Economic Development and Transition

Sarajevo School of Science and Technology May, 2009

Economic Development and Transition

Research paper:

Economic Transition as a part of European Business Position of Bosnia and Herzegovina through EU integrations and transition

Professor: Prof. Boris Tihi Assistant: Jasmina Ahmetbai

Aida Buljubai, Sarajevo School of Science and Technology

Student: Aida Buljubai

Economic Development and Transition

Abstract The aim of this paper was to research and describe the process of economic transition as an important part of European Business. All researched data is compared with current situation and position of Bosnia and Herzegovina, on its way to EU integrations and the transition process. Through a brief account of the history of economic transition and a process of sustainable development in Central Eastern Europe Countries, transmitting it to position. Even though the transition process in Bosnia and Herzegovina is on a very high level of complexity, this paper concludes with recommendations of possible solutions. Bosnia and Herzegovinas till todays structure, this paper seeks to give a clear picture of the current

Aida Buljubai, Sarajevo School of Science and Technology

Economic Development and Transition

Contents
Abstract...2 Introduction....4 The process of economic transition in Bosnia and Herzegovina...5 The European Partnership...6 Communication form the European Institutions to Bosnia and Herzegovina.7 Progress in the process of economic transition in Bosnia and Herzegovina8 Economic and political developments.8 Output and demand......8 Labor market.9 International transactions9 Prices..9 Monetary and financial indicators...10 General government balance....10 Conclusion....11 Reference..13

Aida Buljubai, Sarajevo School of Science and Technology

Economic Development and Transition

Introduction Brief definitions of a process called economic transition and its importance as a part of European Business During last two decades a term transition or transition process is used many times in different ways, for different purposes. Based on this fact, there is various definition of transition process, but at the same time all of them imply the main point, which is changing from a centrally planned economy to a free market economy. The main characteristics of transition process are the changing and creating of institutions, particularly private enterprises; changes in the role of the state, the creation of fundamentally different governmental institutions and the promotion of private-owned enterprises, markets and independent financial institutions. The process of changes started since the collapse of Communism in the late 1980s and early 1990s has directly affected a quarter of the worlds population and has altered the social and political landscape far beyond the countries immediately affected. Has the transition been a success? At the moment it is impossible to give a definitive answer, transition process is not over. Even in the most advanced countries of the region, there are still a number of challenges to be addressed. More fundamentally, a judgment about whether transition has worked must involve more than economic issues, such as income, trade or employment. At last, for transition to be declared a success it have to lead to a measurable improvement in peoples lives, with the principles of democracy, pluralism and the market economy deeply implanted in societies. The most important positive fact is the sense of optimism for the future, mainly among younger people. It is true that many people suffered severe hardship, especially during the early years of transition when most economies went through a deep recession. Even though this positive signal, it is important to keep in mind that the damage done during the hard times, not only to material well-being but also to general levels of trust and subjective well-being, should not be underestimated. To promote transition it is necessary to do more on convincing people of the benefits of transition and to restore trust in public institutions and in each other. One of the aims of this paper is to bring facts about transition process in Bosnia and Herzegovina, to make inquiries about current and future position.

Aida Buljubai, Sarajevo School of Science and Technology

Economic Development and Transition

The process of economic transition in Bosnia and Herzegovina Since the collapse of the former Yugoslavia in 1992 Bosnia and Herzegovina (BiH), have experienced massive economic and political changes. Current constitutional structure is set up of two state-like entities, the Federation of BiH (Federation), and the Republika Srpska (RS), and District Brcko. This means that BiH is highly decentralized; the Federation is further decentralized consisting of ten cantons. Bosnia and Herzegovina started its transition process since 1992. At its very beginning it was forced to impediment it because of the war, which started at that point. The war ended 1995, but at the same time it was impossible to continue with process of transition, because Bosnia and Herzegovina was devastated in every sense. Economy was destroyed; a huge part of population became refuges, a highly regarded part of population was killed. 1995. by signing the Dayton Peace Agreement established a new constitutional order which defines the responsibilities of BiH in future recovery of the country. There were a huge number of issues which needed to solve, in regards of that certain conditions were necessity, such as the normalization of the political situation, constitutional organization, territorial integrity and a functional quality for Bosnia and Herzegovina as an independent state; The normalization of relations with the neighboring countries is not only a territorial and security issue but also a socio-economic one. Economic stability as a requirement for the normalization of the social status of the population, which is at present extremely poor or, more precisely, at the lowest threshold of social tolerance, is dependent on the establishment of normal inter-state relations. In the light of the economy and the entire infrastructure of the country being linked to the countries of the former common state, it would be natural for economic links to be congruent with existing presuppositions, the necessity of interconnectedness, the possibilities of production, trade. The process of introducing changes in Bosnia and Herzegovina is very complex and contains the elements of the implementation of the peace and the sweeping away of the results of the war, the lack of human rights. In addition to what seems common for all the countries in transition, Bosnia and Herzegovina is faced with the need simultaneously to establish normal relations with its neighbors and with a radically new internal organization in accordance with the intentions and basic prospects predicted by the Peace Agreement. This is the reason why the term transition implies changes in the sphere of social relations, in the legislative, political and economic system, in the ownership basis, in the function and nature of the state administration and in the functioning of ordinary people, the rights and freedoms they are entitled to and which they will be able to realize under the new democratic circumstances. During the first years after the war (1996 - 1999) BiH has experienced high GDP growth rates but the annual growth rates slowed down to an average of 5% between 2000 and
Aida Buljubai, Sarajevo School of Science and Technology

