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FROM DEFECTIVE TO EFFECTIVE BIH DEVELOPMENT POLICY

TitleFROM DEFECTIVE TO EFFECTIVE BIH DEVELOPMENT POLICY
Publication TypeConference Proceedings
Year of Publication2017
AuthorsDomljan, V, Mirascic, G, Ridic, G, Ridic, O
Conference NameEconomic Policies of Small Countries in Context of European Integrations
Volume2017
Edition1st
Number of Volumes1
Pagination67-83
Date Published02/2017
PublisherEconomic Faculty University of Banja Luka
Place PublishedBanja Luka, Bosnia and Herzegovina
Abstract

After 21 post-war years Bosnia and Herzegovina (BiH) found itself in a „middle-income trap”. It isnot classified into countries with low income because workers and citizens do not accept low wages and low living standard, nor does it fit into high income countries because those workers do not produce sophisticated products that ensure competitiveness, export and basis for high wages and living standard. The development vision of BIH is to become a high income country however the state has no suitable strategy or policy.This paper represents a detailed study of multifaceted secondary sources (i.e. journal articles,government publications, internet sources, etc.) conducted in a cross-sectional time manner. Byutilizing secondary sources of data we conducted our own calculations based on data from the World Bank, Central Bank of Bosnia and Herzegovina and Agency for Statistics of Bosnia and Herzegovina.We hold that key sectors which would provide return to pre-crisis GDP growth rate of 6-7 percent per year, should be: financial system, diaspora and digitalization of industry (with introduction of suitable strategies and policies), each of which would contribute to GDP growth of two percent per year. The key agents of change should be leaders of value chains (large-scale companies), cities-regions, gazelle companies (fast growing small and medium size companies) and micro digital companies.

URLhttp://www.efbl.org/lat/novosti-full/20087/naucni-skup-na-temu-ekonomske-politike-malih-zemalja-u-uslovima-evropskih-integracija/
Refereed DesignationRefereed
Full Text

FROM DEFECTIVE TO EFFECTIVE BIH DEVELOPMENT POLICY
Dr. Vjekoslav Domljan
Dr. Goran Mirašćić
Dr. Goran Riđić
Dr. Ognjen Riđić
Abstract
After 21 post-war years Bosnia and Herzegovina (BiH) found itself in a „middle-income trap”. It is
not classified into countries with low income because workers and citizens do not accept low wages
and low living standard, nor does it fit into high income countries because those workers do not
produce sophisticated products that ensure competitiveness, export and basis for high wages and
living standard. The development vision of BIH is to become a high income country however the
state has no suitable strategy or policy.
This paper represents a detailed study of multifaceted secondary sources (i.e. journal articles,
government publications, internet sources, etc.) conducted in a cross-sectional time manner. By
utilizing secondary sources of data we conducted our own calculations based on data from the
World Bank, Central Bank of Bosnia and Herzegovina and Agency for Statistics of Bosnia and
Herzegovina.
We hold that key sectors which would provide return to pre-crisis GDP growth rate of 6-7 percent
per year, should be: financial system, diaspora and digitalization of industry (with introduction of
suitable strategies and policies), each of which would contribute to GDP growth of two percent per
year. The key agents of change should be leaders of value chains (large-scale companies), citiesregions,
gazelle companies (fast growing small and medium size companies) and micro digital
companies.
Introduction
After recovering from post-war renewal and transition shock, BiH entered the „middle- income
trap”, due to numerous reasons : (i) nonexistent vision, strategy and development policy, (ii) lack of
rule of law (i.e. non-functioning legal rules, especially execution of unfulfilled contractual
obligations), so, that, the economic transactions with built-in rents slowly and scarcely perform,
(iii) suppression of entrepreneurs (i.e. disabling the formation of the market economy 'bottom up'
(e.g. whereby, basic prerequisites for drawing people out of poverty, inactivity, and unemployment
were not achieved), (iv) very-open economy (exposing weak local producers to strong external
shocks), (v) not introducing financial institutions and instruments coupled with non-adequate
regulation and surveillance of financial markets, (vi) no renewal, or supporting of development of
the research and development (R&D) sector (e.g. BIH is the last country in Europe regarding per
capita investment basis for research and development; (vii) utilizing an orthodox currency board,
(viii) by keeping an educational system of closed ethno-national societies instead of a development
of an educational system appropriate to regional and global needs, BIH is ranked as the last country
in Europe, according to DHL index of global connection, (ix) lack of support for knowledge-based
reindustrialisation of the economy, (x) total domination of non-productive (social and
administrative) over productive public expenditures (research and development and physical
infrastructure, primarily the information-communication infrastructure), and (xi) lack of support for
development of value chains and production clusters (e.g. through public procurement, support
packages to companies etc.), (xii) failure to implement adequate pricing policy, especially the
stabilization through stockpiles, etc.
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BIH will not be able to achieve high rates of economic growth and employment until it has
clear vision, strategy and developmental policy. The vision can only be becoming a high-income
country. Other goals, such as becoming EU member can only be operational aims (targets) but not
a strategic goal of BIH politics. On this developmental journey BIH does not need to become EU
member country but it has to become a high-income country. Therefore, it is important to make
radical turn in development policies. The focus must be shifted from the last development wagon’s
support (by applying subsidies, tax expenditures, credits of development banks, etc.) to
unrestrained locomotive of the economic development.
Basic problem of BIH's economy is that its main economic engine is exemplified in the public
sector while the private and civil sectors are secondary. The inefficient public sector surpasses the
weak private sector, as the main and the most prestigious employer in BIH's economy. It is
followed by the informal agriculture as second largest employer. The Government takes half of
country's GDP and spends it primarily on socio-administrative expenses and service lending.
The development must be based on foreign direct investment (FDI) as much as possible.
Generally, this cannot be a plentiful source of investment financing, but small country can hardly
achieve strong development if it does not ensure technology transfer that is best encouraged by FDI
inflow.
Because of long term improvement of competitiveness of BIH's economy it is necessary to
conduct its second reindustrialization.
Industrialization of BIH's economy was conducted by the Austro-Hungarian empire, the first
reindustrialization was conducted by Socialist Federative Republic of Yugoslavia (SFRJ), and
actual BIH government should conduct second reindustrialization of BIH economy (i.e. conduct
digitalization of its economy).
BIH has a low share of value added from manufacturing in its GDP. It needs to double that
share to reach the most appropriate economic comparators (e.g. Switzerland, Austria, Slovenia and
Slovakia). Before BIH lies the transition of the existing low-technology exports to knowledge
intensive export.
