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CHAPTER 1 INTRODUCTION Capitalism and socialism, as two major economic systems, have shaped the past century to a great extent. After many wars and political games, it seems that the battle between the two systems has come to an end. Capitalism proved to be the stronger system and, as a result, globalization became the most descriptive attribute of the world economy in the current century. Most of the socialist countries decided, or were forced, to start a painful process of transition, which would enable them to become capitalist countries in the future.
The countries in transition have had to deal with numerous problems such as political and economic pressure from other countries, corruption at all levels of political and judicial power, and (un)armed resistance by certain fractions of population. The purpose of this thesis is to shed light on what Bosnia and Herzegovina and other countries have had to go through in order to adopt capitalism. The focus will be the ongoing process of transition in Bosnia. Bosnia is an excellent example of a country in transition.
It used to be a part of a monarchy (Kingdom of Serbs, Croats and Slavs, later Kingdom of Yugoslavia) and a republic in a socialist country (Socialist Federal Republic of Yugoslavia). Bosnia and Herzegovina finally became an independent country in 1990s. During the monarchy, Bosnia was primarily an agricultural region, rich with natural resources that had not been used. It remained underdeveloped and one of the poorest republics in Tito’s socialist Yugoslavia. As an independent country, Bosnia is currently struggling both politically and economically.
It is considered a representative democracy, making its way to capitalism. The population of Bosnia is mainly comprised of three different ethnic groups: Serbs, Bosniaks (Muslims), and Croats. Although very similar, these groups have distinct histories, cultures, and religions (Serbs are predominantly Orthodox Christians, Bosniaks are Muslims, and Croats are predominantly Catholics). Ethnic differences have played a significant role in the development of Bosnia throughout the 20th and into the 21st century.
Unfortunately, those differences proved to be an obstacle to progress for the citizens of Bosnia. Although an independent country, Bosnia has been divided into two separate entities since the civil war in the nineties. Different feelings of nationality and different political agendas have raised many issues that the country is still struggling with. Bosnian diversity and certain individuals’ personal goals resulted in a very painful process of transition to democracy and free market economy.
This transition is a process that affects almost all spheres of society. It is very difficult to analyze economic transition in Bosnia without considering other factors such as culture and politics. This thesis hopes to give a broader picture of the transition in Bosnia and the underlying factors that facilitate transition or slow it down. Although many of these factors could be studied separately, their short introduction will provide a better understanding of the economic transition in Bosnia. For this reason, this text will be divided into three major parts.
The first part gives a historical background, which in addition to Islamization of Bosnia, includes the main political and economic events in the country from the end of World War I until present day. Major political events include the creation of Kingdom of Yugoslavia, SFR Yugoslavia, and Bosnia as an independent country. Some of the events that are also considered include Constitutional changes in 1963 and 1974, and the war-ending Dayton Agreement of 1995. Economic changes closely reflect political changes.
In addition to these changes, special attention is given to self-management, a managing system of former Yugoslavia, which will be discussed in detail. The second part addresses privatization, the key process in economic transition. The differences in privatization between the two parts of Bosnia, called entities, are also addressed. The last part investigates the problem of corruption and other political factors that are a current impediment to transition. At the end, subjective conclusions will be made about whether transition itself is worthwhile.
Each reader is welcome to draw his or her own conclusions. Whether transition is worthwhile is a question that will be approached from the people’s point of view and it will rely on comparison between Bosnia’s economic performance and the living standard in the country before and during transition. It will also consider future estimates. Political events that affected the process of transition will be taken into consideration because of their enormous relevance. Hopefully, the conclusions will be unbiased and provide important considerations relevant to Bosnia’s future.
CHAPTER 2 POLITICAL BACKGROUND Bosnia before World War I – Islamization The focus of this thesis is the transition of Bosnia from socialist to capitalist economy, but in order to fully understand it, one must be familiar with some of the historical events particular to Bosnia. The single most important historical trend is certainly the Islamization of Bosnia. Although the Serbian people consider the Battle of Kosovo in 1389 to be the beginning of this process, only decades and centuries to come marked a significant increase in the number of Muslims in Bosnia.
The primary source of information on population and especially changes in religious composition[1] are found in tax documents from the 15th and the following centuries. With the help of these documents, Malcolm Noel gives a good analysis of the Islamization process in Bosnia (Islamizacija Bosne). The oldest tax documents, from 1468 and 1469, include the areas of eastern and central Bosnia. According to these documents, the total population of eastern and central Bosnia was between 195 and 200 thousand people. Less than one percent of the people were Muslims (Malcolm, Islamizacija Bosne).
Tax documents from 1485 included Sandzak Bosna, which included most of the territory of modern Bosnia, excluding the southern part Herzegovina. The administrative center of the area was Sarajevo, where Islamization was the fastest. As noted by other historians, the Islamization of Herzegovina was the slowest (ibid. ). Documents from 1485 mark a significant decrease in total population. On the other hand, the percentage of Muslims in the total population increased. These trends were largely due to emigration of Christians from Bosnia and conversion of those who stayed to Islam.
The total population of Sandzak Bosna in 1485 was about 177,000. Muslims made up about fourteen percent of total population (ibid. ). According to tax documents from 1520s, the total number of Christians was 98,095, and the number of Muslims was 84,675 (ibid. ). In the following decades and centuries, the number Muslims was constantly increasing and they eventually became a majority in Bosnia. The increase in percentage of Muslim population was almost completely due to conversion of Christians to Islam (Malcolm, Islamizacija Bosne). Christians were considered second-class citizens, although they enjoyed certain rights[2].
Malcolm argues that Christians converted to Islam voluntarily and that no one forced them to accept Islam. Perhaps this is true from a religious point of view, but living every day as a Christian became increasingly difficult. Christians had to pay more taxes, and did not have equal rights[3]. Some Christians were slaves (they could request freedom if they converted to Islam), while others had to deal with treachery because they were unable to bring a suit or a complaint against Muslims from the same social class (ibid. ). The most painful practice, however, was devshirme, or “blood tax”.
