217. Bosnia and Bulgaria: Crossroads for Two Economic Transitions

By
John R. Lampe

Bosnia-Herzegovina and Bulgaria share more than a common border with Serbia. Both of their disparate governments are engaged in a common enterprise, which if unsuccessful, will render their proper connection to Europe, their democratic prospects, and indeed their very survival unlikely. That common enterprise is not "nation-building," understood across Southeastern Europe to mean the construction of nation-states on the basis of the respective ethnic majority. Such ethnic states override the rights of individuals or ethnic minorities.

Western policy has already made its case against such regimes. Since the collapse of communism, the American presence in the region has pursued other more promising goals. In addition to multi-ethnicity, democratic governance, and respect for individual as well as minority rights, our complementary economic goal has been the successful transition to a market economy under rules of regulation leading to eventual membership in the European Union. Without such a transition, living standards will remain low and politically threatening for rule of law.

Hungary and Poland have largely succeeded in this common economic enterprise. Bosnia and Bulgaria are now finally, fatefully engaged in this common exercise. In Bosnia-Herzegovina, the physical security provided by SFOR's small contingent of 20,000 troops (less than 5,000 US and 2/3 from other NATO allies) remains important for allowing free movement of people and goods between the three territorial entities, still divided by a convoluted confederal structure. In Bulgaria, its more successfully democratic and multi-ethnic political transition will similarly depend on an economic foundation whose cornerstones have only recently been laid.

Some Bosnian Steps Forward

I share the judgement of Jean Tesche, a former EES Public Policy Scholar and U.S. Treasury Representative in Sarajevo and now Zagreb -"it is premature to declare the post-Dayton reconstruction of Bosnia and Herzegovina a failure." I also share the dismay of Haris Silajdzic, who resigned as a Co-chair of the Muslim-Croat Federation's Council of Ministers and declined to run for its Presidency this November. To widespread frustration, the Dayton Peace Accords divide as much as connect the three entities of Bosnia- Herzegovina. The latest presidential and parliamentary elections in November 2000 apparently did not bring the three entities closer together. Despite their outcome, several initiatives have nonetheless forged growing economic links between the entities.

In 1998, two diktats from the international Office of the High Representative in Sarajevo mandated a common currency and a common vehicular license plate. Both mandates have worked better than expected. Additionally, the transition from the German DM to the new konvertabilna marka, pegged by the new Central Bank to the DM, has also been successful. Consequently, traffic and trade between the entities continues to grow. Initial shoppers are now joined by enterprises moving goods and even some workers employed in one entity while living in another.

A more problematic initiative, involving the return of displaced minority refugees, has only now begun in earnest. Nearly 30,000 refugees still live in tents, but the total number returning has doubled every year since 1997, reaching 80,000 by 1999. Rural returns admittedly lag far behind in urban areas. Encouragingly, in Sarajevo and Tuzla, Bosniaks are peacefully vacating formerly Serb apartments to the returning owners. Some Serbs sell their apartments and leave again, but most stay. Also promising is a local Serb's emergence as mayor of Sarajevo's city center in recent local elections.

Another promising feature is the continuing ability of the various official agencies for international assistance to Bosnia and Herzegovina to work effectively together. This has been particularly true of the USAID and World Bank missions in Sarajevo. These institutions have led the way in efforts to provide aid quickly as well as efficiently. The European Union and its PHARE program have lagged behind. At the same time, they have provided the largest share of assistance, some $2.6 billion versus $958 million from the US and $696 million from the World Bank.

Still Struggling with the Legacy of Yugoslavia

Two serious problems continue to hold back the Bosnian transition to a market economy. Until resolved, they will continue to discourage the private foreign investment that must begin to replace officialassistance before the current and last large commitment from Western donors ends in 2004. Both problems derive from enduring features of the former Yugoslavia's centralized economy.

