8. Multi-dimensional analysis of development in Bosnia and Herzegovina

This chapter of the MDR of the Western Balkans in Bosnia and Herzegovina identifies the key capabilities and most pressing constraints in Bosnia and Herzegovina by linking economic, social, environmental and institutional objectives. The assessment is organised around five thematic sections based on the five pillars of the 2030 Agenda: People, Prosperity, Partnerships and financing, Peace and institutions, and Planet. Whenever relevant, Bosnia and Herzegovina is compared with a set of benchmark economies in the region (Albania, Kosovo, North Macedonia, Montenegro and Serbia), the OECD (Costa Rica, Czech Republic, Greece, Slovak Republic, Slovenia and Turkey), non-OECD economies in the European Union (Croatia and Romania) and non-OECD economies in other regions (Kazakhstan, Morocco, Philippines and Uruguay). It includes regional averages for the Western Balkans and for the OECD and European Union.

The People pillar of the 2030 Agenda for Sustainable Development places quality of life centre stage, focusing on the international community’s commitment to guaranteeing the fulfilment of all human beings’ potential in terms of equality, dignity and health. In the past decades, Bosnia and Herzegovina has improved overall living standards.

However, there is still a long way to go to achieve a society that provides opportunities for all. There are not enough formal jobs, and many do not provide enough income to escape poverty. Many groups, including young people, women, ethnic minorities and those living in rural areas are left behind in terms of economic opportunities and political voice. The country is fragmented in many ways: 1) a large public sector creates a dual labour market, 2) access to pensions, social assistance and health insurance favours the employed and war veterans rather than the least well off; and 3) complex decentralised education and social protection systems (including health) create inefficiencies and high administrative costs rather than good outcomes for citizens. Going forward, especially given the financial crunch COVID-19 will present, Bosnia and Herzegovina needs to improve the equity and financial sustainability of social protection. The People section identifies six major bottlenecks to well-being (Table 8.1).

Bosnia and Herzegovina has seen a rise in GDP per capita and household spending over the past decades, yet poverty and inequalities remain relatively high. About 17% of people live in poverty (based on the national poverty line) (Figure 8.1 – Panel A). While this is lower than in North Macedonia (21.9% in 2018), for example, it is relatively high compared to the OECD average (12%) (OECD, 2020[1]). In 2015, 15 in 100 people could not afford basic essentials, such as fuel for heating and cooking, health care or transport. Inequality is also very high (Figure 8.1 – Panel B). Among the key reasons are the political influence in gatekeeping access to stable, well-paid public-sector employment and the political influence along ethnic lines of the social policy administration, which controls access to statuary-based, non-contributory benefits (Obradović and Filic, 2019[2]).

Poverty has a disproportionally large impact on rural populations, the low-educated and children. People living in rural areas are twice as likely as city dwellers to be poor (19% vs. 9%). People with no or only primary education are also twice as likely to be poor as those with secondary education. Considering poverty is higher in large families, there is a significant risk of intergenerational poverty transfer, with rural families more affected (Brookings Institute, 2015[3]). Almost all children aged 0 to 4 (98.1%) are deprived in at least one dimension of multi-dimensional poverty,1 and children in rural areas are more likely to be deprived in terms of early childhood education (ECE) facilities and access to the Internet and sanitation (UNICEF, 2015[4]).

Bosnia and Herzegovina’s sizeable Roma minority continues to experience worse well-being outcomes than the general population. At between 25 000 and 50 000 people, according to the latest estimates, Roma are the largest minority group in Bosnia and Herzegovina. Key indicators show that Roma children are three times more likely to live in poverty, five times more likely to be malnourished and two times more likely to lag behind in growth than their peers. Their primary school enrolment rate is one-third lower than the non-Roma rate, and their immunisation rate stands at 4%, compared to 68% for the general population. A European Court of Human Rights report found that ethnic discrimination against Roma is evident in the provision of services like housing, health care, education and employment (UNICEF, 2020[8]).

Lesbian, gay, bisexual, transgender and intersex (LGBTI) communities face continued discrimination and harassment. Bosnia and Herzegovina’s society remains rather conservative and negative in its attitudes towards LGBTI people. Public opinion polls show that they, along with Roma, are the least-accepted minority group in the country (ERA – LGBTI Equal Rights Association for Western Balkans and Turkey, 2020[9]). According to a 2015 population survey (which did not include intersex people), 44% of citizens believed homosexuality is a sickness and would try to help their child find a cure if they found out he or she was not heterosexual. The next most popular answer was to stop communicating with their child (11%). The study found that 15% of LGBTI people had experienced physical violence because of their sexual orientation and/or gender identity, and that 72% had experienced verbal abuse and harassment (ERA – LGBTI Equal Rights Association for Western Balkans and Turkey, 2020[9]). In September 2019, under tight security, Sarajevo held its first Pride march, the last European capital to do so. While inflammatory reporting has been stopped in all major print, electronic and online media, news about LGBTI people in Bosnia and Herzegovina remains rare compared to stories about LGBTI people from abroad (UNDP/USAID, 2017[10]).

Existing legal provisions to protect LGBTI rights need to be strengthened and implemented. The LGBTI activist movement in Bosnia and Herzegovina began in 2004, making it the youngest activist movement in the Balkans. LGBTI activism over the past few years has resulted in significant improvements in legal frameworks. For instance, a 2015 amendment to the Law on Protection from Discrimination bans discrimination on the basis of sex characteristics, sexual orientation or gender identity. However, information on discrimination and hate speech is not being systematically collected or acted upon: the Ministry of Human Rights and Refugees of Bosnia and Herzegovina has not established a database, a task it was meant to complete within 90 days of the passing of the Law on Prohibition of Discrimination in 2009 (ERA – LGBTI Equal Rights Association for Western Balkans and Turkey, 2020[9]). To date, the number of reported cases of LGBTI human rights violations is extremely low, suggesting widespread under-reporting, and it can take up to three years for a case to be ruled on in the courts. Bosnia and Herzegovina does not currently recognise same-sex marriage or same-sex adoption. The Federation of Bosnia and Herzegovina appointed a working group in early 2020 to draft legislation on same-sex couples’ rights, taking the first tentative step towards addressing the issue (Krupalija, 2020[11]).

Employment performance in Bosnia and Herzegovina remains weak. Bosnia and Herzegovina’s employment rate (37.8% in 2019) trails behind the Western Balkans (42.7%) and is about 20 percentage points below the OECD average (57.7%) (Figure 8.2 – Panel A). The unemployment rate (15.7% in 2019) is somewhat higher than the regional average and the second highest among benchmark economies (Figure 8.2 – Panel B). Bosnia and Herzegovina has one of the highest incidences of long-term unemployment. In 2018, 82.4% of the unemployed were without a job for more than a year, which is significantly higher than the Western Balkan average (67.4%) (World Bank/Vienna Institute for International Economic Studies, 2020[12]).

Youth integration into the labour market remains an important challenge. Youth unemployment rates are among the highest in the Western Balkans and are more than double the OECD average. About one in five people is without employment or a training activity (Figure 8.3). Poor labour market integration can be detrimental to the youth population, as young people risk losing motivation and skills or migrate abroad for better employment opportunities. According to Gallup data, approximately 57% of young people in Bosnia and Herzegovina expressed a desire to emigrate, the highest rate in the region (World Bank, 2020[14]).

In the medium to long term, Bosnia and Herzegovina is at risk of losing and underutilising its human capital due to migration. Emigration abroad in search of better employment opportunities, especially by the young, may negatively affect the economy’s development due to loss of human capital. Bosnia and Herzegovina has the highest outward migration among benchmark economies (Figure 8.4). Some 30% of those who migrated in 2018 were aged 18 to 35. People of all education levels are migrating, creating significant skills shortages, including of technical skills (e.g. construction, mechanical and electrical), which are an important skills asset for any emerging country. Many migrate immediately after university. An estimated one in six doctors trained in Bosnia and Herzegovina is now working in Germany (World Bank, 2020[14]). Reasons to emigrate include unemployment, which is the greatest concern in Bosnia and Herzegovina, overall poor living conditions, weak health care and education, and environmental concerns, particularly air pollution. At the same time, the wage differential with the European Union constitutes a strong pull factor.

Migration, together with other factors (e.g. low fertility rates), is expected to create significant demographic pressures in Bosnia and Herzegovina. The working-age population is projected to shrink, from 67.6% in 2020 to 57.9% in 2050 (Figure 8.5). Bosnia and Herzegovina has among the lowest fertility rates in the world. The average rate of births per woman in 2018 was 1.3, compared to the OECD average at 1.7 (World Bank, 2020[7]).

Women continue to be excluded from the labour market. Female labour market participation stood at 35.4% in 2019, 4.6 percentage points below the (also low) Western Balkan average of 40%. Women’s participation is about 23 percentage points below that of men (Figure 8.6) and much lower among poor households: 15% of women from the bottom 40% of households engage in formal work, compared to 42% of their male counterparts (Brookings Institute, 2015[3]). It is estimated that women lose approximately 35 years of productive formal employment over their lifetimes. The under-representation of women in the labour market in the context of a social protection system that relies primarily on social insurance linked to employment, as described later in this section, reinforces the male breadwinner model and women’s dependent status within the family. Women’s wages are approximately 9% lower than men’s, although the gap is less than in the average OECD country (13%) (OECD, 2020[1]; World Bank, 2020[14]).

Myriad institutional factors and discriminatory social norms explain women’s lack of access to economic opportunities. These include women’s unpaid work responsibilities, discrimination in the workplace and traditional family relations. Indeed, virtually no men report staying home to take care of their families (Agency for Statistics of Bosnia and Herzegovina, 2017[16]). Lack of access to affordable, quality long-term care arrangements or childcare is a major issue: children attend preschool for up to three hours per day, similar to the first two grades of primary education. At the same time, while costs vary across Bosnia and Herzegovina, childcare and preschool is generally expensive. For example, in the Federation of Bosnia and Herzegovina canton of Sarajevo, public kindergarten costs about EUR 82 per month, which is around 15% of the 2017 average monthly net salary of around EUR 538 (Obradović, Jusić and Oruč, 2019[17]). This is a significant constraint for many people earning below-average wages.

Women are under-represented in political life, particularly in high-ranking positions and elected offices. Despite a 40% gender quota for election lists, only 21% of national parliamentary seats and 22% of ministerial positions in Bosnia and Herzegovina are currently occupied by women (World Bank, 2020[7]). This is much lower than in OECD countries, where 30.1% of member of parliament posts and 31% of minister posts are held by women, and out of line with the trend in the rest of the Western Balkans. Albania, Kosovo, North Macedonia and Serbia outperform OECD countries in terms of female representation in national parliament (OECD, 2020[1]). Low female representation is especially prevalent in local government: in the last local elections in 2016, only six women were elected local mayors out of 143 municipalities (WFD, 2019[18]). The only exception is the judiciary, where gender balance is almost attained among judges and attorneys, although women are still under-represented as heads of courts or attorney offices (World Bank et al., 2015[19]).

According to the OECD Social Institutions and Gender Index, discrimination against women in social institutions overall in Bosnia and Herzegovina is “low”, but there is room for improvement when it comes to access to productive and financial resources (OECD, 2019[20]). While, from a legal perspective, men and women are equally entitled to owning assets, local customs and traditions often favour male ownership, and men represent over 70% of landowners in the country. There are no customary, religious or traditional laws that discriminate against women's legal right to obtain credit, however, in practice, women rarely own the property or assets required to provide as collateral (World Bank et al., 2015[19]).

Informal employment in Bosnia and Herzegovina is high and incentivised by relatively high labour costs. Informal employment rates are estimated at are around 23.1% of total employment in 2019 (ILO, 2020[21]). Informality is particularly high among young workers and those with lower education (Bartlett and Oruč, 2018[22]). Relatively high labour costs, including social insurance contributions and taxes, are partly to blame: social insurance contributions amount to about 41.5% of the gross wages in the Federation of Bosnia and Herzegovina and about 33% in Republika Srpska. The tax burden on labour in Bosnia and Herzegovina is more in line with advanced EU countries than in many emerging economies (IMF, 2015[23]). It is regressive for those earning incomes below 50% of the average gross wage, whereas the effective tax burden falls as incomes increase (Atoyan and Rahman, 2017[24]). Consequently, high labour costs may deter low-wage earners from entering the formal labour market, considering that the majority of private-sector employees work for the minimum salary. In 2014, about 55% of people in Republika Srpska reported earning the minimum monthly salary or below (Đukić and Obradović, 2019[25]). Free health care for anyone registered as unemployed creates additional incentives for informal employment (World Bank, 2020[14]).

Being employed provides no assurance of improved well-being in Bosnia and Herzegovina. The overall in-work poverty rate was 24.5% in 2015, significantly higher than in other benchmark economies (Figure 8.7). Such a high rate suggests that many people work but do not receive a salary.2 Rates are even worse for the self-employed (36%) and people who work part time (39.9%), significantly higher than for employees and full-time workers (21.5% and 19.4% in 2015, respectively) (Obradović, Jusić and Oruč, 2019[17]).

Labour market segmentation is preventing quality job creation and may increase the likelihood of informality. Considering the two major entities’ differing constitutional competences for labour and social policy legislation, Bosnia and Herzegovina has in fact two labour markets. There is further labour market segmentation between the public and private sectors. Bosnia and Herzegovina has one of the large public sectors in the region. In 2013, the government spent over 12% of GDP on public-sector wages (including wages for the public administration, elected officials, public education, police and the army and excluding wages for SOEs) (IMF, 2015[23]). Employment in the public sector, including government administration and SOEs, entails significant benefits, such as higher wages, which are rare in the private sector (Obradović, Jusić and Oruč, 2019[17]). In the private sector many work precarious working conditions, including long working hours, small and delayed salaries and fear of job loss. As a result, the public sector has been significantly more attractive than the private sector, which acts as a drag on private-sector development. In a recent survey, about 40% of respondents would prefer to work in the public sector vs. 14% who would prefer to work for private companies (IMF, 2015[23]).

Activation policies are currently too limited and underfunded to connect jobseekers with quality work or to boost their skills. Considering the structural employment challenges, including long-term unemployment and skills mismatches, the absence of adequate and well-targeted activation policies can be an important obstacle to improving people’s employability (Obradović, Jusić and Oruč, 2019[17]). Among the active labour market programmes (ALMPs) for unemployed, training programmes represent a very small share (10% in 2015), and the focus is on employment subsidies to companies (71% in 2015). At the same time, the overall coverage of ALMPs is very low: in 2014, an estimated 2.4% of unemployed people participated in an ALMP. Only 18% of ALMP participants undertook training programmes in 2015. Low spending further undermines activation policies. Bosnia and Herzegovina spent about 0.15% of GDP on ALMPs in 2015 (Numanović, 2016[27]). In comparison, benchmark countries such as Slovenia and Croatia spent 0.61% and 0.71% in 2018, respectively (European Commission, 2020[28]).

