Prof. dr. Anto Domazet Influence of global economic crisis on Bosnia and Herzegovina PANEL LECTURE Global Economic Crisis: Implications and the Way Out for Turkey, Bosnia and Herzegovina and the Western Balkans Sarajevo 20 October 2009

For whom the Bell Tolls ? "No man is an island, intire of itself. Every man is a piece of the Continent, a part of the main. If a clod (piece of dirt) be washed away by the sea, Europe is the lesser... Any man's death diminishes me, because I am involved in Mankind. And therefore, never send to know for whom the bell tolls; it tolls for thee. (Ernest Hamingway) Nijedan čovjek nije otok sam za sebe; svaki čovjek je dio kontinenta, dio okeana. Ako more odnese grudu zemlje, Evrope je manje...Smrt svakoga čovjeka smanjuje tebe jer si obuhvaćen u čovječanstvu. I zato nikada ne pitaj kome zvono zvoni; tebi zvoni!" (Ernest Hemingway)

Agenda 1. What where we before recession had started 2. What is impact of recession on our economy and our lifes 3. What governments and other actors of economic activity did in meantime 4. What has to be done to overcome recession

Crisis – unknown phenomen in Bosnia and Herzegovina Lack of research and low level of knowledge about recession and crisis in BH No relevant analysis and estimation of future develpment of recession and crisis Everyone would like to hear or communicate good news, but no signs of positive economic development in BH

Recession or depression – how long it will last? Source: IMF Country Report No. 09/226,

Cost of recession – about mil. KM, cost of crisis 9,4 bill. KM

Real sector weakenning, service sector strenghtenning its share in GDP Source:

Modest results in reindustrialization of the country Industrial production in Federation of BH Industrial production in Republika Srpska Source: Bulletin CB BH 2/09

Big decline in construction works in 2009 in F BH (-20,4%) and growth in RS (6,5%) Construction in F BiH and RS Source: Bulletin CB BH 2/09

Serious decline in tourism in (-7,9% total arrivals, - 13,7% total nights) Source:

Decreasing purchaising power lowers trade distribution activity in BH Source:

Export and imports – the most sensitive indicators of recession in BH (1) Source:

Export and imports – the most sensitive indicators of recession in BH (2) Source:

Estimated unemployment due the recession persons Source: Bulletin CB BH

BH - losing competitiveness capacity for mid-term growth Source: Global Competitiveness Report 2009,

Key macroeconomic indicators -projecting higher debt and lower CAB deficit

Average decrease of revenue of 10% - clear sign of recession in BH * * estimated, source VAT Directorate,

Recovering money supply but still not favorable conditions of credits

Lower claims becouse of higher credit risks and higher interest rates

Monetization of BH economy – money supplay grows faster than real economy (GDP) Source: Central Bank of BH

BH entered recession as neglected society and economy with old fashioned politics BH economy was overheat in 2008, with consumption-lead growth, based on high credit and fiscal expansion Low competitiveness and lack of political will to start structural reforms in social and economic field on the EU way, needed to activate potentail sources of development The main consequences of recession are: a) drop in GDP, fiscal revenue, public, household and investments consumption and external sector activities (export, import, FDI, tourism, remittances), b) losses of working places, c) credit contraction and more expansive money, d) bankruptcies More intensive social tensions – higher risk of poverty

Global recession and Made in BH attributes (magic triangle of BH reality) Ekonomija Socijalna sfera Politička struktura Global recession EU Regional impact BH reality Economy Social Political sphere sphere

Main challenges of BH development Political consensus about future of the country and its political organization Growth of competitiveness based on efficiency driven stage of development Improve the governance in global unstability and recession Increase the level of investments and employment – to mobilize potential sources of development To speed up economic, spocial and political reforms and integration in EU – to reach status of candidate for membership Fighting corruption and organized crime Building up strong state and market institutions

The question of sustainability– there is need for new politics for better economy and fair social system POLITICS BH as a functional state EU and global integration Rules of low Fighting corruption and organized crime Private vs public sectors Market regulation Market institutions SOCIAL SECTOR Social state and security Equal chances for all Improve education and health Reforming tax and social benefits system Reforming pension system Fighting poverty Improve labor regulation Social care for children and old people ECONOMY Macroeconomic stability - SES Improve business environemnt Attract domestic and foreign inv. R&D and Support competitiveness Openning new working places Support SMEs and farmers Privete public partnership Export – lead growth

What have governments done – trying to save themselves or to help to the others

Fire faighting in line with systematic approach to structural and sectoral reforms (Supply side vs demand side approach) Supply sideDemand side Reforming economy Reducing taxes Supplying money under favorable conditions (RB) Privatization to activate business/improve performances Supporting education Promoting entrepreneuership Investing in business infrastructure (business parks Deeper integration in EU Better access to credits for households Public investments Subsidies for working places Increasing public consump- tion by increasing taxes Selecting VAT rates Requisition of property gained by crime

Is recovery natural phenomen? (More realistic approach – to combine internal efforts with global recovery) 2. Good expectations Risk of the growth 1. Winners Recovery and fast growth 3. Losers No recovery – long-term depression and crisis 4. Bad expectations Recovery in long-term period High SUCCESS OF REFORMS Weak Slow GLOBALNI RECOVERY Fast

Thank you for your attention.