Bosnia and Herzegovina (BH) has accomplished a great deal since the 1995 Dayton Peace Accords helped bring an end to the worst bloodshed on European soil since World War II. Most important, BH citizens and authorities have restored peace. Despite intense political debate and lingering ethnic division, there is no popular will for a return to violence. BH is a European Union (EU) potential candidate country and moving, though fitfully, toward alignment with EU acquis requirements. The authorities have also established a solid record of economic management. Between 1998 and 2008, per capita GDP nearly quadrupled and poverty dropped from nearly 20 to about 14 percent. Perhaps most impressive, a decade and a half after the end of fighting, BH’s citizens have managed these achievements within a decentralized and highly complex political and institutional structure which frustrates decision making.
BH has established a solid record of economic and social achievement. This record has come notwithstanding the extraordinarily complex institutional and political system defined under the 1995 Dayton Accords. Major accomplishments include more than 15 years of peace and stability; the resilience of democratic processes; a heroic reconstruction effort, the transition from a socialist to a market based economy; solid economic growth; improved living standards; progress on MDGs; and a substantial drop in poverty.
Following a sharp slowdown in 2009, the BH economy is estimated to have returned to growth of 0.8 percent in 2010, with the recovery gaining momentum toward the end of the year. The rebound was modest because growth in private consumption was constrained by the legacy of the recession in 2009, including increased unemployment, and by the measures taken to rein in the budget deficit, such as cuts in public-sector wages and social welfare benefits. Private investment growth was also close to zero. The contribution to growth was due, in part, to the recovery in external demand.
This CPS builds on an analysis of BH’s key development challenges. To support its EU aspirations and to continue to improve the quality of people’s lives, BH will need to address three critical and interrelated development challenges: (i) sustain growth through improved competitiveness; (ii) reform public finances and institutions to improve service delivery and make growth more inclusive; and (iii) achieve the sustainable use of the natural resources, including by adapting to climate change. Lack of progress in tackling weakness in governance may undermine any progress on these challenges.
BH drafted a Country Development Strategy. As might be expected, the strategy is the product of coordination among the different administrative levels and stakeholders. While the current draft has not been adopted and it may require more work to become a "countrywide" strategy, it reflects the contributions of all levels of government (the state level Council of Minister, FBH, RS, and Brcko district) and it reflects development objectives and activities that are broadly followed by all levels of government in BH.
Moreover, while ethnic divisions continue to shape political alignments and undermine governance efficiency, there are no fundamental ideological or even significant technocratic differences among the authorities at the Entity and State level on most macroeconomic and sectoral issues. Policymakers at all levels of government see BH’s future as an open, export oriented market fully engaged with the EU, and understand that improved transport and communications infrastructure are critical for economic growth and integration in South East Europe.
The World Bank supports a portfolio of 12 operations with commitments totaling US$302.3 million (June 30, 2011). These operations are financed by seven IDA credits totaling US$154 million, three IBRD loans of US$130 million, and three GEF grants of US$18.3 million. The FY11 disbursement ratio exceeded 25 percent. This robust disbursement performance, sustained over the last three FYs, and the continued reductions in effectiveness delays, achieved in the context of a uniquely complex institutional environment, testify to ownership of the Bank supported program and concerted efforts from all local stakeholders.
The principal risk in BH is continued political fragmentation and stalemate. Based on the Bank’s previous experience with policy lending in BH, the risk of policy reversal is significant. In particular, failure to advance with sensitive reforms in social assistance benefits agreed to under DPO I or an overall deterioration of the macroeconomic framework would lead to postponing or even cancelling DPOII. In this case the Bank will consider reallocating the remaining IBRD resources (about US$50 million) to investment operations. Moreover, should completion of the reform of the social benefits system languish, fulfillment of expected outcomes in competitiveness and social inclusion would also be put at risk. It would undermine progress toward gains in fiscal stability and stall reductions in the labor tax wedge; and, most important, the goal of targeting scarce resources to the truly poor will be once again postponed.
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