Young Slavic boys were abducted and brought to other Turkish territories for a formal training to become servants, the sultan’s loyal slave soldiers and janissaries (military administrators)[4]. Muslims had been the dominant people in Bosnia since Ottomans invaded its territory, and it was only in post World War II Yugoslavia that Muslims raised a complaint, demanding to be recognized as a separate ethnic group, and not only a religious group. Despite the difficulties, many Christians stayed in Bosnia and lived side by side with Muslims for centuries.
When Austria-Hungary occupied the Bosnian territories in the 19th century, Slavic Muslims and Orthodox Christians occupied almost the same social positions. Only Catholic Christians were slightly privileged. During the Ottoman rule, Bosnia experienced a period of stagnation. Almost no economic progress had been achieved in four hundred years. When Austria-Hungary gained control over Bosnia, many political and economic reforms were introduced. It seemed that Bosnia was improving, but the people did not feel like it. They were oppressed by foreign rule.
Austrian occupation of Bosnia lasted for forty years, the Bosnian people finally becoming free of foreign rule only after World War I. Kingdom of Yugoslavia (1918 ??? 1941) The Kingdom of Yugoslavia is also known as the First Yugoslavia. At the time of its creation it was the biggest country on the Balkan Peninsula and, proportionately, had the most problems both internally and externally. Within Yugoslavia, it was difficult to find compromises among the different nationalities and religious groups, mainly Serbs, Croats, Muslims, and Slovenians.
The main outside threat at the beginning was Italy, which had acquisitive tendencies towards the territories of Slovenia and Croatia at the end of the Great World War. Austria-Hungary was also a significant threat since it was difficult to simply accept the defeat and give up its valuable territories in the new kingdom. It is a fairly common belief today that in the creation of First Yugoslavia are many of the roots of modern Bosnia’s problems and the civil war in the nineties. For this reason, the creation of First Yugoslavia should be investigated in a broader context.
Austria opposed the creation of Yugoslavia because it meant the loss of valuable territories and the creation of a powerful neighbor. In order to deal with this problem, some forces in Austria-Hungary advocated changes that would include Yugoslavia in their federation. These forces wanted to expand the federation of Austria and Hungary to include Yugoslavia, making it an ally (Corovic, Ujedinjenje). This idea was never realized, but it was insightful in the sense that something had to be done to satisfy the Yugoslavian desire for independence and the struggle to end Austro-Hungarian rule.
Yugoslavians were simply tired of being ruled by the foreigners. In addition to this, Yugoslavian people were underrepresented in the Austrian empire and their common problems could not have been solved; some were members of Austrian parliament, others were under direct Hungarian rule or responsible to both Austria and Hungary. As early as 1914, the Serbian People’s Parliament declared that the war marked a historical moment for all Serbs, Croats and Slovenians and took it upon itself to start the fight for their freedom (ibid. ).
The idea sounded great and was welcomed by many politicians within all three ethnic groups, but it was very hard to practically achieve. While some Yugoslavian politicians were moved by the ideology of a unified Yugoslavia, most supported the creation of Yugoslavia for practical reasons. Serbs were ready to finally reestablish an independent state and cut their ties with Austria-Hungary. They knew that the goal would be much easier to achieve if all Yugoslavians were united. Croats were interested in the same idea but lacked the strength to stand alone against the superpowers such as Austria-Hungary and Italy.
They were especially afraid of Italy, which had tendencies towards their western territories, and which used every opportunity to accuse the Croats of disloyalty in front of the Allies (Corovic, Ujedinjenje). Croats, however, were hesitant to enter into a union with the Serbs because they were afraid to lose their national identity. At first, they wanted the unification of Yugoslavian people under the Croatian state law, but the Serbs refused since their tendencies involved the creation of Greater Serbia (ibid. ).
Serbs and Croats overcame their differences and signed the Pact of Corfu in 1917, which was the key agreement in the creation of a unified Yugoslavia. Both Serbs and Croats knew this was perhaps the last train to catch to get away from Austro-Hungarian rule and become independent and free. Large sacrifices were made to achieve this goal on all sides, including Slovenians and Muslims from Bosnia. They all decided, however, that it was better for them to create a single country, diverse as it was, and fight for independence from Austria-Hungary and Italy as a united people.
The creation of the First Yugoslavia, under the name of Kingdom of Serbs, Croats and Slovenes, was officially announced on December 1, 1918. The country was later renamed the Kingdom of Yugoslavia on October 3, 1929. Although many people today blame the modern struggles of Yugoslavian people on the creation of a joint country, the creation of the First Yugoslavia seems to have been the only way for them to liberate themselves from outsiders. For this reason, a united Yugoslavia seemed a reasonable choice at its inception, and almost its entire people were willing to cope with internal difficulties in order to be free.
The main disagreement between Serbs and Croats was about the political structure of the country; the Serbs were in favor of a centralized government located in Belgrade, while the Croats, who wanted as much autonomy as possible, preferred a federation (Corovic, Vlada Kralja Aleksandra). In order to preserve the country, and after many compromises, the country was finally divided into 33 administrative units. This division was not based on geographical or even historical divisions, but was purely political (ibid. ).
Needless to say, this type of federation did not work very well, and the differences between the Serbs and the Croats were only deepened. By 1929, the disagreements reached a peak, and King Aleksandar was forced to abolish the constitution and repossess the power. In order to reconcile the differences, the king divided the country into nine administrative areas, each one including the territories around the large rivers. He also renamed it Kingdom of Yugoslavia, hoping to bring back a sense of unity (ibid. ). In the next decade, especially after the king’s assassination in 1934, it was increasingly difficult for the Serbs nd the Croats to agree on anything; the federation was facing a decline, and new powers, such as the Communists, gained much support from the people in the country. Bosnia was always a special case in Yugoslavia. Almost all its inhabitants belonged to one of the three main ethnic groups: Serbs, Muslims (today Bosniaks), or Croats. For this reason, Bosnia lacked unity and had the most political and economic problems in the entire country. Naturally, Serbs aligned with Serbian politics from Belgrade. Muslims were originally divided, some remaining loyal to Austria-Hungary, others considering themselves Yugoslavian.
The mainstream of Muslim politics gradually shifted towards a federation of Yugoslavia where Bosnia could preserve its identity (Malcolm, Rat i Kraljevina). The Croats in Bosnia were also divided at the beginning, but followed mainstream Croatian politics from Zagreb and accepted Yugoslavia (ibid. ). The historical differences among Serbs, Muslims, and Croats need to be considered in order to fully grasp the modern Bosnian problem and the civil war in the nineties. Bosnia and Herzegovina has always been only geographically united. Its people always had different agendas.
