FEDERATION AND REPUBLICA SRPSKA IN THE SAME KIND OF TROUBLE

Economic Analysis of B&H by the World Bank

AIM Sarajevo, 2 April, 1997

In the shadow of political negotiations, arrangements and (dis)agreements, after four years of war devastation, the economy in B&H is trying to get on its own two feet again. The current situation in both entities of B&H is similar: 10-15 per cent of the prewar capacities of the economy is working, so it is understandable that the ratio between the employed and the unemployed is approximately the same.

As results of the study "New Foundations for Development of Private Sector in Postwar B&H" made by experts of the World Bank on a sample of 150 enterprises from the Federation and 25 from Republica Srpska, similar problems exist on both sides of the interentity line.

Levied taxes by far higher than the world standards and lack of financial resources for entrepreneurs in both entites are the basic obstacle to faster economic revival. Joint problems are also uncertainty of economic policy, political instability, existing customs and commercial regulations, fear of possible breaking out of the war again, problems with infrastructure and equipment expenses.

According to results obtained from managers and owners of firms included in the research, equipment and lack of raw materials are by far gretaer problems for enterprises in Republica Srpska than the firms in the Federation. Contrary to the firms in the Federation whose managers are at least spared of having to face the results of inflation, in Republica Srpska this appears to be one of the greatest problems.

Nevertheless, the leading men in enterprises in both entities do not lack optimism. A great majority of firms, 97 per cent in the Federation and 92 per cent in RS, expect an exceptional increase of sales of their products in the next two years, on the average twice as big as in the previous period.

While there is an almost unanimous agreement among the enterprises in both entities that among the highest limitations in development of privately owmed enterprises is the existing tax system, in the Federation hopes are very high concerning unification of the law on the federal level, which for the majority of enterprises in the Serb entity does not represent an advantage. As the result of enormous taxes imposed by the state in both entities, there is an expansion of "grey economy" which, thanks to avoiding payments of customs and other taxes, is an unloyal competition which the enterprises, either unwilling or incapable to cheat the state, cannot be an equal to.

The prewar economic picture of B&H in which about 1,000 industrial organizations employed nearly 450 thousand workers and in which about fifteen giant economic enterprises made one third of the gross national income, is definitely history. According to assessments of world economic experts, ideas on revival of the prewar economic system should be rejected from the very start. While the war raged in B&H, the world - but especially countries of central and eastern Europe

• have drastically changed, started privatization, opened their markets and with more or less success, tried to find their "place under the sun".

The key of economic revival, according to the assessment of the World Bank which is based on the experience of former socialist countries, lies in privatization and creation of an adequate tax and legal system by the model of adopted standards in the countries of market economy. In creation of the necessary preconditions, a much higher engagement of the state than so far is also necessary. At the moment, state administrations in both entities have done hardly anything to create these preconditions, using still fresh wounds on the economic tissue as the pretext, but real reasons should probably be sought in the fear of losing the existing positions and influence of the omnipotent state on economic trends.

That is why 21 per cent of the questioned managers in the Federation and 12 per cent in RS believe that there are profitable branches of the economy which are inaccessible to private entrepreneurs because of monopoly of public enterprises, which the state wishes to keep under control. But, trading with the state sector, both in the Federation and Republica Srpska, is not very advisable due to usual practice of delayed payments for the purchased goods. The state as the buyer is rapidly losing credibility, but in the existing situation where 85 to 90 per cent of economic activities is covered by the state sector, it is very difficult to find another buyer.

The existing models of privatization in RS and the Federation, have been differently assessed by experts of the World Bank. For the model chosen in RS, the study says:

"The probability of success of the proposed model in RS is not big. It largely ignores the lesson learnt from experience with privatization in other economies in transition".

The federal model of privatization was made with active participation of different international institutions and organizations, but its greatest shortage is in the fact that it still has not been adopted. Judging by announcements of officials, in the next ten days the set of laws on privatization which are expected to make the model official, should finally be put on the agenda of the federal parliament.

And while postponement of the donors' conference opens even the already prepared projects of reconstruction to doubt, expectations that foreign capital would rush into B&H appear to be unrealistic. Assuarances that "our cheap and highly qualified manpower" would be "a magnet for dollars and marks" from the world, prove to be a wrong evaluation. As international economic experts claim, the most important thing for foreign investors in decision-making about investments of their money is simply - the size of the market. In view of the fact that half of the prewar population of B&H is scattered from Alaska to Polynesia and that the rest which remained in the country has no money and amounts to the size of the population of a major district of a western metropolis, all the stories about our irresistability for foreign capital go up in smoke.

High technology and expert labour force rank second on the list of attractions for the investors. In this respect it is also questionable whether we have an advantage over the other eastern European countries, because "brain drain" from B&H has not stopped even after the war, moreover, due to hopelessness, it is even intensified.

Third, investors require a stable political environment, and there is no use even mentioning it in the situation Bosnia & Herzegovina is in.

There is also control of invested resources without interference of the state as a partner, either direct or indirect, and stable, simple and clear laws, which the Balkans have never been famous for.

    In the end, the old slogan that the world will help us

if we first help ourselves imposes itself. Indecisiveness and hesitation in getting rid of the heritage of communism can just push us deeper down to the bottom of the world scale. Thanks to the past war, countries of eastern Europe which used to lag far behind us are now two steps ahead. If we continue making up new market rules, the painful present such as it is might turn out to be better than the future.

DRAZEN SIMIC (AIM)