The Tragic Economy of Bosnia & Herzegovina
Summary
TLDRThe video script delves into Bosnia and Herzegovina's complex journey from socialism to capitalism, marked by a tumultuous past and a challenging present. It examines the nation's post-war economic recovery, the impact of the Dayton Agreement on its political and economic landscape, and the current state of its economy, including robust sectors like tourism and manufacturing. Despite progress, the country faces deep-rooted issues such as ineffective governance, unemployment, and population decline, which threaten its stability and future growth.
Takeaways
- π Bosnia and Herzegovina has a complex geopolitical history, marked by its struggle for independence from the Socialist Federation of Yugoslavia and the subsequent conflict which ended in 1995.
- ποΈ The country underwent a significant economic recovery and restructuring post-conflict, transitioning from socialism to capitalism with varying degrees of success.
- π Bosnia and Herzegovina is now an upper middle-income economy with robust growth in sectors like tourism, energy production, and metal manufacturing, and maintains low public debt and high bank reserves.
- πͺπΊ The nation was granted candidate status for the European Union in 2022, which presents opportunities for increased confidence, market access, and geopolitical risk management.
- π Despite progress, the country faces deep-rooted challenges including ineffective governance, chronic unemployment, and a declining population, which are exacerbated by ethnic divisions.
- ποΈ The Dayton Agreement of 1995 laid the foundation for Bosnia and Herzegovina's current political and economic structure, creating a highly decentralized power system.
- π The economic recovery was initially driven by foreign aid, followed by pro-capitalist reforms, including privatization and the introduction of a new currency, the convertible mark, which stabilized the economy.
- πΌ Administrative burdens and a complex political system have led to a large informal economy and discouraged business registration and entrepreneurship.
- π The 2008 financial crisis marked a turning point, with foreign direct investment decreasing and domestic investment not compensating for the loss.
- π₯ High unemployment and emigration rates have resulted in a shrinking labor force and population, with significant implications for the country's economic growth.
- π‘ To improve its economic outlook, Bosnia and Herzegovina needs to reduce administrative burdens, tackle corruption, and ensure that state-owned enterprises do not hinder private investment.
Q & A
What is the historical context of Bosnia and Herzegovina's geopolitical situation?
-Bosnia and Herzegovina has a complex history, having been part of the Socialist Federation of Yugoslavia, which dissolved in the early 1990s. The country's independence came at a high cost, with a brutal conflict that ended in 1995, leaving the nation with deep scars and the challenge of rebuilding from a centralized socialist economy to a market-based system.
What was the economic condition of Bosnia and Herzegovina after the end of the conflict in 1995?
-After the conflict, Bosnia and Herzegovina faced a colossal task of economic recovery. The GDP had declined by 84%, and a significant portion of the population was displaced. The recovery was initiated through international aid, with a focus on rebuilding infrastructure and restructuring the economy.
How has Bosnia and Herzegovina's economy evolved since transitioning from socialism to capitalism?
-Bosnia and Herzegovina has transitioned to an upper middle-income economy with robust growth in sectors like tourism, energy production, and metal manufacturing. The country has maintained low levels of public debt and high capital reserves within its banks, indicating a mixed but generally positive economic evolution.
What is the significance of Bosnia and Herzegovina's candidate status for the European Union?
-The candidate status for the European Union, granted in 2022, represents a potential win-win situation for Bosnia and Herzegovina. It could benefit from increased confidence, market access, and participation in supply chains, while the EU could manage geopolitical risks by strengthening ties with a nation that has a significant pro-Russia cohort in its population.
What are some of the challenges Bosnia and Herzegovina faces despite its economic progress?
-Despite progress, Bosnia and Herzegovina faces deeply rooted challenges such as ineffective governance, chronic unemployment, and a steadily declining population. These issues are exacerbated by ethnic divisions and a lack of reconciliation with the difficult history of the country.
How did the Dayton Agreement shape the political and economic landscape of Bosnia and Herzegovina?
