Early warning system: Bosnia and Herzegovina

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EARLY WARNING SYSTEMThird Quarterly Report September 2008

web edition


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Bosnia and HerzegovinaUnited Nations Development Programme

EARLY WARNING SYSTEMThird Quarterly Report September 2008

Although publication of this Report is supported by the United NationsDevelopment Programme (UNDP) the opinions stated herein do not

necessarily reflect the official position of the United Nations Development

Programme (UNDP)

Deputy Resident Representative a.i.: Armin SIRÔ

Project Coordinator: Tarik ZAIMOVI]; Mersiha ]URÎ]

Review by: Armin SIRÔ, Deputy Resident Representative a.i.

Editors: Tarik ZAIMOVI]; Desmond MAURER

Authors: Dina DURAKOVI] M.A.; Adnan EFENDI] M.Sc.

Aleksandar DRAGANI] M.A.; Ivan BARBALI] M.A.

Fahrudin MEMI]; Edin [ABANOVI] M. Sc.Translation: Desmond MAURER

Cover design: Mirna ]ESOVI]

DTP & Layout: Samira SALIHBEGOVI]


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2007 2008% IV quarter I quarter II quarter III quarter

Political stability indicators

Politically speaking, the situation in BiH is getting worse 2.5 -14 -17 0.9

Would emigrate 3.8 -3.4 -4 3.4

View EU membership with hope -2.9 8.9 1.8 -7.4

Think EU membership is important for political stability in BiH 7.9 1.8 -1.3 -1.8

Support the process of joining the EU 6.4 4.5 -2.7 -1.6

Institutional approval ratings

Confidence in Presidency -5.1 4.3 -3.1 0.2

Confidence in Council of Ministers -6.4 4.9 -4.3 1.4

Confidence in FBiH Parliament -6.5 5.9 -5.2 2

Confidence in FBiH Government -7.1 6.6 -5.6 1

Confidence in RS National Assembly -2.9 -1.6 -4.7 1.3

Confidence in RS Government -2.2 -2.4 -4.3 1Confidence in OHR 6.8 -0.3 -6.5 2.6

Confidence in EU 5.7 -0.3 -3.5 0.6

Economic and fiscal stability indicators

Industrial production 6 6 6 7

Unemployment 2 2 2 8

Retail prices 6 7 8

Foreign reserves -1 30

Balance of trade 5 2 1

Incomes and social welfare indicators

Average wages 3 7 4 1

Consumer basket/average wage 3 1.5

Average pension 5 7 7 1

Minimum pension 15 2 2

Average pension/average wage 10

Would emigrate 12 10 10 10

Would protest over low income 10 5 7

Households with < 500 KM a month 7 10

Ethnic relations indicatorsHuman rights violations related to ethnicity (reported) -1.3 -3.5 1.6 -0.1

Accept return by refugees and displaced 1.1 2.5 -1.5 -5

Willing to share country with other ethnic groups 0.5 1.5

Strong pride in being citizen of BiH -3 -3.9 -5.3 -2.8

Concern that war might break out again 7.8 -5 -10 6.6

Public support for ethnic parties 2.5 -1.2 3.9 8.3

Security indicators

Illegal behaviour by police 0.6 -3.9 1.8 -4.3

Level of crimes against property and person(reported by our sample) -1.5 1 3.9 -0.1

Number of requests for police assistance 1.5 -1.9 0.3 0.9

Public satisfaction with police assistance 5.9 -9.3 -30


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Armin Sir~o

Deputy Resident Representative a.i.,UNDP BiH

FOREWORD

As the Early Warning System project enters a new year, we are forced with regret to note that its rel-evance has not decreased with time. As proof of this, we may offer the summary given in the foreword to

last year's annual report, namely the list of most important current issues:"(i) the process of integration with Europe and the various associated reform processes,(ii) growing recognition of the need for major restructuring of the post-Dayton constitutional and

institutional apparatus and the associated process of constitutional reforms, and(iii) the phasing out of direct international controls in favour of local ownership of and responsibility

for the political process, as symbolized by the downsizing and eventual transformation of theOffice of the High Representative into an Office of an EU Special Representative."

While we must once again recognize that there has been a lack of progress with regard to these threeprocesses, but furthermore, we also must unfortunately report regression and deterioration, discussed insome detail in the report.

This lack of progress has been very clearly captured by the Early Warning Reports and by the move-ment of the stability indices in particular, over the year. We are particularly pleased with the improvedanalysis of trends, with better identification of cyclical or seasonal aspects (e.g. in income and expecta-tions) and of patterns of congruence or mutual reinforcement (particularly between socio-economic andeconomic factors, on the one hand, and between political and ethnic issues, on the other). One thing thishas made particularly clear is how much the political situation in Bosnia and Herzegovina has benefitedover the past several years from a countervailing economic lift. Thanks in part to the global downturn, thiscan no longer be expected to be the case. Under such circumstances, analysis of the sort contained inthis report can only gain in significance and usefulness and the results of the 2008 opinion polls may beexpected to make fascinating, if not always pleasant reading.


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experienced a surge of some 10 points in support amongst the relevant electorate. This was partly at theexpense of the HSP and partly due to a reduction in the number of undecideds. This configurationseems likely to result in a more smoothly functioning policy of divide and rule (e.g. energy policy) andstrategic appeasement of the international community, rather than an unambiguously constructive com-mitment to a common agenda for reform. (See Tables IX and X in the political stability section of the annex

for more details on our poll results.) It is in respect to this situation that one should consider TransparencyInternationals finding that Bosnia and Herzegovina is the most corrupt country in the region, as corrup-tion and the enlightened self-interest of vested interests seems likely to be the main motive force indrawing the country back towards more active cooperation with Europe.

As a result, there is as little prospect that the role of the High Representative will be altered or a realdeadline set for the final transformation of the Office of the High Representative into one of the EU SpecialRepresentative as there has been at any point over the past five years. If anything, we can expect theEuropean Union and the international community more generally to take an increasingly hard line withregard to the local political establishment and to rely increasingly on the High Representative, reinforcingthe culture of irresponsibility.

Finally, we may note that the global economic crisis has yet to bite fully in Bosnia and Herzegovina. Thisis, no doubt, a reflection of Bosnias lower levels of foreign investment, less developed stock market, and lowerlevels of credit extension both to business and to households. On the other hand, there are grounds in ourbusiness survey results for supposing that its impact has just been delayed and will affect public opinion andeconomic statistics in the next several quarters, as profits and production levels fall. Still, indications are over-all that the impact on the economy here will not be as severe as in some of the surrounding countries.

The Stability IndicesThe potential for a new direction in politics and the economic time-lag are reflected in our surpris-

ingly buoyant stability indices. The Stability Index for Bosnia and Herzegovina rose one point, from 59 to60. It is to be noted that this small growth is in spite of the fact that Radovan Karad`i} was arrested, the

SAA came into force, and local elections were being held. Moreover, it includes a correction from themajor drop last quarter in the value of the Political Stability Index. This underlines how little room thereremains in Bosnian political life for transformational events, in the absence of real change.

The upward movement in the overall index reflects positive movement in four of the five componentindices, with only the Ethnic Stability Index remaining at the same value as last quarter. No index fell.

The Political and the Security Stability Indices both saw a rise of two index points, while the Socialand Economic Stability Indices both rose one point. The Ethnic Stability Index did not move. As a result,three of the indices are within one point of their long term averages, the exceptions being the PoliticalStability Index, which is 4.5 points below its long term average, and the Ethnic Stability Index, which is

Graph 1. The BiH and sectoral stability indices

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three points above its average. The BiH Stability Index is 1.5 points below its long term average. As thissuggests, the improvement in the indices is more likely to represent a correction than a recovery.

Sectoral Review

We shall now review each of the fields of analysis covered by the authors of this report in turn.As mentioned above, the Political Stability Index rose two points. This represents a minor correction

to the major fall of five points last quarter and as such can hardly be considered evidence of significantimprovement in political life.

The signing of the SAA was the only recent political event that could have had a positive impact onthe index. On the other hand, there has been a series of negative events and trends which have resultedin a sense of profound political and social crisis in the country. The very marked negative trends that wehave noted for several quarters include the already alarming degree of dysfunction in state-level institu-tions, the failure to reach political compromise over key issues related to the future of the state, and thediametrically opposed positions taken by the political leaders vis--vis the future internal organization ofthe country. The holding of local elections in early October was certainly a contributing factor to the deep-

ening political crisis as has become traditional, the run-up to the election was used to promote divisionswithin the electorate, while nationalist and radical rhetoric was used to score political points. This radi-cal rhetoric would seem to have helped shore up support for its proponents (the SNSD and the Party forBiH), though perhaps not to the degree expected, but the main result may have been to send previouslyundecided voters into the arms of the SDA and the HDZ.

