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Washington Economic Agreement and its Implementation in Bosnia and Herzegovina (B&H)

TitleWashington Economic Agreement and its Implementation in Bosnia and Herzegovina (B&H)
Publication TypeConference Proceedings
Year of Publication2015
AuthorsDapo, E, Ridic, O
Conference NameInternational Research Congress on Social Sciences
Date Published05/2015
Place PublishedInternational University of Sarajevo, Sarajevo, B&H.
Abstract

The Washington Consensus approach regarding the economic, political and legal development was proposed by the International Monetary Fund (IMF) and the World Bank (WB) to Bosnia and Herzegovina (B&H) in the period of post-war reconstruction and transitional economic transformation. The Washington Consensus is package of ten macroeconomic and structural policies and their implementation was crucial in order to make proper qualitative changes in the economy and move towards market-determined methods of allocating resources, making production decisions and distributing output. In this paper we will explain and evaluate implementation of these policies over time. This paper will also make comparisons with other transitional countries in the region in order to draw the lessons and make recommendations for future development of B&H.  It can be concluded that B&H has been stagnating in its economic development and that B&H government must improve legal and economic environment by undertaking thorough and necessary reforms.

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Full Text

Title: Washington Economic Agreement and its Implementation in Bosnia and Herzegovina (B&H)

 

Authors:

 

1Assist. Prof. Dr. Edita Dapo – International University Sarajevo (IUS),

Faculty of Business Administration (FBA), Department of Economics

 

2Assist. Prof. Dr. Ognjen Ridic, – International University Sarajevo (IUS),

Faculty of Business Administration (FBA), Department of Management

 

 

Abstract

The Washington Consensus approach regarding the economic, political and legal development was proposed by the International Monetary Fund (IMF) and the World Bank (WB) to Bosnia and Herzegovina (B&H) in the period of post-war reconstruction and transitional economic transformation. The Washington Consensus is package of ten macroeconomic and structural policies and their implementation was crucial in order to make proper qualitative changes in the economy and move towards market-determined methods of allocating resources, making production decisions and distributing output. In this paper we will explain and evaluate implementation of these policies over time. This paper will also make comparisons with other transitional countries in the region in order to draw the lessons and make recommendations for future development of B&H.  It can be concluded that B&H has been stagnating in its economic development and that B&H government must improve legal and economic environment by undertaking thorough and necessary reforms.

 

Key words: Washington agreement, macroeconomic policies, structural policies, economic environment.

 

1. Introduction

Transition process in Bosnia and Herzegovina started in 1989, but was interrupted by aggression from 1992-1995. The process of the transformation restarted in 1996, immediately after the Dayton Peace Accord was signed. At that time, Bosnia and Herzegovina’s government needed to undertake all measures to recover country from the war damages, as well as to manage transition to the market economy.

Two external factors played crucial rule in the post-war development of Bosnia and Herzegovina. The first is the Dayton Peace Accord. The Accord was signed in December 1995 and ended military hostilities on the territory of Bosnia and Herzegovina and defined the country’s external borders. The Accord outlines the Constitution of the state. There has been established two entities, one is the Federation of Bosnia and Herzegovina and the other is Republika Srpska. The Dayton Peace Accord placed banking and customs regulations at the central state level, while fiscal policy was transferred to the entities. Later, after 2002 B&H government established new institutions at the state level and started collecting indirect taxes on state level, i.e. tariffs, value added taxes, excises etc.     

The other external factor that was important for development of B&H is the “Washington consensus” which provides basic advices and recommendations for transformation of the system in the transitional countries.

In this paper, we will first explain “Washington Consensus” policies and review previous literature on this subject. Section 2 discusses their applicability and evaluates these policies in the case of Bosnia and Herzegovina. Section 4 concludes.

 

2. “Washington Consensus”, previous literature

In this section, we will describe and explain the Washington Consensus approach of the development and give previous literature on this subject. The Washington Consensus is considered as a neoclassical approach, which states that the most effective way of guaranteeing the effective allocation of resources is to leave such allocation to free competition. IMF and WB were advising the countries in process of transition to implement the package of policies in order to make qualitative changes in the economy and move towards market-determined methods of allocating resources, making production decisions and distributing output.

