REASONS FOR OTHERONES SUCCES AND BOSNIAN UNSUCCES IN TRANZITION PROCES ( present situation in BiH, dead-end or new chance)

Available at: Collection of papers from First Internatonal Scientific Conference CRISIS OF TRANSITION AND TRANSITION OF CRISIS

Summary: Governments in many countries tried to make their economies rich, perspective, organized on the free market model, but only few made a success in its attention. Key question  this article tried to answer is: which country made biggest success and why they do that and another did not?  Author’s attention was not  to argue about  measures on the ground but to made same macro-economical  model in which the whole economy is divided in two sectors: real and financial and measure of transition would be level of freedom. Doing this I will try to provide to readers a look on the way of transitions in the most successful countries.   Results are more than interesting and useful for authorities in our country. Especially because, analyses of transition process in BiH show that country does not belong to advance-ones. On the contrary, country is right now in dead- end (pessimist opinion) or on cross-road (optimist opinion). 

Key words: Index of wealth, total transition, optimal liberation timing

JEL classification: P 21

INTRODUCTION

Intention of this work is to  set corect „diagnosis“ of reasons for (un)-succes of transition proces in BiH via objective analysis. That should show us recommendations for future.

Logic that would be followed is simple:

• First we will extract examples of successful countries in transition, to found out where we should look, than….

• Made analyses of their transition strategy to understand how they have achieve this, and..

• Compare processes in BiH (strategy or rather lack of strategy) with processes in successful Country in transition (CIT), and finally….

• Made conclusions of possible ways to overcome dead-end in witch country is right now.

Since the effects of world economic crisis, we believe, could reverse conclusions, we will first made analysis of success and strategy until 2008, and than show what was effects of that on present situation.

1. MEASURING OF CIT`S SUCCSES

As we explain, first question we would like to answer is what countries are the most successful in transition process. This could be done at many ways. First is to use different report produce by international organizations. Second is to make our rang-list by parameters we find important. I will do both, to check if this report really is objective.  

            1.1. RANGING BY BERTELSMANN TRANSFORMATION INDEX

As example of well-known report which evaluates performance of CIT we take Bertelsmann transformation index. This report contains two parameters. For us is importance so called “Status report” in which is given estimate about present achievement country by country.  Even in this part of Report there are two indicators:  Index of Political Transformation and Index in Economic Transformation. We will use the last-one.

Table no. 1 - Ranking of CIT in 2008. by Bertelsmann status transformation index

Rank	Cuontry	Value
1.	Czech Republic	9.57
2.	Estonia	9.29
3.	Slovenia	9.29
4.	Slovac Republic	9.07
5.	Hungary	9.00
6.	Lithuania	8.96
7.	Poland	8.71
8.	Latvia	8.50
9.	Croatia	8.29
10.	Bulagaria	8.18
11.	Romania	8.07
12.	Macedonia	7.29
13.	Armenia	6.82
14.	Kazakhstan	6.82
15.	Monet Negro	6.71
16.	Serbia	6.64
17.	Alabania	6.64
18.	Russia	6.54
19.	Ukraine	6.50
20.	Georgia	6.36
21.	Bosnia and Hercegovina	6.32
22.	Kyrgyzstan	5.64
23.	Azerbeijan	5.21
24.	Moldavia	5.00
25.	Belarus	5.00
26.	Uzbekistan	4.14
27.	Turkmenistan	3.89
28.	Tajikistan	3.86

Source:  www.bertelsmann-transformation-index.de

As we can see, acording to the autor of this report, the most advanced CIT is Czech Respublic with rating 9.57 (from maximal 10), what meens that Czech economy became modern market economy. We should not be suprised, bacause majority of FDI in Czech economy came from Germany. After Czech, at some, but not to bigg distance are Estonia and Slovenia, and than Hungary and Litvania.