The escalating political crisis is at least partly due to the passivity of the international community inthe face of Bosnian politicians prepared to call into question the constitutional order and even the terri-torial integrity of the state they represent, not to mention to raise from the dead long-settled issues like thestatus of the state-level broadcaster and the creation of a Croat-language TV channel. The result is a wor-rying level of political instability. There are, however, signs that the international community's attitude tothe situation in BiH may soon change. This is particularly evident from the fact that BiH has found itself

on the agenda of a number of the most important European institutions, including the EuropeanParliament and the Council of Europe, which condemned in no uncertain terms political conditions here,demanding that attention be refocused on matters of importance to the process of European integration.It remains to be seen whether these strong words will be translated into any concrete course of action.The best indicator of this is likely to be the position taken by the Peace Implementation Council's SteeringBoard at their next meeting in late November.

Under the current political climate, the urgent need for constitutional reform has become clearer thanever if the state is to function at all and meet its obligations with regard to European integration. On theother hand, there has been little evidence of any true meeting of political minds in BiH over this issue andno solution seems likely to be found soon or simply.

When it comes to institutional stability, as noted above, government gridlock was the keynote to yet

another quarter in BiH. The hopes and expectations stirred by the signing of the SAA were soon deflated,at least with regard to any increase in legislative activity, the passing of new laws or regulations requiredto bring BiH law into line with EU law, or any signs of greater industry in government institutions. In fact,they became even less efficient, less coordinated, and less effective than before the SAA was signed. Theaffair of the Presidency Chair's addresses to the UN General Assembly and the Council of Europe'sParliamentary Assembly, which were personal statements of grievance and as such repudiated by the Serbmember of the Presidency, is fully indicative of the depth of the political and institutional crisis affectingthe country. The failure to agree on how to represent the country to the world or on a platform that wouldreflect the interests and positions of all three members of the presidency is a stunning example of theimpact of personal and party conflict on the operations of government institutions. No special analysis isrequired to understand the negative impact this must have on BiH's reputation abroad. The reaction of

international institutions and officials to the situation here during the reporting period demonstrates clear-ly that international institutions have woken up to the fact that the crisis the state is going through is bothendemic and lasting. Although no concrete action was taken by international institutions (led by the HighRepresentative) to deal with or mitigate the political and institutional crisis affecting BiH, a general con-


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sensus seems to have matured to the effect that active involvement by the international communityremains necessary.

The most important results of our survey related to political stability were:- The percentages of the various ethnic majority area samples who think that, politically speak-

ing, BiH is headed in the wrong direction remained relatively stable, up just a couple of pointsin the FBiH (to 57% and 61% for the Bosniak and Croat majority area samples respectively),while unchanged in the RS, at 42%. This means that the major improvement (reduction in thenumber who think things are going in the wrong direction) last quarter has been largely pre-served. See Table II on political stability.

- By contrast, there has been a moderate increase in the percentage of the sample who wouldemigrate if they could (as high as 64.5% for the 18-35 age group). It is worth noting that bothBosniaks and Croats are significantly more inclined to emigrate than previously, while Serbsare less so. See Tables IV and V on political stability.

- Overall support for integration with the EU remains stable at 75%, though there was a notice-able fall in support in Croat majority areas (down 11 points). Again, there was little change in

the percentages who said they though EU membership was important for political stability inBiH, but there was an interesting and significant rise in the percentages who view the processwith concern, up from approximately 17% to 23%. The decline is present across all three eth-nic groups. See Tables VI, VII, and VIII on political stability.

- Our poll of political preferences, which was taken after the election, shows the SDA and theSDP with nearly equal support in the FBiH (15.5% and 14.5%, respectively), with the Party forBosnia and Herzegovina considerably behind them at 8.7%, marginally ahead of the HDZ at8.4%. The HDZ 1990 had 1.4%. In the RS, the SNSD had 35%, followed by the SDS at 13%,and the DNS at 3.6%. Percentages are at the level of the entity. See Tables IX and X on polit-ical stability.

- The Serb sample was most likely to support current political arrangements, with between 30

and 40% saying the parties in government were doing a good job, should stay in power, etc.This compares to just 10% or below for the Bosniak sample. The Croat sample was betweenthe two, but generally closer to the Bosniaks than the Serbs. See Table XI on political stability.

- Bosniak and Croat approval ratings for government at both state and entity level did howeverimprove in comparison to last quarter (though still only 30% and 35% respectively). AlthoughSerb support in all levels of government has fallen 11% since the beginning of the year, itremained higher than for the other two ethnic groups (as high as 61% for the institutions of theRS). Interestingly, the approval ratings of both BiH and FBiH government institutions werehigher in the RS than in the FBiH. See Tables I and II on institutional stability.

- The approval ratings of the international organizations in BiH were divided strongly on ethniclines. The Croat sample was the most critical of the international organizations active in BiH,

with double digit falls in the approval ratings of all of them. Serb sample approval ratings alsofell, but were nonetheless higher than the Croat samples. Bosniak sample approval ratingswere up on last quarter, and were higher than for either of the other groups, with some organ-izations at or around 50%. Please refer to Table II on institutional stability.

- There was no major change in overall support for the OHR, but this conceals a major rise (up12.8 points) in Bosniak support and a concomitant fall (down 14.6 points) in Croat support,so that the latter are now the group expressing least support for the institution. There was alsoa definite drop in support for the various reform packages (or at least how they are beingimplemented) on the part of all three ethnic communities the fall is between five and 11points depending on the reform and the group in question. Finally, there was no change inthe percentages of the three groups who think that the High Representatives powers should

be increased or decreased. It is worth noting that none of the three groups has a majority infavour of increasing them, while only the Serb group has a majority in favour of decreasingthem - which looks rather like a mandate for the status quo. See Tables VI to IX on institu-tional stability.

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Our individual indicators show an increase in the percentage of the majority who had notexpe-rienced any form of harassment or abuse due to their ethnicity over the previous twelve months inBosniak majority areas and of both samples in Serb majority areas. This resulted in a major fall inthe percentage of the minority population in these areas who said they have suffered from harass-ment on more than one occasion (from 9% to 2.5%). There was, however, a major fall in the major-

ity sample percentage in Croat majority areas who said they had been harassment free (down 10%),but no major change in the minority sample percentage. This is a clear indicator of Croat alienationin the run up to the election. See Tables I a-c.

Majority support for minority return was up moderately in Bosniak majority areas, but minoritysample support fell again, down to 88%. There was an even greater fall in majority population sup-port in Croat majority areas, down 20 points to 61%, and a lesser fall in Serb majority areas, downthree points for the majority sample and two points for the minority, so 81% and 80% respectively.The worrying indicator of last quarter has thus worsened, again with the accent on Croat disaffection.

This is confirmed by our measures of ethnic distance, with a 10 point drop in the Croat major-ity area sample who are ready to live in the same country as Bosniaks or have them for neighbours,but a drop of 20 points in the percentage who think it is acceptable to send their children to thesame schools. There was a similar but less marked drop in willingness for coexistence with Serbs.As a result, for the first time, Serbs are more acceptable to Croats than Bosniaks in most categories.This seems likely to be the result of tensions related to the election and the far lesser likelihood ofactually living in the same community as a Serb. See Tables IV to VI on ethnic stability.

There was a similar drop in Serb majority areas with regard to both Bosniaks and Croats, acrossthe board. There was little change in the results for Bosniak majority areas, where they remain muchthe highest in any case. It is worth pointing out that around 95% of the Bosniak majority areas sam-ple is open to coexistence in almost all categories, compared to less than 70% of either the Serb orCroat majority area samples.

We also note increases in the sample percentage who said they felt a strong degree of pride intheir ethnicity, particularly in urban areas. In short, there was a reduction in ethnic pride in theBosniak majority areas majority sample, but a rise for the minority one (up 10 points). In Croatmajority areas, the situation was reversed, with a rise for the majority and a fall for the minority(down 12 points). In the RS, majority sample pride rose seven points, while minority sample priderose 11. This clearly reflects tensions related to the elections and political confrontation more gen-erally. There was a concomitant reduction in pride in being citizens of Bosnia and Herzegovina inboth Croat and Bosniak majority areas, for both samples, but an increase in the RS for both. Only21% of the Serb ethnic sample, however, expressed any degree of pride in being citizens of BiH.This compares to 36% of the Croat ethnic sample and 81% of the Bosniak sample. See Tables VIIIand IX on ethnic stability.

Finally, we find an increase in the percentages of the Croat and Bosniak majority area majoritysamples who agreed with the thesis that the withdrawal of EUFOR might reopen the possibility of warhere. There was a decrease in the percentage of the Serb majority area majority sample and of theminority samples in all three areas who believed this to be possible. See Table X on ethnic stability.