The education system in Bosnia and Herzegovina suffers from low access and poor education outcomes. The country has high structural unemployment, which affects those with low and high education alike. Education enrolment rates are comparatively low. First, ECE enrolment is too low for the future labour force to develop adequate cognitive and socioemotional skills and affects education outcomes at the secondary and tertiary levels. The net ECE enrolment rate in 2018 was 14% (Agency for Statistics of Bosnia and Herzegovina, 2020[5]), compared to the OECD and EU averages of 95.3% (Eurostat, 2020[26]). The ECE enrolment was 18.3% in Republika Srpska and less than 3% in the Federation of Bosnia and Herzegovina in 2015 (OECD, 2018[29]). Net enrolment rates at the primary and secondary levels are also rather low given Bosnia and Herzegovina’s income level (83.7.% and 75.1% in 2018, respectively). The tertiary level enrolment rate is also relatively low (23% in 2018) (Agency for Statistics of Bosnia and Herzegovina, 2020[5]). Education outcomes are inadequate. Considering Bosnia and Herzegovina’s level of development, student performance in the OECD Programme for International Student Assessment (PISA) shows that Bosnia and Herzegovina is lagging behind regional and other economies (Figure 8.8). The share of students who achieved minimum proficiency ranged from 42% to 46%, depending on the subject. This is considerably below the OECD averages of between 76% and 78%. There is also a lack of equity in education. The achievement gap between students from Bosnia and Herzegovina’s top and bottom income groups is equivalent to almost 1.5 years of schooling (OECD, 2019[30]).

Many citizens lack skills in demand in the labour market. In a recent survey, about 30% of respondents said that the skills they acquired during their education did not meet the needs of their jobs (see the Prosperity section in this chapter). Some 58% of firms believe that the education system does not impart the skills needed in the current labour market (World Bank, 2017[32]). Broader measures of skills in the labour force also show that Bosnia and Herzegovina is lagging behind other economies (Figure 8.9).

Institutional deficiencies and inadequate use of resources have a major impact on education quality. The complex and decentralised education system in Bosnia and Herzegovina has high administrative costs. While public spending per student in primary and secondary education is high (around 25% to 30% of per capita GDP) compared to peer economies, the outcomes are low given the spending (World Bank, 2020[14]). At the same time, while the number of students has declined in recent years, the number of teachers has increased, indicating a very small and favourable pupil/teacher ratio (Figure 8.10). Because of this oversupply, pre-university teacher salaries account for approximately 90% of education spending, much higher than the 78% to 80% in EU and OECD countries. In addition, a high proportion of salary spending goes to non-teaching staff, who account for one-third of primary school staff, higher than in better-performing education systems. The large salary expenditures mean that there are few resources to invest in quality facilities, teaching materials and teacher training (World Bank, 2020[14]). As an example, Bosnia and Herzegovina has the lowest share of vocational teachers participating in any kind of training, except for continuing professional development at businesses, in which Bosnia and Herzegovina only trails behind Turkey (Table 8.2). Furthermore, the lack of comparable data on learning outcomes and the absence of a state-wide student assessment system to measure these outcomes hinder regular performance monitoring (Obradović, Jusić and Oruč, 2019[17]).

Bosnia and Herzegovina’s overall key health outcomes are good for its income level, although they are significantly worse for minority populations. In 2017, life expectancy at birth (77.4 years) and under age 5 child and maternal mortality rates (5.9 per 1 000 and 10 per 100 000 live births, respectively) were better than regional averages (World Bank, 2020[7]). The latest available data (2012) on child health showed that mortality rates for under age 5 Roma children were much higher (24 per 1 000 live births) and that one-quarter of Roma children were stunted, while 8% were seriously lagging behind the rest of the population in growth (UNICEF, 2020[8]).

As in other economies in the region and in the OECD, an ageing population and unhealthy lifestyles translate into a growing burden of NCDs. Cardiovascular diseases and lung and colorectal cancers are the leading causes of premature death, and deaths from diabetes grew by over 20% in 2007-17 (IHME, 2020[35]). Lack of exercise, tobacco consumption and a traditional diet based on meat and carbohydrates are the main risk factors. In 2019, 9% of the population had diabetes, and 24% of men and 29% of women were obese, compared to 6.4% and 19%, respectively, in the average OECD country (OECD, 2020[1]; OECD, 2017[36]; WHO, 2013[37]). Over one-third of Bosnia and Herzegovina’s adult population is classified as “insufficiently physically active” (WHO, 2013[37]). Levels of exposure to harmful outdoor air pollution are among the highest in Europe (see the Planet section in this chapter), and although tobacco consumption has decreased slightly over the past decade, Bosnia and Herzegovina remains among the world's ten countries with the highest smoking rates: almost 40% of adults smoked regularly in 2016 (World Bank, 2020[7]). The country can do more to discourage tobacco use. Smoking in public places is not currently banned, and retail cigarette prices (EUR 2.66 per pack in 2017) are among the lowest in Europe (Tobbacotaxation, 2018[38]).

The preventative care component of Bosnia and Herzegovina’s primary healthcare sector needs to be strengthened. As a first step, a 2013-19 project funded by the Swiss Agency for Development and Cooperation led to the endorsement of two action plans for the prevention and control of NCDs and included a nationwide programme to improve the quality of and access to standardised cardiovascular risk assessment and management services in primary health care and family medicine (WHO, 2019[39]).

The organisation of health care is fragmented and costly and delivers subpar outcomes compared to economies that spend less. The entities have independent health protection systems: while public health care in Republika Srpska is centralised, each canton in the Federation of Bosnia and Herzegovina has its own health insurance fund and corresponding cantonal ministry of health. A total of 13 subsystems at the entity and canton levels leads to duplication and higher co-ordination costs and prevents economies of scale in healthcare management. Partly due to administrative costs, Bosnia and Herzegovina allocates a very high proportion of resources to health care: per capita expenditure is above the regional average, and expenditure in terms of GDP is the highest among neighbouring economies and close to the EU average (10%) (Figure 8.11). Yet, 78% of the population considers the quality of health care to be low or very low. In a 2016 multi-country survey, 48% of respondents were satisfied with the healthcare system, the lowest percentage in the region (World Bank, 2020[14]).

Healthcare governance challenges need to be addressed to increase efficiency and performance. Unclear oversight of expenditures, absence of medical centre performance assessments and accountability, and lack of merit-based hiring and overstaffing in nonmedical functions are some of the key issues in the public health sector (World Bank, 2020[14]). As in neighbouring economies, doctor and nurses are emigrating abroad in search of better working conditions, and even though there are more medical staff now compared to the end of the war, Bosnia and Herzegovina has the lowest number of doctors per capita in the region after Albania (Figure 8.12). There is no special legal framework to purchase medication, which instead falls under general public procurement regulations. This has led to frequent delays in the supply of essential drugs. Informal payments for health care are frequent, as they are in the rest of the Western Balkans (Mejsner and Karlsson, 2017[40]). A small but growing number of patients are turning to comparatively more efficient and available private-sector clinics and pharmacies, especially when it comes to dentistry, diagnostics, over-the-counter medicines and therapeutic and specialist services: 2.7% of health expenditure was spent at private health providers in 2016, higher than the EU average of 2.2% (Friedrich Ebert Stiftung, 2017[41]).

Reliance on payroll contributions threatens the financial sustainability of Bosnia and Herzegovina’s public healthcare system. In general, health care in both the Federation of Bosnia and Herzegovina and Republika Srpska are financed by a comprehensive system of social security contributions (making up 91% and 87% of revenue, respectively), participation fees for certain services and government transfers (see the Partnership and financing section in this chapter). This makes the systems highly dependent on the performance of the labour market, which is characterised by informality, rising emigration and grim prospects from demographic factors and the likely economic fallout of the COVID-19 pandemic. Although the total number of people registered as employed has risen incrementally, health expenditure has consistently exceeded revenues, and debt to suppliers and tax authorities runs into the hundreds of millions (EUR) (Obradović, Jusić and Oruč, 2019[17]). The country’s current arrangement with the IMF requires entities to implement a budget allocation ceiling for social expenditure. There is thus limited space for reform towards greater dependence on government budget financing in the medium term, an issue that also applies to social protection, as described below.

Access to health care under the current health insurance system is unequal, costly for patients and disincentivises formal employment. In 2018, an estimated 20% of Republika Srpska inhabitants were without health insurance, either because they were not registered (14% – an issue especially among Roma), or because employers did not pay their health insurance contributions on time (6%) (ESPN, 2019[44]). Some 90% of the population in the Federation of Bosnia and Herzegovina was registered as insured in 2017, but this estimation does not include people with unpaid employer contributions. Coverage varies significantly across cantons in the Federation of Bosnia and Herzegovina, with as few as 63.7% of people registered in Canton 10 (Martić and Đukić, 2017[45]). Since each canton operates its own insurance system, which is in turn dependent on local labour market conditions, services covered also vary widely (Friedrich Ebert Stiftung, 2017[41]; ESPN, 2019[44]). For instance, average total spending per health insurance fund member in the Federation of Bosnia and Herzegovina ranged from EUR 232 in the Central Bosnia canton to EUR 448 in the Sarajevo canton in 2015 (Friedrich Ebert Stiftung, 2017[41]). The rate of out-of-pocket payments (29% of total health expenditure) is lower than the regional average but still double the rate in EU and OECD countries (World Bank, 2020[7]). Private-sector providers are not generally covered under public health insurance and need to be paid in full by patients. Health care is provided free to people registered as unemployed (18.6% of all insured in the Federation of Bosnia and Herzegovina and 22% in Republika Srpska) and their family members but not to the working poor, including people in low paying jobs and people working under temporary contracts. This creates incentives for informal work, and the current practice of stamping insurance cards monthly has public employment bureaux spending unnecessary time processing unemployment benefits rather than connecting jobseekers with employers (World Bank, 2020[14]).

As with health care, social insurance spending is comparatively high, particularly for pensions. In 2017, the country’s social protection spending (including health) constituted 17.8% of GDP, the second highest level in the Western Balkans after Serbia, although still lower than the EU average of 26.8% (Eurostat, 2018[46]). More than two-thirds is allocated to social insurance schemes, which spending increased by four percentage points to 76% of total expenditure in 2011-16. Pension and disability insurance constituted approximately 10% of GDP in the two entities in 2017, higher than the OECD average of 8% (ESPN, 2019[44]).

Pensions in Bosnia and Herzegovina are overly reliant on social contributions. Both entities’ pension funds function on the pay-as-you-go principle and are largely financed by social security contributions (87% in the Federation of Bosnia and Herzegovina and 99% in Republika Srpska in 2018) (ESPN, 2019[44]). This is unusual: no EU country has such a high share of social security contribution financing, and almost all lowered their relative share of social contribution financing in the last decade in the context of demographic pressures and post-financial crisis economic recovery efforts. Given the low formal labour market participation, which is in turn exacerbated by the relatively high social contributions,3 each contributor currently supports more than 1.13 pensioners, one of the highest burdens per contributor in Europe (Efendic, Pasovic and Efendic, 2018[47]; World Bank, 2020[14]).

Sustainable pension financing will be a challenge. A steady rise in social insurance fund revenues through more formal jobs in recent years was not sufficient to offset higher expenditure, and both funds were forced to take loans to pay out pensions (Figure 8.13). Given expected negative labour market trends, especially in the context of the COVID-19 pandemic, the entities will need to explore alternative and more sustainable financing models. Both governments have recently transferred or announced the transfer of pension financing to their treasury systems to guarantee payments. In 2018, the government of the Federation of Bosnia and Herzegovina also introduced a decrease of social contributions and a progressive tax rate of 13% (up from 10%) for all salaries above BAM 800 (EUR 410), to be implemented in 2020. It is not yet clear how the resulting drop in social insurance funds will be offset in the short term (ESPN, 2019[48]).

The current pension system cannot be considered fair and excludes informal workers. Although pension benefits are not particularly generous (net replacement rates were just above 40% of net wages, compared to almost 60% in OECD countries), high spending is largely the result of early retirements and war veterans receiving disability or special pensions (OECD, 2017[50]; Bošnjak, 2016[51]). For instance, in 2017, in the Federation of Bosnia and Herzegovina, the government’s bill for early retirement of 1992-95 conflict army veterans was BAM 122 million (EUR 65.5 million) (ESPN, 2019[49]), leading to a situation where one-third of all pensioners in Bosnia and Herzegovina are younger than age 65, while approximately 38% of elderly adults, mostly informal workers, collect no state pension at all (World Bank, 2020[14]). Going forward, the entity governments could introduce incentives for later retirement and encourage voluntary pension schemes for informal workers. A relevant pension reform law exists in Republika Srpska, and the first steps towards a voluntary pension fund were taken in 2017.

Social assistance in Bosnia and Herzegovina is dominated by categorical benefits for war veterans rather than targeting the least well off. Overall expenditures for non-contributory social assistance represented 4% of GDP in 2016, but means-tested benefits only accounted for 2.7% of all social protection benefits in 2017, compared to 11.8% in the European Union (Eurostat, 2020[52]; ESPN, 2019[44]). Approximately 60% of social assistance spending is allocated to various categories of war veterans, regardless of need: over 20% of overall assistance for veterans is given to the 40% of beneficiaries with the highest incomes. On the other hand, less than half the bottom quintile of the rest of the population receives social assistance, and social assistance reduces poverty only by an estimated 4.6 percentage points, well below the average effect of more than 10 percentage points in other upper-middle income countries (World Bank, 2020[14]). While a shift towards means-tested universal benefits is needed to cover those most in need, under IMF conditionality, more resources can only be allocated to the needy if war-related benefits are reduced.

Like health care, social assistance is fragmented and poorly co-ordinated. A decentralised system of more than 20 central and local ministries with separate administrative systems in each entity has contributed to extensive regulatory inefficiencies and significant inequalities among entities and cantons (see the Peace and institutions section in this chapter) (World Bank, 2020[14]). For instance, cantons in the Federation of Bosnia and Herzegovina apply different laws when determining eligibility for financial assistance, including diverging treatment of household income components and differing percentage increases in assistance for additional or incapacitated household members (Delalić et al., 2020[53]). Harmonising legislation and standardising qualification criteria at the entity level at least would lead to equal treatment of citizens, regardless of their place of residence.

The Prosperity pillar of the 2030 Agenda for Sustainable Development calls for broad-based economic growth shared by all people. Over the past decade, Bosnia and Herzegovina has made progress in building a more competitive, export-oriented market economy. The economy’s growth has become more balanced, supported by external demand and domestic consumption, and macroeconomic and financial-sector stability have been restored.

Despite this progress, Bosnia and Herzegovina still faces considerable challenges in achieving the prosperity-related goals of the 2030 Agenda. Private-sector investment, including FDI, is very low, productivity growth is weak, and the unemployment rate remains one of the highest in Europe and the world. These outcomes reflect a number of constraints: a challenging business climate, compounded by a fragmented internal market and unfair competition from the sizable SOE and informal sectors; a significant infrastructure gap that undermines trade and GVC integration; and a skills gap and weak innovation and technology adoption that limit the potential for economic upgrading (Table 8.3).

