An Economic Case for Economic Development

Implementing Economic Policy Reform within Bosnia and Herzegovina

Nicholas Maldarelli, The College of New Jersey

14.12.16

Abstract

The modern refugee crisis has grown exponentially since the Arab Spring of 2011. Political instability, economic adversity, ethnic cleansing, and forced migration are just some of the hardships faced by the

people in Bosnia and Herzegovina (BiH). Formerly part of Yugoslavia, BiH remains a developing country without membership within the European Union. Unemployment is nearly at half of the population, and the government shows no signs of regulatory and economy reform which is needed in order to give BiH a

chance at becoming a EU member. All ethnic groups are fleeing the country primarily because of economic adversity, but find that their chances of being granted asylum in other countries is low. This research paper examines the reasons why Bosnia and Herzegovina suffered after the Yugoslav Wars of

1991, and how the implementation of economic policy may be what the country needs in order to reform its unstable politic climate, revitalize the economy, and encourage more repatriation of refugees.

The state of a modern refugee is multifaceted in its complexity and uncertainty. An unprecedented 65.3 million people around the world have been forced from home…referred to as internally displaced persons (IDPs)…Among them are nearly 21.3 million refugees, over half of whom are under the age of 18 (UNHRC). The majority of refugees are migrating out of the Northern and Eastern Africa as well as Middle Eastern countries. Uprisings such as the Arab Spring of 2011 in reaction to political corruption and economic decay are the primary reasons as to why these regions have experienced so much migration.

Certain economic consequences follow the migration of refugees from these areas; namely economic activity in the form of consumer spending as well as the departure of skilled laborers. With respect to BiH, it is the combination of a failing tourism sector and skilled laborers leaving the country that have propelled the country into a virtually inescapable economic downturn. Despite the glaringly obvious dysfunctions of BiH, an attempt will be made to determine the underlying causes of the modern refugee crisis and examine the health of BiH from 1991-2016. Then, a proposal of economic policy as a means of creating short run and long run economic growth for the nation will be presented.

The Arab Spring of 2011 — A Sociopolitical Cause to the Modern Refugee Crisis

Beginning in 2011 where protests, riots, coups, and civil wars began in Middle Eastern countries such as Libya, Yemen, and Egypt, the Arab Spring challenged the revolutionary ideals of Western democracy. Participants opposed Arab dictatorships, unemployment,

disenfranchisement, inflation, and the privatization of assets in some countries (AboutNews). Economic and political motives made up the ideological framework of the Arab Spring, and similar to the concept of Russia’s communism circa 1970’s with the privatization of businesses and command economy, the intentions of the Arab Spring appeared much more promising and effective on paper than in practice.

Concerning North African and Middle Eastern countries, the Arab Spring of 2011 has cost the region's economies an estimated $614bn of growth because of governmental changes, continuing conflict and falling oil prices, according to a UN agency (Aljazeera). These countries fell victim to violence, government protests, and ethnic schisms. However, the results of the Arab Spring proved to hurt even more those countries who had already encountered revolutions, economic hardships, and political upheaval themselves; namely the countries belonging to the Balkan Region of Eastern Europe.

The Balkan Region of Eastern Europe

Consider the Balkan Region of Europe, formerly known as Yugoslavia. The Socialist Federal Republic of Yugoslavia was one of the largest, most developed and diverse countries in the Balkans, and comprised of six republics: Bosnia and Herzegovina, Croatia, Macedonia, Montenegro, Serbia, and Slovenia, within which various ethnic groups lived (BorgenMag). These ethnic groups dominated each country’s population, and aside from the political power and independence sought out by virtually all countries leading up to the 1990’s, it was this ethnic divide across borders that contributed to the civil wars and ultimate disbandment of Yugoslavia.

In the months leading up to the breakup of Yugoslavia in 1991, most of the countries within the Balkan region were itching for independence, political sovereignty, and ultimate control of their borders. In 1991 and 1992, Yugoslavia disintegrated under the pressures of ethnic conflict, economic issues, and the demagoguery of Serbian President Slobodan Milosevic (StateHistory.gov). Populist ideals backed by a corrupt political agenda encouraged ethnic divides across borders of Yugoslavia, and it soon became a game of which country was going to secede first.

With Bosnia and Herzegovina’s declaration of independence from Yugoslavia in 1992, violence erupted and created a chaos unlike anything the region had seen in the past two years. BiH’s decision to secede left the rest of the Balkan region in economic and political shambles. It augmented the Yugoslav wars by three years, and in that time, thousands of civilians across the BiH territory were killed in fire fights and over a million were displaced. Due to the ethnic schism between Bosniaks, Serbs, and Croats residing in BiH, the country experienced one of the worst migration crises of the modern era, and proved to be only a preface of what was soon to come in the late 2000’s.

Ethnic Adversity through a Global Perspective

The ethnic makeup of BiH’s population in the early 1990’s consisted of the following:

• Bosnian Muslims or “Bosniaks” — 48% • Serbian — 37.1% • Croats — 14.3% • Other — .6%

(The World Factbook)

With the majority of BiH’s population consisting of Bosnian Muslims or Bosniaks, fair representation in voting polls, legislation to-be passed, and other forms of political and economic representation was virtually unattainable. Bosniaks were the majority, but they were also the victims of prejudice and violence. Their unique benefit in the passing

of legislation further enraged minority ethnic groups within BiH.

Hatred, racism, prejudice, and other forms of anti-ethnic sentiments have existed for centuries. It was evident in the holocaust of World War II and the Yugoslav Wars proved to be no different. Parallels can be drawn between the prejudice Bosniaks faced during the Yugoslav Wars and and the prejudice faced by the Tutsi of Rwanda in 1994. In fact, the Rwandan Genocide of 1994 occurred, if only for a year, during the same time as the Bosnia civil war.