Moving to our final section, we have seen that the Security Stability Index rose two points. Ata very general level this is justified, as there were no major shocks to public order or safety duringthe reporting period and the memory of the shocking examples of juvenile delinquency early in theyear fade. The main breach of public order, the violence that marked the opening of the first QueerFestival in Bosnia and Herzegovina, will have had little impact on public opinion, as a majority (ofboth the public and the authorities) are unfortunately likely to have agreed with those carrying outthe violence, rather than the victims. The damage done to Bosnias image abroad is, in this case,unfortunately justified.

Our indicators show that the percentages of the sample reporting that they have suffered someform of crime against property or the person are down significantly for the minority samples, but upfor those in the majority. The following graph, based on Table I on public security, presents thecumulative percentages for each sample (i.e. the sum of the percentages who said they had suffered


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any one of the various forms of crime). The much higher reported incidence for both the Croat andBosniak majority areas minority samples in the past two quarters is clear, as is the fact that it is nowthe Croat majority area majority sample that is most likely to say they have suffered some form ofcrime, followed by the other two majority samples and the Croat minority sample.

Interestingly, there was a reduction across the board in the percentage who sought police assis-tance, with the sole exception of the Serb majority areas majority population. See Table II. The majorrise in dissatisfaction rates with police assistance received that we noted last quarter reversed itself

almost entirely, this time in every category. See Table III. There was a similar reverse in the incidenceof arrest without warrant and a more moderate reduction in the percentages who said they had wit-nessed the clear abuse of police powers during the previous three months. See Tables IV and V onpublic security.

Finally, given our comments on the courts above, it is important to note that in spite of the gen-eral improvement in the rating of the police and reduction in the level of crime reported by our sam-ple, the approval rating of both the police and the courts fell for all groups in the Federation of BiH,as well as for the majority sample in the RS. The RS minority samples opinion of the courts did notchange. The pattern was similar with regard to the percentage who thought corruption is widespreadin both the police and the courts an increase in the FBiH and a reduction in the RS. See Tables VIand VII on public security.

Graph 2. Percentage of sample who have been victim of some crime against the person or property during past three months

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After a dramatic fall in the value of the index last reporting period, there was a moderate recov-ery this quarter, to 50 index points. Regardless of this upward correction, it is clear that Bosnia andHerzegovina is passing through the greatest period of political instability since this report was insti-tuted. The values of the index both this and last quarter are the lowest two consecutive measure-ments since May 2000.

The signing of the Stabilisation and Association Agreement with the European Commission dur-ing the second quarter is in reality the only political event that could have had a positive impact onthe index. On the other hand, there has been a series of negative events and trends which have result-

ed in a sense of profound political and social crisis in the country, which is faithfully represented bythe value of the index. The very marked negative trends which we have noted for several quartersinclude the already alarming degree of dys-functionality of the state-level institutions, the failure toreach political compromise over key issues related to the future of the state, and the diametricallyopposed positions taken by the political leaders vis-a-vis the future internal organization of the coun-try. The holding of local elections in early October was certainly a contributing factor to the deepen-ing political crisis as has become traditional, the run-up to the election was used to promote divi-sions within the electorate, while nationalist and radical rhetoric was used to score political points.

1. Politically divisive period capped by EU warningsYet another extremely political unstable period lies behind us, with further radicalization of

political life, constant conflict between the political representatives of the three peoples, and defacto gridlock in state-level government institutions. As expected, the local elections held on the 5th

Modest recovery of the Political Stability Index

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of October contributed to further radicalization of political life. The run-up to the elections brought,as is now the norm, additional ethnic and political polarization, so that political life has become atraining ground for letting off nationalist passions and orientation of the electorate on ethnic lines.On the one hand, ever more explicit threats of seccession have been coming from the political lead-ers of the smaller entity, while the status of the Republika Srpska has been questioned openly in the

Federation, and Croat representatives have begun advocating the creation of a third entity again.Again to form, this political rhetoric has not created a political climate conducive to any type of con-structive dialogue or activity, so that the work of the institutions of state has remained extremely inef-fective and politicised, incapable of meeting the EU's requirements regarding integration.1

The local political scene did not change significantly as a result of the local elections. Accordingto the report of the Central Electoral Commission (which is still subject to change following requestsfor recounts), the SDA, SNSD, and HDZ did best, while the SDS, SDP, and Narodna stranka radomza boljitak improved their standing. The main losers were the Stranka za BiH and the HDZ 1990.Consequently, on the basis of currently available data, the SNSD took the mayorship in 39 munici-palities, the SDA in 36, the HDZ and SDS in 16, the SDP in 9, the Stranka za BiH in 4, and the HDZ1990 in 3. The SDA was the leading party in terms of number of councillors and committee mem-

bers, followed by the SNSD, SDP, SDS, HDZ, and Stranka za BiH.2No progress was registered during the reporting period with regard to the reform processes on

which further progress towards integration with Europe depends. With regard to public broadcast-ing reform, there was significant interference of politics in the work of the public broadcaster. Thefirst move was by the RS Prime Minister, Milorad Dodik, who stated his view that the state-levelbroadcaster should be wound up, after which the board of governors of the broadcaster sacked theDirector General, Mehmed Agovi}, who in turn questioned the legality and legitimacy of the deci-sion. In the legislature, at the beginning of September, the House of Peoples of Bosnia andHerzegovina outvoted the Bosniak caucus and passed a binding resolution requiring the Council ofMinisters to begin preparations for the creation of a Croatian language television channel. While itis clear that no such channel can be created by decision of the Council of Ministers, these activities

are indicative of the near impossibility of creating consensus regarding this reform, which isnonetheless one of the conditions for closer relations with the European Union.

One of the most important events to take place during the reporting period, not just for Bosnia andHerzegovina, but for the entire region, was the arrest of Radovan Karadì}, wartime president of theRepublika Srpska. Karadì}, who had been in hiding for 13 years, was living in Belgrade under a falseidentity, where he was arrested on the 21st of July by the Serbian security services. The arrest led toprotests in Belgrade, organized by the Serb Radial Party, but most of the public both in Serbia and inother countries in the region welcomed it. In Bosnia and Herzegovina, the arrest was received verypositively by the public and the considerable majority of political figures, and welcomed unanimous-ly by the representatives of the international community. The arrest of Karadì} (after which the Serbiansecurity services arrested another fugitive from The Hague, Stojan @upljanin) has to some degree

relaxed international pressure on Serbia related to insufficient cooperation with the Hague Tribunal,though it did not lead to the unfreezing of the Provisional Agreements with the EU.3 Karadì} appearedin front of the court in The Hague, but the trial itself did not begin during the reporting period.4

Another event during the reporting period from the courts at The Hague caused a stir bothamongst the public and in political life. The former Commander of the Army of the Republic of

1 For more see the section on institutional confidence. We should also note that the election campaigns were generally not focused on themesof local interest. According to election monitoring conducted by the non-governmental agency ACIPS, in only 34% of cases did politiciansdiscuss themes that were relevant to the local election, while in 65% of cases they discussed themes that were irrelevant to the local com-munity. See http://www.acips.ba/bhs/index.php?strana=aktuelnost&id=285

2 Results available at www.izbori.ba.3 The foreign ministers of the EU members were unable to agree over the unfreezing of the Provisional Agreements which regulate trade rela-

tions under the SAA; the Netherlands were against it until Serbia fully cooperates with The Hague and arrests the remaining fugitives. At theirrequest, it was decided that the ratification of the SAA and the application of the Provisional Agreement be delayed until the Council ofMinisters confirms full cooperation by Belgrade with The Hague.

4 The Hague prosecutor's office has reworked the indictment against Karadì} to take into account the Tribunal's current practice, in order toensure a more effective and expeditious trial.

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Bosnia and Herzegovina, pensioned general Rasim Deli}, was sentenced to three years in prison onthe grounds of command responsibility for crimes carried out by the El Mud`ahid order in CentralBosnia between June 1993 and September 1995. While the sentence is not final, as the court'sAppeals Council has still to rule on it, it provoked very negative reaction in the Republika Srpska,whose political representatives characterised the laxity of the sentence as shameful and inadequate,

stressing that this is just one more in a series of indications of bias at the tribunal.Testimony as to the depth of the political crisis in Bosnia and Herzegovina was provided at two

international events held during September the session of the UN General Assembly and the ses-sion of the Parliamentary Assembly of the Council of Europe events at which the state-levelPresidency was unable to agree on the Presidency Chair's address.5 At the session in September, theCouncil of Europe's Parliamentary Assembly passed a Resolution on Bosnia and Herzegovina on thebasis of its Monitoring Team's Report. The Resolution found that Bosnia and Herzegovina had notmet the obligations it accepted when it became a member. Moreover, they condemned all declara-tions or activities which brought into question the integrity of the state or its current constitutionalarrangements, as well as obstruction of the work of state institutions.6 They also called for theremoval of discriminatory provisions in the Constitution related to the election of members of the

Presidency of BiH and the House of Peoples, proposing a reform of the system of entity-based vot-ing in the BiH Parliament. As expected, this Resolution met with mixed reactions in BiH; while itwas welcomed by representatives of the Bosniak people and the response of Croat politicians wasrelatively muted, politicians from the Republika Srpska entirely rejected the parts of the Resolutionwhich related to the view that the Republika Srpska was obstructing the work of state-level institu-tions, as well as those regarding the need for reform of the Constitution and the abolition of entity-based voting. While the resolution is not binding, it has a symbolic and moral force, as Bosnia andHerzegovina, as a member of this oldest of European organizations, has an obligation at least tomeet the conditions under which it was received as a member.