I. DEFECTIVE BIH POLITICS
I.1 Deep internal and external disequilibria
The introduction of the currency board in 1849, in the island of Mauritius, Africa, and furthermore
in Southern Asia and Caribbean was to ensure that British colonies have stable currency supported
by monetary reserves in British pounds. There was no need or space for monetary policy in the
colonies - money supply was gathering or shrinking according to pound reserves. The colonial
governments agreed with that because they maintained interests in monetary reserves, abroad. Most
of independent colonies after WWII have established their central banks and had abandoned the
currency board. The currency boards appeared in the beginning of 1990s after the fall of
communism and/or appearance of hyperinflation. Here we are interested in how this youngest, the
most orthodox from all regimes of currency board(s) is functioning in Bosnia and Herzegovina?
Large and unused advantage of the currency board is mechanism of adjusting current account
of balance of payment, as the one existed in the conditions of the gold standard (described in 1752
by David Hume, the father of economic science), to which the currency board is the most similar
regime.
If the country has a trade deficit the money supply shrinks causing interest rates growth and the
withdrawal of foreign capital. High interest rates translate into deflationary pressure which leads to
reduced imports, enlarged exports and improvement of foreign trade balance). This in turn leads to
reduction of prices (if they are flexible) and makes exports more attractive. This causes the
production growth to its full employment level, export increase and elimination of current account
deficits, which makes economy balanced internally and externally.
In BIH this mechanism does not function, as shown by the long term internal and external
disequilibria. There is a high unemployment rate, low rate of economic growth and high current
account deficit etc. The only positive result of existing currency board is that there is no inflation.
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According to views of those who advocate the currency board, the foreign exchange reserve
should grow parallel with external surpluses (i.e. recede with deficits causing changes in prices and
interest rates). However, BIH is experiencing something quite different: there are current account
deficits and the growth of foreign exchange reserves (and money supply at the same time). The
Central Bank of BIH celebrates (just as the Indirect Taxation Authority which is proud of increased
collections) without wondering who pays the ultimate price for it.
Since there are no policies to correct the external disequilibria that have marked the entire postwar
period, net international investment position of the country (of what BIH is investing abroad
minus what foreigners invest to BIH) is -53 percent of GDP, hence, lower than acceptable -35%.
Fortunately for BIH, this disequilibrium is not financed with credits only, but with non-credit
resources such as foreign exchanges from the non-observed economy’s export, pensions,
remittances to relatives in BIH, diaspora's investments in BIH and FDI and portfolio investments
into the BiH economy.
Table 1:
Importance of personal remittances; BIH, 2009-2015 (in billion of BAM)
Variables 2009 2010 2011 2012 2013 2014 2015
Nominal GDP 24,78 25,35 26,21 26,19 26,74 27,30 28,21
Final consumption expenditure 25,87 26,79 27,64 27,46 27,48 28,56 0,00
Gross domestic savings -1,09 -1,44 -1,43 -1,27 -0,74 -1,26
Gross domestic savings
(% of GDP)
-4,39 -5,68 -5,44 -4,84 -2,77 -4,61
GNI 25,74 25,76 26,42 26,40 27,08 27,49 28,48
Final consumption expenditure 25,87 26,79 27,64 27,46 27,48 28,56
Net current transfers from abroad 3,34 3,53 3,54 3,68 3,69 3,97 3,56
Gross savings 3,22 2,50 2,33 2,61 3,30 2,89
Gross savings (% of GDP) 12,98 9,87 8,88 9,98 12,33 10,57
Personal transfers (Current transfers
between resident and nonresident
households) - credit
2,01 2,01 2,09 2,17 2,31 2,38
Source: own calculations based on the World Bank, Central Bank of Bosnia and Herzegovina and Agency for
Statistics of Bosnia and Herzegovina
The main sources of personal remittances are (i) relatives' remittances and (ii) remittances with
sources in the non-observed economy (Central Bank treats them as typical remittances but they are
de facto primary income that stays non-observed for Central Bank, and statistic agencies in BIH
that have a gap between size of income by expenditure approach1 and production/income
expenditure).2 Thanks to diaspora remittances and foreign exchanges of international financial
institutions (e.g. MMF, World Bank, EBRD), that are given as credit or grant, BH is managing to
live through.
1
What is recorded as a transfer in the balance of payments of the Central Bank represents the official remittances that are
40% less than actual remittances. Around 80% of remittances (formal and non-observed) are put into official channels
through consumption, causing gaps in national system accounts.
2
There is a large gap between the data on remittances flows provided by the Central bank of BiH and much lower size
reported by households in household budget surveys (Oruč, 2011). We estimate that half of these personal remittances
has an origin in the non-observed economy. It should be also noted that 47.7% of the BiH diaspora lives in Croatia and
Serbia. All of this asks for detail account who, how much, where from and what remittances are sent to BiH. There is a
large gap between the data on remittances flows
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In 2014 BiH3 had a GDP of 28.2 billion BAM. That GDP contained personal consumption
(23.38 billion BAM), government final consumption (6.08 billion BAM), investment (5.02 billion
BAM), and net export -6.28 billion BAM (export 9.26 billion BAM, and import 15.54 billion
BAM). Therefore, it is visible that domestic savings are negative. If we deduct consumption
(private sector consumption of 23.38 billion BAM and government final consumption of 6.08
billion BAM) from the income of 28.2 billion BAM we have negative domestic savings of 1.26
billion BAM or -4.5% GDP.
Today, we can raise the question of ''who is being spread too thin''. The answer is the
government since it constantly runs budget deficits. In 2014, the government had budget deficit of
0.61 billion BAM, which means it spent more than 610 million BAM than it collected in revenues.
The private sector (e.g. households, non-profit organizations and companies) spent 650 million
BAM more than it had in income. This way total domestic savings was minus 1.26 billion BAM
(see table 2).