With respect to the Tutsi rebels of Rwanda, the Hutu majority felt the Tutsis were the elite and ruling class of Rwanda, and having unilateral power and decision-making by one ethnic group over the other was dangerous and had to be corrected. The result was a three-month long genocide of the Tutsi minority, where almost 1,000,000 were killed and 250,000 women were raped and then murdered. The genocide was inspired by fear and prejudice towards one ethnic group. The same way the Tutsis were targeted as the problem, the Bosniak’s were equally mistreated by the rest of the Yugoslav ethnic groups, particularly the Serbs.

A war of ethnicity had begun. Bosnian Serbs with superior military might engaged in ethnic cleansing, a systematic campaign of persecution of non-Serbs. They soon controlled more than 60 percent of the country (BorgenMag). The political and economic persecution of non-Serbs was the first step in dividing BiH ethnically and cultivating a future of one-sided economic policy and crooked political agendas.

Bosnia and Herzegovina was Yugoslavia’s epicenter of ethnic cleansing. More non-Serbs were displaced from their homes than of any other country in the Balkan region. The Bosnian diaspora is a relatively new phenomenon, induced by the four-year long conflict in the former Yugoslavia from 1992-1995, when over two million Bosnians were displaced from their homes (Hronesova, 1). Internally displaced persons rose precipitously in the mid 1990’s, and as the EU failed to help BiH out of a looming

economic crisis, so did the number of migrants exiting the country.

Anti-Islamic sentiment has also flourished in areas further south where the spread of the Ottoman Empire left sizable Muslim communities in Albania, former Yugoslavia and Bulgaria. Some of this Islamophobia is racism toward indigenous populations; some is xenophobia against immigrants (Huffington Post). Anti-Islamic sentiment was inspired in the Balkan region, and as mentioned before, an ethnic divide between Serbs, Croats, and Bosnian Muslims was a primary driver of violence, anti-Islamic sentiment, and most prevalently — migration out of the Balkan region. The reverberations of BiH’s secession from the Balkan Region post-1991 proved to be the first to fall in the house of cards that represented ethnic migration in the Middle East and North African regions.

The economic and political consequences of the Yugoslav Wars would force some of the most oppressing policy the world has ever seen. Examining the role of these policies from the conclusion of the Yugoslav Wars and henceforth, I seek to identify what kind of oppression and disadvantages migrants leaving BiH experienced when arriving in other countries. In identifying the root causes of the migration crisis out of Bosnia and Herzegovina, I will then introduce and articulate certain economic policy that could revitalize the economy, reform political corruption, and most importantly, facilitate a more welcoming environment for Bosnian migrants so that repatriation is not just an option, but rather a necessity in facilitating long run economic and social development.

Economic Climate of Bosnia and Herzegovina

The notion that Bosnia and Herzegovina fell victim to the most atrocious ethnic cleansing, political dismantlement, and economic crisis is unchallenged. The country suffered thousands of deaths in its civil war spanning from 1992-1995, and the number of

migrants who became IDP’s or left the country altogether climbed to almost two million by the year 2000.

In the history of BiH, the population peaked in 1989 with approximately 4.5 million, two years before the onset of the Yugoslav Wars and subsequent ethnic cleansing by BiH beginning in 1992. From the years 1991 - 1997, the country experienced the steepest drop of population and fell to almost 3.8 million. The migration post-Bosnia civil war of 1995 is the primary actor in Bosnia’s population plummet . This steep 1

decline of population propelled the county into an economic downturn that the neither itself nor the European Union could have prevented or be able rectify in the coming years.

It should be noted that although the Dayton Peace Accords agreement was signed in 1995 to end the Bosnian civil war, it in fact was the catalyst for BiH’s economic downturn. The agreement preserved Bosnia as a single state made up of two parts, the Bosniak-Croat federation and the Bosnian Serb Republic, with Sarajevo remaining as the undivided capital city (Britannica Web). In acknowledging the anticipated migration of hundreds of thousands of Bosniaks, Serbs, and Croats, the agreement called for Bosnia and Herzegovina, Croatia, and the Federal Republic of Yugoslavia to agree to fully respect the sovereign equality of one another and to settle disputes by peaceful means. In addition, the parties agreed to fully respect human rights and the rights of refugees and displaced persons (Britannica Web). This offered some reprieve to those migrating out of BiH in search for asylum, but by no means solved the migration crisis that would erupt in the following years.

Shortly after the conclusion of the Bosnian civil war in 1995, Bosnia began to show signs of real economic decay. The reasons behind Bosnia’s economic decline suggest that perhaps the country was not yet prepared to secede from Yugoslavia and be granted political and economic sovereignty.

See appendix A for Bosnia and Herzegovina Population from (1950-2016)1

In the premature secession of BiH, Bosnia's per capita income dropped to $500, with industrial output at 5% of pre-war levels, Its infrastructure was destroyed, its population largely displaced and its business reputation ruined (Marin 1). Prior to the Bosnian civil war and secession from Yugoslavia, the country profited from its metal industry. Under the legislation and leadership of late Josip Broz Tito who, up until his death in 1980, was tyrannical yet severely communist, Bosnia was pushed to supply metal for all of Yugoslav nations. In the years leading up to the Yugoslav wars, they were in fact the center of the metal production industry of Eastern Europe.

