DEVELOPMENT CHALLENGES
In recent years, the economic situation in BiH has been characterized by stable macroeconomic growth, resulting mainly from the development of trade integration with the EU. Annual GDP growth was 3.2% on average between 2006 and 2010. Following a sharp downturn in 2009, the country has returned to positive growth, due mainly to the recovery in external demand. BiH is ranked 74th of 187 countries, with a “high” Human Development Index (HDI) of 0.733 in 2011. However, despite its recent graduation from “lower-middle income” to “upper-middle income” country, moving from a GNI per capita of US$3,790 in 2007 to US$4,790 in 2010, the development challenges in BiH persist.
Poverty and inequality
Poverty is still widespread, with 14% of the population living below the poverty line, 23.7% being at risk of poverty, and over half facing some form of exclusion (in 2007). Socially excluded groups in BiH experience the highest risk of unemployment and difficulty in accessing basic social services and participating in political life. The most vulnerable groups include the elderly, persons with disabilities, displaced persons, youth, and minorities.
High unemployment and job informality
Although unemployment has been decreasing over the last few years, dropping from 31.8% to 23.9% of the total workforce over the period 2006-2008, official unemployment remains high, in particular among youth, with young women especially affected. Women constitute only 34% of the labour force in BiH and, in 2010, faced an unemployment level of 26.8%, compared to 21.4% for men. A decline in formal employment security and opportunities, as well as the significant skills gap of the workforce, has contributed to high levels of official unemployment and, consequently, to the emergence and persistence of a large informal sector: approximately 34% of workers are engaged in the informal economy (50% among young workers).
Inefficient public administration
BiH has a unique and intricate constitutional and administrative structure, outlined by the Dayton Agreement, after the 1992-1995 interethnic conflict. The institutional set-up, with overlapping responsibilities, duplicated structures and unclear division of financial, legislative and executive powers among different levels, makes decision-making complicated and inefficient. For public administration, this has led to inadequacies in policy-making, public finance management, as well as service delivery at the local level, which has significantly limited citizens’ access to basic public services and thus contributed to social exclusion.
Widespread availability of weapons
Another remnant of the conflict in BiH posing a serious development challenge and threat to human security is the high level of civilian and military arms possession, as well as the large military stock of surplus ammunition. Although considerable progress has been made in the destruction of weapons and ammunition, 3.4% of the territory is still contaminated with landmines, and approximately 16% of households possess illegal weapons. In addition, mine contamination impedes growth of sectors such as agriculture, environmental protection, and tourism.
Emigration and reliance on remittances
The war in 1992-1995 also caused massive emigration from BiH, with 37.7% of the population now living abroad. Remittances from the large diaspora are a significant contribution to the economy, as a source of critical support for vulnerable households, but this remittance income has decreased due to the economic crisis.
Environmental issues
The country also has a limited institutional capacity for environmental protection, as environmental management was not prioritized during the post-conflict phase. While environmental protection is emerging as a government priority, there is still an absence of a strong policy and legal framework, an overall lack of public information and education about environmental issues, as well as inefficiencies in data collection and monitoring. These challenges affect the country’s ability to reverse environmental degradation, to fulfill its obligations under the multilateral environment-related agreements it has signed, and to develop and implement EU-compatible environmental standards.
KEY TRADE ISSUES
Market concentration, trade deficit and WTO accession
BiH is a signatory of the Central European Free Trade Agreement (CEFTA), along with Albania, Croatia, the former Yugoslav Republic of Macedonia, Kosovo, the Republic of Moldova, Montenegro, and Serbia. However, there is a strong dependence on trade towards the EU at the regional level, and intraregional trade plays a marginal role. Over 60% of total BiH exports go to the EU-27, with less than 35% exported within the CEFTA region. With the onset of the global financial crisis, this market dependence, coupled with a drop in commodity prices, resulted in a dramatic decrease of exports and a parallel increase in trade deficit, which had grown impressively in previous years. There is also a pressing need to finalize the WTO accession process (which began in 1996), in order for the country to become better integrated into the world economy and diversify its market base.
Weak competitiveness and low productive capacity
The country specializes in low value-added production, with industrial supplies (furniture, lighting, etc.) comprising the country’s main non-oil exports. Other top export commodities are based in natural resources: mineral fuels, aluminum, iron and steel, and wood products. Additional sectors of the economy experience low productivity, and sector growth and export competitiveness potential are hampered by major gaps in skills and infrastructure. The productive capacity of enterprises in non-resource sectors is weak, and existing trade support institutions (TSIs) in the country have limited capacities to provide the services necessary for enterprises, in particular SMEs, to increase their international competitiveness.
Administrative barriers to trade
Based on a number of regulatory and fiscal indicators, BiH held the 125th position of 183 countries on the World Bank’s “ease of doing business” ranking in 2012. The slow and bureaucratic system hinders enterprises’ ability to do business. Non-tariff measures (NTMs), in particular technical regulations, conformity assessment, para-tariff and price control measures and various procedural obstacles including customs procedures, represent a significant trade barrier both at the national and regional levels.
Limited access to finance
Access to finance is a major obstacle to business and trade growth, in particular for SMEs. The interest rate is rising, increasing the difficulties for investors and SMEs in accessing credit. In addition, foreign direct investment (FDI) is constrained by the country’s unwieldy institutional structures. The financial crisis contributed to a fall in FDI inflows, from 5% of GDP in 2008 to only 1% in 2009 and 2010.
Statistics have been compiled by the World Bank, OECD and UNECE. Information has been adopted from: the United Nations Development Assistance Framework for Bosnia and Herzegovina 2010-2014; the 2008 United Nations Country Team in Bosnia and Herzegovina Common Country Assessment; the 2009 UNDP National Human Development Report “The Ties that Bind: Social Capital in Bosnia and Herzegovina”; the 2010 United Nations report on “The MDGs in Europe and Central Asia: Achievements, Challenges and the Way Forward”; and the 2009 OECD report on “Sector Specific Sources of Competitiveness in the Western Balkans”.