Institute for War and Peace Reporting | Giving Voice, Driving Change

Bosnia: Strikes Reflect Economic Woes

Economy suffering because of reduction in inflow of international aid and lack of foreign investment and private sector activity.
By Nerma Jelacic

Social unrest is threatening to escalate in Bosnia-Herzegovina this month, once again highlighting dire state of the country’s economy.


Over the last few weeks, thousands of workers across the country have mounted strikes in protest at overdue wages and contributions to pension and health insurance schemes. The Federation Alliance of Labour Unions has threatened a national action - which, it says, might turn into a general strike - if employees’ demands are not met.


There’s little, however, that the government or companies affected by industrial action can do, as their coffers are empty - such is the parlous state of the country’s economy.


Among the main reasons for this is the steady reduction in the inflow of international aid and the lack of international investment and private sector activity.


While Bosnia’s economy appeared robust in the immediate post-war years, it has steadily declined.


According to a report issued in June this year by the European Bank for Reconstruction and Development, EBRD, there has been some progress in strengthening the economy in 2002, but much remains to be done.


“Inflation is low, fiscal discipline has improved and economic growth stands at around 4 per cent per annum, which is, however, a slow-down compared to the post-war reconstruction years, reflecting the lack of new sources of investment,” EBRD stated in its report.


According to EBRD, Bosnia now finds itself at crossroads. With the bulk of infrastructure reconstruction completed, the country is now pursuing a reform agenda, which seeks to accelerate the transition from an aid-dependant economy to one that provides for self-sustained growth – the reason why the inflow of aid has steadily reduced over the years.


But Bosnia has found it hard to replace the loss of aid money with increased foreign investment and private sector activity.


“International community and local authorities planned that around this time Bosnia would be strong enough financially to begin commercial borrowing on international markets, but this estimate was wrong,” one western official said.


Gary Larson, deputy head of economic department at the Office of the High Representative, the leading international body in the country, says that investment pick up has not happened at the pace the international community would have liked.


This is due to slower and less effective political and economic reform than envisaged by authorities back in May 1998.


One of the main problems here is that the division of the country into the Federation and Republika Srpska means there are effectively two markets.


High Representative Paddy Ashdown and his predecessors have sought to unify them through the harmonisation of taxes, customs, banking and other key sectors.


But a report released in November 2002 by the Organisation for Economic Co-operation and Development, OECD, says the job is far from complete.


"The absence of a single internal market is by far the most important impediment to investment in new and additional economic activity," said the OECD study. "Bosnia-Herzegovina must make a serious effort now to utilise the present window of opportunity to join the ranks of countries seen as reforming economies."


Other barriers to investment are the stumbling privatisation process, the absence of a transparent legal and regulatory framework and a lack of consistent and transparent business and administrative regulations.


According to official OHR documents, there was no substantial progress in the privatisation process in either of the two entities during the first half of 2003. “As a result, both entities retain companies that are unsuitable and operating at a fraction of capacity,” OHR said in its report in July this year.


While small businesses have been successfully privatised, the sell-off of larger, state-owned companies is fraught with problems.


One of the main ones is that they are overstaffed. Work forces will have to be trimmed, but communist-era laws mean companies can’t fire employees. The government, meanwhile, is reluctant to change the status quo, as this would inflate the already high level of unemployment - officially standing at 40 per cent but when the grey economy is taken into consideration more likely around half this figure - and make it unpopular with voters. “This deadlock must be broken if privatisation is to [pick up],” one economic analyst told IWPR.


The head of the Bosnia-Herzegovina Federation Alliance of Labour Unions, Edhem Biber, told IWPR he was extremely worried by the state of Bosnia’s companies, but even more by the possibility of mass dismissals.


Economic sustainability and the strengthening of Bosnia’s competitiveness in international markets are dependent on attracting long-term investors.


For the past three years, local authorities, with the help of international community, have been working on creating a more transparent, competitive and business-friendly environment. On the initiative of World Bank, Bosnia started working on Poverty Reduction Strategy Programme, PRSP, the key policy framework for the next few years, which will define how economic and social development and international donor assistance are prioritised.


The PRSP report is expected to be finished by the end of this year. On the basis of its findings, the World Bank is planning to organise a conference for donors and investors interested in getting involved in Bosnia. International analysts IWPR spoke to view the PRSP report as a light at the end of a long tunnel in which Bosnia’s economy finds itself.


Nerma Jelacic is IWPR’s Bosnia project manager. Nidzara Ahmetasevic is a journalist working with the magazine Slobodna Bosna.