Serbs were tied to Serbia, Croats to Croatia, and it was only the Muslims who had an interest in Bosnia becoming an independent country. The differences among the three people have proved to be very burdensome for modern Bosnia. Socialist Federative Republic of Yugoslavia (1945 ??? 1991) Towards the end of 1930s, the Yugoslavian government was shaken, and the country faced a new outside threat. During the previous decades, Germany grew stronger and posed a threat to the new country. Under political pressure from Germany, a weak Yugoslavian government signed the Pact of Vienna in 1941 to side with the Axis Powers.
The people of Yugoslavia rejected this, and the Yugoslavian government was removed after coming back to the country. As a result, Germany bombed Belgrade on April 6, 1941 without a declaration of war. King Petar II and other government officials fled to England. Communists, who had been previously gaining support of the people, were the only ones able to organize a resistance movement. Josip Broz Tito was a head of this movement and soon became a national hero. The first declaration of a new country was in 1943 under the name of “Democratic Federal Yugoslavia”, and the government perated in exile. The name was changed in 1945 to “Federal People’s Republic of Yugoslavia”. In 1963, the official name was finally changed to Socialist Federal Republic of Yugoslavia. Tito was the first Prime Minister of post-war Yugoslavia, and became the president in 1953. Because of their role in World War II, Tito and the Communists had popular support. Many felt that Yugoslavia was finally united and the differences among its people had disappeared; however, the coming decades proved the opposite, when Yugoslavia faced numerous new political and economic obstacles.
Although a communist country, Yugoslavia took a different path than the countries of the Soviet bloc to achieve its goals. Tito was greatly influenced by Stalin, but also saw the advantages of the capitalist west. In 1948 Yugoslavia became the first country to break from Stalin’s communist bloc, becoming a nonaligned nation (Library of Congress). Malcolm argues, however, that Stalin expelled Yugoslavia from Cominform, and that, despite this, Tito continued to implement Stalinist policies (Bosna i Hercegovina u Titovoj Jugoslaviji). Tito’s and the Soviet governments had common elements and the two countries were similarly organized.
Malcolm considers the Yugoslavian constitution from 1946 “a copy of the Soviet constitution formed ten years earlier” (ibid. ). Yugoslavia, however, introduced a different political and economic system, which included both capitalist and communist elements[5]. Essentially, Yugoslavian independence from both East and West and its hybrid political and economic system are the reasons why Yugoslavia emerged as a leader of the Non-Aligned Movement. The first constitution limited civil liberties. Although it promulgated religious freedom, Communists started strong anti-religious campaign (Malcolm, Bosna i Hercegovina u Titovoj Jugoslaviji).
Religious freedom had to be formally guaranteed since many Yugoslavians had different religious backgrounds, including Catholicism, Orthodox Christianity and Islam. The constitution was revised in 1952 to include the separation of Communist and state functions and give more power to the federal republics. The revision also laid a solid foundation for workers’ self-management (Library of Congress). The revisions were meant to create a superior socialist system (ibid. ) and reconcile some of the differences among the republics by increasing the power of local governments. The 1963 constitution introduced more civil liberties.
This was the first time Muslims were mentioned as a separate ethnic group. The constitution was supposed to strengthen the centralization, although some articles actually increased decentralization (Library of Congress). This combination was a compromise among political theoreticians, scholars, and politicians from different federal republics who wanted to ensure their republics’ development and equal political representation in the Assembly (ibid. ). Tito remained the president of the country but “renounced his state position as president of the Federal Executive council, a change that further separated party and state functions” (ibid. . The constitution also limited the executive positions to no more than two consecutive four-year terms (ibid. ). The 1974 constitution continued the reforms of the previous decade. More civil liberties were granted, especially in the realm of “individual rights and court procedures” (Library of Congress). It was the first time the term “Muslim” was used to describe national origin. Each federal republic was given a larger autonomy, including the option to separate from the federation at will. Serbian areas with large number of ethnic minorities, Vojvodina and Kosovo, were also awarded a high degree of autonomy.
None of these reforms, however, were meant to undermine Yugoslavian federation. Individuals were prohibited from using their freedoms to distort the existing socialist system. Numerous provisions were added to protect socialist self-management on both political and economic level (ibid. ). Compromise between the federal republics and the country’s government was obvious and necessary in the constitution of 1974 as well as the previous one???the republics were given more autonomy, but the existing socialist system was protected. The socialist system was protected, but only on paper.
Individual republics saw their independence grow through constitutional reforms. Bosnia probably wanted independence more than any other republic. Although the diverse population was itself divided, more than half of the people were ready to separate. Muslims were the leaders of this separatist movement, in part because they felt their rights were not equal to those of other ethnic groups. They saw a prime example of this inequality in the treatment of the term “Muslim”. For other ethnic groups, the term “Muslim” only described an adherent of Islam. Muslims, however, saw it as the name of separate nationality in Bosnia.
In the Kingdom of Yugoslavia, Muslims were considered and expected to side with Serbs and Croats. In Tito’s Yugoslavia, Muslims who did not declare themselves as either Serbs or Croats were considered “nationally undecided”. The number of nationally undecided people in 1948 census in Bosnia was 778,000 (Malcolm, Bosna i Hercegovina u Titovoj Jugoslaviji). After that, the situation had started to slightly improve. In 1953, when Yugoslavian ideology was largely pushed, Muslims had an option to declare themselves as “Yugoslavians, nationally undecided” (ibid. ).
A more realistic improvement happened in 1961 when people could declare themselves as “Muslims, in the ethnic sense” (ibid. ). In the 1963 constitution, the existence of Muslims as a separate ethnic group was implied, although not explicitly stated. The constitution read “Serbs, Croats, and Muslims, joined together in the past…” (ibid. ). “Muslim, in the national sense” option occurred in 1971 census for the first time, while the 1974 constitution officially considered Muslims a separate nationality and not only an ethnic group (ibid. ). The struggle of the Muslim people to be recognized a separate nation in Bosnia continues today.