Table 2:
Savings, Investment; 2014
Income Domestic Savings National Savings
• Y=28.20
• C=23.38
• G=6.08
• I=5.02
• E=9.26
• Im=15.54
• Y=C+G+I +(E-I)
• 28.20=23.38+6.08+5.02+(9.26-
15.54)
• S=Y-C-G
• S=28.20 -23.38 -6.08
• S= -1.26
• S= - 4.5%
• S=I+CA
• -1.26=5.02+(9.26-15.54)
• -1.26=5.02-6.28
• S-CA=I
• -1.26 - (9.26-15.54)=5.02
• -1.26+6.28=5.02
Government Savings Private Savings
• Sg=T-G
• -0.61 (=2.2% Y)
• -0.61=T-6.08
• -0.61+6.08=T
• 5.47=T
• S=Sg + Sp
• -1.26=-0.61 + Sp
• -1.26+0.61=Sp
• -0.65=Sp
• Sp=Y-T-C
• Sp=28.2-5.47- 23.38
• Sp=-0.65
• S=Sp + Sg
• -1.26= -0.65 -0.61
• -1.26=-1.26
Source: own calculations based on the World Bank, Central Bank of Bosnia and Herzegovina and Agency for
Statistics of Bosnia and Herzegovina
It is necessary to differentiate between national (total) savings and domestic savings to
understand how BiH has managed to finance the aforementioned five billion BAM of investment.
When domestic savings increase for the size of net personal transfers this provides us with the total
size of national savings. The BiH national savings rate is 10.5% of GDP. Net transfers from abroad
are taking BiH out of negative zone of -4.6% of GDP and take it to the positive zone of 10.5% of
GDP. As far as the other countries from the zone of negative values, Kosovo and Moldova are
saved by remittances to an even larger extent reaching +17.7 and +17.0% of GDP respectively. In
short, their diaspora is sending more than BiH diaspora. The personal foreign remittances of BiH
are around 2 billion BAM, and in 2014 they were 2.3 billion BAM (World Bank, 2016).
When inflows of foreign exchanges weaken (or are stopped by putting BiH on the black list),
the BiH economy is threatened by chaos or collapse. One source of those inflows, mother-bank
loans to daughter-bank loans had dried out. Before the global crisis of 2008, it was a plentiful
source of foreign exchange and financial sources of credit and in turn of strong aggregate demand
3
Still, there is no detailed data for 2015, so illustration is based on 2014 data. There are no significant differences
between these two years.
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increase and economic growth of almost 7 % of GDP. With global crisis the economic growth of
BiH had virtually collapsed and since then it has a growth rate of 1-2% per year.
If one or two larger banks were to withdraw from BiH it would cause a strong contraction of
the money supply for which BIH has no antidote. Actual behaviour of foreign banks, that are
strengthening more non-interest income than interest bearing ones, acts as a brake on the economy.
BiH has effectively lost control over its monetary and financial system. Just as previously,
when pounds from Mauritius were relocated to London, the foreign exchange reserves of
10 billion BAM are outside of BiH (and serve only to discipline the local politicians). In
addition, the banks are not under the (efficient) oversight of the BiH government. They are
being controlled by two banking agencies that became mere instruments of banks, just one
step lower than their Bank Association, a pure lobbying organization. When banks whose
deposits originate to a big extent from the public company’s deposits decide to buy
treasury bills they engage in that activity (or decide not to buy- in order to corner the
government, as was the case recently).
I.2. Middle-Income Trap
Many countries have developed rapidly after WWII and became middle income countries. Few of
them continued to develop and became high income countries. 4 According to the World Bank,
certain countries are stuck in „the middle-income trap“.5 Resources that enable high growth of
countries with low income (e.g. natural resources, cheap labour force, easy absorbing technology)
are not enabling growth of countries with high income.
Journey from a country of middle income to a country with high income requires the direction
of resources into highly-productive, skilled and knowledge intensive activities. The production of
higher value-added goods seeks qualified workers who need to have higher wages. Due to the
increase of wages the manufacturing companies of countries with upper middle income often deal
with situation of not being competitive on export markets where more efficient producers are
operating.
Journey of the middle income to high income country is based upon export-led development
(i.e. the exploitation of global demand at deep elastic markets for their products). This way four
„small tigers“(i.e. Hong Kong, South Korea, Taiwan and Singapore) increased export of industrial
products from 4.6 billion in 1962 to 715 billion US dollars in 2004. (US$ in 2000). In 42 years they
increased their exports by 155 times. Domestic markets could not secure it. When South Korea, in
1950, followed strategy substitution import („buy domestic“), it had the economic growth rate of 2-
3% per year. Since 1960s, when started to use „export the domestic“ strategy, growth rate jumped
to over 7% per year or more for 41 years and country became an economic miracle (Commission
on Growth and Development, 2008).
The ratio of exports to BiH's GDP is one third of GDP, while the ratio of imports is almost
60% of GDP. BiH's export is twice lower than simple average of the small European transition
countries. Export per capita of BiH is 10-odd times lower than the export of Slovenia, Slovakia and
Check Republic. The simple averages for European transition countries are 54% for exports and
57% for imports. It is a common sense that values of imports and export should be equal in the long
run, but it is not normal and it is unsustainable to have imports double the size of exports which is
the case of BiH (World Bank, 2016). BiH has low exports due to lack of tradable goods. Globally
looking, modern economies are service-based with the aggregate production dominated by
production of services, but the international economy is based on goods trading - the total export of
goods and services consists of four-fifths in goods, and the remaining quarter in services export.
4 After WWII only 30 countries have managed to pass the way from middle income to high income. Five of them
succeeded until 1950 and 25 after 1950 (Felipe, Kumar and Galope, 2014). In 1961 there were 101 countries with middle
income, until 2008 only 13 became countries of high income (Larson, Loayza and Woolcock, 2016).
5 This term was introduced first by Gill and Kharas 2007 in study “An East Asian Renaissance: Ideas for Economic
Growth.” Since then, there is a debate about the concept which here in the case of BiH is used for diagnostic purpose
while therapy is based upon viewpoints of Commission on Growth and Development (2008) – discussed in detail in third
part of this work.
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Those who do not have tradable goods drop out of international trade and the international capital
market.
Figure 1: Export and Import; BiH and comparators, 2015
Source: own calculations based on World Bank (2017)
''The middle-income trap'' country is the one that stays in that state more than the average time
of retention. In school terminology, a student who stays longer than one year in the class is a bad
student, and needs to repeat the class. Argentina and Greece are the most famous repeaters in the
class of higher middle income. Argentina needed 40 years (1970-2010), and Greece 28 years
(1972-2000) to become high income countries. According to the World Bank, the transition from
upper middle income to high income country last on average 14 years and in the case of South
Korea, Taiwan and Hong Kong it lasted seven years. For 18 years BiH has been a middle income
country. After two post-war reconstruction years, for 18 years, now, BiH is an upper middle
income country. Undoubtedly, BiH is not going to be a good student but it is still far from being the
worst one (i.e. to have Argentina and Greece syndrome).