Prior to the global financial crisis, the growth of Bosnia and Herzegovina’s economy was strong but unbalanced. In the run-up to the crisis, between 2005 and 2008, annual GDP averaged 6% (Figure 8.14 – Panel A). Growth was mainly consumption driven (Figure 8.14 – Panel B), fuelled by credit growth from the newly privatised financial sector (up from 26% to 53% of GDP between 2001 and 2008) (World Bank, 2020[7]) and high and rising remittances (up from USD 1.4 billion in 2002 to USD 2.8 billion in 2008, averaging 18% of GDP over the period) (see the Partnerships and financing section in this chapter) (World Bank, 2020[7]). However, this growth model, accompanied by loose fiscal and monetary policy, resulted in the build-up of significant imbalances, including high current account deficit (Figure 8.14 – Panel C), high inflation (Figure 8.14 – Panel D) and the accumulation of bad credit that led to a high share of NPLs in the crisis aftermath (peaking at 15% in 2013) (see the Partnerships and financing section in this chapter).

Over the past decade, economic growth has become more balanced but is still largely driven by domestic consumption. Since 2009, GDP growth has declined considerably as the pre-crisis growth engines faltered and new growth engines were slow to emerge due to weak progress on structural reforms. Growth also became more balanced through increasing external demand and moderating domestic demand (Figure 8.14 – Panel B). Macroeconomic stability improved considerably as a result (Figure 8.14 – Panels C and D). Nevertheless, the economy remains largely consumption driven (consumption accounts for 96% of GDP) (World Bank, 2020[7]), with a significant contribution from the public sector. General government spending accounts for 20% of GDP, compared to the 15% average for the remaining Western Balkan economies. Bosnia and Herzegovina also has the largest SOE sector in the region, accounting for 10% of value added (World Bank, 2020[7]) (see the Partnerships and financing section in this chapter).

Investment has been low compared to regional peers, having declined considerably in the period following the global financial crisis. Between 2005 and 2008, investment accounted for 24% of annual GDP. Since then, its GDP contribution has declined to below 20% and has remained relatively stagnant. This level of investment is low relative to regional and global peers and to the more advanced EU and OECD economies (Figure 8.15 – Panel A). Private investment has been particularly low, contributing 7% of GDP in 2019 and an estimated 3% of GDP in 2018 (IMF, 2020[56]). Bosnia and Herzegovina has also struggled to attract FDI, despite the introduction of fiscal and other incentives similar to those of regional peers (Foreign Investment Promotion Agency of Bosnia and Herzegovina, 2020[57]). Between 2015 and 2019, FDI inflows accounted for just 2.2% of GDP, well below most regional and global peers (Figure 8.15 – Panel B). This relative underperformance likely reflects the more challenging business environment posed by the country’s fragmented internal market, high bureaucratic burden, large state footprint in many sectors and high infrastructure gap.

Investment has not gone to export-oriented sectors or sectors that can enhance productivity. The largest share of FDI inflows over the past four years has gone to the non-tradable sector, including financial services, wholesale and retail trade, energy and real estate. Export-oriented FDI has been relatively limited and largely focused on raw materials (Figure 8.16). Moreover, most FDI inflows over the past few years have been earnings reinvested into existing FDI, while greenfield investment has been very low and concentrated mainly in the tourism sector (European Commission, 2019[58]). As a result, the structural transformation of the economy has been limited, and sectoral value added and employment have remained relatively unchanged over the past decade, with the exception of some labour reallocation from the agriculture sector to the services sector (Figure 8.17).

Exports are diverse and have increased considerably in recent years. Bosnia and Herzegovina’s exports increased significantly in the post-crisis period: 40% of GDP in 2019, compared to 24% in 2002 (Figure 8.18 – Panel A). The export basket is relatively well-diversified due to the country’s strong industrial past. Top goods exports include base metals, machinery, furniture and wood products, chemicals and apparel. The share of base metal exports has declined in recent years, largely in favour of increased machinery and power exports (Figure 8.18 – Panel B). The period also saw growth in export-oriented service sectors, including construction and tourism (European Commission, 2019[58]). However, exports are still dominated by raw materials and low value added manufacturing products, and there is considerable scope for further diversification and upgrading of the export basket.

Productivity growth declined significantly in the post-crisis period, and employment remains largely in low value added sectors. The private sector is dominated by SMEs (64% of total value added and 70% of total employment) (Agency for Statistics of Bosnia and Herzegovina, 2020[61]), which face considerable constraints to investment and growth, including a challenging business environment, weak infrastructure, skills gaps and weak access to finance (see the Partnerships and financing section in this chapter). As a result, productivity is weak and remains well below that of EU peers: labour productivity is below 30% of the EU average, with value added per worker in industry being the lowest at 18% of the EU average (World Bank, 2020[7]). Productivity growth declined post crisis due to weaker within-sector productivity growth and limited gains from structural change and labour reallocation (Figure 8.19 – Panel A). In addition, over 90% of employment is in sectors with relatively low productivity (Figure 8.19 – Panel B). Productivity is also dragged down by highly inefficient SOEs that undermine competition in many sectors and underinvest in critical infrastructure for development.

High wage growth and relatively high labour costs undermine competitiveness. Over the past decade, average wages have grown at a faster pace than productivity (Figure 8.20 – Panel A), which has negatively affected external competitiveness. Labour cost adjusted for productivity (Figure 8.20 – Panel B) and the average nominal gross wage in Bosnia and Herzegovina are the second highest in the region after Montenegro (World Bank/Vienna Institute for International Economic Studies, 2020[12]) This has been primarily been boosted by high public-sector wages. The public sector accounts for one-third of all employment and pays, on average, 38% more than the private sector (Agency for Statistics of Bosnia and Herzegovina, 2020[62]). In combination with remittances, which represent 11% of GDP (World Bank, 2020[7]), high public-sector wages have contributed to rising reservation wages and thus to wage and competitiveness pressures for the private sector. The high wages may also contribute to the high unemployment: at 15.7%, the unemployment rate in Bosnia and Herzegovina is one of the highest in the region (World Bank, 2020[7]) (see the People section in this chapter).

Other labour market indicators are among the weakest in the region as well. Despite an increase in employment in recent years, the employment rate remains low at 38% (World Bank, 2020[7]). It is particularly low for women (28% of the total population), which reflects their very low labour force participation rate (33% in 2019) (World Bank, 2020[7]), and young people (over 39%) (World Bank, 2020[7]).

Due to these persistent challenges and the long and devastating war, Bosnia and Herzegovina has among the highest emigration figures in the world. Since 1991, an estimated 1.65 million people, or 37.5% of the 1991 population, have left (WFD, 2020[63]).

Bosnia and Herzegovina’s complex political structure has resulted in a fragmented internal market, which has negative implications for investment and doing business. If a business wishes to operate across the country, it must be registered in each of the entities and may need to obtain the same type of license, permit or other documentation multiple times to meet the regulatory and legal requirements of each entity. Business laws and regulations can also vary by administrative level. For example, the Federation of Bosnia and Herzegovina’s ten cantons have different regulations and administrative procedures (World Bank, 2020[14]).

As a result, it is more difficult to register a business and obtain licenses and permits in Bosnia and Herzegovina than in most countries in the world. According to the latest Doing Business Report, compared to peers in Europe and Central Asia (ECA), registering a business in Bosnia and Herzegovina requires, on average, twice as many procedures (13 vs. 5.2), takes nearly eight times as long (80 days vs. 12) and costs more than three times more (14% of income per capita vs. 4% [ECA average]). Bosnia and Herzegovina ranks 184th out of 190 economies globally (World Bank, 2020[64]). Obtaining licenses and permits is also lengthier in Bosnia and Herzegovina compared to regional and global peers (World Bank/EIB/EBRD, 2020[65]). Some recent reforms, such as the establishment of one-stop shops for company registration and an online business registration system, are good steps forward, but more progress is needed to harmonise business licences and permits across the country (European Commission, 2020[66]).

Differing quality control rules and procedures make it difficult to trade externally and internally between the entities. Initial steps had been taken to establish a single economic area and to align the legislative and institutional framework with the free movement of goods acquis. Recently, the government recognised the critical importance of trade and has introduced measures to harmonise the quality infrastructure in order to create a single market and facilitate trade. However, in the absence of cross-cutting entity co-ordination and commitments across levels of government, progress may be slow (European Commission, 2020[66]).

Numerous para-fiscal charges levied at all three levels of government create additional non-tax expenses for business. Due to the inadequate oversight, transparency and consistency in the application of these charges, they have created uncertainty and significant scope for corruption. In recent years, efforts were made to improve the situation by creating registries of parafiscal fees at all levels of government. These registries are also expected to support the elimination of unnecessary or detrimental parafiscal charges, which will in turn improve the business climate across Bosnia and Herzegovina (European Commission, 2020[66]).

Costly and lengthy contract enforcement remains an important impediment to investment in Bosnia and Herzegovina. The court system is weighed down by a large backlog of cases, but alternative methods for dispute resolution are not available. Moreover there are no specialised commercial courts (European Commission, 2019[67]). As a result, it takes longer to enforce a contract in Bosnia and Herzegovina compared to peer ECA and global economies: 595 days vs. 495 (ECA average) and 120 for global leaders. The process is also more costly: 36% of the value of the claim vs. 27% for the ECA region). (World Bank, 2020[64]).

The state footprint in the economy remains large, and the SOE sector constitutes an unfair source of competition to the private sector. There are 550 SOEs in Bosnia and Herzegovina (315 in the Federation of Bosnia and Herzegovina and 235 in Republika Srpska), and ownership varies by level of government, including entities, cantons and municipalities. They operate across a wide range of sectors, from utilities to mining, manufacturing, transport and agriculture, and they account for an estimated 10% of value added, 25% of public-sector employment and 11% of total employment. SOEs have significant advantages compared to the private sector. Roughly half receive direct budgetary support or indirect support through tax exemptions in light of their financial difficulties. Most SOEs do not pay any dividends. Last, SOE salaries are, on average, 40% higher than in the private sector, despite lower labour productivity (roughly 8% lower) and lower profitability (SOE salaries are estimated at 31% of total operating expenditures, compared to 12% in the private sector). The higher salaries and more stable employment conditions put unwarranted wage pressures on the private sector and negatively affect its ability to attract talent (Cegar and Parodi, 2019[68]).

Bosnia and Herzegovina has a comparatively sizable infrastructure gap that stems from significant underinvestment in development and maintenance across all key sectors. To a large extent, this reflects the broader challenge of inefficient SOE operations raised in the previous section in this chapter. SOEs dominate the infrastructure-related sectors (transport, energy, and utilities), but due to their weak governance, inefficient operations, excessive employment, lack of cost-reflective pricing of services, and high indebtedness, they are unable to finance the necessary investments needed to maintain and upgrade the relevant infrastructure. For example, in 2017, SOEs invested EUR 274 million in non-financial assets, which is equivalent to 1.7% of GDP (Cegar and Parodi, 2019[68]). As a result, Bosnia and Herzegovina lags behind most regional and global countries with respect to quality of infrastructure: in the World Economic Forum’s Global Competitiveness Index, Bosnia and Herzegovina ranks 89th out of 141 global economies on the composite indicator of infrastructure quality, behind all but one of the regional and global peers (World Economic Forum, 2019[33]).

Bosnia and Herzegovina’s road infrastructure needs significant expansion and upgrading. Road density is low compared to regional peers and the European Union (34 km per 100 km2 of land, compared to the Western Balkan and EU averages of 41 km and 111 km, respectively) (World Bank, 2020[14]) and road infrastructure quality is weak due to considerable underinvestment, inadequate maintenance and poor selection and implementation of road infrastructure projects (Atoyan et al., 2018[69]).

The railway sector suffers from outdated infrastructure, lack of openness and the inefficient operations of the publicly owned railway companies. The rail network density is low compared to most global and aspirational EU peers (Atoyan et al., 2018[69]), as is the share of goods transported by rail (1 177 million tonne-km in Bosnia and Herzegovina, compared to 9 223 million tonne-km EU average) (World Bank, 2020[7]). Underinvestment in expansion and in maintenance and upgrading of the outdated rail infrastructure is in part due to the lack of unbundling: the two highly indebted, overstaffed and inefficient state-owned railway companies (Željeznice Federacije Bosne i Hercegovine and Željeznice Republike Srpske) are in charge of both infrastructure and operations. The poor infrastructure meanwhile prevents the opening of the market to private operators (European Commission, 2019[58]). The restructuring of Željeznice Republike Srpske is currently underway and is expected to be completed by the end of 2021. This includes ownership, financial and organisational restructuring supported by the World Bank (World Bank, 2018[70]).

Deficiencies in energy infrastructure undermine the development and greening of the energy sector. The energy sector contributes to over 4% of GDP and exports, but it has considerable scope for expansion in light of the country’s natural endowments (see the Planet section in this chapter). However, weaknesses in energy infrastructure limit the sector’s potential growth and pose risks to the sustainability of the energy supply. Namely, Bosnia and Herzegovina relies strongly on thermal power, particularly coal power plants, for its electricity generation; however, most of these plants are old and in need or rehabilitation or closure. In fact, about one-third of all thermal plants are set to be closed over the coming decade (World Bank, 2020[71]). The need to transition to greener energy sources therefore remains an important priority, especially in light of high pollution (see the Planet section in this chapter). Substantial investments (estimated at EUR 3 billion) will be needed to compensate for the loss of coal power production capacity, modernise the power generation sector and ensure the security of the energy supply (Nikolakakis et al., 2019[72]). Elektroprivreda Bosne i Hercegovine (EPBiH) has started by replacing inefficient blocks with new ones, notably in Tuzla. The low energy efficiency, fuelled by lack of cost-reflective pricing, and the weak private-sector participation in the sector contribute to the challenges of upgrading and greening the energy infrastructure (see the Planet section in this chapter).

Bosnia and Herzegovina lags behind many regional and global peers on education enrolment and attainment indicators. ECE enrolment is well below that of regional peers and the EU and OECD averages. This is particularly the case in the Federation of Bosnia and Herzegovina, where enrolment in 2015 was less than 5%. In Republika Srpska, it was less than 20%. By comparison, the South East Europe and EU averages were 37% and 92%, respectively. Net enrolment rates are relatively high at the primary and secondary levels (83.7.% and 75.1% in 2018) but relatively low at the tertiary level (23% in 2018) (Agency for Statistics of Bosnia and Herzegovina, 2020[5]). Bosnia and Herzegovina also lags behind regional peers in the share of early leavers from education and training (over 30% among men) and participation in life-long learning (see the People section in this chapter) (OECD, 2018[29]).

Bosnia and Herzegovina needs to make considerable improvements in the quality of its education system. In the latest PISA assessment, students performed well below the OECD average and most EU and regional peers. Across all subjects – reading, mathematics and science – the share of students who achieved minimum proficiency ranged from 42% to 46%, depending on the subject, considerably below the OECD average of between 76% and 78% (OECD, 2019[30]).