-The Dayton Agreement, signed in 1995, ended the war and established the modern political and economic powers of Bosnia and Herzegovina. It decentralized power, creating two separate entities within the country, each with control over their own tax collection, public spending, and development policies, while monetary policy and foreign trade policy remained at the state level.
What role did foreign aid play in the initial economic recovery of Bosnia and Herzegovina?
-Foreign aid played a crucial role in the early years of Bosnia and Herzegovina's recovery, providing funds for the reconstruction of damaged infrastructure. The country received significant aid from the World Bank, the EU, and other international partners, amounting to $5.1 billion.
How did the introduction of the convertible mark contribute to Bosnia and Herzegovina's economic stability?
-The introduction of the convertible mark in 1998 standardized the monetary system and generated financial stability by pegging it to the Deutsche Mark and later the Euro. This fixed exchange rate protected the currency from market fluctuations and attracted foreign investment, fostering confidence in the economy.
What are the current challenges to Bosnia and Herzegovina's economic growth and development?
-Challenges include a high administrative burden for businesses, corruption, and an ineffective government that hinders entrepreneurship and investment. Additionally, the country's political system, with its complex power-sharing structure, slows the legislative process and impedes economic development.
What steps could Bosnia and Herzegovina take to improve its economic situation and attract more investment?
-To improve its economic situation, Bosnia and Herzegovina could reduce administrative burdens for businesses, address corruption, and ensure that state-owned enterprises and public sector spending do not crowd out private investment. Additionally, leveraging the banking sector's capital adequacy ratio to increase long-term funding to key growth areas could stimulate the economy.
Outlines
ποΈ Post-War Economic Recovery of Bosnia and Herzegovina
This paragraph discusses the complex geopolitical history of Bosnia and Herzegovina, highlighting its transition from the Socialist Federation of Yugoslavia to an independent nation. The aftermath of the 1995 conflict led to a significant economic recovery effort, shifting the economy from socialism to capitalism. The country has since become an upper middle-income economy with growth in tourism, energy, and metal manufacturing. Despite these advancements, Bosnia and Herzegovina faces challenges such as ineffective governance, unemployment, and a declining population along ethnic lines. The nation's goal of EU membership, granted as candidate status in 2022, presents opportunities but also geopolitical risks due to a pro-Russia cohort within the population.
π Economic Transition and Challenges of Bosnia and Herzegovina
The second paragraph delves into the economic transition of Bosnia and Herzegovina from market socialism to private enterprise, following the collapse of the USSR and the Berlin Wall. The country's banking sector underwent significant reforms, including privatization and new regulatory frameworks. The introduction of the convertible mark in 1998 stabilized the monetary system by pegging it to the Deutsche Mark and later the Euro. Despite the impressive post-war recovery, characterized by an average annual growth rate of 22%, the economy faces headwinds such as a decrease in foreign direct investment after the 2008 financial crisis and high administrative burdens for businesses. The political system's complexity and ineffectiveness are also highlighted as barriers to economic development, contributing to high unemployment and an informal economy.
π Bosnia and Herzegovina's Economic Prospects and EU Integration
The final paragraph addresses the future economic prospects of Bosnia and Herzegovina, emphasizing the need for job creation to stem the tide of emigration and population decline. It suggests that the banking sector, with a high capital adequacy ratio, could play a role in funding key growth areas. However, this requires reducing administrative burdens, addressing corruption, and ensuring state-owned enterprises do not overshadow private investment. The potential of EU membership is presented as a historic opportunity for increased confidence and participation in value-added supply chains. Despite recent progress, including anti-corruption laws, the journey to full EU membership is uncertain and will not be a panacea for the country's issues. The paragraph concludes with an assessment of Bosnia and Herzegovina's economic standing on the National Leaderboard, noting areas of stability and growth, as well as ongoing challenges.
