An Op Ed by Marco Mantovanelli,

World Bank Country Manager in Bosnia and Herzegovina

Published in Dnevni Avaz daily, February 28, 2009

 

 

A couple of weeks ago the Economic-Social Council of the Federation adopted an Operational Plan against the worsening global economic crisis for 2009-2010. Among other crucial elements, this plan provides some directions for reform of the social sector, which should include rationalization of spending and better targeting of benefits on those who truly need them.

 

This plan has come just in time, as the fast-approaching global recession already knocks on the BH doors. From the Atlantic Ocean to the Baltic Sea a wave of unemployment is sweeping across Europe. In January last year there were 800,000 people claiming unemployment benefits in Britain. By the end of this year it is estimated that British unemployment will double to 1.8 million people. Meanwhile, in France, there are over 2 million unemployed already. Even in the once dynamic Baltic economies, riots have erupted over the pain caused by the government retrenchment required as a result of the banking and economic crises.

Several BH companies have already announced that they have to lay off workers because reduced demand on global and regional markets have forced them to reduce their production. Just in last December some, 5,000 people have registered as unemployed and have requested social assistance in BH. More than 1,000 new unemployed have registered in January.  

In BH throughout the past decade official unemployment rate was exceeding 40 percent.   While we can question the accuracy of this official data, such frightening statistics in light of the approaching hardship is cause for a major concern.  An additional concern is the fact that these dire unemployment statistics are inflated by those who register as unemployed even when they have a job, sometimes even two.

 

Many seem to believe it is perfectly normal to cheat public finances by registering as unemployed to receive health insurance and other social benefits, even when they hold a job.   And some employers seem to think that that is a good idea because they will not have to pay social contributions for that particular worker.   This cheating of the system deteriorates public finances and deprives those truly in need of state assistance.

 

Yet while we may think that this is contrary to the law, there are instances where legislation has actually encouraged such behavior.

 

An example of how this plays out in practice is provided by the FBH demobilized soldiers’ benefit that was introduced in October 2006. In the period 2004-2006, prior to the introduction of the aforementioned benefit, the number of unemployed demobilized soldiers registered with the Employment Bureau in FBH had been around 60,000. Between September 2006 and December 2007, the Employment Bureau in FBH had recorded a 46% increase in the number of people registered as unemployed demobilized soldiers – form 60,000 to nearly 90,000. It is truly hard to believe that 30,000 demobilized soldiers lost their job during that period, when other official statistics were showing the economy was actually creating jobs.

 

Moreover, parallel information from private employers indicated that many of these 90,000 people actually continued to work at their firms and had no intention being ‘really’ unemployed. This suited employers just fine because, in this case, both employers and employees profit jointly as the former don’t have to pay payroll contributions and the latter keep receiving unemployment benefits on top of their salaries.

 

Since they are awarded regardless of the claimant’s economic means, these kind of right-based benefits are not generally so high as to enrich the individual recipient, but provide enough incentives to either substitute work with leisure, or, enable the person to register as unemployed and continue working in the ‘grey’ economy.   At the same time, the economy and public budgets are struggling to fund the various benefit transfers even though there is no evidence that these transfers are making society better off as a result.

 

On the contrary, this makes BH society worse off since paying out hundreds of millions in benefits now implies foregoing of either other social payments, such as better child allowance, or public investment opportunities that could increase the overall wealth and welfare of BH citizens in years to come.  We estimate that social expenditure in BH, one of the highest in Europe as percentage of GDP, reaches only 30 percent of those most in need in BH, one of the lowest rates in Europe.

 

In other words, those people who cheat the system to get even a meagre extra income actually cheat themselves and their dears.    This is why the World Bank recommends that the authorities start targeting social benefits to need.

 

The global economic crisis is probably going to lead to a genuine increase in the number of unemployed in BH.   In light of that real threat, it is important to reform the current system so that the people in genuine need can be identified easily and helped quickly.

 

As things now stand, there is no way of telling who on the BH unemployment roll has been really laid off and who, though registered as unemployed, is in fact a businessman who may or may not be laying off people himself.