Despite president Tito’s intention of maintaining Yugoslavia as a communist region, the breakup of Yugoslavia in 1991 called for all participating countries to transition from their former command economies to liberalized market economies. In theory, this transition economy meant 2

that the government would have less influence on what factors of production would be used to produce goods and services. The government would also sacrifice major investment, pricing, and distribution decisions of its products and services. Lastly, the government would become decentralized in that citizens would have more voting power with respect to legislation.

BiH was not alone in this transition of economies. As the 2000’s approached, all countries within the Balkan region were adopting the liberal market economy with the hope that a free market would alleviate some of the tensions faced in the past 10 years. However, as per usual with a country whose economy transitions from command or central planning to a market economy, short-term economic hardships are faced. Structural unemployment pervades the labor 3

market, prices rise, infrastructure shrinks, and political corruption develops as a short-term solution. This is precisely what occurred

with Bosnia and Herzegovina at the turn of the century, albeit it came as a surprise to economic analysts, policy makers, and international investors.

Despite the textbook response to the transition economy, foreign investors and and Bosnian’s own government and central bank did not expect it. Bosnia & Herzegovina was positioned, like many of the other former Yugoslav republics, to make a successful transition to a market economy (Marin 1). They had a booming infrastructure in the production of metal, furniture, chemicals, and raw materials. The majority of the workforce was highly educated with per capita income that was around $2,000. What distinguished BiH as a superior economic power from the rest of the Balkan region was its previous business dealings with Western businesses. Before 1989, no other country in Central and Eastern Europe had as much Western business experience as the former Yugoslavia (Marin 1). This leaves many unanswered questions with respect to the failing economy of the Balkan region.

If the economy and infrastructure of BiH was so healthy in anticipation of a move to a market economy after their secession from Yugoslavia, then why in fact was there such an adverse reaction?

This question has been posed by numerous analysts and despite those individuals who believed BiH should have remained a command economy, it is universally agreed upon that the political corruption following Bosnia’s change of economies is the primary reason behind their inevitable economic and political demise. It is important to note as well that Bosnia and Herzegovina did not expect their own civil war to be so catastrophic that a personalized Peace Agreement would be required to end the war. Four years of war eliminated many of Bosnia's natural commercial and economic advantages (Marin 1). Infrastructure crumpled from war destruction and business

Economy that is changing from central planning to free markets2

Category of unemployment arising from the mismatch between the jobs available in the market and the skills of the available 3

workers in the market. Usually occurs due to a change in technology or industry inputs

reputation was minimized. Perhaps the most damaging was the financial crisis of 2008. The effects of a global recession hit BiH especially hard.

By 2008, the government of BiH had done an excellent job in persuading the European Union to offer economic stimulus packages for the short term. Those packages came in the form of foreign direct investment (FDI) which flowed into the country at a 4

relatively constant rate from 2000-2008. When the crisis occurred, market failure, heightened investor risk and doubts in futures, and rampant political corruption within BiH slowed FDI to a halt. This left Bosnian policy makers scrambling for a bailout or other kind of solution. With the EU checked out of the Balkan region and high tensions among its neighbors, BiH was left to its own devices on how to solve an impending economic crisis and migration dilemma. This problem would only grow in complexity with the Arab Spring that hit three years later in 2011.

Political Climate of Bosnia and Herzegovina

Once the European Union decided to withdraw their financial resources, Bosnia and Herzegovina decided to political strategy to provide a safety net in case all other options failed. Now divided into two entities: the Republika Srpska (RS) and the Federation of Croats and Muslims (the Federation) (Marin 1), all subsequent legislation would favor one political party over another. The Federation has received about 98 percent of all international assistance (Marin 1) during the time of EU’s bailout and other foreign stimulus packages such as increased joint-venture opportunities and the investing of privatized state-owned commercial assets. Despite a hopeful future for Bosnia and Herzegovina, the country’s political landscape would crumble due to the Federation’s near-absolute benefit and power from passed political legislation.

The RS, on the other hand, was subject to international sanctions up to mid-1996 and has not sufficiently cooperated in the implementation of the Dayton Peace Accords - two main reasons keeping the international community from designating reconstruction funds for the region (Marin 1). An argument can be made that the Republika Srpska or Република Српска, which was dominantly Serbs, is the political party responsible for the delay of economic and political progress within BiH and the greater Balkan region.

In the bloody aftermath of the Yugoslav Wars, the Republika Srpska proved to be the more authoritarian and bellicose of BiH’s two political parties. Bosnia's secession followed in early 1992, but it was complicated by the Bosnian Serbs, who proclaimed their own independent enclave — Republika Srpska — around the same time (Beary 10). An ethnic cleansing of Muslims residing in BiH was the primary objective behind the political and military agenda of the Republika Srpska. This agenda was backed by the coalition of Orthodox and Christian Serbs. Killings and destruction of Muslim-owned property not only widened the political dichotomy between The Federation and the Republika Srpska, but it also sparked a massive migration of Bosnian Muslims out of the country.

The political landscape of Bosnia and Herzegovina in the years of 1992-1995 proved to be just the beginning of a turbulent, decentralized, corrupt, and utterly dysfunctional government system. The baseless notion that the Bosnia Muslim majority were parasites and had to be ostracized was a decision that, unbeknownst to every Balkan region at the time, would alter the migration crisis of Eastern Europe for years. The government of Bosnia and Herzegovina decentralized power in their transition from a command economy to a market economy, but this proved to only exacerbate the disagreements between the two dominant political parties. The legalization helped one party almost unilaterally and left the other party a

Investment made to acquire lasting or long-term interest in enterprises operating outside of the economy of the investor4

minority in representation and political power. This furthered ethnic tensions between the main ethnic groups of BiH.