Mindmap
Keywords
π‘Bosnia and Herzegovina
π‘Socialist Federation of Yugoslavia
π‘Economic Recovery
π‘Capitalism
π‘European Union (EU)
π‘Decentralization
π‘Privatization
π‘Currency Peg
π‘Foreign Direct Investment (FDI)
π‘Administrative Burdens
π‘Emigration
Highlights
Bosnia and Herzegovina has a complex geopolitical history and has transitioned from socialism to capitalism with mixed success.
The nation experienced robust economic growth post-conflict, particularly in tourism, energy, and metal manufacturing.
Bosnia and Herzegovina was granted candidate status for the European Union in 2022, offering potential benefits in market access and geopolitical risk management.
Despite EU relations, the country faces deep-rooted challenges including ineffective governance, unemployment, and population decline.
The Dayton Agreement of 1995 laid the foundation for Bosnia and Herzegovina's modern political and economic structure.
The country's decentralization is unique for its size, with entities controlling their own economic policies except for monetary policy and foreign trade.
Bosnia and Herzegovina's GDP took until 2003 to recover to pre-war levels, with an average annual growth rate of 22%.
Post-war recovery was significantly aided by international foreign aid, including $5.1 billion from the World Bank and the EU.
Economic reforms included privatization of state-owned enterprises and the introduction of a new regulatory framework for the banking sector.
The introduction of the convertible mark in 1998 stabilized the currency and attracted foreign investment.
Bosnia and Herzegovina's economy has been affected by a decrease in foreign direct investment following the 2008 financial crisis.
The country has high administrative burdens for businesses, ranking poorly for ease of doing business and construction permits.
Political complexity and a tripartite leadership structure contribute to an ineffective government and slow legislative process.
Unemployment rates have declined, but this is attributed to a shrinking labor force as workers emigrate for better opportunities.
Bosnia and Herzegovina's banking sector has the capacity to increase funding to growth areas but requires administrative and corruption reforms.
State-owned enterprises and public sector spending may be crowding out private investment, which needs to be addressed for economic growth.
Progress towards EU integration has been noted, with new anti-corruption laws and recommendations for advanced negotiations.
EU membership is not a guaranteed fix for the country's issues and Bosnia and Herzegovina must strive for more than compromise.
Bosnia and Herzegovina scores an average of 4 out of 10 on the Economics Explained National Leaderboard, reflecting its economic and political challenges.
Transcripts
This is Bosnia and Herzegovina, a nation that is home to perhaps the darkest geopolitical
backstory in all of Europe, which is saying a lot. For many, the all too recent memories
of conflict represent the high cost of independence from the Socialist Federation of Yugoslavia,
a large state in the western Balkans that no longer exists. The end of the conflict in 1995
triggered the beginning of a colossal economic recovery effort, which not only sought to physically
rebuild Bosnia and Herzegovina, but also sought to restructure the economy away from centralized
free markets. Almost 30 years on and the nation has transitioned from socialism to capitalism
with mixed success. Now an upper middle income economy, Bosnia and Herzegovina is experiencing
robust growth in tourism, energy production and metal manufacturing whilst maintaining low
levels of public debt and high capital reserves within its banks. What's more, the country has
had a clear goal to work towards having been formally granted candidate status for the European
Union in 2022. This is potentially a win-win situation, with Bosnia and Herzegovina benefiting
from increased confidence, market access and participation in supply chains, whilst the EU
manages geopolitical risks by befriending a nation with a significant pro-Russia cohort in its
population. But regardless of its relationship with the EU, Bosnia and Herzegovina has a number
of deeply rooted challenges, which have, if anything, worsened since becoming an independent
state following the war. Ineffective governance, chronic unemployment and a steadily declining
population are adding tension to a nation divided by ethnic lines, who, it is felt by many,
are still not reconciled its difficult history. So, how did the newly independent nation bounce
back from war and genocide? Why has the economic development of Bosnia and Herzegovina stagnated?
And finally, what opportunities and challenges lie ahead for the nation? After we've done all
of that, we can put Bosnia and Herzegovina on the Economics Explained Leaderboard.
