Economic Freedoms in Bosnia and Herzegovina
„There could be no political freedom without economic freedom; free mind and free market are in correlation“ (Ayn Rand)
In January 2013 the Heritage Foundation and Wall Street Journal released a report on the state of affairs of economic freedoms in the world. This was the 19th report of this kind which has been published since 1995. According to this report, Bosnia and Herzegovina ranks 103rd on the Economic Freedom Index (169). In the European framework Bosnia and Herzegovina ranks 38th out of 43 countries.
The total score with regard to the Economic Freedom Index for BiH amounts to 57.3 which places Bosnia and Herzegovina in the group of countries without freedoms. BiH improved its position by one place in comparison with its 2012 score in respect of a better public consumption management and work freedom, but scored lower with regard to monetary and fiscal freedoms.
In the follow-up we will refer explicitly to every component of economic freedoms, including the assessments and clarification of the Heritage Foundation and Wall Street Journal (IEF Bosnia and Herzegovina, 2013).
In respect of the rule of law Bosnia and Herzegovina“s score is 20.0 (property rights) and 32.0 (freedom from corruption) respectively. As indicated by the Adriatic Institute for Public Policy a complex governance system is vulnerable to backlogs which, in turn, prevents a reform process. Property registers are by and large unreliable, leaving transfers open to disputes. The efforts to update the laws on real estate ownership and develop new registers have come to a halt. The judicial system does not cover adequately the commercial activities. Contracts are almost impossible to carry out in practice while the implementation of law on intellectual property protection is inadequate. Corruption remains widespread.
In the category of limited state the fiscal freedom component has the 83.2 score while budget consumption has the 26.9 score. The clarification provided was that the two entities in Bosnia and Herzegovina have different fiscal policies. The highest income tax and profit tax is 10%. Other taxes include VAT and property tax. In total the taxes amount to 38.5% of GDP. The budget consumption amounts to half of the GDP, resulting in chronic budget deficits and an increasing public debt.
In respect of regulatory efficiency the scores are as follows: business freedom has the 54.3 score, work freedom 61.2 score while the monetary freedom has the 79.0 score. In spite of specific moves to reform the burdensome regulatory framework, cumbersome bureaucracy and lack of transparency often make the creation and work of private enterprises expensive and difficult. The labor market is not efficient while the unemployment rate, especially among the young, is one of the highest in the region. Due to the strict currency board regime, inflation rate has remained relatively low.
At the end of the report the scores for market openness are indicated as follows: the trade freedom score is 86.4%, the investment freedom score is 70.00% while the financial freedom score is 60.00%. The pondered average of the customs rate is 1.8%, but BiH has concluded free trade treaties with many other countries in the region. Cumbersome state and municipal administrations contribute to a lack of transparency that, in turn, makes investments less attractive. The financial sector is undeveloped. Around 80% of bank assets are privately owned, but the failure to implement contracts and the unsafe regulatory environment put constraints on credit availability.
The report states that Bosnia and Herzegovina has made progress in the area of budget consumption, freedom of trade and freedom of work, but has regressed in the areas of fiscal freedom, business freedom, monetary freedom and trade freedom. Bosnia and Herzegovina lags behind the average world score (59.6), the regional average score (66.6) and, understandably enough, it is behind the average score of countries ranking as free nations in the world (84.5). Thus in 1998 Bosnia and Herzegovina“s score was 29.4, but it kept improving over the years. A significant breakthrough was made in 2000, and later in 2005 and 2006 respectively. After that we witness a modest growth of the level of economic freedoms.
The report for BiH is conducted by the Adriatic Institute for Public Policy from Rijeka while a broader interpretation of the report is completed by the Federal Institute for Growth Programming (171). The research findings are reported by the majority of media in the country, but unlike in the neighboring Croatia we have no in-depth media analysis of the research findings. In the group of non-governmental organizations, when it comes to promoting economic freedoms in BiH, the Atlas network from Washington singles out the citizens“ association „Multi“ from Tuzla and CPA from Zenica. The NGO „Multi“ organizes monthly seminars dedicated to raising an awareness of the public about the importance of economic freedoms for Bosnia and Herzegovina.
The Economic Freedom of the World annual survey (173), whose latest data are taken from 2010, places BiH in 93rd position out of 144 countries covered in the said survey, with the 6.61 score. In the follow-up you can see the scores for each segment of economic freedoms, along with the relevant position on the Index list: (174)
* Size of government: 5.53 (108th position)
* Legal system and property rights: 4.57 (98th position)
* Sound money: 8.27 (77th position)
* Freedom of international trade: 7.64 (46th position)
* Regulations: 7.02 (66th position)
* Regulation of financial market. 9.49 (24th position)
* Regulation of labor market: 6.43 (75th position)
* Regulation of business: 5.13 (114th position)
This report does not deal with a survey of economic freedoms in Bosnia and Herzegovina over a timeframe, but both reports make it clear that BiH enjoys the lowest scores in respect of economic freedoms pertaining to the size of government, legal system and property rights, and also regulation of business. Bosnia and Herzegovina has achieved the highest scores in the field of monetary and fiscal policy along with the freedom of trade.
Other reports published annually for Bosnia and Herzegovina additionally confirm the said findings. Thus, according the World Bank Doing business report BiH ranks 125th out of 183 countries in the world. In the Global Competitiveness report for 2012 -2013, published by the World Economic Forum, BiH ranks 88th in respect of total competitiveness level. According to the Index of Corruption Perception (ICP) of Transparency International Bosnia and Herzegovina ranks 72nd out of 176 countries surveyed. On the scale from 0 (total corruption) to 100 (without corruption) BiH“s score is 42 which is still further from the pass grade of 50 but also below the European Union average of 63.6. Each of the above results can be brought into correlation with the reports about the level of economic freedoms in BiH.
The criteria for measuring economic freedoms in the world in the above two annual reports arise from the basic requirements of economic freedoms, i.e. property rights, freedom of making deals and low taxation. In view of the fact that economic freedoms define the market orientation of a state, we can draw a conclusion that Bosnia and Herzegovina is a country wherein the state, in a narrower sense, still plays a significant role in the economy when compared to the role of market. Bosnia and Herzegovina ranks 103rd on the Economic Freedom Index which implies that it is still far from liberal capitalism, namely from the market economy. The improvement of economic freedoms does not demand from the state to assume an active role in resolving economic problems, but rather to withdraw from the area where market can play a more positive role. In other words, the state should focus on key state prerogative such as establishing the rule of law, legal system efficiency, protection of private ownership and freedoms of individuals, as well as providing social benefits for citizens of BiH who have no legal responsibility.
When it comes to specific areas in need of major reforms with the aim of developing economic freedoms, the findings of both reports for the measurement of economic freedoms in the world indicate the problems related to the rule of law, size of the state and regulation of business. In respect of the said three areas Bosnia and Herzegovina has the lowest score which implies that decision makers in the state must undertake the reform of the judiciary, downsizing of administration and removal of unnecessary obstacles to a better functioning of the economy.
Authors: Admir Čavalić and Dženan Smajić
Translated into English by Nazifa Savčić/Iskra.ba