51953 IDA At Work Bosnia and Herzegovina: From Reconstruction to European Integration B osnia and Herzegovina (BH) is on the mend. Over the past 14 years, infrastructure and basic services have been restored to almost prewar levels, while the country and its people have made substantial progress in their overall economic and social develop- ment. Country Indicators 1995 2008 GNI per capita (US$) 780 4,500* Average inflation (%) 39.5 1.5 Total public debt (% of GDP) 73 227.8 Fiscal balance (% of GDP) ­8.1 ­4.0 FDI net inflows (US$ millions) 67 774 Poverty incidence (%) 19.1 (2000) 14 (2007) Gross primary school enrollment rate (%) 92.3 (1996) 96 (2004) Under five child mortality (per 1,000) 19 14 (2007) Infant mortality (per 1,000 live births) 16 13 (2007) Population (millions) 3.4 3.8 (2007) Source: BH statistics agencies, BH Living Standard Measurement Study 2004, HBS 2007, World Development Indicators database (July 2009), and World Bank estimates. *(2008 preliminary data) During the three and-a-half-year war that ended in late 1995, at least 100,000 people were killed or went missing, some two million people were displaced, land mines riddled the landscape, the infrastructure and economy were almost completely destroyed, and services devastated. In the intervening years, infrastructure and basic services have been restored, while the country and its people have made substantial progress in their overall economic and social development. Beyond reconstruction, the country's focus now is on deepening reforms, joining the EU and achieving a successful economic transition. IDA has supported BH's reconstruction through significant investments and worked with the European Commission (EC) and many other donors towards mobilizing unprecedented levels of assistance for the war-torn country. n n n COUNTRY ACHIEVEMENTS The country is also making important strides toward EU integration. BH reached an impor- Three and a half years of war left a heavy toll tant milestone in June 2008 with the signing but Bosnia and Herzegovina has achieved of a Stabilization and Association Agreement an impressive post-conflict recovery. The (SAA) with the European Union (EU), joining challenge now is integration in Europe. the other countries of the former Yugoslavia with formal accession contracts with the EU. BH exited from the war devastated and divided, riddled with mine fields, with The country's capital base has been effec- police and military check points preventing tively restored to almost pre-war levels, even the essential freedom of movement. with housing rebuilt, energy supply reestab- By the end of 1995, BH's output had fallen lished throughout the country and transport to just 10-30 percent of the prewar level. infrastructure restored. Schools and medical GDP had collapsed to less than US$500 per facilities have been reconstructed with a new capita, about 20 percent of its prewar level. family health care system put in place and Most of the basic infrastructure and services educational reforms underway. were shattered and more than 80 percent of the population received some form of food Before being affected by the international aid. The level of destruction was such that economic slowdown at the end of 2008, BH the total amount of war damages was never managed to triple its GDP compared to 1995, fully calculated. In Sarajevo alone, damages with real GDP growth averaging 5 percent amounted to EUR 14 billion during the capi- since 2000. All this has been done while pre- tal's record-long 1,417-day siege. serving peace and stability. Nearly 14 years after the war, the country has Some progress was made on poverty reduc- made tremendous progress in post-conflict tion, although economic growth has not been reconstruction, rehabilitation of basic infra- particularly pro-poor. BH, supported by a structure and services, social integration, strong effort of the international community, and state building. BH today is in the process showed good progress on the Millennium of integrating into Euro-Atlantic structures-- Development Goals (MDG). something few would have dared to predict back in 1995 when the country lay in ruins. Many challenges still remain. The complex BH is working toward accession to the Euro- institutional and political environment pean Union (EU) and membership in the World continues to slow the reform process and Trade Organization. In December 2006, BH development of institutional infrastructure was invited to join NATO's "Partnership for supportive of market economy and EU Peace" program. integration. As expected in a small open 2 IDA CONTRIBUTIONS A Turning Point IDA engaged early and extensively in the postwar As the UNDP 2004 Millennium Development reconstruction and development efforts. The Goals for BH update report notes, BH is first World Bank teams arrived in BH in 1995, facing a turning point "...away from aid even before the fighting fully stopped. IDA has dependency towards a genuine ownership of the development process... BH must