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For better or more likely worse, it's impossible to understand the modern economy of Bosnia and
Herzegovina without at least a cursory understanding of its all too recent history. In the late 1980s
and early 1990s, a wave of national sentiment rose across Yugoslavia which consisted of six
federations with their own cultures and identities. After Slovenia and Croatia broke away from Yugoslavia,
Bosnia and Herzegovina held an independence referendum in 1992. The outcome was in favour
of independence which was largely welcomed by Bosniaks and Bosnian Croats but rejected by
Yugoslavia and Bosnian Serbs who made up 33% of the population. Conflict broke out shortly after as
the different ethnic factions fought for territory in an escalating struggle that eventually led to
NATO bombing and UN peacekeeper troop deployment. In total almost 100,000 people died, 2.2 million
people were displaced and GDP declined by 84%. After international efforts for a peaceful solution,
the war ended in 1995 with the signing of the Dayton Agreement and Wright-Patterson Air Force Base
in Ohio USA and it's this agreement which founded the modern politics and economic powers of Bosnia
and Herzegovina to this day. Obviously that's the incredibly oversimplified summary of an endlessly
complex issue but the takeaway was that this was a bad set of circumstances to begin the process
of nation building especially since a lot of these core issues never truly went away. Founded on a
compromise in power sharing, the Dayton Agreement effectively split the state into two geographically
separate entities. The Federation of Bosnia and Herzegovina in the central, south and west of the
state which is controlled by the Bosniaks and the Bosnian Croats and the Republic Serbs go in the
north and the east of the state controlled by the Bosnian Serbs. Because of the Dayton Agreement,
power in Bosnia and Herzegovina is highly decentralized with both of these entities in
complete control of their own tax collection, public spending, development policies and welfare
programs. The only economic powers that lie at a state level are monetary policy which is managed
by the central bank, foreign trade policy and macroeconomic coordination. This level of decentralization
for a relatively small country is what makes Bosnia and Herzegovina unique and it was a requirement
for the piece that was desperately needed to enable the economic recovery that followed. It took
until 2003 for the GDP of the nation to eventually recover back to levels last seen in 1990 requiring
an average annual growth rate of 22% following the end of the war. And yes, much of this growth
derives from redeployment of huge spare capacity in the labour market but even when these factors
are accounted for there's no denying that a 22% average annual growth rate over almost an entire
decade is an impressive feat. So how did this recovery actually happen? In the first years of
peace a lot of the recovery can of course be attributed to the vast sums of post-war foreign
aid that Bosnia and Herzegovina receive from the international community for reconstruction of
damaged and destroyed infrastructure which includes $5.1 billion from the World Bank, the EU
and partner donors. As time went on however the economic growth became increasingly driven by
the pro-capitalist reforms that constituted the nation's transition from market socialism to
private enterprise. To be clear this transition of economic systems was not as extreme as other
countries across central and eastern Europe following the collapse of the Berlin Wall and the
dissolution of the USSR. As part of Yugoslavia Bosnia and Herzegovina was already using free
markets to allocate production and exchange with enterprises either being state-owned or
worker-owned and managed. In the later half of the 1990s and early 2000s large state-owned
enterprises started to be privatised which signalled opportunity to European banks who
started to provide liquidity and management expertise to the country's newly reformed banking
sector. Insolvent banks were closed, state-owned banks were privatised and new regulatory framework
was introduced to drive return on investment and manage systemic risk. Additional private property
laws were also introduced alongside the establishment of key institutions such as
two stock exchanges and the central bank. After the war many different currencies were circulating
with no generally accepted standard of payment and so a key factor of the recovery was the
introduction of a new currency the convertible mark in 1998. Not only did it standardise the
monetary system but it also generated financial stability since it was pegged to the Deutsche
Mark and eventually the Euro in 1999. A currency as payment has a fixed exchange rate to another
currency. The value of the currency is not affected by supply and demand in the foreign
exchange market against the peg because the central bank cancels out large movements by
counteracting the market when it needs to using its reserve holdings of both currencies.
