The Washington Consensus

II. Washington and Sarajevo

By: Sam Vaknin, Ph.D.

Also published by United Press International (UPI)

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The internecine war lasted three years, from 1992 to 1995. It displaced more than one quarter of the population. Of 4.4 million people, at least 250,000 are missing and at least 40 percent of these, most of them men, are presumed dead. Education was disrupted, disability benefits soared, destitute, single parent families are the norm.

The damages are unimaginable. The costs of ruined infrastructure, devastated crops, demolished real estate - amount to tens of billions of dollars in a country whose GDP, at $4 billion, or $1000 per capita, is one half of its pre-war level. Industrial production ceased altogether during the years of fighting.

The international community has poured well over $5 billion into Bosnia-Herzegovina since the Dayton Accords were signed on November 21, 1995. The World Bank accounts for one fifth of this inordinate amount. This is more than $1000 per every citizen. What do donors and creditors have to show for it?

Not much. To start with, most of the money went to support the peacekeeping force and UN administration in BiH and to repay its bilateral and multilateral public debt.  An international force of 21,000 soldiers - known as SFOR - succeeded a 60,000 strong IFOR in 1996. Additionally, the two mutually-hostile entities which comprise the unprecedented entity that is BiH spend between one quarter and one third of their meager budgets on defense.

It seems that most of the cash flows - domestic and foreign - of this turbulent "republic" go towards keeping its constituents from each other's throats. The rest is brazenly stolen by vast networks of patronage, crime, and money laundering.

In the meantime, the rate of unemployment has leveled off at 40 percent. In the Republika Srpska, a family of four typically consumes one and a half times the average salary. The Sarajevo-based UN Independent Bureau for Human Issues found that 60 percent of BiH's population lives below the poverty line. Imports exceed exports by a margin of 4 to 1. Corruption scandals erupt daily.

But there are signs of renewal. Refugees are returning, albeit hesitatingly. One hundreds thousand of them came back last year, double the number in 2000. Volkswagen decided to reinstate the assembly of its popular "Golf IV" model in Sarajevo - subject to customs privileges and an effective, republic-wide, customs system. Production of the "Beatle" in the much-tortured city was halted during the war.

BiH completed free trade agreements with all the republics of former Yugoslavia. Yet, vast swathes of the economy subsist on international aid and consist of catering to expats and peacekeepers. Like Kosovo, Afghanistan, the Palestinian Authority, and others charmed spots, BiH is addicted to other people's money.

The new International High representative, BiH's procurator, is Paddy Ashdown, a British Liberal-Democrat, an erstwhile commando, a member of the House of Lords. He might need all these trades in his new post.

Quoted by the International War and Peace Report, he says:

"The truth is that Bosnia and Herzegovina spends far too much money on its politicians and far too little on its people. The same is true for defense. Proportionately, Bosnia spends twice as much on defense as the United States and four times more than the European average. Bosnia has twice as many judges per head of population as Germany, yet each German judge deals with four times as many cases per year as his Bosnian counterpart."

The outgoing High Representative, Petritsch, was much less diplomatic in an interview he gave to Associated Press upon his return from Brussels on May 24:

"(Bosnians must) understand that many people in other countries that are financing this have their own problems and they don't want to be bothered with (Bosnia's) problems."

Still, why is Bosnia so economically backward?

The politicians of BiH have perfected their mendicity - as well as their venality - into art forms. A former president, Izetbegovic, and his cronies, were alleged by Western media to have absconded with more than $1 billion in aid money in less than 4 years.

Moreover, Bosnians of all ethnic groups are powered by an overwhelming sense of entitlement. They sincerely feel that the world owes them - either because it stood by as a genocide unfolded (the way the Moslems see it), or because it spitefully deprived them of an imminent victory (as the Serbs perceive it).

Bosnia's beggars are assertive choosers. Beriz Belkic, the Chairman of the make-belief presidency of BiH, had the temerity to say this, in connection with a forthcoming Srebrenica donors conference:

"The programme is planned to last until 2004, and in my opinion it should be a symbolic start of the international community's care for this region against which serious mistakes were committed during the war by the very same international community."

