| Source: http://www.worldbank.org/html/extdr/kosovo/kosovo-pb2.htm Accessed 15 July 1999
LESSONS FOR REBUILDING SOUTHEAST EUROPE, THE BOSNIA AND HERZEGOVINA EXPERIENCE Just over three years after the end of the war, Bosnia and Herzegovina has made significant strides in solidifying peace and bringing about greater prosperity for its citizens. The country has successfully capitalized on the large flows of donor assistance to rebuild its economy and jump-start growth. By end-1998, donor funds totaling US$4.2 billion had been firmly committed, and US$2.8 billion had been disbursed in support of the Priority Reconstruction Program (PRP) and related peace implementation activities. This donor support, combined with the commitment of the people and authorities of Bosnia and Herzegovina, has brought important achievements in each of the areas targeted by the program.
To complete the PRP, external financing requirements in 1999 will a total of US$1 billion. Priorities include community and social services in support of refugee return (housing, water and wastes, heating, health, education, and landmine hazard management); completion of network infrastructure reconstruction; targeted economic restart initiatives (such as credit lines to small and medium sized enterprises, credit and inputs for agriculture and employment generation programs); provision of fiscal support for recurrent expenditures, including social assistance; and deepening institutional and policy reforms in support of private sector development and social sustainability in order to prepare all sectors to be effective players in a robust market economy. However, it is also clear that while much of the job of reconstruction has been completed, there are important remaining reconstruction needs from the legacy of war that need to be addressed, and that are likely to complicate and perhaps slow Bosnia and Herzegovina’s transition. Notable among these are housing, community services in return areas, demining and continued interim support of social assistance and economic restart programs. Continued stabilization and reform will be essential in the coming years to ensure sustainable recovery and growth. Provided these measures are taken, Bosnia and Herzegovina’s GDP could recover to about two thirds if its pre-war level by early in the next decade, but the country will need continued partnership with donors to reach its objective. Given the continued remaining reconstruction and other development financing needs, concessional donor assistance will remain important in the medium term. The 1992-1995 war had a devastating impact on the economy and people of Bosnia and Herzegovina. Before the war, a diversified industrial base was responsible for half of GDP and nearly half of non-agricultural employment. By the end of 1995, output had fallen to just 10-30 percent of the prewar level. GDP had collapsed to less than US$500 per capita, about 20 percent of its prewar level. Destruction of physical capital - buildings, equipment, transport, communications, and power networks - caused much of the contraction. But the war also disrupted trade channels, halted nascent economic reforms, and left pervasive rifts in government, institutions, and laws. And it radically altered the social fabric of Bosnia and Herzegovina: half the country’s prewar population of 4.5 million was displaced from their homes, either abroad as refugees, or internally. A quarter of a million people - mainly men - lost their lives, and the number of orphans and of female headed households increased dramatically. Most of the country’s 1.3 million workers lost their jobs, many lost savings with the freezing of bank assets, and more than half had houses damaged. Much of Bosnia and Herzegovina’s agricultural land - which provided full or part time employment to many before the war - was mined or left fallow for lack of supplies and equipment, and more than 80 percent of the population received some form of food aid. Young people throughout Bosnia and Herzegovina lost years of schooling and much of the population suffered physical disabilities and psychological trauma. While Bosnia and Herzegovina was at war during the first half of the 1990s, however, much of the rests of Central and Eastern Europe region had embarked on the reforms needed to shift from socialist, planned to market-driven economies. Thus, as Bosnia and Herzegovina emerged from war in early 1996, its authorities and people confronted three daunting and parallel challenges:
Priority Reconstruction Program Following the signing of the Dayton-Paris Peace Agreement that ended the war in December 1995, a "Three- to Four Year Priority Reconstruction and Recovery Program" was endorsed by international donors as a means of rebuilding the country and cementing peace. Setting out an external financing requirement of $5.1 billion 1, the program was designed to reconstruct war damaged physical assets, jump start economic recovery, attract home the millions of refugees and displaced, and build a framework for sustainable growth.2 It was clear that donors could not rebuild Bosnia and Herzegovina as it was before the war - nor was this desirable, given the outdated and uneconomic structure of much of the economy. The program set a target of recovery of two-thirds of prewar GDP by the end of the decade. Three years into the program implementation, Bosnia and Herzegovina has achieved substantial results in terms of reconstruction and recovery. Annual economic growth has averaged about 40 percent in real terms since 1995, and GDP reached US$4.1 billion in 1998, equivalent to roughly 40 percent of its pre-war level. During the same period, GDP per capita has risen to US$965. But even with very high growth rates - on an extremely low postwar base - Bosnia and Herzegovina remains the second poorest country in the region on a per capita basis. Moreover, growth remains largely driven by the reconstruction, and an important agenda of policy reforms remains to achieve private sector growth and reach sustainable recovery. Although reconstruction has been largely successful, achievement of the growth target of the program is likely to be slightly delayed. First, more reliable national accounts data for the entire country suggest a slightly lower postwar starting base for GDP. Second, policy reforms aimed at encouraging private investment have been implemented more slowly than hoped. Finally, the Kosovo crisis has dampened growth prospects somewhat for the entire region. With sound policy measures and continued donor support, however, it is forecast that GDP recover to the two-thirds target by early in the next decade. The year 1999 represents a critical transition for Bosnia and Herzegovina’s reconstruction effort. As the last year of the formal $5.1 billion Priority Reconstruction Program, it is an opportune time to assess the successes and failures of reconstruction on the basis of the three full years of implementation. But 1999 is also the beginning of a crucial phase of postwar evolution during which the reconstruction of economic and social infrastructure and the institution building and reforms needed for a market economy will need to be consolidated. It will be essential for the economy to generate a growth momentum that can be sustained in the face of the inevitable future decline in external concessional assistance. With still-high unemployment and disproportionate numbers of the elderly, disabled, and orphaned, many individuals and households remain vulnerable to poverty. Thus, the benefits of economic growth also need to be expanded to allow for more broad based increases in living standards and an affordable and equitable safety net designed to protect the truly needy. Moreover, certain aspects of the prevailing conditions in Bosnia and Herzegovina will likely make for an unusually difficult transition - such as the large number of refugees and other displaced persons, demobilized soldiers, young adults with incomplete education, the political and social constraints to labor mobility, and issues related to security and the rule of law. Donor support, combined with the commitment of the people and authorities of Bosnia and Herzegovina, has brought important achievements in each of the three broad areas targeted by the Priority Reconstruction Program: Reconstruction of physical assets; restart of economic activity; and institution building and policy reform. RECONSTRUCTION OF PHYSICAL ASSETS With firm commitments of US$2.4 billion and disbursements of US$1.5 billion (about 54 percent of the overall program disbursements, the Program’s physical reconstruction objectives are well on their way to being met. As a result, 1999 is expected to be the last year in which extraordinary levels of concessional donor assistance will be required for postwar reconstruction in many sectors. Accomplishments include:
Still, important challenges remain to complete the reconstruction and recovery agenda. Many of these will require support in 1999 and in the years beyond:
Network Infrastructure Transport The prewar transport sector, designed around the needs of heavy industry suffered large-scale war damage. The well-developed road and bridge network and railway system were oriented to transporting production output of metallurgy and other industries to neighboring republics and abroad. Urban transport services were not well developed. During the war more than 2000 km of the main road network were destroyed, all railways lines were rendered inoperable, and the Sarajevo Airport was closed. Compounding direct damage, little maintenance was done during the war. The PRP set out quickly to resolve major transport bottlenecks by repairing the most essential road corridors and bridges, reopening Sarajevo Airport, restarting rail and urban transport, and reestablishing maintenance activities. However, the quality of the transport network remains inadequate - cracked pavement, uneven roads, temporary military bridges, and deficient installations for signaling and safety. Railway traffic remains low because the parties involved are unable to agree on the implementation of an inter-Entity agreement. An adequate and sustainable funding mechanism for road maintenance is a key near term issue. Building capacity and reorienting the sector are needed to meet the demand driven needs of a service-oriented economy. There are several primary objectives for the transport sector in 1999 and beyond: ensure that there is an understanding on cooperation and operational arrangements for inter-Entity railway traffic; for civil aviation, the existing inter-Entity agreements must be implemented; the Federal government must be encouraged to organize an effective road administration, and both Entities must allocate adequate funding to road maintenance activities. On the physical side, the objectives are to complete the ongoing rehabilitation of the main road and railways networks and civil aviation infrastructure, and to provide further support to the urban transport sector. Electric Power and Coal Bosnia and Herzegovna’s energy sector played a key role in the prewar economy, producing eight percent of the GDP. The sector was oriented to meeting the demands of energy-intensive heavy industry located primarily in what now is the Federation. Domestic coal production employed 26,000 workers, but coal was of poor quality and produced uneconomically. By war’s end, direct damage and inadequate maintenance had reduced electric power generation to less than half the prewar level, and coal production had