„Starting from 1859 to the present, it has never even been forbidden by law in BiH to form a credit union compared to today’s independent, democratic, multi-party, market, capitalist, BiH.“
In this issue we are talking with the Profesor Vjekoslav Domljan, one of the most eminent economists in the Western Balkan. Professor Domljan, the Government of the Federation of Bosnia and Herzegovina (FBiH) established the Economic Council in 2017 and appointed you to lead it. Can you tell us what the Council’s job is and how much power it has to influence future decisions in the Federation of Bosnia and Herzegovina?
The Economic Council (EC) has the mandate to advise the Government of FBiH on economic politics; to analyze proposed laws and legislations and their potential impact; to submit proposals of potential economic measures and activities to the Government of FBiH on its own, with a sustainable economic growth as the primary result previously outed by the Government of FBiH, the Reform Agenda and Letter of Intent to the IMF, not excluding the other goals; and to collectively and individually communicate with a wider social community pertaining to reforms.
The composition and work of the EC is reflected by the condition and trends in BiH society. Anything new takes a long and hard way to materialize. The EC has been formed in the middle of the third year of the Government’s mandate, when it was not easy to propose something new that could hardly be acceptable on account of new elections, especially having in mind working conditions of the Government and Parliament of FBiH. However, there was plenty of time to come up with and promote fiscal devaluation, which is fundamental to speeding up growth of the economy and reducing inequalities in society. The year 2018 should be dedicated to the design of fiscal reform and fiscal devaluation followed by the reform of the deposit-loan system and the introduction of productivity policies, in order to implement all of this in 2019, which will be the first year of new Government’s mandate.
In the past period, news that Government of FBiH adopted the so-called “Blue Book” was not picked up by the media. What is the aim and purpose of this document? How can Blue Book improve the lives of citizens of the Federation of Bosnia and Herzegovina?
The Blue Book is the joint work of the members of the EC, the FBiH employers’ board of directors, and the BiH Council of Foreign Investors. Public presentation of the Blue Book will also be scheduled at a later date due to respect for the public which has the right to have an insight and make inquiries. But the crucial thing is that its content and its messages were communicated to the Government.
The purpose of the document is to show that (F)BiH has to undertake significant structural reforms in order to be able to rectify internal and external imbalances, which are reflected in high rate of unemployment, insufficient production, negative domestic savings rate, low investments, high bank account deficits and deeply negative international position of net investment.
Without structural reforms, it is not possible to create a basis for a growth rate of 7% or more. To put it simply, the (F)BiH has no engines of growth, and the Blue Book has shown how they can be built.
The population of Bosnia and Herzegovina has been decreasing in recent years through negative natural increase and so-called economic migration, and we have often heard from you that our citizens “vote with their legs”, meaning that their response to the current political and economic situation is to leave our country. How would you assess the current economic situation in Bosnia and Herzegovina, is the road to Europe the only way out of poverty, or can this be a European road of BiH?
The global recession has clearly shown that (F) BiH is not able to react to external shocks the same way as the former Yugoslavia was unable to respond in the event of oil shocks. They both have brought out reform programs with medium-term delays. It is all a well-known fact for the older generations.
Those who “vote with their legs” have lost all hope that job tide can rise in the (F) BiH and lift up their boats. Out there is a growing inequality while the position of the middle class weakens, which will be certainly felt by our people abroad. However, there is a legal safety and order. It is precisely why this insecurity, combined with a disorder and the arrogance of the ruling structures, drove people from here.
BiH does not have to be a member of the European Union, but it must grow into a high income country. Ukraine, Belarus and the Balkan countries (except Greece) are the black hole of Europe, and these are not high-income territories. The Eastern European countries managed to become high-income countries and OECD members in only one-generation, alongside EU members. Some countries, for example South Korea, has succeeded in becoming an economic wonder in two generations without any natural resources, while Finland has turned from a Russian pond to one of the world’s most competitive countries in three generations.
And what did BiH accomplish in these 20 years? Do not say that BiH is ‘complex’, because it has always been complex, take a look on what others managed to do in BiH in two decades with illiterate peasants.
It is true that political and economic climate is eventually created by politicians. How much are they aware of the fact that by often provoking crises they also affect the poor economy, economic migrations and departures from our country?
Politicians are rational beings. They know that no system in the world would offer them more benefits than this one. On the other hand, in a society with a history of deeply-rooted conflicts, which has lasted since 9th century or 14th century, it would suffice to maintain an ethno-national manipulation in order to preserve power.
However, an honest man who does not see his first neighbour as an enemy but as the first help in a case of emergency becomes cheated and therefore a society looses a basic pillar.
If honest and professional work is not appreciated, and really it is not in a morally depraved society, and on top of that gets ridiculed by those who “got by”, there can be no progress. It is enough to see that no ruling body in Bosnia and Herzegovina put the issue of people leaving the country on the agenda, which means that politicians welcome this migration. Those who are not their voters and who could damage them in the future simply leave.