The political crisis in Bosnia and Herzegovina has put the state once more at the centre of atten-tion of the European institutions. Thus the European Parliament passed a Resolution on Bosnia and

Herzegovina on the 23rd of October which clearly states that Bosnia and Herzegovina, as it existstoday, divided, politically radicalised, and without political consensus regarding the path towardsEurope, has no place in the European Union. The need for change was confirmed when theCommissioner for EU Enlargement stated that constitutional reform is necessary if Bosnia andHerzegovina is to progress on the path towards European Union membership.

2. No change in level of political and economic pessimismAfter the fall in public pessimism regarding the political situation noted during the first two quar-

ters of 2008, there was no further significant change this quarter. Some 51% of the total sample saidthat the situation in the country is getting worse, while 36% said it was getting better. There were no

5 For details, see the section on institutional confidence.6 The text is available at http://assembly.coe.int/Main.asp?link=/Documents/AdoptedText/ta08/ERES1626.htm

Table IIPolitics in BiH are getting.....?Ispitanici Bosniak majority areas Croat majority areas Serb majority areas

March 08. June 08. Sept 08. March 08. June 08. Sept 08. March 08. June 08. Sept 08.

% % % % % % % % %

Worse 78.8 54.4 57.2 57.7 57.5 61.5 57.3 42.5 42.5

Better 16.1 31.7 31.8 26.5 27.9 23.3 30.6 43.0 42.0

DK/NA 5.1 13.9 11.0 15.8 14.6 15.1 12.2 14.5 15.5

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: Public opinion polls conducted for EWS by Prism Research

17

POLITICAL STABILITY IN BIH EWS - Q3


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major changes for the Serb or Bosniak samples, with a moderate increase of 4.1% in pessimismamongst Croats, making them the most pessimistic group (Tables I and II in annex).

The situation is similar with regard to the sample's views on the economic situation in whichBiH currently finds itself. Some 62.5% describe the situation as bad, with 24.2% calling it very badand 38.4% generally bad. Only 3.6% describe it as good. When we look at the ethnic samples, wefind that the percentage of of the Bosniak sample who described the economic situation as bad wasup 5.6 points on last quarter, while the percentage of Serbs of this opinion was down 9.5 points.Amongst Croats, there were no major changes. The sample from Bosniak majority areas was themost critical of the economy, while the sample from Croat majority areas was least so (Table III inannex). Somewhat fewer of the Republika Srpska sample than last quarter described the economicsituation in that entity as poor (55% compared to 61.4%) and there has been a moderate rise in thepercentage who think it has improved (26.1% up from 17.5%) (Tables IIIa and IIIb in annex).

During the reporting period, 41.6% of the total sample would emigrate if they could (up from38.2% last period). The youngest age group (18-35) remain the one most likely to want to emigrate,64.5%. The sample for Bosniak majority areas showed the greatest change in level, with a rise of11.4 points in the percentage who would emigrate. There was a rise of 5.3 points for the sample fromCroat majority areas, while there was a reduction of 6.5 points for the sample from Serb majorityareas (Tables IV and V in annex).

3. Level of support for European integration steadyThere was no change in the level of support for the process of integration with Europe during the

reporting period, with 75.6% of the total sample in favour, 50.9% strongly in favour, and 24.7% gen-erally in favour. The only relevant change was for the Croat group, where support fell some 11.3 points(to 65.0% from 76.4%). The reduction is due to an increase in the percentage of uncommitted. No suchchanges took place for the other two groups, with Bosniaks convincingly the most supportive (88%)

and Serb support at much the same level as Croat (Table VIII in annex).Public opinion regarding the importance of integration with Europe for political stability here

was also very similar to the preceding period, with 77.3% of the total sample of the view that EUmembership is important in this regard. There was a minor change within this group, with a reduc-tion of 7.4 points in the percentage who think the process is very important and a rise of 5.6 pointsin the percentage who consider it generally significant. When we look at the ethnic breakdown, wefind that Bosniaks are still most likely to support the thesis (88.9%), followed by the Croats (74.2%),and then the Serbs (64.4%). There was a five point reduction in the Serb sample percentage (TableVII in annex).

There was, however, an increase in the percentage who look on the process of integration withEurope with concern, with 22.8% now expressing such a view (up from 16.9% in the second and18.2% in the first quarter). We find the same change with regard to the ethnic samples, with more thanhalf of all three groups looking on integration with Europe with hope, with Bosniaks first (78.3%), fol-lowed by Croats (66.4%), and then Serbs (56.6%) (Table VI).

Table VIYou look at the process of BiH joining the EU with....

All Bosniak majority areas Croat majority areas Serb majority areas

March 08. June 08. Sept 08. March 08. June 08. Sept 08. March 08. June 08. Sept 08. March 08. June 08. Sept 08.

% % % % % % % % % % % %

Hope 73.0 74.8 67.4 85.8 86.0 78.3 61.8 69.9 66.4 62.1 63.2 56.6

Concern 18.2 16.9 22.8 9.5 7.3 15.9 27.3 24.4 27.0 24.7 25.4 27.3DK/NA 8.8 8.3 9.8 4.7 6.6 5.8 10.9 5.8 6.6 13.1 11.4 16.0

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0


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19

POLITICAL STABILITY IN BIH EWS - Q3

4. Poll results in line with local election resultsOur poll results on public support for the political parties are generally in line with the results the

parties achieved at the October local elections. In the Federation, our poll showed that the SDA wouldbe the party chosen by most people as representing a political point of view close to their own (15.5%),

followed by the SDP (14.5%), the Stranka za BiH (8.7%), the HDZ (8.4%), the BPS (2.5%), and theHDZ 1990 (1.4%). We also note that nearly all these parties did better during the reporting period thanin the previous one and that the percentage who would not support any party was down (to 25.9%from 35.4%), though the number clearly remains high.

Asked to identify the party that most closely represents their point of view, the Republika Srpskasample were most likely to choose the SNSD (35.3%), followed by the SDS (13%), and the DNS(3.6%). We also note that the SDS and the DNS did better than in the previous period, and that, as inthe Federation, the number who would not choose any party was down (to 24.6% from 32.4%) (TableIX in annex).

The results by ethnic group are similar, with Serbs most likely to support the SNSD and SDS, Croatsthe HDZ and HDZ 1990, and Bosniaks the SDA, SDP, and the Stranka za BiH (Table X in annex).

This reporting period, the Serb sample was again the most supportive of the parties in government,with support back up to the level of the first quarter, after a dip during the second quarter. Thus, 40.3%of this group agreed with the thesis that the parties in government are relatively successful in definingand implementing key reforms, while 35.9% think the parties are capable of meeting the conditionsfor further progress towards European integration on time, and 33.7% think they deserve to remain ingovernment.

The Bosniak group's views of the parties in government are diametrically opposed to those of theSerbs. Just 10.2% think the parties are reasonably good at defining and implementing key reforms,8.7% think them capable of meeting EU integration conditions on time, while 61.3% think they do notdeserve to remain in office. The Croat group were even less supportive of their performance, with just8.3% holding the view that they are relatively good at defining and implementing key reforms, 5.4%

thinking them capable of meeting EU integration conditions, and 40.4% of the view that they do notdeserve to remain in office. There was however also a high percentage amongst the Croats (between35% and 42%) with no clear opinion as to the effectiveness of the parties in government, a trend thathas been present since the beginning of the year.


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21

INSTITUTIONAL STABILITY IN BIH

VII VIIIVIVIVIIIIII

1. Political crisis paralyses institutionsThe political crisis has had a very negative impact on the work of the state institutions. During the

third quarter, their operations saw the continuation of a highly negative trend, the politicisation of deci-sion-making processes, leading to extreme ineffectiveness in their operations, so that the dividing linesbetween the representatives of the three constitutive nations have never been more evident. One of theresults of the crisis has been that the institutions are incapable of responding to the EU's demands andmeeting the conditions for further integration with Europe. After the signing of the Stabilisation andAssociation Agreement with the EU, Bosnia took on the obligation to meet a series of conditions foreventual membership. Of the 30 short-term priorities placed before Bosnia and Herzegovina by the EU,only 13 had been met by the end of September, in whole or part, while the others remain at the stageof political wrangling.