In the 1990s, the “Washington Consensus” became a synonym for “neo-liberalism” or “market-fundamentalism”, regardless of the meaning with which the term was initially used by Williamson (Williamson, 1999). The Washington Consensus is divided into two sets of policies: macroeconomic and structural policies. Macroeconomic policies are: exchange rates (stable exchange rate to ensure export competitiveness), fiscal discipline (budget deficit should be small enough, implying a primary surplus of several percentage of GDP) and fiscal liberalisation (eliminating preferential interest rates for privileged borrowers, achieve a positive real interest rate, with the ultimate objective of the market-determined rates).  Structural policies of the Washington Consensus are: privatization (privatization of state enterprises), deregulation (abolishment of regulation that impede entry of new firms or restrict competition), trade liberalization (replace quantitative restriction with tariffs, which should be progressively reduced), foreign direct investment (remove discrimination by abolishing barriers on entry of foreign firms, with domestic and foreign firms allowed to compete on equal terms), tax reform (broaden the tax base and improve tax administration), property rights (establishing the legal system that secure property rights throughout the economy without excessive costs), and public expenditures priorities (redirection of expenditures from areas with low economic return for example administration, defense, indiscriminate subsidies to areas with high economic return and the potential to improve income distribution i.e., redistribution of public funds in favor of the education and health sectors).   

The “Washington Consensus” has had a huge influence on the economic policies of transition economies in the last decade. The “Washington Consensus” accelerated globalization which is not always favorable for developing countries (Stiglitz 2002). Stiglitz was arguing that Washington Consensus policies were based on neoclassical assumptions of the naturalness, spontaneity and efficiency of the markets. It suggested that role of the government should be restricted to enhancing systems of laws, enforcing contracts and providing stable currency. However, it ignores the theory of market failure as rationale for government intervention. Japanese economists were also opposing the Washington Consensus approach stating that development countries needed some kind of support in order to overcome their structural weaknesses. The purpose of the structural adjustment is to place the nations on the path towards sustainable development. Structural adjustment is important and should be regarded as a means to adjust long-term goals (Kohama 2003, Stiglitz 2002, Kapur 1998), but in order to achieve that government should take a active role in development.

Yanagihara (1998) called “Washington Consensus” a “framework approach” arguing and criticising it because it is based on the idea that economies do not function efficiently when there are distortions introduced by government. This approach calls for liberalization of the economy as soon as possible and pays no attention to the question of which industries will grow or which industries should be developed. Japanese post-war experience proved that Japanese so called “ingredient approach” was successful because it first sets the goals and then promotes certain sectors.

Ohno (1998) also criticised this neoclassical approach. In his opinion, the neoclassical approach does not define proper priorities and the implementation is not appropriate in time scope and speed of transformation. He does not support that governments can solve all problems simultaneously.

Kohama (2003) states that Washington consensus is a naïve and unrealistic approach, because as such hinders developing nations from initiating their own self-reliant efforts. He underlines that the driving force behind economic development is the willingness of a government and people to help themselves. He points out that the people’s confidence in government and governments’ clear vision of the economic future is crucial for development.

 

3. Evaluation of Washington Consensus Policies in B&H

 

Foreign Direct Investment

The Washington Consensus approach to the development is based on the assumption that introducing the market mechanism and eliminating restrictions on the private sector and trade will produce an improved investment climate, stimulate competitiveness and economic activities. The measures aimed directly at the promoting investment are important for some limited period of time. To date, the experiences of foreign investors have not been very positive in Bosnia and Herzegovina. In most instances, they emerge in marketing goods produced outside of Bosnia and Herzegovina. Those engaged in manufacturing have largely failed, many of them close and left. To attract foreign direct investment, host country has to have good condition for profitable business. BiH seems as very unstable country with high uncertainty. If perceived uncertainty and instability are present, that will increase risk of investment and investors will go to less risky countries. Beside this, BiH is usually associated with corruption. Bosnia and Herzegovina still has very complex legal and regulatory framework, a heavy public administrative system, very complex procedure to register new business and weak judicial structure. Laws and regulations at the state, entities, cantonal and municipality level are often contradictory or duplicative (Ilgun, 2009). Many aspects of the regulatory quality reforms have stagnated over a number of years, making B&H among the least competitive economies in the South East European region. To enhance the prospects of the country as a destination for foreign investment government established the Foreign Investment Promotion Agency (FIPA) and adopted various incentives for foreign investors. However, the inflow of FDI into Bosnia and Herzegovina was quite low, several percentage of GDP.

Foreign investors were rare in the past, but now their number and amount of FDI inflows is rising (Figure XX.). Many multinational companies are investing in BiH, mainly in services sector.

 

Figure XX

 

 

 

Perhaps in the countries with strong investment demand this is possible, but in the post-war country improvement of the investment climate through deregulation is not sufficient to attract a huge amount of investment immediately.