V.

Economy

Bosnia was economically one of the least developed republics of the former Yugoslavia. The republic’s economy was largely devoted to mining, forestry, agriculture, and some sectors of light and heavy manufacturing, notably of armaments. Although Bosnia exported specialty agricultural products, such as fruit and tobacco, it had to import staples, including more than half its food. The war shattered the newly independent country’s economy, and recovery has been tentative.

A.

Wartime Collapse

In 1990, 48 percent of the labor force was employed in industry and 11 percent in agriculture. Bosnia produced mineral products, timber, manufactured goods such as furniture and domestic appliances, and about 40 percent of Yugoslavia’s armaments. By the time war broke out in 1992, Bosnia’s inflation rate was already at 120 percent; during the war, it rose to well over 1,000 percent. Unemployment was about 30 percent when war broke out, and by 1995 it had risen to 75 percent. Prices of goods soared during the war, and average living standards declined sharply. All sectors of the economy were hit hard by the war. About 45 percent of industrial plants, including about 75 percent of the republic’s oil refineries, were destroyed, damaged, or plundered.

B.

Tentative Recovery

The Dayton accord allowed economic recovery to begin. Bosnia’s gross domestic product (GDP) grew at 20 to 30 percent per year from 1995 to 1998, although the recovery was driven almost entirely by international aid. The GDP in 1998 was estimated to be about $6 billion. Unemployment dropped from its wartime high of 75 percent to 42 percent in 1998. Renewed economic growth has come mainly within the construction, trade, and services sectors, with traditional light industries also showing some capacity for recovery. But the big industrial conglomerates that dominated Bosnia’s prewar economic life remain largely unrestructured and are operating at a fraction of their production capacity. Corrupt political leaders apply regulations and taxes arbitrarily, stymieing the development and growth of new businesses. The black market remains a significant factor.

Behind this mixed pattern of recovery lie the special problems of privatization of state-owned firms in Bosnia. When Bosnia was part of Communist Yugoslavia, its economy was controlled by the state, which effectively owned most enterprises. These enterprises did not have to be profitable and often were managed inefficiently. Transferring firms to private ownership so that they can prosper or, if unprofitable, fail and cease to be a drag on the system, is a crucial step for the success of a free-market economy. While 90 percent of Bosnia’s registered firms are in private hands, the big conglomerates remain under state ownership. Comprehensive privatization legislation is now in place, but the political obstacles to privatization remain formidable.

The country’s mandated division into two autonomous entities has proved a significant obstacle to economic recovery. The central government has scored notable successes by establishing a single central bank and adopting a unified customs fee schedule for imported and exported goods. But in many essential areas of economic life the governments of the entities, rather than the central government, make the decisions. The Serb Republic’s territory includes much of Bosnia’s agricultural and mineral-rich land, while the industrial zones remain largely within the Bosniak-Croat federation.

C.

Energy

Prior to the war, Bosnia drew electricity from coal-burning and, to a lesser extent, hydroelectric power plants. As a result of the war, Bosnia’s electricity-generating capacity declined by about 78 percent. Aid-financed reconstruction of the electric power grid has made substantial strides, but the political divisions create serious obstacles to the entire country being reconnected. In 2003 hydroelectric plants accounted for 50 percent of Bosnia’s energy production, with coal-burning plants producing the rest. With most of the hydroelectric plants located in the Croat-controlled area of the Bosniak-Croat federation, cooperation across Bosniak- and Serb-controlled territory is essential for the widespread distribution of electricity. The cost of electricity varies enormously from region to region. In the Serb Republic the government heavily subsidizes energy producers, cutting the amount users must pay.

D.

Foreign Trade

In 1990 Bosnia’s imports totaled about $1.9 billion. They consisted primarily of fuel, machinery, transportation equipment, miscellaneous manufactured products, and chemicals. In the same year, exports totaled about $2.1 billion. They consisted mainly of miscellaneous manufactured products, machinery, and raw materials. The war severely disrupted Bosnia’s trade, with both the Federal Republic of Yugoslavia (now the separate countries of Serbia and Montenegro) and Croatia imposing economic blockades on the republic and supply routes being obstructed by the fighting. In 2004 imports totaled $4.9 billion and exports $1,615 million. The huge trade deficit reflects the degree of Bosnia’s dependence on foreign aid.

E.

Currency and Banking

In January 1998, after Bosnia’s Bosniak, Serb, and Croat leaders failed to agree on a new national currency, the United Nations introduced one, the konvertibilna marka, or just marka. Marka banknotes entered circulation in June 1998 with a value equal to the German deutsche mark (In June 1998 1.79 deutsche marks equaled U.S.$1). Yugoslav dinars continue to circulate in the Serb Republic, and the Croatian kuna was used in the Croat parts of the Bosniak-Croat federation. Inflation came down in the federation following the introduction of the new currency. In the Serb Republic, price trends were less clear. The Central Bank of Bosnia and Herzegovina, established in 1997 under foreign administration, is the bank of issue for the marka. The Serb Republic and the federation each oversee their own banks.

F.

Transportation and Communications

Much of Bosnia’s infrastructure, including its highways, railroads, and telecommunications network, was devastated in the war. In 1991 Bosnia had 21,168 km (13,154 mi) of highway, of which about half was paved. During the war, about 35 percent of the country’s highways and 40 percent of its bridges were damaged or destroyed. The railroad system consisted of around 1,000 km (600 mi) of track, of which three-quarters was electrified. Damage to the railway system was estimated at about $1 billion. There is an international airport at Sarajevo, which was also seriously damaged in the fighting. From 1995 to 1998 more than $1 billion in foreign aid was provided to rebuild Bosnia’s battered infrastructure. However, reconstruction of the road and rail network also has been hampered by Bosnia’s divisions. More is being done to reconnect the telecommunications network, with the European Bank for Reconstruction and Development (EBRD) coordinating national reconstruction and providing a $20 million loan. The fourth donors’ conference for Bosnia and Herzegovina, held in Brussels, Belgium, in May 1998, made improvement of infrastructure a continued priority for future aid.

The Economy section of this article was contributed by David Dyker.