The education system does not equip graduates with the skills needed by the labour market. In the 2019 Balkan Barometer survey, 30% of respondents noted that the skills they acquired during their education did not meet the needs of their jobs. The most deficient were digital skills (32% of respondents), communication skills (30%) and other cognitive skills, including ability to learn on the job (27%) and creativity, innovation and risk taking (27%) (RCC, 2019[73]). The lack of digital skills reflects, to some degree, the relatively high share of individuals who still have no regular Internet access (Figure 8.21).

The lack of adequate skills in the labour force may reflect demand-side constraints. Only 19% of people in Bosnia and Herzegovina believe that the right level of education or the right qualifications is necessary to get a job; only 16% believe that previous experience is essential. Some 52% believe that personal contacts are necessary, and 30% believe that a network of family and friends in high places are necessary. The question on what is needed to succeed in life evoked similar answers (RCC, 2019[75]).

The skills challenge is also closely linked to weak innovation and technology adoption, which limit the scope for SME integration into GVCs. Firms in Bosnia and Herzegovina are, on average, less innovative and technologically advanced than those of regional peers. Only 15% of firms have adopted technologies from other countries, and only 38% have introduced new products or services in the past three years (World Bank, 2020[71]). Business investment in research and development is also very small (estimated at below 0.15%, which is less than one-tenth of the 1.5% EU average). There is very limited collaboration between the business sector and research institutions (OECD, 2018[29]), although there have been important initiatives in Republika Srpska in recent years. The Government of Republika Srpska is supporting collaboration between business and science institutions through the Synergy project. In 2019, the Ministry of Scientific and Technological Development, Higher Education and Information Society adopted a strategic document that maps out the research infrastructure of Republika Srpska in order to guide the development of the scientific and research system and to support its closer integration with the private sector.

The Partnerships and financing pillar of the 2030 Agenda for Sustainable Development cuts across all goals focused on the mobilisation of resources needed to implement the agenda. It is underpinned by the Addis Ababa Action Agenda, which provides a global framework to align all financing flows and policies with economic, social and environmental priorities.

In Bosnia and Herzegovina, more financing is needed to support investment and growth. Low domestic savings, coupled with low FDI and other external financing, constrain domestic private investment, which at an average of 5% of GDP over the past two years, is among the lowest in the region. Investment is also impeded by weak access to finance, particularly for start-ups and SMEs, due to prohibitively high collateral and other banking-sector requirements, as well as the relative lack of awareness and availability of non-bank financing options. On the public-sector side, high fiscal revenues have not translated into quality public services due to high current expenditures (on wages and social transfers) and weak public investment. The large, inefficient and highly indebted SOE sector imposes a high fiscal burden that limits the funds available for investments in infrastructure, education, health and other areas of development importance (Table 8.4).

Domestic savings in Bosnia and Herzegovina are among the lowest in the region and among global peers. In the post-crisis period, domestic savings increased as real consumption expenditure declined from 109% of GDP in 2012 to 96% in 2019. However, at 15% of GDP, domestic savings remain low compared to most peers (Figure 8.22). This represents an important constraint to domestic investment, particularly private investment, whose share in GDP has been less than 6% annually for the past two years (see the Prosperity section in this chapter). This problem has been exacerbated by the decline in or weaker growth of important sources of external financing, including FDI and overseas development assistance (ODA).

FDI declined considerably in the post-crisis period, limited by fewer privatisation opportunities and a challenging business environment for other greenfield investment. In the pre-crisis period, FDI was strongly driven by privatisation and largely market-seeking investments in the financial sector, telecommunications, energy, and other sectors. As privatisation progress has stalled, especially in the Federation of Bosnia and Herzegovina, market-seeking investment has become more limited, with the exception of the power sector. Meanwhile, the lack of progress on many structural reforms, coupled with the complex political structure and the fragmented internal market, creates a uniquely challenging business environment, which limits other investment. As a result, Bosnia and Herzegovina has struggled to attract FDI, despite the introduction of incentives for investors similar to those of neighbouring economies (e.g. customs-free imports of raw materials and equipment, deductions from corporate income tax [CIT] payments subject to investment-related criteria, tax deductions for new employment) (OECD, 2017[76]; Foreign Investment Promotion Agency of Bosnia and Herzegovina, 2020[57]). FDI financing has accounted for less than 2% of GDP for the last five years, which is significantly lower than the regional average of 5.8% (World Bank, 2020[7]) (see the Prosperity section in this chapter).

ODA financing is high compared to global peers but has declined since the early 2000s. Bosnia and Herzegovina has benefited considerably from ODA financing, especially in the aftermath of the war, but aid has gradually declined since, from the peak of USD 1.8 billion in 1999 to USD 341 million in 2018. At 1.8% of gross national income (GNI), ODA financing in Bosnia and Herzegovina is still high compared to most global peers (Figure 8.23), but the decline has had an impact, especially on public investment.

Remittance income has declined from its peak in the run-up to the global financial crisis but has been relatively resilient in recent years and has provided important support for private consumption expenditure. Remittances have declined considerably from their peak in 2007-08 (Figure 8.24 – Panel A). Their contribution to GDP declined from 14% in 2008 to 11.2% in 2018 (Figure 8.24 – Panel B). However, remittance income has been relatively stable over the past decade, despite downturns in the Eurozone, where a considerable share of Bosnia and Herzegovina’s diaspora lives. Moreover, remittances have shown some countercyclical tendencies by increasing notably in 2011, when the economy was hit by declining demand due to the Eurozone crisis, and in 2014, when Bosnia and Herzegovina was strongly affected by the floods (see the Prosperity section in this chapter).

Strong revenue performance and good control of the growth in expenditures have resulted in high fiscal surpluses and declining public debt. Along with the return of growth and the improvements in other macroeconomic indicators, fiscal performance has improved considerably since 2009. Strong revenue performance outpaced the growth in expenditures, giving way to positive fiscal balances that have increased over time (Figure 8.25 – Panel A). As a result, public debt declined from 41% of GDP in 2010 to about 33% in 2019, one of the lowest levels of public debt across comparable global economies (Figure 8.25 – Panel B). As such, there is considerable fiscal space to counter the negative impacts of the COVID-19 crisis.

Bosnia and Herzegovina has high fiscal revenues compared to peers, largely on account of high value added tax (VAT) and social security contributions. At 46% of GDP in 2019, revenues as a share of GDP are the highest among all regional and global peers (Figure 8.26 – Panel A). The relative overperformance is mainly due to the high share of VAT income, particularly import VAT contributions, which are significant in light of the high import dependence of the consumption-driven economy (see the Prosperity section in this chapter). At over 15% of GDP, social security revenues are also relatively high compared to regional peers. This is largely due to the high social security contribution rates. At 41.5% in the Federation of Bosnia and Herzegovina and 33% in Republika Srpska, the contribution rates significantly exceed the Western Balkan 6 average of 29.7% (World Bank, 2020[14]).

On the other hand, personal income tax (PIT) and CIT are relatively low, mainly reflecting the low tax base and considerable tax avoidance. Informal employment remains high at 30% of total employment (ILO, 2020[21]). Many employees are registered on a minimum wage while also receiving envelope wages (Obradović, Jusić and Oruč, 2019[17]). Under-reporting of sales and non-issuance of fiscal receipts are also prevalent, and the share of companies operating entirely in the grey economy appears to be high. In the latest Business Environment and Enterprise Performance Survey, 42% of companies stated that they compete against unregistered firms (World Bank/EIB/EBRD, 2020[65]). The relative underperformance on PIT and CIT revenue also reflects the relatively low tax rates (Figure 8.26 – Panel B).

The high revenues, however, do not translate into higher-quality public services or better infrastructure. In fact, public satisfaction with the quality of public services and infrastructure is on par with or lower than that of regional peers. In the latest Balkan Barometer survey, citizens rated the timeliness, quality and cost of obtaining information or services from public institutions at 2.5 out 5.0 points, in line with all other regional peers (RCC, 2019[75]); however, Bosnia and Herzegovina ranks below most peers on indicators concerning infrastructure quality (see the Prosperity section in this chapter). It also lags behind most global peers on education outcomes (see the People section in this chapter).

The relatively weak outcomes mainly reflect the composition of public expenditures, which include high spending on public-sector wages and social transfers but weak investment spending. Since 2005, capital expenditures have represented only 7% of total government spending (Figure 8.27 – Panel A) and 2.8% of GDP. Meanwhile, the high current expenditures have risen considerably, largely on the back of high increases in social transfers and public-sector wages (Figure 8.27 – Panel B).

High spending on social transfers in part reflects the significant inefficiencies in the social protection system. The inefficiencies cut across various areas, including social assistance, unemployment benefits, maternity benefits and health insurance (see the People section in this chapter). They not only increase current fiscal expenditures but also discourage formal employment. Some of the key challenges in this area include the link between unemployment benefits and health insurance, which allows people working informally to get health insurance benefits by registering as unemployed. On the other hand, social benefits discourage labour force participation because low-income households whose members are employed are not eligible for social assistance. Last, the war veterans’ scheme is generous, not well targeted and discourages employment because only unemployed veterans are eligible (World Bank, 2020[14]).

The SOE sector also poses a significant fiscal burden and limits the funding available for infrastructure, education, health and other productivity-enhancing expenditures. SOEs are largely loss making and have incurred considerable as of 2017 debt (estimated at EUR 4 billion, or 26% of GDP). This includes considerable arrears to suppliers, including other SOEs, such as electricity and water companies (4% of GDP). It also includes tax and social security contribution arrears (4% of GDP), mainly affecting the pension and healthcare funds, which already face considerable sustainability challenges (see the People section in this chapter). About 15% of SOEs are insolvent, with negative equity totalling EUR 290 million, or 2% of GDP, and they require financial and operational restructuring, which may include capital injections. Roughly 50% of the companies are illiquid and require direct or indirect budgetary support, which is estimated at about 5% of GDP annually (Cegar and Parodi, 2019[68]).

Enterprises’ access to bank financing has been relatively limited following the 2008 global financial crisis and the 2011 Eurozone crisis. In the early to mid-2000s, the entry of foreign banks in the market fuelled a credit boom that built up significant imbalances in the banking system, including high credit risk. In the aftermath of the crises, the banking sector was hit hard by high and rising NPLs, which peaked at 16% of total loans in 2015 (Central Bank of Bosnia and Herzegovina, 2020[59]). In this context, private-sector lending suffered significantly as banks tightened credit standards (Figure 8.28).

Over the past five years, financial-sector health and stability have improved, and private-sector lending has begun to recover. Since 2015, NPLs have declined (from over 16% to 6% of total loans), capital adequacy has improved (the risk-weighted capital ratio increased from 16.3% in 2008 to 18% in 2019) (IMF, 2020[78]) and the profitability of the banking sector has increased. The improved conditions and overall improvement in the macroeconomic environment have resulted in declining lending interest rates, from an average of 6.6% in 2014 to 3.3% in 2019. All these factors have been conducive to stronger private-sector lending, which has risen by 6.3% annually since 2016, following nearly a decade of very weak growth (Figure 8.28).

Despite this progress, access to finance remains relatively constrained for SMEs, particularly start-ups and microenterprises. Although over 95% of SMEs in Bosnia and Herzegovina have a bank account, about 50% have a bank loan (World Bank/EIB/EBRD, 2020[65]). The financing gap is particularly large for microenterprises, nearly 50% of which need external financing but are unable to get it (Figure 8.29).

Access to bank financing is limited by stringent lending requirements. Often SMEs, particularly start-ups and microenterprises, cannot meet the relatively stringent bank lending requirements, including high-value collateral (over 200% of the loan value), with a strong preference for land and real estate (WB et al., 2021[79]). This also represents an important constraint for women-owned businesses, as women are less likely to own such assets. The financing gap for women-owned businesses (over 60%) is significantly is larger than for male-owned businesses (34%) (World Bank, 2018[80]).

SEOs and ample demand for consumer credit crowd out bank lending to enterprises (World Bank, 2020[14]). This challenge is exacerbated by the relative lack of other financing options. Non-bank financing (equity capital, debt securities, factoring, leasing, credit unions, etc.) remains underdeveloped in part due to weak demand from the SME sector, whose awareness and understanding of alternative sources is relatively weak. Likewise, start-up financing through venture capital funds, business angels, etc. is undersupplied and cannot adequately support the growth of innovation (World Bank, 2018[80]).

The Peace and institutions pillar of the 2030 Agenda for Sustainable Development encompasses peace, stability and accountability, as well as effective governance and the performance of the public sector more broadly.

Since the end of the civil conflict, Bosnia and Herzegovina, with the support of the international community, has established and preserved territorial integrity and shown progress in some policy areas. The country has managed progressively to guarantee peace and safety to its citizens: between 2000 and 2018, the incidence of intentional homicides fell from 2.6 to 1.2 per 100 000 inhabitants, the lowest figure in the Western Balkans and lower than the OECD average (2.8) (UNODC, 2018[81]). Recent reforms have made the judiciary more independent of external pressure, despite serious ongoing limitations. Integrity plans addressing judges and public officials have been introduced, although differently across entities. As part of the decentralisation process, the central state and the two entities went beyond their divisions and adopted the Global Framework for Fiscal Balance and Policies to co-ordinate fiscal balance and policies at the local level (OECD/UCLG, 2019[82]).

Bosnia and Herzegovina’s complex system of governance helps maintain institutional balance between communities but, without adequate co-ordination, creates scope for significant inefficiencies. Three separate, autonomous and ethnically characterised subnational governments and a quota system ensure representation of the three “constituent peoples” of the economy (Bosniaks, Croats and Serbs) at all institutional levels and all branches of the administration. However, this system can pose challenges to the proper functioning of the state and may entrench ethnic polarisation. For example, it affects the capacity of the high judicial body that watches over the independence and professionalism of courts. It encourages political leaders to compete for support from ethnically homogeneous groups rather than create incentives for interethnic co-operation and makes it difficult to achieve a shared social contract that could counterbalance divisions (Belloni and Ramovic, 2020[83]).

“If you can’t easily walk away from something, then the only way forward is to double down” (Brooks, 2020[84]). As a society with a long history of multiple ethnicities and religions living peacefully side-by-side, Bosnia and Herzegovina can strive to make multi-ethnicity an asset. For most of the past 500 years, coexistence has been peaceful. When violence broke out, its origins were often of a socio-economic rather than an ethnic or religious nature. An effective social contract and performance-oriented government are the cornerstones of institutional, social and economic development.

This institutional assessment identifies three major constraints to the future development of Bosnia and Herzegovina (Table 8.5): (1) the asymmetric decentralisation framework, which fuels inefficiencies and severe territorial disparities; (2) the lack of independence and professionalism in the judiciary; and (3) the widespread reliance on personal relationships, which creates social exclusion, distorts the labour market and undermines the efficiency of the public sector.