When there's excess demand for the domestic currency on the market the central bank will
sell some of this domestic currency reserve to match the success. On the other hand if there's
excess supply of the domestic currency on the market the central bank will buy the excess using
its reserves of the peg currency. This ensures balance in the markets preventing the currency
from deviating from the currency it's pegged to and as a result the Bosnian Herzegovina economy
benefits from the stability that the Euroback currency brings. Now it's worth noting that peg
currencies don't always work in practice and there is some risk involved. Take for example the
Russian ruble in 1998 which was pegged to the US dollar. Investors were selling the ruble hard and
fast which forced the central bank of Russia to buy the ruble using US dollars to defend its currency
value. After selling 27 billion of its US dollar reserves in under a year the central bank ran
out of US dollars and the peg finally broke. The ruble devalued by two-thirds in just over a month
which meant the price of import a good sword causing inflation and huge drops in real living
standards. So far however the Bosnian Herzegovina and central bank has successfully maintained
the pegged exchange rate which has fostered confidence in the currency and attracted significant
amounts of foreign investment. This rewrote the nation's narrative from one of post-war recovery
to one of rapid modernization and development. The large inflows of foreign direct investment
generated employment improved infrastructure and helped to establish key export sectors in the
national economy such as electricity and metal manufacturing. This was a pretty standard and
promising development path for a country with close access to both markets in the east and the west
but it didn't last forever. Fast forward to the present day and foreign direct investment
still makes up a huge portion of the economy in Bosnia and Herzegovina particularly in banking
and manufacturing. The latest statistics value the total stock of FDI to be worth about 9.3 billion
US dollars. However net inflows decreased significantly after the 2008 financial crisis which like so
many other nations appears to be a turning point for the trajectory of the economy.
Private investment from within the country has not picked up this slack either and the reason for
this is that Bosnia and Herzegovina has some of the highest administrative burdens for business
not just across Europe but across the entire world. In 2020 the World Bank found that there are only
six countries in the world where registering a new business is more difficult. The country is also
ranked 173rd for ease of doing business with construction permits and 141st for paying taxes.
Although most recent data is a few years old now and the country ranks slightly better for other
ease of doing business metrics this is clearly discouraging for both foreign and domestic
investors who may not have the time and legal know-how to properly administer their business
operations in such a complicated regulatory framework. This explains why Bosnia and Herzegovina
has a large informal economy which is a whole other problem itself. These issues are largely
caused by the political system within Bosnia and Herzegovina which to put it frankly is overly
complex, fragmented and ineffective at taking action to drive economic development. While the
date and agreement was heralded as a success story of international peace brokering in the
modern era during the 1990s you were thinking ahead to the implications that power sharing
would have on the overall functioning of the government in the long term once this piece was
achieved. The political complexity begins right at the top with a tripartite political leadership
structure. Every four years three presidents are elected who represent each of the ethnic
constituents of the nation Bosniaks, Bosnia Croats and Bosnia Serbs. These three presidents rotate
every eight months until the four year term is over and each one has veto power to block decisions
which they believe are against the interests of their ethnic group. This high degree of power
sharing has embedded political friction into the government from the top down preventing
political solutions and slowing the legislative process. So whilst this political structure
has undoubtedly helped sustain peace it has created an ineffective government that's unable
to foster entrepreneurship. This has reduced investment causing spare capacity in the labour
marker where the unemployment rate is 10.7%. This has dropped significantly since 2015 where the
rate was 27.7%. Taking these statistics at face value you might think the declining unemployment
rate would be a positive sign but the reality for Bosnia and Herzegovina is that this has been
driven by a shrinking labour force as working age adults leave the country to find employment elsewhere.
