Where did the rebuilding money go?


Bosnia, economy / Wednesday, March 7th, 2018

Where did the rebuilding money go? Why do I still see unfixed houses and buildings?

In this paper I will try to analyze the failure of economic reform in the post conflict Bosnia and Herzegovina. This will be achieved by examining the pre-war economy of Bosnia, the effects of Dayton Peace Accord in 1995, and influence of international institutions involved such as IMF and the World Bank.  By looking at the case study of reconstruction in Bosnia this paper will serve as an example of what international economist William Easterly refers to as the failure of international monetary loans.

Background on the Balkans and its History

The region of Southern Balkan peninsula has never been completely stable. Former Yugoslavia was not able to avoid the invasion from the Turks and Austrians, World Wars, or various internal civil wars and divisions. After three bloody years, Bosnia and Herzegovina claimed its independence from Socialist Yugoslavia on March 1, 1992. This landlocked country with only 20 kilometers of coastline of Adriatic Sea borders with Croatia on north, west, and south, Serbia to the east, and Montenegro to the southeast. The civil war in the 1990’s devastated the landscape of this country and the previous flourishing economy (Hoare 2007). With the signing of the peace treaty billions were pledged to rebuild and restart the economy of this tiny European country.

Dayton Peace Accords. Source Wikipedia

 

Although the Dayton Peace Accord was signed in 1995 and the war was officially over, the process for the economic reconstruction has never surpassed its beginning phase. The reformation into democratic Bosnia by using neoliberal ideas began with structural reforms. The Dayton Peace Accord established a colonial government in Bosnia that took out billions of euros in loans to pay for its peace keeping forces (Bose 2005). Former Swedish Prime Minister, Carl Bildt who was the head of peace negotiations in Bosnia became the de facto chief executive of Bosnia (Bildt 1998). The Bosnian Central Bank became controlled by the IMF, and all public-sector enterprises (i.e. roads, railways, water, energy, and postal service) were under European Bank control. Instead of a strong central government the Dayton Peace Accord set up three separate government bodies based upon the three ethnic nationalities. These separate governments would take turns being the official federal government and have no jurisdiction in a separate autonomous region of the country. As the war left Bosnia in ruins and everything in the country from the water supply to the power and the telecommunications had to be reconstructed. This reconstruction was to be paid for by loans given to Bosnia by international organizations in exchange for institutional reforms.

Bosnia get rebuilding loans

Source: http://moneycrux.com/evaluation-structural-adjustment-programs/

 

A structural adjustment loan (SAL) is a type of loan that international financial organizations such as World Bank and IMF lend out to developing countries. In return, they demand from these countries to impose “structural adjustment” to their governments/countries such as promoting new taxes, privatization, and other neo-liberalist ideas.  High inflation rates on these loans, poor timing on when these loans were created, and indiscriminate structural adjustments with no respect to the problems faced by the country lead to failure of these loans to create economic growth. Bosnia highly depends on these loans to function.

International Financial Organizations are established by multiple nation states and are subjected to the international law. The International Monetary Fund (IMF) is a creation of 189 countries who work together to “foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment, sustainable economic growth, and reduce poverty around the world (IMF).” According to the IMF Report, in the period between 1996 to 1999, Bosnia has received $3.7 billion from 48 countries and 14 international organizations (IMF 2005). Another report shows that in the period between 1996 to 2002, Bosnia’s annual aid was $730 million or $1,400 per person (Kamhi 2006).  This money has not trickled down however to the common Bosnian in the form of any of the goals set out by the IMF.

Affects of International loans

Why does average the Bosnian wish to leave this country even though all this foreign aid is pouring in? The answer may lie in the fact that the average Bosnian has not seen any of the $1,400 per capita given by the international assistance to help rebuild the economy in the last ten years.  Bosnian leaders have taken this money to line their pockets and those of their friends. The Bosnian governmental representatives and officials increase their salaries that already exceed the annual salary of most Bosnians. The scale for Corruption Perceptions Index reports Bosnia as 99 out of 109 countries (Transparency International 2017). Bosnia has a score of 3.0 on the scale 1-9, where 1 being the lowest (Transparency International 2017). The IMF loans are often abused by the Bosnian corrupt governments who use these loans for their private gain. One report in 2006 published that more than 2 billion euros have been “lost” in Bosnia (Pasic 2011). Besides corrupt officials the reconstruction loans are being taken out to pay for previous loans and peace keeping forces in the area.