II. HOW TO REACH EFFECTIVE BIH POLICIES
The five main ingredients of high and stable development, based on the experience of countries that
became economic miracles, are: (Commission on Growth and Development 2008; Jones and
Romer, 2009; Stiglitz, 2012; Lin, 2012):
1. Involvement in international economy (openness)
2. Macroeconomic stability
3. High rates of savings and investment
4. Market allocation of resources, and
5. Small, determined and capable government.
In addition, during the last three decades the prevailing view is that the best strategies of
development for small middle income countries, such as BiH, are export-led development ones.
Their main characteristics are: high investment and savings, high foreign investment, and high
export of industrial products. Specifically, the high-growth Asian small tigers, which also become
economic miracles, had in common: high saving and investment rates, rapidly improving education
levels, relatively moderate inflation rates and if not free trade, at least a high degree of openness to
and integration with world markets (Krugman, Obsfteld and Melitz, 2015).
Therefore, is necessary to bring export-led strategies to all levels of BiH's government.
Their existence is like a lightbulb in a dark room. The room can be crossed without the
light but it will take time and bring along some painful bruises. Foreign trade policy of BiH
must facilitate foreign trade transaction of companies and be connected to biggest socio-
Austria
Albania
BiH
Croatia
Bulgaria
Greece
Portugal Montenegro
Macedonia
Moldova
Kosovo
Serbia
Slovenia
Slovak R
Switzerland
Hungary
Czech R.
Averages
20 40 60 80
100
Export (% of GDP)
40 60 80 100
Import (% of GDP)
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economic questions of the country (i.e. unemployment, rural development, inactivity,
poverty and inequality) in order to secure jobs.
Incentives for export rather than for exporters, have to be short-term (what is the kind of
country comparative advantage if it should be supported with no limit!) and agnostic (country must
support export without specifically benefiting some companies).
In 1955, the development economist Arthur Lewis said that „governments are failing because
they are doing too little or too much“. During the promotion of sustainable economic development
the government must focus on creating the environment for economic activity which will easily
introduce new undertakings.
In the most adequate way the government will adhere to market's functioning and creating
conditions to introduce new economic activities if its intervention is adjusted to the country’s
comparative advantages, defined by structure of available production factors in current period,
among which are knowledge and entrepreneurship (Lin, 2012, Stiglitz, 2012).
BiH policy makers do not support the development of competitive market. They strongly
support the existence of moral hazard because it helps non-efficient public companies to stay on
market6 even while creating losses. Some public companies are in privileged position and extract
rents. For example the prices (and profits based on them) of telecom operators are high which
prevents development of entrepreneurship through unaffordable production inputs and distancing
telecoms from global production frontier and it hurts their legal privatization.7
Policy makers should resist demands to protect activities, companies or jobs. Instead, they
should protect people. The best protection that government can offer is education and training
(enabling acquiring of skills that enable people to be employed) and creating an environment
securing jobs and helping people to find jobs. By respecting the solidarity principle people need to
be supported while between two jobs by social security's support. This is why unemployment
benefit exists.
In BiH the economic growth rates of less than 7% per year are not acceptable. It is necessary to
increase production to improve competitiveness by 3% per year (in order to achieve Copenhagen’s
criteria to enter the EU) and increase employment to 4% per year (in order to reduce mass
inactivity and unemployment to prevent the collapse of health and retirement funds). In the last 21
years, no significant level of government in BiH had made clear strategies and productivity
policies. In recent years some levels of government had an employment strategy and nowadays
there is none.
BIH was on the threshold of those high growth rates in 2007 with growth rate of 6% and in
2008 it had 6,8%. In those successive years BiH was even close to 7%. With 7% growth rate it
could reach in 10 years income of 9.400 US$. This would overpass today's global average, with
income larger than Romania's. By increasing growth rate to 10,5-11,0% in ten years BIH would
ensure income per citizen of 12.196 US$, (i.e. entering the club of countries with large income)
(Domljan, 2014).
II.1 Cities-regions and value chains, engines of economic development
BIH needs to focus on supply side economics8 and find engines for export and development. These
could be cities-region and value chains (VCs), or even better value chains of cities-regions. Policy
6 There is no study of tax expenditures in BIH (what will country lose due to tax exemptions, exceptions, etc., for
supporting certain sectors, regions or social groups and what is it gaining with it), or a consolidated balance sheet of the
public sector in order to see when and how many losses it creates and to whose account.
7
Economic privatization was carried out when the public companies became political party holdings. The profits of these
“public companies” are stripped by managers and employees through payroll and uncontrolled employment, through
public procurement and by the government through taxes. Citizens do not participate in business results through lower
prices and better quality services. Thus, the economic situation as it was and in communism: the working class and the
people do not get anything - a piece of fruit is taken by privileged social groups. Only the terminology has changed: the
company is not in the "social" but in the "public" property.
8 It is very difficult to conduct demand side economic policy in BiH under currency board (renunciation of monetary
policy and exchange rate policy) and the lack of institutions and instruments, and above all the political interests of
policy-making at the country level. Only indirect taxes policy could be conducted at the macro level - direct tax policy is
lead at lower (mezzo) levels.
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makers need to analyze global niches and decide where it is the easiest to become technological
leader and achieve economies of scale.
Cities-regions are current pockets of excellence from which excellence needs to be spread to
country-wide and support BiH’s fitting into the space of South-Eastern Europe and Mediterranean
and gradually to EU space. In cities-regions (Banja Luka, Bihać, Bijeljina, Mostar, Sarajevo, Tuzla,
Zenica) it is necessary to support VCs where BiH has traditional comparative advantage, and
where it needs to acquire that advantage, primarily in the areas of software production and creative
goods.
Even though the total share of BiH's economy in global export is 0.028 %, the country is
struggling for global niches where the share of its leading companies is 0.10-0.70%. It secures the
20th-30th place among 100-130 countries exporters of certain products. BiH has the chance to
become leader of certain global niches.
This can be achieved with development of VCs based on large-scale companies as leaders of
VCs and inclusion of large number of micro, small and medium enterprises (MSMEs) where some
function as locomotive and other as wagons. At the same time government’s support policies can
grow out of politics of VCs into cluster policies. Based on EU countries' experience the cluster
policy is conducted at regional level, even in constitutionally unitary countries (Italy), and
especially in federal countries (Switzerland, Belgium). The cluster policy is conducted in BiH at
the regional level.