since supported 59 projects to help recon- therefore mobilize all the resources at its struction and development of virtually every disposal--physical, social and human segment of the war-torn country--housing, endowments--to achieve equitable economic energy, transport, schools, etc. Since 1996, IDA development and sound governance reform. has committed close to US$1.3 billion to BH. Membership of the European Union is both The total value of these projects, including central to achieving these objectives and an Bank-managed funds and counterpart fund- end in itself. The accession process presents ing, amounts to more than US$3 billion. both the opportunity and the means by which BH citizens can come to secure the A review carried out by the Independent same economic prosperity and the social Operations Evaluation Department (OED) in entitlements enjoyed by other Europeans. The 2004 found the BH reconstruction program eight MDGs continue to help to deliver these to be an example of "the Bank at its best." objectives by providing a powerful framework for defining BH's long-term strategic priorities Together with resources from the European and for measuring and evaluating its Union, and other donors, exceptional levels progress." of per-capita support have helped BH repair its infrastructure, develop economically and move towards deeper structural reforms. This exceptional post-conflict allocation rep- economy, the global economic crisis spread resents some 53 percent of the total value quickly in BH from the end of 2008, revers- of the financial aid package pledged by the ing some of the effects of strong growth entire international community to support and putting at risk macroeconomic stability the peace process. Due to BH's initially and important economic reforms. The crisis weak absorptive and managing capacity, this threatens to reverse also recent gains in financing for the first few post-war years was household living standards. International made under simplified procedures, yet fully assistance is also set to decrease markedly respecting all basic professional principles. in the coming years. Thus BH is focusing now on mitigating and reversing the impact of the The Reconstruction Phase crisis (an agreement for an IMF program was reached in June 2009). In the medium term, Consolidating a fragile new state. The with the post-conflict reconstruction phase Dayton Peace Accord left BH with a complex largely completed, the country's challenges political and administrative system which come from the constitutional reform debate represented a special challenge for IDA and and the need to deepen reforms for joining other international partners operating in the EU and achieving a fully successful and the country. The state comprises two enti- equitable economic transition. ties with different institutional setups--one 3 centralized entity (Republika Srpska) and they have contributed to social inclusion in a one federation of cantons (the Federation of number of ways. Bosnia and Herzegovina)--with a weak and decentralized state government. Reconstruc- Under the Bank's micro-finance projects, 50 tion efforts therefore required technical skills percent of borrowers were women. This has and political sensitivity. strengthened women's role in the family and helped support female-headed households-- IDA often acted as a catalyst and facilita- an important contribution given that the war tor bringing together different local parties left many households without male heads of behind joint projects and endeavors. In this families. way, IDA contributed not only to the imple- mentation of specific projects, but more Participatory decision-making introduced generally to social reconciliation within the under the community development project country. facilitated greater involvement of minor- ity groups (including returnees and Roma populations) and other vulnerable groups (for Mediation example, youth, women, disabled, people with special needs) in selecting development "In Bosnia in 1995, there was no way the warring parties could discuss reconstruction; they could priorities in their respective communities. not even agree where the discussion should be located," recounted author Sebastian Mallaby in his Combining resources with analysis and book The World's Banker (2004). "It took the World policy advice. IDA's financial assistance was Bank's mediation to focus the Bosnians on practical often based on in-depth analytical work, problems: Should there be a central bank? How to which assessed existing conditions, chal- reconcile conflicting tax and customs systems?" lenges, needs and potential developments in a given sector. For example, the first two power sector reconstruction projects financed Strengthening communities, promoting by IDA supported the preparation of power social inclusion. The war and immediate sector development strategies in BH which post-war period in BH had a serious impact on then underpinned the following two power the basic fiber