The personal conflict between Haris Silajdì}, the Chair of the Presidency, and Milorad Dodik, thePrime Minister of the Republika Srpska, has had a major impact on the functioning of the state institu-tions, as it has transferred to the institutional realm. The most striking examples of institutional dysfunc-tion at state level came from the Presidency. The members of this august body were unable to agree aplatform for the delegation participating in two major international assemblies held during September the session of the United Nations General Assembly and the Council of Europe's ParliamentaryAssembly. Failure to agree a platform for participation in the UN General Assembly is due to the lack ofa common position on the part of the Presidency members regarding support for Serbia's motion that theagenda include a request for an opinion from the International Court of Justice as to the legality of theunilateral declaration of independence by Kosovo.1 As a result of this disagreement, the speech madeby Presidency Chair Silajdì} to the General Assembly was a presentation of his personal views and pro-

voked sharp reaction in the Republika Srpska.2

A similar thing happened with the Presidency Chair's speech to the Parliamentary Assembly of theCouncil of Europe, which again represented his personal views and not the official view of Bosnia andHerzegovina, due to failure to agree on the part of the Presidency.3 The Report of the Council of Europe'sMonitoring Team and the Resolution passed by the Assembly in session provoked divisions within thedelegation of Bosnian and Herzegovinian parliamentarians attending, as the parliamentarians from theRepublika Srpska took issue with the parts of the report which refer to the Republika Srpska blockingreforms. Much the same happened within Bosnia and Herzegovina, where Republika Srpska politicians

1 Presidency member Neboj{a Radmanovi} was for support by Bosnia and Herzegovina, while the Presidency Chair Haris Silajdì} was

against and Presidency member @eljko Kom{i} abstained.2 Silajdì} put forward his views on the recent war, the genocide committed at Srebrenica by the Army of the Republika Srpska, and the needto negate the results of genocide.

3 The Chair Silajdì} stated that the BiH Constitution contains discriminatory provisions and that entity based voting represents "genocide byother means."


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22

rejected the views expressed in the Resolution, in so far as they related to the Republika Srpska itself,while it was received positively for the most part in the Federation.

During the reporting period, the representatives of the Republika Srpska, led by the Prime Minister,continued to question the integrity of the country (which they linked with questions raised about the sta-tus of the Republika Srpska within the state), as well as raise the issue of authorities transferred to thestate level by agreement of the entities. During the reporting period, this went beyond rhetoric and con-crete steps were taken in certain areas which are the responsibility of the state. In early September, theRepublika Srpska government expressed determination to begin the process of forming its own compa-ny for the transmission of electrical energy on the territory of the Republika Srpska and to withdraw fromthe state-level transmission company, Elektroprenos BiH, to which responsibility for this area had beentransferred.

A further move which has been assessed as obstruction of the state-level institutions by theRepublika Srpska government is the decision on the 11th of September instructing the entity TaxAdministration and other institutions not to hand over documentation to the State Intelligence Services(SIPA) or the Bosnian and Herzegovinian Prosecutor's Office, which had been sought with regard to thetax records of two companies, the RS government, and a number of ministries. Only after sharp inter-vention by the High Representative and the ambassadors of members of the Steering Board of the PeaceImplementation Council, the RS Government agreed to deliver the documentation requested.

The Republika Srpska government also continued opening offices abroad. This served as the occa-sion for Presidency Chair Haris Silajd`i} to accuse the entity administration of violating the Constitutionof Bosnia and Herzegovina, on the grounds that the Republika Srpska had engaged lobbyists in the USto promote the Republika Srpska as an independent foreign policy agent. Silajd`i} also confirmed thathe had requested the Constitutional Court of Bosnia and Herzegovina to rule on the constitutionality ofthese activities.

The National Assembly of the Republika Srpska held a special session in mid-September to discussinternal political relations in Bosnia and Herzegovina. Political representatives of the Republika Srpskasharply opposed efforts to question to continued existence of the Republika Srpska, condemning thespeeches made by the Presidency Chair at the UN and the Council of Europe, which they interpretedas a call for the abolition of the Republika Srpska. It was again stressed that many of the entity's author-ities had been illegally transferred to the level of the state and a call was made for an analysis to be con-ducted, with a view to restoring them to the entity. Although expected, there was no mention in the res-olution passed on that occasion of the possibility of holding a referendum on independence,4 due large-ly to sharp warnings by the Office of the High Representative. It should be noted that the activities of theinternational community, and in particular of the Office of the High Representative, during the report-ing period were limited to warnings to local politicians for their radical rhetoric or for public displays inwhich they openly advocated options which were clearly against the Dayton order.

With regard to the Federation, after the presentation of the local election results, there were movesby the SDA and HDZ to restructure the government. This is because of the poor election results of twoof the coalition parties, the Stranka za BiH and the HDZ 1990, and the increasingly poor relationsbetween representatives of the SDA and the Stranka za BiH.5 At the time of writing, it was not clearwhether there would be a restructuring.

2. Shift in ethnic groups' ratings of government institutionsWhen we look at the sample as a whole, we find that there were no major changes during the

reporting period in the ratings for government institutions at all levels. Some 38% of the sample report-ed confidence in state-level institutions, while confidence in entity institutions was at the same level.

4 The possibility of a referendum should there be any 'move' on the 'sovereignty' of the Republika Srpska was mentioned in the report that wasalso passed, but it is not binding.

5 We discussed how these poor coalition relations manifested themselves in the first and second quarterly reports.


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The municipal level continues to score the highest level of public support, at 46.5% of the total sam-ple (Table I in annex).

When we look at the results by ethnic group, we note differences in comparison to the previousperiod. After the reduction in confidence expressed during the past two reporting periods by all threeethnic groups with regard to all levels of government, there was a correction this quarter with regardto the Bosniak group, whose support for all levels increased. Bosniaks remain the most critical group,nonetheless, with support for state and federal government at around 30%, confidence in theRepublika Srpska institutions at 22%, and in the municipal level at 38%. When it comes to the Croatsample, we note a moderate rise in confidence in state and federal institutions (now between 32% and35%), but a fall in the approval ratings of all other levels. There was a considerable drop in Serb con-fidence in all levels of government, though it nonetheless remained higher than for the other twogroups. The Serb group's approval rating for state level was around 45%, for federal institutions wasaround 42%, and for municipal level was 58.6%, while for the Republika Srpska government andNational Assembly it was as high as 61%. We should still note that the Serb constituency approval rat-ing for the Republika Srpska institutions has been steadily falling, so that it was 11 points down thisquarter on the beginning of the year (Table II in annex).

When it comes to the approval ratings of the international community and its organisations, wenote significant changes for all three ethnic samples this quarter. Taking the sample as a whole, we notea moderate rise in support for all international institutions, now above 40% (except for the US, whosesupport is at 36.7%). If we look at the results for the various ethnic groups, we find significant differ-ences with regard to the views of the Croat and Bosniak groups.

There has been a very significant reduction in the Croat group's support for all the institutions of theinternational community in Bosnia and Herzegovina a fall of 13.2 points for OSCE (to 32.5%), of 12.8points for UNDP (to 35.1%), of 14.9 points for EUFOR (to 32.3%), of 11.1 points for the EU (to 35.9%),and of 16.5 points for the US (to 32.2%). This means that the Croat group are the most critical one with

INSTITUTIONAL STABILITY IN BIH EWS - Q3

23

Table IIDo you approve of the work of.?

Bosniak majority areas Croat majority areas Serb majority areas


% % % % % % % % %

BiH Presidency

Yes 28.2 25.3 31.8 46.6 31.4 32.4 52.9 53.9 45.7

No 47.8 49.4 50.7 21.7 48.3 33.4 26.0 27.3 30.3

Not applicable 0.8 4.7 1.0 1.9 1.9 3.2 0.6 2.4 1.4

Neither approve nor disapprove 11.7 7.2 8.7 17.6 13.6 18.2 16.6 10.8 14.6

DK/NA 11.4 13.5 7.8 12.2 4.8 12.8 4.0 5.6 7.9

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

BiH Parliament

Yes 28.1 23.6 30.5 46.3 31.1 33.4 52.9 53.6 44.7

No 47.6 51.3 50.7 22.2 50.1 33.6 25.9 27.6 31.2

Not applicable 0.8 4.7 0.9 1.7 0.8 2.0 1.0 2.4 2.1

Neither approve nor disapprove 11.8 6.9 8.8 17.2 13.1 17.5 16.2 10.6 14.1

DK/NA 11.6 13.5 9.1 12.6 4.8 13.5 4.0 5.9 7.9

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Council of Ministers

Yes 27.7 22.9 30.8 45.8 30.7 35.0 53.5 53.6 45.9

No 47.5 50.9 51.8 22.6 51.8 32.0 25.2 28.0 30.1

Not applicable 0.8 5.1 0.9 1.5 0.6 2.0 0.8 2.4 1.8Neither approve nor disapprove 12.3 7.5 8.8 17.5 12.4 17.5 16.4 10.1 13.8

DK/NA 11.6 13.7 7.8 12.6 4.5 13.5 4.0 5.9 8.4

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: Opinion poll conducted for the UNDP EWS project by Prism Research


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regard to international institutions this quarter. Bosniak opinion moved in the opposite direction, with sup-port for all international institutions up 10% (except the US, where there is no change in support). Duringthe quarter, 49.7% of the Bosniak sample expressed confidence in OSCE, 49.9% in UNDP, 50.4% inEUFOR, 46.7% in the EU, and 42.7% in the US. The Serb sample is somewhere in the middle, after see-ing a moderate drop in approval ratings this quarter: 39.8% expressed confidence in OSCE, 38.2% in

UNDP, 34.2% in EUFOR, 37.6% in the EU, and 29.4% in the US (Tables I and II in annex).