Aside from the failed decentralizing of power, the government of Bosnia and Herzegovina implemented other political policy reform to encourage more FDI, business startups, and tourism back into the region. Unfortunately, those policies proved to be clandestine approaches in furthering the personal interests of powerful politicians within the political framework of BiH.

Political corruption within Bosnia and Herzegovina has pervaded the lives of honest-working citizens. It is the people of BiH who deeply feel the consequences of corruption in the healthcare, education, and employment (BBC Monitor European). The government of BiH accepts bribes from foreign firms so they may enter the country and conduct business. However, the only businesses that can afford to pay off the government to enter are large corporations. This extinguishes the hope for SME’s , both 5

domestic and foreign, from converging on BiH for business. Bribes artificially raise GDP but also foster an unethical, corrupt, and economically unsustainable business model. It stifles economic growth in the long run, and gives all the power to those corporations with enough purchasing power to enter BiH the authority over price, output, and labor resources. It invites the forming of monopolies which, as seen in the past, are only a detriment to sustainable economic growth for a developing/(ed) country.

Moreover, the government engaged in vote-buying in recent elections of 2010. A comprehensive primary research study was conducted to represent citizen perceptions and realities of the extent to which corruption pervades BiH. The United Nations Convention against Corruption (UNNC) invites countries to identify criteria concerning candidatures for election to public offices and to enhance transparency in the funding of candidatures and, where applicable, of political parties (United

Nations Office on Drugs and Crime, 32). The UNNC set out to find out just how many citizens in BiH were involved in vote-buying by the government. Specifically, Appendix B shows the breakdown of how many citizens were offered concrete offers, such as money, goods or a favour (United Nations Office on Drugs and Crime, 32) in exchange for voting in either the BiH national election or local election.

The findings are very interesting. The research breaks down rural vs. urban areas where individuals were asked. See Appendix C for a vote-buyer proportion of rural vs. urban with respect to each political party. This exhibit is perhaps the most intriguing. Recall that the Federation of Croats and Muslims were the minority but in fact reaped 98% of the benefits derived from passed legislation. They are the target of Serbian nationalism and are the victims of the migration crisis. Taking all of this into consideration, those individuals claiming allegiance to the Federation were approached overwhelmingly more for vote-buying than their political rival, the Republika Srpska. This discrepancy suggests that perhaps the government of BiH favors the voting power and political compass of the Bozniaks and Bosnian Croats than of the tyrannical Bosnian Serbs. Regardless of the government’s political partiality, the act of vote-buying for both the national and local elections further suggests the country’s brazen behavior towards real political and, on a grander scale, economic reform.

It must also be noted for being perhaps the most heinous of corrupt activities with respect to vote-buying that, according to Appendix D, those males living in rural areas of BiH with presumably lower education and income were asked more to engage in vote-buying than any other demographic. This serves to confirm with almost-certainty the severely corrupt behavior the government of BiH engages in. It demonstrates a complete economic and political disjoint among the demography of BiH. Even worse, it shows that the government is fully aware of these disparities

Small to Medium-sized Enterprises 5

and therefore capitalizes on the young, poor, and uneducated as a vehicle to gain more political power over the entire population. One could certainly make a case that in the current political climate of the United States in 2016, a similar act of graft and political misguidance has taken place, facilitated by the dangerous vehicle of right-wing political rhetoric.

Lastly, the government of BiH unethically recruited public sector workers through bribery of the applicants themselves. 18 per cent of citizens or members of their households applied for a job in the public sector in the three years prior to the survey, of whom a quarter actually secured a job. Of those who were successful, 14 per cent admit paying money, giving a gift or doing a favour in order to be hired (United Nations Office on Drugs and Crime, 32). On the surface, a normal amount of applicants were sent in for public sector jobs, but only those who paid out of pocket in fact secured the desired position.

According to Appendix E, three quarters of those who did not get a job think that somebody else was employed due to cronyism, nepotism (50%) or the payment of money (26%). Only about 6 per cent believe that somebody else better fitted the job requirement (United Nations Office on Drugs and Crime, 32). Regardless of what the actual reasons were behind who was offered public sector positions, it is the overwhelming opinion of citizens who applied that those individuals who secured positions were beneficiaries of nepotism or bribery. This lack of transparency with respect to public job attainment is a the third publicized transgression of the government of BiH.

In evaluating the extent to which every country in the world engages in corruption, the Corruption Perceptions Index (CPI) has a scale which ranges from zero, which means the absolute corruption, to 10, which represents the countries where it does not exist at all (BBC Monitoring European). With no country in the world falling on zero, Bosnia and Herzegovina has been assessed to have a corruption index of 3.0 as of 2009 and 3.2 as of 2010. The 2 tenths increase is

attributed to the passage of the very important laws and the strategic documents that include but are not limited to the following:

1. Law on the agency for the prevention and the coordination of the fight against corruption 2. Strategy for fighting corruption 3. Appropriate action plan 4. Amendment to the law on the free access to information and the imposing of sanctions unto violators

(BBC Monitoring European)

In light of the marginal improvements across legislation, BiH still suffers from systemic corruption. In their defense, however, there are many reasons for such widespread corruption in Bosnia-Hercegovina; the war, the transition process, which very often brings along the emergence of the elites, and the state becomes the so-called prisoner of corruption. We can, certainly, say that the reason why Bosnia-Hercegovina cannot currently fight corruption is exactly the lack of the political will of the authorities to start the fight against this plague (BBC Monitoring European). It is the hope of the greater Balkan region, the European Union, and the rest of the world that BiH can begin taking steps in acknowledging its systemic corruption. It may then be able to implement plans to reform it, and then introduce economic policy that can reinvigorate the economy and rebuild the country’s reputation. In addition, a reformed political system can increase BiH’s chance of being offered membership into the EU. However, only when the country’s political and economic environment are stable and healthy can policy makers then pay attention to how this policy can shape repatriation of the nation’s refugees.