“Czech the flag” .Local children and U.K soldiers, Prijedor, Election Day, Sept. 14, 1996. Source: NATO

“Czech the flag” .Local children and U.K soldiers, Prijedor, Election Day, Sept. 14, 1996. Source: NATO

Out of the 3 billion dollars promised in reconstruction loans after the war, only 518 million dollars was granted. Instead of reconstruction, these loans were used to pay for financing the costs of IFOR and other peace keeping forces in the region during the 1990’s. There were 60,000 NATO forces in Bosnia implemented to act as IFOR peacekeeping force. In subsequent years other loans were issued but only to pay back interest incurred from previous loans (Chossudovsky 2016). In June of 2017 Bosnia raised 17.3 million dollars in a new International Monetary Fund loan to help pay interests on previous loans (International Monetary Fund 2016). The effects of these loans and neoliberalist policies that dismantled the Bosnian infrastructure can be easily seen by examining a local areas economy before and after the war.

In the Vrbas valley of Central Bosnia just as in the entire countryside employed workforce decreased dramatically in the last two decades. Valuable industrial machinery that people once relied on for jobs was now sold out for private gain. Previous industrial workers are now unemployed and dream of emigration to western countries with healthier economies. Haris Gekic and Aida Bidzan did a study on the change of industry in the Vrbas valley in the 20th century. In 1987 the six main industries (textile, food, leather, footwear, chemical and electrical) employed 8891 people.  Just before the civil war broke out in 1991 the “Slavko Rodic” company employed 4000 workers. The Vrbas valley was a thriving and prosperous region of Central Canton in Bosnia. In 1987 the number of employed Bosnians was 421,320. In 2010 in contrast there were only 144,861 Bosnians who had jobs. In the Vrbas valley there were only 1,790 workers employed in industrial sectors in 2010 (Gekic, Bidzan 2015). Up until 1992 when war occurred industrial growth was expanding. After 1992 industrial production almost stopped and the educated workforce left with it. Today Bosnia imports roughly four billion dollars more than it exports (CIA WorldFactBook). Previous to the war, during Tito’s governance Yugoslavia was a strong export economy. Huge decline in the economy has been a main push factor for the Bosnian youth causing a massive brain drain and shift to more traditional methods of employment.

Unable to find employment many citizens in the Vrbas valley and Bosnia have to turn to traditional plots of land that have been previously left abandoned. Previous to the industrial revolution at the turn of the 19th century most families were subsistence farmers who also produced one or two cash crops that can be used in exchange for goods and services. With the collapse of the modern economy in Bosnia people have turned to the old fashioned traditional money-making methods. International organizations such as Islamic Relief and USAID have been developing markets for these new agricultural cash crops and providing education and loans for farmers (Khan 2008, and Lacner 2005). Agricultural subsidies to Bosnia have become an increasingly common way for microcredit organizations to grow the economy, 42% of microcredits in 2004 were given to agricultural programs from MCO’s (Zivko 2006). Due to the small sizes of farms and the climate labor intensive high yield berry agriculture has been popular. Families in Central Bosnia rely on agriculture for survival.

The change in job opportunities from factories to farms is affecting younger generations by promoting farm work over white and blue-collar opportunities. Most Bosnians are literate and many are well educated. Almost all children in Bosnia attend and graduate primary and secondary schools (Bruhn 2011). College is attainable for almost all Bosnians as is it is heavily subsidized by the state. Summer is the picking raspberries season and families need to get up very early before the sun hits to pick the raspberries. This kind of work is not sparing to children who spend their summer vacations on raspberry patches with their parents. Instead of going to after school programs to remain competitive with other industrialized countries Bosnian children instead work with their parents on the farms to help generate family’s income.

The shift from industrial to agricultural society after the civil war has been slowly changing the educated workforce. Before the war there were four times as many job opportunities. After the war the brightest left to seek their fortunes elsewhere leaving Bosnia causing a brain drain. Those who stayed see high unemployment rates and turn to traditional methods of employment including farming. Higher levels of learning are slowly being seen as irrelevant and wasteful to the younger generations who see their future following their parents’ footsteps in growing crops.

Summary

https://mitpress.mit.edu/books/elusive-quest-growth
https://mitpress.mit.edu/books/elusive-quest-growth
Elusive Quest for Growth

 

In his book, “The Elusive Quest for Growth”, William Easterly explains why international development loans did not work in Bosnia and other countries needing to ‘jumpstart’ their economy after a disaster or war. In 1980 the World Bank began making loans that carried conditions for the recipient country to change their economic policy. The IMF and World Bank gave an average of 3 adjustment loans to each country in Eastern Europe in 1980’s. Instead of the predicted 3.5 % increase in economy the average growth of developing countries was at 0%.  Easterly found that very little to no structural adjustment was created after the loans were dispersed (Easterly 2002).  Easterly generalizes when concluding his study on what a reconstruction needs to have to be successful.