The Constitution of Bosnia and Herzegovina administratively divides the economy in two entities: the Federation of Bosnia and Herzegovina and Republika Srpska. According to the 2013 Census, the ethnic composition at the national level consists of Bosniaks (50.11% of the total population, or 1 769 592 people), Serbs (30.78%, or 1 086 733) and Croats (15.43%, or 544 780). The rest of the population belongs to other ethnic groups (2.73%) or has not declared an ethnic group. The borders of the entities roughly reflect the distribution of the three constituent peoples. The majority of the citizens of the Federation of Bosnia and Herzegovina are either Bosniaks (70.4%, or 1 562 372 people, according to the latest census) or Croats (22.4%, or 497 883). In Republika Srpska, 81.5%, or 1 001 299 people, are Serbian, followed by Bosniaks (12.69%, or 148 477) and Croats (2.27%, or 26 509).

The administrative division at the sub-entity level is asymmetric. The Federation of Bosnia and Herzegovina is administratively divided into 10 self-governing cantons, 74 municipalities and 6 cities. Republika Srpska has a single level of local government constituted of 56 municipalities and 8 cities. In 1999, Brčko district, a former municipality in the northeast of the country, obtained autonomy. Its population consists of Bosniaks (42.4%), Serbs (34.6%) and Croats (20.7%). The district is officially a condominium over which the Federation of Bosnia and Herzegovina and Republika Srpska jointly exercise their rights. In practice, it is a self-governing unit with the same competences as entities (OECD/UCLG, 2019[82]).

At the state level, the presidency is three-headed and collegial. Two presidents are elected from a joint constituency in the Federation of Bosnia and Herzegovina and one is elected by Republika Srpska, guaranteeing equal representation of the three constituent peoples. Each president serves as chairperson for eight months on a rotating basis. A Council of Ministers functions as the state federal government, while a bicameral parliament is the legislative branch.4

At the entity level, the Federation of Bosnia and Herzegovina and Republika Srpska each have a constitution, president, government and parliaments – bicameral in the Federation of Bosnia and Herzegovina and unicameral in Republika Srpska. At the sub-entity level, the cantons in the Federation of Bosnia and Herzegovina cantons have their own constitutions, unicameral parliaments and governments. In Republika Srpska, municipalities have their own assemblies and mayors. The state and the entities share judicial powers.

Most decision-making powers reside at the subnational level. The Constitution of Bosnia and Herzegovina assigns most of the responsibilities to the entities, while the Council of Ministers is responsible for sovereign powers, such as defence, foreign policy, trade policy, customs policy and indirect taxation (Art. III of the Constitution of Bosnia and Herzegovina).5 The Federation of Bosnia and Herzegovina has competences in, among others, direct taxation, energy, industry and economic policy. Cantons have exclusive and shared powers and can further delegate responsibilities to municipalities (a canton must delegate responsibilities when most of the population in a municipality is from a different ethnicity than that of the canton). In the more unitary Republika Srpska, responsibilities are usually fully or partially delegated to municipalities. Entities regulate their own subnational government finance systems within the three-year Global Framework for Fiscal Balance and Policies (the current framework covers the period 2020-22) under the supervision of the state fiscal council, which sets fiscal targets and debt ceilings (OECD/UCLG, 2019[82]).

In spite of this apparently decentralised setting, subnational governments’ fiscal power is limited. Total subnational revenues account for only 10.9% of general government revenues (Figure 8.30) and 4.7% of GDP, which is lower than the average in the rest of the Western Balkans (5.9%), the OECD (9.3%) and the EU27 (10.7%). Some 56.9% of total subnational revenues comes from taxes – the highest share in the region and higher than in other benchmarking economies (Figure 8.31). Nonetheless, tax revenues at the subnational revenue level remain low relative to GDP (2.7%): total tax revenues (excluding social contributions) in 2016 amounted to 23% of GDP (see the Partnerships and financing section in this chapter). This affects municipalities’ spending capacity, especially in the long term. Direct investments make up 13% of the total subnational spending but only 0.6% of GDP, the lowest share in the region. Tariffs and fees account for 28% of total subnational revenues – a record high in the region – and for 1.32% of GDP, in line with the EU27 average (1.31%) (OECD/UCLG, 2019[82]; NALAS, 2019[85]).

Most taxes are collected at the central level and then shared with the entities. In particular, shared revenues from VAT and PIT account for 68.8% and 16.2% of subnational tax revenues, respectively (OECD/UCLG, 2019[82]). These revenues are then then redistributed to the sub-entity levels according to each entity’s laws (Table 8.6). For instance, in the Federation of Bosnia and Herzegovina, cantons get the largest share of VAT revenues redistributed from the central government to the subnational level (51.48%). The rest is shared between the Federation of Bosnia and Herzegovina and the municipalities. In Republika Srpska, the entity level retains 72% of the shared VAT revenues, and the municipalities receive the rest.

Grants from the central to the subnational government levels are less used than in other Western Balkan and benchmarking economies. Most of them serve to cover subnational current expenditures. Municipalities in the Federation of Bosnia and Herzegovina rely mostly on shared tax revenues and, to a limited extent, on conditional grants transferred from the entity or the cantons. In Republika Srpska, municipalities can access equalisation grants and conditional grants for capital expenditure.

Insufficient funds at the municipal level pose a challenge. In the Federation of Bosnia and Herzegovina, responsibilities are either not transferred to the municipalities, contrary to the stipulations of the Law on Principles of Local Self-Government, or transferred without appropriate funds. In some cases, cantons absorb the competences of municipalities, particularly with respect to the provision of utility services, without necessarily guaranteeing higher quality and performance. While the constitutional court of the entity has ruled in favour of municipalities multiple times, there are no enforcement mechanisms forcing cantons to respect the law or courts’ decisions (CoE/CLRA, 2019[87]).

Bosnia and Herzegovina’s public debt is roughly evenly distributed between the two entities (50.7% in the Federation of Bosnia and Herzegovina, 48.1% in Republika Srpska and 0.5% in Brčko district) (Ministry of Finance and Treasury, 2019[88]). However, in light of the Federation of Bosnia and Herzegovina’s relatively higher contribution to GDP (about two-thirds of total GDP), its contribution to Bosnia and Herzegovina’s total public debt is relatively lower than that of Republika Srpska. In entity GDP terms, the Federation of Bosnia and Herzegovina’s debt was 27.5% of its GDP in 2018, and Republika Srpska’s was 43.8%. In the Federation of Bosnia and Herzegovina, the entity government incurred the largest share of the debt (79.8%), followed by the cantonal governments (15.7%) and the cities and municipalities (4.5%). In Republika Srpska, municipal and city debt accounted for 46.7% of the total public debt in 2018. Municipalities and cities in the Federation of Bosnia and Herzegovina can contract long-term debt if their debt service payment in a given year does not exceed 10% of the previous year’s revenues. Municipalities in Republika Srpska can borrow to finance capital investment expenditures by up to 10% of the actual revenues generated in the previous fiscal year (OECD/UCLG, 2019[82]). Moreover, Republika Srpska’s Local Self-Government Development Strategy 2017-2021 identifies the strengthening of local self-government units’ financial capacities as a strategic goal for the period.

Political interference and inefficiencies continue to undermine citizens trust in the judiciary. According to the World Justice Project, both civil and criminal justice in Bosnia and Herzegovina is less free of government influence than in the average OECD country (Figure 8.32). The number of days required to resolve a case has decreased by 13%, or 82 days, since 2012, and the efficiency of first instance courts seems to have increased over the past decade (OECD, 2020[89]). However, the disposition time for litigious civil and commercial cases in Bosnia and Herzegovina (574 days) is longer than in the rest of the Western Balkans (Albanian courts take 159 days, for example). A backlog in the second instance courts may be part of the cause of unreasonable delays (USAID, 2018[90]). As a result, trust in the judiciary is eroding. According to 2018 Gallup data, 30% of Bosnia and Herzegovina citizens trust the judicial system, the lowest percentage of all benchmarking countries used in this report, except for Morocco. Confidence is also down from ten years earlier. Like in Serbia, people in Bosnia and Herzegovina rely more on family and friends than on legal services.

Three main factors may explain the weakness of the justice system in Bosnia and Herzegovina: 1) the complexity of the judicial system that is not compensated by adequate co-ordination mechanisms; 2) the functioning and composition of the High Judicial Council, the highest judicial self-governing body; and 3) the way judges are selected and kept accountable.

There are four court systems in Bosnia and Herzegovina, including the system of prosecutors’ offices: one at the national level, two at the entity level and one for Brčko district. At the state level, there are two courts: the Constitutional Court of Bosnia and Herzegovina and the Court of Bosnia and Herzegovina (Sud Bosne i Hercegovine). The Constitutional Court is the highest judicial body in the country and has jurisdiction over the entire territory of Bosnia and Herzegovina. It settle disputes between bodies of the state and is an appeal body on constitutional issues. The Court of Bosnia and Herzegovina ensures the respect for human rights and the rule of law in the territory of the country (CoE/Venice Commission, 2011[92]).

At the entity level, the judicial system in the Federation of Bosnia and Herzegovina is made up of the Supreme Court, 10 cantonal (appellate) courts and 31 municipal (first instance) courts. The Supreme Court is the highest judicial authority in the Federation of Bosnia and Herzegovina. Prosecutor’s offices exist at the entity level and in each canton. A Constitutional Court guarantees for the coherence of laws but has no formal judicial power. The judicial system in Republika Srpska is made up of the Supreme Court, 6 district (appellate) courts and 21 general (first instance) courts. There are also courts with special jurisdiction: the district commercial courts and the Higher Commercial Court. Each district has a Prosecutor’s Office, headed by a general prosecutor for the republic. A special department of the Prosecutor’s Office at the entity level initiates investigations of corruption, organised crime and serious economic crimes, which are then adjudicated by a special department in the Banja Luka district court (first instance) and by the Supreme Court (second instance). As in the Federation of Bosnia and Herzegovina, the Supreme Court is the highest judicial authority in the entity, while a Constitutional Court exerts normative control. In Brčko district, there is a Court of Appeal, a general (first instance) court and a Prosecutor’s Office (CoE/Venice Commission, 2011[92]).

There is no mechanism ensuring the consistency of the law across the country. There is no state-level Supreme Court guaranteeing coherence across the four legislative frameworks and judicial systems. The Court of Bosnia and Herzegovina is in theory well placed to play this role, but as of today, it only rules over administrative acts adopted on the basis of state law, not entity law (CoE/Venice Commission, 2011[92]). As discussed in the next section, the four main prosecutors’ offices (at the state and entity levels and in Brčko district) are autonomous and independent, making law enforcement highly fragmented.

Concerning the independence of the judiciary, Bosnia and Herzegovina has made significant progress on paper in the past two decades. In 2004, it established a powerful High Judicial and Prosecutorial Council (HJPC) that is supposed to protect its judges and prosecutors from improper external influences. The council is a self-governing body of 11 professional members of the judicial system elected by their peers, 2 members elected by bar associations and 2 political appointees (Figure 8.33). The council has great powers: among other responsibilities, it appoints the members of the judicial system, supervises their training, creates methodologies to evaluate their performance and conducts disciplinary procedures. Before 2004, all these functions belonged to the executive branch of the government, which created scope for political interference in the judicial process. The establishment of a powerful HJPC, ideally independent of undue external pressures, was therefore a milestone in the creation of a professional judicial system (CoE/Venice Commission, 2014[93]).

The 2004 law might not create the conditions for the emergence of a fully independent and efficient high council. Citizens and members of the judicial community perceive the HJPC as “a centre of unaccountable power in the hands of people serving the interests of a network of political patronage and influence” (Priebe, 2019[95]). The method of selection of members seems to be problematic. Any professional member of the HJPC is elected by peers from her or his entity of origin who serve at the same court level, and not by the entire judicial community (Figure 8.33). The compartmentalisation of the pool of candidates and their voters is rightly respectful of the multi-ethnic nature of the country and of the different branches of the judiciary, but it undermines the competitiveness of the selection process (CoE/Venice Commission, 2014[93]). As the number of peers to win over shrinks, informal networks become a key asset for candidates to win votes – possibly in exchange for leniency during disciplinary proceedings. To surmount the current multilayered system of quotas, authorities could consider a system of proportional representation of judicial members from different entities and court levels whereby any candidate is scrutinised by a broader segment of the judicial community (either across entities or across court levels within an entity) (Priebe, 2019[95]).

Appointment and promotions by the HJPC are based more on ethnic principles than merit, but rules are slowly changing. In particular, the appointment of court presidents and chief prosecutors aims at striking a fair representation of constituent peoples (Priebe, 2019[95]). Ethnic affiliation, which should rightly be taken into account in the formation of courts, should be considered only at the very end of the process, if there is a choice between two equally ranked candidates. Appointment is for life, but all judges and prosecutors need to be subject to performance appraisal, which used to be overly reliant on quantitative criteria and statistics, thus distorting incentives of the appraisee. A recent reform has been introducing better qualitative criteria aimed at evaluating the actual merit of judges and prosecutors (Priebe, 2019[95]).

Last, integrity plans and the assessment of potential conflicts of interests could help enhance citizen trust in the judiciary. Overall, Bosnia and Herzegovina needs a homogeneous, rigorous and credible system of checks of asset declarations of judges and prosecutors that could help unveil misdemeanours. Declarations need to be submitted and processed periodically, and a credible system of sanctions should be in place to punish proven illegal activities (Priebe, 2019[95]). Integrity plans and guidelines for prevention of conflicts of interest have been developed, but implementation is lagging. Courts and prosecutors in Republika Srpska, for instance, face two plans: one developed by the HJPC and one imposed by the Ministry of Justice of the entity. Some prosecutors are also unfamiliar with the steps and activities related to the implementation of the integrity plans (USAID, 2018[90]).

A reform of the judiciary is part of the Justice Sector Reform Strategy 2014-2028 and the Action Plan 2019-2020. The strategy is based on four pillars: 1) independence of the judiciary and harmonisation of laws and court practices; 2) efficiency and effectiveness of judicial institutions; 3) responsibility and professionalism of the members of the judiciary; and 4) transparency of the work of the judiciary. Political deadlock and the resulting slow formation of the Council of Ministers have been delaying implementation of the strategy and the action plan. A new Strategy for Reform of the Justice Sector is under discussion.

Formal institutions lack citizen trust because of institutional inefficiencies. While the delivery of public services seems to have improved in the past decade (Fund for Peace, 2020[97]), citizens still find that access often depends on wealth or place of residence. When the state is absent, access to services depends on the work of non-state actors (Belloni and Ramovic, 2020[83]). Bosnia and Herzegovina citizens have the least confidence in their national government (23%) in the region. Trust has been deteriorating since 2007 and is particularly low among young people (aged 15 to 29) (OECD, 2020[89]).

