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1996-1998 LESSONS AND ACCOMPLISHMENTS REVIEW OF THE PRIORITY RECONSTRUCTION PROGRAM AND LOOKING AHEAD TOWARDS SUSTAINABLE DEVELOPMENT Prepared by: The European Commission and World Bank, May 1999 Executive summary Just over three years after the end of the war, Bosnia and Herzegovina has made significant strides in solidifying peace and bringing about greater prosperity for its citizens. The country has successfully capitalized on the large flows of donor assistance to rebuild its economy and jump-start growth. By end-1998, donor funds totaling US$4.2 billion had been firmly committed, and US$2.8 billion had been disbursed in support of the Priority Reconstruction Program and related peace implementation activities. This donor support, combined with the commitment of the people and authorities of Bosnia and Herzegovina, has brought important achievements in each of the areas targeted by the program. • Reconstruction of physical assets has been the most highly successful aspect of the program, with most bottlenecks in infrastructure removed, and many community and other services restored. • The reconstruction effort – including targeted programs to jump-start economic activity -- has also fueled high growth rates and brought a tangible re-start of economic activity. The achievements in this area are moderated however by the fact that recovery is fragile. Unemployment remains high, economic growth continues to be linked primarily to reconstruction, and refugees and the internally displaced have not yet returned in the numbers hoped. • Modest achievements have been made over the last three years in building and strengthening institutions and initiating the policy reforms of transition. Here, the challenges are among the most complex of all of Bosnia and Herzegovina’s postwar tasks; nevertheless, success is the essential precondition to safeguarding hard-won initial gains in the other two areas. Over the next several years the authorities and their donor partners must focus on the unfinished items of the institution building and policy reform agenda in order to ensure that the economic recovery momentum begun by reconstruction can be maintained. • Finally, there have also been important achievements in the peace implementation activities necessary for ensuring reconciliation and a fertile ground for reconstruction and recovery. To complete the Priority Reconstruction Program, external financing requirements in 1999 total US$1 billion. Priorities include community and social services in support of refugee return (housing, water and wastes, heating, health, education and landmine hazard management); completion of network infrastructure reconstruction; targeted economic restart initiatives (such as credit lines to small and medium-sized enterprises, credit and inputs for agriculture and employment generation programs); provision of fiscal support for recurrent expenditures, including social assistance; and deepening institutional and policy reforms in support of private sector development and social sustainability in order to prepare all sectors to be effective players in a robust market economy. As Bosnia and Herzegovina enters the last year of a successful reconstruction program, the key questions facing its policymakers and international partners as they look to the future are how to sustain growth in the face of an inevitable decline in external concessional assistance, and how to ensure that the benefits of this growth are expanded to allow for a broad-based increase in living standards. Bosnia and Herzegovina will enter the 21st century with newly rebuilt physical assets, and a relatively healthy economy. The country has the opportunity, moreover, to learn from the lessons of other transition economies. The measures to ensure rapid success are linked to more efficient use of scarce domestic and foreign resources. Reforms are most needed in three areas to enable the country to grow as a thriving market economy: • Continued strengthening of economic institutions and sound macroeconomic management, including a medium-term fiscal strategy that aims to smooth the adjustment as donor aid flows decline. • Active private sector development, including policies aimed at stimulating private investment, banking sector reform, privatization of enterprises and banks and the start of utility privatization, and labor market reform. • Development of Bosnia and Herzegovina’s human capital and establishment of a fiscally affordable and equitable social protection system. However, it is also clear that while much of the job of reconstruction has been completed, there are important remaining reconstruction needs from the legacy of war that need to be addressed, and that are likely to complicate and perhaps slow Bosnia and Herzegovina’s transition. Notable among these are housing, community services in return areas, demining and continued interim support of social assistance and economic restart programs. Continued stabilization and reform will be essential in the coming years to ensure sustainable recovery and growth. Provided these measures are taken, Bosnia and Herzegovina’s GDP could recover to about two-thirds of its pre-war level by early in the next decade. But the country will need continued partnership with donors to reach this objective. Given continued remaining reconstruction and other development financing needs concessional donor assistance will remain important in the medium-term.