After the civil war in the nineties, Muslims decided to call themselves Bosniaks, loosening the Islamic connotation of the term Muslim. Their language also became Bosniak instead of Serbo-Croatian, although it was only the name that changed. The struggle to have their name established mirrored the political agenda of Muslim politicians in Yugoslavia. Serbs and Croats wanted break from Austria-Hungary, and Muslims wanted to break from Serbs and Croats. The only problem was that Muslims did not have their own republic. A significant portion of the Bosnia’s population has always been Serbian and Croatian.
It was unrealistic for Muslims to expect Croats, and especially Serbs, to yield and allow them to turn Bosnia into an Islamic country, where Serbs and Croats would be considered minorities. Together with this separatist politics led by Muslims, the crisis of 1980s was to blame for the outbreak of civil war in the nineties. After Tito’s death in1980, Yugoslavia faced a leadership crisis, while at the same time it was shaken by unfavorable political and economic conditions, rising out of “unemployment, prices, and national debt” (Library of Congress). It was only a matter of time before Yugoslavia was going to be in flames.
Bosnia after 1991 Bosnia and Herzegovina declared its sovereignty in October 1991. This declaration was followed by a referendum in which citizens of Bosnia opted to become independent from Yugoslavia. The referendum was supported by a Muslim majority who wanted an independent Islamic country. Ethnic Serbs, on the other hand, wanted to keep their ties with the Serbian government in Belgrade and decided to boycott the referendum. On March 3, 1992, Bosnia officially declared its independence from Yugoslavia. Serbs were unwilling to accept this declaration of independence, while Muslims were not interested in compromises.
Strong religious, ethnic, and political feelings reached a peak, and war erupted. The war was devastating for all three nationalities in Bosnia. The economy of Bosnia was shattered, and the country is still far from achieving its pre-war production level. Many people were killed, including heavy civilian casualties. Initial figures presented by the Bosnian government estimated the number of dead at 200,000. Those figures were later shown to be exaggerated, and research shows that the actual number of dead was about half of the initial estimate (Research Shows Estimates of Bosnian War Death Toll Were Inflated).
The non-government organization, Research and Documentation Center, published the Book of Dead, which contains the names of 97,207 casualties. Roughly sixty percent of casualties were soldiers and forty percent civilians. Muslims suffered the greatest losses (65%), followed by Serbs (25%), and Croats (8%) (ibid. ). Similar results came from the Tibeau and Bijak study in 2004, which estimated the total number of casualties at 102,000[6] (102. 000 Drept I Bosnia). Over a million people were displaced or had to seek refuge in the surrounding countries of Serbia and Croatia.
Many also fled to countries of Western Europe, North America and Australia. Displaced people and refugees were a huge economic problem for Bosnia after the war. Although the situation has improved, some families are still unable to obtain compensation for their property losses. At the beginning of the war, the Serbs were militarily superior to the Muslims and Croats[7]. The Yugoslav National Army in Bosnia practically became Army of the Republic of Srpska overnight. Serbian forces controlled most of the territory in Bosnia and enjoyed the help of neighboring Serbia.
As the war progressed, the Muslim-Croat Federation grew stronger through the help of Western nations, including those of the North Atlantic Treaty Organization (NATO), and Islamic countries such as Saudi Arabia and Iran. By the end of the war, the Federation was stronger than the Serbian part of Bosnia, officially called the Republic of Srpska. Croatian and NATO forces backed the Federation in a 1995 military offensive, helping it conquer large territories controlled by Serbian forces. This offensive was the last large scale military action as the warring parties started the negotiations which ended the war.
The key negotiations were finalized in Dayton, Ohio on November 21, 1995. Although the war-ending agreement was officially signed in Paris on December 14, 1995, the Dayton Peace Accords defined Bosnia as it exists today. The Dayton Agreement maintained Bosnian international boundaries, but it recognized the existence of two entities within Bosnia and Herzegovina: the Federation of Bosnia and Herzegovina (Bosniak-Croat Federation[8]) and the Republic of Srpska (Serbian part of Bosnia). The Federation makes up about 51 percent of the territory, while the remaining 49 percent belongs to Republic of Srpska.
A special status was given to the Brcko District[9], which is virtually a separate entity supervised by the international community. The Dayton Agreement also included a new constitution and established the Office of the High Representative, which was supposed to oversee implementation of the civilian aspects of the peace agreement. Although the new constitution defined Bosnia as a single country, it gave many powers to the entities’ governments. Article III of the Constitution lists the responsibilities of the central government as well as the entity governments.
Among other things, state institutions are responsible for foreign policy, foreign trade policy, monetary policy, and finances of institutions to ensure that international obligations of the country are fulfilled. Two entities, however, reserve the right to establish special parallel relationships with neighboring countries. Bosnian Serbs and Bosnian Croats, who have always had close ties to Serbia and Croatia, respectively, particularly take advantage of this clause. Entities are also allowed to enter into agreements with other countries and international organizations if the Parliamentary Assembly approves it.
Sometimes, the Assembly may decide that its approval is not even necessary. The Parliamentary Assembly is also defined in the Constitution. Article IV states the Parliamentary Assembly is bicameral and consists of the House of Peoples and the House of Representatives. To ensure equal representation, each of the Houses has an equal number of Serbs, Bosniaks, and Croats. Of the fifteen representatives to the House of Peoples, nine (at least three Serbs, three Croats, and three Bosniaks) are needed to reach a quorum. Any twenty one of the forty two representatives are needed to reach a quorum in the House of Representatives.
Among other things, the Parliamentary Assembly has powers to decide “upon the sources and amounts of revenues for the operations of the institutions of Bosnia and Herzegovina and international obligations of Bosnia and Herzegovina” (Article IV, Paragraph 4(b)), and to “approve a budget for the institutions of Bosnia and Herzegovina” (Paragraph 4(c)). Each of the entities also has its own constitution and legislative branch. The government of the Federation of Bosnia and Herzegovina is organized similarly to the government of Bosnia and Herzegovina.
Its bicameral legislature consists of the House of Representatives and the House of Peoples. House of Representatives has 98 seats and members are elected by popular vote. The House of Peoples has 58 seats, where Bosniaks, Croats, and Serbs each have 17 seats. The remaining 7 seats belong to other minorities. The Republic of Srpska, on the other hand, only has the National Assembly. All 83 members are elected by popular vote. Bosnia and Herzegovina does not have one president. As provided in the Constitution (Article V) and approved by the Parliamentary Assembly, the chief of state is the Chairman of the Presidency.