3. Confidence in OHR-led reforms suffersThe general level of support for the Office of the High Representative was relatively unchanged

this quarter, compared to last quarter, at 42.9%, with women a little more inclined to express sup-port (45.2%) than men (40.5%). The levels of confidence expressed by the different ethnic groupswere also very uneven. Bosniaks expressed the highest level of support this quarter (51.4%, up 12.8points), followed by the Serb sample (35.2%, a minor reduction on the previous quarter), and Croats(31.5%, a decline of 14.6 points) (Tables I and II in annex).

While the level of overall support for the Office of the High Representative has remained onmuch the same level, support for the various reforms conducted by the office has taken a hit withregard to all three ethnic groups. We find much the same level of support for individual reformsamongst Serbs and Croats. The Serb group's support for political reforms is 26.7%, for economicreforms is 24.8%, for anti-corruption reforms is 29.7%, and for public administration reforms is32.3%. There has been a reduction in support by this group for economic and public administrationreforms (of 8.5 and 5.8 points, respectively), while support for political and anti-corruption reformsis at the same level as before (Table VII in annex).

There was a significant drop in Croat sample support for all reforms, except anti-corruptionreforms. Support for political reforms dropped 7.4 points (to 30.2%), for economic forms 7.7 points(to 30.6%), and for public administration reform 6.3 points (to 28%). For anti-corruption reforms,

Croat support rose 5.4 points, to 26.5% (Table VII in annex).The Bosniak sample continues to express the highest level of support for OHR-led reforms, eventhough it is down significantly on the last reporting period. Some 48.1% of the group support the politi-cal reforms (down 7.2 points), 44.1% the economic reforms (down 5.4 points), 36.6% anti-corruptionreports (down 11 points), and 44.5% public administration reforms (down 9.3 points) (Table VII in annex).

There was little change in attitudes towards the High Representative's authorities, compared tolast quarter, and differences between the various ethnic groups remain very significant. Some 69.9%of the Serb sample continues to think the powers should be reduced, while 20% think they shouldstay the same, and just 2.8% think they should be increased. By contrast, the Bosniak group isinclined to think that the High Representative's powers should be increased (33.1%), with 29.7% ofthe opinion that they should not be changed, and 22.6% of the view they should be reduced. Croat

opinion is somewhere in between, with 42.2% for reducing the High Representative's powers,36.1% for leaving them as they are, and 16.2% for increasing them (Table IX).

EWS - Q3 INSTITUTIONAL STABILITY IN BIH

24

Table IXIn your view, should the High Representatives powers be reduced, increased or stay the same? (%)

Bosniak majority areas Croat majority areas Serb majority areas


Reduced 13.9 23.3 22.6 29.0 40.2 42.2 71.2 69.9 69.9

Increased 49.2 25.9 33.1 32.6 15.5 16.2 4.3 1.7 2.8

Stay the same 24.2 33.8 29.7 22.7 39.8 36.1 18.3 23.5 20.0

DK/NA 12.7 17.0 14.5 15.7 4.5 5.4 6.2 5.0 7.3

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0Source: Opinion poll conducted for the UNDP EWS project by Prism Research


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25

Economic Stability Index recovers

ECONOMIC STABILITY IN BIH

VII VIIIVIVIVIIIIII

After falling for three quarters in a row in 2007, the economic stability indices (chain and com-posite) experienced a sharp positive turnaround during the first quarter of 2008. In the second quar-ter, the composite index continued to rise, but the chain index remained more or less stable. Weassume the sharp positive movement in the first quarter to be due to Bosnia and Herzegovina's for-mal progress towards closer relations with Europe and signing a Stabilisation and AssociationAgreement. This enthusiasm does not seem to have lasted into the following two quarters, which wemay state have been marked by internal political problems and the 'birth' of the global financial cri-sis abroad, which would certainly have been major factors shaping our indicators. Overall, theEconomic Stability Index has returned to approximately its average value for the past several years.

1. Industrial production up significantlyIndustrial production in Bosnia and Herzegovina rose significantly in both entities during 2007

(compared to 2006). This same positive trend was evident during the first three quarters of 2008, withminor differences between the entities.

Industrial production in the Federation was up6.5% on the same period last year. In the RepublikaSrpska, the rate was a little higher at 8%. This is verysimilar to the situation during the second quarter.September did not represent an increase in productionin the Republika Srpska compared to August, but didin the Federation where production was up 3%.

The branches of industry which saw thegreatest relative (that is percentage) increase in production in the Federation were the production of

Table IRetail Price and Cost of Living Indices

VIII 2008 VIII 2008 I- VIII 2008

VII 2008 VIII 2007 I- VIII 2007

FBIH 98.2 109.6 105.4

RS 100.2 109.4 107.8Source: Entity Statistics Offices, BiH


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EWS - Q3 ECONOMIC STABILITY IN BIH

26

other forms of transport, the production of chemicals and chemical products, and the production ofmedical, precise, and optical instruments and timepieces.1 The leading three sectors in theRepublika Srpska were the production of other electrical machinery and equipment, the extractionof stone, black coal, lignite, and peat, and the production of motorised vehicles and trailers.2 As thevalues of the indices make clear (see footnote), some of these sectors experienced growth of more

than 100% compared to last year.The sectors that saw the largest decline in the index of industrial production during the first nine

months of 2008 (compared to the same period the year before) in the Federation were the extrac-tion of other ores and stones, followed by furniture production, and in third place the production ofoffice machinery and computers.3 This is the same set of sectors as in the previous report, which isa worrying indicator. In the Republika Srpska, the worst performing sectors were the production ofradio, TV, and communications equipment, the production of office and computer equipment, andrecycling.4 In previous reports, we noted that the radio, TV, and communications equipment sectorhad been one of the worst performing in the Republika Srpska, which is again the case, with pro-duction a mere 24% of what it was in the same period in 2007. If this index is anything to go by,this sector in the RS economy has clearly been experiencing very poor results for two years.

2. Unemployment downThe official data, which do not include the grey economy, have shown for some years a tenden-

cy for the number of unemployed individuals registered with the employment bureaux to rise. In 2007,there was a modest recovery, as unemployment began to fall in the latter three quarters of the year.

Although the overall number of the officially unemployed is still very high, at around half a million, wetake some modicum of comfort in the fact that it was some 40,000 less during the third quarter of 2008than it had been in January, which is a reduction of 8%.

A look at the educational background of the unemployed shows that the largest group are skilledand highly skilled workmen (173,664), followed by the unskilled (164,823) and people with schooldiplomas (109,867). The smallest group are those with university or other third level qualifications

(19,810), who make up only 4% of the total. We also note that men and women are fairly equally rep-resented amongst the unemployed, with a slight imbalance in favour of the former.5

3. Retail prices up significantly, as are Central Bank reservesRetail prices rose 8% in both entities during the first nine months of 2008, compared to the same

period the year before. Unlike previous years, we find that the retail price indices are somewhat

1 The values of their respective indices are: 231.4; 130.7; 124.3. Source: the Federal Statistics Office, Mjese~ni statisti~ki pregled broj 10,October 2008.

2 The values of their respective indices are: 230.5; 163.3; 134.9. Source: the RS Statistics Office, Saop{tenje statistike industrije - Septembar2008. godine, Broj XVI/10, October 2008.

3 Source: the Federal Statistics Office, Mjese~ni statisti~ki pregled broj 10, October 2008.4 Source: the RS Statistics Office, Saop{tenje statistike industrije - Septembar 2008. godine, Broj XVI/10, October 2008.5 BiH Statistics Agency, Saop{tenje, Registrirana nezaposlenost za avgust 2008, Broj 8, Godina II, October 2008.