BiH's cities-regions have rich cultural diversity which is an excellent basis for development of
creative economy. Multiculturalism encourages creativity. In BiH creative economy's production
and export have minor significance causing foreign trade deficit even in this field. Creative
economy is an important part of knowledge economy. It has strong economic growth and
employment growth in comparison to the total economy, and it is important component of cultural
identity and development of cultural diversity as basis of modern development. Primarily based on
ideas, not on capital, the creative economy leans on unlimited resources and not on optimization of
limited resources as manufacturing.
Therefore, BiH, which neglects the export of intangible goods, needs to focus on export of
creative services, business services and financial service and above all export of software and
software services.
II.2 Aggressive knowledge production
Observed from contemporary industrial society's viewpoint let alone from knowledge based society
and digital economy's viewpoint, BIH has an insufficiently skilful work force. Only 5,7% of
citizens older than 25 have a university education (150.000). All regional and economic
comparators have relatively more educated citizens with tertiary education (including high and
higher). Without the acquisition of knowledge there is no removal of the technological gap in BIH
in comparison with high income countries. Insufficient number of students in BIH, especially at
Faculty of Natural Sciences and Mathematics and Technical-Technological faculties, makes a
fragile basis for recruitment of research-development personnel. Research-development centres are
missing in the companies (in EU countries 60% of total number of researchers are employed at
centres of this type) so there are no preconditions for companies to be successful in product
development. Globally observed BiH is among countries with lowest innovation capacity (Nair,
2008). Due to little investment into R&D, production and dissemination of knowledge are low (see
Figure 2). Out of all comparators only Albania has the lowest knowledge production.
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Figure 2: Knowledge Production; BiH and comparators, 2013.
NB: bubble marks the county’s total patent activity
Source: own calculations based on Dutta and Lanvin (2013)
The number of patent resident applications reported to the BiH patent BiH authorities is lower
than any economic or regional comparators, and the simple average of all forms of country income
groups besides low-income countries. Globalising BiH is late because of poor physical
infrastructure (and promotion a closed society). As for the physical infrastructure, primarily it is
behind comparators countries on IC infrastructure (Domljan and Domljan, 2014). The world is
becoming physically and economically more remote for citizens and companies from BiH, as it is
more difficult, more expensive and longer to travel. While the time and economic distance in
Europe is decreasing, for example, for an hour or two you can go to end of Europe, and in BIH you
can hardly go from Sarajevo to Mostar by the road - and with rail and plane not at all.
Figure 3: Export and Import of ICT Goods; World, 2014
Source: own calculations based on WB (2017)
Total in the world today there are over 400 science parks, which already pass the third
generation of development. Of course, most of them in the United States (150) and Japan (111),
Albania
Austria
BiH
Bulgaria
Montenegro
Croatia
Greece
Maced.
Moldova
Portugal
Romania
Slovakia Slovenia
Serbia
Švicarska
0
200 400 600
Impact of articles
0 20 40 60 80
Citations of articles
BiH: Export 0.17%; Import 2.93%
0
10 20 30 40 50
0 10 20 30 40
Import of information goods (% of total import)
76
and China (100), which began to be developed in the mid 1980s, and there are dozens in Africa.
Thus, according to the International Trade Centre (ITC), e-commerce in Africa amounted to 8
billion US $ in 2013, and will amount to 50 billion US $ in 2018.
The question is no longer how to ensure internationalization of SMEs, because microenterprises
are born as global firms from the start. They use "plug and play" Internet infrastructure
platform and so with no problems can reach a global customer base and become exporters.
According to the World Bank (2010), there is a total of 125 million MSMEs, while Facebook
(2016) estimates that 50 million MSMEs use this platform, of which 30% are foreign MSMEs. BiH
must, as quickly as possible, work on the establishment of digital platforms for many reasons, and
one is overreaching, namely, the very small BiH's market.
II.3 Increasing Savings and Investment
One of the lessons from the experiences of countries that have strongly developed, and some of
them became world miracles, is that there was not high economic growth without high rates of
savings and investment. For example, China has saved each year more than a third of income for
more than a quarter century, but in recent years it saved about half of gross domestic product.
Figure 4: Saving and Investments; BiH and comparators, 2014 (in % GDP)
Source: own calculations based on IMF (2017)
BIH has a negative rate of domestic savings, spanning from -3 to -6 percent of GDP and the
low rate of overall national savings, which is about 9-13% of GDP. Global average of domestic
savings is about two tenths of GDP, while BiH is among the ten countries on the globe that save the
least. Only two European countries (Kosovo and Moldova) save less than BiH. On the other hand,
BiH invests around 15 percent of GDP in the period after the outbreak of the global recession,
which is significantly below the global average of nearly a quarter of GDP.
BIH has a higher rate of investment than the savings rate, which means that it is 'importing'
foreign savings and the inflow of foreign capital in the size of these differences. As much as import
is higher than export of goods and services, so are investments financed with 'imported' savings.
II.3.1 Introducing of deposit non-banking institutions
The main reason for the low savings rate, and consequently the rate of investment and growth rate
of GDP is the underdevelopment of the financial system of the country. There is no variety of
financial institutions and financial instruments capable of mobilising resources ranging from a few
BAM (micro institutions that accept deposits - in BiH it is prohibited by law) to several billion
BAM (through infrastructure bonds issuances). There is no law in BiH on mutual guarantee funds,
savings banks, savings and loan associations (there are in the Republic of Srpska), financial holding
companies, credit guarantee funds for over two decades.
Albania
Austria
B-H
Bulgaria
Croatia
Czech Republic
Greece
Hungary
Moldova
Montenegro
Serbia
Slovak Republic
Slovenia
Switzerland
10 15 20 25 30
Investment
10 15 20 25 30 35
Savings
77
World Bank research shows that reform of the financial markets provides a GDP growth of two
percentage points. Simply put, only reform of the financial system and attracting of diaspora funds
(which, to a large extent, can mean one stone hits two birds, but in BiH means one stone missing
two birds) can be glum rates of GDP growth of 1-2% per year (we do not know for sure what was
the growth rate in 2015) to minimal 5%.
The creators of economic policy in BiH did not develop the financial system indeed they
reduced it to five-six foreign commercial banks, whose aim is (quite legitimate, there is nothing to
complain about) making profit and not funding the development of BiH.
About 90% of the financial system of BIH is controlled by commercial banks, and the only
banks - with the exception of development banks that are nothing but a pocket bank of the ruling
elite. Of the remaining 10%, insurance companies control the half (due to mandatory car insurance)
and the remaining half of the leasing companies and microcredit organizations.