The scale of the issue is demonstrated by the fact that Bosnia and Herzegovina has one of the
largest emigrant to population ratios in the world causing a reliance on remittances for
economic growth rather than investment into its own economy. Perhaps even more concerningly emigration
is leading to population decline with the total population having already decreased by 23% since
2000. So given such a steep decline of fundamental economic factors is there any hope for the future?
In order to reverse or at the very least slow the exodus of productive workers Bosnia and Herzegovina
needs to improve its economic offer to its citizens by increasing the quality and quantity of jobs
available. Ask most macroeconomists and they will say that investment is the key to achieving this.
Fortunately for the nation there looks to be capacity for ramping this up. Currently the capital
adequacy ratio of the banking sector which controls the level of risk and the ability to protect
depositors sits at 19.5%. This is well above the regulatory minimum of 12% which means the
domestic banking sector could increase long-term funding to key growth areas in the economy such
as energy, metal manufacturing and IT. To do this however three things need to happen. First the
discouragingly high administrative burdens of operating a business need to be reduced to
incentivise entrepreneurship. Some efforts have already been taken to address this through the
digitisation of tax filing and customs declarations for trade but more widespread reforms are needed
to significantly reduce administration and encourage entrepreneurship. Secondly corruption
in the political system in the banking sector needs to be addressed in order for capital to be
more effectively deployed in the economy. Thirdly the government must ensure that state-owned enterprises
and public sector spending are not crowding out private investment. This final point is particularly
important since the state is a huge economic power with fiscal revenues making up 44% of GDP
and state-owned enterprises having a presence larger than they do in any other country in the
western Balkans. Clearly Bosnia and Herzegovina's transition to a market economy only went so far
with the state still having significant ownership states in over 550 enterprises.
This is also likely to be an important point of future discussions on advancing its membership
prospects with the European Union. This represents a historic opportunity for the nation that would
increase confidence and enable more participation and value added supply chains. So far the nation
has made good progress towards EU integration since becoming a candidate in 2022 especially having
introduced new anti-corruption laws. In light of this progress the European Commission has
recommended that advanced negotiations begin with Bosnia and Herzegovina to plan and agree on a pathway
to its full membership. While this is promising it's not likely that the nation will become a
member for many years to come. It took Croatia eight years from this stage to become a member
whilst Turkey has been in negotiations for almost 20 years. Point being there's no guarantee of
becoming a member once the nation gets to this stage and with the range of political and economic
challenges that Bosnia and Herzegovina possesses the weight could be won to test the limits of
political patience. What's more is that EU membership alone will not fix the country's
issues. Just ask Greece Spain and Portugal. Bosnia and Herzegovina has immense potential
but it has to do more than just strive for compromise to get there.
Okay now it's time to put Bosnia and Herzegovina on the Economics Explained National Leaderboard.
In terms of size Bosnia and Herzegovina has a GDP of 27 billion US dollars which means
most national economies are larger. It ranks amongst Trinidad and Tobago and Zimbabwe giving
it a 2 out of 10. That is spread across a population of 3.2 million people which means the GDP per
capita is 8,426 US dollars which puts it below the global average and a long way away from the EU
average giving the economy a 4 out of 10. Stability and confidence is a mixed picture. While the
central bank has maintained the currency peg with the euro and the public debt levels are low the
declining population and ineffective government are weakening the confidence in the economy.
On top of this ethnic divisions are beginning to stir up again as political leaders from the Serb
territory of the nation increasingly challenge the legitimacy of the central government and call
for their own independence. In light of this it gets a 5 out of 10. Growth is steady averaging 3%
since 2000 but it is all bit stagnated since the 2008 financial crisis so it gets a 5 out of 10.
And finally industry. Bosnia and Herzegovina has a solid manufacturing base especially in metal
and electricity production. However the economy remains a net importer and there is room to
further develop its industry and increase productivity and exports. It gets a 4 out of 10.
Overall this gives Bosnia and Herzegovina an average score of 4 out of 10 putting it down here on
the leaderboard. If you liked this video then you'll also like the video we did on the economy of
Turkey which covers similar themes of how different political and economic systems affect production,
inequality and growth. Thanks for watching mate. Bye.
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