Table IITotal number of registered unemployed by entity

Jan-05 Jan-06 Mar-06 Jan-07 Mar-07 Apr-07 Jun-07 Aug-07 Sep-07 Jan-08 Mar-08 Aug-08FBiH 328,225 349,137 351,867 367,449 371,156 370,961 370,410 369,886 371,342 367,449 357,281 340809

RS 144,823 142,754 145,331 146,180 146,517 144,306 140,189 136,520 134,197 136,108 138,497 133.827

BiH 473,048 491,891 497,198 513,629 517,673 515,267 510,599 506,406 505,539 503,557 495,778 474636


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4. Trade deficit at alarming levelThe high trade deficit which has been a constant phenomenon in recent years was reduced some-

what in 2006, largely as a short term consequence of the introduction of value-added tax. In 2000,however, it began to rise again at an even greater rate than previously. The main reason for the grow-

ing deficit is that imports are growing faster than exports. During 2007, at 7.5 billion KM, the tradedeficit was 1.5 billion KM greater than the 5.9 bil-lion deficit for 2006.8 In other words, after a mod-erate improvement in the balance of trade afterthe introduction of VAT, the country quickly founditself facing a rising deficit again, as the import-export ratio fell. The situation has not improved in2008, as may be seen from Table V.

When we look at the balance of trade duringthe first nine months of 2008, we find that the deficitwas 7.2 billion KM. This is an increase of 2.5 billion

on June. While the total volume of trade has grown,we also find that imports have grown faster (22 %)then exports (17%), which is the root cause of the

deficit and naturally affects the import-export ratio. Thus, during the first nine months of 2008 the import-export ratio was not quite 42%, down from 50% (during the first quarter). Overall, it is to be expected thatthe trade deficit will exceed last year's, continuing the negative trend towards an increase in the absolutedeficit.9 This is certainly not a good indicator, particularly under circumstances of global financial crisis,when it will become increasingly difficult to access resources to finance the deficit.

Exports were highest in the manufacturing sector. Looked at in economic terms, both exportsand imports were highest of intermediate goods (i.e. raw materials and semi-finished goods) and ofcapital goods.10

Bosnia and Herzegovina's most important foreign trading partner is the European Union,accounting for more than 50% of total trade, or rather, 47% of imports and 55% of exports. The indi-vidual countries with whom Bosnia and Herzegovina does most trade are Croatia, followed byGermany and Italy, as was the case in 2007.11

5. Public still pessimistic about the economic situationMost of our sample is of the opinion that there have been no major changes in the economic sit-

uation during the past year. As was the case last quarter, approximately one third described the eco-nomic situation as having deteriorated, while just 16% described it as improved. A look at the trend

for the past few quarters suggests that the public mood has become fairly static, with no major oscilla-tions on a quarterly basis and with a modest tendency to improve. In any case, assessment of the eco-nomic situation in the near future is such that we can certainly say public expectations have not beenmet and only a small percentage continues to expect positive economic change in the country.

The sample from the Federation is most pessimistic, with 29% describing the economic situationas having deteriorated. In the Republika Srpska and Br~ko district, a similarly high percentage, oraround 22%, share that opinion. When we look in terms of ethnic minority areas, we find that Bosniakmajority areas are the most pessimistic, followed by Serb majority areas, with relatively the best resultsin Croat majority areas.12

8 Source: Foreign Trade Chamber of BiH, Pregled i analiza ostvarene vanjskotrgovinske razmjene za BiH za januar 2008. godine, accessed

on the Chamber's website in March 2008.9 Source: BiH Statistics Agency, Priop}enje statistike vanjske trgovine, Broj 8, Godina IV, September 2008.10 Source: Ibid11 Source: BiH Statistics Agency, Priop}enje statistike vanjske trgovine, Broj 8, Godina IV, September 2008.12 Source: Table VIII in annex

Table VBalance of Trade of BIH

VIII 2008 I VIII 2008 I VIII 2008

I VIII 2007

Exports 547 4531 + 16,7 %

Imports 1383 10861 + 21,8 %

Volume 1930 15392

Balance -836 -6330

Ratio 39.55 41.71

Source: BiH Statistics Agency, Priopenje statistike vanjske trgovine


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There are few signs of optimism in public opinion regarding the economic situation over the com-ing year. As is normally the case, most of the sample expects no change. On the other hand, some16% expect the economic situation to deteriorate, while 17% expect improvement. In any case, on

average, it seems that the public expects next year to bring more of the same, economically speaking.As is clear from the first section, statistical indicators suggest a moderate growth in retail pricescompared to last year. For sure, the September poll reveals a considerable level of public concern overpotential price and cost of living increases. Consequently, more than 70% of the sample expects pricesto continue to rise, which is only a little less than in the previous four quarters.13 We have already men-tioned that prices rose most during the reporting period with regard to food and agricultural produce,to which the public is no doubt particularly sensitive. Consequently, expectations of continued pricerises are no doubt under the influence of the recent past. Moreover, trends on international markets dosuggest that retail prices may in fact continue to rise, which may be affecting our sample's predictions.

We have seen that most of the sample said they expect prices to rise in the coming year. At thesame time, a high percentage (58%) do not expect their household income to increase.14Just 13% said

ECONOMIC STABILITY IN BIH EWS - Q3

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Graph 5: How do you expect your family finances to change over the next year?

13 Source: Table X in annex14 Source: Table XI in annex.

Graph 3: Have your family's economic circumstances changed over the past year, and if so how?


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they expect income to increase. This implies that any further increase in prices would have the effectof reducing the standard of living of most people. While this only represents the views of our sample,such views are clearly worrying, particularly with regard to low-income groups.

Finally, given our above analysis, we can hardly be surprised that more than 85% of the sample saidthey do not expect to be able to save any of their income the highest level to date. 15 These indicatorsonly provide further confirmation of the great dependence of the Bosnian and Herzegovinian economyon foreign savings, which is certainly not a good indicator, particularly at a time when it is likely tobecome more difficult to access foreign capital, due to the impact of the global financial crisis.

6. Institutions in Bosnia and Herzegovina cost too much in bothtime and money

According to institutional economics, a country's economic performance is largely determinedby the costliness and efficiency of its domestic institutions. When institutions cost more than theyshould and are insufficiently efficient, this may be one factor in that countrys economic backward-

Table XIIIHow much does the current institutional framework in BiH (how public administration is organized and functions) affectyour activities with regard to ...? (%)

BiH FBiH RS D Brcko

I 2008 Jun. 08Sept. '08 I 2008 Jun. 08Sept. '08 I 2008 Jun. 08Sept. '08 I 2008Jun. 08Sept. '08

Money

More than it should 51.9 54.4 50.0 51.0 46.6 50.8 54.1 67.3 46.6 37.8 24.7 91.2

Less than it might 22.6 22.3 29.0 22.4 25.8 28.4 21.5 16.2 30.9 51.5 37.5 8.8

DK 25.4 23.4 21.0 26.7 27.5 20.7 24.4 16.5 22.5 10.7 37.8

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Time

More than it should 50.2 53.2 47.3 49.0 46.2 47.9 53.3 64.9 44.0 25.7 27.3 91.4

Less than it might 23.1 22.5 31.2 22.4 25.9 30.8 22.0 16.6 32.9 63.5 37.5 8.6

DK 26.6 24.3 21.6 28.6 27.9 21.3 24.7 18.5 23.0 10.7 35.2

Source: Public opinion polls conducted for UNDP EWS by PRISM Research

15 Source: Table XII in annex.

Table XIExpect household income over the next six months to...?

Sep 2006 Dec 2006 April 2007 Sep 2007 Nov. 2007 Mar. 2008 Jun. 2008 Sept. 2008

Bosnia and Herzegovina % % % % % % % %

Fall significantly 4.9 3.1 1.8 2.3 7.1 6.2 3.8 4.0

Fall modestly 9.5 10.3 8.7 9.7 9.8 6.2 7.3 9.2

Rise modestly 15.8 19.8 18.1 19.5 15.1 17.6 15.0 19.1

Fall modestly 2.5 1.7 3.9 4.3 2.8 3.8 3.5 3.7

No change 59.7 59.2 55.6 54.0 58.0 60.0 63.0 58.0

DK/NA 7.5 6.0 12.0 10.3 7.3 6.2 7.3 6.0

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Total fall 14.4 13.3 10.4 12.0 16.9 12.4 11.1 13.2

Total rise 18.3 21.5 22.0 23.8 17.9 21.4 18.5 22.8

No change 59.7 59.2 55.6 54.0 58.0 60.0 63.0 58.0

DK/NA 7.5 6.0 12.0 10.3 7.3 6.2 7.3 6.0

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0


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in both time and money. Or to put it more simply, institutions here are not just expensive; they arealso time-consuming. Their efficiency is in question.

Asked to rank direct and indirect institutional costs on a scale, our sample seemed to suggest thatthe indirect costs are higher than the direct cash charges. On average, some 30% of our sample saidthat their costs where some 10-30% higher because of direct charges.16 On the other hand, more than30% said that their budgetary spending was at least 10-30% higher because of indirect costs due toinstitutions, which is to say as a result of those institutions failure to act, or the length of time requiredfor procedures, or the insecurity the institutions create, etc.17 In other words, these answers imply thatthe public is not satisfied with the degree of efficiency of domestic institutions, as aside from directcosts, like tax, they also face higher indirect costs, due to institutional failure, particularly as a resultof poor implementation in the field. We note that the results for the Federation are worse than thosefor the Republika Srpska.

