created a highly unequal and misbalanced economy with a very small
number of big corporations and a high number of small microenterprises but no serious
companies "in between" to sustain and generate economic growth.
4. Gray economy and the black market in Bosnia & Herzegovina
Taking a look at informal employment is especially in a country like Bosnia and Herzegovina
a highly interesting topic as we may not only observe and describe the gray (and black)
market of the country per se but also trace its causes in the development model of the country.
As we have noted in a previous chapter discussing the influence of microfinance in the
country, the economic system is characterized by a large proportion of microenterprises that
operare in the trade and service sector. Most often, due to for instance a lack of adequate
funding and abnormal burocratical procedures, small enterpreneurs operate either fully or
partially in the sector of the gray economy.
This is to be observed as a reaction of the ordinary citizens on a economy which is highly
unlikeable (and unable) to encourage legal and ordinary economic activity.
A large share of an informal economy is always the expression and the result of a weak state
that is unable to efficiently regulate formal activity.
62
The Bosnian economist Rajko Tomas (2008: 93ff) has defined a series of aspects that favour
the existence of a large informal sector in Bosnia.
1. Political instability
2. Poor economic status
3. Absence of the state of law
4. Low efficiency of reforms
5. High level of poverty
6. Low level of coordination between levels of government
7. Low level of institutions efficiency
8. Large role of the international community
63
5. Bosnia & Herzegovina in comparison to other (former) countries in transition
Comparing the Bosnian growth model within the process of economic transition to other
countries that have experienced and gone through similar processes towards establishing a
(free-) market based economy is a crucial starting point that permits us to compare the
different models amongst them.
Dragoljub Stojanov (2004) for instance, compared the Bosnian process of transition to the
Hungarian case considering the Bosnian case as a failure of transition and the Hungarian case
as a success story.
This comparison is indeed highly interesting as Hungary was considered for a long time the
example par excellence of a successful transition country recording high growth rates.
Stojanov (2004:5ff) notes in this context that, unlike Bosnia, Hungary seems to have
vindicated the Washington Consensus and the aggressive free-market and privatization
process whilst the Bosnian growth model was entirely free-market driven creating basically a
totally open state from an economic point of view.
Hungary oriented its economy with any doubt towards a free-market model, too, but
conducted privatization in a much more wise and gradual way.
Another further important aspect of Hungary’s transitional process was its ability to attract a
high number of FDI.
“An important feature of FDI in Hungary is its scope in terms of sectors covered and
actual number of foreign-owned firms. Although manufacturing received the largest FDI
64
inflows (US$ 4.2 billion) in 1992-96 and accounted for 40 per cent of the foreign investment
stock in 1996, other sectors of the economy, such as public utilities and energy (the “big”
privatization of 1996) attracted US$ 1.5 billion. Since foreign firms account for almost threequarters of Hungary´s foreign turnover and that this share bas (sic!) been rapidly increasing,
they are largely responsible for the spectacular improvement in Hungary´s export
performance on EU markets” (Stojanov 2004: 12).
The integration in the (Western-) European economy was insofar important as, after the fall of
Communism in 1989 and the end of the COMECON market Hungary lost a big export
market. Foreign TNCs have played a very important role not only by investing in the country
but also by elevating the technological level of the Hungarian economy, the export sector was
characterized by a high value-added component. Foreign TNCs such as Suzuki, Audi,
Volkswagen and Nokia who were amongst the biggest investors did not only (re-)integrate the
country into the global economy but also lead to the creation of physical capital.
Unlike to Bosnia, where FDI was mainly constituted by the take-over and merger of domestic
firms FDI in Hungary was characterized by the creation of new production facilities such as
the Audi fabric near Györ. Bosnia did not experience any notable construction of new
facilities whereby no physical capital was created.
It lacks serious capacities to attract foreign capital and enforce the constitution of physical
capital as we have seen in the previous chapters. Due to the anomalous situation created by
the Dayton Accord, the country is hardly able to develop a nation-wide economic policy and
establish economic relations with other countries. Instead, the two entities follow their own
plan of creating economic ties with other countries25 leading to further isolation instead of
cooperation between the entities.
Another further fact is that the country, as we have already noted several times lacks an
autonomous monetary and foreign-exchange policy. Being quasi ever since the end of the war
25
Even in this aspect political motivations seem to be the rule. The Republika Srpska for instance started
developing cooperation with former Soviet countries and endeavours furthermore to establish close ties with
Belorussia whilst the Bosnian-Croat federation is having good relations with Turkey and a series of Arab
countries such as Qatar and Saudi Arabia that have invested especially a lot in the construction of new
mosques in the country.