A bad government according to Easterly could never achieve a sustainable market economy. “An unchanged irresponsible government will create an illusion of adjustment without doing the real thing (Easterly 2002).” The Dayton Peace Accord created a government in which three separate governments operated autonomously as a federal government in Bosnia along with a separate semi-independent republic. The three governments rely upon ethnic nationalistic identities to maintain their authority upon the people and the economy. For example, in a small town in Central Bosnia, Jajce, two separate school systems exist along ethnic divisions to service the area. Instead of minimizing the cost two separate school systems i.e. teachers, administrators, books and buildings double the cost of education in Bosnia. When students and their parents protested this segregation school officials and government officials ignored and ridiculed their claims. NATO Ambassador to Bosnia, Jonathan Moore on the topic of two schools under one roof stated: “When you have two schools instead of one, you have more jobs you can hand to your own ethnic group or party members… When you have more schools, it costs more money, but as long as they provide jobs for people connected to political parties, than nobody cares about it (Knezevic 2017).” Even with this blatant discrimination and cronyism with the government of Bosnia refusing to reform and cut such blatant excessive costs lenders such as the IMF continue to send millions in additional loans to Bosnia.

In” The Institutional Prerequisites for Post-Conflict Reconstruction” by Coyne he outlines how economies can be rebuilt after a military conflict. The institutional prerequisites that serve as fundamental bodies of structural change are: “shared ideology and ethic of individual and private property rights, a commitment to markets and the rule of law.” Without the prerequisites to serve as a foundation “reconstructed liberal orders will fail to be self-sustaining over time”. Coyne redefines reconstruction as the creation and/or reconstruction of all the “infrastructure and facilities, minimal social services, and structural reform and transformation in the political, economic, social and security sectors” (Coyne 2005).  Coyne mentions that peacekeeping is a subset but not the entirety of the reconstruction process. In Bosnia the majority if not all of the reconstruction funds went towards funding peacekeeping forces. The infrastructure and economy was sold off by the IMF to the highest bidder to be privatized. The ultimate goal of reconstruction as Coyne states, is a self-sustaining liberal democracy. Twenty years after reconstruction began Bosnia is still receiving foreign aid and cannot join the European Union membership because it fails to meet the definition of a democracy.

Putin with President of the Republika Srpska entity of Bosnia and Herzegovina Milorad Dodik. Source Kremlin

The resources and labor of Bosnia are being exploited by world powers to grow their economies and political agendas. Serbian nationalists are being exploited by Russia for their geopolitical interest in Europe. Russian president, Vladimir Putin regularly meets with the president of the autonomous Republic of Srpska within Bosnian borders to show its political support and project power (Kovacevic 2016). German and Austrian companies regularly open mining and manufacturing facilities in hard hit rural areas of Bosnia. They exploit the minimum floor wages and low to minimum environmental regulations to extract materials needed for luxury goods produced in Germany and Austria.  Additionally, entrepreneurs from the Middle Eastern countries such as Saudi Arabia and Kuwait, are building and investing in luxury real state resorts to gain a foothold in European economies. They are attracted by the Islamic friendly Bosnia in the heart of Europe where prices are artificially low due to decades of negative economic growth (Reporter 2016).  International powers that are propping up competing nationalistic groups and do nothing more than destabilize Bosnia further. The recent lack of attention paid by larger international players such as United States due to their decade long military conflicts in Iraq, Afghanistan, and now Syria and Yemen is creating a tinder box for a new conflict in the region.

Reconstruction in Bosnia and Herzegovina is a classic case of international good intentions gone bad.  Bosnia once had a robust and thriving economy under the communist Yugoslavia with a socialist economy.  Bosnia and the International Community should be more concerned for diversifying the economy so it does not rely upon small cash crops to survive. Low interest loans and programs should be set up to encourage young entrepreneurs to set up internet based businesses and children after school programs designed to promote education in the new global economy. Since 1996, the World Bank has committed over $1.1 billion, while other World Bank agencies had sent $500 million to Bosnia for economic development with little to no increase in economic self-sufficiency.  One of the first reforms that should be in place however should be the removal of the bad government set up during the Dayton Peace Accords and a liberal government being set up giving political and economic power to a self-sufficient nation with their interest at heart and not that of other countries.