A Transition of Economic Ideology

The European Union understood the ethnic battles faced in BiH, but could do virtually nothing to mediate the situation. Davor Kunc, a Croatian expert on European Union (EU) and international affairs who is working at the World Bank on sustainable

development issues claims that “some issues cannot be solved with EU membership…” and that the “EU is good at institutional reform but is not efficient at tackling political questions (Beary 10). Their inability to grasp the political situation unfolding in BiH further suggests a necessary intervention of economic policy reform.

Since the conclusion of the Bosnia civil war ending in 1995, the Bosnian economy has been infused with over a billion dollars in reconstruction (Marin 2). Private sector, domestic companies that are viable businesses have been given more access to capital which has allowed for ramped-up employment and production. For those firms with legitimate business plans, U.S based lending institutions paired with other international lenders have provided favorable market-based loans (Marin 2). These short-term stimulus packages have helped lessen the damage of Bosnia and Herzegovina’s political and economic environment. However, they are by no way a lasting solution to migration, repatriation of refugees, and solving the country’s economic and political crisis.

Recall that BiH transitioned from a command economy to a market economy. With this transition, market-based economic behavior will follow. In the case of SME’s acquiring loans, they are executed through organized markets similar to the London Stock Exchange or New York Stock Exchange. The relationship with lenders and borrowers is purely limited to the transactions of granting loans or taking deposits and loans are usually granted on short-term (Popa Web). Despite economic optimism, this short-term solution is a bit convoluted. Medium to large-sized enterprises have too much market potential and capital to qualify for stimulus packages in the form of market-based loans, therefore leaving them search for partnerships with U.S firms and other investment opportunities. These firms include producers of furniture, health care products, pharmaceuticals, food products (food processors), heavy construction equipment, baked goods, confections, and paper and wood products (Marin 2). BiH’s market-based economy is not developed

enough to afford these kinds of selective capital loan provisions. It is clear then that the implementation of economic policy can expedite the nation’s transition economy.

A Proposed Economic Policy Reform

In reforming a country’s economic environment, a certain degree of regulation by the central bank or federal reserve is necessary. Economic policy acts as this regulatory tool. Economic tools such as interest rates, monetary supply, fiscal spending, and tax rates directly impact consumers and businesses. With the special case of Bosnia and Herzegovina, implementing economic policy will also, in theory, improve the likelihood of repatriation of refugees native to BiH. Addressing the failing economy of BiH will create a more sustainable environment for SME’s to redevelop, ostensively creating new private sector jobs whilst stimulating economic growth. This means when refugees repatriate, they will be re-entering their countries with jobs that facilitate a middle class lifestyle. This postulation is the basis of my research, and will be justified by implementing a strategic complimentary economic policy: expansionary monetary and fiscal policy.

However, before any economic policy can be advised and put into action, a stable political environment is absolutely paramount. Without holding corrupt politicians accountable for their actions, economic policy is virtually ineffective and falls flat. It can therefore be argued that the economic health of BiH and any other country for that matter is predicated on a stable political environment.

That being said, an a priori economic assumption regarding the political environment of Bosnia and Herzegovina must be made. The assumption is as follows:

The political environment of Bosnia and Herzegovina is relatively stable, allowing the implementation of appropriate economic policy to take effect almost immediately and without political disruption i.e. corruption and bureaucracy.

Expansionary Monetary and Fiscal Policy

The introduction of an expansionary monetary and fiscal policy (EMP/EFP) appears to be the most promising economic policy to reform the macro-environment of BiH. EMP is a policy by monetary authorities to expand money supply and boost economic activity, mainly by keeping interest rates low to encourage borrowing by companies, individuals and banks (Lexicon Web). Contrasted with fiscal policy, which deals with the spending within an economy and tax rate fluctuation, EMP aims to boost a market’s health through non-spending mechanisms. However, expansionary fiscal policy must also be introduced in conjunction with EMP. In theory, lowering taxes increases household disposable which in turn increases GDP for a nation. Implementing EMP will be the focus of my research, but a cooperative relationship with EFP is essential in maximizing long run economic growth for BiH. The tools associated with EMP specifically include but are not limited to the following:

1. Expanding the money supply A. Quantitive easing

2. Increase aggregate demand 3. Increase short-run economic growth

B. Foreign direct investment 4. Increased borrowing

C. Banks D. Businesses

5. Combatting inflation rates E. Artificially lowering I-rates

It is important to note that implementing expansionary policy is designed to reverse low-growth periods of the economic cycle. Low interest rates, increase in money supply, and lower taxes are the primary mechanisms of EMP and EFP. Interest rates act as the main driver of EMP. The lower interest rates are, the higher aggregate demand will be for goods and services of a market. Tax rates act as the main driver of EFP. The lower tax rates are, the more disposable income consumers have to spend. Having both drivers work together in the same direction at the same time can be what the economy of BiH desperately needs. There are, however, inherent risks to implementing any kind of expansionary economic policy, monetary or fiscal, in a failing economy within a developing nation. EMP will be the driving economy policy suggestion for BiH with EFP acting as a safety net should the mechanisms of EMP fail. Therefore, a basic risk assessment and subsequent analysis will relate only to EMP.

