140. Bosnian Economic Prospects and The Dayton Process After 1997

By
John R. Lampe

Nearly a decade after the end of the Cold War (black resigned, in the chess parlance chosen by one Hungarian observer), the issues in Eastern Europe are not black and white, but neither are they a uniform shade of grey. They are different shades and degrees of grey in which the security issues confronting the United States and the NATO alliance, especially an enlarged alliance, are likely to be defined from now on. For anyone unwilling to face these complexities, especially in a situation where all parties see the United States as the only decisive external force, "let them come to Bosnia."

Given the complicated nature of the Dayton agreement, this paraphrase of John F. Kennedy's clarion call in Berlin thirty-five years ago is particularly poignant for an analysis of Bosnia-Herzegovina today. The latest reports on Bosnia, for example, suggest that there are signs of economic recovery and an amazingly good, American-led effort to put in place the trade and financial framework needed to sustain that recovery. Nevertheless, powerful voices continue to suggest that the United States throw in the towel on the Dayton process.

What is the solution? It seems most appropriate to make the best of the Dayton mechanism in the months ahead. Only if further progress is made on the civilian side, especially in giving all entities a stake in secure and legal business, can a skeptical American public and Congress be expected to accept the retention of a reduced military presence after next June. All those talked to on the ground in Bosnia this past July agreed that such a continued presence is essential to a recovery process that is just now creating institutions and mechanisms that can make it self-sustaining.

A realistic exit strategy for NATO ought to be the creation of a functioning confederation of two or three entities--a confederation in which resettled ethnic minorities are secure and are able to live, work, and travel legally; a confederation in which labor and capital must reconnect. And the three entities must craft interconnected economies that do not rely on the international aid that heavily supports the BoŠniak (Bosnian) part or on the illegal trade that sustains Herceg-Bosna, the Croat part of the Federation. Economic reconnection will doubtless demand at least a minimal American, and therefore NATO, military presence on the ground--as in Macedonia--for several more years. After that, legal domestic employment and private foreign investment should be able to secure the peace and recovery that optimists expected to be in place by 1998.

Legal income (fairly taxed) and private enterprise (legally competitive) should be at the heart of any self-sustaining recovery in Bosnia. But the sharp increases in the Federation's economic indicators over the past eighteen months do not rest on such a foundation. In May the World Bank projected a 50 percent jump in Gross Domestic Product for the Federation for 1997, which contrasts significantly with the bare 5 percent reckoned for the Republika Srpska (RS). Net wages in the RS, usually paid several months late, remain at roughly the 1995 level of DM 60 per month, while the Federation's average has risen past DM 180. The growing number of Serbs from the RS visiting Sarajevo or Tuzla see this gap physically in the well-stocked shops, the cars now crowding the streets by day, and the people parading in new clothes by night.

The growth of legal employment in the BoŠniak area continues to be limited by the lamentable tax levy on gross wages, which takes away half, compared to 25-30 percent in most Western economies. Demand for the tax revenues from legal wages is actually growing as the new cantons, or district administrations (nine across the Federation), set up their own schools and assemblies and overstaff their new bureaucracies (frequently with demobilized army officers). More and more, expenses are exceeding the cantonal share of wage taxes, and the Federation budget is expected to make up the difference. The Federation budget in turn owes too much of its own deficit reduction to the flow of international aid. This aid will surely decline after the $1.2 billion just promised for 1998 at the Brussels Donors' Conference is delivered, partly as credits whose annual repayment already exceeds 60 percent of export value.

Still more importantly, long-term recovery of the Bosnian economy needs a process that privatizes large enterprises for market competition rather than allows them to become cheaply purchased political monopolies, by which the entire local economy becomes personal property. This burden already rests on too many enterprises in Herceg-Bosna and threatens most of the enterprises in the RS if the Pale regime and its police force remain and oversee a proposed privatization plan.

The Bosniak regime in Sarajevo is the logical candidate to take the lead in large-scale privatization, having attracted over 90 percent of the aid and credit granted for recovery in Bosnia. Further aid, especially from international financial institutions, hinges on advancing privatization. Perhaps more importantly, Sarajevo is the business center for most of the large-scale enterprises surviving from the former Yugoslavia. The profitable and ready-to-privatize parts of some of these enterprises, most obviously Energoinvest and the timber-processing complex, Sipad, have export contracts waiting and need to be turned loose as soon as possible.

They are caught, however, between two forces. On one hand, the World Bank insists that the entire enterprise (best described as a holding company) must be restructured and privatized before any part is deemed credit-worthy. On the other hand, Haris Silajdzic, Co-Chair of the Federation Council of Ministers, demands (in a point perhaps defensible under the Dayton agreement) that these large enterprises receive the same legal recognition of their rights to facilities across the Federation and in the RS as do the public utilities. If both economists and lawyers retreated a few steps here and the Federation's parliament acted on provisions for privatization, the profitable parts of the enterprises could provide employment and exports to the Federation immediately. The example of these enterprises, combined with their existing RS facilities, would create an opportunity that those in the RS ready to reject the outlaw economic network of Serb leader Radovan Karadzic would not want to refuse.