1.2 INDEX OF ACHIEVEMENT

      Main aim of (economic) transition was (economic) cach-up of developed countries. That is why we belive that only objective measure is to find out degree of economic cach-up. You can see it in next tabele:

Table no.2 – Running of relatively ratio RGDP per capita in CIT to average of EU 15

	% RGDP per capita in CIT/ЕУ 15 (1990.)	% RGDP per capita in CIT/ЕУ 15 (2008.)	+ -
Slovenia	41,5	56,76	+ 15,3
Estonia	25,4	33,7	+ 8,3
Poland	18,7	27,02	+ 8,3
Slovakia Republic	26,97	32,26	+ 5,29
Czech Republic	38,4	42,42	+ 4,2
Hungary	28,4	31,55	+ 3,15
Belarus	10,67	13,47	+ 2,8
Azerbeijan	6,8	9,18	+ 2,38
Armenia	4,91	6,8	+ 1,89
Latvia	22,9	24,7	+ 1,8
Kazakhstan	11,97	13,47	+ 1,5
Alabania	9.71	11,13	+ 1,42
Bulagaria	10,8	12,18	+ 1,4
Croatia	25,94	27,28	+ 1,34
Romania	15,6	15,9	+ 0,3
Kyrgyzstan	2,6	1,5	-1,1
Lithuania	26,04	24,7	- 1,3
Macedonia	12,2	8,91	- 3,29
Russia	22,78	19,13	- 3,65
Ukraine	9.98	6,15	- 3,83
Georgia	14,21	5,38	- 8,83

Sorce:  International Macroeconomic Date Set, USDA,  www.ers.usda.gov

 It could be said that every country with + in front of indicator made progress during pass time or, to put it otherwise, this countries improve their position to EU 15. But the most important result of upper table is that the most successful CIT is Slovenia. Next, but with same distance are Estonia and Poland, and after them Slovakia, Czech and Hungary.

1.3.COMPARASON BETWEEN BERTELMANN INDEX AND INDEX OF ACHIEVEMENT

As we have announced in the Introduction, one of our aim is to compare ranking between reports same of well-known international institution and indicator we think is most objective. That comparison is given in next table[1]:

Table no 3. – Succes of CIT by two inicators

Ranking by Bertelsmann index	Ranking by Index of achievement
1. Czeh Republic	1. Slovenia
2. Estonia	2. Estonia
3. Slovenia	3. Poland
4. Slovakia Republic	4. Slovakia Republic
5. Hungary	5. Czech Republic
6. Lithuania	6. Hungary
7. Poland	7. Belarus
8. Latvia	8. Azerbeijan
9. Croatia	9. Armenia
10. Bulagaria	10. Latvia
11. Romania	11. Kazakhstan
12. Macedonia	12. Аlbania
13. Armenia	13. Bulgaria
14. Kazakhstan	14. Croatia
15. Albania	15. Romania
16. Russia	16. Kyrgyzstan
17. Ukraine	17. Lithuania
18. Georgia	18. Macedonia
19. Kyrgyzstan	19. Russia
20. Azerbeijan	20. Ukraine
21. Belarus	21. Georgia

Source:  Table no. 1 and 2.

Comparing those two indices, we could conclude that there is significant matching between them. In fact, from five leading country by Bertelsmann index four took place and in Index of achievement. Even more, almost all took same place, except Czech and Slovenia. In Bertelsmann leading Czech Republic, was just fifth at index of achievement, while third Slovenia take firs place by effect of transition for their citizens. Interesting example is Belarus, which by experts of Bertelsmann foundation is taking last place, while by index of achievement is at high seventh place.

2. STRATEGY OF TRANSITION 

This part of work contains answer to the question how the most successful countries achieve that.  Doing this, I will ignore political explanations (although I do not underrate them),  and I will focus on the economic area, to be more precise, I will try to find-out if there is any logic or rules that separate those countries from the rest of developing countries.  For this analysis it is of huge importance to remind us that (in theory and practice of transition) there are two dominant strategies. First is so-called “total transformation right-now” or better known as shock-therapy. That strategy was suggested to CIT by IMF, WB and USA government in the early phase of transition. Second approach is “Theory of optimal timed transformation” or graduation approach.  The best known authors of this theory are Mc Kinnon and Sebastian Edwards. But, far away that only those two authors were working on its development. In fact, Professor Milutin Chirovic issued similar theory in his book “Banking” in the chapter “Restructuring of banking sector in CIT”. Main point of this theory is that during transition attention should be given to order of measure which should go something like this:

1. Creating of functional internal market of goods
2. Gradual liberalization of external trade
3. Internal liberalization of financial sector
4. Liberalization of external financial flows  

In my analysis I would not give examples of particular measures done by authorities in CIT, because it would take too much space, than create simple macroeconomic model consistent to upper basis. That means economy of any country is divided in two sectors: real and financial while measure of transition is liberalization[2].  Even more, within this two sectors liberalization take part at two levels: as increasing level of freedom for private business activity within country and as increasing level of freedom to create relations with external world. With this we get four parameters that should be monitored in attention to check what strategy was used by same country.