of BH's society, shaking its local sector projects, financed by IDA and many communities. The Bank paid special attention other donors. to strengthening these communities--essen- tial building blocks in BH's reconstruction, A second Living Standard Measurement Study reconciliation and development efforts. IDA (LSMS) supported by IDA provided crucial financed a community development project data for a variety of activities in a country which reached about a quarter of the coun- where local statistics agencies had not yet try's population through small infrastructure reached their full potential. Some of the projects selected locally, as well as two local most recent ­ and well-received - World Bank initiatives projects which introduced micro- reports included a labor market study, a financing to BH and helped sustain or create public expenditures and institutional review, some 200,000 jobs. While social inclusion was pension study, assessment of social benefits, not the main objective of these projects, and local governance study. 4 Working on Many Fronts In a country utterly devastated by war, IDA's ability to work across sectors and on many fronts has produced a wide range of results: Housing, heating and gas. A majority of the country's population in 1995 lived in war damaged houses and apartments, without glass windows and with improvised heating. In the immediate post-war period, over 22,000 public apartment units and private houses were repaired under IDA housing and emergency reconstruction projects. Two other IDA projects helped revive Sarajevo's district heating system and rehabilitate the country's gas network so it would provide a reliable and safe gas supply. Power and water systems. At war's end, most of the country had no regular water and power supply. The destruction of BH's power grid has not only left BH citizens without power supply, but has also disconnected the Southeastern Europe power grid from the rest of Western Europe. Damaged and neglected water systems suffered from significant water losses. Over the past decade, hundreds of kilometers of power and water lines, transmission stations, and thermo and hydro power plants were rehabilitated through four electrical power and three water reconstruction projects. Road and Transportation. Most of the bridges were destroyed during the war and the road network was damaged by military activities and lack of maintenance. About 2,300 kilometers of roads, 41 bridges, 3 tunnels and Sarajevo's International Airport were rebuilt through three IDA transportation reconstruction projects. Education. IDA projects helped to restore, furnish and equip 82 war-damaged primary schools. The overall education system was modernized. Over 100 new textbook titles have been published and distributed to pupils across the country. The government's priority program for school reconstruction was estimated at US$275 million--of which IDA financed US$21.5 million. Health. Five clinical centers and 15 hospitals, damaged in fighting, were rehabilitated, 24 medical facilities equipped, and health care professionals trained. The family medicine model was introduced and has spread rapidly, now covering about 25 percent of the country, thanks to four IDA health projects. Forestry. One of the key economic activities in BH before the war, forestry, suffered due to war damages, lack of proper maintenance and extensive mine fields. After one IDA project helped clear mines, some 550 hectares of new trees were planted, 210 kilometers of existing forest roads were reconstructed and new ones were built under two subsequent forestry projects. Employment. Two IDA employment projects stimulated job creation, a key challenge in post-war BH. In addition, 200,000 jobs have been created or supported under two local initiatives microfinance projects, under which some 350,000 microcredits were disbursed and sustainable microcredit industry was created. A social sector adjustment credit helped increase labor market flexibility, by supporting the reform of employment conditions and of unemployment and job placement legislation. A labor market study conducted by the Bank was also influential. Banking sector. An enterprise and bank privatization credit helped shore up BH's banking system. Banks have seen their total assets increase by almost 100 percent over the four years preceding the global crisis, enjoy good level of confidence., and are weathering the global crisis better than in the rest of the region. Public spending. A labor redeployment project set a model for the social integration of former soldiers into civilian life by providing employment services to over 7,000 ex-professional soldiers. At the same time, this has reduced political pressure on policy-makers and allowed them to maintain fiscal stability. In addition, two policy loans targeting public finance management have had a significant impact. Independent audit institutions and new treasury systems have been set up and the overall budget management was strengthened. Four health and one social sector projects supported initiation of health and pension reforms, which helped to improve effectiveness and reduce the share of public spending of these two sectors. 