Thanks to a largely successful post-war reconstruction program, Bosnia and Herzegovina has recorded impressive growth rates since the mid-1990s. However, sustaining rigorous economic expansion will become a challenge amid declining official aid flows and modest private investment. This chapter argues that continued adherence to the currency board arrangement and sustained fiscal prudence are the best options for sustaining macroeconomic stability. Rigidities constraining the economy’s potential are best addressed through an acceleration of key structural reforms, including through improving the business environment and increasing the flexibility of labor markets.

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Despite a liberal trade regime and early pick-up in export growth after the end of the conflict, BH's recent sub-par export performance and still-frail record in attracting foreign direct investment remain major bottlenecks to economic growth. This chapter reviews the surge in exports immediately after the end of the war and their subsequent moderation, and concludes that resorting to a more restrictive trade regime would send adverse policy signals and not deliver the intended results. The real constraints to a more dynamic export performance lie in the business environment, investment climate, and the viability of the corporate sector.

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The low level of domestic savings in BH reflects, in part, disappointing corporate performance. Establishing a favorable investment climate is central to building a basis for accelerating real GDP growth. To understand the sources of the weak performance in BH’s enterprise sector, this chapter analyzes the underlying institutional fabric of the country’s business environment.

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Slow progress in market-based institutional reforms underlies the poor investment climate and weak corporate performance in BH. Building on this analysis, this chapter investigates in detail the most critical institutional constraints and incentives to enterprise restructuring and development, based in part on the findings of recent region-wide analysis of the business environment in eight south eastern European economies.

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Labor mobility and redeployment have been low in BH even by regional standards, especially in the formal sector. The formal sector, and within it the budgetary, state, and socially-owned sectors, still maintains some of the features that characterized the labor market during socialism. Furthermore, the labor market has a noticeable duality between the functioning and performance of its formal and informal sectors. The objectives of this chapter are to analyze the recent performance of BH’s labor market and to identify policy measures to improve its functioning as a means of supporting growth in output and employment.

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