Aspects of the Political Economy of Bosnia and Hercegovina

Essay, 2010
11 Pages, Grade: 1,0



Peace, democracy, prosperity, stability and growth are the foundations of modern, western-styled democracies. These basic principles are the result of a long, intrinsic process of state-building, democratisation and liberalisation in the so-called western countries.

When it comes to “exporting” these ideals, when it comes to “westerni- sation” of transforming countries, there is a contradiction between the path and the goal, namely: liberal means with as little of non-market influences in economic life as possible; democratic means the political order and its ac- tors are to be chosen by the people of the country. By forcing countries into westernisation,the bureaus and governing bodies and officials as well as the noise that surrounds them produce exactly the opposite: a country that is de-facto externally ruled and its economy largely disturbed by the external intervention.

The idea of a state failure has been discussed in economic literature for a long time20, the idea of the state intervening in the economy and therefore disturbing the “invisible hand’s” equilibrium that would seem to be the op- timal outcome. The state failure might become a UN/NATO/international- failure, when it is not the state, but external actors trying to set up the prosper, liberal democratic country, as ”economic development typically in volves working within given political and economic structures to bring about growth. Reconstruction typically involves a drastic change in the political structure”8

The nature of the intervention might therefore inevitably constraint its own goal.

The current constitution of Bosnia and Hercegovina dates back to the year 1995, when the Dayton Peace Agreement was signed by the presidents of BiH, Serbia and Croatia. This peace agreement, aimed to set an end to a long and bloody war is still the foundation of the bureaucratic order of Bosnia and Hercegovina; the de-facto protectorate became the permanent structure of BiH. The High Representative of the United Nations, also acting as the European Union’s Special Representative has the last authority in every law- making in Bosnia and Hercegovina.

Additionally the so-called international community maintains a strong presence in the country and became also - directly via “aid” and indirectly via “demand” an important player in the Bosnian economy.

This paper tries to examine some political and economic consequences of the international intervention in BiH and highlights some aspects when trying to establish a liberal democratic country, based on market economy and doing so by putting a non-democratic position on the top of political hierarchy and disorting the economy by very strong international bureaucracy and “aid”.

The political Economy of post-Dayton BiH The state and political reforms “State plays the major role in any reform process. Because of that, a much wider concept has to be used than that of a provider of public goods, although that remains to be one of its crucial functions.”16

On the other hand the state intervenes in economic life by levying taxes, subsidizing, acting as supplier and demander and it does all this while being unable to “engage in economic calculations and therefore sufferimg from severe inefficiencies.”9

Namely the state is one of the main sources of rents existing in an economy and these rents do not only change the economy directly but also indirectly by changing the behaviour of the economic actors. It might become, given the relative attractiveness, the most attractive form of economic action to become a rent-seeker and not to engage in productive areas of economic life11. The economy might become a renteer economy, where every senseful economic activity includes the competition for the rent that exists not due to a market outcome but due to the transfer of funds19.

BiH is a very special case when it comes to rents. The rents in the country have two main sources: The international aid and presence and the black market (that produces rents f.e. simply by not paying taxes). The war had - without discussing that point in detail - at least an ethnic component. By the cementation of the ethnic separation via the Dayton peace agreement, this ethnic separation became a very valuable thing for the political elite (which might be similar to the economic one): The aid depends on the conflict, i.e. the rents depend on the conflict. Since rent seeking is the most profitable form of economic action, the source of the rent might be kept alive only for the purpose of further extracting a part of the rent[22, 13].

Another possibility to create rents is the complex governmental system. The idea is straightforward: If all laws were 100% clearly formulated and the responsibilities among the bureaucrats were perfectly assigned, there would never be a possibility for bureaucrats to extract bribes, as it would simply lack the discretionary power to do so. Another effect of unclear rules and re- sponsibilities is the informal regulation of entry11: By putting high hurdles and unclear regulations for wanna-be entrepreneurs or foreign investors who are about to invest in BiH, the local market and therefore the profiers stay relatively protected.

The state in the Weberian sense means the monopoly of the legitimate use of force16. Additionally, efficient economic and fiscal policy requires the majority of people having regular and legal relation with the government as tax payers, consumer of public goods etc.13

The public goods of BiH are to a large part either directly provided by the international community (as security) or, at least when they affect the daily life of a citizen, are provided by the - ethnically divided - entities of Federation and Republika Srpska or cantons. Therefore the political actors are very much interested in maintaining the current order and not moving forward towards less frictions within the country’s entities.


The layout of institutions in a country are crucial to both, political and economic progress of a country. The institutions are normally founded and assigned by the people or their representative. In Bosnia on the contrary, they were designed by international experts during the Dayton Peace talks. The strength of externally determinated institutions is generally lower than of those formulated by the people19. Besides the fact that those experts were international and not Bosnian, experts tend not to represent the average population, as the average population is not an expert in institution-building.

A, practically maybe irrelavant, but symbolically very important restric- tion of the sovereignty of BiH, though not formally touching it, is «Bonn Powers», t.i. that the high representative has the last say when it comes to any law, by-law, dismissal or appointment of politicans or bureaucrtats. It is clear that this weakens all layers of government in BiH, and «are incompat- ible with international efforts to build democracy and the rule of law, and that this is independent of the best intentions of your office to help Bosnia on its path to Europe.»15

The argument for the heavy intervention of EU in Bosnia is the «imma- turity» of both, politicians and voters;


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Aspects of the Political Economy of Bosnia and Hercegovina
University of Vienna
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Bosnia, Ökonomie, economics, mahler-hutter
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Manuel Mahler-Hutter (Author), 2010, Aspects of the Political Economy of Bosnia and Hercegovina, Munich, GRIN Verlag,


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