Post by MiG on Jan 29, 2008 14:45:30 GMT -5
Bosnia and Herzegovina: Unlocking Economic Potential
28 January 2008 Despite strong growth in recent years, the Bosnian economy is in danger of lagging behind its neighbours, unless steps are taken to cut taxes, speed up privatization and create a more business-friendly environment.
By Graham Slack in Sarajevo
The Bosnian economy has performed well over the last few years. However, the Bosnian authorities need to make the country more attractive for doing business, create a more flexible labour market and reduce spending on the administration to unlock the economy’s full potential and make its growth sustainable in the long term.
Bosnia and Herzegovina’s gross domestic product, GDP, has increased by 5-6% a year, exports have grown by 15-30% a year, and international investors have shown increased interest in the country.
This economic growth is in part the result of earlier policy choices made by the governments of Bosnia and Herzegovina, BiH, notably the adoption and maintenance of the currency board, putting government budgets onto a more sustainable footing, and engaging in privatization. These choices have also facilitated the inflow of money from abroad which in turn has further stimulated economic activity in BiH.
Most observers agree that BiH is not doing too badly on the broad economic front. But they also point out three concerns: (i) the economy is growing no faster than in neighboring countries, even though BiH had a lower starting point; (ii) the sustainability of BiH’s growth is questionable given that it relies heavily on externally financed consumption, and export growth has slowed last year; and (iii) for many BiH citizens, economic growth remains something of a mirage: it is faintly visible but not yet tangible.
The fact that official unemployment remains at around 30% (including employment in the informal sector) suggests that a significant number of citizens are not yet sharing in the growing economy.
In sum, there is a strong sense that BiH’s economic performance remains well short of its potential. Here are some suggestions of what needs to be done:
There is no substitute for getting the economic basics right: while quick economic fixes are politically appealing, they rarely lead to permanently higher living standards, and can do lasting damage to the economy. To its credit, BiH has achieved much in terms of macroeconomic stability - a key ingredient for economic growth. But this is not enough in itself, other basic ingredients are needed if BiH is to realize its economic potential:
Make BiH an attractive place to do business: this will stimulate investment and job growth and help BiH reduce its large trade imbalance. Yet Bosnia and Herzegovina continues to lag behind its neighbours across a range of “doing business” indicators. The World Bank’s latest Doing Business report shows BiH slipping from 95th to 105th place out of 178 countries. The World Economic Forum’s Global Competitiveness Report ranks BiH 89th out of 125 countries for global competitiveness and 96th out of 101 for business competitiveness. All of this means that Bosnia is a relatively difficult place to do business in, hampering investment and job creation.
Accelerate privatization: if done properly this will improve services and create space for investing in public infrastructure. There has been some progress in this area in Bosnia’s Serb entity, the Republika Srpska, in recent years. It needs to continue. And the authorities in the other entity, the Federation of Bosnia and Herzegovina, are showing increased interest in meeting the targets they have set for themselves for privatization. Not all public companies put up for sale will find a buyer. In these cases, the best course of action is to restructure the companies under bankruptcy procedures.
Make labour markets accessible to all: this will help the large numbers of unemployed find work in the formal sector. To this end, BiH’s labour laws and general collective agreements are too restrictive and should be amended to render the labour market more accessible. Alongside, direct tax and contribution rates should be reduced to make it more attractive for businesses to increase employment.
Reduce direct taxes and spend public money better: BiH’s government structures are costly, consuming about half of the country's GDP. To pay for this, BiH citizens are saddled with taxes that are higher than in other transition countries. And yet the results of government spending in BiH are worse than in other countries: the World Bank finds that educational and health care outcomes are particularly poor, yet receive proportionately large amounts of funding. Both of these things - the heavy direct tax burden and poor results of government spending - adversely affect BIH’s economic environment. In addition, government spending could do a much better job of supporting economic growth: taxpayers’ money is largely spent on salaries and benefits for public sector employees and on untargeted social transfers, rather than on investment and on those people who are most vulnerable.