plummeted. Form one state-owned enterprise, three companies had emerged - based in Sarajevo, Mostar, and Banja Luka - complicating the efficient sharing of the power supply. The PRP aimed to restore electric power generation, transmission, and distribution to a level acceptable for normal economic activity at the lowest cost. Additional goals were to improve power exchange, strengthen company finances, and begin to restructure the sector towards competition and efficiency. An investment program was prepared by donors in conjunction with the three power companies. At end-1998, 17 donors had firmly committed US$513 million to this investment program, and US$288 million had been disbursed. Power sales to distribution companies reached 87 percent of the prewar level in 1998 with these investments. But many areas are still not reconnected to the network, and critical sector policy and institutional issues remain. With funding and complete implementation of the 1999 program the power system will be able to fully meet forecast demand for the medium term. However, even after the 1999 program there will be a continuing need for rehabilitation of the distribution network, especially in areas that were heavily damaged or have temporary of unsafe connections and areas to which refugees are the displaced are returning. Studies on power tariffs and coal restructuring remain to be completed and action plans for their implementation agreed. Further, establishing a regulatory framework that encourages efficiency and private provision is a medium-term challenge. Work on a new electricity law that will guide restructuring will also need to be finalized. Telecommunications Bosnia and Herzegovina’s well-developed prewar telecommunications system suffered severe direct war damage. Before the war, Bosnia and Herzegovina had about 15.3 lines per 100 people, which compared favorably with the other republics. The war damaged switching and transmission equipment, reducing the installed phone lines by more than 30 percent and international lines by 90 percent. The telecommunications company (which also handled postal service) was split into three de facto separate and largely disconnected networks based in Sarajevo, Mostar, and Banja Luka. The objective of the PRP was to restore disrupted service as close to prewar levels as feasible, specifically to modernize the backbone transmission infrastructure and restore international and inter-Entity communication links. And to ensure speedy return service the Program aimed for a quick rollout of mobile cellular service. Since 1996, 11 donors have firmly committed US$78 million and disbursed US$26 million. In addition, an estimated US$100 million has been contributed by company own-resources and by the telecom operators of neighboring countries. Service restoration to prewar levels is now largely complete as a result, though the sector requires further development to assume its important potential role in the country’s future growth. Telecommunications will need to play a major role in achieving broader economic and development goals. In Bosnia and Herzegovina, this means articulating the future goals of the telecommunications sector and involves a process of clarifying the objectives, identifying concerns, and preparing detailed options on future sector structures and regulatory arrangements going forward. Community Services Housing An estimated 30 percent of Bosnia and Herzegovina’s largely privately owned housing stock was damaged or destroyed during the war. In the Federation, 33 percent of the housing stock was damaged and 6 percent destroyed; in Republika Srpska, 29 percent of the stock was damaged and 5 percent was destroyed. This was exacerbated by the collateral damage from weather, lack of maintenance, and the deterioration of connections to network and local infrastructure. Population shifts have continued to occur in the postwar period as some internally displaced and refugees return home, creating a need for additional shelter for the newly displaced. Conflicting property claims have also arisen as a result of war and population dislocations, complicating reconstruction. The PRP aimed to create conditions to both facilitate return and to rapidly expand the usable housing stock for the entire population. As the program evolved, efforts were make to supplement donor grant funds with household savings as well as donor-funded loans from local banks. As of end 1998, 34 donors had firmly committed US$667 million and disbursed US$503 million. Further, a significant and growing number of additional housing units have been repaired through private initiative. Almost 100,000 private houses and public apartment units have received repair assistance; and employment and business activity has been generated. However, many of the most badly damaged houses remain. To ensure recovery of the housing sector and adjustment top medium-term demand, national governments must take the lead in establishing a policy and regulatory framework that encourages private investment and development of the housing market. District Heating and Natural Gas Before the war, much of Bosnia and Herzegovina’s urban population depended on district heating often fueled by natural gas; these installations were badly damaged by lack of maintenance. While there was some direct shelling, most damage came from the corrosion and cracking of boilers, pipes and building installations during years of disuse. By early 1996, functioning district heating connections had dropped by two –thirds. At the same time, natural gas connections had increased sixfold, including a large number of dangerous self-made connections. The Priority Reconstruction Program aimed to restore heat to urban customers and to rapidly regularize dangerous gas