The Presidency consists of three people, one from each ethnic group. The Chairman is elected from the three members of Presidency who rotate every eight months at this position. Both the Federation of Bosnia and Herzegovina and the Republic of Srpska have a President and two Vice Presidents. As noted earlier, each entity has its own government. The entity governments have broad authority, and in reality, rule their respective entities. The judicial branch consists of the Constitutional Court and the State Court. The Constitutional Court has nine members.
Four members are elected by the House of Representatives in the Federation, two are elected by the National Assembly of the Republic of Srpska, and the remaining three members are non-Bosnian citizens selected by the president of the European Court of Human Rights. The State Court has three divisions: Administrative, Appellate and Criminal. The War Crimes Chamber has been in existence since 2005 in addition to these three divisions. Each entity has its Supreme Court as well as lower courts. The Federation has ten cantonal courts and several municipal courts, while Republic of Srpska has five municipal courts.
Much of the power remains with the internationally appointed High Representative for Bosnia. The Office of the High Representative was established to oversee the implementation of the Dayton Agreement and especially its civilian aspects. Although his mandate derives from the Dayton Agreement, the High Representative reports only to the Steering Board of the Peace Implementation Council. In reality, the High Representative has virtually unlimited power. Bosnia has had several High Representatives so far and none has been hesitant to use the power of the office.
They have removed democratically elected officials, including the President of the Republic of Srpska Nikola Poplasen. The role of High Representatives has been very controversial and many people believe some of their actions to be counter-productive (Hayden). The High Representative has had to make decisions that should have been made by Bosnian politicians, but this is largely due to the fact that Bosnia and Herzegovina still does not function well as a unified country. The Dayton Agreement itself is part of the reason because it granted large powers to entities.
Central Bosnian institutions were only granted powers to conduct foreign politics, while entities had the responsibility to run themselves. The result of this arrangement is that Bosnia is practically divided into two countries. The international community has pushed for the creation of a unified Bosnia, but this is probably not the best solution for the country. Different ethnic groups and their political representatives cannot agree on many issues, which is a continuous obstacle to political and economic progress. Instead, High Representative has to act as a mediator and make decisions that affect Bosnian people.
The most fundamental example involves the Bosnian currency, flag, and coat of arms. These symbols do not mean anything to Bosnian people. They were chosen by High Representative for their “neutrality” (Hayden). The flag and the coat of arms have blue and yellow colored elements with white stars. Clearly, this choice represents the international community more than it appeals to any of the three constituent people in Bosnia. Bosnia is a multiethnic country, also called “small Yugoslavia” for that reason. Ethnic composition is as follows: 48 % are Bosniaks, 37. 1 % are Serbs, 14. % are Croats, and minorities constitute less than 1% (CIA World Factbook 2007). Religious composition is similar with 40% Muslim, 31% Orthodox, 15% Roman Catholic, and 14% other (mainly atheist) (ibid. ). Yugoslavia had been divided from inside for decades before it actually fell apart. Although they still suffer economically, people of the ex-Yugoslavian republics seem happier about the new political organization of the Balkan territory. If Bosnia were to be divided into three separate countries, an idea that would be supported by Serbs and Croats, overall economic situation would improve.
The reason is simple: it would be easier for politicians to agree on anything. CHAPTER 3 ECONOMIC BACKGROUND Economic Problems and Systems Economics is a study of choices people make under constraints. All resources are scarce and individuals as well as societies have to make decisions about how to use the available resources. Scarcity of resources imposes constraints on individuals’ and societies’ decisions. Since resources are limited, decision makers must choose among the alternative uses of resources. Thus, every time a decision is made about the use of resources, an alternative use of these resources is given up.
This opportunity cost of decision making is an important factor in economics. Individuals and societies try to minimize the opportunity costs of their decisions. Problems of choice and decision making raise other issues that societies face. Unemployment is one of them. Unemployment lowers the living standard of individuals in societies and can gradually lead to a significant number of the poor. Societies, therefore, try to ensure full employment, but this is not easily done. Problems such as inflation might arise as a product of the attempts to lower unemployment.
Keynesian theory suggests that by increasing (or lowering) collective spending[10], societies could reach optimal levels of “employment without inflation” (Conklin 4). Other theories suggest that unemployment and inflation could be regulated through monetary policies (ibid. ). Sometimes these theories hold to be true, but when they do not pass the test, other theories emerge. Regardless of whether certain economic theories are correct or not, governments are under pressure to make decisions on how to deal with important problems. Equality is another problem the societies face.
Some people might argue that societies should be judged by the way they treat their poorest and that everybody should get the basic necessities of life, even if society has to pay for it. Others might believe that everybody should be awarded according to their productivity, even if it means they get nothing. Regardless of these preferences, governments must make serious decisions about income distribution and the amount of money to be spent on welfare. They also must decide whether basic services such as healthcare and education should be available to everyone, including the ones who are not able to pay for them.
In order to make important decisions, societies and governments choose among alternative preferences to serve as a guide in making these decisions. Equality can serve as one preference. Some view equality through comparable living standards, while others see it as an equal opportunity to improve living standards. Liberty can serve as another guide in making decisions about organizational structure and functionality of societies. Again, some would sacrifice individual liberties for betterment of an entire society, while others would not give up their individual freedoms for anything.
Obviously, different societies will choose according to their particular preferences. Many societies are organized in the form of countries, with appointed governments that make decisions on “who gets what and who does what” (Pejovich, Economic Analysis 5). Societies elect governments to fulfill certain goals set in front of them. In addition to liberty and equality, some of the goals that societies set include efficiency and growth (Conklin 23). As mentioned earlier, all resources are scarce and it is important to use them efficiently. Efficient use of resources can help societies fight shortages and respond to consumers’ preferences.
Inefficient use of resources leads to shortages and lowers living standards. A constant desire for progress moves societies forward. Increases in population and appetites for certain goods and the desire to improve living standard make economic growth an important goal. After the goals are set, the question of how to achieve them arises. Ultimately, governments have the responsibility of choosing the sets of policies that would enable countries to reach their economic goals. Society chooses its “organizational arrangements and processes through which it will make production and consumption decisions” (Conklin 1).