The international community has paid more attention to and made more progress in restoring regulations for legal trade and introducing an accountable financial structure than in helping legislate taxation or speeding privatization. These two areas were targeted by the Quick-Start agreement in June, where Western governments and those of Croatia and Serbia brought Federation and RS representatives to agree on seven overdue laws.

The agreement on uniform Bosnian customs regulations and tariff rates still leaves much to be desired, as numerous media accounts have noted. The income of the Karadzic network in the RS, for instance, largely comes from the export and import of alcohol, cigarettes, gasoline, timber, and arms. The independent Sarajevo magazine, Dani, has just published details of a comparable Croat network in Herceg-Bosna. But new legislation at least provides a framework for legal trade, one that the BoŠniak government is already trying to observe. It has ended duty- and tax-free imports for all war veterans and victims, a concession that put many of those new cars on the streets of Sarajevo.

More importantly, the negotiation of the Bosnian trade laws extracted agreement from both the Croat and Serb sides that excluded a future customs unions with Croatia and Serbia. The entities' reconnection with a single Bosnian economy needs this guarantee if it is to proceed. This recognition by Serb economists and managers in Banja Luka, the economic center of the RS, is a neglected source of support for the embattled President, Biljana Plavsic, in her struggle with the Karadzic trade network.

The Quick-Start agreement sought to advance an accountable financial framework with a central bank and a common currency. The central bank's chief officers (including a French governor) have been appointed, but its operations await an IMF loan to secure full capitalization. A currency board will control emissions and tie them to reserves.

After a spring of negotiating a single currency with different colors for each entity (a doubtful approach) and a summer of Serb insistence on separate notes, negotiations on currency notes in the same colors as the German deutschmark have now resumed. They are proceeding on a fixed timetable, still assisted by the able team of US Treasury advisors. In the meantime, the convertible unit of account, the marka, is being used, and the former Yugoslavia's Payments Bureau is clearing bills from Sarajevo to Banja Luka within a week's time.

Of greater urgency for economic recovery is the need to privatize and regularize commercial banking. Forty-three banks are operating on Bosniak territory, up from 30 in 1996, and the same 9 in Croat territory and 11 in the Serb entity. The Federation's Croat Minister of Finance argues that the Croat side is owed more by the BoŠniak side in the settlement of internal and former Yugoslav debts, in part because of greater contributions to the Federation budget since customs revenues began to arrive regularly last year. But for any external private credit to flow into Bosnia, its banks must operate with open balance sheets and the standard accounting procedures outlined in the proposed legislation.

A number of BoŠniak banks have already made good progress because of their association with the Bosnian Reconstruction Finance Facility (BRFF). Among a number of successful projects from the USAID mission in Sarajevo, the BRFF stands out because of its wider impact. It has a total of $278 million to dispense in loans between 1996 and 1998 and works through existing banks to dispense loans up to DM 1 million (about $650,000) to small- or medium-size enterprises on soft terms that require repayment to begin promptly. Enterprises promising to increase employment and production just as promptly, such as the Sarajevo shoe factory that needed to replace a war-damaged roof, have received preference. Lending banks must open their accounts to external audit. Borrowing enterprises initially included a minority which were not private firms; but a recent AID decision to lend exclusively to private firms may accelerate the legislative process for privatization.

The BRFF also began lending outside the "American sector" of Bosnia within the past year--approximately 12 percent of the $60 million extended so far--and is prepared to go beyond the Federation into the RS. A feasibility study for potential lending in the RS reveals that some private enterprises and even several private banks operate beyond the reach of the Karadzic network. But approaching them without the rule of law in place, as insisted by President Plavsic, would only call them to the network's attention. Indeed, at the recent donors' conference, European representatives took an even harder line than the Americans and made it clear that any international aid or credit to the RS economy was conditional on the dismantling of the Karadzic network. The impoverished RS economy desperately needs assistance as much as it needs to be rejoined to the rest of the Bosnian economy. Such rational self interest is the most realistic pressure on the RS leadership to close down the Karadzic network.

Dr. Lampe presented these remarks at an EES Noon Discussion on September 17, 1997.

Experts & Staff

  • Christian F. Ostermann // Director, History and Public Policy Program; Global Europe; Cold War International History Project; North Korea Documentation Project; Nuclear Proliferation International History Project
  • Kristina N. Terzieva // Program Assistant
  • Emily R. Buss // Program Assistant