An Op Ed by Jane Armitage

World Bank Country Director and Regional Coordinator for Southeast Europe

Published in Dnevni Avaz, July 11, 2009

 

 

The world is in the middle of the worst recession since World War II. Its impact has been felt no more severely than in Eastern and Central Europe. Bosnia and Herzegovina is no exception: Bosnia’s GDP is expected to shrink 3 percent in 2009, and its fiscal deficit will amount to around 2 billion KM if no measures have been taken to reduce it.  The authorities have worked hard to design measures to establish macroeconomic stability and obtain financial commitments from the IMF and other international financial organizations. These resources will be crucial to not only weather the crisis but to prepare for the future once the external environment improves.

 

Countries throughout the world are responding to the crisis in different ways, depending on their particular circumstances.  In almost every country, however, policymakers and citizens are coming to terms with the reality that hard choices have to be made.  The most successful of these choices balance expenditures with available resources, promote economic growth, and most important protect the most vulnerable.  

 

Bosnia and Herzegovina has its own difficult choices to make.  The main challenge is to reform Bosnia’s system of social benefits, which is almost entirely based on legal rights related to military service and war damage and not on need.  All countries have social benefit systems, and they strive to make them equitable, sustainable, and efficient.  BH’s is none of the three.

 

The current system in BH is not socially just.  Less than 30 percent of all—civilian and war-related alike—social benefit programs reach the poorest in BH.  The distribution of these payments largely explains Bosnia’s stubbornly high rate of relative poverty, which remains at around 18 percent of the population.  Indeed, the World Bank estimates that the sum of these programs—which amount to 41 percent of public spending in the Federation only—reduce poverty by a negligible 1.2 percent.

 

Bosnia’s system is also not fiscally sustainable; even before the crisis, the country ended 2008 with a large fiscal deficit.  With the global economic crisis now hitting Bosnia with full force, the very survival of its socio-economic system is at stake.  With a projected budget deficit of 8.0 percent of GDP in 2009 (or 2 billion KM)—Bosnia is running out of money.  One of the main causes of this deficit has been an uncontrolled increase - in the Federation in particular- in social benefits, which now consume an unsustainable 4 percent of the country's GDP.  By comparison, Bosnia’s neighbors in the region spend 1.6 percent of GDP; for wealthy OECD countries it’s 2.5 percent.

 

Finally, the scale of these payments is undermining BH’s long term competitiveness.  The share of GDP Bosnia spends on public investment, including in basic infrastructure, is about half of what new EU member states spend.  BH, for example, is ranked in the lowest decile worldwide when it comes to perceptions of the quality of air, road, and port infrastructure.  This not only undermines competitiveness, it has resulted in a lost opportunity to generate jobs during the crisis as the Government has too few resources to start or scale-up large capital projects.

 

Reform will not be easy, but there is broad agreement on what needs to be done.  Fraud and lack of transparency in eligibility criteria need to be eliminated.  Furthermore, targeting systems have to be introduced to ensure that social benefits are going to those who really need them. This will require the introduction of some formula to make the benefits contingent on income and other indicators of wealth.  To do this, Bosnia needs to strengthen the institutional systems which administer these benefits.  Specifically, by  introducing integrated databases to determine if individuals are getting more than their fare share, and undertaking eligibility audits to ensure that only those with real disabilities receive benefits. 

 

The purpose of this is not to deny people benefits, but to ensure that there is money left to pay the benefits to those who really need them.  The time for action is now. With reduced financial resources due to the crisis, and in the absence of reforms, the disproportionate size of these benefits is very likely to leave the Federation unable to meet public sector payrolls, including teachers, policemen, and other providers of essential public services.

 

Every government has a duty to help provide for the comfort, health, and dignity of its citizens, including its veterans; part of this responsibility is making sure that whatever benefits it provides are sustainable.  Bosnia’s system will reflect its own history and values.  The World Bank, which has been a close and committed partner to Bosnia since before the war ended in 1995, stands ready to provide ideas from other countries’ experience.  More generally, we look forward to delivering continued support to help meet Bosnia’s broader development challenges, today and in the future.