There is a complete dominance of foreign commercial banks in the financial system of BIH.
Worst of all - which did not exist even in the former communist countries of Eastern Europe, let
alone in the communist BiH - is what exists in the capitalist BiH: The law on banks prohibits nonbanking
financial institutions, because no institution other than a bank can collect deposits and
grant loans. There is no doubt that BiH and FBiH especially with the transposition of EU
legislation shall abolish this civilization's shame on the soil of Europe.
The Banking Act should regulate banks and abandon any mentioning of non-bank depository
institutions in the law (especially being regulated by banking agencies). Other deposit taking and
credit approving institutions should be regulated by other, respective laws, in which, on the other
hand, operation of banks should not be limited. It would be unreasonable, by using law on savings
banks or savings-credit cooperatives, to limit the work of commercial, investment, development
and other types of banks.
High real interest rate can be lowered only by creating competition in the financial market and
the inflows of funds from abroad. Extremely difficult task is to lower the interest rate, one of the
most difficult in economic policy. Since 1995, in the capitalist BIH we have not seen any measure
of economic policy makers aimed at lowering interest rates. What should the government do in this
regard? The correct way of pushing banks towards reducing interest rates is to reduce systemic risk
and increase competition in the financial market.
In developed economies the financial system relies on two legs - on mobilizing capital by
taking deposits (commercial banks, savings banks, etc.), and on mobilizing capital through the
capital market (investment banks, development banks, mutual funds, etc.). In BiH, the book is
reduced to an institutional letter, i.e. the commercial banks. No savings, no development banks
(what is called in BiH the Entity Development Bank has never engaged in mobilizing of resources
before waiting for the funds to be allocated to them in a way funds and agencies function.
Therefore, these so-called development banks cannot be called development banks because they
are not banking institution at all, neither collecting nor placing funds through market mechanisms
and instruments etc. How is it possible to have high saving rates in BiH?
The banking mediation in BIH was effective (and banks considered 'the best part of BIH
economy, which is quite wrong, as clearly shows the situation with the banking system in the
Republika Srpska) when the mother-bank were sending money to subsidiary banks, and they traded
with it. In the era of Great Recession mother banks do not send money (they are committed to the
Vienna Initiative that ask them not to withdraw) - which is not the worst. The problem is that these
subsidiary banks have hardly whom and what to credit, and are swimming in liquidity (with a share
of risky loans due to asymmetric information, an increasing number of good companies are
"engaged with the enemy" while bad companies do not have a similar problem) and business
sectors in insolvency.
The unfavourable general and business environment, particularly high fiscal and parafiscal
burdens, are forcing the private sector to emigrate (in underground or abroad) or (hopefully
temporarily) closing the firm. 'Corporate-cows', organically grown and with no support, are long
lasting and are poorly developed while the citizens-clients can still be found in some public
monopoly enterprises, but there the situation is more difficult, because the authorities succeed in
putting these monopolies into losses (as Elektroprivreda and Telecom companies clearly show).
78
Such companies, whose profits are spring of economic life of the economy, precisely of saving and
investment, are less and less generated.
Competition in the banking market must be sharpened with the introduction of non-bank
deposit taking financial institutions, such as savings banks. The threshold for the establishment of
commercial bank should be increased to BAM 20 million, while the establishment of savings banks
could be established with BAM 10 million. This would assist in the further consolidation of the
banking system, while the remaining banks could be transformed into savings banks.9
In Bosnia and Herzegovina, savings banks could be established in cities-regions, which would
serve the needs of citizens and MSMEs. They could acquire 20-30% of the credit market, as in the
case of the economic comparators, that is to say at least five billion BAM, thereby employing about
5,000 workers.10
According to available statistical data, it is possible today to have the savings and credit unions
in 109 countries on six continents. 11 Movement of credit cooperatives began with a simple idea:
individuals can improve their own and other people's living standards by putting their savings in
the common pile and lend it to neighbours and colleagues.
This year, on the World Day of the credit, the first credit union in (F)BiH, Spark 1 was formed.
It is called Spark 1 because it is expected that the Spark 1 will be joined by Spark 2, 3, and will be
possible to form a league of credit cooperatives, like the one developed by Desjardins in Canada.
We should recall that the credit unions in the country began to develop by the Austro-Hungarian
Empire in the early 20th century, when they had strong growth, which had weakened in the era of
the Kingdom of Yugoslavia and the Socialist Yugoslavia while in the capitalist BiH they were not
only extinguished but forbidden by law.
II.3.2 Development of government bonds' market
Foreign banks, no matter how good, are not able to mobilize large amounts of capital, while BiH
development banks are not interested in dealing with it. The securities market is not developed. The
number of potential issuers of attractive securities (shares, bonds, etc.) is small. None of the other
domestic players has an interest in the pump priming finance and the government remains as the
solution.
Firstly, infrastructure bonds with maturities of 5, 10, 15 and 20 years could be purchased by
BiH's citizens. Citizens now have nearly five billion BAM of savings in BiH banks. There are no
other possibilities, except to keep the money under 'the mattresses' as dead capital or abroad as
placement (or, at least some of them become business angels or loan sharks). The yield on
government bonds would have been safer and more profitable (higher yield of bonds than from
interests on bank savings). And it would be very liquid, because it could be traded on the bond
market. Objectively, calculations could be intertwined by inflation, but it is nowhere in sight, nor
will it be until the currency board functions as orthodox.
For instance it is clear that public pension funds in BiH could face a collapse unless deep
structural reforms are undertaken, since citizens need security in their old age. By purchasing bonds
a person can do more for his/her (healthy) child than to provide a good education, through the
purchase of bonds. And as the child gets to college and receives an education, bonds will come for
collection.
9 Savings Bank, a financial institution over 300 years old, is strongly developed in Europe, but not in BiH. Modern
societies adorn 3R retail, regional and responsible). They are involved in retail banking (payments, savings products and
loans and insurance for citizens and SMEs). Since commercial banks are distinguished by the fact that they focus on the
local and regional markets.
10According to the World Institute of Savings (World Savings Banks Institute, WSBI, operating since 1924, for its
members from 92 countries) shows that countries where there are savings to those with low income (Burkina Faso,
Guinea, Ivory Coast, Namibia, Uganda, Togo), the communist country (Cuba, China), transition countries (Bulgaria,
Croatia, Czech Republic, Hungary, Latvia, Poland, Romania, Slovakia, Ukraine, etc.), and those from the 'rich countries'
(Austria , France, Germany, Italy, Spain, Portugal, Japan, UK, USA, etc.).