connections-namely in Sarajevo. Medium term objectives included rehabilitation of other urban district heating systems, securing an assured supply of gas, and improving cost recovery in both subsectors. Sector investment programs were developed by donors and the sector authorities. As of end-1998, eight donors had firmly committed US$99 million and disbursed US$75 million. Heat and gas have since been restored in Sarajevo and dangerous illegal connections have been regularized with these investments, but heat to other cities is not yet restored. More than 90 percent of flats in Sarajevo have been reconnected to the district heating system and substantial improvements in cost recovery have been made with the installation of new billing and collections systems. In addition, the repair of the Sarajevo natural gas network is complete. However, the district heating networks remain to be repaired in Banja Luka and 36 other smaller towns and cities. As Bosnia and Herzegovina urbanizes, district heating and natural gas will likely become increasingly important. Water and Waste Management Municipal water supply and sewerage networks, which served 75 percent of the urban population before the war, were damaged by neglect. By 1996, half of the population no longer had 24 hour water supply and clogged sewer and drainage systems left areas flooded for extensive periods. Countrywide water leakage losses reached 50 percent. The quality of solid waste services were also severely impaired, with collection equipment sustaining extensive damage and access to landfills limited by landmines. The PRP aimed to urgently restore water services and begin to upgrade sewerage and solid waste services as well as to strengthen institutionally and financially local sector agencies over the medium term. A sector investment program was developed by donors in conjunction with the Entity water authorities. As of end 1998, 18 donors had committed US$213 million and disbursed US$120 million, directly or through NGOs. Investments were also made by the local community own resources. Bosnia and Herzegovina’s average urban water supply coverage has, by now, reached nearly its prewar level with these investments though quality of service varies dramatically by region and coverage is much lower in Republika Srpska. Moreover, sewerage and waste collection services remain very poor. Landmine Hazard Management During the war, some half a million mines were laid in over 17,000 minefields, largely around the lines of confrontation. Mine pollution in Bosnia and Herzegovina is a significant obstacle in the establishment of normal development activities. In addition to the direct consequences of mine accidents, mine pollution has far-reaching indirect effects, such as changes in patterns of social interaction and modes of subsistence. Moreover, landmine hazard is a factor affecting decisions on return and the pace of reconciliation, generally as part of the overall security environment. The PRP aimed initially at mine clearance needed for access to or operation of priority reconstruction facilities and return objectives. A further goal was to establish domestic institutions and funding mechanisms to ensure a sustainable domestic landmine hazard management capacity. Demining components were built into several large infrastructure programs, and a dedicated mine clearing program was established. Over time, as experience in humanitarian demining developed, priorities shifted to making land available for use by clearing identified minefields and systematically surveying priority areas to reduce uncertainty, and to preventing land mine related accidents through mine awareness campaigns. As of end 1998, 9 donors had committed US$78 million and disbursed US$43 million. Some 6 million square meters have been cleared and institutional progress has been made, but landmine hazard management will remain a long-term challenge. The total area cleared only represents 5 percent of the estimated mine contamination, leaving a significant challenge for local authorities and the citizens of Bosnia and Herzegovina. Social Services Education Bosnia and Herzegovina’s well-developed prewar education system was severely affected by damage to schools and disruption of services. As elsewhere in the region, Bosnia and Herzegovina had high literacy and school completion rates. Secondary education focused on specialized vocational programs oriented to the needs of predominant industries. During the war, about 60 percent of school buildings were damaged or requisitioned for military use, the teaching force was devastated, and formal educational funding ceased to exist. Despite the difficulties, the extraordinary efforts of parents, governments, and relief agencies ensured that most children continued their education throughout the war, though in a very disrupted form. The PRP aimed to rebuild primary education facilities while providing near term support for teachers salaries, school maintenance, and educational tools. Over the medium term, it aimed to begin reorientation needed to enable the education system to provide services that will meet the needs of an emerging modern market economy. As of end 1998, 25 donors had firmly committed US$192 million and disbursed US$144 million. Most primary facilities have been rebuilt and teaching and learning at all levels is being carried out at minimally acceptable standards. However, policy reforms related to governance and financing have not been adequately addressed. And essential physical reconstruction requirements have come at the expense of needed education reforms for the system to play its role in economic transition. The focus must now shift to qualitative improvements, and to sustainability and cost recovery in the areas of curriculum, teaching