            As source of information for our model I will use the report of Heritage Foundations: “Index of economic freedom for period 1980.-2006.” Levels of economic freedom in many areas in relatively long and for us important period are nicely given in this Report.

2.1. Slovenia

            Slovenia is today one of the most prosperous countries of ex-East block, member of EU and EMU. But, it is importance to notice that Slovenia start from relatively better position than most of CIT. Simply, RGDP per capita was relatively high for country from the East, privatisation by models of Ante Marchovica was in later phase, nearness of markets of developed countries and as Jeffrey Sachs[3] notice that: ” catholic faith majority and sympathy for Slovenia attitudes during disintegration of SFRJ gave country same extra support[4]”. But it is hard to notice by level of FDI/GDP, that never was at levels of same other countries (what is connected with Slovenia strategy and will be explained later). Even without FDI Slovenia has healthy balance of payments (trade deficit practically do not exist) with 70% of GDP made through trade with world (Estonia manage similar by using FDI to increase export). How Slovenia managed this you could see in the next table and graph:

 Table no.4 -   Levels of freedom by sectors in Slovenia

	1990.	1995.	2000.	2004.	2005.	2006.
1. Freedom of business		6	7	5.16	6	6.41
2. Tariff barriers		7.53	8.05	8.89	8.48	8.30
3. Freedom at  loan market		6.50	6.52	8.03	8.56	8.65
4. Controls of international capital flow		5.00	5.30	5.85	5.73	5.83

Source: Index of economic freedom 1980. – 2006.

Graph no.1

Source: Table no. 4

As we can see, there is high fit between activities made by Slovenia authorities and recommendation of graduation approach. Actually, only sector of economy that was not liberalise fast enough (according to graduation approach), is real sector (freedom of business).  But this could be explained in this sense: liberalization of real sector is the hardest thing to do. It includes restitution, privatisation with wild spread workers dismissal etc. Authorities of Slovenia could conclude that it is not necessary to implement those reforms to the end, but to satisfying level, rather than lost time with that, especially because time later shows as very importance factor. Additional shadows on Slovenia model of transition are even in year 2008,   relatively low levels of freedom of business and Control of capital flow.

                                               2.2. Estonia

Estonia is, probably, the best known country whose transition strategy was almost entirely based on shock- therapy. That this would happen, it could be anticipated in the early 1990, from announcement of first post-communist premier Mart Liar (whose ideal was Margaret Thatcher) when he said (paraphrase): eliminate tariff barriers and reduce taxis, give market freedom and milk and honey will run.

Foundations made by Lar, continue to build every next Estonian government, what made this country one of the most competitive countries in Central and East Europe, and equal to majority of counties in EU (member since 2004.) and EMU (member since 2011.)

Estonian transition strategy looked like this:

Table no. 5. -  Levels of freedom by sectors in Slovenia

	1990.	1995.	2000.	2004.	2005.	2006.
1. Freedom of business		8,14	7,14	6,88	7,36	7,67
2.  Tariff barriers	9,77	9,81	9,99	9,89	8,48	8,30
3. Freedom at  loan market		4,30	7,82	9,03	9,68	9,95
4. Controls of international capital flow		8,00	7,82	7,45	7,48	7,51

Source: Index of economic freedom

Graph no.

