Ghosts of past shackle Bosnia’s economic future

The conflict between Serbs, Muslims and Croats may no longer be waged with heavy artillery and ethnic cleansing, but a toxic combination of de facto partition, obstruction and graft by politicians in each group keeps a stranglehold on the economy.

“What sort of investment can we expect when our political leaders are sending such very bad messages to the world and to each other?” asks Svetlana Cenic, an economist and former finance minister of the Bosnian Serb Republic.

Fallout from the global financial crisis has deepened economic stagnation wrought by the rival Bosnian communities’ inability to reform dysfunctional institutions created by the 1995 Dayton peace accords that ended the 1992-95 war.

A staggering 42 percent of the workforce is officially unemployed. Taking into account the informal grey economy, the jobless rate is reckoned to be nearly 25 percent.

While the country has a single market on paper, with free circulation of goods and the same rates of customs and value added tax, businesses often have to bribe or obey politicians in the two main entities to be able to operate, Cenic told reporters.

“Foreign companies… have to struggle to get all kinds of permissions and guarantees that no one will disturb them, that they will not be racketeered,” she said in an interview.

Hardline Bosnian Serb Prime Minister Milorad Dodik has a tight grip on economic activity in his fiefdom, but things are messier in the Muslim-Croat Federation, where several layers of administration have to be greased.

“The perception of this country is still so bad that serious investors don’t want to risk anything,” former Foreign Minister Mladen Ivanic told reporters. “The main problem is the political system, not the economic system.”

For local private companies, the key to survival is often to stay close to the governments in both Bosnian entities to ensure a share of contracts dependent on the state budget.

Bosnia’s home market of an estimated 3.8 million citizens with just $4,600 in GDP per capita is too poor to attract much investment. Access to the larger neighbouring markets of Croatia and Serbia is vital, but there are many non-tariff barriers.

A trade forum in the central Bosnian town of Mostar recently illustrated how politics continue to trump economics. Serbian President Boris Tadic came to promote business cooperation between the neighbouring former Yugoslav republics.

But he walked into a political lecture from Bosnian presidency chairman Haris Silajdzic, a Muslim, who warned “we must not push the problems of the past under the carpet.” Bosnian Serb companies and executives mostly stayed away.

The main potential for investment in the mountainous country, still patrolled by European peacekeepers, lies in energy and infrastructure, but political feuding and self-enrichment continue to thwart big projects.

Austrian construction giant Strabag was chosen by the Bosnian Serb government in 2006 to build a three billion euro motorway from Banja Luka, the autonomous region’s capital, to the town of Doboj. But the company ran into financing problems because there was no competitive tender for the contract. The European Bank for Reconstruction and Development refused to participate, and road building has still not started.

Energy investments are held up because Bosnia still lacks a functioning national electricity grid, despite repeated promises to remove political obstacles.

The prime ministers of the two entities agreed in November to enable the Elektroprenos company to operate normally, but little has moved. The dispute may also endanger a potentially lucrative power deal with Italy and Montenegro.

Italian Prime Minister Silvio Berlusconi has courted Dodik for joint energy projects, including the Bosian Serb Republic’s participation in the Russian South Stream gas pipeline, a rival to the European Union-backed Nabucco pipeline from central Asia.

Another brake on economic growth is land ownership. While other former Yugoslav republics have reformed their laws, Bosnia still labours under a system whereby the government owns the land, and companies buy only the right to build on or use it.

This gives politicians a huge source of patronage, often requiring several layers of bribery to complete a building or run a business. Furtheremore, the lack of freehold ownership limits the amount companies can borrow and stifles growth, according to a senior international official in Sarajevo.

Add to that the 400 state enterprises in the Muslim-Croat federation alone, whose board members and top management are all political appointees, and it’s easy to see how politics continues to shackle the economy.

While many Bosnians seem unhappy at this state of affairs, nationalist politicians have so far succeeded in fanning ethnic fears at election time to drown out economic discontent. Don’t count on this year being any different.