Secure the sustainability of the governments' budgets: the lack of coordination between state and entity government budgets risks putting government spending and debt accumulation on an unsustainable path. Without a coordinated approach to fiscal policy making, BiH’s hard won macroeconomic stability is being put at risk.
The agenda set out above will help BiH realize its economic potential. It will also help it navigate the coming economic headwinds: slower growth in export markets, higher food prices, and higher interest rates. But to deal with these properly, key vulnerabilities in the financial sector also need to be addressed:
Credit risk: in view of the continued rapid credit expansion in BiH (and the region), it is imperative that commercial banks ensure that they are properly addressing the associated risk of defaults on loan repayments. If not, the fallout can affect the wider economy.
Bank supervision: competition for market share has led some banks in BiH to increasingly engage in lending to higher-risk customers. A strong supervisory framework is essential in such an environment. In BiH this means that that the entity bank supervisors should tighten loan classification standards, raise the fines levied on banks for not complying with prudent regulations, and move to a risk-based consolidated supervision model. Moreover, the two entity bank supervisors should be strengthened and unified.
Cooperation with foreign bank supervisors: foreign-owned banks dominate BiH’s banking system. This provides a direct channel for turbulence in foreign markets to be transmitted to BiH. Open lines of communication between domestic and foreign bank supervisors are therefore essential. BiH’s bank supervisors do not currently enjoy such an arrangement with key foreign bank supervisors. This shortcoming in the regulatory framework needs to be fixed.
Capital inflows: countries, like BiH, that rely on large capital inflows to finance current account deficits and surges in domestic credit should consider carefully how they will respond if capital flows dry up or are reversed. While there is little evidence of this happening so far, the recent global liquidity squeeze indicates that such large scale inflows should not be taken for granted.
This is a large and complex economic reform agenda, but one that other transition economies have embraced. Without undertaking similar reforms, BiH will take longer to attain its economic potential, will remain vulnerable to economic shocks, and will generate fewer jobs.
28 January 2008 Despite strong growth in recent years, the Bosnian economy is in danger of lagging behind its neighbours, unless steps are taken to cut taxes, speed up privatization and create a more business-friendly environment.
By Graham Slack in Sarajevo
The Bosnian economy has performed well over the last few years. However, the Bosnian authorities need to make the country more attractive for doing business, create a more flexible labour market and reduce spending on the administration to unlock the economy’s full potential and make its growth sustainable in the long term.
Bosnia and Herzegovina’s gross domestic product, GDP, has increased by 5-6% a year, exports have grown by 15-30% a year, and international investors have shown increased interest in the country.
This economic growth is in part the result of earlier policy choices made by the governments of Bosnia and Herzegovina, BiH, notably the adoption and maintenance of the currency board, putting government budgets onto a more sustainable footing, and engaging in privatization. These choices have also facilitated the inflow of money from abroad which in turn has further stimulated economic activity in BiH.
Most observers agree that BiH is not doing too badly on the broad economic front. But they also point out three concerns: (i) the economy is growing no faster than in neighboring countries, even though BiH had a lower starting point; (ii) the sustainability of BiH’s growth is questionable given that it relies heavily on externally financed consumption, and export growth has slowed last year; and (iii) for many BiH citizens, economic growth remains something of a mirage: it is faintly visible but not yet tangible.
The fact that official unemployment remains at around 30% (including employment in the informal sector) suggests that a significant number of citizens are not yet sharing in the growing economy.