Source: Table no. 5

From the table and graph we could see that Estonia in early years of transition represent real leader in liberalizition  between CIT, who did not save itseves in radical measers. High freedom of business, low tariff bariers and controls of international capital flow (in scale from 0 to 10, all this get mark over eight) became brand of this country. Only shadow at the proces of total liberalization represents keeping control on financial sector (banking sector) of country. This brings us to conclusion that even such supporter of shock-therapy did not ignore specific consequences of fast liberation in financial sector. But, after some time, Estonia had done even this, so in 2006, mark for Estonia in this segment was 9.95 (from 10) what put this country on the top in the world. At the end, if we compare Estonia with, for example, United Kingdom we could see that Estonia reached its idol in every segment except controls of international capital flow. In fact, in that segment Estonia made one step back.    

    3. TRANSITION IN BOSNA AND HERZEGOVINA

One of the problems for all the people who would like to make an objective analysis of BH economy system is the fact that there were hardly any statistics for BH until recently (or at least it was not done according to the international statistical standards). It could be easily noticed on our example too, because all indicators which we were using until now for other countries in transition started to be calculated and published in BH since the 2005. That is the reason why we are compelled to draw up the conclusions about the transition strategy in BH before the world economy crisis from the data which refer to the very few years before that crisis. The data for BH are given in the following table (according to the previously established model):

Table 6 - Liberties level in BH

	2005.	2006.
1. Business Liberty	4.98	4.47
2. Customs payment liberty	5.76	5.76
3. Credit Market Liberty	9.49	9.48
4. International Capital Market Control	4.55	4.51

Still, I think that we could draw some conclusions from the date given above.

Above all, we can easily notice that BH made significantly better progress in the financial market liberalization then in every other segment. After the financial market liberalization comes foreign trade liberalization, but there is still large distance between those two. Far behind those two we can find capital control with index 4.51 for 2006 and we have even lower degree of business liberty with index 4.47 points for 2006. Comparing it with optimal liberalization timing recommendations, we can draw out some conclusions.

From the given data it is easy to see that implementers of transition process in BH did not opt for fast and complete transition and they did not comply with the theory of optimal liberalization timing. Moreover, there is a diametrically opposed hierarchy to the recommendations of gradual approach present in the major part of the liberalization segments (which are generally on low degree).

3.1 Transition Strategy and the Growth Model: macroeconomic trends in BH before and after the world economy crisis

War activities are the reason why it would be inadequate, even unfair, to measure success of BH transition on the same way we have done it for other countries, by comparing the change of the position of a certain country with the position of developed countries. So we have to observe the issues of BH transition process form other, more detailed perspective. About the effects of the transition process we can judge on the basis of following table:

Table 7 - Macroeconomic Trends in BH

Year	2000.	2001.	2002.	2003.	2004.	2005.	2006.	2007.	2008.	2009.	2010.
Trade deficit	5.868	6.470	6.892	7.180	7.193	7.749	6.661	8.101	9.432	6.662	2.758[5]
credits to private sector	1269.7	1844.7	2926.2	3866.1	5165.9	6765.3	8518.9	11094.6	13580.3	13049.2	13108.3[6]
Public Debt	4.055	4.420	4.290	4.013	4.031	4.338	4.071	3.961	4.240	5.234	5.819[7]
Unemployment (statistical)	415	416	435	468	488	508	524	515	483	510	522
Unemployment according to survey about labour force	-	-	-	-	-	-	366	347	272	272	315
Gross wages		596	660	717	748	798	910	994	1163	1223	1250
Exchange reserves	1027.3	2678.4	2482.9	2791.9	3478	4223.5	5450.7	6697.6	6295.7	6212.2	6.256,8[8]
Real GDP	5.5	4.5	5.5	3.8	6.3	3.9	6.1	6.2	5.7	-2.9	0

Source: Monthly reports of BH Statistics Agency and Bulletin 3-2010 CBBH

From the table above can be seen significant changes of trends, starting in 2008. Therefore, the characteristics of economic movements before the crisis were: explosive growth of private debt (that increased about eleven times) and exchange reserves (that increased about five times); significant growth of trade deficit (about 50%) and real GDP (about  55%), as well as stagnation of public debt and decline of unemployment (real, not statistical).

