BiH is practically a dysfunctional country, and it is growing economically faster than Croatia

ALTHOUGH their EU membership is still on the long run, the countries of the Western Balkans have been developing faster than Croatia in recent years.
This is confirmed by data from the European Commission and international institutions, which show higher rates of economic growth in these countries than in Croatia. While, for example, in 2017, according to the CNB, Croatia achieved GDP growth of 3.1 percent, in 2018 of 2.7 percent, and in 2019 of 2.9 percent, the economies of the countries of Southeast Europe as a rule, they grew at higher rates.

The statistical factor, but also the economic policy, pushed the countries of the region forward

Thus, according to Eurostat, the Serbian economy grew at a rate of two percent in 2017, and a year later at a rate of 4.4 percent, to grow by 4.2 percent last year. The economy of Montenegro in 2017 grew by 4.7 percent, and in 2018 by as much as 5.1 percent (data for last year are not yet available).

Bosnia and Herzegovina has been developing faster than Croatia in recent years. In 2017, the Bosnian economy grew at a rate of 3.2 percent, in 2018 at a rate of 3.7 percent, and last year at a rate of 2.6 percent, which is only slightly lower growth than in Croatia.

There is no lack of reasons for the faster dynamics of development of the countries of the Western Balkans. Experts, for a start, point out the statistical factor throughout the story. Namely, all these economies are much less developed than in Croatia, so any growth in economic activity is felt more strongly. In other words, the construction of 10 kilometers of highway in Croatia or in BiH does not contribute equally to the national economy because BiH is much less developed than Croatia, so the construction of a new 10 kilometers of highway means more to its economy than in Croatia.

Investment destinations with cheap labor in the middle of Europe

However, not everything is in statistics. Simply put, the countries of the Western Balkans have profiled themselves on the international economic scene as countries seeking to attract investment with cheap labor and tax breaks. Some of them had more and some less success in that. For example, Montenegro has attracted large foreign investments in its tourism sector. Serbia has also turned to attracting investment, in production.

BiH, on the other hand, was much less successful than Serbia-Montenegro in attracting investment, but after the war of the 1990s, Damir Novotny, an economic analyst, turned to rebuilding large industrial conglomerates from the socialist era, such as the Zenica Ironworks or (now stumbled) Mostar’s Aluminij, which stimulated industrial production. In addition, BiH has invested a lot in the development of tourism in the last 20 years.

In addition to attracting investment, the countries of the region have also invested heavily in the construction of transport infrastructure, especially motorways. This is roughly the model Croatia used in the early 2000s, especially during the government of Ivica Racan, when a major highway construction program was launched. Something similar has been done in recent years in Serbia, and to a much lesser extent in BiH, where the construction of a motorway on the Pan-European Corridor 5c, which connects Budapest with Ploče, is underway, while in Republika Srpska the capitals of that entity towards Doboj and Prijedor. The highway is also being built in Montenegro, and will connect Bar with the Serbian border and further towards Belgrade and Budapest.

The BiH diaspora fills in the household budgets of parents and relatives and thus enables higher spending

But while in Serbia, Novotny says, the main generator of economic growth is investment spending, in BiH it is personal spending. However, wages in BiH are, in general, higher than in Serbia, and the large diaspora also contributes to strengthening personal consumption.
“BiH has a large number of guest workers across Europe and the world. They actually drive domestic demand to their families in BiH by remittances,” Novotny told Index.

Damir Novotny

At first glance, the situation is similar in Croatia, but there are many differences. For a start, in Croatia, after most of the planned motorway network was built, the construction of new motorways has stalled. Only recently have road construction works been accelerated, so now the Pelješac Bridge is being built, the conversion of the Istrian Y into a motorway is being completed and the construction of Corridor 5c through Croatia is continuing.

Croatia has recovered more slowly than the Western Balkans since the last recession

So far, Croatia has not been very famous in the use of money from EU funds, which would allow it a bigger and cheaper investment momentum. On the other hand, although personal consumption grew until the corona crisis, it was mainly due to changes in the tax system, which left citizens with a little more money in their pockets, but still insufficient for strong consumption growth. Due to all this, Croatia has been recovering slowly and slowly since the last recession, certainly slower than other comparable countries, both in Central Europe and in the European Southeast. To all this must be added the heavy tax burden that greatly hinders the economy, which in the countries southeast of us is, as a rule, smaller.

“We threw all the tickets primarily on tourism,” Novotny notes.

Previous development models have been used in both Croatia and the region

As things stand now, it seems that the current economic models in both Croatia and the countries southeast of it have worn off. Namely, warns Novotny, a growth model based on cheap labor in today’s Europe can hardly give results for a long time. The model of reviving the former socialist industrial giants has also been used up, which is perhaps best shown by the case of Mostar’s Aluminij. Therefore, the countries of the region will have to consider a new development model, and Novotny believes that the Turkish development model, based on the development of micro-entrepreneurship and the parallel operation of a number of large companies, which attracted foreign capital and are now global players investing, might suit them best. to other countries.