Citizens often rely on informal practices to get a job or overcome government inefficiencies (Efendic and Ledeneva, 2020 (forthcoming)[98]). Around 95% of the population always or occasionally uses personal networks to access basic services, such as employment, education or health care (UNDP, 2009[99]). These informal practices are more common in the Federation of Bosnia and Herzegovina than in Republika Srpska, reflecting different levels of trust in the formal institutions of the respective entities. The Federation of Bosnia and Herzegovina is indeed a very complex entity, with several, often overlapping layers of government. Interactions with the administration are therefore more unpredictable and costly than in Republika Srpska, which is a one-tier entity. Ethnic minorities across Bosnia and Herzegovina are more likely to rely on personal networks compared to citizens belonging to majority communities (Efendic, Pugh and Adnett, 2011[100]).

Informal personal networks may be a blessing or a curse for Bosnia and Herzegovina. Personal networks do not usually involve monetary transactions but rather reciprocity. It is not just a form of material exchange but a practice that reproduces existing and creates new social connections between people (Brkovic and Koutkova, 2018[101]). Therefore, in some cases, it could work across formal divisions, kinships and trauma that separate former neighbours, facilitating interethnic relations (Belloni and Ramovic, 2020[83]). In other cases, these relationships, albeit strong, are primarily family- or locally-based ties. Society is therefore segmented: those without networks have lower access to public services, goods and jobs. In 2009, the United Nations Development Programme estimated that 12% of the population was in this situation (UNDP, 2009[99]). No more recent estimations exist, but the increasing polarisation of the economy along ethnic lines may suggest that network poverty is still an issue.

Informal personal networks can introduce distortions into the labour market and create the wrong incentives. Over 65% of jobseekers report that having the right connections is the most important criterion for getting a job (World Bank, 2019[102]). Leveraging a personal network to navigate the job market is not necessarily bad. However, when networking becomes so predominant, qualified candidates without connections may either be left out or discouraged from applying. In these cases, personal relationships risk becoming more important than investment in skills, contributing to an underqualified labour force and widespread skills mismatches.

Informal networks play a crucial role in getting jobs in the public sector. As recruitment processes remain largely opaque and discretionary, political parties and leaders have often used personal networks to trade public jobs for political support (World Bank, 2019[102]). This practice has contributed to an overly large public sector, which today employs 30% of workers and keeps growing, in spite of numerous hiring freezes.6 Recruitment of the most connected but not necessarily best candidates, together with a substantial lack of in-depth performance assessment of public employees, weakens the capacity and performance of the public sector, including SOEs. This weakening of state capacity deepens mistrust in formal institutions and dependence on personal relationships, with the potential negative consequences described.

Where personal relationships (and therefore implicit reciprocity) fail to work, citizens pursue administrative action through monetary remuneration. The legislative framework and the distribution of resources across government levels has left room for grand corruption.

Corruption in Bosnia and Herzegovina is systemic. According to Gallup data, almost 90% of interviewees consider corruption widespread throughout the government, compared to 70% in the Western Balkans and 50% in the OECD. Citizens usually pay bribes to access medical and health services or to avoid police fines (RCC, 2019[75]). Business leaders often complain about the lack of public integrity, and around 30% of business leaders use bribery to facilitate doing business (compared to 19%, on average, in the region) (RCC, 2019[75]). Several voters report receiving a monetary offer or favour in exchange for political support.

Bosnia and Herzegovina has established an institutional, legal and strategic framework to combat corruption; however, significant gaps remain. Almost 90% of citizens are highly dissatisfied with the government’s anti-corruption efforts (RCC, 2019[75]). For instance, the number of officials investigated or indicted is low, and in 2017, no high-level corruption case ended in a conviction.

A centralised anti-corruption body – the Agency for the Prevention of Corruption and Coordination of the Fight against Corruption (APIK) – has a preventive function. It is responsible for the development of the anti-corruption strategy and for the co-ordination and supervision of its implementation. The APIK moreover consults and supervises entities and cantons in the development of their anti-corruption strategies and action plans in line with the principles of the state-level strategy, as prescribed by law. The agency is accountable to the Parliamentary Assembly of Bosnia and Herzegovina, which elects the APIK’s director. Corruption-prevention bodies have also been set up at the entity and sub-entity levels. The auditing offices of Bosnia and Herzegovina, the Federation of Bosnia and Herzegovina, Republika Srpska and Brčko district also have a preventive role. They support the development of anti-corruption policies and strategies at all institutional levels and report to the parliaments and the public about the use of public money.

Corruption-prevention institutions are short of capacity. At the state level, the APIK has an appropriate budget, but 20% of 41 positions are vacant. Exchange of information with other bodies that could favour anti-corruption efforts (e.g. ministries of interior, tax authorities, land and vehicle registers) is problematic, making cross-checking data and information arduous if not impossible. The APIK has no power to sanction institutions that refuse to co-operate. Corruption-prevention institutions at the entity level lack professionalism. For example, cantons in the Federation of Bosnia and Herzegovina have set up ad hoc bodies without full-time professional members. Their mandate is usually linked to the duration of cantonal government, and they need to be reappointed when new cantonal governments are put in place (European Commission, 2019[103]).

Law enforcement is fragmented. At the state level, the State Investigation and Protection Agency and the Special Department for Organized Crime, Economic Crime and Corruption within the Prosecutor’s Office investigate and prosecute corruption cases and criminal offences that fall under the jurisdiction of the Court of Bosnia and Herzegovina. Each entity has a Prosecutor’s Office, but a department dedicated to anti-corruption activities exists only in Republika Srpska. In the Federation of Bosnia and Herzegovina, specialised departments do not exist, although the relevant legislation has been adopted. All three prosecutor’s offices (one at the state level and two at the entity level) are independent of each other and competent within their area of jurisdiction only. Without an overarching body, co-ordination across offices is often difficult. The Central Election Commission (CEC) investigates violations of political party and election financing regulations (European Commission, 2019[103]).

The CEC has a “very limited mandate when it comes to audit and control of party financing, particularly in the field of expenditure auditing” (Bosso, 2014[104]). The CEC has no obligation to control the accuracy of asset declarations of candidates, which are not made public.

The anti-corruption legislative framework may lack coherence. The four coexisting criminal codes – one for each administrative unit: the state, two entities and Brčko district – are not always consistent with each other. For example, third-party beneficiaries of active bribery are covered in the criminal code of Bosnia and Herzegovina only. Lack of harmonisation may raise issues of jurisdiction too, especially during the investigation and prosecution phases (Lee-Jones, 2018[105]). The legal framework regulating party financing is dispersed across multiple laws, including the election law (for elected officials), the law on government service (for public servants and all government employees) and the law on high judicial and prosecutorial council (for judges and prosecutors). Whistle-blower protection is scarce. Reporters of misdemeanours are protected against retaliation by state law and at the entity level in Republika Srpska; there is no such legislation in the Federation of Bosnia and Herzegovina (Lee-Jones, 2018[105]).

The fight against corruption can become more effective only with stronger political commitment. The recent effort of 13 anti-corruption bodies led to the definition of the new Anti-Corruption Strategy 2020-2024 and an action plan for implementation. The AKIP has prepared an Action Plan for Prevention of Corruption of Bosnia and Herzegovina’s Institutions during the COVID-19 to guide the preparation by all levels of government of specific anti-corruption activities during the pandemic. Actual implementation depends on the political will to overcome entrenched patronage and vested interests and to co-ordinate anti-corruption efforts beyond ethnic divisions.

SOEs are a large part of Bosnia and Herzegovina’s economy. They own 40% of all fixed assets and account for about 11% of total employment. Most SOEs are small and medium-sized municipal utilities, but entity-owned SOEs have the largest operations and account for most of the sector’s employment. Municipalities own 279 SOEs, mainly in the water supply, heating and sewerage sectors but also in communications and recreation. Entity-owned SOEs generate about 85% of SOE revenues (EUR 2.9 billion), employ 58 000 workers and mostly operate in the electricity, mining, manufacturing, agriculture and transport sectors (Cegar and Parodi, 2019[68]). SOEs in the electricity, gas, steam and air conditioning supply sector generate almost half (46%) the total revenues from SOEs and employ 27% of total SOE employees (Table 8.7).

SOE performance is poor, but the wage premium is high. SOEs contribute only 10% of total value added generated in the economy, and the estimated average revenue per worker is 8% lower than in the private sector. Yet, salaries are, on average, 40% higher than in private firms.7 Wages account for 30.5% of total operating expenditures in SOEs, compared to 12% in the private sector. SOE debt accounts for roughly 26% of GDP, including 4% of GDP in tax and social contributions arrears. This dampens tax revenues and jeopardises the functioning of the social security system (Cegar and Parodi, 2019[68]).

Poor governance can explain the underperformance of SOEs, which may at times become a drag on productivity growth (see the Prosperity section in this chapter).

SOE registers and ownership strategies are either incomplete or partly missing. In the Federation of Bosnia and Herzegovina, the list is impartial and does not include canton- and municipality-owned enterprises. In Republika Srpska, a comprehensive list exists and is publicly available but has not been updated since 2004. Neither entity has a SEO ownership strategy that would justify entity intervention in SOE sectors (Cegar and Parodi, 2019[68]).

Government oversight and performance management are inadequate. In the Federation of Bosnia and Herzegovina, line ministries oversee both SOE operation and financial performance. Authorities have been establishing a separate unit in the Office of the Prime Minister that should centralise oversight. In Republika Srpska, the Investment and Development Bank of Republika Srpska (IDB Republika Srpska) is the only owner on behalf of the entity government. However, no government agency is tasked with overseeing the IDB Republika Srpska. In practice, there is scarce financial and operational performance oversight, and there is no fiscal risk assessment framework for systematic performance assessments. In principle, SOEs have to publish externally-audited financial statements, but compliance is uneven. Moreover, the entity governments have never produced a sector-wide SOE annual report summarising performance and outlining fiscal risks (Cegar and Parodi, 2019[68]).

Opaque ownership and insufficient oversight create space for mismanagement practices, including the hiring of personnel based on personal networking instead of skills or on political motivations. Line ministries in both entities usually nominate supervisory and board members. Professional competence requirements guide the selection of board members but are weakly defined. There are moreover no provisions requiring independence from political parties nor regulations for conflicts of interest (Cegar and Parodi, 2019[68]). By controlling SEO management, political parties have often abused SOEs, for example by distributing jobs in exchange for political support.

Statistical capacity has been improving over the past years, yet co-ordination is a challenge, and important data gaps remain, particularly in social policy design. The statistical system of Bosnia and Herzegovina is characterised by a high degree of regional decentralisation, reflecting the administrative and political organisation of the country. The statistical law designates the Agency for Statistics of Bosnia Herzegovina (BHAS) and the Central Bank as official producers of statistics at the state level. The Federation of Bosnia and Herzegovina Institute for Statistics (FIS) and the Republika Srpska Institute of Statistics (RSIS) are obliged to collect data and statistics at the entity level (Official Gazette of Bosnia and Herzegovina, 2004[94]). The BHAS approves and endorses the data collected and processed by the FIS and the RSIS.

Statistical capacity has been increasing over the past two decades, although slowly (World Bank, 2020[106]). In particular, data accessibility at both the state and entity levels has improved (Ardeni and Kveder, 2014[107]; Misic and Richter, 2015[108]; European Commission, 2019[58]). In 2014-17, thanks to EU support, the amount of macroeconomic, employment, business and other statistical data that comply with EU standards increased (European Commission, 2018[109]). This will support evidence-based policy making for socio-economic reforms. For instance, the Labour Force Survey (LFS) has been upgraded to the Eurostat standards set for yearly LFS surveys, supported by the Swedish International Development Cooperation Agency and Statistics Sweden, among others (Ardeni and Kveder, 2014[107]). Environmental statistics were standardised and environmental accounts introduced in 2016 (European Commission, 2019[58]).

Nevertheless, important data gaps remain, particularly in health, agriculture and the disaggregation of social data. Health statistics have not been available for the past five years (World Bank, 2020[106]). The last agricultural census was conducted in 1960, which impedes reliable policy design for agriculture and rural development. Moreover, policies targeted to vulnerable groups require disaggregated data. However, the 2013 Census did not provide data on the civil, political and socio-economic status of national minorities (European Commission, 2019[58]). The statistical classification of subnational data does not follow international standards, making comparability difficult (European Commission, 2019[58]). Data and information collected are not fully disaggregated by gender, as the Law on Gender Equality requires.

Better co-ordination could help improve data quality. Poor co-operation across statistical bodies hampers data provision and transparency. For instance, the statistical agencies of the entities do not always provide the BHAS with the full set of data they collect, as required by law. Moreover, entity-level agencies contest some of the statistical activities carried out by the BHAS (European Commission, 2019[58]). The next census, planned for 2021, is key to improving the data quality of other statistical products. The BHAS needs to develop a new master sample frame not only for the household survey but also for upcoming surveys, such as the LFS, a full-scale Survey of Income and Living Conditions and the Multiple Indicator Cluster Survey (MICS) (European Commission, 2019[58]).

The Planet pillar of the 2030 Agenda for Sustainable Development reflects the need to find the right balance between socio-economic progress and capacity to sustain the planet’s resources and ecosystems and to combat climate change.

The Planet section in this chapter identifies several major constraints Bosnia and Herzegovina faces in its development path (Table 8.8). Bosnia and Herzegovina’s economy is highly reliant on heavily polluting coal, and energy efficiency is low. Hydropower accounts for more than one-third of electricity generation, but other renewables, such as solar and wind energy, are almost absent in the country’s energy mix. This results in high levels of GHG emissions and air pollution. Air pollution poses a threat not only to the environment but also to human health and Bosnia and Herzegovina’s economy. Pollution from poor waste management is another major concern. Illegal landfills and untreated sewage damage natural resources and pose a risk to biodiversity and well-being. Public utility prices set below operational costs undermine the financial sustainability of public utilities and limit financial resources available for investment in water, waste and wastewater management infrastructure, modern and more efficient energy infrastructure and renewable energies.

Bosnia and Herzegovina is vulnerable to natural hazards, particularly floods, earthquakes, droughts and landslides. Natural hazards are estimated to cost 1.4% of GDP annually, the highest toll in the region (Figure 8.34). The greatest recent disaster was the floods of 2014, causing USD 450 million in damages. Over the last 20 years, Bosnia and Herzegovina experienced a drought, on average, every four years, resulting in reduced harvests, higher food prices and lower river levels, which affects hydropower generation (World Bank, 2020[110]).

Bosnia and Herzegovina faces particular challenges in geographic exposure to natural hazards, capabilities to cope with natural disasters and adaptive capabilities for climate change. According to the World Risk Index, the population’s exposure and susceptibility to natural hazards, which depend on infrastructure, nutrition, income and the general economic framework, are low. Yet, the economy’s geographic exposure to natural hazards is classified as high, and its adaptive capacities for climate change and its coping capabilities for natural hazards – based on governance, medical care and material security – are evaluated as medium (Bündnis Entwicklungshilfe, 2017[111]).