Economic Development and Transition

2002. The main reason for the slowdown has been the limited capacity of BiH to substitute the aid driven growth with mobilization of domestic sources of growth. Although the slowdown of the growth rates continued in 2003 (3%), the economic rebound initiated the increase of the GDP growth rates in 2004 (6%) and 2005 (5.5%), particularly due to an increase of the industrial and agricultural production. In the Federation, the increase was mainly attributed to growth in the processing industry as well as in the utilities, while the rise in industrial production in the RS mainly came from mining (European Commission 2004, p.46). The unemployment rate at the end of the year 2003 was at an at least to OECD standards incredibly high value of 42%, with an unemployment rate of 44% in the Federation and 37% in RS. However, estimates including employment in the grey economy point to an actually lower unemployment rate of around 20% in 2003 which came down from 23% in 2001. New estimates of the size of the grey economy, made by the Central Bank, suggest that the grey economy roughly corresponds to 40% of official GDP figures. Following several years of progressive fiscal consolidation, a further significant adjustment took place in 2004. The consolidated budget moved from a deficit of 3.3% of GDP in 2001 to a surplus of 1.8% in 2004. Structural reforms are proceeding, although progress has been unevenly distributed among different areas of potential reforms. Major achievements have been reached with respect to the establishment of the Indirect Tax Authority, which will unify indirect taxation across the entities, as well as reforms improving the business environment and budget control. Although a large number of laws have been adopted, the fast implementation of enacted laws is certainly necessary in order to achieve concrete improvements.

The European Partnership Bosnia and Herzegovina at the moment is in the contract relationship with the European Union, confirmed by the signing of the Stabilization and Association Agreement. The signing of the Stabilization and Association Agreement (SAA) with Bosnia and Herzegovina confirmed the EUs commitment to the countrys European future. Bosnia and Herzegovina began implementing the interim agreement in July. But constitutional elements established by the Dayton/Paris peace agreement have been challenged by key political leaders in both entities, and EU related reforms have stagnated. Consensus remains weak on key reform priorities. (COM (2008) 674 final, pg. 5).

Aida Buljubai, Sarajevo School of Science and Technology

Economic Development and Transition

Bosnia and Herzegovina is a potential candidate for EU membership. The Interim Agreement, which focuses on trade-related areas, has been in force since July 2008. At the same time some constitutional elements established by the Dayton peace agreement have been frequently challenged by some of the key political leaders. A shared vision on the direction of the country is very important and highly necessary for creating more functional and efficient state structures, institutions and for speaking with one voice on EU and international matters. Enlargement is one of the EU's most powerful policy tools. It serves the EU's strategic interests in stability, security, and conflict prevention. It has helped to increase prosperity and growth opportunities, to improve links with vital transport and energy routes, and to increase the EU's weight in the world. (COM(2008) 674 final pg.2) The EU provides guidance to the authorities of Bosnia and Herzegovina on reform priorities as part of the European Partnership. Following a proposal from the Commission, the Council adopted an updated European Partnership for Bosnia and Herzegovina in February 2008. Progress on these reform priorities is encouraged and monitored by Reform Process Monitoring (RPM) meetings and following the signing of the SAA, also by the bodies set up by the Interim Agreement. Eight RPM meetings have been held since the last progress report was published, including two Economic Dialogue meetings. The first meeting of the Interim Committee was held in October 2008. (SEC(2008) 2693 final pg. 6)