5 Lessons from a Successful Recovery Bosnia and Herzegovina's successful reconstruction offers useful insights for international assistance in post- conflict countries: · Engage early and strong. IDA and the EC mobilized resources even before the end of hostilities in late 1995. Altogether, donors pledged more than US$5 billion at the Dayton conference. This financial package offered the prospect of reconstruction and a welcome return to normalcy, and helped seal a peace deal between warring parties. · Maintain a strong field presence. Post-conflict situations are complicated and involve a multitude of players and organizations. Presence on the ground is essential to monitor projects, maintain coordination with other donors and respond quickly to eventual changes. · Start structural reforms earlier. Although BH performed well on the basic reconstruction front, it was slower in undertaking key structural reforms and now lags behind other transition countries. · Strengthen the government's capacity to formulate strategy and implement reforms. · Adapt projects to local realities. Contrary to investment projects, which have had an excellent track record, some development policy loans proved to be too unwieldy for the already complex BH political and administrative apparatus. Policy loans need to be less complex and more targeted. From Reconstruction to Development In 2009, the Bank is supporting BH with a study on reforming social assistance transfers. BH Supporting policy reforms. With most of spends 4 percent of GDP on non-insurance the basic reconstruction work completed social protection cash transfers, mostly for and infrastructure levels raised to almost programs based on defined benefits acquired pre-war levels, a greater emphasis in recent during the war period. This is the second years has been placed on fundamental struc- highest level in the World Bank's Europe and tural reforms critical to the emergence of a Central Asia (ECA) region. These transfers are market economy. IDA assistance has focused neither fiscally sustainable nor well targeted on providing financial and analytical sup- to reach the poorest. The Bank has worked port to foster private sector-led growth and closely with authorities at both the State and employment, strengthening institutions and Entity level to identify approaches to reform governance, reforming the public sector, and these payments and achieve greater sustain- encouraging social sustainability. ability and higher poverty impact. Although a significant outstanding reform Regional cooperation. IDA is helping BH agenda still remains and policy discussions implement lessons from a July 2008 Bank have not always proved easy, IDA support study on deepening regional and EU integra- kick-started several important reforms in the tion across the Western Balkans, which looks country. These include the reform of the bank- at long-term growth issues, including trade ing sector, which is now considered one of the performance, regional integration, and the strongest in the region; the early stages of pen- investment climate in the different countries sion system reform; and ongoing efforts aimed of the region. The study urges countries in at improving the efficiency and transparency the Western Balkans to deepen regional and of the public land registration system. EU integration, further develop human capital 6 and reduce telecommunication costs in order finalized and one continuing project (ECSEE to sustain economic growth. In this context, APL3), IDA financing of about US$130 million IDA is preparing to support BH and its regional was able to leverage a total of almost US$880 neighbors reclaim the River Sava for naviga- million from other sources, including Aus- bility, which will permit passage of vessels tria, Belgium, the BH government, Canada, of 3,000 tons between Sisak and Belgrade for the Czech Republic, the European Bank for the first time since 1990. The proposed proj- Reconstruction and Development, the EC, the ect is supported by the EC and the Regional European Investment Bank, France, Germany, Cooperation Council, and involves the four Ireland, Japan, the Netherlands, Norway, riparian countries under the auspices of the Spain, Switzerland, the UK and the USA, for International Sava River basin Commission. a coordinated program of investments and associated sector reforms. Enhancing the role of the private sector. IDA has played an important role in improving With BH now set on joining the EU, support- BH's business environment. IDA supported ing the integration process has become the lines of credit with components to strengthen overarching theme of IDA's country partner- participating financial institutions; adjust- ship strategy, along with job creation and ment credits to strengthen banking reform; the