            Since the start of crisis trends have been dramatically changed, mainly worse. Thus, since 2008. have been noticed fall of exchange reserves (6,6% or 440 million of BAM, related to the climax in 2007) , economic activity stagnation, as well as growth of unemployment  (officialy for about 40.000 labourers) and public debt (for about 47% or 1.858 millions of BAM, related to the lowest level in 2007).  The only clearly positive trend has been trade deficit fall. The reason of the fall is to be found in stopped growth of the private debt, which is, according to one of DEP (?) reports about 70% used for import financing. To a certain extent surprising trend is a constant growth of wages despite constant growth of unemployment. Rigidity of wages is clear enough.

What can be concluded according to the trends?

World economic crisis has stopped functioning of a model of economical growth, based on getting private sector onto debt abroad in order to finance over dimensioned consumption in the country. As a consequence of such a model, economic structure that left behind cannot function normally and for that reason the country has started to get onto debt rapidly in order to compensate the fall of foreign exchange flow.

Can this function on long terms?

            No, it can’t. There is a limit for any country to what extent it can get onto debt (and especially those countries with weak credit rating, such as BH. In the end of 2010, credit rating of BH was B+ according to Standard & Poor’s and B2 according to Moody’s). Herein, the very dinamics of getting onto debt of BH, when the authorities make a decision to do it whenever getting in debt is possible, is determined with European ambitions of BH. Precisely:

·         The country is a signatory of Stability Pact, by what it is commited not to surpass budget deficit over 3% of annual GDP

·         The country is in the process of joining EU, and as a consequence of the crisis, the process of making strong budget limitations is on the scene

·         Ambitions of BH are also related to joining EMU, what implies that public debt should not surpass 40% of GDP, and that is one of the required conditions

Is there a chance to return the trend of credit expansion, that was in force before 2008?

In a nutshell, no, mainly for the two reasons:

• BH population and economy are approximating upper limit of indebtedness[9]

• The third recommendation of the new Basle agreement (Basle III) requires from foreign banks reducing the country’s exposure to risk, which means that instead of acceptance of foreign currency from countries of a mother-bank, the orientation will be on compiling savings in the country itself.

The conclusion: In the nearest future (about few years) neither private sector nor the country will be able to get onto debt abroad (at least not greater amounts). Therewith, existing model of growth and non-existing transition strategy has come to the dead-end, and cannot be recovered without help.

4. NEW TRANSITION MODEL FOR NEW GROWTH CYCLE

What can BH (in other words, its entities) do to get out from dead-end?

The simplest answer is that BH can and must implement all reforms until the end. Nowadays it is too late for gradualist approach (industry has already been destroyed and various freedoms introduced), so the country can only complete the reforms. Specific issue is that for the country where currency board system works, the fall of foreign – exchange reserves is caused by trade deficit. The fall of exchange reserves, which cannot be financed from any sources any more, can cause both liquidity crisis as well as monetary crisis[10]. Consequently, reform processes in BH can be performed in two different scenarios:

1.      The less popular scenario is general savings. It means that in short terms consumption is to be reduced and production boosted (especially export), in order to reduce trade deficit and maintain economic viability of the country. Meanwhile, reforms should be completed, for the purpose of making the country internationally competitive. Afterwards, the consumption would be able to grow again, however, this time only in accordance with productivity growth of laborers in BH. Therefore, this scenario could also be called “through depression to prosperity“. This is an unlikely performable scenario, for the two reasons: Inhabitants of the country are too poor to give up anything, and even if they could, economic structure is clear enough, there is almost nothing for export.

1. Another scenario is continuation of the project that Government of Republic of Srpska has started in 2007 and stopped. The point is to implement privatization of public services without monopole character and attract SDI. This reform would approximate BH to Estonian model of transition, where economy growth bases on the growth of export caused by foreign investments. Lack of the up mentioned strategy is dependence on the will of local authorities. The good side is the fact that by rapid attraction of mass foreign capital recession could be avoided, economic structure changed without dramatic cuts and positive business climate could be created for domestic economy subjects (therefore, foreign capital will not be available if numerous problems of local businessmen are not solved. Those problems alienate potential investors, as well).

Conclusions:

• Our analysis shows the success of transition is not exclusively connected with using only one transition strategy. In fact, the success can also be made using gradualist approach as well as by shock therapy, depending on relation between the chosen approach and circumstances on the field. That way, Slovenia starting with very favorable economic conditions, successfully implemented gradualist approach, whereas Estonia after chaos that ruled after breakup of the USSR successfully used shock therapy.