In sum, there is a strong sense that BiH’s economic performance remains well short of its potential. Here are some suggestions of what needs to be done:
There is no substitute for getting the economic basics right: while quick economic fixes are politically appealing, they rarely lead to permanently higher living standards, and can do lasting damage to the economy. To its credit, BiH has achieved much in terms of macroeconomic stability - a key ingredient for economic growth. But this is not enough in itself, other basic ingredients are needed if BiH is to realize its economic potential:
Make BiH an attractive place to do business: this will stimulate investment and job growth and help BiH reduce its large trade imbalance. Yet Bosnia and Herzegovina continues to lag behind its neighbours across a range of “doing business” indicators. The World Bank’s latest Doing Business report shows BiH slipping from 95th to 105th place out of 178 countries. The World Economic Forum’s Global Competitiveness Report ranks BiH 89th out of 125 countries for global competitiveness and 96th out of 101 for business competitiveness. All of this means that Bosnia is a relatively difficult place to do business in, hampering investment and job creation.
Accelerate privatization: if done properly this will improve services and create space for investing in public infrastructure. There has been some progress in this area in Bosnia’s Serb entity, the Republika Srpska, in recent years. It needs to continue. And the authorities in the other entity, the Federation of Bosnia and Herzegovina, are showing increased interest in meeting the targets they have set for themselves for privatization. Not all public companies put up for sale will find a buyer. In these cases, the best course of action is to restructure the companies under bankruptcy procedures.
Make labour markets accessible to all: this will help the large numbers of unemployed find work in the formal sector. To this end, BiH’s labour laws and general collective agreements are too restrictive and should be amended to render the labour market more accessible. Alongside, direct tax and contribution rates should be reduced to make it more attractive for businesses to increase employment.
Reduce direct taxes and spend public money better: BiH’s government structures are costly, consuming about half of the country's GDP. To pay for this, BiH citizens are saddled with taxes that are higher than in other transition countries. And yet the results of government spending in BiH are worse than in other countries: the World Bank finds that educational and health care outcomes are particularly poor, yet receive proportionately large amounts of funding. Both of these things - the heavy direct tax burden and poor results of government spending - adversely affect BIH’s economic environment. In addition, government spending could do a much better job of supporting economic growth: taxpayers’ money is largely spent on salaries and benefits for public sector employees and on untargeted social transfers, rather than on investment and on those people who are most vulnerable.
Secure the sustainability of the governments' budgets: the lack of coordination between state and entity government budgets risks putting government spending and debt accumulation on an unsustainable path. Without a coordinated approach to fiscal policy making, BiH’s hard won macroeconomic stability is being put at risk.
The agenda set out above will help BiH realize its economic potential. It will also help it navigate the coming economic headwinds: slower growth in export markets, higher food prices, and higher interest rates. But to deal with these properly, key vulnerabilities in the financial sector also need to be addressed:
Credit risk: in view of the continued rapid credit expansion in BiH (and the region), it is imperative that commercial banks ensure that they are properly addressing the associated risk of defaults on loan repayments. If not, the fallout can affect the wider economy.
Bank supervision: competition for market share has led some banks in BiH to increasingly engage in lending to higher-risk customers. A strong supervisory framework is essential in such an environment. In BiH this means that that the entity bank supervisors should tighten loan classification standards, raise the fines levied on banks for not complying with prudent regulations, and move to a risk-based consolidated supervision model. Moreover, the two entity bank supervisors should be strengthened and unified.
Cooperation with foreign bank supervisors: foreign-owned banks dominate BiH’s banking system. This provides a direct channel for turbulence in foreign markets to be transmitted to BiH. Open lines of communication between domestic and foreign bank supervisors are therefore essential. BiH’s bank supervisors do not currently enjoy such an arrangement with key foreign bank supervisors. This shortcoming in the regulatory framework needs to be fixed.
Capital inflows: countries, like BiH, that rely on large capital inflows to finance current account deficits and surges in domestic credit should consider carefully how they will respond if capital flows dry up or are reversed. While there is little evidence of this happening so far, the recent global liquidity squeeze indicates that such large scale inflows should not be taken for granted.
This is a large and complex economic reform agenda, but one that other transition economies have embraced. Without undertaking similar reforms, BiH will take longer to attain its economic potential, will remain vulnerable to economic shocks, and will generate fewer jobs.
Source: www.balkaninsight.com/en/main/comment/7574/