Content to maintain the precarious house of cards that passes for a polity, IFI's have rarely applied pressure to implement in BiH the prescriptions of the "Washington Consensus" over-zealously and indiscriminately applied elsewhere.

When the World Bank submitted recently a report about the privatization of Aluminji Mostar, an aluminum plant in Croat territory, the BiH Federation government thumbed its nose at it and issued this statement:

"(The Federation Government) confirmed its commitment to protecting the state capital in all companies which are strategically vital to the Bosnia-Herzegovina Federation economy."

This timidity of the gatekeepers of the international community was exploited to the hilt by intertwined networks of politicians, bureaucrats, militias, businessmen, managers, and criminals in Bosnia. Economic enterprises were transformed into cash cows and money laundering fronts. The payment system - a relic of socialist times - served as a mammoth "off-shore", Hawala-like, cash conveyance web until it was dismantled.

BiH has no checks and balances. Its institutions are utterly compromised and distrusted. Its police and judiciary are little more than private enforcers at the employ of the criminalized wealthy and mighty. Its Potemkin banks are dysfunctional and arthritic. Its triple and multilayered bureaucracies refuse to collaborate. Red tape suffocates entrepreneurships and barriers to entry often culminate at the point of a gun.

While International Financial Institutions and donors - such as the IMF, the World Bank, the European Development Bank, the EU, and the UNDP - stressed foreign investment, no one paid attention to inward flows.

The EBRD has floated a few sporadic initiatives to encourage small and medium sized enterprises and the World Bank provides microfinance through the Local Initiatives Project (LIP). But the emphasis was overwhelmingly on trying to secure headline-grabbing, big-ticket, FDI.

Yet, foreign investors - deterred by political instability, pernicious graft, crime, and economic stagnation - are unlikely to pitch their tent in Bosnia any time soon - unless they are provided with economically counterproductive tax and customs benefits, passim Volkswagen. Even the resilient and persevering McDonald's failed to penetrate the thicket of Bosnian demands for backhanders coupled with self-serving and contradictory regulations.

BiH had a surprisingly large, entrepreneurial, and cosmopolitan middle-class before the war. Its assets (mainly real estate) and savings (largely foreign exchange deposits) were expropriated and squandered by the warring parties and other, post-war, scoundrels.

The revival of this middle class, the institution of incentives to save and to form capital, the introduction of competing financial intermediaries into the moribund banking system, the encouragement of domestic investment, the enhancement of business-related services, the establishment of new institutions (such as business courts) to circumvent the hopelessly corrupt ones Bosnia sports - should have been the top priorities of the successive High Representatives of this makeshift country.

Yet, they were not. The multilaterals appeared to have been concerned chiefly with tax collection - but not with engendering a taxable economy. Until the latter part of 2000, they did not even bother to significantly reform the intractable, business-repelling, and corruption-inducing tax code. Nor was the legal environment made more business-friendly. Numerous and tedious inspections, regulations, controls, and conflicting permits afflict every shop, plant, and service establishment in the land.

Incredibly, it was as late as last week that the World Bank approved a $44 million "Business Environment Adjustment Credit". At one third the size of the government's annual budget, it is supposed to support these long-overdue reforms:

"Facilitating business entry through the creation of a simplified and transparent countrywide approach to business registration, and licensing and a strengthened legal framework and capacity for attracting foreign investment; Streamlining business operations by reducing administrative and regulatory compliance costs through the rationalization of inspections and regulations; building judicial and extra-judicial capacity to resolve commercial disputes; improving enforcement of secured transactions, and ensuring equal access to public procurement; and, easing business exit through strengthened bankruptcy and liquidation systems."

Yet, this program is bound to fail. IFI's, governments, and development banks - hypnotized by the mantra of "country ownership" - keep pretending that Bosnia meets the definition of a state, with functioning institutions, and patriotic politicians. They keep conveniently ignoring the fact that Bosnia has no banks, no courts, no police and that its customs service is a primitive extortion racket.

The international community should have founded parallel financial, tax, customs, bureaucratic, and judicial systems to cater to the needs of the emerging private sector, now less than 40 percent of Bosnia's moribund economy.