• In experience, there are neither pure examples of shock therapy (in the beginning, Estonia controlled bank sector) nor pure gradualist approach (Slovenia did not completely succeed to create real trade sector when implementing reforms).

•  The worst experience in transition had the countries without any strategy (such as BH)

• Countries without clear strategy mainly leaned on the model of getting onto debt abroad, which forced over dimensioned consumption, so as to delay load of reforms that should be performed.   

• It was a “short – breath” strategy, with easily visible limitations, as results of world economy crisis.    

• We are offered two ways:

1.      Using poverty to make economy balance or......

2.      Finishing started reforms, for the purpose of changing public enterprises through privatization  of public enterprises of non-monopole character and making the country competitive

Literature at English language:

1.       Bertelsmann transformation index 2008., Bertelsmann Foundation, Gütersloh, 2009, available at: www.bertelsmann-transformation-index.de

2.       Doing Business 2009, IFC, Washington D.C, 2009. available at: www.doingbusiness.org

3.       Global Competitivness Index 2008, World Economic Forum, Geneve, 2009.

4.       Index of economic freedom 2009, The Heritage Fondation, Washington D.C.2009. www.Heritage.org

5.       International Macroeconomic Date Set, , USDA, Washington D.C, 2008., available at: www.ers.usda.gov

6.       McKinnon R:“the order of economic liberation“, John Hopkins University press, Baltimor, 1991.

7.       Melo M, Gelb A., „A comparative analysis of twenty-eight transition economies in Europe and Asia“, Post-Soviet Geography and Economics, vol. 37,1996.

8.       Melo M., Denizer C.; Tenev S.;”circumstances and choices: The role of initial conditions and polices intransition economies”, WB Economic Review, vol 15, br 1 (2001.)

9.       Sachs J, Zinnes C, Eilat Y: „The gains from privatization in transition economies: Is change of ownership enought?“, Hardvard Institute for International Development, Cambridge, 2000.

Literature at Serbian language:

10.    „Балтичи тигрови“, доступно на: www.bgsvetionik.com, датум приступа: 15.2.2009.

11.    Бурда Мајкл, Виплош Чарлс, „Макроекономија“ ЦЛДС, Београд 2004.

12.    Ћировић Милутин, „Банкарство“, Bridge company, Beograd, 2001.

13.    „Транзиција: првих десет година, анализа и поуке за Источну Европу и бивши Совјетси Савез“, WB Washington, D.C. 2002.

14.    Зашто би неко инвестирао у Босну прије него у Мексико“, БХ Дани, бр.207, доступно на www.bhdani.com/arhiva/207/intervju.shtml

15.    Штајнер Александар,„ Естонско чудо“, Каталаксија,  22.12.2006.

World wild web:

16.    www. bhas.ba

17.    www.cbbh.ba

18.    www.katalakisija. com

19.    www.swot.ba

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[1] In this table are compared only countries hold by both earlier tables

[2] This is based on fact that level of conomic freedom in comunist time where low, what makes liberalization good indicator of transition, althought we know that transition is wilder terms that include buldin of institutional etc.

[3] One of the well-known economist of today. Between many ather duty he was advise of ex-SFRJ prime minister Anthe Marchovic, and later of Slovenia government

[4] Taken from article “ Why would someone invest in Bosnia rather than in Mexico”, BH days no. 2007, available at: www.bhdani.com/arhiva/207/intervju.shtml, 

[5] And including 30.6.2010.

[6] 30.9.2010.

[7] 30.9.2010.

[8] 30.9.2010.

[9] See more in the paper: М. Djogo;  „Financial Liberalization Scopes in BH; Discrepancy between how we see ourselves and how others see us“, internet magazine “Каталаксија”, Belgrade, 2010. Available at: www.katalaksija.com

[10] See more in the paper: М. Djogo, „Sustainability of Currency Board in BH; Price of Missed Reforms“, Quarterly monitor no. 3. Association of Economists in Republic of Srpska – SWOT, Banja Luka, 2011. Available at: www.swot.ba