Communication form the European Institutions to Bosnia and Herzegovina Communication in the form of the Progress report has started since March 2002, when the Commission of the European Communities has reported regularly to the Council and the Parliament on progress made by the countries of the Western Balkan region. This progress report generally follows the same structure: briefly describes relations between Bosnia and Herzegovina and the Union; analyses the situation in Bosnia and Herzegovina in terms of the political criteria for membership; analyses the situation in Bosnia and Herzegovina on the basis of the economic criteria for membership; reviews Bosnia and Herzegovina's capacity to implement European standards, i.e. to gradually approximate its legislation and policies with the acquis, in line with a Stabilisation and Association Agreement and the European Partnership priorities. Progress is measured on the basis of decisions taken, legislation adopted and measures implemented. As a rule, legislation or measures which are being prepared or awaiting parliamentary approval have not been taken into account. This approach ensures equal treatment across all reports and permits an objective assessment.
Aida Buljubai, Sarajevo School of Science and Technology

Economic Development and Transition

The report is based on many sources. As usual, these include contributions from the government of Bosnia and Herzegovina and from the Member States, European Parliament report1 and information from various international and non-governmental organisations. The Commission draws detailed conclusions regarding Bosnia and Herzegovina in its separate communication on enlargement2, based on the technical analysis contained in this report. Every report made by European Institutions is based, among other criteria on the implementation of the four key areas in which Bosnia and Herzegovina have to work and progress on its way of EU integrations and transition process: 1) Implementation of police reform in compliance with the October 2005 agreement on police restructuring; 2) Full co-operation with the ICTY; 3) Adoption and implementation of all necessary public broadcasting legislation; and 4) Development of the legislative framework and administrative capacity to allow for proper implementation of the SAA.

Progress in the process of economic transition in Bosnia and Herzegovina Economic and political developments 2008 progress report for Bosnia and Herzegovina: the country had made some, although uneven, progress towards becoming a functioning market economy and that the macroeconomic stability had weakened as a result of worsening trade balance, higher inflation and expansionary fiscal policy. A joint report of the EU High Representative for the Common Foreign and Security Policy Solana and the Commissioner for Enlargement Rehn on the EU's policy in BiH: The report calls on BiH to show more political responsibility and greater ownership of the reform process to advance to the next stages of European integration. Output and demand The global economic slowdown has started to reveal an impact on BiH: The metal and automobile industries, the country's most important export sectors, have recently announced output cuts and lay-offs. The wood processing industry and the service sector report a worsening of performance. Growth rates of industrial production are still quite optimistic In the FBiH, energy, capital goods and nondurable consumer goods contributed positively to the annual growth rate of industrial
Aida Buljubai, Sarajevo School of Science and Technology

Economic Development and Transition

production from January to November 2008, while a decline was observed for intermediate goods and durable consumer goods. In the RS the production of both durable and non-durable consumer goods, energy and intermediate goods increased, while it decreased in capital goods. Labor market The consolidated national official rate of registered unemployment further decreased from 42.9% in December 2007 to 40.3% in October2008. Employment increased by 4.1% in the first ten months of 2008 as compared to the same period 2007. Wages have grown rapidly in 2008. In November, nominal net wages in the RS were 30.1% higher than in the same month of the previous year. In the FBiH they increased by 14.9% (October data). Gross wages increased by roughly the same percentages in both entities. International transactions During the first three quarters of 2008 the current account deficit increased by 48.3% year-on-year. This decline was caused by an increasing trade deficit during that period when import growth was persistently above export growth, so it widened by 21.7% to an estimate 41% of GDP. Improving income and current transfer accounts partially offset the effect of the worsening trade balance. Net FDI declined sharply by 76.8% year-on-year during the first three quarters of 2008, this is the result of the high basis and may not be interpreted as a withdrawal of investors from BiH. Figures for 2008 suggest that the volume of FDI will be in line again with the years 2004-2006. In the meantime, the opposite scenario was observed in other investments which grew from a negative base to EUR 818million during the first three quarters of 2008. Prices Since August 2008, annual end-of-period inflation rates have been declining from 9.5% to 5.5% in November, after a year of increasing rates. Reflecting global tendencies, this moderation was caused by the slowdown in transport and food prices. The annual growth rate of transport prices came down from 11.7% in October to 3% in November, while the increase in food prices fell from 8.4% to 6.2%. Most remaining commodity groups also reported slowing price increases. The overall trend is similar in both entities: Annual consumer price inflation in November stood at 6.0% in the Federation and 5.1% in the RS.