11 It began 1844 in Rochdale, England and 1849 in Germany. Today it is possible to see them in 25 African countries, 21
Asian country, 19 Caribbean countries, 14 European countries, 15 Latin American countries, 2 North American countries
and 14 countries in Oceania. They can be seen from Burkina Faso and Uganda, through Myanmar, Albania and the
Netherlands to Canada and the United States. There are a total of 60,500 credit cooperatives, with assets of 1.8 trillion US
$, serving 223 million people.
79
Investing in bonds is not only a good and safe investment for citizens, both at home and
abroad, but also a good opportunity for domestic financial institutions (savings banks, which make
long-term placed assets in these bonds, insurance companies, public companies, private companies
and banks, etc., which would address issues of over/under current assets by selling and buying
bonds.
The infrastructure bonds would be bought, for example in the part of the 20% of issuance, by
banks, insurance companies, pension funds, mutual funds and citizens. Banks would hold the
respective bonds as a first-class, 100% secure placement, hence the provision of them was 0%.
Also, a regulation could be adopted according to which part of the foreign reserves at the Central
Bank in excess of the coverage of 110% could be held in these bonds. This way secondary bond
market could be developed. Banks and other institutions could release excess liquidity with
profitable, secure and liquid placement. This would contribute to the strengthening of the credit
system because the banks, savings banks and credit unions could accept these bonds as security for
loans.
II.3.3. Powerful mobilizing funds of diaspora
With the appropriate policies, BiH can make significant use of its diaspora community which
includes emigrants and their descendants - to support the economy. Mitra et al (2016b) found that
diaspora can help raise long-term economic growth, on average, by 0.6 percentage points GDP in
emerging and developing home countries, (Mitra, 2016a) while in emerging Europe diaspora can
contribute with 1.4 percentage points of GDP (Mitra et al, 2016a). In the post-global crisis BiH has
had GDP growth rate oscillating around 1-2 %. Accordingly, tapping into diaspora’s resources
could double the GDP growth rate, which BiH desperately needs.
Table 3:
GDP; BiH, 2014-2021 constant prices (in %)
2014 2015 2016 2017 2018 2019 2020 2021
GDP growth rate 3.2 3.0 3.2 3.7 3.9 4.0 4.0 3.2
Diaspora's potential
contribution to GDP
growth rate
1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4
Source: Mitra (2016) and own calculations
IMF research shows that central and eastern European countries can increase GDP growth by
1.4% percentage if they manage to attract diaspora funds. BiH could provide a higher GDP growth
rate than the average for Central and East European countries due to the abundance of its diaspora
and the size of sent remittance.
II.4 Cutting public expenditure by a third
BiH must implement fiscal consolidation, i.e. remove the fiscal disorder, fiscal deficits and reduce
public debt. Also, it must reduce all types of public expenditures and introduce R&D expenditure
and increase them (at once 1% over the next two years, to 2% over the next two years, and at 3%
and strive to maintain this rate until further notice).
In particular it is necessary to review public expenditure on social programs. A set of measures
is needed to support, starting with the introduction of ID cards (to determine who, how, how much
and from whom receives, as from BIH and outside of it, and put the whole social security system
under control), to political and a legal review of the basis for granting aid.
It is necessary to act on public revenues (diverting taxation and contributions from the labour
and exports to consumption, property and imports, i.e. to implement fiscal devaluation), especially
to expand fiscal space.
In the existing circumstances it should be necessary to pass a law that would a ban state
borrowing for current consumption. If despite of all loans are taken, this should at least prevent
money from going into non-productive expenditures. Thus, besides the debt offspring will have
infrastructure and skills.
80
Measuring the effectiveness and efficiency of the public sector (of public expenditure and
public companies) is very limited in BiH. It is necessary to start benchmarking the activities of
these institutions, i.e. to simulate operation of the market in non-market activities.
II.5 Reduction of non-observed economy and tax evasion
Last year Association of Employers of FBiH published a Grey Book, which is based on primary
research seeking to establish what drives the informal economy in the FBiH. According to
employers, the main driver is fiscal burden. It comprises 26.8% of the informal economy, followed
by tax morale (23.2%), regulation (labour and other regulations) (16.5%), the quality of state
institutions (14.2%), social support (6.1%), and political protection (7.9%).
In other countries, the order of drivers is almost identical: fiscal burden (35-38%), tax morale
(23.2%), regulation (7-9%), the quality of state institutions (10-12%), social support (5-7% ) and
political protection (0%, respectively in studies for other countries this driver is not recognized as
valid, while in FBiH it has some significance).
When it comes to taxes, it should be noted that in the case of the FBiH the issue is about
the size of social contributions and the procedures of paying taxes. A large number of
procedures and the number of payments require immense time and administrative work.
The tax morale is the driver as it was recently included in the survey of the grey economy.
People are aware that the market can produce private goods, but not the public, whose
production has to be funded by the country.
The country must treat the taxpayer as a contracting party. On the one hand is the government,
and on the other is taxpayer. If the government treats the taxpayer fairly, and if he/she sees that the
government produces public goods efficiently and equitably distributes them, he/she will duly pay
taxes. And it is tax morale that FBiH employers understand and appreciate as a driver of the gray
economy. The calculations show that in some countries the tax morale amounts for to 30% of the
gray economy. Reducing the tax by 1% increases the gray economy by 0.20%. Simply put, if the
taxpayer does not respect the government, he/she will "manage" in a variety of ways not to pay
taxes and at the same time will have no remorse, quite on the contrary.
If the grey economy accounts for a quarter of the income of the country and a quarter of the
work force, as in (F)BiH, it is clear that it cannot be eradicated overnight. BiH would have
achieved a great result if in the mid-term manages to reduce the grey economy by a fifth of that i.e.
force it from a quarter to a fifth of GDP.
Sequence of moves must be clear, starting from that which would cause the least social and
political tensions. Firstly, it is necessary to reduce the gray payment, then to reduce the gray
income and ultimately to reduce the gray employment. Few people understand that in BiH the
government creates the gray economy. Everyone knows there are a number of public institutions
and companies (mines, railways, hospitals, etc.) that do not pay contributions to workers. If taxes
and contributions are not paid, the public entity and its workers are automatically considered grey
employment, grey sector and the grey economy. Also, within a range of organizations, both public
and private, part of the salary is paid as a minimum wage, and it is a formal sector to that extent.
The part of the salary is paid in cash and to that extent it is a shadow economy.