These sets of policies comprise an apparatus called an economic system, which has a task of achieving society’s goals. The two major types of economic systems in the 20th century are capitalism and socialism. In addition to these two systems, some governments combined elements from both systems to create hybrid systems. Although every economic system is very complex, some determinant attributes point out the differences among the systems. Capitalism is famous for its individualism and profit motivation. Socialism was chosen by people who wanted equal income distribution and collectivism.
Most of the resources in capitalist societies are privately owned, while in socialist economies the state owns them and makes production and consumption decisions. Self-management, which was implemented in former Yugoslavia, combined the elements of both capitalism and socialism. In this system, the state owns the resources and means of the production, but the production and consumption decisions are made by the employees of state-owned companies. In reality, all economic systems are mixed. Countries are referred to as capitalist or socialist only because they predominantly use elements from either system.
The United States has a central bank, the Federal Reserve, which is a symbol of government involvement in monetary policies. Other capitalist countries such as Canada have universal healthcare, which is also a socialist idea. Socialist countries have free markets where smaller producers can exchange goods. Economic systems are the combination of different policies that are implemented in order to achieve certain goals. Basic differences among capitalism, socialism, and self-management will be discussed in the following sections. Capitalism As an economic system, capitalism is synonymous with free-market economy.
All production and consumption decisions are made by individuals and with minimum government involvement. The task of government is merely to facilitate the processes and to ensure that certain principles are followed (i. e. , to enforce the laws). Capital and means of production are privately owned. The focus is on individual responsibility and an individual both keeps the profits and carries the losses. Profit and loss outcomes depend on a variety of factors such as prices. Prices help decide who gets what and who does what. They reflect relative scarcities of resources.
If set correctly, prices ensure the efficient use and allocation of resources. In a free-market economy, prices adjust to changes in market conditions automatically and ensure efficiency by shifting production and consumption according to market forces. In order to ensure efficiency and correct allocation of resources, government should not have any control over prices. In certain cases, however, government steps in to protect lower income families. The two major forces in any economic system are demand and supply. Scarcity of resources is an important underlying factor that can be explained through the production possibilities frontier.
These functions help explain the model of capitalism. The interplay of demand and supply functions determines the market price for goods and services. The quantity demanded and the quantity supplied are functions of price. Demand schedule gives an idea about consumers’ preferences. It shows how much of a certain good consumers will want at different prices. Generally, as the price of a good goes down, people want more of it; proportionately, as the price goes up, people want less of it. To use an illustrative example, consider that a car costs $1,000. An average person might want to own several cars in that case.
If a car costs $100,000, however, an average person will probably look for alternative means of transportation. It follows that demand schedule is a downward slopping curve[11]. Supply curve works the opposite way. It reflects producers’ preferences and costs. Based on their profit calculations, producers decide how much of a certain good they will produce at certain prices. Naturally, as the price goes up, more producers will produce more of a particular good; inversely, as the price goes down, fewer producers will produce less of that good. For example, if a cake costs $1,000, a person might want to bake as many cakes as possible.
If a cake costs a penny, however, people might not want to bake and sell cakes at all. Thus, supply is an upward slopping curve[12]. The point where demand and supply curves intersect is called equilibrium. At a certain price, consumers want exactly as much as producers are willing to produce. Hence, the point of intersection gives the equilibrium price and the equilibrium quantity. The market is then said to be in balance, and no shortages or surpluses occur. If the market is not in equilibrium, producers might be willing to produce more than consumers want, thereby creating surplus of goods.
In the opposite case, consumers might want more of a good than producers are willing to supply, resulting in shortage. The equilibrium state results in efficient allocation of resources, and equilibrium price reflects the true scarcity of resources (Leeman 15). The market almost never reaches an actual equilibrium because demand and supply are dynamic forces and their adjustment is not instantaneous. Many factors such as price controls and lack of information have negative impacts on market. In a capitalist economy, however, markets tend to equilibrium.
An important underlying idea is that markets adjust to changes in conditions and moves toward equilibrium, although it does not necessarily reach it. The changes in resource allocation and movements toward the equilibrium state are the “actual economic processes” (Pejovich, Fundamentals of Economics 229), while the equilibrium state itself only depicts a perfect model. Production possibilities frontier (PPF) represents the limits of resource allocation. It shows how many units of a certain good can be produced, and how many units of another good will have to be given up in order for a unit of the first good to be produced.
Since resources are scarce and choices have to be made, the cost of producing a unit of a certain good can be expressed in terms of another good (opportunity cost). The simplest model of PPF includes production of two goods. Assume that producers make only tables and chairs. If they want to increase production of tables, they must lower the production of chairs (under the condition that all available resources are mobilized at all times). Inversely, if they want to increase production of chairs, they must lower production of tables. It follows that PPF is a downward slopping curve.
The PPF curve is actually concave to the origin, if other factors are taken into consideration. Production of a single table might require a set of four chairs to be given up. After a certain point, production reaches its peak and it requires additional resources to be continued (more workers, machinery, etc. ). Thus, production of tables becomes more expensive, and it might require lowering of production of chairs by six or seven for every additional table that is made. Obviously, producers must find out the optimal production levels of both tables and chairs in order to maximize their profits.
Profit-maximization is a driving force of capitalism and it allows for efficient use and allocation of resources. To make profit, producers must have revenues higher than costs of production. Through profit-maximization strategies, producers try to find the “rate of output at which the difference between their total revenue and total cost is the greatest” (Pejovich, Fundamentals of Economics 221). In order to maximize profit, producers must know their marginal cost and marginal revenue. Marginal cost is the cost of producing an additional unit of some good.
Marginal revenue is additional revenue associated with that unit. If marginal revenue is greater than marginal cost, producers will decide to make an additional unit since their total profit would increase (revenue will increase more than cost). On the other hand, if marginal cost is greater than marginal revenue, produces would not go ahead with production because it would decrease their total profit. Thus, producers decide whether to produce more or less of a particular good based on the breaking-point of marginal revenue and marginal cost (MR=MC).