Aida Buljubai, Sarajevo School of Science and Technology

Economic Development and Transition

Monetary and financial indicators Tensions in the financial market led to a withdrawal of deposits by the population and liquidity shortages in the banking system. The Central Bank of Bosnia and Herzegovina (CBBH) and the government have introduced a number of measures in order to strengthen and restore confidence in the Bosnian currency board arrangement and national financial markets. Provided cash to the banking system and lowered the minimum reserve requirement rate from 18% to 14% in October. Credit growth slowed down to 24.8% year-on year at end-November. Liquidity indicators declined slightly, though still revealing a positive position. General government balance Government Finance Statistics revealed a drop in the surplus of the consolidated budget by 76.6% year-on-year in the first three quarters of 2008 to EUR 94 million. Since the State Parliament budget committee proposed certain amendments to the draft 2009 budget in order to harmonize it with a decision of the National Fiscal Council limiting its annual increase to 12%, it was not adopted before year end. Therefore, the Council of Ministers had to define provisional financing for the first quarter 2009, amounting to a quarter of the 2008 budget. Both entity budgets are in line with the provisions of the Fiscal Council of a maximum increase of 6% as compared to 2008.

Aida Buljubai, Sarajevo School of Science and Technology

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Economic Development and Transition

Conclusion The main characteristics of transition process are the changing and creating of institutions, particularly private eneterprises; changes in the role of the state, the creation of fundamentally different governmental institutions and the promotion of private-owned enterprises, markets and independent financial institutions. The process of changes started since the collapse of

Communism in the late 1980s and early 1990s has directly affected a quarter of the worlds population and has altered the social and political landscape far beyond the countries immediately affected. Has the transition been a success? At the moment it is impossible to give a definitive answer, transition process is not over. For transition to be declared a success it have to lead to a measurable improvement in peoples lives, with the principles of democracy, pluralism and the market economy deeply implanted in societies. To conclude with one of the many conclusions form different kinds of reports, all those conclusions are starting with the same ending such as: There is limited difference between urban and rural areas in terms of ownership of consumer goods, and little difference among income groups regarding access to public services. People surveyed overwhelmingly believe that the current economic and political situation is worse than in 1989 while opinions are fairly evenly divided about whether life will be better in the future. Dissatisfaction with life varies by age and income; there is strong dissatisfaction among older people and in the lowerincome group whereas the young and richer are in general much happier. People generally support democracy but many favour a planned economy in some circumstances over a market economy. Corruption is perceived to be widespread but the frequency of irregular payments to public officials is generally low. There is a high level of distrust of public institutions and of people in general.

Aida Buljubai, Sarajevo School of Science and Technology

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Economic Development and Transition

The main issue of BiH is the lack of legal and political basis and the will for efficient decision-making and for delegation of responsibilities and efficiency at all levels of government. At the same time by signing the SAA there is no doubt that BiH will adjust its legal framework to the EU standards and regulations. The prescribed activities include the following issues: harmonization of the domestic legislation with the EU acquis communautaire, structuring of the market compatible with the relevant rules in the EU, organization of wholesale and retail markets, reform of the tariff system, and integration of the market into the regional and European market. The signing of the Stabilisation and Association Agreement (SAA) with Bosnia and Herzegovina confirmed the EUs commitment to the countrys European future.

Aida Buljubai, Sarajevo School of Science and Technology

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Economic Development and Transition

References:

1. Council Regulation (EC) No 594/200 2. EU CANDIDATE AND PRE-ACCESSION COUNTRIES ECONOMIC QUARTERLY 2008 - ECFIN Unit D-1 3. COUNCIL DECISION of 18 February 2008 on the principles, priorities and conditions contained in the European Partnership with Bosnia and Herzegovina and repealing Decision 2006/55/EC 4. BOSNIA AND HERZEGOVINA 2008 PROGRESS REPORT - SEC(2008) 2693 final 5. COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT Enlargement Strategy and Main Challenges 2008-2009 - COM(2008) 674 final 6. INTERIM AGREEMENT ON TRADE AND TRADE-RELATED MATTERS BETWEEN THE EUROPEAN COMMUNITY 7. Life in Transition A survey of peoples experiences and attitudes - The European Bank for Reconstruction and Development

Aida Buljubai, Sarajevo School of Science and Technology

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