A Basic Risk Assessment of Expansionary Monetary Policy

Timing the implementation of EMP is essential in preserving market equilibrium. Market equilibrium is where the supply and demand curves intersect, thereby demonstrating a buyer/seller agreement on quantity demanded and price of the good or service, respectively. Because the intention is to combat inflation of goods and services while there is low-growth, if EMP is implemented at an inappropriate time, it can cause super-inflation of prices, pushing the market price upward. This will disrupt the supply and demand equilibrium ( E1 ) within the microenvironment of a country as shown in Appendix F. It puts more pressure on suppliers to slow production so as to not enter a producer surplus . This produces a 6

negative effect on economic growth by stifling a producer’s ability to sell goods at the natural equilibrium price.

Quantitive easing exists as a primary driver behind EMP. It operates when central

Excess supply- that is quantity supplied is greater than quantity demanded. In this situation, some producers won't be able to sell all their goods.6

banks create money by buying securities, such as government bonds, from banks, with electronic cash that did not exist before. The new money swells the size of bank reserves in the economy by the quantity of assets purchased—hence "quantitative" easing (The Economist). This leaves banks with a surplus of m2 currency in a market where interest 7

rates are near zero. This presents itself as a buyer’s market, and banks feel forced to increase lending in order to make up for a loss of profit from interest revenue channels. Although banks suffer, more lending means more buying within the market. In the short run, this stimulates economic growth through the following two avenues:

1. Increase in stock prices 2. Lower short-run interest rates

While these byproducts of successful QE can improve an economy, it isn’t a permanent solution. The biggest risk is if too much money is dumped into the market without enough loans being distributed by banks, it can hyper-inflate currency and choke the profits of banks. Timing is essential when conducting consecutive rounds of quantitive easing. Avoiding unwanted inflation hikes as well as a potential recession are top-of-mind issues for policy makers with respect to QE.

The value of a country’s currency is also important in determine the appropriate policy. See Appendix G for the BiH Convertible Mark (BAM) exchange rate with the U.S Dollar. Albeit close in value, the currency value history of the BAM demonstrates a precarious economic health, reflecting a lack of FDI, consumer spending, and responsible management of the money supply. The economic indicators of Bosnia’s failing economy suggest consecutive rounds of QE are necessary in providing short run economic relief.

Lastly, the predictable lag-time between implementing an expansionary policy and when that policy begins to take place can be

problematic. It takes time for economic policies to flow through a market and begin to take effect, and in that time, the economy could self-regulate. The condition of an economy when the effected policy takes place could in fact prove detrimental, so it’s crucial for policy makers to make educated assumptions in implementing policy so to minimize unintended consequences.

Despite these risks, expansionary monetary policy has proven effective in stimulating short-run economic growth for a stagnant market. Quantitive easing as a form of EMP has undergone some criticism, but it has shown improvements in situations of economic uncertainty. In tandem with the workings of EMP is EFP which, albeit more relevant to how the government actually spends its money, is crucial in facilitating sustainable economic growth. The partnering of EMP and EFP are most certainly not the panacea to BiH’s failing economy, but it is a convincing first step in the direction of lasting progress for a country who was abandoned by the European Union after years of economic dependence.

EMP: A Proof of Concept

When the financial crisis of 2008 took effect, the consequences of irresponsible trading and loan provisions reverberated across world markets. Alan Greenspan will go down in history as the person most responsible for the enormous economic damage caused by the housing bubble and the subsequent collapse of the market. The United States is still down almost 9m jobs from its trend path. We are losing close to $1tn a year in potential output, with cumulative losses to date approaching $5tn (The Guardian). Reckless lending behavior facilitated by a negligent Chairman of the Federal Reserve altered the trajectory of the U.S economy in an unforeseeable way.

Greenspan ignored loosely strung bank regulation and encouraged the distribution of

Includes all M1 currency (cash, coins, checking deposits) + “near money” i.e. savings deposits, money market securities, mutual funds and other time 7deposits

Mortgage-Backed Securities and Asset 8

Backed Securities (ABS) in order to 9

stimulate nearsighted economic growth and bloat the U.S market to as to attract more investment. The most common and dangerous MBS being distributed were Collateralized Debt Obligations (CDO) . 10

These Mortgage Backed Securities were sold to banks who then sliced them into less risky portfolios and sold them to middle class families who mortgaged houses they could not afford. All of this behavior was encouraged and facilitated by Greenspan’s negligence of the law.

The securities held virtually zero-risk but maximum and immediate return when the homeowners would inevitably default. This provoked the Subprime Mortgage Crisis of 2006 which, coincidentally, was the same year Greenspan stepped down as Fed Chair. The next two years of market instability would foreshadow the worst economic crisis in the history of America.

In a 2010 statement, Ben Bernanke, the tenured Chairmen of the United States Federal Reserve said the Fed developed special lending facilities that helped to restore normal functioning to critical financial markets, including the commercial paper market and the market for asset-backed securities; led the bank stress tests in the spring of 2009 that significantly improved confidence in the U.S. banking system; and, in the area of monetary policy, took aggressive and innovative actions that helped to stabilize the economy and lay the groundwork for recovery (Federal Reserve). Those actions carried out by the Fed in response to the crisis include the following:

1. For macroeconomic stability — Short-term adjustment of interest rates.

• Influence spending production, employment, and inflation.

2. For financial stability — Provision of liquidity (short-term loans) to financial intuitions or markets

• Calm financial panic

(The Federal Reserve and the Financial Crisis)

Recall the inherent risks of implementing monetary policy, specifically timing of execution. It would seem that the two aforementioned tools Bernanke used to try and salvage the U.S market would do just the opposite. Inheriting the Subprime Mortgage Crisis brought about by his predecessor Greenspan, Bernanke exacerbated market instability by flooding it with $1.7tn of quantitative easing. He took the bad he was given, made it a whole lot worse, and within two years secured the financial crisis that would inevitably cripple the U.S economy.