The budget-oriented politicians stay, so the question arises as to whether, as far as BiH is concerned, the Berlin Wall should have been destroyed at all. The farce regarding the electoral law shows the essence: they do not need the elections as it has been clearly shown with the case of Mostar. Hence the initiative to delay the elections by 2020. Each and every budget year is a blessing for this budget system, but also a curse for the indolent and the unemployed, including those with uncertain jobs.
According to EUROSTAT data, Bosnia and Herzegovina has about 30% of the average European Union GDP, on par with Albania, while other countries from the region (Serbia, Macedonia, etc.) are better ranked. What growth do we need to catch up with our closest neighbors?
We need a growth of 7% until 2035 to reach the threshold of high-income countries. They used to tell us that we would become a ‘second Switzerland’, however we are on a good path to become ‘another Kosovo’.
The industry of Switzerland creates over USD 100 billion, the industry of Slovakia around USD 20 billion, the industry of Kosovo’s 1 billion, and the industry of Bosnia and Herzegovina creates about USD 2 billion. These are the consequences of deindustrialization in our country. Instead of going towards the Third and Fourth Industrial Revolution, BiH struggles through the remains of the Second Industrial Revolution.
How to accelerate economic growth? What is the “therapy” for that? How much should we rely on our natural resources or whether we should turn to other sources of growth (innovations, tourism, etc.)? How should the public administration behave and is it up to the task?
In the economics theory, one of the most important questions is whether natural resources are a blessing or a curse. In the case of BiH, they are currently more of a curse.
Those who rely on natural resources and cheap labor in the era of globalization, are doomed to fail. As indicated in the Blue Book, it is necessary to move from extensive to intensive development.
The wealth of a country is not in the country itself, but in the minds of its people. If we do not know how to make a product with high-tech content (except antibiotics), we may not have high salaries and high standard. Conversely, only well-paid employees can make highly sophisticated products.
The standard of the African Union is to allocate 1% of GDP to research and development, in EU that is 3% (with 0.4% and 2.0% respectively). R&D investments in BiH amount to 0.15% of total GDP. If there are no such investments or researchers (which can be counted on the fingers of one hand) in the economy, there will be no innovation.
And all of this should be added to the fact that BiH has a small market and must export in order to secure the scale of the economy that other countries have by “beating” the comparative advantage that our country possesses. Therefore it is necessary to find ou global niches in which BiH can participate. These should be sought in metal, wood and agricultural industries, in tourism, etc. But nobody deals with finding out the chains of value, clusters of development, so this all is a dull story. The results are well known to us.
How much the lack of business market is hampering economic development? And how do you evaluate the existing banking system? Are the reforms needed in this sector as well?
The domestic savings rate has been negative since 1995. It varies from -5% to -1% GDP depending on the year. However, the overall aggregate (national) savings rate is positive: around 10% of GDP.
At minimum, the savings rate should be doubled to about 20% and have the investments amounting to 1/3rd of GDP, which is the amount that the countries with upper middle average income have. Some of these countries, such as China, have a savings rate of 52% of GDP plus a growth rate of 9.6% over the past 38 years.
BiH must introduce new financial institutions and financial instruments. Here is an example that can clarify this: when the global recession arose, Kengen (the leading electric power generation company in Kenya) has issued bonds. Citizens could have invested their assets in these bonds at 12% instead of bank at 5%. Kengen received money at 12% instead at 15% from the bank. And the bonds were “sold like hotcakes“.
Starting from 1859 to the present, it has never even been forbidden by law in BiH to form a credit union compared to today’s independent, democratic, multi-party, market, capitalist, BiH. And yet there is no one to raise his or her voice against such a legal monopoly in conditions of negative domestic savings rate. The miserable sum of citizens’ savings of BAM 5 billion, which has remained dormant for many decades (remember the sudden rise in savings following the withdrawal of Deutsche Mark) as a result of various international and personal remittances, speaks more about the weakness than about the virtue of the current banking and investment systems. What does the average increase in citizens’ savings of 200 million BAM per year mean if the budget deficit exceeds 200 million BAM and if citizens spend at least 200 million BAM per year more than they earn. Hence the negative savings rate.
Finally, how much do we need the International Monetary Fund and what is your opinion on the use of IMF funds? Do we have any alternatives?
On the IMF website you can see who is dealing with them, and these are the countries that have frivolous politicians in power who constantly say “we need the IMF because we don’t know how to stop”, just as little Peter does not know when to stop eating bananas.
As long as BiH has politicians, and not statesmen, there will be a need for the IMF. And not only that – there will also be a need for an imperial structure such as the currency board.
If BiH had statesmen, it could move away from the currency board to the central bank system and immediately get free and clean 5 billion BAM.
However, the international community (read USA) does not want to hand over the money printing machine to BiH politicians, who are not even aware of friendly intentions. It would suffice to let loose speculators attacking the currency board, and have them wiped not 5 but 11 billion in 11 seconds. The country could not escape the chaos like Hong Kong in 1997 when it was attacked by speculators because the amount of foreign exchange reserves was three times higher than money in circulation. There is also the case of Argentina clearly demonstrating how frivolous politicians can ruin such a gadget as the currency board.