by
Joseph K. Ingram
Director, The World Bank Country Office
Bosnia and Herzegovina
October 18, 2000 Mr. President, Honorable Prime Minister, Mr. Mayor and Deputy Mayor, Friends and Colleagues, 1. Thank you for inviting me to talk to you about Mostar and its future, from the vantage point of the World Bank. In doing so, I would like to start by putting your city into the larger context of BiH, since many of your economic problems are a microcosm of the problems which the country as a whole faces. In concluding, I will return to Mostar itself and what it can contribute to economic development for the entire country.
2. Let me also say that, as you know, I am not a politician facing elections one month from now, so I will not present quite as rosy a picture as some of this morning’s speakers.
3. As many of you know, the Bank has been since the end of the war, the largest single financier of development investments in BiH, and until today we have provided close to US$ 800 million in investment financing. Most of this has been directed at helping to rebuild the country’s infrastructure; roads, bridges, power plants, water supply, hospitals, schools, etc., and most of it has been done with remarkable alacrity and efficiency; a credit to the authorities of BiH.
4. As a result, much of the necessary infrastructure for sustaining rapid growth is now in place. What is still missing, however, is the full commitment and determination to radically restructure the institutions, processes and policies which are imperative to ensure that growth increases over time, with its benefits accruing more broadly across all of BiH. Now going on five years after the war, we are still stuck in a business environment which is inherently biased against private business. As a recent report in mid-1999 by a respected think tank concluded: “ Although the BiH economy displays the potential. To achieve a degree of self-sustained economic growth, it remains handicapped by a statist, overly bureaucratic system, which robs the economy of its lifeblood and destroys incentives to invest in the country”.
5. While such a conclusion reflects an extreme view of the situation, which I don’t fully share, the failure of today’s governments in BiH to adopt – after almost two years of reflection –a modern and affordable pension system, as well as modern labor legislation, suggests that we still have a long way to go despite some progress in a number of other areas, like tax reform, the early stages of enterprise and banking privatization, and public finance management. Too many of this country’s public sector decisions makers still have the intellectual instincts and reflexes of pre-war Yugoslavia and are unwilling to give up their administrative controls and allow the creativity and dynamism of the private sector to be unleashed. This is tragic given the enormous economic potential of this country. It is also dangerous given the potential consequences of economic stagnation and the resulting inequalities in social and economic well-being. It is just such inequalities in economic and material well-being which ignite ethnic and religious conflict. The history of this region over the past 10 years is stark testimony to this fact.
6. In contrast to this country’s efforts at reform, it is worth looking at the performance of another ex-socialist economy, Hungary, and briefly analysing why it has managed to perform so well during almost the same period of time. We in BiH have much to learn from their experience. Today almost one in seven cars manufactured in Europe run with Hungarian engines, while Hungarians themselves are driving Audis, Suzukis, Opels, Fords. At the same time, Hungarians are holding Nokia, Motorola, Ericsson and other mobile phones manufactured in Hungary, while trying to find parking places in one of many shopping malls that offer a wide selection of international brand names at prices that are often 40-50% cheaper than in Bosnia. About 90 of the 100 largest multinational companies of the world already operate in Hungary and because of scarce labour in the more prosperous areas of the country, are now opening third and fourth factories in the relatively poorer parts of the country.
7. As a result of these developments, unemployment has fallen from 20% in 1993 to 7% today and it continues to decline. Industrial production expanded at 20% during the first half of 2000, exports that grew at double digit over the last seven years will likely surpass $28 billion by the end of this year, with four cities including Budapest, exporting more than all of BiH combined. This in a country of only a little more than twice BiH’s population. The economy has been growing at more than 4% annually since 1997 and growth will likely reach 6% this year with no signs of overheating. GDP surpassed pre-transition levels this year. Though they still remain amongst the most competitive in Central Europe, real wages are increasing. As a result, signs of modernization are everywhere in Hungary. There are 26 PCs per 100 people, which is 3 times more than in the Czech Republic, twice as many as in Poland and higher than in Slovenia. Nokia is now developing software in Hungary, tourism is on the rise, and outsiders are showing increasing interest in the country.