The first problematic area is financial reform, which continues to lag behind. Even if legislation to reform banking and tax collection is passed this Fall, the consolidation of the 44 banks remaining in the Muslim-Croat Federation alone into a commercially viable number, capable of providing affordable credit, is uncertain. There was at least the prospect that the entity's Payments Bureaus, through which all daily transactions and account transfers must flow, would pass out of their inhibiting existence by January 1, 2001. Even that prospect now seems to be in doubt due to unpaid tax arrears that remain to be settled.

Meanwhile, privatization and the necessary legal framework reform are going no faster. The sale of Czech-style vouchers for the 90 largest enterprises in the Federation is fetching unattractively low prices for the relatively small number being sold. Politically appointed directors are hanging on, buying too many shares on behalf of still supposedly self- managed enterprises. Even efficient managers must pay another 80 percent beyond wage totals to the same sort of contributions (doprinosi) that burdened them in the 1980s. The resulting higher costs for goods and transport threaten the few private foreign investments already underway, including the major Kuwaiti commitment to restructuring the Zenica steelworks.

Bulgaria Shows the Way

Who would have imagined in 1990 that the least reformed economy in Eastern Europe after Romania's would be showing the way to the rest of Southeastern Europe in 2000? We must look past any republic of the former Yugoslavia, save Slovenia, to find as much progress as Bulgaria has recorded and as much determination to press further ahead.

The assessment that follows does not dismiss the considerable political problems that the government of Prime Minister Ivan Kostov will face before next Spring's elections. Public opinion is troubled with the lagging standard of living and social indicators such as low pension levels and university salaries. Some 500,000 ethnic Bulgarians, largely young and educated, have emigrated since 1990. Recent polls show Kostov's Union of Democratic Forces (CDC) winning support of less than 20 percent, barely more than the Bulgarian Socialist Party. This summer, a series of corruption scandals prompted Kostov to replace nine of his cabinet ministers. Additionally, cynicism over Western aid promised from the Stability Pact is widespread, allayed only by the promise of a new Danube bridge at Vidin. Similarly, enthusiasm for joining NATO has also fallen in the wake of the air campaign against Serbia.

The Bulgarian economy is nonetheless poised to take considerable advantage of the reopening of the Danube and the general prospect of legal business with and through Serbia. Both macro-economic indicators and the existing legal framework offer realistic encouragement. Gross Domestic Product (GDP) should grow by 4.5 percent in 2000 and by 5 percent in 2001. Tourist income, rebounding from last year's drop due to the Kosovo war, is up by 26 percent and is likely to pass $1 billion. A new foreign currency law that allows free movement of capital but requires legal registration will hopefully combine with newly simplified licensing for new business to encourage foreign direct investment (FDI). Two large energy ventures from the U.S. could add another billion to the modest FDI total of $3 billion. The Standard and Poor index has moved the rating of state bonds up from B to B+, perhaps encouraged by the stable exchange rate of the leva and the successful finish of the first IMF funding agreement. Consequently, another, more favorable IMF agreement is likely.

Supporting the privatization of virtually all large industrial enterprises and of all but two commercial banks is an equally promising commitment to legal regulation and improved public administration. The government has already met its 1999 commitment to pass five measures by 2001 that would help bring public administration into compliance with the requirements for EU accession. Two measures deal directly with the civil service; the rest address access to information, defining legal acts, and tightening procurement procedures. Furthermore, Bulgaria is committed to working with its neighbors in a common regional enterprise to meet EU standards.

Indeed, only a common regional enterprise, led by local governments but supported by a viable and working Stability Pact, can prepare Southeastern Europe for Europe. In Bulgaria, as in less advanced Croatia, Serbia, Macedonia and Albania, the prospects for multi-ethnic democracy will stand no chance if a legal, largely market economy does not provide it with the necessary framework. In still contested Bosnia and Kosovo, this peaceful path will stand no chance if the U.S. military presence necessary for any credible NATO enterprise does not stay the course.

Dr. Lampe spoke at an EES Noon Discussion on October 19, 2000. This summary is based on a visit to Sarajevo, Bosnia, last summer and two recent trips to Bulgaria this Fall. Meeting Report #217.

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