65
unable to devaluate its currency, it could not follow the same strategy as Hungary that used
exchange-rate policies to further boost the competitiveness of the country.
It occurred thereby as necessary to paragon the Bosnian case with the one of another country
that did not, at least at first sight
6. The Bosnian after-war economic model – A dependent economy?
Having analyzed and discussed various aspects of the Bosnian pre- such as immediately afterwar economy, it now emerges as a necessity to furthermore assess the now already
consolidated after-war economy by using arguments of the dependency approach26.
We can identify within our context a series of key elements characterizing a dependent
economy.
It is thereby fair to distinguish between exogenous and endogenous factors that hinder an
independent and autonomous economic policy making. Not all factors originate from abroad
but may, as in the case of the Industrial policies in Bosnia are the result of a fragile and
inefficient political framework.
In following, we are presenting a series of aspects that help us to describe certain
characteristic of the Bosnian economy containing elements of a dependent economy.
Having previously discussed a broad range of development theories dealing with the critical
dependency and polarisation approach, we will be further able to link the actual (dependent)
situation to our theoretical arguments.
1. Industrial policy making
By this we mean the fact that the economy, though surely still being in a process of
transformation, is however consolidated as the legal framework of the state is now existing full
17 years.
26
66
One of the most problematic barriers to economic growth is the non existing autonomy of a
nationwide industrial policy.
The Dayton agreement has left behind a highly fragmented political structure dividing a
country into two political (and economic!) entities whose industry has been built upon a
single political and economic entity as commercial ties between industrial complexes within
the country that now are located in one of the two entities and subject to different industrial
policies.
2. The currency board in B&H – A monetary policy shaped outside of the country
The perhaps most notable example of an exogenous element of a dependent Bosnian economy
is the framework within which the country generates its monetary policy.
This framework was stipulated with the Dayton peace agreement and later on adopted by the
central bank law whilst having established a currency board.
It foresaw a unique national currency, the Bosnian mark (BAM), which was pegged by a fixed
exchange rate to the German mark (DM).
Dragan Kovacevic (n.d: 59) notes in this context:
“The choice of a currency board had two main motivations. First, it provides a firm
nominal anchor in the form of a fixed exchange rate. This was considered critical for the very
uncertain postwar economic situation in BiH. Second, it is a rule-based approach to
monetary policy that took into account the difficulty there would be in establishing institutions
and making political decisions in the complex political environment that existed in BiH after
the war.”
The currency board is thereby characterized by three essential aspects. A fixed exchange rate
regime, pegging the convertible Bosnian currency to the German mark (DM) at a rate of 1:1
was established which was later on maintained when the Euro was introduced fixing the BAM
at 1.95583.
67
It is undoubtedly true that the fixed exchange rate, stipulated outside of the country is
characterizing a country not able to conduct its own autonomous and independent monetary
policy.
A main problem hereby is the question how the economy, once relying on the exports of big
industrial conglomerates would perform if the country would be able to depreciate its
currency making the economy more competitive then instead being pegged to the as
overvalued regarded Euro.
7. Conclusion
The present work dealt with the post-war economic development of Bosnia & Herzegovina
which we have presented focussing primarily on theories from the field of development
studies.
Two competing and contrasting theories of the development studies, the modernization and
the dependency theory have been used as theoretical frameworks that enabled us to conduct
an analysis from two different standpoints. The scope hereby was on the one hand to close the
theoretical and methodological gap for development studies focussing on Bosnia. On the other
hand, the paper was designed to propose a different approach then the mainstream one
focussing primarily on deregulation, trade liberalization and privatization.
As we were able to show, the adaptation of neoliberal dogmas imposed to countries in
economic transition have not been always success stories. Even worse, some neoliberal
policies prove to have crippled the economic structure of the state leading to political and
social problems such as for instance the growing inequalities we have noticed.
68
The present work, however, was limited unfortunately to economic aspects of the post-war,
post-Dayton development taking also the role of the Bosnian economy in the Yugoslav
constellation into account but not considering important factors such as the political
development.
We can definitely identify the war as most important census in the Bosnian development as it
has lead to a nearly complete destruction of the domestic industry and a quasi complete
detraction of economic activities if taking the GDP as a measure.
The influence of the war on the socio-political development of the country is something we
still cannot assess taking the massive brain drain the country faced, the political fragility
(extremist) nationalism the war has caused into account.
What regards the economic prescriptions from the international community, we cannot be
sure that the focus on SMEs is the optimal guideline for the country as small entrepreneurship
was never present in those territories.
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