Bosnia and Herzegovina’s vulnerability to natural hazards is likely to increase through climate change. Bosnia and Herzegovina ranked 129th out of 181 countries on Germanwatch’s Climate Risk Index in 2018 (Germanwatch, 2019[114]). Since 1961, the average annual air temperature has increased 0.4°C to 0.8°C in Bosnia and Herzegovina (USAID, 2016[115]) and climate models predict an additional increase in average temperatures of up to 1°C in the country by 2030 - 2035 (Table 8.9) and less regular rainfall patterns. This will result in more extreme weather events, including droughts and floods, leading to loss of lives, property and infrastructure. Since the early 2000s, there have been more droughts and floods than in previous decades. The agriculture sector, water resources, biodiversity and hydropower will be particularly affected by climate change (World Bank, 2020[110]).

Bosnia and Herzegovina is one of the most biodiverse countries of Europe. Some 30% of flora endemic to the Balkans is found in Bosnia and Herzegovina (around 1 800 species) (CBD, n.d.[116]). There are more than 5 000 species and subspecies of vascular plants, more than 100 species of fish and more than 320 species of birds in Bosnia and Herzegovina (GEF/UNEP/Government of Bosnia and Herzegovina, n.d.[117]).

Bosnia and Herzegovina’s rich biodiversity is threatened and not sufficiently monitored or protected. Coal mining and the disposal of its waste have resulted in the degradation of meadows, arable land and forests. Opencast mining or opencast exploitation of mineral ores has damaged approximately 15 000 ha of land in Bosnia and Herzegovina (UNEP, 2012[118]). Untreated wastewater and illegally dumped solid waste cause pollution and negatively affect biodiversity. Other important pressures come from habitat conversion, over-exploitation of natural resources, unsustainable use of land and forests, pollution, climate change, invasive alien species, fires and inadequate fire protection, agriculture, energy, the industrial sector and illegal hunting and mining. Bosnia and Herzegovina has no biodiversity monitoring system, and data on biodiversity is scarce, fragmented and often outdated. Budgetary allocations to nature conservation and biodiversity monitoring are too low (UNECE, 2018[119]). Only 1.4% of Bosnia and Herzegovina’s land area was designed protected as of 2018 (Figure 8.35) (World Bank, 2020[7]) the lowest area in a Western Balkan economy. Bosnia and Herzegovina’s alignment with the EU acquis on nature protection is very limited (European Commission, 2020[120]).

Legislation for biodiversity protection is in place but its enforcement remains a challenge. The Law on Environmental Protection for the Federation of Bosnia and Herzegovina was adopted in 2013 and the Law on Nature Protection for Republika Srpska in 2014, both of which are harmonised with the EU Directives on Habitats and Birds. Bosnia and Herzegovina has had a Strategy and Action Plan for Protection of Biological Diversity in Bosnia and Herzegovina (2015-2020) since 2016, but financial resources and expert knowledge for its implementation are lacking. Although both entities have red lists of species at risk of extinction, there is no unified list for Bosnia and Herzegovina. There has been progress in biodiversity protection through the establishment of gene banks and a national Biodiversity Clearing House Mechanism, and through public awareness raising (CBD, n.d.[116]).

The large forest areas that house this rich biodiversity are an important economic factor in Bosnia and Herzegovina. In 2016, 42.7% of the land area was covered by forests (World Bank, 2020[7]) above the Western Balkan and EU averages (Figure 8.35). In total, 5.7 million m3 of timber, corresponding to about 331 km2 of forest area, is harvested annually for wood production (UNECE, 2018[119]). According to local data, the forest sector accounted for 2.7% of GDP in 2018: forestry and logging contributed 0.7% in 2018, and manufacturing of wood, cork, furniture and paper contributed 2%. Timber is also an important export product: Bosnia exports about 1.5 million m3 of wood annually (UNECE, 2018[119]). Forests also provide protection against floods and natural cooling in urban areas.

Important challenges persist in forest management. Entities are responsible for forest management legislation, but there is currently no such legislation in the Federation of Bosnia and Herzegovina. A new framework has been elaborated but not approved by parliament. Establishing comprehensive forest legislation in the Federation of Bosnia and Herzegovina is important to ensure adequate forest management. There is a lack of co-ordination in forest management in Bosnia and Herzegovina, and institutional and inspection capacities are underdeveloped. Public forest management enterprises are not profitable since the price of wood is set by law at a very low level. This results in insufficient financial resources for investments in forest management and encourages the use of wood as a source of energy, for example for residential heating and cooking, which in turn contributes to high air pollution levels. The low price of wood also discourages private investment in the sector. These challenges result in poor forest management and a lack of organised reforestation. Illegal logging and forest fires are additional threats. As a consequence, the country’s forests are degrading, threatening biodiversity and the development of economic activities in the forest sector (UNECE, 2018[119]).

Soil degradation and loss of agricultural land are increasing in Bosnia and Herzegovina. Soil degradation and loss of agricultural land are mainly caused by sudden urbanisation, industrialisation and changes in commercial development. Inadequately managed solid waste is also a challenge. Bosnia and Herzegovina lacks specific laws at the state or entity level that address soil protection and monitoring, a systematic soil monitoring and soil and land information system, and information on soil contamination. Data on soil use and quality are limited and of poor quality (UNECE, 2018[119]).

Bosnia and Herzegovina has high levels of air pollution, mainly due to the economy’s high carbon intensity. Bosnia and Herzegovina has the second highest level of air pollution of Western Balkan economies after North Macedonia (Figure 8.36). Both particulate matter (PM) 2.5 and PM10 air pollution are high in Bosnia and Herzegovina. Banja Luka, Sarajevo and other urban areas are most affected.

The main sources of PM2.5 are residential combustion and the heating, industry, coal power plant and transport (through an aging vehicle fleet) sectors. Energy efficiency is very low across residential and economic sectors. Heating of buildings accounts for more than 50% of primary energy consumption. Some 70% of houses are heated with low-grade wood, lignite or coal in inefficient stoves and boilers, and buildings are often badly insulated. This causes a lot of air pollution, particularly in urban areas. It is estimated that energy demand from residential, public and commercial buildings could be reduced by 60% through energy-efficient and cost-effective refurbishments (World Bank, 2020[110]). Electricity production contributes to air pollution through a high reliance on coal. The average age of the private car fleet is 17 years, and more than 75% use diesel fuel (UNECE, 2018[119]). Waste and agriculture are further sources of air pollution (World Bank, 2020[110]).

The high levels of air pollution threaten well-being and Bosnia and Herzegovina’s economy. Some 62% of the population considers pollution a serious or somewhat serious problem (RCC, 2018[113]). In 2016, the mortality rate attributable to household and ambient air pollution in Bosnia and Herzegovina was 159.3 per 100 000 inhabitants, the highest rate in the Western Balkan region (Figure 8.37): approximately 5 300 citizens die prematurely due to air pollution every year. According to the World Bank, 9% of annual mortality in Bosnia and Herzegovina is attributable to air pollution (World Bank, 2020[110]). The Federation of Bosnia and Herzegovina is more affected by premature deaths due to air pollution than Republika Srpska (World Bank, 2019[122]). According to the United Nations Environment Programme, the overall loss of GDP due to air pollution amounts to 21.5% of GDP when taking into account not only premature deaths but also lost work and school days and healthcare and fuel costs (UNEP, 2018[123]). However, there is a lack of local data on the impact of air pollution. Public data on the health impact of air pollution, including the number of premature deaths, are not currently being collected by national authorities (United Nations in Bosnia and Herzegovina, 2020[124]).

Bosnia and Herzegovina is making efforts to reduce air pollution, but policies and enforcement need to be improved. Currently, enterprises must pay a tax on emissions that is progressive and increasing with the level of pollution. Environmental permits issued at entity and canton levels include emission limits for the leading air-polluting substances that are mainly based on EU standards. A special environmental fee, dependent on the type of engine and fuel and vehicle age, must be paid at the time of motor vehicle registration, although the fee’s linkage with actual pollution is weak (UNECE, 2018[119]). The legal framework to tackle air pollution is largely in place, but implementation and enforcement are inadequate (United Nations in Bosnia and Herzegovina, 2020[124]). For example, Bosnia and Herzegovina adopted a National Emission Reduction Plan for Large Combustion Plants in 2015, but financing has not yet been secured for the estimated implementation cost of over EUR 300 million (UNECE, 2018[119]). Air quality monitoring efforts in Bosnia and Herzegovina focus mainly on PM10 and less on PM2.5, and the quality of monitoring data is a challenge. The division of competences and lack of co-ordination across municipalities, cantons, entities and the state are further impediments to tackling air pollution (World Bank, 2019[122]). Bosnia and Herzegovina’s alignment with the EU acquis on air quality, most importantly, air quality monitoring, remains limited (European Commission, 2020[120]).

The development and implementation of waste management policies in Bosnia and Herzegovina is at the entity level, and responsibilities are shared among entities, cantons and municipalities (Cero, Silajdžic and Kurtagic, 2018[127]). Municipalities are responsible for the organisation of the collection and disposal of municipal waste in co-ordination with cantons. Waste management services are mainly provided by communal enterprises, which are wholly or partly owned by the state or, less frequently, by private entities contracted by municipalities. Public communal enterprises are financially responsible for their businesses: they collect fees from households and pay fees to landfill operators. Municipalities in the Sarajevo canton are an exception: the communal enterprise in Sarajevo both collects waste and manages the cantonal landfill (World Bank, 2020[110]). The Federal Ministry of Environment and Tourism of the Federation of Bosnia and Herzegovina’s, the Ministry of Physical Planning, Civil Engineering and Ecology of Republika Srpska, and the Department for Physical Planning and Proprietary Affairs of the Government of Brčko district are responsible for cross-border movements of waste and the development of legislation in the field of waste management (Cero, Silajdžic and Kurtagic, 2018[127]).

Inadequate waste management poses risks to the population, contributes to pollution and damages natural resources and the environment. Municipal waste generation is in line with other Western Balkan economies: Bosnia and Herzegovina produced 352 kg of municipal waste per capita in 2018, compared to a Western Balkan average of 365 kg (Eurostat, 2018[128]). However, only approximately 66% of Bosnia and Herzegovina’s population had access to municipal solid waste collection and disposal services in 2015, and only 74% of solid waste generated was collected through waste-collection services in 2016 (Cero, Silajdžic and Kurtagic, 2018[127]).

The limited capacity of the waste disposal system and poor management have contributed to a large number of illegal landfills and dumpsites. Illegal dumping and burning of solid waste is widespread in Bosnia and Herzegovina and results in soil, air and water pollution (World Bank, 2020[110]). In 2015, only 33% of municipal waste collected was disposed of in sanitary landfills; 67% was disposed of in non-compliant and uncontrolled municipal landfills (Cero, Silajdžic and Kurtagic, 2018[127]). There are an estimated 1 200 illegal dumpsites in the country (Cero, Silajdžic and Kurtagic, 2018[127]). Even where regional sanitary landfills exist, enforcement is often lacking, in part due to high transport costs (World Bank, 2020[110]).

Low levels of recycling and treatment of special categories of waste are further challenges. As Bosnia and Herzegovina lacks recycling facilities, recycling of solid waste is very limited (World Bank, 2020[110]): recyclables separated from mixed municipal waste amounted to less than 5% of total municipal waste in 2010 (EEA, 2010[129]). Despite recent improvements, particularly with regards to electrical and electronic waste, Bosnia and Herzegovina lacks facilities to treat and dispose of special categories of waste, such as medical and hazardous waste (Cero, Silajdžic and Kurtagic, 2018[127]).

Competence for water regulation and management in Bosnia and Herzegovina is shared among entities, cantons, towns and municipalities. Entities are responsible for managing and regulating wastewater; creating the strategic framework and legislation for water management; overseeing implementation of the water legislation; monitoring and supervising local and communal public services; controlling water quality; granting and controlling water extraction and discharge rights; setting fees for water extraction and discharge; and managing category I surface waters. Cantons are responsible for managing category II surface waters. Towns and municipalities are responsible for managing water supply and sanitation systems, treating urban wastewater and setting water tariffs (World Bank/IAWD, 2015[130]). Bosnia and Herzegovina lacks a national water policy and water management plan and does not comply with most water-related provisions of the EU acquis (European Commission, 2020[120]).

Bosnia and Herzegovina’s total renewable water resources per capita (8 790 m3 per inhabitant annually in 2017) are 20% below the EU average and rather low by international comparison (Figure 8.38). Most drinking water is extracted from groundwater (81%) (World Bank/IAWD, 2015[130]). About 82% goes to domestic use, 16% to industry and the remainder to agriculture and other applications (UNECE, 2018[119]).

Water resources are unevenly distributed across the country and over seasons. Water resources are split between the Danube River Basin District and the Adriatic Sea and are therefore scarce in some areas, such as the Bosna River sub-basin, which is densely populated and contains a large concentration of industries. Highly seasonal rainfall leads to flooding in the wet season and water shortages in the dry season. Climate change is likely to reinforce these patterns. Bosnia and Herzegovina has not yet developed specific strategies for dealing with the impact of climate change on water availability (World Bank/IAWD, 2015[130]).

Water pollution is a challenge. Water quality in Bosnia and Herzegovina is negatively affected by untreated wastewater and improperly disposed of solid waste. Other sources of pollution are uncontrolled animal manure, silage leaching and surplus fertilizer. Due to pollution, 21% of drinking water samples fail microbiological tests (UNECE, 2018[119]). Surface water pollution is a particular concern, most importantly, nutrient pollution in the Danube Basin. The entire Danube Basin and limited parts of the Adriatic Basin are “sensitive areas”, as defined by the EU Water Framework Directive. Of the country’s 22 groundwater bodies, 6 are considered at risk because of quality concerns to do with pollution or because of decreased water availability due to overexploitation (World Bank/IAWD, 2015[130]).

Despite good access to drinking water, there is scope for improving public water services. In 2017, 96% of the population was using at least basic drinking water services, and 89% was using safely managed drinking water services. Good access to quality drinking water is reflected in a low mortality rate attributable to unsafe water (only 0.08 per 100 000 inhabitants in 2016 (WHO, 2020[43]). However, only 58% of the population is connected to the public water supply network (UNECE, 2018[119]). Furthermore, Roma are marginalised and mainly live in informal settlements that lack basic sanitary facilities, including access to potable water. Water quality and water pollution are also much bigger challenges in rural areas than in urban areas (World Bank/IAWD, 2015[130]).

The water supply and sewerage infrastructure is outdated, and there are quality concerns. Water leakages are frequent in Bosnia and Herzegovina’s public water supply system: 59% of water is lost through leaks in the network (UNECE, 2018[119]). In some areas, water supply infrastructure destroyed by the war has not yet been fully rebuilt and repaired. The World Bank estimates that the water and wastewater sector will require EUR 3.66 billion of investment over the next 20 years (38% for water management; 62% for wastewater management) to comply with EU environmental standards (World Bank/IAWD, 2015[130]).