Bernanke’s successor, Janet Yellen, was elected Chairwoman of the Fed in 2014. Yellen understood the logic of an EMP, but also understood the inherent dependency markets developed with respect to monetary cash inflows. She cut off rounds of QE, and instead artificially lowered interest rates so to promote borrowing from an alternative perspective. As of August of 2016, the Fed raised interest rates in December (referring to December of 2015) for the first time since the financial crisis and predicted four more rate increases this year. Instead, it has kept its benchmark rate between 0.25 and 0.5 percent. Low rates encourage borrowing and risk-taking, which can bolster economic growth. Raising rates will gradually reduce that stimulus, and the Fed has been reluctant so far to take its foot off the gas (Appelbaum, NYT).

Yellen has shown reluctancy in significantly raising interest rates because of the inherent dependence markets develop on consecutive rounds of monetary inflows (QE). It should be noted, however, that with respect to the comeback of the U.S market following

Asset-backed security that is secured by a mortgage or collection of mortgages.8

Bonds or notes backed by financial assets such as mortgage loans, auto loans, and home-equity loans. 9

Package of individual loans sold to the secondary market consisting of credit card, mortgage, and corporate debt. The value of the CDO is derived 10from the collateral that gives the loan its value — hence it being collateralized.

its collapse in 2008, consecutive rounds of QE did raise economic activity a bit (The Economist). In particular, monetary expansions appear to have affected inflation forecasts while fiscal policies seem to have influenced expectations of economic growth (Carvalho 1). A combination of EMP and EFP in response to the 2008 financial crisis proved to provide temporary economic relief for the United States economy in the following ways:

1. Increased consumer spending 2. Revitalized market investment 3. Stabilization of economy 4. Balance of bank balance sheets

Despite economic optimism, central bankers have been more cautious in using QE than they would have been in cutting interest rates, which could partly explain some countries' slow recoveries. At least a few central banks are now experimenting with stimulus alternatives, such as promises to keep overnight interest-rates low for a very long time, the better to scale back their dependence on QE (The Economist). This strategy mirrors that of the Fed in 2016, where Yellen has enforced a near-zero interest rate of .25-50% for the past years. In light of these ideas, EMP and EFP have shown market improvements into 2016. See Appendix H and J for a graphical representation of the real effect of three consecutive rounds of EQ for the U.S economy and GDP growth during the years following the financial crisis of 2008.

Thus, with respect to the United States economic environment, albeit superior to that of BiH, the implementation of EMP and EFP in the shadow of economic despair proved successful, but as noted, not without some damage. Looking forward, with in-depth analysis, risk assessment, and careful implementation and regulation, EMP and EFP can be introduced into the BiH economy. In a best case scenario, the Central Bank of Bosnia and Herzegovina can heed the warnings the U.S Fed always ignored, and

perhaps learn the method behind a tactful, complimentary enforcement of EMP and EFP.

A Long Run Perspective

Implementing a complimentary expansionary monetary and fiscal policy is not the panacea to all of the problems faced by Bosnia and Herzegovina. Vehicles of monetary policy such as quantitive easing or lowering of interest rates have proven to stimulate an economy in the short run, but the effects dissipate into the long run. The uncertainty of how to react in the long run has puzzled economists for years. Policy makers must be acutely aware of the long-run when developing policy so to work towards a sustainable economic environment.

Economists have challenged the traditional economic factors of slowed economic growth, and have since begun to combat the real effects of diminishing marginal returns to capital . Albeit 11

unpopular at the time, an economist in 1992 postulated that we ought to incorporate into theories of economic growth capital goods that can be produced without using non reproducible inputs. Examples of such goods are human capital and the ‘state of knowledge’. As long as the production of these goods has no limit, sustainable growth is possible (Kahn 5). Kahn admits the ambiguity of long run economic policy and its role in creating a sustainable economic environment. However, he iterates that an investment in training a nation’s human capital will increase productivity of other workers. This is a promising long run economic idea that may be leveraged against the potential failure of EMP and EFP within BiH.

Consider the economic opportunities of repatriating refugees back to BiH and utilizing their skilled labor. Utilizing this labor force to build a newly adopted market

Concerns short run factors of production i.e. labor capital. At a certain point, employing an additional factor of production causes 11

a relatively smaller increase in output.

economy may be the long run economic policy BiH desperately needs. This notion further necessitates the need for an effective short run economic policy and mediation of the political environment of BiH. The value of repatriation will be discussed further in my concluding thoughts. To better illustrate the role of policy in the long run of an economy, consider again the example of the U.S market.

The United States is entering the long-run of economic policy, and the Federal Reserve must introduce policy that can maintain the steady growth of Yellen’s interest rate plummet. Yellen’s intention to begin raising interest rates within the next few months has the U.S economy and global economies on their toes.

