Commentary

Rebuilding Socialism in Bosnia?

By Gary Dempsey
February 6, 1998

Shortly after the Dayton Peace Accords halted the fighting in Bosnia in late 1995, the World Bank announced it would raise $5 billion in reconstruction aid. Concerned with securing large pledges from the United States and other Western governments, bank officials claimed that the break-away Yugoslav republic was intent on privatizing its economy as soon as possible. Bosnia is expected to respond quickly to privatization, explained the bank’s director for Central Europe, Kemal Dervis. “This is not an economy like the former Soviet republics,” he assured skeptics. “Yugoslavia was halfway to the market when the war started.”

More than two years and $3 billion in aid later, Bosnia has yet to implement a comprehensive privatization plan to desocialize its economy. “There is a general feeling here that broken-down state companies are an asset,” explains Kevin Mannion, director of the UN’s International Management Group in Bosnia.

Nevertheless, President Clinton recently extended the U.S. troop commitment to Bosnia indefinitely. After fighting the Cold War for 40 years, American forces now find themselves in the curious position of upholding the institutional remnants of a defunct communist state.

The primary obstacle to privatization in Bosnia has been political foot-dragging. Under heavy international pressure, the Muslim-Croat area of Bosnia approved a package of privatization laws last October, but it has yet to be implemented. The Serb area of the country recently said it plans to sell off 250 to 300 state-owned enterprises, but the World Bank and other international agencies say the plan is seriously flawed and have appealed to Serb authorities to stop its implementation. As of today, foreign companies still may not invest in any state-owned commercial enterprise in Bosnia.

Many Bosnian officials are resisting privatization in order to protect a highly bureaucratic system of jobs and privileges left over from communist days. In many cases the heads of Bosnia’s major state-owned enterprises — such as the main utility, Electropiverta — are also members of the SDA political party. Party officials use these state-owned enterprises to further their own financial and political interests. Officials close to Bosnian president Alija Izetbegovic, for example, also run the state-owned television station. So far, they have resisted privatization and blocked the start-up of an independent, Western-financed competitor.


As one U.S. official recently noted, “The goal is not to rebuild a socialist economy” in Bosnia. Unfortunately, that may be the ultimate result.


Bosnia’s ongoing failure to implement a viable privatization plan has had a disastrous economic impact. Although its economy grew 35 percent last year, most of that “growth” reflects an influx of billions of dollars in international aid, not an expanding national economy. Bosnians may be building bridges and airports with aid money, but that activity only masks the underlying sickness of their economy. “There’s really no economic growth,” admits Peter Hanney, head of private business development for the UN’s Office of the High Representative; “there’s no job creation.”

The reality is that Bosnia is in an economic coma. Most state-owned enterprises are struggling to stay open. Many are completely dormant. Unemployment, which fell after the war, did not improve at all last year. Fifty percent of the workers in the Muslim-Croat half of the country are still idle, and 70 percent of workers in Serb half remain unemployed.

Moreover, the Bosnian government’s unwillingness to privatize state-owned banks has held back the formation of financial institutions capable of offering reasonable commercial loans to start new businesses. Other remnants of the communist era — onerous taxes and regulations — also continue to thwart business start-ups. “Things are still so rigidly controlled here that many businessmen can’t get off the ground even if they have money and ideas,” explains one Bosnian reconstruction specialist.

Bosnia’s failure to formally privatize its economy has also led to scattered “illegal privatizations” of state-owned property. The state-owned aluminum plant in the city of Mostar was one of Bosnia’s biggest employers before the war. Today, the plant is operating, but federal officials in Sarajevo do not know who owns the plant. They are now investigating whether it was simply taken over by local officials.

The Bosnian government’s resistance to privatization, of course, was known last month when President Clinton informed American taxpayers that they will have to pay for an open-ended military presence in Bosnia. With little prospect for real economic growth and foreign investment in Bosnia without privatization, the question now becomes: What impact will the American troop commitment actually have? As one U.S. official recently noted, “The goal is not to rebuild a socialist economy” in Bosnia. Unfortunately, that may be the ultimate result.

Nation building in the Balkans is a bad idea, but socialism building is even worse.

Gary Dempsey is a foreign policy analyst at the Cato Institute.