An incomplete sewerage system and a lack of wastewater treatment threaten water quality and human health. Bosnia and Herzegovina lacks sewerage systems and wastewater treatment plants. Only 31% of Bosnia and Herzegovina’s population is connected to the public sewerage network (World Bank, 2020[110]) (33% of the population in the Federation of Bosnia and Herzegovina and 36% in Republika Srpska in 2015). Only about 3% in the Federation of Bosnia and Herzegovina (excluding Sarajevo) and less than 5% in Republika Srpska was connected to a wastewater treatment plant in 2015. Brčko district has no urban wastewater treatment facility at all (UNECE, 2018[119]). As a result, only 15% of Bosnia and Herzegovina’s wastewater is treated before reaching the rivers (World Bank, 2020[110]). Untreated wastewater poses an important threat to water quality.

Access to basic sanitation services is good; however, limited access to the sewerage network and wastewater treatment results in poor access to safely managed sanitation services. In 2016, 97.2% of the population had access to basic handwashing facilities, and in 2017, 95.4% was using at least basic sanitation services (World Bank, 2020[7]). Some 91% of the population had access to a flushing toilet in 2012 (World Bank/IAWD, 2015[130]). However, in 2017, only 21.6% was using safely managed sanitation services (World Bank, 2020[110]).8 Improving access to safely managed sanitation services is important to protect the environment and human health, especially in light of the COVID-19 pandemic.

Insufficient water quality monitoring and a shortage of qualified staff and financial resources are key challenges for public water management. Water quality monitoring is not comprehensive, and monitoring infrastructure is lacking. Water and wastewater utilities also lack sufficient qualified staff (World Bank/IAWD, 2015[130]) and expertise for the preparation and implementation of projects to adapt water management to EU water supply and sanitation directives.

Responsibilities for environmental governance are divided among the state, entities, cantons and municipalities. In general, entities are responsible for most environmental regulation and legislation. Bosnia and Herzegovina’s Ministry of Foreign Trade and Economic Relations has a role in co-ordinating entity and Brčko district environmental policies and is responsible for international agreements and projects. An inter-entity environmental body deals with all environmental issues that require a harmonised approach by entities.

The provision of public utilities is too fragmented. According to the constitution, it is the responsibility of municipal authorities to provide public services. Therefore, a multiplicity of public utility companies operate in the country (e.g. 119 water utility companies). A public utility system that is too fragmented is inefficient and fails to take advantage of economies of scale. Furthermore, few of the municipal utility companies have the ability to ensure adequate operation of their facilities (World Bank, 2020[110]).

Tariffs are set below operational costs and threaten the financial sustainability of public utility services. Due to political considerations, tariffs for public utility services, including for waste collection, water and electricity, tend to be below the cost of service provision and too low to cover operation and maintenance expenses, undermining financial sustainability. Local governments are required to support utility companies through transfers and subsidies, while the government lacks financial resources for investments to upgrade and build new waste and water management and electricity infrastructure.

Low tariffs do not encourage water and electricity conservation and lead to overexploitation of water resources and high levels of air pollution and GHG emissions through electricity generation from coal (World Bank/IAWD, 2015[130]). Tariffs charged for waste collection amount to 0.5% of disposable income in Bosnia and Herzegovina, compared to 1% to 1.5% in most EU countries (Cero, Silajdžic and Kurtagic, 2018[127]). Electricity prices charged to users are below the cost of supply, producing a revenue shortfall amounting to 3-4% of GDP from 2011 to 2014. In 2017, households paid less than half the average electricity price of residential customers in the European Union, and business tariffs were the second lowest of all EU and Western Balkan economies. Authorities need to align tariffs with the cost of services (World Bank, 2020[110]).

Environmental legislation and regulation is continuously being improved in Bosnia and Herzegovina, but challenges remain. New laws on environmental protection and on air protection are currently being discussed in parliament in the Federation of Bosnia and Herzegovina. The entity-level laws on environmental protection stipulate the requirement for environmental impact assessments (EIA) and strategic environmental assessments (SEA) as prerequisites for the granting of operating permits to large-scale projects with significant environmental impact. However, integrated permits, for example for air and water pollution, are not yet issued in Bosnia and Herzegovina.9 Bosnia and Herzegovina is taking steps to harmonise environmental legislation with EU standards: since 2017, Bosnia and Herzegovina has had an official Environmental Approximation Strategy to align its environmental legislation, regulations, policies and infrastructure (Ministry of Foreign Trade and Economic Relations, 2017[132]). Republika Srpska has had such a strategy since 2016 (Government of Republika Srpska, 2016[133]). The criminal codes of the Federation of Bosnia and Herzegovina, Republika Srpska and Brčko district include articles on environmental crimes, which however do not cover the spectrum of offenses as provided in EU Directive 2008/99/EC on the protection of the environment through criminal law. Moreover, the legal provisions are incomplete and insufficiently specific, precise and clear (UNECE, 2018[119]).

Challenges remain in terms of law enforcement and implementation and public participation. Since 2011, the Federation of Bosnia and Herzegovina has taken steps to make the environmental permitting system work. All new industrial installations require EIAs and receive environmental permits. Nevertheless, not all existing installations have yet received environmental permits. Republika Srpska also faces challenges in implementing the provisions on SEAs, environmental permits and eco-labelling. Although SEAs exist in Bosnia and Herzegovina (since 2003 in the Federation of Bosnia and Herzegovina), only three were conducted in the Federation of Bosnia and Herzegovina and eight in Republika Srpska in 2015-16, and none has ever been done in Brčko district. The EU provisions for EIAs and SEAs have not been fully transposed to entity-level legislation (European Commission, 2020[120]). Furthermore, the current, relatively low level of financial sanctions for violating permit conditions (EUR 500 to EUR 5 000) does not incentivise permit holders to change their behaviours: paying the fine is, in many cases, cheaper than investing in the technological upgrades required to meet environmental standards (UNECE, 2018[119]). Progress on the implementation of the Environmental Approximation Strategy is slow (European Commission, 2020[120]). It is also important to improve public awareness of environmental protection and challenges and to involve environmental civil society organisations and the private sector in environmental decision-making processes.

CO2 emissions and energy intensity are quite high by international comparison. Bosnia and Herzegovina’s CO2 emissions per capita (6.4 tonnes) are the highest among Western Balkan economies and in line with EU countries (Figure 8.39). This largely owes to the economy’s reliance on coal and its high carbon intensity. The carbon-intensive energy sector is the main source of GHG emissions (61% to 70%) (UNECE, 2018[119]). Bosnia and Herzegovina’s energy intensity is also the highest in the region and is twice as high as in the European Union (Figure 8.39). Progress in aligning regulation with EU standards on energy efficiency is limited. Bosnia and Herzegovina still needs to align its legislation with the EU Energy Efficiency Directive and the new Framework Energy Labelling Regulation (European Commission, 2020[120]).

Bosnia and Herzegovina has ambitious renewable energy and energy-efficiency targets but may not be able to meet them. Bosnia and Herzegovina ratified the Paris Agreement 2017, and through the Energy Community Treaty, committed to limit the emissions of existing and new large combustion plants (World Bank, 2020[110]). Bosnia and Herzegovina is currently working on a national adaptation plan and an integrated national energy and climate plan in line with the 2018 Energy Community recommendation (European Commission, 2020[120]). Bosnia and Herzegovina also adopted a Climate Change Adaptation and Low-Emission Development Strategy in 2013, which is currently being revised, to increase resilience to climate change and reach a peak in GHG emissions in 2025 from which they will decline (UNECE, 2018[119]). However, Bosnia and Herzegovina recently announced investments in new coal plants to replace existing ones, which may jeopardize its ability to meet these targets (World Bank, 2020[110]). Yet, replacement with new coal plants will contribute to reducing GHG emissions and air pollution.

Bosnia and Herzegovina remains very dependent on highly polluting and inefficient coal. In 2018, 61.5% of electricity was generated from coal and 37.8% from hydropower (Eurostat, 2018[128]) (Figure 8.40). Coal is relatively cheap and seen as increasing energy security in Bosnia and Herzegovina.

Extensive subsidies promote electricity production from coal. Bosnia and Herzegovina’s two main energy producers received an estimated EUR 23.3 million in direct coal subsidies and a further EUR 177.6 million in indirect subsidies in 2017. Coal mines are profitable only thanks to these large public subsidies: mine productivity is low due to outdated methods and high labour costs (World Bank, 2020[110]).

Despite coal’s disadvantages, Bosnia and Herzegovina is currently stepping up exploration of coal reserves and starting to explore local oil and gas reserves. There are plans to replace obsolete lignite plants with new, more efficient ones and to meet the growth in electricity demand with four to six new coal power plants (World Bank, 2020[110]), including the Block 7 Tuzla thermal power plant investment project (European Commission, 2020[120]). Even though the new coal power plants will be less polluting, they increase the country’s strong dependence on coal as a source of energy. Through its reliance on coal, Bosnia and Herzegovina’s energy sector is a leading source of GHG emissions and an important contributor to air pollution. Phasing out subsidies for coal mining and coal power stations is key to reducing these threats (UNECE, 2018[119]).

Despite recent progress, Bosnia and Herzegovina does not sufficiently incentivise investments in renewable energies. Renewable energies, such as hydro, solar and wind, are relatively abundant in Bosnia and Herzegovina, and more than one-third of electricity production is from hydropower. However, the share of other renewables in the energy mix is very low. The Federation of Bosnia and Herzegovina has set up a new incentive scheme for electricity production from renewable energies and bond schemes for the implementation of energy-efficiency measures. The entity also plans to establish an emissions trading system and an emissions monitoring system. Despite these efforts, the government still subsidises coal mining and electricity production from coal too much for renewables to be competitive: in 2017, paid incentives for energy production from coal in Bosnia and Herzegovina were almost twice as high as those for energy from renewables (Figure 8.40). In Republika Srpska, incentives for wind energy projects were recently removed, and the growth of incentives to generate electricity from renewable energies was reduced in the context of an amendment to the Law on Renewable Energy and Efficient Co-generation. Moreover, Bosnia and Herzegovina has not yet transposed recent amendments by the Energy Community Secretariat on renewable energies to entity-level laws, and its legislative framework on renewable energies needs to be further aligned with the EU acquis (European Commission, 2020[120]).

The outdated energy infrastructure contributes to the low levels of energy efficiency. Electricity tariffs set below operational costs have resulted in a lack of financial resources for investments in the outdated energy infrastructure. More than half the country’s thermal power plants date from the 1960s and 1970s, and at least 30% of thermal capacity will need to be shut down over the next decade. Approximately EUR 3 billion will be required to modernise power generation plants and to build new capacity in the next 20 years, and a further EUR 350 million will be needed to upgrade the electricity transmission network. Without these investments, the country’s energy security is effectively threatened. Investments in energy infrastructure are also required in order to comply with obligations under the EU Stabilisation and Association Agreement and the Energy Community Treaty (European Commission, 2020[120]). Outdated electricity infrastructure contributes to the country’s low levels of energy efficiency (World Bank, 2020[110]).

Bosnia and Herzegovina has started making some of the investments required to upgrade its energy infrastructure. In the Federation of Bosnia and Herzegovina, EPBiH, one of the SOEs in charge of electricity production and distribution, has started replacing old and inefficient coal power plants with new ones, most importantly in Tuzla. Although less polluting, this plant reinforces Bosnia and Herzegovina’s dependence on highly polluting coal. Republika Srpska recently invested EUR 80 billion in the construction of a desulphurisation plant at the Ugljevik thermal power plant that complies with EU standards.

Bosnia and Herzegovina’s electricity sector is dominated by a few SOEs. Electricity production and distribution are regulated by entity law. Within each entity, electricity generation and distribution is performed by one or two SOEs. These enterprises are in fact public monopolies in their exclusive service areas, and there is no competition between them (Enerdata, 2020[138]). EPBiH and Elektroprivreda Hrvatske Zajednice Herceg-Bosne are in charge of electricity distribution and the largest share of electricity generation in the Federation of Bosnia and Herzegovina. In Republika Srpska, Elektroprivreda Republike Srpske owns five subsidiary companies for electricity generation and five companies for electricity distribution and supply. Komunalno Brčko operates the Brčko district’s electricity distribution network (USAID-EIA, n.d.[139]). Bosnia and Herzegovina has not yet unbundled the transmission system operator or the electricity distribution, supply and generation operators in entities, thereby failing to comply with the Energy Community Secretariat’s Third Energy Package (European Commission, 2020[120]). There are few private enterprises in Bosnia and Herzegovina’s electricity sector, and SOEs have few incentives to increase electricity generation from renewable energies.

Bosnia and Herzegovina’s energy sector is also affected by lengthy procedures, red tape and a shortage of qualified professionals. Procedures for the construction of energy infrastructure, such as power stations, and permitting processes are complicated and lengthy. The regulatory framework for renewable energies is incomplete. A chronic lack of professional and qualified staff and lack of expertise, particularly in renewable energies, are further concerns. These challenges are obstacles to the implementation of energy-sector reforms and energy-efficiency measures.


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← 1. Dimensions of multi-dimensional child poverty covered in this UNICEF study are nutrition, health, child development, violent discipline, information access and housing.

← 2. High in-work poverty often occurs in countries with large insolvent SOEs and in unsuccessfully privatised enterprises whose new owners are under a contractual obligation to keep people in employment but cannot pay wages due to insolvency (Obradović, Jusić and Oruč, 2019[17]).

← 3. The total social contribution rate is 41.5% (23% for pensions) of gross wages in the Federation of Bosnia and Herzegovina and 33% (18.5% for pensions) in RS.

← 4. The Parliamentary Assembly of Bosnia and Herzegovina is composed of the House of Representatives and the House of Peoples. The former has 42 members directly elected on a proportional basis; the latter counts 15 members appointed by the parliaments of the entities.

← 5. The Central Bank of Bosnia and Herzegovina is the sole authority for issuing currency and for monetary policy throughout Bosnia and Herzegovina (Art. VII of the Constitution of Bosnia and Herzegovina).

← 6. Following the latest attempt, as part of the European Union-led Reform Agenda for Bosnia and Herzegovina 2015-2018, at least two-thirds of public institutions at state and entity levels continued hiring, and the net number of civil servants rose by between 5% and 10%. At the entity level, Republika Srpska has implemented a legal framework to regulate hiring in the public sector tightly. The Law on Civil Servants and the law on administrative inspection, for example, provide legal protections for those who contend that their rights were violated during the employment process.

← 7. In 2017, the SOE average gross monthly salary was EUR 756, compared to EUR 540 in the general government and EUR 535 in the private sector (Cegar and Parodi, 2019[68]).

← 8. Safely managed sanitation services are improved sanitation facilities that are not shared with other households and where excreta are safely disposed of in situ or transported and treated off site. Improved sanitation facilities include flush/pour-flush-to-piped sewer systems, septic tanks or pit latrines (ventilated improved pit latrines, compositing toilets or pit latrines with slabs) (World Bank, 2020[7]).

← 9. Thus, an operator of an installation having multiple environmental impacts, for example on air, water and generation of waste, would need to apply for multiple permits from various ministries.

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