“Such a model is not applicable to Croatia, which has a different economic structure, but is for the countries of Southeast Europe,” Novotny concludes.

“New Cefta”: strengthening integration among the countries of the Western Balkans

Of course, a lot will depend on the scale of the corona crisis, which is very much felt in BiH and Serbia, as well as in other countries in the Western Balkans. However, it should be reminded that the countries of the region, in the face of the corona crisis, moved in the direction of deeper economic integration, which in Croatia mostly went under the radar. A key initiative in this direction was the strengthening of the reduced CEFTA and the creation of a “Balkan mini-Schengen”, aimed at creating a zone of free movement of goods, services, capital and people in the region from Bihac and Subotica to Bitola and Albanian Korca. Given that EU membership is still relatively far away, the “new CEFTA” can provide the Western Balkan countries with some compensation for EU membership.

Both Serbia and BiH are lagging far behind Croatia economically

It is important to say that many countries in the region, especially Serbia and Bosnia and Herzegovina, are not yet members of the World Trade Organization (WTO), which Croatia joined back in 2000. Moreover, BiH is not yet an official candidate for EU membership.

It is therefore not surprising that all the countries of Southeast Europe are still lagging far behind Croatia. The data of the World Bank speak enough about that World Development Indicators which rank all the world’s economies by size. According to these data, the Croatian economy in 2018, which is the latest available data, was ranked 76th in the world. Moreover, in 2018, Croatia had the largest economy in the former Yugoslavia, with a GDP of just under $ 61 billion.

By comparison, Slovenia ranked 83rd in the world in terms of the size of its economy, with a GDP of about $ 54 billion, while Serbia ranked 85th in the world, with a GDP of just over $ 50 billion. In 2018, BiH had only the 114th largest world economy, with a GDP barely exceeding 20 billion, which means that the total value of goods and services produced in its economy is three times lower than in Croatia. The economies of Northern Macedonia, Kosovo and Montenegro, as well as Albania, are significantly smaller and weaker in the world rankings.

The countries of the region lag behind Croatia in terms of relative data. Thus, GDP per capita in Croatia, according to the central bank, in 2017 amounted to 11,907 euros, a year later 12,632 euros, and last year 13,270 euros. At the same time, in BiH, GDP per capita, according to the European Commission, in 2017 amounted to 4564 euros, in 2018 4873, and last year 5129 euros.

Eurostat statistics also reveal that the GDP per capita in Serbia in 2017 was 5,580 euros, in 2018 6,140 euros, and in 2019 6,590 euros. When it comes to Montenegro, the GDP per capita in that country in 2017 was 6910 euros, and in 2018 7490 euros, while for last year Eurostat has not yet published data for Montenegro.

The countries of the region are still among the most underdeveloped European countries in terms of level of development and are significantly behind Croatia in this indicator. While GDP per capita, expressed in purchasing power parity, which corrects price differences between countries, in Croatia in 2017 was 62 percent of the EU average, in BiH it was half lower and amounted to 31 percent, and in Serbia 39 percent and in Montenegro 46 percent. In 2018, Croatia’s GDP per capita was 63 percent of the Union average, while in BiH it was only 32 percent of the EU average, and in Serbia 40 percent and in Montenegro 48 percent of the Union average. Last year, our GDP per capita reached 65 percent of the EU average, while in BiH it remained at 32 percent of the Union average, in Serbia it rose to 41 percent of the EU average, and in Montenegro to 50 percent, according to Eurostat data.

BiH is practically a dysfunctional country, and it is growing economically faster than Croatia

Apart from the slow catch of the train that should finally take them to Brussels, most countries in the region are also facing political problems. In the case of Serbia, this is primarily an unresolved issue of Kosovo. In BiH, the main problem is a dysfunctional and ethnically divided state, which is very much reflected in everyday life and business in it. The extent to which divisions in BiH are large is sufficiently shown by the fact that representatives of the two entities and three nations have been arguing for years about the tax system or the creation of a joint army, but also that they have failed to reach agreement on whether BiH should join NATO. or not. The poor functioning of the central state is also evident in seemingly banal issues, such as public holidays, which the two entities fail to agree on.

On the other hand, BiH has an administrative apparatus, so in addition to central authorities, there are authorities at the level of two entities and the Brcko District, as well as 10 counties in the Federation of BiH (or cantons, depending on who lives and to which people). ). To all this should be added about 150 municipalities. It should not, of course, be specifically stated that each level of government enacts its own regulations and introduces its own levies. In such conditions, one could say, any economic growth is commendable, and when the growth rate is higher than that of the western neighbor, which is part of both the EU and NATO, then it almost borders on a miracle.

Nevertheless, Croatia should not be afraid that the countries of the region could overtake it. But if they continue to develop faster than us in the long run, some of them could catch up with us over time. Something similar happened, after all, with Romania, which until a few years ago was behind us on the European development lists, and now we are looking back at it. That is why it is up to the Croatian political and economic elite to devise a new model of the country’s development.

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