methodologies, textbooks, and education materials. Efforts 1999 and beyond should also begin to accelerate policy reform and capacity building, including developing curricular material, training teachers and initiating reforms to improve education governance and finance. Health Before the war, Bosnia and Herzegovina had a substantial network of health facilities, dominated by large hospitals and specialized clinics that were financed largely through payroll taxes and revenues. Health service indicators were higher than for most countries at similar income levels, however, little attention was paid to primary care or family practice. War brought damage to Bosnia and Herzegovina’s large network of health care facilities but also directly to the population. The war and its aftermath left hundreds of thousands of people with physical injuries and disabilities as well as psychological disorders such as post traumatic stress disease. About 35-50 percent of health care facilities were damaged or destroyed. Moreover, health care financing collapsed, due to the fall in wages and general revenues. The PRP aimed to establish immediate programs to provide for the needs of war victims, rebuild health care infrastructure, with a more appropriate balance between first line primary care and the institutional hospital subsector, and provide recurrent funding for urgently needed drugs and salaries. Reforming health care finance and reorienting the sector to respond to the requirements of a market economy were medium term priorities. At end 1998, 15 donors had firmly committed US$221 million and disbursed US$136 million. The reconstruction of hospitals and establishment of rehabilitation centers for war victims has advanced and drugs and supplies have been provided, but the task is not yet complete, and policy issues remain. Reconstruction needs remain to ensure a fully functioning health care system capable of providing adequate care and addressing post conflict medical needs. Health care financing is not sustainable and efforts are underway in both Entities to develop adequate mechanisms for revenue generation. RESTARTING ECONOMIC ACTIVITY Bosnia and Herzegovina’s annual growth rate averaged about 40 percent over the past three years - although on a still-low postwar base. Unemployment was halved from its high of 70 to 80 percent and is now approaching its prewar level. Enterprise activity and private investment have begun. Thus the narrowly defined objective of restarting economic gains can be attributed to investments in reconstruction that translated into contracts for local firms for works, supplies, and consulting services, much of the impact has been generated by the US$740 million in firm commitments and US$552 million in disbursements, or about 20 percent of PRP disbursements, in support of short term targeted programs:
However, despite rapid growth Bosnia and Herzegovina remains the second poorest country in Central and Eastern Europe region on a per capita income basis. Moreover, economic recovery and growth are not yet sustainable. Achieving sustainable economic activity and private sector led growth is a long term challenge that will require decisive transition reforms in 1999 and beyond. Industry and Finance Employment The devastation caused by the war brought employment to a virtual standstill. Economic decline in the 1980s had meant that before the war, Bosnia and Herzegovina - like other former Yugoslav republics - had a relatively high unemployment rate. About half of its 1.3 million workers had jobs in the industrial sector, and about 20 percent in agriculture. The war brought economic contraction and loss of most of these jobs, with the exception of temporary employment in agriculture and in the informal economy. Official postwar unemployment reached around 70-80 percent. The PRP aimed to set up programs for short term employment creation, as well as others that could form the basis of longer term employment programs. While it was recognized that the reconstruction program would itself generate employment in the near term, targeted temporary public works programs and longer term schemes for micro and small enterprise credit, retraining and employment services were also important to creating jobs in the immediate postwar period. In parallel, labor market reforms were needed to begin the increase the flexibility of labor to respond to market signals. As of end 1998, 12 donors had firmly committed US$146 million and disbursed US$116 million for emergency programs designed to create jobs. Unemployment has fallen to an estimated 35 percent - about half of the postwar level.3 However, this gain had been largely achieved by the end of 1997 and little further progress was made in 1998. Despite a dramatic decline, the rate of unemployment remains painfully high and appears to have stagnated over the last year. Some of the apparent stagnation may be due to delays in implementing the privatization program. Employment remains the primary concern for most Bosnians and individuals see employment as key to rebuilding their lives as well as rebuilding the country’s economy. Transition and labor market reforms are among the highest priorities in 1999 and the medium term. Agriculture Agriculture, which provided full- or part-time employment to many before the war, was devastated by the conflict. The war brought 50-70 percent decreases in production and, as a result, nearly 80 percent of the population depended on imported food aid by end 1995. This situation was compounded by the effect of large population movements: experienced farmers migrated to urban areas, while many previously urban dwellers with little farming experience moved to rural areas. The PRP targeted the near term need to restart domestic