November 17, 2005

After postwar recovery, Bosnia needs reforms

By Daria Sito-Sucic

ZEPA, Bosnia (Reuters) - The people of Zepa, an isolated
Muslim town in the Serb half of Bosnia, have businessman Enver
Stitkovac to thank for the roads that link them to the rest of
the country.

Stitkovac financed and built 60 miles of roads from Zepa,
east of Sarajevo, after he got tired of waiting for the Balkan
country's authorities to chip in and help.

"They made me go door to door to get all the permits," the
construction firm owner said with resignation. "They don't need
to help, just not to obstruct."

The authorities finally contributed 15 percent of the total
investment in Stitkovac's project.

Ten years after the end of the 1992-95 war between Muslims,
Serbs and Croats which devastated Bosnia and killed up to
200,000 people, economic reform is slow, foreign investment
scarce and unemployment high.

Analysts say that although initial, internationally funded
recovery was swift after the end of Europe's worst conflict
since World War Two, later reforms have been hampered by the
unwieldy power structure drawn up in the Dayton peace treaty.

The U.S.-brokered accord split Bosnia into a Muslim-Croat
federation and a Serb Republic and established a central
government, a two-house parliament and a three-person,
inter-ethnic presidency.

The two entities each have their own government and
parliament and critics say the central authority remains weak.

The United States recognizes that the treaty needs an
overhaul: Washington is pushing for a new constitution that
would take Bosnia beyond Dayton, and away from the ethnic
divisions opened by war and enshrined in the settlement.

Until that happens, Stitkovac and other entrepreneurs are
likely to suffer more frustration in a country generally seen
as a difficult place to do business.

"A society not led by the economy is condemned to
catastrophe. A society where incompetence and party affiliation
are advantages is a disaster," Stitkovac said.


Stitkovac accused local politicians of trying to preserve
the ethnic divisions that exploded during the war, saying this
obstructed economic progress.

"There has been a lot of impressive achievement (since)
Dayton," John Norregaard, the International Monetary Fund (IMF)
representative in Bosnia, told Reuters.

He said real gross domestic product (GDP) had tripled in
the last decade, with growth likely to remain robust at 5 to 6
percent and inflation low. He praised the creation of a central
bank in 1998 and a new unified customs and tax system.

But current account and foreign trade deficits threaten
economic stability, Norregaard warned.

Bosnia's unemployment rate officially stands at 45 percent
and is seen as Europe's highest, but central bank officials say
it may only be half that as a "gray economy" of undeclared
business is believed to make up 40 percent of GDP.

However, industrial production is still at half its prewar
levels and foreign aid donations -- which amounted to $5.1
billion after the war -- are drying up.

In September, the World Bank said slow progress on
structural reforms was endangering a $120 million loan package.

Damir Miljevic, the president of the Serb Republic's
employers association, said dependence on imports was also
holding the economy back. "Ten years after the war, Bosnia's
economy is still not on its feet," he said.


Experts say heavy foreign direct investment (FDI) is needed
to make Bosnia more competitive and reduce the foreign trade
deficit, which accounted for 49.9 percent of GDP in 2004.

Bosnia is one of the poorest regional performers in terms
of attracting foreign investment, with only $1.6 billion
received since the end of the war.

"Only FDI has the volume of capital we need to become
export-oriented," former Prime Minister Bozidar Matic said.

But Bosnia's poor business climate does not help. It takes
nearly two months to start a business, slightly longer than in
other neighbouring countries, but it can take over a year to
get the necessary licences from the fragmented authorities.

Matic said there was an urgent need to improve the business
climate and privatize state companies to lure more investors.
He said the sell-off process has been so far driven by ethnic
rather than economic interests.

Norregaard said the piecemeal policy-making structures,
inherited from the Dayton accord, also represented a problem
for the IMF when negotiating loans.

Some analysts hope the start of negotiations on closer ties
between Bosnia and the European Union will help speed reforms.
Initial talks are due to start by the end of the year, but
membership would not happen before 2015.

The EU has told Bosnia it will have to revamp its complex
constitutional structure before it can advance toward
accession. That will not be easy: Bosnian Serbs want to
preserve more of the existing ethnic structures while Croats
and Muslims want a more radical overhaul.