Producers adjust their output in order to maximize total profit. By doing so, they allocate resources to their “higher-valued” uses (ibid. 227). If producers can make larger profit by producing more of a certain good, their opportunity costs are too low and adjustments need to be made so the resources will be allocated properly (i. e. , producers need to increase their production). Comparably, producers can cut their production levels if their profits are too low. Profit-maximization behavior and producers’ self-interest result in efficiency and optimal resource allocation based on consumer preferences (ibid. 27). Efficiency and optimal resource allocation can only be achieved if certain freedoms are granted to individuals. These basic capitalist principles include the right of ownership, the freedom of contract, and limited government (Pejovich, Philosophical and Economic Foundations of Capitalism 1). As mentioned above, the right of ownership implies that an individual bears the cost as well as enjoys the profit of his or her actions. Thus, an individual strives to earn the maximum profit and, perhaps unconsciously, plays a role in optimal allocation of resources by responding to consumers’ preferences.
The freedom of contract allows an individual to make arrangements according to his knowledge and beliefs. Limited government allows individuals to voluntarily exchange goods and services instead of dictating from the top what needs to be done (ibid. ). In essence, “the individual whose behavior is guided by the principles of self-interest, self-responsibility, and self-determination, is the real decision maker in a capitalist society” (ibid. ). Distribution of income in a capitalist society is fairly simple. Nobody is guaranteed anything, and individuals are “awarded according to contribution or productivity” (Leeman 178).
The idea that everybody must work to support themselves and get wealthier provides incentives in a capitalist society that result in responsiveness to market conditions. If it becomes necessary, individuals are prepared to “work, to accumulate capital, to bear risk, and to change jobs and move capital as changes in the economy require” (ibid. 177). Such distribution of income might seem fair from a capitalist point of view. When individuals receive compensation based on “contribution or productivity”, however, it becomes clear that some will be more or less fortunate than the others.
People who favor socialism argue that such distribution of income is not fair and offer alternative means for deciding how much an individual should get. Underlying ideas in socialism are discussed in the following section. Socialism Socialism is an economic system that emphasizes collectivism over individualism. For socialists, every individual matters as a member of the group who contributes to the group’s overall well-being. Ensuring that the less fortunate members of society are taken care of is an essential promise of socialism.
This promise comes from the belief that all men are born equal. It is important to understand that equality assumes equal contribution to society as well as equal sharing of benefits. As Karl Marx points out, every individual should contribute “according to his ability” and receive “according to his needs” (as quoted in Leeman 208). Socialists consider inequality among group members in a capitalist economy to be inevitable. The inequality creates large gaps among social and economic strata and eventually leads to significant levels of poverty.
Government involvement in economic processes is expected to help create a more equal society. In addition to creating inequality, socialists argue that capitalism is inefficient (Pejovich, Philosophical and Economic Foundations of Capitalism 5). Historically, socialist governments, and especially Soviet bloc governments, controlled most of the economic processes in their countries. These controls were supposed to bring both equality and efficiency. It can be argued that socialist politicians and governments failed to implement the core values of Marx’s philosophy.
Misinterpretation and abuse of the core socialist values allowed for the potential problems to escalate beyond control. This view is due to the fact that socialism is considered synonymous with communism, which is considered synonymous with the system instituted by the Communist Party in the Soviet Union that eventually collapsed. The Soviet system was a totalitarian regime that brought everything except equality and efficiency. Nevertheless, the Soviet Union performed the largest socialist experiment and serves as an example model for the analysis of socialism.
The analysis of available data shows that income distribution in the Soviet Union was not more equal than in capitalist countries. The available data from 1970s and 1980s were used to calculate Gini coefficients, which are a measure of income equality distribution. The coefficients range from 0 to 1, where 0 represents perfect equality and 1 represents perfect inequality in money-income distribution. Income distribution in the Soviet Union was comparable to that of countries such as Norway and the United Kingdom (Schroeder 17). Gini coefficient for the Soviet Union was estimated to be 0. 9, while the United States estimate was 0. 32 during the 1970s and 1980s (Pejovich, Philosophical and Economic Foundations of Capitalism 5). As it is shown, income distribution in the Soviet Union was only slightly more equal than that in the United States. In later years, the Soviet system yielded increasingly unequal wealth distribution among the people. Part of the reason was corruption and increasing role of the ruling administrative and political class. In order to fully understand some of the reasons for the failure of socialism, basic socialist institutions need to be investigated.
Among the reasons for the failure of socialist systems are corruption, lack of responsiveness to changing economic conditions and consumer preferences, and fundamentally wrong ideas of price-setting, which lead to erroneous levels of production and allocation. In a socialist society[13], means of production are owned by the government, which also plans the economic processes. Obviously, the role of government is very extensive and includes the decision-making about issues such as production (who does what) and allocation (who gets what). Unlike in the capitalist conomies, decision-makers in socialism are government and party bureaucrats who bear no individual interest in production or allocation. These individuals do not own means of production and therefore, have nothing to lose if the planning turned out to be inadequate. Thus, “socialist system of incentives” is one of the core problems of socialist planning (Schroeder 19). The planning decisions, therefore, do not represent the actual market situation (customer preferences), but rather the preferences of the ruling elite (Pejovich, Fundamentals of Economics 146).
Managers do not enjoy prestige and reap rewards as they make their companies more efficient and competitive. Instead, they are expected to fulfill the plans made by the government officials who, in return, allow them to remain in their managerial positions. This system of preferences prevents a socially efficient allocation of resources (Pejovich, Philosophical and Economic Foundations of Capitalism 6). Resources are not moved to their highest valued uses, but are rather allocated to serve the ruling elite, thereby strengthening its position in society.
Price-setting is another big problem in economic planning. Prices are very important because they contain information about scarcity and valuation of resources as well as consumer preferences. In a free-market economy, prices are determined by the supply and demand. This allows the consumers as well as producers to play a role in price-determination. Socialist governments, on the other hand, set prices themselves according to their preferences and goals. The government price-determination results in constant shortages and surpluses since prices cannot adjust to equilibrium.
The Soviet Union suffered from chronic shortages (rather than surpluses) that manifested themselves in all spheres of society, leading to lower living standards. Chronic shortages and low living standards are also related to inflation. Since prices are fixed, however, inflation is manifested in daily activities rather than through an increase in money-prices (Pejovich, Fundamentals of Economics 151). Consumers, for example, are forced to travel larger distances in order to obtain particular goods or they have to wait in long lines.