8. How has Hungary achieved such remarkable success and is it truly sustainable over time? In fact, the foundations for growth are strong and attractive to private investment, both foreign and local. The legal system is fair, transparent, and efficient, as is public finance management at all levels of government. Payment discipline and liquidity are strong, and the penalty for a failure to pay is immediate and effective for all. Most important, however, is that Hungary has opened its economy to private investment, though especially foreign investment, the stock of which in 2000 will surpass $23 billion, without taking into consideration the profits earned and reinvested by foreign companies over the last decade. Compare this with a stock in BiH of only about $500 million, accumulated over more or less the same period. Per capita FDI ($2100.) is the highest amongst the transition economies and total FDI is equal to more than 40% of GDP. About $2 billion per year in new investment comes into Hungary annually and this arrives despite the fact that privatization is all but finished in the country.
9. How did this happen so quickly? With the collapse of eastern export markets in 1992 Hungary took a decision to adopt one of the most draconian bankruptcy laws in the region, and chose not to experiment with mass privatization schemes. Instead they sold state companies to strategic foreign investors early on, and used the proceeds to ensure the establishment of reliable social safety nets for people during the early difficulties when decrepit industries were closed.
10. Compare these results with BiH where FDI is still a minute fraction of Hungarys’ and where, instead of fighting to invest, firms still from Aluveneto from Italy to Germany’s Gluck Norm, America’s Pilkington, and most recently Benneton and McDonalds either shut down or choose not to invest because of obstacles arising from outdated regulations and administrative requirements, managed by people, many of whom still have mind-sets frozen in the economic framework of pre-war Yugoslavia.
11. Without going into lengthy detail, what simple lessons can be drawn from the Hungary experience, for BiH and its constituent parts? First of all, a low corporate income tax (18%) allows companies in Hungary to keep more of the profit they produce. At the same time local governments went a long way in waiving local taxes, providing land, lots of positive attention and help to potential private investors. Mostar is beginning to do the same. Secondly, growth in unit costs should be kept at levels lower than productivity growth, which means that social, telecommunications, electricity and other costs need to be kept at a level based on economic and financial considerations only. Thirdly, these lower unit costs should be achieved while resources from privatization are still available to finance social sector reforms and social safety nets. Fourth, Hungary aggressively courted FDI to replace its old dying industries rather than attempting to buy time for them through wasteful subsidies and bail outs. This was key to achieving and maintaining high productivity growth. Fifth, the selection of where to invest was pretty much left up to the investors themselves, unlike the case of the former Yugoslavia, as Prof. Krkic pointed out this morning. Hungary had no industrial policy to direct multi nationals, other than limited incentives to direct FDI to the underdeveloped Eastern part of the country. And finally, the sixth lesson drawn is that genuine interest, openness and quick follow-up on the part of authorities are what inspire trust and long-term commitment.
12. In Mostar, I am happy to say that progress in many of these respects is being achieved, as Prime Minister Bicakcic indicated this morning, though much more remains to be done, especially since Mostar remains a bell weather in a sense for the rest of the country. First of all, the new municipal administration has made substantial progress in bringing together the two communities here. With the help of the World Bank and other donors, they have succeeded in creating a single water and sewage facility for the city thereby reducing costs and eliminating the inefficiencies arising from the operations of duplicate services and administrations. Under the Cultural Heritage project, the administration is also supporting the reconstruction of the very symbol of the city’s common cultural heritage, namely the old bridge. Not only are these important symbols of reconciliation for all of BiH, they are also intended to make Mostar once again the popular tourist destination it once was. The recent merger of the two local basketball teams from the east and west of the city, as well as the success of a recent city wide soccer tournament are also important symbols of reconciliation and stability, and in a sense are leading the way for other parts of the country.
13. On the other hand, when compared to Hungary, it is clear that these symbols of ethnic reconciliation are not nearly enough to create an environment in BiH more favorable to private investment, and much more needs to be done if this fragile foundation is to serve as a basis for rapid growth. The pace and scope of reform needs to be much faster and much deeper so that the populations of both entities soon begin to feel the social and economic benefits of change. In the absence of accelerated reforms, the real danger is that public assistance will decline even more quickly, private investment will fail to materialize on the scale needed, and Bosnia’s population will lose all hope and abandon commitment to the transition and nation building process. Mostar now has an opportunity to help ensure that this doesn’t happen and that instead BiH will go forward as a dynamic multi-ethnic economy, serving as a positive model and symbol to all of South East Europe.
Thank you.
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