Work Cited Page

Bildt, Carl. Peace journey: the struggle for peace in Bosnia. Vol. 45. London, 1998.

Bose, Sumantra. “The Bosnian state a decade after Dayton.” International Peacekeeping 12.3 (2005): 322-335.

Bruhn, Miriam, and Bilal Zia. “Business and financial literacy for young entrepreneurs: evidence from Bosnia-Herzegovina.” World Bank mimeo (2011).

Chossudovsky, Michael, Prof. “NATO’s War of Aggression against Yugoslavia.” Global Research Centre for Research and Globalization. Global Research, 28 Mar. 2016. Web. 23 June 2017.

Coyne, Christopher J. “The institutional prerequisites for post-conflict reconstruction.” The Review of Austrian Economics 18.3 (2005): 325-342.

Easterly, William. “The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics.” Journal of Macromarketing 22.1 (2002): 136-144.

E.V., Transparency International. “Corruption Perceptions Index 2016.”Www.transparency.org. Transparency International, 25 Jan. 2017. Web. 23 June 2017.

Gekic, Haris, and Aida Bidzan. “A Geographical Analysis of Industry in Bugojno, Bosnia and Herzegovina.” Academic Research International 6.2 (2015): 157.

Hoare, Marko Attila. The history of Bosnia: from the Middle Ages to the present day. Saqi Books, 2007.

International Monetary Fund. “Correction: BOSNIA-HERZEGOVINA.” Journal of the Royal Society of Arts 57.2935 (1909): 290. IMF Country Report No. 16/291. International Monetary Fund, Sept. 2016. Web. 23 June 2017.

Kamhi, Nadja, and Vivek H. Dehejia. “An assessment of the currency board regime in Bosnia and Herzegovina.” Emerging Markets Finance and Trade 42.6 (2006): 46-58.

Khan, Ajaz Ahmed. “Islamic Microfinance.” Birmingham, UK: Islamic Relief Worldwide (2008).

Knezevic, Gordana. “Balkans Without Borders.” RadioFreeEurope/RadioLiberty. Balkans Without Borders, 23 June 2017. Web. 23 June 2017.

Kovacevic, Danijel. “Putin Meets Dodik On Eve of Bosnia Referendum.” Balkan Insight. Balkan Insight, 23 Sept. 2016. Web. 23 June 2017.

Lachner, Erinn. “The Road to Recovery: Economic and Social Development in Srebrenica, Bosnia-Herzegovina.” (2005).

Pasic, Lana. “Balkanalysis.com.” Bosnia RSS. Balkanalysis.com, 21 June 2011. Web. 23 June 2017.

Reporter, Mail Online. “Fury over Bosnian Town Built by Middle East Investors Which Has Arabic as Its ‘official’ Language – and Locals Can Only Enter If They Work as Servants.”Daily Mail Online. Associated Newspapers, 27 Oct. 2016. Web. 23 June 2017.

Zivko, Igor. “Role of Microcredit Organization in Financial System Transitional Countries -A case of Bosnia and Herzegovina.” An Enterprise Odyssey. International Conference Proceedings. University of Zagreb, Faculty of Economics and Business, 2006.

5 Replies to “Where did the rebuilding money go?”

  1. Interesting article, and I very much agree with the destructive role of the World Bank, IMF and USAID. Their hardline stance on Bosnia adopting a neoliberal policy package, and therefore committing itself to repeating the very same mistakes that almost destroyed the earlier transition countries, was appalling. I argued with World Bank economists about this here:

    https://www.brookings.edu/blog/future-development/2015/11/05/three-reasons-why-the-economy-of-bosnia-and-herzegovina-is-off-balance/

    I very much disagree, however, with your point about microfinance, which was huge in Bosnia (second in volume per capita after Bangladesh) yet it greatly contributed to Bosnia’s economic and social decline, as we argued in a working paper (now being updated) which you can find here:
    https://www.researchgate.net/publication/272302642_The_Contribution_of_the_Microfinance_Model_to_Bosnia's_Post-War_Reconstruction_and_Development_How_to_Destroy_an_Economy_and_Society_Without_Really_Trying

    1. Dr. Bateman,

      You honor me for stumbling on my tiny website. Thank you for adding to the discussion on why the economy of Bosnia is failing. This was originally a paper written by Ilhana Vele for a undergraduate class at George Mason University for a developing economics class. http://ilhanavele.github.io/BosnianEconomyBlog.html.

      I agree micro-loans are a terrible idea. I once participated donating money to kiva.org the microloan website but stopped when I found out that most of the loans were charging 10-50% interest rates.

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