They sacrifice their time and perhaps other goods to obtain the ones that are in shortage???the opportunity cost of obtaining goods in shortage increases (ibid. ). In essence, the problems such as bureaucracy and its corruption, insignificant consumer roles and inefficient price-setting arise from a common source, which is economic planning itself. Gosplan, which was the central planning agency in the Soviet Union, had a task to “prepare, modify, and execute the [economic] plan” (Pejovich, Fundamentals of Economics 148).
In reality, Gosplan was controlled by other government agencies such as Politburo (top party leadership) and Council of Ministers (highest executive agency of the government). Gosplan prepared both long-term (five-year plan) and short-term plans that set prices as well as the use of resources. It also set output in various industries and individual firms (Leeman 46). Firms were instructed about the particulars of the plan including what inputs they would get, in what quantities, from whom, and when to expect deliveries (Pejovich, Philosophical and Economic Foundations of Capitalism 8).
The supply process was the essential process of the Soviet economic planning. Gosplan controlled the allocation of about 2,000 inputs, but other ministries and lower level agencies allocated another 38,000 inputs (Pejovich, Fundamentals of Economics 149). Controlling such a large number of inputs centrally was an extremely difficult task, especially in an era where powerful computers of the modern day were not available. Since all the processes in the economic plan were closely related, it was very difficult to correct even minor mistakes in planning.
In addition to difficulty, the changes also required a timely response, which was virtually impossible to achieve in the Soviet bureaucracy. Instead, the Soviet planners turned to constant modification of the economic plan and adjustment of the targeted levels of production, usually lowering them (Pejovich, Philosophical and Economic Foundations of Capitalism 8-9). Communication between a firm’s manager and the planning authorities was essential in this constant modification of the economic plan. As mentioned earlier, a manager’s task was to fulfill the plan rather than make his firm efficient and competitive.
The above shortcomings of socialism can be divided into two groups: root causes of the problems and manifestations of these problems. Among the root causes are faulty valuation of the factors of production and of their products (Schroeder 18) including price-setting and ineffective system of incentives. Through price-setting, the government disregards the importance of producers’ and consumers’ preferences, which leads to inefficient allocation of resources and production. When the planners do not personally carry the losses and enjoy the profits, they do not have means to objectively assess the risk and reward balance (ibid. 3) of their actions. The main causes of socialist problems manifest themselves through poor productivity, slower growth process, low living standards, and unequal income distribution (ibid. 15-17), although these are the things that socialists wanted to improve in comparison with capitalism. Self-Management Capitalism and socialism were the major economic systems in the twentieth century. A number of countries and scholars, however, tried to come up with alternative systems that would yield better results than these major systems.
Among other things, they recognized the problems of inequality among social classes and income distribution in capitalist countries and inefficiency and low living standards in socialist countries. As a result of this constant struggle to find the optimal economic system, alternative systems such as market socialism and self-management were introduced. Yugoslavia introduced a unique form of a socialist economic system, self-management, making it the largest socialist experiment at the time. Yugoslavian self-management came as a result of the political and economic struggle of the Yugoslavs.
Before the World War II, Yugoslavia was a backward, agrarian nation. Forms of capitalism had been introduced in the Kingdom of Yugoslavia, but with the lack of investment and entrepreneurship on behalf of most people, it did not go far. Most Yugoslavs felt exploited by its own bourgeoisie, which they did not find any more appealing than the foreigners who ruled the country in the prior centuries[14]. When the Communists seized the power during the World War II, the change was welcomed by most ordinary people. Shortly after the war, the Communist Party reorganized the state and turned into a socialist country modeled on the Soviet Union.
This introduction of the state socialism was an expected move, bearing in mind that the Soviet Union was the only socialist country that could serve as a model and that the Communist Party gained the power in Yugoslavia. The new constitution was almost an exact copy of the Soviet constitution. In 1946, all the property of “the enemy and of collaborators” was transferred to the “people’s liberation committees” (Seibel 19). This process of the change of ownership was called nationalization, and marked the beginning of the Yugoslavian transformation, which gave power to its people after centuries of exploitation.
Although the new system gave more power to the people, many felt unwilling to substitute one tyrant for another (i. e. , its own government). The Yugoslavians were not interested in living in the Soviet Union or any other country that resembled it. The Yugoslavian politicians largely looked upon the Soviet Union for solutions of some of the problems, but were never interested in becoming a part of the Soviet bloc and completely model the country according to their standards[15]. The constitution of 1946 and immediate organization of the state were modeled upon the Soviet Union for the lack of a better solution.
When it became obvious that Yugoslavia was not going to yield in front of the Soviet Union, certain measures were taken by both Yugoslavia and the Soviet Union. On June 20, 1948, Stalin reacted and expelled Yugoslavia from Cominform, Information Bureau of Communist Parties, accusing it of “betraying socialism”, “counter-revolution” and the similar (as quoted in Seibel 25). Yugoslavia faced a strong economic and political blockade by the Eastern European countries. It also did not have any relations with the capitalist West. Isolated Yugoslavia was forced to fight its own way out of this unfavorable situation.
Afraid of the possible aggression by the Soviets, Yugoslavia spent about 20 percent of the national income for military purposes during those years (ibid. ). The military conflict never occurred, but Yugoslavia was forced to develop independently from the rest of the world. The development of political situation laid a solid foundation for the development of self-management. After the breakout with the Soviets, it was obvious that Yugoslavia had to find its own way out of the crisis and find alternative economic and political system that would allow it to develop.
Officially, self-management was introduced in Yugoslavia on June 27, 1950 (Seibel 31, Pesakovic 7). Self-management is a “system of vesting authority in the producers, i. e. the workers, who run their organization through councils elected by and responsible to the workers” (Seibel 7). When faced with enormous problems, such as isolation that Yugoslavia was facing, countries might decide to implement “self-management as the only method of keeping an economy running” (ibid. ). In Yugoslavia, additionally, self-management sprang from the belief that workers should be iven power to the greatest extent. Self-management means that companies are run from within, by its workers. In smaller companies, all workers take part in decision-making process. In large companies, however, the workers would choose among themselves tho