agriculture production, create rural jobs, and increase the competitiveness of domestic production, as well as restart high-value forestry development. In the medium term, it aimed to begin to address longer-term policy issues. As of end 1998, 12 donors had firmly committed US$191 million and disbursed US$101 million. Planted agricultural areas, crop yields, and food production for the major food crops have returned close to prewar levels as a result of these investments. But agriculture remains underutilized. While policy reforms have been initiated, major issues remain. To date, little progress has been made addressing deep seated institutional and structural constraints facing agriculture and forestry, for example, progress in terms of addressing agriculture issues cutting across the boundaries of the two Entities has been very modest. INSTITUTION BUILDING AND POLICY REFORM While important strides have been made in institution building and fiscal, management, overall progress on policy reform has been slower than hoped. Initial expectations that substantial reform could be made in a postwar context may have been ambitious. After a slow start in 1997, following establishment of State institutions, 1998 saw more rapid progress on policy reform and institution building, resulting in large part to quicker disbursement of donor funds in 1998 than in 1997, creating a "virtuous circle" based on effective collaboration. As of end 1998, donors had firmly committed US$685 million and disbursed US$498 million. Accomplishments include:
In contrast, however, very little has yet been accomplished in the areas of social protection and transition reforms. These are among the highest priority area for donors and the authorities in 1999 and beyond.
Macroeconomic Institution Building and Fiscal Reforms The war disrupted Bosnia and Herzegovina’s macroeconomic governance structures and bankrupted government budgets. The tax base collapsed soon after the outbreak of war, leading the war-time government to finance expenditures on credit through the then-central bank resulting in hyperinflation. Strict monetary and fiscal discipline were imposed and the economy recovered as the war came to an end. The Dayton -Paris Peace Agreement4 set out a macroeconomic framework based on a strong role for the country’s two Entity governments (a decentralized Federation and a centralized Republika Srpska), a limited role for the State, and a currency board (with a new domestic currency, the convertible marka (KM), pegged to the deutsche mark) that would restrict domestic borrowing and enforce balanced budgets. As reconstruction began, however, fiscal pressures became evident: donor funded reconstruction supported an unsustainable high public expenditure program. Meanwhile, taxes were distortionary and poorly collected and the country had a large domestic and foreign debt burden. Fiscal adjustment thus became one of the program’s key priorities. The PRP aimed to restore government capacity to raise revenue as the economy recovered and to strengthen government institutions by further defining and implementing this general macroeconomic framework. Budgets had to be established at all levels. State level measures included customs and trade policies, debt rescheduling, and establishment of a State financing mechanism to include provision of a debt service. At the Entity level, reforms included harmonizing of customs, tax and payments systems, and provision for payment of State expenditures. As of end 1998 donors had firmly committed US$485 million and disbursed US$373 million in support of these activities. Progress in establishing State and Entity institutions has been good, but the pace has been much slower than hoped. Careful management and further reforms remain if Bosnia and Herzegovina’s fragile fiscal balance is to be maintained in the post-reconstruction period as donor funding phases down. Many of the basic political and economic institutions required for the country’s effective functioning have been established, including the issuance of the national currency and establishment of the central bank. Significant progress has been achieved in removing barriers to the movements of goods and people within the country, and a common, country-wide customs tariff regime and trade policy have been introduced. In addition, reform of the public finance system has begun, including the establishment of a funding mechanism for State expenditures. The Entities have made progress in harmonizing tax policies, including through implementation of a common schedule of tariffs. The country’s official and commercial debts have been rescheduled, and debt management units have been established. Also, both Entities have made progress in improving the transparency of budget management. However, this modest progress has been slow and difficult and pressure from the international community has been required. Thus, these initial efforts toward policy harmonization and coordination will have to be deepened and strengthened. Social Protection Prewar social protection needs were relatively modest. War brought increased poverty and greater need for a social safety net just as government budgets were collapsing. The war divided and disrupted social protection systems-including social assistance, pensions and veteran benefits. At the same time, the war dramatically increased the need for these systems since many Bosnians were pushed into unemployment, poverty and vulnerability. Both the three postwar pension and veteran benefits programs emerged from the way with unsustainable high benefit levels and large arrears. There were virtually no government expenditures on social assistance for the hundreds of thousands of the poor and minimal unemployment benefits. The systems were