Around 3.3 billion of cash is outside the Central Bank and banks. There is no doubt that at least
in part, cash payments are used in the grey economy. These flows should be stopped. It is necessary
to introduce electronic payment of social benefits, to determine the maximum amount that can be
paid in cash (which already exists in Bulgaria, the Czech Republic, Croatia, Slovenia, Slovakia,
etc.), necessary usage of POS terminals for certain types of sectors and types of companies (which
exist in South Korea ), a lottery for those who picked up the bills for which VAT is paid, tax
incentives for buyers and merchants who use electronic payment (e.g. the return of 0.02% VAT)
which will probably be hard for Indirect Taxation Authority, which alarmed the BiH VAT system
and does not want to implement (as seen in South Korea and Uruguay). According to EY if BiH
starts this way it could further increase tax revenues in the size of 4.2 % of GDP. This is BAM 1.2
billion, which is even more than the latest arrangement with the IMF.
81
Note on the statistical basis for the design of policies
Superficial views of Figure 5 show that there is something wrong with BiH statistics (the strong
money supply growth of 5-10% per year, accompanied by a price drop of about 1%). It would not
be surprising if there were strong income growth, which is not the case: it grew at a rate of 1-3%
per year.
Figure 5: Real GDP, Prices and Money Supply (in %); BiH, 2013-2015
Source: own calculation based on the CB BiH (2016)
One thing is certain: the statistical agencies are doing their job poorly. To what extent we can
only assume. It is possible that this is a bad calculation of the growth rate (i.e., the actual growth
rate is higher than statistically shown), a bad calculation of gross domestic product (there is a great
non-observed economy) or the simultaneously bad calculation of price and income which is likely
the case. If we accept that the statistical calculation of the price is correct, income growth would
have to be far greater than statistically shown (there is a theoretical possibility of changing the
speed of velocity of money, but the economic circumstances in the short period have not changed,
and it is difficult to work on the appearance of a strong slowdown of the velocity of money).
It should also be noted that the growth in money supply results from an increase in foreign
exchange reserves at the Central Bank, because it is a currency board arrangement. Purely
theoretically observed, an increase in foreign exchange reserves may come because the
country has a surplus in its relations with foreign countries. However since 1995, BiH has
a deficit in its relations with foreign countries.
Theoretically speaking, if the country has a trade deficit, the money supply of the country is
shrinking (because country needs to pay, and in the case of BiH almost double is the import vs. the
export of goods). This should lead to rising interest rates and attract foreign capital (in BiH happens
that interest rates are high, and that despite this there is no inflow of foreign capital, nor any action
of this mechanism to establish equilibrium.
Furthermore, high interest rates should cause deflationary pressure which should lead to the
decrease of imports and improve the balance of payments. Reducing the pressure of buying funds
on the selling funds would lead to reduced prices and the depreciation of the real exchange rate,
which should lead to the growth of exports and reducing imports. All this should lead to increase of
production to the level of full employment and increase of exports. Finally, the current account
deficit should be eliminated and the economy will achieve an internal and external equilibrium.
Some of this is only happening in BIH in practice. Enormous unemployment and inactivity of
the work force means that there is no establishment of internal equilibrium, economic growth rates
are low and the current account deficits are high. No one knows how big the deficit of the public
sector is since there is no consolidated balance sheet. There is no doubt that it is vast, because the
moral hazard is equal to the communist times (as seen by the vast and uncovered losses of public
companies). However, the price level is stable (at least no statistically expressed rise in prices) and
that is BiH’ result from the currency board.
According to the currency board system, foreign exchange reserves need to grow with foreign
trade surpluses and with deficits to fall, leading to price changes and interest rates' changes.
-2,0
0,0
2,0
4,0
6,0
8,0
10,0
2013 2014 2015
GDP
Prices
M2
82
However, in BiH it occurs that foreign exchange reserves are growing along with the deficits in the
current account. Now the question could be raised whether the balance of payment given by the
Central Bank of BiH is correct. It is obvious that it is not, and the reason is simple: the official
balance of payments greatly underestimates the foreign currency inflow. Primary and secondary
incomes are much higher than it is officially stated. The export of goods and services is higher than
what is officially presented (the non-observed economy is high) and personal remittances are
higher than officially reported.
It has already been shown that, due to personal remittances, negative rate of domestic savings
turns into a positive overall (national) savings rate. Now it can be said that this savings, local and
national, should be increased, especially when connected with the investment, which greatly
exceed the savings and there is no abundant inflow of funds from abroad.
In this work, we cannot go into the discussion about these issues, but we indicate them, because
they are of great importance for the evaluation and design of economic policies.
Conclusion
To solve the problems the BiH economy is facing fundamental reforms, which require wide
participation of citizens, are necessary. Reforms will have its losers (privatizers of social
ownership, public sector employees, recipients of public support) and winners (exporters, the
unemployed etc).
The reforms are not implemented because political rulers are not changing the existing
institutional arrangements with a consensus (i.e. do not build unity without imposing). Therefore
they rely on 'institutional doubt', (i.e. the right of veto when they are a minority and thus block the
organized (institutional) inducing of institutional arrangements. Ruling parties act in the interest of
the parts of the ethnic groups, and not the interests of the broader social classes. They deal with
issues of distribution, not production. The period from 1995 to 2017 is the period of defective
economic policies.
Effective policy, one that is able to mobilize the factors of production, must be based on the
creation of enterprises. Only it can solve the "curse of unemployment" (Keynes). Development is
associated with high rates of appearance and disappearance of enterprises, (i.e. with high rates of
turbulence, and with it related reallocation of resources from unprofitable to profitable activities
and companies).
The Dayton peace agreement does not inconvenience the regional authorities to develop an
entrepreneurial economy. For the development of traditionally managed economy the key level of
national economy and modern economic management is crucial to regional development,
especially in BiH where (volens-nolens), central institutions and central instruments are nonexistent
or are ineffective.
BiH will only be on the path of becoming a high income country when it activates chain of
knowledge production: the production of ideas - conducting research (testing ideas) - increase in
knowledge stock - the commercialization of knowledge (i.e. innovation) - increase of productivity
– increase of competitiveness – export increase of higher added value - raising of the standard of
living.
BIH needs to radically cut parts of public expenditures other than those in the R&D and
productive physical infrastructure. It must introduce an aggressive innovation policy because it
ensures the production of products with high technological content. Currently, their share in total
exports of BiH industrial products BiH is 2% or US $ 21 per capita. From European and transition
countries only Albania has worst result (though for 10 of them there is no indication).
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