improvement of public services. IDA has and guarantee operations to support the tailored its support to complement EU efforts establishment of an insurance agency to to build the country's capacity in this acces- underwrite private investments and exports. sion process. Important progress has also been achieved in business registration, inspections, licensing CHALLENGES AHEAD and bankruptcy procedures. This support has contributed to a sharp jump in export per- In the short-term: mitigating the impact of formance, with export growth surpassing that the global slowdown. BH has met many of of all other countries in the Balkans. Exports the most intractable challenges related to growth was 36 percent in 2006, 15 percent in post-war reconstruction. It has taken impor- 2007 and 13 percent in 2008. tant strides toward further reconciliation and development and poverty reduction. New PARTNERSHIPS challenges are emerging, however. As with most of the countries in the ECA region, the IDA, together with the EU, chaired five inter- global economic crisis of late 2008 and 2009 is national donor meetings which eventually reversing some of the progress made possible mobilized US$5.1 billion for BH in the post- by the strong economic growth of the 2000s war period. This financial package was central and putting at risk macroeconomic stability to the quick and successful reconstruction of and important economic reforms. BH's basic infrastructure and services. In July 2009, the IMF Board agreed to support In addition to this over-arching donor coordi- a new US$1.57 billion Stand-by Arrangement nation role, IDA often acted as a focal point (SBA) to help support an economic program for donor coordination in specific sectors. In to mitigate the effects of the global financial the power sector, for example, through three crisis. 7 Following extensive policy dialogue, the increasing much-needed capital outlays by authorities asked IDA to complement this the government for infrastructure. Reducing program with policy lending and technical the external deficit further by sustaining fiscal support to reform the country's social trans- discipline, curbing credit growth, and accel- fers system. erating structural reforms is also paramount. Keeping corruption in check is also essential The crisis is placing in even sharper relief the to the success of economic reforms. longstanding--and unique--institutional chal- lenges BH faces as a result of the war and IDA, looking to the future. its aftermath. Further economic integration of the Federation of Bosnia and Herzegovina BH is preparing to graduate from IDA, and in and the Republika Srpska into a single eco- November 2008 received its first loan from nomic space is a prerequisite for attracting the International Bank for Reconstruction and more investments and making progress in the Development (IBRD), the nonconcessional country's EU accession process. lending arm of the World Bank which serves middle-income and creditworthy low-income Becoming a dynamic, self-sustaining econ- countries. omy integrating in Europe. Although BH still requires further investments in many sectors, Against this background, IDA's current strat- from urban infrastructure to health, educa- egy in BH is to be a catalyst for the inclusive tion and transport, the main challenge for BH and sustainable integration of BH's economy in the medium-term will be to complete the in Europe. In the short-term however, IDA is transition from a largely aid-dependent coun- striving to help BH mitigate the impact of try to a dynamic and self-sustaining economy, the global economic crisis, particularly on integrated into Europe. the most vulnerable BH citizens. The MDGs continue to help to deliver these two objec- Due to the war and post-war reconstruction, tives by providing a powerful framework for BH has lost more than a decade in terms of defining the country's strategic priorities and transition reforms compared to other coun- for measuring and evaluating progress. tries in Eastern and Central Europe. Thus, faster reforms, especially reforms of the pub- As poverty in BH is strongly correlated with lic sector -- to create new job opportunities, formal employment, the IDA's focus is on pov- improve competitiveness and foster private erty elimination through economic growth, sector-led growth -- are needed for BH to improvement of the business environment compete with other transition economies. and job creation. Finally, IDA will continue The EU accession process will also mandate to support improvements in targeting and shoring up state level institutions, procedures management of social programs to help and financial management. reduce poverty through increased efficiency of government spending, particularly when it Rationalizing and streamlining government is directed to the most vulnerable. spending will be needed to help cope with the pressures of building state institutions, July 2009. creating an efficient social safety net, and http://www.worldbank.org/ida 8