thus bot unaffordable as well as inequitable. The PRP aimed to reform the social protection system by establishing fiscally-affordable, needs-based programs. The goal was to freeze pension arrears and ensure that limited resources provided a minimum pension to all by establishing a social assistance system and initiating labor market reforms. Since end 1998 donors have committed US$163 million and disbursed US$125million for direct social assistance, much of it implemented through NGOs, as well as technical assistance and other measures aimed at assisting the government in putting in place policy reforms designed to create a stronger protection system. Progress in reforming the social protection system has been very limited, and a significant amount of reforms remains on which a much greater effort is required on the part of the authorities. The most significant achievement is that widespread hunger and cold - a serious risk for the vulnerable in the postwar environment - have not resulted in widespread fatalities due in large part to the support of donors and NGOs, and local authorities including the Social Welfare Centers. Further, the federation pension finances have been strengthened by a new law that will prevent the future accumulation of pension debt and gradually increase the retirement age. Transition Reforms Before the war, the former Yugoslavia had taken steps towards a more market-oriented economy; however, war interrupted this process. During the 1980s, greater autonomy had been granted to socially and state-owned enterprises, encouraging explicit employee ownership of shares and liberalizing conditions for setting up and operating private enterprises. But lack of accountability and easy access to credit from enterprise owned banks meant that in practice firms were only slightly exposed to market incentives. The war affected firms both by direct damages to plants and infrastructure, loss of skilled employees, interruption of trade links to markets and evaporation of credit for working capital. The PRP recognized that reconstruction and recovery were too big a task for the public sector alone and that a key element of reform would be to continue the steps toward transition to a market economy. Challenges would imply a new role for government as facilitator and manager rather than owner and controller of productive assets. To assist in setting these reform measures in motion, donors have committed US$37 million and disbursed US$31 million. However, domestic and foreign private businesses continue to encounter barriers to activity and very little has yet been done to address the constraints. Preparations for privatization have taken longer than initially expected, and privatization itself is likely to be a lengthy process. The banking sector remains extremely weak and banks undercapitalized. And although both Entities have drafted new labor laws, they appear to restrict rather than support transition reforms by establishing a highly regulated labor market. Reform measures in these areas must be top priorities in 1999 and beyond. Financing requirements to complete the reconstruction program in 1999 total US$1 billion. Priorities include community and social services in support of refugee return, completion of network infrastructure reconstruction; provision of fiscal support for recurrent expenditures, including social assistance; and deepening institutional and policy reforms in support of private sector development and social sustainability in order to prepare all sectors to be effective players in a robust market economy. As Bosnia and Herzegovina enters the last year of a successful reconstruction effort, the key questions facing its policymakers and international partners as they look into the future are how to sustain the face of an inevitable decline in external concessional assistance, and how to ensure that the benefits of this growth are expanded to allow for a broad-based increase in living standards. Bosnia and Herzegovina will enter the 21st century with newly rebuilt physical assets and a relatively healthy economy. The country has the opportunity, moreover, to learn from the lessons of other transition countries and avoid some of the policy mistakes that they have made. Reforms are needed in the following areas to enable Bosnia and Herzegovina to grow as a thriving market economy: continued strengthening of economic institutions and sound macroeconomic management, including a medium term fiscal strategy that aims to smooth the adjustment from large donor aid flows; continuing private sector development, including policies aimed at stimulating private investment, banking reform, privatization of enterprises and banks and labor market reforms; development of Bosnia and Herzegovina’s human resources and establishment of a fiscally affordable and equitable social protection system; and completion of remaining reconstruction needs. Material from the
1 Estimates of deconstruction of productive capacity range from four to ten or more times this amount2 These objectives were set out in reports Bosnia and Herzegovina" Priorities for Recovery to Sustainable Growth, 1995; Bosnia and Herzegovina: Toward Economic Recovery, 1996; and Bosnia and Herzegovina: From Recovery to Sustainable Growth, 1997, as well as annual reports updating the Priority Reconstruction Program. While modifications were made as the program evolved, these goals have remained consistent throughout. 3 Official employment data are unreliable. For example, it is clear that data do not capture those employed but not officially registered, and large numbers of people rely on unofficial or informal sector jobs for employment and income. 4 And in the Federation, the Washington Agreement of 1994 |
Document compiled by Dr S D Stein