The same level of care and consideration must be considered for BiH. Assuming EMP proves to increase lending, consumption, FDI into the region, and market trust while EFP lowers tax rates, facilitates increasing consumption, and acts to compliment the workings of EMP, the following long-run benefits are possible:

1. Rebuilding infrastructure 1. Steel 2. Energy

2. Raising employment rates within private sector 3. SME development 4. Multinational development 5. Healthy adaptation to market-based economy

Considering the current economic indicators of BiH, implementing an expansionary monetary and fiscal policy similar to that of the United States circa-2008 appears to be the most promising short-run solution. One round of quantitative easing followed by an artificial lowering of interest rates matched with a lowering of government-imposed taxes can bring BiH’s economy out of its slump, and buy the Central Bank of BiH some time in developing a long-run solution. Perhaps the aforementioned benefits of a successful EMP could ostensively work as long-run solutions, or perhaps increased repatriation and employment of refugees may create sustainable production of goods and services

and extinguish non reproducible inputs. It’s important to note that these postulations are based upon empirical data of real GDP increase, employment increase, and investment increase within the United States as a primary reference. Therefore, it is not out of the realm of possibility that the implementation of EMP and EFP will bring about a similar result for the economy of Bosnia and Herzegovina.

The Issue of Repatriation

Today, Bosnia and Herzegovina continues to suffer without aid from neighboring countries. Migration is at an all-time high, leaving the country’s infrastructure to waste away and the economy to remain stagnant. Repatriation of refugees back into BiH occurs, but those who make it back are not left in promising economic conditions. There is a notion that a refugee who flees from their home country for economic reasons is less legitimate than those who leave for political reasons. Therefore, refugees leaving BiH have the lowest probability of being offered asylum in countries such as Germany or Sweden where a demand for asylum is at an apex. See Appendix I for a graphical representation of asylum offered to refugees by all participating countries.

From a refugee’s perspective, returning to one’s improved home so to continue life in a more stable country is infinitely better than having to live somewhere else in perpetuity. Issues of language learning and other acculturation barriers remain the largest of concerns for refugees finding asylum in host-countries. Although they are grateful, it is a reality that the lives of these refugees will be changed forever. However, if those refugees could be repatriated back to their home country and, after government intervention and economic policy has taken effect, begin to make a better life for themselves, this is ideal.

Concluding Thoughts

It is clear from an in-depth analysis of the political and economic climate of BiH that

the country is in dire need of economic reform. Before any economic policy can be implemented, however, the country’s political environment must be reformed in a serious way. Fiscally irresponsible politicians must be held accountable for their actions. Corruption in the form of vote-buying, bribery through the securing of private sector jobs, and bribery through allowing SME’s to enter the country is the main driver of political instability in BiH. Although the purpose of this paper concerns an economic case for economic development, perhaps the presence of an NGO can reform BiH’s political landscape. NGO’s are objective in their missions, and the influence they have on changing the trajectory of a company or country is tantamount to the influence of media and public opinion. In lieu of money bailouts, the European Union could address corruption in BiH by lobbying for the formation of an NGO that could begin to rectify the country’s political system. Although a complex and difficult task, it must be done before economic policy can be considered.

Implementing an expansionary monetary policy comprised of one round of QE followed by a maintenance of low interest rates can potentially reform the economy of BiH in both the short and long run. Although there are no real long run economic policies that can be introduced once quantitive easing takes effect, the positive effects of the EMP can produce long run positive change. Should the aforementioned benefits of a perfectly timed EMP take place, the following course of events may take place for Bosnia and Herzegovina in the long run:

1. Infrastructure may be built up to accommodate its transition from a command economy to a market economy 2. A self-sustaining infrastructure will increase employment and GDP 3. SME’s may begin to re-enter the business environment of BiH, along with scalable multinationals 4. Aggregate demand will continue to shift to the right, facilitating increased consumption and business growth within BiH 5. Optimistically speaking, manufacturing companies operating in BiH can achieve economies of scale, and mass production of consumer goods could become a driving economic force

6. Tourism may revive itself, contributing more revenue to the country’s balance sheet 7. With corruption eviscerated, membership into the European Union can be seriously considered

Reforming a developing nation’s economic and political environment is an expensive, lengthy, and arduous process. However, my proposed economic policy is a promising path for the betterment of Bosnia and Herzegovina, especially with respect to the repatriation of refugees. If the refugees that originally left BiH can return to a country that has undergone serious political and economic reform, a renewed sense of patriotism can foster. The psychological consequences of being forcibly displaced from one’s home will no longer have as much of an effect on refugees. A citizen’s faith can be restored should that citizen have the opportunity to return home and continue living their lives with minimal lasting damage.

Labor is the lifeblood of an economy. It is a factor of production, and remains one of the most critical factors of general economic growth. This means repatriation is even more important for improving the health of BiH. Without laborers, employment will not increase, businesses cannot develop, and consumerism will remain stagnant. Albeit EMP can improve the economy in the short run, long run implications of that policy remain irrelevant so long as hundreds of thousands of the skilled workers of BiH cannot return home. It is incumbent of Bosnia and Herzegovina to recognize its IDPs and refugees not as deserters or defectors, but rather as assets to the business lifecycle.

The economic future of BiH looks bleak. However, with appropriate political reform, and the careful and timely implementation of an expansionary monetary and fiscal policy, the nation may be able to use its short run benefits to sustain a long term economic solution. Paying careful attention to repatriation as a driving force of economic development, BiH can potentially rebuild its economy and hopefully gain membership in the European Union. This is my economic case for economic development for Bosnia and Herzegovina.

Appendices:

A. BiH population over the years

B. Vote-Buying in Bosnia and Herzegovina

C. Vote-Buying in Bosnia and Herzegovina by political party

D. Vote-Buying in Bosnia and Herzegovina by Urban vs. Rural, gender, income, and education.

E. Bribery through securing public sector jobs

F. Negative effects of expansionary monetary policy

G. BiH Convertible Mark (BAM) exchange rate with the U.S Dollar

H. The real effects of EMP on U.S stock prices from ’08-’14.

I. European decisions on asylum applications

J. GDP growth and decay in response to the Global Recession of 2008

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