Given the fact that institutions are important to economic growth and development may be moreor less efficient, we ask the sample to rate the performance of important institutions in Bosnia andHerzegovina. The institutions rated best are the Central Bank, the indirect taxation authority, and theentity tax administrations. The worst ranking are the privatisation agencies, the employment bureaux,and the legal systema list which has been stable for some time now.18 These results should certain-ly concern the institutions in question, at least as assessment of their performance. For more detailssee table XIV in the annex.

Finally, inefficient and ineffective formal institutions act as a motive for both individuals andindustry to invest in so-called informal institutions, in order to ensure that matters which should bethe responsibility of government are actually done. By informal institutions we mean the use of rela-tionships, whether with friends, family, or colleagues, to ensure that a job is completed more quick-ly or more easily. Our September poll suggests considerable use of such connections by the public(around 20% said they do use them).19


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16 Source: Table XVI in annex17 Source: Table XVII in annex18 Source: Table XIV in annex19 Source: Table XV in annex


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cant unemployed workforce. This is also an indicator that, with relatively little problem and appro-priate policy, it would be possible to reactivate the unemployed capacity, thus increasing the totalnational product and indirectly providing a better standard of living.

3. Financial indicators deterioratingThe results of our last seven quarterly surveys suggested that most companies were finding them-

selves in a better financial position compared to the year before. The results of the second quarterof 2008, however, revealed a certain deterioration with regard to this economic indicator. The third-quarter results are worse again, even though most of the sample still record that the financial per-formance of the companies has not significantly changed.

Thus, according to our July business survey,one third of the companies surveyed reported thatthey were in a better financial position than theyhad been the year before, while the September sur-

vey brought even less favourable results. Only oncebefore have we recorded such a low percentage ofthe sample responding in this fashion, in March2006. The most common answer (offered by 46%of the sample) was that their financial indicators hadnot changed over the past year, while 26% said theyhad deteriorated. In other words, after the relativelyfavourable assessments recorded in 2007, it wouldappear that companies once again have reason tocomplain of their financial performance. Projectionsfor the coming six months were a little better, with

31% suggesting that a financial improvement mightbe on the cards. There was little real differencebetween the entities, though the sample from theFederation was a little more optimistic.3 Overall, theresponses to this question were less positive than theresponse to the second quarterly survey.

The answers to our questions on the level ofdebt companies owe, compared to the same period the year before, suggest that levels have risen in 34%of companies. The percentage is higher in the Republika Srpska, at 41%. Moreover, 42% of companies atthe level of Bosnia and Herzegovina said there had been no change in the level of debt, while 24% said ithad decreased. In short, the results for this question are less favourable than for the past two surveys. Looked

at by entity, the answers were a little worse in the Republika Srpska, which is a reversal of the situation lastquarter.4 It is, of course, difficult to make an objective judgement in this case, as an increase in debt maysimply be a consequence of investment, which we cannot tell from our questionnaire. Moreover, withregard to future debt, we can expect a reduction in the short to medium term, given the current increasein interest rates as a result of the global financial crisis. It is a general economic principle that higher inter-est rates, which mean an increase in the price of borrowed money, lead indirectly to an increase in the costof investment, which ultimately results in less investment.

Finally, 63% of the sample said they had made a profit, while 26% said they had operated at aloss during the previous six months. If we compare these results to those for 2005, we find that theoverall increase in the number of companies making a profit has been reversed during the past twoquarters.5 In recent reports, somewhere around 80% of the sample reported operating at a profit. The

result of the third quarter of 2008 is the lowest to date.

Table IVWith regard to your companys overall operations, howwould you characterize your financial status compared tothe same period last year? (%)

Better The same Worse

June 2005 23 43 34

Sep. 2005 20 49 31

Dec. 2005 31 39 29

March 2006 19 43 38

June 2006 35 34 28

Sep. 2006 36 38 26

Dec. 2006 38 36 26

April 2007 43 36 21

Sep. 2007 62 24 14

Dec. 2007 46 34 20

March 2008 50 32 17

Aug. 2008 35 41 24

Sep. 2008 28 46 26

Source: UNDP EWS BiH Top 150 Business to Business Survey, conducted by

Prism Research

3 Source: Table V in annex.4 Source: Table VI in annex.5 Source: Table VII in annex.

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4. Inefficient institutions, unfair competition, and high taxes aremajor burdens to business

Asked to what degree the various levels of government help business to overcome the variousobstacles that face it, our sample have for a number of quarters now provided discouraging answers.

Looked at overall, the municipal level received the worst rating in the September poll, for the firsttime. In previous reports, business opinion had generally been that higher levels of government wereless effective. It is difficult to know the reason for this change, but one factor may be the local elec-tions and that the respondents may have been more aware than previously of the performance ofthis level of government, of the councils, and of the candidates for council office, etc. They were nodoubt expressing their dissatisfaction with the performance of the lowest level of government inBosnia and Herzegovina. The other levels of government did not fare much better, however, and,regardless of whether we are talking about canton, entity, or state, the results are nearly identical.Overall, more than 40% of the sample characterised government in Bosnia and Herzegovina as oflittle help to the private sector, regardless of level.

In an attempt to identify the key obstacles to company operations, we have asked a number ofrelated questions in our recent surveys. Most of these questions relate indirectly to the samples viewof the effectiveness of institutions in Bosnia and Herzegovina, with the answers acting as an indica-tor of the quality of the institutional framework in the country and the services which institutionsoffer the business sector, whether directly or indirectly. The following table provides an overview ofthe rankings of the various obstacles to business.

In most of our previously business sector opinion polls, the sample have identified unfair com-petition, political instability, and the performance of the courts as the main obstacles to business.

Table VIIITo what degree do the various levels of government assist business overcome problems in BiH:

Very helpful Generally helpful Neither helpful Generally unhelpful Not at all helpful Cannot judge N.A.

nor unhelpful

III '08 VIII '08 IX '08 III '08 VIII '08 IX '08 III '08 VIII '08 IX '08 III '08 VIII '08 IX '08 III '08 VIII '08 IX '08 III '08 VIII '08 IX '08 III '08 VIII '08 IX '08

State 1 1 1 10 7 11 26 25 29 17 19 22 28 32 19 5 3 5 13 13

Entity 2 1 2 8 12 16 19 22 26 17 26 21 29 24 19 2 6 14 13

Canton 2 1 1 10 9 22 28 21 19 14 20 22 28 26 19 2 5 18 21

Municipality 3 1 3 14 16 16 28 20 20 10 14 23 29 30 23 2 3 4 15 16

Source: UNDP EWS BiH Top 150 Business to Business Survey, conducted by Prism Research

Table IXTo what extent do the following represent an obstacle to successful operations:

Very Somewhat Little Not at all N.A.

III '08VIII '8 IX '08 III '08 VIII '8 IX '08 III '08 VIII '8 IX '08 III '08 VIII '8 IX '08 III '08 VIII '8 IX '08

Customs procedures 23 19 21 23 33 46 23 13 17 20 13 12 10 21

High taxes 52 50 39 19 24 33 12 10 17 11 6 6 6 10

Unfair competition 46 48 34 24 29 26 15 9 25 9 4 7 7 10

Corruption 36 46 37 21 16 25 13 9 20 9 4 5 21 26

The performance of the courts 45 47 43 20 21 22 15 11 20 7 7 5 14 14

Political instability 44 36 26 27 32 39 10 10 23 10 8 3 10 14

Labour market regulation 21 14 24 23 27 31 25 27 27 23 14 11 7 18

Tax administration 25 23 20 27 32 34 19 20 29 20 10 9 8 14

Procedures for issuing work permits 37 39 36 30 30 29 8 9 20 15 9 7 11 13

Environmental regulations 21 17 17 25 28 35 21 21 30 21 16 9 11 19

Safety regulations and standards 16 16 11 29 20 28 21 32 36 22 16 13 12 17

Lack of qualified staff 18 19 17 25 24 34 16 20 25 25 16 16 15 21

Source: UNDP EWS BiH Top 150 Business to Business Survey, conducted by Prism Research

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The answers to our September poll were somewhat different in so far as it identified the courts asthe main obstacle, followed by high corporate taxes, then corruption, and in fourth place unfaircompetition. It is worth noting how regularly the business sector singles out the courts as an obsta-cle to business, while at the same time there is relatively little progress being made in the area,which, while not directly connected with economic activity, nonetheless so significantly hinders

business progress in the country.The general conclusions of our September survey suggest that most of the problems cited as

major obstacles to business relate to the performance of institutions in Bosnia and Herzegovina,