The likes of the EBRD and the World Bank should have sapped the stifling might of the putrid elites of Bosnia by fearlessly providing functional and, where necessary, foreign-managed, alternatives. This is not without precedent. Bosnia's Central Bank is successfully governed by an IMF-appointed New Zealander. The EBRD runs much of business-related regulatory organs.

Instead, the multilaterals keep enriching and empowering the mortal foes of private enterprise: criminalized monopolists, power-inebriated virulent nationalists, corrupt officials, and their penumbral sidekicks, the Bosnian "bankers".

Every soft loan, every grant, every subsidized credit, and every round of "negotiations" with the criminals that pass for politicians and government officials in BiH and its constituents - demonstrates to potential investors - Bosnians and foreigners alike - that the international community is unwilling, or, worse, unable, to take on the entrenched anti-business kleptocracies of BiH.

There is an enormous pent-up demand for small business finance. The World Bank summarizes the astounding success of its - single - microcredit facility in Bosnia thus:

"Five years after the start of the LIP, the overall evaluation of the project is highly satisfactory. As of March 31, 2001, some 80,000 loans have been disbursed to microentrepreneurs throughout the country helping to create or sustain over 100,000 jobs. Monthly disbursements support more than 3,000 new loans. Levels of repayment are very high at 98.5%, with only 1.21% of outstanding repayments (30 days past due).

On the ground, these numbers translate in improved living conditions and a renewed sense of hope and confidence for many of the poor. An independent Client Survey commissioned by the Local Initiative Departments (the monitoring agencies of the project) in 1999 found that 79% of borrowers considered that the loan had significantly improved their economic situation. Furthermore, some microfinance institutions have used microcredit as a tool to bring together people previously divided by the war.

On the operational and financial side, the LIP has been equally successful. Just three years after the project was initiated, seven microfinance institutions became operationally sustainable, meaning that they are able to cover their operating expenses from their operating income. Four of these institutions were financially sustainable, i.e., they can cover all expenses, including the cost of maintaining the value of their capital, as well as adjustments that fully account for subsidies and write-offs for non-recoverable loans. These results make microfinance institutions in Bosnia and Herzegovina high performers among such initiatives worldwide."

This is not counting the prospering informal ("grey") economy - equal in size to the formal bit - and the massive remittances of hundreds of thousands of Bosnians abroad. The drain of brains and entrepreneurship is inexorable. A United Nations survey conducted earlier this year found that 62 percent of the youth dream of leaving BiH, six years into the Dayton peace process.

The World Bank approved a second, $20 million, LIP last July. Yet, it is telling - and outrageous - that credits for SME (small and medium enterprises) and microcredits amount to less than 1 percent of the funds expended in Bosnia hitherto.

Bosnia fosters in IFI's a keen and sudden adherence to their charters and mandates. The IMF, which would have encroached gleefully on the World Bank's turf in almost any other country, confines itself in Bosnia to taxation.

While not averse, in dozens of countries, from Macedonia to Indonesia, to sonorously conditioning its programs upon painful structural reforms and development priorities  - in the minefield that is Bosnia, the IMF is content to tiptoe and procrastinate apologetically.

Public posturing - together with the US, EU, the World Bank, and others - over the botched privatization process at the end of 1999 notwithstanding, the IMF's subservience to its American paymasters is nowhere more transparent than in BiH.

Despite having consistently reneged on all its obligations, Bosnia's 1998 standby agreement with the Fund has - most unusually - been extended three times over. A new agreement was finally negotiated late last year.

As global interest wanes, BiH is likely to face a precipitous decline in international aid. This will result in an economic crash akin to the one experienced by Cambodia when the UN withdrew in 1993. A Lebanon-like country, governed by Russian-style oligarchs, with African-level poverty and Serb-reminiscent nationalism - Bosnia's future is unlikely to improve on its sorry past.

Also Read:

The IMF - Kill or Cure?

The IMF Deconstructed - A Dialog

Russian Roulette

The Washington Consensus - I. The IMF

Bosnia - An Economy in Search of a State

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